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PHIL HARDWICK — Real Estate Realisms

PHIL HARDWICK

In this column, we will introduce you to REALisms. What is a REALism and what does it have to do with real estate?

A REALism is a phrase, saying, or words of wisdom that captures a truism about real estate. It is a statement that is based on self-evidence or factual evidence. and is accepted as an obvious truth in a way that further proof is not considered necessary. You won’t find this word in the dictionary because I made it up. Below are nine often-stated REALisms.

REALism #1 – The three most important characteristics of real estate are location, location, and location. This particular realism points out the importance of where the property is located it says that location is more important than anything else when it comes to real estate.

REALism #2 – If there is a lender who will make the loan on a real estate project, there is a builder who will build it regardless of market demand. We all like to think that real estate projects are market-driven, but we found out in the 1980s that wasn’t true. Real estate projects are finance-driven rather than market-driven. Many lenders and taxpayers are still paying the price for this realism today.

REALism #3 – If you’re looking for appreciation in value, buy the worst house on the best street. This realism is based on the principle of regression/progression, which states that the value of real estate is negatively or positively affected by surrounding properties. A superior property will “pull up” the value of the inferior property and vice versa. Thus, the property which will be pulled up most is the worst property. So if you’re buying a house and you are most concerned about it being a good investment, by the worst house on the street, not the best house. By the way, the best house on the street is often the one considered to be the one overbuilt for the neighborhood. But don’t forget that the house you should always buy is the one that suits you best.

REALism #4 – If you are preparing to sell your home consider having it appraised first, but don’t list it at appraised value. Real estate appraisers estimate market value, which is defined as “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.” In other words, the appraiser is estimating what the property will sell for after negotiation. Remember the appraised value is the price for which your property should sell, not what it should list for.

REALism #5 – If you know and trust the builder, a cost-plus contract will cost less than a set price contract. Remember this realism if you are thinking of building a new house this year. A cost-plus contract is one in which the builder agrees to construct your new home for their actual cost plus an agreed-upon percentage. Unless there is a sudden surge in building material costs during construction, a buyer should pay less with the cost-plus contract. So if you have a good builder, you will probably save money with a cost-plus contract.

REALism #6 – In general, a person can afford a home that cost 2.5 times their annual income. This is the general rule of thumb used by many lenders to estimate what a person can afford. There are many other factors considered in the loan decision. Things such as your total indebtedness, your monthly debt obligation, length of employment, and credit history go into the equation. Nevertheless, this is a good place to start if you are wondering how much you can afford.

REALism #7 – Many real estate transactions are closed in spite of, not because of, the real estate contract. If each party to a real a start real estate contract held the other party to the strict terms of the contract, there would be a lot less real estate sold. For example, an often verbally amended provision in a real estate contract is the closing date. Sometimes the buyer’s financing needs a few more days for approval, so the parties agree between themselves to extend the closing date. Many times, the buyer and seller do not go back and forth and formally amend the contract. But be careful. What happens if the parties get into a dispute over something in the contract? What’s written down on the contract is what prevails.

REALism #8 – The good analysis of any real estate project will include sitting on the curb across the street and simply observing the property. This realism emphasizes that real estate loans should not be made on property that has not been physically inspected and been subject to the observation of the neighborhood surrounding it. You would be surprised how many investors have bought property without ever seeing it. So go sit on a curb.

REALism #9 – A town grows toward the intersection. Most towns have a main intersection. There, traffic counts are highest, and therefore, the demand for real estate is greatest. When a highway bypass is built away from downtown retail will quickly follow.

» PHIL HARDWICK is a regular Mississippi Business Journal columnist. His email is phil@philhardwick.com.

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