Go Up The Housing Price Curve To Find Better Value

How To Value Investment Property To Make A Better Return

I originally published this post in late 2021, when the housing market was looking iffy. In 2H 2021, the housing market is now really iffy. Prices are holding strong, partially due to record low mortgage rates and an increased desire for better living. If you want to buy real estate now, I suggest you go up the housing price curve to find better value.

Homes priced no more than 30% higher than the median home price for the area are in high demand. Homes priced below the median are flying off the shelves as the millennial generation become the biggest home buying generation. Competition is fierce!

If you go up the house pricing curve, your competition declines. Due to all that’s going on with the pandemic and the economy, lending standards have really tightened up. Banks require 720+ credit scores and 20% down payments nowadays. Jumbo loans are very hard to get as a result.

Let me share how you can get better value if you move up the price curve.

Go Up The Housing Price Curve To Find Better Value

Back in 2004, I was looking to upgrade to a three bedroom, two bathroom condo in San Francisco. I had bought a two bedroom, two bathroom condo in early 2003 for $580,000, but had a twinge of regret that I didn’t buy a larger place for more money because prices kept on going up. It was my first place, so I had decided it was better to be conservative.

What I discovered in my search for a new home was that the $900,000 – $1,400,000 price point for three bedroom, two bathroom condos was an absolute buyer’s frenzy. Every single condo I observed went for 10% – 20% over asking due to multiple offers. After getting blown out of the water on several places, I decided to temporarily shelve my plans for a larger condo. It was too disheartening.

A Lucky House Find

Then one rainy weekend during the winter of 2004, I stumbled across a single family house priced just above the frenzy zone at $1,550,000. Yes, it was on a busy street next to a busier street, but this was a three bedroom, two bathroom home with an in-law unit with its own bathroom. It also had a backyard and a little deck to boot.

I would never have imagined at that time being able to buy a single family home in a good area in San Francisco, so I never bothered looking. But there it was. I went up the housing price curve to find better value!

Unlike the condos in the $900,000 – $1,400,000 price point, there was no demand for this single family home at $1,550,000 despite having 50% more square footage and valuable land. The property had been sitting there for months.

So instead of trying to buy a $1,300,000 condo for $1,400,000 at $1,100/sqft, I decided to buy a $1,550,000 house for $1,525,000 at $720/sqft. I closed in early 2005. Who doesn’t like a 35% discount?

Poorly Marketed House

The house was being marketed by an out-of-town agent with a flimsy one-page flyer. She wasn’t doing a great job because she hadn’t connected to the San Francisco real estate network. The house wasn’t showing well because it hadn’t been cleaned or staged due to its existing owners still inhabiting the place and looking for a rent back.

Back in 2004, a 30-year fixed mortgage rate was closer to 6% and the median household income was about 30% less. With $1,400,000 at the top of the frenzy range, $1,500,000 was the absolute cap. Even the Bank of Mom & Dad had their limits.

What’s Going On In The New Decade

The typical San Francisco household buyer (not median income earner) now earns between $200,000 – $500,000 a year. As a result, the frenzy price range shifted from $900,000 – $1,400,000 to $1,200,000 – $1,900,000. Even more parents are helping out with the downpayment according to all the real estate agents I’ve spoken to.

But what I’ve discovered today is that once you break the $2,500,000 price point in San Francisco, the value you get grows once again. To comfortably buy a $2,500,000 home requires at least a $500,000 down payment plus a $100,000 liquidity cushion. Having $500,000 to earmark into a single asset isn’t the easiest thing to do, even if you’re making a healthy $300,000 a year middle class income.

Although I’m not interested in buying property in San Francisco anymore, I still look online for fun every week because that’s what I’ve been doing since I first came here in 2001. There are always opportunities to be had or stories to be told.

In fact, the $2.2M house I put a lowball $1,950,000 offer in May, is back on the market because the potential buyer’s loan didn’t go through. Being on the market for over six months is unheard of in San Francisco. This fixer is being priced at $530/sqft ($688/sqft after putting $500K of remodeling work), while smaller homes in inferior locations still see good demand at $1,000/sqft in this location because they are priced under $2,000,000.

Glad I Was Able To Sell My Hom

The large drop-off in demand at $2,500,000 was one of the reasons why I decided to hit the bid when a guy wanted to buy my previous house for $2,740,000 in 2021. It was so far above the $2,500,000 cap that I hoped to one day get because I had tried selling the house for $1,700,000 in 2012 with no takers.

My buyer had to take out a $2,000,000 first mortgage and a bridge loan in order to close the transaction. Without him, there would be no sale because there were no other interested parties after a month of looking.

With new fatherly duties, zero tolerance for wasting time, and a detailed strategy to re-invest my proceeds, I decided it was better to take some money off the table.

The end price was roughly $1,320/sqft vs my $720/sqft purchase. This was a lucky outcome because I held on. But there were about three years there where I might not have even been able to get my original purchase price if I needed to sell.

Your Buying Mission If You Choose To Accept

If you choose to buy property when prices are at or close to all-time highs, implement my communications strategy to try and get up to 5% off fair market value.

Further, you should consider my spray n’ pray method since it’s so easy with electronic contracts nowdays. Finally, you should also spend time looking for stalefish properties. Stalefish properties at a price point one level higher than you are used to will provide great value. It’s free to look, so you better.

Do your best to get out of the frenzy price point. The frenzy price point is where any dual income earning couple in your city can afford to buy. This is where you’ll get the least value.

Since real estate is local, you’ll have to figure out what that price point is for your area. Ask your realtor or put a multiple on the typical homebuyer’s household income.

For example, the frenzy zone for a typical $100,000 income earning household might be $300,000 – $500,000, based on a 3X – 5X multiple.

There are artificial price points which mentally, homebuyers have a difficult time crossing. These price points are generally $250,000, $500,000, $750,000, $1,000,000, $1,250,000, $1,500,000, $1,750,000, $2,000,000, $2,500,000, $3,000,000, $5,000,000 and so forth.

Predict Where The Future Price Frenzy Zone Will Be

Your goal is to anticipate what the future frenzy zone is and own that piece of property now. While you wait, you’ll have a grand old time getting more bang for your buck than everybody else.

If you don’t properly predict the future frenzy zone, you may face difficulties selling in the future.

I’ve decided to take my anticipation one level further by investing in the heartland of America. I predict over the next several decades, eager beavers from the coasts with overpriced college degrees will realize that grinding it out in congested and expensive cities will no longer be appealing.

With work from home a big trend now due to the pandemic, there should be an acceleration of people moving to lower cost areas of the country.

Yes, because we’re all lemmings, it’ll take time to see the change. But if you can invest in a long-term trend, I’m confident your wealth will be greater than those who don’t.

Please go up the housing price curve to find better value. I’m sure you’ll be surprised at the better deals you can find.

Consider Investing In Passive Real Estate

If you’re looking invest in property take a look at Fundrise. Fundrise is one of the largest real estate crowdfunding platforms today. They are the pioneers of eREIT funds which give investors broader exposure to real estate with less volatility.

Thanks to technology, it’s now much easier to take advantage of lower valuation, higher net rental yield properties across America.

Fundrise Due Diligence Funnel
Less than 5% of the real estate deals shown gets through the Fundrise funnel

Please Refinance Your Mortgage

Finally, for the love of goodness, refinance your mortgage. Mortgage rates are down to all-time lows!

Check out Credible, my favorite mortgage marketplace where prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free. When banks compete, you win. 

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