Before You Buy A Home, You Need To Understand The Real Estate Pyramid

Before You Buy A Home, You Need To Understand The Real Estate Pyramid

Did you know that most people who want to buy a home are looking in a specific price range that they can afford and/or finance? Most of them are looking in a low to mid range between $80,000 to $400,000 dollars. The fact is few people can afford more. The very few who can buy more occupy the top few levels of the pyramid.
Most buyers typically have a payment in mind that they feel they can make if they keep their jobs. Of course jobs aren't a sure thing these days. People who are wise aren't mortgaged to the hilt. They have some financial cushion so they could keep a home if they lost their job.

But we see people who have built homes in locations that will not support the price of the home they are building. For example the man who had good credit but still could not obtain a loan to refinance the very expensive house he built in a rural location. We call this a 'white elephant'.

The reason he could not get a loan was because he wanted a 90% loan on a house in a location where there were no comparable homes in the area for appraisers to use to prove the value of the property to a lender. A lender will definitely not appreciate your unique vision. They just aren't made that way.

So this person who had good credit could not get a loan to refinance his rural behemoth. His own ego built him a financial trap. This is a bad position to be in from a number of ways.

Why would this happen? Why does it have to happen? It doesn't. Here is how to avoid it.

The answer lies in the number of potential buyers who can afford to purchase a property when it goes up for sale. Still more important is how many people are willing to purchase a property.

1. There are many people who will be interested in buying a home in a place where a good number of people want to live. 2. Next in importance are the people who can afford to buy and finance the home. 3. Next are the people who like the home and the way it looks. 4. Then you have the problem of whether the house can pass an appraisal and whether there are comparable resales nearby. 5. And finally you have the problem of whether there is a market for the kind of property you are trying to sell.

The fact is that the more expensive a property is, the smaller the potential market is. This is especially true in places where the median or average price of a home is lower. There are places in this country where you could build a million dollar house and find zero comps for appraisal purposes. If you can't find comps for appraisal, you can't get a loan and neither could a buyer. Many, if not most custom-built homes resell for less than they cost to build, some for a lot less. Don't blow your money on an ego trip, which could turn into an ego trap.