Value Homebuying: The Buffet-Inspired Homebuying Mindset

Warren Buffet is renowned for his style of investing in the stock market. It’s known as value investing. The way he thinks when buying stocks… that’s exactly how I think when buying a home.

Below, you’ll find an overview of my Buffet-inspired homebuying process.

I use this process regardless of if the home is for me or if it’s an investment property. I will almost always make changes to a home (not to mention repairs) and most likely, so will you. Right away, add those cost estimates to the purchase price. Can you resell the house for that amount? If not, I’d move on.

Begin by collecting knowledge. Knowledge is the cornerstone of value homebuying. When you’re armed with knowledge, you can make decisions very quickly and you’re less likely to regret them later.

Markets are generally stable. As we know, the pandemic created an enormous boom in housing and it became, in my opinion, an unstable market. If the market is unstable, I like to be very cautious. Getting caught up in bidding wars often ends in regret, so be careful. Arm yourself with knowledge. Take as much time as you need. 

Let’s begin! Here’s a list of all the things you need to know as a value homebuyer. This list can guide you through your knowledge quest.

            -know the market. This means having a good gauge for how fast a home will get an offer and for how much. With a few months (preferably more) of looking at listings every day, you’ll know the market as well as some of the agents out there.  

            –know the active listings, their prices, and their descriptions. Check in on these active listings as long and as often as you can. Get a gauge for how quickly the active listings receive contracts. Analyze the homes that get offers the fastest and learn from them.

            –know your sold comps for the homes in your target neighborhoods. This is the most important data for deciding how much money you should be offering. If the house down the street with a brand new kitchen sold for 300k, why would you pay more than that for a similar house on the same block, but without a brand new kitchen? You shouldn’t! This is precisely why you need to keep an eye on the active listings and the sold comps. Learn more about knowing your comps and following your market here.

            –know how to navigate your local assessor site. Visit it. Play around on it. Use it to gain huge amounts of insight into your property, neighborhood, and overall market. Read more on the importance of visiting assessor sites here.

know who wants to buy your house in two years. This is your target buyer. Your target buyer might influence your design decisions or how much money you spend on renovations or upgrades. If you spend too much money on the wrong upgrades, you could lose money instead of make money. Unless this is your forever house, always factor in the target buyer. (However, if this is your forever house, you should make the decisions that make you happy, not the next buyer…)

            –know the general budget of your target buyer. This ties into the point above. If your target buyer has a lower budget, you may want to update to nicer laminate countertops instead of marble. Or leave them alone all together (gasp!).

            –know if home prices (in past years) remain stable, increase, or decrease. Use this knowledge to conservatively estimate what market conditions may look like moving forward. Of course you can’t foresee the future, but at least consider it. Every neighborhood/market is different and some are more stable than others. On that note, if you’re in an area that is rapidly gentrifying, you can be more risky. But if you’re in an area that’s stable (or not growing), you need to be more cautious. Investors should avoid an area in decline.

            –Be aware of any external issues which may affect value. Too small a yard? Noisy? Tons of powerlines? Train tracks? Busy street? Bus stop? School nearby? Halfway-house next door? These things should earn you a discount.

            -know the resale price as if it’s in dream condition. Maybe it’s already dreamy and everything is in new or perfect condition. If it is, that’s totally okay! But you need to know the price difference between a home that’s either unattractive or in need of repairs versus that same home in a drool-worthy state.

            -know the house inside and out. Visit as many times as you want. Really!

            –know the estimated cost for needed repairs. Some unexpected things may come up. But be prepared by knowing the obvious. If you know something will need to be replaced, look up the materials at Home Depot, Lowes, or wherever you’ll likely shop.

            –know the estimated cost for upgrades. If you plan on upgrading or renovating your home; arm yourself with how much that will cost you and factor it in to your offer.

            –Learn how to estimate labor cost- Most people have no idea how much labor will cost them. Where I live (in the Midwest), a general way to “safely” estimate labor is taking the material cost and then double it as “factoring in labor”. Ask around how to best factor in labor wherever you live.

            – know how long it will take for any renovations to be completed. This knowledge is very crucial if you are doing a “flip” or renovating a rental property. It is less important if you’re going to be living in the home yourself. The time spent renovating will involve carrying costs that need accounted for.

Now, after considering all these things, decide how solid your potential asset appears now. If anything is shaky, no deal!!  If your target buyer doesn’t match the target price? No deal. Target price doesn’t match the neighborhood? No deal. Unstable market? No deal. If all the above checks out, decide if the home is a good buy based on the actual numbers. I’ll show you my process below, with completely made up prices.

            -Let’s pretend the listing price is 300k.

            -First, I take the list price then add the carrying costs for the work period. Carrying costs would include your mortgage payment, utilities, taxes, insurance, HOA, etc. (If you aren’t flipping or house hopping you don’t need to do this. For simplicity, I’ll skip this part).

            -Then I add the material cost of repairs and upgrades. Let’s say materials are 30k. (300,000 + 30,000= 330,000)

            -Then I add the labor cost of a pretend 30,000. (330,000 + 30,000= 360,000)

You can see that my 300,000 purchase is really a 360,000 house. Now that I know I’m all in at 360,000, I see if the resale checks out.

            -Can I sell the house for at least 360,000 in this neighborhood to my target buyer?

                        If the answer is yes, I can buy the house for myself.

                        If the answer is no, I will not buy the house. Or perhaps I will try to negotiate a lower purchase price so I can get this to pencil out.

                        If the home is a flip, I’d want to be able to sell the home much more than 360,000. First, because the whole point of flipping is to make money. Second, because I will have hefty real estate fees and other closing costs. Lots of people forget to account for those extra costs- don’t let that happen to you.  

This process has helped me minimize risk. Houses are risks, even if it’s a home you live in. When you purchase a risk, this is the mindset you should have! Value homebuying hedges your risk and protects your financial well-being.

To be honest, value homebuying can be incredibly frustrating. Most of the time, I get to the end of this process and the house is not a buy. I try not to be emotional about it, but I’ve had moments when it’s been tough. It took a long time for me to find the house I’m in now. The process sucked. But it also protected me from making a poor financial decision and it provided me with a buffer should markets change.

And look at the market now. Hot damn, what a ride! Was I flipping in 2021, while investors were piling into purchases? That’s a HARD No. Because remember one of my questions above (Do I know the house price in its dream condition in two years? Is the market stable?). But perhaps I’m just a fool…

There you have it folks- my handy value-based homebuying process in a nutshell. What do you think? Too crazy? Too strict? What’s your process (or do you even have one)?

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