Money

Investor who became a millionaire at 26: Don't make this huge homebuying mistake I made

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Don't miss this crucial step if you're buying a home for the first time

We hear all the time that buying the cheapest house on the block is a bad idea. "It won't appeal to buyers when you're ready to sell," real estate agents will tell you. But depending on your priorities and financial situation, it can pay to spend less than you can afford. 

There are no "secrets" when it comes to homebuying. But unless you're super wealthy and have millions in the bank, buying the cheapest house on the best block (in the best neighborhood) is a smart decision. Most buyers avoid this, but when you think differently from everyone else, you can get significantly higher returns.

I once made the mistake of buying the most expensive house on the block because I thought it'd help me break resale records. But nope — that didn't happen. My property value went down due to the surrounding houses that sold for much cheaper than they should have. And because the pool of buyers looking for the most expensive houses is extremely small, I also had a hard time selling.

So I took a major hit and lost a lot of money. (Granted, I started my career in real estate at a young age, so I had a lot of learning to do. Luckily, my poor decisions taught me so much that I reached millionaire status at 26.)

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Millionaire real estate agent: How to be a master negotiator

'Location, location, location'

I'm not saying, "Find the cheapest house and buy it now!" You'll only get high returns if you're buying on the best block in the best neighborhood. Don't waste your time looking at a block full of dilapidated houses in a bad (or even mediocre) neighborhood.

As a homeowner, you can do whatever you want with your house: Remodel the interiors, change the exterior facade, paint it a different color, update the landscaping and so on. But the one thing you can't do is change the location. Enter the real estate adage: "Location, location, location."

Do your research. Talk to locals if you can. Get in the car and drive around until know the area inside out. Are there good schools? Low crime rates? Lots of shopping and entertainment? Good transportation and walkability? Above-average job growth? Choose a good location and you'll likely get significant increases in property value. Choose a bad location and you're screwed.

Advantages of buying the cheapest house on the best block

  1. It's an affordable way to gain access to an expensive neighborhood. The best locations are usually the most unaffordable. Buying the cheapest house allows you to join the club.
  2. You're almost guaranteed a property value boost. Your house will be worth a lot more once the expensive houses on your block get sold. Obviously, owners of the most expensive houses don't get to enjoy this perk.
  3. You'll get more interested buyers. As I mentioned earlier, most buyers stick to purchasing houses priced in the middle range — not the most expensive, and not the least expensive. So even if you do the minimum amount of renovations, you'll still hit the market at higher price and get a lot of interested buyers.
  4. You could buy it at an even cheaper price. Not all buyers have the confidence to undertake a major renovation project, so you'll have fewer buyers to bid against when it comes time to strike a deal. That said, you might be able to negotiate the "already-cheap" price down to an even lower number.

Getting started

  1. Take your time. For 99% of the population, buying a house will be the most expensive purchase they'll ever make in their lives. Don't rush. Create a spreadsheet. Calculate the numbers. Do the research. 
  2. Find a local agent who has a strong track record in the area. A local agent with years of experience can provide you with the best advice and a better understanding of how values have changed over the years. They can also spot a good deal when it pops up.
  3. Compare recent sales. Ask your agent to provide you with comparables (or "comps," as they call it in real estate). That data will be much more accurate compared to what you get from sites like Zillow and Trulia. Those are also great, but they can be misleading since the data is based on an algorithm system.
  4. Research repair estimates. Talk to at least two contractors to estimate the costs of vital reparations. Houses in need of major work are often sold "as-is" — meaning the seller won't make any repairs or offer any credits for potential defects. Never spend more than you can afford on renovations, and try to keep in tune with market trends in terms of popular fixtures and fittings.

Josh Altman is a real-estate agent in Beverly Hills. He has been continually ranked as a top 25 realtor in the country by numerous media outlets, including The Wall Street Journal. Josh's sales have topped billion dollars locally, nationally and internationally. He is also the author of "The Altman Close."

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