Why the time to buy an apartment is Right Now!

Everyone is talking about whether the real estate market will go up or down. A natural question, to be sure, yet for most buyers, that’s not the right question. What most buyers really want to know is “How much more will I have to spend to buy my next home?” This is known in the industry as “the leap.”

Up till now the cost of the leap from one apartment type to the next has been the single biggest obstacle for buyers. In the red hot market of 2007, the average amount of money required for a leap was:
Average Studio to Average 1 Bedroom: $ 300,000
Average 1 Bedroom to Average 2 Bedroom: $ 500,000
Average 2 Bedroom to Average 3 Bedroom: $1,000,000

Now the situation has certainly changed – creating a real opportunity. Average leaps are now:
Average Studio to Average 1 Bedroom: $200,000
Average 1 Bedroom to Average 2 Bedroom: $400,000
Average 2 Bedroom to Average 3 Bedroom: $750,000

But there is more to the leap than this arithmetic suggests.

For example, Susan G. owned a studio apartment and decided to sell it in a hot market for $500,000. She paid off her old mortgage of $300,000 and used the $200,000 difference toward the purchase of a nice one bedroom that cost $800,000. Susan had a leap of an additional $300,000, which she financed completely with a new mortgage of $600,000.

Susan’s neighbor John S. decided to wait to sell his home for a few years and he has missed the golden opportunity enjoyed by Susan. He resigned himself to the reality that his home is only going to sell for $400,000. His poor timing resulted in a sales price $100,000 lower than Susan got.

John recently started looking to buy a 1 bedroom apartment similar to the one purchased by Susan. He finds one, negotiates a good deal and buys it for $600,000. He only needs $200,000 in additional cash and mortgage, which is $100,000 less than Susan required.

Because the price drop on the average one bedroom was much more severe than the price drop on studios, John actually ended up doing economically better than Susan did, even though he sold his apartment for less.

And consider the financing. When Susan purchased her home she was able to get a great 30-year mortgage at 5.5%, which meant that her monthly payment was $3,408.

John financed 75% of the purchase price, as well. Yet bank rates have dramatically declined. Since the price he paid was $600,000, he took a loan for only $450,000 at a rate of 4.5% for a 30-year fixed loan. His monthly mortgage costs $2,281 per month.

The Bottom Line

In the leap, getting a high price for your home doesn’t necessarily mean that you do economically better when you move. The issue becomes what you do with the money. Given the market, sometimes what looks like a good opportunity is a leap of expensive proportions, and sometimes what appears to be ill-timed venture might be the best opportunity of all.

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