Real Estate the Ramsey Way - Will Overbidding on Homes Ever Stop?

Episode Date: November 4, 2024

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Dave Ramsey here and welcome to another episode of Real Estate, the Ramsey Way, where you'll learn how to make smart home decisions, avoid costly mistakes, and navigate home ownership with confidence. Grace is with us in Philadelphia. Hi, Grace. How are you? I'm good. Hi, Dave. Hi, George. Hey, what's up? I appreciate you taking your time. I know you and your team talk a lot about the trends in the real estate market. And I had, my question is, when do you think the obnoxious overbidding on houses will stop?

Wow. Is that happening in your area in Philly right now? I mean, I believe so. But yeah, I could tell you personal experiences, but I just feel that I personally put in offers, and, I mean, I'm just getting beat 50,000 more than asking price. Well, the simple. The qualified answer is that that is caused by more buyers than there is inventory. Anytime basic economics supply demand curve says that anytime there are a large number of people chasing a few goods, it drives the price up.

Scarcity drives the price up. The opposite of that would be if there was more houses on the market than there were buyers, then that would be called a buyer's market. This is a seller's market. A buyer's market means that the sellers feel just blessed to have anyone look at their poor little house because nobody's out looking at houses and because there's hardly any buyers. In other words, there's 10 buyers for 100 houses. Right now there's 100 buyers for 10 houses. You see the difference?

And that's a simplified answer. And that's being caused by several things. But one of the things that's driven it of late in the last. last five years, as much as anything, is all of the migration that has happened of people changing states because of taxation and archaic crazy laws having to do with the Fauci pandemic and all kinds stuff. People just left California. They left New York, and they're in Tennessee, they're in Georgia, they're in Florida, and they're in Texas, and the numbers are there to support that. That's not a political statement. It's just a huge change in population shift.

And so that's created in those states in particular, a shortage. Now, you're not in one of those states, but just to say that's exasperated it in those states. Then the other thing that's exasperated is if the economy, if builders of single-family homes do not believe in the economy, then they don't build houses because they're afraid they can't sell them. And that's happened hardcore in the last 18 to 24 months because the real estate market slowed down. and so builders the number of new housing starts is way off and we were already had an inventory shortage and so now with not as much new housing coming online as it needs to now we've got even more of an inventory shortage and that's what's driving this is you've got 100 buyers or

whatever the number is on 10 houses that's not an exact number but it's there's this tremendous oversupply of buyers and so they're doing stupid stuff like bidding 50,000 bucks over what the appraisal is, which then ends up ultimately changing the appraisal because people do it enough, it becomes a new market value. Yeah, and that was a follow-up question, too, exactly. I mean, how are these houses, townhomes, getting appraised to this value that or just, it's kind of, I don't want to be made up, but how is it equaling the, the, um, the overbidding? How are these praises saying, you're right, it is over $50,000.

Well, if you have 10 houses in a row on the market and six of them sell with overbids, you now have a new market value. It's the overbid value. Because market value, the definition of it in appraisal class is what a willing buyer gives a willing seller where no duress is involved. Now, we could argue that this is a duress market. But in other words, neither one of them are being cheated and neither one of them have a gun of their head. And so that buyer's willing to pay that seller that, knowing it. And if they do that enough times on that block, voila, you have a new market value.

And it's the overbid price. It's not the original value. And so, again, the shortage of housing versus the number of buyers is driving it up. And so we've got some markets like yours. I was not aware of Philadelphia was that hot, but we've got some markets like yours where you put a house on the market and you're getting multiple bids over the weekend, even with interest rates, almost double what they were two years ago. Yeah.

And that's another piece of this, Grace, is that there's some golden handcuffs out there because people either refinance or bought at crazy low rates. And now they're unwilling to sell that home because they don't want to take on a new mortgage that has double the interest rate, which means there's lower inventory. So I don't see this thing shifting drastically in the next, you know, a year. I think when you're ready to buy, you got to buy. And if it means you had to get a competitive bid in with a good real estate pro, then that's what you had to do to get that home. There's not going to be deals out there where you're, you know, doing 20,000 under asking price right now. Not the time to look for a bargain in real estate business, that's for sure. No, not at all.

I mean, I'm a bargain buyer. I don't buy except in bargains. Dave hasn't bought a lot lately. And I haven't bought anything in a while. I mean, it's, and I'd kind of like to. I got some cash I'm sitting on, but I'm not going to pay. I don't pay retail, so it's just like a Ramsey rule. So what's your price point, Grace?

Well, I mean, and I've been guilty where I, I mean, I, to kind of get to be competitive, I've gotten 20,000 over. But, I mean, I'm looking around the 300 to 320. That range goes real fast, especially the hot market. Oh, yeah. I was talking to my real estate buddy yesterday, and he said homes under 500,000 in Nashville are going like that. If I was a home builder in an average city in America right now,

I would build all the $500,000 houses I can build because you could sell everything you built. There's just because that's an entry level in some markets. It's a number two move up in other markets. And it's just, you know, I would build. There's a tremendous inventory shortage. I know this is going to be behind the scenes, but do you think banks are going to, when the appraisal comes back and they're saying, okay, this townhome that was, I mean, for example, I had a 309 townhouse.

I bid for 330 and it finally sold for 363. So do you think the banks are going to counteroff for that thing? I don't think this is going to be appraised for that high. Well, they're going to run an appraisal, and if there's no statistical evidence that other count houses are selling at the 369, then that deal is going to have a problem because that bank has got a bunch of regulations on them. They cannot loan more than appraisal. That's what got us in the 2008 debacle,

was them loaning on bogus appraisals. And so the appraisal industry since 2008 is tightened way up on regulations, and the banks are tightened way up. mortgage companies are tightened way up. So they don't have a lot of wiggle room. So if somebody made that offer, they have to disclose to the bank. They're paying $369. But if the appraisal comes back at 320, the bank's going to lend on $320. They've got to have the cash in the pocket for the difference. So, Grace, you're going to have to compromise on some things, whether that's location, you know, the home type, how old it is, see past some things that you can renovate. But I don't want you

sit on the sidelines hoping for the market to shift drastically. It's not going to, yeah. And I don't really disagree with your word obnoxious. I kind of think it's accurate, but it is based on supply and demand. And especially if you're trying to buy, it's just, it's distressing. It's harsh out there. Weird. Danny is in Miami. Hi, Danny. Welcome to the Ramsey Show. Thank you so much for having me. You're very excited. Well, good to talk to you, sir. How can we help? The main point of the reason for my call is because me and my fiance, who we're getting married in July in Montana, but she inherited a house from her. grandparents after they passed away.

And where right now it's been a rental property for a couple decades, right, where somebody in the front of the house is in renting and then somebody in the efficiency in the back has been renting out, right? It brings in, well, right now we're renovating it, the back end of it, but we know that once we get it fixed up, total should bring about maybe $4,000 a month in rental. her perspective is that she wants to move in into that house. The house is paid off. Where is the house?

It's in Miami and Cole Gable. Oh, okay. But you're getting married in Montana. That's what threw me. Okay. Yeah, yeah. Okay. So she wants to move into the house, which is paid off, right?

Just to maintain it would be about $1,500 a month, aside from the $4,000 if we kept it rented. My standpoint, or at least my perspective, is that if there is a same thing, scenario where we can, and I know you're all about, you know, cash, cash, cash, right? If finding a home using the benefit of my first home buyers, right, to find a new house and then use the rental property monthly money to pay off its mortgage of a new house. Because I, my perspective is I really want to maintain a rental property instead of just moving into the house that's paid off. How old are you, Danny?

I'm 28. Good for you. And she's 27. Good for you. Well, I share your love of real estate investing. I believe in real estate investing. I own a whole bunch of real estate. I love it.

And not everybody should own real estate. You have to deal with these things called tenants. And so sometimes you shouldn't own real estate. But it is not a problem for me. I do conflict well, so I can handle it. And so I'm with you on owning investment real estate. estate. Rachel's husband does real estate for a living, runs our family real estate and has his own company as well. And so, you know, we, we both of us love real estate. And so we share that with you.

We do also know that the shortest distance between where you are and wealth is to become and stay debt-free, house and everything. That's why we're cash, cash, cash, cash, cash, cash, cash all the time, because it's the best thing for you. It doesn't affect me if you go buy a house on debt. It affects you. So it doesn't, once we get off the call, my life's going on, and you're going to be dealing with the debt, not me. But I love you, and I want you to win.

I want you to go out there and be big time wealthy, and the shortest distance is not borrowing money on a residence and keeping a paid-for inherited rental. So if you're going to, going to follow that advice, then you've got two choices, actually. One is do what your fiancé thinks is okay. Move into one of the properties, move into one side, rent the other. It's paid for you.

You have zero debt and you're a young married couple with no debt. That's a very nice place to be in a very unusually wonderful place to be. You have your entire freaking income to invest in pile up some money and buy your first rental otherwise with cash. And that's what I did after I went broke years ago in the real estate business by borrowing too much money. So that's one option. The other option is probably emotionally painful, but also mathematically,

is just as valid. And that's sell the inherited property. Use that cash and buy your first home for cash. Now, I don't think that's going to be real appealing to your fiancé. Yeah. Because this was her granny's place and it's been in the family, even though it's been a rental for years. She's got some emotional attachment to it. So suggesting that might not be a winner for you.

Probably not. Yeah. It's a good house. I mean, it's in an area that's very, her grandparents bought the house for, I believe, like $100,000. It was years ago. You were talking, and now it's, now it's about worth $750. Yeah, and for $750,000, you can buy a pretty decent home in that area if you pay cash for it and sell that house and pay cash.

Mathematically, that's fine. But she just got this. You're just getting married. there's a lot of just starting things here. So I would not do your suggestion, and I would not do her suggestion long term, but I would do it initially. And the way I would set it up with her is say, listen, I don't think long term we want to live in this house. Next to renters. But I also don't.

And that's why. Yeah, even though it's Granny's house and even though it's inherited and all that. but there's nothing nostalgic about a piece of real estate in most cases. So what I would say we do is we live in this house for a year or two years, and then we sell it and use the money to buy a house. But for right now, we're newly married, and this inheritance is fresh for you, and I want to be sensitive to that. So let's give it a little time, but I don't think we want to 10 years from now be living in this house.

And I think she'll agree to that because she probably doesn't either. she's just looking at, oh, I can live here for nothing. And I just got this. So, you know, I would suggest you spend a year to two years in that house as a marriage investment. Yeah, yeah. And then sell it and move up. But no, I would not borrow money to buy another house with your first-time homebuyer. Not while you've got a place to live for free.

Your fiancé has a point. But also probably, unless it's her idea, would not sell it. today. I don't mind. The only thing that bothered me about someone's today is the emotions of it. I think selling it today would be a fine idea. I mean, nothing wrong with it at all. Yeah, but she probably wouldn't go for it. Yeah. Yeah. Probably going to feel weird to her. And the family might go, oh, well, she married that guy. And the first thing, he didn't sell off the house. Well, that's because he's got sense. But, you know, yeah, it's a good thing to sell it off,

actually. I'd be rid of it and go buy a house. But I don't know that that's going to work relationally in a brand new marriage situation that hadn't even occurred yet. Yeah. So it doesn't occur until July. So, but, but I'm trying to think about all the angles on this, but Danny, yeah, you're thinking like most people think that get in trouble with real estate, and that is, is that the tenants are going to pay the bill. Tenants sometimes pay the rent.

Sometimes there's tenants. And when there's tenants, sometimes they pay the rent. there's a lot of sometimes in there. And those other times, you pay the freaking payment. And so that's how that works. Well, and there's no payment on this one. But using it, but using it to buy another house. If you're using it to cover your other house, then you get to pay your house payment, dude.

Yeah. So, you know, this, you can tell a brand new landlord when they think they're always going to get their rent. That's a brand new landlord. That's somebody who's never done it because you don't. Hello. And there's all kinds of stuff happens. I mean, sometimes it's sad things. Winston was managing one of our properties,

and we gave these people four months free rent because the guy was diagnosed with a terminal cancer. He was going to die in four months. The last thing I'm going to do is evict this woman in the middle of her losing her husband, but I can afford to be that generous if I want to be because I don't have any payments on it. Right, right.

And that was just a sad thing. And then she needed to move and on anyway after he passed away, So, you know, it wasn't a long-term situation, but you can afford to do that. But for people like Danny. You don't always get your rent. Yes. Yes. But for people like Danny, because the real estate game, it's always been there, but I feel like

it continues just to bubble up. Social media has made it popular to be stupid again. Well, it has risen of like, hey, here's another way to invest your money and how to grow wealth and how to become wealthy. Leverage. Yeah, that's how most people, if they get into the game, that's where they have to start out, right, is leverage. So how do you encourage people to say, okay, this is how you start? It is cash, but do you, is there a formula where it's like, okay, you know, you pay off your

primary home or in Dana's case? Pay off everything. Become 100% debt free on your personal residence and then save up with no payments of any kind. You can save up money real fast. And you'll probably get a condo or so, like you'll start small, your first property. Yeah, buy your first little thing. And as you build it up. But I think some people, it's, it feels defeating of like I'll never be able to get into the real estate game. I was with a Arizona guy's podcast this morning. We were recording it one of these big YouTube guys and a wonderful guy. And he was quoting Charlie Munger.

He said, you know, one of the things that hold, he said, Charlie Munger says three things hold people back. Liquor, ladies, and leverage. Oh, my gosh. That'll set you back.