The Great Arbitrage in Real Estate

There are times in the real estate market where a great arbitrage can occur.  The most frequent I have seen in the residential sector is when a home owner sells their home for a strong price relative to the market conditions and buys up at a price that is still low relative to the market potential.  According to Wikipedia, the definition of arbitrage is:  the practice of taking advantage of a price difference between two or more markets:  striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.

There have been several instances recently where agents on our team have been able to do this for clients.  One example is clients who purchased a single family home in North Arlington, Virginia in the low $800,000 range.  Values have been increasing in the area at about 10% per year.  There have been many instances of multiple offers on similar homes that escalated well over list price.  If the current appreciation rate continues that means similar homes will be selling close to $900,000 at year end.  If these clients waited until next year to purchase, it is likely that they would have been priced out of the community.

On the other side of the great arbitrage scenario was the sale of their condo in the Fairlington Village section of Arlington, Virginia.  The clients paid in the mid-$400,000 range at the peak of the market in August 2006.  We were able to help them recover the majority of their investment by selling in the low $400,000 range.  This part of the market is just now returning to peak prices from the correction that occurred during the recent recession.  It is recovering at a rate of about 5% per year on average.  At that rate, their condo would have increased in value at best to about the $430,000 range.  Even if this year achieves 10%, they would still lose ground on the buy side.

The higher priced home appreciating at a rate of 10% per year means $80,000 potential increase in value where even if the lower price property achieved 10% per year that only meant a potential $40,000 potential increase in value.  As you can see, by waiting this family would have lost ground each year!

Clearly this was an instance of great arbitrage.  There was some risk involved.  It required putting the single family home house under contract prior to having the condo sold.  It meant that they had to qualify with a lender to carry the debt on both properties and be willing to possibly pay two mortgages.  I recall clearly the clients asking us if we could sell their condo and I said absolutely yes the home would sell, it just would depend on whether the price would be acceptable to them.  Because they were adamant that they did not want pay two mortgages any longer than necessary, they priced the condo correctly for the market and had it under contract in less than 2 weeks.

There are still numerous arbitrage opportunities in the market place.  The best way to uncover them is to work with an experienced Realtor that is intimately familiar with the market nuances.

Karen Briscoe and Lizzy Conroy are active and experienced Realtors® in the Northern Virginia, suburban Maryland and Washington DC market place and would be delighted to assist with home selling and/or buying.  Our team works with Buyers, Sellers and Investors in all price ranges.  Please contact via the means most convenient for you:  www.HBCRealtyGroup.com, 703-734-0192, Homes@HBCRealtyGroup.com.