The Great Arbitrage in Real Estate

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.

A real life example is what my husband and I did in late 2009. We purchased in McLean an all brick 4-level end-unit town house with an elevator that was built in 2001. We paid $850,000 for the home. At the peak of the market in 2004 there was one unit in this community that sold for $1 million, a time when the market was just heating up.

Another high sale occurred in 2007 for $1,035,000, just as the market was cooling. That means that the potential upside for our purchase in 2009 at $850,000 was between 17.6% to 21.8%. That is a nice return on investment. Values have been increasing since 2009 for this development. There were 2 sales that occurred in 2011, one unit sold for $895,000 and another at $947,000. That translates to a return on investment already in the 5.3% to 11.4% range.

On the other side of the great arbitrage scenario was the sale of our single family detached home in McLean that we purchased in 1999 for $306,000. It was a detached colonial built in 1959 in the Rosemont section of McLean. Over the years of ownership we made the following improvements: added a one-car carport, a front portico and a family room that opened off the kitchen, completed extensive professional landscape and hardscape, replaced the windows and roof, update the hall and powder bathrooms, renovated the master bath by adding separate tub/shower and walk in closet, numerous other cosmetic improvements.

The most expensive sale for the neighborhood not surprisingly occurred at the peak of the market in the fall of 2005, closing for $779,000. That is the most that we expected to sell our home for when the market returned to peak. Looking back of course it is evident that the fall of 2009 was the bottom of the market, so we anticipated peak was several years away. We sold the home in Rosemont for $745,000, which was a bit less than 5% off peak market value. Since that sale occurred, which has been a bit more then 2 years, there have been no sales higher than that price in that sub-market. Thus waiting for those 2 years for the market to improve would not have proved beneficial in terms of increased return.

Clearly that was an instance of great arbitrage. There was some risk involved. It required us putting the town house under contract prior to having the single family sold. It meant that we had to qualify with a lender to carry the debt on both properties and be willing to possibly pay two mortgages. I recall clearly my husband asking me if I could sell our single family house and I said absolutely yes the home would sell, it just would depend on whether the price would be acceptable to him.

Because I was adamant that I did not want pay two mortgages any longer than necessary, I had my husband write in the listing agreement that he would be willing to lower the price every week by 1% until the home went under contract. Fortunately for us it only took one price adjustment to find the market. But then again we weren’t trying to squeeze out top dollar, but rather to obtain a fair market price.

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.