Hurray! It's a buyer's market and you're on the prowl for a deal. But just because you may have a perceived upper hand doesn't mean you should throw caution out the proverbial Pella window. Here are 5 things that can help stretch your home-buying dollar and make sure you don't get a negative return on your investment.
1. Start with a reputable lender. With the rapid drop in interest rates over the last few years several fly-by night companies opened up suddenly to take advantage of the interest rates and you. If you have reasonably good credit, start with a bank. In fact, start with 2 or 3 banks, but don't have them all run your credit. That costs you money and points off your credit score. You can run your own credit report from any of the three credit reporting agencies.
Ask for a good faith estimate of closing costs. If the lender refuses to give you one, move on. Closing costs and pre-paids together should be around 3 % of the sale price. Question every fee listed and get a second opinion. Nothing kills a good real estate buzz like massive closing costs. Ask about the interest rate and then check the rates reported daily in the financial section of the newspaper. If the bank's rate is way off the reported rate in either direction there will be problems later on. For example, if the reported rate is 6.875 for a 30 year fixed rate mortgage and the lender shows you numbers based on an interest rate of 8.25 percent for the same type of mortgage, there is a problem.
Beware of adjustable rate mortgages (ARM's) and pick your payment mortgages (negative amortization and interest only mortgages). Two to five years down the road you could end up owing as much as 25% more on your home than what it is actually worth. If you have no money but still want to buy a home there are many legitimate programs out there to help.
2. Be realistic about price. Prices do tend to come down a bit in a buyer's market. However, we're not talking "day after Thanksgiving" discounts. Grand Rapids was fairly insulated from the rapid price increases that happened on the East and West coasts. In our market you are likely to find prices remain stable or drop by a slight 2 to 3 percent. If you see a home that has been on the market for a extended period of time and has had several price reductions, chances are the seller talked to his neighbor who heard from his buddy who does real estate part time that the house down the street sold for x amount of dollars. It's like the real estate version of the telephone game. Every time the story is told the sale price goes up five grand. The seller was the last one on the line and now thinks his house is worth a fortune. Negotiating price can be tricky. There is a fine line between negotiating and p*****g people off. If you come in too low the seller will most likely reject the offer and stop talking. Unless the seller is a bank trying to dump a foreclosure you will be dealing with someone who has an emotional attachment to their home. At this point it is best to be dealing with a buyer's agent.
3. Work with a buyer's agent. Agency is important. And what you need to know is that all real estate agents work in the best interest of the seller. You, the buyer, are at their mercy unless you have a buyer agency contract with an agent. A buyer's agent will do five things. They will promote your best interest; tell to you anything they may know about the house that might influence your decision to buy it; keep your information confidential; present all offers on your behalf; and finally, tell you anything they may know about the seller's willingness to complete the sale or possibly take a lower price. Some buyers think that by working directly with the seller's agent they are saving money. Most are under the impression that the seller will take a lower price and have the agent cut their commission. It doesn't work that way. The seller's agent has a direct interest in getting the highest price possible for that house.
4. Be realistic about needs and wants. How much house do you really need? How long do you plan to be in the home? Are you planning on expanding your family in the near future? What if your family expands unexpectedly? (Congratulations, you're having triplets!) Consider your commute, location and school district. They all have an effect on resale. What other things would you like to spend money on apart from your home? Would like to take a vacation or do something wild and crazy like buy groceries? What about maintenance costs? Older homes cost more to maintain. Large yards take a lot of time and care to look good.
When buying a home there are two numbers we consider; what the bank says you can afford and your pain threshold. Your pain threshold is your comfort level. It's the monthly payment that doesn't give you panic attacks. Just because that bank says you can afford $1500 a month doesn't mean you have to spend that much. Your real estate agent should not get snippy if you want to look at homes that are 15% to 20% below what the bank says you can afford. If they do, move on
5. Be willing to work on a home. The great thing about the market in Grand Rapids is that we still have plenty of affordable housing. It may not all be pretty but with a little money and lots of sweat it still makes a great investment.
Look beyond the cosmetic. It's amazing that buyers will reject a great house because they don't like the color of the half-bath. If you love everything about the house but you're hesitating making an offer because the walls are beige and you prefer ecru, you need to get a grip. If the seller has watched one too many episodes of Trading Spaces, negotiate a paint allowance.
Consider buying a foreclosure. Okay, the condition may be a crap-shoot, but if the major stuff is in decent shape a little paint can go a long way. When buying a home from a bank, there is no emotion involved. They have a formula. You can go in a low as you want. The asset manager plugs in the numbers. If the numbers work the offer is accepted and if not the offer is countered. Foreclosures are sold as-is so make sure you get a home-inspection from a qualified home inspector.
On any home that you decide to buy make sure you have inspections. Go ahead and have your contractor buddy look it over before you write the offer. If there's a serious problem with the property after it closes, a report from a reputable home inspector is more likely to stand up in court.
There are deals to be had in this buyer's market. Good financing, a buyer's agent and realistic expectations will go a long way in making a sound investment.
Happy hunting.
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