Are California Home Buyer Tax Credits going to make you give up your cash for a clunker?

Last week the state California in it's infinite wisdom passed a $200 million tax credit bill to entice home buyers to stay interested in the market. There is now a small window of opportunity for homebuyers to double dip the federal tax credit and the California tax credit for a whopping $18,000.00.   The California home buyer tax credit unlike the federal tax credit will be doled out over a three-year period. Real state agents, government officials and the banking industry is hoping and praying that buyers will come out and take advantage of a cash grab.

With the federal tax credit deadline of April 30th (to put a home in escrow), any buyer looking to make a purchase now should be careful as the enticement for cash may stir enough excitement to blind those buyers of potential problems with properties or offer more than they normally would. 

Consider the available properties fall into several categories.

1. Short Sales -  These distressed properties typically have deferred maintenance, lack upgrades and often need immediate repairs. If these typical issues exceed the tax credits, is it really worth pushing forward?
2. Foreclosures - These distressed properties can have similar conditions as short sale properties.  Even more important, because these properties were taken back as a foreclosure, there is extremely limited knowledge as to the condition of these homes and the history of past problems with these homes. Even with the best home inspectors, a homebuyer could be in for a surprise that exceeds the value of the tax credit after purchasing one of these homes.
3. Equity sellers -  There three kinds of equity sellers; first, equity sellers who have been in the property for a long time, maintained the property, no recent upgrades, but have the home and overall decent condition. Second, equity sellers who have upgraded and kept their homes in above average condition for the area.  Third,  equity sellers who didn't do a darn thing to their house in the last 40 years. What's common about all three categories is that since these home sellers are not underwater and don't have the pressure of a short sale or forclosure, they are the least likely to give away their property at fire sale pricing. The homes in this pool that are in better condition attract the most buyers and the most competition with little room for bargaining.
   

While $18,000 is a sizable amount for any first-time home buyer; if a home requires $18,000 to mitigate deferred maintenance and upgrades, consider everything that goes with that kind of work put into a house. For example,  if you plan on using the tax credit to remodel a kitchen, remember only approximately $11,333.00 will be available,  As California will divide the $10,000 tax credit over three years. I'm a pretty smart do-it-yourself kind-of-guy, I've remodeled my kitchen, put my own retro fit dual pane windows in my house have done a number of other jobs, but $11,333 won't be enough to remodel a kitchen, not to mention how it displaces your family when you don't have a kitchen sink, stove or oven for several weeks while dealing with cabinet installations, counters, plumbing & electrical. 

My point in giving the darker side in this tax credit fiasco is that buyers need to be careful to not get hyped into an impulse purchase.   The market has softened in the first quarter of this year, sales volume has declined and the buyers I am running into at open houses, and in public, and even my clients are cautious and skeptical. Even though inventory has increased somewhat the choices are still slim. So, if you're going to go after the cash just be careful not to buy a clunker.