I ran across this article and thought it was great. I wanted to share it with all of you.
At first it may seem like a no brainer, low-hanging fruit and child's play, but purchasing in a down market is not as easy as it may seem. The problem is not a shortage of homes or a lack of sellers willing to bargain, rather it's that buying in such a market can be risky. Why? Because values may continue to fall.
Markets are always in flux so there's no way to determine when absolute bottom has been hit. This means that buyers looking to make a purchase in today's marketplace need to act with special care. It's not enough just to get a lower price, buyers must also look for long-term value.
How can you do this? Here are 10 steps to protect your interests as a buyer in a down market.
1. Look at the relationship between prices and inventory. Even if prices have been declining they may have further to go if the inventory of homes on the market is increasing or is far larger than usual.
2. Be aware that recorded sale prices do not tell the whole story during slow times. To figure out what's really happening you need to know how local transactions are constructed. This means if two homes are each sold for $600,000, the real cost to buyers may actually be different. This is possible because one buyer may have gotten concessions worth $5,000 while a second may have negotiated better and gotten an even bigger discount. The only way to really know about local pricing is to work with a local buyer broker who does a large number of transactions.
3. What are the long-term prospects for the local community? You need to look at such markers as population growth, job base expansion and new home construction. A growing population suggests more demand for housing. A growing job base indicates a larger pool of qualified potential buyers. If home construction is not sufficient to meet marketplace demand then supply is likely to tighten and home prices will be pressured to rise.
4. In previous down markets owners who could not sell simply hung on to their homes until times improved. In today's market, new forms of toxic financing mean that many sellers no longer have this luxury because they can face rapidly rising monthly mortgage costs. The result is not only higher rates of foreclosure, but foreclosure auctions which are not successful. Lenders then wind-up with a growing inventory of "REOs" -- real estate owned. An expanding REO inventory is one sign that the bottom of the market has not been reached.
5. When negotiating with sellers in a down market it's smart to have a compassionate attitude. A buyer who swaggers and flaunts his position may find that sellers will harden their attitudes, making negotiation more difficult than necessary. A better approach is not to be critical of either the seller or the property, but instead to explain that marketplace conditions limit your ability as a buyer to pay more money. In other words, it's nothing personal and I respect you and your situation.
6. Before looking at homes, make sure you have reliable financing in place. Down markets are the very times when lenders tighten underwriting standards and pull risky loan products from the marketplace. If your idea is to buy with nothing down and a stated-income loan application, you may find that most lenders no longer have much stomach for such arrangements. Be sure to have a loan officer review your credit standing with care so that you understand how much you can borrow and what programs are available in your situation. Get a pre-approval letter from a lender to show sellers that you have the financial capacity to buy.
7. Don't buy the first bargain property you find. In a down market there's typically a huge array of properties from which to choose. Take your time, have a checklist of the features you want most. Time is on your side because each day that passes sellers have additional carrying costs.
8. Think about where the local market is headed. Where is future growth for your community? Maybe it's along a corridor of newly-developing suburbs or perhaps an inner-city area is being revitalized. Whatever the case one should not forget investing basics merely because you're buying in a soft marketplace.
9. Be conservative in a down market. It's true that you may be able to buy a bigger home than in the past, but do you really need a bigger home or a larger mortgage?
10. Be aware that no one knows what the future will bring. As they say on Wall Street, past performance does not guarantee future results. Whether the market is up or down we have no certain way of knowing where prices will be in the future. Because of this uncertainty it makes sense to buy with caution and care, to look not only for low prices but also for properties which have the best chance of lasting value and marketplace desirability. After all, at some point today's buyer is likely to become tomorrow seller.
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