By Kevin M
Despite hints and statistics showing a somewhat improved housing market, now is not the time to merely assume that the market is teeming with good deals and that a return to the real estate price spiral will soon cover any mistakes made in the purchase. The market remains sluggish in most areas, and if it remains this way for several more years, getting the best deal is more important than ever.
The most important moment in the ownership of a home is the purchase. A good deal at purchase can reap big rewards in the future—especially if prices don’t rise appreciably in the near future. You only have one shot at making a good deal, so make it the best you can.
But how do you get the best deal on a home in this market? The same ways you would in any type of market.
1. Buy below current market. Right now a lot of people are mistakenly believing that they’re getting a good deal on a home because they’re paying less for it than they would have two or three years ago. Now I’d rather pay less under any circumstances, but the real issue of getting a good deal isn’t merely paying less than you might have in the past, if less is now the current market. A good deal is paying less than the current market!
Let’s say that homes in a given neighborhood were selling for $250,000 three years ago, but now the typical home is going for $200,000; it’s a better price than it was three years ago, but it’s not necessarily a good deal. The value from three years ago no longer exists. A good deal would be paying something less than $200,000 because that’s the current value. And in most markets paying less than the current market value is very doable, and should be the goal.
2. Buy at peak holiday seasons. Generally speaking, there are two significant annual business troughs in real estate, high summer and the holiday season. In the summer, business tends to tail off after Memorial Day, bottoming out by 4th of July, then slowly rebounding into August. The same situation develops just before Thanksgiving, bottoming out by Christmas, then slowly rebounding after New Years. A lot of people take their vacations during these times or are consumed by non-business activities, such as shopping and the end of the school year.
But what’s bad for business is good for you as a home buyer. If you wanted to pick THE most perfect weeks of the year to make an offer on a home—and to get the best price doing it—you’d do it either the week before/after 4th of July or the week before/after Christmas. Buy during those weeks, and you may be the only prospect looking at a house, let alone making an offer. And by then, sellers are getting discouraged at the lack of activity on their homes and are more open to negotiating.
3. Buy a house that needs TLC. One of the bedrock rules of buying a home traditionally has been “buy the least expensive house in the most expensive neighborhood”. But as this is a different time and a different generation, buying a “turnkey”—a house you can move into immediately with no renovations—has become the preferred practice. In fact, buying a house that’s turnkey and has the most features—wood floors, granite countertops, wood blinds, premium lighting—is causing people to buy the most expensive house in the neighborhood.
There are three problems with this approach, 1) you’ll always pay the highest price in the neighborhood, 2) many of the features you’re paying top dollar for now will need to be replaced in five to ten years anyway and 3) given the current state of the market, you probably won’t be able to recover the premium price paid on the sale of the house in three to five years, as has been the case in the past.
Get back to buying the least expensive house, even if it suffers from some cosmetic neglect. A fading paint job and an uncut lawn can be your best negotiating tools at buying time.
4. Buy a house that’s been on the market at least six months. No seller is more confident than the one who just put his house on the market. Make an offer on his house and he will most likely want something very close to the asking price. Make an offer on a house that’s been sitting on the market for six months or more and you may find a seller desperate to negotiate—anything to make a sale.
After six months the sellers have been through the gristmill. They’ve probably entertained offers that fell through for one reason or another. They’ve known the anxiety of going for weeks without an offer—or even any lookers. Worse, they’ve had a brush with the hopelessness that comes from having a major asset they can’t sell. That’s your preferred seller! They’ve been beaten down, softened up and they’re ready to make a deal.
5. Find a real estate agent who knows what you want and will work to find it. A good real estate agent is your best friend when you’re in the market for a home, but buyers often take the selection decision too lightly. The agent selected is often a family friend, and just as often someone who just entered the business. But you don’t need a family friend working with you on the largest financial transaction you’ll make–you need an expert.
How do you find one? Ask people who have used agents who it was they used and whether they were satisfied. You should hear the same agents name more than once. Make sure the agent has been working the business for a number of years, and knows the area you want to buy in very well. Test their knowledge—ask questions and carefully gauge the answers: are they technical answers demonstrating a deep knowledge of the market, or are they sales answers designed to get you to move forward? Too much sales jargon indicates an agent who wants a commission more than anything, and that agent isn’t working for you.
6. Avoid buying new construction. Let’s face it, most of us want a house that’s OURS—meaning a house that no one but us have ever owned, and that means brand new. Now multiply that feeling by millions of people and you can see why new homes cost more than existing ones.
When ever you follow the herd, you’ll pay more because that’s where the traffic is. Go where the traffic is lighter—to existing homes—and you’ll find a better deal. One of the reasons you pay more is because new home prices are often pushed up by options, like carpeting, light fixtures and window treatments that are a regular part of existing homes. New homes might feel better—for the first few years, until they aren’t new anymore—but the better deals are on existing ones.
7. Know your market area. Make sure you know the price levels in the area you want to buy in. This is the best way for you to know if you’re getting the best deal or even if your real estate agent knows the market and can adequately represent you. You can drive around the area pulling sales flyers from houses for sale, check with the county hall of records for closed sale prices, or look on real estate websites to see what sellers are asking. Realtor.com is an excellent site that offers perhaps the largest number of listings in most markets.
Keep in mind that what you will be seeing on flyers and websites are asking prices and understand that closing prices—the real market value—is something less.
8. Buy BENEATH your means. Buying something as large as a home is a tense situation to being with, so it’s vitally important that you remain in control of all that you can. Control equals bargaining power! When you try to buy at the top of your ability—something many real estate agents will try to have you do—you create stress and limit your options. Buying beneath your means keeps you in control of the financing, and that keeps you in control of the deal. As a buyer, you should never be in a more desperate position than the seller, otherwise you may end up paying too much.
Don’t let the current sluggishness of the real estate market lull you into thinking that any deal is a good deal just because sellers are desperate and prices are lower than they were a couple of years ago. Use these tips and make the best deal you can based on the current market.
Have you ever used any of these methods to buy a house? How did they work out for you?
All great tips! I love your assessment of this current generation that isn’t willing to put in any work, and is pretty much spoiled! And of course people love feeling like they are getting a bargain, so jumping into the housing market by using comparisons to 2006/7 has become the preferred method – but as you stated, it’s illogical.
.-= Khaleef @ KNS Financial´s last blog ..Can You Eat Well for $1 a Day? =-.
So true. It’s more critical to get a good deal on a house now than it’s been at any time in the past few decades. Making a bad one today means you’ll be locked into it for years. Relentless appreciation papered over a lot of bad deals in the past, but that may not be the case going forward.
We have mortgage rates below 5% and the market is still sluggish (or worse). At any other time, rates that low would have caused a boom. Obviously, this time it really is different.
We have always bought our houses during a ‘sellers market’, so it was hard to employ a lot of the suggestions you made. (Our current house was on the market 1 day and had 3 offers on it.)
The one thing I did do though is buy below our means. I never believed the inflated mortgage amount we were told we could afford. I knew that I never wanted to work or live to support our nice, big house.
I envy those that are first time home buyers right now. Although all the choices available may make it hard to decide which house to buy!
.-= Everyday Tips´s last blog ..Thoughts for Thursday – When Ridiculous Rules Make Life Much Harder =-.
Everyday Tips – Your point is very well taken. Most of these strategies are unique to a buyers market–which is why they’re included. But as you say, buying beneath your means is something that can and should be done anytime we’re buying something as large as a house.
Mortgage Rates Fall To .01 Points Above All Time Historic Low June 13, 2010
The 30 year rate fell from 4.79 to 4.72 this week. This is the lowest point this year. The previous low was 4.78 reached two weeks ago. What is more interesting is that the all time low is 4.71 so just .01 points lower than current rates.
Looking at other rates the 15 year dropped from 4.20 to 4.17. The 5 and 1 year arms dropped from 3.94 to 3.92 (5 year arm) and 3.95 to 3.91 (1 year arm). These are all time lows since we have good tracking data for these mortgage products. So would it make sense to look at some of these other mortgage products since they are at all time lows? Personally I would still avoid the 5 and 1 year arm. Since mortgage rates in general are so low it makes sense to lock in for as long as possible. Below are rates from the weeks from May 13, 2010 to Jun 10, 2010.
Jun 10, 2010
30-fixed 4.72 15-fixed 4.17 5 ARM 3.92 1 ARM 3.91
Jun 03, 2010
30-fixed 4.79 15-fixed 4.20 5 ARM 3.94 1 ARM 3.95
May 27, 2010
30-fixed 4.78 15-fixed 4.21 5 ARM 3.97 1 ARM 3.95
May 20, 2010
30-fixed 4.84 15-fixed 4.24 5 ARM 3.91 1 ARM 4.00
May 13, 2010
30-fixed 4.93 15-fixed 4.30 5 ARM 3.95 1 ARM 4.02
Nov 26, 2009
30-fixed 4.78 15-fixed 4.29 5 ARM 4.18 1 ARM 4.35
So rates are one thing but it’s also informative to calculate mortgage payments. We took today’s rates and calculated a mortgage payment on a 200k house. We also did the same thing with rates from May, 13 2010 and rates from November,
26 2009.
Jun 10
30-year $1039.68
15-year $1496.47
5-year ARM $945.62
1-year ARM $944.48
May 13
30-year $1065.1
15-year $1509.62
5-year ARM $949.07
1-year ARM $957.13
Nov 26
30-year $1046.91
15-year $1508.6
5-year ARM $975.7
1-year ARM $995.62
So compared to a month ago a mortgage payment is $25.42 less a month for a drop of 2.45 percent. While that is not a huge drop it is considering rates from last week were already pretty low.
So what is going to happen moving forward? As always it’s hard to tell. If the economy continues to have a rocky recovery I would expect that rates will stay at current levels and possibly break down to new all time lows in the next few months. If the economy starts to rebound we should see mortgage rates move higher perhaps much higher. Over the next 6 months while it’s hard to know which way mortgage rates will move if they move up they could move up substantially while if they drop they do not have much room to fall.
Austin – you did more work on your comment than I did on the post. But your comparison is well worth the presentation–THANKS! I agree with you, that the 30 year fixed is THE deal. The fixed rates are ridiculously low and should be taken on instinct.
BTW, I’m more than a little concerned that these historically lower rates aren’t causing a surge in housing. Imagine what the impact they’d have had on the market in the 80s and 90s?
Hey Kevin – great work on this article!
Point #8 is jumping off the (web)page at me. When my wife and I were shopping mortgages, we were told we qualified for nearly twice what we ended up actually borrowing. What a huge choice to buy down in house.
Since then, we’ve both made career changes and haven’t dealt with the pinch of an encumbering mortgage payment. Plus, to have the flexibility to seek work we love – even in this market – money can’t by the pleasure that comes with that!
The old mantra of “stretching to buy as much house as possible” is definitely suffering under the weight of the Recession and the real estate market fallout. Who would’ve thought that buying what you can afford right now would, today (instead of five years from now) would be en vogue?
.-= Derek Sisterhen | Past Due Radio´s last blog ..109 Past Due – What Are You Waiting For? =-.
Derek you’ve brought up a point that’s worth spending some time on. In today’s economic environment, we shouldn’t be locking ourselves into ANYTHING that denies us at least some flexibility. Maxing out debt, even for a mortgage, could push us past the breaking point under future circumstances we can’t imagine at the time of purchase.
Recovery or no recovery, if ever there was a time to live beneath our means it’s now!
All excellent points Kevin. Number 3 is worth a lot, especially if you can get a house that just needs some cosmetic work that is in a great neighborhood. The house I purchased a little over 2 years ago had been on the market for over 6 months and was being sold by an estate. I was not in a hurry to buy and had been looking for awhile and just happen to call on another house close by on my way back from the gym. Decided to drive through the neighborhood and saw this one that had bars on the windows and was on a street of smaller houses in an area with much larger homes. It needed a lot of cosmetic work but was in an excellent area. It even had orange and green shag carpet from the 70s! When I pulled back the carpet I saw beautiful hardwood floors and decided right then to have it inspected and make a lowball offer and the rest is history. First thing I did was remove the security bars and I finally finished painting the last bedroom this week!
Norm – Dollar for dollar, a fresh coat of paint is the best improvement you can make on a house–it that and cutting the lawn, cleaning it up a bit, etc are the most you have to do, it could be a gold mine. You can know that dozens of prospects looked at it and decided it was too much work and the sellers are on the edge of desperation.
Someone elses loss was your gain.
For a while I’ve been wondering how to get a fundamental and technical analysis of all the markets based on various regions. I was thinking about buying a couple duplexes to get some cash flow happening.
.-= Aury (Thunderdrake)´s last blog ..A short ramble: How this dragon chews inflation =-.
Good advice. These tips are certainly great ways to get a home for less. I knew that the summer months were always a little slow for real estate but never knew that about the peak holiday times. Interesting.
Eric Myers´s last [type] ..Welcome to Eagles Nest Living in Fountain Hills- Arizona
Eric – Yes, some of the best deals to be had are right around Christmas when (and because) people are looking in other directions. The key is always to move when others have stopped. But most follow the herd and pay more than they need to. That’s why there are peak buying seasons.
#4- Interesting point. My father just sold his house last year. It took him seven months to close a deal with a buyer. Since I know not much about how real estate works, I began to see that the longer the property stays on the market, the more bargain you can get from it as a buyer.
Jason Sage´s last [type] ..Mahogany Moldings
Jason – that’s absolutely true. And often there’s no negative reason the house doesn’t sell, so there could be some good deals there. The longer it sits on the market, the more motivated the seller is likely to be.
“5. Find a real estate agent who knows what you want and will work to find it.”
Now this is GOLD! Not many people will go for what you want but what is beneficial for them. Find an agent like this and you’ve hit jackpot.