Why Buy Today?
On a previous post about buyers just caring about the price, someone from Mesa, AZ left the following comment and questions:
My husband and I just made an offer on a bank owned home in Mesa, AZ. We are first time home buyers. The house needs no work at all and has only been on the market about three weeks - my realtor suggests that we pay the bank what it wants $229K and then try to get 6% closing costs and 3% toward downpayment. We also qualify for the Ameridream program for FHA. Is that good advice if it is all about the price? It is in a great community, etc., and the house was appraised at 255K last year. Even with this market, the bank got a previous offer. In this market, how does one go about making an offer and knowing it is fair? We just don’t want to get ripped off. Thanks for any advice you can give us.
Not being in Mesa, I can’t intelligently comment on the price of the property, but I can tell you how I approach it with my clients here. It starts with questions:
Question: How long do you expect to keep the house?
The reason is that the value of the property when you sell is just as important as when you buy. If the value of the property drops another 10% before the market bottoms out, and it costs you 5-6% to sell, you need more than 16% in appreciation to break even.
Question: Does it pencil out?
Can you cover the monthly nut if you have to rent it out? If for some reason you have to move and you are upside down - and that isn’t hard with 97% loan, can you rent it out while you wait it out?
Question: Why buy now?
This one usually surprises people because the mantra of Realtors is always “Now is a good time to buy”. They take away our lapel pins if we don’t chant this into the mirror every morning.
Seriously though, every economic expert out there that doesn’t benefit from the sale of real estate believes that this down market has a ways to go. In a research note published today, Goldman Sachs revised their 2nd half ‘08 projections, stating:
“[W]e are on the cusp of a renewed deceleration in growth.”
Chase, which used to benefit from the sale of real estate, made the following statement today:
It has been quite a tumultuous time in mortgage banking for the past 12 months. In fact, we are in the midst of the worst mortgage and real estate crisis in American history.
Notice the phrase “in the midst”? So the question remains, why buy today?
That answer is different for everyone. If you can own for the same as rent, then it might make sense. The answer can also be property specific.
If you have a fairly certain longterm outlook and the right property comes along - one that you could see yourself staying in for 7-10 years, then it can make sense.
The one person who probably shouldn’t help you answer that is the Realtor.
Ok, let’s move past the whys and look at the hows.
Both of our respective markets are over inflated bubble markets. Both are making regular appearances at the top of the Case-Shiller Index for markets that are seeing double digit drops. Both have a ton of lender owned (REO) inventory. So the question here is how do you determine the price and the offer and how do you know if it’s fair.
Price is a moving target, and moving downward. How bad do you want it? If you lose it, how many others can you find that you would consider to be just as acceptable? How many REOs have sold in this neighborhood (are they a rarity or commonplace)? How many of the neighbors are upside down and could be tomorrow’s distressed property that will sell for less than this one?
Terms of the offer.
The 3% down payment assistance program (DAP) from the seller is going bye-bye October 1st. The new housing bill put a temporary end to that. Temporary because it will be back in a new bill in one form or another after the election. As a result, agents and lenders will tell you that you need to move now, or miss the boat (haven’t we heard that before) and only be able to buy once you have saved either a 3% down payment for FHA or 20% for anything else.
Asking for the closing costs is a no brainer. I would ask for the 3% down as well, even if you have it. The trick here is whether to come in lower, understanding that you are hitting the lender up for close to $30k. Since I would bet your down payment that the value of whatever you buy today will be less tomorrow, and that by New Years you’ll owe more than it’s worth, I would lowball and risk losing it, but that assumes certain answers to the “how” questions.
The bottom line - fair or ripped off?
There are deals to be made that will be highly profitable and there are deals that will be made that will have disastrous results. As much as I don’t really care for most real estate agents, there are quite a few that are honest and look out for the client. Some just won’t volunteer information that would kill a deal unless you ask. I don’t think you are getting ripped off per se, but you are making a financial decision that involves, at least for the immediate future, a depreciating asset. Go into this knowing that this property will go down in value before it goes up. Are you good with that?
That leaves us with the issue of fair. From my perspective, the only fair part of buying in bubble markets is fair warning.
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I agree with Bob on a couple points. They are:
1. Most agents are not going to be straight with buyers because they are usually more worried about getting their next pay check. What a shame
2. If you are going to buy is this market you better get a great deal going in and plan to be in it least 7 -10 years.
I know Bob very well and he definitely is a guy that will be straight with his clients. He is looking out for their best interests, not his own (Very rare in the real estate industry). He is one of the few agents I really feel comfortable referring a buyer or seller
Kudos - This post is a breath of fresh air. I’ve been dealing with Realtors for many years and they always say it’s at the bottom and now would be a good time to buy ( they were telling me this while i was trying to obtain some bank owned properties earlier in 07′)
You hit the nail on the head with “Question: How long do you expect to keep the house?”
That should be one of your main factors when deciding to buy in this market climate.
In my market, I think the worst is over. August sales are up compared to last August. I am getting more web hits and more calls from buyers. Also, there is a lot of pre-election anxiety and after the election, I think the pent-up buyer demand will be released to take advantage of the incredibly low prices.
@Kermit,
Also, there is a lot of pre-election anxiety and after the election, I think the pent-up buyer demand will be released to take advantage of the incredibly low prices.
Really?
As a Realtor, I would be very careful calling the “bottom”. Like it or not, buyers will view your advice as self serving (because it is).
Count how many banks fail this week. That will give a good idea whether our market is “declining” or not.
Great guidance, Bob. (BTW, this is a great line: “They take away our lapel pins if we don’t chant this into the mirror every morning.” LOL)
You need a game plan in order to determine what you need to do. Unfortunately, a great many persons (real estate agents, and consumers alike) simply just don’t have one.
While I don’t think anyone should be calling a bottom just yet, I’m glad to hear that agents are comfortable comparing regional markets as opposed to the overwhelming coverage of the “national” market. The markets in San Diego and Mesa don’t necessarily match the market in Washington state or Pennsylvania, and I think a lot of blog readers (both agent and consumer), lose sight of the fact that while the market might be “bad” in one place, it might not be as bad in another area. Thanks.
Do you want a home, or are you after a quick return. There is a big difference. Property Investment is a different game to chosing a family home where you hope to stay for many years ans bring up your family there. Of course this is the biggest decision of your life and you should consider all advice.
I am an associate broker in the Phoenix market which includes Mesa AZ. Your agent at the least should have ran comps in our tax search in ARMLS. The tax record comps are very quick to do and also show the homes that sold without being in the mls. These would include private party sales like fsbo’s meaning For Sale By Owners.
Your agent should have ran a second set of comps in the mls system to verify the tax record comps as well as to see what the asking prices are of the current Active lisings in the immediate area.
When to buy is a very personal decision. We as real estate agents cannot see into the future. The downward slide has to stop somewhere and for us in Tampa Bay it is really looking as if we are there.
Yes,I agree that most of the real estate agent sees their interest but you need to be wise enough to find the right real estate agent. A right real estate agent is an indispensable agent.For this you can make a google search and browse the directories of various website.
Two things any buyer should keep in mind :
First - “All real estate is local”, so don’t focus on the “national trends” you see on the nightly news.
Second - No one can call the absolute bottom of the market.
So if you are an investor in real estate (a “flipper” is not an investor), you have to make sure you buy right and have a detailed plan. A good Realtor can help you. Many investors don’t care if the market fluctuates because they are in positive cash flow, their tenant is paying the mortgage, and in the long run their investment will increase in value. (It always has.)
I can appreciate your comments on “not depending on a Realtor’s opinion” but not all of us are just looking to make a sale. We would love for our clients to take our advice but they do not always do this. The majority of the time, a Buyer is going to buy what they want to buy regardless of what we advise them to do. Also, many times, they want the house more than they want the “deal”.
Again, I appreciate your blog. It is very appropriate.
A Realtor can advise their client, but ultimately the decision to buy or wait is up to the buyer. If the buyer has fallen in love with the house, they are often willing to pay more than market value to get it. I have advised clients not to offer full price in the past, only to have them do it anyway because they were afraid of losing the house.
Your blog had good questions and good comments. Thanks for your wisdom on this issue.
Can someone explain to me the sudden outpouring of comments from Austin based real estate agents?
to answer the question about comments from Austin agents here are in touch with the market not only in Central Texas but nationwide. We are a high tech community. I myself like to keep up on the latest news and that’s my reason for reading this blog. I think buyers are like stock investors. Everyone invests at a different time and who’s to say where the bottom of the downward trend is. If everyone had the hold off mentality the market would never turn around. The media is a big perpetuator of the economic problems in this coountry. The market will turn around but without a crystal ball I can’t say if it will be next week or next year.
Thanks Eric.
I cannot find the bottom in any stock I pick. If come within 10%, I consider that a victory. Same is true int he real estate market. It’s impossible to pick the exact bottom in a any market. It’s not like they sound the sirens and announce: “This is it. Buy now because tomorrow will too late.”
So, you have to balance lifestyle requirements like “I do have to live somewhere” with an individual analysis of the market in which you are buying. If inventories are continuing to increase while sales are continuing to decrease in your price range range and neighborhood, that could be a red flag. But, forget about trying to hit the exact bottom in any market.
This is great pretty frank advice for home buyers. I think if more realtors were as straight forward as this it would be a real boon for our industry in general.
I think in order to survive as an industry we need to transfer from “sales people” to “real estate consultants”
And maybe at the end of the year instead of looking at how many sales we made we should look at how many bum houses did we save our clients from.
There is no need to change the job title. In most states where agency applies, the title is “agent”. That carries far more weight and responsibility than “sales person” or “consultant”.
A sales person has to move a product.
A consultant offers advice (and in most cases is paid for the advice, not the outcome).
An agent acts on behalf of another and can do both of the above.