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.

Feel free to search all San Diego real estate throughout the county.