When real estate sales are slow and there is a glut of homes for sale, buyers have an opportunity to pick up a house on the cheap. The operative word here is "opportunity". There are times when you should pounce and times when you should show restraint and avoid an impulse buy. Knowing the difference could save you thousands of dollars.
In Pictures: 7 Tips On Buying A Home In A Down Market
In this article, we will give you five tips to follow if you have the good fortune to be house hunting during a downturn in the housing market. (For the basics of housing market cycles, check out Why Housing Market Bubbles Pop.)
Tip No.1 - Do Your Homework
Buyers generally have the advantage in a down market, but this doesn't mean you should walk into a transaction blindly. Prospective buyers should search the internet for listings, inquire with a Realtor or real estate agent and also check the local newspapers to gain insight on a particular area. Realtor.com is a good source, and many national and local Realtors also make their listings available on the internet.
The objective of this research is to get to know the price range for the area. You want to learn what is considered excessive and what is considered low. This research will help you make a reasonable bid and also provide the first inkling that there is bargaining room on a particular home. (To begin with an overview of the buying process and terminology you need to know, check out First-Time Homebuyer Guide.)
Tip No.2 - Get Organized
Remember, you are probably not the only bargain hunter out there. You may have an edge on the sellers, but another buyer could snap up your great deal if you delay the buying process. To make sure that you're able to pounce on a deal at a moment's notice, it makes sense to get pre-approved for a mortgage and to have an attorney on retainer to handle the closing paperwork. (To learn more, see Pre-Qualifies Vs. Pre-Approved - What's The Difference? and The Benefits Of Using A Real Estate Attorney.)
It also makes sense to line up a home inspector and an insurance agent. These professionals provide valuable information and let a buyer know early on in the process, during the attorney review period, what items might need repair as well as what the home will cost to insure.
Tip No.3 - Watch for Motivated Sellers
Some homeowners may want to sell their homes in a hurry. This gives you additional bargaining power. In a situation like this it makes sense to ask if the seller will throw in the lawn mower, furniture or fixtures that you like. You can also ask the seller to cover closing costs in total or in part. Of course, the listing price is always negotiable as well.
Here are a couple of signs that the seller is motivated:
- The home may have been on the market for several months and has undergone several price reductions.
- At the showing the home is empty, which suggests the seller has moved and may be holding two mortgages.
It's very difficult to determine exactly how much leverage you have in any given situation - after all, there are many reasons why someone could be selling. However, your agent can give you a general idea of the seller's motivation. An agent has access to the Multiple Listing Service and can track down the original list price versus the selling price for similar homes in the area. The agent can also find out how long the house has been on the market and determine any price reductions that have occurred.
Many states make deed records and home-sale information available to the general public on the internet. This information will tell you what the seller paid for the home, which, in turn, tells you how much profit the seller stands to make if he or she gets the asking price.
Tip No.4 - Negotiate With the Realtor
When houses are selling at a slow pace, many real estate agents are also struggling. In such an environment, both agents and firms may be more inclined to knock a percentage point or two off of their commission schedule to get a deal done.
But isn't it's the seller's job to pay the real estate agent? Why should you care what the commission is?
Commission is important to the buyer because the seller probably listed the home at a high price so he or she could pay the commission to the agent and still walk away with a nice profit. Buyers can get their real estate agents to ask the listing agent to lower his or her commission so that the deal gets done, and both the seller and his or her agent both walk away with a decent profit.
The Consumerist.com offers these tips for increasing your leverage when negotiating with a real estate agent:
- You may be able to get a discount by using the same agent to sell your current house and buy a new one.
- Smaller real estate firms may be able to approve lower commission rates more quickly, because they have fewer layers of bureaucracy.
- If one agent won't negotiate, find another who will.
- Consider using the internet instead of a real estate agent. There are services available online that give house hunters direct access to the Multiple Listing Service, allowing them to find potential properties themselves.
Tip No.5 - Make Sure You Have Clear Title
During trying economic times, sellers may be looking to unload their homes because they are in over their heads. In some cases the property itself may be encumbered by a lien from a contractor, service provider, bank or other lending institution.
For this reason, it always makes sense to use a title insurance company and to have a lawyer do a title search to make sure that there are no liens and the property can be transferred without the risk. The last thing you want is to have to absorb any of those liabilities. Note: Lenders typically require title insurance and a title search if a mortgage is going to be taken out on the home; however, cash buyers should use these services as well.
For more information about title insurance, you should speak to your insurance representative. The web also contains a wealth of information on the subject, and many states, or the insurance commissioner of the state, have websites that discusses the reasons for and the typical types of such policies.
Bonus Tip - Avoid a Bidding War
When you are shopping in a down market the last thing you want to do is let your emotions get the best of you. A bidding war is almost always an unnecessary waste of time and, in the end, money. Down markets are all about getting a really good deal, so to fritter away that possibility because of ego, or the desire to simply win a bidding war, is foolish.
The best advice for avoiding a bidding war is to set a price limit and stick to it. Remember, there are plenty of homes out there and other deals to be had.
Prospective buyers have an edge in a down market, but this doesn't mean they are guaranteed to make money on the properties they buy. Ask yourself some hard questions about why you are buying the home. A quick flip may not be possible in a prolonged down market, and so you should be prepared to live in the new home, or at least to hold on to it for an extended period of time. Being prepared and organized and relying on trained professionals for guidance can help you get a great deal in a struggling real estate market.
For more information on the difficult process of selling after a housing bubble bursts, see Selling Your Home In A Down Market.