Buyers in charge: 4 strategies
The good news: Rocky real estate markets mean home shoppers finally have the upper hand.
NEW YORK (Money Magazine) -- You'll find no better experts on the real estate boom and bust than Joyce and Louis Bertulfo.
Between 2004 and 2006 the couple successfully navigated a hot San Jose housing market, buying and selling two homes for a profit.
By the time they relocated to Tampa with their three children this January, however, the winds had shifted. The pace of home sales in the area had fallen by 40 percent from a year earlier. Prices were already softening.
So Joyce, 32, and Louis, 33, spent weeks looking for just what they wanted (four bedrooms, three full baths and a three-car garage), adopting a decidedly more philosophical mind-set.
"We said, 'If this one doesn't work out, we'll find another house,'" says Joyce. When they saw the ideal home, they bargained hard. The house they finally bought, originally listed at $539,000, had been marked down to $479,000.
Still, the couple offered $410,000, 14 percent below the asking price. The sellers countered with $465,000. A few rounds later they met at $430,000.
"Now that we've settled in, we're just ecstatic," says Joyce.
Welcome to real estate's new reality, where prices are down, foreclosures are up, experts are jittery, and a lot of for sale signs are getting weather-beaten.
That may be bad news for homeowners, sellers and investors. Buyers on the other hand, have a rare point of advantage.
"We don't often have a buyer's market like we have now," says Ned Marrs, a longtime broker in Colorado Springs. "Every decade it happens for a year if we're lucky. Then it's a seller's market for another nine years."
Gene Trinks, 35, moved to the San Francisco Bay area in 2002, but the engineer couldn't bring himself to buy a house in that frenzied atmosphere. "People were just overbidding wildly," he says. "There was a danger of paying too much without regard for what a house is really worth."
In January, though, he and his girlfriend closed on a four-bedroom home in Oakland, paying $880,000 for a house originally listed at $979,000.
"We were the only offer, we bid below ask, and they accepted without any counters, which is a great position to be in as a buyer," says Trinks. "We could be a little bit more in control of the process."
As a buyer, you now have plenty of choice, as well as the upper hand in negotiations. You also still have the benefit of low interest rates. If you're tempted to upgrade yet worry that your home isn't worth what it was six months ago, keep in mind that the home you want to buy is worth less too.
Moreover, if prices have fallen at the same rate on all homes in your market, the discount, measured in dollars, will be bigger for a more expensive house.
Say you're in a $200,000 home and want to move up to a $500,000 home. Your cost of upgrading will be $300,000.
But if prices drop 10 percent, your current house is worth $180,000; the one you've got your eye on is worth $450,000. Cost to upgrade: $270,000.
Last fall Vinse and Kathryn Sullivan, 29 and 28, of Charleston, S.C., decided they wanted to move from their 2,000 square-foot home in the western part of the city to a larger one on the north side, putting them closer to Vinse's pharmaceutical-sales territory and giving them more space for their son Carter, 2, and daughter Kate, now nine months old. They listed their home, which they bought in 2003 for $215,000, for $358,000, and they expect to spend as much as $500,000 for a four-bedroom house with a home office.
Once they sell, the Sullivans are confident they can trade up. "I know I can pay the bills on a bigger house," says Vinse, "and at the end of the day, that's all that matters."
Vinse has that right. You can't be sure that a house you buy today won't lose more value before prices recover, but if you can pay well below what sellers were getting last year, you've already built in a comfortable cushion against price drops.
For extra protection, buy only if you can make a 10 percent to 20 percent down payment and heed the lessons from the current mortgage madness: Adjustable rates do adjust, and when you're paying interest-only, eventually you will have to pay the principal as well.
Can't afford to buy the home you want at today's fixed rates? Keep renting or look at cheaper homes. Once you jump into the market, follow these tips to make the most of your powerful position.
Free yourself to act fast Buying may be easy, but selling isn't, so you have to guard against getting stuck with two mortgages. The best way to avoid that trap is simply to sell first.
That's what Veronica and Maxwell Green, both 28, did last year after the birth of their baby. Realizing they were outgrowing their two-bedroom Tampa condo, they were desperate to find a bigger place. But they held off on house hunting until they had a sales contract on their condo.
"We didn't look. We didn't research. We didn't do anything," says Veronica. "We didn't want to find something we loved and not be able to sell our house."
Freed of their condo, they bid $275,000 for a four-bedroom home listed for $289,900. Two weeks later the seller took the offer.
Another option is to include a contingency clause in your purchase contract, which lets you exit the deal on your new home if you can't sell your old one. Shortly after the Sullivans put their home up for sale, they signed a contract to buy a newly built one but added a clause that they could bail on the deal if their home didn't sell by the time the new house was finished.
It didn't, but their only loss was $800 they paid for upgrades to the new house, which the developer subsequently sold. "Lesson learned," says Vinse. "I'm not losing sleep over it."
Know how strong you are The longer a house has been for sale, the more powerful your position as a bidder. "Time on market is a good indication that someone is likely to be really hungry," says Gary Eldred, author of "The 106 Common Mistakes Homebuyers Make (and How to Avoid Them)."
If you're browsing a public multiple-listing service, don't trust the date of that listing; sellers can game the system by briefly taking a home off the market, then re-listing it.
Ask your broker to look at the privileged MLS data, which details a home's full listing history, complete with time on market and any asking-price changes.
Pick allies carefully You can often hire an agent who works exclusively on your behalf. Typically, these buyer's brokers earn a 3% commission, usually paid by the seller (though if you buy from a seller using a discount broker, you may have to make up the difference).
Keep in mind that buyer's brokers, who theoretically work just for you, may have a financial incentive to push certain homes. In some markets builders and even individual sellers are offering higher-than-usual commissions to buyer's brokers, which can tempt your pro to skimp on negotiations or steer you to more costly houses.
Hire a broker who will work for a set fee or will sign a contract stipulating that his or her cut will be the same for any home you buy.
Wield your power If you see a house you like, chances are you can find another one that is similar. Exploit that advantage. Make demands you never would have dared ask for in crazier times, such as requiring the seller to make repairs or the builder to throw in free upgrades.
Sellers may be trying to make what their neighbors made two years ago, but they're too late, says broker Marrs.
Don't be afraid to start with an offer that's 15 percent below asking price.
In February, Joyce and Louis Bertulfo passed on a house over a $5,000 difference between their offer and the seller's. Where is it now? Still on the market, with the advertised asking price cut from $475,000 to $440,000, just $5,000 above their best offer.
Joyce's expert advice to sellers: "Buyers are scarce these days, so when you find some, don't let them go - especially over $5,000."