10 Secrets of Off-Season Home Buying
As the housing market heads into its sluggish months, savvy buyers can squeeze out some nice deals
By Luke Mullins
US News & World Report
October 14, 2009
With real estate values still sliding and mortgage rates approaching record lows, a favorable climate for home buying is accompanying this year's fall foliage. And as the days grow colder, housing experts say home buyers will have another reason to jump into the market in the coming months. "Let's face it," says Guy Cecala, publisher of Inside Mortgage Finance. "Anybody who is trying to sell a house going into the winter months has to be flexible, and you should be able to get good deals." That's because the residential real estate market is highly seasonal, with many home buyers planning their transactions around the academic calendar. Buyers with children typically start their search in the early spring in hopes of having a contract signed by summer so they can move into their new house by late August. Once the school year begins, however, the housing market heads into a period of hibernation, with sales activity declining until January or February, when it bottoms out.
With fewer buyers competing, anyone looking to purchase property in the off-peak season may find themselves in a better position to land the deal they've been looking for. "I tell people to buy off season," says Ron Phipps, a broker with Phipps Realty in Warwick, R.I. "You may be able to do better than you otherwise might." Here are 10 tips for anyone looking to buy real estate in the off-peak season:
1. Make sure you are secure in your job: Although the house-hunting climate may be favorable, buyers need to be confident in their income stream before jumping into the real estate market. And with the unemployment rate heading toward 10 percent, a growing number of Americans may find themselves out of work in the coming months. "If you are unsure about your [employment] outlook, there is nothing wrong with renting," says Mike Larson of Weiss Research. "Renting is a bargain these days, too." The real estate research firm Reis says that the national apartment vacancy rate hit its highest level since 1986 in the third quarter. Landlords dropped asking prices by nearly 2 percent to attract tenants, the firm says.
2. Spit-shine your credit: With home loan defaults on the rise, banks have jacked up lending standards for borrowers of all sorts. For example, today's borrowers will need a FICO score of roughly 720 or higher to get the most attractive mortgage rates. At the same time, most borrowers will have to produce several months of bank statements and tax returns for the previous two years to obtain a loan, Cecala says. Such requirements, while not earth-shattering, stand in stark contrast to the breezy credit standards that many could get in the first half of the decade. "It is a brave new world out there when it comes to getting a mortgage," Cecala says. To ensure that they can get the home loan they need, he recommends that house hunters get preapproved by a lender before starting their search. "The idea is to try to work your way through the financing issues before you actually are ready to put an offer down," he says. It's also helpful for borrowers to review their FICO score and credit reports. If any errors appear on the credit report, take care of them.
3. Gear up to get down: The financial turbulence of the past two years has driven the once-popular "no money down" home loan into extinction. As a result, would-be home buyers will need cash on hand for a down payment. Although requirements will vary, depending on the borrower and the market, buyers will need a down payment of at least 3.5 percent. "If you haven't got your assets in order, or your liquid reserves are pretty low, you are going to want to go make changes to your holdings so that you have got the cash available to make the transaction happen," says Keith Gumbinger of HSH.com, which tracks mortagages and consumer loans. Borrowers who can't come up with a down payment should consider setting aside a portion of each paycheck until they have saved enough cash.
4. Get wired: Although national housing statistics often make the headlines, real estate markets fluctuate tremendously from one place to the next. As a result, it's essential for house hunters to become intimately familiar with the community they are looking to buy into. What are the home price trends? How long have listings remained on the market? Although a real estate agent with experience in that particular market can be a big help with these questions, today's buyers can also gather all sorts of useful information from real estate websites like Zillow and Trulia. (U.S. News has a partnership with Trulia.) And Joshua Dorkin, the founder and CEO of BiggerPockets.com, a real estate networking and information site, encourages home buyers to find a good real estate blog that covers the area. "The advent of the localized real estate blogger is a really useful tool for buyers," Dorkin says. "You will get a nice localized perspective as to what's going on in the neighborhood."
5. Do your homework: For a ground-level understanding of the community you're considering, get out and stretch your legs. "Drive around the neighborhood, go up and down [and] look at all the houses," Dorkin says. "Are people taking care of their properties? Is every house on the block for sale or for rent?" Don't be shy about snooping around—go ahead and knock on a few doors and find out what the neighbors think of the community. "I always tell people that if schools are a priority for them . . . they should visit a potential school as opposed to just doing the research and getting test scores," says Judy Moore of Re/Max Landmark Realtors in Lexington, Mass. Moore also recommends that would-be buyers figure out how long a commute they would have from the property to their office. "I always suggest that a buyer do a test run," she says.
6. Pay attention to Washington: The steps the federal government has taken to stabilize home prices have turned the nation's capital into an important variable in the outlook for the real estate market. And future developments coming out of Washington could have profound implications for would-be home buyers. For example, the popular $8,000 first-time home buyer tax credit, which took effect in February, is set to expire at the end of November. But Senate Majority Leader Harry Reid, a Democrat from Nevada, has endorsed a bill that would push the deadline back six months. And Scott Talbott, a top lobbyist for the Financial Services Roundtable, says the measure is "very likely" to become law. "It threads the needles of politics and costs," Talbott says. "The U.S. economy and the housing market desperately need it."
Developments at the Federal Reserve, meanwhile, could also have important ramifications for home buyers. The Fed recently moved to extend by three months its program of purchasing debt and mortgage-backed securities from Fannie Mae and Freddie Mac, helping ensure that mortgage rates will remain attractive for a longer period of time. Depending on how the economy and housing market perform in coming months, the Fed could always tweak this program again. In light of these potential developments, would-be home buyers need to pay attention to the news coming out of the nation's capital as they continue their search.
7. Check out the foreclosure stock (with help): While it's been a nightmare for some homeowners, the foreclosure epidemic has created bargain opportunities for would-be buyers. House hunters should be sure to check out the foreclosed inventory in their local market. However, foreclosed home buying can present headaches that many consumers aren't qualified to handle on their own. Anyone looking to get into foreclosed home buying should track down an agent with experience handling such transactions. "A lot of people don't realize [that] foreclosures are heavily regulated, and every state has its own set of laws," says Alexis McGee, the president of Foreclosures.com. "If you don't have the language proper in your contract, or if you have even the font size wrong, it's criminal and civil damages. Don't count on every Realtor knowing this."
8. Beware of rising taxes: Buyers should pay close attention to real estate taxes associated with the property they are considering. But rather than simply looking at the present amount, Gumbinger says borrowers should determine the trajectory of the area's tax rates. "Your Realtor will tell you, 'Taxes on this property were $3,600 last year,' " Gumbinger says. But borrowers need additional information. "What were [property taxes] the year before? What were they the year before that? How fast are taxes rising? Because with states so strapped, property taxes are definitely on the rise and could put a crimp in your livelihood," Gumbinger says.
9. Get those concessions: Although the national housing market is clearly on the mend, buyers still have plenty of leverage over sellers in most parts of the country. "In my market, [buyers] still have a great deal of influence, and the sellers will do just about anything, assuming it is doable and legal," to get the home sold, Phipps says. So don't be shy about bargaining. Feel free to low-ball the listing price or ask the seller to pitch in for closing costs. Just be aware that if you go overboard with unrealistic requests, you could insult the seller and tank the deal. "You can negotiate hard and aggressively, but you also need to know when to be magnanimous," says Phipps.
10. Don't feel pressured to act immediately: Larson expects home prices at the national level to continue sliding—albeit at a less precipitous rate—until they hit bottom sometime in the next 12 months. (Home prices could fall another 5 percent before then, he says.) At the same time, mortgage rates are projected to remain in an attractive range—between 5 and 5.5 percent, approximately—for the next six months or so. As a result, buyers in most markets should not feel pressured to act immediately. "There is no harm in waiting for the right deal, as opposed to jumping into something because you are afraid of losing that opportunity," Larson says.
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