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Home prices continue to skyrocket in parts of the country. Here are some bargain-hunting approaches that work in almost any market.
By Liz Pulliam Weston
When Justin Sloggatt started looking for a home in Los Angeles’ Miracle Mile area, the typical place he toured was selling for a steep $500,000. Only a year later, similar homes there were selling for nearly $100,000 more.
With prices spiraling upward at the time, Sloggatt, a 30-year-old film producer, began to despair that he would never find a house he could afford in the neighborhood he liked.
Fortunately for Sloggatt, he nabbed a 2,800-square-foot home for $425,500 in probate court, using one of the techniques determined buyers can employ to get an edge in pricey markets.
Through the back door
Whether you’re a first-time buyer or a homeowner trying to upgrade, purchasing a house in an expensive or fast-rising area can be daunting. But real-estate experts say there are plenty of ways for committed buyers to get into even the hottest markets.
Before we begin, though, a few caveats:
- Don’t expect screaming deals. Hot markets mean there’s competition for virtually every available home. You can reduce the rivalry by looking off the beaten path, but don’t pass up a good deal because you’re waiting for an impossibly great one to come along.
- Buy the worst home in the best neighborhood you can afford. This old real-estate saw still works. Desirable areas appreciate faster in good times and hold their value better in bad times.
- Look for homes you can add value to. You’re more likely to get a payoff -- in terms of a higher selling price later -- when you spend money bringing a home up to the average level of the rest of the neighborhood. If it’s already the biggest or the best, you’re going to pay a premium.
- Don’t bankrupt yourself. You need to set limits on how much debt you’re comfortable carrying, since many lenders today will loan you far more money than makes sense. (See “3 Worst Money Moves You Can Make.”) Allowing your housing and debt payments to eat up more than about 36% of your gross income is asking for trouble.
- Get pre-approved. Pre-approval is much better than mere pre-qualification. You want to be able to tell a seller that a lender has already committed to loan you money.
Now, on to the strategies:
Look for motivated sellers
Death, divorce, relocation, foreclosure -- all can induce a seller to part with a home for less than the going market rate.
You often can discover the seller’s motivation by schmoozing his or her real-estate agent. Real-estate professionals really aren’t supposed to disclose why a home is on the market, but many do -- fortunately for you. You often can negotiate a better deal when you know someone needs to sell and isn’t just “testing” the market.
Other motivated sellers include banks and other lenders that own foreclosed homes. But don’t expect the great bargains often touted on late-night infomercials. Some lenders get a premium for homes they fix up before sale, and even neglected homes tend to get many bids from people who’ve purchased those “get rich quick with foreclosed homes” tutorials.
You can find lists of foreclosed homes in a variety of places, from commercial Web sites like Foreclosures.com to government agencies like the U.S. Department of Housing and Urban Development (See links at left under Related Sites.).
Sometimes you don’t have to do any detective work. Real-estate listings, for example, will include the fact that a home is in probate, which is the court process that typically follows a death.
The rules of probate differ by area, but often there’s a court proceeding involved. Offers are made public, and rivals may bid against each other for the home.
In Los Angeles County, for example, someone who makes an offer on a home that’s in probate can easily be outbid by others willing to pay at least 5% more.
That’s how Sloggatt got his house. Another buyer originally bid $400,000 on a house that was listed for $425,000. Sloggatt showed up at the court proceeding and bid $425,500. The original bidder had a chance to counter, but chose not to.
Tackle the unloved
Most people have little imagination. They can’t see, for example, that a bungalow with its warren of tiny rooms could be transformed into an open and airy showplace with the removal of a couple of walls. Or that hiding behind overgrown shrubbery or a bad paint job might be an architectural gem that just needs some elbow grease applied.
If you can see the possibilities in a fixer-upper, you’re ahead of the game. Just don’t get in over your head.
Always get a professional, independent inspection, and steer clear of any house that has foundation or geological problems. Outdated wiring and plumbing can also be expensive to fix.
Stacy and David Grow thought they had found their dream home in Chicago before they had it inspected. The kitchen had been updated after a house fire, and the sellers assured them all was well. The Grows’ inspector, however, found antiquated knob-and-tube wiring -- a potential fire hazard, especially with the power demands of modern appliances.
The Grows would have had to pay thousands to update the home. They passed, and eventually they found a more updated house that better suited their needs.
Inspections cost “a pretty penny,” Stacy Grow said, “but it saved us a lot of money.”
Don’t shun the stigmatized house
A home needn’t have been the scene of double homicide to get a bad reputation. Sometimes a greedy seller is all it takes.
Overpriced houses often linger on the market, ignored by buyers and real-estate agents who have moved on to the excitement of newer listings and sellers who seem more reasonable.
“In a market like this, there’s a stigma if it doesn’t sell within a month,” said Anthony Marguleas, a buyers-only agent and owner of A.M. Realty in Los Angeles. “People think there’s something wrong with it.”
That’s a warning for sellers -- but an opportunity for buyers, Marguleas said. Realizing they’ve blown it, a seller may begin to get desperate and be willing to deal.
“Sometimes,” he said, “it will go for 10% or more below the market if they overprice it to begin with.”
So-called “FSBO” homes -- “For Sale By Owner” -- often get neglected, as well. They’re typically not included in multiple-listing services, and real-estate agents may ignore them in favor of sellers who offer full commissions.
Be careful buying homes with more permanent stigmas. You may get a deal on a home near a school, on a busy street or fronting a cemetery. But you may have trouble selling it in the future. The school will still be noisy, the street still dangerous (maybe even more so, since traffic almost inevitably gets worse), and the graveyard will still give people the willies.
State housing agencies
States offer loans with below-market interest rates as well as assistance programs that lend or give you the money for a down payment. And you don’t have to be poor to qualify.
In Boston, for example, a family of three can have a household income of $101,000 and still qualify for help from the state’s MassAdvantage program.
The lower the interest rate, the bigger the mortgage you can get, and the more house you can buy. The downside: If you sell within nine years of getting the loan, a federal tax could take back up to 50% of any profit you make on the home.
For details, and to find your state’s agency, visit the National Council of State Housing Agencies, see the link at left under Related Sites.
