Tips For Rookie Home Buyers In Down Market

Ray Martin and Hannah Storm
CBS/The Early Show
What a difference two years make. The real estate market has gone from sizzling to soft in most parts of the country, and as conditions have changed, so have the rules of the game for home buyers and sellers. On The Early Show Tuesday, financial adviser Ray Martin began a three-part series on buying and selling homes in a buyers' market with a look at buying, especially for first-timers.

Home Buying and Selling in a Down Market

The real estate market has changed dramatically in the past two years.

After booming for the first half of the decade, when it was characterized by "bidding wars," the market is markedly different. Starting in 2005, it showed signs of cooling, and buyers now have the upper-hand.

For many buyers and sellers, this is an environment in which they have little experience, especially after such a prolonged strong market for real estate. With the spring selling season firmly under way, it is clearly a buyers' market in many regions, as the inventory of homes for sale exceeds six months supply and rises, listing prices are lower than last year's comparable sale prices, and the number of closings is lower than last year.

But, with the backdrop of double digit-price rises just a few years ago, many buyers, especially first-timers, are reluctant to jump in, as they feel there may be more price declines in store. They also feel that many sellers may be asking too much for the sole reason that they paid too much.

One first time buyer recently summed it up this way, "Just because the seller overpaid doesn't mean that I should; I shouldn't have to pay too much so that they don't lose money."

Time to Buy?

There's no guarantee that home prices won't fall further after you buy. In fact, there are signs that home prices will continue to decline this year, especially in regions where markets were overheated by speculative home buying, such as in Florida, California and Nevada.

The rising number of homeowners in default on their adjustable rate mortgages is causing more and more of them to throw in the towel and sell, just to get out of the debt. In the worst of cases, some owners are walking away and forcing the lender to foreclose on the home.

The bottom line is that the current trends point to a rise in the number of sellers eager to cut a deal, which is the good news that many home buyers have been waiting for.


Click Here to visit CBSNews.com's real estate section
All Real Estate Markets Are Local

The key thing buyers should know is that the direction of real estate prices is a local matter, and little, if anything reported about national trends may apply to your local area. The main thing is to know how to spot the way your local market is headed before buying, to avoid paying too much. This is important for sellers, too, as it can help them get the most for their homes without waiting to long to sell.

But what if you want to buy a home now, while interest rates are still low? What if home prices in your area haven't fallen that much? Here are a few tips for first-time buyers to follow to avoid overpaying:

  • Research Local Market: The best way to know if a home is priced fairly relative to comparable houses for sale is to consider the asking price using a comprehensive market analysis. This should be your first step, before you even begin shopping for a house. Get the listings of the houses in your desired price range and area. Also, get a list of the recent sales prices and the original listing prices of comparable houses in the area. You can find them on Web sites such as www.zillow.com and www.realtor.com, or ask a local realtor to do it for you.

    Use what you learn from a market analysis to determine what you will offer. For example, compare the original list prices and final sales prices to determine price reductions sellers are accepting; if recent sales prices were 10 percent less than the list price, you will get a sense of what sellers have accepted as lower offers.

    Also, if you have your eye on a house that has been on the market for a few months or more, or the seller has dropped the asking price several times, those could be signs that the seller either overpriced the house or is more willing to deal, giving you more room to bargain.

  • Ask the Right Questions: Ask the seller or his or her realtor when the seller bought, how much they paid, and why they're selling. Those are key questions to get answered in a buyers' market, especially in the early stages, as many sellers may still be clinging to the idea of selling their houses for the price they could have gotten a few years ago.

    The problem is that most buyers don't ask these questions, and sellers and their real estate agents may be reluctant to provide candid answers.

    If you explain that you need to know so you will know what to include in your purchase offer, they may be more willing to answer.

    For example, if the seller bought the home a long time ago or for a lot less than he or she is asking, they'll have more room to negotiate. Also, if they're selling because of a job change or because they can't afford the payments, you can help them get out of the situation if you can offer to close quickly.

  • Look for the "Right Things Wrong": A popular piece of advice by many seasoned real estate pros is to search out the homes that are "diamonds in the rough." Look for a home that's in a great location but looks "tired," that is, is in need of paint, floor refinishing, or an updated kitchen or appliances, for instance. These are things that, when improved, can add more value to the home than the cost of the improvement. These homes will get less attention, and, as a result, the sellers may be more willing to strike a deal.
  • Get an Inspection and Deduct Cost of Repairs: When you make an offer, always include an inspection contingency clause in the purchase contract. This provides you the right to hire a professional home inspector to inspect the home and identify needed repairs and problems. If the repairs identified in the inspection report are considerable, such as the removal of an old fuel oil tank, replacement of roof shingles, fixing a leaky basement, etc., then you can make a counter-offer to pay your original offer price reduced by a list of the costs to make the needed repairs.

    Explain to the seller that your offer price was for a home that didn't need these repairs and that, if the seller agrees, you will buy the home and make the repairs yourself, saving him or her the time and aggravation. Just be careful to get firm and reasonable estimates from contractors willing to do the work, as you won't not want to find out that the actual cost of the repairs is considerably more than you thought it would be.