No one wants to settle when buying a house, but finding your dream home at a reasonable price isn’t always easy. These tips on making an offer will help you make good decisions when buying a home:
Let’s start with your connections. Word-of-mouth can help you when you’re searching for a property to buy. The key is to use discretion. If you announce to anyone who will listen that you are in the market for a fixer-upper or a great deal you could unwittingly make instant enemies with the Realtors who want the same type of property themselves, or with the little old lady who’s in love with her house, even though she no longer needs its five bedrooms and sprawling, overgrown yard. Still, keep your ears open. Your pharmacist may mention that her sister’s neighbor was thinking about downsizing now that the kids have gone off to college – bingo! Or your banker buddy may admit that he’s been thinking about selling but has so many friends who are Realtors that he is afraid of alienating or offending all of them except the one he chooses to list his place. Talk to friends you can trust; I find killer deals through my network all the time.
The second way to score a deal is by making a low-price offer. Your best bet here is a house that has been on the market for a while with little or no activity (Realtor-speak for genuine offers). “Days on market” (DOM) is public information — simply ask the Realtor who has the listing. You can also ask if there have been any offers (maybe it just fell out of escrow or recently had a price reduction); a good Realtor can tell you the history of the property as well as the level of interest it has received (although don’t be surprised if you come across a few schmucks who aren’t wholly forthcoming with the facts).
Let’s say a house has been on the market for 60 days at $350,000. Comps in the area (you’ve done this homework, remember?) are going for anywhere from $325 to $365. If it is still sitting there without a “sold” sign out front, this property is probably overpriced at $350,000. Why not write an offer at $300? “But that would insult the seller!” you cry. (You gentle, kindhearted soul, you.) Maybe. But keep in mind that selling prices are usually arrived at rather arbitrarily, and while some sellers are married to their price, others all but pick a number out of a hat, or else choose one that they would love to see materialize even though they would settle for considerably less. The power of paper is amazing; sometimes not even the sellers know what they will accept until it is in writing.
The year was 2007. The U.S. stock market continued its record-breaking uphill climb. Unemployment was at a six-year low. And home prices across America were surging ever higher. In the hottest real estate markets, house “flipping” was all the rage. Despite high interest rates on mortgages, investors bought up single-family homes, apartments and townhouses and sold them within months for a hefty profit. In the mad rush to cash in on the real estate boom, millions of Americans signed mortgages they couldn’t afford, often encouraged by unscrupulous lenders. The logic was tempting: “Don’t worry that your mortgage rate will double in two years, because you will sell this place in less than one.” In the golden haze of 2007, that argument made sense. If only we could have predicted what happened next.
The Short Sale Process
To simplify things, let’s walk through the short sale process from the prospective of the buyer. As a buyer, the first step is to find short sale listings. Short sales are rarely listed as such, because they can’t be approved until there’s an offer on the table. Instead, sellers use euphemisms like “pre-foreclosure,” “third-party review required” or “subject to bank approval” [source: Freddie Mac]. A good place to start is the pre-foreclosure section of a Web site like RealtyTrac, which carries listings in all 50 states.
Once you have a few listings in mind, compare the prices of similar homes in the area, especially those that recently sold. That gives you a better idea of the fair market value. With a price range in mind, the next move is to get a mortgage preapproval letter from your lender. As a buyer, this will not only lock in an interest rate for homes in your price range, but also show the seller’s bank that you are a serious buyer.
Advantages and Disadvantages of Short Sales
The most significant advantage of a short sale is that the seller can avoid foreclosure. With a foreclosure in your credit history, you have to wait at least seven years before another lender will even consider you for a mortgage, whereas a short sale only puts you on the blacklist for as little as two years [source: Weston].
Contrary to popular belief, however, short sales aren’t any better for your credit score than a foreclosure. According to Fair Isaacs, the company that calculates the FICO credit score, both short sales and foreclosures will cut a 780 credit score by 140 to 160 points. The first buyer tip for a successful short sale is to use a real estate professional with short sale experience. Short sales are complex real estate transactions that require a deep understanding of determining fair market value, how lenders work and what they need to see before they approve a short sale.
In general, avoid homes that carry multiple mortgages and liens on the property. Every additional lender will add months to the approval process and decrease the chances that the deal will ultimately go through. Save yourself some heartache and stick to the properties with only one mortgage lender.