by Andrea Murad | Published January 31, 2013 | FOXBusiness
With the real estate market gaining solid footing across the country and interest rates holding near record lows, many consumers are taking the leap into home ownership.
In recent years, homes have been selling for less than the true value or replacement construction costs, according to Walter Molony, spokesperson for the National Association of Realtors. “Even though prices are up, they’re still below their peak.”
But real estate is very local—some markets are experiencing price drops while bidding wars break out in other areas of the country.
“In certain markets, there’s almost a frenzied feeling again because of the shortage of inventory,” says Daren Blomquist, vice president at RealtyTrac. There are fewer homes for sale mostly because foreclosure inventory is down about 30% from the peak and new construction is still slow. On top of that, many underwater homeowners are waiting to sell their homes until the market recovers more. Low inventories make buyers feel like they have to bid up the price of a home to be able to buy, says Blomquist.
Low interest rates and cheap money make it tempting pay more for a new home as well. Before making an offer, Michael Corbett, Trulia’s real estate expert, suggests knowing the true worth of properties and the inventory status in a desired location.
“Take your emotions out—it’s a business decision,” says Corbett. “Don’t throw money at a purchase price out of the excitement of a bidding war.”
Even with a bidding war, knowing whether you’re getting a good deal on a home can be difficult, says Jonathan Clements, director of Financial Education for Citibank. Once you’ve chosen the house you want to buy, experts recommend questions to research before making an offer.
Question 1: What are the comparable sales?
“The primary way to make sure you’re not overpaying is to look at the comps,” says Corbett. Sales rather than listing prices can help you monitor what something’s worth. Corbett suggests researching sales in the same neighborhood that occurred within the last 60 days to get a good idea about home prices.
Regardless of what you can afford, experts advise against paying more than what someone else paid for a similar home last month. Even with multiple bids, homes are not selling for more than their asking prices, says Blomquist. “What ends up happening is the seller has to choose what offer they like best based on other factors that the buyer brings to the table.” These days, sellers tend to choose the most qualified buyer rather than the highest bidder.
Question 2: Can you afford the house?
“When you’re home shopping, you shouldn’t be looking for a return on your investment,” says Corbett. “Buy for lifestyle and all the advantages home ownership brings you.”
“If you put 20% down, is your mortgage payment going to be less than what you’re renting in that area?” asks Blomquist. Since homeowners get a tax break for mortgage payments, even if the home’s monthly payments are higher than rent, it still may make financial sense to own a home. “If you’re a homeowner, you should be taking advantage of that deduction that’s available to you.”
Blomquist suggests keeping monthly payments, including insurance, property taxes, and maintenance costs, for a new home at one-third or less of your monthly income. If you lose your job or have to relocate unexpectedly, you’ll have the fallback position of being able to cover your expenses if you rent your home.
Buying an investment property may require a higher down payment to be competitive with area rents. “You have to look at your own financial situation,” says Corbett. “In some cities, it’s cheaper to rent than buy.”
Question 3: What’s the appraisal value?
“If you need a mortgage, you’re going to be precluded from overpaying,” says Molony. Underwriting standards have made qualifying for a mortgage difficult and many lenders require an appraisal. “Appraisals are coming in below the agreed upon price.” On average, about 33% of real estate contracts were canceled, delayed or renegotiated because of issues that include low appraisals, according to the National Association of Realtors.
“If you have a price that’s bid up above the appraisal value, you won’t get a mortgage unless you come to the table with cash,” says Molony. With a low appraisal value, the bank may deny you a mortgage or require a higher down payment so experts suggest requesting another appraisal. Contract offers are usually contingent on getting a mortgage and a satisfactory home inspection—buying a house “as is” can cause you to lose out.
“Look at the comparables that the appraisers are using,” says Molony. Banks have been demanding that appraisers use eight to 10 comparables that sold in the past three months. In areas without many sales, appraisals sometimes use foreclosures without making any price adjustments.
Experts recommend becoming educated about home prices so you have a good appreciation of valuations before making an offer. All cash buyers who aren’t seasoned investors may risk overpaying if they don’t understand an area’s home valuations, says Molony. “If you’re purchasing as an owner occupant, you really have to do your homework.”
Question 4: How long do you plan to stay in that home?
“If you don’t see staying put for five to seven years, you probably shouldn’t be buying a home,” says Clements. The longer you stay, the more likely you’ll be able to ride out any market declines and to recoup the enormous amount of money it costs to buy and sell real estate because of broker fees, application fees, lawyer fees, commissions, title searches and home inspections.
If you’re going to be in the home short-term, consider renting as an alternative to buying, says Corbett. For a time horizon less than five years, if renting and buying cost the same, buying could still be a viable option.
Read more: http://www.foxbusiness.com/personal-finance/2013/01/31/how-to-tell-if-your-dream-home-is-really-good-deal/#ixzz2KGKuoulj