Six Bits Of Home Buying Advice For Cautious Shoppers
Today's homebuyer is especially cautious, so let's review some of our best home buying advice to help you avoid making some big mistakes.
We all know that the real estate market has been rocked. Tallahassee home values have been falling for more than five years, and the bottom is not yet appearing in our rear view mirror.
So what's a prospective home buyer to do? Do you sit out on the sidelines and hope to catch the bottom, or do you jump into the market and take advantage of historically low interest rates? You just need sound home buying advice.
I'm sure that if you are reading this article about home buying advice, then you are either thinking about buying a home or even selling a home (and scoping out what buyers are doing).
In fact, this article was inspired by "Francis" who wrote this comment and questions after our recent blog post Use Housing Supply And Demand To Determine The Asking Price Of A Home:
Joe, I love the blog keep up the good work. I am a prospective buyer in the area and I have grown increasingly frustrated by unrealistic sellers. I have done a fair amount of research on the market and it seems like prices are still high in the area. There is still a lot of uncertainty around housing due to high unemployment, a backlog of foreclosures and tight credit conditions and many buyers (me included) don't want to overpay. Rates are at historically low levels and when they start to rise, more expensive homes will be that much harder to sell in the future since people these days buy based on mortgage payments and not house price.
How do you advise buyers to approach a prospective seller with an offer that is 20% below asking price without offending, even if it is a fair price based on the market? I find that many real estate agents are hesitant to do this, regardless of their thoughts on the market, because they are incentivized to get the highest price possible, not to necessarily get the buyer the best deal. Do you have any thoughts about where current price levels should be (example: pre-bubble 2003 valuations)? -Francis
First of all, great questions and thanks for sending them in Francis.
In order to keep this home buying advice consumable for one sitting, I have broken down Francis' comment into the following pieces:
Home Buying Advice For Cautious Homebuyers
1. Home prices are still high in Tallahassee - This is certainly open to debate by many of us who own homes ... :). The fact is, much of the Tallahassee housing market is selling at prices that are below replacement cost, meaning the market has adjusted and is no longer over-valued. THIS DOES NOT MEAN THAT PRICES WILL NOT CONTINUE TO FALL! We know that supply levels will continue to put pressure on pricing for years to come, and the new influx of foreclosures will only fuel depreciation. There are homes today though that can be purchased for prices as low as I think this market will go. My home buying advice on this ... as I wrote in a recent article, price is not the only consideration when determining whether to buy a home or wait!
2. Uncertainty about housing - I really do not have much uncertainty about the housing market. If you would read everything I have written over the past few years (over a thousand articles), you will see enough analysis to know what is wrong with this housing market, and more importantly, why we know it will resolve itself over the ten or so years. If you are going to be in Tallahassee for many more years, this home buying advice is that you will look back at this time as being the absolute best time in the history of Tallahassee to buy a home.
3. What will happen when mortgage interest rates rise - In my recent blog post titled How To Decide Whether To Buy A Home Or Wait, my home buying advice showed how the changing interest rates affected the decision to make a purchase. This is a double-edge sword, because interest rate increases hurt both buyer and seller. Buyer's can afford less home, and this means there are fewer buyers for sellers. But in our current market cycle, rising interest rates will have a larger impact on borrowers than they will on sellers who are already dealing with a diminished buyer pool. The best home buying advice is to consider rising interest rates more of a threat than the remaining home value declines.
4. How do you approach over-priced sellers - This one is easy. My home buying advice is ... "You don't!" One of the first rules that I point-out in my Home Buying For Smart People e-series (FREE of course), is there is nothing good that can come from looking at over-priced homes. The real estate market has moved online, and online means that homeowners have resources that will show them what their home is worth. An overpriced home seller is somebody who has not yet become serious about selling their home. If you look at their home, you will either not like it (because it is not as nice as other homes priced at the same level), or even worse, you will like it. The seller will be in a position to get you to pay more for the home than it is worth, or you will end up disappointed. My home buying advice says "nothing good comes from looking at over-priced homes. DON'T DO IT!"
5. How are real estate agents incentivized - If you are serious about buying a home and getting a great deal, you should follow the home buying advice that works for smart home sellers, and that is "hire a great real estate agent." Do your homework and pick the best company and best agent to help you purchase a home. This should be done before you look at homes, because you want the agent working for you, and not for the seller. Our office provides both a buyer's brokerage agreement (an Agreement For Services) as well as a Buyer's Service Pledge in writing, so that you are sure that we are working for your best interests. Personally, I would never buy a home without a signed agreement for services, so my best home buying advice is get your agent first, then select your home.
6. Housing forecast for the coming years - It sounds to me like "Francis" is a pretty sharp buyer, doing his research before he jumps into the role of homebuyer. THIS IS SMART! For most people, buying a home is the single most expensive purchase that they will make during their lives, and doing so without ensuring a smart decision seems a little reckless. If you want a solid overview of where I see the market heading in the next few years, check out my Real Estate Forecast 2012 blog post. It has quite a bit of analysis on "why" the market is heading "where" it is heading, and it serves as the background for much of my home buying advice these days.
Smart Home Buying Advice
If you take the time to follow the links reference above, you will be better informed than the majority of real estate agents (and their home buyers) that are in the market today.
If you have any more questions that parallel what we've covered here, I hope you will continue below in the comments section.
If you would like more personal home buying advice, just drop me a note and we can schedule a time to have a home buying specialist counsel you on your specific situation. I hope this summary of my six bits of home buying advice help you in your housing quest.
Discussion
Hey Joe,
Great points. One other thing to consider though is that perhaps Francis may also be unrealistic. If you run into the same problem with people over and over again, it could be that the problem is not with the other people, the problem might just be you.
This is a lesson I have tried to teach my children as they entered the work force. One of my children entered the work force and had a multitude of jobs the first few years. The complaint was always the same "My boss is a jerk". After a few job changes, I advised my child that perhaps they had the wrong expectations of what it meant to have a job. Perhaps the boss was never the problem but they were experiencing what reality was like when you actually have to work for someone.
Perhaps Francis may have unrealistic expectations as well. Perhaps while the market may be soft, that does not mean owners are just going to take a low ball offer because Francis does not want to pay more.
I am not saying that homes are or are not over priced. Only that the street runs both ways. Sellers may have unrealistic expectations on what they can actually get for their homes and Buyers may have unrealistic expectations as well. The market has been so depressed for so long some might think that Sellers should be desparate and take low ball offers.
Anyhow, love the blogs. Keep them coming.
Joe,
Thanks for taking the time to answer my questions. This was very helpful and I know that there are a lot of people out there that find this blog very informative.
As a follow-up, could you shed some light on residential home price appraising? I struggle with understanding how a home could be appraised for $600,000 at the peak of the boom and now appraise for $300,000. What has changed from an appraisal standpoint? The real estate is the same. I know that supply and demand can impact the market price, but the underlying value of the "sticks and bricks" has not changed. I know the answer probably lies in the sales comparison approach to appraising, but why don’t appraisers focus on replacement cost or a cost based approach?
It seems to me that a prudent buyer would not be willing to pay more for a home than the cost to build an equally desirable home. I would think that the replacement cost of new of a home would set the upper limit on value for a home (not a new home) and be adjusted according to depreciation or any modifications to the home. It seems that a cost based approach would be a good starting point for making adjustments to market sales in the sales comparison approach for items like a new roof, HVAC, etc.
Any insight would be greatly appreciated.
Francis
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