Top Twelve Things That Help You Buy a Bargain Property

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Quite a while ago, I wrote Top Ten Reasons You Bought The Wrong House and Top Ten Reasons Your Home Isn't Selling. In that vein, I'm going to write a list of the most important things when you're shopping for a property. Lots of folks shoot themselves in the foot, and it's easy enough to see why in retrospect - but isn't it better to not make those mistakes in the first place? I'm going to count down from twelve to one and try to inject what humor I can.

12)Short escrow periods, but only if you can perform. That seller is out money every day of the escrow period, and every day that passes while the property is Pending is another day that other potential buyers aren't looking at it. This daily racking up of costs has been known to cause seller panic. Knowing that there's a limit to how many days the property is going to be tied up is certainly something that can be useful in convincing a seller that this is a better offer. Warning: The deposit is always at risk, so if you cannot perform within the time period you agreed upon, you could find yourself out the deposit money.

11) Short term leasebacks: If the seller is living in the property, accepting your offer means that they have to get on the stick to find their next home. This can cause them quite a bit of anxiety, especially if they're not certain the transaction is going to close. The sellers can sign a lease and risk not needing the leased property while still having to pay a mortgage, they can enter into another purchase contract and find themselves unable to perform, they can find themselves living in a hotel because they didn't allow enough time, and with the problems in the market today, they can often be risking homelessness. If you're not in a particular hurry to move in (and you shouldn't be!), offering to lease the property back to them for up to thirty days after closing is a major anxiety reducer for the seller. Delaying your own gratification - the ability to turn that key and say "Mine, mine, all mine!" like Daffy Duck - can be a lever to get a better price or something else you want out of the seller. Short sales are a particularly good time to offer this - you're looking at an extra six weeks, possibly three months or more, before the lender gives their blessing to the transaction, then usually wants to close faster than the speed of light while the buyers are trying to get their loan done and the sellers are stressing about the tax implications and whether anyone is going to be willing to rent to them along with everything else. To add both parties suddenly having an urgent and immediate need to pack up for a move that they're not certain is going to happen and sign a new least or give thirty days notice when they're possibly going to be without a place to live doesn't make things any easier. As long as the move happens within thirty calendar days of closing, loan standards for "owner occupied" loans are still satisfied, making it a win for everyone.

10)Buyers have liquid cash - Sellers have an illiquid property. Cash money is the universal problem solver - everybody takes cash, everybody needs cash. What most buyers have isn't the full price in actual cash - but the seller gets cash proceeds from the loan as well. That seller isn't sitting upon the crown jewels of the world either - they have the most illiquid investment there is, and they are attempting to exchange it for cash - that universal problem solver. Otherwise you wouldn't see that property listed for sale. The buyer is the one with access to the universal problem solver, and if that seller wants that problem solver, they had better be cognizant that their problems are not the buyer's problems until the deal is done. If the property has problems, it is the seller's challenge to persuade the buyer that it is worth the buyer's resources to deal with those problems. Otherwise, that seller is stuck with those problems.

9) Be willing to do without meaningless contingencies. The appraisal contingency is the prime example of this. By requiring an appraisal contingency, you're saying that you don't want the property unless everything is absolutely perfect - unless some appraiser can pretty much arbitrarily be persuaded to say the property is worth at least the official purchase price. That's a weak offer, and it puts a lot of sellers in the position of resistance because they "don't want to sell for less than it's worth". If more agents explained what the appraisal is and is not, this would be a much smaller problem. I am always looking for value, and always mindful of the minimum necessary appraisal amount, but I'm also pretty much always willing to give up the appraisal contingency if I even put it into the offer in the first place. If there's a loan, the loan contingency is going to cover my clients. If there wasn't a loan, why would you care if the appraisal came in? You shouldn't ever offer more money than the property is worth to you, so why should you care if the property appraises? Being unwilling to give up the appraisal contingency is the sign of a weak offer from a buyer who isn't really sold on the property.

8) Zig when everyone else is zagging. The time to buy a property is when nobody else is willing or able. If potential buyers are waiting for the market to bottom, if they're scared they'll lose money on paper, scared they'll lose their job, or just don't want to move right now because it's Christmas, that's the time to be out buying. On the flip side, as this whole housing bubble and Era of Make Believe Loans should have made clear to everyone, when everyone is convinced that prices are going to keep going up 25% per year and therefore real estate is selling like hotcakes is probably the time to sell yours and go rent until the bubble pops. Don't confuse mass psychology with the fundamentals of the market. This applies in reverse as well.

7) Know what cannot be improved or fixed. Location is the first item on that list. If the property is already the best in the neighborhood, it's not a bargain. If everything around it is selling for half the price, it's not a bargain, it's a misplaced improvement. The area is what it is, and while sometimes they do improve, it's not under any individual's control unless you're a corrupt public official capable of zoning that airport out of existence. There are other items here - environment, view, desirability, etcetera - but what I wrote about location finds a good analog in each of them.

6) Look for properties you can improve: If they're the cheapest property in the neighborhood, that is an opportunity for profit. The beautiful turn-key property where everything is already perfect is not an improvable property - at least not at a price that's worth it, not only because everything easy has already been done, but because those properties are in high demand. When everybody wants it exactly as it is, that's not a bargain property. If you look at it and fall in love with the beautifully done kitchen and bathrooms, that's not a bargain property because most buyers are willing to pay a premium for those sorts of things. Which leads us into-

5) Look for solid, not beautiful. Even if it hasn't been updated in fifty years, a good floor plan is a good starting point. Most people will not look past an outdated surface to what is underneath - solid foundation, good floor plan, good location, lot with plenty of usable space. Yes, you're going to have to do some work to make it shine, but you're looking for a bargain property, not the one that's already been over-improved by a devotee of one of those house-flipping shows. The people that have done that work expect a premium for all that effort. If you want already beautiful, you can expect to be the one paying that premium. If you're willing to take something solid and make it beautiful, you're going to be the one getting that premium.

4) Don't fall in love with one particular property Be willing to walk away if the negotiations don't work out, or if you discover something about the property that's worth walking away from. I see people get all worked up over the possibility of losing a $3000 deposit and sign on the dotted line for things that are going to take ten times that much money just to bring the house up to where it should have been already. I tell buyer clients that the ideal time to fall in love with a property is as I am handing them the keys - something that doesn't happen until escrow has closed and they actually own it.

3) Have a plan Why are you buying this property? Is it a starter property for a few years, are you trying to flip for a profit, or is the home you're going to live in the rest of your life? Are you planning to hold onto it and rent it out once you're done living in it? Is it the basis of the plan to use leverage in your favor so you qualify for a better property when you sell this one? Is this the end property, or is it a shortcut for getting where you want to be? Each of these possibilities has consequences and implications that make it advantageous to do one thing and not the other. A good agent knows what they are. Plan ahead for what you want, and the right things to do to achieve it are a lot more definite.

2) Good buyer's agent. This is the expert who will help you with how best to make the transaction in your favor, as well as reverse engineering what the sellers and their agent are trying to do. Everything about a real estate transaction happens for a reason. You want someone who can take the what and figure out the why from that, as well as the how of getting from where you are to where you want to be most efficiently and effectively. It is easy to find a good buyer's agent if you make the effort. But this is not number one because the best buyer's agent in the world can't do you much good if you haven't got the

1) Patience If you're only willing to look at a few properties, if you're not willing to investigate the property and the market, if you're not willing to consider that maybe another property might be better for you - if you're going to get your heart set on one beautiful property because it's the most upgraded one in the neighborhood, there's not much anyone or anything else can do for you. The more patience you have, the more I and other buyer's agents can do for you. If you're not in any particular hurry, we've got time to make things happen your way. If you need to be under contract in two weeks, you've got about a week to start negotiating an offer, and no plan B available if that first negotiation fails. This weakens your bargaining position, to say the least.

Bonus item: Higher Deposit People are funny about cash. Perhaps it's because they had to earn that cash dollar by dollar, not spending it on other things. Every dollar in that deposit represents something that they could have bought, fun that they could have had, but didn't. A large deposit is therefore indicative of someone who has made some serious sacrifices and is putting that money on the line in the pursuit of this property. That says a lot of positive things about how serious they are, how certain they are that they want the property, and how certain they are that they can make the loan happen. A large deposit is also (usually) indicative of someone who's in the habit of saving and therefore really does have good credit. The deposit is always at risk, but there are steps you and your agent can take to minimize that risk. Look at it from the seller's point of view: You've got someone willing to put thousands of dollars of their own money potentially on the line, versus someone who's scraping together change out of the seat cushions of their couch. Which of those two offers would be more attractive to you?

Caveat Emptor

Article UPDATED here


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This page contains a single entry by Dan Melson published on March 18, 2009 7:00 AM.

Loan Fall-Out And The Effects Upon Consumers was the previous entry in this blog.

Buyers: Stretching Your Budget Means Compromise is the next entry in this blog.

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