As I will continue to advise you that now is not a good time to buy, there are still some people out there that will go out and buy anyway regardless of my good advice; Perhaps it may be that they have a spouse that is pressuring them to buy when they really know they shouldn't. Whatever the reason, here are some things you should be aware of before taking on such a task. If you're going to go to the wolves, at least you can learn how to fight. This page will be updated from time to time; Consider it work in progress. Suggestions are always welcome.
Buyers Agent
If you look around in the paper or somewhere in the advertisements, you will see buyers tips that are given to you by realtors. These "tips" they give you are there to build your trust and to brainwash you into believing that buying now is a good idea and that they can show you how to get a better deal. These "tips" as they call them are nothing more than propaganda delivered to you by the real estate industry. My favorite one is about "buyers agents"; how they will tell you that you should get a buyers agent because "they work for you to negotiate the best possible price". Common sense tells me that anyone who is going to be paid a commission on a sale is going to want the sale price to be as high as possible. Don't be fooled by this, no agent is going to help negotiate the price lower because of this conflict of interest; they certainly will try to make you believe this though! You can setup an agreement on a fixed commission but that only goes so far. Sometimes a buyers agent will be offered something under the table by the sellers agent to get you "the buyer" to accept an offer and close the deal; some of these things include a vacation, a broadway ticket, etc. They know that if you have a buyers agent, you trust them so this is an easy way to get past your natural defenses and perform an inside job; I like to refer to them as double agents. It's like you're playing a game of football and one of the players on your team is really on the other team and when the opposing team gets the ball, they will "accidentally" let the opposing team get through your teams defense and score; they are truly the hand that rocks the cradle!
The term "buyer's agent" was created by the industry for the industry not for the protection of consumers. Do you really think that there is any kind of advantage for the industry to get the house sold at a lower price? Realtors know that people are skeptical of them so they created the "buyer's agent" to make you feel more comfortable working with them while convincing you to let them make critical decisions for you. The "buyer's agent" is just a way of breaking through your natural defenses to manipulate you to close as quickly as possible and buy at as close to the asking price as possible by discouraging you from "lowballing", that is what they will try to do while making you believe otherwise; It's like sleeping with the enemy.
They will also use scare tactics such as telling you something like, "If you don't offer a higher bid than that, another buyer is going to buy it and you will lose the house". While this may have been true during the inflating of the bubble, it is not true anymore; but there still may be someone with a buyers agent of their own that will be convinced to beat out your offer. Don't worry about it, let it go, you will see many more houses that are nicer and cheaper as time goes by; It's just not worth it to involve yourself in a bidding war at this point in time!
Trust no one when you are shopping for a house. Look up houses on the internet for yourself in neighborhoods you like, then call the realtor listed and set up an appointment to look at it; This way you don't have anyone pressuring you into buying a house just because they need a quick sale. Don't let them talk you into looking at other houses either, they will try hard to do this; You are a walking sale and they don't want you to walk away because you are now so hard to come by. If you follow this rule, you will find it much easier to negotiate because you're only allowing them to show you that one house and if they can't get you to buy it, they know they probably won't get a chance to sell you another. If you let them show you other houses, they will discover your weaknesses and prey on them; you don't want them to get to know you too well and whatever you do, don't ever let them know the most you are looking to spend!
There really is no reason for you to have an agent find you a house, it only benefits them! You know what you want and you are in no rush to buy; agents are hurting for sales so when they get your phone number, be ready to get alot of calls from them. Many people are clueless about buyers agents.
Typical Scenario: One day the wife asks her husband to look at some houses; it's Saturday morning.
Wife: "Why don't we look at some houses today?"
Husband: "Why would we do that? You know it's not a good time to buy, wait for prices to come down."
Wife: "I know, but why don't we just look and see what's out there?"
Husband: "What is the point if we're not going to buy?"
Wife: "Just to see what kind of a house would be good for us. What's the harm of just looking?"
Husband: "Ok, but remember, we are just looking?"
Wife: "Great, I'll get Suzanne." - [she immediately walks away].
Husband: "Suzanne????"
Suzanne [her "buyer's agent"] goes to take them to see a bunch of houses. The next morning, this is what happens.
You could just imagine the conversation between the wife and the agent beforehand.
Here is a possible ending to this story
A buyers agent can tell you anything they want without any legal consequences whatsoever. They can tell you that a house will be worth X amount more in a few years and when the price falls instead, that is your problem not theirs. If a stockbroker made claims that a certain stock was going to take off, he could be put in prison just for making that claim, whether it was true or not. A consumer is protected by the "lemon law" if they buy a car through a used car lot; not much protection since there could be problems that come up at a later date, but at least there is "some protection." That is one of the things wrong with the housing industry; there are "no rules" and "no protection!"
Do you need someone to shove a house down your throat? Hire a buyer's agent!
Another thing; if you question the honesty of a buyer's agent, they will tell you something like, "If I ripped off a customer, I would never get repeat business or referrals". First of all, what are the odds of someone using the same realtor when most people who buy, stay at least 7 years and when they do move, they usually move to another location outside of the area that the realtor covers. Second, how often does someone get referred to a realtor; people usually latch on to a realtor in their quest to locate a house; it's like a grab bag, only the prize isn't good for you.
Asking Prices
You look around and see prices that are all over the place and you try to make sense of it. How could one house be priced so much higher than another relative to a similar house and location? The problem in today's market is that we are at the crest of a falling market and sellers are in denial and asking all different prices depending on the situation they are in. Some of them are reading the buyer and trying to determine what is the most a buyer is willing to pay and if it's possible, lower their price; Others don't have the option of lowering their price and are truly a foreclosure waiting to happen.
A seller who is in trouble with his mortgage; He may be falling behind on his payments and has to sell, but since prices have been falling and his house is now worth less than his mortgage, he can't sell the house for what the market will bear. He is hoping and praying that someone who isn't doing their research will buy his house; thus taking his head off the chopping block and putting their head in place of his. For some of these sellers, this is their second house or investment property that just didn't pan out the way they thought it would. His price will be higher than the other overpriced houses, but it's not his choice. Usually these sellers are trying to sell the house themselves because they can't afford to pay a commission and a realtor doesn't want to take on a listing that is sure to sit. Most of these sellers will end in foreclosure while a few really ignorant buyers may bail a few out. Example:Could be.
A seller who bought his house (many before the bubble) to live in with no plans to sell and had a good amount of equity in it; Only he kept pulling equity out to spend on stuff he doesn't really need such as a new Car, Plasma TV, vacation, etc. This seller has realized that prices have fallen since he pulled all the equity out so he is underwater. These types of sellers will be very desperate, but keep in mind, like the Distressed Seller, they cannot sell the place for less than they paid so their asking price will be much higher than others. These sellers have a bunch of items such as the Plasma TV that they will be desperate to sell to help minimize the impact, look for these items on Ebay the next couple of years if you want a good deal on stuff like this; I refer to these items as "Equity Distressed Assets" (EDA's). If the seller declares bankruptcy, those EDA's will be liquidated to compensate the lender since the lender will not be able to get his money back on the sale of the house alone. This kind of an owner is truly pitiful because if only they didn't take out the equity, they would still have their house; They brought this on themselves by buying stuff to keep up with the Joneses and now their whole family has to suffer.
A seller who bought the house with only the intention of selling it for a profit (A Flipper) but because of his bad timing had bought at the very top. He was playing a game of musical chairs and got stuck without a seat when the music stopped. These people are alot like the distressed seller, but usually aren't living in the house; because of this, they are even more desperate to sell because of the holding costs. Some may be able to rent it out, but the rent usually won't cover the holding costs; In other words, the alligator is hungry and the rent is just an appetizer.
A seller who bought the house only to turn a profit by selling it for more, but unlike the Distressed Speculator, he has plenty of equity and is able to carry his mortgage. He knows the price is falling and he wants to cash out before the big fall. The seller bought the house several years ago for a lesser inflated price or he may have bought it before the bubble and wants to get out for what the market will bear; This is the type of seller who will undercut his price just to attract a serious buyer to get it sold. He knows that whatever profit he can get now but cutting his price, most likely won't be on the table later, yet he has plenty of room to lower his price should it not sell quick enough.
A seller who has owned this house prior to the bubble; These are sellers who were going to sell years ago during the bubble (Such as boomers that want to retire), but since prices kept rising, they decided to wait and see how high the prices would get; They are no different than those who were holding their stocks before the Nasdaq crashed. Although they can still be considered Voracious Speculators, I refer to them as Voracious Owners instead only because they are living in them and their original plan wasn't to make a huge profit, but since they saw prices shoot up and held out, it really does make them speculators. Alot of these sellers are either looking to relocate to a cheaper area or are just going to rent until the prices fall so they can buy back in at a significant discount. These sellers are most likely not in any danger of being underwater unless they zapped the equity which would make them a Distressed Owner instead; However, they are under pressure of getting it sold quickly so they don't lose too much of their bubble equity. These are the best type of seller to buy from if you are going to buy; They have plenty of room to cut their price.
As you can see, asking prices vary tremendously depending on each sellers particular situation; So don't think too much about them when it comes to making an offer; They are just a reflection of how desperate or confused the seller is about what the buyers are willing to pay, it's your job to show them. You may feel that if your offer is very much lower than what they're asking that you will insult the seller and lose the chance of buying it; If you feel this way, you are a danger to yourself. Buyers get emotionally attached to a house and this is what many sellers are counting on. While some prices may be lower than others, they aren't low prices. If you're going to buy, your best bet is to look for the Voracious Owners and Speculators and drop an appropriate lowball offer on them and walk away, because although they are trying to get some unreasonable price for their house, they have room to drop their price whereas those in distress cannot. These Voracious Sellers are caught in a cloud of confusion but will soon be slapped in the face with the cold hand of reality. See if you can spot which of these sellers fall into each of those categories.
Buyers Market
Realtors will tell you it is a buyers market, but what is a buyers market? Does it mean that it is a good time to buy? Does it mean that the inventories are very high? Does it just mean that it is a bad time to be stuck selling? Does it mean that your lowball offers will be accepted?
According to Encarta's Dictionary:
buy·er's mar·ket (plural buy·er's mar·kets)
Definition:
situation favoring buyer: a situation in which supply exceeds demand, prices are relatively low, and buyers therefore have an advantage.
They say that it's when the situation favors the buyer; while it may look that way, it really doesn't favor the buyer. Any discount you believe you are getting now you will find out later that it wasn't really a discount. If you were informed that there was going to be a huge sale at Macy's next week, would you rush out to Macy's and buy right now? If you go out to buy a new big screen TV and it goes on sale a couple of weeks later for hundreds of dollars less, you get that sinking feeling until you realize that many places have a roll back policy that allows you a reimbursement if the price drops within a 30 day period. When you buy a house, there is no such policy and the amount you lose when prices fall is 100's of times more and so is the pain! They further define what a buyers market is:
- Supply exceeds demand
Supply does exceed demand and the inventories will rise further as more owners (debtors) default on their mortgages and lending standards tighten limiting the amount of buyers available as well as the maximum amount that could be lent to them.
- Prices are relatively low
Prices are relatively low; the key word here is that they are "relatively low". This means that they are low relative to what? Inflated prices, previous sales. If you take away the word "relatively", the statement is falsified. Prices are no way's near "low" and the exotic financing that made them appear to be low is disappearing quickly. The prices will eventually be "low", but we have quite a while to go before that takes place.
- Buyers therefore have an advantage
Prices have risen to such an extreme that they have quite a distance to fall; see bubble-o-mics 101. If prices have dropped and aren't going to drop anymore; thus if prices have stabilized, the buyer certainly would have the advantage. Prices are dropping and will continue to drop so the only ones with the advantage are the Voracious Owners and the Voracious Speculators. Those in distress might feel like it is a buyers market because of their dire situation.
According to the dictionary, it can only be a buyer's market if all three of those conditions are met. Since they aren't, it is not a buyer's market. The realtors will have you believe it is though. They want you to believe that it can only be either a buyers market or a sellers market that it has to be one or the other, but according to the NAR, they want you to believe it's a buyers AND a sellers market. The only way I see it is that it's a sellers market for the Voracious Speculator and the Voracious Owner but isn't for those in distresses; For the buyers, it is neither a buyer's market or a sellers market. Realtors want you to believe it's a buyer's market because it leads the typical buyer to believe that they should get off the fence and buy. When prices stop falling and they slowly start to rise, that is when it will truly be a buyers market; Don't worry about missing the bottom because when we get there, we will be there for a very long time.
Priced Right™
In the realtors circle you hear the term "Priced Right" as in "If it's priced right, it will sell". What exactly does this mean? I hear this so much, it makes me want to puke. It really doesn't have a useful meaning, in other words it is plain common sense and anyone saying it to another is clearly insulting their intelligence; It's kind of like saying, "If you throw a rock at a window, it will break the window" and you have my permission to smack anyone who say's it to you! This is just a way for a realtor to tell the seller without insulting him that he must reduce his price without tipping off the buyer that the seller is getting desperate and prices are falling; It doesn't sound harmful to either party. Unlike when it is a true sellers market and prices are rising, the buyer is now the head and the seller is the tail but because they both are parts of the same animal, you can't step on the tail without getting the head's attention. Agents have to cater to both parties all the time and the only way to do that is to keep both parties happy at all times; Even if it means coming up with some stupid cliche.
While this means lower the price to the seller, it means that houses are still selling to the buyer keeping the fear alive that someone may outbid him. With today's inventories, you would have to be extremely ignorant to take part in a bidding war; If someone outbids you, walk away, it's not worth it! There are just too many houses with many more to come; buy with your brain, not your heart!
When I hear a buyer or non-realtor say something like, "If it's priced right, it will sell" on a forum, I always think to myself, "Good grief, they got to them too!".
My uncle sold his house a couple of years ago. He didn't sell at the top of the market, but he did make more than enough to make him happy. When he had his house for sale, he was worried that the bottom was going to fall out of the market soon because he thought that there wasn't enough idiots out there willing to make such irrational offers. It was that fear that drove him to sell at the time. You may say that he should have waited a little longer, but if he waited until now, he wouldn't have gotten as much as he did. I remember when he was selling his house and we were talking at a family gathering, I was saying to him how prices were so overvalued and him agreeing with me. Having lived in the house over 40 years, he owned the house free and clear, paid something like $20k for it at the time. He was asking something like $600k for it, he told me (I will paraphrase), "I would be more than happy to get half that much for it, but if some lunatic came at me with $600k, I wasn't going to turn him down". It wasn't long before some lunatic did come at him with a toxic loan; My uncle was more than happy, took the money, retired, moved to Florida and is doing very well; No one is really sure whatever became of Waldo.
This is why prices will fall alot quicker than anyone would think. Boomers like my uncle are approaching retirement and the cost of living is just too high for the average boomers fixed income and much like my uncle, paid so little for it when it was purchased four decades or more ago, own the house out right and would be more than happy with year 2000 prices; Some of them are finding much cheaper places to spend their golden years using the bubble bucks they get from the sale of their house (see video below). These boomers have seen the highest real estate prices they will in their lifetime; At this point, they have no incentive (or time) to wait and they know it! They are going to take whatever you the buyer is willing to pay (the true meaning of the phrase "priced right"); But if you want to pay alot? They sure won't turn you down!
Motivated Seller
A motivated seller is a seller that has a real strong incentive to sell his house as quickly as possible; Gee, I wonder why that might be! Search for motivated on craigslist and you will get alot of hits. Another variation to this is to search for reduced. Today, everyone selling their house is motivated; The motive is either to get a nice big fat chunk of equity (and laughing all the way to the bank) or just saving your ass from foreclosure (Thank gaaaawwwwwddd!). Anyone who specifically advertises as motivated is more than motivated; They're desperate!
If you're going to buy a house in this market, it might be worth your while to check and see just how desperate these sellers are. Some sellers are stuck in denial mode and they aren't too quick to jump at an offer; A desperate seller on the other hand just might be quick to make a deal. Be very careful when buying from this type of seller because usually someone who is desperate probably doesn't have a very big equity stake in the house (see distressed) and they are just trying to pass on a deathtrap; Usually it is best to avoid these types. The best kind of desperate seller is one that was stupid enough to buy another house before selling the one they own; This type of seller has gobs of equity and you got them right where you want them; Especially if the house they are buying is in another state. They are paying two mortgages and they have to sell RIGHT NOW! You can spot these types when they show pictures of the house and the inside shows that it is unfurnished or empty (No one is living there). This will show their desperation to sell, you then have to narrow it down to what category they fall in, speculator or owner.
Some things to note about this video is that this guy Gary bought his house in 2004 while real estate prices were still rising. Since he was forced to sell by 2006, he was "lucky enough" to break even; had he bought the house at a later date or sold at a later date, he would have lost alot and any debt that he was forgiven he would be taxed for with a 1099C. Now he is renting and his monthly costs to rent are $600 cheaper. Even if he were able to keep the house, he would be paying $600 a month more for an asset that is falling and will continue to fall in value. Just something to think about before you lay your money down.
Find out what they paid for the house previously and when; It will give you an idea of what type of seller you are dealing with and whether or not you should even waste your time. Use my House Appreciation Estimator to help you make that decision. If the house was purchased by them in 1987 or later, the data should be available; Do your homework!
Comp Values
Ok, so the asking price is quite meaningless so a realtor does a "Comparative Market Analysis" or a Comp to see what a similar house in the same neighborhood has recently sold for to give you an idea of what a house would sell for. This is definitely more valuable than the sellers asking price since it is what a house sold for, but to what extent? In discussion, we'll talk about a hypothetical couple that buys a house.
A couple decides they are going to buy a house, so they start searching neighborhoods and school districts. They come across a house they like and want to put an offer in. The seller is asking $450k for the house after reducing his asking price from $500k because his house has been sitting for months and the house down the block that is very comparable sold for $420k 3 days ago; the seller knows that the buyer is going to talk him down so he figures by adding a 10% cushion he expects to get no less than what his neighbor has. The fact that the buyer of the other house was willing to pay $420k for the house, doesn't mean that there are others that would and therefore doesn't mean the house is worth $420k; on top of that, did the house really sell for $420k?
When a house is sold, many people these days seem to have a hard time coming up with a down payment, that is why the lending industry was offering 100% financing; so that people who have already proven that they can't save money and thus cannot be trusted to make monthly payments would then be able to get a mortgage. Now that the mortgage market is imploding for the obvious reasons, they are tightening up lending standards and those no money down loans are disappearing quicker than the red eye in the "clear eyes" commercial; So now buyers have to come up with a down payment or they won't be able to get a mortgage. Along with having to come up with this down payment, a buyer has to come up with closing costs which can be as high as $15k or more. With all this money that has to be available up front when buying, sellers have come up with what is known as a sellers concession. What exactly is this? The seller agrees on a price for the house and then takes all these added expenses (closing, down payment, etc.) and adds them to the price of the house; this way, the buyer has everything rolled into his mortgage and doesn't have to come up with anything. While this might sound like a good idea to the typical buyer since he doesn't have to lay out any money of his own, the problem with this is that the house along with all those other expenses goes down in the books as what the house was sold for. What this means is that you are screwing over the other buyers who buy based on the new inflated comp you are creating; just as other buyers have screwed you over by creating their own inflated comps that you used to help you decide on what to pay for your house. This is actually illegal, but it still doesn't stop anyone from doing it as you can see. These comps are unreliable and can be used along with the "sellers concession" to help inflate prices by presenting evidence that is thought to be reliable when it is in fact not. It's all just smoke and mirrors; make sure you understand this the next time a realtor does one for you and tells you how much the house up the block sold for.
In the case of that house that allegedly sold for $420k, who's to say that the house wasn't sold for $385k and the seller gave the buyer a sellers concession of $35k ($20k down payment and $15k for closing). That would mean that the comp was inflated by $35k. If you buy the house based on the comp and you do the same thing with the sellers concession then your house will get booked as an inflated comp based on another inflated comp; this distorts prices and is one more thing that affects the median. They have been doing this for years, this is another reason prices have risen so fast. They can get away with this as long as there is an appraiser that will value it as high; appraisers have been blackmailed for years to do just that, but now that busts are starting to be made, soon there might not be too much of that going on, but I wouldn't count on it! Right now there still are some that don't even go in the house; obviously they are bogus appraisals.
Asking prices are for the most part fantasy prices that don't have much meaning other than to indicate who is more serious about selling their house. If you are thinking of buying and I hope you aren't for your families sake, base your offering price on what the house should really be sold for using historical computations and decide for yourself whether or not the amenities in the house are worth any added premium. Prices are falling and they will continue to fall until they are very close to the mean value; Don't let anyone tell you differently, especially a realtor. It is your money and it is your future, not theirs. If you buy because the seller accepted a lower price than he was asking or a lower price than a similar (inflated) comp, you may think you got a bargain but you are most likely catching a falling knife and will be extremely disappointed in the years to come.
Typical Agent and Buyer conversation
Typical conversation that goes on after finding a house on the internet, calling the realtor listing it and going to look at it. If the agent can't succeed at selling you the house, they will try to convince you that they can find you other houses. Once they do this, they will ask you to sign some papers designating that they are a buyer's agent and that they are working for you. Yes, sellers agents can be buyers agents as well; there are no rules.
Agent: "So what do you think of the house?"
Buyer: "I don't know, the price [$500k] seems kind of high."
Agent: "Well, I did a comp on the house down the street that sold for $550k 3 months ago." [Never mind that the people who bought it used an exotic loan, are having a hard time making the payments and will soon foreclose; many of those foreclosures can't even fetch a bid at the auction].
Buyer: "So you think that's a fair price?"
Agent: "Definitely, it's priced right." [thinking $$$$$$$$$$$$$ I'm very close now $$$$$$$$$$$$].
Buyer: "I like the house, but I don't think it's worth $500k."
Agent: "Well, what's it worth to you? Put in an offer."
Buyer: "How about $400k."
Agent: "You're going to have to offer more than that, a 20% discount? They're not gonna go for it. If you don't offer more, someone else will buy it." [if they do it's their loss].
Buyer: "So
what should I offer?" [Don't ever ask this! You are giving up control!]
Agent: [thinking $$$$$$$$$$ I love when they ask that question $$$$$$$$] "How about $450k? They might not go for it, but at least they will counter." [They may be willing to take it depending on their situation].
Buyer: "But I don't think the house is worth any more than $400k." [actually it's worth much less than that]
Agent: [thinking this is going to be much harder than I thought] "This is how the market is today."
Buyer: "What do you mean? Aren't prices coming down?"
Agent: "Yes, they've come down [shrugging off the fact that they still are], but they're now stabilizing."
Buyer: "You mean prices are going to go up again."
Agent: "They just might, after all we are now going into the spring selling season and there are alot of people looking at houses. The nice ones like this one will be the first to go, I wouldn't drag my feet if I were you." [there are many people looking, most are just looking, fewer are buying and there are alot more sellers than there are potential buyer's (Buyer's who are really going to buy)].
Buyer: "But I can't afford to pay that much."
Agent: "How much do you want to spend?"
Buyer: "As little as possible; I don't think I can afford much more than $400k." [never tell them how much].
Agent: "I can hook you up with my mortgage broker who can help you set up a budget to see how much you can afford; he is a great friend of mine and he can help you." [thinking $$$$ how much can I squeeze out of you $$$$$$$$$].
Buyer: [thinking this agent is very pushy] "No thanks, I think I'm going to wait till the end of the year and then look again."
Agent: "I do have some other listings that might interest you." [Agent doesn't want to lose a potential buyer so the agent will offer to show other houses that are somewhat like this house so that they can get to know you more and find a better selling strategy].
Buyer: [walking away] "Really, I'm just not interested right now, thanks" [excellent idea].
Agent: [thinking 00000000000 Damn, lost another one!!!! 0000000000000].
When they meet with you, will you be ready?
Build Equity
You hear it all around you, "If you rent, you don't build equity"; That statement alone implies that prices only go up. Realtors like to use talk like this to convince the common fool that it's always a great investment and they need to buy; Thus generating a commission. Of course if prices do fall (like they are right now) you are still building equity, only in a negative direction.
They want you to think that the rent you pay is just going to waste, but this is not the case; Everyone has disposable income, it's what keeps the economy alive. When you buy a house or should I say, "enter debtorship", you are basically renting money that you borrow from a bank. The monthly payment you make is divided between interest and principle with the majority of it going towards interest which is no different than rent because it is the banks profit and money you give up (Just like a renter does); A very small amount of it goes towards the principle. As time goes on, more of the payment goes toward the principle and less goes towards interest until you are one of the very few who makes the very last monthly payment, then you will no longer be a debtor and be a true owner. Of course this assumes that you have a fixed rate mortgage and not some exotic loan where you are only paying the interest or less. Statistics show, that many people stay in their houses on the average of 7 years; So the buyer is still throwing away money similar to the renter.
Now if house prices always went up (You do know they don't, right?), it would be a no-brainer to buy a house instead of renting; In fact if this was the case, you wouldn't be reading this right now because I would have never started this site; In fact, I would sell everything I own (maybe even my PC) and buy up every house I could....but it don't, dream over!
The next argument is the tax benefits. One thing I have to say is that if you aren't in a high tax bracket, you will not benefit much from this. Secondly, since you don't get all the property tax money back that you pay each year and renters don't pay that tax at all, it's benefit is cancelled out when you compare it to renting. In other words, the debtor gets back MOST of the money he PAYS OUT; The renter doesn't payout this money so this "tax benefit" is effectively nullified and isn't a gain compared to renting.
Now it doesn't sound so great does it? But wait, we're not done yet. Anything that breaks down in that house of yours, you will have to have fixed. The roof may need to be redone, the boiler may have to be replaced, in fact there are so many things that can and will go bad that you will have to replace especially if you are buying an existing (used) house. On top of this, there are many chores that have to be done such as cutting the grass, shoveling snow, or raking leaves (Ah those fresh autumn leaves never seem to stop falling!) that you will have to either do by yourself or pay someone to do it. Renters don't have any of these problems as they are all priced in to that money they are "throwing away ", so you can subtract all of this from that equity you have been building so far; and while you're at it, subtract the closing costs as well because renters don't pay that either. If the location goes bad (see Location, location, location), it can take a significant bite out of whatever equity you think you still have. Here is a good article about buying.
That being said, there are two ways to build equity, by the small portions of your monthly payment that go to the principle (Which don't account for much in the early years of the mortgage) and by the value of your house going up (It's not anymore, trust me!). So if you buy a house this year, be prepared that you will be building alot of negative equity, the kind that puts your net worth well below zero.
Another thing, equity is not savings and shouldn't be regarded as such. Savings is money that will never shrink nominally. If I have $100k in a savings account, next year I will still have $100k and most likely more from the interest. If that $100k was invested in real estate instead; if I put $100k down on a house, I would have $100k equity in the house, next year I might have only $50k, or $20k, or zero, I may even have -$20k or less. Your house is only worth what people are willing and able to pay for it, just like anything else and next year as the lending standards tighten, people will not be able to pay as much as they have been and since there will be less buyers capable of even getting a mortgage, there will be less people willing to pay as much.
So in a nutshell, the amount of equity you have is depending heavily on what other people think it's worth at the time of its valuation. Imagine if savings accounts worked that way? Do you think I'd put $100k into a savings account if there was a possibility that it would turn into $20k next year or fall below zero and I'd actually owe the bank? That's why there is the FDIC; without it, many people would be afraid to put money in the bank. It's strange how people who invest their money in real estate do so without any such protection. Does this mean that investing in real estate is a bad idea? Normally no, but at this point in time due to the current circumstances, I have to say yes.
Homeowner
Here's a term that is often misused. When someone "buys" a house, they usually use credit rather than their own money. Because of this, the house is really owned by the institution lending the money, the true "owner". If you were to lose the ability to service that debt, the lender will show you who really owns it; This is why I refer to a "homeowner" as a "home debtor".
Another mis-meaning coming from the term "homeowner", is the word "home". A "house" is a "thing", but a "home" is a "place of residence". You cannot literally own a "home" because it is not a "thing".
According to Encarta's Dictionary:
Definition:
residence: the place where a person, family, or household lives
Instead of "homeowner", it should really be referred to as "house owner"; Since it really is just a house. A "house owner" is a person who owns a house; to me that means a person who has enough of an equity stake in the house and enough savings in the bank or other assets to allow them to keep the house no matter what life throws at them; its ownership has no dependencies. These people are not "house owners" and sadly enough, alot of them will soon find out. The "home ownership rate" as they call it is around 70% up from around 65%. When all those people lose their house due to foreclosure, this "home ownership rate" will come close to the historical 65%; The percentage we were at before the easy money came to temporarily inflate that number along with the prices of houses.
Realtor's refer to houses as homes to soften the meaning giving it a warm appeal, as in "There's no place like home" or "Home sweet home"; It's just Realtor propaganda used to make you feel insecure about renting and more eager to buy just like any other type of marketing. A home in actuality is really just a place where you live; It could be a house, It could be a rental, or it could even be the street. If I own a house and I'm renting it out to someone, it's still my "house" but it's my tenants "home", not mine. Quite simply, "A home is where you hang your hat".
Owning a house is without a doubt one of the best things that you can do for yourself and your family; I am all for owning a house. Buying a house that will surely plunge in value is not what I call owning a house. It's not just a matter of if you can afford the payments or not; Having the value of your house fall while you are going through a tough financial time with no financial cushion can plunge even the most successful people into bankruptcy. When you live in a house and you lose your "home", you are just losing your "house"; It is at this time when an apartment or "the street" will become your new "home".
Since many people have overpaid for their houses using toxic loans which reset to higher rates they cannot possibly afford, many of them are losing their houses as a result. Now that the politicians have squeezed as much money out of the bubble as they possibly can, they are suddenly becoming "aware" of the fact that so many are in danger of losing their houses. Many of them are now trying to make themselves appear to be on the side of those who are defaulting in hopes that they will win votes by making themselves appear to be doing something about it. You can see how they refer to the loss of their houses as losing their homes. They are not losing their "homes"; They are just losing their "houses". This just makes the situation look worse than it actually is and is a way for them to get the sympathy of other people so they can build a case to dump this mess on us taxpayers. Most of these people will go back to renting (like they originally were doing), others will move in with their parents/children; They will not be "homeless". When you lose your house, it doesn't take your job along with it and if it's the loss of a job that caused you to lose the house in the first place, then you wouldn't be able to pay rent anyway, in which case you can become "homeless"; Perhaps some of these people were "homeless" before they bought their "houses" which wouldn't surprise me given the fact that they have been giving out loans to anyone who can sign their own name. A "home" is a necessity, but a "house" is a luxury; Try not to confuse the two. When we start feeling sorry for the people who are losing their "Lamborghini's" or their "yacht's", then we can start feeling sorry for those losing their "houses".
So the next time you are out looking for a house and a Realtor asks you if you are looking for a "home"; Correct her/him. Tell them you're not "homeless", but you are looking to buy a "house". Maybe if enough of us do this, they will get it and stop insulting our intelligence by calling them "homes".
Days on the Market
When a house has been on the market for 6 months or more, it's a dead give away that the house is overpriced. Sellers start to think that there is something they need to do to it in order to get someone to buy it other than lowering the asking price. The truth is that every house has its price whether it is in excellent shape or in shambles. That price is the intrinsic value or what a buyer is willing to pay for it. If the house is overpriced, the Realtor will suggest to the seller that they need to price it right to get it sold.
If you go to a site such as www.lirealtor.com and do a search for a house, they give you the option of looking for houses that have been on the market for a specific date range. This is supposed to help you look for houses that aren't what Realtor's refer to as a "stale listing"; A house that has been on the market for a long time; I like to call it a "dead listing" which is more appropriate. This is a good feature to keep you from looking at houses that no one wants, however Realtor's have found a way around this by removing the listing and re-listing it under a different MLS number; Thus the house becomes a "fresh listing". Not only does this hide the fact that it is a dead listing, but it also gives a Realtor the ability of using scare tactics to get you to believe that others may be interested in it since it does appear to have just hit the market. This sneaky trick they do is one thing you need to be aware of; It happens alot, especially in this market (If you want to call it a market). It's no different than a used car salesman who will turn the odometer back to make the car appear to be more valuable than it actually is.
If you find a house that apparently has been on the market a short time, be sure you ask the Realtor if the house has been relisted; They are supposed to tell you the truth and they can get in trouble if they get caught lying, so they probably will tell you the truth. If you don't ask, they won't tell you which is another way of lying to you without actually lying; Just like a lawyer will tell you not to volunteer information. If they tell you it has been relisted, you know it has, but if they say it hasn't, be skeptical anyway; Remember, their job is to sell houses, not to get you an excellent deal.
Median and Average Prices
I have already covered Median and Average Prices in detail here, but I will discuss a much more simpler example shortly that even a child could understand.
You must be very aware that median and average prices are a Realtor's most powerful marketing tools and I see that many people including bears go by them as well. Don't fall for this, it's a double edged sword. You may look at these figures month after month seeing them fall and you may even blog about it, talking others out of buying just because of it (there are many other better reasons); Then suddenly, the following month they go up for no apparent reason and you sit there dumbfounded as all the Real Estate bulls come out of hiding with their magnifying glasses on the little blip calling it a bottom. David Lereah has been doing this since the third quarter of 2006. This can cause many bears who otherwise know exactly what they are talking about to be discredited and some confused fence sitters to jump in and buy. Don't worry about missing the bottom because when the bottom hits, we will be there for a long time. The true bottom is not when prices are no longer going down nominally, but rather when they are rising at the rate of inflation; in other words, if prices stopped falling (nominally) and stayed there for five years, they are really still falling due to inflation, just like stuffing money into a mattress.
You know prices are falling if the inventories are high and the money supply is tightening (which they now are); This is economics 101! It's impossible to reach a bottom when there are excesses in supply; the same way that it is impossible to reach a peak when supply is very tight. There is no point in playing with the Median and Average numbers; These numbers just confuse you and can safely be ignored.
A Simple Example:
Here I will give you a simple example of median and average prices and how they are disconnected from actual price trends on the houses themselves.
Let's say there is a town called Simpletown; in Simpletown, everything is simple so numbers are easy to work with and understand while the principles are still the same as anywhere.
In simpletown, everyone who lives there makes the same income and has the same expenses.
In Simpletown, there are two different houses, the low end $300k and the high end $400k and it is illegal to negotiate the price so whichever house you buy, you have to pay what the seller is asking (aren't you glad you don't live in Simpletown?).
Families could afford to spend $400k if they really stretched themselves thin; however, they are rational people (this isn't Long Island) and they realize they would have to lower their standard of living to buy the high end house so they won't; and so it is very rare that someone buys the $400k house.
Another odd thing about Simpletown is that only 5 houses sell each month and that's a good thing because it makes it much simpler to explain the math. Since they usually buy only the low end $300k house we can easily do the math in our heads (well....most of us).
The Average Price is $300k because:
$300k = ($300k + $300k + $300k + $300k + $300k) / 5
The Median Price is $300k because:
$300k <------- the least expensive sold
$300k
$300k <------- the Median (the mid point sold)
$300k
$300k <------- the most expensive sold
Very easy numbers and very easy math (Hey, this is Simpletown!).
One day, the sellers of the high end houses got desperate to sell and decided to cut their price from $400k to $350k. The sellers of the $300k houses decided that they will lower their price to $250k just to compete with the higher end houses because $50k more to get a high end house made alot of buyers interested; thus enticing them to increase their budgets (which is what the median reflects as you will soon see).
Three buyers decided they have to get the more expensive model so they each bought one at $350k each and two buyers felt they would like to save money and bought the low end for $250k; prices are falling all around in Simpletown!
The price on the high end houses dropped by $50k or 12.5% and the low end houses dropped by $50k or approximately 16.5%
The Average Price is now $310k because:
$310k = ($250k + $250k + $350k + $350k + $350k) / 5
The Median Price is now $350k because:
$300k <------- the least expensive sold
$300k
$350k <------- the Median (the mid point sold)
$350k
$350k <------- the most expensive sold
Wow! The Median increased by approximately 16.6% and the Average increased by 3.33% while the high end houses dropped by 12.5% and the low end houses dropped by approximately 16.5%.
....and so my dear Watson, we have another mystery solved.
So why do we see everyone in the industry talking about the median and average sale prices? One word....., "propaganda!"
A few things to note from the example:
The buyers of the high end houses paid more than they would have for a low end house but got a high end house for less; this is the sole reason why the median had risen (more than 50% of the buyers bought the high end house) as well as the average prices. These buyers increased their budgets by $50k.
The buyers of the low end houses paid less for the same house as they previously did; this took away a small amount from the average prices that were driven higher by the high end house sale; it would have also took away a small amount of the gain in median if there was a much bigger data set, but it would have still been a gain. These buyers decreased their budgets by $50k.
Want something accurate to go by? Use the Case/Shiller index. It uses the "repeat sales" method on houses (the house has to have sold at least twice to be included); which means that the data is compared between when a single family residence last sold and when it sold previously. This factors out the different types and sizes of houses and is the most accurate method used today. Although, since the Comp values can be incorrect due to a seller's concession; the true appreciation could be less.
Learn more about the Case/Shiller index methodologies.
Lowball Offer
Realtor's always frown on true "lowball offers" as if they're not offer worthy. They feel it's ok to offer less than the asking price as long as it isn't more than 10% less; sometimes they refer to this as a "lowball offer" (Which really isn't a "lowball offer") to confuse you into believing that you are getting over on the sellers by offering an artificial "lowball offer"; thus building a "friendship" with the Realtor. This is one of the reasons there are buyer's agents, so they can persuade you not to offer too much less; after all, the seller's agent would kind of feel out of place trying to convince you themselves. Buyer's agents will try to make you feel that you are insulting the seller by offering alot less than the asking price. This didn't seem to be a problem to the sellers or their Realtor's as prices doubled and tripled over the last half decade while Realtor's aggressively marked up the prices to fatten their wallets.
The reason behind them not wanting you to offer significantly low offers isn't just because of a smaller commission, but to keep sales steady. If everyone was selling their houses for 20% - 30% lower than they were asking, this would create a panic in the industry and an avalanche in prices which can cause buyers to really start backing out as they see people who bought at a significant discount, only to find out a few months later that the discount was beaten out by even more significant discounts; however, I predict that this will happen later on this year regardless as more people experience house depreciation.
There is no such thing as an offer that is too low; don't ever let anyone talk you out of offering what you think the house is worth. Also, don't ever compare your offering price to their asking price and think "Maybe I should offer more" in fear that they might reject you altogether; you are trying to feel them out just the same way they are trying to feel you out, the only difference is that you have the advantage because you don't "have to" buy right away, but they "have to" sell as soon as possible.
In the real estate industry, the "lowball offer" is considered a dirty word but the truth is that the buyers make the prices and the sellers accept them or reject them. The reason prices have went up so much in recent years wasn't just because the sellers demanded so much more, but because buyers offered so much more since money was so cheap and supply was so tight; bidding wars were very common. Now, the tables are turned and everything is reversing; sellers will soon come around and start accepting "lowball offers" as they see more and more other sellers who are under the gun accept them. It is your duty to be persistent and to not give in.
Whenever I talk about "lowball offers", I like to refer to them as the "appropriate lowball offer". This is an offer that usually is significantly lower than the asking price, but based on fundamentals and not meant to insult the seller. These are offers based on the 3% - 5% rule; where a house should appreciate between 3% and 5% per year with additional premiums if the house has had major upgrades. If you try to estimate an offer relative to Comps or asking prices, you will surely overpay. After you have done your research and come up with this offer, stick to it; this is the maximum you want to pay for it, not your first offer.
If you're going to go out there and make offers, this is the way to do it. Find several houses that you are interested in on the internet and don't limit yourself to just one area; you want to have a list of 100 or so houses in nice locations (see Location, location, location). Make your calls to the listing agents and set up appointments to see the houses; the idea here is to see alot of houses spread over many months. When you go to see them, don't be taken by the way they have their house set up; you can have many things done to a house to make it the way you want it. Many things can be easily changed with a house; as long as you like the type of house (ranch, cape, colonial, etc.) which cannot easily be changed. It may take $20k, $30k or more to make the house the way you want, but if you limit yourself only to houses that already have it done the way you want, you will be paying $100k or so more for the same house; this is why sellers are doing upgrades before they sell so that they can get a buyer to be taken in by it. It's a shame that so many buyer's don't realize this!
When you see a house you like and that has the potential you are looking for, make an offer 5% or 10% below the "appropriate lowball offer" and walk away. Use this letter of intent to make your offer; it does not bind you to a contract and if it is accepted, you are not legally obligated to buy it. Continue looking at other houses; don't get tied down to one house and just sit there waiting for a response. You will learn alot doing this as this will give you a chance to see so many different houses (and there are alot of them). You will also see how asking prices vary so much for no apparent reason. Don't worry about making offers on several houses; you are not committed to buying them all. You do not have to study the houses too much critically just yet; I will soon explain why. Keep looking at many houses and enjoy it as you go along; it's a learning experience, don't worry about if you forget what a house looks like because you will be back at a later date if your offer is accepted.
After you have put in offers on several houses; the more, the better, you will start to get some responses. Don't panic, this is a good thing because just like when the sellers had bidding wars to get you to offer more in a fight to win the house, you are now going to get the sellers to fight over you. Since you have been placing those offers slightly below the "appropriate lowball offer", you will most likely get "counter offers" that are no ways near your offer. Remember, at this point you will still continue to set up appointments and look at other houses. You then decide which sellers have come down the closest to your offer; these are the ones you are going to deal with first, the other ones are still in denial at this point and will just waste your time and energy if you were to make a counter-offer right now.
Now you will request another showing of the house. This is the time where you are going to get really critical about the house and ask alot of questions. Find everything that is wrong with the house or anything you don't like about it and use that to justify your offer. If you feel this house is good for you, make the "appropriate lowball offer"; this is an offer 5% or 10% above what you originally offered. You will do the same thing for the other houses; again, you are under no obligation to buy any of them. If you find yourself waiting for a particular seller to get back to you, you haven't looked at enough houses; keep looking! The idea here is to forget the houses you looked at and the only thing you have is the address of the property, the asking price, the date you made the offer, the offer itself and the Realtor's name and number; this should all be written down in a notebook and put aside. Don't put down or think about anything else that further separates one house from another, you will do all this later when the opportunity presents itself. What you are actually doing here is eradicating the emotional aspect of a very expensive business transaction which will help prevent you from paying more than your planned offer.
If you do this long enough, you will not only find the house you really want, but you will get it at as close to a reasonable price as you possibly can right now because you will be finding the few voracious sellers that are the most motivated, particularly boomers (like my uncle) that need to retire right away. It will take some time to do this and yes, you will have to see alot of houses, but isn't the most expensive purchase you probably will ever make in your life worth the time and energy? Your not picking out a pair of shoes; you plan on staying there a very long time, Sometimes it makes me wonder when they say people sell their houses on the average of 7 years; I could only come to the conclusion that alot of them really didn't find the right house to begin with.
One more thing, if the house has been sold in 2002 or later, don't waste your time looking at it because they already overpaid for it and the only way they can sell it to you for a reasonable price, would be to sell it for less; in most cases, this isn't possible even if the person wanted to because they don't have the funds to pay the difference. Personally, I wouldn't waste my time with anything sold after 2000 unless I was buying it from the bank or at auction.
Open House
You see them all over the place and sometimes there is alot of people who go to them. Are all these people interested in this one house? Is this my competition? Will there be a bidding war? If you feel this way, then the Realtor propaganda is doing exactly what they meant for it to do; damn those Realtor's are good!
The fact is, people go to "open houses" for many different reasons. More than half of them don't even have any intention of buying a house at all. For instance, sellers go to "open houses" to see what kind of competition they are up against. They want to check out someone else's house in the neighborhood to see how it compares to theirs and maybe get some ideas on how to make theirs look more appealing to the buyers. If you look through those real estate "tips for sellers" such as in Newsday's real estate section, the Realtor's recommend that if you are selling, this is a good idea. No wonder they would recommend this! It increases traffic to an "open house" to make it appear as if there are more interested parties; thus creating the illusion that there is more competition.
Many of the other people who go to "open houses" that have no intention of buying are those who just want to see what people are selling; these people are just "browsers" who have some extra time on their hands that were so mesmerized by the prices rising so quickly over the years that they just want to get an idea of what people are selling now that prices are falling. I must admit, I have done this several times myself. These people you will mostly find on the weekends; Realtor's love these people and will even cater to them by offering coffee, donuts and other snacks. Anyone who is really serious about buying the house is not going to be eating snacks, they will be too busy inspecting all the rooms.
Then there are the serious buyer's; you might just be the only one. You are not there to buy that house; you may be interested in it and may consider an offer, but there are many others that you will also consider unless you are one of those silly people who fall in love with one house. Other buyers like you are looking and comparing to many others that they have seen and some others that they have yet to see.
Realtor's love "open houses" (When there are actually people going to them) not only because of what I just mentioned, but because it gives them a chance to network and get to know the interested buyer's better. They will be there welcoming you with open arms and smiling faces as they hand out their business cards and introduce themselves to you; this is where they may even try to make themselves your buyer's agent. When you leave the house, they will usually ask you what you think of the house and start on their "If you're not interested in this house, I can show you others" routine; most people just say they are "just looking" and keep walking because they have been through this so many times before at other "open houses" and they don't want to waste their time. This may be your exit strategy too; you have the listing agents number and you will call if you are interested in it; don't give them your number, the house isn't going anywhere.
"Open houses" are more for the Realtor's than for the sellers; it gets them more business. Most buyer's don't even buy a house that they visited at an "open house". When someone is interested in a house, they will book an appointment with the listing agent to go take an exclusive look at the house. An "open house" is just a real live infomercial much like an appetizer for the buyer. So the next time you go to one, be sure to eat some of their snacks, it really makes it all more worthwhile.
Location, location, location
You ask a realtor, "Why are these houses so much more expensive than the ones in the other area" and the realtor responds, "Location, location, location."
Realtors love that saying and they use it alot to convince you to spend more; thus generating a bigger commission. In their minds it's, "$$$, $$$, $$$." Of course they are partially correct by making this statement since no one wants to live in a "bad neighborhood"; "nice neighborhoods" are definitely worth paying a premium for, however, "nice neighborhoods" can turn into "bad neighborhoods" and "bad neighborhoods" can sometimes turn into "nice neighborhoods" over the long run; what is so stressful about it is that when they turn bad, you have absolutely no control over it. I'm sure you've heard the saying, "There goes the neighborhood."
Many things can make a "nice neighborhood" go bad. When there is a recession, people get desperate and do desperate things just to survive which can easily compromise a "nice neighborhood." Foreclosures can uglify a neighborhood, crime can elevate, good companies can move out and not so good people can move in. Since we are heading for a recession, you should be prepared for what can easily happen to that "nice neighborhood" you are interested in buying into.
Neighborhoods can go bad even without such a recession. "Sex offenders" can move into your "nice neighborhood" and there is nothing you can legally do to stop it. Realtor's don't like to talk about "sex offenders" because it's a double edged sword; they know that they can come and go at any time and if they appear in their neck of the woods, it can really hurt sales. They do know where they all are though; they are always conscious of it, kind of like how a car enthusiast notices the smallest ding on his prize chariot. Want to make a realtor really nervous? Ask her/him if there are any "sex offenders" living in the neighborhood and watch their expression carefully. This is such an important question to ask when you buy a house, but yet so many people don't even ask or think about the possibility. When you get an answer, don't expect to get the complete truth either; they might "accidentally" forget about the new one that just moved in; do the research yourself using sites such as these:
www.familywatchdog.us
www.mapsexoffenders.com
www.us-sex-offenders.com
www.registeredoffenderslist.org
Use all of them and search for more as well because some aren't listed on all the sites; better to be sure than to be sorry.
There are alot of these animals living all over, no matter where you go; don't be surprised if there's one living right next to you right now. Of course if you are renting, you don't have to worry about this because you can always move away. Unfortunately, if you buy a house and a "sex offender" moves into your "nice neighborhood", there is nothing legal that you can do about it; some people have even resorted to vigilantism because of this very fact. If you have children, you have to worry about them all the time especially if the "sex offender" lives between your house and the school your children will be going to! If you don't have children, you still have to worry about finding a buyer when it comes time to sell; they can really bring down the value of your house overnight at the very time you need to sell your house; unless of course the buyer doesn't do his/her research.
Another thing you should check out is if there are toxic spills and other health hazards in that "nice neighborhood" because they can not only drive the value of your house down and cost you alot of money for cleanup, but they can also kill you! Long Island has alot of these toxic spills and there is a good chance you will find one in what you thought was a "nice neighborhood."
One other thing I must add; if the house isn't connected to a sewer, you will have to deal with cesspool issues. One thing that always bothered me is the idea that there may be thousands of pounds of crap that the previous owners left behind in the cesspool. The best thing to do is find out if there are sewers in the particular area you are buying into; this will help you avoid these areas. Although cesspools aren't the end of the world, those areas that have them should be placed at the bottom of your list of places to buy into. It is quite sad though, how with the high taxes everyone has to pay that there aren't sewers everywhere.
Cesspools are not only costly when they have to be cleaned out, but they also have flushing problems from time to time; I have even spoke to a friend of mine that has one and says that when there is a storm, some of the crap backs up.
Another site I recently came across is this one where anyone can make remarks about the neighbors in their neck of the woods.
Market Value
Everyone seems to have their own opinion of what "market value" is; the sellers think it's much higher, the buyer thinks it's much lower and the realtors think it's somewhere in between; yet much more closer to what the seller thinks. No matter what anyone's opinion is, the "market value" is what buyers (plural) are willing and able to pay for a particular property and that true amount isn't acknowledged until the house is actually sold; but just because one buyer was willing and able to pay that much, doesn't mean that others would, so the meaning of "market value" is somewhat blurred. If that were the case, it would imply that if someone bought something, they would be able to immediately resell it for what they paid. As an example, there are many buyers who bought at the peak and now they are trying to sell for what they paid, but there aren't any takers.
According to Encarta's Dictionary:
mar·ket val·ue (plural mar·ket val·ues)
Definition:
amount expected from open-market sale: the amount that a seller could expect to obtain for property or goods sold on the open market
"Market value" means the amount that a seller "could expect" to obtain for property or goods sold on the open market. Make sure you understand that without the word "could" before "expect", it would change the whole meaning of the term; in fact many sellers and realtors seem to interpret "market value" that way.
When a house sells, the published amount or comp value is not necessarily what the buyer paid for the house as I have already explained. On top of this, the buyer could have (most likely if bought after 2001) overpaid for the house. Many buyers who fall into this category believe that what they paid is "market value", some will even proclaim that they are selling "below market value", which is kind of silly if you think about it. Why would someone want to sell something for less than they can actually get? If they "could expect" to get a certain amount for their house, why in hell would they choose to ask for less? Simple, one word, "propaganda"; they want you to believe that you are getting a great deal so they can unload it fast. As sad and crazy as it seems, there are some people who are being taken by this.
"Market value" can only exist if the buyer who buys the property makes a rational offer on a house based on the fundamentals. This would be an amount that would appeal to many other rational buyers. The only way for that to happen is for easy money to disappear and for interest rates to return to normal; thus taking the irrational buyers out of the market.
Now that lenders are losing money as a result of irrational lending, many are tightening their lending standards and are cutting a significant amount of irrational buyers out of the market. When the remaining buyers realize how much prices are falling and how much inventory is rising due to the abundance of foreclosures, they will be less inclined to act irrational. When this all plays out, prices will return back to the mean where the true meaning of the term "market value" hides.
Low Interest Rates
It is commonly believed that the best time to buy is when "interest rates" are low. Of course it is always better to pay less interest; no one wants to pay more than they have to. If "interest rates" rose and prices stayed where they are, this theory would certainly hold true, but that is not how markets work. House prices are inversely related to "interest rates"; when "interest rates" go up, prices go down (due to less demand) and vice versa. The fact is it is actually better to buy when the "interest rates" are high.
When "interest rates" are low, more people are inclined to buy; thus creating more demand. When demand is higher in relation to supply (unlike now), prices rise as buyers fight over the tighter inventory (bidding wars); this is economics 101. When "interest rates" just start to rise, more buyers jump in and buy under the self-inflicted fear that they won’t be able to buy the house they felt they could otherwise afford. What they don’t realize is that they are forcing themselves to overpay for a house under the false assumption that they are saving money by paying less in interest; this causes a spike in demand that makes it hard for them to negotiate with a seller who has a sudden spike of buyers that are under the same self-inflicted pressure to buy right away. This can also show as an increase in the median and average prices which realtors like to use to induce more clueless buyers into the market; data that has very little useful meaning when it comes to prices yet realtors will have you believe otherwise.
If you ask any long time successful investor, they will tell you, “The best time to buy is when no one is buying and the best time to sell is when no one is selling.” This is because there is less competition and more power to negotiate. Most people buy when "interest rates" are low, this is the reason I say that it is best to buy when "interest rates" are high; the time when much "fewer people" are buying.
We are not in a normal market right now and it is certainly not a true buyers market. Asking prices have risen to astronomical heights and the support (easy money) that made that possible is being pulled out from under the market. Many people are living in houses that will soon be back on the market due to their inability to make their much higher monthly payments; Schumer is panicking and trying very hard to keep these people in their houses at least long enough to hold down the added supply (due to foreclosures) at the expense of our taxpayer dollars. This will not prevent a crash, it will only slow it down which is very bad for the economy because the longer the pain persists, the longer it will take to rebuild the economy. You just can't duct tape a broken housing bubble with taxpayer funds and expect it to hold. It's like one big virus; there is no cure so you have to let it work itself out of the system. Isn't it better to be really badly sick for 24 hours rather than to be less sick for several weeks? Or to pull that band-aid off quickly rather than to slowly pull it off enjoying the pain of each hair being ripped out one by one?
Right now, "interest rates" are low (although not as low as in recent years) and there are buyers out there; however, there are much more sellers than there are buyers which is causing prices to fall, but slowly. The problem is, sellers are still in a stage of denial and many are holding out because they find it hard to swallow that their neighbors got so much more for their house a year or two ago and they are testing the market just to see if maybe, just maybe there is still someone dumb enough (and financially capable) to pay their ridiculous asking price in what is traditionally known to be the hottest selling season of the year….., "spring time".
As we head further into "spring time", more and more serious sellers will be cutting their asking prices which will (most likely) cause comp values to fall or appear to stay the same due to “seller concessions” that artificially inflate the comp values above the actual "sale price". This will cause many other sellers to realize that their house is losing more value month after month while their house sits convincing them to cut their prices further. This deflationary spiral will continue with a few spikes as "interest rates" rise causing more buyers to jump in; but the pool of buyers is rapidly deteriorating due to tighter lending standards and less interested buyers and we will soon see an avalanche in prices.
When "interest rates" are higher, you will be paying more interest for the house, however, you will be paying a much lower price that wasn’t bid up by irrational market participants. How much lower will it be? However much you want it to be since you and a much smaller bunch of (rational) buyers will be bidding much lower prices that make fundamental sense on a much higher supply of inventory.
If you buy a house with a higher "interest rate", you will get a bigger tax deduction because you will have more interest to deduct and over the years, "interest rates" may come down again, at which point you will be able to refinance into a lower rate which will further lower your payments. That being said, it is no wonder that more people have made bigger fortunes in real estate when they bought in a higher "interest rate" environment than otherwise. You are not looking to buy in a high rate environment; just a normal rate environment and we are far from that right now.
So don’t be fooled by low "interest rates" when it comes to buying, they are really only good for the seller (or the refinancer) because it creates more interested buyers by enabling them to leverage more; thus allowing them [the buyers] to pay more by giving them more competition (other irrational buyers) to bid against each other. Remember, after you buy a house, "interest rates" can always go down (if they are high); but once you agree on a set price, that price is locked into your mortgage for however long you own your house whether you are able to refinance or not. Higher "interest rates" will crimp the budget of what you are capable of paying for a house, but it will also crimp the budgets of everyone else; this doesn't mean that you will have to buy a lesser house, just that you will have to pay less!
"Interest rates" are just one other marketing tool that realtors use to create the illusion that it is a great time to buy. When the bubble was growing, they used scare tactics such as "They're not making more of it" (land) or "Population growth will only increase demand for houses" which was just a way of using the temporarily lean supply of houses as justification that you should "buy before you are priced out." Obviously, they cannot use these tactics anymore due to the massive supply that is only increasing daily.
When "interest rates" are low they say, "Now is the time to buy" because you have more buying power. When "interest rates" are high, they say, "Now is the time to buy" because there are fewer buyers which makes prices lower, this is when they are actually telling the truth!
"Interest rates" as well as median and average prices are some of the only marketing tools that realtors have left right now; but you can see how I have debunked both of those myths.
Affordable Housing
You've heard the term "Affordable Housing" many times before; you read it in the paper every once in a while or hear about it on TV. What exactly is it? "Affordable Housing" is a dwelling where housing costs are affordable to those living in the housing unit.
Several years ago, the idea of "affordable housing" meant that there would be lower cost housing built specially for underprivileged families; that was when the supply of houses was artificially low due to artificial demand created by "easy money" (Low interest rates and lax lending standards). Now you don't really hear too much about those houses because there is way too much supply already; just that prices have yet to come down (but they soon will). No one can make housing affordable because the price of a house is controlled by the market; politicians will have you believe otherwise though. They want you to believe that by giving people free money (welfare), they can make housing affordable.
Now before you jump for that "free money" to supplement your purchase on a grossly overpriced house, you must understand that this money may seem to help you, but it is only just an illusion that will only hurt you in the long run. That money is just a desperate attempt to keep prices from falling too fast; it may slow it down, but it certainly won't stop it, the market will make sure of that!
House prices are only unaffordable because an irrational market made them that way. When markets behave irrational due to artificial stimulus such as "easy money" credit terms which promote speculation, you get a market bubble. Irrational markets only last until they lose their stimulus; giving out loans that will eventually default makes "easy money" unsustainable. Normal markets get their stimulus from rising wages which rise modestly and are sustainable; it is these wage increases (3%-5%) that mirror normal house price appreciation.
When people can no longer buy houses at the asking price, the price will fall at least until it becomes affordable again; this is how the market works to correct what was done by an irrational market.
If money is given free to people to buy houses, it will only create the illusion that housing is affordable because instead of the rational market lowering the price like it should, it would be propped up by this "free money" and houses will cost that much more.
As an example; we know house prices are too high and we know the market has to correct; this is healthy. Prices will naturally come down not to what buyers want to pay for them, but what they can reasonably afford without having to severely lower their standard of living. If the price on a particular house comes down to hit bottom at say $150k from $300k, then this is what the market calls for. If the politicians offer $60k to people to buy a house, the market price will just rise to $210k because the extra $60k will be added to everyone's budget; income (welfare) that they didn't earn or need.
Who is this helping out? Certainly not the buyer! Would you rather buy a house for $150k without any welfare funding or would you rather buy that same house for $210k with the $60k of welfare funds?
The politicians want you to take the welfare money because they believe it will help prop up the prices; thus promoting higher tax revenues and higher salaries for them. This kind of thinking is very dangerous to the overall health of our future economy. We are talking about working class people relying on welfare; this is just insane!
There are two ways to increase tax revenues, increase the taxes themselves (raise the percentage) or increase the property values (the stealth method); neither of them are desirable. If they raise the taxes themselves, taxpayers will scream; but if they increase the price by handing over "free money" which will indirectly boost the tax revenues, many people will think they are being helped out when they are really being taken advantage of. They are just taking the bad medicine a different way; with the candied flavoring ("free money"). If you own a house, you might think that you want it to be worth as much as possible, but it really only matters when you actually sell it! It is much better for the price of your house to be as low as possible while you are living there; normal house price appreciation is really just inflation.
There is no such thing as "free money"; if you accept it, you will pay for it one way or another either through taxes or inflation. The current house prices have been driven up by artificial stimulation (cheap money) and now the politicians want to try to keep the prices from falling too much too fast by throwing this "free money" at it. This "free money" has to come from somewhere and the place it's coming from is either from income tax or from the printing press; either way, we all pay for it.
The only way to truly create "affordable housing" is to build more houses; thus increasing supply and some day they may need to, but right now we have way too many of them.
Value Range Marketing
Here is a marketing method that is used by many Realtors to get buyers in the door; it was originally started with Prudential and is now being widely used with many Realtors. Recently it has gotten very popular; which usually happens when inventories build to extreme levels (like now). It's basically a desperate attempt to push a house that has been sitting for way too long and according to statistics, it has worked well in the past.
The idea here is to stimulate interest by widening the price range which causes people who are looking in the upper price range to be interested as well as those looking in the lower price range. It's also used as a psychological deterrent to discourage what they interpret to be extreme low ball offer. They know that people fall in love with a house when they enter it and by getting more people to enter it will increase the chances of this happening.
The way it works is this: The Realtor will create a range of prices that the seller will accept as an offer; from let's say $359k - $389k. They are basically telling you, "We would like to get $389k, but we know there is no way anyone is going to pay that amount, but we will accept a low-ball offer of no less than $359k."
The logic behind this is silly if you think about it. When we negotiate a price on an asset, whether it be a Car, a Boat or a House, we do not tell the interested party our bottom line until we are done negotiating. Here, they are telling you (or at least making you believe) that their bottom line is $359k before they even encounter you. Why would they tell you what their bottom line is so fast? The answer is that it isn't their bottom line; they just want you to think that, for now; thus discouraging you from low balling and getting you interested.
This idea goes against the free market and their own rule that states, "A Realtor must accept all offers" and assumes that if you want to make an offer that is lower than the lower value ($359k in this case), they will not accept it. Don't let this stop you from offering a price that you logically think it is worth.
The fact is, no offer is too low. This is just an act of trickery to convince those inexperienced house buyers that if they really want the house, they BETTER offer at least the lower of the range.
The way too interpret these Value Range asking prices is to assume the lower value to be what the asking price is; which means, make your offer lower than what their lower range ($359k in this case) is; ignore the upper range, it means nothing.
Value range marketing is really just saying, "In the very unlikely scenario that you offer the higher value, we will be more than happy to take your money (and run), if you offer the lower value or above, we will either take it or hold on to your offer until we are absolutely certain their isn't anyone dumber than you that will offer more; and if in the most likely case, you offer less than the minimum, we will reduce our lower price hoping we might attract more fools".
Like I have mentioned before, buy with your head, not with your heart; you can change the look of any house to make it more appealing to your tastes and the costs can be significantly less than buying it already done.
Realtor's despise my site because they feel that I am a threat to their livelihood; the fact is that they are a threat to the livelihood of us all, including themselves. By pushing overpriced houses on uninformed buyers, it's like they are pulling out the support beams on a house one by one and selling them. While it may prove profitable to them, eventually that house will come tumbling down; that house I refer to is the U.S. economy.
