Prime season for house hunting

Falling prices, low interest rates appealing, but snags abound

by Susan Felt - May. 30, 2009

The Arizona Republic

Wooed by historically low housing prices, tax incentives and enticing interest rates, people once again are flirting with buying a home.

Whether they're first-time purchasers, second-home buyers or investors, the housing market's slide can have an upside, experts say.

A housing market top-heavy with foreclosures and short sales is helping drive the jaw-dropping sales prices - the median price of homes in Phoenix at the end of February was $68,000, and some new homes are selling in the low $100,000s - but wading into the real-estate market is not for the faint of heart.

"There are good opportunities, but you have to be very cautious," says Jay Butler, director of Arizona State University's Real Estate Center.

An estimated two-thirds of homes for sale are lender-owned properties, says Bob Bemis, CEO of Arizona Regional Multiple Listing Service. Foreclosures and short sales, properties that are on the market for less than what the homeowner owes, have accounted for the majority of listings and help create the unpredictable climate, according to Brett Barry, real-estate agent with Realty Executives.

Although someone's bad luck can prove to be someone else's good fortune, it's not just a stout heart that is needed.

Cash or solid credit

"You have to be prepared to close, with your financing in place," Barry says. And in today's market, especially in the case of foreclosures and short sales, offers contingent upon the buyer having to sell his or her home are rarely accepted.

Like a suitor pursuing a damsel in distress, a potential buyer needs cash (or solid credit) and that tricky mix of aggressiveness and patience. And as with many precarious relationships, in the end the buyer could face rejection.

Come prequalified for a loan or with cash in hand, experts recommend.

Banks may require interested buyers to fill out loan applications, and in some cases offer reduced closing costs if buyers pursue loans through their institutions. It is, however, not a requirement.

There's competition for many of these usually deeply discounted, lender-owned and short-sale properties, Barry says. Earnest money, the sum buyers put up to show their sincerity in making a purchase offer, needs to be more than a token gesture.

"In some cases, people are making $5,000 to $10,000 in earnest-money payments," Barry says. But beware; in the case of bank-owned transactions, that money is lost if the potential buyer backs out after the inspection period.

Unlivable properties

There are chilling stories about the condition of some foreclosed homes.

Previous owners have stripped them of appliances, doors, hinges, wiring, lights, fans and, in some instances, air-conditioning and heating units, according to real-estate agents left to sell these homes.

Buyers, especially first-time buyers, emboldened by housing prices suddenly within their reach, the $8,000 tax incentive and low interest rates, may find the bank-owned home of their dreams, but then find that the price tag to make it livable is beyond their grasp, says Reg Gustin, senior loan officer at Sun American Mortgage Co. in Mesa.

The Federal Housing Administration offers a 203k mortgage-loan program that includes money for refurbishing a home, Gustin says. The 3.5 percent down payment and $346,250 loan cap under this program are appealing, particularly to first-time buyers. However, the loan amount must include the repair costs, and the home has to appraise for the total amount, Gustin adds.

The appraisal is done with the rehab plan in mind. The program carries conditions and regulations, including using approved contractors. However, for many it's a way to buy a home without first having to come up with fix-up money.

Patience vital

That 3-year-old, five-bedroom home with granite countertops, premium appliances, three-car garage and pool on a cul-de-sac listed as a short sale for nearly half what the owners paid for it new could seem too good to be true. Frequently, the price is too good to be true, real-estate experts say.

Homes can be priced at unrealistically low prices to entice buyers and a bidding war. It can also take time and be frustrating.

"You have to be patient, and you have to love the home," says Debora Nichols, a real-estate agent with Realty Executives in Phoenix. "It has to be worth the wait."

Although some short sales move through the system quickly, most take weeks to months longer than foreclosures. And the lender, not the seller, has to agree to the offer. A potential buyer could think he or she got a smoking deal on a home, only to have the offer rejected by the lending institution. Often there's a bidding war among buyers, which drives the price higher than the enticing listing, Nichols says. Or in the interim, the home winds up in foreclosure and the process begins anew.

However, real-estate agent Greg Markoff, with HomeSmart in Peoria, who specializes in short sales, says that if the real-estate agent can support the listing price and is familiar with the area market and the lending institution, then a short-sale home purchase can be negotiated within a reasonable time.

Bank auctions

Banks are turning to auctions to unload a backlog of homes. Negotiating a home-auction purchase also can be challenging.

Interested buyers can inspect the home before the auction, but they also need to understand that the lender is not obligated to accept the winning bid. Look for the fine print "subject to" in auction information.

The buyer may jump through the necessary prequalifying hoops only to be disappointed when his or her bid is ultimately rejected by the bank, Barry says.

Location, location, location

Valley real-estate expert RL Brown of RL Brown Housing Reports joins the growing chorus of experts who say it can be an ideal time to buy property. Even if housing prices have further to drop, low interest rates still signal a return on the investment, Gustin and others say.

But if that screaming deal is in a neighborhood where every other home is a foreclosure sale or a 45-minute commute to work, be cautious, ASU's Butler warns. Those areas could be among the last to experience recovery.

He sees people motivated not only by cheap housing prices but also by what he describes as a return to basics.

"People are back to the traditional (home-buying incentives). They want to be close to jobs, family and the church," he says.

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