Ten Rules to Avoid Overpaying for Your Next House Purchase

The National Association of Realtors recently came out with their latest home sales statistics. U.S. home sales dropped 9.8% in July 2000 to a seasonally adjusted annual rate of 4.79 million houses. That is a drop from 5.31 million annual residence sales as of June. The July 2000 sales volume was also 9.8% below the 5.31 million home sale rate in July 1999.

Your first response might be "Who cares?" but if you are in the market to buy (or sell) a house, this trend is very important. The reason is it shows the volume of home sales have slowed since April and May 2000.

However, I found something equally important buried in the Realtor statistics. The supply of resale (excluding brand new dwellings) houses and condos listed for sale has risen from a low of only 940,000 in January 2000 to 1,680,000 in July 2000. In January 2000, there was only a 2.6-month supply of resale homes available. It is no wonder the realty agents were complaining last January and February about the lack of inventory. However, by July 2000 the resale inventory supply had increased to a more normal 4.2-month supply. With more homes available for sale, perhaps the current nationwide average upward market value appreciation rate of 5.4% will slow down. Incidentally, this home value appreciation rate ranges from a low of 2.0% in the Northeast, 4.4% in the Midwest, 6.3% in the West, to 6.7% in the South.

What do these statistics, coupled with fixed interest rates in late August about 7.86% and one-year adjustable rates around 7.15%, mean? In a nutshell, it means today is a great time to buy a home and negotiate with sellers. The days of multiple purchase offers above the asking prices, which we saw last spring in many cities, seem to have disappeared in most communities. Today, realty agents are back to holding weekend open houses where sometimes only a few serious, well-qualified prospective buyers show up.

The volume of newspaper classified "homes for sale" ads is way up because there are more homes for sale, and they are selling much slower than last spring. That is good if you are a homebuyer, but not so good if you are a home seller. Although it is still a "seller's market" in many towns, meaning there are more qualified home buyers than sellers, in many cities we are back to a "buyer's market" with more homes listed for sale than there are qualified buyers. However, by the time you read this, the situation might be different in your community, and there are always local exceptions.

Last Saturday I was at my favorite coffee shop, reading the weekend newspaper real estate sections when I got up to get some more coffee at the self-serve coffee bar. When I came back to my table, my real estate sections were gone. The lady that was sitting next to me "borrowed" them. She wanted to check on her "for sale by owner" ads for a weekend open house. She is selling her $2.6 million mansion alone without a professional real estate agent. When I asked how long it had been on the market, she said "only about six weeks." I then politely pointed out if she had listed it with a Realtor, it probably would be sold by now because our local market is very hot. Then she said, "but I am willing to cooperate and pay half a commission to a realtor who brings me a buyer." Realizing it was a losing cause to convince her to list with a real estate professional, I went back to reading my real estate sections, which she returned to me. Just for fun, I checked the recent sales transactions our local newspaper publishes. I showed her a nearby home, which sold a few weeks ago for $2.1 million. She knew about that house and proceeded to tell me why her house is worth $500,000 more. Then she told me she has several buyers from out-of-town who are very interested in buying her house. If they do buy, and if they pay close to her asking price, they will probably overpay. Incidentally, buying from a determined "FSBO" home seller like that is extremely difficult..

What matters is knowing how to avoid overpaying for your next house or condo whether it is a local buyer's or seller's market. Here are the ten key rules to follow:

1 - KNOW WHAT HOME YOU CAN AFFORD TO BUY. Unless you are paying 100% cash and do not have to borrow any of the home's purchase price, the first step to buying without overpaying is to get pre-approved (not just pre-qualified) for a home loan. Shop among at least a six lenders to learn what programs are available. You might want to include some Internet lenders too. Although lots of homebuyers shop rates on the Internet, most wind up going to a local lender's office. Whether you decide to borrow via the Internet or locally, your pre-approval should be in writing, with the contingencies clearly stated -such as appraisal of the home you buy and re-verification of your job and credit report data.

Banks, S&Ls, brokers and bankers can arrange written pre-approvals. Be sure it is a letter or certificate from the actual lender, signed by an authorized loan officer who works for the lender. If you are obtaining your loan through a broker, the signed pre­-approval must come from the actual bank, S&L or banker which will commit to making you a home loan. Your broker cannot issue a binding pre-approval because brokers do not loan money - they just act as middlemen between the borrower and the lender.

In addition to giving you confidence you will be able to get the mortgage you need to buy a home, home loan pre-approval offers more advantages, such as (1) knowing the maximum amount you can afford to pay for a home, (2) being able to tell your real estate agent and the home seller you have written pre-approval (it is best not to show the letter to your buyer's agent or the seller because then they know the exact maximum amount you can obtain), and (3) being able to close the sale relatively quickly if a fast sale is important to the seller.

2 - DO NOT BE IN A HURRY TO BUY A HOME. Real estate agents love selling homes to job transferees from out-of-town who are in a hurry to buy a home because they have a deadline by which they need to get moved in. These homebuyers often overpay because they do not know local home sales conditions and they do not have time to look at many houses. Fortunately, even when homebuyers overpay, inflation often bails them out after a few years. However, overpaying can be avoided by careful home shopping and knowing the local market before purchasing.

Years ago I took a real estate seminar from Bill Greene. He was a rather unusual fellow who was a successful realty investor. The seminar was conducted on the front lawn of his Mill Valley, CA estate. Among the things we learned was ‘The 100 House Rule." Bill advised inspecting at least 100 houses in the vicinity before making a purchase offer to buy one. He said this was the best way to avoid overpaying because, after inspecting 100 houses, the buyer will probably know more about local home values than do most local realty agents. Incidentally, several years later Bill went to federal prison for income tax evasion. One of his ex-wives turned him into the IRS for hiding untaxed money in Liechtenstein. Has anybody seen Bill lately? I heard when he got out of "Club Fed" he retired to a Caribbean island.

Although looking at 100 houses or condos might be a bit extreme, inspecting at least 25 homes before making a purchase offer should give you keen insight into what is available in your range. Today it is possible to do major home shopping investigation work on the Internet. Start with www.realtor.com. That will lead you to other websites, such as those of local Realtors who have their personal websites with more information on their listings and their communities.

If you do not have much time available to shop for a home, perhaps you should rent an apartment or house for six months to become acquainted with the community where you think you want to buy. Better yet, lease a house or condo with an option to buy. Then part of your rent will be credited toward the purchase price if you decide to buy - details are in Report #99300 "How to Buy or Sell Your Home (or Investment Property) With a Lease-Option."

3 - GET TO KNOW THE LOCAL COMMUNITY WHERE YOU THINK YOU WANT TO BUY - CHECK SCHOOL TEST STATISTICS, CRIME RATES, SHOPPING, TRANSPORTATION, FLOOD AREAS AND THE ACTUAL COMMUTE TIME TO YOUR JOB. A major reason for not being in a hurry to buy a home is it takes the time to research the local market situation before making an offer to buy a home. Become the "neighborhood expert" on the pros and cons of a neighborhood, as well as its home values, before making an offer. While this might seem like lots of work - and it is - the payoff is avoidance of paying too much for a home or, worse, buying a home in a location you will grow to hate.

School statistics are readily available on the Internet. The realtor.com site has much free local school information. Also, most progressive school districts have their websites where they brag about their schools and the student accomplishments. The best local realty agents have the details for each of the local schools in the communities they serve. If an agent does not have or will not give you this school information, he is not the right one for you.

Crime statistics can best be obtained by visiting the local police station after you narrow your home search to a specific neighborhood. Some realty agents say it is illegal "steering" if they give you this information. I disagree. However, a visit with the police "community outreach officer" or a police officer with a similar title will give you the crime history information you need. Some police departments even keep statistics on how many calls they receive regarding a particular block.

Flood areas are very important to home valuations. Most real estate offices have flood maps, usually posted in the back room, where a Realtor can show you the local areas, which are subject to flooding. If you buy a home in such an area, your lender will require you to carry flood insurance, adding to your insurance costs. Whenever possible, avoid buying a home which requires flood insurance. By the way, even some condominium complexes are required to carry flood insurance too, but that will be the responsibility of the homeowner's association.

Commute times can be very important if you are considering buying a home a considerable distance from your job location. New homes in distant suburbs can look very attractive. However, if you will have a commute each way over 45 minutes, you might quickly grow tired of that long daily drive. Homes a long distance from job centers often do not appreciate well in market value because few buyers want a long commute.

To illustrate, Moreno Valley outside Los Angeles became a hotbed of home foreclosures a few years ago, thus depressing home values, because so many homeowners there got tired of the long commute and they could not resell for as much as they owed on their home. Before buying a home far from your job, try the commute during the morning and afternoon rush hours to see how good or bad it is.

Investigate local shopping, public services, transportation, and property. Finally, before making a home purchase offer in a community, which interests you, check out its shopping, transportation, public services (such as library and recreation facilities which are important to you), and the property taxes. Some towns are "wastelands" when it comes to amenities. Others offer first class services, but the property taxes might be high.

My primary home is located in a town where the voters approved extra taxes for fire, police and school services. My secondary or vacation home is located where the voters approve every school bond issue by wide margins; the result is superb public schools, which help keep residential property values up because families want to buy homes there.

4 - WORK WITH A GOOD BUYER'S REALTY AGENT. During the more than 26 years I have been teaching real estate classes at the College of San Mateo, I have met hundreds of real estate agents. Many have become very successful. Some have become very wealthy real estate investors. However, I have observed the most successful realty sales agents usually specialize in home listings rather than representing homebuyers. The reason is the listing agent controls the sale.

Few realty agents want to specialize in representing homebuyers exclusively. Why? It is probably because most realty agents who work primarily with buyers have difficulty keeping a client loyal to them. If a Realtor or the brokerage has the home listing, that agent can also represent the buyer; it is called a "dual agency." Frankly, a dual agency is an inherent conflict of interest when the agent represents both buyer and seller. However, it is perfectly legal if it is fully disclosed to both parties.

There are a few real estate brokerages which only represent homebuyers. They do not accept listings of homes for sale. While the theory of representing buyers only is great, the reality is these firms often struggle to earn a decent income. I have seen high-pressure buyer's agents ask their buyers to sign 90-day, and even 180-day, exclusive buyer's agency listings. That means the homebuyer must buy their home through that buyer's agent, even if the client is unhappy with that agent.

Unless an exclusive buyer's agent comes very highly recommended to you by a person who recently used that buyer's agent to purchase a home. I do not recommend signing an exclusive buyer's agency contract. You will be much better off working with a buyer's agent who does not require a signed buyer's agency contract. However, I strongly recommend you work only with one buyer's agent at a time - but let him or her know if you are not happy with the service. Of course, if you are looking at homes in different areas, such as on the north side of town and the south side of town, you will probably need a buyer's agent in each area - unless it is a very small town.

What service should you expect from a buyer's agent? A buyer's agent, who probably also takes listings of homes for sale, should (1) phone you at least weekly to inform you of new listings, recent sales of homes you inspected but rejected, and reductions, (2) show you homes she/he thinks will interest you - including "for sale by owner" FSBOs, (3) prepare a CMA -comparative market analysis - for homes on which you want to make a purchase offer, (4) make certain you receive the seller's written disclosure of home defects, (5) advise you on the initial offer amount and prepare a purchase offer when you see a home you want to buy, (6) represent you in negotiations with home sellers,- (7) handle the inspections after a purchase contract is signed - such as the appraisal, termite inspection, and a professional inspection, (8) if necessary, re-negotiate with the seller if the inspections reveal undisclosed defects in the home, and (9) make certain the sale closes on time.

The best buyer's (and seller's) agent I ever worked with was the late Betsy White. Long time subscribers will recall I have written about her before. She was the #1 Realtor in our local area the year before she died of cancer at age 72. Betsy loved real estate and enjoyed helping clients buy and sell homes. Yes, she made a superb income. However, she earned every dollar. Even when I was not in the market to buy a rental house, when she saw a new listing which she thought might interest me, she would phone, or mail me an information sheet about it. I often bought those houses based on her recommendations. Although I tried to avoid phoning her at home, Betsy never seemed to mind my phone calls (although I am sure her husband and family were not too thrilled.). If she was busy, she let the answering machine take the message. However, she would return my phone calls promptly when she could. Although Betsy could get a bit "pushy," I am still thankful that she was persistent because, without her, I would not own my home today. She never gave up on negotiations, even with difficult sellers. I recall her often phoning me, long after I was ready to give up, to say, "I think WE ought to..." Of course, it was always my money we were using. That is the kind of great service home buyers should expect from their buyer's agent.

5 - EXPECT YOUR BUYER'S AGENT TO PREPARE A WRITTEN COMPARATIVE (OR COMPETITIVE) MARKET ANALYSIS BEFORE YOU MAKE A PURCHASE OFFER. As mentioned earlier, homebuyers should expect their buyer's agents to prepare a written comparative market analysis (CMA) before the buyer makes a home purchase offer. This is the same form, which was (hopefully) prepared for the home seller at the time the listing agent put the house on the market for sale.

The CMA should include recent sales (not asking) comparable nearby homes, asking prices of similar neighborhood homes now listed for sale, and the asking prices of recently expired comparable home listings. A sharp buyer's agent will have inspected each of the houses listed on the CMA. Of course, if you are buying a condo, the CMA will be limited to condos. Then a buyer's agent should recommend an offer price on the home you want to buy.

When you make your offer, your buyer's agent should use the CMA to show the home seller why your offer is reasonable and should be accepted by the seller.

6 - ASK WHY IS THE SELLER SELLING? However, before making your purchase offer, find out why the seller is selling. Your buyer's agent might not know, but she/he can usually find out by phoning the listing agent. As a buyer of rental houses, I often find it is difficult to learn the sales motive. Shockingly, many listing agents are not even aware of the seller's true reason for selling. Would not you think a listing agent would ask the seller "Why do you want to sell this lovely home?"

The homebuyer should always know why the seller is selling so a purchase offer can be made which will meet the seller's needs.

Years ago, my buyer's agent Betsy phoned me on a Tuesday morning to tell me about a new home listing. I had mentioned to her I wanted to buy a larger house with a swimming pool and a view. She remembered that. Tuesday is broker's tour day in our community. Betsy had to hold an open house for one of her new listings and could not accompany me (she always served the realty agents lots of food to get them to attend her broker open houses - that is why she was so successful by getting many realty agents to tell their buyers about her listings). She gave me the address and told me to inform the listing agent I was her client. After I inspected the house, I asked listing agent "John" why the sellers were selling. His rude reply was "It is none of your ... business." Even my polite reply that I just wanted to make a purchase offer meeting their requirements was rebuffed by his curt "Just make an all-cash offer." He was so obnoxious, even though I wanted to buy that house, I did not make a purchase offer. It took him about six months to sell that attractive house. I am sure his sellers never knew part of the sales problem was their unpleasant listing agent (who is not liked by many of his fellow agents). However, I should have bought that house. When it came on the market for sale about five years later, it had doubled in market value.

7 - AVOID THE BEST HOUSE OR CONDO IN THE NEIGHBORHOOD. Although you may have found your dream home, if it is the best house or condo in the area, you will probably be overpaying. Instead, if you want to earn a profit at the time of purchase, buy the worst house or condo in a good location and fix it up to increase its market value.

The reason it is foolish to buy the best residence in the area is its market value will be dragged down by all the other homes in the vicinity. In other words, the seller is selling an over improved home. If you insist on buying it, be guided in your purchase offer by the CMA valuation of nearby residences, not by the fact it is the best home for its location. To illustrate, if neighborhood houses sell for around $250,000, but the house you want to buy is $300,000 because it has many extras, do not pay more than $250,000 if you want to avoid overpaying.

8 - DISREGARD THE HOME SELLER'S ASKING PRICE AND MAKE A SIMPLE PURCHASE OFFER. By now, you have obtained the CMA prepared by your buyer's agent, you have studied the community and want to buy a home there, you have learned the seller's "alleged" reason (it is not always the truth.) for selling, and now you are ready to make a purchase offer on the house or condo you want to own. I know it is difficult, but try to disregard the seller's asking price (unless the CMA fully justifies it). Most sellers, like that lady with the $2.6 million asking price when a nearby home recently sold for $2.1 million, often set their asking price unrealistically. They dream some stupid out-of-town buyer will come along and foolishly pay their inflated asking price. That rarely happens.

The best advice when making an offer is to follow the old KISS principle: Keep It Simple Stupid. Who said, "A confused mind says ‘no'?" He or she was correct. Hopefully, your buyer's agent will use a purchase offer form, which is short and easy to understand. I have recently seen horrible six and eight-page Realtor purchase offer forms. That is far too long for a sane seller (or buyer) to read and understand. If a real estate attorney prepares your offer, be sure he understands you want to buy the home. "deal killer" attorneys too often feel they must justify their fees by preparing complicated multi-page purchase offers. If you insist on having a real estate attorney, be sure you are not hiring a "deal killer."

Include reasonable contingencies. Most offers contain one or two reasonable contingency clauses, such as for the appraisal and a professional inspection. Your buyer's agent can advise about other local customary inspections, such as for termites (also called "pest control"), radon, energy efficiency, and building code compliance. These contingencies mean if the home does not appraise out, or the inspections reveal serious defects, you can cancel the purchase and get your good faith earnest money deposit refunded.

Even if you have to take time off from work, be sure to accompany your professional. Your buyer's agent should also be there. The seller and seller's listing agent might also want to attend. Then you can discuss any discovered defects, which the seller did not disclose. Some problems, which look serious, really are not. The inspector can explain what is involved in correcting the problem. In my opinion, the best professional inspectors are members of the American Society of Home Inspectors (ASHI). You can find local ASHI members in the phone book yellow pages under "Building Inspectors," at their www.ashi.org website, or by calling 1-800-743-2744.

After you receive the professional building inspector's written report, you can then review it with your buyer's agent. If there are no problems or the defects discovered are minor, do not risk losing a good purchase deal. However, if there are serious defects which the seller did not previously disclose to you, this is the time to either (1) get the seller to pay for repairs, or give you a credit so you can then either do the repairs yourself, hire them done, or forget them, or (2) cancel the sale and get your earnest money deposit refunded.

If you want to buy the home, it is best not to include a contingency for the sale of your old residence. The reason is the seller, upon the advice of the listing agent, is likely to reject summarily your purchase offer without even a counter offer. The reason is home purchases which are contingent on the sale of the buyer's old home tie up the home without any assurance the sale will ever be completed. Home sellers and their listing agents do not like sales contingent on another sale.

9 - IF YOU WANT TO PROFIT FROM YOUR HOME PURCHASE. BUY A RESIDENCE, WHICH NEEDS PROFITABLE FIX-UP WORK. As long-time subscribers know, the best way to earn real estate profits is to buy a fixer-upper house, which has "the right things wrong. That means buying a run-down house, probably the worst house in a good neighborhood, which needs profitable improvements such as painting, cleaning, repairing, and landscaping. Additionally such improvements include new light fixtures and new carpeting. However, avoid buying a fixer-upper house, which needs expensive but unprofitable improvements, which do not add more market value than they cost, such as new roof and foundation repairs. More details are in Special Report #99296 "How to Find Fun and Fortune With Fixer-Upper Houses."

10 - ASK YOURSELF "IF I HAVE TO SELL THIS HOME WITHIN A YEAR, CAN I GET MY MONEY OUT?" Finally, to avoid overpaying for a home, before purchase ask yourself, "If I must sell this home within a year, will I be able to get my invested dollars out?" If your answer is not a positive, enthusiastic "Yes," you are probably overpaying.

Every house has a range of values, for instance, a house might be worth between $150,000 and $160,000. If you pay top dollar at $160,000, you probably overpaid. Do not expect an appraiser to tell you that you paid too much. However, if you pay $150,000 for that house, you got a "good deal" and can probably sell it for $160,000 so you can get your invested dollars out if you have to sell within a short time.

A SPECIAL WORD ABOUT BUYING A CONDOMINIUM. In addition to the considerations explained above, there are many extra precautions, which condo buyers should take if they are to avoid overpaying. There is not space here to go into all the details. Please study Special Report #99293 "How to Avoid Buying a Bad Condominium" to understand the special rules for buying a condo.

A SPECIAL WORD ABOUT BUYING A BRAND NEW HOUSE. It is hard to determine the actual market value of a brand new house in a new subdivision. The reason is there often are no true comparable home values unless there is a comparable new subdivision nearby. Negotiating the asking prices of new homes is difficult, especially when the builder has pre-arranged financing for the entire development with one or two lenders. If home builders reduce the price on the home you want to buy, that will reduce the sales prices the lender's appraiser uses for appraisals in the subdivision.

However, many home builders will negotiate on the upgrades or extras they will include in the fixed sales price. If home sales in the subdivision are slow, builders will often include upgraded carpets and appliances. They might even include landscaping and other extras. It will not hurt to ask.

CONCLUSION. To avoid overpaying for your next house or condominium purchase, just follow the ten rules. However, please be aware no home is perfect. Even brand new houses have their defects. Buying a home is a series of compromises, the most important of which is negotiating to or below fair market value, so you avoid overpaying.