The declining home values that are plaguing homeowners are just one of the factors creating an opportunity for prospective homebuyers.

Standard & Poor’s latest Case-Shiller index, which tracks home prices across 20 major U.S. cities, reported that values dropped 19% in January from a year earlier.

Those depressed values, combined with near-record-low mortgage rates and government incentives (an $8,000 first-time homebuyers’ tax credit included in the stimulus bill), are luring more first-time home buyers into the market. Indeed, a recent Century 21 Real Estate survey found that more than three-quarters (78%) of potential first-time homebuyers say now is a good time to buy.

If you agree, be aware that buying a home comes with plenty of potential missteps. Here are 10 all-too-common mistakes first-timers make.

1. Not knowing how much house you can afford.
Many novice homebuyers spend a lot of time researching homes — comparing kitchen layouts and backyard square footage — but very little time researching their financing options. One of the first things buyers should do is talk to a qualified lender and get preapproved for a mortgage, says Claire Clark, senior vice president of business development at Prudential California Realty. Without first figuring out how much house you can afford, you risk falling in love with one you can’t.

2. Assuming foreclosures are great deals.
Just because the previous owner owed $450,000 on a house before the bank took it over doesn’t mean it’s worth that much now. Values have slipped significantly, says Jay Michael, partner at Estate Property Group, a Chicago real-estate brokerage, so you may not be getting the bargain you think with a foreclosure. Also, most homes owned by lenders or banks have been sitting vacant for months and may have been vandalized. That could require extensive renovation or repair. Weigh the costs of fixing up the property against the savings you’ll likely reap by buying a lower-priced foreclosed home.

3. Letting your true feelings show.
No matter how much you’ve fallen in love with a house, don’t let the seller’s agent in on it. Otherwise, he will gain the upper hand in negotiations.

4. Failing to find a good buyer’s agent.
Landing a mortgage is tough these days. So buyers should rely heavily on knowledgeable agents to help them get their finances in order, says Michael. After all, buyer’s agents have a fiduciary responsibility to the buyer exclusively — and should be looking out for his best interests. Start your search at the National Association of Exclusive Buyer Agents, a nonprofit representing buyers. Or consider using an agent recommended by a relative or friend. Interview the candidates about their experience; ask if they’ve worked with first-time buyers before and what kind of service you’ll get from them.

5. Underestimating the costs of owning a home.
Whether it’s a rusty pipe or a leaky roof, things go wrong and need to be fixed. Many homebuyers don’t anticipate the additional costs for repair and maintenance, or for an increase in utility costs, says Erin Baehr, a certified financial planner and president of Baehr Family Financial. Consider the age of your new home and how well it’s been treated by the previous owners in your budget. Be prepared to set aside a small percentage (1% at most) of the home’s purchase price annually for repairs and upkeep.

6. Failing to budget for property taxes.
Property taxes — and the likelihood that they’ll climb over the course of your time in the house — should be factored into any homebuying budget, says Baehr. To get an idea of how much you’ll be paying, call the local assessor’s office or talk to people in the neighborhood.

7. Assuming your first offer will get accepted.
As home prices get even more affordable, competition is bound to heat up. “You can’t assume you’ll walk in there, make the offer and get it,” says Clark. Try not to get discouraged if you lose out on the first — or second — house you make an offer on.

8. Skipping the inspection.
Before signing anything, hire a professional inspector, says Justin Lopatin, a mortgage planner with American Street Mortgage Co. The seller isn’t likely to tell you there’s mold in the basement or the walls are poorly insulated. Lopatin advises buyers to find and hire their own inspector — independently of the real-estate agent — to ensure there’s no conflict of interest. (You can find inspection companies in the phone book, or by doing a simple Web search with your ZIP code.)

9. Doing too much too fast.
Some buyers want to make the house their own right away, says Baehr. They overextend themselves on credit to do so, and assume the improvement will pay for itself by increasing the home’s value. But that’s not always the case — especially in today’s market. Instead, buyers need to exhibit patience and make changes over time.

10. Failing to include a contingency clause in the contract.
A mortgage financing contingency clause protects you if, say, you lose your job and the loan falls through or the appraisal price comes in over the purchase price. Should one of these events occur, the buyer gets back the money he used to secure the property. Without the clause, he can lose that money and still be obligated to buy the house, says Lopatin.

By Lisa Scherzer, SmartMoney

The reports will not be sent automatically. Each consumer must request reports one of these three ways:

* Go to AnnualCreditReport.com, which is the only authorized source for consumers to access their annual credit report online for free.

* Call (877) 322-8228.

* Complete the form on the back of the Annual Credit Report Request brochure, and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. The brochure, which can be ordered or printed, is available from the Federal Trade Commission.

A credit report is simply a rundown of your payment history, listing your accounts, balances and your payment behavior for each. It is not a credit score, or FICO, the three-digit gauge of your creditworthiness used by lenders, employers and insurers. But credit scores do use the information on your credit reports in their calculations, so it’s important to spot and correct inaccuracies as quickly as possible.

[MSN Money]

Not long ago, no-down-payment loans were the height of fashion for homebuyers. But now that lenders have tightened their standards, borrowers once again are expected to “put some skin in the game,” to use a favorite industry catchphrase.

That “skin” refers to the borrower’s own cash, and it means down payments are definitely back in style.

The chief advantage of a down payment today is simply the ability to qualify for a loan, as only a handful of so-called zero-down loan programs still exist. Yet down payments have other benefits, too.

The more money you put down to buy a home, the smaller your monthly payments will be, explains Greg Gwizdz, the national sales manager at Wells Fargo Home Mortgage in Des Moines, Iowa.

A buyer’s down payment becomes a homeowner’s instant equity when the purchase closes, and that equity can be borrowed against with a home-equity loan or line of credit. Guidelines to qualify for these loans have become much stricter, however.

And, Gwizdz adds, many first-time homeowners are “surprised by the true cost of owning and maintaining their home.” So they should keep some reserves rather than allocate every dollar to their down payment. Some loan programs require cash reserves for this reason.

Other benefits of a down payment include:

* Borrowing less money to buy the home.

* Shopping among more lenders, loan originators and loan products.

* Getting a lower interest rate.

* Paying less for mortgage insurance.

* Avoiding mortgage insurance altogether if the down payment is at least 20% of the home’s purchase price.

How to get a down payment
Many homebuyers have difficulty coming up with a down payment. Here are a dozen ways to do it:

* Set up an automatic saving plan.

* Get a gift from your parents, grandparents, other relatives or friends.

* Sell a car, boat, motorcycle, collectibles or other assets.

* Liquidate stocks, mutual funds, savings bonds or other investments.

[Bankrate.com]

5 easy fixes to make your home more inviting

• Place a box of chocolates and a water pitcher with lemon slices in the kitchen.
• Hide pet toys, bowls and litter boxes.
• Heat an apple pie in the oven. Studies show that the smell of baked goods makes people nostalgic for childhood.
• Light candles in every room to create a glow.
• Put away toilet brushes, plungers, sponges, toothbrushes and medications.

Fake more space
Buyers always want more for their money. Here are seven sneaky ways to create the illusion of extra square feet.

• Bedroom: Remove one piece of furniture — an ottoman or a second nightstand. Too-tight spaces are a major buyer turnoff.
• Windows: Take down worn drapes. Don’t worry about replacing them — bare windows always make your home look bigger.
• Closet: Empty closets by two thirds to create a plenty-of-storage feel. Box and store out-of-season clothes and shoes.
• Den: You can double other people’s perception of your home’s play space — just pack up and put away half of your kids’ toys.
• Kitchen: Clear small appliances off your counters. Experts say reducing the number of items visually triples the work space.
• Cabinets: Stop buying in bulk at the warehouse club. Reducing inventory lets you arrange supplies so that the shelves seem roomier.
• Dining room: Create a feeling of uninterrupted flow by taking out dining-room table leaves and removing all but four chairs.

Hot ticket! This big celeb trend could help you sell your house.
When stars go house hunting, they search high and low for homes that have been feng shui-ed — a Far Eastern philosophy that is said to create “good aura.” Here are five tricks to try.

• Get a fruit bowl. “In feng shui, the kitchen symbolizes prosperity,” explains Feng Shui Master Carole Swann Meltzer, one of the leading practitioners in the United States. According to Meltzer, a bowl of fresh fruit in the kitchen sends a subliminal message that the buyer’s life will be both bountiful and abundant.
• Head east. That’s the side of the room where people seek warmth and relaxation, experts say — so place a comfy sofa on that side of the den.
• Go green. The color symbolizes new opportunity. Position a green mat outside your front door.
• Avoid red. “It’s the color of discord,” Meltzer says. Too much crimson causes mental fatigue and argumentative feelings. Neutral colors keep prospective buyers calm and interested.
• Make mirror magic. Capturing light is only one benefit of hanging mirrors around your house. Experts say buyers will “see” themselves in the home when they walk by a mirror, helping them feel a connection.By Colleen Moriarty, Good Housekeeping

Companies that promise to buy homes for cash will do it, but their lowball offers probably will appeal only to desperate sellers.

Q: Our house has been on the market for nearly eight months. I recently transferred jobs to another city, and we desperately need to sell because we are now paying two mortgages. Should we relent and turn to one of those “buy your house for cash” operations? How do these businesses operate, and how much do they typically pay?

A: Most of these companies are legitimate and basically play the role of a fast-acting, lowballing investor. The larger buyers have good credit lines and can close deals pretty quickly. But they usually pay less than smaller investors — sometimes much less.

Still, these businesses have a broadening spectrum of customers in today’s market. Sellers include those trying to avoid foreclosure or sell off recently inherited property, homeowners caught in less-than-desirable mortgage structures, people who owe a multitude of back taxes and those who are retiring, downsizing or going through a divorce.

Or, as in your case, they may be transferring jobs. Some sellers don’t want to go through the machinations of multiple repairs and welcome the convenience of a quick disposal.

The pluses are that such operations pay cash, move quickly and buy “as is.” Many will also pay most standard closing costs. The minuses are the deep discounts they command. Critics say they welcome unsavory elements in some neighborhoods when they convert homes to rentals. Proponents counter that they actually help prevent blight by ridding neighborhoods of poorly maintained homes.

What do the companies pay? That can vary widely. Most of them use software to analyze how much a home will cost to repair and how much to offer for it. Officials of such operations have told the media in the past that their aim is to buy at about 65 cents on the dollar, although in some particularly depressed markets that number has dropped to as low as 50%, particularly on condos. Some will merely try to gauge how much equity you have in a house and offer that and little more.

As you might expect, these are some of the lowest of the lowballers out there. The deep discounts, they say, allow them to renovate the place, pay for utility and maintenance costs while it’s under renovation, and market the home once it’s ready to resell. When these homes are repaired, the firms or their franchisees resell the properties or add them to their rental portfolios

These days, more of these “opportunity investors” are cropping up. The big and established ones, such as the heavily capitalized HomeVestors, focus mostly on starter homes and rental homes in the $100,000-and-under category in older neighborhoods. But as home values continue to drop and conventional sales slack, some have started picking up higher-dollar houses.

How does the process work? Representatives will come to your home, give it a thorough and free inspection, make their assessment, then make you an offer — usually within a few days. It will be limbo-low, of course, and they expect you to haggle. Be sure you make at least a couple of counteroffers if you are going this route. If their low offer doesn’t offend you, your return offer won’t offend them

Make sure you check with the Better Business Bureau before making any commitment. There are more and more scammers out there. Ideally, the company will belong to an organization such as the National Association of Responsible Home Rebuilders and Investors.

To employ an overused term, these companies “are what they are.” Most nondistressed sellers won’t bite at their offers, however. You may be better served finding a midpoint between their offer and your current asking price and re-listing the property with a different brokerage for that median price for no more than 60 days, then see if that scares up any new offers — if you have that much time, that is.

01/2008

#1 Your home is overpriced

Optimistic home sellers love to parrot the old adage, “There’s a buyer for every home.” But they often leave off the qualifier: “at the buyer’s price.”

The fact is that buyers, not sellers, ultimately determine the market value of a home. You can ask for the moon and set your listing price well above comparable properties in your neighborhood, but at some point it will be up to you, the seller, to accept what the buyer thinks your home is worth.

Overpricing is the most common reason homes don’t sell. When you ask an unrealistic price, it sets in motion a process that often works against you. Here’s why:

Most real estate agents, and hence most qualified buyers, will see your new listing within 30 days. If it is overpriced by as little as 5%, it will be duly noted and interest in your property will wane, especially if you show no intention of coming off your asking price. You likely already priced out buyers who might have qualified for financing at a more reasonable price. Even if you manage to find a buyer at your inflated asking price, the property may not appraise at that figure and the financing will fall apart.

If you have a house that really should be priced at $200,000 and you’ve got it listed at $260,000, you are trying to compete against homes that really are worth close to $300,000 You want to compete with what is available out there among homes similar to yours.

If your home remains on the market for too long, agents and buyers may begin to wonder if there are other, perhaps more serious reasons why it isn’t selling.

#2 Your home doesn’t ’show’ well

Your home is competing against shiny new houses in those pristine subdivisions out in the suburbs with their attractive prices, incentives and community amenities.

Face it: Even the best old house needs a little makeover if it hopes to attract a qualified buyer.

The good news is most of the work will be cosmetic and relatively inexpensive: a new coat of paint, a few attractive window boxes, a thorough cleaning of floors and carpets. Voila! The place may look good enough to reconsider.

A good real estate agent can advise you on where your time and money are best spent.

Price and condition are two things that the seller can do something about, Paint is probably a seller’s best friend because it makes things smell fresh and look fresh. If it’s time to paint, it’s time to paint. It’s the best return on investment.

#3 You’re in a bad location

Nothing has a greater effect on your home’s value than its location. Your humble abode might be worth a king’s ransom were it located in Palm Beach, Aspen or San Francisco. It might even jump thousands in value just two streets over in the next (and far superior) school district.

The point is, location rules in real estate.

If your home’s location is less than desirable, your options are somewhat limited. A good real estate agent will do his/her best to help you accentuate the positive and eliminate the negative of your circumstances, say by using foliage to screen off offensive adjoining properties or dampen traffic noise.

The best way to compensate for a poor location is to reduce your asking price or offer attractive incentives such as seller financing or a lease option with rent credit.

#4 You have a lousy listing agent

Yep, they exist: Real estate agents who mislead, misfire and misbehave.

Their bad advice can cost you plenty in time, money and the sheer hassle of keeping the place show-ready 24/7.

The agent from hell will allow you to overprice your home (”Here’s what I can get for you if you list with me!”), not market it properly, fail to screen for qualified buyers, be unresponsive to interest from other agents (if they sell their own listing, they don’t have to split the commission) and keep you totally in the dark throughout the process.

What’s more, if your agent is abrasive, arrogant or otherwise difficult to work with, other agents may not want the hassle of showing any of their listings to prospective buyers

#5 You are battling competition or market conditions

We’ve all heard the terms “buyer’s market” and “seller’s market.” In real estate, market conditions are affected by any number of external forces, some of them predictable (the weather, sort of), some of them unpredictable (the local economy, interest rates, public optimism or pessimism).

In a “hot” or seller’s market, homes go fast. Inventory (homes on the market) may be low, meaning less competition for you. Chances are better that you will get your asking price in a hot market; in fact, it is not uncommon to even be offered more than your listing price.

But in a “flat,” “cold” or buyer’s market, sales slow to a trickle, inventories grow and buyers can find bargains, especially when they know the seller is motivated (i.e., paying on two mortgages).

If you’re trying to sell in a flat market, you’re not only competing against all that vacant new construction, but against rentals as well. In this case, be prepared to settle for less than top dollar, or wait to sell until the pendulum swings once again in your favor.

#6 You have ineffective marketing

Gone are the days when an agent could simply place your listing with the local multiple listing service, hold a halfhearted open house and wait for another agent to bring forth a buyer.

Today’s top performers launch a multilevel marketing plan that includes listing tours for area agents, newspaper and even TV ads, weekend open houses, listing fliers and placements in local real estate publications.

Computers and the Internet also have changed the face of real estate. According to the National Association of Realtors, today more than one-third of all home buyers use the Internet for house hunting. The best real estate agents are computer-savvy. They have your listing in color on their laptops to show clients and communicate frequently via e-mail, a particular boon when working with out-of-town buyers.

Suffice it to say that if your real estate agent isn’t listing your home online through the company Web site, local MLS, other real estate web sites, classifieds, you may not be getting the exposure necessary to find a buyer.

The booming real estate market is driven by historically low mortgage rates, solid employment growth and brisk demand — not wild speculation.

Flippers — those who buy a house and quickly sell it at a profit in a hot market — are active, but there are no definitive nationwide statistics compiled on the number of mortgages turned over in a year or less. However, the number of flippers appears to be small.

“Investor interest in the U.S. housing market does not seem to be driving local house-price patterns,” Freddie Mac says. “While there has been some rise in the investor share of overall U.S. home-purchase lending in recent years (from 7% of purchase-money loans in 1998 to 11% in 2003), the investor share has generally remained near or below 7% in most markets experiencing significant price gains in recent years.”

The National Association of Realtors, a trade organization in Washington, D.C., says about 3% of all home buyers sell their home in a year or less. This statistic spikes the conventional wisdom that rampant speculation has created a real estate bubble.

Even if all those who sell quickly are assumed to be speculators — ignoring the likelihood of common reasons for moving, such as job change, divorce or illness — flippers are an insignificant slice of the market. The underlying reason is simple: Unlike the shares of a hot IPO that can be flipped within hours of the first trade for a quick profit, real estate is a long-term investment.

About 23% of second homes sold in 2004 were purchased by investors, leading some to conclude that speculators are relentlessly driving the real estate market upward. However, this overlooks the cascade of baby boomers in their prime earning years beginning to think about retirement. Many boomers, real estate agents say, buy a second home with the intention of retiring there — but most are more than happy to sell it in a few years if plans change or if the price is right.

“Some who expect to flip the property in a year will be disappointed,” he says. “You’ve got to look at commissions, taxes and fees. A lot of people come in with high expectations, but when they work through the numbers, they realize how much the property has to appreciate to make money.”

A basic tip to aspiring real estate flippers: Hold or use the property as a rental for more than 12 months. This converts it to a capital asset, subject to long-term capital gain treatment that can be offset by capital losses or taxed at long-term capital gain rates.

If the owner is classified as being in the real estate business, the income would be considered ordinary income and taxed at 35%. If taxed as a long-term capital gain, the minimum rate is 15%.

Real estate is appreciating in most markets throughout the country. The median price for an existing single-family house was $208,500 in the second quarter of 2005, up from $183,500, or 13.6%, from the same period a year ago. The historic average gain is 6.4%. Since 1968, prices have generally risen one to two percentage points faster than the rate of inflation. The National Association of Realtors says the historic average price increase is skewed by the high inflation in the 1970s and early 1980s.

The Phoenix-Mesa-Scottsdale, Ariz. area reported the nation’s heftiest price increase with a first-quarter price of $243,000 — 47% above a year ago.

Speculation or not, the runup in real estate prices raises a basic question: Is it healthy for economic growth?

If the market slows, some homeowners will be stuck with hefty mortgages, fat monthly payments and little equity. The market is unlikely to collapse, but some owners will be forced to pull their houses off the market or sell for less than they expected. That would create a downdraft that will suck the life out of many investments.

The red-hot housing sector alone, which typically represents just 5% of the total economy, accounted for an astounding 50% of the overall growth in the U.S. economy by the first half of this year, and more than half of the private payroll jobs created since fall 2001 were in housing-related sectors.

“We argue this represents an unhealthy and disproportionate share of economic growth. The overreliance on residential investment leaves the economy very vulnerable if housing demand and prices cool — prices do not need to even fall; just a slowing in the pace of home price appreciation would have a noticeable negative impact on economic growth — not unlike the fallout following the frenzied tech overinvestment in the late 1990s.”

Forbes.com
01/2008