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Defrost Buyers' Markets

By Broderick Perkins
 
Veronica Hulitt purchased her South Central Los Angeles home six years ago for $140,000.
Today, the senior analyst for Ralph's Grocery Co. can't sell it and take out the paltry $10,000 equity she'd like to invest in the stock market.
Her neighborhood is not hot.
"I'm thinking about just holding onto it now," said Hulitt.
Even in today's bullish economy, including California's generally hot seller's market, you can find pockets where buyers rule.
Often designated by community, region or some larger geographic areas in today's economy, they generally tend to include high inventories, slow appreciation, flat or falling prices and more sellers than buyers. The regions can also be marked by economic distress.
Generally, if more than half of the houses remain on the market a month or more before selling and most of them sell for less than asking, it's a cool buyer's market, says George Devine, San Francisco broker and author of "For Sale By Owner In California" (Nolo Press, $24.95).
Devine said a cool market freezes over when the supply of houses for sale steadily increases, sales are slow and prices decline.
More specifically, a market with nine or more months-of-inventory is considered a buyer's market said Ted Jones, chief economist at Houston-based Stewart Title Company, who studied 23 national markets' trends.
Months-, weeks- or days-of-inventory is a theoretical measure of the time it would take to sell all available homes if no more came to market and the current sales pace continued for the duration.
Others say a smaller inventory can mark the onset of a buyer's market.
"If there is more than 80 days (about three months) of inventory, it is a buyer's market," says Richard Calhoun, a San Jose, CA mortgage broker and resident number cruncher at the Santa Clara County (CA) Association of Realtors.
Unfortunately, a seller's market doesn't become a buyer's market overnight and, if you are in the market during the transition, it could cost you.
"Prices (sellers set) can overshoot badly, as they did in 1989. In the 1980's through March 1989 it was a seller's market, but the market was shifting and prices should have stabilized. Instead, prices didn't peak until August 1989, and then they dropped rapidly after that because no one knew," said Calhoun.
The fast run up in prices during the late 1980’s and economic turmoil should have been clues.
"The same thing is likely to happen again. The $1 Million Question is when," said Calhoun.
 
Buyers' Blunders
  • Paying seller's market-prices in a transitional market is one of the easiest and most common mistakes buyers make.
    To avoid that costly error, home buyers should make the same price checks a seller makes to price it right -- check comparables, keep track of the sale price range for your street and immediate neighborhood, use the local newspaper to monitor asking prices, visit open houses and consider a real estate agent who will know the latest market trends.
  • Buyers who don't educate themselves about prices tend to low ball sellers and ask for too many concessions. Even in a buyer's market, you'll likely only insult the seller.
    "Starting at 25 percent below what the home is worth generally won't work unless the seller is desperate," said Brown.
  • Buyers feeling their power also overlook obtaining general knowledge about the home buying process when learning the ropesis an easy task.
    "There are a number of excellent books on all phases of home buying, but only 10 percent ever buy any of them. This is a negotiating business and a zero-sum game and he who is better prepared will get the better deal," says Newport Beach, CA-based mortgage broker Randy Johnson, author of "How to Save Thousands of Dollars on Your Home Mortgage" (John Wiley & Sons, Inc.).
  • Buyers also often fail to buy the least expensive house on the best block. Looking at the larger picture the same applies to buying in the least expensive neighborhood in the best community or in the least expensive city in the best region.
    For example, the booming San Francisco Bay Area yields two cities, Vallejo to the north and East Palo Alto to the south as cities that either are or include areas considered buyer's markets, compared to other cities in the region.
    "This might be the worst house on the block, but it's still in the Bay Area,” said Ray Brown, a San Francisco broker and author of "Home Buying For Dummies" (IDG Books, $16.99).
    The tactic is much like strategy used to buy and sell stocks -- buy low and sell high. The cheapest home in a neighborhood in transaction will give you the greatest return on your investment.
  • Buyers mistakenly approach home buying in a buyer's market with no cash backing. Imbued with a false sense of power, some don't even get pre-approved. Even sellers anxious to unload their home aren't going to wait for the money to show up.
    "It used to be 'Does this buyer have enough income? Enough cash to close? Good credit?' All three have been reduced to 'Is this buyer pre-approved?'" said Drew Beveridge, a mortgage broker at Partners Mortgage in San Jose, CA.

Sellers’ Blunders
Sellers, already behind the eight ball in a buyer's market must be careful not to exacerbate their situation.

  • With so much competition and so few buyers, sellers often ask for too little to attract a sale or too much to make up for value they've lost.
    "Pricing is critical. It's the biggest mistake sellers make. They most often think their house is worth too much. Pricing is everything," says Rancho Palo Verdes, CA real estate broker turned property investor and author of "The For Sale By Owner Kit" (Real Estate Education Company, $17.95).
  • Over-improving at sale time to attract more buyers can be another mistake.
    "A foolish seller puts on a roof and then sells the house. If there's a leak, guess whose roof it is?" asks Brown. "Leave money in escrow and let the buyer pick his or her roofer. Then if anything goes wrong, it's their roof."
  • A thorough home inspection to let the buyer know exactly what's for sale is a better cost-conscious approach.
    "Another mistake sellers make, and it comes back to haunt them, is disclosures. Even if you sell it "as-is," that does not exclude you from disclosures, and a home inspection helps you do that," Brown said.
  • Sellers who aren't flexible enough to make concessions when buyers rule could find themselves with a home for sale languishing on the market, says Blanche Evans, author of "Homesurfing.Net" (Dearborn, $17.95).
    "Chandeliers, not normally included in the purchase price, are now a bargaining chip. The buyer may ask for a home warranty at the seller's expense, or for the seller to pay more of the closing costs, or any number of other contingencies," Evans said.
  • Finally, frustrated sellers who give up after a lengthy listing, probably quit at the least advantageous time.
    "The one certainty is that one side of the market will never stay on top forever. In fact, it can turn on a dime. The same area that remains depressed for a period of time can make a comeback as lower prices stimulate reinvestment," said Evans.

Broderick Perkins, has been a consumer journalist for 20 years. Experienced in print, electronic, and consulting journalism, he is chief executive editor of San Jose, CA-based, DeadlineNews.Com, an editorial content and consulting firm.

© Copyright 2000 by Broderick Perkins. All Rights Reserved.

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