Keep a Cool Head in Home Buying Wars

Here today, gone tomorrow.... Is the high-pressure sales slogan and song of woe for the luckless homebuyer trying to grab a home at a reasonable price before someone else does. Real estate is cooling off slightly in some areas but that's only a hiccup coming from homebuyers who continue gobbling up homes at a record rate. Scarcity and competition are driving up prices in many real estate markets. The first-time homebuyer needs to avoid getting caught up in the auction-style atmosphere, and instead get both realistic and creative.

There are many reasons to keep your head and avoid impulse buying and overbidding, not the least of which is the real chance of getting a dud of a deal. Your best bet is to set your maximum home budget and stick to it, even when sucked into a bidding war for your dream home with several other homebuyers. Don't rationalize paying more on the hope that home values will continue to appreciate, making your inflated purchase price look better in a few years. That's a high-risk strategy that may or may not pay off.

Decide realistically what you can afford, before you get caught up in the heat of negotiations. According to the Mortgage Bankers Association of America (MBAA) you can afford a single-family house that costs up to two and one-half times your annual gross income. (Annual gross income is the amount you make before taxes are deducted.) But that's only a rule of thumb, however, and it comes with some major caveats. Of course you must have the long-term capacity to repay the mortgage, and the savings to cover the down payment, not to mention the all-important comfort factor: don't go to settlement with that queasy feeling of being over-extended financially.

Instead of stampeding with the herd to the best-looking houses and competing for a seat at the negotiating table, consider taking a different tack. First, look for the proverbial diamond-in-the-rough, the home that doesn't show well but has hidden potential. It might be a fixer-upper that needs some repairs, or simply an older home needing cosmetic measures such as carpet and paint. In the upscale neighborhoods or places with low turnover, sometimes homebuyers overlook the hidden value of an aesthetically challenged home. Most people are looking for a "turnkey" home that requires a minimum of sprucing up. But that mindset creates an opportunity for the opportunistic buyer. Picture how the home would look with necessary upgrades, then do a rough estimate of the costs. Use that estimate as a factor in negotiating price.

Next, consider the pros and cons of hiring a buyer's agent. Unlike the standard arrangement where your agent legally represents the financial interests of the seller, a buyer's broker represents you, the buyer. That means he or she can tell you which home to buy, how much to offer for it, or criticize its defects, and even represent you at the negotiating table. A buyer's broker is free to do any of those things, while the traditional "seller's agent" is not. Just make sure you're comfortable with the agent's fee and qualifications, including personality, before entering into any exclusive contract.

By Cliff McCreedy