Reading: 5 Tips for Buying Real Estate in a Down Market

Report

5 Tips for Buying Real Estate in a Down Market

Whether you’re looking to rightsize or help your child invest, here are some key things to consider

By Dara Pettinelli

Is this the right time to buy or sell? That’s always the question when thinking about purchasing a new property or downsizing.

The answer is: it depends.

Nationally speaking, it’s a down market, meaning housing inventory is low. This benefits sellers because there are fewer single-family homes available. There is also an increase in buyers who are entering the market.

But housing is not cheap. Prices have increased at more than twice the rate of income growth, mortgage rates have increased, and tax changes have lowered write-offs for many investors.

According to a recent report by Arch Mortgage Insurance and covered by Forbes, the size of the monthly mortgage payment needed to buy a home rose nearly 5 percent over the last three months of 2018, and projections have affordability possibly decreasing an additional 10-15 percent. (Housing prices for 2019 are up again.)

This means not only do your kids have fewer options for their first homes, but so do those of us looking to downsize.

But the unique thing about real estate is that it’s hyperlocal — some markets end up favoring sellers and some favor buyers. And they can reverse rapidly.

Despite local volatility, there are some general tips you should consider, whether you’re thinking of downsizing or helping your children invest in their first home.

Don’t Ditch the Broker!

“People think that by using these apps like Trulia that they have all the listing information they need,” says Ann Cutbill Lenane, an agent at Douglas Elliman in Manhattan, “but you need a broker.” Especially if you’re buying in a city like Manhattan where the co-op boards have myriad stipulations and rules about everything from your ability to renovate to owning a dog or even making a purchase for your child. “It’s not just a matter of picking a place you like,” she says. A broker will know the best building for your needs and how to get you approved by the board so that you don’t waste your time and energy.

Jaclynn Carroll, an agent at Houlihan Lawrence in Westchester County, NY, recommends finding a good buyer’s agent and committing to working with that person exclusively. “You want them to want to work hard for you,” she says. Though personal referrals are the best way to find an agent, you can also scout open houses for realtors you click with who may be able to help you with other listings. “Do not call listing agents directly and think you’re going to get a better deal on a home that way,” Carroll says. “They’re working for the seller and do not have your best interest in mind.”

Think About Where You’ll Be in 5-10 Years

The turnaround time on your real estate investment is typically five years, but nowadays Carroll advises: “If you’re not going to be in the property for at least eight years, you’re better off renting — you have to be careful in a down market.”

Buyers and sellers can be extremely picky when the market is in their favor and it can be much harder to reach a deal. Dan Downey of Berkshire Hathaway in Vero Beach, Florida, warns that in a seller’s market like he sees in Florida, you should be prepared to put more money toward a down payment, up to 10 percent of the sale price, during the escrow and home inspection period. And when you’re in a hot seller’s market like San Francisco, chances are good that homes will sell for 2-5 percent above the original asking price.

“I still believe in buying the least expensive house in the most expensive neighborhood,” says Chris Meyers, president of Houlihan Lawrence in Rye Brook, NY. “Buyers today want everything to be brand new, they don’t want to have to do anything, but if you’re willing to do a little work to a house in a great neighborhood, you’re making a good investment.” He also says that in today’s market, when you find something you like be prepared to act quickly.

There are a few things that will give you a competitive edge as a buyer. One is removing contingencies. The second is paying in cash. (A personal note from the buyer to the seller about how much they love the house can also help seal the deal.) Prepare ahead of time.

If you’re helping your kid buy their first home or secure a first loan, Meyers recommends putting $15,000 in cash directly into their bank account a few months before hand. It looks good to mortgage lenders. For downsizers, Downey suggests selling your home before finding a new place to buy so that when you are ready to make an offer, you shop with all cash. Carroll also suggests that downsizers should take their time and avoid making a purchase in busy market seasons like the spring. The only Don’t: Downey warns that it’s never worth waiving a home inspection contingency.

Small Chic Is the New McMansion

Both Carroll and Downey see many customers who no longer want to be burdened by big homes and the required maintenance. This can go for overall property size too — all many people want today is an outdoor patio and space to throw a ball around or put in a playset.

Carroll also believes the concept of the “starter home” is outdated. Most people in her market are buying their first homes in their 40s; they’re investing a lot later because they’re not making as much money and housing prices are high. “People tell me they’re buying a house and they’re not moving until their kids go to college,” says Carroll. “They’re buying small homes because they have to, not because it’s a ‘starter home’.” Clients would rather add on to a small house than buy a new one and deal with refinancing and increasing mortgage rates, not to mention paying commissions, which eats away at their equity.

Pay Heed to the Things that Won’t Change

Outside of purchasing in a new housing development, the most notable signs that an area is poised for growth are the influx of new restaurants and retail stores — anything that draws foot traffic, explains Meyers.

When you’re thinking of purchasing a place for your children, however, Cutbill says it’s crucial to think about the potential long-term value of the property based on whether or not you see a future for your family there. “A sketchy location can change and become cool,” says Cutbill, “but if there are buildings nearby that are never going to look good or you don’t feel any sense of security in the area then you don’t want to buy there.” And if you’re buying an apartment, it’s critical to have extensive inside knowledge about the building. Working with a good real-estate attorney is critical. Cutbill says they’ll help you ensure that a building is in good financial shape and that there won’t be any surprise increases in your maintenance fees. You also want to make sure the building’s super, manager, and management company are friendly and easy to work with. Cutbill recommends doing a “drive-by”: just drop in and visit them. “You’re making an investment in a bunch of people,” she says.

When it comes to buying a house in the suburbs, Downey and Carroll agree that aside from being in a good school district, a location on a quiet street that’s walking distance to a village and public transportation will always be a big selling point. Whether they’re buying their first home or downsizing, people want to be able to walk to amenities like shopping and restaurants, says Downey. A short walking distance to schools and medical centers offers a tremendous advantage.

Try to Take Your Emotion Out of the Equation

Most empty nesters have probably owned their homes for a long time so they’re bound to make some sort of profit, explains, Meyers — just not as much as they would have if they’d put their house on the market last year. “It’s just like the stock market,” explains Carroll. “You can’t demand a certain amount because you paid a certain amount.” Furthermore, when it comes to making an investment for your kids, you have to be realistic about how much both of you can really afford. “It’s easy to get carried away with your kid,” she says, “but you need to set a budget … [as a parent] you can’t feel like you’re going to lose money.”

What about passing your home onto your kids? Carroll says do your loved ones a favor and don’t assume they will want the property or even be able to handle the tax burden. “Don’t get sucked into nostalgia,” she says.

RELATED:

She Was Fine with an Empty Nest. Until a Storm Moved In. (TheCovey, July 2018 issue)

How to Declutter in the Digital Age (TheCovey, May 2018 issue)

One Woman’s Quest to Change How We Think About Stuff

Tell us what you think.
Leave your comments below