Bidding strategies for first-time homebuyers

By Liz Pulliam Weston
MSN Money

Renters Lisa and Fred Flynn are about to dip their toes into the bubbling-hot New Jersey real-estate market. But they aren’t sure how to proceed.

They know they want a single-family home in a safe neighborhood, one close to public transportation so Fred can easily get to his job at a grocery store. When it comes to making an offer, though, the couple isn’t sure how much under the asking price they should bid.

“This may sound silly, but I watch ‘House Hunters’ on HGTV, and they say 6% under the [asking] price,” said Lisa, a school bus driver. “I don’t want to pay the whole price, but I'm not sure how much to bid.”

Actually, in the areas the Flynns are house-hunting -- Woodbridge and Avenel -- they should be prepared to pay more than the asking price, said Realtor Frank Nicolato of Century 21.

“The old rules of thumb are out the window,” Nicolato said. “A home that’s priced right will have 10 or 15 offers -- and sell for $10,000 to $15,000 over the asking price.”

The good news? The Flynns don’t have to sell a current home to buy another one -- a potential delay that’s causing many trade-up buyers in the area to lose out in bidding wars.

“The perfect buyer,” Nicolato said, “is the first-time buyer with a mortgage commitment in hand who is willing to close in 30 to 60 days.”

Competition in hot real-estate markets can upend house-hunting strategies for every buyer, but it can be particularly daunting for first-timers or those, like the Flynns, who are re-entering the market after a long hiatus.

Wish lists and hardball negotiating tactics often have to give way to bottom-line realism about what you can pay, what that will buy and what will make your bid rise to the top.

Figure out what you can afford
Lots of first-time buyers incorrectly assume that this is the easiest piece of the house hunting puzzle: They just have to find a lender to tell them how much they can borrow.

But as I discussed in “Don’t bite off too much house,” lenders don’t know what you really can afford. That depends on too many factors that aren’t covered in their applications, such as how many kids you want to have, how much you need to save for retirement and how tied down to your house you want to be.

So you need to decide for yourself how much you can pay -- and how much you can stretch if you get into a bidding war. If the homes you’re bidding on are already listed at the top of your range, you’re in for a lot of frustration or the possibility that you’ll stretch too far trying to snag a home that ultimately will sink you financially.

You’ll also want to talk to your agent about closing costs and get some ballpark estimate of how much cash you’re likely to need. That could affect the amount you’re able to bid and put down as earnest money.

Decide on the type of home you want
The hotter the market, the more likely that your dream home is moving out of reach. Most buyers want a perfectly-maintained, detached, single-family house in a great neighborhood, but fewer and fewer first-timers can qualify for these desirable properties as prices rise.

The techniques I outlined in “Find a bargain in a hot housing market” might help you snag that perfect bungalow in the best school district, but, if not, you still have plenty of options. Among the most popular for first-timers:

Condos and townhouses. Yes, you have to share some walls, but condos have appreciated faster than single-family homes in the last decade. Median prices for condos nationwide doubled between 1993 and 2003, to $174,700, according to the National Association of Realtors, while median prices for single-family homes rose 66% to $171,600.

Will that trend continue? It depends. I think higher interest rates will dampen the demand for starter housing of all kinds, but luxury condos for downsizing boomers are likely to remain popular.

New construction in the boonies. Most new homes are built in ever-expanding rings around central cities. The bigger the city, the farther away the new construction -- and the longer the potential commute. New homes built 10 years ago also haven’t appreciated quite as fast as condos in many markets, as the figures below show. On the other hand, you’re more likely to get modern amenities and have lower maintenance and repair bills than if you had purchased an existing home.

Contrast that experience with Los Angeles’ South Central neighborhoods, which have largely recovered from the 1992 riots but which still trail the rest of the region in appreciation. The median South Central home sold for $220,000 in March, according to real estate research firm DataQuick, up about 80% from a decade earlier.

Predicting which neighborhoods will take off and which won’t is tricky business. Proximity to an area that’s already gentrified can help, as can an influx of hipsters, increased investments by business and beefed-up police patrols.

Decide your bidding strategy
This is where an experienced real-estate agent -- one who really knows the neighborhood -- can be invaluable. A pro can help you evaluate the home and the asking price to see if a bidding war is likely to erupt, or if you might have the field all to yourself. In the meantime, here are some tips to give your bid the best chances to succeed.

Make yourself a strong candidate. You want to be pre-approved, not just pre-qualified, for a mortgage. Having a lender committed to granting you a mortgage will help you compete against people who have cash in hand. Your agent also can advise you about earnest money amounts. Typically 2% to 3% is enough, but, in some markets, fat earnest money payments can help your bid rise to the top.

Be prepared to make a strong first offer. And follow up with your best possible bid. In a multiple-bid situation, the seller will often counter the best offers to see who’s willing to pay more. Don’t expect several rounds of these counters, however. This isn’t an auction, and you won’t have unlimited opportunities to raise your bid. The seller will typically snatch the most attractive counter to her counter. If you haven’t made your best showing, you’ll lose out to someone who did.

Make as “clean” a bid as possible. In a slow market, your bid might include all sorts of contingencies, such as requesting a long escrow, demanding that the seller make certain repairs or preserving your option to back out if your current home doesn’t sell.

In a hot market, those contingencies are likely to bump your bid out of contention. In the most frenzied markets, some buyers even forgo an inspection contingency -- the clause that says they can walk away from the deal if an inspection turns up serious problems.

Personally, I think it’s nuts not to have an inspection. But you may be desperate enough for a house to try it. If you do, check out a do-it-yourself inspection book from the library so you’re at least prepared to spot the obvious problems.

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.



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