Buying a Home in Today's Market: Contrary to Popular Opinion

I have never been a subscriber to the belief that "those who can, do....while those who can't, teach."

In college, I had a business school professor, Mr. Everett, who had made millions in the "real" world. He retired early and then decided he was passionate about teaching young minds.

I was fortunate to take one of his classes. Mr. Everett was a profound believer in contrarian investment strategies and he said that's how he made his millions.

Contrarian investors believe in investing in stocks or other investments when the general popular opinion, in the contrarian's eyes, appears to be wrong.

The contrarian investor believes that when the crowd leads the way it can make investments priced incorrectly.

In other words, if everyone is buying something, it drives the price up to levels that it shouldn't really be at to meet demand. If no one is buying it, the crowd can hurt the price of something that should have real value.

The contrarian believes, as most other investors do as well, incorrect prices mean opportunity for investors.

When the crowd is very optimistic, and the masses concur, this usually inflates prices unjustifiably beyond where they should be. Like the real estate market of 2003-2005.

On the contrary, when the crowd is very pessimistic about something, and they stay away in droves, they can drive the stock price so low that they overstate the risk of the possibility for returning to profits. Possibly the real estate market of today?

The contrarian investor is an opportunist looking to buy or sell investments when the majority of investors appear to be doing the opposite.

They look to do this at the point where that investment is priced incorrectly.

I mention this example because I was recently talking to a real estate agent who enjoys my industry newsletters and we often discuss them. We were discussing my last one and he asked, "What are you writing about next?"

Always looking for ideas, I said, "What do you suggest? What's topical?"

"How about ways to help my sellers get rid of these houses that they have been sitting on for six months?"

"Great idea," I said. "I will write about the reason to buy!" It's not quite what he had in mind.

But the more I thought about it, the more teachings of Mr. Everett crossed my mind.

Do sellers really need help selling in today's market? I don't think so. They have experienced agents. They know when they are priced too high. They know when their home needs fresh paint or a better smell. They know when their house is too cluttered.

They likely know all this yet their home sits without an offer for months.

The larger problem is that the crowd, the masses, the buyers, are convinced today is not the time to buy a house.    This belief, as a well as the tightening of credit,  has deflated the market.

Its time for the contrarians to step in and make their money.

Now, I must confess, although I loved Mr. Everett's class and really believed in his teachings, I have never been a contrarian investor and that's probably one of the reasons I have not had his success.

I usually invest with the crowd. Except when I make a small weekend sports bet, but that's a different blog for a different crowd.

Until recently, I have never really had the stomach for contrarian investments. Contrarian investments take certain courage and strength and an ability to face fear. You have to have the ability to look at an investment and disagree with the opinion of the crowds. I have usually followed the crowds.

"You gain strength, courage, and confidence by every experience in which you really stop to look fear in the face. You must do the thing which you think you cannot do." ELEANOR ROOSEVELT

However, I truly believe that today's market is an opportunity. I have one of my close friends to thank for that.

I am doing a loan for my friend. He is one of the top real estate consultants in the country. And he is a renter. He sold his home in 2004, made a bundle, and decided to rent. Until last month.

He has made 12 offers in the last month to banks with foreclosed properties. Each of the offers was for 20% below list price and included a two-week closing. Not appraised value, but the list price.

Eleven of the banks didn't even counter. Number 12 accepted.

The appraisal came in this week and it seems my friend will have $110,000 of built-in equity next week when we close.

Now he and his wife have chosen to live in the home but this would have been an amazing opportunity for a first-time homebuyer or anyone else for that matter.

How about an investor who is down on the real estate market, and back making 3% in a money market account, because that's what the all of the current news and the rest of the masses have told him??

An investor who, in his wildest dreams, during the peak of the hottest real estate market in history, could never have imagined a $110,000 gain in that short a period of time.

If you are thinking about buying but want to "wait" until it goes down further, think again.   If you look hard enough, the opportunity exists today just as it will on that magic date you are looking for. 

Sellers, who want to upgrade "someday", beware and be realistic.  If you are waiting for prices to go lower before selling your home and buying a new one, you are simply waiting for your own home to go lower as well.

Act now! Take your profits and take advantage of the swollen inventory.  Grab your dream home for far less than it was a year ago.   Less than it was six months ago.

Let's say you bought your home in 2002 for $250,000 and today you think it's worth $350,000. Your neighbor sold theirs for $360,000 last year and yours is "so much nicer."

Now, let's say because of market conditions you have to lower your price all the way to $315,000.

It's painful to think about, I know. But follow me here.

You really can't look at this as if you have lost $35,000. You actually made $65,000.

What other investment did you make over the last five years that made you $65,000?

But, Aaron, what about all of those monthly payments I made? You have to forget about those when you are calculating your profits. You wrote off the interest deduction on your taxes and you would have paid nearly the same amount each month in that two-bedroom apartment you got out of back in 2002.

If you are truly that upset about the $35,000 you just gave away, take it off the offer you make on that brand-new, gated home you are about to upgrade to with the pool and bigger yard in the better neighborhood.

By the way, your old neighbor, the one that sold his home for $360,000? He bought in that same neighborhood last year for $50,000-100,000 more than you.

Any astute investor will tell you, trying to time real estate markets, or any other financial market, for that matter,  is usually a losing proposition.

Today, sellers are offering incredible incentives like no closing costs, free upgrades, free pools, no payments for a year.

I can find very few arguments why a buyer would not be out there house hunting today.

Keep in mind every $10,000 you save in a home by waiting for it to decline in price can mean about $50 or less per month in your mortgage payment.

Is that really enough incentive to hold out and possibly be wrong?

As a buyer, looking for a great deal, there would be a few things I would be interesting in knowing.

These five would be most important for me if I was bargain hunting:

1) HOW MUCH DID THE SELLER PAY FOR HIS HOUSE?

If he bought it recently at close to the number he is asking, he probably doesn't have much room to negotiate. Unless you are madly in love with this house, I would move on.

2) HOW LONG HAS THE HOUSE BEEN ON THE MARKET?

The longer it's been on the market, the better chance you have of a deal. It's not uncommon for homes today to have been on the market well over 90 days. Some up to a year and more.

3) HOW MANY TIMES HAS THE PRICE BEEN REDUCED SINCE ITS BEEN ON THE MARKET?

The more reductions, the more you know the seller is willing to negotiate.

4) WHAT ARE THE COMPARABLE HOUSES WORTH?

You need your real estate agent to get you a CMA (Comparative Market Analysis) on the property. This will help show you what the home is really worth today. Make sure it is up-to-date. You are looking for a bargain. The home may seem like a bargain by all other accounts but if the CMA doesn't say it is, trust the CMA.

5) MINOR DAMAGE IS NOT THAT BAD.

If you are not adverse to a little clean-up and investing a few dollars to make a lot of dollars, then you may want to consider looking for a home with a little damage. Damage means fewer interested buyers which can mean way bigger discounts.

Hopefully the seller's agent had some preliminary inspections done on the property and hopefully, for the bargain seeker, some of these are bad enough to make a lot of buyers walk.

Here are a few other tips:

MAKE SURE YOU HAVE THE RIGHT TO RENEGOTIATE AFTER THE HOME INSPECTION

In the last two months, in dealing with my clients who buy foreclosed properties from banks, I have seen many 11th hour discounts of $5,000-$20,000 as a result of damage found in the house that the seller doesn't want to repair.

MAKE SURE YOUR OFFER IS CONTIGENT ON APPRAISAL

When you are bargain hunting in a buyer's market, the last thing you want to do is end up buying a home that is worth less than you are paying.

ASK THE SELLER TO PAY ALL OF YOUR CLOSING COSTS

Closing costs can be up to 3% of the loan amount. Once again, if it's your dream home, the negotiations are far different. If you are looking for the huge discount, 3% is a big number to have to come out of your pocket.

ASK FOR "THE STUFF"

Normally furniture, appliances, TV's, washer and dryers, etc., don't come with the deal. You cannot include them in your loan, but they can be given to you for free, without additional compensation. Don't be afraid to ask. These items can be expensive for a new homeowner. If you like them, ask for them. In today's market, you will be surprised just how far the seller will go. I recently saw a seller give away a 60" Plasma. Not bad.

MAKE THEM MOVE QUICK

In my experience, the more time someone has to think, the greater the chance they will back out. They may talk to a friend or relative who can talk them out of it. When you make your low-ball offer, demand a quick response, even the same day, if you can get away with it. Make the close of escrow quick too. No more than four weeks.

DON'T BE AFRAID TO WALK AWAY

Investors and buyers of all kinds get emotionally involved in the process and their desire to close the deal can be blinding. If you are bargain-hunting and one thing doesn't smell right, you have to be willing to take your loss of time, and possibly a few dollars, and be strong enough to walk away. It could save you $10,000's later.

There is a ton of inventory and a lack of buyers. That makes it a buyer's market.

Recently we have seen even less buyers in many markets. This is a crowd scared off by current news and serious reservations about the economy of real estate and its future.

Those who don't simply follow the crowd and make wise investments, based on their own individual goals, can still reap the rewards that smart, fearless contrarians, with courage and strength, often do.

Contrary to popular opinion, I believe the opportunity is there.