When prospective buyers decide to make an offer for a home, they predominantly focus on the price they will offer, and often think about the other terms as something that will get worked out later.

In my local market, that has led to some very surprised rejections, even in this economy. Any offer that doesn’t come with a pre-approval letter from a reliable lender is not considered worthy. Having an offer that’s contingent on a property to sell is also a non-starter to most sellers. The closing date can also be a critical factor. That much is pretty well travelled ground. Is there more?

In the areas I focus, 454 homes closed since 9/1. Of those, we have data on 312 of them (come on guys, update the MLS), so we’ll just look at sales we have data for.

For homes under $300K, 48% were financed through conventional loans, 24% were financed through VHA loans, and 28% were paid cash (In our system cash means that the mortgage contingency was either waived or the home was purchased in cash). This means the buyers had the means to close without a mortgage, whether they used one or not, and made the purchase on that basis, making for a much stronger statement to a seller.

In this range, one quarter of the purchases fell into this category. If a buyer were using an FHA loan (with 3% down) and competing with another offer that was effectively a cash deal, we see that from a terms standpoint, the FHA offer would be blown out of the water, even if it was a little higher.

Between $500K-$600K, the number of deals classified as cash drop to 5%. FHA loans are 10% and conventional loans are 85%. Since the majority of buyers fell into the ‘conventional loan’ category, then other terms could become more important, such as the size of downpayment. We don’t have numbers to support that self evident truth, but we do know many agents discourage offers with lower down payments because they recognize the risk of having a home not appraise for the borrowed amount, which effectively kills the deal.

In the $900K-$1MM range, 24% were classified as cash. A full one quarter of them either waived their mortgage contingency or paid cash altogether. We saw a surprising amount of multiple offers and bidding rounds in this range and its fair to say that in this economy perfectly good buyers lost homes to stronger terms. We’re not privy to the prices each offer submitted, but we can guess that the cash deal was not necessarily the highest price.

Up to $300K terms could make a huge difference in determining if an offer was accepted. Between $500K-$600K perhaps not as much, between $900K-$1MM it could make the difference again between getting your offer accepted or not. Analyzing specific markets, towns, and price ranges can reveal very different things going on.Don’t generalize!

Make sure you understand the dynamics around the particular purchase you’re considering so that you can make an offer that will give you the strongest chance of moving into your new home!

We’ve seen our share of home negotiators beat up the other side over a few thousand dollars under the guise of getting the best deal. Is that a good practice for home buyers? Many prospective buyers get into a competitive position when negotiating with sellers and miss out on larger issues that have a bigger effect on the overall cost of their purchase.

When negotiating for a home, buyers should remember that it’s not a two party negotiation (buyers and sellers). It’s at least a three party negotiation (buyers, sellers, mortgage rate). Most buyers simply forget about the interest rate variations and focus on the seller’s concessions (price, inclusions, etc). Perhaps it’s the one on one nature of negotiating with ‘the other side’, which is easier to focus on than an anonymous corporation and an ever moving bank rate.

In my local market, the interest rates have wandered one quarter of one percent in the week. If buyers are not focused on these nominal rate movements and the timing of their rate lock, they are not considering a pricey component of their purchase. While 1/4% is not a particularly alarming swing, what does it mean?

Let’s compare a purchase where the buyers and sellers are $5,000 apart and spend a week splitting the difference, which delays attorney review and their rate lock. If we compare a $500,000 mortgage at 5%* to a $497,500 mortgage at 5.25%, we would find that a quarter percent increase $23,000 more expensive over the life of the loan, for a net loss of $20,000.

Should a buyer be fixated on that last concession? Are buyers cognizant of interest rate movements at the quarter of one percent level while in the heat of negotiations? How many buyers won or split the $5,000 battle but lost the $20,000 war and didn’t even realize it? Although interest rates are set to increase over time, that quarter of one percent could easily drop this week, go back up the following, etc.

Buyers should keep in mind all the elements that make up their total cost of ownership and not treat any negotiation as a personal two way contest. Buyers should also get their financing in place earlier in their home selection process so their lender can give them daily updates on rates. This will help them get a feel for the saw tooth nature (up and down) of interest rates and help them time better.

The numbers:

*30 year conventional.

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President Obama signed into law on Friday the extension of the first time home buyer’s tax credit, putting in our hands $24 billion of stimulus money. This is huge any way you slice it (and it can be sliced a couple of ways), but first the particulars:

First Time buyers can get up to a $8,000 tax credit if they buy a home before April 30, 2010. The salary limits have been raised from $75K / $150K (individuals / couples) to $150K / $225K. That alone qualifies many buyers that were not eligible before.Existing home owners who have lived in their home for five years are also now eligible for up to a $6,500 tax credit. That, too is a significant change. Only homes under $800K are eligible.

What does this mean? Let’s look at a $500K house (which in my market is a first time buyer). $8,000 can certainly help with closing costs, or improvements. Those are good things.

If we do some math however, we see that $8,000 is just over 1.5%. If I were to borrow an extra $8,000 for 30 years at 5%, I would be paying $43 more a month. I’m not looking at $43 a month gift in the mouth. I’ll take it, but I’m not buying a house I wouldn’t have otherwise because of it.

Is the value more psychological? If it is, I don’t discount its impact, I just put it in a different category. Those of us that have been frustrated at expensive deals falling apart over much much less than $8,000, know how much can ride on stubborn positions and clients that just have to beat the other guy.

Move up buyers can benefit as well (to to $6,500), but they are already in great shape. They are presumably buying a home that has depreciated more than theirs has, and are getting an interest rate that’s likely lower than they already have. Let’s assume our trade up buyer is buying a $700,000 home, the tax credit for him or her is less than 1%. Again, not nothing, but is anyone in their right mind walking away from their dream home for less than one percent when they are already getting a great relative value with amazingly low interest rates?

The 800 pound gorilla in the room are move down sellers; either empty nesters or people simply wanting or needing less. If they bought at the height of the market, their home will need some time to appreciate there again. Clearly if they don’t have to sell, that might be their best option, but I would have liked to see some relief for those folk, too. They may not be able to claim capital losses (depends on their particular situation) and they have the homes that trade up buyers want. If they bought seven years ago, they’re golden (even with the downturn), but if they bought more recently...

I don’t want to be a wet blanket on the extension, and I don’t agree with the naysayers that it won’t have a positive impact. It’s going to provide for a very interesting spring market for many buyers and sellers. That said, I disagree with all those 'free government money' claims. It's not free if our tax dollars have to cover it or we dump the debt on our kids.

It’s important to keep this in perspective though so that people make the best choices for their particular situation taking all the factors into account with the appropriate importance. I put the tax credit as a solid C plus in importance behind home price, taxes, INTEREST RATE, and the single most important thing: Is this your dream home and is this the right time for you?

Agents out there, you know where to send your hate mail.

You’ll be reading about this all day!!!

Yesterday (November 4, 2009) the Senate officially passed a six month extension on the first time home buyer tax credit of $8,000, which is intended to encourage more people to buy homes and spur economic activity. The bill has expanded to include ‘trade up’ buyers (present home owners that have lived in their home for at least five years can get up to $6,500).

The bill will now move into the House, and then to President Obama’s desk for his signature, at which point it becomes law.

If you have any doubt that this is huge, don’t! This is huge. Read some of my other posts on the need for every tax deduction we can get. We’re going to need it!

There is an $800,000 maximum for the purchase price of the home, and the income caps which has been raised to $125,000 ($225,000 for a couple).

If you are so inclined, you can find the bill here.