Helping a first timer with negotiation

I second Rona's comments, esp. regarding the inspection and mortgage contingencies. Re the inspection - even if you are planning to gut the property, you need to know if there are any issues, i.e. major termite damage, etc. Re: the mortgage contingency, you should not waive this protection unless you can buy the place for cash. While you may be confident in your ability to qualify, the mortgage contingency will protect you (and your deposit) against the myriad issues which could arise and impact the bank's willingness to approve your loan such as a conservative appraisal, encroachments, etc.

I'd like to know, what's the equivalent rent for a similar place in the same or a similar town? A place with outdoor space for the kids, equal beds and baths, and so on. If someone is paying a premium over that, they better know exactly why. And their reason shouldn't be just a passel of fact-challenged cliches, like "renting is just throwing money away!"

All good advice so I'll address the one item that wasn't: You (prospective buyer) make note of what the seller paid for the property in 2000. Perhaps I'm misreading the reason you mentioned it but I would guess it's because you estimated that your lower offer still leaves the seller with a profit. I'd suggest to you that you consider the fact the seller refinanced this property sometime in the last 8 years and took money out of it. Not your problem of course but definitely changes the tone of your offer. Best of luck.

I'm not as sold on the value of inspections, but they aren't a bad idea for the average person as a blanket statement. They provide a lot less than most people think if you read the standard caveats - that might make interesting reading for some.

Also, home inspectors effectively derive their income from real estate agents - a reputation for trashing deals will count against them for future recommendations. I'd hire a home inspector my real estate agent didn't know. Actually, I'd never hire an inspector for a property I was interested in even if I was going to have it inspected - for a thorough inspection I'd have each system checked by a specialist in that system.

Advice for the buyer? Wait. Prices are dropping, why rush to buy? If you want, lowball, and see if the seller goes for it. TIme is on the buyers side, not the sellers

Town is very important in this market to get to know the right price for the house.
Rona, do you know the town name?

Aside from the typical affordability benchmarks:
- 3 times household income
- mortgage is no more than 28% of gross monthly income
- emergency fund available for 6 months of being laid off

Aside from typical market benchmarks:
- 15 times the yearly cost to rent a comperable place (just learned about this week)
- cheaper than anything recently sold or on the market at that price point
- nothing that dramatically better at the next higher price point
- nothing that dramatically better in surrounding communities

Aside from economic benchmarks:
- interest rate and house price trends (make an assumption about how far you think prices will drop and what the prevailing mortgage rate will be and let that be your offering price ceiling)

After all of that if things are in play, a buyer that could do a quick close has to understand the amount of leverage that brings. If a home in that price point is moving within 4 to 6 months, you could just calculate 5 months times what it might cost to carry two mortgages. I know it isn't that simple, but it is something. Like an investment there are risk factors, and if you do not have to sell anything that reduces substantial risk. The only way to know how low is to offer real low.

The flip side is that if you don't have 10 percent down and have good credit, there is more risk that you don't get a mortgage, so having a qualified buyer is becoming more of a risk. If you have a preapproval letter for an amount $100k above the amount you're offering, that might help eliminate some doubt about being a "good buyer".

Rona points out some great considerations to take into account, with regards to the seller's motivation. However, there is no way anyone here can give you a blanket % off to offer for this house.

What if the house is fairly priced as it is?

I know it may sound crazy -- :) but sellers do *sometimes* price the house fairly. Especially like in our case, where the house we bought sat on the market at a very overpriced figure, then went off and came back on right where we felt it was valued. It probably doesn't happen often, but it happens.

Have the sellers in your case done a lot of upgrades or performed expensive maintenance that you might have to factor in when purchasing a different home?

Marcus, I'm a renter, and I'll tell you that rents are not comparable to mortgage payments in the Boston area. I rent an Arlington apartment for $1500/mo that would sell for well over $300,000 if it were condoed. The mortgage payment, tax, and insurance on that apartment greatly exceeds what I can rent it for. Perhaps outside 495 that argument makes more sense. (That said, I think paying $300K for an *apartment* is ludicrous.)

Renter, that's typical for Boston-area aptmts, but it doesn't mean it's right, it just means that what people have been expecting these places to sell for ("would sell for well over $300,000 if it were condoed) was too high.

My Boston-area aptmt was for sale as a condo at around $325,000, but we rent it for $1500. That means a price/rent of 18, which means it was overpriced, and it did not sell. It should be worth $275,000 at most, and I bet the same is true of your place too.

Plus, I agree with you - a condo has to be pretty darn special to lure me into buying, because it's just buying an apartment, or half-a-house, so if it costs more than half of what I see the whole house should be worth when I look at it, no thanks.

I'm still not seeing renting as a good alternative for families with children, if they are considering buying and are unsure of which way to go. Houses or apartments large enough are $2200 and up. The homes available in the lower part of the range are not that nice, at all. I have seen them.

Who would want to pay that amount to live in basically a dump while paying someone else's mortgage for that dump, if they are qualified to buy?

Sally-- who cares if you are paying someone else's mortgage-- the question is whether the cost to rent a property is less than the cost to own the same property. If this is true, then any rational person would choose to rent.

Eco 101

The point is that there are not very many decent rentals out there for families in both price and condition. It doesn't make any sense to rent if you are qualified to buy. Rents for a nice space in a town with good schools and with enough room for everyone are very high. You might as well buy for that money.

I agree with Sally(#12). Properties for rent are not the same as properties for sale. We are buying a smallish single-family in Newton(in perfect location and in a nice condition). I looked up rentals... There is nothing similar, just NOTHING. Houses in nice locations (convinient to public transportation, schools, "fancier" parts of the town) and in a good condition are 1) rare, 2)going at a rent higher than our future mortgage payments.
Can we rent something cheaper than the mortgage? Sure, no questions, even of the same size, but only a condo in 2/3 family. There are tons of condos for rent, but not as many SFH. I do think that condos in Newton are overpriced, but I have difficulties of saying the same about single family houses.

To Sally (#12)

Rents for a nice space in a town with good schools and with enough room for everyone are very high?! Are you kidding?

Can you buy a 1500 sf 3+ BR house in Lexington (with monthly payment + tax + maintenances total ) for less than $2000? Even a apartment in a mutil-family costs much more than that (more than double).

OK, Sally, line-by-line:

"I'm still not seeing renting as a good alternative for families with children, if they are considering buying and are unsure of which way to go." I see - if one is unsure of whether to make the biggest financial decision of one's life, just go for it & jump in!

"Houses or apartments large enough are $2200 and up. The homes available in the lower part of the range are not that nice, at all. I have seen them." Yes, because they are overpriced. You do not have to spend $2000+ to rent what amounts to a nice condo. A whole house in a premier town? Maybe, but guess what - I couldn't afford to rent or buy that anyway.

"Who would want to pay that amount to live in basically a dump while paying someone else's mortgage for that dump, if they are qualified to buy?" My place is not a dump; it's quite nice, spacious, clean, and pleasant, with all necessary amenities. If it were not for the loud people upstairs, it would be just like living in a house we owned. That's the only reason I have right now to buy, since though I am qualified, I am glad I didn't stretch to buy something a few years ago and become upside-down in that mortgage.

If you want more renters (particularly first-timers) to start buying, stop pricing shabby, smallish, utterly ordinary starter homes at $350,000+ instead of what is affordable based on sound historical ratio to median income.

I don't find Sally's comment to make much financial sense. "Losing" 24k by renting is far better than losing 40k by owning - A 5% drop on a 700k house, which is less than the realtors association is projecting for this year. And the realtor projections have a well established reputation for being optimistic.

jchristian,
I don't sell homes, I work with buyers. So your point of pricing homes has no bearing on this discussion.
You prove my point exactly when you say: "If it were not for the loud people upstairs". Families with children do not want that nor do they look to rent or buy a condo. They would prefer a single family house. You clearly want something different from a home than a family with children does.
And, yes, they want what you are calling "premier" towns, those with good schools, because ...they have children!
I'm in this search everyday and know my market well.

An important point in this "should families rent or own?" discussion, is that renting can be unstable. If you can afford to buy, even in the current market, and you have a family, owning a home is a lot more stable than renting. The rental inventory for family homes is poor both in numbers and quality. And the rents get raised every year, believe it. Plus you can never be sure when:
a.) the owner will sell or
b.)want to rent out the house to a relative.

Families thinking about buying right now don't want to have wait 3 years to have stability. That's a long time in a child's life. It's a completely different set of priorities.

well Sally, single family home sales are down massively year over year and yet we do not see legions of families with children out in the street, so it seems many people have found a better alternative in renting. undoubtedly, there is more inventory of single family homes for sale than rent, but where is the value? Most of these homes are wildly overpriced, otherwise all of these families with children would be making the choice you believe is so obvious.

Rents are nowhere near the cost to purchase, and everyone in this discussion knows it. Comparable rentals can be found by talking to agents, not by "looking things up;" there is, sadly, no online service like MLS for rentals.

Reciting outdated talking points from an old NAR ad ("paying someone else's mortgage") is not gaining much traction, I'm afraid.

Sally, of course you sell homes. You earn a commission only when you complete a transaction.

You prove my point exactly when you say: "If it were not for the loud people upstairs". Families with children do not want that nor do they look to rent or buy a condo.

Condos are just as loud as apartments, except you can't move away as easily. And of course families live in condos. And apartments. Good lord.

An important point in this "should families rent or own?" discussion, is that renting can be unstable.

I've lived in this apartment for three years. Last time I rented, I had the same apartment for eight. Landlords do not, despite what you may believe, regularly evict tenants just for fun and amusement. Nor do rents get raised every year; no one familiar with the Boston real estate market over the past eight years would make such a claim!

Certainly the exploding numbers of foreclosed homeowners are learning just how unstable owning can be.

Sally-
I'd like to know if you were telling people that now is a good time to buy instead of rent back in the bubble when everyone was saying that values were going up up up.
Buy buy buy!

We're renting until we can find a place that's not a dump to buy [in a town with an excellent school system]. I'd rather rent a dump that's not mine than own a dump that I'm stuck with and underwater because prices are still out of whack.

I wonder if any posters in this thread actually have children and have the slightest inkling what I am talking about here.

Every place I have ever personally rented for my own residence has had regular yearly increases.

I currently have 3 families I am working with to buy homes and they all want houses not condos or a rental. I am writing from my own real experience. Are you?

I think what sally's saying, and what everyone seems to be missing - is that if a family can afford to buy and wants to, then it's most often better than renting.

What is so hard to understand about that?

What is there to contend?

Actually, I am married with a child and I rent a 3BR single family home in a very nice area. The cost per month to me is $2450. I signed a two year lease a little over a year ago. I could have signed a 3 year less for $2400 per month, but I didn't want to be locked in case I decided I would like to buy. I have talked to my landlord about renewing my lease next year for another year or two at a similar rate and he is in favor of this. Given that the average owner stays in a home less than 7 years, I don't see my situation as being so transient, relatively speaking.

Also, I think this house was a pretty good deal, but it was not the only one like it I saw at the time (plenty of people who were unsuccessful sellers were offering to rent their places as well, many for multi-year leases).

By way of reference, a similar house across the street from me was for sale at the time I signed my lease for $775,000. It went through several price cuts over a ten month period (all the way down to $650,000) and is now being rented as well.

If I had bought that house at the time (which I could have done), assuming I put down 20% ($155,000, or 63 months of my current rent!) and a 30 yr, 6.5% mortgage, I would have paid over $3700 a month on the mortgage, which even after the mortgage interest deduction would have been $400 more per month than my rent. Add on $1000 per month in property taxes, plus insurance and maintenance costs and it was an absolute no brainer to rent. By the way, lawn maintenance is included in the rent as well.

I am continually amazed at the stunning inability to grasp the simplest, most basic principles of economics revealed in some of these discussions.

The purchase/rent ratio started rising in 1997 and skyrocketed in 2000-2005. In other words, only in that period people did people start to pay an extraordinary premium for homeownership, far above historical norms.

Why? What changed?

Did apartment neighbors suddenly become noisier? Children abruptly more athletic and demanding of larger yards?

Of course not.

So what happened?

Rental rates measure overall demand for housing, meaning both the number of households who want apartments, as well as the amount of money they can afford to spend on it. Rents are tied to incomes, because you can't get a mortgage to finance your rent. You have to pay for it out of your paycheck.

So, when unemployment rose and incomes fell in Boston after the dot-bomb bust, rents fell, too. They have stayed more or less flat since. Which makes sense, because incomes have also stayed flat.

But purchase prices exploded. Because, as we all now know, people were buying a housing lottery ticket with money they didn't really qualify to borrow.

All this nonsense about why families supposedly "prefer" houses is irrelevant. The question is why they suddenly started paying so much more for them.

My family clients are looking at homes in the $400,000-$480,000 range not in the $700's.

A 3 bedroom house currently on the market in a town with good schools is listed in the $420's. Total monthly payments including insurance come to around $2400 less than the $2700+ per month rent I'm seeing on the market.

And I question that there are "plenty" of SFHs on the market for rent. I'm not seeing them. There are a few here and there and they have high rents . They are often furnished which is a problem for most of my clients.

Sally, amazingly, I have a baby. That's why I was honest enough to bring up my one issue with renting as we do: the neighbor-noise. So, yes, I have the slightest inkling what you're talking about.

However, the fact remains that if I had bought a house 2 years ago rather than renting my current apartment, I would have lost money for my family. Instead, we have a nice place, can survey the dropping market, still have savings, my wife can take time off from work, and we can (hopefully) wait until starter homes are more appropriately priced.

I also don't want a condo (it's basically what I'm living in now, though with less risk), I want a home - I'm just not willing to pay what has long been an inflated price for it.

J Christian,
If you bought earlier in the market cycle, you would have made money for your family. However, home ownership has intangibles that many on this blog like to ignore and many on this blog feel are important. We are not going to agree on this.Everyone agrees that renting tends to be cheaper right now, with few exceptions. The size of the difference is another discusion we will not agree on.

People are going to buy on their personal schedule, not only based on market conditions. For people who see owning as what they want to do, I am here to help them stay out of avoidable trouble. So are Sally, and others.

Sally is saying she doesn't understand why anybody would rent when they could own. My above explanation is why. Between the lesser monthly carrying cost of renting and the avoidance of the big decline of value of the house I could have bought at peak price, I have saved over $150,000 just in the short time I have rented my current place. I understand there are certain intangibles associated with owning, but I seriously question the judgment and motivation of anyone who would counsel someone that these intangibles outweigh such a significant loss. For those who are not keeping up with current events, we are in the midst of the worst real estate market in at least a century. Any objective observer will tell you that houses are still very overpriced. And since the credit crisis we are in the midst of is global, your particular state, town, neighborhood, street, building, etc. is not immune.

Why would I rent instead of owning? Because I make a lot more money that way. And yes, I can easily afford to own, where ever I care too. The sour grapes theory is an amusing one, but clearly in-accurate.

Some people of course do not want to make sensible financial decisions. That's why we have a housing mess.

For the rest, though I have the urge to rant, I don't think I can do better than recommend people re-read Marcus and Economics 101 above.

Considering our distant ancestors raised their children in caves, and our not so distant ancestors raised theirs in log cabins, I rather think our children can survive in an apartment. Mere 100 years ago that was the Boston standard... And from personal experience, living in a rental house as a kid did not precisely stunt my, nor my brother's achievement.

Granted I understand - I've kept my brother and sister and their family from buying a house for the last 3 years, and it requires a hefty dose of convincing every 6 months. Granted its been easier of late when they look at their bank accounts and the housing price reports.