bostonbubble.com

[homeless]

Hi,

My wife and I have been searching for houses for a year or two now. We've settled on bedford due to the schools and commute distance to cambridge (where I work now) and burlington/waltham (where I would likely work, other than boston/cambridge, over the next decade).

We've made initial offers on two homes, admittedly both were low by 7-12%. Neither of which were responded to with a counter offer. One seller even took their property off the market shortly after our offer which provided a decent reason for their reluctance to negotiate.

I need some advice. Question 1 - Whats the right number (% wise) on a house from 400-600k that gets the negotiation started? I should mention there is no mortgage contingency.

Out of principal I can't bid against myself now. I event justified our lower offers by listing items I expected to be flagged in inspection and indicating to the sellers in writing I would not attempt to negotiate on these issues as I have already factored it into the price.

Despite how much we love these homes, the financial stakes are too high to make a purchase on pure emotion. I don't understand the logic of leaving a buyer, with no mortgage contingency, at the bargining table without at least attempting to find out how much I would pay. It seems like bad business in a normal financial transaction, but naturally home buying / selling comes with more emotion involved and maybe they were just insulted that the offer was not what they wanted.

The second thing I'm wondering is: Is 1/2 million dollars for a split level or cape built in the 60's located in Bedford a bad investment? The town is decent now but the home prices are almost at lexington levels and I have so much trouble justifying a purchase like that. Does anyone have any opinions on the long term value, and appearant short term housing crunch, in Bedford?

Lexington to me has less risk with respect to airport expansion, millitary or Lincoln lab abandonment, and overall sellability. Do people agree?

[Former Arlingtonian]

Homeless,

You can't buy expecting your potential Home to appreciate.

The current Interest Rates are at levels not seem before - if interest rates rise and the economy doesn't take off you should expect the value of a home to state the same or drop from where you purchased it at.

You need to determine - if buying makes sense for your life?
Things to consider:
1. Do you save Money (or lower your cost of living through purchasing a home)?
2. What is the lost Investing/Savings Income from taking Cash out of Savings/Investments for a downpayment.
3. Do you have a 1-2 year Emergency Fund to pay your bills if you lose your job ( you may be lucky enough to be in a Super High demand career)?
4. Make a choice that your family can comfortably afford as long as you have lots of cash in case the unexpected happens.


I've seen lots of people get chewed up because they thought a 6 month emergency fund was enough - its not - at least not in my book.

Make offers that you think are reasonable for the property - if your offer insults the seller - the seller needs to get a thicker skin or find someone who is willing to over spend on a Home.

PS: My bias is to rent - in the future you might be paying higher interest rates - but, there will be less competition or I could be wrong.

[guest]

Homeless,
I am surprise to see asking price in Bedford. As per as I know you can buy a split entry built in 60's for half million in Lexington.
I agree Lex is better protected from all housing disasters and good schools compare to other surrounding towns.

[john p]

For a seller, the person you have to worry about the most is your own realtor.

They are supposed to work for the seller and get the highest price they can, but if they are getting 2.5 to 5% of say $500k and it takes them 6-8 months to sell it, they would actually be happier getting 2.5 to 5% at $450k and sell it in a few weeks.

Listing Agents will negotiate with sellers much, much more than the actual buyer does.

This is why negotiations don't get started on a low-ball. If a seller indicates to their listing agent that they are willing to settle at a lot lower price, the listing agent will never, ever push to get their asking. They will indicate to the buyers agent that their clients are motivated etc.

This is an interesting read.

http://www.boston.com/realestate/news/blogs/renow/2012/05/along_495_home.html?p1=Well_MostPop_Emailed2_HP

[CL]

@Homeless - I'm currently involved in both selling (in Newton) and buying (in Lexington) so here's my 2 cents.

1. Instead of incorporating likely inspection in the offer price, I think it may make sense to not incorporating it in offer price, get on the negotiation, then ask seller to fix/pay for repair. From a seller perspective, it's much easier to accept a higher offer then repair after the offer accepted, than to accept a low offer. Also get around the agency issue John P mentioned (once an offer accepted, the listing agent is on your side pressuring the seller to pay up for repair since they want the deal to go through).

2. I am personally biased since I am buying in Lexington, but I do think Lexington is better than Bedford from a risk perspective, mainly due to the school system. A lot of buyers are willing to pay for a top-notch school system and they typically are price inelastic.

Having that said, for 400-600K cape/split level in Lexington, you probably need to compete with local builders who do tear downs and McMansions, unless the lot is very small.

@Former Arlingtonian - I agree the interest rate are at level not seem before. That said, 1. I really don't know how it will play out (ie. whether it will rise or stay low aka Japan), 2. I still cannot see enough data to suggest a tight relationship between change in interest rate and home price. Affordability (ie. income to payment) seems to be tracking better. and 3. Personally, I don't think rate will rise if economy does not brighten significantly. When shxt hits the fans, people still rush to treasury (not because they like t-bill, but there is no real alternatives), thus depressing the rate.

I do think 1 year rainy day fund is minimum.

[admin]

[CL]

@admin - I agree affordability should not be defined as monthly payment as per your reason. My view is it should be a percentage of income.

Change in interest rate both have an impact on real estate but I suspect on different sides. Interest rate going down will affect both potential buyer (for the first mortgage) and existing homeowner (for refinancing), but interest rate going up will affect potential buyer only (for new mortgage, existing homeowner can still use the old low rate). Thus, when interest rate goes up, it will reduce buying power and demand, but it will also reduce selling supply given the opportunity cost for a new mortgage is higher. Thus I think the result is, all else equal. a reduction in both demand and supply, price range bound but transaction volume drop.

[Former Arlingtonian]

I recommend folks read Mark Hanson Mortgage Blog- I think he was a Mortgage Broker - for a long time, and say the madness of the 2002-2006 Real Estate run up and started a Financial Analysis service that does deep analysis of the Real Estate market.
Great write up on ....another bottom in Real Estate!
http://Mhanson.com/archives/856

If interest rates start to rise in the future, then inflation will be on the rise, the cost of carrying a home will be rising, this will be especially hard on retirees with fixed Income.

[JCK]

I agree with the above comments; don't incorporate your inspection matters into your original offer. I'd get the ball rolling and if there are any make-or-break issues on the inspection, back out.

7-12% below asking I don't think is going to get any bites for the reason John p points out.

One suggestion is this: If you're not working with a buyer's agent, put some pressure on the agent to reduce his or her commission. The sellers typically pay 4% if no buyer's agent or 5% if the buyer uses an agent, which then gets split in half between the two agents. Suggest the agent take a 3% commission, which will allow the seller to come down the extra percent. This might be worth doing at later point in negotiation, but keep it in mind, as the agent would rather get 3% of something vs. 4% of nothing.

I think you should be about 3-5% below asking, but it really depends on how asking price relates to the market.

With regard to your comment about out of principle not bidding against yourself, I wouldn't operate that way. You must have a bottom line price in mind that you're willing to payay (or at least you should), and you should be working towards getting that price or less, assuming you're a serious buyer.

Did you get no response, or did you submit an offer letter and hear nothing back? Did you follow up with the agent? I think asking the agent for feedback on your offer will net you a lot more useful information than posting your experience on the internet.

If you're just fishing with lowball offers (which is fine by the way), then don't expect a lot of bites.