Are Home Prices Headed Down?

 Signs are that home prices could be heading for a drop. Recent mortgage rate increases will almost certainly mean fewer homebuyers this fall. Then, owners who have been sitting on the fence will feel forced to sell sooner rather than later. More homes for sale coupled with fewer buyers will put further downward pressure on prices.

However, even when prices turn down, bargains rarely fall into a buyer's lap. Good deals start with the buyer, not in the market; and they are created rather than discovered. The key question is this: Are you clear about your task and what you need to do? Here are tips for getting the best deal when home prices are falling.

TIME: Begin your research early, at least four months before you aim to buy. Good decisions are based on knowledge, and are rarely made in urgency (time pressure) or anxiety. As a first step, write down your needs in a home and location ('must haves'), then your wishes ('would likes').

MORTGAGE: Clear the decks. Don't go into any market without pre-approval for the loan you will need, and be certain of your 'comfortable spending limit' and your 'maximum budget'.

HELP: Engage an exclusive buyer agent, at no expense to you. A homebuyer needs an advocate, a genuine ally, someone 'in the business'. Timeliness, professional expertise, and negotiation skills are critical.

THE NEIGHBORHOOD: All real estate is local; get the local 'buzz'. What has been happening in the area in the past two years (sales and price trends, changes, development)? Compare asking and selling prices (ask buyer broker or agent) and note the spread, and the trend, then factor in current market conditions and market outlook. In a falling market this 'price-demand direction' can be a big plus when it comes time to negotiate.

TAKE ACTION: Try to be the first, or among the first, to see homes. A smart buyer broker will often know of properties before they go up for sale. Then, when you find the right home, get in early with an offer. When home prices are falling sellers are more eager for an early deal.

THE HOME: Learn what you can about why the owner is selling. You'll already know what is happening in the area: shopping mall going in, crime on the rise, new airport, etc. Now find out what the owners paid for the home, how long they have owned it, what major repairs or alterations they made.

THE OFFER, Part One: The broker's opinion of value is usually reliable, but be sure the broker knows the area well and has researched the comparables (spontaneous guesses are not what you need). If you still doubt the value put on the home, hire a professional appraiser. Your initial offer will be based on an accurate valuation of the property, along with what you learned in your research.

When sales and prices are dropping, an offer of 15% below asking price might be a good start. If rejected, the offer can be sweetened. If the seller sends back a counter offer, increase your first figure by a small increment, and keep doing this until a deal is reached or you decide to walk away (2 - 4 offers and counter offers is common). Creeping up like this keeps the negotiation going and makes time your ally.

THE OFFER, Part Two: Make your offer as 'clean' as possible. No finance clause (which says you'll go through with the purchase only if you get the mortgage you need), no 'fix-up the kitchen' or 'leave the garden swing' or 'replace the water heater' clause, and no 'third party' clause. You can of course insert one or more of these conditions then agree to concede some or all as the negotiation proceeds. Then at the appropriate time agree to the seller's settlement date (this often swings the deal). Sellers too have future plans, so be flexible, even if you have to make adjustments to your own schedule; in dollars saved it is often worth it.

However, one clause should stay: Require a professional home inspection that 'is acceptable to the buyer'.

TACTICS: The following tactics are most appropriate when prices are falling. (See Not One Dollar More! for actual examples of the best ways to use these tactics):

Attractive Alternatives: Let it be known that one or two other homes also interest you, and that you would of course like to buy this home but it is not a 'must have'.

Comparative Value: Point out that the asking price doesn't gel with comparable local properties for sale or recently sold, and cite examples from your research to support this.

A Bird in the Hand: Your point here is that mortgage rates are rising, prices falling, sales are scarcer; and that your offer is firm, reliable, fair, clean, genuine, accommodating, immediate, guaranteed, but you will withdraw it and buy another home if seller isn't reasonable. Note here that you are not requiring that your offer be 'accepted'; your goal is to get the offer process started -- that's the key!

Placing a 24-hour time limit on your offer will prevent the seller from 'shopping around' your offer (using it to get a higher price from other buyers). If the seller does not respond with acceptance or a counter offer within the time limit, your offer auto- matically becomes null and void. This tactic is effective but requires a judgment call on your part as it can backfire; let the situation and personalities dictate your decision.

Joseph Eamon Cummins is an award-winning writer and a specialist in psychology and human learning. A former licensed real estate agent, he spent three years researching and writing the clear, lively text for Not One Dollar More!

The author's work is regularly featured in national magazines such as Money, Home, Business Week, Money World, and Kiplinger's, among others. He has appeared on CNBC, NBC, CBS, and other national TV and radio networks, and is on Money Magazine's 'Panel of Experts'.

A member of The Author's Guild in New York City and a former affiliate of American Psychological Assn., he has held faculty positions at a number of universities, and has produced acclaimed television documentaries.

Since it first appeared, Not One Dollar More! has been hailed as a classic, and has won for the author a score of superlative honors and reviews.

For more information about Not One Dollar More!, visit their Web site at http://www.notonedollar.com/.