Saturday, July 05, 2008

5 Reasons to BUY Real Estate NOW!

It’s time to start considering a re-entry into the real estate market. After all, simple supply and demand dictates it is a buyer’s — and investor’s — market.

Many savvy real estate investors have made excellent returns by moving against the trend with careful market timing. The thought process is simple: When everybody is buying, it’s time to sell. And, when everyone is selling, it’s time to consider buying.

Here are five market conditions that have investors thinking today just might be the perfect time to buy real estate.

No. 1 – Low prices

Prices are down in most real estate markets across the country. In fact, the national median existing home price for all housing types was down 7.7 percent from a year ago, to $200,700 in March from $217,400 during the same month last year, according to the National Association of Realtors® (NAR). In many markets, the drop is even more substantial, especially when you compare with 2006 prices.

Greed is one of the biggest culprits keeping buyers on the sidelines. They are hesitant to buy now because prices may continue to drop. No one wants to buy a $210,000 home and see its value drop to $190,000 in six to 12 months.

Though this is a valid concern, it can be minimized with careful research of a specific market. You can further ensure your investment will hold value by making an offer that is 10 percent to 15 percent below the current market value.

The days of bidding wars and escalation clauses are gone. Homes are no longer selling for more than market value, and sellers are lucky to get the list price. Now is the time to invest in a real bargain.

No. 2 – Great selection

The housing inventory is on the rise, meaning there are more homes available for sale. According to NAR, it will take more than nine months to sell the national inventory of homes at the current sales pace. In some markets, such as South Florida, there is more than a 16-month supply of homes.

In addition to lower prices, this large inventory means a greater selection for buyers. As an investor, you can look for a home with the features, amenities, and favorable location you desire. By getting in the market now, you can afford to be particular and take your time finding exactly what you want.

No. 3 – Motivated sellers

When faced with the possibility that their house could sit on the market for a year or more, sellers become motivated to work with prospective buyers. Not to mention the fact that the already sodden market is being further deluged with an increase in foreclosures, short sales, and bank-owned properties, providing sellers even more motivation to be flexible so they can sell their properties.

Seller motivation extends far beyond accepting a lower offer. Sellers today will consider owner financing, where the buyer makes payments to the seller over time for all or a portion of the purchase price. Sellers are also more likely to agree to repairs or improvements requested by a buyer or recommended by a property inspector.

No longer in the driver’s seat, sellers are now agreeable to covering a portion of closing costs, buying down the rate, accepting a trade for the down payment, or throwing in new appliances and even furniture in the sale. In short, sellers will now negotiate.

No. 4 – Favorable interest rates

Interest rates are down, making housing more affordable. With the national average rate for a 30-year conventional fixed-rate mortgage at around 6 percent, a buyer can save thousands over time. For example, a $200,000 loan amortized over 30 years at 5.9 percent interest will carry a monthly principal and interest payment of $1,186.27.

Let’s say you’re waiting for the price to drop, however, and you buy the property for $190,000. Sure, you’ve saved $10,000 initially, but in the meantime the interest rate climbs to 7 percent, and your monthly payment increases to $1,264.07. By missing out on the lower interest rate today, you pay an extra $28,008 over the 30-year life of the loan.

In case it bears repeating, now is the time to obtain a fixed-rate amortized loan. There is no reason to take on the risk of an adjustable rate mortgage when interest rates are at historical lows. Also keep in mind that lenders are going back to more traditional underwriting requirements in light of increased delinquencies. This means tougher restrictions on the amount of the down payment, proof of income, and credit scores will make obtaining a loan more difficult. Federal Housing Administration (FHA) loans, seller financing, and lease options are on the increase as alternative financing options to conventional loans.

No. 5 – Rental opportunities

As overblown real estate prices begin to deflate, investors will find they can begin collecting rents that cover all their monthly expenses. It was difficult to find and purchase a rental property that would cash flow at the previously over-inflated prices, but today’s bargains can make a cash-flowing rental realistic once again.

Further, tenant demand for rental properties is on the rise. And with foreclosure filings up 57 percent and bank repossessions up 129 percent over last year, according to RealtyTrac, the rental demand is likely to increase further as people who have lost their homes to foreclosure look for alternative places to live.

And most people who find themselves in this situation will be forced to rent for five to seven years before they can qualify for bank financing to purchase their own home again.

Making the decision

Although there are compelling reasons to consider buying real estate now, it is always important to weigh the pros against the cons.

To help alleviate indecision, follow these rules:

1. Look at values in the local area to see if they’ve stabilized or if they still appear to be in a downward spiral. Only buy in stable areas.

2. If you’re buying a personal home, be sure to plan on living in the house for at least the next three to five years.

3. When buying real estate as an investment, be certain the property cash flows, with rental income exceeding expenses such as the mortgage, taxes, insurance, and other costs.

4. Finally, analyze your economic stability and only buy what you can comfortably afford. Keep at least three months of living expenses in reserve in preparation for that fabled rainy day.

With a little common sense and thorough homework, you’ll likely find that now is a great time to consider buying real estate. Markets are cyclical, and the current combination of low prices, high inventory, low rates, motivated sellers, and increasing rental demand make it a buyer’s market for bargain shoppers.

Source: Growing Wealth

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