5 KEYS TO FINDING HOUSING BARGAINS
By Marilyn Lewis courtesy of MSN Money

It's increasingly obvious that real estate isn't a science, but that doesn't mean research can't turn up reliable indicators that a house is at a discount price.

Buying real estate right now isn't for sissies. Financing is a struggle, prices will almost surely keep dropping, and who knows what will happen to your job.

But if you have the money and can hang on to a home for five years or more, there's a huge inventory of properties priced at levels not seen since 2004.

"You could argue that everything is on sale today," says Amy Bohutinsky, a spokeswoman for Zillow.com, which offers online listings, research and home-value estimates.

The question for anyone brave enough to buy is: Can you ever really be confident you're getting a bargain?

Analysts at Redfin, an online discount brokerage, think so. Crunching data from sales of 9,053 single-family houses in Los Angeles County; Fairfax County, Va.; and King County, Wash., between April 15 and June 15, Redfin found most homes fetched within 3% of asking prices.

But a good many sold for more than 10% below asking prices. Studying these sales, Redfin came up with a formula. The recipe includes some tactics that savvy buyers use instinctively and others that run counter to prevailing wisdom.

Of course, not everybody agrees that homes selling well below list price can be considered discounted. Maybe they were just overpriced, says Barry Nystedt, the president of the National Association of Exclusive Buyer Agents.

"Home buying is not an exact science," Nystedt points out. "Discount," he says, "implies savings from actual value, as opposed to a price reduction from an unrealistic asking price."

Patient as a spider with a fly

Jeannine Daggett couldn't sleep one night in mid-September, so she got up and surfed Internet real-estate listings for waterfront homes, a longtime dream.

By the time her husband, Dave, woke up, she'd compiled a list of addresses not far from their Seattle home. A week later, the Daggetts persuaded the seller of a two-bedroom, two-bath house on a double lot with 210 feet of lakefront to drop the price from $595,000 to $540,000 -- a 9% discount. Other discounts -- $5,500 off at closing for electrical work and an $11,000 rebate on the agent's fee from their online broker, Redfin -- saved them $71,500 in all, effectively a 12% price reduction.

Their new home's value may drop still further; after all, it was originally listed at $675,000. But the Daggetts plan to stay "probably for the rest of our lives," so they took the plunge.
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The trick to spotting vulnerable listings is research. While Sherine Wright was stuck at home last spring with a toddler and a risky, late-term pregnancy, she conducted her family's home purchase almost entirely online. She'd been researching the market in Loudon County, Va., intently since January 2007. "I knew that the longer I waited, the more I would get for my money," she says. Her budget was $1.15 million.

On Redfin, she subscribed to e-mail notifications of changes in listings, comparable sales, square-footage prices, open houses and neighborhood sales trends. Other real-estate sites good for intensive research include MSN Real Estate, Propsmart, Terabitz, Retrove and Trulia. Patient as a spider with a fly, Wright watched as price reductions pushed previously inaccessible listings into her price range.

Finally, in September, she and her husband, Martin, a tech-company chief information officer, offered $1.1 million for a 9,500-square-foot, 5-year-old, four-level home on 3 landscaped acres in a golf-course community. She had watched the house since its market debut at $1.6 million. It has six bedrooms, six and a half baths and many luxuries, including a second kitchen, high-end appliances, hardwood and marble flooring, and a home theater with $40,000 worth of equipment. The sellers made no attempt to negotiate -- although, as Wright knew from her research, they'd purchased the house in 2003 for $1.2 million.

Here are Redfin's five tips for getting a sweet deal:

#1. Find Listings On The Market For 90 Days Or More

The Daggetts' lakefront house had been for sale for 357 days. "We thought since it's been on the market for a while and since it's an estate sale, maybe they're kind of anxious to sell it," Dave Daggett says. (Estate sales, with empty houses and heirs eager to sell, are an excellent target for bargain hunters.)

Smart buyers have long known that if a home doesn't sell in three months, the listing becomes stale. Redfin says the more deeply discounted homes were 83% more likely to have been listed 90 days or more.

Interestingly, the discounts didn't increase after 90 days, so it's not crucial to wait longer to make a bid.

#2. Bid Low On A Fixer-Upper

Dave Daggett's eyes lit up when he first saw his lakefront house. The yard was overgrown, plasterboard was missing in places, unfinished wiring dangled here and there, and the roof was mossy. It was ripe for a discount.

Redfin found that bargain sales were 73% more likely to have used "fixer-upper" or similar terms in listings and ads: "People who sell homes before fixing them up are usually more concerned about an easy sale than the best price." That jibes with a 2003 study by the National Association of Realtors, which found that, on average, fixer-uppers sell for 24% less than other homes. Fixers are increasingly common as sellers grow discouraged and foreclosures increase, Redfin CEO Glenn Kelman says.

Caution: Nystedt, the buyers' agent, warns that "fixer-upper" and similar terms can be misleading. These properties are likely to need more work than the average homebuyer can handle, he says, making them not a bargain, even if they do include significant price reductions.

#3. Bid Aggressively On A Discounted Property

Many discounted homes have sustained not just one or two but several price reductions.

"Heavily discounted homes are 28% more likely to have already been price-reduced," the Redfin study says, adding that with 56% of the biggest bargains, prices had been dropped at least twice before buyers made a bid.

"Once a seller lowers his asking price, he sends a signal to buyers that he is willing to accept further discounts in negotiations," Redfin speculates.

"Probably the area where we've seen the biggest change is in negotiating with builders," Kelman says. "If they can't liquidate and pay creditors, they're in a crunch."

In order to keep his official prices up, a builder may make expensive concessions by throwing in luxury amenities or reducing a buyer's mortgage terms or down payment.

#4. Look For Desperate Flippers

Redfin found a small (9%) chance that homes purchased within five years would be discounted by more than 10% from the listing price. It could be that some people who are desperate to exit an unmanageable loan are willing to take a bit of a bath.

#5. Skip Remodeled Properties

"We had assumed that remodels are overpriced," Kelman says, "but in fact the remodelers are still able to command top dollar."

Redfin found that houses with the biggest discounts were 20% less likely to have been remodeled. Even though sellers probably can't recoup the entire expense of a remodel when they sell, "these sellers were able to command a higher price," the report says. "You see fairly healthy demand for high-quality properties," especially in a popular price range, Kelman says. "If properties have anything wrong with them, the price just falls through the floor."

Nystedt, the exclusive buyers' agent, disagrees about what is meant by "bargain." "Many remodels could be a good value because many sellers have overimproved a property in ways that will not yield a return in actual market-value dollars," he says.

If you want to avoid homes with expensive improvements, stay away from ads and listings with terms such as "renovated," "all-new," "upgraded," "addition," "remodel," "renovated," "redone" and "updated." But since remodeled homes were only 20% less likely to be bargains, maybe the lesson is not to invest too much energy into trying to drive a bargain on one of them.

Don't expect much bargaining from banks

Banks don't negotiate as freely as you might imagine when selling foreclosed homes. They also keep a tight rein on prices in short sales, when a seller owes more on the mortgage than the house is selling for.

Don't expect much price flexibility here, Redfin points out. (Banks also tend to move very slowly in such sales.) Redfin found that 9% of the bargains it studied were short sales or houses owned by banks.

One more crucial tip

An expensive mortgage can easily wipe out any savings you achieve in price negotiations, so research scrupulously here, too, Zillow's Bohutinsky advises.

For example, a $530,868, 30-year fixed-rate loan at 5.76% requires a monthly payment of $3,101. At 5.96%, the payment is $3,169 -- $68 more a month, $816 a year and an additional $24,480 over the life of the loan.

Published Oct. 14, 2008