Land of Opportunity

Kimberly Sloan and her husband Michael Saunders thought it was time to buy a house. “We wanted more room and a yard for our 4-year-old son,” says Sloan, a nurse living in suburban Los Angeles. “A few years ago though, homes in the neighborhood we liked were selling for $350,000 to $400,000, which we couldn’t afford.”

Times are certainly different now. Sloan and Saunders, both 31, just purchased a home on a nice block in a neighborhood they know well: “It’s right across the street from where I used to go to school,” Kimberly says. The purchase price on their three-bedroom home: $179,000. Such bargains aren’t unusual these days. “In some areas, home prices have fallen by 50% to 60%,” says Stephon Carradine, a broker and owner of Century 21 Success in Signal Hill, California, who helped the couple. “Mortgage rates are down for buyers with good credit. This is a great time to buy a home.”

Indeed, it is. As everyone knows by now, the housing market is in the aftermath of a decade-long overheating, which saw home prices increase at unsustainable rates. In the post-housing bubble market, prices are still cooling off. By the beginning of 2009, the median price for an existing single-family home had fallen to $180,100, 19% less than the mid-2006 high of $221,900.

The downward trend was broad, but some regions experienced steeper price drops than others. In the Northeast, the median price dipped 11% to $248,800. In the Midwest, it fell 15% to $139,500. In the South, the median home price dropped 14% to $158,300. The most dramatic price-slashing of all occurred out West, where the median home at the beginning of 2009 was $243,200, nearly 31% lower than in 2006.

New Rules

In today’s environment, financing is key. Just as the financial crisis creates opportunities for homebuyers, it is ushering in a new era of tighter standards for obtaining a mortgage. It’s not that banks aren’t lending, but gone are the days where lenders had no problem backing “no money down” deals, and offered so-called NINJA (No Income, No Job or Assets) loans. To get the lowest interest rate on a mortgage today, in most cases, you’ll have to make a 20% down payment–and show proof of income. In addition, you’ll probably need a credit score at least as high as the national median of 723.

If you don’t have the cash for a large down payment or a stellar credit score, there’s still hope. Donnell Williams, a broker with Destiny Realty in Morris Plains, New Jersey, says he has seen borrowers with credit scores above 580 who are able to secure mortgages. What’s more, you can buy a house with only 3.5% down with a federal assistance mortgage (or Federal Housing Authority (FHA)) loan. In fact, that’s how Sloan and Saunders bought their house this year. The catch? You’ll pay a higher interest rate for an FHA loan.

Coming Up Short

If you decide to buy a home now, be prepared to enter into a new world. You might be buying ahome from a seller who can’t keep up the mortgage payments or from a bank that has foreclosed on the previous owners. If you’re buying from a homeowner in distress, you will probably be entering into a “short sale”: a deal where the seller owes more on the mortgage than the home is currently worth. In this case, it’s the owner’s lender who must accept (or reject) your bid or offer price. Here’s how it works: Say the current occupant bought the home in 2006 for $400,000, and took out a $380,000 mortgage loan from the bank; that loan balance is now $375,000. But due to declining home values, the house is worth less than the loan’s principal. So if you offer to buy the house for, say, $325,000, you’ll have to get the lender to agree.

“From what I’ve seen and heard, lenders allow short sales to go forward no more than 10% of the time,” says Emerick Peace, a real estate agent with Keller Williams Preferred Properties in Upper Marlboro, Maryland. “Lenders might think the borrowers have the ability to keep making the payments, so lenders are reluctant to take a loss on the loans they’ve made.”

In many instances, short sale buyers may get a house in move-in condition because the previous owner has been living there, but that’s not always the case. Williams recently worked with a couple who put a contract on a short sale home.

“After the home inspection and the appraisal, the buyers found out that the house needed repairs. The current owner didn’t want to do the repairs and my clients didn’t want the added expense, so the purchase fell through. Now the buyers are looking for another house in the same area.” As a result of complications like these, as well as involvement from the lending bank, the short sale process tends to be lengthy. It can add weeks or even months to a purchase.

Bank Shots

If a short sale doesn’t work, don’t despair. You can probably get a better deal buying from the lender after it has foreclosed on a home. In the language of real estate, such homes are “REO”: Real Estate Owned by a bank or another lender. “At least half of the sales I see now are REO homes,” says Carradine, who is also the founder and CEO of BlackRealEstate.com. For example, the house Sloan and Saunders purchased was an REO house. “The bank put the house on the market for around $220,000,” says Sloan. “I guess there were no acceptable buyers at that price, so the bank lowered the price and lowered it again.” Finally, when the price came down to $179,000, Sloan and Saunders put in a bid, which the bank accepted.

Rewards of REO

Buying an REO home requires some patience, but it also has advantages, according to Marvin E. Katz of Ben-Ezra & Katz P.A., a law firm and real estate title company in Fort Lauderdale, Florida. “If you purchase after the foreclosure sale as an REO, you can buy the home free of title liens and other claims,” says Katz. “Lenders, as part of the REO process, will eliminate all liens, judgments, and delinquent taxes. That includes any outstanding homeowners’ association or condo liens.”

When you purchase a property at a foreclosure sale, Katz points out, you might not have had an opportunity to inspect the property. “However, if you purchase an REO home, it can be inspected prior to the contract for purchase and sale or as part of the contract giving buyers the ability to back out of the contract based upon the results of the inspection report.

Typically, the bank will have placed the property in a readily salable condition,” says Katz. He adds that depending on the condition of the property, buyers may be able to negotiate a reduced purchase price by assuming the repairs.

Buyer Beware

With all of these advantages, what’s the downside of buying an REO property? “You usually are purchasing the property in ‘as is’ condition,” says Katz.

“This means that you accepted the inspection report on the physical condition of the property and are willing to assume the risks of purchasing such a property in that condition. Therefore, you will need to know the cost to place it in move-in condition.” He suggests that REO buyers make sure the contract is contingent on allowing the buyer to cancel the contract for any reason if he or she is not satisfied with the results of the inspection. And if necessary, there should be a financing contingency allowing you to cancel within a reasonable time without losing your down payment/escrow deposit.

If the advantages of buying an REO home seem to outweigh the drawbacks, how should you proceed? “Work with the listing realtor, the one who represents the banks,” says Katz. “The listing realtors not only have more access to properties, they are in the best position to move the deal along. Both the realtor with a glut of foreclosures, and the bank, are motivated to sell. Let them know to contact you in the future if the bank needs to quickly unload foreclosure properties.”

Carradine says that banks eager to sell their REO homes will drop prices if they don’t move quickly. “I’ve seen lenders reduce prices by about 3% every 15 days or so. On a $200,000 house, that’s more than $5,000 every two weeks. Buyers have to be careful though. Once a house reaches an attractive price, multiple buyers might come in and top your bid.”

Peace suggests some negotiating techniques. “Find out the prices of comparable recent sales in that area,” he says. “If a bank has priced a house at $300,000 but you can show that similar houses are selling for $280,000, the bank might come

down to $280,000. Another tactic is to offer the seller the asking price, but on the condition the seller pays the closing costs. “Closing costs can be 5% to 6% of the sales price,” says Peace. “Having the seller pay can save you thousands of dollars of cash upfront–money you can use after buying a house that needs work.”

Bottom Fishing

The next six months should be an especially attractive time for first-time homebuyers to close the deal. As part of President Obama’s stimulus plan, people who have not owned a home they used as a principal residence in the last three years can get a 10% tax credit, up to $8,000 ($4,000 if married, filing separately), if they buy a place before Dec. 1. This tax credit reduces your federal income tax bill by $8,000 and can be claimed on either 2008 or 2009 returns. “That credit is refundable,” says Carradine. In other words, if your federal tax obligation is only $5,000, for example, that obligation would be wiped out and you’d get a $3,000 refund from the IRS.

However, government intervention won’t be wholly positive for bargain-seekers. “This will probably dampen the decline of housing prices somewhat,” says Lance Freeman, associate professor of urban planning at Columbia University and noted housing expert. “Fewer homes will go into foreclosure and foreclosed homes typically sell at a dramatic discount. Moreover, foreclosed properties lower property values of surrounding homes.” How much will such a slowdown in foreclosures affect housing prices? “I don’t believe anyone can estimate that accurately,” says Freeman. “However, house prices in many metro areas are still inflated by historical standards. This suggests we have not reached the bottom yet.”

Trying to find the bottom of the housing market is akin to locating the bottom of a bear market in stocks: difficult if not impossible. “At today’s interest rates,” says Carradine, ”paying $10,000 less for a home will save you only $40 or $50 a month. At the lower price, you might not get the best selection. If you see a house that you like and you can afford, buy it now.”

This story originally appeared in the May 2009 issue of Black Enterprise magazine.