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Don't commit to more house than you can afford

May 09, 2009

Decades ago, sellers priced a little high to leave room to negotiate down. Buyers typically offered 5 percent less. Then they negotiated and settled at a price in between. Today, there is so much variability in the housing market that it's impossible to use a pat formula for coming up with an offer price.

Your goal is always the same. You want to buy the best house for your needs and pay the lowest price. In many cases, you can start with a price that is less - maybe even considerably less - than the asking price and negotiate from there.

However, this strategy might not work in some California inland markets where housing prices have dropped about 50 percent in recent years. Some low-end housing markets plagued with foreclosures have heated up in recent months. Multiple offers are common, and some listings sell for more than the asking price.

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Tailor your offer price to the specific house you want to buy. How much you offer should depend on how much you can comfortably afford to pay, which may be less than what the lender says you can afford. The price should be determined by current local market values, how well the listing is priced for the market and whether or not you are in competition.

HOUSE HUNTING TIP: Buyers making offers in competition should try to make a rational decision regarding how much they're willing to pay. Don't get caught up in the frenzy of activity and offer more than your top price for the property. If you overpay, you could get cold feet and back out. In this case, your deposit might be at risk.

An appraisal contingency makes your offer contingent on the house appraising for the price you agreed to pay in the purchase agreement. If the property appraises for less than that price, you can withdraw from the contract and your deposit will be returned to you. That is, if your purchase agreement clearly stipulates this.

Other options are to try to renegotiate the price with the seller or put more cash down to make up the difference between the loan amount the lender is willing to lend and the purchase price.

Lenders are being just as cautious about appraisals as they are about qualifying buyers for a mortgage. Some appraisals are coming in lower than market value and some lenders are knocking down the appraisal 5 percent or so if they're concerned that home prices might decline.

Buyers who offer an under-asking price can improve their chances of starting a dialogue with the seller if they are preapproved by a lender for the financing they'll need to close the deal. The number of transactions that fail has increased in the current market. In most cases, this is due to buyers having difficulty getting financing. If the sellers know you will be able to perform, they'll be more likely to work with you to come up with a mutually acceptable price.

Short-sale sellers will need lender approval if the accepted price is lower than the amount of financing secured against the property. This can be a slow and tedious process. Many lenders realize that it makes more sense for them to work with a buyer on a short sale than it is to let the property go into foreclosure. But, your contract should include an escape clause so that you can withdraw without penalty if the lender is not responsive.

THE CLOSING: If you make a low offer on a bank-owned property (REO) and you don't get a response, make another offer at a higher price, but only if you think the property is worth it.

Dian Hymer is a nationally syndicated real estate columnist and author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.

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