It's natural to want to save money when you're making a purchase as large as a home. You want to buy the best home in the best neighborhood at the best price, and to do that, you may think you have to shop in the bargain bin.
FSBOs (for sale by owner,) foreclosures, and short sales aren't as plentiful as equity listed homes -- homes listed with a real estate agent by the seller. You may even scour the MLS (multiple listing service) for signs of desperate sellers, such as homes priced AS-IS, or homes that have been on the market for months.
While some people are successful buying a bargain basement home, you may not be so fortunate, if you put price first. Here are five ways a low price can backfire on you:
The home doesn't suit your needs. A home is a good buy only if it suits your family's needs for space, features, comfort, and function. If you buy a home without enough bedrooms or baths, it's not as comfortable or functional.
A bad fit costs you later. To get out of a home that's too small, too old, or too far from where you need to be, you'll likely to pay more in transaction costs to sell the home and buy another than if you'd chosen more wisely in the first place.
Bargains are rare. If a home is priced lower than others in the area, there's a reason. Sometimes bank-owned home will appear to be a bargain compared to other similar nearby homes, but you may notice a real difference in the way it's been maintained. It's not much of a bargain if you find out that all the appliances have been stolen or all the copper wiring has been pulled out of the walls.
The home needs updating. A home priced below market value usually requires expensive repairs or updates. Are you willing to perform the work or pay someone else to do the work? Any remodeling you do will be at today's prices. Before you buy, get a home inspection and then talk to professionals who can help you bring the home up to today's standards.
You lose ground trying to lowball the seller. Just as you want the home you buy to appreciate in value, sellers purchased their homes as investments, too. They want to net as much as possible, because they've already taken on the risks of buying and maintaining a home. That makes sellers less willing to negotiate on homes that are well priced and well maintained.
If a home has been on the market for a long time without a price reduction, there's usually a good reason. You have an unmotivated, unrealistic, or upside-down seller, any of which could waste your time unmercifully.
An unmotivated or unrealistic seller simply won't negotiate to your level. For example, for-sale-by-owner homes are typically priced the same as listed homes, even though the sellers aren't paying real estate agent commissions, including for your agent, if you have one. Why would you pay the seller not to represent your interests?
Furthermore, a bank foreclosure or bank-approved short sale could take months to close. What if interest rates go up before you close? You may get the home at a bargain price, but the savings could evaporate in higher interest payments.
Right now, home prices are still below previous market highs. Mortgage interest rates are hovering near historic lows. And inventory levels are improving in most areas.
Under these circumstances, you're buying a home at a bargain already. The best strategy for today is not to try to beat the seller down, but to offer a fair price for the home you think is best for your household.