Do you have to be Warren Buffett to find “deals” in the current market?

Buffett has been increasing his stake in financial services companies, including those with significant exposure to the mortgage market.

Nation wide, real estate markets are stalling as the financial turmoil sorts itself out. Many prudent buyers are on the sidelines as they wait to assess the resulting implications to the Bay Area real estate market. This may create opportunity for the adventurous. First a warning: This post is about speculation and speculation involves risk. For those ready to put a big toe in the deep-end here are some facts in your favor:

1.) Buyer competition has been greatly diminished. Some buyers are out of the market because they will not qualify for a loan given the implementation of more prudent lending practices. Some buyers are out because they do not have a sufficient down payment mandated by new guidelines. Some buyers will sit the next few months out voluntarily as they wait for the market to declare itself.

2.) Lending institutions do not want to be landlords and some will be anxious to unload bank owned property to free up capital. Bank owned properties are not as common in the East Bay as in other parts of Northern California, but they are more common than they have been in past. Some banks will still seek to protect the value of their collateral by pricing aggressively and holding firm through negotiations. However, it is our experience that most bank owned properties are not advertised optimallyl or as well presented as other “pride of ownership” properties. If you have a little vision (and look beyond challenged aesthetics and the advertised open houses) you may find an opportunity.

3.) More Sellers will be willing to negotiate. Sellers who do not need to sell will wait for the market to correct itself. These are the sellers who can afford to wait for the perfect buyer and are often the most tenacious negotiators. When this group sits out, buyers will find a more level playing field. Other sellers will need to sell based on personal circumstances, job transfers, or excessive holding costs. In contrast to the first type, these are the motivated sellers and qualified buyers will have their attention.

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4.) Money talks as well-qualified buyers gain renewed credibility. As the mortgage market stands on shaky ground, buyers with good credit and decent down payments are gaining the attention of Bay Area sellers. In addition, a bird with cash in the hand is worth a flock of seagulls. Sellers will give extra credit and consideration to Buyers offering all cash.

Buyer Tips:

  • If you are looking for your “forever” home, don’t obsess about the short term market. As your event horizon projects further out, market fluctuations will have less impact. This is where buyers can really benefit from reduced competition and greater opportunities. Desirable homes in prime locations are experiencing an unforeseen lull.
  • Look for the motivated sellers and buy below current market value. Time is money for some banks looking to unload. Don’t be afraid to try a low offer as your timing may be opportune.
  • Be prepared to hold onto your investment through any downturn with an expectation that a market correction may take several years. If you plan for a downturn, you resulting decisions will be more prudent.
  • Make location your primary objective. Buyers often seek “fringe” properties during a hot market with the hope that the gentrification tide will absorb them and the value will increase exponentially. In a downturn, values often recede from these areas first as buyers can once again afford the prime locations.
  • Seek your agent’s advice in obtaining real-time market data. Look to the most current sales in order to assess value. June sales are already obsolete in most areas. Some agents also know market grapevine information which may be more telling than recorded sales data.

Seller Tips

  • Good news for those who need to sell now; the area has not yet experienced significant price reductions. If price reductions do happen, they are likely a month or so out. However, you may have to be willing to make more concessions to buyer contingencies because the pool of buyers is reduced.
  • 417,000 is the magic number. This is the cap on a conforming loan. Conforming loans have become more desirable as jumbo loans become less available and rates increase. If you can price your home within range of a conforming loan, you may find more buyers.
  • Exposure is your key to success. As the pool of buyers shrinks, increased market exposure will reach the widest possible audience. Now is not the time to put a sign on the front lawn and wait for a buyer. Discuss with your agent a strategy for reaching the most qualified buyers possible.