If you're thinking about buying a house or condominium in August or September, bear in mind two facts about the 1981 buyer's market we're in. There are superb opportunities out there for sharp-eyed buyers who know how to recognize and negotiate for them.
But there are also a growing number of "bargains" available that aren't what they seem -- especially in financing and pricing.
Here's a quick tactical guide for savvy buyers, based on discussions with finance and brokerage specialists in key U.S. markets.
Watch out for financing deals that offer cut rates up front but bill you for them later without your knowing it -- sometimes at a higher total cost than you'd pay in a healthier market.
The most common examples of this from coast to coast this summer are the so-called "buy-downs." Although many new home builders and individual sellers offer genuine discounts to consumers with interest-rate subsidies, some cut-rate financing deals simply don't add up.
In a typical buy-down plan, the seller arranges to pay an agreed-upon portion of the purchaser's monthly interest costs. For example, on an $80,000 house with a $64,000 conventional mortgage at the 16 1/2 percent prevailing market rate, a buyer would have to come up with $890 a month to qualify.
A seller eager to entice that buyer into a contract, however, might offer to subsidize the rate down to 12 or 13 percent. The seller would pay $180 or $185 of the monthly mortgage bill to the bank on behalf of the buyer for a set period, such as two or three years.
The cash value of that buy-down to the consumer can be readily estimated. A 31/2 point subsidy for three years on the $64,000 mortgage is worth $6,480 (180 times 36 months), putting aside the impact of inflation. If the seller doesn't pad part or all of that amount onto the price, or tuck it somewhere else into the deal, then the buyer is truly receiving a discount.
But if, as commonly occurs, the financing subsidy ends up as an unstated component of the selling price of the home, bargain hunters aren't getting as much off as they think. An $80,000 house with buy-down financing may in fact be a $74,000 or $75,000 house without buy-down financing.
Federal truth-in-lending protections for the con;sumer are "cloudy at best" on the buy-down issue, according to an official at the Federal Trade Commission. "There's almost no effective way sellers can be made to disclose these add-ons," and recent federal regulations sidestep the problem altogether, he said.
Buy-downs aso cn be misleading in other ways. Some sellers of existing or new houses, for instance, will custom-tailor deep-discount interest rates for buyers at 10 or 11 percent. On close inspection, though, the big buy-down turns out to have a steeply graded phase-out: The rate may be 10 or 11 percent for the first 12 months, but then jump to 14 percent for the following 12 months. In the third year the buy-down virtually evaporates. The net effect is to cut the subsidy fast and limit whatever true discount the seller may have factored into the transaction.
The smart buyer's strategy on buy-downs is: Don't assume there's been any discount whatsoever on the cost of the total package -- the price plus the financing subsidy. Even with a 13 percent rate, push the seller for a lower price on the house, or for other cash concessions such as picking up the escrow or closing fees.
If the seller resists your tough stance, you can back off and negotiate further . . . or walk away. That's what a buyer's market is all about.
A second piece of advice on price financing strategy -- this one from a Sacramento, Calif., realty broker, John Aberg:
Purchasers in general "are timid, too polite and too reluctant to get the most out of seller's problems," says Aberg, the blunt-talking chairman of a firm with 250 sales personnel.
"Tell your broker that you're truly after a bargain price," says Aberg, "and he or she will be far more effective on your behalf when you make a rediculously low offer for a house you want."
"If you've get cash [to assume existing loans] and you know the sort of home or investment you're looking for right now," counsels Aberg, "there are bargains open to you that'll knock your socks off. Once the economy bounces back next year and in 1983, these houses are going to be seen as buyers' market steals."