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Buyer Advice
Has the Real Estate Market Bottomed?

By: Bernice Ross

There’s no way to tell exactly when the bottom of the market will be in your area. The best predictor is “months of inventory.” Here’s how it works:

Assume that there are 96 houses on the market currently in the $200,000-$250,000 price range in your area. Last month, 12 of these houses sold. If no new listings came on the market, it would take 8 months (96 listings divided by 12 sales per month) for the entire current inventory to sell.

As a rule of thumb, if there are six months or less of inventory on the market, you are in what is known as a seller’s market. A seller’s market is one where the demand is greater than the supply. The result is upward pressure on the prices. The fewer months of inventory on the market, the greater the potential for price appreciation.

If there are seven or eight months of inventory, your market may be transitioning or flat. This means prices are generally stable and there is a good balance between the number of buyer and sellers.

If there is more than eight months of inventory, you are in a buyer’s market where there may be downward pressure on the prices. The more months of inventory on the market, the steeper the rate of decline.

To determine when is the best time to buy, check regularly with a local Realtor to determine if the amount of inventory in your price range is increasing, staying steady, or decreasing. The good news for you is that prices lag behind inventory changes. For example, many parts of Florida and California are currently seeing big drops in the amount of inventory on the market. Nevertheless, the property values are still decreasing. As the excess inventory is absorbed, prices will stabilize. This is the time that most sophisticated real estate investors like to buy — when prices are still falling and the inventory is beginning to shrink.


Pre-Qualified vs. Pre-Approved

You should get pre-approved and not just pre-qualified if you are buying an investment property. When lenders say they have “pre-qualified” a buyer, it means that they have looked at the buyer’s loan application. Based upon the application, the buyer should be able to get a loan, provided everything checks out. In other words, the lender has not yet run a credit report, they have not verified the source of the down payment, and they have not verified the buyer’s employment. In addition, the lender has not yet appraised the property. They also have not ordered a title report that would show if the buyer has any outstanding liens that may prevent them from purchasing the property.

In contrast, when a lender “pre-approves” a buyer, it means that they have completed everything they need to do to close the transaction with the exception of the appraisal and the title work.

There are also some additional benefits to being pre-approved:

1. You will know exactly what price range is right for you.

2. Errors on credit reports are common. Avoid putting your earnest money deposit at risk by checking your credit prior to making an offer.

3. Sellers are more likely to be flexible on their price when they have a buyer who is pre-approved.

4. If there are multiple offers on the property, being pre-approved will give you an advantage over other buyers who are not pre-approved.

5. Some purchase contracts require the buyer to be pre-approved within a few days of the seller’s acceptance of the buyer’s offer.

It’s also smart to ask the lender for a written loan commitment. If the lender tries to renege on their commitment, you will have a much greater chance of getting your loan funded if the commitment is in writing.

You can apply for your loan through a bank or a reputable mortgage broker who has the ability to place your loan at several different lenders. Finally, if you get a really good rate, ask your lender to “lock the rate” and put it in writing. That provides some degree of protection if the rates increase.

   
  
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