Buying Property in a Down Economy

Buying property in a down economy is a prime opportunity for first-time buyers and investors to break into the market. Houses are priced way below market, sellers are often willing to negotiate and lenders are offering exceptionally low rates to attract new buyers into investing. The prices in a down economy may seem too good to pass up, but invest carefully. There are many pitfalls to buying property in times of economic turmoil.

Do not assume that low prices are all symptomatic of the down market. While prices have been slashed across the board, the conditions of some of these houses may reflect their low prices. Houses in foreclosure and those that have sat vacant on the market for extended periods may have fallen into disrepair. Some new homeowners love fixer-uppers or homes with unfinished basements, but these may require more fixing than you bargained for.

Be an Informed Buyer

Before buying a home, no matter the state of the economy, buyers must be informed about the property and financing. Foreclosed homes may move fast because they are priced so low, but you should never buy property sight unseen. In a down economy, the former owners may not have been financially able to keep up the maintenance the house needed, so take a firsthand look at the property and have an inspection done.

You can identify visible structural damage by taking a walk-through, but a licensed inspector can determine if there are plumbing, electrical or roofing problems you may have overlooked. In a down economy, some investors will buy homes and "flip" them--renovating and selling for a huge profit. Major problems may not faze experience investors, but if you plan to live in the home, dealing with faulty pipes, wiring and other issues is a huge undertaking.

Take a look at the neighborhood. Some neighborhoods were hit hard when the housing bubble burst, and many homes for sale on a block is a turn-off for buyers. Neighborhoods that were thriving several years ago can be run-down by the economy. On the other hand, many cities are seeing gentrification in their formerly rough areas. These areas develop quickly and can be great places to buy real estate before the market recovers.

Get Better Financing

Interest rates have fallen along with property values, giving buyers an opportunity to negotiate better terms. Banks are competing to attract qualified buyers. If you have good credit, you are highly desirable to lenders. Your ability to get financing anywhere gives you the leverage to negotiate more favorable mortgage terms, like having closing costs reduced or waiving the loan origination fee.

In the past, people wrapped up a large proportion of their wealth in their homes. That did not turn out so well for many people, so don't make the same mistakes. Invest no more than 30 percent of your pre-tax monthly income in housing costs. This includes monthly mortgage payments, property taxes and homeowner's insurance.

Most banks will not lend to someone whose housing costs exceed a certain benchmark of their monthly income, but sub-prime lending is a major culprit that leads to down housing markets. Don't rely on the bank to monitor your ability to pay. If your costs are more than 30 percent of your income, reduce them by making a larger down-payment or increasing your homeowner's insurance deductible. Just be sure you have to cash-on-hand to meet the deductible if repairs are needed.

Buying property in a down economy allow people to acquire assets at a fraction of market value. Buyers should take advantage, but be aware of the pitfalls. Be an informed buyer and borrower, and begin investing in the future.

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