Hitting home

There is so much big-picture economic news these days that it is sometimes hard to see how the current financial trouble affects us individually, except by watching our 401k value drop through the floor.

However, my wife and I are shopping for a home right now. We also have our home listed on the MLS and other sites, for sale by owner. Our current home is a unique design which will take longer to sell, anyway. Anything out of the ordinary always does. But we think that we can rent the home out for at least break-even money, if not a slight positive cash flow. Even if it rents at a slightly negative cash flow, with the rent paying all but a small portion of the monthly note, then we'll be happy. It would represent a return of 6% (the APR of our 30-year mortgage), which is better than just about anyplace else we could invest our money.

More confusing, though, is the house we are trying to buy. It's a "tainted property". Listed at $229,000, the owner is an attorney who is now in jail for mortgage fraud. The house is in pre-foreclosure, but it has a $500,000 IRS lien against it. We offered $222,000 to the lender, pending release of the tax lien, which the lender will negotiate.

It has been a little over a week since we submitted an offer. We were told it may take 2-3 weeks to learn whether the tax lien could be removed. The house had been shown many times, but no offers, mainly because people did not want to wait so long to find out if they could get the tax lien forgiven.

Now, in this tightening market, knowing that lenders are desperate, I am wondering if we should not withdraw our offer, and re-submit it for less, say $199,000. The intrinsic value of the house was a little inflated to begin with, even at $222,000 (the owner had it on the market for $249,000 before he went to jail). $222,00 is a reasonable price, considering it's good location, size, configuration, and age. However, I think the house is really worth about $200,000, once you remove the market "buzz" that has fueled Austin's home market for the past several years.

If I was an investor with cash, I absolutely would make such a low-ball offer. I see many homes starting to sit on the market longer and longer as credit and loan offers dry up for people with good-but-not-great credit scores and asset ratios. It started about a year ago, according to my credit broker, when sub-prime loans began to be scrutinized more and more buy mortgage-backed securities (MBS) buyers. Zero-down loans were rejected, and then any loan with less than 3% down, then anything less than 5% down, etc.

Now, I'm wondering if buyers who cannot afford at least 20% down, even with good credit, will have a tough time getting loans, and if they'll have to pay higher-than-expected interest rates, which could depress the market further, driving down home values.

For those who can afford to sit and wait, then pounce on deals with cash in hand, there will likely be incredible real estate deals to be had.

For those who need to buy or sell now, the news is not so good.