Purchase power: Know your true max

Q: My wife and I were approved to buy a home up to $400,000, but we knew that we couldn't actually afford the monthly payment on that much. So, we started out looking at homes in the $200,000 range. Over the months, we realized that we would have to offer quite a bit more than the asking price to get in.

And so many of the properties we were seeing were in really bad shape -- so bad that we couldn't afford to fix them up if we did get them. So we decided to look in the $250,000 range, but even after offering $30,000-$40,000 over asking, we still weren't getting anything.

Now we're looking up in the low $300,000s -- we're starting to see fewer offers on the properties and better places, but I'm concerned by this trend and I fear that we're in danger of overextending ourselves. How should we proceed?

A: When I was a kid, there was a series of animated commercials for Crest toothpaste in which the city of Toothopolis was attacked by these massive, muscular invaders whose sole mission was to drill cavities into teeth. The name of this tribe? The Cavity Creeps. I believe that you might be running into their cousin: the "Price Creep."

Mindset Management

Unlike The Cavity Creeps, Price Creep has some redeeming qualities. Many times, buyers start the house-hunting process with unrealistic expectations, especially given the hit home values have taken recently. Many first-time buyers or folks who have been out of the market for any significant period of time read the headlines that prices were down and assumed they could get a mansion for a song.

For those who were laboring under this misconception, Price Creep can be useful, even necessary. You need to have some mental flexibility and, ideally, room in the budget to creep your mental maximum price upwards to the point where you're at least operating within the same reality as the rest of the players in the market, or you'll make lowball offers, continually experience rejection, and burn yourself and your agent out -- all without getting a home.

Educated, reality-based Price Creep is the opposite of fantasy-land, ignorant rigidity, and that might be why you were willing to move your price range upward initially.

However, Price Creep Gone Wild is a potentially dangerous animal. I've seen it time and time again -- buyers trying to beat out all the other offers, creeping up by $5,000 or $10,000 every 15 minutes because, well, it adds only $50 or $75 to their monthly payment. And that's true, but those reasonable and incremental Price Creeps, multiplied by four or five, can hike up your monthly mortgage payment from a place where you have to give up a night out a month to a place where you have to give up food altogether -- and that's not a good look, as the kids say.

Need-to-Knows

So the name of the game is getting clear and concrete: on your personal finances and what they can bear, on your priorities, and on your vision for your life in your new home -- and what lifestyle or property must-haves, compromises and sacrifices you're willing to make to keep Price Creep under control. ...CONTINUED

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