Q: My family wants to buy a house in Miami. They are looking for a foreclosed property around $60,000, and will pay all cash. Do you think the time is right to buy now? If not, when would be the best time to buy? –Mehmet, Florida
A: First, I’d like to ask you and your family to rethink a core element of your approach to this process. I’m often approached with questions by buyers-to-be who say they "are looking for a foreclosure."
I submit that what you’re actually looking for is a good deal — even a really good deal — on a property that is well-suited for your purposes. I also submit that the property that best fits that description may or may not be a home that was foreclosed on.
Sellers of individually owned homes that are currently on the market are largely aware that they are in competition with many distressed (bank-owned and short-sale) properties.
As a result, there are many bargains available on non-foreclosures, which are often in superior condition to foreclosed homes. As well, individual sellers tend to be vastly more negotiable on terms like repairs, included personal property, etc., when compared to banks.
Now, let’s turn to your question of when the best time to buy is or will be. Overall, the best time to buy is the time that makes the most sense for your family’s life, plans and vision for the future. This is also a very frequently asked question, though, especially from those savviest of buyers and investors who are fixated on market timing, so let’s talk about whether the market has hit bottom.
The most recent Case-Shiller housing index reported that Miami home prices were on their third month of increases, after nine straight months of decline. As a result, some learned observers of the real estate market would say that Miami prices are actually slightly past their bottom.
However, just as many learned observers might opine that the Miami market — and the American real estate market in general — are actually simply going to bounce around the bottom of the appreciation trajectory for awhile. Long story short: It’s impossible to know with certainty whether the market is at bottom.
And frankly, trying to time the bottom is a fool’s errand on at least two levels. The first? It’s impossible. The second: The desire to time the bottom arises out of fallacious reasoning.
A logic flaw called myopic loss aversion causes consumers to be more afraid of losing money than they are excited about gaining a similar amount of money, or equity.
The fact is this: We all know that prices in Miami are very, very low, and likely near bottom. But some will hold off from buying because they think losing even a dollar’s worth of equity would be excruciating; in that desperate attempt to avoid a post-purchase loss in value, they will wait so long that prices will go up and they will experience the opportunity cost of lost appreciation they might have realized had they bought a bit sooner.
Human tendency when trying to time the bottom of the market is to wait too long. When prices hit bottom, everyone comes out and wants to buy, sending prices right back up. The only thing stopping that from happening on today’s market are the twin buyer paralytics of unemployment and tight mortgage lending guidelines.
That creates a great atmosphere for you and your family to take advantage of low prices soon, without feeling a desperate, breakneck urgency to buy anything before prices skyrocket — although I don’t expect we’ll be seeing any true "skyrocketing" anytime soon.
So this might be a great time for your family to buy, if it’s a good time in the context of your lives, and if you are comfortable making the commitment to owning a home for a good seven years, plus or minus a bit.
With a longer-term view, you can feel much more comfortable that you’ll come out ahead on the purchase and don’t have to be fixated on whether the value of the home rises or falls by a percent here or there in the very short term. But to do that, you have to let go of the all too currently common fixation on getting the absolute most for the absolute least, and decide to be OK with buying very, very low.
"So if you wait for the robins, spring will be over," Warren Buffett once famously said about the stock market, and the same applies to real estate. He elaborated that no one — not even he — can predict the short-term market movement and that, in fact, those who buy near the bottom might very well lose money — in the short term.
But if you wait until the signs of appreciation and recovery are clear enough to make a strong short-term prediction, you will have waited so long that everyone else will be buying, too, and prices will be on the rise. Your bargain-basement pricing opportunity will have passed.
With all that said, if you are committed to buying a foreclosed home, or happen to simply select a foreclosed home as the one that works the best for your family, I’d say that now is a very difficult time for REO buyers. There is a great deal of uncertainty about whether flaws in the foreclosure documentation practices of a number of banks may have created "clouded" or unclear title for the buyers of those homes.
If you do elect to buy a foreclosed home, make 150 percent certain to obtain title insurance, which is commonly forgone by cash buyers. I’d also recommend working with a local title or real estate attorney during your purchase, or consulting with them in advance on how to obtain clear title, if you plan to buy a property at an actual foreclosure auction.