5 Buyer's Market Real-Estate Tactics

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BOSTON (TheStreet) — How do we know it's a good time for prospective homebuyers to get creative when negotiating a sale? Let's count the ways.

One, mortgage rates are still below 5%. Two, home prices keep dropping. Three, sales of new single-family houses fell in May to the lowest level in recorded history. In short, sellers are eager to please.

"We always talk about now being the right time to buy, and sometimes there's not as much gravitas in the comment," says Ron Phipps, president of the National Association of Realtors and principal broker at Phipps Realty in Warwick, R.I. "But right now, the sellers are not in the superior position, and the buyers are in a better position to negotiate."

Here are five tactics to take advantage of a real-estate buyer's market — to kick the tires on a dream home and maybe even buy it.

5. Negotiating a lease with an option to buy: Nothing epitomizes a real-estate buyer's market better than a lease option, which lets a buyer try out a house for years.

With a lease option, a prospective buyer agrees to rent a house for a set amount of time, usually one to three years, with the right — but not the obligation — to buy the property when the lease is up. Sellers may agree to such a situation when they're trying to pay the mortgage on a second home but haven't had luck selling the first one.

The parties agree on the price of the property at the beginning of the lease, usually with a small portion of monthly rent payments going toward the mortgage in the event the tenant agrees to buy. Both parties should keep in mind, though, that when it comes time to buy, the underwriters won't count the bulk of the monthly rent payments toward the actual purchase.

"What's acceptable to an underwriter is only any money above the fair market value of the rent," says Joe Heisler, president of the New Jersey Association of Mortgage Brokers. "We would only count the difference."

4. Negotiating a lease purchase: A lease purchase differs from a lease option in that it obligates both parties to commit: The buyer must agree to purchase, and the seller must agree to sell, eventually. But the buyer gets to buy time. While more committal than a lease option, a lease purchase gives a would-be buyer a few years to save money toward a down payment, not to mention time to repair bad credit to secure a mortgage with a decent interest rate.

3. See if the seller will act as the bank: One of the biggest problems with the housing market now is that while mortgage rates are historically low, mortgage lenders are historically picky about issuing loans. Borrowers with credit scores lower than 620 are likely to be rejected by banks, and those with scores below 750 may be subject to higher interest rates and additional fees, thanks to loan-level adjustments from Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE).

Prospective buyers who can't get a bank loan — or just don't want to deal with a bank — can ask whether the seller is willing to act as the lender instead. It's clearly a big risk for a seller, especially in a time when foreclosure rates are so high. But because it is so tough to sell a home these days, it is something more sellers are willing to consider, "particularly if they own the home outright," Phipps says.

2. Negotiate a trade: With the exception of first-timers, those who are looking to buy a home are also looking to sell a home. They find themselves in a vicious circle of sorts: To come up with the down payment on a new home, they must sell the old one. But they can't sell the old one because all the other prospective buyers are waiting to sell their homes to come up with a down payment.

A rare but viable option: trade houses. It's a bigger risk than trading a tuna sandwich for bologna. Because two houses are involved, there's twice as much of a chance the deal will fall apart. But if the stars align, a flat-out trade is a good way to avoid financing headaches. It's also a way to sidestep capital-gains taxes, Heisler says.

1. Ask the seller to pay the closing costs: In a seller's market like that of a few years ago, sellers weren't coming down much in price or contributing toward closing costs, Heisler says. "Now you're seeing selling concessions where the seller can pay a percentage of the sales price toward the buyer's closing costs, so the buyer can get in with virtually just the down payment," he says.

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