House Call: To Buy or Not to Buy by Lisa Scherzer Smart Money 03-22-2010

House Call: To Buy or Not to Buy
by Lisa Scherzer
Smart Money
March 22, 2010

There are fewer than 40 days remaining until the federal home buyer tax credit expires. And home builders and realtors aren’t letting consumers forget it.

Home builder Lennar is touting its move-in ready homes in South Florida. Beazer Homes’ web site encourages house hunters to “cash in on the tax credit,” while KB Home’s site declares “Time is running out,” along with countdown -- to the second -- until the credit expires.

Time is, indeed, running out: Buyers must have a binding contract on a house in place by April 30, and the sale must close by June 30. But should you heed the call?

It is true that the tax credits, combined with low mortgage rates and overall affordability make buying a house tempting today. But there are other considerations that should factor into your decision.

Here are a few reasons why taking advantage of the credit may not be a savvy move:

1. Say there was no credit

Taxes are important, but they shouldn’t drive the decision-making process. “If absent the tax credit, you wouldn’t make that purchase, don’t do it just to save a few thousand dollars,” says John Scherer, a certified financial planner and president of Trinity Financial Planning in Middleton, Wis.

The bottom line is, if you’re in a position where it makes sense to buy a house, and you’ve found a house you really want at the right price, then you should pursue the credit, he says. But don’t settle for a house you may not be happy with just to get the money – you might regret it.

For existing homeowners after the $6,500 credit, think about what’s involved in selling your current house. Buyers are still bidding low and homes continue to come on the market, says Neil Sullivan, president of Westfield Mortgage in Westfield, N.J., who adds that many homes that didn’t sell last year were taken off the market.

2. The bigger picture

From a psychological perspective, $8,000 is a lot of money to many people. But as a percentage of the purchase price for, say, a $200,000 home, it represents just 4%.

“How many of us would rush off to a car dealer who was offering a 4% discount off the car price?” says John Vogel, a professor of real estate at the Tuck School of Business at Dartmouth. And buying a home is more complicated and involves more time and effort than buying a new car.

Also, if you’re in a rush to land the credit, a seller might more inclined to use that as leverage and be less willing to negotiate on price, says Erin Baehr, a certified financial planner and owner of Baehr Family Financial in Shawnee-on-Delaware, Pa.

3. Last-minute snags

The deadline to be in contract is April 30 and June 30 to close on the house. For buyers who haven’t started doing research and seeing houses, it’s cutting it close. Even if you’re preapproved for a mortgage, things might still hold up the transaction that could mean missing the deadline.

For one, the appraisal process can be a wild card in many transactions, says Sullivan. For deals with little margin for error, an appraisal below the agreed sales price can make the deal hard to complete.

“Deals have been canceled because of low appraisals – it has to match up with the purchase price,” says Richard Vetstein, a real estate attorney in Framingham, Mass.

One way around this is making sure you include a provision (called a mortgage contingency clause) in the purchase contract to protect the buyer. So if the appraisal comes in less than anticipated or if there’s a title issue that pushes the closing date back, the buyer can terminate the deal, says Vetstein.

4. How long do you plan on staying in the home?

If you don’t plan to live in the new house for at least three years -- and preferably five years -- the brokerage and other transaction costs are likely to swallow up all the profit, including the $8,000 or $6,500 tax credit, says Vogel.

What’s more, if the home ceases to be your primary residence after less than three years after purchase, the IRS will ask you to pay back the $8,000 tax credit. If you’re self-employed and you know where you’ll be living five years from now, buying a house isn’t that big of a risk, says Jake Engle, CFP and founder of Wealth Planning & Management in Portland, Ore. Get transferred to another region for work and you may be forced to sell into a bad market – and you “could get a bill from the government for the credit you just took,” says Engle.

5. Prices might still be declining

All the variables that a housing rebound depends on makes it difficult to forecast where home values will be in a few months, let alone a few years from now.

The credit, which was has been around for about a year (and was extended and expanded last fall), to a large extent artificially stabilized home prices. That also means there’s a lot of uncertainty about what will happen once the credit expires and all the demand still trickling into the market will have evaporated, says Jonathan Miller, president and CEO of Miller Samuel, a real estate appraisal firm in New York.

Without another extension – which most in the industry don’t expect – you may see weaker prices in the second half of 2010. (Moody’s Economy.com predicts house prices to fall 2% this year.) And if you buy into a slumping market, that tax credit may not be as compelling as you thought.