Postbubble Home Buying

It's almost impossible to open a newspaper or watch television without hearing about the "cooling" housing market in the United States. There are 4 million homes currently for sale, according to the National Association of Realtors. That's about 1 million more than a year ago. And those numbers don't include the expected new entries as rising interest rates force some of the homeowners with adjustable-rate mortgages to put their homes on the market. (About 25 percent of all mortgages have adjustable interest rates.)

All that extra inventory means that those lucky enough to be looking for a house are now entering a buyer's market. Across the country, builders and home owners are offering incentives like covering closing costs, adding extra goodies like upgraded appliances or even contributing to the initial down payment. But even buyers who get a great deal should be wary of unexpected costs. That extra-large house might not seem like such a deal if heating costs go up significantly. NEWSWEEK's Raina Kelley spoke to Katherine Salant, author of "The Brand-New House Book" (Three Rivers Press), about how to evaluate a home's resale value and make smart buys in a down market. Excerpts:

NEWSWEEK: Is it a good time to buy a house?

Salant's advice to postbubble homebuyers: 'Do your homework, now you have the time'

Katherine Salant: It's certainly becoming a buyer's market, which means that sellers are much more amenable to negotiations. Base price is not usually negotiable. But the options [on newly constructed homes], which usually have 50-100 percent markups, are very negotiable. You can say: "I want you to throw in the granite countertops or the marble tile in the bathroom." But be conservative with your upgrades; don't pick everything. You want a house that nine out of 10 buyers will want five years from now. You need to know the conventions to look for in your market.

How do you figure out which upgrades have the most resale value in your market?

When you get serious about a particular area, find out which options are the most popular. You don't want to overimprove because people aren't going to pay for it. The selling agents should be very upfront about it; but, also go around and ask the neighbors what they [looked for when they bought]. Ask them what they would do differently next time around. You'll learn a whole lot about what people look at in that area. You want a house that's not greatly better or greatly worse [than the local norm] because you're always going to be competing with other houses on the market. An example? We moved to Michigan from southern California. Well, nobody has a basement in southern California, so we bought a house in Michigan with no basement. When we later put it on the market, we found out that people in Michigan want basements. It took us eight years to sell that house.

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What if you really want something that most homeowners would never want, like a closet just for baseball bats?

You can get an option that you really love. Say you invest $5,000 in a really elaborate closet organization system or a whirlpool bath, but five years from now, investors won't pay extra for it. If you really enjoy it, you'll get utility out of it but you won't get it back in resale.

Which upgrades or extra options are likely to help with resale value in any market?

Upgrading the kitchen is always a good idea. Things like granite or engineered-stone countertops, cabinets with pull-out [not fixed] shelves for increased ease of use or frameless cabinets for increased storage space. Stainless steel appliances are huge. They used to only be for rich people. Most builders will offer wall cabinets up to the ceiling for extra storage.

What else should people look for in a new house?

Think size and location. Energy costs are only going up. Think about a smaller house closer to your office. How many bedrooms do you need? How many rooms are you actually going to use? Just because you can afford a big house doesn't mean you should get one. If you're buying from a housing project, you may not get a particularly energy-efficient house, so you should look into that. Ask about window upgrades. Over time, the average buyer is going to be concerned with heating and cooling costs.

You can negotiate your future energy bills?

Yes, if you get serious with the builder. Ask for a more efficient air-conditioning system or heater. Ask about upgraded insulation. If you're picking new appliances, you can negotiate for Energy Star [energy efficient] appliances, or you can ask for a credit if you have to supply your own.

Should you get a three-car garage?

Three-car garages are very popular even if you don't have three cars because they provide great storage. But, park your car in the garage before you sign the contract. Make sure you can open and close the door and move around comfortably after you get out.

That's a great tip. How else should you test a house?

Go with someone else, have them go upstairs and flush the toilet to see how noisy it is. In a buyer's market, you might be able to convince the builder to insulate the pipes. Go into the house next door; it's more typical of a builder's quality then the model house. Open and close every door and window; make sure they work. Listen to the dishwasher. You can even have someone mimic a treadmill for annoying vibrations. See how close your neighbors are. Can they see you in your new great master bath? I saw a house once that was built into a retaining wall so anyone could just walk up and look in your second-floor windows. And look at how close your front window to the sidewalk. Do your homework, now you have the time.

Any tips on selling your house before you buy a new one?

When it's a buyer's market, you have to make the house you're selling more appealing. Go through it with a cold eye and take out some of the furniture and a lot of the stuff you've accumulated over the years--it'll make your house look bigger. Give it a fresh coat of paint, but be prepared for suspicious buyers that smell paint and think you're hiding leaky pipes. Hang pictures, get new drapes or window treatments. Talk to a savvy real-estate agent about your neighborhood and what's selling. Maybe you need to invest in granite countertops or a hardwood floor.

Anything you don't need to do?

In general, wall-to-wall carpeting is not a good idea. If the central air is 25 years old, you can fix it or offer to replace it or offer buyers a credit against a new one. Before, buyers wouldn't give you the time of day on a contingency contract [a promise that you'll fix something before the new owner moves in], now they're more amenable. Go around your neighborhood, see what the Joneses have done. Does your house measure up? The right price is crucial to selling your house faster. So look around, talk to professionals. Everyone thinks their house is worth more than it really is. A price-reduced sign can bring in people, but it can also turn a savvy buyer off.

What else?

You want to know that your buyer has financing from a credible home lender. You can see the moving trucks in the driveway and the financing [could] still fall through. If you're buying, straighten out your credit and then apply for financing. You don't want [someone buying with] a subprime mortgage now.