Real Estate: Tips for the Intrepid

Even though housing prices are still falling, some bargain hunters are already getting to work. What takes patience these days is the financing

by Lauren Young

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Durliat expects to pay $1 million for a Miami condo he figures is worth $1.6 million Jeffery Salter/Redux for the property above Durliat

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Is it safe to venture back into the property market? Some real estate pros are switching into full bargain-hunting mode even as home prices continue to fall nationwide. But if you're tempted to join them in bottom-feeding, look out. Not only is there a chance home prices will fall more and not recover for years, but even seasoned professionals are struggling as they try to work out deals.

Among the bargain-seekers is Jim Gillespie, president and chief executive of Coldwell Banker Real Estate. In April he closed on a 35-year-old, three-bedroom, two-bath ranch house just south of Santa Rosa, Calif. A year and a half ago the seller paid more than $450,000; Gillespie got it for $320,000. He wasn't trying to make a killing: "The way I look at it, I got a fair market price," he says. "I'm not saying it will go up to $450,000 overnight, but it's going to be a good investment. People shouldn't try to time the market."

Gillespie purchased the house for his son and family (they're renting it from him) in what is called a short sale. Here's how it works: A lender allows a property to be sold for less than the total amount due on the mortgage and any other loans on the property. If a homeowner has a $300,000 mortgage but the house has sunk in value—the most it can fetch is, say, $250,000—the bank can choose to forgive $50,000 of the mortgage to get the property off its books. For homeowners, short sales offer a way to avoid foreclosure and still pay off their loans by settling with the lender. Negotiations take place between the buyer and the bank.

The transactions are complex, and Gillespie waited five months to hear that his offer was accepted. It was only then that he learned from the bank that there was a second mortgage on the home he hadn't known about. "We had put this much time into getting this house that [we decided] we could wait longer," he says. Luckily, Gillespie ultimately wasn't asked to pay more to cover the mortgage. "To our surprise, the decision by the second-mortgage holder to waive their stake took less than two weeks," he says.

Another real estate insider trying to get a deal through a short sale is Mark Durliat, CEO and co-owner of Grace Bay Club, a resort in the Caribbean islands of Turks and Caicos. He's wading into the battered Miami market to buy a second home, and it has been a deeply frustrating process.

Durliat, who spends about 30% of his time in Miami, found his dream home through a real estate broker about five months ago. It's a luxury condominium on Brickell Bay Drive, with three bedrooms and an ocean view. He expects to pay about $1 million on a property he figures is worth $1.6 million based on the prices buyers were paying for properties identical to his in the same building two years ago. "My position is that it will require three to four years to reach this value, which suits me fine," Durliat says. It will take that long for the Miami market to work through its glut of inventory, he adds.

Durliat has spent more time than he bargained for negotiating—"actually, waiting to negotiate"—a price. It often takes several weeks to get a response from the seller's bank every time a change to the offer is made. "This has been a brutal exercise," he says. "If you are not patient and you are desperate for a home, this certainly isn't the way to do it." An even bigger frustration, however, is financing. In June, Durliat lined up a mortgage to cover 70% of the purchase. Now his bank, JPMorgan Chase (JPM), says it will finance only 60%, so he needs to find a new lender.

Financing is also proving to be more of a hassle for Paul Johnson, the ex-mayor of Phoenix. He now runs a homebuilding company called Old World Communities as well as a distressed-property investment fund. He's looking for a vacation property in the mountains of Colorado to buy with three of his brothers. They plan to use it for vacations six times a year and rent it out the rest of the time.