$8,000 tax credit’s hoops frustrate house hunters

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This summer, Brian Smith decided he should buy a house.

The 35-year-old was in the break room at his Maitland, Fla., office talking to a friend about the idea, and the timing seemed perfect.

Prices were at record lows; “for sale” signs were common, and, most important, he could get a tax credit of as much as $8,000 for first-time buyers if he bought before December. But four months later, after looking at more than 40 houses and condominiums, Smith quit his search in frustration.

“Honestly, my heart was so broken,” said Smith, an associate at a financial-investment company. “I hate it I am going to miss the tax credit. But it’s better to wait and get the place you need and want than to get a place and not be happy with it.”

As the Nov. 30 deadline nears for the first-time-buyer tax credit, no hard numbers suggest how many buyers are in Smith’s position. But interviews with real-estate agents, lenders and buyers suggest that the number of first-time buyers who are encountering challenges is rising.

At least some are learning they must play by a whole new set of rules from just a few years ago. Stung by a real-estate meltdown fueled with free-flowing mortgages and runaway prices, regulators have reacted to the downturn by forcing lenders to be stingier with loans.

Buyers in Orlando, one of the hardest-hit markets in the country, must compete with multiple offers on bargain properties. Short sales can take months to finalize. Foreclosed houses often need repairs that disqualify them from federally backed mortgages. And, amid the free-falling prices, deal-killing appraisals often fall short of sales prices.

Smith found monthly fees on the condos would have cost more than mortgage payments. He endured a trail of “junk” houses that needed new roofs and other repairs. Some of the foreclosed properties had no power, and he had to view them by flashlight or cell-phone light. And finally, the four-bedroom pool home he wanted the most failed to meet federal lending rules.

“In a nutshell, it’s a whole different world out there,” said Judi Northrop, the Equilliance LLC loan officer who worked with Smith. She said he was a great candidate for a mortgage, but the days of someone with a pretty credit score skating through the process are over. Now lenders want documents to address every note in a mortgage application.

The real-estate industry continues to hope that the tax incentive will revive the sagging market. A study released earlier this month by the Fisher Center for Real Estate and Urban Economics at the University of California showed the credit has spurred sales.

The supply of homes priced at less than $300,000 decreased by 26percent compared with a year ago; and the amount of homes priced within the $300,000 to $500,000 range dropped by only 18percent. Study author Kenneth T. Rosen, lead researcher on the study and Chairman of Rosen Consulting Group, credited the federal tax break.

In the Orlando area, it’s not clear how many first-time buyers are hitting snags while investors and others scoop up bargains.

Though sales overall for the year are up 45percent from last year, the percentage of home sales with prices from $300,000 to $500,000 grew more during the last year than home sales under $300,000, according to a review of data from the Orlando Regional Realtor Association.

Investors are definitely making their mark, said Les Simmonds, president of the association.

“Multiple offers are there because investors are getting back in the market,” Simmonds said. “Traditional buyers coming in are going to find they’re in that mix with those bids … the frustration is understandable.”

Until the tax credit emerged, buying a home had not been on Smith’s to-do list for a long time. In 2002, he considered purchasing a house but “chickened out” after declines in the stock market. For years, he rented from a roommate.

Smith, who was earning $39,000 at his job in Maitland when he started his search, targeted homes priced at $100,000 ? about $28,000 less than the area’s median price. His loan officer said he could have afforded more, but he wanted to play it safe. Working with Olde Town Brokers agent Robert Gaudreau, Smith focused on neighborhoods along Interstate4 from Altamonte Springs south to the Mall at Millenia area.

Early in his hunt, he found a real-estate landscape defined by foreclosures and distress sales, which constitute about half of the sales in the Orlando market. Of the 20 houses or condos he had seen by June, only two had people still living in them.

Northrop recalled that one of the houses Smith zeroed in on was in such rough shape that the drywall was missing in some places and only the studs showed after owners did not complete a renovation. Smith was getting a Federal Housing Administration-backed loan because those mortgages require down payments of only about 3percent, compared with 10percent or 20percent for conventional loans. Those loans also require solid houses instead of makeover candidates.

“His problem has been finding the right property,” Northrop said. “Quite honestly, one of the last ones I saw, I wouldn’t live there.”

Troubled house hunts aren’t unique to Smith. Orlando resident Darby Miller, 29, said he has found the market so competitive that one house had 12 offers by the time he looked at it. The biggest problem, he said, was that he did not qualify for a state program that would have given him the $8,000 tax-credit money upfront to use as a down payment.

“At this point, it’s very inconvenient,” Miller said. “I’m going to have to draw from funds I didn’t really want to use.”

For Smith, any condos and houses that were in his price range and in good condition quickly disappeared from the bargaining table. Two months into his search, Smith had made no offers.

“By the time I’ve said I’m interested, they’re gone,” he said in August. “Someone got to them before me.”

Finally, at the end of August, Smith found something. The four-bedroom pool home south of downtown Orlando threw him off at first because it was the color of mustard. But with a large, fenced backyard, it had everything he needed.

When he went to put together an offer, he learned that the house had sold for $54,000 the month before ? half the price it had fetched seven years earlier. The most recent buyers painted it and put it back on the market for $99,900. Smith quickly learned that FHA would not OK a mortgage on a house that had just been flipped.

“I should have figured as much that it wouldn’t happen,” he said. “I didn’t even get a chance to put in an offer.”

Even if he had put in an offer, it wouldn’t have mattered. The house quickly sold for $7,000 over the asking price.

He said he’s going to spend the next few months saving more for a down payment. Then maybe he’ll try again.

(c) 2009, The Orlando Sentinel (Fla.). Source: McClatchy-Tribune Information Services.