Beginners’ pluck

First-TIME buyers Allen Lulu and his wife, Beth, had almost given up. After spending months last summer bidding on homes and losing, they were weary of competing and having nothing to show for it but stories -- ones that might sound familiar to others in the market for a $300,000 chunk of Los Angeles real estate.

There was the charming two-bedroom Craftsman in the West Adams district where 10 buyers, including the Lulus, bid up to $70,000 above the $289,000 asking price within a week of the home entering the market. And the two-bedroom, $310,000 house where a blind bid had to be accepted before they would even be allowed inside. Their $320,000 offer was insufficient to gain entry.

“We were debilitated,” said Allen Lulu, an actor in his late 30s. “I got the sense that even though we were seeing houses in our price range, there would always be somebody who would outbid us by at least $50,000.”

Then it happened. The couple’s broker, Michael Caldwell of Housing Solutions in Los Feliz, drove by another two-bedroom Craftsman in West Adams that seemed perfect. It was listed for $359,000 and had a one-bedroom house in the back that could be rented out to help cover the mortgage payments. Because it was listed in the South Bay Multiple Listing Service instead of the Los Angeles MLS, no other buyers seemed to be aware of it, and the Lulus’ asking-price offer was accepted without contest.

“For once, everyone else in L.A. wasn’t bidding on something,” said Allen, who closed on the house in October and plans to move into the new place from the couple’s one-bedroom apartment in West Hollywood in January. “We got lucky, very lucky.”

Soaring prices have forced first-timers into an ever-tougher position in California. Their ranks have declined sharply over the last two years despite favorable lending conditions, as more of them have been priced out of the market or worn down by competition.

Those who have persevered and bought first homes have had to become more businesslike in their approach, touring houses with preapprovals in hand and beefing up down payments with family gift money, opting for low- or zero-down loans backed by stellar credit or using interest-only loans.

First-timers dropped as a percentage of California home buyers from 36% in June 2002 to 31% in June 2003 to 26% in June 2004, according to the California Assn. of Realtors. This decline bucks the national trend in which first-time buyers have represented 40% of the nation’s home buyers for the last 10 years.

In most areas of the country, first-timers have been taking advantage of low interest rates to get into the market and have become a driving force in the record-breaking pace of home sales over the last few years, said Walter Molony, spokesman for the National Assn. of Realtors.

But in California, even with low interest rates, steeply rising prices are preventing an increasing number of residents from buying their first home, said Leslie Appleton-Young, CAR vice president and chief economist.

The problem isn’t getting a loan, she said: “If you can fog up a mirror these days, you can get a loan. But you still have to make the payments, and that’s not easy.”

A comparison of the U.S. median October home price of $187,000, a rise of 9% over last year, with the California median October home price of $463,620, a 21% increase over 2003, shows the challenge that first-time buyers in the state face.

California households with the state’s median income of $52,940 were $55,370 short of the $108,310 qualifying income need to purchase a $462,510 median-priced home in the third quarter of 2004, according to CAR statistics.

Moreover, price surges over the last year in the more affordable pockets, including the high desert, Riverside/San Bernardino and Palm Springs/low desert markets, have been in the 30% to 40% range.

However, competition in some areas may be easing slightly, real estate agents say, as the inventory of unsold properties is rising.

The number of homes for sale in October nearly doubled this year over last, jumping from a two-month supply to a nearly four-month supply, according to the state Realtors group.

But Appleton-Young stressed that market conditions were not softening or changing in a significant way. The boost in inventory has lessened some of the fierce bidding wars, however, which could bode well for first-timers who generally have less than 10% for a down payment and commonly make offers with nothing more than a zero-down mortgage agreement and some high credit ratings in hand.

“The prices and the down payment make a big difference when [first-time buyers] are bidding against a move-up buyer who has built a large amount of equity in their home,” said Ann Pettijohn, past CAR president.

To be more competitive with trade-up buyers, real estate agents recommend that first-timers adopt a more professional approach to the home-buying process.

Shopping around for the best lending offer can make a big difference. Doug Duncan, chief economist at the Mortgage Bankers Assn., recommended that home buyers visit at least three places before committing themselves to a lender.

“About 30% of the people who get loans never talk to more than one person,” Duncan said. “You can and should get them to compete for you by shopping around for the best deal.”

Those who seek loans over the Internet can use this shopping-around period to get a second back-up agreement letter, which can strengthen their Internet agreement, said Stephen Ward, a West Hollywood-based Realtor for Keller Williams who specializes in first-time buyers. But, real estate agents and mortgage brokers caution, home buyers should be realistic about the payments they can afford.

“If they have to rob Peter to pay Paul and make their mortgage payments, I’m not afraid at all to tell people that it may not be the best time to buy a house,” Ward said.

Improving credit before shopping is a tried-and-true strategy that worked for Russell Wyckoff, who bought a two-bedroom two-bath townhouse in Studio City in February. He said credit card debt discouraged him from looking at homes when he was first interested three years ago.

“I knew I wanted to buy something, but I wanted to be debt-free, have all my ducks in a row,” said Wyckoff, who spent two years paying off his debt and boosting his credit rating before entering the market.

He was then able to put 10% down and was preapproved by a credit union, factors that helped make him the most attractive candidate for the first property he bid on, a townhouse listed in the low $300,000 range. He beat out several other bidders.

Other first-timers watching prices rise and eager to get in on the frenzy are beefing up their down payments with family gift money.

“I see a lot of parents in their 50s and 60s who are getting their estates in order and helping out their 25-to-35-year-old kids with down payments,” said Stephanie Vitacco, a Coldwell Banker Realtor in Northridge. “There’s been a big transference of wealth that I haven’t seen before.”

Without $10,000 of gift money from his uncle, Larry Oberman said he would not have been able to buy his two-bedroom home in Valley Vista or any home in the Los Angeles area two years ago.

“It was absolutely the deciding factor. We wouldn’t have our house without that money,” said Oberman, whose down payment totaled $18,000, or 5% of his home’s $360,000 purchase price.

Guidelines for gift money vary depending on the lender, size of the gift and loan type, but lenders say they typically ask for a letter from the giver stating that the money is a gift and documentation showing that the gift money has been in the home buyer’s account for at least three months.

“Most lenders just want to make sure that the gift giver is someone with a personal vested interest in the home buyer, not someone who is an investor,” said Darlin McRoyal, first vice president of affordable housing at Metrocities Mortgage.

Some who do not have enough cash for a down payment have been taking out zero-down mortgages.

But lenders favor borrowers with higher credit scores for zero-down loans, Duncan said, and it may be difficult to get a good rate on a loan with a score below 700.

It’s also important that buyers understand the risks involved with zero-downs, said McRoyal, whose clientele is about half first-timers.

Having a loan that represents 100% of the home’s value may make it difficult at resale for those who find they need to move suddenly.

“It may be hard to build equity in a short amount of time” to cover commission and other selling costs, McRoyal said.

In a competitive bid situation, those with zero-down mortgages may also find they need to plead their case more convincingly than those who make offers with large down payments. Ward recommended buyers take the opportunity to include a sincere “letter of intent” to try to gain the seller’s favor.

“A lot of people think it’s hokey, but I advise first-time buyers to include a letter stating who they are and why they like the house,” Ward said. “A lot of them also enclose photos of their kids. It puts a face on the offer and makes it harder to reject.”

The Lulus took advantage of another increasingly popular borrowing option -- an interest-only loan. Interest-only loans can minimize a homeowner’s monthly payments and allow buyers to qualify for bigger mortgages by delaying the payment of the principal for a specific amount of time.

There are many kinds of interest-only mortgages. The Lulus’ plan, called a 5-1 interest-only loan, has a fixed interest rate for the first five years. After that period, the rate will be adjusted every year and the principal payments will be amortized over the remaining 25-year span of the loan.

Because the Lulus were putting only 10%, or $35,900, down, they also took out two mortgages, one for 80% of the loan and another for 10% of the loan.

Their monthly payments are $1,820, which is partially offset by the $600 a month in rent income generated by the one-bedroom home on their property. They also expect the rental income to help pay for the $15,000 to $20,000 in renovations they plan to do themselves over the next several years.

“Actually, when you think about it, we don’t really own very much of our house right now,” Allen Lulu said, “but we are still really lucky we have it.”

Jennifer Lisle can be reached by e-mail at jenlisle1119@aol.com.

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Resources to get more answers

Shopping for a mortgage “can be like walking into a toy store,” said Darlin McRoyal, first vice president of affordable housing at Metrocities Mortgage. “It’s dazzling how many different loans are out there. It’s very easy to take what someone offers you.”

But home-buyer education can help borrowers make better choices and reduce loan delinquencies and late payments. These sites can help prepare buyers for the challenges of homeownership and provide resources for buying, selling, repairing and refinancing:

* Freddie Mac, www.freddiemac.com/homeownership, provides a general and thorough step-by-step course in homeownership. The course is divided into seven modules, which offer information on mortgages, credit reports and refinancing. There is also a loan calculator.

* Mortgage Bankers Assn., www.homeloanlearningcenter.com, is set up like a newsletter with rotating articles on specific areas of homeownership and financing. The articles are submitted by institutions other than the association and cover such topics as reducing student debt, finding foreclosures and unveiling the truth behind a credit score.

* HUD, www.hud.gov/buying, serves as a homeowner’s advocate, citing the rules and regulations that govern fair housing standards, home-buyer’s rights and borrower’s rights. There is also advice on avoiding predatory lending.

-- Jennifer Lisle