GETTING IN: A special report on how to buy a first home in today's tight real estate market : How First-Time Buyers Can Get Their Piece of the Dream

By DAVID W. MYERS

May 21, 1989 12 AM PT

<i> Times Staff Writer </i>

Judy Burnfield’s dream home is perched atop a hillside overlooking the Pacific Ocean. The front porch has a swing, the back yard has a barbecue and Jacuzzi. A white picket fence circles her spacious yard.

But for now, her dream home will have to remain just that--a dream.

When the 26-year-old physical therapist went shopping for her first house earlier this year she learned just how hard it is to buy even a modest home in Southern California’s overheated housing market.

“I couldn’t even touch a single-family home with my income,” said Burnfield, who makes about $36,000 a year. “I knew prices were high, but I didn’t know they were that high.”

Undaunted, Burnfield turned to the less expensive condominium market. Many condos were also out of reach, so she again downsized her expectations and settled on a smaller, $136,000 unit in Long Beach that she could buy with her down payment of about $15,000.

“It’s not my dream home,” she said, “but at least it’s a start.”

Burnfield has done what more than 50 real estate experts interviewed by The Times are telling other would-be home buyers:

Sacrifice, scrimp, stretch your budget, scrape up the money for a down payment any way you can, but buy something-- anything-- now.

And of all the words of advice the experts offer to first-time buyers the most common is compromise.

“You’ve got to be realistic,” said David Carden, an agent with Century 21/A Marketplace Realty in Long Beach. “You’re not going to get your dream home the first time out, but you need to get something now .

“With the market this strong and prices going up so fast, you can’t afford to wait because you’ll fall further behind every day. So compromise--just like your parents did when they were starting out.”

The Times asked the experts what they’d suggest to two hypothetical couples who want to buy a home today. The first has an annual income of $39,000 and can make a down payment of $20,000; the second earns $30,000 and has a $10,000 down payment.

Clearly, both couples would have to stretch their incomes and down-scale their dreams to buy a home in most parts of the Southland.

A family trying to buy California’s median-priced home of $196,097 would need a household income of $63,904 to qualify for a loan at an interest rate of about 10%, according to the California Assn. of Realtors.

And that’s assuming the buyer has a 20% down payment of nearly $40,000, which few first-timers have.

Such constraints mean that would-be buyers must carefully study all their financing options.

“I’d tell these couples to consider taking out an adjustable-rate mortgage instead of a fixed-rate loan, because the lower (initial) rate on the ARM will make it easier to qualify for the loan and allow them to borrow more money,” said Judi Arnold, sales manager in the Canoga Park/West Hills office of Coldwell Banker.

Adjustable Mortgage

Arnold estimated that the $39,000 couple could afford a $127,000 house if they chose an ARM at the current rate of about 9%, but only a $115,000 house with a fixed loan at the current 11% rate.

The couple making $30,000 could get a home worth about $86,500 with an ARM instead of $74,000 with a fixed-rate loan, Arnold estimated.

Of course, the trouble with ARMs is that their interest rate almost always jumps between one and three percentage points as soon as the low, introductory rate expires at the end of six months or a year. Further increases can be expected if rates rise in later years.

“Before you take out your loan, get the lender to estimate in advance what your new payment will be once that introductory rate disappears,” recommended Lawrence A. Krause, president of the San Francisco financial planning firm that bears his name.

“It won’t do you any good to buy a house, then lose it later because you can’t keep up with the payment increases,” he said.

To guard against skyrocketing payments, experts say consumers should choose an ARM that can rise no more than three points at each adjustment period and no more than six points over the life of the loan. So, an ARM that starts at 9% shouldn’t go higher than 12% when it is first adjusted and--in a “worst-case” scenario--never go higher than 15% during the loan term.

Many lenders offer more exotic financing programs that are especially attractive to cash-strapped buyers.

Rate Stopping Point

For example, Calabasas-based ARCS Mortgage Co. and some other lenders are offering graduated-payment mortgages: The ARCS loan starts at 8 7/8% and rises one percentage point every six months until it reaches 11 7/8%--not much higher than today’s fixed rates.

The rate then stays at 11 7/8% for the rest of the loan term, unless the borrower wants to refinance because interest rates drop.

“The low initial rate makes the loan easier to get, an important consideration for first-time buyers,” said ARCS president Ira Cohen.

Cohen and other experts also urge consumers to check with local housing agencies to see if they offer attractive financing. Many cities provide low-interest loans to first-time or moderate-income buyers.

The California Housing Finance Agency offers home buyers fixed-rate financing at about 8 1/2%. Depending on the area and the number of people in the household, borrowers can earn up to $50,600 a year and buy a house that costs as much as $176,000.

Although budgets may be tight in the early going, experts say most people don’t need to worry too much about it.

Get ‘Prequalified’

“If you’re upwardly mobile and expect your earnings to grow in the future, don’t worry about stretching your finances a little,” said Harriet Clune of Jon Douglas Co.’s Ventura office. “That mortgage payment that seems so hard to make today will seem a lot smaller a year or two from now.”

Experts also urge buyers to get “prequalified” by a realtor and lender before they even start their house hunting. This allows buyers to get a good idea of how big a loan they can get, based on the size of their down payment, annual income and other factors.

“By prequalifying, you’ll know how much home you can afford, so you don’t waste time looking at properties that are too expensive for you to buy,” said Steve Scheinwald of Sylvia Miller Realty in Rancho Mirage. “It doesn’t cost anything, and it gets the (loan) paper work rolling before you even find a home.”

But more important, Scheinwald and other experts said, prequalified buyers usually get a written document from the lender that says how big of a loan they can get.

“That makes you a more credible buyer,” said William Blalark of Exclusive Properties in the Crenshaw area of Los Angeles. “If you show the seller that you’re prequalified, you’ve got an advantage over a buyer who isn’t prequalified because there’s no proof that the other guy can get a loan.”

Would-be buyers also should think of ways to pay off outstanding debt or increase their down payment to get a bigger loan or nicer home.

Personal assets--paintings, stocks, cars--can be sold, life insurance policies can be converted into cash, or perhaps retirement plans can be tapped. (For more suggestions, see the chart accompanying this story.)

Help From Employer

“But don’t get in too far over your head,” cautioned financial planner Krause. “You’ll still need some ‘emergency money’ in the bank after your escrow closes.”

Also see whether your employer or union will provide financial help. “Some of them provide part of the down payment or low-interest loans to workers that they want to keep,” said Peter G. Miller, a Maryland broker and author of “Successful Real Estate Investing.”

Of course, there’s also the old-fashioned way of raising cash: Get it from the folks.

“About one-third of all first-time buyers get a gift from their parents,” said Liz Johnson, a spokeswoman for the National Assn. of Realtors in Washington. “Asking your folks for help is nothing to be embarrassed about.”

Even parents who don’t have much cash can help their children buy a house by agreeing to co-sign the loan application, Johnson said. The added financial strength can make a lender more willing to make the loan.

Broker Clune said there’s a new twist to parental help.

“We’re seeing more and more grandparents and even parents give money to the kids and say, ‘This is your share of the estate we’ll leave after we die. We’re giving it to you now so you can buy a house before prices go any higher.’ ”

And increasingly, many experts said, financial help that parents give to their kids comes with strings attached.

Equity-Sharing Agreement

Among the most common are so-called “equity-sharing” agreements, in which both the parents and children own an interest in the property and agree to split the profits when the home is eventually sold.

And although some experts said equity-sharing agreements should only be struck with family members or friends, a growing number of firms now offer to match cash-strapped buyers up with private investors to buy single-family homes.

Typically, the investor makes the down payment and the buyer makes the monthly payments. A written contract covers every detail, from how tax breaks will be shared to who will pay for repairs.

“You can put together a successful equity-sharing deal with anybody,” said Mark Blakely of CoEquity Corp., a Costa Mesa firm that packages deals across the Southland. “The key is to have a carefully worded contract that deals with every conceivable issue that might come up, especially who pays for what and how profits will be split.”

Added Herman Pass, president of West Los Angeles-based RealEquity Investors Inc.: “I say 50% of something is better than 100% of nothing.”

If equity-sharing isn’t appealing, cash-short buyers can look for sellers willing to help with the financing.

Seller Financing

Seller-financing typically involves the use of a second mortgage, usually called a seller “take-back” or “carry-back.” For example, if a couple wanted to buy a $125,000 home but could only qualify to purchase a $115,000 house, the seller could take back a $10,000 second mortgage to complete the sale.

“Finding a seller willing to help out with the financing isn’t always easy, but it can be done,” said Sandy Sandison, an agent with Betty Landes Realty Services in Riverside.

Sellers willing to provide financing usually say so in their newspaper ads, often by using the initials OWC for “owner will carry.”

Other likely candidates include people who have had their homes on the market for several months, owners who are being transferred out of town and older people who own their house free and clear and don’t need their sale proceeds in one lump sum.

Another alternative for buyers with small down payments: search for a home financed with an assumable loan.

A buyer who assumes a seller’s mortgage usually puts up cash equal to the amount of the seller’s equity and then takes over the monthly payments. For example, a seller who had $10,000 equity in a $130,000 home might let the buyer assume the loan if the buyer put $10,000 down and agreed to take over the payments.

Assumable Loans

Some lenders won’t let their loans be assumed, but many others will.

“The buyer sometimes doesn’t even have to qualify for the loan and won’t have to pay all the fees entailed in setting up a new mortgage,” said Colleen McFarland, branch manager of the Coldwell Banker office in Riverside.

Buying a lower-priced condominium or townhouse is yet another option. “It means giving up some privacy, but at least you’ll get some appreciation and tax deductions,” McFarland said. “That’s a lot more than you can say about renting.”

But other experts are not as high on condos, claiming they don’t appreciate as quickly as single-family houses.

“If I had a choice between a condo in good shape or a single-family home that needed work, I’d buy the single-family home and gradually fix it up,” said Chuck Cusumano, owner of Burbank-based Gem Realty.

“Most people prefer single-family homes, so you’d always have built-in demand for your house,” he said. “That’s what pushes property prices higher and helps you build equity faster.”

The most promising fixer-uppers are often found in older areas that show signs of revitalization, such as a flurry of new construction projects or remodeling jobs.

‘Dumpster Theory’

Some experts call this the “dumpster theory”: Several homes and buildings with large trash cans out front, filled with torn-out construction material, indicate that owners are improving their properties and that prices in the area may be poised for an upswing.

Once a promising area has been located, buyers should search out homes that need only cosmetic improvements, such as fresh paint, new drapes or carpeting, and other relatively cheap repairs.

“You won’t get a bargain if you buy a house that needs a whole new roof or a complete overhaul of its electrical system,” said Joan DeStout, branch manager in the Coldwell Banker office in Poway, a suburb of San Diego. “But a chipped sink or missing screen is something you can live with until you get used to your new mortgage payment.”

Of course, there’s an even easier answer: Move to a less expensive area.

“Our average price is less than half that in L.A., Orange County or San Diego,” said Linda Crowell, owner of Century 21/Action Realty in San Bernardino. “Riverside is also a lot cheaper than homes near the coast.”

Half of all the existing single-family homes in the Riverside/San Bernardino area sell for less than $119,884, according to the California Assn. of Realtors, which puts that market well within the grasp of most first-time buyers.

And moving inland to take advantage of lower home prices doesn’t necessarily mean two- and three-hour round-trip commutes to a job in the coastal counties each day.

“People who haven’t been out to Riverside or San Bernardino for a long time don’t know about all the industry and commerce that has sprung up,” said Jeff Kirshner of KMK Real Corp., an investment company that is building two housing tracts in the area.

Jobs in Outlying Areas

“If you’re a hotshot lawyer . . . in downtown L.A., or a brain surgeon at a big hospital, then you’d probably have to face that commute,” Kirshner said. “But if you’re an office worker, waitress, accountant or something like that in Los Angeles, you can get a similar job right here and avoid the long drive.”

Another advantage of moving to less expensive areas: loans insured by the Federal Housing Administration.

FHA loans require a minimum down payment of about 5%, and usually have a fixed-interest rate that’s slightly below those offered by conventional mortgages.

The maximum FHA loan limit in most parts of California is $101,250. As a result, the program isn’t viable in most of the pricey coastal areas but is extremely popular in the less expensive Riverside and San Bernardino markets as well as in Palmdale, Lancaster and other parts of north Los Angeles County.

All veterans of the armed services are eligible for the no-money-down VA loan program operated by the Veterans Administration, while California veterans are especially attracted to the 8% loans available through the California Department of Veterans Affairs.

Despite the good financing offered by the FHA and VA, some borrowers who use the program can’t make ends meet and fall into foreclosure. Those foreclosed properties are then resold, often at discounted prices or with attractive financing.

“A couple with $30,000 in income and $10,000 down should pursue VA foreclosures because they require no down payment,” said Dave Del Dotto, a TV real estate lecturer. “All they’d have to pay is closing costs, and their $10,000 in cash should cover that.

Looking for Foreclosures

“The couple with $40,000 in income and $20,000 down should look at FHA and HUD (U.S. Department of Housing and Urban Development) foreclosures, because there are more of them,” he said. “They’ll have to make a down payment, but their $20,000 should be plenty enough.”

Both HUD, which administers the FHA program, and the VA advertise their foreclosures in newspapers. Their ads appear in The Times’ classified advertising section on Sundays.

Many Southland banks and savings and loan associations also have foreclosures and typically offer them at discounts ranging from 5% to 15%. Down payments can be as low as 5%, or the lender may offer a below-market interest rate on the loan.

Information about foreclosures can be obtained by calling lending institutions and contacting local realtors. Some companies, such as the West Los Angeles-based REO Register, sell lists of foreclosed properties in different areas.

So what about the people who want to buy property, but adamantly refuse to compromise their standards or don’t want to spend the time tracking down the best bargains?

“I’d ask them whether they’d consider investing in real estate with somebody else,” said Kevin Hutchings, a vice president in the Woodland Hills office of James R. Gary & Co. Ltd.

“If they did, they’d probably make more money than they would by putting their cash in the bank. After a couple of years, they could sell the property and use the profits as a down payment for a home of their own.”

Investment Increase

As an example, say two people each put up $10,000 to buy a $200,000 home with a 10% down payment of $20,000.

If property prices rose 10% annually for each of the first two years--a reasonable expectation, considering the strength of most Southland housing markets--the home would be worth about $242,000 and each of the investors would have about $31,000 equity.

Their overall return would be boosted by tax deductions they could take for mortgage-interest payments, property taxes and, if the home was rented out, depreciation and other write-offs only landlords can take.

If they had instead opted to invest $10,000 each in a two-year certificate of deposit bearing 10%, their investment would be worth only about $12,100. “And remember, they’d lose a big chunk of their interest earnings to the tax collector,” said Paul R. Yoder, who runs the Grubb & Ellis brokerage outlet in San Clemente.

Indeed, waiting on the home-buying sidelines with the hope of saving up a bit more cash seems fruitless: Today’s sky-high prices seem destined to go even higher and no big drop in interest rates is expected in the near future.

“It’s never been easy to buy a first home, and it’s not going to get easier any time soon,” said Linda Orr of Real Estate Marketeers in Irvine. “So my advice is to buy anything you possibly can.

“Beg to do it, borrow to do it, steal to do it,” Orr said. “Just do it.”

SOURCES OF FINANCING

Possible sources of cash for raising a down payment.

Loan or gift from parents.

Getting a co-signer for the loan.

Sale of personal assets or securities.

Loan secured by personal assets or securities.

Withdrawal from retirement plan.

Cash value of life insurance.

Second mortgage from seller or other lender.

Private mortgage insurance.

Low-down FHA, CHFA or VA loan.