What Homeowners Can Do

By Barbara Kiviat

Buyers: Maximizing The Advantage

1.With the number of homes on the market up 19% from a year ago, buyers (finally) hold the best cards. To play them, start entertaining all the offers homebuilders and real estate agents are hurling your way. How about a finished basement? Or having the seller pay your closing costs? The downturn has yielded less obvious opportunities too. John Mead, a teacher in Calhoun, Ga., paid $120,000 for the three-bedroom house he found on Foreclosure.com a solid $40,000 less than similar offers he was considering from people not as desperate to sell. (Don't feel guilty about buying a foreclosure; it helps move inventory.)

True, lenders have tightened standards, and some buyers qualify for less house. Yet rates are still relatively low--though loans of more than $417,000 have gotten pricier faster.

Just keep in mind that the housing market hasn't hit bottom. Looking at the gap between how much it costs to rent a place or to buy one, Deutsche Bank research analyst Lou Taylor concludes that in the bubbliest markets, renting is still the better short-term deal. Consider Sacramento, Calif., where rent runs about 40% of the monthly cost of buying, half of what it did a decade ago. Of course, not everyone can wait for the trough to become a homeowner. "If you just got married and your wife is pregnant with twins, you've not got much of a choice," says Taylor. "Just buy carefully and plan to stay for a number of years, because it may take that long for home prices to increase again."

Sellers: How to Limit the Damage

2. Real estate is largely a local matter. People selling houses in Bismarck, N.D., or Binghamton, N.Y., might find they have a relatively easy time of it, but in big chunks of the country, putting a home up for sale hurts.

The best way to avoid the fate of sellers who watch their property languish (the average sell time is eight to 10 weeks) is to hit the field with a bang; the house should look sharp (fresh paint, fresh flowers) and be priced to move. "People used to try a higher price and see what happened," says Realtor Judy Moore, based in Lexington, Mass. "Today, when the buyer has so many choices, you don't want to sit on the market for 30 days and then reduce your price. That buyer is long gone."

So sellers are sweetening the deal. Paying closing costs is common, as is ponying up cash for expenses like condo fees and renovations. If you fix the place up before you sell, stick to the kitchen and bathrooms, since renos in those rooms (along with new siding and windows) return the most, says a survey in Remodeling.

And try not to feel bad: there are larger forces at work, after all. "House prices are falling back in line with economic fundamentals," says Economy.com housing economist Pat McPherron. Even granite countertops can't change that.

Debtors: Facing Up To Foreclosure

3. First, know that you are not alone: 1.4% of mortgages are now in foreclosure, which translates into roughly 730,000 homeowners. And that doesn't count the 5.1% (2.6 million) simply behind on payments.

The most important thing is to call your mortgage servicer--which may not be the outfit that made the loan--and talk to the loss-mitigation department as soon as you sense trouble. The more temporary the help you seek--a forbearance, say--the more likely you are to get it. Lenders prefer workouts to foreclosure, but attitude is key. "It's not easy to be polite when you feel dragged through the mud, but this is an art, not a science," says Scott Thompson, president of the realty group Mortgage Resolution Services. If you seek relief for an investment property or second home, more will be asked of you, such as tapping family for money.

A housing counselor can help with the process. HUD provides names at hud.gov or 800-569-4287. One option is to declare Chapter 13 bankruptcy, which forces a lender to accept a negotiated repayment plan. Chicago bankruptcy attorney David Siegel says that saves a house about 30% of the time.

Investors: Heading Into Vulture Mode

4. In a typical year, about 250,000 foreclosures are scheduled for auction at county courthouses nationwide; so far this year there have been 440,000, according to RealtyTrac. Investors once lured by the prospect of flipping houses at ever inflating prices are now (if they sold in time) focused on scooping up distressed houses on the cheap and turning them into rentals. "There's a whole crowd of people who say, 'Wow, what an opportunity,'" says William Bronchick, president of the Colorado Association of Real Estate Investors.

Sales of bank-owned repossessions like the one auctioneer Hudson & Marshall is hosting in Detroit later this month are sellout events (700 properties will be on the block, vs. 130 this time last year), but the real money is made by people who get their hands on houses before the banks do. By outbidding the bank at a courthouse foreclosure auction, return on investment can get as high as 25% to 35%. Make sure you are incredibly well versed in your state's real estate laws and prepared for tasks like evicting a family.

However you get your hands on a house, it's important to remember that foreclosures are often cheap for a reason, like having a cracked foundation. Says Terry Dunkin, president of the Appraisal Institute: "Just because it's priced less than other houses in the neighborhood doesn't mean it's a great deal."

Renters: In the Perfect Spot

5. Even though home ownership peaked during the boom, landlords didn't suffer, nor did renters benefit. Why? So many buildings were going condo, the apartment stock actually fell in 2005.

Now, with sales slowed, builders are reverting to rentals. In the second half of 2007, some 62,300 apartments will be added, double that of the first six months, according to real estate tracker Reis. In the short term, that gives renters the advantage, since their numbers aren't growing as fast as the apartment count is. "In some cases, vacancy rates are going up," says Reis chief economist Sam Chandan. Unless you're in a tight market like New York City or San Jose, Calif., you might be able to win a free month or other concessions.

There's another upside playing out in slack markets. When Karin NeJame couldn't sell her Bethel, Conn., house after a year, she decided to rent it. Now, for about $2,000 a month, her tenants get three bedrooms, a Jacuzzi and a landlady who gladly does the gardening.

* Source: S&P/Case-Shiller (R) U.S. National Home Price Index