6 Sneaky Tips for Buying a Luxury Home Without Wads of Cash

Courtesy of Realtor.com

The rich might be a little different from you and me. Especially me. But that doesn’t mean an average buyer (that’s us!) should be shut out of the high-end home market. A luxe place can be within reach, if you make smart choices before bidding.

Of course, no home—regardless of how luxurious it appears—will be a dream home if you bite off more mortgage than you can safely chew. It’s imperative to do your due diligence. And remember that when it comes time to sell, it could take longer to find a buyer for a luxury home, and if prices fall, a luxury homeowner has more to lose.

But if you’ve done the research and run the numbers, here are a few additional strategies for going high-end without taking a major hit to your finances.

Tip No. 1: Time your purchase right

This one goes back to the age-old lesson we learned in Econ 101: Supply and demand drive prices. And when there’s less demand (read: competition from other buyers), you stand to get a darned good price.

So if you’re looking to score a deal on an otherwise out-of-your-price-range home, look to the off-season—which, in most places, is winter.

“When it’s cold and snowing and dark out, people aren’t necessarily excited to get outside and go on home visits,” says Howard Margolis, an agent with Douglas Elliman Real Estate in New York City. “Then the holidays come up, and there’s a focus on family and spending money on holiday things.”

Another reason to shop during the off-season? Owners of luxury homes may want to offload a property before the new year arrives, so they can take it off their books before the next tax year.

Tip No. 2: Know how to spot a motivated seller

Look at the property’s listing history to determine whether a seller could be motivated, Margolis recommends. If a home has been sitting on the market for three months or longer without any price reductions, the seller may have misjudged the list price.

As Margolis explains, “In a competitive market, the best-priced homes will go in two weeks.”

To find motivated sellers, set alerts for price changes on your favorite properties, and tap a knowledgeable real estate agent for help. Make sure to ask your agent what he or she can find out about the sellers’ situation to get an idea of how quickly they’re hoping to sell—and how much wiggle room there is on the price.

Tip No. 3: Make your bid straightforward

Bids with fewer restrictions such as contingencies go a long way during the negotiating process, according to Hillary Hertzberg, an agent for Coldwell Banker in Miami. Sellers, just like buyers, are looking for a seamless transaction.

“Making an offer as straightforward and appealing as possible by offering a shorter window before home closing or fewer contingencies gives the seller a better understanding that you want to close the deal,” Hertzberg says. (Just be aware of the risks before you waive contingencies.)

Another strategy: offering a larger deposit when signing the contract, which could help lock in a deal where you’ll save on the actual price of the home.

And as always, getting pre-approved and lining up financing ahead of time can make your bid more attractive and allow you to act quickly when you find a home you like.

Tip No. 4: Ask the seller to finance a piece of the mortgage

If you’re looking to buy a pricey home but don’t have cash on hand to put 20% down, you can ask the seller to carry a piece of the mortgage for you, Margolis advises.

Say, for example, you’re interested in buying a $500,000 home but don’t have $100,000 available for a down payment. You can apply for a smaller loan with a smaller down payment, and then ask the seller to personally lend you the difference between your approved mortgage and the price of the home. In essence, the seller assumes the role of a lender.

Why would a seller want to do this? Well, if the market is soft or if the primary lender’s appraisal comes in lower than the agreed-on selling price, the seller may think it is worthwhile (the seller would also be earning interest, just like a bank). Just be sure to enlist the help of a lawyer familiar with seller financing if you go this route, to be sure that you strike a fair agreement.

Tip No. 5: Borrow from your retirement funds

Buyers can dip into retirement accounts to fund a dream home—though experts warn that this should be done cautiously. Don’t splurge on a luxurious home today and shortchange yourself in your golden years.

For those considering a dip, you should know participants of some 401(k) plans are allowed to take out 50% of their vested balance—with a $50,000 limit—as a tax-free loan, but the loan will need to be repaid after a specific period, most often five years. Check with your plan administrators.

You’ll also want to keep in mind that since the 401(k) plan is tied to your employer, you’ll have to return those funds if you leave the company. If that balance isn’t paid within 60 days, it could be considered an early withdrawal, and you’ll then owe taxes as well as a penalty.

You may also have the option to tap into a traditional IRA account for up to $10,000, and sidestep the 10% penalty. The catch? You’ll have to pay taxes on the withdrawn amount. On the other hand, a withdrawal of up to $10,000 could be tax-free if it’s coming from a Roth IRA that has been open for at least five years.

Tip No. 6: Look for foreclosure listings

If you’re looking to buy a luxury home for as much as 15% below its actual value, hunting for foreclosed properties could be the way to go. To search for foreclosed homes in your market, you can take a look here.

While there’s a myth that foreclosed homes can be purchased only with cash, roughly 60% of foreclosed homes purchased are actually financed, says Wells Fargo. Just keep in mind that buying a foreclosed home usually means you’re buying it as is, so it’s important to have a home inspector thoroughly check the house and provide an estimate for repairs. Factor that amount in before bidding to avoid overspending.

With these strategies in mind, buying a luxury home can happen. When in doubt, keep in mind that a happy home is one where you can live comfortably and within your means.