Posted on: Friday, June 6, 2003

Imperfect homes help first-time buyers get foot in door

By John Boudreau
Knight Ridder News Service

SAN JOSE, Calif. — The tiny house has green paint that is fading. Its walls appear to be sagging. And its location — to some potential buyers — could hardly be worse: It's two doors down from a corner bar.

One could say this house has issues.

"It's kind of dilapidated," conceded Steven Silveira, the listing real estate agent of the 82-year-old house in downtown San Jose. He was selling the property for his elderly uncle, who had just moved out after living in the house for at least two decades. The asking price, originally $250,000, was knocked down to $220,000 and advertised as a "contractor/investor special."

Still, the Coldwell Banker broker noted that the situation could be more bleak. "If there was a big bar with strippers, I could see a downside to that," he said of the next-door watering hole, The Derby, whose sign reads, "Where Friends Meet." "But this is a neighborhood bar.

"It's more like a landmark. It's like 'Cheers.' "

Real estate agents, who are trained to see a home in every house or condo, acknowledge some properties present extreme problems. Even in Silicon Valley, where demand always outstrips supply, homes with issues can be tough to sell. If carefully priced and inspected, though, such homes can be the first foot into the housing market for some, or for others a way to break into a neighborhood in a high-test-score school district.

"The cliche is really true: location, location, location," said Wanda Buck, an independent broker. "If you have a bad location, there will be people who won't come in the door."

Real estate agents all agree on one caveat: If you buy a discounted house, you'll probably have to sell at a discount relative to similar homes without problems, such as being on a busy street.

David Martz, an agent in Los Gatos, specializes in houses with issues. In fact, he bought one himself.

"It allowed me the opportunity to buy my first house with a 5 percent down payment and build up enough equity to buy a house in Willow Glen," he said. "I have story after story like this."

The key is being able to stay put for several years or more, depending on the economy, he added. Anyone who bought a home at the peak market in 1989 would have been stunned to watch home values plunge during the recession that followed. But, Martz said, if that person stayed in the home until now, "you would have doubled the price of your home."

In the fall of 1998, Nick Bougopoulos, a 37-year-old corporate lawyer, bought a two-bedroom, one-bathroom house a few blocks from the Pink Poodle strip club in San Jose for about $260,000. Friends and family members cautioned against the purchase.

"They said it wasn't a good neighborhood," he recalled. "There might be problems with appreciation." In the spring of 2001, at the peak of the boom's buying frenzy, he sold the home for $440,000. "It was a good starter home," said Bougopoulos, who then bought a house in San Jose's Japantown for nearly $500,000. "I was able to parlay it into something bigger and nicer."

In 1999, Rodrigo Liang and his wife, I-Han, paid about $500,000 for an English Tudor on a busy street. It was near railroad tracks. The couple did a little shoe-leather homework before buying their first home: Neighbors said the tracks were rarely used. Furthermore, the couple was willing to put up with street traffic.

At the end of 2002, they sold the roomy 1925 home for nearly $700,000.

"You have to sacrifice something," said Rodrigo Liang, who designs microprocessors for Sun Microsystems. "And to us it wasn't such a sacrifice. We knew what we were getting into. If someone's objective is to own a house, the sooner they get in, the better.

"You may not get the perfect house you want," he added. "But waiting for that perfect house isn't the way to go. The market isn't waiting."

Indeed, the house near The Derby sold after just a few months on the market. The buyer was an investor who plans to put "sweat equity" into the home, Silveira said.

Once it is fixed up, he added, the house might fetch $320,000.