Everyone love a discount. It’s a serious rush-generator for yours truly. Yet and still, there are several things I just don’t believe in cutting costs on. Attorneys, for one. Surgeons, for two. Yoga pants — some things just need to work, perfectly, every time, and the discount version causes bad results.

And I feel the same way about overconfidence. Much of the time, it actually serves our interests to take a reasonable estimate of our abilities (which we tend to be overly conservative about, as a rule), and jack it up 10 or 15 percent: When we go into a sales pitch, or start a business, say — maybe even when it’s time to approach the man or woman of our dreams and start that first, terrifying conversation.

But when it comes to financial decision-making — especially in the real estate realm — overconfidence only ever causes bad results. Here are some of the ways overconfidence rears its ugly head in the world of real estate.

1. No showings, no offers. When sellers are overconfident in their home’s appeal, their read on market dynamics, or their own personal negotiating power, the result is a phenomenon that strikes terror in the hearts of real estate agents from coast to coast: overpricing.

Overpriced homes don’t get shown to buyers nearly as much as they would if they were properly priced, because buyers see them online up next to much bigger, better homes in the same price range, or next to similar homes that are much better priced, and decide to not even bother coming to see them unless and until the seller’s overconfidence is cured.

And no showings means no offers. No offers means no sale. No sale means the house lags on the market, maybe eventually attracting some lowball offers from buyers who’ve read the lengthy number of days the place has been on the market as a sign of desperation. Overconfident sellers shoot themselves in their own feet.

2. A series of unsuccessful, lowball offers. When buyers are overconfident, on the other hand, it usually manifests in a misunderstanding of the market (i.e., they think there’s less competition or that sellers have more flexibility than really exists).

A typical overconfident buyer might read a national news headline that says home values are down, then go make an offer on the biggest and best house in the most desirable part of their own booming town at 30 percent below asking — despite the fact that there are seven offers on the place.

While that might seem like an exaggeration, there are plenty of buyers out there who don’t understand that the down market does not mean that sellers are giving homes away — nor does it mean that banks are desperate to offload foreclosed properties.

These folks end up making unsuccessful offer after unsuccessful offer, then usually end up having to either adjust their offers upwards or their standards downward.

3. Defies the data. Today’s buyers and sellers have the advantage of access to powerful data that previous generations of buyers and sellers simply did not have.

This data — including the ability to see what recent similar homes have sold for and what homes are in competition for buyers right now, photos and all — puts today’s real estate consumers, and the agents that advise them, in the position to set list prices and make offers based on the facts and strategy, not emotion and guesswork.

Overconfidence deactivates the power of the data that today’s consumers should be using to make smart real estate decisions. In other words, you might as well toss your spreadsheets and laptops out the window and go back to guesswork if you won’t allow the data and your agent’s data-based advice to correct your overconfidence.

4. Creates delay. Overconfidence causes buyers to make crazily low offers, lengthening their house-hunt times unnecessarily. It also causes them to make bizarre demands during escrow, asking bank sellers to make repairs or reduce the price midstream (even though foreclosure sales are particularly firm on “as-is” terms).

It makes sellers list their homes high, delaying the sale of their home until they relent and bring their pricing into line with reality. Generally speaking, overconfidence delays both buyers and sellers from meeting their real estate objectives.

5. Destroys rapport. When an overconfident buyer makes an irrational demand during a transaction, some sellers find it to be completely insulting. Even if the seller does bend on her position a little bit, ultimately, the buyer might have destroyed any and all rapport he might have had.

Why should the buyer care? Well, if he later needs to request an extension of time to obtain his lender’s final approval or to close escrow, or he needs to ask the seller to complete a small repair, the seller might simply refuse.

Rapport is crucial to making real estate transactions runs smoothly, and overconfidence kills rapport.

Ginny: As a buyer, if I make a deal to buy a house contingent on the sale of my house, but my house doesn’t sell, do I get my deposit back?  Anthony D’A., Taos, NM

Anthony: Rarely do I get the chance to give a short, yet accurate, answer to a real estate question, so thanks for the chance! And that short answer is yes.

If you made your purchase contract contingent on the sale of your home, and you are unable to sell your home, you have the right to back out of the sale and recoup your deposit. Of course, there are a number of scenarios that can unfold in any real estate purchase, so let me brief you on how the sale of your home (or its failure to sell) can play out vis-à-vis your and the seller’s rights and obligations under your contract.

See, negotiating to buy a home with a contingency for the sale of your existing home is the real estate equivalent of placing the home on hold for the price you negotiated. Of course, you do have to write an earnest money deposit check, so it’s not a move to take lightly. But because you do have the right to back out with no penalty at any time before your home sells and you remove that contingency, it’s only fair that the seller not be bound any more than you are. Sellers are bound to sell you the home at the price and term in the contract only if you move forward when your home sells or in response to their demand.

Under most contracts that impose a contingency for the sale of the buyer’s home, the seller has the right to demand that you either commit to moving forward with the sale (irrespective of whether your home has sold) or cancel the deal, and that you make one decision or the other within a certain period of time, often 48 hours, after the seller makes the “demand to perform,” as it is called in many standard real estate contracts.

Generally, sellers make a demand that you move forward or back out in the event they receive an offer from another buyer.

If the seller makes this demand, and your home hasn’t sold, you can back out of the deal and get your deposit back. Or, you can agree to remove the contingency for the sale of your home and move forward with the transaction; if you do this, though, you should be prepared to handle the financial obligations of both homes until such time as you do sell your current home. Once you remove the contingency for your home’s sale, you lose the ability to recoup your deposit if you later have to back out of the deal because it hasn’t sold.

Note, though, that even after you remove the contingency for the sale of your home, you most likely retain the ability to recoup your deposit if you later exercise another contingency as a reason to cancel the deal. These inspection, loan and appraisal contingencies typically expire or must be removed within a fairly finite period of time — 17 days or so — unless you and the seller agree to a longer time period.

The lackluster housing market has many investors looking for bargain properties, sometimes in bunches. Buyers are getting more creative about funding their purchases, rethinking the role of real estate not only for their portfolios but also for their residences.

In a recent example, an older couple sold their home and purchased two Arizona golf-course condominiums with the proceeds — one for their primary residence and another as a rental — and still put some money in their pocket. What made the deal interesting was that they had purchased the original home six years ago via a tax-deferred exchange.

While investors had turned rental properties into principal residences for years, the timing for claiming the $500,000 principal residence exemption ($250,000 for a single person) on a home acquired via an exchange wasn’t clarified until late 2004.

Before then, taxpayers were left to guess how long they had to hold an investment property before deeming it a primary residence — or when it was safe to sell it and pocket any gain.

The American Jobs Creation Act of 2004 spelled out the steps necessary to create a “safe harbor” with the Internal Revenue Service for investors who ended up living in one of their rentals. The key stipulation was the exchange property must be held for five years in order to qualify for the primary residence exemption. The five-year period curtailed people from buying investments, immediately moving into them and then quickly selling them simply to avoid a capital gains tax.

In order to qualify for the $500,000 exclusion ($250,000 for single persons) homeowners must own and use the property as a principal residence for two out of five years prior to the date of sale. Second, the owner must not have used this same exclusion in the two-year period prior to the sale. So, the only limit on the number of times a taxpayer can claim this exclusion is once in any two-year period.

Under the exchange rules, commonly known as 1031 exchanges or Starker exchanges, a taxpayer who exchanges property that was held for productive use or investment for “like-kind” property may acquire the replacement property on a tax-free basis. Because the replacement property generally has a low carryover tax basis, the taxpayer will have taxable gain upon the sale of the replacement property.

However, when the homeowner converts the replacement property into a principal residence, the taxpayer may shelter some or all of this gain from income taxation. The committee that drafted the five-year rule wrote that proposal “balances the concerns associated with these provisions to reduce this tax shelter concern without unduly limiting the exclusion on sales or exchanges of principal residences.”

While the five-year requirement is a helpful guideline, it does not significantly extend the timeline for people who might consider moving into their own rental. That’s because an investment property needs to be rented (used as an investment) after an exchange to show the exchange was clearly an investment-for-investment transaction.

Accountants say the exchanged property should be held for at least two years as an investment property before an owner considers converting it to a primary residence. In addition, once the homeowners move in to the new primary residence, they must stay at least two years before qualifying for the $500,000 exclusion.

When you add the suggested two years as investment property with the two years required under the residency guideline, that’s four years minimum needed to reach the five-year safe-harbor status.

Exchange facilitators and tax attorneys caution that all exchanges must meet the “facts and circumstances” test regardless of how much time has passed before converting an investment property to a personal residence. In a nutshell: It’s all about intent. If it’s clear at the time of the exchange that a taxpayer intended to use the exchange property as a primary residence, the exchange can be challenged.

While a tax-deferred exchange appears just like a “sale” for you, your real estate agent and parties associated with the deal, Section 1031 of the Internal Revenue Service code specifically requires that an exchange take place. That means that one property must be exchanged for another property, rather than sold for cash. The exchange is what distinguishes a Section 1031 tax-deferred transaction from a sale and purchase. The exchange is created by using an intermediary (or exchange facilitator) and the required exchange documentation.

If you’ve traded for a lakefront getaway condo and now think you would like to live there, make sure you own it for five years before attempting to pocket a principal residence exemption.

In most cases it is easier to qualify for a home mortgage by applying with another person — be it a spouse or partner, or even a close friend or sibling. But problems may arise if the other person’s credit score is less than stellar.

The federal agencies that oversee and buy mortgages from lenders, like Fannie Mae and Freddie Mac, require lenders making conventional loans to focus on the lower of the two FICO scores. (Scores generally range from 300 to 850, with the national median at 711, according to FICO.)

But both scores may be factored into other loans. On a jumbo loan, for instance, the lender is likely to “put more weight on the credit score of the person with the higher income,” said Greg Gwizdz, an executive vice president of Wells Fargo Home Mortgage in Somerville, N.J.

For some people, however, it may be necessary to hold off on a home purchase for a few months to allow the co-borrower with credit issues to clean up his or her report and raise the score.
This can be done by being “hypervigilant on paying your bills on time” for a few months, said Tracy Becker, the president of North Shore Advisory, a credit restoration company in Tarrytown, N.Y., or by perusing the credit report and correcting any inaccuracies.

Ms. Becker says that one way to raise a FICO score by 30 to 40 points in a few months is to be added as an authorized user to a well-established person’s credit card, even if you don’t use the card. Your score can rise, too, if you pay down credit-card balances so they are at least 10 percent of the maximum credit limit.

Even if you cannot afford to pay down the cards that far, it can help even to reduce the balance to, say, 60 percent of the limit, said Joanne Gaskin, the director of product management global scoring at FICO. The closer your balance is to the credit limit, the more the score will increase when the balance is paid down.
If the cards are “maxed out,” Ms. Gaskin said, “that’s going to be very negative.”

Preparation is key, Ms. Becker said, suggesting that both parties review their credit reports and scores together early on in the home-search process.

Alexander Arader, the owner of Arader & Associates, a mortgage broker in Stamford, Conn., said that a borrower with a credit score of 620 to 640 could pay as much as one percentage point more in interest than a borrower with good credit, say around 760 or higher.  “Do whatever it takes to get your credit score up,” he said.

If there is little time for a significant upgrade in a credit score — perhaps because you found your dream home and can’t wait to make an offer — borrowers should explain to the lender any issues that might have affected the credit report, said Mr. Gwizdz of Wells Fargo.

“Take time to tell your story,” he said, and make sure you carefully document any major life issues that might have contributed to a score’s decline, like an illness, divorce or job loss.

The borrowers also need to make it clear why a second person is on the mortgage, especially if that person is not living in the house, he said. A parent helping a child buy his first apartment in Manhattan will have less trouble explaining the connection than a friend who isn’t there full-time, he said.

Sometimes it may make more sense to have just one person on the mortgage — provided, of course, that the person can afford the monthly payments alone. Some banks may allow two people to appear on the property’s deed with only one on the mortgage note.

While the FICO credit score is important, it is only one part of what lenders evaluate in the application process, Mr. Gwizdz noted.

Among other factors that underwriters examine: the size and source of the down payment (many are now requiring 20 percent); both applicants’ incomes and whether they have been rising; their debt-to-income ratios; and the property they are buying.

A lease-to-own house purchase (also “rent-to-own purchase” or “lease purchase”) is a lease combined with an option to purchase the property within a specified period, usually three years or less, at an agreed-upon price. Such arrangements have proliferated in the post-crisis market because many potential homebuyers can’t meet the tougher loan qualification requirements today, and many potential sellers are unable to realize a satisfactory price in any other way.

Lease-purchase plans can be structured in such a way that both parties benefit. They can also be structured so that all the benefits flow to one of the parties and none to the other. Buyers especially need to be careful because they usually know less about the market than sellers, and the seller usually provides the contract.

Contract features of a lease-purchase…

In a typical arrangement, the borrower pays an option fee, 1 percent to 5 percent of the price, which is credited to the purchase price. The borrower pays a market rent, and an additional rent premium that is also credited to the purchase price. The option fee, option period, rent, rent premium, and purchase price are all negotiable items. If the purchase option is not exercised, the buyer loses both the option fee and the rent premium.

Buyers generally prefer a long option period because it provides more time to accumulate savings and repair credit. A long period can boomerang on them, however, if they are never able to exercise the option, because they lose the rent premium they have been paying all the while, in addition to the option fee. Sellers generally prefer a short option period — but if it is too short, the house won’t be sold.

The option fee and rent premium are viewed differently by buyers and sellers. To the buyer, they are part of the equity in the house they fully expect to own. To sellers, however, these payments are the best guarantee that their houses will sell; if they don’t sell, the payments are retained as income. That the benefit to the seller generally exceeds the cost to the buyer makes the lease-to-own deal a possible win-win.

A lease-purchase contract may or may not give the renter/buyer the right to sell the option. This will have value to the buyer who isn’t completely confident of being able to exercise the option. It is a cost to the seller who prefers to retain the house and the monies collected.

Lease contracts may also contain provisions that nullify the buyer’s option, a point discussed below.

Using a lease-purchase to buy…

The lease-purchase offers homeownership opportunities to consumers who can’t qualify for a loan from any source, but who are prepared to bet on themselves. The bet is that before the option period expires, they will qualify for the mortgage they need to exercise the purchase option. During the option period, they have the opportunity to rebuild their credit and accumulate savings while living in the house.

Even though it is costly, the right not to exercise the option is of value to buyers. If there is something seriously wrong with the house, neighborhood or neighbors, the buyer can cut her losses by not exercising the option.

Dangers to buyers…

A major threat to buyers is contractual provisions that can nullify their option, such as the failure to pay the rent on the first day of the month. Such provisions are most likely to appear in contracts used by developers or firms that own multiple homes. One such firm in Florida had more evictions based on unreasonable conditions than they had purchases. Read the contract very carefully to make sure you are confident you can meet all the conditions.

Using a lease-purchase to sell…

Most home sellers want a cash sale, but for those prepared to hang on to the property awhile longer, the benefits can be compelling. Buyers unable to become homeowners in any other way will generally be willing to commit to a future price substantially higher than the same property could be sold for today.

While the deal may fall through, in that case the seller gets to pocket the option fee and rent premium. The seller also continues to enjoy the tax deduction on his mortgage interest payments during the option period.

Not part of the down payment…

The option fee and rent premium are not part of the down payment unless the seller agrees to relinquish the right to retain these payments in the event the buyer doesn’t exercise the option. Few sellers would be willing to do that. But the option fee and rent payments do make the required down payment slightly smaller.

For example, the parties agree to a price of $100,000 and the option fee and rent premium add to $5,000 when the option is exercised. From the standpoint of the lender, the price is $95,000 and a 5 percent down payment requirement would call for a down payment of $4,750 instead of $5,000.

We’re at the start of a New Year, which begs the question of whether it’s worthwhile trying to sell your home now. Is it a waste of time? Will it sit on the market and become shopworn? Should I take my house off the market until the spring? Will the home-sale market be better for sellers in 2012?

The first question you need to ask yourself is: Are you emotionally prepared to sell? Selling is a challenge for most sellers, although some markets are better than others. Unless you bought more than eight to 10 years ago and preserved your equity, you may not be able to sell for enough to pay off the mortgages secured against the property and the other costs of selling.

For sellers who have no additional assets, a short sale or foreclosure may be the only option. If so, first look into government programs that might help you out financially. Also, talk to your attorney and tax adviser.

Sellers who have the resources to make up the difference between the sale price and the amount they owe need to ask themselves if they are willing to pay the additional cash in order to sell and move on.

There are two reasons why you might prefer bringing cash to closing. One is that your credit will not be negatively impacted, as would be the case with a short sale or foreclosure. The second is that many buyers shy away from short sales because of the lengthy and uncertain process involved.

The next thing to consider is the condition of your home. Is it ready for the market? The most salable homes are those that are in move-in condition.

Before racing to the hardware store, ask your Realtor about how much competition there would be for your home if you put it on the market before the holidays. Some areas are shy on inventory of good homes on the market. If so, now could be a good time to sell.

HOUSE HUNTING TIP: The supply/demand ratio plays a significant role in the health of a local real estate market. No matter what is said about the housing market nationally, it’s the local picture that tells the tale in terms of the possibility of selling your home at any given time.

Most sellers don’t put their homes on the market during the last or first couple of months of the year. The inventory of homes for sale tends to dwindle during the winter months. Interest rates are low. So, if there are buyers in your local market, you may be at an advantage selling when most sellers are waiting.

Some sellers feel that if they’ve waited this long to sell, they should put the process on hold until spring and get the house ready in the meantime. Certainly, it’s not a good idea to put your house on the market until it looks great. But if you and your house are ready to sell, move ahead.

The market in general tends to slow down over the holidays. But rather than pull your house off the market and miss a likely prospect, change the showing procedure to require advance notice. And enjoy your holidays. A sale before year end could be a great holiday gift.

There is a lot of pent-up demand, on both the buyer and seller sides. Sellers have been waiting for a better time to sell. Buyers have been waiting for more quality inventory and a sense that prices have bottomed or are close to it.

THE CLOSING: Recent projections call for another five or so years of bouncing along close to the bottom of this market cycle. Many experts believe that the big price declines are behind us.