Not a week goes by that I do not talk to some buyer prospect who states their interest in buying a distressed property. Word on the street is that these foreclosures, short sales, estate sales, HUD and Fannie Mae homes and the like represent the best deals the market has to offer. But is this true? Here are some quick hit random thoughts that I usually end up discussing (in no particular order):
- How Low Can I Go? Most of these properties are currently offered at the best price the seller and / or the bank is currently willing to take. So, do not expect to be able to come in and offer 30-50% less than the list price. A 30% discount would be on the extreme high end and very unlikely, whereas a 5-10% discount is much more reasonable and likely. If you need the price to be a lot lower than that then you either need to keep looking or else be willing to wait many months (and gamble) to see if the seller and / or bank will end up dropping the price.
- HUD homes seem to represent some of the most discounted homes at this time (in general).
- Short sales will take at least 3-5 months, will be frustrating and in the end may not work. Foreclosures are usually a good bit faster. (FYI, if you are a seller reading this and are considering a short sale, you should definitely consider our short sale services: shortsale.group15realestate.com)
- The Money Pit? Go watch this Tom Hanks classic before you buy a fixer-upper. Appropriately factor a house that is in need of a lot of repairs and obviously has had significant deferred maintenance. As much as you can see that is wrong with the house there is a ton that you cannot see. Realize that the person that owned that home did NOTHING to maintain it... ever. Value your time and headache and realize it will always cost more and take longer to fix than you think. With that in mind, also look at some houses of similar size and location that are already in immaculate condition and being sold by a very responsible homeowner. Perhaps this home is actually a much better value!
- Good deal? Just because it is a distressed sale does not automatically make it a good deal and just because it is not a distressed sale does not automatically make it not a good deal. Allow your real estate agent to give you good guidance on what is and is not a good deal completely aside from whether or not it is a distressed sale.
When meeting with a new seller client one of the first questions they always have is: "What do I need to do to get my house ready for showings?" Every house will have varying levels of de-cluttering, cleaning, painting, repairs and updating. And most people want to stay focused on interior improvements. But, the number one thing that every house needs is immaculate curb appeal.
Consider that recently a buyer gave me their criteria of what they wanted in a house and after I did a search I came up with over nine hundred possible properties for them to consider! So, I added some more limiting criteria to get the list to under a hundred. But, then it was their turn to narrow that list down to the ones they wanted to see. They will narrow it in two ways:
- They will narrow it by what they see online about the property. The first thing they will see for every house is the main exterior photo of the street view of your house. With so many houses to consider they will automatically eliminate a lot of listings with only having seen that one exterior photo. They will not bother looking at any of the other photos or reading the description of the property.
- Once they have narrowed the list online, they will do some drive-bys. And based on what they see of the outside of your home they will decide if it is worth coming back to see the inside.
So, before you market your house for sale spend that extra Saturday outside mowing, edging, trimming, planting, pressure washing, repairing and painting those lingering tasks you have been putting off. If your house has been on the market since the winter and your house picture is not taking advantage of the beautiful spring and summer conditions, then ask your agent to come out and take a new exterior photo. Here are a few more tips to consider when sprucing up your landscaping.
One of my favorite blogs, Calculated Risk, recently posed ten economic questions to ponder for 2011. Here are my quick hit answers to some of those questions:
1. House Prices: How much further will they fall and will they bottom out in 2011?
The answer to this question really relies on how quickly we can get through the bulk of our foreclosure inventory (discussed in the next question). The good news is that in Charlotte home prices actually rebounded in 2010 over 2009 (although number of sales stayed flat). And in popular Charlotte urban neighborhoods home prices exceeded their 2007 peak! However, foreclosures will continue to create a drag on home prices.
3. Distressed House Sales: Will foreclosures peak in 2011 and begin to decline.
There is no doubt that now that we are getting "foreclosure gate" behind us that foreclosures are really going to begin to accelerate. Although we are not seeing unemployment improve much, we are seeing it stabilize. With this in mind, I think if the banks are left to their business, then we will see them trying to clean up all of their backlog of foreclosures and we will see foreclosures peak in 2011 and begin to decline. This will be a difficult time to sell, in the midst of it, but will be very good overall for the housing market to have foreclosures behind us. The wild card here is if the government get involved in some way to further hinder the foreclosure process.
7. State and Local Governments: How much of a drag will local governments have on the economy and unemployment?
NC seems to be faring middle of the road with government budget crisis. Our leaders, for the most part have taken budget issues seriously and have been trying to address them for sometime. We are sending a new Republican majority, that in this writer's opinion, will do good things for the NC budget. Charmeck leaders understand the threats existing to our budget for CMS and libraries and while some will disagree about some of their approaches, no one can deny they are trying to make some tough choices. North Carolina also seems to be doing a good job of attracting new businesses to our state. All in all, I think NC will come out of next year in better shape than coming out of this year.
9. Inflation: Will inflation rates stay below target? Will there be any spillover from China and elsewhere?
I do not think anyone has any reliable guesses on this right now! Here is one statement I made in a recent blog post: "Here's the 10 second elevator speech on QE2: 'A lot of really smart people are concerned about inflation, but they are even more concerned about deflation. So, they are going to print lots of money as an attempt to fight against deflation, even if it leads to higher inflation.' " And I do think there will be spillover from China and elsewhere.
The most common question I hear from prospective buyers is: "How much less from the purchase price should I offer?" Conversely, sellers have the same question: "How much of a discount do buyers expect to get? If I am willing to take $X, how much more than that should we make the list price?"
I consistently remind both buyers and sellers that this is not the right approach to negotiating a sales price. I actually try to get my buyers to ignore the list price as much as possible. Every house and every seller is different. Perhaps the seller was shooting for the moon when they chose that list price or perhaps they listed it at a great discount to make sure they could sell it quickly. Thus, it is best to actually set the list price aside and remove the guessing game of the seller's state of mind. Instead, focus on two things:
- What do the comparable sales say you should offer?
- What price are you comfortable with (that at a higher price you would rather go find another house)?
Sticking with this approach sometimes you may discern your offer that you need to offer at a significant discount and other times you may discern your offer should be right at or near the list price.
Recently someone submitted a question to Bankrate.com and asked about the possibility of getting a mortgage after a foreclosure (read the full article here). The article goes on to discuss how difficult it can be to get a mortgage after a foreclosure. But, the sad part is that it is becoming that hard for many people to get a mortgage for many reasons other than a foreclosure. Bankrate offers a solution that we here at Group 15 have been endorsing for a long time now: Lease Option! There are many advantages as a buyer to locking in on a Lease Purchase instead of just renting and paying your landlord's mortgage. And you can take the steps necessary in the interim while you are in the midst of your Lease Purchase to then be able to exercise your option and get that mortgage that is elusive to you at this present time.
While I enjoy being a lifelong student of economy, I can easily see that there are a great many people way smarter than I am that are trying to make sense of our current set of circumstances. For most of us, up until recently we may have thought that QE2 might be something akin to Carbon Dioxide. But, if you have been paying any attention to the news lately you know that Quantitative Easing is all the hubbub. And like any present day issue, it is, of course, highly politicized with its detractors and supporters. Here's the 10 second elevator speech on QE2: "A lot of really smart people are concerned about inflation, but they are even more concerned about deflation. So, they are going to print lots of money as an attempt to fight against deflation, even if it leads to higher inflation." Please comment below if you have a more refined or better definition that might shed some light on the issue.
What is the important take away from this? The large consensus at this point is that inflation is coming. We hope it will be as kind to us as it can be, but it is most definitely coming! Okay, but what does that have to do with real estate? Consider these important thoughts:
- We are at the bottom of home prices. Their may be some continued dips and vagaries as we slog our way through the remaining foreclosure market. But, we will not see dramatic price drops over the next year or two like we have seen the last year or two. If you know you will be holding onto your real estate purchase / investment for at least a few years then you can remain confident in your return.
- Interest rates are going up, up, up. I tell this to everyone I can as often as I can and I still think it cannot be mentioned enough. We tend to get so focused on actual cost of the homes, but even more important is to remember the cost of borrowing money! Rates recently were as low was 4.25% and they are currently still low at around 4.5%, but they are raising by the day. It is reasonable to think they could be back around 6.5% within a year or two. Let's consider for a moment the differences involved on a 30 year fixed $150,000 loan on a 4.25% interest rate versus a 6.5% interest rate. At 4.25% the monthly payment would be $738/mo for a total of $266,000 paid over the life of the loan. Compare that to 6.5% for a monthly payment of $948/mo for a total of $341,000 paid over the life of the loan. That is quite a big difference! To put it differently for the money you can spend on a $150,000 home today, next year might only buy you a $116,000 home. That could be the difference between a small 2 bedroom fixer-upper and a nice 3 bedroom that has been totally remodeled.
- With inflation coming, you want your wealth stored in "stuff", not dollars. If your dollar today will be worth less tomorrow, but you could buy something with that dollar today that will be worth more tomorrow; well, what would you do?
I will leave you with this final thought... Ever heard of John Paulson? He is a hedge fund manager that made his name and fortune to the tune of $15 BILLION by betting against subprime mortgages when no one else knew what they were. Basically he is really smart about the housing market, so when he speaks up, it would be wise to listen. He recently said this: "If you don't own a home, buy one. If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home." Why did he say this? "The reason is simple: Inflation."
Do you live in Charlotte? Do you have the impression that Charlotte will be a leader in economic growth, middle of the pack, or lagging behind? The Charlotte Business Journal reported a story last week from Business Facilities magazine that Charlotte is faring well in some regards. Charlotte is ranking #5 in economic growth potential and #5 in most wired cities. The state of North Carolina on the whole also ranked well for economic growth potential, work-force training and business climate.
A good friend of mine who works for a prestigious consulting company and is constantly jetting all over the country and meeting with high-powered business leaders has anecdotally told me the same thing for months now. The thought is that NC remains a great destination point and place to live. We have the beach in our front yard and the mountains in our back yard. The climate is great, we have all four seasons and it doesn't get as hot as some parts of the country, nor as cold as other parts. The cost of living remains very low compared to other high-powered areas such as NYC or LA. Furthermore we have been a great banking city for a long time that has attracted some very smart financial minds. With the banking crisis some of those people still find themselves un- or under-employed. So, as companies establish, grow and expand they will begin looking to Charlotte as a place to do so. For all of the above mentioned reasons making this a great place to attract employees, but also because some of those bright financial minds are already here and waiting for new opportunities.
And as Charlotte does well in business and economic growth so also will we see our employment and housing markets continue to stabilize.
So, what does all of this mean for you? If you live in Charlotte, enjoy it. If you don't, consider moving here!
In response to our last blog post about the tax credit I had a good discussion with one of our friends on facebook. She asked, "who really benefited from the tax credit: the buyer or the seller?" Of course, the general idea behind the tax credit was that the buyer would be getting a house at current market value AND would be getting $8,000. But, what if the prices were instead just inflated by $8,000 or more?
As soon as the tax credit expired, it was my premise that, in fact, the price had simply been inflated. So, any buyers that I had looking to go under contract after 04/30 I looked at the comparable sold data from the past 6 months and then deduct $8,000 from that price to reach my suggested offer price. Some real estate agents didn't get it, others disagreed and others just got angry. And at the time, there was not enough data to know which of us was right. But, that was my premise.
Now that some time has passed we do have some data that we can look back on and see what happened. I researched all of the sold comps in Charlotte in May between $60-250k (nearly all of them were likely to have received the $8,000 tax credit). And then looked at the same data for July (none of them should have received the tax credit). And this is what I found:
- May sold for $78.18/sf
- July sold for $72.11/sf
- Delta: -$6.07/sf
- Extrapolated over an average 1828sf = -$11.096
So, May's prices were well more than $8,000 on average over July's. Combine that with the fact that July had nearly 50% more closings than July and that could attribute for the other $3,000 inflation. With a total of $11,000 benefit going to the seller. It is my contention that waiting until after the tax credit has now expired is yielding you an even better deal than with the tax credit. Of course, you don't have the luxury of getting an $8,000 cash advance worked into your mortgage. What do you think?
It has now been over three months since the tax credit contract date has expired. So, what has the market done since then? In the three months leading up to the tax credit there was an average of 8 total showings on each listing in Charlotte. That was not a lot, but it was a surge at the time of people trying to get in to get under contract before 04/30 to be eligible for their $6,500-8,000 from the government. The idea was for this to "jump start" the slumping real estate market and propel it forward and upward into the summer months. In order for that to be true these buyers needed to be people who were not going to buy otherwise in the near future. Did it work?
In the three months after the deadline passed there have only been an average of 5 total showings on each listing in Charlotte; nearly a 40% reduction in showings. There simply are far fewer buyers now than there were before. The fear is that instead of producing new buyers, rather the tax credit merely used up a future supply of buyers. Now the only question is: "How far into the future did the tax credit reach?" That is a question we cannot answer for sure, but many "experts" are trying.
An article last week from Bloomberg Business made their best guess at when exactly is the bottom of the real estate market - the trough. As a nationwide average they predict it will be early next year. But, what caught my attention about this article is that it detailed state by state and metro by metro what each trough may likely be. They note that the trend seems to be improving in Charlotte and that we should reach our trough in the 3rd quarter of this year. I think this sounds right. Interestingly, while the number of sales are still down, the price of the sales that are happening are stabilizing and even starting to trend upwards.
If you are a seller the advice would be to not sell right now unless you must. And if you must, then be open-minded to some alternatives like rent-to-own. If you are at all considering buying at some point in the next year there is likely no better time to act than now. Of course we will never know what was the bottom until it is behind us, so there is no point in trying to be Nostradamus. Instead, take advantage of all of the indicators of now being a good time to buy as rates continue to fall to record lows and home prices seem to be stabilizing. If you can buy, there has never been a better time than right now.
We did a survey asking what our first blog topic should be and the consensus was to discuss alternative sales techniques. In this buyer's market it helps to think of creative ideas that can set your house apart from your competition. I was reading one article last week that discusses five wacky ways to sell your house:
- Let prospective buyers sleep over
- Hire house sitters
- Offer incentives, incentives, and more incentives
- House trading
- Sell to a builder
Now, some of these are indeed pretty wacky and have their pros and cons. Offering incentives has become fairly commonplace, but does it work; and if so, which ideas work the best? The most common incentive is to offer to pay closing costs. But, in this market buyers now expect to receive some seller paid closing costs, so offering it does little more than communicate the seller's "real" asking price. Other popular incentives are things like paint, carpet or appliance allowances. There is a big problem with this in today's market. Right now buyers are either looking for an absolute steal of a deal or they are looking for a fairly priced home that has all of the nice finishing touches. This means that sellers really need to decide in which of these two categories they will fit. And with so many bank-owned distressed properties with which to compete, most sellers will need to compete on the market as a nicely finished move-in ready home. And a seller cannot compete effectively in that market if there is paint, carpet or appliances that need to be replaced, even with an offered allowance.
Incentives that make the most sense are ones that are so unique or outlandish that it will certainly grab a buyer's attention and make them want to find out more. Ideally it would be something that does not have an obvious dollar value attached to it since, again, this would mostly just communicate the seller's "real" asking price. For example, maybe the seller own's a time share or has access to a beach house for a week and can offer buyers an all expenses paid vacation for a week. Or perhaps a seller might own season tickets to a theater company or sports team that are really difficult to come by and offer buyers some or all of those tickets.
One of the most practical and effective incentives is to find out how much it would cost to buy down a typical buyer's interest rate to say 4% or even 3%. And then market the incentive that if a buyer purchases your home they can do so at that incredible interest rate. Picture that on a sign in your yard and on all of your web advertising or perhaps even flyers around town. That will most certainly grab some attention.
Now, one more question to ask is if the seller should instead just lower the price. Showing statistics consistently reveal that houses priced right below quarter marks (for example, $225k, $250k, etc.) get the most showings compared to those priced $5-10k above a quarter mark. So, if you are priced right above a quarter mark and you are trying to figure out how to better market yourself to potential buyer then your best bet will be to lower your price under that next quarter mark. If you are already right under a quarter mark and you are trying to figure out what to do, then consider offering the rate buy down or some other incentive instead of lowering your price.