Archive for the ‘Ask the Realtor®’ Category

Three Big Remodeling Errors Home Sellers Make

Picture this: You have to sell your home. Perhaps your company asks you to move to another city. Quickly. The real estate market is a buyer’s market, but you hope to recoup the costs in the place you relocate to. But you still want to make a good sale. Thankfully, you have been judicious in the purchase and the sale will not be short. You have some cash on hand to spruce up the place you currently live in before you put it on the open market. What do you do? Hopefully, you don’t make these three biggest errors when remodeling for a sale!

Painting Everything White

This seems to be a favorite mistake because it appeals to everyone’s sense of cleanliness. If it’s white, you can spot a speck of dust, we think. And so, if it’s white, it must be clean. While that seems like a good idea, usually painting the entire place white has just the opposite effect. For one thing, it looks like an attempt at sanitation. Like a hospital. People don’t like living in a hospital – it appears cold and unappealing to comfort and warmth – two things home buyers will pay a premium for. Why cold? Because it dulls all the little details. It hides the crown molding and it covers up the window design. It makes all the features of the home disappear! Why would you want to do that?

The only time whitewashing a house is a good idea is when the house is a short-term rental and one that is painted every 3 months or so. The landlord has chosen the cheapest paint available and one that requires the least amount of work and attention to detail. You want to create the opposite effect. So pick your paint with care and pay attention to detail. Use paint to accentuate the trim, the molding and the wainscoating. These are features. Don’t hide them!

Making Changes Based on Personal Preferences

I don’t know why it is that moving (or potential moving) brings out the finish-it-all-now monster out in all of us. Suddenly, we feel the desire to set everything right, become more organized, clean up our act, so to speak. This nesting instinct is a good thing – especially once we get to the new home – or we wouldn’t unpack and would live in boxes all our lives! But in the home that is going on the market, the nesting instinct is completely misplaced. While finishing projects is necessary, getting them to fit your personal preferences is not! Sometimes, it’s hard to draw the line, but you must!

Most home owners have projects. They have ideas of how the home should look and what it should feel like. Unfortunately, only a few homeowners ever get their home to look like that picture in their mind. And it’s a worthy endeavor, just not one to engage in while the home is on the market. Sometimes, this involves abandoning projects and finishing them in a way different than one imagined, getting the home to appeal to a taste that is different from your own. But remember, you will not be living in the home any more! Save your efforts for the new place and save yourself some money, too.

Getting the Latest and Greatest

Many home sellers think that the more they remodel, the more money they will make in the sale of a home. That is simply not true. According to most research, kitchens, bathrooms and siding gets the most return on investment. So watch for what remodeling efforts you want to put into the home before you list it. All of them are not created equal. Just because granite countertops are fashionable does not mean they immediately increase the value of the home – just look at the all the REOs on the market today. Believe me, a lot of them have granite counter tops.

A better idea is to look at how much you’re willing to spend and then take a good look at your home. If you can afford an interior designer, get one. The most important thing for a home to sell is not that it has the coolest, newest brand-name appliances or fixtures. It’s conformity. You want to stay within the style of your home and the houses around it. It’s called the principle of comformity. This is not to say that you cannot upgrade a 1940s kitchen. By all means, go ahead and do it. Home buyers love upgraded kitchens but be sure you retain a sense of the original style of the home. Then, when the home is on the market you could also play up the charm by staging it.

While I’m not absolutely sure these are the three biggest errors home sellers make, I’m pretty sure they rank pretty high on the list. So try and avoid these and hopefully you will hold on to enough of your money to be able to get the next home just as you like it!

Nine Things Home Buyers Don’t Expect: Part 3

This is the last part in a three part series. It seems like often home buyers who don’t have much experience purchasing or selling houses are not aware of how things really proceed in a real estate transaction. Sometimes even if they have been active in the market in the past, laws and rules change and keeping up with them as a consumer is hard. TV shows like the ones we see on HGTV don’t help either, because every state is different and sometimes there are different conventions within the same state across counties. All of this creates a sometimes confusing environment for home buyers.

Here I wanted to go over a few of the main issues that come up during and after escrows so you are more informed as a home buyer. So far, we have discussed the “as-is, where-is” clause, disclosures, inspections, flood insurance, keys and buyer’s remorse. Today, I want to go over some things that would occur after escrow closes or very close to the end of the escrow.

Buying a Home as an Individual when Married

This comes up about as often as once every three to four transactions. Sometimes the client is investing in a flip and does not want to include the marriage partner in the risk involved to his or her credit. Other times, a parent wants to buy a home for his or her children and does not want to include the other. Whatever the reason, it is important that you know that if you are married, the title company will want to get the spouse to either be on the title of the home or they will want the spouse to give up all claim to the house by signing an interspousal deed before the main purchaser signs the main document taking title.

Most home buyers are a little confused by this and are confused when asked if they are married. However, there is a reason for this. California is a community property state, which means all assets and liabilities are shared equally between spouses. Thus when one spouse acquires a house half of it belongs to the other unless expressly signed off. So, even if only one spouse will be buying a home as a sole and separate property, both signatures are required at the notary. It is a good idea for both spouses to make the time to be there. In the past, I’ve had the spouses sign at different notaries and it always creates confusion and leads to closing delays.

Home Warranties are not Perfect

Lately, home warranties are a good way for home sellers to attract buyers. The idea is that the seller pays for a home warranty and if something in the home needs repair, the dishwasher, for example, the warranty company sends someone to repair it for a low fee – currently around $50. You can also add roof coverage or air-conditioning coverage to the home warranty and it is typically paid for a year. You can also extend it after the first year by paying for it yourself.

A home warranty is a pretty good thing for home buyers to have, especially if the seller has paid for it. A home warranty covers unexpected expenses, especially at a time when new home buyers need them most – when they are dealing with a new mortgage and getting used to homeownership. However, there are certain exceptions to home warranties that you should be aware of. For one thing, you should know that they do not cover outside plumbing. Read the home warranty exclusions before relying on them completely to avoid unpleasant surprises.

Taxes

This one gets almost all new home buyers. Even if you have created a reserve in your impound account for all the year’s taxes, you will still get a supplemental tax bill for the year. This is because there is a gap between the taxes the earlier home owner paid (based on home prices when they bought the home) and the taxes you will owe (based on the price of the home when you bought it.) So don’t be surprised if it is a hefty one. Depending on when you buy the home, you can receive one or two supplementalt tax bills. It is a good idea to keep some cash in reserve for this supplemental bill.

However, be sure to check the year on the tax bill. Even if you are sure it is a supplemental bill, ensure the year. With the amount of foreclosures on the market, tax bills missed by the earlier home owners can mistakenly become part of your liability if you don’t check the date. The title company is your best friend regarding this, so hang on to the title company’s phone number and the title officer’s name.

As if that wasn’t enough, another thing that can go wrong with your property taxes is that the mortgage company might just return your reserves months before your annual (not supplemental) taxes come due. They might see it as an excess in their audit, but hold on to that money and do not spend it! You’ll be glad come tax time.

I think that about covers it. These are the most common pitfalls home buyers seem to run into on a regular basis. As the risk of using a cliche, forewarned is forearmed, so be aware of these when you decide to buy a home and ask your Realtor® questions! Questions don’t bother us. Believe me.

Nine Things Home Buyers Don’t Expect Part 2

This is part two in a series. The last time, we covered things related more closely to REOs or bank-owned homes, since that seems to be what most buyers are picking up lately. While the “as-is, where is” clause, disclosures and inspections are not necessarily specific to bank-owned homes, it is usually in the purchase of one that a home buyer runs across the them. Today, I want to go over three more that most home buyers are not prepared for and are especially shocked at because they appear so late in the escrow transaction.

Flood Insurance

Usually flood insurance is optional. However, I have had escrows where the client gets a quote from his insurance agent and we send over the proof of insurance to escrow, but the net sheet on the day of the signing comes back with a quote for flood insurance as well. What happened? The client thinks there is a mistake and refuses to sign. The lender however believes that flood insurance is required and refuses to remove it from the net sheet, will not have loan documents out without the home getting flood insurance. Who’s right?

Sometimes there really can be an error. Maps of flood hazardous areas are constantly revised and no one can say with any guarantee that a certain area falls within a flood zone. A classic example is Colonial Village. Just five years ago, flood insurance was required in all homes in that neighborhood, but then maps were revised and flood insurance is optional. Home buyers are advised to read their Natural Hazard Disclosure Reports closely. That is where you will find out if the property is in a flood zone. If it does fall into one of the flood zones, the lender will require you to carry flood insurance, just as you are required to carry home insurance. But at the very least, you’ll know during the contingency period, so that there are no surprises the day of the signing, which is pretty nerve-racking already without added stressors.

Keys

If you’ve been watching movies or the property shows on HGTV, you’ve probably got the wrong idea. Almost always, the happy home buying couple signs the documents and the Realtor® or the title officer hands them their keys. The pens are barely capped and put away, the ink isn’t dry and the keys to the new home are exchanged. Well, I have news for you: that almost never happens. Signing documents really is as dreary as it sounds. There will be a stack waiting for you when you get to the title office. You will be warned about what happens if you default on a payment, the details of your loan will be explained to you along with other disclosures and then you get to sign and go home. You don’t receive keys on that day.

After you sign the loan documents, they are taken back to the lender. The lender ensures everything looks right and then the loan is funded. This usually happens the following day. When the loan is funded, the title company is notified and the transfer of title is sent for recording at the county clerk recorder’s office. It is only after the recording confirmation is received that the keys transfer hands. Chances are your Realtor® will meet you at the property and take the key from the lockbox and hand it to you.

Most buyers are surprised that so much has to occur between signing and receiving their keys. It all usually takes no longer than 48 hours. But those can be the longest 48 hours you experience!

Buyer’s Remorse

Yes, Virginia, there really is buyer’s remorse. When it hits, even the most excited first time home buyers have no idea what is wrong. The truth is, there really is nothing wrong. Maybe it’s that the excitement of buying a home is now over. After the hundreds of homes to choose from, there is the one that has been settled on. Maybe it’s that you have just got a huge loan and feel like you have spent a lot of money. Or maybe it’s just the adjustment into a new place. Whatever the reason, buyer’s remorse involves a feeling of sadness or disappointment home buyers often experience after the purchase of a home. Sometimes, it hits during signing, sometimes before signing. Other times, home buyers complain of feeling especially low right after they move into the new home.

One way to overcome buyer’s remorse is to get involved in decorating the home. It also helps to have a housewarming. And definitely cancel all those services where you had new listings emailed to you automatically. Stop looking at new listings around you. Yes, it is a commitment, a little like getting married. Make the most of your new home and stop looking at others.

Hopefully, this helps you the home buyer anticipate some potential problems that could arise if you didn’t know everything about the home buying process. Come back for the last and final part of this series!

Nine Things Home Buyers Don’t Expect – Part 1

The alternative title for this post series was going to be “Nine Things that Knock Home Buyers Off their Feet” but I thought that was rather dramatic and I’ve decided to put drama in my life away for a while. Just for a little while. So there. Anyway, I’m writing this series because some of my clients had no idea about what to expect when it came to the home buying process. Recently, I read in a book and mentioned elsewhere that the real estate market at any time is filled with people that are inexperienced buyers and sellers. The reason I repeated it is because it struck me as so true. This post is designed to make you, home buyer, a little more aware of what to expect. Today I’m talking about the as-is clause, disclosures and inspections. Today’s post is more related to the REOs, if you’re considering buying one.

The “as-is, where-is” Clause

Banks don’t like real estate. It ties up their money so that there’s less to lend and reduces their profits. So when a bank (read lender, mortgage company, etc.) acquires a piece of real estate, either through foreclosure or a short sale, something I like to refer to as an “almost-foreclosure,” (Note: A bank doesn’t come into direct possession of a home when a short sale occurs. Rather, the owners have let the bank know they cannot make any more mortgage payments and the bank forgives the loan and sells the home short. It’s an alternative to the traditional, otherwise eventual, foreclosure.) the bank wants to get it sold.

Chances are, the lender has already lost money on the home. Add to that the fact that none of the lender’s representatives have ever been inside the property and have no idea what is wrong with it. Thus, most banks will have an “as-is, where-is” clause in the contract. As such, the bank will make no repairs to the home. What you see is what you get. (And sometimes, you get more than what you see.) In fact, the “as-is, where-is” clause is so common that if the lender does want to make repairs, it will be advertised prominently in the listing to draw buyers!

As a home buyer though, you should know that just because the contract says “as-is” does not relieve the banks of giving you time to get your inspections. And get your inspections you must! If something does come up as a deal-breaker for you, you can always get out of the contract, and provided you do it during the contingency period, you will get your good faith deposit back.

Disclosures

Okay, so you have found the ideal home. You think it’s perfect! Your Realtor® shows you the CMA and you decide it’s a fantastic deal! Now, what could be wrong with it? In a “normal” sale, a non-distressed sale, the seller would have to fill out a Transfer Disclosure Statement in which he would tell you anything he saw as a potential problem. This time, the seller is a bank. And the problem, of course, is that chances are the bank – or any of the representatives of the bank – has never set foot in the home that is now on the market. So they have no idea what’s wrong with it, so how can they disclose anything to you, the buyer?

What you will receive however from the two Realtors® involved is an agent’s visual inspection. This should name all the potential red flags the agents note. Be sure to read these two disclosures along with all the others you receive during escrow and go over them with your property inspector. Don’t be afraid to pick on every little thing if it bothers you. In the absence of any “real” disclosures, you have to depend on your own inspections and your Realtor®.

Don’t expect any help from the lender. Most home buyers don’t expect this and think that the bank will tell them if there is anything wrong with the home. Disclosures are important, but even in a non-distressed sale, real estate brokers will always insist you get your property inspections.

Inspections

Inspections, as I have covered elsewhere on this blog, are paramount to making a good real estate purchase. Which inspections should you get? A termite, roof and property inspection are the main three. If you live in the country, a septic inspection is also important. If there are any specific concerns you have – like mold – it’s not a bad idea to get that, too. Be sure to get these inspections during the contingency period. That way, if you do discover something that you do not like about the home, you can always back out of the escrow and get your good faith deposit back. If the inspections are scheduled after contingencies are removed and you discover something which makes you back out, you will lose your good faith deposit.

That being said, home buyers should be aware that certain things might still go unnoticed during a property inspection. This one happened to me: my friends bought a bank-owned home when the power was turned off. As such, the home inspection was not as thorough as it could have been. (REOs often do not have power. You should try and get the power turned on before you get your inspections. Sometimes, the timelines don’t work, however, and that’s what happened to us.) After escrow had closed, they discovered the home had no hot water. Further plumbing inspections revealed that the plumbing in the home needed work. When we asked the home inspector why he didn’t catch it, he said that such an in-depth plumbing inspection was not required of a home inspector. Thankfully, the repair cost a few hundred, not a few thousand. So, get all your inspections and then some. It might seem overly cautious, but it’s not.

I thought I should do this series because many of the homebuyers out there in the market today are first time buyers. While I love that the recent real estate downturn is inspiring many people to buy homes – something that was out of their reach in Sacramento for a long time – the market is unfortunately filled with REOs and thus also full of risks. Most of the time, the purchase works out just fine and many homeowners today are so thrilled that they bought a bank-owned home because they got such a fantastic price, but sometimes things don’t quite work out. Either way, I like to inform my home buyers what to watch for.

In the next two parts, I’ll be going over other concerns home buyers have regarding a purchase that are common to both REOs and non-distressed sales. Come back for that, and Happy House Hunting!

Common Home Seller Pitfalls Part 3

This is part of an ongoing series of pitfalls most homeowners make when their house becomes a listing on the open market. So far, we have covered in the last post dealing with clutter, using a lockbox and having curb appeal. In the post before that, we went over pricing, competition and trusting your Realtor®.

As I have said before, it is imperative in this real estate market especially to be extremely careful when putting your home on the market. Studies into human behavior have repeatedly shown that the more options there are for a person to choose from, the less likely the person is to actually pick something. and today, there are so many homes to look at that a potential homebuyer can easily become overwhelmed. So, what can you do to stick out in the home buyer’s mind? Read on!

Not Leaving the Home during a Viewing

This is a pet peeve of mine, so bear with me here. You’ll see why it’s important. There have been times when I have come by as a buyer’s agent to a listing that is not my own with some potential clients and the sellers have killed the sale. Of course you know that Realtors® don’t get paid unless the potential buyers close escrow, so for the sale to be killed during the showing itself is pretty upsetting. But it’s not just that – it’s that the way the sale is usually killed just shows a lack of manners.

Let me explain. From the moment my clients walked into the home until the minute we crossed the threshold out of it, we were constantly scrutinized by an angry old lady who didn’t say a word. Now I don’t know that she was angry but she definitely seemed that way and she never took her eyes off my clients as they walked around the house trying very hard to ignore her.

This is a mistake, sellers! And it will ensure your home never sells. You don’t need to let home buyers run free in your home but putting them under a microscope and making them feel unwelcome will only force them our in less than 30 seconds. And decisions to make offers don’t get made in 30 seconds. Get a business card from the buyer’s agent and leave the home for about 15 minutes. Give the clients room to picture their belongings – and themselves – in that property. And please, please don’t stare at them! They’re not under scrutiny; your home is! There are many REOs out there that are vacant. The last thing you want them to do is go look at those because they don’t want to be made an object of when they’re shopping for a house!

Being Hard Headed when you Receive an Offer

Some homeowners still remember the good not-so-old days when they received a full asking price offer and then could counter asking for more money because the real estate market was headed up. And are chagrined when their home stays on the market much longer than expected and then they receive an offer way below asking price. What’s a seller to do?

For one thing, I would recommend a home seller determine if the offer is serious. If the person making the offer has taken the time to write it down with a Realtor®, has a good faith deposit and a letter of preapproval, chances are the offer is serious regardless of the amount offered. A home buyer who does all of the above definitely has an intent to buy and is not – the bane of home sellers everywhere – a tire-kicker. So, with that being established, the worst thing a home seller could do is get angry, get emotional, feel insulted and not respond to the offer or otherwise reject it outright.

Many home buyers today are confused. The real estate market is at any time made up of inexperienced buyers and sellers anyway. And with all the information coming at first time buyers today it is not surprising that they don’t have a clue what they are doing sometimes. So the fact that they made a lowball offer has nothing to do with your home or you and everything to do with what information they have received. The fact that they made an offer means they liked your home, now the next step is to work with it. Send a counter with your rock bottom price. Better yet, get your Realtor® to call theirs and see if he can guage anything about price. Or give them a verbal counter offer. Sometimes the buyers are just trying to get an idea of exactly what you want, so tell them. Getting offended and not working with an offer only leaves your home longer on the market and lowers the price at which it will eventually sell.

Well, that about sums it up for today’s rant. But I’m hoping the potential home sellers out there are learning something about this very tough market. Remember the old real estate adage: sellers sell in a sellers’ market, but buyers don’t buy in a buyers’ market. It’s true. And I hope these home seller tips help you bring in a buyer and get your home sold for a price you want. As always, we at Elite are here to help! Just give us a call. Happy Home Selling!

Common Home Seller Pitfalls Part 2

As part of an ongoing series, I am dealing with common mistakes home sellers make when they put their home on the market. As you already know, getting a house sold can be hard work. The current real estate market is making it even harder. So it is more important than ever to price the home right from the beginning, get a good Realtor® and take her advice, and learn to study your competition. We covered each of these in detail in the last post. Today we’ll go over a few more.

Not taking down Personal Items and Getting Rid of Clutter

There seems to be some disagreement between people when it comes to taking down personal items when the home goes on the market. The reason is this: some tastefully done artwork or photographs can actually enchance the look of the house. My personal take on it remains, “Yes, but…” Yes, but no one knows what constitutes tasteful when the house is on the market and we’re referring to personal items. Yes, but home sellers – especially if they have lived in the home – usually can’t distinguish their lives from it. They must take it all down, because they will inevitably leave something. And to be honest a wall of pictures never sold a home. Yes, you can quote me on that.

On the topic of clutter, it’s almost the same. You want to bring your house down to the bare essentials and box everything else up. This is what makes selling a home so hard – you have to live in it, but barely. I always recommend getting a storage place and storing most of your furniture, pots and pans, personal items, whatever you are not using and whatever is not essential to make your home look complete to the homebuyer in it. It’s amazing how much we leave in our home which we never use and when the home becomes a listing impedes the sale. Homebuyers get caught up in your stuff and get distracted from what they should be looking at, the house. They also want to see their own things in the home and cannot do so if you have too many things. They are trying to use their imagination – you just have to help them out.

Not Having a Lockbox

I mention this next because this point ties in very well with the previous one. Many clients do not want to use a lockbox because they have too many things in the home. Unfortunately, they have not mentally moved out of the listed home. Hence the recommendation for getting a storage box.

Lockboxes only allow access to a Realtor® with an e-key. They are coded with the time the access occured as well as the name, phone number and real estate brokerage the Realtor® was associated with. As such, there is an added level of security. If you have ever seen a lockbox you can tell that no one can get into one or get a key without using the electronic key used by Realtors®. Lockboxes also have a default time during which they do not open – I’m pretty sure it is between 9 p.m. and 8 a.m. so you can be assured that no one is going to be lurking around in your home when you are asleep.

Lockboxes make showing your home convenient. Remember your home will not be shown by your Realtor® alone. You can ask for a courtesy phone call before the buyers come by (called “Call first lockbox) but asking to make an appointment with you only when you are available severely limits the pool of buyers.

Not Pursuing Curb Appeal

If clutter is important to get rid of to encourage home buyers that walk through your home to make an offer, curb appeal is important to get the potentials walking by your home to come inside. “Curb appeal,” now a common term thanks to HGTV, literally means the appeal your home has from the curb. This includes landscaping, siding, windows and everything else that entices the homebuyer to come inside the home because he or she thinks it will be prettier or just as nice as what it promises on the outside.

Some sellers focus on the inside of the home so much they forget about the outside. Remember that most homebuyers first do a drive by properties they have shortlisted from the MLS. You want to then encourage those buyers to call their Realtor® and come see your home. It’s the only way it will sell! This is not to say that you should spend thousands on landscaping your property; just ensure that the lawn in mowed, plants are trimmed and the front door looks like it is in good shape. Dust the entryway and remove dead flowers and plants. If it is fall and your are lucky to have a centerpiece like a maple tree, draw attention to its color by removing distractions. Remove peeling paint and fix anything broken that can be seen from the outside. Repaint if you have to. You will see your return on investment by just the number of buyers who make appointments to see your home!

This series is of course by no means over. Come back for more! There are thousands of errors I see home sellers make and in this real estate market some of those errors can be fatal. So watch out for these pitfalls!

Common Home Seller Pitfalls Part 1

A friend of mine asked me yesterday about giving her tips for home sellers. Okay, technically the tips were not for her – she hosts an HD radio show and I was called in as the real estate expert but you’re not interested in shameless plugs right now, are you? Suffice it to know that I was left thinking about common home seller pitfalls that occur which essentially hurt the sale of a home very often. The unfortunate thing is that sellers sometimes have no idea they have actually caused the home buyers not make an offer. And some of these pitfalls are so easily avoided and / or fixed. So I want to dedicate a series to them. Home sellers, listen up!

Not Listening to your Realtor®

Maybe this should have come in last. I don’t like making a plea that requires you to trust someone right at the outset, but I think in this troubled housing market it is necessary. Many sellers desperate to sell in this real estate market won’t be able to. Unfortunately, that’s just the truth. The number of bank-owned homes out there are mind-boggling. Not to mention the fact that they are priced at outrageously rock-bottom pricing. Even if the intent is to get multiple offers and hence drive up the actual selling price on these homes, they are nonetheless your competition. So listen to your Realtor®. Ask him to use all the tools at his disposal: first, to give you an idea of the absolute truth about the real estate market today and then, to market your home in the best way possible to get a home buyer who will not just make an offer, but actually follow through and buy the home – YOUR home.

Realtors® are professionals who have to sell homes for a living. If there is a Realtor® in business today, chances are she is good at it. Since we don’t get paid unless and until a home sells, it is impossible for Realtors® to stay in business unless they are aware of the current market and are able to guide buyers and sellers through real estate transactions and to a successful close. So listen to your Realtor®. Chances are she has been there before.

Not Pricing a Home Right from the Outset

In a better real estate market the strategy of let’s-price-it-high-and-see used to work. Today, you couldn’t come up with a worse idea to sell your house. When a new listing comes on the market, it shows up with a “new” tag in the MLS and immediately gets emailed to anyone who is looking in the area in that price range. If it isn’t priced right, you’ve missed your buyer base completely! Sure, when the price drops it will still remain under current listings that match the prospect’s criteria, but then it isn’t a new listing any more. And, believe it or not, I still get asked the question, What’s wrong with it that it’s been on the market so long?

Why not price the home right from the beginning? It creates excitement – even a sense of urgency in the mind of the buyer that they might be competing against other buyers. And a sense of urgency leads to sales, as any Christmas shopper today will tell you. Much better than letting the home languish on the market and then just be grateful to receive an offer, any offer. One caveat, however: the price you think your home is worth might not be its market value in today’s market. Be prepared for the truth.

Ignoring your Competition

This seems like a repetition of the previous point, but it’s not. That’s because I’m giving you specific advice here: when you look at the CMA (Competitive Market Analysis) that your Realtor® hands you, be sure to look at not just the sold properties, but the active listings as well. When the market is going down, it makes little sense to look at the sold comps and base your price on them.

When the market was headed up, sellers considered the sold homes, then priced their houses 3% – 5% higher than the latest sold comp and got the price they wanted. Unfortunately for you we must do the opposite today. Keep an eye on the sold prices of homes and then take a look at the active listings. Chances are your home will sell somewhere in line with the sold comps, but your competition when your listing is on the market are the active listings. Most buyers don’t look at the CMA until they want to make an offer. What they consider first is the relative price of the listing with regard to the others on the market. If you price your home like the solds, you will miss out on the pool of buyers looking for a bargain home and your listing may stay on the market longer, until it’s time for a price reduction. In reality, you will be following the market down.

That’s it for today. This is part of an ongoing series, so do come back to read more common home seller pitfalls. Sellers in this market need all the help they can get! And with the holidays approaching people walking through your home are quickly dwindling into shrewd bargain hunters or simply tire-kickers. So make every day your home is on the market count. Avoid these pitfalls. Get your home sold. And if you need to sell fast, give us at Elite a call. Our professionals will be glad to help!

REOs vs. Short Sales: What’s the Difference? Part 2

This is part two of the series REOs vs. Short Sales and today I want to discuss what benefits and disadvantages REOs and short sales offer the home buyer.

It’s all about Price… Or is it?

I mentioned in the earlier post that most home buyers mistakenly believe a short sale is a better deal and more deeply discounted than an REO simply because the word “short” appears in the term. This is a mistake. The truth is that home prices are determined by comps – comparable properties around the home and then adjusted for price. Ideally, the way you should determine if a home on the market is a bargain is by getting your Realtor® to get you a comparative market analysis. This will show you the sold prices of homes in the neighborhood that are similar to the one you are considering buying. It will also show you the asking prices on all other homes that are currently active listings.

Most REOs are priced on the low end. In fact, I have seen many that are grossly underpriced to encourage multiple offers and as such command a higher than asking price. So be sure to ask your Realtor® for a CMA.

As compared with an REO where the home buyer knows the bank’s rock bottom price, with a short sale one can never be sure. This is because the listing agent who is advertising the property and has put it up for sale has done so at the request of the home seller. Since short sales require the bank’s approval (to forgive the mortgage principal) the appraisal or Broker Price Opinion has not been done yet. It is only after the bank receives an offer do they sound out a real estate agent of their choosing to give them an idea of what the house would sell for. The price you see on the tag is not what ultimately the selling price, which leads nicely into the next topic.

Escrow and Other Timelines

To really find out what the bank wants for the home takes time. The biggest difference between an REO and a short sale really is that a short sale can take much, much longer. The reason behind this is obvious – with an REO the lender has already requested an appraisal and knows what the property should sell for in its current condition and has priced it as such. With a short sale, that entire process of getting an appraisal is yet to be done. Also, with a short sale, there has to be a reason for the lender to approve it. Since the lender would be forgiving the principal on the mortgage with little repurcussion for the homeowner, the home owner is required to provide bank statements, tax returns and so forth to prove genuine financial hardship. The simple fact that the house has lost value is not enough. This takes time as well.

Perhaps the best thing homebuyers can do is decide how long they are willing to wait and start the home search as soon as that period is up. There is even a short sale addendum that limits the time home buyers wait for a response. Although response times seem to have become shorter, it is still in the home buyers’ best interests to decide a timeline for themselves and stick to it to find a good discounted house.

Escrow timelines for short sales begin the day approval is sent over by the bank. This is usually when the home buyer has to start the loan process with his bank. REO escrow timelines start with the acceptance of the offer by the bank. Be forewarned, though: banks are notorious for taking all the time in the world to get back to you regarding your offer, but they take the timelines they give you – the home buyer – very seriously. They are known to include heavy fines in their offers for delayed closing of escrow, so be sure you can close before you remove contingencies!

Inspections & Disclosures

As every real estate investor knows, homes that smell cost less. The idea really is to find out what causes the smell. Of course, I’m using figurative speech here, but the truth is that with both short sales and REOs one might never know what exactly is wrong with them. Inspections thus become imperative. The reason is that the bank has never set foot in the house it has listed as an REO. With a short sale, you have a slight chance that the home sellers will be honest about what needs repair, but they are trying to get out from under the house and I wouldn’t count on any huge disclosures. The problem is that with both thes situations, the sellers have been under financial duress and so have not maintained the property. There are probably many issues of deferred maintenance which you as the home buyer should at least know about, so hire a good home inspector and leave nothing to chance.

So there you have it. Ultimately, I think it really comes down to a choice for the home buyers to decide how they can acquire a home which needs little work, in a good location that will appreciate as fast or faster than other homes in the area for the least money today. But remember that Realtors® are your biggest allies in this regard. Happy home shopping!

REO vs. Short Sale: What’s the Difference? Part 1

This question seems to come up a lot with home buyers, so I would like to deal with it in detail. I will be covering this topic in a two part series. Today we’ll discuss how REOs and short sales come to the real estate market. Since most homes on the market currently that are bargains are REOs and short sales, (sorry, non distressed sellers, but it’s true!) it is important that home buyers, especially first-time home buyers understand the difference between these two options.

What is an REO?

REO stands for Real Estate Owned. It usually means real estate owned by a bank or a lender. It is also referred to as a bank foreclosure, a bank-owned home, a bank repo (a word I detest, by the way), a repossessed house or simply a foreclosure. REOs find their way on to the open market when a home buyer who has bought the home with a mortgage does not make payments. The lender has given him the loan secured by the value of the home. In other words, the home buyer has said to the lender, “Give me the money to buy this home worth so much and I will pay you back with interest every month for the next 30 years while I live there. If I don’t pay you, you can take the house back,” and then has defaulted on his payments.

In this case, the lender has to “take the house back” through a legal process called foreclosure. First, the homeowner is given a notice of default. This is also recorded in the county clerk’s recorder’s office and is public record. The homeowner is given enough notice to be able to “cure” the loan by paying the back interest and principal. If he does not cure the loan the house is then open for auction. If no one buys it at the auction, the home then becomes real estate owned by the bank. Most banks are not interested in owning real estate.

Then What?

Two things happen. When a bank owns real estate, it stays on its books as a bad loan. A bank can only have a certain percentage of bad loans, so they are motivated to get rid of the house as soon as they can. Also, they understand that now their cash flow which should have been coming from the mortgage payments is stagnated, so they have less money to lend. Remember that a bank can only make money by lending money. So they hire a real estate agent.

The process by which they hire a real estate agent to sell the home can get a little complicated, but in the most direct way they ask for a broker price opinion (also called BPO or a rough appraisal) of the property and then list the home. That is how an REO ends up on the open market. Usually, until the house sells, it is up to the listing agent to maintain utilities, keep the home clean and get rid of debris inside the house. The agent can then bill the bank for it at close of escrow.

What is a short sale?

A short sale attracts many home buyers simply because of the term. They are erroneously led to the assumption that because a house is selling “short” it must be at a discount. Nothing could be further from the truth. While it is possible that the house is selling at a much lower price than its competition, a short sale could also be grossly overpriced. A “short sale” simply means that the sellers of the property are asking the lender to accept the current market value of the home as a sale price, which is less than the value on the note (loan) which secured the home. Thus, they are asking the lender to forgive the principal on the loan instead of foreclosing on the house. The assumption is that forclosures cost the lender money and hurt the seller’s credit score far worse than a short sale does. This is arguable and best discussed with an attorney. In my experience, clients have had the same damage to their credit.

How does a Short Sale get on the Market?

In most cases, the homeowners realize they are in financial trouble and cannot make their payments. In a better real estate market, this is not a problem. If they have paid down most of the principal on their total mortgage, they can sell the home. In other words, if the market value of the house is higher now than when they bought it, they can usually sell it without a short sale. The problem now of course is that the real estate market is trending down. So most homeowners who bought their homes in the upturn cannot sell them without a substantial loss.

At this point, the homeowners call a Realtor® and ask that the Realtor® speak with the bank and try and negotiate a short sale. The Realtor® becomes the listing agent and the seller’s real estate representative and works with the lender to approve the short sale of the property.

Most lenders currently are considering short sales seriously. We are definitely seeing the tide turn. But home buyers should be aware that just because a house is placed on the market as a short sale at a certain price that the lender will approve of the sale at that price. That, in my opinion, is the essential difference between REOs and short sales. With an REO, you know the sale price. With a short sale, the lenders don’t give out the information before the home is placed on the market and buyers are left playing the guessing game.

So now you know how REOs and short sales make it to the market. In the next part, I will discuss what some of the pitfalls are with both these options and also what, if any, are the benefits of buying either a short sale or an REO. Yes, that would be besides just the discounted price.

What are Contingencies?

Sometimes, Realtors® seem to speak a language all their own. I still remember being a new Realtor® and being completely confused during an office meeting with the acronyms: RPA-CA, CMA, WPA and so on. What in the world did it all mean? And now, I’ll be talking with clients and then look up into their bewildered eyes. Oops, I guess I commit the same cardinal sin: speaking in Realtor-tongue.

So, Just What the Heck are Contingencies?

Dictionary.com defines a “contingency” as a “dependence on the fulfilment of a condition.” In other words, as a home buyer your offer is contingent upon the fulfilment of certain conditions you write into the contract. If any of the contingencies are not fulfilled, according to the terms in the residential purchase agreement, you can back out of buying the home and take your good faith deposit with you. So a contingency is what in the past used to be called “a weasel clause,” as in something that gave you the opportunity to weasel out of escrow in case something didn’t go the way you wanted.

Today, the real estate transaction is less scary to the home buyer. Contingencies are already written into the printed contract used by Realtors®. If you wish not to have contingencies in your escrow, you have to (literally) sign them away.

Specific Contingencies & the Contingency Period

The RPA-CA (Residential Purchase Agreement or Offer or Contract) includes the following contingencies: inspection (and disclosures), loan and appraisal. The first seventeen days of escrow by default is called the contingency period. It is during this time that you will get the opportunity to clear the above contingencies. The home buyer receives all disclosures, schedules inspections, gets a loan and the lender clears the appraisal. If anything is amiss, for instance – if the potential home buyer cannot get a loan, he can walk away from the transaction and get his good faith deposit back from the title company where it is deposited. The same is true of the appraisal, something most home buyers worry about. If the home that the buyer is buying does not appraise for the price on the contract, the lender will, of course, refuse to lend that amount to close. Thus, the buyer can then either choose to cancel escrow or drop the price. Of course, all changes must occur with both parties’ permission.

I also have to mention that with the huge number of bank-owned homes on the market lately, the contingency period has suffered a bit of a contraction. A strong offer during the real estate boom years used to mean a 14 day contingency period – shorter than the 17 default days offered by the purchase agreement. Today, banks are reducing these days even further. I once saw a counter sent by the bank to my clients with the total contingency period shortened to just 10 days. While this reduction limits the number of days the property stays off the market (in case the escrow were to fall through and the house needed to be put back on market) with tougher lending guidelines and escrows and appraisals taking longer, it does severely limit buyer’s rights and can potentially put them in a difficult situation should the lender want more comps or another appraisal, for instance.

How Contingencies are Removed

As with all contractual agreements in California, this too must be removed in writing. At the end of the contingency period, the listing agent will usually ask for this form from the home buyers. It is usually up to the buyer’s agent to keep track of the total contingency days and remind the home buyers that they should remove the contingencies. If they do not, the listing agent can serve them with a “Notice to Perform.” Usually, this means that if the buyers do not remove contingencies, the seller can assume that the escrow has fallen through and – after returning the buyer’s deposit – can put the house back on the market.

Consequences of Removal

Home buyers should be careful, however. Once these contingencies are removed, it is assumed that escrow is going to close. Also, by removing contingencies, the buyers have now handed over their good faith deposit. If – after written removal of contingencies – the home buyers default on closing escrow the sellers retain their good faith deposit as liquidated damages. This default on buying the home could be for any reason, even if their loan fails to go through at the very last minute.

As such, many home buyers will “forget” to remove contingencies in writing. The jury is still out on whether in this case they should get their good faith deposit back. I’ve heard both sides of the story.

Do Contingencies have to Exist?

Contingencies are in place to protect the home buyer. Some people have asked me if there need to be contingencies even if they are making an all-cash offer and the escrow period is greatly reduced. I believe it’s always a good idea to keep contingencies. As a buyer it is your most important asset in buying the home. A lot can go wrong with an escrow, even if you are absolutely certain you will buy the house and do not need a loan. The disclosures could reveal something, or the inspections might find something you would not want to live with. In such cases, the home buyer is relieved to know that he can still cancel escrow and not have lost his deposit. Even if the escrow period is greatly shortened, leave time for inspections and disclosures. Cash escrows can close in two days – yes, I have seen them – but it’s still a good idea to extend that to at least a week and keep three days to clear inspections and disclosure reports. Contingencies are a home buyer’s best friends. Don’t scorn them.

Home Buyers: Get your Inspections!

I’ve been hearing lately that home buyers are skimping on the right home inspections because they are financially stretched thin. And I want to take the time today to talk about what inspections you should get before you buy a home and how important these are to your contemplated real estate purchase.

Time is on Your Side

As a home buyer, the first ten to seventeen days are yours. You must guard this contingency period and use every day you have been given to get any and all inspections and disclosures on the property as you can. Please, please do not fall in love with the home before this period is over. I know. This comment might as well fall on deaf ears, because most buyers have already decided they love the home and will buy it no matter what. They’ve figured out the furniture placement and which room is for which of their children. All right, then. At least treat the first few days as important so you know what’s wrong with the home that you might have to fix later – somewhere between your kids growing up and before the grandchildren come to visit. There. Now that might make sense.

But seriously, the contingency period is a little like dating. This is where you get the time to bring in whoever you need to approve of the property’s structure, appliances, electrical system, plumbing set up, roof, and so on. As a home buyer, this is your active time. While the lenders are working on getting your paperwork processed and ready to send to the underwriter, you should be at the property getting your inspections done. There is no better use of your time than this.

Let’s go over some of the common inspections home buyers ought to get.

The Pest Inspection

A termite company will send out a pest inspector to check for “wood destroying pests” in the structure. Since wood destroying bugs like beetles and termites can threaten the structural integrity of the house, you can probably tell that this is an important inspection. It is so important that the seller of the home might have even gone ahead and got a pest report. A pest report will tell you where the problems are on the property and will be divided into Section 1 pest issues and Section 2 pest issues. Section 1 is an active infestation, Section 2 is something that could become an active infestation given enough time.

The pest report is only valid for four months. The pest report will also show you how much the pest company will charge to fix all the problems in the home. Remember that if you are buying a bank-owned home, chances are that the bank will not fix anything. In that case, it is up to you to make sure you understand the liability in buying a home that might have a lot of pest damage. There might be active infestations that can get missed if the home is a big fixer.

Cost of pest inspections: $90 – $125.

The Roof Inspection

The roof inspection is another important one you should not miss as a home buyer. With the cost of a new roof currently bouncing around $9,000 to $10,000 it is not something you want to have to replace if you are already financially unstable. Even if you are doing well as a new homeowner, no one wants a big bill on top of their mortgage payment.

To me, there is really no argument against getting a roof inspection done except maybe getting one scheduled in time. There is no cost to getting one done, you don’t need your Realtor® to even open the property up for the inspector, you can then be assured of the structural soundness of the roof when you are huddled in your home during one of those New Year storms we always get in Sacramento and your home insurance company is happy as well!

Cost of roof inspection: Free. (Roof certifications and / or repairs costs vary. Again, keep in mind that with a bank owned home, you will probably not get a roof certification or repairs. Ask the roof inspector to spell out the costs associated with fixing it on the report. Always a good idea to get it in writing!)

The Entire Home Inspection

This is the big one. Plan on having about 2 – 3 hours for this one, especially if the home you are buying does not have a slab foundation and requires someone to crawl underneath the house to take a look at the structure under the ground. The home inspection covers mostly everything inside the home. The inspector will also check the outside water systems, walls, and so on for any glaring issues. He might then direct you to call a specialist if he sees anything. Remember that most of this inspection is visual and not invasive. He will not, for instance, pull up the carpet to check for mold underneath.

In my experience, home inspectors do a pretty thorough job. The power should be on for this inspection to be done right, so if you are buying an REO, ensure that your Realtor® calls the listing agent and has the power turned on. This is the only way to see if the central air works, for instance and that the electrical outlets are wired correctly. The home inspection is also a good time for you to ask questions. If at all possible, show up early and talk to the inspector about anything you might be concerned about. That way, he can pay extra attention to those issues and let you know at the end of those three very important hours if your concern is warranted.

Cost of a Home Inspection: $375 – $600 depending on square footage of the home.

Other Inspections

While between the three inspections above, most issues are covered, (Of course, if the home has a septic system, that is another inspection you absolutely should get!) don’t be fooled into thinking that everything is just fine. Sometimes, it is also a good idea to bring along someone you know to have a good eye for a property. Even though inspectors have been trained to look for problems, they are still human. I once had some friends buy an REO, got all inspections done and then a week later they found out there was something wrong with the plumbing and had to get it fixed for $500 or so. The home inspector said he had only checked what he was supposed to and the problem must have been deeper than that.

While such misfortunes unfortunately cannot be avoided, if you have a contractor friend (lucky, lucky you!) it might be worth it to bring him along and buy him lunch or dinner later to just have him check the place out during the home inspection. His insights might be priceless.

You’ve Been Warned!

This list of recommended inspections is, of course, not exhaustive. If you think it is, you only have to take a look at the Buyer Inspection Advisory you sign along with the Residential Purchase Agreement or “the offer.” It lists a whole host of inspections you can get to ensure that the property you are buying is safe and – structurally, physically, topographically – sound.

I hope I have worried you home buyers now into getting all your inspections done and using every one of those contingency days to ensure the house you are buying is really something you can afford. There is really nothing wrong with the home having flaws as long as the flaws are either fixable or manageable. And always remember that the fees you pay up front to get these inspections will dwarf in comparison to the huge amount you may avoid paying later when going through buyer’s remorse.

The Life (and death) of an Offer

The life of an offer really begins when a home buyer says, mostly to him or her self, “I want that house.” The next thought usually is, “Oh no, now I’m really in deep.” When the home buyer recovers, his Realtor® is standing there usually ready with approximately a dozen pages and a pen in her hand. (These days, it’s more a laptop and some printed sheets, but what the heck. The old fashioned pen in hand is a better metaphor.) The home buyer regains some co-ordination control, signs, hands the Realtor® a check and begins to pray.

But then what happens? Most home buyers, after waiting nervously by the phone for three days, hear back from their Realtor®. It’s either a “yes” or a “no” but mostly a “maybe.” So how do these responses come about? What is the process by which an offer either grows up and becomes an adult escrow or meets an untimely and sad death?

Love me or Change me!

Offers make pretty good adolescents. They are written in the youthful hope of getting accepted just as they are – one-sided and all. Full of idealism, they are created by the home buyers in the wish that the seller will settle to sell the house to them for 25% less than asking and wait patiently while the loan process works itself out. Maybe the home buyers could move in early and get a feel for the place. Maybe the seller could even repaint the house for them. That color in the master bedroom just doesn’t do it. (I know, I exaggerate. Most home buyers are not this hopeful.)

Anyway, whatever it is that the home buyer wants gets written in and signed. The Realtor® then calls the listing agent and lets him know that an offer is on its way. Most of us now like our home faxes. “Send it over!” the listing agent says excitedly, secretly hoping the buyers love the home, have paid over asking price and are ready to pay cash and move in within ten days. (Hey, no one said there aren’t crazy expectations on both sides!)

The Painful Growth

The reality of course is that the offer falls somewhere in between what both parties want. The sellers usually like the down payment but not the offer price. The buyers love the house but know that it will take a little work to get it looking like something they own and can adore. Adjustments are hard. The seller’s Realtor® (the listing agent) looks at it critically and takes it over to the sellers. While it is not the dream they were hoping for, the sellers do realize this is nonetheless a serious offer and one they can work with. They decide to counter it.

Is this the End?

Technically, when you “counter” an offer or write a counter-offer, the first one is considered dead. Which means the sellers cannot now go back and say they would like to take the original offer to escrow. However, I like to think of a counter as the maturing of an offer. The counter heads on over to the buyer’s agent over the fax again and the home buyers are finally glad to hear back from their Realtor®. They were getting tired of being excited each time the phone rang. “We have a counter,” she says. “The sellers like everything but…”

The “Everything, But…”

The counter is usually the “everything, but…” offer. And I like that, most people do, because it identifies problem areas, deal breakers, and usually the counter offers are really where escrows are made. They are the sticky areas but also general and specific things buyers and sellers eventually concede. Counters are the peacemakers, as opposed to first offers. It’s unlikely there are more than two counter offers in an escrow. I once had an almost-escrow with four counter offers, the last one asked for $500 more. At that point, you can tell no property is exchanging hands. Most reasonable home buyers and sellers will reach a conclusion with one or two counter offers.

Yes, we have a Deal!

Eventually, the “everything but” clause is worked out and both parties reach an agreement. The offer has matured and it makes a wonderful escrow. Both parties sign all documents and the offer, ready to meet the world and hold its own, is sent to a title company where every word in it is pored over and followed. The offer is now a legal document and any changes to it require the approval of both parties.

The 30 – 60 day life of an offer, albeit short, is an important one. It marks the transition between home buyer and homeowner (and a homeowner to beach / golf course retiree, perhaps?) And it shows, in however small a way, that sometimes two parties can agree for the greater good of both. And isn’t that what all business is about anyway?

REO Buyers – Get your Offer Accepted Part 3

Welcome to the conclusion of this three part series on getting your offer accepted! The basics we have covered so far if you are a home buyer making an offer on a bank-owned property are to come across as a “normal” buyer, increase your good faith deposit, let the seller decide which title company to use, increase your down payment, get preapproved with a direct lender, offer over asking price, shorten timelines, clear contingencies as soon as is reasonably possible and not to ask for repairs. These are the specifics. There are other general conditions that help get your offer accepted and I will be going over them today.

Don’t get Greedy

The real estate market can be a lot like the stock market at times in that it is constantly driven by greed and / or fear. If you base your decision not on those two feelings but instead concentrate on inherent value and your own pocketbook, you will do just fine in your purchase. What do I mean by that? Greed runs buyers in a buyer’s market just as it did sellers a few years ago at the top of the real estate market. Fear also runs rampant in buyer’s markets as well as seller’s markets, except it’s quashed pretty easily. Don’t be one guided by panic or folly. (I know, I know – easier said than done.)

But more specifically, don’t offer an amount ridiculously low with the wildly optimistic hope that the bank will take it, because, hey, they have to get rid of the house anyway! Also, many home buyers like to get closing costs rolled into the loan so they don’t have to pay them out of pocket. In this case, don’t guess at the amount and ask for a ton of money back to close. If the cash back to close is not supported by the appraisal and the final HUD-1, both lenders (seller and your own lender) will be unwilling to give it to you. So, at all times, keep your cool.

Respond Quickly

Here’s a time when it pays to be opportunistic. If you find the right home and you think the price works for you, make an offer. When you hear back and the counter seems fine, sign it and send it over. It might be a good idea to sleep on it for a while, but if you take too long to decide, the house might very well belong to someone else by the time you get back to the bank. I know what you’re thinking: isn’t this a buyer’s market? Absolutely. But that’s why you’re seeing homes selling for so little! And even if you don’t see the value in some of these houses, I can guarantee that other home buyers are. Sales have been up for a while now – a sure sign that demand is beginning to catch up with supply. Wait too long, let fear overcome you and your window of opportunity might be lost. So make up your mind before you make the offer; think hard and long before, but when it’s time to act, well… act!

Be Prepared!

Of course, to be able to perform, you must be well-prepared. And preparation is more than saying, “I’m going to buy a house this year,” or listening to a relative talk about his real estate fortunes made when he bought homes in the 70s. While both these can be great incentives to your buying a home, you should have at the very least (1) done the math to know if you can buy a home and how much it’s going to cost you every month and (2) figured out a way to get the money to buy a house – whether it is begging, borrowing or stealing. Just kidding. Keep the stealing out of it.

I feel the need to reiterate this because I once met a client ready and willing to buy a house – she even wrote an offer on it and then realized she had jumped the gun. Why? The money she was going to use to buy the second home had to come from a refinance of the first one. She had waited to refinance because she was afraid to keep money lying around, lest she get tempted to go shopping with it. Do you know the conclusion to the story? Everything fell apart – the entire plan. Waiting to refinance the first home had been the mistake. Prices had fallen further and her first home now didn’t appraise for the amount she needed out of it. So, to use a cliche, get your ducks in a row before you sign the contract!

Get Good People on your Side

This should go without saying, but I feel the need to spell it out because, I’ll admit it, there are too many people out there who think they can make a good deal with a bad person. If you are not comfortable with your real estate agent or lender and you get a sense of not being able to fully trust that they have your interests at heart or that they are otherwise – well, shady – find honest ones. There are plenty of honest, hardworking Realtors® out there (ahem, notice the toll free number at the top right corner? There’s a hint!) with their circle of hand-picked good lenders they can refer you to. There’s no reason to stay in an untrustworthy relationship. Also, ensure that besides being nice and honest, the professionals working for you are also competent. No sense in having an honest lender who can’t perform at a critical time!

I hope this series has been helpful to the home buyers out there. Feel free to send it your questions through our contact form and if it’s something we have not addressed, I’ll be glad to answer on this blog!

REO Buyers: Get your Offer Accepted Part 2

Welcome back! This post is the second in a series of three posts regarding how to get your offer accepted by a bank if you are buying a foreclosure or REO property. So, besides coming across as a “normal” buyer with all intentions of really buying the house, increasing your good faith deposit, getting preapproved with a direct lender and offering over asking price, what more can you do?

Don’t Ask for Repairs

Nine times out of ten, banks will not make repairs or pay for repairs to a property listed as an REO. Actually, make that 9.9 times, a bank will not make or pay for repairs. It is so rare that if the bank is willing to do such a thing that fact will be spelled out in the marketing and become a selling point. This is why the property you are buying is priced so low. This does not preclude the fact that you will know about the repairs (some banks will already have a pest report for you to take a look at) but if you think the required repairs are a negotiating point, remember that the lenders have taken them into consideration when they listed the house. Also, if you ask the bank to make repairs, chances are your offer will likely get rejected in a multiple offer situation. That being said, do keep in mind that sometimes the banks are not right in pricing the home. Get your inspections done and weigh the repairs against the price. If you think the asking price is not worth the work, move on. There are plenty of homes to view.

Increase your Down Payment

With today’s FHA loans, it is possible for a home buyer to put just 3.5% down (with closing costs paid by the seller) and buy a house. However, if you can afford to pay your own closing costs, maybe take care of escrow costs by yourself or increase your down payment, your offer is sure to stand out from the rest. Some home buyers will even succesfully get their offer accepted at asking pricesimply by increasing their down payment. Or you can get your closing costs paid by the seller and use your cash as additional down. It’s up to you. Bottom line: see if you can find any more cash to use as down payment to bolster your offer and it will be taken more seriously by a bank.

Let the Bank Pick a Title Company

This is a small one, but it does cut out extra paperwork. Chances are the listing agent selling the REO has a preferred title company and that particular title company is well set up with all the details of dealing with that particular bank. If you pick your own title company (and, of course, that is your prerogative), you might get a counteroffer and you will need to rewrite your good faith check. It is sometimes simply easier to let the title company be the seller’s choice and make your good faith deposit out to a generic “Title Company.”

Shorten Escrow Time

This might not always be in your control, but it does help your offer if you can close the loan in 45 days or less. Timelines have gotten a little stretched lately since paperwork review has become more thorough in the lending industry, but anything over 45 minutes will probably merit a counter offer from the bank. Be careful, however. Writing a short timeline which you know to be unrealistic just to get the offer accepted could cost you. Most banks will have a counter that levies a pretty hefty fine on every day beyond agreed upon days to close – something like $50 per day or more. So make sure your lender is ready to perform on your shortened days in escrow.

Shorten or Clear Contigencies

The default contingency period on the California Purchase Agreement is 17 days. This means that if you do not write in a shorter contingency period for approving all documents and completing all inspections, you will have said that you want 17 days to do them. The bank will usually try to shorten these to 7 or 10 days. Why? Well, if the buyer does decide to walk away during the contingency period, the house has wasted less days on market. A good idea for a buyer at this point is to know that the bank will want to do that and shorten the contingency period himself. Better yet, it’s a good idea for the home buyer to get at least the home and roof inspection done before making an offer. However, be advised that if competition is stiff, this can get pretty expensive, (Home inspections cost approximately $350 – $500, pest inspections cost about $100 – $200 and roof inspections are usually free, certification and repairs on roofs cost money depending on how much work is involved) so only get inspections done before making an offer if you’re absolutely sure you are in love with the home.

If you keep these tips in mind when making an offer on an REO, you should be in pretty good shape. These are specific pointers to follow to get your offer accepted. For more general ideas, check back tomorrow for our last post in this series.

REO Buyers: Get your Offer Accepted Part 1

Last week, we received this query from a home buyer:

Thank you for the Sacramento Real Estate Blog and the time you
take in putting out this information. It’s been really informative and
helpful to read through the blog, especially in the current Sacramento
market. Anyhow, I’m a first time buyer with a question about offers on REO
homes. In the current market, I’ve noticed REO listings typically elicit a
multiple offer scenario. Aside from offering over list price, what can a
buyer do to make their offer stronger in the eyes of a bank? Are there
certain things that a bank will view more favorably (e.g. larger down
payment)?

I think this is a very good question and one repeated by many first time homebuyers. Buying a home is stressful enough. Add to that the fact that you are a first time home buyer and also are dealing with a lender / bank directly to buy a house and the discounted price almost doesn’t seem worth it.

However, notice I said “almost.” There are a few things you can do to make your offer stand out when a bank is looking at it. I will give you the inside details on that in this series. This is a three part series and I will discuss what you can do to have your offer stand out from the multiple offers a bank (usually) receives if the house is priced right.

To understand what your offer needs to be like, you have to understand the bank’s point of view. Imagine this: you have an object which needs maintenance, which you have never seen and have no idea how to take care of. Now place the object far away from you – miles away in fact. The person you loaned money to who promised to care for it refuses to pay you back, so you have to take the object back. But it is heavy, so instead you have to keep the defaulting person away from the object. Mind you, the object is still miles away from you. All you’re thinking is, I need to get rid of this object. I need to salvage some money here. But I have to get rid of it!

Get the idea? Then these tips will help!

Give all impressions of being a “normal” buyer

Banks typically don’t like offers that are not straightforward. (Now, you can argue that the banks themselves play all sorts of games with loans and so forth and are not straightforward themselves, but remember your goal at all times. If your goal is to buy the home, you must be direct.) What do I mean by “direct?” This would mean that you are an individual buyer or write your offer as an individual buyer (not a business entity like a corporation, typically). Do not even try to use the games most so-called real estate investing books recommend. For example, do not write something like “and/or assignee/s” after your name on the offer. Most loans are not assignable and since it is the first line on the California purchase contract, chances your offer won’t get very far at all. Of course, this is just an example. If you haven’t read any game-y real estate investing books, keep it that way. Listen to the advice of your Realtor® and come across as a normal buyer. Don’t do anything that would be grounds for immediate rejection.

Get Preapproved

Today, most listing agents require a preapproval (not a prequalification) letter from a lender (not a broker.) This means that you have met with either your own bank or credit union and have an approved loan or you have been to a mortgage broker and he has submitted your information and has received a loan approval for you. This is the most basic requirement for writing an offer and most REO banks will not take your offer seriously unless you attach a preapproval letter with it. Also, it would be a good idea to have a copy of your credit report because some banks still require that even if you have a preapproval letter, you get approval from their lender. It’s an extra step, but necessary. Sometimes, you can send the bank’s lender your credit report to expedite the process.

Increase your Good Faith Deposit

This is the oldest trick in the book, except it’s not a trick. Again, think of this from the point of view of the seller. If he has two offers to consider and one is offering $100 that he would lose if he walks away from the transaction and the other offers $2000 that he would lose, which one would you consider to be more serious about buying the property? Remember the bank wants to ensure that once the house is in escrow that is stays that way and ends in the buyer buying it. Ensure that you have between 1% – 3% of the offer price to put as a good faith deposit. This money will be deposited in an escrow account after the offer is accepted. You can get this amount back if you find a problem during the contingency period and cancel escrow. You only lose it if you cancel escrow after the end of the contingency period. So make sure you schedule inspections immediately after the bank accepts your offer. More on this later.

Offer an amount over asking price

Banks will typically underprice a property, especially if it shows well or has been built in the last five to ten years. Why? It’s a sales technique to get home buyers into the home and create a sense of urgency. Also, the price attracts more buyers which ultimately leads to multiple offers and sends the price up. If you don’t have a substantial down payment or a decent good faith deposit, offering over asking price might be the best way to get your offer accepted. But be careful – don’t offer more than you think the house is worth. At this point, it would be a good idea to ask your Realtor® to get you a market analysis and make an offer on the high side of the market, but not over the top. Besides having buyer’s remorse if you pay too much, you might have trouble during escrow if the house does not appraise for the offered amount.

That’s it for today! Come back tomorrow for more tips on getting your offer accepted! There are many REOs out there. If you’re interested in buying one of them, search here or call us. We’ll be happy to help!

Home Sellers: Snag Buyers by Distinguishing Yourselves

After I wrote the recent post on how you should react to offers as a home seller in today’s market, a few clients asked me to follow that up with what a home seller could do now to get their homes sold. Are there any other tips a seller can use to compete with the bank-owned homes? As we’ve seen, foreclosure sales have almost tripled in Sacramento county from last October to this October. While that might seem like a dead end to many sellers in this market, it is important to remember that some buyers are still interested only in homes that are not bank owned. How can you reach these buyers? Here are some ideas.

It’s Still About Price, But…

You cannot avoid the fact that price is on everyone’s mind these days. Even if your home is not bank owned, you will be competing against homes that are either short sales or REOs. Not to mention the reality of depressed prices in your neighborhood due to less expensive homes selling before all others. Banks can afford to drop their prices to get rid of inventory. Maybe you can’t drop your asking price to rock bottom, but you must price the home as close to an REO as you can handle. Leave some room for negotiation (because there will be some!) but I don’t have to tell you that overpricing your home in this market is essentially like not listing it at all.

That being said, be aware that just because the REO next door to you sells for say, thirty thousand dollars less than where you are priced, that it’s all over for you. Appraisers do have to take into consideration that your home is not a distress sale. Chances are also that REOs have deferred maintenance, thus reducing their value. Ask your Realtor® if you can see the pictures inside the homes listed around yours – that should give you a pretty good idea of where your house should be priced.

Accessibility is Important

Besides just price, bank owned homes have another thing going for them: accessibility. Almost all of them are easy to show. Buyer’s agents love showing REOs because there are never appointments to make and all of them have lockboxes and are vacant. While it might not be possible for you to move out (and sometimes a vacant home can be negative, because buyers don’t get an idea of furniture placement), it is a good idea to have your Realtor® use his lockbox on your door and indicate in the showing instructions that just a message on the phone is enough notice to show the home. This is called “Call 1st lockbox” and is easier on most buyer’s agents and the buyers than making an appointment with you or waiting for a call back. Remember, the home buyers are not in love with your home yet! You have to let them into the home first.

It is also a good idea to leave the house when the Realtor® and the potential buyers come by. Take a walk around the block, go to the store, take the dog for a walk. Give the buyers room. Definitely do not sit and stare at them as they look around the house. That will ensure they run out in within two minutes. And buyers that leave in less than five minutes almost never write offers!

Language & Negotiation

I covered this in detail in the previous post about how to deal with a purchase offer, but it bears repeating: ensure that your Realtor® is telling every buyer inquiry that all reasonable offers will be considered. When you do receive an offer, read it carefully and don’t rush to answer. Chances are it will be low. Learn to negotiate with it. Read this before you do anything. Also, another thing worth mentioning here. Don’t take too long to consider an offer. Your competition, banks, take anywhere from 72 hours to a week and are getting quicker. The best already have a counter offer written and they take very little time in getting it out. Sleep on the offer you receive, but don’t be caught snoozing. The home buyers don’t want to wait forever – there’s a lot to look at!

Ensure Clearances

This is arguably the best advantage you have over REOs and short sales. You have money. I know, it sounds crazy, but hear me out. You, as a homeowner, have lived in the home and chances are you have made repairs where they were necessary. You have taken care of the house. REOs are priced at wholesale prices because they have not been kept up. The people who had their homes foreclosed on definitely did not fix leaky faucets, torn roofs and the banks will not offer clearances for pest work, roof certifications or fix anything else that’s broken. In fact the first line in any bank owned home sale counter offer is, Property sold as-is, where-is.

You will not do that. In addition to making your home look pristine, inviting and warm, in addition to pricing it right, you can get pest inspections and clearances done ahead of time. In other words, your home is turn-key. In spite of what you see around you, there are buyers for turn key homes. Not everyone wants to add their own sweat equity; some people are just fine paying others to do so.

Sweeteners

No, I’m not talking about Splenda. Sweeteners have been largely forgotten in the strong seller’s market we had and could come back in a big way today. These include letting buyers customize their preferences in carpet, paint and so on. If you are considering painting anyway, let the potential home buyers know that they can pick the paint color. Same for replacing the carpet – let them pick it. Most home buyers will change some aspect of the home to suit their personalities anyway and your buyers might appreciate the opportunity to be able to move in without changing anything.

I hear often that to sell a house in this market you must think like a bank. I disagree. I think distinguishing yourself from the rest might be the key. Good luck!

Home Sellers: Offers & What to Look For

After I wrote the post on Home Buyers and Purchase Offers, a few people have asked me what the seller is supposed to do when an offer comes his way. In other words, in addition to the efforts of the two real estate agents to get the buyer to write a fair price offer, is there anything the seller can do to encourage the potential home buyer to come up with a price everyone can agree on and lead to a successful transaction that leaves everyone happy? The answer of course is yes.

Firstly, Encourage an Offer

If you are a seller in this market, I don’t have to tell you that it is tough out there. As a seller you are competing against short sales and bank owned properties. The most important thing you can do today is to distinguish your house from the REOs and short sales. I will deal with this aspect of selling a home in another post, but for now remember that you must price your home right. It might seem a little like you are gifting your home to a buyer, but you cannot argue with the market. Obviously, you wouldn’t be selling right now if you didn’t have to, so do everything you can to encourage an offer. Ensure that your Realtor® is letting every buyer inquiry know that all reasonable offers will be considered.

Now that the basic assumption is out of the way, let’s see what you can do with the various offers that might come your way:

The Lowball Offer

Don’t be too disappointed if you get a lowball offer. As I said in the post regarding buyers and the offers they write, you might see more low offers in this market than you will be prepared for. Most sellers think they are ready for the home selling process until they see two or three lowball offers. This might be hard, but try not to take it personally. Sometimes, all the home buyer is trying to do is get an idea of the seller’s rock bottom price. This is the buyer’s market’s counter point to the multiple offers of the seller’s market. So play along. Counter the buyer’s lowball offer with what you’re willing to accept and send it off. If the home buyers really liked the home and were serious enough, they might come back with a more reasonable offer. If they were merely tire kickers, hoping to buy the home for a song, you will never hear from them again. Either way, you’ll know. What you absolutely do not want to do is get offended and never get back to them. While you might be upset by the offer, remember it is ultimately a business transaction. Everyone is trying to get the best deal that works for them and getting angry could cost you a home buyer, albeit a clueless one.

The Asking Price Offer

Before you hurry to sign it – in case the buyers change their mind – be sure to go over all the eight pages with your Realtor®. In particular, you want to check how long the escrow will be (anything over 60 days merits a counter to reduce the amount of days), if the buyers need any money back for closing costs since that will reduce your net amount and how the escrow costs are divided. That being said, in today’s market, if you do receive an offer at asking price, remember that the buyers will expect you to pick up some or all of the escrow and closing costs. This is a reasonable expectation, no matter how many price reductions you have had. If you do wish to make any changes to this, be sure to have a verbal agreement before you send out a written counter. While verbal agreements are not dependable and definitely cannot be used instead of written contracts, it does seem to send out a message of wanting to work it out and fair negotiation.

The Over Asking Price Offer

Before you do anything, try not to faint when your Realtor® announces that your house has received an over asking price offer. Chances are, you have done a great job pricing the home and it shows extremely well. The potential home buyers have made an over asking price offer because they are concerned there are other offers on the table or they are coming. When you receive an over asking price offer, be sure to go over with your Realtor® – in addition to the points discussed above – if the home buyer has asked for any cash back for closing costs. That is common with offers over asking because the loan amount is increased by that amount. Remember that appraisals are tougher in today’s market and offers over asking might not always be a boon. Also ensure that closing costs above 5% of the purchase price are approved by the buyer’s lender.

And With All Offers…

Make sure the home buyers have a letter of preapproval for the entire amount of the purchase. Have your Realtor® talk to the lender before you sign the offer. This is perhaps the most important part. Follow all these rules and you should be just fine!

Before Foreclosure: Before you Walk Away

While I was having my early morning cappuccino today, made with a rather indulgent birthday gift I gave my husband, this impassioned email sent to us by someone who had been to our website caught my eye:

“Their loss is your gain” Very tacky marketing! We loved that home & left it in great condition. We worked with your representive [sic], I actually that [sic] about sending her a thank you note. Were [sic] is your empathy! I truly hope someone can purchase the home that I designed & finish it right. I hope that you are happy that your posting sent me & my family into tears again. OUR LOSS? Yes we did have a loss I am sure you do not care about exactly what our loss was/is. Did it occor [sic] to to [sic] that terminal illness could have played a roll [sic]? You should think again before marketing a foreclosed home in such a ruthless way.

I hurried off a reply explaining that the marketing was not ours. We never use tacky terms like that and are hugely empathetic to sellers in this market, especially ones that have ended up in a foreclosure / short sale situation through no fault of their own and genuine financial hardship. Unfortunately, there are so many others that simply want out of their homes because they are so called “upside down” in them that even the banks are having a hard time distinguishing between the genuine cases and the ones that just sick of falling house values.

So let me reiterate: this post is for those with genuine financial hardship. Here are some of the steps you can take before you decide to walk away from your home.

Determine if there is Genuine Hardship: As I mentioned earlier, some people in this market simply want out of their homes and the mortgage agreement because they see the value depreciating. Depreciating value in itself is not a reason for the bank to accept a short sale. You must prove genuine financial hardship. Remember that the mortgage agreement you signed when you bought the home is a contract and letting someone out of a contract requires a strong reason. Depreciating value of an asset is in itself not a good enough reason.

Get on the Phone: The single biggest mistake people make when they are beginning to have trouble making payments is to avoid all phone calls. As a landlord, if the rent doesn’t get to me in the specified time and the tenant does not call, it is my first red flag. I can tolerate the rent being late for a long time if there is communication. Your mortgage holders have the same thinking. They really don’t want to foreclose. They just want the payment. So, your first response to a difficult financial situation should be to call your creditors. That would include your credit card companies, the IRS, your mortgage holders and so on. You might be able to get your mortgage holders to rewrite the loan (and have a different monthly payment and terms) and stay in your home.

Keep in mind also that a home is a secured debt, which means it is secured by your house. If you stop making payments, the mortgage holder can take your home. Your credit cards are unsecured debt. If you stop making payments on those, the credit card companies cannot technically come after your home. If you have the stomach for it, you can keep your home and see about negotiating with other creditors.

Begin Building a Case: A banking job is very paperwork-heavy. Remember the thick stack of documents you signed as a home buyer? Well, to get out of it, the stack will be just as thick. Start collecting any and all documentation of your hardship. Collect bank statements for the last entire year, tax returns for the last five years, pay stubs for the last year and all other documentation you have which shows and documents the reasons for your hardship. This may include a letter from your employer if you have lost your job, a medical letter if you have a disability or illness, medical bills, IRS bills – anything to establish in the eyes of the negotiator that you are not someone who simply wants out. A paper trail is very important to a successful short sale.

Start Looking for an Apartment or Rental Home: Do not plan on living in the house until the date of the foreclosure. While this might seem like a good idea on the surface because you are not making mortgage payments and getting free rent, remember that every month of a missed mortgage payment hurts your credit score – something most landlords check when you apply for a place to live in. Even if the short sale does not go through, you will have to leave and need a replacement place to stay. There is no doubt about that. Your credit is going to be in a downward spin. The smartest thing you can do now is get a place to live and explain to the landlord that you are losing your home.

Try to get an Approval or a Dollar Amount: This is unfortunately the toughest part of a short sale. Before you call a Realtor®, send in the paperwork to the bank and try to get an idea of what price they will accept. Lenders are notorious for not telling you their price and having you wait for an offer before they send someone out for a broker price opinion. The problem with this approach is that the buyers tend to get tired of waiting and walk away. If you can get the bank to send someone out before an offer comes in, it saves time (lesser time also means your credit will be hurt less) and you are more likely to get a home buyer to make an offer. This does require that your paperwork be complete however, so make sure to get that sent into the bank and follow up with them.

Call a Realtor®: At this point, all a Realtor® has to do is advertise your house as an approved short sale, be open to an offer and send it over to the bank for final approval. Approved short sales can close in less than sixty days. Also remember that you do not have to pay either Realtor®, as would be the case in a traditional sale where the seller pays the Realtors® involved. In this case, the lender would be the one making the payment for services rendered. That is why the lender will often ask for a net sheet from a title company before the final approval is issued.

Don’t Forget your Accountant! Your short sale or foreclosure may have tax ramifications and perhaps legal ones as well. Be sure to talk with your tax preparer and attorney regarding these. Deciding to walk away from your home is a difficult and painful process – one that we hope you never have to do. But if it is inevitable, I hope the tips in this post help.

Home Buyers & Purchase Offers

Perhaps the hardest thing for home buyers, whether this is their first home or whether they have bought many others before, is deciding what the home is worth and the price to offer the seller. Buyers are usually caught wondering if they should offer full price, or over asking price, if they should try a lowball offer or actually listen to the advice of their Realtor® and send in a reasonable offer which allows room for negotiation and ensures both parties some wiggle room on the negotiation table. Since this question comes up pretty regularly, let’s discuss the pros and cons of each.

The Full Price Offer

Drumroll, please! Of course, this is one of the offers that is the most liked by the seller, unless it’s over asking, but that comes with its own set of problems we’ll discuss in a minute. A full price offer is usually made by buyers in stable markets for a house they really love. Usually, there are no other offers on the table.

What happens? If everything goes according to plan and the buyers are not overstretched on their budget, the seller accepts and everything moves on slowly but surely. An incredibly boring escrow closes and leaves everyone happy. The sellers walk away getting what they wanted, the buyers wonder if they paid too much, but soon get caught up in decorating and enjoying their new home and forget their buyer’s remorse.

The Over Asking Price Offer

Writing an offer over the seller’s asking price shows nervousness on the buyer’s side. It is usually made in a market where prices are headed up or when the listing is priced extremely low to encourage multiple offers. The sellers in this case are aware that they have the upper hand and can command a good price. In the recent real estate boom in Sacramento, most homes appreciated by the time escrow closed and buyers came out richer just a month after making an offer, so sellers felt the need to earn some of that future appreciation by pricing the home pretty aggressively.

However, there is a problem with such a strategy. When the real estate market is headed up, there are usually few or no comps available for an appraiser to ascertain value. The difference then has to be made up with cash from the buyer or the price has to be readjusted to reflect the value of the home as determined by comparable properties. (By the way, when the market is headed down, there is a whole set of other problems with comps appraisers have to provide. Nervous lenders usually request more than the usual number to ensure some level of stability in house values.)

The Lowball Offer

Lately, these are the most commonly found offers. So you can probably guess that these offers dominate a buyer’s market, when supply is high and demand is low. Prices are usually headed down or seem to be headed down and foreclosures abound.

On the surface, the lowball offer seems like a good idea. Home buyers often make these offers to sellers in the hopes that they are in a win-win situation. They think that either the seller will accept and they will have purchased a house at a rock bottom price or the seller will come back with a price closer to what they have offered.

The reality, however, is quite different. With so many lowball offers floating around (most from unqualified buyers and other frivolous tire-kickers) the sellers lump even the most qualified home buyer into the to-be-ignored file and never get back to them. As a result, there is no negotiating, the sellers feel insulted and what could have been a reasonable purchase dissolves into nothing but a bad taste in the mouths of both parties involved.

The Right Offer

If you ask me, the right offer is always dependant on a variety of factors. Mainly, how much does a homebuyer like the home? Are there other houses like this one available? What do the comps look like in terms of price per square foot? Does the home buyer know his options when it comes to financing the home and does he really understand his mortgage? How many other offers are the sellers considering? What is the strategy behind pricing the home at the listing price? How soon and why are the sellers moving? All these questions would help determine the right offer price.

That being said however, I think serious home buyers in today’s Sacramento real estate market would do well to make every effort to come across to sellers as reasonable and ready and willing to make the home purchase with a little negotiating. I think if they are armed with a letter of preapproval, a decent good faith amount and an offer that is not too wild, chances are sellers will discount the price. Get off on the wrong foot however and none of this happens. Going in with unreasonable demands or a “my-way-or-the-highway” attitude only results in wasted time and effort by the potential home buyer, the buyer’s agent, the seller and the listing agent.

What would I do? I’d be sure to get the right Realtor®, ask the right questions and then make the right offer. I would take the advice of my Realtor®.

The Buyer-Broker Agreement

A few buyers have asked me why certain real estate brokers will not show them property or even put them in their car without first signing a buyer – broker agreement with them. In fact, when I was working at one of the bigger brokerages, I was expressly warned that unless I got a client to sign one of these very serious contracts, I was not to take them inside a home listed for sale at all. “At the very least,” one manager said at a sales meeting, “Get the Agency signed.”

It was easy for us green agents at the time to lap all this up as bringing us one step closer to being great real estate salespeople – soon on our way to making our first $100,000 in commissions (ha!) but now I believe the manager may have had other motives besides giving us confidence in real estate sales. Today, let’s look at what this contract is.

The Buyer Broker Agreement
Actually, the title should probably say the buyer broker agreements. There are three: the exclusive buyer representation agreement, the non-exclusive representation and one that calls itself simply the buyer representation agreement. They all say The essential difference between the three is simply the amount of commitment expected by the broker on the buyer’s part. They vary from the buyer hiring one broker exclusively (named, uncreatively enough, the buyer representation agreement – exclusive) to the broker agreeing to be simply one of the agents the client can hire (the buyer representation agreement – nonexclusive). The third leaves all the above negotiable.

How the Buyer Agreement Benefits You
I know most clients are afraid when it comes to signing anything before the offer is written or they have found the house they want. They fear that they will be tied to one broker or have to pay the Realtor® even if they don’t find their dream home. While this is a legitimate concern and will be discussed in a minute, buyers should remember that most real estate contracts are written to protect the buyer in many cases. The verbiage of the buyer representation agreement binds the broker to look for a house for the client as much as it binds the client to the broker. In other words, the commitment works both ways. If the broker isn’t doing his job, the buyer should be able to fire him.

What you Should Look For if you Sign These
So along those lines, here are a few things you should consider before you sign one of these agreements. (By the way, you should know that I actually had to go looking for these in my forms because I haven’t used one for years, but some real estate agents swear by them and so do some home buyers, so I feel the need to tell you about them.)

1. Is this exclusive? First off, if you trust your Realtor® and believe her to be the only one you will look for homes with, you should get an exclusive agreement. If not, sign a non exclusive contract.

2. The timeline: Check how long the Realtor® is committed to showing you homes and if that matches your timeline for finding a house.

3. Compensation: If you wish to pay your broker out of pocket (may happen if the price of the property is extremely low, as in the case of some mobile homes) the amount will need to be agreed upon and included. If not, most brokers get paid by sharing the commission with the seller’s agent and this line should say “as noted in MLS.” It is important that this line not put a percentage like “3% of sales price” because if the seller has only agreed to 2.5% of the sales price, you as the buyer will be responsible for the difference.

A Powerful Tool
One of the best things about the buyer representation contract is that it gives us as Realtors® permission to go prospecting for the right home for our homebuyers. If you don’t find the home you want, we can then legally advertise the fact that we have a home buyer who wants a certain home. It gives us permission to knock on someone’s door and broadcast a definite need. To me, that is the best use of this agreement and can be a powerful tool for any home buyer. So don’t immediately get on the defensive when a Realtor® offers you this 4 page contract. Read it over and see if you can negotiate it to help & protect your needs as much as you think it protects those of the broker.

Real Estate Price Questions

image Realtors® and home buyers approach the issue of home prices very differently.

It’s not that we’re not trying to do what the buyer wants us to do, which is get the home for the buyer at a good price.  It’s just that we tend to think different things have an impact on price than buyers do.  Because of this, we tend to ask different questions.  Certain questions come up again and again, and while you’re asking one question about price, your Realtor® is often asking himself very different questions.

First, let’s look at the mother of all buyer price questions.

How Motivated Is The Seller?

Buyers ask us this a lot.  This question is problematic on several levels.  First of all, every listing agent will tell you his sellers are motivated.    Certainly the listing agent is motivated to sell the house.  But the word gets thrown around a lot, and it’s hard to get at what "motivated" really means.  So what does the question really mean? 

To a buyer, the question seems to mean: "How much less than the listing price can I get the house for?"  Well, OK, that’s a fair question.  The answer has a couple of different parts.

Part of the answer is that you never really know until you write up the offer.   On television, real estate agents are always calling each other up and negotiating prices on the phone.  In real life, you’re better off actually writing the offer up.  This is partly because it shows the seller that you’re not just kicking the tires, that your offer is a serious one.  It’s also better to have the offer in writing because it shows the seller all the details of your offer.  For example, banks selling foreclosures are notoriously interested in cash buyers and buyers with very strong financing, so they know they can close the transaction and move on.  Writing up the offer out is a way to get all the terms on paper so the offer can be evaluated fairly.

The other part of the answer brings us straight back to the question:   How motivated is the seller?   Is motivation simply an abstract concept used by hungry real estate listing agents (and method actors)? 

What would be helpful is if we had a way to find out how motivated the seller is without having to rely on the listing agent.  And in fact, there’s an excellent way to tell how motivated a seller is, and this brings us to the mother of all questions that Realtors® ask themselves when they look at price.

How Does the List Price Compare to "The Comps"?

Let’s make up a neighborhood, and a house and a seller.  Let’s say it’s a 3 bedroom, 2 bath home, single story, 1700 square feet, built in 1980, and in the last three months homes built between 1975 and 1985 between about 1600 and 1800 square feet have been selling in this same neighborhood for $145.00 per square foot.  So on the basis of $145.00 per square foot, we expect this 1700 square foot home to be listed for around $246,500.  (i.e., 1700 x $145).

How motivated is the seller?  Bear with me.  We’re about to get to The Weird Result.

Remember we said that when the buyer asks "How motivated is the seller", she’s asking "How much less than list can I get this for?"   The Weird Result is this: the more motivated the seller is, the less you can knock off the price.

Why?

You see, a seller who’s really motivated lists the home worth $246,500 for $180,000 (for example).  Now if you were the only buyer in the world, that’d be fantastic news for you because you could just swoop down and grab it!  Unfortunately for you as a buyer, a seller who’s really motivated attracts a hoard of buyers because he prices the home according to his high motivation.  A seller who’s not motivated lists the same home at $285,000 and has a listing agent who writes "motivated seller" in the listing.

If the seller’s not motivated, you stand a better chance of knocking something off the price.  The seller with the listing at $285,000 may still be thinking $265,000, which is too high, but at least he’s willing to negotiate.  Chances are pretty good that that listing at $180,000 is on its way to selling for $200,000 (or some other arbitrary, higher than list price figure). 

So, How Motivated Is the Seller?

Psychology is fun, and trying to psych out your adversary in a negotiation has a lot of appeal.  And I do understand that it can feel like you’re not getting a good buy if you don’t knock $30,000 off of "the price".  If the seller motivation is a psychological rocket science, running the comps to come up with a market value is as simple as can be — and often tells you far more about what’s realistic in a given transaction.  The fact that a built in low price attracts more buyers is the reason behind the observation that there’s more "swing" (difference between list price and sale price) on non-bank-owned properties than on bank owned.  It’s also why we often see prices selling on average above list price, but this only tends to happen in areas where there are many foreclosures.

What Is Real Estate Inventory (And Why Should You Care?)

To some people who aren’t in the business, this talk of real estate inventory can sound a little weird at times.  It’s not as if we have shelves with houses on them and we can order new ones from the factory, and I can personally guarantee you that no temporary workers are running around the streets with little handheld barcode scanners looking at the open house signs.

Still, real estate inventory is a key concept that helps us to understand how the market is doing.

What is Inventory

Inventory is simply the number of homes that are for sale now, expressed in terms of the average number of homes that sell every month.  Sometimes we call the number of homes that sell every month the absorption rate.  To get the absorption rate, simply pick a time period (the last six months, for example, or the last year), and divide.  If 120 homes sold in the last year, then the absorption rate is 120 divided by twelve, or ten homes per month.  So, in that same market, if there are 30 homes for sale, then the inventory is 30/10, or "three months of inventory".

By now you may be thinking, ok, that’s fine, number of homes for sale divided by the number of homes that sell every month.  That’s great, but why should I care?

In the first place, inventory gives you a snapshot into the state of the market.  For example, did you know that the traditional definition of a seller’s market is one that has less than six months of inventory, whereas the traditional definition of a buyer’s market is one that has more than six months of inventory. 

More concretely, inventory is also an expression of how much competition there is with you when you’re buying or selling.  Let’s say you’re selling, and you’re looking at homes that sold like yours and trying to see where your home should be compared to the average.  In that case you can generally get a higher price for your home if there are two months of inventory than if there are twelve months of inventory.  Conversely, if you’re buying, twelve months of inventory gives you more leverage with your price, but if there are two months of inventory, be prepared to be in a bidding war.

Finally, looking at the inventory numbers can tell you which way the market is moving.  For example, in Sacramento County, generally inventory is falling at present, which is partly seasonal and partly the result of the huge upsurge in demand in 2008 over 2007.

So knowing the inventory numbers can help you understand not only where the market is now, but where it’s going!

Why is Home Buying so Stressful?!?

I wish I knew. All I know is that having moved four times in the last eight years of my life and bought three homes in a relatively short period, stress is a necessary evil part of buying a home.

Here’s an interesting scale developed by some psychologists regarding stressful events in one’s life. Note that change is a residence and a mortgage above $10,000 (dates this list, doesn’t it?) are both listed as pretty strong stressors, very close to change in careers and a death of a friend!

Now throw in escrows and deadlines and inspections! Really, I’d be surprised if it’s not stressful!

I Want a Fixer!!!

There are not too many buyers these days – or ever, I guess – looking for fixers or fixer-uppers as they are called by the not verbally lazy. Typically fixers are homes that need more than just carpet and paint. These are the truly sweat-equity homes where entire walls needs replacing, have mold problems, termite problems or the foundation or floor is not level. Sometimes the homes needing just carpet and paint are labeled “cosmetic fixers” and you can get these at discounted prices as well, just not as deeply discounted as the “real” fixers.

So what are the conditions under which you may be able to buy these deeply discounted big fixers? For one, they are usually bank-owned. The property owners have probably had a history of non-payment of their mortgage due to financial problems and the property will reflect that. Keep in mind however that the bank has no legal requirements to tell you all that is wrong with the home – they might not know. So get your inspections done thoroughly.

Another deterrent most buyers have (hence the low price) is that it is almost impossible to get a mortgage to buy one of these fixers, unless it is a construction loan. So it is imperative that you have cash to complete the purchase.

Big fixers have some pretty good potential for the savvy investor, but you must research them well and make sure you are getting a good deal and also plan your escape route. If they are deeply discounted, you could buy one, fix it up and sell it or rent it out. But do your homework!

Why does the Realtor® not Introduce the Homes?

I’m guessing you’ve watched some movies – perhaps the older ones – where the Realtor® walks into a home chatting up his clients and telling them everything about the house before they arrive there. The truth is your experience is likely to be very different. Chances are good that your Realtor® has not seen the home before you enter it and may be surprised himself at what he sees there.

If you did choose the neighborhood expert, you might hear a lot about the neighborhood before you get to the property. Also, if the Realtor® has shown the house before to someone else, he might know more about it. But otherwise, you shouldn’t expect that the Realtor® has previewed every house he is showing you. (Also, we have been expressly told not to walk from room to room saying “here’s the kitchen, here’s the bedroom, etc” by most trainings.)

However, this by no means implies that you cannot get the answers you want. Make sure to ask questions regarding matters that are important to you. The Realtor® should have an MLS printout of the house with all the details. And if the information you need is not contained in the printout, he will have the necessary phone numbers to get the details.

What Happens When We Find the Right Home?

When you find the right home and decide to make an offer, usually the Realtor® will get you a competitive market analysis of the area. The market analysis – or CMA as we like to call it – will be a list of homes that are similar in square footage and style usually in a one mile radius around the subject property with the price they have sold for, or the price they are asking. Solds are important to your appraiser, while actives will tell you if you picked the best deal on the market.

If you are satisfied by the CMA, you can go ahead and make an offer. The Realtor® will write the offer up based on your instructions regarding what you are offering (you can use the CMA to determine the best price), the down payment, the earnest money deposit paid by check, how long you want escrow to be and other instructions and contingencies you may have.

The offer is then sent over to the listing agent who conveys it to seller. That’s when negotiations begin regarding everything in the offer. Once an agreement is reached in writing, escrow officially begins and you are between 30 – 60 days of moving in to your home.

How Binding is the Purchase Contract?

The purchase contract, especially when signed by both parties – the buyer and seller – counts as a legal contract and binds both parties to the instructions set forth in it. As a buyer however, there are various contingencies written into the contract that allow you to walk out of the purchase without losing any of your deposit.

These contingencies are:
1. Inspections – if you find anything wrong with the house during inspections, you can back out;
2. Appraisal – if the house doesn’t appraise for the price in the contract, you can back out;
3. Loan – if you can’t get a loan for the house, you can back out.

As a seller, if the buyer is expected to do something, like remove the above contingencies in writing at day 14 for example and does not, you can send them a notice to perform. If after the notice, the buyer still does not perform, you can back out of the escrow.

Disclaimer time! Please don’t take this as legal advice. I’m a Realtor®, not a lawyer. Contact your lawyer for more details.

How Long Do We Wait for a Response to our Offer?

Typically, offers are responded to within three days of receipt. That is the default on the actual residential purchase agreement in California (the RPA-CA) unless it is changed by your Realtor®, based on the circumstances. But especially in today’s market, it is a good idea not to get too caught up in the dates and deadlines, especially when dealing with banks. Most banks will respond within a week, especially if the property is an REO. But they might not and at that point it is up to you to decide if you are willing to wait longer than the date on the contract, and if so, how long.

If you are waiting on a short sale, besides wishing you good luck, I’d also say that you get your Realtor® to write a short sale addendum along with the offer. This will limit the time you wait legally to get the short sale accepted. The short sale addendum sets a date for the bank to come up with an approval date. If you don’t receive approval by that date, you are free to look elsewhere.

How Many Houses should we Look at?

There is no simple and straight answer to this question. Some Realtors have a number beyond which they will not show any more homes to their clients. While I have been known to limit the number of homes I show if I am unsure of my client’s motivation to buy, I doubt any one of us at Elite Properties has a preset number of homes we will show.

Usually, in one day it is best not to view more than a handful. The reason for this being that homes will converge in your mind and just become one big mess of backyards and bedrooms. So by that definition, calculate how many weekends you want to devote to looking at houses. (Most people shop on the weekends – you can consider about six homes as a day of shopping.)

It also takes clients about 10 – 15 minutes to look at each home. And then unless the houses are all in one community, there is also drive time between houses. So plan on about three hours of home shopping in a day – more if you’re up to it. But your Realtor might insist on a break at this point.

Happy Shopping!

How do we know if there is a Problem?

A lot of the times, clients see something that might be a potential red flag. Ants, for instance, can be an indication that there is moisture around the house (an issue with flooding or mold) or just that the place has ants in the lawn. When they see this, the first thing they do is assume the worst. While this might be a good way to stay away from any trouble, it is also a way to miss out on some of the best priced real estate. Something that looks like a potential problem in an REO say might not be one.

The best way to know is to get a home inspection. If you suspect some aspect of the house to be a concern, it is also a good idea to get a specialist in that area. For example, if you suspect something wrong with the roof, get a roof insection done. Roof inspections are usually free. If you suspect something wrong with the plumbing, see if the home inspector can tell you. If not, hire a plumber.

Sometimes you might find the best deals just because other potential buyers worried and ran at the first sign of trouble that later might turn out to be nothing!