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Wednesday, October 21, 2015

The myth of “Comps”…

One of the most overused, misused and abused terms in real estate is the term “Comps.” The term is generally defined as homes that have sold recently that are comparable (thus the term Comps) to the house being evaluated by the real estate practitioner. Comps are used on both sides of the deal. On the Sellers’ side they are used to help establish the rationale for a market price recommendation. On the Buyer side they are used to help establish or evaluate an offer price.

So, what is the myth part? The myth is found in the word itself and its definition.  Few Realtors® have the time, or take the time, to do the kind of exhaustive analysis of the homes that are chosen for comparisons sake. The Realtor may choose a few recent sales within a reasonable distance from the home being priced, based upon a quick look at some easily evaluated criteria – style, square footage, number of bedrooms and baths and maybe a few more. Most good Realtors do take some time to vet the list to make sure that homes with special value changing criteria, such as waterfront location, are removed.  Then the Realtor may run the remaining comparison homes through a CMA program of some sort to generate averages and statistics. Notice also that the Realtor did not usually visit each house on the list, so he/she really doesn’t know that they are comparable.

Appraisers, on the other hand, may spend hours agonizing over the details and accounting for differences with adjustments to the final value that they use for comparison in rendering their value opinions. Most appraisers also do drive-byes on the Comps, so that they get a feel for the neighborhoods involved and they usually take pictures of the comparable houses.. They may also take the time to look at all of the listing pictures of the Comps, so that they get a better feel for the interior amenities of the homes being used as Comps. Appraisers have to be able to defend each house that they choose to use as a comparable house and the relative values that they assign to it and to the subject house.

I stopped using the term Comps several years ago. I prefer to state to clients that what I am using for my analysis are “similar” homes – similar in size and style and amenities – at least as far as I can tell. I spend some time educating the seller or buyer on the fact that I have usually not been in the other homes, so I really can’t state that they are really comparable. What I can say with some high degree of comfort is that buyers looking for a home within the area of the subject house will likely also visit these houses or did visit them if we are looking at sold homes. I do stay within a reasonable search radius, where the term “reasonable” is relative to the density and sales activity of the area. In some cases a mile radius may suffice, but in some I may have to go out 5 miles. The same is true for the time span for sold homes. In high-density, high-activity areas, 90 days or even less may be all that I need to look at; however, out in the boonies I may have to look out over 6 months, even though the market may be changing in that time frame.

So, instead of Comps, I use a list of 5-8 “similar” homes, within a reasonable area and timeframe. I try to make sure that major factors like the style, square footage, number of bedroom and baths and a few other things are the same or close. Sometimes is it impossible to even get enough similar homes within the same style (ranches can be hard to find), so I try to make sure that the other criteria are very close.  I mainly use this list of similar sold homes for the averages that it allows me to generate. I then spend my time trying to evaluate whether the house that I’m evaluating is above or below that average and by how much. I do that based upon my own visit to the subject house. If it is a house that I might be listing, I do a Franklin Chart of the Pluses and Minuses of the house upon which I’m trying to establish a market value.  I am also usually able to create a to-do list for the homeowner of the things that he can do to improve the market value of the home. Some homeowner care about that and will take action, but many just say “it is what it is” and then I say “and because of that, here is the market value that I recommend and it is what it is, too.”

I usually take the time to educate a would-be seller on the four values that every home has – The assessed value (usually the lowest), the appraised value (higher but still conservative), the Realtor’s Market Value (sometimes called the CMA value and usually higher than the first two) and the insurance value (always the highest “value” for any house).  I try to get them to accept a Market Value for listing purposes that is not too far above what I believe might be the current appraised value. Being a little high is OK, if the market is moving up. On downward trending markets we have a heart-to-heart talk about letting go of “value” that is no longer there. Currently we still talk about when the market will recover all of the value that was lost in the Great Recession.

Many times homeowners have old appraisals, maybe from their last re-fi, and we have to discuss why those are no longer valid. We also have long discussions about why what was good enough for them for all of these years may not be good enough for the market and the potential  impact on market value of not having done any updates or upgrades for the entire time that they owned the home. I point out why Buyers will be discounting their offers on a home with a 25 year old roof, even though it doesn’t leak, yet or for a heating system put in when the house was built in the 1960’s, even if it still works fine for them.  On the buy-side we discuss why they can’t take all of the cost for every project that they see off the asking price. Some things just have to be accepted under the heading of normal maintenance needed.  

So, when getting Comparative Market Analyses on your home as you prepare to sell, take the term “Comps” with a grain of salt. The homes on any list that you are given are probably similar, but there can be major value-changing differences, even if all of the houses are in the same sub. There are choices that people make, while building or as homeowners, such as granite counters or Formica, hardwood floors or carpet, finished basement of unfinished,  crown molding or none, updated or original, new roof or original, new mechanicals or updated, all of which can have dramatic impact on the market price. Two houses with the exact same floor plan can have differences in all of those areas and have values that are tens of thousands of dollars apart. Are they Comps? You decide.


There is value in the work that your Realtor does to arrive at his/her market value recommendations, but don’t cling to the term Comps or get too upset if you happen to be in one of the homes that they used and it is nowhere near as nice as your home. They are just similar. But, do take note of the things that there that perhaps you could do in your home to improve its value. Take heart also that nothing will ever be comparable to the home that you made in your house. It’s just time to love it AND list it. 

Sunday, October 18, 2015

Evaluating the strength of your offer…

Many times Realtors® may use the terms “strong offer” or “weak offer” when you suggest what you want them to offer to the other side in a real estate deal. What do those terms means and how is an offer’s strength determined?

The strength of the offer really refers to the attractiveness of the offer from the Sellers’ perspective. Your offer is usually evaluated by the Sellers’ agent as well and they will likely render their opinion and advice to the Sellers (even if not asked to do so).
So, looking at typical offers from the Sellers’/Realtor’s perspective, let’s explore offers from the strongest to the weakest, so that you’ll better understand where the offer that you are about to make might fit and how it might be viewed by the Sellers and their Realtor. Use the Infographic below for a quick reference guide.



CASH
There’s a saying in real estate that “cash is king.” The strongest possible offer is an all-cash offer at or over the asking price, along with clear proof of the funds necessary to get to the closing table and no contingencies or concessions. These offers also usually hold out the promise of a quick close, since no time is required for arranging financing. Who wouldn’t accept and all-cash offer for what you were asking (or perhaps even a bit more) from someone who produces financial statements representing the money in the bank and ready to go. Some of these offers go further (and get even stronger) by putting no contingencies (not even an appraisal or a property inspection) into the offer. I would never recommend that approach to a Buyer, but it is attractive to Sellers.  Most of the time there is a contingency that the property must appraise for the sale value and most buyers will request a property inspection. These offers usually do not carry requests for concessions to cover closing costs. Sometimes these are called “no-brainer” offers by the Sellers and their agents. While they are relatively rare, they do happen; especially at the lower end of the market, where cash buyers are often investors (or investor groups) looking to pick up rental properties.

MORTAGE OFFERS - The next strongest offer is usually one involving a mortgage of some sort. Within this category of offers there is a hierarchy of strength that depends upon several factors.

CONVENTIONAL
In general the strongest of these offers involves a Conventional mortgage with a good down payment (20% or more) and a pre-approval letter by the lending institution. Note that the letter is stating that the buyer has been pre-approved and not just pre-qualified. That means that the Buyer has been run through the Underwriting process and not just had some financial data collected and a quick credit check. It is a very strong offer if only the normal contingencies are specified – a good home inspection and an appraisal that supports the sale price. Conventional offers may have other contingencies or request Seller concessions; however, those both weaken the offer.
The next three offer types also have mortgages associated with them, but of differing types.

FHA
An offer with an FHA Mortgage is the most common type in this area. An FHA offer is considered to be slightly weaker than a Conventional offer because the Buyer only has to put down as little as 3%. For many Sellers that is a red flag that th3e Buyer may not have the wherewithal to get to the closing table. FHA deals often also carry Seller Concession requests for assistance with closing costs. Another reason that some Sellers (and their listing agents) don’t particularly like FHA deals is the FHA Appraisal process. Many people call it the FHA Inspection, but it is really not an inspection; there are just a bunch of things that the FHA appraiser looks for in the house while doing his appraisal walkthrough. Most of those things currently involved safety hazards in the home, such as not having handrails on stairs that are more than 3 stairs long or not having GFCI circuit breakers on outlets  that are within 5 feet of water (kitchens and baths) or are in the garage or are exterior plugs. IF the inspector finds those things FHA required that they be fixed and made safe before the loan can proceed. It required a second visit by the appraiser (which someone has to pay for) and adds time to the process. Still, an FHA deal is the strongest non-cash offer, assuming that the contingencies and concessions requested aren’t onerous. More on that below.

VA-
Mortgage loans backed by the U.S. Veterans Administration (VA) are next on the mortgage deal spectrum. Basically all of the FHA requirements are encompassed within the VA loan process, plus a few other things. VA still requires a pest inspection as part of the home inspection process and someone has to pay for that (usually the Seller). Not all condominium developments went through the VA certification process while they were being built, so the Seller may also have to do the paperwork to get his own condo development VA certified. That involves getting the Condo Owners Association or Management Company to submit the proper paperwork and may involve a cost that the Seller might have to bear. That can be a particular problem in Michigan, because we are the only state that allows subdivisions of free-standing homes to be built under the State’s Condominium Law. These are called Site-Condos, where the owners own their own site and the house on the site, but are also required to belong to a Home Owners’ Association which owns common elements in the sub – parks, play areas, sub entrances, etc.  The same cautions about contingencies and concessions apply to these loans. The more there are the weaker the offer is considered to be.

RURAL DEVELOPMENT
The last mortgage type that we see a lot of locally is USDA Mortgages under the Rural Development (RD) program. The USDA RD program was originally aimed at getting people to move into rural areas that needed people and development. These days, much of what we might call “the suburbs” actually qualifies for RD loans. These loans are also aimed at the lower-end of the market and at first-time buyers or people who haven’t owned a home for at least 3 years.  There are strict household earnings limits.  Much of the process and most of the rules are the same as for an FHA loan, but these loans can go all the way down to a zero down payment and the don’t have the onus of the FHA Appraisal associated with them.  Zero down loans really spooks some sellers and just looks a lot weaker than loans where the Buyer has at least some skin in the game. The contingencies and concessions issues are heightened in the Sellers’ minds if they see a zero down USDA RD loan in the offer.

CONTINGENCIES -
So, what are the contingencies that weaken your offer? Things like the appraisal value supporting the offer and a satisfactory home inspection are expected and pretty much accepted by most Sellers. Including such inspections as a well and septic inspection, a radon inspection or a pest inspection aren’t necessarily show-stoppers, unless you try to make the Seller pay for all of them. Just those four items could run well over $1,000 in costs to the Seller. Adding requirements for things like a staked survey of the property or an environmental study could runs over $1,000 by themselves and would probably get your offer deep-sixed if you asked the Seller to pay for them.

The most onerous contingency of all is the dreaded “Offer contingent upon the sale of the Buyers current home.” That is the kiss of death for most Sellers. Almost as bad, but perhaps acceptable is an offer “contingent upon the closing of the sale of the Buyers current home.” That says that the current home is escrow and awaiting a closing. Usually the Buyers will supply proof of the sale and usually they are ask to supply proof that the buyer of their home is capable of getting to the closing table on that sale. It can get fairly complicated to evaluate.

CONCESSIONS –
As for Seller Concessions; these are normally requested to help the Buyer cover his closing costs and usually are 3% or less of the sale price, but could be more. Sellers really don’t like concessions because it feels to then like they are paying the Buyer to buy their house (at least that’s what I hear a lot). Sometimes, when the appraisal doesn’t come back high enough to cover the sale price, Buyers will request a Sellers’ Concession to make up the difference. Many times a compromise will be worked out where the Buyer and the Seller both kick in something to make up that difference.

Why worry about the strength of your offer?
The main reason to be aware of the relative strength of your offer is so that the Seller doesn’t just turn it down because it is too onerous or because you look like a buyer that might not be able to get to the closing table with this offer. Remember that you are asking the Seller to take the house off the market based upon your offer. The other reason is that your offer may be compared side by side with other offers. Many times a Seller will take an offer that has a lower offer price but with less contingencies and no concession. You may see later that the house sold for $5-10,000 less than you offered; but what you don’t see is that the offer that was accepted was judged to be much stronger than yours and much more likely to close. Most times the accepted offer also resulted in a higher net to the Seller than your contingency and concessions laden offer.

A final factor impacting the strength of an offer as reflected on the Infographic is a more of a contingency on the buyer. It is the ability of the buyer to obtain a grant through the MSHDA (Michigan State Housing Development Authority) or to get a gift from family or others approved by the mortgage company.  The grant or gift will be used by the Buyer to make the down payment and perhaps to cover the closing costs that he/she incurs. The MSHDA grant program is unique to Michigan and is used my many first-time buyers.  A MSHDA grant is not considered to be a loan, since it does not have to be paid back if the Buyer lives in the house for at least 5 years. Gifts from relatives are not loans either; however, gifts must be qualified by the mortgage company and cannot contain any payback strings. The gift giver also has to show where the money is coming from. It can get a bit complicated and usually adds a bit of time, which is why the Sellers don’t like to see them in the deal.


Your Realtor should be able to advise you on the potential impact of the things that you want to put into the offer. They are working for you and trying to make the deal happen. They may have to tell you that you honestly aren’t ready to buy the house that you want to make an offer on, because the things that you need from the Seller are too expensive or onerous. They will point out that you are wasting everybody’s time with those kinds of offers. Listen to their advice. Lobbing in weak offer after weak offer is no more productive than lobbing in a constant stream of low-ball offers. A good Realtor won’t allow you to do that repeatedly. 

Friday, October 16, 2015

Dan Elsea's October Southeast Michigan Market Report

We are now through the third quarter of 2015 and the overall housing market continues to move at a steady and positive pace with buyer interest as strong as the fall of 2014. The overall economic news remains good as well, with Michigan leading the Midwest in terms of economic growth. The combination of steady job growth, low interest rates,  increasing household income, and home values give consumers increasing confidence in housing.

The housing recovery has been surprisingly strong considering so many homeowners have been sitting on the sidelines waiting for their home equities to rise, and with For Sale inventories so low, waiting for a home to purchase. With home values up, it appears that those homeowners are finally beginning to act, increasing the number of homes for sale, which in turn, should bring more buyers into the market, providing fuel for the 2016 housing market. Add to that the credit easing up for first time home buyers, (and their desire to move out of their parent’s basement) and it looks like a steady flow of buyers entering the market for the balance of this year and into 2016.

We do anticipate that For Sale inventories will be rising faster than sales, which will give buyers more choices and sellers more competition.  At the same time, sellers will see increased time on the market, as well as a leveling out of home values. The charts below confirm these trends across all price categories.

Going into the fall and winter markets, sellers should be wary of over-pricing.  Values are rising but not as fast, and in fact, most of the current inventory, particularly over $400,000, is over-priced compared to homes on the market this past spring.  With more listings coming on the market, values may settle a little and homes that might be just a little over the market now, will be quite a bit over this winter.

The under $100,000 market has shown a steady decline in sales and inventory over the past three years as a result of fewer bank-owned homes. Removing the bank-owned properties, the number of sales are down only slightly and the number of listings are actually rising over the past 2 quarters. Values based on the average price per square foot have had a steady rise, the most of any price point, as a result of both fewer lower priced bank-owned properties and more buyers competing for fewer listings.



The next price point, $100k to $250k, shows a more pronounced rise in inventory, along with a strong jump in sales, with the rise in inventory since mid-2014 out pacing the rise in sales which has resulted in a corresponding flattening of the increase in value per square foot during 2015. We expect these trends to continue through the fall and winter, keeping values relatively
flat.

The $250k to $500k price points follow the same trends as the prior charts with a more pronounced increased in listing inventory this year which results in an even flatter pricing chart for 2015.

For the luxury market, the gap between the rise in inventory and sales has been the most pronounced, so it has not been surprising to see values remain flat, and even start to decline, during this past quarter.  We don't expect this value decline to be a long-term trend, but until inventories are absorbed later in 2016, values will remain flat, or in some cases, continue to decline.


All investment markets, whether stocks or real estate, don't recover in a steady line, they jump around as demand jumps, then supply follows, then demand jumps again. So for the next year or so, across all price points, we should see a temporary jump in For Sale inventory, and over the balance of 2016, the market should settle back down to a better balance as those new listings are sold.