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Thursday, January 21, 2016

Our agent isn’t working hard enough to sell our house…

I recently overheard that comment from someone that I have known for some time. I didn’t butt in and say anything, but it was interesting to hear. It was also a bit painful, since these same friends had prevailed upon me a year earlier to give them some advice about what to do to get their house ready to sell and asked what I thought it might sell for when they did put it on the market.

Apparently I was too honest for them, and my own good, with the advice that I rendered at the time. They didn't do the things that I recommended and found another agent who would tell them what they wanted to hear,especially about price; and they listed with him, a little over 6 months ago at a price well above what I had given them. Apparently the listed price was also well above what the market sees as the value of the property, since it is still sitting on the market. But, that’s likely because their agent “isn’t trying hard enough to sell their house.” Or, so it seems to them.

Some of the most valuable work that a good agent does occurs before the house is put on the market. It involves assessing the condition of the property and giving the would-be sellers advice on things that might be done to help the property sell faster or for more. It also involves doing the research to understand the market and how the property is going to fit into it and at what price it should be positioned within that market. If the agent is good at what they do, and the clients will listen to and heed the advice that they get, the house will sell relatively quickly in any market. In our local market that will probably happen within the first 30-45 days.

The local real estate market is very tight, with low inventory; so buyers are quickly attracted to any new listings. They are also quickly turned-off by sellers who ignore their agent’s
advice and overprice their homes. Some agents are very good at sensing what it will take to get a listing, even if it means initially overpricing it; and they are not above going along with the sellers and setting the initial listing price too high. They do that for two reasons – 1) they get the advertising benefits of having their signs up in public, and 2) they go into the listing with a plan to reduce the price as quickly as possible to what they know is the true market price. That is a morally questionable way to do business, but perfectly legal. It feeds on the desire of the seller to hear what he/she wants to hear, rather than deal with the truth.

Sometimes that strategy backfires on the agents; especially when the seller remembers that the agent initially agreed with their overly high listing price. Sometimes the agent isn’t trying all that hard to market or sell the overpriced house, because he/she knows that it would be wasting money on a product that will be rejected by most prudent buyers. If they get showings the feedback will likely be fairly consistent about the price being too high, so they can start pushing on the seller to lower it to where it should have been all along. If the seller resists for too long the house can become stigmatized, as would be buyers look at the old listing and wonder what’s wrong with the house to make it sit on the market for so long.

As for the concept of the agent selling the house; that is a bit off base, too. The agent’s job
is to market the house effectively so that people make showing appointments or visit open houses. There is a saying in real estate that the house will sell itself and that is largely true. There are things that the agent can do to make the visit experience to the house better or make the house show better; however, the concept of selling the house, as if it were a consumer product doesn’t really hold true. A good agent night use some of the same consumer product sales techniques in marketing the property, such as dealing with objections or highlighting the positive features and downplaying any negatives; but, Realtors are not consumer product salesmen and the good ones don’t act like one either.

So, how can you tell if your agent is “working hard” to sell your home? You can go on-line and see what kind of job he/she has done to get widespread publicity for the property. Go onto 3-4 real estate web sites and see if your property is advertised on them. Read the ads to see how the house is being positioned and marketed. See if the agent has posted a virtual tour or video tour for the property and check it out, too. Ask about open houses and the agent’s plans for them. See if your agent has a marketing plan for the house and ask him/her to go over it with you.

Don’t worry too much about not seeing your house in the local papers, most modern buyers wouldn’t see it there either and most real estate companies and agents have greatly reduced their use of print ads. Instead, download 1 or 2 of the real estate smartphone apps and see if you can find your property on them and what the presentation of your property looks like when compared to others. All of those things represent the “hard work” that your agent should be doing in today’s real estate marketplace.

Finally, if it’s been 5-6 months and you’ve had few showings and no offers, it may be time to swallow your pride and listen to the honest advice of your agent or another agent about what your property is worth in the current market. If that price is not something that you can live with, then take it off the market and wait a year or so until the market catches up with your grand vision of what you property is worth. You are wasting everyone’s time and efforts – those of your agent and the buyers who visit the property. Maybe it wasn’t that the agent wasn’t working hard enough to sell your property; maybe it was that you really didn’t want to sell it bad enough to take what it is worth.

Saturday, January 9, 2016

Buying in at negative equity…

One of the things that a buyer has to watch out for, especially with new build houses, is whether or not they are buying in at too great of a negative equity position. Builders always seem to price a little higher than the sold price averages of existing homes in the current market would dictate. Some of that is attributable to the “new factor”. Everything is new, so there should be little in the way of maintenance or update costs for several years. That certainly justifies a premium of some sort; but, it is that premium that is contributing to the negative equity of the property.
Equity may be defined as the net value of the house as an asset – it’s sales value less the cost to payoff whatever the remaining mortgage balance is at the time, i.e. what you put in your pocket after the sale is closed. Prior to the recession there had been a commonly accepted notion that equity in homes always went up; sometimes slowly and sometimes rapidly, but always in the same positive direction. If the quick run-up during the housing balloon period that led to the Great Recession is taken out, the historic appreciation curve showed a steady increase in home values of about 3.0 - 3.5% per year for decades, going back to the end of WWII. So, if you bought a house and maintained it well, you could count on its market value increasing that much each year.
Then the Great Recession hit and our notions about home values and the equity that we have in them got turned upside down. We all got somewhat used to the concept of negative equity during the
recent “Great Recession.” That is where the house is worth less that what you paid for it. Some homes in the area around Southeastern Michigan lost 30-40% of their pre-recession values; with many in cities like Detroit, Pontiac, Ypsilanti and other losing more than 50% of their pre-recession values. New terms were coined like “being underwater” or being “upside down”. Those were terms in the vernacular to describe being in a negative equity position.
In reality, all homeowners are in negative equity positions on the day that they close on the purchase of their new home. That is caused by the fact that the price paid for the home includes costs that were independent of the home’s underlying value and which were paid for by the seller (so the buyer never saw them), but which are part of the “value” that is reflected in the mortgage. Those costs include the
commissions that were paid to the real estate brokerages involved as well as the various fees and taxes that the seller had to pay and which were “rolled into” the purchase price and thus into the mortgage. In Michigan those costs average about 7.5 to 8% of the purchase price. So the day that you walk out of the closing room with your new house keys in your hand you are underwater by at least that much – 7-8%. Why is that on you? Because, if you had a misfortune in the next week or month or year and had to sell that same house for exactly what you paid for it that 7.5 – 8% would come out of your pocket now, because you are the seller.
In the “good old days” of positive equity grow it might take you 2-3 years to get back to the break even point on that house. Break even is where you walk out of the closing with no debt, but also with no money in your pocket.  For many who bought just at the peak of the housing bubble in 2007/8, that is still an elusive goal. They still have negative equity in their homes. The good news is that somewhere between 80-85% of all homes across America have regained enough value to put their owners into positive equity positions.
So what does all of this have to do with were we started?   We are well out of the recession and home values have come roaring back much quicker than most experts expected they would. That rapid run-up of values is being driven mostly by a scarcity of homes on the market and the pent up demand for housing that was stifled during the recession.  The good news is that the most home owners have recovered the value that was lost in the recession. The bad news is that many home sellers have gotten greedy and inflated the asking prices for their homes. That has been especially true for some builders who have recently been pricing their new build homes well above what can be justified in the current local markets.
How do you know what the current local markets justify for home prices? The best way to know is to work with a good Realtor® who can do a Comparative Market Analysis for you of the local market. Tell him what the characteristics ae f the house that you are interested in – size in Sq. Ft., number of bedrooms and baths and ½ baths, and features like a garage and basement and the size of the lot or
land with the home. The agent will be able to look at the similar homes that have sold in the area that you desire and tell you what the average cost per Sq. Ft. is for homes that meet your criteria. Usually the agent will give you a range that helps cover the differences between homes in great shape and with really good finished on the high end and those that might need some work or redecorating on the low end. For instance, in the Village of Milford where I live and do business, the range for a mid-market, 3 or 4 bedroom. 2.5 bath house of 2200 t0 2500 Sq. Ft. would be $125 – $145/Sq. Ft.
So, let’s say that you were out looking and you come across a new build subdivision that featured similar sized homes and they want $180/Sq. Ft. for their homes. A red flag should go up! Right away you would be paying well above the prevailing local market averages and are probably will end up in a larger negative equity position. Remember that you are already going to be 7-8% to the negative the day that you close, just due to the cost of the real estate transaction. Now add to that having paid a price that is 25% above the prevailing average and you are now in the hole more than 30% against the market. At the historic rate of appreciation it would take you more than 8 years to reach break even.

Buying in at the prevailing local value averages is about the best that you can do, unless you happen
to get a great deal on a house that is priced below market. At a minimum you should think long and hard before you buy in to negative equity that will take you longer than 5 years to recover, especially if you are at the beginning of your home owning years. The U.S. Census Bureau reports that the average American moves 12 times during his lifetime; so you probably aren’t going to be there all that long. If that is the case, don’t buy into too much negative equity. Your local Realtor is the best source for the kind of information that you need to make good decisions. If it’s the Milford, Michigan area, give me a call and I’ll help you.