How Buying A Distressed Property Actually Works

This is number five in our ongoing series on creating your own real estate investment business plan.

Today we’ll run through how buying a distressed property actually works in a nutshell. So here is what you can expect when you find a distressed property and you want to make an offer. To purchase a foreclosure auction home, you need cash. Realtors are not involved in foreclosure auctions because no one pays a commission to the Realtor. If you are new at bidding at foreclosure auctions, you might want to bring someone experienced with you such as another investor.

Auctions are generally for more seasoned investors who understand the risks associated with them such as no warranties, not being able to purchase title insurance and having to pay off liens and evict former tenants or owners. Foreclosure auctions are open to the public. The auctions are generally conducted by the sheriff or an auction company at the courthouse steps in the county where the property is located, at the property or at another designation. Check the notice of sale to find out the time and place. It is generally posted at the courthouse or on the property.

Our New House © by Unfurled

Bids often come thick and fast, be prepared
The lender sets the opening bid price, which is typically the amount that is owed on the loan or market value. The highest bidder is typically awarded the property. Bidding goes quickly. You need to register, bring a cashier’s check generally for 10% of your bid price and a cashier’s check to pay for the home. Other people may be bidding on the home so you should set a maximum price you are willing to pay for the home before you bid so you don’t get caught up in the excitement of the bidding process and end up paying more for the home than you intended.

Many times the lender purchases the home back and it becomes a REO. Making an offer on a REO is similar to making an offer on a resale property owned by an individual owner except that with a REO, you must make the offer through a Realtor and the seller is the bank who owns the home. It may take a little longer to get a response. Sometimes the bank will pay your closing costs up to 3% or maximum 6% if you write it in your offer. You don’t need cash to purchase a REO.

Although making cash offer on a REO gives you an edge over other buyers as well as minimizing the number of contingencies in your offer. Have your financing set up and deliver a pre-qual or pre-approved letter with your offer so the seller knows you are qualified to buy the property. The closer to the asking price you offer and the least amount of contingencies as well as a quick closing are negotiating points that will win you the acceptance of your REO offer. Banks like quick clean deals.

Buying a short sale property
A short sale is a whole different game. The short sale is still owned by the seller, but they are upside down on their mortgage. This means they owe their lender more than the home is worth if they were to go and sell it on the retail market. The short sale may be listed with a Realtor or for sale by the owner. You will make your offer with a Realtor if the seller has the property listed with a Realtor. If not, then you can negotiate directly with the seller or the seller’s attorney.

Before you make an offer, be sure to ask the seller if they have spoken to their lender to make sure the property qualifies for a short sale so you are not wasting your time making an offer on a property that does not qualify. The seller has certain obligations that they must take care of such as providing the lender with their financial documentation to prove their financial distress. If the seller has assets, the lender may not approve the short sale and may require the seller to sell the assets to pay off their mortgage. If the seller does meet the lender’s financial hardship guidelines, the transaction will fall apart. The seller should also negotiate that the short sale process satisfies their mortgage debt so that the lender cannot go after them later for a deficiency judgment.

A short sale is contingent upon the seller’s lender approving the transaction because they are going to have to write off the loss between the sale proceeds and what the owner owes them on the loan. If the seller is not willing to provide their financial information or documentation that the lender requires, the whole deal can blow up. So the seller needs to be committed to the process as well. It is best if the seller is working with their attorney in negotiating the short sale because short sales are very complex.

Learn the ins and outs of short sales before bidding
Be sure to ask the seller or their Realtor if there is a short sale negotiator or attorney handling the short sale. This is important because most sellers do not know how to negotiate a short sale with their lender. If you are not familiar with the process, the chance of the short sale being successful is less. So if there is a short sale expert involved who knows how to handle the transaction, your offer has a better chance of getting accepted.

Lenders take short sale transactions more seriously if there is real estate professional or attorney involved. Otherwise, they tend to take advantage of the fact that the seller is not sophisticated about the process or the seller may omit an important piece of information, and the short sale might get rejected because of that.

Also it is recommended that you also do some research and educate yourself about the short sale process in case you have to end up negotiating the short sale if there is no attorney or negotiator. But again, in that situation, it might be smart for you to hire an attorney to help you if the seller cannot afford one or is not willing. You would need to get the seller’s permission to negotiate with their lender by having them sign an authorization letter.

With a short sale, you should also have a cash offer or have your funds lined up because the seller and the lender want to know that you are able to close the transaction quickly should the lender approve it. Again, the least amount of contingencies and a quick closing after the lender has approved the transaction are your best bet of getting the property. Be sure to negotiate that the short sale is contingent upon the approval of the seller’s lender and negotiate an out clause so you can get out of the contract if it takes too long to get a response from the seller’s lender.

Usually a 45 day out clause is sufficient. Keep your initial deposit small such as $1,000 because the contingencies do not start until the lender approves the transaction and you don’t want to tie up a large sum of money in an escrow account. You can always negotiate an additional deposit after the inspection contingency has been removed. Remember, all your contract contingencies start running after the seller’s lender has given their approval in writing. You may have to counter back and forth a few times with the lender until they accept the offer. Also be prepared that they might not accept the terms, and you might have to move on to another deal.

Buying a property – an example of how it’s done
To determine if the distressed property is a good deal, you want to run the numbers. Let’s say you find a three bedroom two bath distressed property in a hot neighborhood with good schools, and the asking price is $200,000.

You have a local Realtor provide you with a comparable market analysis and you discover that similar homes that are in better condition and are not distressed properties are selling for $250,000- $300,000. You know that the home will cost you approximately $10,000 to fix up and rehab. Taxes are approximately $4,000 a year and insurance is $1,200 a year and you pay away an extra $500 a month for repairs which is approximately $6,000. You already know that you have built in equity and appreciation, and the home is a good deal if you decide to rehab and turn around and sell it. Figure another 2% to 4% for your closing costs, and you are still ahead.

Income stream is also important. Having a regular income stream and cash flow keeps you in the black and out of the red. Cash flow is the difference between the income generated by the property and the property expenses. What the property will generate in steady cash flow is actually more important for investors than appreciation. Although having said that, appreciation is also a factor to consider.

Take for instance the above example. You can check market rental rates on our own or by asking your Realtor or a local property management company to provide you with a rental market analysis. So let’s say that you can rent out the above home for $1,500-$1,800 a month. You will generate rental income of approximately $18,000 at $1,500 a month.

Your expenses are approximately $4,000 for taxes, $6,000 for repairs, $1,200 for insurance and you might want to figure in a vacancy factor of two month’s rent so another $3,000. If you add all that up, you still have a positive cash flow for the year of approximately $3,800. If you buy at least 2-3 properties around the same price range, you can see how you can create quite a bit of positive cash flow with your rental properties.

The No Nonsense Guide To Investing In Short Sales

This is article four in our ongoing series on formulating a real estate investment business plan

Short sales or pre-foreclosures are also considered distressed properties because the borrowers are about to default on their mortgages and the homes may be heading to foreclosure, or the owners may have already received a foreclosure notice from their lender. With a short sale, the owner must provide you with disclosures about anything that is considered materially and would influence your decision to purchase the home because they still are in possession of the property. However, they are under no obligation to make any repairs.

Short sales require the approval of the borrower’s lender before the transaction can close because the lender has to write off the difference from the sale proceeds and what the borrower owes the lender on their mortgage. Short sales may take a while to close because lenders typically don’t respond quickly. The average short sale transaction may take three to six months or even longer. Keep in mind there is no guarantee that the lender will even accept the offer. You could be waiting and miss other opportunities.

House © by Tax Credits

How to protect yourself when making an offer on a short sale
If you do decide to make an offer on a short sale, negotiate an out clause in case a better opportunity comes by and you want out get out of the deal. An example of an out clause might be that the offer is contingent upon your attorney’s approval or your partner’s approval. Give yourself a 45 day out clause so that if you have not heard anything in writing from the seller or their lender in 45 days from the time you and the seller negotiated the short sale contract, you have the right to cancel and get any initial deposit returned.

Short sales are not for everyone, especially if you are in a hurry to close. However, if you have the time, they are good investments because you can purchase them below market value. Many short sales are also in much better condition than foreclosure auction homes or REO’s because generally the owner or a tenant is living there maintaining the property. The home might only need cosmetic fixing or it could even be in move in condition. That is not to say that every auction property or REO is in poor condition because there are also a number of properties that only need cosmetic repairs or are also in move in condition.

Avoid short sales that need lots of work
REO’s and short sales offer less risk to the investor because the new buyer is not responsible for paying off any liens on the properties, title insurance can be obtained and there are no costs that the buyer has to incur for evicting former owners or tenants because the properties are always delivered vacant. However, auction properties can be bought at larger discounts.

You need to do your homework first before you buy a distressed property by checking out the comparable prices and conducting a physical inspection of the property so you know what you are getting for your money. All distressed properties are sold as is so what you see is what you get. Many distressed properties are in bad or poor condition so it is important to budget for repairs.

It’s smart to avoid distressed homes that need major systems replaced because that is expensive and cuts into your profit margins. Cosmetic fixers are better investments, especially if you are handy and can do the work yourself. Either that, or you’ll have members of your team that specialise in those areas and can make light work of it.

The Single Biggest Mistake That Real Estate Agents Make

The single biggest mistake that real estate agents make has the potential to ruin their reputation and their business. The funny thing is that they probably don’t even know they are doing it. The reason they don’t see it is that they are looking at their business wrong, and as a result they are missing a bunch of business (and a chunk of money).

What I’d like to do is be open and honest about the mistakes I see real estate agents in my local area making. First, a couple of caveats: I’m no agent, realtor or broker. I don’t work with any companies in the industry and am a commentator on it. I’m writing from the perspective of a client, and want to share my experiences in the hope that what I see happening to the detriment to the local market stops.

Price Drop Ahead © by gtquast

The biggest mistake that real estate professionals make
One of the biggest errors that I see time and time again jumps out at me almost every time I see real estate marketing material. The irony is that the mistake is almost always made in an attempt to make more money for the listing agent – but it achieves the reverse. Instead of making sales, potential property buyers are actually driven away from anything that the agency has to offer.

I’m talking about price. The listing price is everything, a very important number. Let’s be clear though that this price is not altogether linked to the actual value of the property. The listing price is something different, but that’s for another article.

With the reduction of property values, inventories are lower and sellers who are actually in the market now really want to sell. So putting properties on the market at prices which don’t reflect the drop in values is completely counter-productive. It’s not half obvious either, as properties listed by other agencies in the area are listed at obviously lower prices, which are realistic and reflect current values.

Higher listing prices drives business away
As a potential buyer I will do everything I can to avoid an agent who has high listing prices. I’m not saying that I want bargain prices, everyone knows that the final price paid for the property will be subject to negotiation. What I want to see when I see a property listed is a price that reflects a fair appraisal – not a generous appraisal designed to make the seller happy to list with that particular agent.

Real estate agents need to think carefully when coming up with a listing price. Remember that that you want to attract buyers, sell properties and earn commissions – that’s your core business. If you do this well and efficiently then you will earn more referral business, make more money and have a successful business.

If, however, you choose to list properties at inflated prices that do not reflect the fair current market value, but rather a wishful thinking type figure – you’re doing yourself a dis-service. Be honest with your clients, the people that list with you. Tell them the truth about current market conditions and the list price that will attract potential buyers.

Finally, remember that every listing is a reflection of your business, your morals, and your skills. If your listings don’t reflect positively on your business, your business will suffer. Simple really isn’t it?

What Are REOs Anyway?

This is part three in our series on formulating a real estate investment business plan.

Plenty of articles around the place talk about REOs, but what are REOs anyway? Many won’t realise that a REO property is actually in foreclosure: if a foreclosure auction property does not sell, then it becomes a REO (real estate owned). REO’s are bought back by the banks that foreclosed on them and then offered for resale. All REO’s are listed by the lenders that own them with local realtors, who market them in the MLS and other places to potential qualified buyers.

Sign and tumbleweeds, Salton Sea, Mojave Desert 2009 © by fotogail

Banks are tough to deal with so do your due diligence and be prepared. You make an offer through the bank’s Realtor or your own Realtor. The bank usually chooses the title and escrow services and may have special language that you have to agree to in their contract. Usually banks use their own riders and amendments that the buyer must agree to. There are no warranties or representations and the homes are sold as is. You can negotiate an inspection contingency and a financing contingency.

Banks and REOs – there is no disclosure obligation!
Generally, banks don’t make any repairs, but it doesn’t hurt to ask after the inspection if there is mould or some other repair you want them to make or give you a credit for or reduce the purchase price. However, keep in mind that most distressed homes are priced to sell so don’t expect to negotiate the price after you have an accepted offer.

Also, banks are not required by law to disclose anything they know about the property. Real estate property disclosure laws do not apply to banks because they have not resided at the property. That is why it is so important that you as the buyer investigate everything about the house so you know what you are getting. This means also checking with the city to make sure there are permits and that the home is in compliance with local zoning codes and ordinances or has been grandfathered in.

When you purchase a home from a seller other than a bank or a trust, they are required to disclose any material items they know about the home. With a distressed REO or auction property, the burden is on you to investigate.

Remember that not every foreclosure, REO or short sale will be a great buy, or an easy one. Do your research and due diligence – and never, ever jump into a sale without it.

The Stages of Foreclosure: An investor’s guide

This is part two of our series on formulating a real estate investment business plan.

There are many stages of foreclosure – and they will very much depend on the property’s location and jurisdiction. A home that is a pre-foreclosure is a short sale or one that the owner is about to lose. If the lender has already instituted a formal foreclosure proceeding, then it is in the first stage of foreclosure. The foreclosure process depends on the laws of where the property is located. So the lender must follow the laws to the letter or they have to start the process over again.

The lender must either foreclose through a formal judicial foreclosure process which requires court approval of the sale or a private trustee sale, which does not require court approval. Some states allow the lender to foreclose by either method. Check the foreclosure laws of the state where you are buying property. You might want to consult with a real estate attorney to make sure you fully understand the laws and procedures.

Trash Fence Real Estate Auction © by aturkus

Once the home is in foreclosure, the owner has a certain amount of time to redeem the property by paying the default amount and any other costs. Some states allow the former owner to redeem the home post foreclosure sale. The owner may have other options to try and negotiate with their lender to prevent the foreclosure. This is where you as the investor can be helpful because you can offer to purchase the home and save both the lender and the owner money and time.

Buying a foreclosure at the right price is about communication
The best part is you get to purchase a discounted property. The seller can negotiate a short sale or mortgage modification, if they want to keep the home during the time the home is in foreclosure and up to the time the home is offered for sale at a foreclosure auction. Foreclosures are complex and very emotional for the sellers/owners.
If you are tracking a foreclosure default notice filed against a property, the first step you will need to do is to contact the seller and see if you can help by purchasing the property before it gets foreclosed. Find out if there is mortgage. If there is, then ask how much they own the lender.

If the seller is upside down, then the seller would have to contact their lender and get approval to sell you the home for less than they owe their lender. That process is referred to as a short sale transaction. Many times people are in denial and do not want to admit that they are going to lose their home. They are embarrassed and scared. You can help reassure them by telling them you understand their predicament and only want to help. They may not be receptive to your offer to help at first. Or you simply may not be able to agree on the price and terms. If you really think the home is a great bargain, then you might have to wait until the lender actually completes the formal foreclosure process and make a bid on it at the foreclosure auction.

Of course, there could be a long wait until the home actually is put up for sale at auction. Some homes are sitting empty or owners are still living there and not paying their mortgages for as long as year or two before the lender actually completes the foreclosure process. In the meantime, you might want to focus on other deals that you can purchase now and put this home on the back burner.

You can track the process by checking the public records. Once the property is ready to be sold at the auction, then a notice is published in the local newspaper and usually at the property to let the public and the former owner know about the sale.

The mechanics of bidding at a foreclosure auction
Before you bid on a foreclosure, you should check the foreclosure laws. The last thing you want to do is purchase a foreclosure, and then rehab it to find out later that the former owner has decided to redeem the home, and you lose your money. If there is no post sale redemption period, then you can bid on the home at the foreclosure auction. You will need to check with the sheriff or auction company regarding the rules and the amount of the deposit. Typically, a 10% deposit of the purchase price is required in the form of a cashier’s check to bid.

Most foreclosure homes are purchased for cash. The highest bidder is awarded the property. Homes are sold as is and without any warranties or title insurance. The new buyer is responsible for paying off liens and evicting any former tenants or owners at the property. You should have a title company perform a title search before you bid to make sure you are aware of any liens that you are responsible for paying off. It is also a good idea to drive by the property to check out the neighborhood and see if anyone is living at the property. Have your cash or financing available because you have to pay for the auction home immediately.

Simple and Effective Business Strategies For Investing

This is part one of our series on formulating a real estate investment business plan

I’m not going to tell you that there are complex strategies that only
professional investors and real estate agents know, because there aren’t. Real estate investment is all about finding properties that are able to be purchased for a price that is below their market value – for whatever reason.

There are strategies to keep in mind when making your business plan. The most important and crucial one is to remember that when you invest, you are looking to buy at a low price and sell at a high one. Look for properties that are at least 20% to 70% below market value. Whether you decide to rehab, flip or lease your properties, when you buy them at discounted prices, you know that you have built in equity.

112108: Plans © by owlpacino

When you are making these decisions, you need to choose wisely, do your due diligence and always ask questions. Not every deal will be the right one for you. Knowing when to say no is something that every successful real estate entrepreneur and investor learns quickly, because it is better to be sure than to make a huge mistake down the road that you might regret and end up paying for many years later.

Getting Started with Distressed Properties
Distressed properties are the dream come true for investors because they can be purchased at deep discounted prices. Many can be bought for as much as 40% to 50% or more below market value. Distressed properties are foreclosed homes, REO’s and pre-foreclosure short sales.

Distressed properties are considered distressed because the borrower is usually in some kind of financial distress and about to default on their mortgage or they have already defaulted and may be heading towards a foreclosure. There may be many reasons why the seller is in financial stress such as a job loss, illness in the family, one of the property owners died, divorce, job relocation or other reasons.

Keep in mind that when you purchase a distressed property from a seller that is still in possession of the property that you are helping the seller so that they do not lose their home to foreclosure and ruin their credit. Be sure to stress this when you meet with them. Listen and be patient. It is a difficult choice for an owner to let go of their most valuable asset.

2 Key Tips for Creative Marketing in Real Estate

Creative marketing is not something you see too much in the real estate business – at least not in my experience. The reliance has always been on the tried tested and true method of hammering a sign in the front lawn of a property and wait for a phone call from an interested buyer. With the significant change in the real estate marketplace though, things have changed in the way that agents are marketing their properties too.

The general stereotype of the intrusive real estate professional who pushes the hard sell and wants all of your contact details so that they can badger you about your intentions is not accurate. At least not all the time. Sure there are some annoying agents who are pushy and cross the line, but there’s a bad one or two in every bunch, that’s business. The trick is to separate the wheat from the chaff and find a true professional who not only knows what they’re talking about, but who walks the walk and talks the talk.

Frame of mind © by kevin dooley

Think outside the box

A good way to recognise an imaginative real estate agent is by how they do their marketing. As he passed the proverbial torch to me, Jonathan was telling me about Carra Riley and her creative marketing efforts. In order to attract a bit of a buzz around a land release she was selling, Carra threw in a very interesting incentive to buyers- a red Ferrari. This seemed to me to be a little gimmicky at first – but the more I thought about it, the better the idea seemed. First, a red Ferrari is very rarely gimmicky – especially when it is given away. Second, it is a genuine incentive for real people to buy real land and grab a real bonus. It takes more than a ‘reduced sale price’ to get people interested these days.

It’s obvious that real estate is a little slow at the moment – and it is in times like this that creative marketing efforts usually come to the fore. ‘New low price’ will only get you so far in this market, and this sort of pitch is (to be absolutely honest) is old and lazy. Agents and brokers out there need to do something different to attract attention in the marketplace.

Be professional and approachable

Many professionals will tell you that the best form of marketing is word of mouth – it’s been that way for a long time and it’s still true today. If you have a good name in your industry, then people will not only come to you more often to do business, but because of the way they have found you, they will trust you more. This is a kind of vicarious trust. You are recommended by someone whose opinion they trust enough to seek it out – and you are the result of that query – that’s a very solid start to a business relationship.

How do you get business through word of mouth? It’s simple – be approachable and professional. Have standards and stick to them. Over time (it’s not instant, it takes a little time to build this type of a reputation) you will build a name for yourself as a decent human being as well as a good real estate professional. Do it well and people will recommend you to friends and family without even being asked. If you are patient, respectful and professional, you will do well in real estate.

If you are looking only for the sale and don’t focus on the relationship, then your business will fail. It may take a little while, particularly if you’re especially slick, but it’ll happen. Creative marketing in the real estate business is an absolute must, and it begins and ends with the listing agent.

5 US Great Neighborhoods & Cities for Solid Investment and Great Living

Buying yourself a home is a big decision, something full of choices you’d better carefully make before putting down several hundred thousand dollars in equity or handing a couple of decades of monthly payments to the bank. You need to consider a number of factors, like investment value, crime rates and accessibility to services, transport and shopping.

You also have to keep in mind what the local economy is like, how the weather can get and what kind of structural condition your house is in. As you can see, there are numerous factors to consider and only certain neighborhoods or cities are going to make the cut. Here is a list of several that have all the bases covered and make for excellent places to settle into, in no particular order.

Search! © by Jeffrey Beall

Austin, Texas
Austin’s population of roughly 800,000 people will ensure that you don’t feel hemmed in by the big city, while providing you with all the amenities that any large city should have. Combine this with great weather, low crime rates, an excellent night life and a 14.2% job growth rate between 2000 and 2010 and you get a fantastic all around living experience. There are also over 2000 technology companies headquartered in Austin and the population keeps growing at a steady rate. These are the kind of indicators that also lean towards excellent investment value in purchasing your home. Current home prices, at a median of $120,000, are relatively cheap for the time being.

Ansley Park, Atlanta, Georgia
Rated in 2010 as one of America’s Top 10 neighborhoods by the American Planning Association, Ansley Park is designed in such a way so that not one of the homes on its 275 acre expanse is located more than a few minutes’ walk from any one of 14 parks. This safe and clean urban neighborhood is located close enough to Atlanta’s central business district to offer stunning skyline views. Median home prices are a bit steep at $226,000 but this is more than made up for by the access to excellent family friendly living and proximity to a major and growing metropolis with thriving technology industries.

Deerfield Beach, Florida
This small but bustling town of 75,000 residents, located in southern Florida, near both Miami and Fort Lauderdale, sits along beautiful coastline and boasts year-long warm weather. There are numerous beachfront properties on sale and at extraordinarily cheap prices. The median home cost in this town is about $89,000 and at an enormous discount from recent highs of $400,000 plus. This alone is a good indicator of increasing potential housing value in either the near or long term future, especially if you consider the city’s geographical location.

Paradise Palms, Las Vegas, Nevada
Paradise Palms is located only two and a half miles from the Las Vegas Strip and sits in between Las Vegas’ Boulevard indoor mall and the National Golf Course. This planned neighborhood was built during the 1960’s and expanded from there. Las Vegas may not be an ideal location for many types of homeowners, but the neighborhood of Paradise Palms, along with the whole city of Las Vegas, are at a state where home prices have hit rock bottom and stand a very good chance of going up at least part of the way to their boom prices. One promising trend is that Las Vegas has made strong efforts to turn back the dereliction tide and the quantities of owner occupied homes are steadily increasing.
Smaller 2000 sq foot homes can be founds for as little as 50 to $60,000 and even large vintage houses of the most sought after kind can be bought for between $200,000 and $400,000.

Broomfield County, Colorado
Broomfield isn’t a city or a neighborhood, but a whole county that’s located right in between Denver and Boulder. The area boasts a small population of only 55,000 residents and home prices average a somewhat stiff $239,000. However, the proximity to two major cities is only one of the benefits of buying real estate in Broomfield County. The scenery of the area is extraordinarily beautiful, plenty of nature is available for enjoyment and job growth in the area has shot upwards by more than 50% during the last 10 years. Homeowners with a University education, especially one in technical or computer science related fields can easily benefit from the closeness of several major technology corporations.
Broomfield County may not be the best option in terms of real estate investment planning, but as a career investment for certain types of professionals and their families, it could be an excellent choice for home buying.

Other Real Estate Investment Options
Five neighborhoods and cities represent only a tiny fraction of the numerous neighborhoods and regions across America that would be ideal for home investment and lifestyle improvement. There are probably hundreds of locations to choose from, and as long as you keep in mind key points about economic growth, crime, real estate prices and local ownership regulations in mind, deals can be found in surprising locations.

Why ‘Setup’ Properties Erode Consumer Confidence

Earlier, I read an article by Kenneth Harney about ‘setup’ properties or ‘pinball’ homes that I felt compelled to write a response to. I found the article through Barry Cunningham, who posted a link to it over on Google+ (thanks Barry). The original article I read can be found here on the LA times site, and here if you prefer the Boston Herald. Although I promptly shared the article I still don’t feel that I said enough about this practice, there’s more to get off my chest.

Along with all the talk about what’s happening with property prices, and when values will start to go up again, there’s a real need to infuse some confidence in the industry in order for it to properly recover. IF the industry is to kick off again, we need people to buy houses – and not just investors and other businesses either – but actual home owners, owner occupiers. These buyers are the real key to the housing market, and they are the true barometer of where the industry is in terms of its recovery or otherwise.

Display Lounge © by mikecogh

So when I read about agents who have a property listed at an unrealistic price, and then use it to make the prices of other homes in the area seem reasonable (or even low), it smacks of bad business practice. It’s bad because it’s dishonest. It’s dishonest to the owner of the ‘setup’ property, to the prospective buyers, and the owners of other properties in the area. For the industry to regain its reputation and success, this practice must stop.

What matters here is the conduct of the agent. It’s the need for real estate professionals to look beyond the immediate sale, and take a longer term view of their profession, of their industry. They need to be prepared to do the morally correct thing and assign the correct price to start with. Naturally there will always be difficult clients who will insist on an over-inflated listing price – but that is their issue, not the agent’s. Why accept the listing to begin with if you are not going to try and sell it? If the plan is to use the property to hold up as a property not to buy, are you really fulfilling your obligations to the owner of that property?

I would really like to see listing agents be more careful in what properties they list – and the prices at which they are listed. Consumer confidence is a fickle thing, and is what will drive any recovery in the future. Using one over-priced property as a ‘pinball’ property in order to sell others in the neighbourhood at a similar price is not only unprofessional – it may also go against your obligations as an agent, depending on the jurisdiction. This practice is most certainly morally wrong – and is damaging to the industry as a whole.

Turnaround For Homes For Sale In Seattle

Homes for sale in Seattle are showing strong signs for growth as the rest of the US housing market appears to have flat-lined. 12 out of 20 major US cities saw prices barely increase over the past year while other market hubs such as New York and Atlanta saw new lows, according to the S&P/Case-Shiller 20-city home-price index. The ratio of sales to list price in Seattle is lingering between 96-99.7% and downtown condos have been selling at a rapid pace. Much of this success has been rightly attributed to the strength of the Seattle job market.

The Seattle Housing Market

On average in 2011, buyers were paying 93% of asking price for homes for sale in Seattle. Moreover, we saw an uptick in demand as buyers are now paying over 96% of asking price and the average days on market for a home for sale is just over 2 months.

These numbers, although good for Seattle, hide some of the main reasons for this growth. For one, the number of additional homes for sale in Seattle is very small. Sellers with quality inventory are remaining out of the market in order to ride out the downturn. As a result, the lack of inventory is inflating demand and raising prices on buyers who felt the Seattle housing market would continue to drop. Many of the homes being purchased are average priced homes, distressed homes, and investment property. The Seattle real estate that continues to struggle is luxury.

homes for sale in Seattle
Sales Price to List Price for All Homes for Sale in Seattle

 

Woes of Luxury Homes for Sale in Seattle

As you can see below, buyers are generally paying below 90% of asking price for luxury Seattle real estate. One reason for this is because many sellers are inflating the listing price in order to create a buffer for negotiation. In the current luxury Seattle housing market, it’s extremely rare to come in at asking price. Sellers are expecting buyers to come in with offers well below market values in order to try and meet somewhere in the middle. Hence, sellers are attempting to act first with a higher asking price.

Second, the luxury markets just aren’t what they used to be. The pool of potential buyers isn’t large enough to support the current inventory of luxury homes. Although the job market is strong in Seattle, the type of higher paying positions necessary to create a well supported luxury market just aren’t there. Those that do have the capacity to look for luxury real estate are having difficulty selling the home they currently have on hand. Thus, we’re seeing luxury struggle while lower and middle of the road homes are exceeding expectations. These results stem from a job market built on the tech sector.

homes for sale in Seattle
Sales Price to List Price for Luxury Homes for Sale in Seattle

Seattle Tech Jobs for Seattle Homes

Named by Forbes as #1 for tech jobs in 2012, Seattle has maintained a strong job market in the midst of the recession. This comes at the brink of Amazon expanding into South Lake Union with 10 buildings to house 8,000 employees. Microsoft and the Facebook addition have also played a large role in bringing buyers with higher earning potential.

Many of these tech professionals relocating to Seattle have helped maintain and raise values as these new buyers created higher demand for homes for sale in Seattle. In addition, sellers have artificially raised prices by choosing to stay out of the market. There are currently only 2.3 months of inventory and, from the graph below, you can see that this number has drastically decreased over the last year. Homes for sale in Seattle will continue to see prices rise on sellers remain unwilling to sell at these price points.

homes for sale in Seattle