Pushing A Buyer To Lift Contingencies, What Options Are There?

Most sellers begin the process of selling their home with a few common misconceptions.  The usual ones revolve around condition and price; “someone will pay my asking price because they’ll fall in love with the home just as I did.”   Or the, “I lived with it all these years (some problem discovered on the inspection), my buyer can too.”   One of my favorites is the, “I need to get “X” amount out of my home, so we should price it with that in mind.”  These are all typical seller positons that generally soften up when confronted with the reality of home selling.  The one that is trickiest however, is the one after you’ve gone under contract, where the seller expects the buyer to perform and do the things the buyer is supposed to do, like get a loan approval and lift loan, appraisal and investigation contingencies.

Now I’m not talking about someone deliberately committing fraud, that’s a whole other can of worms, no I’m speaking to the process in California whereby the buyer has definitive timelines that they are contractually bound to adhere to.  These timelines include, apply for a loan, do investigations and include lift any and all contingencies. 

What does this mean lift contingencies anyway?  The California Association of Realtors Residential Purchase Agreement (RPA) defaults to a 17 day time allowance for a buyer to do their due diligence, their investigations, which would typically include a physical inspection (which could also mean inspecting for mold, geological conditions, Radon testing, structural, roof etc.)  It also includes things like verifying the insurability of the property, examination of HOA docs, and ensuring clear title to the property.  Sometimes a buyer might even have a contingency on selling their current home, but this is a little different so I won’t be addressing this specifically today.  The most critical contingency is on the buyer obtaining financing which includes having an appraisal done to validate the sales price.  At the end of the buyer’s due diligence, the buyer is supposed to sign off on contingencies or cancel the transaction; Paragraph 14 b (3)At the end of the time specified (or otherwise specified in this agreement) Buyer shall, Deliver to the Seller a removal of applicable contingency or cancelation of this agreement.”  In other words, at the end of the default of 17 days (unless otherwise agreed to) the buyer either lifts or cancels.  It is not until the buyer lifts all their contingencies that their deposit can be forfeited.  A buyer has no money at risk until they lift all contingencies.  In other words, the buyer can cancel escrow and get all their deposit back.  Does the buyer need a valid reason to cancel?  Technically, yes, but how can you ever prove otherwise?  It’s really pretty impossible for a seller to try and prove the buyer isn’t cancelling for one of the allowable reasons as say opposed to, they just changed their mind.

So what happens when day 17 comes and goes and then day 18 and 19, and the buyer still has not lifted their contingencies as required under the terms of the agreement?  What happens really depends on how strong the seller’s position is.  Do they have a backup offer in place or is this the only buyer?  Does the Realtor sense the buyer is stalling for reasons other than the loan or appraisal ie: they are still trying to assemble all the down payment monies?  Are the buyer and their lender really moving forward or are they playing games, maybe hoping rates are going to drop?  Is it even reasonable to expect a buyer and their lender can actually get financing in 17 days?  You end up asking yourself, do I have a deal or don’t I?  The answer to these questions will dictate the response from the seller. 

Let’s say you have a back-up buyer.  In that scenario, on day 15 the seller’s Realtor might send out a “Notice of Buyer to Perform,” NBP.  This is required for a seller to cancel.  Under the terms of the agreement, a seller cannot cancel until the allotted time frames have expired and a notice to perform was delivered to the buyer 48 hours prior to the unilateral cancellation by the seller.  Huh…?   A seller has to give 48 hour notice (unless otherwise previously agreed to) before they are allowed to cancel the transaction.  If a seller decides they want to cancel but haven’t yet delivered the notice, a seller must add on the 48 hours before cancelation is possible.  The buyer has to be given the opportunity to lift contingencies prior to cancellation.  But what if you don’t have another buyer and you are reluctant to cancel your one and only buyer just because they are a little slow in getting loan approval?

This is the most common snag in the sale process; the buyer’s lender is late and without a back-up offer, you’re not going to blow out your buyer just because off a few days, but do you really have a deal?  The reality is, many homes sale contingencies are not lifted on time.  But what happens when a couple days turns into several, then into weeks, then what?  This is when the remedy is the lesser of two evils.   If I start to sense a real problem, I usually encourage the seller to send the Notice to Perform even if they do not intend on exercising the option to cancel right away.  That’s correct, the seller can send the Notice to Perform without actually cancelling the transaction.  This is a little like an old western movie where the sheriff pulls out his revolver and sets it on the bar.  He’s letting everyone in the room know that if things get out of hand, he’s ready to shoot.  But that doesn’t mean he has to shoot, only that he now is ready to should the need arise.  Because the Notice to Perform must be delivered for the seller to cancel, it can be delivered at any time and so the 48 hour clock is ticking.  It is in this situation that the seller’s has discretion to cancel.

Can’t a seller just cancel anytime?  No, a seller can only cancel for buyer’s failure to perform, ie: lift contingencies.  Yet the buyer can cancel at any time, even at the last minute.  California courts have ruled that you can’t force a buyer to buy, but your can compel a seller to sell.   Ya ‘Gotta love California.  The lifting of contingencies is important because up until they are lifted, the buyer can cancel without any forfeiture of deposit.  Once the contingencies are lifted however, their deposit is susceptible to forfeiture and the seller can cancel the buyer and keep the deposit.* 

*Keeping a deposit is never as easy as it sounds.  Why?  Because a seller who has an open escrow, is still in escrow until it’s closed by mutual agreement (with the buyer) or the court of law or through arbitration.  That means that the deposit can only be handed to the seller, and escrow closed, when the buyer agrees to allow this. “Wait a minute,” you say, “The buyer has to agree to let me keep their deposit and to cancel escrow, even after they wasted my time and defaulted?”  Yes.  So when they don’t agree what happens?  A couple of things can happen, first you can negotiate to give them some of the deposit back while keeping the balance.  More often than not this is the outcome.  Second, you can continue to sell your home, but you’ll have to disclose to the new buyer there is an open escrow elsewhere and then when you accept an offer, open the new escrow with a new escrow company.  Then eventually after mediation and arbitration with the original buyer, you win, and the arbiter awards you damages, you keep the deposit money and have closed escrow with the new buyer.  So it’s not exactly as simple as cancelling your buyer for failure to perform and then just keep their deposit.  By the way, the maximum allowable forfeiture?  3% of the purchase price, which is why almost every deposit in a California home purchase is 3%; that’s the maximum a seller could retain under the liquidated damages clause in the event of buyer default.

Knowing all this about default and attempts to keep deposit, what’s a seller to do when a buyer won’t lift their contingencies when they’re supposed to?  Here is where it really comes down to your agent, their status in the real estate community and their interpretation of the situation.  Emotional sellers at this point really need an agent who’s knowledgeable, one whom they trust and one who is hopefully familiar with the other agent.  The agent is going to have to speak with the buyer’s agent and really assess this: Do you have a deal or not?  For me, I am the hammer.  I make the other agent stay on their client.  I hammer them over and over and over, to get those contingencies lifted.  I’ll send the notice to perform, even when we really don’t want to cancel.  I’ve had agents yell at me because I’ve done this and I’ve told them, “We aren’t cancelling this minute but if your client doesn’t get their act together and release contingencies, we will.”  It doesn’t always work and sometimes the delays are totally legitimate.  Sometimes they are due to honest mistakes but sometimes they really are deals going off the tracks and it takes a hammer to get them to either “Putt or get off the green…” 

It’s never easy when a deal starts falling apart, but more often than not a good set of agents can keep a deal moving forward and get you to the finish line, close the escrow, so that everyone can live happily ever after.

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Market Forces At Work

It’s a funny thing this economy of ours; this system of capitalism where the free market drives the movement, prices and value of goods and services.  With real estate, too many homes means prices drop; not enough, prices rise.  The same is true for the labor market.  As the U.S. economy continues its slog forward, adding jobs at retail stores and restaurants, the unemployment rate keeps dropping; 6.1% as of last week.  Yet very few would say they are making what they were before The Great Recession.  The reason?  The vast majority of the jobs being created are in the service industry and therefore not the high paying jobs we need to make life a little easier and allow us to spend a little more freely.  Sure it is better that we work than not, no question, but the value of the American worker has never been lower and when you’re at the bottom, there’s only one way to go and that is up.  How one wonders, is an American worker supposed to compete with a Southeast Asian country paying a dollar a day or an engineer or physician from India earning a fraction of an American engineer or doctor?  Not since the era of the monopoly, when child labor was common and worker safety and a fair working wage, the rallying cry of organized labor, has the American worker been valued less than they are today.  But that I believe, is about to change. 

In the early part of the 20th century, American business saw more than enough workers to do the jobs required, especially by using women and children who earned much less than men.  But labor law was a new concept.  Once it took hold and sweatshops became factories, suddenly the American workforce gained the upper hand, able to demand a better standard of living, a higher scale of pay. 

The root concept for this shift in the working man’s ability to command better wages, was the shortage of available labor, supply and demand.  Take away the kids and now you have to pay someone who won’t work for pennies a day.  It is this concept that we hopefully are finding ourselves on the precipice of once again: as the unemployment rate drops, competition for skilled labor increases.  More companies are bringing jobs back from overseas because the quality is better here and the cost to move product from foreign lands is only going up.  Making stuff here is proving more economical.  This means an increase in demand for workers and increased demand for workers leads to better pay.  As employers have to lure workers from one job to fill another, our salaries increase.  A simple case of supply and demand.  And as wages improve and income rises, so does everything else, including real estate.

I go into this rather extended history lesson to make the point that once the labor market breaks through the malaise of stagnant wages, our whole economy is going to get markedly better and owners of real estate will be one of the chief beneficiaries.  A little wage inflation is a good thing and not the enemy of real estate.

I’ve heard many argue that the rocket ship rise in property values last year was an artificial boom; that it was fueled by investor cash and not an improvement in the real value of real estate or the economy.  Even more argue that as inflation kicks in and interest rates rise, the cost to purchase real estate will rise as well and thus prices will have to go down in response to lower affordability.  Further eroding property values, some even say, will be the alternative investments fixed income instruments like bonds will offer.  Investors will divest their real estate holdings in exchange for the greater, more liquid returns that higher interest rates offer via U.S. Treasuries and corporate bonds.  So the argument goes any way.  It’s an interesting argument, particularly in the short term, but it ignores the fact that we all need a roof over our head; that the population is not getting any smaller and that as our wages increase, so does our ability to afford a little more mortgage, a little more house.  Our ability to earn more has a direct impact on the value of real estate.

This leads me to the following suggestion: Go buy a house, especially one needing work.  If you own one and would like a larger one, price your home to sell and upgrade.  Now is the time.  In fact now is an outstanding time because as inventory rises, (which is what has been going on for the past 12 months) there are more homes to choose from.  More homes means greater competition and like the worker competing with other workers for one job, too many homes means prices for some homes will come down.  Right now we are seeing that many of the homes coming on the market are coming on priced too high for their condition.  Where upgraded and turnkey homes are still selling with multiple offers, homes needing a little work are not.  They are priced too high and thus, sitting.  The sellers of those homes believed that their homes went up equally with turnkey homes and this is simply not the case.  Just as the demand for a computer scientist may be high, the demand for a field worker may not be.  So while there is a shortage of upgraded, move-in ready homes, there is no shortage of homes needing work.  These sellers are finding themselves competing for the same buyer.  This means for these homes you’ve an opportunity to negotiate a better price.  Once wages start to increase however, the demand for housing is going to increase and that darn supply and demand thing is going to lead to higher prices across the board.  Right now, there is an opportunity to buy a home with a little sweat equity built in.  You’ll have to negotiate of course, but with rates still ridiculously low, it’s an opportunity you won’t want to miss.

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Thoughts On Seeing The Inventory And Why It Matters

One of the best aspects of being a real estate broker, is that I get to go into a lot of homes.  Every Wednesday, Thursday and Friday, depending on the specific area, as an agent, I’m afforded the opportunity to go out on “Caravan” or “On Tour” and see the new listings without having a client in tow or having to have an appointment.  It’s an important part of the process for an agent to understand the market; what’s for sale, what’s a good deal and what’s not, and what people are doing to improve their homes.  Knowing the inventory is one of the key elements to being a successful Realtor.

Since the advent of the internet based Multiple Listing Service, home buyers and sellers and even just the curious, have the ability to view properties without ever stepping foot inside.  30, 40, even 50 or more photographs representing a property, are now commonplace.  Back in the day, all a would-be buyer would have is the view from the curb (think ‘curb appeal’) since there were no pictures available except maybe in the store front of the listing office.  The only way to  see what it looked like, was to get inside with a real estate agent or at an open house.  This was just as true for agents as the general public.  Thus to help sell a listing, the home had to be made available to other Realtors and this was accomplished by having Caravan.  What is interesting is that with all the changes to the way properties are marketed today, getting inside is still just as important for agents as ever.  Knowing the inventory is essential.

It’s a funny thing going into other people’s homes for a living.  Like the public, I see the photos online and base an opinion on that representation.  But relying on a picture alone can be a big mistake.  I can’t tell you how many times I’ll go into a home that looked amazing on paper, only to be disappointed at the actual property.  Those tricky Realtors with their wide angle lenses…  I know one agent who uses a photographer that will blend three different flash exposures to create a look for a room that is physically impossible to replicate in real life.  Some Realtors will digitally enhance the color of the grass or even put grass where there is now only dirt with a little caveat, “grass is an artist representation.”  I one time had to have an algae green swimming pool Photoshopped because the owner was in the process of cleaning up the pool but hadn’t finished when we finally had a good sunny winter’s day to shoot our pics.  Or another time when the owner forgot to change a light bulb the day of the shoot and the photographer said, “Don’t worry, I’ll Photoshop it in.”  And how about those amazing twilight shots where the house is illuminated just after sundown?  Did you know that the sky always comes out white with the twilight exposure and the photographer has to add the sky?  And then there’s the whole room size thing…  A wide angle lens always makes a room look a little larger.  It’s amazing how many times a home that looked completely redone turns out to be pretty tired too.  Knowing the inventory is a pretty important part of my job.

The other thing about getting out and seeing the homes is that I get to see some amazing properties.  A few weeks back I went on Caravan to a home in Old Agoura that on paper looked overpriced.  How could a home in an area that typically sells for +/- $1m have a listing for nearly $3m?  So I went to see it; it with its knotty pine cabinets, commercial French 60” oven range accompanied by a pot bellow stove for wood cooking in the kitchen.  It had not one but two guest houses and a 7 car garage, was on horse property that backed up to protected parkland littered with horse trails… wow.  Or the time I went into a home that had a spectacular garden, totally manicured and private; made me feel like I was in England.  So much care and so much attention to detail, yet the pictures just didn’t do it justice.  It had to be seen.

Yesterday I went into a home in a neighborhood where homes typically sell for $700-900K.  I was speaking with the owner about how much her home might be worth, and I said, “Well without seeing it probably $900K-ish.”  When she asked me to come in and look I felt pretty comfortable with my “pencil sketch” assessment; that is until I got to the kitchen.  She hadn’t mentioned that she’d remodeled with traditional “Small Bone-like” white soft-close cabinets and glass inserts, “Brush finish” absolute black granite counters with a white Carrera marble island, subway back splash and commercial stainless steel appliances.  My estimate immediately went out the window and I’m whispering to myself, a million… this home is worth a million bucks maybe more.  Too bad she’s not selling…

Not long ago a home came on the market, in the “Salt Box” style; very unusual in Southern California.  This is where the front of the home is straight across, no indentations, like a salt box – think Virginia.   It was white clapboard siding with black shutters.  Inside the owners had used recycled farm boards from somewhere back East for the flooring.  Super cool.  Based on the pictures it looked nice, but once inside… incredible.  I sent it to every client I had, but alas it sold immediately.

I saw another home a couple days ago, a flip, that had the most interesting matte finish dark oak floors, almost walnut in color, but not at all glossy.  If I hadn’t gone into this home, I’d of had no idea because it wasn’t specifically called out in the listing description and the photos didn’t do it justice.  ‘Just looked like a dark wood floor, but it was way cooler than that.  Knowing inventory, this is what a Realtor does.  But it’s not only important for my buyers, it is equally important for my sellers.

When a seller starts telling me about all of the things they’ve done to their home, I use my knowledge of the inventory (the competition) to very often, boost the estimated selling price as my earlier example demonstrated or to bring that seller back to reality.  That decorative backsplash from the builder may have cost a lot when you bought it 20 years ago but that doesn’t mean much anymore.  Or your custom paint including the red dining room that was popular around 2000, isn’t going to get you more money today; or those multicolor balloon valances that make me want to sing, “The Heat Is On” and roll up my coat sleeves a la Miami Vice, may have cost a bundle back when, but you’d better take them down because they aren’t going to help you today.  I joke, but for every amazing home I see, I see ten others that will need my help to get my seller a fair selling price.  This isn’t the knowledge you can glean from pictures alone.  You have to get out there and see the inventory.  This is why being a Realtor is a full not a part time job, and why Realtor gets paid what they get paid: market knowledge, product knowledge, analysis and advice.  It can be a fun job, but like any job, it’s a lot of work and to be good at it, a whole lot of work and a whole lot of time.  Now if you’ll excuse me, I have a seller I have to help to declutter.  I just hope I can get them to pack away the Elvis ashtray collection, remove and replace their purple carpet and wash their dogs before I open it up to Caravan.

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What’s My Home Worth?  A Sensible Guide To Pricing A Home For Sale

When I am asked to meet with a potential seller to discuss listing their home for sale, the first thing I need to understand is their motivation.  Why are they selling?  Could it be there have been changes in the family or changes in employment? Perhaps it’s as simple as the desire for a different location, amenity or maybe it’s health related.  The second thing have to do is to research the property because I am going to have to give an opinion of value.  Keep in mind that an opinion of value for selling is not the same as appraised value.  My opinion is designed to get the home sold for the highest price, in the shortest amount of time, for the least amount of hassle.  An appraisal is designed to give the bank a general sense as to the value of the security (the home) for their investment (your loan.)  So how do I approach this process?

The obvious starting point is to look at the structure size and the property size and to find homes that are similar in nature.  This is called finding comparables or finding “Comps,” as you will often hear them referred to.  Comps are tricky business because no two homes are ever the same.  Still, it’s all we have to go on. Thus recently sold homes form the backbone of our property value assessment.  Closed sales however, only tell part of the story.

Circling back, we need to consider the motivation.  Why?  A seller’s motivation has a direct impact on the value of their home.  Huh?  Let me explain… If a seller is not in any kind of hurry, our approach to pricing is going to be different from a seller who needs to sell quickly.  Naturally I will argue that every seller needs to sell quickly since the faster sale invariably achieves the highest sales price.  That said however, a seller that is willing to wait indefinitely for that “Buyer that just loves my home,” may find that in fact if they wait long enough, “The One” will come along and pay the asking price.  Most sellers don’t have the benefit of time, or at least don’t have the desire to see the process extend over months or possibly years.  So motivation does have a direct impact of the value in the context of selling.

The next thing we have to consider are the pending sales.  These are the properties in escrow.  These are the sales that have taken place in the past 45 – 60 days.  They are important for the obvious reason that they are the most recent sales.  The problem here is that we don’t know how much they were negotiated for, rather only the asking price.  The number of days on the market will help us to guesstimate the sales price.  If a home is in escrow and sold in 5 days, we can assume fairly safely that the agreed price was at or possibly even above ask.  If that home on the other hand sat on the market for 120 days or longer and has already had several price reductions, it is fair to assume it did not go out at asking.

Next I will consider the competition.  How many homes might be an alternative to the one I am selling?  This is significant because the more choices a buyer has, the more compelling my pricing has to be.  Remember in the context of selling, competition (or absence thereof) will influence our pricing approach.

Once we have analyzed closed and pending sales and evaluated our competition, it’s time at look at absorption rate.  Absorption rate is found by taking the average time on market divided into the number of homes available; ie: 12 homes sold in 3 months, 12/3 = 4 are selling per month.  In other words, how quickly the homes for sale are being absorbed by the buyers gives us vital insight into how we will price ours.  For example if the avg. number of homes selling per month is 2 and there are 18 homes available, there are 9 months’ worth of inventory (18/2 = 9).  If like the earlier example the avg. per month is 4 then with 18 homes on the market the absorption rate is 4.5 (18/4 = 4.5).  It will take 4.5 months to sell all the homes on the market.  If our goal is to be sold in less than 60 days and the average is 135 days, we need to be priced lower or offer more than our competition.  By the way, the National Association of Realtors deems a balanced market, one not favoring buyers nor sellers, to be 6 months’ worth of inventory.  In our area I believe that magic number closer to 3 months.  California must always me in a state of perpetual shortage or else the value of Malibu wouldn’t be any higher than that of Dallas.  Notice that nowhere do I consider the “I need to get this much out of my home to sell,” in this discussion.  The “Need” discussion rarely has any relationship to the market value of a home, nor what it will eventually sell for.  That’s not to say it’s not an important consideration, it is, but it is not connected to my opinion of value.

By now I imagine by you’re about ready to stop reading and hire a Realtor, which is exactly what you should do.  As a Realtor I do all this analysis for you and more. Because it’s not just comps and absorption rate that determines how to price a home for sale, but also understanding the overall market, buyer demands and amenity/condition evaluation.  Putting all these elements into a blender is basically how you figure out a sensible, approximate price, but putting that approximate pricing estimate together with a marketing strategy is exactly why you hire a professional.

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Steve Ballmer, The LA Clippers And The Conejo Valley Housing Market

Twice a day the father of two middle schoolers, checks his favorite MLS site to see if anything new has come on the market.  He’s looking for the perfect place to call their next home.  It has to be on a good lot, preferably with a view and a great location.  It needs the right number of bathrooms and bedrooms and the kitchen has to be really upgraded since his wife loves to cook.  A pool would be nice but it has to have a three car garage and of course it has to be in the right school district.  They’re a busy family so remodeling is out of the question.  In fact, their current home was an older home when they bought it 15 years ago and they did all the work to fix it up, but that was life BC (Before Children) and they certainly aren’t going to do that again at this point in their lives.  This is pretty much the description of the move up buyer in our Idyllic community of the Conejo Valley.

Across town another couple, slightly younger, is searching for their first home.  They’re in their late 30’s, both working professionals and they have two small children approaching elementary age.  Since they aren’t selling a home with equity to roll into a new place, all the money has come through hard work, saving, a few stock options from his company and a couple of lucky investments.  They’ve saved 20% for a down payment and have finally paid off their student loans.  As professionals they work long hours, come home to spend a little family time and put the kids to bed.  Lucky for them, her mom is able to help with the kids.  They need a house large enough to accommodate everyone but they have no extra money to remodel after the 20% down nor do they have the time or acumen to do it themselves.  This is our typical first time buyer.  The traditional late 20’s/early 30’s first time buyer couple doesn’t buy in the Conejo Valley anymore.  It’s too expensive and their first job out of college simply doesn’t pay enough for them to qualify under the tight lending standards today, plus they have some pretty big student loans they need to pay off first.

Meanwhile, the homes in the Conejo Valley aren’t getting any younger.  In fact, there hasn’t been a sizable new home subdivision in more than a decade and there won’t be any either, the community is built out.  There’s simply no land left to build new homes.  Over the past several years, buyers looking for a new home had to settle for something totally remodeled or something “newish.”  The need for the desired “turnkey” home has been largely satisfied with an abundance of investor “flips.”  These were homes purchased at steep discounts at the foreclosure auction during the down turn of the economy.  These investors would take a blighted property, fix it up, putting in all the newest niceties and turn a handsome profit.  There were no shortage of flips from 2009-2013 but those days are over what with distressed properties (foreclosures and short sales) declining as percentage of the market every month.  So given this reality, what are our first time and move up buyers to do?  Simple, they fight with others just like them, over the scant number of updated, upgraded homes.  So while inventory is rising and sales are declining, buyers complain that there isn’t anything on the market and if it’s nice, they end up in a bidding war with someone equally qualified as they.  And this brings me to the Los Angeles Clippers potential sale to Microsoft Billionaire Steve Ballmer.

Prior to putting the club up for sale, Forbes had valued the LA team somewhere well under a $1 billion.  After all, the lowly Milwaukee Bucks just sold for the highest price ever for an NBA team at $558 million and in the Clippers, we are talking about a playoff team located in the 2nd largest media market in the country.  Not only have the Clippers been a playoff team for 3 years in a row, they have the core of their roster signed for the next 4-5 years and have a fantastic coach.  They play in a great arena, have a new state of the art practice facility and oh by the way, the new television contract is coming up for negotiation in 2015 and that is going to be a windfall for ownership with the NBA being the fastest rising sport in America.  So what has this all to do with our two couples and their struggle to find a home?

Imagine that after many months of home hunting, the dream house comes on the market for our move up couple with middle school aged kids.  It’s got most everything they are looking for; the schools, the square footage; the Viking kitchen; the cul de sac, pool, yard and oh yeah, an amazing view.  Along with their evidence of down payment and prequalification letter, our family of four write a full price offer even though the home is priced significantly higher than the comparable sales in the area suggest it is worth.  Since our couple have been looking and looking, they are not going to miss out on this place, it’s nearly perfect!  Then the unimaginable happens: 4 more offers come in, with some even over asking price.  What??  How can this be?  The ensuing bidding war is crushing for four of the five bidders since only one will win.  And that winning price?  Significantly over ask and eons from the last neighborhood sale.

You see like the LA Clippers, this home had location, desirable amenities and was up for sale in a market where there isn’t another comparable property available and it is unknown when the next might come on the market.  To this end, the home went to the person most willing to step up and pay way over what common thinking would suggest it is worth.  And like Steve Ballmer, the couple that won the bid, knew they were probably over paying for the home, but they didn’t care because value is in the eye of the beholder and they recognized that another opportunity like this was unlikely to come along any time soon.  They wanted it, had the where with all to pull it off and darn it, they weren’t going to miss this chance over a little bit of money.

Now what do you suppose the owners of a losing team like the Orlando Magic or even a big market club like the Philadelphia 76er’s are thinking?  They are figuring that if the Clippers are worth $2B, even though their arena isn’t as nice as the Staples Center and even though their roster isn’t stacked with young allstars under contract, rather it’s filled with maybe-one-day rookies and a bunch of bloated contracts of hasbeen players and even though they aren’t in LA, they are thinking their ball club is worth similar money.  Not as much of course, but maybe 10% less, say $1.8B.  And if one of those clubs comes were to come on the market, what do you think would happen?   How about nothing?  In fact maybe they don’t even get an offer since they are so overpriced no billionaire Wall Street hedge fund manager is going to touch them and the club just sits on the market for sale.  This is exactly what is happening in our housing market.  Homes that are not fixed up are coming on the market in droves so our inventory is swelling, but they are not what the buyers want nor are they priced to reflect the improvements required and thus they are not selling.  “I’m not going to give my home away,” they say.  Or “Look at the home up the street.  It sold for ’X’ and my home just isn’t as updated so it should be worth ‘X’ minus the upgrades.”  Of course they completely under value the upgrades and under estimate the cost to put them in having never done them themselves.  Coupled with the fact that no buyer is going to pay a price for a home that after the home has been upgraded by them, is only worth acquisition cost plus upgrade cost.  No.  They are going to want to pay below that because why would they do all the work and not have some sweat equity upside?  They won’t and rather will just wait for the upgraded one to come on and buy that instead.  So what is going to happen?  Sellers of non-updated homes will have to lower their price until it gets to a point where a buyer has enough upside potential to purchase and fix it themselves.  Until then, our inventory is going to continue to grow and prices of remodeled homes, continue to rise.

So did Steve Ballmer over pay for the Clippers at $2B, I think he would say no.  Did our move up couple over pay for the dream home?  They too would say no, because market value is after all defined as “What a willing buyer and a willing seller agree to without the presence of duress.”

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The Latest From Case-Shiller And Thoughts On The Economy

The latest Case-Shiller Home Indices came out yesterday and there were few surprises.  Price appreciation declined in almost every market, a fact that suggests that home values are stabilizing.  This should come as no surprise since for most markets the first half of 2013 was when the greatest appreciation occurred.  This has been especially true in Southern California.  It is a natural occurrence that as we get closer to the tail end of the previous cycle’s boom, that the year over year comparison of home values should draw closer.  Assuming prices have been relatively flat since July of 2013, we should find that the year over year appreciation number would become zero or close to it anyway.  If for example we’ve gone up 2% since last July, we should be 2% higher when we compare this July to last.  It’s totally logical.  If prices were to continue to show a spread in the coming months, this would indicate that appreciation may not have stopped in July, rather that it continues to rise only at a slower pace.  At some point either the % of change will be zero or may even go into the negative, that is unless we continue to appreciate some measurable amount each month over the last indefinitely.  I suspect it should near zero as we get into the fall.  Of course even within Case-Shiller there are 20 markets that the numbers are based on and some markets may continue to appreciate.  Every market is local and appreciates or declines at its own pace.

In reading the report, a couple things stood out to me.  First was that San Francisco is about the hottest market in the country.  Not a surprise given that the Bay Area is home to the nation’s largest economic engines of tech and biotech.  The other interesting cities were Denver and Dallas.  If we are to believe the media reports, Texas’ economy is growing exponentially as more and more companies are lured there because of a belief that it is a better climate for business and offers a lower cost of living.  It will be interesting to watch the effect on Dallas of its appreciating housing market.  Denver is interesting because the only economic windfall I am aware of there, is their legalization of marijuana. It begs the question, is dope fueling the housing industry in Denver?

Another interesting point to come out was the dearth of single family home building.  Virtually all the construction gains were said to be in multifamily apartments.  And while this is clearly needed, it is not the engine for economic growth that single family home construction is.  What we know is this: home builder stocks prices have been on a torrid pace since the housing began its rebound.  We also know that in areas like California, there is a shortage of land and nationwide a shortage of build-ready lots.  There is also a shortage of skilled labor to build single family homes since so many workers had to learn new skills for new careers when home building came to a standstill during the Great Recession.  In addition there’s the pent up demand factor.  With new homes in short supply after years of anemic home building volume and with the decline in investor flips due to the decline in distressed property availability, newer or updated properties are selling at a premium.  This premium should push home builders to build.  But if there’s no ready land and not enough workers, that’s just not going to happen.  Fed Chairwoman Yellen recently expressed concern over the slowing of the housing market.  Talk about a tiger chasing its tail.

Housing is slowing because prices and interest rates have risen while incomes have not.  With housing slowing, builders are being more cautious and measured in the number of units they are building.  New home availability is a catalyst to move and a monster job creator.  The absence of new homes leaves would be buyers only access to older used homes to move to.  Thus many would be buyers remian on the sidelines since there is a shortage of newer and improved or updated properties available.  This in turn leads to a continued slowing in housing, which then logically leads home builders to use greater restraint when building, creating fewer jobs, repressing income growth which leads to… a slower housing market and a floundering economy.  Thus it would appear that our current economic lethargy may continue and this could lead to pressure on home values.  What could change this course?  More jobs, better jobs, maybe changes in tax policy or maybe a slight give back of some of the housing value gains we experienced last year.  Maybe a little decline will be just enough to get buyers off the fence and back to buying, providing a spur for the next wave of home price appreciation.  Alas, only time will tell.

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When Is It Time To Replace Your Realtor?

You’ve been on the market for many months and your home hasn’t sold.  Maybe you got some traffic in the beginning but what was a trickle, has now turned into a tortuous drip.  You’re getting pretty anxious because you really want to sell and it’s supposed to be a good market.  So why isn’t your home selling and is it time to replace your hired help?  This is a particularly difficult question for any home seller who hasn’t been able to get their home sold.  The closer you get to the listing expiration, the more you start thinking, “Is the problem with my agent?  Would I be better off with another company?”  “I really like them but…”

Before we directly answer this question of replace or not replace, there are some things we need to examine first.  Let’s start with communication.  The number one complaint from sellers about their Realtor is their failure to communicate.  So ask yourself, “Does my agent reach out to me or do I have to call them?”  If the answer is the latter, you need to address this and it’s best addressed early on.  If you aren’t articulating this frustration, you need to.  If after doing so they still are falling short of your expectation, then yes, you probably want to start anew when the listing expires.  Mind you, being a Realtor I don’t say this lightly but from the beginning you need to lay out certain understandings and one of those is communication.  Establishing clear expectations is the first step to a successful relationship with your agent.  If you said to your agent, “Text me for showings” and they didn’t that’s a reason to be disappointed and if the problem were to go unchecked or unattended, that disappointment will lead to anger and frustration.  This is no way to maintain a quality working relationship.  That’s not to say that if they are communicating but you are micromanaging, that maybe you may need to look in the mirror and ask yourself, “Am I being constructive or do I have a need to control the situation?”  I have had situations where a certain seller is on top of my every move and that makes me less effective and the more tedious every conversation, the less I want to call or communicate.  This is just human nature and if love is a two way street, so is business.  However, in the end, if you are a micromanager, be honest with yourself and honest with your agent and if after you’ve done so, you still aren’t satisfied, you’ve every reason at that point to work towards terminating the relationship.  One thing to bear in mind here is that a listing agreement is a binding contract and you can’t unilaterally end it until the listing expires. If you are really unhappy and the agent is not responding or addressing your concerns, you should escalate and speak with the broker or office manager.  They have the ability to be an intermediary and even help assign another agent from the office whose personality more aligns with yours if the situation truly is untenable.

The next thing you want to ascertain is the trust level you have with that agent.  Ethics and trust are absolutely essential to having an effective agent/seller relationship.  If you doubt the agent’s ethics or not sure you trust them, you are never going to be fully satisfied or happy with the outcome of the transaction. You will always have a gnawing doubt that your interests were not being fully considered.  Remembering that selling a home is a stressful process, the last thing you want to wonder is, “Is my agent really looking out for me or are they just thinking about their commission?”   Conversely, if you have a rapport with your agent based on mutual trust, respect and communication, the process though stressful, can be rewarding.  You must have trust in your agent.

At some point you’ll want to examine is your agent’s job performance.  Every employer does this and so should you.  This review should be a sit down, straight forward talk between you and your agent, though it seldom is.  Rather what tends to happen is that time passes and the listing expiration sneaks up on you.  This however circles us back to communication issue and is your agent keeping you informed and giving you assessments of your progress?  Part of an agent’s job is to eliminate surprises. 

“My agent didn’t bring me a buyer.”  This is a pretty common complaint when your home doesn’t sell.  While it is possible that an agent has any number of potential buyers for your home, more times than not they don’t have “the one” and the job of getting your home sold is really about getting your home exposed to as many potential buyers and agents as possible.  “Some agents have a bigger network and are better connected, right?”  True.  But that doesn’t mean they have your buyer now and have been patiently waiting for your listing to expire to show your home.  If they had a buyer, they would have shown them your home already.  In real estate one of the oldest tricks in the books is for an agent to tell a seller that they “have a buyer for your home,” get the listing and then mysteriously, that buyer never materializes.  Or worse, some unethical agents have been known to bring in an offer from a shill buyer and in some cases even open escrow only to have the buyer cancel.  I heard of this in our area only recently where an unscrupulous agent actually brought an offer on a home with her brother in law (of different last name) as buyer, opened escrow and then on the day the buyer’s contingencies were to be lifted, cancelled, just to get the listing!  By then it’s too late to change and difficult to prove any wrong doing.  Does it help to be with a larger office?  Not really.  All homes go on the same multiple listing service (MLS) so once listed, your home is exposed to everyone.  In the beginning if you were hoping to sell without ever actually having to go on the market, then a larger office might offer an advantage as a “Pocket Listing.”  But this typically sells you short on sales price since you are not getting exposed to every possible buyer, only those from that office.  A bigger office may have more agents, but the MLS has all the agents.  Most transactions involve two agents, two agencies.

We started this discussion with the framework that the listing was coming to an end and you are considering making a change in representation since your home hasn’t sold.  Let’s assume you’re satisfied with your agent’s communication and that you trust them.  Since they didn’t have the right buyer for your home and it’s been sitting on the market unsold, it’s time to ask if they are marketing your home effectively and doing the things they said they would when they took the listing.  If your agent told you they would have professional quality photographs but took the pictures themselves with their iPhone, you have a legitimate gripe.  If they told you they would hold an open house every weekend and they aren’t, that’s not right.  If they said you’d be a featured home on Trulia, Realtor.com or Zillow and you look and you are not, they haven’t lived up to their promise.  Some agents will actually put their commitments in writing.  I include a partial list of my marketing plan in my listing presentation book and some agents will even make it part of the listing agreement itself.  However, if the agent is doing everything they said and you’re still not getting traffic, changing agents is not likely to have an impact.  Why?

A correctly marketed home should have quality photographs, maybe video or virtual tours, be on all the websites and in some print media etc.  And so long as you’re paying a full commission and your agent isn’t a complete unknown/out of area agent or has a really bad reputation, one which gets them and your listing boycotted by other agents (yes this happens,) then the problem isn’t with the marketing and changing agents won’t help.  OK, what is the problem then?  When a home is in good show ready shape and has been marketed properly but still doesn’t sell, ultimately the problem is pricing.

This argument seldom sits well with the home seller, but let’s face it, in the end the reason any home doesn’t sell is price.  Price for the condition, price for location, price for size, room count, amenities, lot size, priced for the current market.  It’s always price.  What distinguishes one agent from another is their market knowledge in setting the price, their ethics and the expertise to help you achieve the highest possible price by properly preparing your home for sale.  An agent must effectively present the home to the public.  (Effectively is the key phrase and that speaks to all the marketing we’ve already discussed.)  Changing an agent will not make your home more saleable though it might make you feel like you are doing something.  Since many sellers feel helpless when their home doesn’t sell, changing agents seems like their only recourse.  I compare this to a ball club firing the manager: even if they have a winning record and faced a lot of injuries, if they didn’t win the championship, sometimes the coach still gets fired.  The owner just has to shake things up.

So before you look to fire your agent, ask yourself, “Do I like my agent and do I feel they have done a good job even though we’ve not sold” and most importantly, “Do I trust them?”  If the answer is yes, then you should probably relist with them when the listing expires.  If you aren’t satisfied with something other than the fact there’s little traffic or you haven’t gotten a satisfactory offer, then you should consider making the change.  Sometimes new blood can inject new life into a property.   More times than not however, it’s not the new blood that brings the offer, rather the price reduction that the new agent gets from you, that creates the interest, that sells the house.

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