Has the first-time buyer tax credit really worked?

This broker’s opinion is…NO. Although a number of buyers did want to take advantage of the $8K tax credit, most of the purchased homes were at the lowest levels of the market and would probably have taken place anyway. The real failure of the program is that these sales resulted in very few “trickle up” sales. Traditionally, when a seller sells their property in an entry level price bracket they take that equity and buy something else, bigger and more expensive. What has actually happened is that these sellers lost all their equity and did not buy anything. They are generally renting until they can get their finances back to a level where they can again enter the housing market. Some even had to move in with family. Nice try but we need much more help than this to precipitate a faster market rebound.

4th Qtr – Sales Might Be Up But Prices Sure Aren’t!

Consumers have recently been encouraged by reports that sales of homes have increased consistently since early summer. But don’t give your boss your retirement notice just yet! Exactly which homes HAVE been selling? I have seen sales fall into two very distinct categories. The first is the foreclosure or short-sale. These are properties the banks have acquired or will and want to quickly unload. For example, we had a buyer obtain a single-family home in decent shape in a great location for about 40% less than what the neighbors might have expected to get for theirs. …a good buy for him but not very good news for them.  The second category is distressed sales that don’t involve any banks directly. These are corporate relocations, estate sales, or divorces that require immediate resolution. These properties are often occupied and in better condition than bank-owned properties. Unfortunately, they are also selling well below the current “market” price. If you are selling a home and do not fall into either of these categories, your chances of getting a “reasonable” price for your home are probably less than 10%. Do not expect any buyer right now to pay EXTRA for good decorating, a better view, or a finished basement. Unless you are prepared to be very aggressive on price, you might as well saty put for now.  Do not despair. Things could change quickly by spring IF employment rebounds and forelcosures stabilize. There are many buyers out there waiting for the right time to buy and when they can, inventories of available homes will return to a more favorable balance.

Should I consider “contingent” offers when selling my home?

A contingent offer is one  which depends on the sale of another property in order for the deal to go through.  If the other property actually is under contract and just awaiting closing, that would be fine. But in the cases involving properties that are not yet under contract, the answer 95% of the time should be NO.  When you sell your home dependent  on another’s future sale, you are merely trading your problem for theirs. The big difference is that you don’t have any control over their efforts to precipitate a sale. If they are not aggressive enough on price or have an ineffective agent, you could be in big trouble. Remember, with so many listings on the market, nobody will likely pursue a home with a contingency attached. If your home is very unique or has a peculiarity that might make it difficult to sell, even in a better market, it might be worth the risk. Some examples would be high-end homes with non-traditional design, homes adjacent to railroads or highways, condos with unusually high assessments and homes that substantially exceed the price norm for their given neighborhood.

Will I sell my home for more by LOWERING the price?

Surprisingly, the answer is YES. With so many overpriced listings buyers only are interested in the most competitively priced homes. Why would they want to try to “lowball” you when they can just as easily work with someone who clearly has more realistic expectations. I have experienced this phenomenon on a number of occassions this year. I listed a townhome in excellent condition for $199,900. Similar homes had recently sold for $193,000 and $195,000. In a declining market, we were getting few showings and eventually a “stupid” offer of $160,000. Then a short-sale in the neighborhood in poor condition sold for $180,000. What to do? We dropped the price to $189,900 and the number of showings drastically picked up. In two weeks we had two offers and got $189,000. If we were still listed in the $190′s, I feel certain it would still be for sale.  Eventually, it would sell for less because of more short-sales, more difficult financing, and deteriorating weather.

It’s not only the buyer bringing money to the closing anymore!

In the last few years with home prices falling and mortgage balances rising, the unthinkable is now commonplace. Sellers are BRINGING the money to the closing….sometimes even more than the buyers!
Why does this happen?

I recently had a closing where the seller was fortunate to get $278,000 for his home. Unfortunately, his mortgage balance was about $275,000. This means that in order to cover the mortgage, commission, and other selling expenses, the seller had to bring $15,000 to the closing.
The alternative would have been to not sell the property and not move out of state. That was simply not an option. Even if the seller stayed, it could be years before prices are such that they could sell and break even or better. The other thought was that the lender might accept a lower payoff of the mortgage which is often referred to as a “short sale”. This is only an option when many mortgage payments have already been missed and the owner’s credit has already been compromised. So, they found a way to scrape together the money and get out of a bad situation while they still could with their credit intact.

This scenario brings up an interesting question. What risk does the buyer have in case the seller agrees to contract terms and then doesn’t ultimately have enough money to close?  We always verify the buyers’ funds and the buyers’ mortgage but who verifies the sellers’ ability to close?  Unfortunately, nobody. But you can protect yourself and should. If you are involved with a purchase in which it appears the proceeds will not cover the sellers’ expenses, you need to let your attorney know this.  He can arrange for the seller to deposit the expected shortfall into an escrow account prior to the closing to insure there are no unpleasant surprises.

Why should I use the mortgage company or an attorney recommended by my Realtor?

Last year I was at a closing that could have been a real disaster. For whatever reason, the mortgage money showed up $30,000 short. It was clearly an error but could have taken a day or two to fix. The sellers had entered into a purchase of their own and were planning to use their proceeds for that purchase in the next hour. I called my loan officer and he immediately hand delivered a check for the $30,000 and then went back to fix the error. Do you think that would have happened if he didn’t know me? I assure you it would not. The reason your agent recommends someone is because they have a track record of service and will go the extra mile to solve a problem to keep them happy. Agents do not get kickbacks from the people they recommend. It is illegal to do so.

You have searched for a month for the right home, negotiated a great deal, and now you are going to jeopardize it all to save $100 on a cheap attorney? I have worked with attorneys that NEVER answer their phone. We even joked once that one of them had actually died and his secretary was covering for him. Turns out he was in rehab! When you think you have found a better deal in a day than your Realtor has found in years, think twice. Some lenders offer a great rate but then charge high fees to make up for it. Some attorneys have a low fee but make it up on overpriced title expenses. Listen to your agent…you chose them for a reason.

Should I finance my purchase FHA?

With interest rates still close to historic lows and many sellers anxious to move their properties, this is a great opportunity for home buyers. For the first-time buyer, the government is adding an $8,000 tax incentive besides. Conventional lending, however, has become more difficult to qualify for and there are new limitations especially regarding condos. Some mortgage companies will not even lend without a 15% down payment or more on condos. This should not discourage buyers who cannot save enough to cover this amount.

Government-backed loans (FHA-Federal Housing Authority) allow buyers to put down as little as 3.5% and receive up to an additional 6% back from the seller in closing costs. You must intend to occupy the property as your primary residence.

Thus, a $200,000 home could be purchased as follows: Conventionally with $30,000 down  or FHA with $7000 down.  Assume  the closing costs are about $4000.  If the seller on the FHA provides only a 3% credit (which is common), your total cash outlay is $5000 on the FHA deal compared with $34,000 on the conventional loan.

But now you have a $193,000 mortgage vs a $170,000 mortgage.  At the current rate of 5.5%, the difference, however, is only about $130 per month. ($965 for principle and interest on the conventional loan to $1095 for the FHA loan).

So, what’s the catch? The property to be purchased must be FHA approved. This does not mean the property has to be in a depressed area. Most single-family homes will qualify as long as all the systems are in good working order. Condos, however, have different requirements. At least 51% of the units must be owner occupied and the association may not have “first right of refusal” on potential buyers. This means exactly what is says. FHA interprets this as a possible means of discrimination. Unfortunately, many buildings in Chicago have this in their association even though they have seldom exercised the right. Be sure you have investigated this possibility before attempting to purchase using FHA financing.

Should I use the “Neighborhood Specialist”?

Over the years, many sellers have told me that “so-and-so” sells most of the homes in their area and that they are hesitant to list with anybody else, especially in such a difficult market.  There is a big difference between “selling” and “listing”. In one case, the listing agent in question did in fact list 8 of the 12 homes that had sold in that area in the last 2 years.  However, a search of the buyers’ agents for each of the sales showed that the listing agent did not also represent a single buyer in any of those transactions.  Not only that, but she didn’t bring buyers for any of the other 4 sales either!  Also of interest was that 3 other listings with the agent had been on the market for a year and cancelled.

The importance of the “neighborhood specialist” has faded with the advent of the Internet and regionalization of the Mutiple Listing Services.  Consumers can choose agents based on merit and experience and not be so concerned with geography.  Gone are the days when a consumer would need to find a Naperville agent to sell them a home in Naperville.  Even if their preferred agent is in Northbrook, that agent has access to exactly the same information that the Naperville agent would have available to them. Naturally, they should have a general working knowledge of the area.

I have recently noticed that the “Neighborhood Specialists” have in many cases become a detriment to the sellers because they have a hard time dealing with declining prices in their “kingdom”. When an agent focuses too much on one neighborhhod they have difficulty seeing the big picture. In one extreme case, a local agent was telling  sellers to list 20% higher than the market analysis indicated because he actually felt he had enough influence to affect the market in that location.  He clearly didn’t.  After a year with him, they listed with another broker and ended up selling at 20% below their original market value.

Always get at least a few price opinions before you list your home. By all means consult the neighboorhood guy but also check with somebody else who knows the business well and does not concentrate specifically in your area. Choose your agent on merit, not geography.

Welcome to my new blog…

…and to a new way of communicating about the various issues that affect real estate in the metro Chicago area.  As the title of my blog suggests, I like to be direct and tell the truth as I see it. Rather than to pontificate about market trends, I am here to discuss real life experiences that I have observed over the last 25 years. Knowledge is power…you can avoid many of the pitfalls of buying and selling if you listen to professionals and learn from other people’s mistakes. I am also very interested in your comments and welcome them.  I promise to keep this blog updated and interesting. Thanks for visiting. Mike