I recently had a conversation with a friend on Facebook discussing whether or not purchasing a home in this market is a good idea. Would waiting for a downturn be a better option? On the surface and with prices being as they are, the answer seems an obvious “yes,” but let’s take a realistic look. As a residential real estate agent, there is always an argument for buying now. It’s sales after all, but let’s put the sales jargon aside and just talk reality. The “right time” depends on the Buyer’s goals and circumstances.
The information in this article may seem obvious to some, but when you’re a potential Buyer in the thick of the Los Angeles real estate market and overwhelmed by the barrage of online (mis)information and market craziness, a little reminder and focus from an insider can bring much welcomed clarity. When it comes down to it, here is my No B.S. Formula to gauge if now is the right time to purchase a home:
- IF one has the desire and/or need to purchase AND
- IF s/he can comfortably afford a home now AND
- IF s/he qualifies for a good loan with a low interest rate AND
- IF s/he finds a home s/he loves AND
- IF s/he is planning on living in it for several years <notice the bold print>
- THEN now is the right time to buy.
If a Buyer is constantly showing interest in properties above his/her price range and absolutely can’t find anything within it, this is an obvious indicator that s/he should either wait for a different market or that it’s time for a reality check and refocus. Spending all of one’s savings and being “house poor” is not a safe choice.
We know what the market is like right now but frankly, the future is up in the air. Something has to give but what, when and at what cost? We can certainly speculate. Regardless of affiliation, the fact is that we don’t know exactly how the new political climate will influence the future market, since we’re not sure what the current administration will do or how it will affect housing. Will there be more red tape? Homeowner breaks? Maybe. Maybe not. Buyers can wait and hedge their bets for the market downturn, but we don’t know when that will be or what will come with it. Interest rates generally increase in a downturn yielding a higher cost of money, however, we just saw a .25% rate increase and yet housing prices in the Los Angeles market are enduring. We also know that demand has consistently outpaced supply for several years now. The consensus is that current construction still falls drastically short of current and projected future supply. Is this due to building restrictions, high costs, a lack of developer interest? Speculations abound. Regardless, this doesn’t paint a positive picture on a downward price shift anytime soon.
Right now, the number of all-cash investment purchases are down since it’s difficult to flip and make a significant profit. I have several investor clients who are waiting for a downturn so they can buy up as many homes as they can, then hold or lease them for as long as necessary until they can sell in an up-market. These are the ones who benefit most from lower housing costs.
I’ve seen Buyers wait for the perfect climate and never end up buying. I’ve also seen Buyers buy in a peak market and have their value decrease shortly after. My point is, that buying now or later is a risk no matter how you slice it. Inventory is low right now and we’re in the height of the market, price-wise. Consider this: During a downturn, the majority of homeowners who will most likely be selling are those who HAVE to sell, so inventory should be even lower, since homeowners with a choice will most likely wait to sell when prices are high.
When is comes to homebuyers, we can hope for a friendlier climate. The saying, although cliche, is true: There’s no crystal ball so really, nobody knows for sure. Although the listing element of my profession benefits from inflated home prices, I’m a human being first and take my fiduciary duties towards my clients very seriously. I truly hope something can be done to allow more people to afford the “American Dream” and be able to purchase a home for themselves. Time will tell and the next cycle should be very interesting.
HOMEOWNERS: The BEST pricing strategies for this market.
HOMEBUYERS: How to get your offer accepted in a Seller’s market.
Updated for 2017
Buyers: You’re about to start looking for your new home. It’s exciting, scary and most likely overwhelming. You may not know where to start. Zillow? Trulia? Redfin? Realtor.com? You can read all the articles you can get your hands on but to truly be prepared, you need to speak with a full-time real estate agent who knows the area(s) in which you’re looking. Since inventory is lower than expected and Buyers are out in droves, you have to make yourselves as competitive as humanly possible. This is part of an agent’s job and can save you significant time and energy. Read these points to stay on top of the game and come in as a serious contender:
Choosing Your Agent
I’ve encountered many Buyers who are hesitant to work with an agent at the beginning of their search because they don’t want to feel rushed, persuaded or “tied” to anyone, however, the right agent will be supportive and not pushy. Your agent is your point-person to make you as competitive as possible for the market, introduce you to the right lenders, find the right properties, schedule showings, advise you on all real estate related matters, help you write a killer offer and take you through the escrow process. Your agent should coordinate all aspects of escrow including inspections, the escrow company, title company, lender, listing agent and most any other unforeseen element that can, and most often does, rear its head.
When choosing an agent, make sure s/he:
1. Knows the area in which you’re looking.
2. Is available by cell phone everyday and will call you back in a timely manner.
3. Can explain offer strategies, the escrow process and field any related questions.
4. Has relationships with quality vendors (lenders, inspectors, etc).
5. Has a positive and determined attitude.
6. Is with a reputable brokerage.
7. Is a Realtor®
What’s the difference between a Realtor and a real estate agent? Realtors® are members of the National Association of Realtors® as well as a local association. We are held to a strict code of ethics and offer unique tools. A real estate agent is someone who has a real estate license but has not joined an association. All Realtors® are real estate agents but not all agents are Realtors®. Make sure yours is.
There are some amazing lenders out there and there are some that will kill your escrow. To get an offer accepted when you’re coming in with financing, it is CRUCIAL to keep the following in mind:
1. Have your credit score, bank statements and tax returns at the ready. If your chosen lender hasn’t requested a full set of documents from you, RUN!. In order to accurately pre-approve you for a loan, the lender has to input a significant amount of information into his/her database. Then, and only then, can your pre-approval be considered accurate. Pre-approvals are not guarantees and lenders will remind you of this with very specific verbiage. What you DON’T want to happen, and what happens way too frequently, is to have a lender who hasn’t done the work at the onset. Several weeks into escrow, when it comes time to go to underwriting, the lender finally inputs the rest of the data and finds that you don’t qualify for the loan amount for which you were originally pre-approved or, more commonly, there are new resulting snafus that need extra time to correct. The home then either becomes unaffordable or escrow has to be delayed. Delays can be common, however, in a Seller’s market, there are most likely several backup offers waiting to get your spot. It’s best to hedge your bets and avoid as many speed bumps as humanly possible.
2. AVOID THE ABOVE by using established and trusted lenders. I refer excellent lenders with whom I’ve worked and trust. They are excellent in their communication, products and expertise. By suggesting lenders I’ve worked with and trust, I ensure that you are being represented by the best and avoid potentially unnecessary and costly delays.
3. Be sure your lender is accessible by cell phone or email, 7 days a week. If you need a pre-approval on a Sunday, you need someone who can deliver same-day or you risk losing an opportunity.
4. Banks or Loan Brokers? Banks are notorious for long escrows and lots of unnecessary red tape. Plus, they’re limited to certain types of loan products and may not have the loan which most works in your best interest. Long escrows = more risk for a Seller so the shorter escrow, the higher the chance of getting your offer accepted. Very few banks can promise a short escrow. Anything more than 30 days can present an unnecessary obstacle.
***Some of the major banks are offering incredible rates and timetables for certain types of loans. I have found (and worked with) some excellent reps who I can recommend if a client prefers to work with a major bank. They are available by phone 24/7, can get a pre-approval letter out quickly and meet tight timelines which makes your offer much more attractive to a Seller.
The All-Cash Offer
This is the golden goose of offers. Sellers love cash offers since they don’t have to deal with a lending institution or the risk of an appraisal coming in lower than an accepted offer. All-cash transactions usually have short inspection periods and very short escrows. If you’re going to be making all-cash offers, you can skip the next point.
Terms are important and can make or break a comparable deal. The highest price doesn’t always win the property. There are several terms in the offer contract which can be tweaked to be more attractive to the Seller while still keeping you protected, and thus, increasing your chances of an accepted offer. Make sure that your Realtor® has this strategy down pat.
Researching The Comps
In this market, the comps serve the Sellers in pricing their property. The market value of a property, in terms of getting an offer accepted, is not in the comps but in how much a Buyer is willing to pay for it. In a Buyer’s market with few Buyers and lots of inventory, you can use the comps as leverage but this strategy is counterintuitive in a Seller’s market and can hurt your chances. The best question to ask yourself when deciding how much to offer is, “How much is this home worth to me?”
It’s a tough market but Buyers are snagging properties left and right. Real estate is exciting and buying a home fulfills a large part of the American dream. It can be an emotional process and quite a ride but it will never be boring. Build a good team, stay positive, committed and realistic and you’ll find the home you’re looking for.
For Sale By Owners: You REALLY Want To Read This
Every real estate agent looking for a listing will tell a For Sale By Owner that having an agent is significantly more beneficial than selling it without one. Understandably, a homeowner may be hesitant to believe someone who is, ultimately, in sales, so let’s break down WHY is this true.
These are the common arguments FOR doing a FSBO, followed by my responses that illustrate the reality, based on actual sales and transactions. Misleading and bogus sales pitches do exist, but the following is grounded in reality and intended to help Sellers:
1. “I don’t want to pay commission.”
Who would?! Commission can be a big chunk of the proceeds. This argument would hold the most water EXCEPT for the fact that an agent can most often NET a Seller MORE money than a Seller can get on his/her own, even with commission. Buyers with agent representation expect to pay fair market value for a property. If you go to a reputable department store, you expect to pay fair market value for a quality product. It’s the same mentality as in real estate. True, a $600 leather jacket isn’t a $900k home, however, the sales philosophy holds true.
On the other hand, Buyers without representation who look at FSBO’s are looking to get a deal. They know you, as a FSBO, are not paying broker commission and they use that as leverage when they give you low-ball offers. In fact, they’re usually not qualified for your asking price so they HAVE to offer lower. But don’t take my word for it. There are multiple studies conducted every few years, which corroborate this very concept.
2. “I can advertise just as well or better than any agent.”
The days of simply posting your ad in the newspaper and selling a home are over. The vast majority of buyers now turn to the online marketplace for their home searches. This means targeted Facebook ads, email blasts to thousands of local agents, letting the neighbors and surrounding communities know about your property, creating marketing pieces that have a track record of success in attracting Buyers, distributing to all of the online forums (Zillow/Trulia, Redfin, MLS, Craigslist, online news publications, etc) and fielding countless calls. The large brokerages also syndicate its agents’ listings to 70+ other sites. Since FSBO’s most always end up hiring an agent anyway, it’s a good source of business for us, so expect to be called by countless agents who want to get your business.
3. “Selling it myself will be easier with less paperwork and red tape.”
There are regulations that govern the sale of a home that most people don’t know about. Unless actively working in real estate, how would a Seller know about the retrofitting compliance that has to be done (or risk a hefty fine) or what disclosures need to be made to both inform the Buyer and protect the Seller or the nuances of the Fair Housing Act which regulates the type of language used in advertising and marketing? Not knowing ALL of the elements puts a Seller at risk. The number of real estate related lawsuits should act as a reason to take as many precautions as possible.
The sheer number of real estate lawsuits each year alone dictates that a Seller should do all they can to limit their liability. A real estate agent can help protect you by limiting your liability with the appropriate forms (some so obscure that very few, if any, non-agents would know about) and practices.
4. “I can contact real estate agents directly and tell them about my property.”
A licensed real estate agent cannot enter into a deal with an unlicensed individual. This means that, even if you find someone with an agent, who wants to purchase your home, they cannot enter into an agreement with you. If you want to pursue that Buyer, you’ll have to either find an agent to represent you or end up having the Buyer’s agent also represent you in a dual-agency.
Selling a home is truly a monumental undertaking with lots of involved legality and risk. Once you list your home, you need to market it. Once you market it, you need to be able to weed out the qualified Buyers from the average, unqualified ones. Then you need to vet their lenders to ensure they’ve gone through the appropriate D.U. requirements to give an accurate pre-approval so as to avoid long T.R.I.D. delays and potential cancellations. This is just the beginning. A legitimate agent who provides excellent customer service is worth the commission, especially when he nets you more money than you would receive on your own (fact).
*My full list of services is available upon request.
You want the most amount of it you can possibly receive for your home. As an agent, I want the same thing. First and foremost, I have a fiduciary responsibility to you, my client, to look after your financial well-being before my own. In doing so, I assure myself a commission check for a job well done and an excellent reputation leading to a long, successful career. Our goals are 100% aligned but it goes even deeper. Your agent wants the highest dollar amount and the best terms for you. Whether the highest offer is the best one for you depends on your goals. Different strategies work for different goals, so if your agent hasn’t inquired about yours, be sure to initiate the conversation ASAP.
Now that we’ve established that we share the same goals, what next? It’s time to set the listing price. Before we get to the most common pricing strategies, here are a few important things to consider:
•THE LISTING PRICE IS ONLY THE SELLING PRICE IF YOU WANT IT TO BE
•The value in a property is dictated by the market and by how much a Buyer is willing to pay to have it.
•The comparable value only matters in a Buyer’s market. In a Seller’s market with multiple offers, the comps become relevant only for appraisal value.
•A Buyer with financing can offer a ridiculously high sum for your home, however, keep the appraisal in mind.
•If the appraisal comes in below the offer price, the loan amount decreases, leaving the Buyer to pony up the difference in cash, the Seller to negotiate a lower price or leading to the cancellation of escrow.
•All-cash Buyers have no appraisal or loan contingency, usually offer shorter escrows and an easier sale, HOWEVER, all-cash offers generally come in much lower than asking.
•Homes that sit on the market become less attractive to Agents and Buyers. For example, a house on the market for 60 days may inspire people to wonder what is “wrong” with it.
Common Pricing Strategies:
1. At-Market Pricing
The Play: Price your property right at fair market value. This one is a crap-shoot. Expect a mixture of low and just-above-asking offers, but the numbers don’t usually skew too far from asking price. Today’s Buyers know what has sold in your neighborhood. If they see that your home is at fair market value, they’ll usually stick with a number around that price so they don’t “overpay.” It’s all psychology.
Example: Your home is worth between $800k and $850k. You price it at $825 and most likely sell it for around that price.
When to Employ: This strategy is perfect for a Buyer’s market where inventory is high. Many Sellers choose this option when they are not comfortable with “Price Low, Sell High” (#3) below.
2. Price High, Sell Low
The Play: Price your property at it’s upper range to bring in lower offers which reflect your true goal price.
Example: Your home is worth between $800k and $850k. You price it at $860 and close for $845k.
When To Employ: This can be a good strategy if you have a specific number that you have to hit to pay off a mortgage, liens or if you just have a set price in mind that you want to meet.
3. Price Low, Sell High
In my experience, this is, by far, the most effective strategy for selling a property quickly and for the highest dollar amount.
The Play: Price your property low to entice multiple offers and start a bidding war, bringing the price to the highest point the market will allow.
Example: A property is worth between $530k and $560. Price the property at $525 and get offers in the $550s. I employed this strategy on a home listed at $525. We received multiple offers and closed at $561k. It then appraised for $564k.
When To Employ: This strategy works in any market where it’s common to have multiple offers.
Addressing Seller Concerns: A common Seller concern when introduced to this strategy begets this question, “if I list my home at a lower price and someone offers that price, I have to accept it, right?” After speaking with legal counsel, it is my understanding that this is not true. The offer from a Buyer is non-binding on the seller until s/he accepts it and the Seller is not obliged to accept any offer at any given time*.
Remember, THE LISTING PRICE IS NOT THE SELLING PRICE unless you want it to be. It’s merely a strategy, a jumping-off point to get the ball rolling. This method is effective because you can’t underprice a home but you CAN overprice it. There is no money being “left on the table.” Trusting that your agent is looking out for your interest and not just advising for a quick sale, is paramount. It’s crucial to have an agent you trust.
Pricing your property correctly and strategically at the onset not only significantly increases your chances of a quicker sale, but can also earn a higher priced offer. Yes, the out-of-the-ordinary can happen and someone could come in with an astronomical, all cash offer in response to any pricing strategy. The question is…do you hedge your bets and do what is known to be effective or do you dig-in and risk sitting on the market with diminishing Buyer interest? Ultimately, it’s up to you.
*Please consult with your lawyer. I am not a lawyer and thus, cannot give legal advice.