Commentary by Dick Gaylord Print Article
With all the newspaper articles, television reports and Internet stories discussing how much real estate values have declined over the past several years, buyers in today’s market are unquestionably looking for a great deal. And with the surge in distressed properties, buyers are often looking at either a foreclosure—a property that has been taken back by the bank—or a short sale, where the amount owed on the mortgage is greater than the value of the property. In September, 44.4% of the closed escrows in California were either short sales (20.2%) or REOs (24%). In some markets the share of distressed properties is much higher.
Even though many foreclosed properties, which are referred to as REOs (Real Estate Owned by a Lending Institution, Fannie Mae, Freddie Mac and HUD), are priced at market value and subject to multiple offers, buyers often expect to pay 10-20% less than the asking price. In addition, they typically ask for seller concessions and seller assistance with closing costs. This is also the case for many short sales, where buyers often have unrealistic expectations regarding price reductions. In fact, demand for distressed properties is intense and the market for them is highly competitive. Over half of the distressed sales transactions are subject to multiple offers.
Most lenders, Fannie Mae, Freddie Mac and HUD attempt to use current market value to price properties they have taken back. The question many buyers ask is this: “If the property is priced at market value, why hasn’t it sold?” The answer, of course, is that not all properties sell quickly, and buyers may not feel the property is worth what it is listed for. I always recommend that buyers “make an offer.” In the final analysis, a property is worth what someone will pay for it.
Sellers (often encouraged by their agents) list their properties on the high side, figuring they can reduce the price in the future if they don’t get any offers. The problem with this strategy is that oftentimes the longer the property sits on the market, the more difficult it is to sell. Buyers might consider the property over-priced or think something is wrong with it since it hasn’t sold. And it’s often the case in real estate that the first offer is the best offer, a painful lesson for many sellers. It can be a long time before a seller attracts as good an offer as the first one, which they may come to regret rejecting or countering.
When looking at a foreclosure that the lender has taken back, it may be on the market at a different price compared to when a buyer saw it a few months earlier. Chances are that the initial price was set when the property was still owned by the former owner who was attempting a short sale at the time. It’s likely that the short sale did not work out, and the lender has attempted to price the property at what is now deemed market value.
When considering offers, sellers often rely on a CMA (Comparative Market Analysis), a BPO (Broker Price Opinion), an appraisal or comparables. It’s important to understand that a CMA, BPO or appraisal are one person’s opinion or estimate of value. In this volatile market, the value of a property is only one thing: what a qualified buyer is willing to pay for it.
Regarding sales of nearby homes, buyers and sellers both have to understand that all may not be as it appears. If they have not seen the inside of the sold home and don’t have all the particulars about the home and the sale, it might be unwise to use the home as a good comparable.
There is one other potential problem; when activity picks up, many sellers and REO lenders sense the market is improving and tend to price their properties higher in order to test the market. The result is that the market slows down again. The bottom line is until distressed properties are a smaller part of all properties listed for sale, sellers will have to price properties to sell and may also need to be willing to offer incentives.
Until consumer confidence improves and buyers see the properties they are interested in moving quickly, sellers are going to have to compete for their interest. If a property hasn’t sold in a month or so, chances are it is over-priced for the current market. And, if several offers are received in a range lower than the listing price, the property is probably over-priced for the market. In any case, it is always wise for sellers to pay attention to what buyers think their property is worth.
However, there is a bright side to every story and this one is no exception. Today’s market offers historically low mortgage rates, attractive prices, motivated sellers and a plentiful inventory. Housing affordability has never looked this good. And while real estate is cyclical, and the current cycle has been difficult, over the long-term, real estate values will increase in addition to providing the one thing we all need—a home. In fact, most individuals have built their wealth through their real estate holdings. My advice to every potential buyer is that now is the time to buy.
Richard F. (Dick) Gaylord, CIPS, CRB, CRS, GRI, CDPS, is a top-producing broker with RE/MAX Real Estate Specialists in Long Beach, California.
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