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i turn REALTY into REALiTY

How to detach in 3 easy steps!

No, this isn’t a post about your personal relationships (there have been too many written already!). What I’m referring to, is your home.

In the world of economics, it is called by several names:

  • The “Endowment Effect”
  • The “Willingness to Pay / Willingness to Accept Gap”
  • The “Attachment Bias”

As William Shakespeare wrote in Romeo and Juliet, ‘…a rose by any other name…,’ what matters is what something is, not what it is called.

So, what is it you ask?

In economic terms, it means that when we own something of financial value (stocks, jewels, or some other asset), we ascribe a greater value to it than if we did not own it. In other words, we let our emotions dictate our actions.

Think of the TV shows Pawn Stars or Antiques Roadshow. Grown men and women getting emotional over some old piece of junk they happened to find in their attic. The owners of these pieces always seem disappointed to discover that other people aren’t willing to pay them what they feel it is worth.

Why You Must Detach If You Want To Sell That Home

Another example is your home.  When potential buyers look at a home, they always believe that it is over-priced.  Sellers on the other hand, always feel their home is worth more than what buyers are willing to pay (e.g. the Willingness to Pay/Willingness to accept gap). The primary reason is that buyers have no emotional attachment to the asset, so it is worth less to them.  How many times have you been inside a home and thought to yourself “I can’t believe they are asking this much”?

Hence the big disconnect and cause of long market times for homes currently for sale.  We are currently in one of the worst market downturns in recent history, yet some sellers hold steadfast to the belief that their home is still worth much more.

So how do we fix this problem? How do we detach? Read the rest of this entry »

Is a picture is worth a few Thousand Dollars?

How about a few months on the market?

Back in 2008, I posted a 3 part series titled “Is it your agent’s fault“. In the articles, I spoke about many things that contribute to the successes and/or failures in the sale of a client’s home. There is no better time to look back and review these posts, especially since we are right in the middle of the worst housing market we will likely ever see. Read the rest of this entry »

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How to solve the housing finance market in 2 easy steps.

A recent report authored by The American Enterprise Institute for Public Policy Research revealed  that the US government should not be in the business of guaranteeing loans.

It supports the elimination of Fannie Mae and Freddie Mac as GSE (Government-Sponsored Enterprises) and suggested that over time, they be privatized. To the extent that government is involved in the financial market, they also concluded that their focus be on ensuring mortgage credit quality, not guaranteeing the quality of mortgages or MBS to potential investors.

Those against the removal of government intervention and guarantees argued that by doing so, investor confidence in the financial securities market would be further eroded, and that the housing recovery would be near impossible.

It reminded me of a funny discussion I overheard recently that went like this:

Broker: “Who has some good news they’d like to share?”
Agent: “I do. I just wrote an offer for some clients on a home I showed them.”
Broker: “That’s great news!”
Agent: “What’s even better is that they qualified for a loan, and neither of them have a job!”

Wait a minute! Isn’t this what got us into the problem in the first place? What happened to all of the mortgage reform policies that lenders were going to put in place? Seems like Deja Vu all over again.
You can download the report here.

What are your thoughts? Should the government continue to guarantee bad loans?

Cool Real Estate app for your Android phone…

I love technology. People who know me know that I love technology. I’m usually on the bleeding edge, and I’ve got the financial scars to prove it. In late 2010, I switched from my Blackberry phone to the new bleeding edge HTC Evo. I love this phone, but it has its own set of problems. I’m not writing today to discuss the phone itself, but rather, the real estate application that I recently downloaded for it.

First let me state that my Evo phone is based on the Google Android operating system. Don’t despair if you happen to have an iPhone or (God help you), a Windows Mobile phone. This app has a version available for those phones as well.

The app is Zillow. This real estate site aggregates data on homes, culled from various MLS cooperatives and public tax records across the nation. What I like about this app is that by using the GPS feature on my phone, I can view data on nearly every home around my current location, not just those homes currently for sale.  For example, let’s say you’re at a dinner party at a friend’s house, and the subject about real estate comes up (doesn’t it always???). Your host mentions that the house next door just sold, but she doesn’t know the final sales price.  You simply pull out your phone, click on the zillow app and Voila!, the information is right there on your screen! How cool is that???

Don’t have any of the smartphones named above? Don’t fret. You can also just visit Zillow’s website and pull up the same data. The screen will be easier and larger to view, but it doesn’t have that same wow factor!

If you have the new QR Code reader on your phone, just snap the image below for an automatic link to the free download. FYI, this app is ad based, so you do have to put up with a small banner ad at the bottom of your phone screen while using the application.

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To Rent or to Buy, that is the question…

A recent press release put out by Trulia, a real estate site, detailed where it was more beneficial to buy a home rather than renting. I found the results to be very interesting, and while I do question the accuracy and/or the methodology of the report, it does get me (and I’m sure many other readers as well) thinking about it, given the current economy.

I decided to replicate their analysis, but scale down the area to my specific city of Woodinville. I know that the smaller the sample size, the greater the margin of error (I remember a little from my college days and statistics courses). But, what I’m going for here, is a broad overview to see if the data from Trulia could be used to measure the affordability index in Woodinville. Here are my findings, based on their methodology:

There are 6 homes (condos) for sale in Woodinville, with a median price of $88,200. These condos are 2 bedroom, 1 bath units. The median rent for a similar apartment unit is $1,022/mo (which I think is a bit high, but that’s what I got off the Trulia site.

Using their calculations ((median price / (median rent*12)) = 7.19

So, going by their calculations in their report, it would be better to BUY in Woodinville, than to rent.

There are many flaws in my research data to be sure, but remember that this is a “Broad Overview”. Interested? Drop me a line…

What is lurking in the shadows?

Many people have heard the term “Shadow Inventory” in connection with real estate. But, what exactly does the term mean?  In a nutshell, shadow inventory

“is the inventory of homes that are either owned by the bank (foreclosed upon but not yet listed for sale), or where the current owner is in jeopardy of losing his/her home to the bank in the near future”.

CNN recently released a report on this problem and in it described the long term effects it could have on our nation’s housing recovery.  You might be asking yourself how

homes that aren’t even on the market could have an effect on the market? There are two ways that this inventory can affect the market.

  1. Perception – This is when potential buyers read in the news about how bad the real estate market is, and decide to delay their purchase until they see more positive results.  I call these people the Lemmings. They blindly follow the crowds, listen and believe whatever they read and/or see on the news. Until this shadow inventory actually comes into the market, it is all speculation.
  2. Reality – When these homes are actually listed for sale and compete against other homes in the marketplace. The effect of this extra inventory causes downward pressure on the asking and eventual sales prices of other nearby homes. It is simply the law of supply and demand but with a twist…

According to some statistics provided to me at a recent seminar I attended, Short Sales (those sales where the sellers’ home will not sell for an amount high enough to cover the liens on the property) will generally net 70-88% of fair market value. REOs (bank owned property where the home has been taken back by the bank) generally net 40-60% of fair market value.

Here’s the problem if you actually think about it:

Fair market value is generally defined as the price at which a seller is willing to sell for, and a buyer is willing to pay in an arm’s length transaction. However, housing sales are not done in a vacuum. There are many factors that contribute to a property’s value, including but not limited to: location, condition, amenities, and much more. So let’s create a scenario which is pretty common right now…

A condo complex of 100 units with a historical average value of $250,000 (the price that many of the current owners paid for their homes just a few years ago) has one unit (fair market value) for sale at $250,000. What is the value of that unit? $250,000? Maybe a little less given the decline in the market?
Now let’s say that that unit sells for $200,000 and is recorded as a closed sale at that price. Another unit comes on the market for $225,000. Is that unit over-priced?
Then another unit (short sale) comes on the market at $150,000. Then another short sale at $140,000. Then another short sale at $130,000. Finally when all is said and done, you have 19 units for sale in the complex (out of 100 units = 19% of the total # of units, but 100% of the total units currently for sale) that are either short sales or REO, and with an aggregate average price of $150,000. What is the value of a unit in this complex now? This scenario is real, and happening in a condo complex in Lynnwood, WA. All of these short sale and REO properties have brought down the values of ALL units in the complex!

The end result of this glut of REO and Short Sale properties, is that those homeowners who weren’t “Short” before, may now become “short” as a result of the declining values in the complex brought about by the other short and REO properties, thus setting a new value benchmark, and exacerbating the problem further…

Current MLS statistics show that there are 2846 condos for sale in King County. Of those 2846 units, 623 are short sales, and 402 are REO properties. An astounding 36% of the total units for sale (1025 units) are NOT Fair Market Value properties. Imagine what is happening to the prices!

And those buyers? The savvy ones are jumping in and picking up one or more units to hold long term. The Lemmings stand on the sidelines because they fear that prices will continue to fall and their purchase will lose even more value. Just like the stock market, these buyers wait until the market has bottomed out and is on the rise before they jump in…

Should I avoid short sales when looking for a home?

This is a question that comes up frequently when meeting with potential buyer clients, and I’ve got mixed feelings about how to respond. To be sure, Short Sales offer an opportunity for buyers to pick up properties for less than market value. In my last post, I shared a statistic that was offered to me about a nationwide average of 70-88% of fair market value for Short Sales. To put that into real numbers, let’s say you have two identical homes with a market value of $100,000. In this scenario, the Short Sale home (on average) would sell for $70,000 – $88,000 vs. the $100,000. A pretty good deal!

However, statistics are macro level, real estate is sold at the micro level. By this, I mean that each market is different, and the numbers should be taken with a grain of salt.  But, what if we could get every Short Sale for less than market value? Should I recommend them to my buyers?

I’ve done many Short Sale transactions, both as a Buyer’s agent (representing the buyer) and as a Listing Agent (representing the seller), and I will declare that they are not for the faint of heart! From a Buyer’s standpoint, there is little difference between a Short Sale and a Fair Market sale in terms of process. However, the main difference is TIME! While a typical sale might close in 45-60 days from the date of mutual acceptance, a Short Sale could take as long as 6 months to close, and even then there is no guarantee!

So, the big question that I ask my buyers is “how long are you willing to wait for a ‘potential’ deal on a property?”

I recently had a buyer write an offer on a Short Sale property. This particular property had been in contract twice before but had fallen through while in escrow. We were told by the Listing Agent and his Short Sale Negotiator that this time would be a breeze. They lied! Four months of waiting and with no end in sight, my buyers became so frustrated at the lack of response by the Listing Agent and his “team” of negotiators, that they rescinded their offer and purchased another property.

As a buyer, I would urge you to consider the following before deciding to pursue a Short Sale property:

  1. Do you have a deadline (date) in which you need to be settled in your new home? If the answer is YES and it is less than 3 months, then I wouldn’t suggest a Short Sale property.
  2. Do you have a low tolerance for frustration? If the answer is YES, then I wouldn’t pursue the Short Sale property.
  3. Are you impatient? If so, then move on…

From an Buyers Agent standpoint, Short Sales are time-consuming and frustrating. There is no guarantee of a closing, and after 4-6 months of working with a buyer on a deal (only to have it fall through) it can be disappointing. Based on personal experience, I recommend only pursuing Short Sale properties if:

  1. The Listing Agent is experienced in handling Short Sales AND has processes in place to insure that the appropriate paperwork and communication between the bank and seller/agent is professionally handled.
  2. There is NO 3rd party negotiator involved. This is because these “professional” negotiators try and pass their fees onto you, the buyer. How unfair is this???

Still interested in Short Sales? Give me a call…

Buy Now!

In my last post about strategic defaults, I promised to explain why now is a good time to buy a home. If you watch the news, you’ll find conflicting reports everywhere. Some reports claim that the market is still in a downward spiral, and isn’t expected to recover for another few years. Other reports claim that the market has indeed rebounded and is now slowly on its way back up.

I’m not going to delve into deep statistical explanations but rather offer a few meaningful stats and some anecdotal evidence of my claim.

In a press release from the NWMLS (Northwest Multiple Listing Service) dated today, some stats were disclosed. In a nutshell, the numbers showed that while the market is down slightly from last year in terms of Pending sales of homes in January, the figures were within 5% of 2010’s figures. If you believe that President Obama’s housing tax incentives propped up last year’s numbers, then the actual number of REAL sales based on buyers’ optimism has increased over last year’s numbers.

The number of CLOSED sales increased modestly by 2.7%, but the prices were down 6.7%. This means that buyers got better deals on their homes (can you say BUYERS MARKET?). Prices remain at pre-2005 levels due to the influx of short sale and REOs (Bank Owned Homes) that are slowly being released into the market. This “Shadow Inventory” will lengthen the delay of recovery in the housing market, but create further opportunity for qualified buyers. (I’ll talk more about how this shadow inventory affects the overall market in my next post).

Interest rates remain low and while it may be a bit more difficult to obtain financing (You’ll need to do more than just fog a mirror), qualified buyers are finding some good bargains out there. Rates are hovering around 4.5-5% which is pretty darn good!

I’ve been working with an investor couple who understand this opportunity. In their words, this is the “Perfect Storm” in real estate. Of course, they are thinking long term (10+ years holding time). For example, we looked at a cosmetic fixer which is listed at $209,000 (4bdrm, 2bath rambler on 1/3 acre). This is NOT a home they would live in, but as a rental, it pencils out pretty good if they can pick it up for the specific price they have in mind.

As a Realtor, I’ve seen some great opportunities out there. Many are diamonds in the rough, while some are just the rough… Yes, you’ll need to have vision (and some handyman skills), but for those savvy buyers, things are looking pretty good right now…

Strategic Defaults continued…

I can’t stop thinking about the whole strategic default premise. Is it guilt that prevents us from doing what large corporations do without nary a second thought? Do we really care what our neighbors, friends and family think?

I think its more than that. I think fear plays a larger role than guilt. When a corporate entity defaults on their loan, they still have individual homes to go to at the end of the day. The credit of the individual employees aren’t damaged. They can still go out and charge a dinner at a local restaurant, or buy clothes at their local department store.

If I were to default on my mortgage, my credit would get screwed up. I probably wouldn’t qualify for a credit card. Where would I live after they took my home from me? So many things in our daily life depend on good credit scores. Auto insurance is one of them. My rates would probably increase at my next renewal period. Would I be able to rent somewhere else? As a landlord, I always run a credit check on potential renters. It would take several years before I could buy another home. I think fear is what prevents us from taking that big step.

But I guess that’s where the strategy comes into play. I’m supposed to find alternative housing BEFORE I default on my loan…

But wait! I’m a REALTOR! I’m not supposed to talk about these things. It’s real estate Blasphemy! That’s right, the housing market is strong. The market will rebound. The market will rebound. It’s a great time to buy! It’s a great time to buy!

Really! It is a great time to buy! I’ll tell you why in my next post…

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Strategic Mortgage Defaults… For or against?

There has been quite a bit of controversy lately on the topic of strategic mortgage defaults. If this phrase is unfamiliar to you, it can be summed up like this:

A strategic mortgage default is when you have sufficient funds to continue making mortgage payments on your residence, but choose NOT to make them because your home value is less than your mortgage balance.

It is happening all over the country by homeowners like yourself. Large corporations have done it too! What is ironic about this, is that while the banks frown upon homeowners who default on their mortgage, the Mortgage Bankers Association (MBA) strategically defaulted on a building they owned!

In a study by Brent White at the University of Arizona (where the housing market has been hit worse than other areas), he posited that strategically defaulting on a mortgage is not immoral, nor is it necessarily wrong. In fact, he believes that it should be based purely on sound financial logic, something that large corporations have done for years. Think of it this way: Why should you continue paying money towards a home that has little or no chance of regaining value in the foreseeable future? Wouldn’t it make more sense financially to just rent instead?

I’m not sure where I stand on this topic. As someone who was raised to be a good citizen, taught to obey the rules, pay my bills, etc, my conscience tells me that it is wrong! However, the left side of my brain tells me that it makes absolute financial sense in certain situations. Additionally, as someone who makes a living selling real estate, how can I support such an idea when my financial livelihood relies upon a strong housing market?

I read a story a few years ago where homes in a particular neighborhood saw their values drop by 50% or more. The story chronicled one particular homeowner who purchased a home a few doors down that was identical to his for half the price he paid. He then defaulted on his original home. The bottom line was that he reduced his mortgage by half for the same home! He said in the interview that he tried to work with his bank to reduce his mortgage payment, but they wouldn’t even talk to him unless he was in arrears by several months.

Fast forward to 2011 in Lynnwood WA. There is a condo complex that I’ve been showing to potential investors. There are 19 units for sale in this complex (out of nearly 200 units). ALL are either Short Sales or Bank Owned (REO), and all are selling for about 50-70% of their original sale prices. I also happen to have a friend who owns a unit here. I explained the concept of Strategic Defaults to her and she mentioned that she would feel too guilty to try it. The Seattle Times recapped Mr. White’s article just this weekend. Here is a link to it.

And that, is what the book that Mr. White wrote, focused on. He wrote that we shouldn’t feel guilty about defaulting if the numbers don’t pencil out. Do you think that the Mortgage Bankers Association felt guilty when they defaulted on their building loan? How about Morgan Stanley when they defaulted on a $2 Billion loan in 2009?

His position on the subject is that a loan is just a business contract. You pay your mortgage off, and you get to keep the house. If you don’t the bank gets to take it back.  If you’re willing to give the house back to the bank, why should you feel guilty? You’ve lived up to the agreement stated in the contract, didn’t you?

What are your thoughts on the matter? I’ve got additional thoughts that I’ll save for tomorrow…