Bidding Wars Return

When I ran this morning, it was 29 degrees, with wind chill that made it feel like 17 degrees, so it didn't seem like the first day of spring, but it is!  And with spring comes the spring real estate market, which we are definitely seeing.  The surest sign of an improving sales environment is to have a listing come on and receive multiple offers right away, and that's happening.  Although we don't yet have the shortage of supply that other markets do, it's true that most of what is selling has just come on the MLS, and is garnering attention immediately.

Buyers have been coming in close to asking price on properties correctly priced to sell.  In more cases than we've seen in a long time, several parties have come in at once, leading to situations where buyers have been asked to produce a "highest and best" offer.  Just to be clear, that does include price, but it also considers terms, so offers that are cash, or that don't have inspection clauses, are usually favored over offers with contingencies.  We realize that buyers often doubt the veracity of real estate agents who say that they have another offer, so I'm using this forum to make sure that everyone knows that it is indeed happening often these days.  While there may indeed be cases where an agent claims to have another offer coming in to raise or accelerate a bid, it is true that, even with properties that may have been languishing for months, there are instances of multiple bids.

What does this mean for sellers?  First of all, it doesn't mean that you underpriced your property.  Things priced to sell quickly go for more than those set higher, even though that may seem counter-intuitive.  Buyers go higher when they perceive that the price is attractive, because buyers today are well-informed, and they know what properties are worth.  Also, since mortgages require appraisals and appraisals depend upon comparable sales sold recently, rising prices mean difficult appraisal situations, since appraisers can only use closed properties as comparables, and those contracts are already several months old when they close.  So, you can hold out for more money, but your buyers may not get a mortgage for the higher amount.

And what does it mean for buyers?  You'd better get out there soon...and don't fool around.  Offer what you would be sorry to hear that someone else bought it for, and do it quickly.  Make your offer as clean as possible, and don't ask for contingencies you don't need.  You'll never borrow again at rates this low, so be happy and buy now!

Appraisals

Now that consumer confidence has risen back to the point it was when Lehman Brothers failed, and the spring market has begun, we're starting to see some action. The new problem is that the houses under contract are not always "appraising out". That means that, when a buyer goes to get a mortgage, how much the bank will lend depends not only upon his or her credit score and income, but on an appraisal ordered by the bank before granting the loan. Most banks have an approved list of independent appraisers, who are sent out to examine properties with mortgage applications, and value them by comparing them to other similar properties that have recently sold. Therein lies the rub. What's a comparable property? What if nothing nearby has recently sold? What if the appraiser is from out of the area, and doesn't know which streets or neighborhoods are considered prime? All of those factors come into play, and sometimes the appraiser goes back to the bank with a value far below the sales price, even when there have been multiple offers of around the same amount on the property (which almost guarantees that the sales price is at least very close to the true value, since no buyer knows what another is offering).

When that happens, one of three things usually occurs: the bank orders another appraisal, which differs, and its internal processes allow the loan to go forward at the requested amount; the buyer backs out, due to inability to get a mortgage, and the property goes back on the market; or the parties renegotiate the sales price downward. In the current market, any of the three can happen. On a hot property, the first alternative is most likely. If the buyer does back out, it often sells again just as quickly. As Realtors, we hate to see the sale fall through, in part because someone looking won't necessarily know why it's back on the market, and it may decrease the desirability of the property (of course, to be honest, it also means that we are selling it twice for the same fee). This is particularly infuriating when we believe that the appraiser made a mistake. Some banks are more interested than others in taking a second look, and often local banks are more confident of values within their smaller footprint.

Whatever happens, it's just another bump along the road of selling property in today's market.

The Mark-to-Market Rule

You may have been reading about the mark-to-market rule in connection with the travails of the banking world. It applies to real estate in a very unfortunate way, which helps to explain why appraisals are so problematic these days.

Very simply, mark-to-market means that the value of an asset should be governed by what other similar assets are worth. Since most homes are only valued when they are sold, or refinanced, most people would expect to be unaffected by changes in valuation when they are not in the process of selling. However, the current focus on "stress testing" banks, and the influx of the TARP money, has caused regulators to take a new look at the revaluation of assets already on the books of those banks, and revalue them based on the basis of recent transactions or valuations at other banks.

Let's assume that there's a house on your street that went into foreclosure, or even just got sold to a relocation company when the owner moved. Since either of those scenarios would favor a quick sale, it might well have changed hands at what you would consider a rock bottom price. The mark-to-market rule, however, would then dictate that your home is now worth what the relo company sold your neighbor's home for, at least insofar as they are comparable properties.

You can easily see how things can spiral downward from there. If you then had problems with your mortgage, your bank would be carrying the value of your home at the "new" value, making your home further underwater. If every other bank then writes down the homes they have financed on your street, pretty soon everyone is underwater on their mortgages, and the banks have way more in the way of "troubled assets". All this is true even though perhaps only one or two homes changed hands at the lower value, and maybe not even in an arm's length transaction. The next thing you know, another bank is below recommended capital requirements, and is on the endangered list. At that rate, every bank may end up on the list, when the only thing that happened is that one home in a neighborhood got sold at a bargain price. Scary, right?