Escalating Offers

So my last blog was about the return of multiple offers, a sure sign of an improving market, but now there's a new twist, and one we've rarely seen before.  It's call an "escalating offer", and essentially it says that the offerer will exceed any other offer made on the property, sometimes up to an amount certain, and usually for a specific amount over the other offer.  For example, if the home is listed for $550,000, I might offer $5,000 over any other offer, up to $600,000.

These escalators are problematic, legally and ethically.  If I'm the listing agent, I can't exercise your higher bid  without proving to you what the other offer is. Does that violate the privacy of the first buyer? Also, how do we know what makes a better offer? Will you also match the mortgage, inspection, and closing clauses?  If the first offerer responds in kind, don't you now have an advantage, since you know what the terms of the first offer are?

Additionally, if I am the listing agent, acting on behalf of the seller, shouldn't I be assuming that your offer is for the highest amount that you'll go?  So, if you say you'll match up to $600,000, and an offer needs a fixed price to be legal, wouldn't that be the only fixed amount you've indicated?  So isn't your offer really $600,000, since you've indicated that that's how high you'll go to get the property?

All of these questions are food for thought, and likely to be settled over time through a combination of convention and controversy.  In the meantime, however, I just wanted to make readers aware of the newest trend in real estate offers.  And show you how complicated it is!

Lots of Cash

Many more real estate sales lately are for cash.  While it's true everywhere in the country, it's particularly true in Connecticut.  Can you guess the percentage of people who close with cash?  If you guessed 39%,  you're right!

While that seems like a lot, and it is, it makes some sense when it's so cumbersome to fill out the paperwork for a mortgage, and when the restrictions are so much tighter.  I suspect that some number of those buyers later apply for, and receive, mortgages, especially with rates so low (although they're certainly not losing much in the way of interest on cash, and they don't have a great deal of stability in the stock market).

When there is no mortgage, the closings often happen much sooner.  We see people closing in a couple of weeks, once all the inspections are finished.  Getting a mortgage later really speeds the process up.

One tricky question, however, is how to know whether the buyer is serious and qualified, without the help of the mortgage qualification letter.   It seems strange, but it's sometimes easier to believe that someone is really going to buy if they are borrowing the money, than when they say that they have it in the bank.  Not a bad issue to have, I guess, but it has been arising more frequently.  The danger of real damage is less, however, when the closing is quick. Nothing's perfect, but cash is king!

First-time Buyers

There are lots of first-time buyers in the market now, and they are driving the action.  It's clear that it's harder to get a mortgage now than it was when those of us who are older bought our first homes, and the qualification standards are stiffer, even though rates are lower.

Because they are buying for the first time, they are often more hesitant to buy in situations where they might not feel comfortable.  Therefore, they often request more in the way of repairs, tests, and allowances for improvements.  In addition, having buyers ask for contributions to closing costs is a trend that we have seen in increasing numbers.  Sellers should not be insulted, since first-time buyers have no history, so no way of knowing that such a proposition might seem aggressive.

Since beginning buyers often look at more options, open houses have been very popular.  There may also be more repeat showings, with relatives and friends coming to weigh in on the potential purchase.  The closing can take longer as well, since documentation requests may be unfamiliar and take more time to fulfill.

Whatever the downsides, there is a great upside:  They are very motivated to buy and own their own homes, and they are out there!

Seller Concessions

One of the new realities of the current real estate market is that buyers often ask for concessions, monetary and otherwise, from sellers.  It used to be that they asked for things to be included or fixed, based on the inspection.  Now, they also may ask for the seller to pay some or all of the closing costs.  This is often so that the purchase price is higher, and allows them to qualify for a higher mortgage amount.

We have seen some issues at the closing with these requests.  The sellers don't always seem to realize that the purchase price will be the basis for the conveyance tax, the land records, and the commission.  It's the amount at the top of the sales contract that governs all those amounts.  We, for instance,  have other brokers to pay in almost all cases.  Sometimes it's a referral, sometimes a co-broke, either inside or outside the company.  The commission offered is on the full amount, and we are responsible for it, whether or not the seller made concessions.  While I understand why sellers wouldn't always like that, I don't see the difference between a concession made in cash or at closing from a concession made during inspections or even during negotiations.  It happens, and it isn't our fault.  And we shouldn't have to take the co-broke commission difference out of our pocket.

There are a lot of ways to get upset during the length of a sales transaction.  But, please, don't shoot the messenger.  We're trying to help.

Rate Rise Alert

We've been talking about this for months, but it's finally happening. Interest rates are going up. The latest rates are almost half a percent higher than they were a couple of months ago. What does this mean?

First of all, the cost of owning a home with a mortgage goes up when the interest rates rise, meaning that fewer people can afford to purchase a home. It also indicates that, in most cases, buyers can afford to pay less for the same home, since they will qualify for a lower mortgage amount. In a buyers' market, which we are in now, that burden falls on the seller in large part. So, if you are selling, you will almost always receive less for your home when interest rates are higher.

In the larger sense, it could also mean that we are past the bottom of the market. Mortgage rates generally start to rise when things are starting to improve. Some of that is a signal from the stock and bond market that inflation could be a worry, and part is that the government will stop holding rates down if demand increases.

So, just as people often try to time buying an airline ticket to wait as long as possible to buy a non-refundable ticket at the lowest price, and frequently hesitate just a little too long (as I recently did....), you may already have waited past the point where you should have bought that property. Just don't wait any longer. Once things start to turn around, prices can move quickly. Consider this your warning!

Home for the Holidays

This is the second of my annual posts. It's another one that is often the same, although this year I might even being writing it a little earlier than usual. It's time to remind those who want to close out the year by finishing a move that we have arrived at the eleventh hour.

By the time a buyer makes an offer, gets it accepted, does his/her inspection, obtains a mortgage and insurance, and closes the property, it will be the end of December. And that's if nothing goes really wrong.

The buying process has always contained some amount of sturm und drang, and there may be a little back and forth negotiation after the inspection results, but it is the mortgage process where the time frames have drastically changed. People who have not financed or refinanced recently will be shocked at the current level of documentation required for getting a mortgage. Often, they even spend time arguing about whether something is necessary--not worth your time, if you try--and it may take some time to produce all that is needed. The appraisal process can also take longer, especially since the low rates mean that there is a great deal of refinancing work being done at the banks now.

Even insurance is more complicated than it used to be. I remember the days when you could call on the day of the closing and get a binder. No more. Flood insurance in particular seems to slow up some transactions, where it is required.

The final point to keep in mind is that the holiday season is often a vacation time and/or a busy time for attorneys. Buyers have to plan ahead a little more to get things closed at the very end of the year.

There's my annual warning, so now it's time to get going!

Back From Boise

I just returned from Idaho, where the national group of independent real estate companies to which I belong was meeting, and I can report that it's scary out there. We have all cut costs, and are continuing to cut costs, finding new businesses and new ways of doing business, and changing our organizations to adapt to a changing world. No one thinks that it's going to get easier in the next couple of years.

We are probably not that different from owners in many industries. When you look at the stock market, it may seem as though times are better, since many are reporting higher earnings. However, when you examine things more closely, most of the improvement comes from cutting costs and laying off employees, not from raising revenues. Especially when you get to smaller companies, that strategy has its limitations. As one member of our group reminded us, you cannot save your way to prosperity.

While the whole country is affected, it's a good time to be in the Midwest. Those in that area say that it's because what doesn't go way up doesn't come way down, and that may be so. Everyone agreed, though, that some ways in which we traditionally made our profits--traditional brokerage, relocation, and commercial sales--are all suffering, and people are increasingly looking to new sources of income--mortgage, property management, and insurance (which, ironically, was fairly recently thought not to be much of a moneymaker for real estate). Short sales continue to affect all parts of the country, with the Midwest again being better than Nevada and other hard-hit markets.

We talked about the trends, the harsh realities, and the future of our industry. Afterward, we adjourned to do the only thing we could then think to do--drink!

Buyer Brokerage Again

It's time to explain buyer brokerage again. The real estate business has changed a great deal over the years, and buyers don't always understand the changes. It is similar in many ways to the medical field, where privacy concerns have led to the HIPAA law, requiring patients to sign documents each and every time that they see a physician. Even lawyers have gone in this direction; a client must now sign a retainer agreement before any work on his or her behalf can begin.

Well, we have those rules as well. When you begin to work with an agent, he or she is required, at the first significant contact, to present representation forms. Although we are allowed to take you into our own listings, that is because, in those cases, we represent the seller. We cannot take you into someone else's listing without having buyer brokerage. If we do, we don't have to be paid. Would you work at your job without knowing whether you are going to get a check?

These rules are also for your protection. If we don't represent you, we cannot tell you things that it would be in your interest to know. For instance, we are only supposed to tell you the listed price without a buyer brokerage agreement, not what we think you should offer or what we think the property is actually worth. The current regulations arose out of a genuine feeling that everyone deserves his or her own agent, looking out for his or her own interests. Almost all of the time, the seller still pays the commissions to both agents--that's because the seller is the one with the cash, since buyers cannot roll commissions into the mortgage amount. However, even that will probably change some day.

In the meantime, be kind to your agent who asks you to sign a form that you didn't used to have to sign. He or she is just trying to do his or her job in the best possible way, and to help you get all the information you need to make a good decision.

Last Call

The Wall Street Journal had an article about buying a house for your child for Christmas. I guess it's appropriate that such an article would be in the WSJ, but it's an interesting idea and deserves some thought!

However, for the average person, it's time to think about buying a property as a holiday gift for yourself. If you hurry, and really move on the mortgage and the inspections, you might even get in for the New Year's celebration. We bought our current house that way. We signed the contract around Thanksgiving, and moved in the weekend before New Year's Day. We even thought of the purchase as a present to ourselves, since, at the time, it was our second home. Many people now do that--buying a vacation home now, with the idea that you might retire to it, is increasingly common with baby boomers. After all, how many socks and sweaters do you need? Putting all the gift money together, and doing something big with it, is likely to be the present that you remember--and enjoy--longest of all.

Countdown for Tax Savings

We were talking about the $8000 first-time homebuyer's credit this morning, and figuring out the timeline for the deadline of December 1, 2009. Given the time it takes to get a mortgage and close, we think that a safe deadline for purchase would be October 15th, 2009. That means that anyone who wants to take advantage of the tax credit must buy within the next six weeks!

We further realized that many people (including most of us) have lots of questions about exactly who qualifies and for what, so it's worth talking to an accountant or doing some research on the Web. Many more people qualify than one might expect. Also, the type of property is broader than just single-family homes. I don't want to put in too many details, since that would imply that I know all the answers. I learned in business school, however, that the important thing in life is to know the right questions, and then find someone who knows the answers. That advice may be worth what you just paid for it, but I think you should think about whether anyone in your family might qualify. I'm thinking that parents may want to help their kids purchase homes in the next six weeks.

When the tax credit is combined with positive real estate news--like the article in today's Wall Street Journal, saying that now is the time to buy---we're looking forward to a very busy fall season!

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.