Renegotiation is the New Normal

Sellers may be surprised, and not particularly happy, to learn that today, more often than not, the sales price listed on the first contract signed is not the same as the sales price at the closing.  It's just a fact of life for us now, because so many issues can arise between the accepted offer and the final transaction that occurs.

Inspections come right after the offer is signed, and today's buyers are likely to expect that everything that gets pointed out as an issue in any inspections will be paid for by the sellers.  That wasn't the case years ago, when buyers viewed work to be done as something that they were taking on in the purchase, unless the problems were structural.  Although the sellers don't always agree to every item, especially when it involves questions of taste and preference, but they often are asked to give money back.

Mortgages now can also provide for funds from the seller.  Various programs differ greatly, but there is a range of items, from inspections to closing costs, that banks and mortgage companies may allow the buyers to have paid by the sellers, and that range goes up to 6% of the mortgage amount on the high end.  While everything must be disclosed in the closing documents, it can prove to be an additional hit to the sellers.

Appraisals, usually ordered for the lender, can cause changes, if the home does not appraise for the amount being requested in a mortgage.  If the sellers can't pay the difference, the sellers might decide to lower the price.  This, as with money toward inspection items, is less likely to occur if there are backup offers that could be accepted, if the buyers do not want to leave the contract price alone.

Finally, things that break or go wrong between the time of the accepted offer and the closing are the responsibility of the sellers, and, while it doesn't happen that commonly, the reason for the preclosing walkthrough is to make sure that the home is in the same condition as when it went under contract.

Although this list may strike fear in the hearts of sellers, the real lesson is that you shouldn't be angry or unprepared with an answer if any of these items are raised.  Once you know that there can be bumps along the way, it's easier to accept changes, or at least consider them rationally.

Multiple Offers

With supply down and interest up, there are many more multiple offers on houses being seen this spring.  They are, obviously, more complicated for both buyers and sellers (not to mention agents!).  Sometimes, they can lead to a feeding frenzy on a property; other times, buyers can all walk away, not wanting to get drawn in.  So what's a seller to do?

If you price your home correctly, that price will be a call to action.  In other words, buyers, who are very sophisticated about the market in the Internet age, will know that it won't be on the market long.  If they are interested, they will need to act quickly.  They also know that they can withdraw during the inspection process, so they may act, even when they haven't fully committed(sellers should take note of this!).  They also know, pretty well, what the house is worth, so they will bid at least full price, figuring that other people will as well.  In fact, we often tell them to make their "highest and best" offer--I say that people should offer what they would be upset to learn that someone else bought the property for.  This often takes place in a second round of offers, where everyone who has expressed interest has a chance to put in one last contract.

The seller should set a date to consider all offers, and make that soon; most offers are only good for a period of hours or a few days.  With multiple offers, sellers should assume that buyers are continuing to look at other properties, and should not feel that they are in the driver's seat, and can think about things too long.  S/he should choose one offer, using price and terms to pick the best one for them, and negotiate it through to a signed contract.

 Then the inspections begin.  That's where it might be good to have a back-up offer, which often makes buyers less insistent during the inspection negotiation.  Sometimes, if a buyer plans to do enough work to the property, s/he might even waive the inspections.  Often, buyers waive the mortgage contingency, although that doesn't always mean that they don't plan to get a mortgage.  If they don't, they often ask that the house "appraise out", meaning that there is an appraisal anyway, to make sure that they don't overpay, although that's a subjective term.  If they are getting a mortgage, the bank will do an appraisal, so the same vetting process on value will occur.  We don't consider the home sold until the contingencies are satisfied, so keep your fingers crossed both as buyer or seller, and don't let up on the timeline.

This explanation assumes that the sellers proceed with one contract at a time.  While it is legal to ask for all offers, and then sign one, or to negotiate (but not sign!) with more than one buyer at a time, it gets confusing and frustrating for everyone.  Final advice:  Don't be greedy.  If you have an offer at or above what you would have sold for, take it.  Those last dollars aren't guaranteed, especially if it doesn't appraise at that higher amount.  Take the money and run to your new home!

Time to Move Forward?

I just read the report of a study saying that Americans now have the greatest gap between what they think their homes are worth, and what an independent appraisal shows.  You can see the problem here--how can we sell your property for what you want, if you think it's worth more than the experts do?  That doesn't mean that some buyer might not agree with you about value, but the general idea suggests that many homes wouldn't sell for what the owner would agree to take.  Recently, we had one homeowner who wouldn't accept an offer for the full listing price, because it didn't seem worth it to them to move for that amount. 


This brings me back to the old proposition that it doesn't matter whether you sell low or sell high, as long as you are buying in the same type of market.  Therefore, if you sell your current property for 10% less than you think you should get, if you are honest, you are probably buying your new property for the same differential.  At some point, you need to move on with your life, whether that means upsizing, downsizing, changing towns, or just changing.  It's better to do that when rates are (still) historically low, which will matter more in the end than the price you pay.  And it's better to live your life in the present, not the unpredictable future.

Property Taxes

Your House as seen by...

Yourself

 

Your Buyer

 

Your Lender

 

Your Appraiser

 

And . . . Your County's Tax Assessor

 

 

Sales and Resales

Although it's true that the real estate market is improving, the actual degree of improvement is less than one might suspect, since so much of what is selling is selling, falling through, and selling again.  At our sales meetings, we've had agents report up to three "repeat" sales in a single week.  There are a variety of reasons for these resales.  Some of the problems are mortgage issues, either of credit or of appraisal.  Some involve other contingencies that are never met, or renegotiations based on inspections.  There are a few, however, that boggle the mind.  One was a person who lost his job the day after the offer.  One was a couple who decided not to move.  The office winner, though, has to be the couple who completely disappeared, after a completely clean contract was accepted.  If anyone has seen these people, who had even brought their parents to see the property, please let us know!

I'm telling these stories so that sellers know better than to count their chickens before they hatch. To add cliche on top of cliche, just remember that it's not over til the fat lady sings!

Are Prices Starting to Rise?

As with many things, prices are local--very local. In addition, price indices are rarely apples-to-apples comparisons.  They usually take prices on one date and compare them to prices as a whole on another date.  For example, the Case-Shiller Index actually takes the total sales of all the property in a city and compares it to the total value of the property sold in that city in an earlier period, to calculate the rise or fall of real estate values over a period of time.  That means that it's hard to know what would happen to one specific property when it got sold or resold.

In the current market, sales are being driven by first-time homebuyers and are strongest at the low end of the price spectrum.  Overall, prices are flat or still falling slightly, although this does lag in time, due to reporting delays.  However, we are beginning to see appraisal problems again, which had not been occurring in recent months.  That indicates that prices are rising, thereby pushing up sales prices above levels of past reported sales, which are used by appraisers to calculate value.

What's the bottom line?  Prices at the lower end are being squeezed by supply and demand factors, and are probably heading up.  Higher-end sales are still waiting for that phenomenon to take place.

Help from the Government?

President Obama has proposed some new rules that would allow homeowners to refinance in many cases where that has not been possible up until now.  The main hurdle has been the appraisal--often, homeowners who have the ability to pay have not been able to take advantage of lower rates, because their homes are "underwater" (worth less than the mortgage, or worth less than the amount that they could refinance for).  His proposal would allow homeowners who are current on their mortgages, and have been for the last six months, to refinance without an appraisal (it does say "in most cases", and I'm not sure what that means).  His stated goal is to lower people's monthly payments and free up the extra cash to circulate into the economy and improve sales of other goods and services.

I see two problems with this.  One is that such homeowners would be allowed to convert their loans, at their option, into 15-year mortgages.  Since such a move would raise, rather than lower, their payments, I fail to see where the extra cash goes into anything except a different loan.  Secondly, the idea that banks are being told to refinance without qualifying appraisals seems ironic.  Isn't that supposedly how we got into this recession in the first place?  So, we tell them to make loans that don't meet the criteria that we just tightened?  And, if those loans go bad, and we can't blame the banks and their greed, whom do we blame?

It's clearly frustrating for good credit risks to lose out on lower rates because they are paying their mortgages regularly, and I understand that.  Somehow, though, the whole program has the ring of having started with some White House staffer complaining about not being able to refi his/her house, and then letting policy people hash out a compromise so that the banks would be happy with the result.  It seems to me that we have done that too often already.