Todd & Lisa Sheppard
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Archive for May 2012

Seven Factors of the “Just-Right” List Price

May 31st, 2012   by lisasheppard

A famous little blonde girl of fairy-tale lore made it look like child’s play to master the art of finding the ‘just-right’ solution to her various lifestyle challenges (e.g., finding a bowl of porridge, a chair and a bed that suited her fancy). In the real-life world of real estate, though, it is much more difficult to find the ‘just-right’ price at which to list your home. There are loads of moving pieces, competing priorities and voices to be sorted through, internal and external. Sellers, if you work from a definition of the ‘just-right’ price for your home as the one at which it will sell without lagging, then it is possible – necessary, actually – to stop the chaos and start sorting and selecting the inputs that will get you there.  Here’s a short(ish) list of those factors: 1. The Comps. If pricing a home was about putting your heart’s deepest desire on some universal wish list, the world would be a very different place, my friends. But it’s not. And the first step to buying your ticket out of fantasy-land and into the realm of the price that will get your home sold is to narrow down the range of realistic pricing by looking at ‘the comps.’  ‘Comps’ is just industry shorthand for sales data on similar homes near yours which were recently listed and/or sold (“comparable” listings and sales).  Ask your agent to provide you with your home’s comps; also, check them out by searching your address and general area for homes similar to yours, here on Trulia.  While you should view the actual sales prices (vs. list prices) of comps that have recently closed escrow as very informative and influential for your pricing decision, the list prices of homes that are lagging on the market can also help educate you about what price points buyers in your area see as too high. 2. DOM [Days on Market].  The MLS data your agent will provide with the comps and the listings you find here online should also contain information about how long the various listings in your market have been on the market. You can use this information – or your agent do the math for you – to get a gauge on what the average DOM, or Days on Market, is in your neighborhood.  This empowers you to look at the comps with more nuance and to use them more strategically to influence your own pricing decision; you will ideally want to price your home in line with properties that went pending and/or sold in a time frame at or shorter than the average time homes in your area stay on the market. The homes that have lingered on much longer than that may be overpriced and may even require a list price reduction to sell; and that’s a club you don’t want to join. 3. List price vs. sale price. Here, LP stands for ‘list price’ and ‘SP’ stands for ‘sale price or ‘sold price.’  This comparison – sometimes expressed in a ratio, other times in terms of how many percentage points the sale price was over or under the asking price – gets at the difference, if any, between what sellers are asking for homes in your area vs. what buyers in your area are willing and able to pay.  When homes are selling for more than the asking price as a pattern or average, this usually suggests that your market is more of a seller’s market or that multiple offers are commonplace.  And the opposite is true – when homes typically sell for less than the list price, it indicates that buyers may have superior negotiating power.  Work with your agent to do the math and to understand its implications for your own pricing decisions, as they are not always completely obvious. For example, your agent might be able to point out patterns you don’t automatically see, like the increasingly common one in which well-staged, vacant homes that are listed at a slight discount are the ones that typically sell for significantly over asking. 4.  Competition Level.  How many homes are competing with yours for the hearts, minds and wallets of qualified buyers? How has the number of competing homes on the market trended over time, recently? Many areas are reporting a massive decline in competition – less supply is good for sellers, but you need to know what’s going on in your area; don’t try to apply national headlines to your local, personal real estate decisions. As you work to understand competition levels and their impact on your pricing, here’s what not to do:

  • Don’t just look up and down the street, or in your subdivision – also look at similar homes in nearby neighborhoods or even nearby towns that a buyer who likes what your home might also target.
  • And don’t just look at quantity – look at the quality, or nature of the competing listings. Is the competition mostly comprised of ‘regular’ equity sales, short sales or foreclosures/REOs? If you’re a regular sale in a sea of foreclosures, your price competition might be steep, but there may be other advantages of your listing that can offset that, to a degree.

So, what should you do? Get your agent to help you understand the competition level and the trends in number of listings on the market in recent months. Then, crash some of the competing listings’ Open Houses to scope out their condition and collect the rest of the intel listed here, before factoring it into your pricing decisions. 5.  Timing.  If your neighborhood’s award-winning school district or abundant colleges drive much of the buyer demand, you might be able to ask or get more for your home in June than in October, once the school year is in full swing.  If you live where it snows, listing it while it’s easy for buyers to get around might pay off, literally. There are a number of area-specific timing considerations that you may need to calculate into setting your just-right list price. Chances are good that you know what they are where you live, but your agent may have some novel insight on the matter, as well. 6.  Motivation Levels.  How motivated are you? Are you just testing out the market to see if you can hit a target number, or do you need to have escrow closed by a particular date to make your life and job plans run smoothly? What is your primary motivation?  Price, timing, closure, making sure your home passes into caring hands or just getting rid of a home or a mortgage that no longer serves you?  And how motivated are buyers in your area?  From insights like:

  • Average number of days on market
  • Average list price vs. sale price
  • Trends in comparable sales – their number and sales prices
  • Trends in interest rates
  • Trends in competition levels
  • And insights like where you are in the seasonal changes that impact buyers in your area,

you can work with your listing agent to gauge whether buyers are so motivated that they will not be deterred by a premium list price, or whether you’ll need to use a discount or value-based price to churn up motivation in a market of fence-sitting buyers. 7.  Agent and Market Feedback.  So, you came up with a list price that you thought was ‘just-right,’ but you’ve had little or no Open House traffic or private showings. Or you got lots of showings, but no offers – or nothing but lowballs, anyway. It’s not too late to get to the ‘just-right’ list price for your home; in fact, time is of the essence if you want to take advantage of the swelling levels of buyer interest and activity that has sprung this Spring. In many scenarios where a home lags on the market, the list price was set or maintained against the express advice of the listing agent, who urged the seller to list it lower. Or maybe you and your agent agreed on pricing early on, but they’ve been asking you for a price reduction for months now. If you trust your listing agent, and they have a strong background for getting homes in your area sold on today’s market, then it behooves you to at least take their pricing advice seriously, whether or not you follow it to the letter.  If you need more data before you make the understandably scary move of cutting your list price, ask your agent to ask for feedback from the brokers and agents who have shown the property or attended Open Houses – or even to run the property past their own colleagues at their office or marketing meetings. Once you have this input – listen to it and factor it in, along with the other factors.

The Top 5 Reasons Deals Fall Apart

May 24th, 2012   by lisasheppard

I’ve been told that 29% of all contracts signed never make it to the closing table- that nearly 3 in 10 transactions where a buyer and seller have come to terms (no easy feat in this market) fall apart. In a more normal market, I would say 90% of deals close. So, I figured if I could point out some of the reasons deals are crumbling, maybe those putting them together could prevent some of the challenges.

  1. Short Sales – In theory, they sound terrific because the buyer can low-ball an offer. They get little resistance from the seller (because the seller isn’t getting any money out of the deal anyway). However, the existing lender isn’t just accepting any offer. Appraisals are done and scrutinized. Lenders are not agreeing to deep discounts. Additionally, the lenders are still, in many cases, taking months to make decisions and many buyers are losing patience and withdrawing offers (and finding another house).
  2. Appraisal Issues – It seems that there are more appraisals coming in short than has been the case historically . Conceptually the value of a home has been loosely defined as “what a reasonable buyer would pay to a reasonable seller”. With the market including so many “unreasonable” sellers (short sales, foreclosures, distressed situations, etc.), many of the comparables used for an appraisal are dragging the numbers lower than they should be.
  3. Title Challenges –  The analysis of Permits and Certificates of Occupancy are at an all time high. Judgments and liens are more prevalent amongst buyers and sellers. The complications on title are messing up and delaying deals.
  4. Poor Pre-Qualifications – Many deals were never really deals to begin with. Loan officers need to take more care in reviewing tax returns, pay stubs, bank statements, contracts, and such before issuing pre-approvals and taking in applications. Simply not seeing unreimbursed expenses on the tax returns can kill a loan.
  5. Unforeseen Circumstances – It seems there is an inordinate amount of unusual stuff coming up- buyers losing a job, credit challenges arising as a loan is in process, property damage, buyer’s remorse. Everyday seems to bring a new one.

Many issues are visable up front if people really look at them (some are not). Those that can be seen usually are seen by the top professional real estate agents, loan officers and attorneys. Many, when addressed in the beginning, can have happy resolutions. It’s just another reason why you need to be associated with the best people you can find.

Short Sale vs Foreclosure – 10 Common Myths Busted

May 9th, 2012   by lisasheppard

It’s likely you’ve heard the term “short sale” thrown around quite a bit. But what, exactly, is a short sale?

A short sale is when a bank agrees to accept less than the total amount owed on a mortgage to avoid having to foreclose on the property. This is not a new practice; banks have been doing short sales for years. Only recently, due to the current state of the housing market and economy, has this process become a part of the public consciousness.

To be eligible for a short sale you first have to qualify!

To qualify for a short sale:

  • § Your house must be worth less than you owe on it.
  • § You must be able to prove that you are the victim of a true financial hardship, such as a decrease in wages, job loss, or medical condition that has altered your ability to make the same income as when the loan was originated. Divorce, estate situations, etc… also qualify.

Now that you have a basic understanding of what a short sale is, there are some huge misconceptions when it comes to a short sale vs. a foreclosure. We take the most common myths surrounding both short sales and foreclosures and give a brief explanation. LET’S BUST SOME MYTHS!!

1.) If you let your home go to foreclosure you are done with the situation and you can walk away with a clean slate.  The reality is that this couldn’t be any farther from the truth in most situations. You could end up with an IRS tax liability and still owing the bank money. Let me explain. Please keep in mind that if your property does go into foreclosure you may be liable for the difference of what is owed on the property versus what is sells for at auction, in the form of a deficiency balance! Please note this is state specific and in most states you will be liable for the shortfall, but in some states the bank may not always be able to pursue the debt. Check your state law as it varies widely from state to state.

Here is an example of how a deficiency balance works

If you owe $200,000 on the property and it sells at auction for $150,000, you could be liable for the $50,000 difference if your state law allows it.

Not only could you be liable for the difference to the bank, but in some situations you could also be liable to the IRS! Although there are exemptions (mostly for principle residences) under the Mortgage Debt Forgiveness Act, there are times when you could be taxed on both a short sale and a foreclosure, even in a principle residence situation. Since the tax code on this is a little complicated and I am not a CPA, I advise always talking to a CPA when in this situation as you are weighing your options. Hard to believe?  Well, believe it or not, the IRS counts the difference between the sale and the charged off debt as a “gain” on your taxes. That’s right-you lost money and it’s counted as a gain! (I didn’t make that rule, that’s a wonderful brainchild of the IRS). Banks and the IRS can go as far as attaching your wages. Not to mention if you let your home go to foreclosure you will have that on your credit, as well.

Guess What?  A short sale can alleviate your liability to the bank, in most situations. There are also exceptions to this, but in most cases banks are releasing homeowners from the deficiency balance on a short sale.

2.) There are no options to avoid foreclosure. Now more than ever, there are options to avoid foreclosure. Besides a short sale, loan modifications along with deed in lieu are also examples of the many options. In most cases (but not all) a short sale is the best option. Either way, there are more options today than there have ever been to avoid foreclosure.

3.) Banks do not want to participate in a short sale, or, it is too hard to qualify for a short sale. Banks would rather perform a short sale than a foreclosure any day. A foreclosure takes a long time and creates a huge expense for the banks; a short sale saves both time and money. Banks have more foreclosure inventory than ever before, and certainly do not want any more. Banks more than ever welcome short sales. Qualifying for a short sale is easier than you think, you need to have a true financial hardship, or a change in your finances and your house has to be worth less than what you owe on it. Not only do consumers, but banks also now have government incentive to participate in short sales.

4.) Short sales are not that common. At this present time, short sales range from 10-50 % of sales in various markets and it is predicted that in 2012 we will have more short sales than any other year, to date. Due to economic changes in the last few years, this is something that is affecting millions of Americans. Short sales are in every market, and are not just limited to any particular income class. This has affected everyone from all facets of life. A short sale should be looked at as a helpful tool, not a negative stigma. That is why the government is offering programs that actually pay consumers to participate in short sales. It is not just affecting one community; it is affecting communities and consumers across the nation.

5.) The short sale process is too difficult and they often get denied. Though the short sale process is time consuming; it is not as difficult as the media would have you believe. The problem is that most short sales are denied because of a misunderstanding of the process.  It is true that if the short sale process is not followed correctly there is a good chance of getting denied. An experienced agent knows how to avoid this. Short sales require a lot of experience, and a special skill set. If you are looking to go the option of a short sale make sure your agent is skilled and experienced in this area.

6.) Short sales will cost me money out of pocket.  A short sale should not cost you any out of pocket money. In fact, you could get between $3000-up to $30,000 to participate in a short sale. In many ways, a short sale may put you in a better financial position than prior to the short sale. Almost every short sale program now has some type of financial incentive for the home owner, as long as it is a principle residence, and we are even seeing relocation money being paid on some investment/second homes. As a seller of a property you should never have to pay for any short sale cost upfront to any professional service. Realtors charge a commission that is paid for by the bank. In most communities there are also non-profits and HUD counselors who can help you with foreclosure prevention options for free. The only potential cost you could incur is if the bank would not release you from a deficiency balance in the short sale, which is happening less and less now.

7.) If I am behind on my payments, I can perform a short sale any time. The farther you get behind on your payments, the harder it is to get a short sale approved. The closer a property gets to a foreclosure the harder it is to convince the bank to perform a short sale. As they get closer to a foreclosure sale more money is spent, thus deterring them from doing a short sale. If you think you need to perform a short sale, time is of the essence; the sooner you start the process, the better. Waiting too long can trigger the ramifications of a foreclosure, losing the ability to do a short sale as a viable option.

8.) I have already been sent a foreclosure notice so I can’t perform a short sale. For the most part just because you received a foreclosure notice or notice of default it does not mean that you do not have time to perform a short sale. The timeline and specifics do vary from state to state, but having done short sales all over the country, I have seen banks postpone a foreclosure to work a short sale option as close as 30 days prior to the scheduled foreclosure auction, but the longer you wait the less chance you have. If you have received a legal foreclosure notice, please reach out to a professional right away. The longer you wait, and the closer you get to foreclosure, the fewer options you have. If you have received a notice to foreclose this means the bank is filing paperwork and starting the process to take legal action to repossess the house. You still have time at this point to prevent foreclosure, but do not hesitate! The closer you get to the foreclosure date the harder it becomes to negotiate with the bank for whichever option you choose.

9.) I was denied for a loan modification, so I know I will get denied for a short sale.  Short sales and loan modifications are handled by two separate departments at the bank. These processes are totally different in approval and denial. If you got denied for a modification you can still apply for a short sale; in some cases you can get a short sale approved faster than a loan modification, as some loan modifications are denied because they cannot reduce the loan low enough based on the  consumers income.

10.) If I go through a short sale I cannot buy another house for a long time. The time to buy another house depends on your entire credit picture and can vary from 12-24 months. There are even a few FHA programs that allow for a purchase sooner than that. I have worked with clients who went through a short sale and bought another house in less than 12 months.

These are just a few of the common myths surrounding short sales and foreclosure. With the options available today, no homeowner should ever have to go through foreclosure, and hopefully this information can help a few more homeowners think twice before walking away from their home not realizing the possible long term ramifications a foreclosure can have.