Hot Property (Really!)

Want a Deal? How about *82% off?

Where: 22xx Vincent Ave. North; Minneapolis
How much: $42,500
Key Stats: 4BR/2BA; 1,363 FSF
Last sale*: $240,000 (6/2006)
Tax assessed value: $165,000

No, it's not in Edina or Wayzata. And, yes, it's a foreclosure, with all the headaches that can be involved (including less than pristine condition).

However, this brick-and-stone rambler is just minutes from downtown Minneapolis, a block off stately Victory Memorial Drive just northeast of Theodore Wirth.

Apparently, the market agrees: another agent who has an offer in told me that he's competing with eight(!) other offers.

Spotlight on Value: 2905 Benton Blvd.

Where: 2905 Benton Blvd, Minneapolis
How much: $739,900
Tax value ('09): $849,900
Original asking price: $925,000
Originally on market: 4/28/09

One year ago, this home likely would have fetched in the mid-$800's (I should know: I sold a very similar home, with fewer updates and farther from the lakes, for $790,000).

Fortunately for my Seller, at the time Benton was priced at $925,000. Located between Minneapolis' Cedar Lake and Lake of the Isles, it has 4 BR's, 4 Baths, and over 3,000 square feet. Nearby homes are worth anywhere from high six figures to north of $3 million.

Today, this home is suffering from a double-whammy of weak upper bracket demand, and excess market time. As Realtors and would-be Sellers both know, overshooting the correct asking price in a declining market often requires aggressive price cuts later on.

At $739,000, I think the Seller has now dropped enough to make this home a compelling value . . .

Foreclosure Headache #7 (and #9, #17, #22, etc.)

Lack of Standardized Contracts
Creates Foreclosure Can of Worms

From a realtor's perspective, representing a Buyer trying to purchase a foreclosure can present an endless can of worms.

For starters, there's the issue of the house's condition. What is it?

Unlike a typical owner-occupied home, there are no disclosures, and the Buyer usually must agree to purchase "as-is." Since no one's home, literally, anything can -- and does -- go wrong. Because foreclosed homes in Minnesota are frequently winterized, one of the first issues to negotiate is how -- and sometimes even if -- the prospective Buyer can test the plumbing, heating, and other major mechanical systems.

A second hurdle is response time. Unlike a typical deal, where a sale negotiation can be consummated in 24-48 hours, with many banks the equivalent timetable is weeks (I've even heard of months, in a few cases).

However, undoubtedly the biggest headache associated with foreclosures is, shall we say, the "variety" of bank-required contracts (suffice to say, there are as many bank-required legal forms circulating as there are bank-owned properties). That lack of standardization not only creates a great deal of uncertainty, but can be time-consuming, and can present novel traps and pitfalls for Buyers (and their realtors) each transaction.

Not Just "Boilerplate"

One of the biggest advances in residential real estate the last few decades, at least in Minnesota, is the adoption of standardized purchase agreements and addenda. While the 20-odd page, single-spaced contract you signed when you purchased your home last year may have said "Edina Realty," "Coldwell Banker Burnet," or "ReMAX," the underlying document is the same in virtually every deal.

As Martha Stewart might say, "that's a good thing."

Unbeknownst to most consumers (and unfortunately, not a few realtors), the standard real estate contract is a dynamic, constantly evolving document.

In fact, each year, the purchase forms undergo a series of tweaks and adjustments to address new market conditions (like the prevalence of short sales now); conform with any new state or federal law; and to refine earlier language that has proved problematic.

That combination of standardization and constant updating greatly streamlines the deal process, by creating conventions for handling the complications and ambiguities that can be part of any transaction.

To pick just one example, consider the Financing Addendum.

The standard Minnesota form balances the Buyer's need for time to firm up their financing with the Seller's need for certainty. The compromise is to set a specific date by which the Buyer's lender is to provide a "Written Statement" to the Seller indicating that the Buyer has secured their financing.

What happens if the Buyer's lender doesn't do that? The Addendum explicitly addresses what happens to the Buyer's earnest money, the effect on the transaction, each party's relative rights, etc.

Custom Contracts

Now throw all that out and start over with the bank's required forms.

How much time is the Buyer allowed to line up their financing? How are they to communicate lender approval? What happens if they can't get it? Under what circumstances does the Seller get to keep the Buyer's earnest money -- and when do they have to give it back?

As they say, "read the fine print." And if the fine print happens to be ambiguous . . . prepare for some friction and (more) delay, at the very least. (As a general proposition, you can assume that banks are inserting/deleting language to increase their rights and limit their liabilities relative to Buyers.)

Similar issues can arise regarding the Inspection timing and the Buyer's ability to back out; the scope of Seller disclosures (usually, just disclaimers); and responsibility for any third-party claims on the property (delinquent taxes, contractor liens, etc.).

After navigating all these issues, and investing a few months of their time, Buyers (and their realtors) are as likely as not to discover that the Buyer's offer has been knocked out by another, higher one.

For all this aggravation, you'd think realtors would get a bonus, right? No way.

Not only is the typical foreclosure steeply discounted from the average market price (about $180,000 now), but the "payout" (the commission offered to the Buyer's realtor) is heavily discounted, too.

Deal . . or No Deal?

Another Steep Discount From Listing Price

If you have to sell Christmas week in what is already a soft market . . . you may not like the price.

This is the second instance I've seen of a property sold then accepting a very deep discount from the most recent list price. The home is located in Minneapolis, just northwest of Cedar Lake:

http://matrix.northstarmls.com/de.asp?k=411903X1JL0&p=DE-39406710-836

In this case, the last list price was $299,900; the selling price was $220,500, a 26% discount!

So did the Buyer get a deal?

I didn't see the interior, and therefore can't speak to either floor plan or condition (the home was a foreclosure). However, I do know the neighborhood, tax value (almost $400k), what the last Buyer paid ($490k in 2004), and the home's tortured selling history (almost 3(!) years of market time, starting at $539,900).

And perhaps most crucially, I've got a very educated guess about when the deal was struck: going by the off-market date, January 2, you'd infer that the Purchase Agreement was consummated right after Christmas, and that the Inspection occurred shortly thereafter (most Inspection Contigencies play out within a week).

Based on the foregoing, I'd guess "yes" -- unless the Inspection turned up a major issue (or several of them).

List Price Discounts

Sold Price $135k below List? Ouch!

One of the characteristics of a Buyer's market is Buyers wresting steep discounts from the Seller's asking price. Even so, a $135k discount -- from an already reduced $800k asking price -- stands out for sheer magnitude (note: to see the unabridged report, go to "display" in the lower left and select "Property/Agent Full"):

http://matrix.northstarmls.com/de.asp?k=411903X1JL0&p=DE-39160848-449

Is the market really that soft?

At least in this case, I think a couple of other factors are operating.

First, the original asking price, $850k, was, shall we say, aggressive, based on what I know of the comp's ("comparable sold properties") -- quite a bit, considering that I've sold millions of real estate within a few blocks in the last few years.

Second, based on the time that elapsed between when the home went pending and when it closed -- one week -- you'd speculate that the Buyer paid cash. With tightening underwriting standards and fewer well-qualified Buyers out there, an all-cash offer warrants a nice discount.

Third, the home was a "spec" (speculative) remodel done by a builder-remodeler. By definition, such homes are vacant -- no one is deriving any benefit from them. Meanwhile, the holding costs continue to mount along with the time on the market.

Whereas many long-time owners can be quite emotional --and therefore stubborn -- about taking price reductions, corporate sellers tend to be more dispassionate and bottom-line oriented. Closing by year-end may also have had favorable tax consequences (if indeed the Seller took a loss).

Finally, the home sold in mid-December. Ordinarily, this is already a seasonably slow time of year for the Twin Cities housing market. However, with all the economic turmoil the last few months, December this year was colder than the thermometer.

In such an environment, a heavily "discounted" offer is better than none at all.