Tax Assessed Value as Yellow (or Red) Flag

List Price = $800k, Tax Value = $400k

As I've written previously, a home's tax assessed value isn't particularly relevant for establishing a home's actual, what-will-it-sell-for market value.

Rather, fair market value is determined by: a) scrutinizing the comp's, or comparable sold properties, to set a list price; then b) testing it on the market.

While in theory the tax value should approximate market value, there are all kinds of reasons why they can diverge.

So why do Realtors still consult the tax assessed value?

Speaking for myself, I always check to see if the assessed value appears too low.

Especially if the home hasn't sold recently, that can be a sign that major remodeling was performed without the requisite permits.

If the home has sold recently, it's possible that the appropriate permits were pulled, but that the new tax assessed value simply hasn't caught up yet.

Pre-Approval Letters & Written Statements

What Are They Really Worth?

Put it this way: the picture of toilet paper should give you a hint.

First, some background.

In Minnesota, the first things that typically lead off any offer to purchase residential real estate are the Buyer's earnest money check, and a pre-approval letter from a lender (unless the Buyer is paying cash).

The standard pre-approval letter recites that the lender has initially screened the Buyer's finances and credit scores, and, based on that quick review, says that the Buyer can afford the home.

In practice, a pre-approval letter almost always means . . . nothing.

Most lenders will issue them in less than 10 minutes on the phone with a prospective borrower, after collecting the most basic information.

Meanwhile, their express language explicitly states that nothing in the pre-approval letter obligates the lender issuing it to actually fund the loan.

The Written Statement

Which is where the Written Statement supposedly comes in (think of it as "the Final Approval" Letter).

Once the Buyer and Seller reach agreement on terms, the Purchase Agreement typically includes a Financing Addendum that calls for the Buyer to deliver a Written Statement within 2-3 weeks.

The standard Written Statement recites that an appraisal satisfactory to the lender has been completed; presumes that the lender has finished vetting the Buyer's W-2's, recent tax returns, and any other Buyer financial "bona fides"; and lists any outstanding conditions remaining -- usually pro forma ones, like the Buyer not blowing up their credit or losing their job.

Once the Buyer delivers the Written Statement to the Seller, the Buyer's loan is supposed to be finally underwritten -- and the Buyer's earnest money becomes non-refundable.

O-for-2

Except that in practice, that's not how it works today.

Now, skittish lenders can and do reserve the right to revisit the loan at any time up until closing.

They may request additional Comp's to substantiate the value of the collateral (the home being purchased); ask the Buyer for (still) more financial documentation; or tweak (tighten) their underwriting standards.

Or all of the above.

The result?

What was supposed to be a finally underwritten loan suddenly . . . isn't.

All of the foregoing means two things:

One. Buyers and Sellers today, especially when upper bracket properties are involved, should consider drafting custom language to address the Buyer's financial qualifications, and defining when their earnest money becomes non-refundable; and

Two. Sellers shouldn't load up the moving van until they know, for sure, that the Buyer's financing is good.

A "Team" of One

"What You See is What You Get"

I've written previously about real estate teams ("Teaming Up"), and the pro's and con's.

So it was interesting to me, during my most recent listing presentation (they hired me), to hear my now-client express a strong preference not to work with a(nother) real estate team.

Their reason(s)?

On their previous deal, they never seemed to talk to the same person twice, and nobody seemed to know what was going on with their transaction.

One vs. Many

Of course, not all real estate teams are chaotic or unwieldy.

But as someone who operates "solo" (kind of -- see next), I can assure my clients, honestly, that if they hire me . . . they get me.

That means I'm the one who walks them through the Seller disclosures; analyzes the Comp's and helps fine-tune the list price; prepares the marketing materials; instructs the photographer; debriefs other Realtors after showings; hosts the Broker Open and most (if not all) of the Sunday open houses, etc., etc.

In brief, I always know what's going on, and my client(s) will have exactly one point of contact.

Not Really Solo

Of course, it's also the case that, through my association with Edina Realty, I actually have a huge organization of professionals supporting me (sort of like the Sprint network, pictured above).

That includes a superb office manager, Josh Kaplan; an outstanding front desk and OA (Office Administrator); Edina's knowledgeable legal department; great tech support, etc.

And although I don't refer to them as "team members," I have also developed a circle of expert stagers, photographers, and desktop publishers that I regularly work with.

Down Time

So don't I ever take a vacation?

Not often enough, but yes, I do take off an average of 2-3 weeks a year, usually a long weekend at a time.

Who covers for me then?

Like other veteran Realtors, I'll typically "trade" coverage with another colleague for those things -- like doing a showing -- that can't be done remotely.

In return for their backstopping me when I'm out of town, I'll do the same for them.

Virtual Real Estate

But the surprise the last several years is, thanks to technology ("Look Ma! No Hands!"), how many modern real estate tasks can be done remotely ("virtually").

Even when I'm out of town, I'll regularly scan MLS for new listings that meet my (Buyer) clients' criteria, and won't hesitate to email them if something promising pops up (I'm actually not such a fan of searches that automatically email clients directly -- I like to weed out the "chaff" first).

It's also the case that, for something critical like fielding or negotiating an offer, my clients know that I'm never more than a phone call away.

P.S.: it's accepted real estate wisdom that the best way to sell a property is to head for the airport on vacation.

$11,000 per Block?

Putting a Price Tag on

Proximity to Cedar Lake

A client of mine says his engineer son-in-law has done a regression analysis calculating the premium associated with proximity to Minneapolis' Cedar Lake.

His number?

$11,000 per block.

If that's correct, that's a very valuable number to have, because lots of Realtors, appraisers -- and their clients! -- spend a lot of time and money trying to quantify just such variables.

"Ceteris Paribus"

And yet . . . as I discussed in The Art of Doing Comp's ("How Big a Premium for Small Lakefront?"), isolating and quantifying such adjustments is more difficult than it sounds.

That's because it's never the case -- at least outside new, tract developments -- that two homes, identical in every respect but their location, sell at exactly the same time.

To use a fancy term, they flunk the "ceteris paribus" test ("everything else held equal").

So, if the two homes are the same size and style, one's much more updated; if they're equally updated, one's substantially bigger; if they're the same style, size, and condition, they sold two years apart, in different market conditions.

Theory vs. Practice

Which doesn't mean that Realtors and others don't estimate premiums and discounts, for many variables, every day.

It's just that it's more a "gut," judgment call than a hard-and-fast objective number.

P.S.: my number for Cedar Lake proximity? I'd start with 2% per block, but would tweak that depending on which block (some are clearly nicer than others).

I also know that the East part of Fern Hill -- between Monterey and France -- commands a bigger premium than "West" Fern Hill, and that a handful of homes on Glenhurst and Huntington with lakeviews command much bigger premiums.

"A Tale of Two Pole Barns"

"Fat" and "Skinny" Comp's

Due to the lack of good Comp's -- an issue I've raised repeatedly on this blog -- both appraisers and Realtors find themselves digging for more info on the ones that they do have.

So, I've been fielding more calls than usual from appraisers who want to debrief me on the features, floor plan, updates (or not), etc. of a home I've just sold.

I'm sympathetic, and subscribe to the "you gotta give to get" ethic, so -- time permitting -- I try to be cooperative.

Bottom Line: Less Discretion

Which brings me to the conversation I had the other day with an appraiser working on a refinancing loan.

After giving him some details on the home he'd called about, we discussed his specialty: hobby farms in the west suburbs.

One of the typical outbuildings on a hobby farm is a pole barn, a barn that is constructed with support poles that serve as the underlying support structure for the outer walls and roof (impressed? I looked it up).

Suffice to say that there is a great deal of variety in their size, functionality -- and cost; in fact, according to the appraiser, an elaborate pole barn can easily be worth $25k or more than a simple one.

Nevertheless, spooked lenders now doing everything "by the book" have arbitrarily decided that the maximum adjustment for pole barns is $5k-$10k.

The result?

A hobby farm with a deluxe pole barn is less likely to appraise -- and therefore, sell.

How Much Showing Activity?

One Way to Tell

It's a moot point if your (Buyer) client doesn't like the home, but if they do, and certainly if they're mulling an offer, one of the more important pieces of information to glean is, "how much showing activity has there been?"

That's relevant because it tells you how much (if any) competing interest there is.

Mix that in with a thorough analysis of the Comp's, the nearby Actives, and, of course, how much your client likes the home, and you start to have an idea what a good offering price should be.

All of that came to mind yesterday as I wrestled with the front key stuck in the deadbolt of the home I had just finished showing (it wouldn't budge, so I left it there and called the listing broker to alert them).

Assuming it wasn't just me but a truly sticky deadbolt, the answer to the aforementioned question would be, "not much."

Home Pricing: 'the Tilt Factor'

Pinball Wizard . . . or Dunce?

The analogy is lost on anyone under 30 -- too many electronic video games -- but I like to invoke something called "the Tilt Factor" in pricing my clients' homes.

By that, I mean that it's fine to be aggressive, and pick a price at the high range of what the "Comp's" suggest is fair market value.

In pinball parlance, that's equivalent to jiggling the machine to get the pinball to move a scooch to the left or right.

However, if you overshoot that range -- i.e., shake the pinball machine too aggressively -- you "tilt," and the game's over.

The same's true in real estate . . .

Reason for Tougher Negotations

"What's That House Cost?" -- Vol. #42

Want to buy 100 shares of Microsoft?

If the last trade was for $25.43, it's a good bet that you'll have to pay . . . .$25.43 (or maybe $25.42 or $25.44).

Want to buy a nicely updated, four Bedroom Colonial in East Edina?

That'll be . . . . $950,000. Or maybe $875,000. Or perhaps a cool $1 million.

For the same house.

Defining "Market Value"

Why such a broad range?

Because there haven't been that many recent deals to serve as benchmarks (called "Comp's," or Comparable Sold Properties," as they're known in the trade).

With fewer transactions to serve as precedents, Buyers and Sellers have more ground to bridge to reach what everyone agrees is "market value."

"We Don't NEED to Sell"

Seller Motivation (and Lack Thereof)

Does "not needing to sell" make your house worth more?

At least some Sellers seem to think so.

Put it this way:

You seldom hear a Buyer, in the middle of a negotiation, say, "You know, we don't NEED to buy."

Yet Sellers, on the other side of the same negotiation, increasingly can be heard to say, "We don't NEED to sell."

Which begs the question: so why are you?

Real vs. Fake Leverage

What that statement is really about is perceived leverage.

If you don't really need to sell (at least the owners' thinking goes), you can hold out for a higher price.

Maybe so.

But that doesn't change the Comp's, which Realtors and appraisers alike use to establish value.

And therefore, that stance is not likely to raise the Seller's market value.

P.S.: By contrast, extreme Seller motivation can certainly lower it.

P.P.S.: As often as not, "not needing to sell" causes Sellers to set (and hold out for) for an unrealistic price, which leads to undue market time, which leads to . . . an artificially low price.

Chaperoned Showings

"Listing Agent Must be Present for All Showings"

Most listing agents -- myself included -- are usually not thrilled when a client insists that you be there for all first showings.

For one thing, it's an imposition on your time; for another, prospective Buyers and their agents can view it as crimping their schedule and privacy (showings are typically set up as a one hour window; if the listing agent needs to be present, they must commit to a specific time).

However . . . for an upper bracket home with a lot of subtle features, it can be a real advantage for the listing agent to provide a guided tour (then absent themselves so the Buyer and their agent can talk privately).

As I discovered Saturday, it also affords the listing agent the opportunity to tailor their pitch to the specific Buyer -- and can save a lot of time, depending on the Buyer's questions and interests.

Other Pluses

So, I found myself fielding the Buyer's questions about local schools, Comp's and recent price trends, (lack of) plane noise, nearby bike paths and trails, etc. -- questions that their agent, located in the 'burbs, knew nothing about, and which I, as one of the leading Realtors in the area (and a neighbor!) knew in my sleep.

Meeting the Buyer and their agent also afforded me a chance to discuss the other homes on the Buyer's showing list later that day.

It did not exactly hurt my credibility -- or my client's selling chances -- to be able to discuss each of the homes on the list, their pluses and minuses relative to my client's home, the amenities of the surrounding neighborhoods, etc.

Appraisal Air Pocket

Housing Market Circular Reasoning

The reason more upper bracket homes aren't selling . . . is because more upper bracket homes aren't selling.

Huh?

Once a deal is struck, the lender's appraiser seeks to substantiate the value of the collateral -- the home being sold -- by looking to other, similar homes that have sold recently.

The preferred number is three, within the last six months (more recently, if possible).

But what if there aren't three good comp's?

Increasingly, lenders in CYA mode appear to be filling that vacuum with the most conservative assumptions possible -- scuttling more than a few local deals.

The result is . . . . even fewer upper bracket deals.

That's certainly not the whole story with respect to upper bracket housing -- the tiny little recession we're experiencing, elevated unemployment, a weak stock market, etc. are all contributing factors, too.

However, "appraisal issues" are increasingly exacerbating the problem.

Why I Don't Price Other Realtors' Listings

Real Estate's "Heisenberg Uncertainty Principle"

The observer influences the thing observed.

--Heisenberg uncertainty principle

It seems self-explanatory, but as a principle, I don't price other Realtors' listings.

The issue usually comes up when I do a listing presentation -- essentially, a job interview for Realtors.

In the course of interviewing Realtors, homeowners (and prospective Sellers) naturally want to know how you'll market their home; your qualifications; and what their home is worth.

While I always come to listing presentations armed with the latest, nearby market activity (and am happy to offer a ballpark range), I decline to name a specific price until the homeowner commits to using me as their Realtor.

Rationale

There are four reasons why I take that stance.

One. Time.

Carefully pricing a home (vs. haphazardly) takes a great deal of due diligence.

At least for me, the steps include: identifying and analyzing the Comp's (Comparable Sold Properties); learning the history and condition of the client's home (vs. taking the 10 minute tour after first arriving); previewing the Active listings that the client's home will be competing against; identifying any Pending homes similar to the client's home and estimating what their likely Sold price is; and pouring all the foregoing into a CMA, or Comparative Market Analysis, then crunching the related numbers.

All of the foregoing takes . . . time. Done properly and well, lots of time.

As a Realtor, the two things I ultimately have to sell are my time and expertise.

If I spent undue amounts of time working for non-clients, my actual clients will suffer.

That hardly seems fair to them.

And spending the requisite 6-8 hours carefully pricing a home that another Realtor is ultimately going to list isn't fair . . . to me!

So, I don't invest that time . . until I'm hired.

Two. My price for any given home isn't a fixed number.

Rather, it depends not a little bit on the homeowner themselves.

So, do they need/want to sell quickly, or can they be patient waiting for an offer?

Can the home benefit from staging, strategic updating, etc. , and if so, is the client willing and able to do it?

Does the client want to price aggressively -- and take the risk that goes along with that -- or do they want to price more conservatively?

And so on, and so on.

Three. My price may not be the same as another Realtor's (call this phenomenon "Real Estate's Heisenberg Uncertainly Principle").

Whereas homeowners tend to think of their home as having a fixed, objective value, Realtors (and anyone who knows marketing) understand that the actual price is a range -- a fluid range that is influenced by the skill of the professional(s) involved in the sale.

A home that is optimally staged and photographed, then aggressively and expertly marketed by an excellent Realtor at a top-flight Broker is likely to sell for one price; a home where a less-talented and motivated Realtor simply shows up, gets the requisite signatures, then puts a "For Sale" sign in the front lawn, is likely to fetch . . . another price altogether.

Four. "Buying the Listing."

The last reason I won't casually price a home is because I don't want to get caught up in what Realtors call "buying a listing."

Pretty much what it sounds like, the practice consists of appealing to a homeowner's vanity (or ignorance) by throwing out an unrealistically high price for their home, and thereby beating other Realtors' "bids."

With the listing secured, the Realtor then focuses on getting a price reduction -- or several of them -- when the home proves unsaleable at the quoted price.

Bidding wars are great for Sellers, but not so great for Buyers.

That's true for Realtors, too.

As a prospective listing agent in an already tough market, the last thing I want to do is get into a Realtor bidding war to list what is certain to be an overpriced home.

P.S.: For the record, when prospective home Sellers interview both me and another Realtor . . . they hire me the vast majority of the time.

Did the Seller Leave Money on the Table?

Four Ways to Tell

In the history of mankind, no first-time Mother has ever under-dressed their newborn in the winter.

--Manhattan Pediatrician

So which pediatrician uttered the above line?

Mine (and my wife's).

What prompted that comment were the 3 layers of clothing my wife had already put on our newborn son (this was 10 years ago), coupled with her anxiously asking him whether he thought "the baby was dressed warmly enough?"

What's that got to do with real estate?

I've yet to encounter the Homeowner who thought their house sold for too much.

Money Left on the Table

On the contrary, a great deal of Sellers seem to believe that their home sold for too little.

So, are they ever right?

To help answer the question, here are the four, inter-related variables I'd weigh:

One. How long was the property on the market?

It's hard to argue that any home on the market listed for more than a month -- let alone six months or a year -- sold for too little.

In today's networked, 24/7 world, serious Buyers (and their Realtors) often know about properties before they come on the market.

If a home is a good fit for a serious, prospective Buyer, it's a good bet that they'll: a) know about it; and b) have gotten in to take a look.

Assuming, of course, that the home was on the market longer than 48 hours.

Two. Was the home professionally and aggressively marketed?

My checklist of "To Do's" for Sellers literally has 143 items on it.

Things like, "work with professional stager to the get the house ready; "arrange professional photography and meet them at the house"; "proof marketing materials designed by professional desktop publisher"; "do pre-list networking with other Edina agents" (all 1,600 of them); "plug new listing at various Realtor meetings"; "draft and proof (flattering) copy on MLS"; "promote the home's Broker Open."

And so on and so on.

All those things come across loud and clear to prospective Buyers.

And so does their absence.

Three. Who was the Selling agent? (representing the Buyer) -- and was it the same as the Listing Agent?

As I've blogged before, there are two types of dual agency: "broker-level," and "single agent dual agency."

In the first type, both the Buyer and Seller have their own agent -- but they work for the same Broker.

While that legally shifts the agents' duties, in my experience it doesn't alter either the negotiation dynamic or the outcome.

The second kind of dual agency-- where both the Buyer and Seller have the same agent -- is much more problematic.

In my opinion, no agent can serve two masters.

Which is why I will only represent one party in the transaction.

Four. Who was the Listing Agent? (representing the Seller).

Good Realtors have good reputations.

They do repeat business in the same neighborhood(s); are known for being thorough and hard-working; and have an established track record.

Mediocre agents . . . don't. (In fact, you're less and likely to run into mediocre agents, because today's hyper-competitive real estate market has already weeded them out.)

So, to sum up . . . . .

If the same (no-name) agent represented both the Buyer and the Seller; the house sold in 3 days with no prep or marketing campaign to speak of; and no other agents had a chance to get their clients through (or even knew the house was on the market) . . . . yeah, it's just possible that the house sold for too little.

Absent one or more of those factors, I'd be dubious.

P.S.: Note that none of the above factors include, "Sold for less than the Comp's would suggest."

While the Comp's (Comparable Sold Properties) certainly frame the owner's asking price and eventual sale negotiation, showings and actual feedback trump Comp's once a home is actually on the market.

Single Men, Taxi's, and "For Sale" Homes

"Serious" vs. "Non-Serious" Home Sellers

Men are like taxis. The theory is that when a man is ready for, or open to, the possibility of a relationship he turns his taxi light on. If you happen to be the girl that hails the cab (him) while the light is on, you've got a possibility of a decently long ride. But if you grab a cab with the light off, it doesn't really matter what you do, it's just not going to go anywhere.

--Candace Bushnell, "Sex and the City"

Substitute "serious home sellers" for "men" in the quote above, and you have a pretty good shorthand for what's going on in the housing market at any given moment. (And no, this isn't meant to be sexist; arguably the same phenomenon applies to single women.)

Just consider all the contrasts between "Serious" and "Non-Serious" home sellers ("motivated" and "unmotivated," if you prefer):

Serious: Price their home consistently with the Comp's ("Comparable Sold Properties").

Non-Serious: List their home at a price that nets them "what they need" -- or what their neighbor got 3 years ago.

Serious: If feedback and days on market indicate the price is unrealistic, reduces the price 3%-5% at regular intervals.
Non-Serious: Won't budge from the original list price. Or, after an eon of market time, will cancel-and-relist . . . at the same price.

Serious: Ferociously cleans and de-clutters before hitting the market. Donates accumulated stuff to charity to make their home feel as big as possible. Spends a nominal amount on cosmetic updating (painting, floor refinishing, landscaping, etc.) as needed. Brings in a stager -- and takes their advice!

Non-Serious: Thinks their home is perfect as is -- so why do anything?

Serious: Accommodates showing requests whenever possible. Cleans, empties the Kitchen sink, turns on all the lights, etc. ahead of first showings -- and especially second showings!

Non-Serious: Does none of the above. Thinks showings are a good time to water the lawn . . . in their underwear!

Serious: Has the municipal point-of-sale inspection done prior to going on the market, and fixes any items listed.

Non-Serious: Leaves the point-of-sale inspection for if/when there's a Buyer (illegal in some cities).

Serious: Hires a good, full-service Realtor who tells them all of the foregoing, markets early (pre-list) and energetically, negotiates well, knows the neighborhood, etc.

Non-Serious: Hires the cheapest Realtor they can find -- or none.

And on and on.

While serious home sellers don't literally turn on the equivalent of a taxi light -- based on all the things they do (or not) -- they're just as easy for Realtors and prospective Buyers to identify.

When the Comp's Are "Thin" -- Or Non-Existent

"Active's" Loom Larger in Pricing Decisions

Realtors and Appraisers alike rely on "Comp's" -- comparable sold properties -- to estimate fair market value for any given home.

By definition, a Comp is similar in style, condition, and size as the "subject property" (the one you're trying to price); is physically nearby; and has sold in the same market.

Given that interest rates, economic conditions, listing inventory, etc. are constantly in flux, the "same market" typically means going back no further than six months -- and sometimes three, depending on the lender and price point.

"One of a Kind"

So what happens if there aren't any homes that meet those criteria?

That's especially the case for "upper, upper" bracket homes in the Twin Cities (and elsewhere) right now, which: a) are moving very slowly in today's market; and b) by virtue of their price, size, and finishes, tend to be more unique, anyways. (To be fair, the expected market time for expensive homes is always significantly longer than for more modestly-priced homes.)

By necessity, you then have to rely more on what you're competing against.

Typically, that means scrutinizing the dozen or so "Active" listings that prospective Buyers are most likely to consider along with the to-be-priced home -- then picking a price that beats all of them!

The virtue of that approach is that it (also) satisfies prospective Buyers' insistence on getting what they perceive to be a great value -- a requirement at the top of most Buyers' lists today.

Seller's Comp's vs. Buyer's Comp's

"East is East and West is West"

From experience, here are two good rules of real estate negotiation:

Rule #1. Never argue the "comp's" with the other side.

A comp, or comparable sold property, is a similar, nearby home that has sold recently.

To determine fair market value, Realtors and appraisers alike typically look for three good ones, then go through a "compare-and-contrast" process with the subject home to arrive at an adjusted value.

The first person to do the comp's is the listing agent, in the course of preparing a "market," or Comparative Market Analysis, for the homeowner.

Subsequently, the prospective Buyer's agent will also scrutinize the comp's.

Then, once there's a deal and the Inspection Contingency has been removed, so will the appraiser hired by the Buyer's lender (unless it's a cash deal).

In almost nine years of selling real estate, I've yet to encounter a situation where the Buyer's agent, in the course of negotiating an offer, made the case that the Seller's comp's were unrealistically low.

Nor have I seen an instance where the Listing agent, representing the Seller, readily conceded that their comp's were too high ("You got me! What was I thinking!?!").

In fact, the agendas of each side are so manifestly clear and self-serving -- not to mention transparent -- that it's almost always a waste of breath to engage on this.

Rule #2. If you're going to break Rule #1, you'd better make sure that you know the comp's -- or comp, if there's one in particular that looms large -- better than your negotiating counterpart.

I recently had a deal where the other agent was adamant that, "based on the comp's," my Seller's asking price was out of line.

He placed particular significance on one property in particular.

It turns out that the other agent had never been in the home.

Guess who had?

In fact, I'd shown the home to 3(!) clients, and knew every square foot of the house by heart.

So, I knew that the flattering Kitchen shots masked what was easily $100k in needed updating; the floor plan was off; and that the master bath was tiny -- and couldn't be expanded.

The upshot?

The Buyer significantly raised their offer, and ultimately reached agreement with my client.

P.S.: Trial lawyers have a saying, "never ask a witness on cross-examination a question that you don't already know the answer to." Good advice for Realtors "debating" the virtues of various comp's!

Ignoring the Asking Price

Mispriced Properties: Exhibit A

Where: 46xx 1st Ave. South in Minneapolis

What: Bank-owned (foreclosure) 3 BR/2 BA 1917 stucco home with 2,000 square feet.

How (much): asking price -- $72,900; sold price -- $130,000

When: listed -- 4/19/2009; closed --8/18/2009

In my post yesterday (Seller's Motivation: Is it Relevant?"), I made the case that the Seller's motivation (usually) isn't nearly as important as most prospective Buyers think it is.

Often times, neither is the Seller's asking price.

At one extreme, Banks selling foreclosures have been known to price ridiculously low to foment bidding wars (at least, you'd assume it was purposeful; the other alternative is that they truly have no clue. Hmm . . . ). See Exhibit A (above).

At the other extreme, lots of Sellers today have been known to pick asking prices that reflect, shall we say, "wishful thinking."

Either they've been in their home for decades, and are genuinely oblivious to how dated it has become, or, they feel the need to "pad" their asking price, to give themselves "negotiating leverage."

Unfortunately, that's not how it works.

Realtors (and appraisers) know that home prices are set exactly one way: by identifying the 3 best Comp's (similar, nearby homes that have sold the most recently), then doing a detailed compare-and-contrast between the subject home and each of the Comp's to arrive at an adjusted value.

Obamas' Hyde Park Home

Now That's a Tough Comp

Not since Richard M. Nixon lived in a New York City apartment has the market tried to assess the value of immediate proximity to the president in a dense, urban neighborhood.

--Susan Saulny, "Hyde Park House for Sale Comes With a View: The Obamas; The NY Times (9/15/09)

As I've been posting recently, pricing a home -- whether it's done by a Buyer, Seller, or appraiser -- is all about the comp's.

The magic number is three -- as in three, recently closed homes similar in style, size, and condition to what's called the "subject home."

To clients, their home is always "one of a kind"; to them, there's nothing as inviting, beautiful, functional, etc.

Usually, they're wrong about that.

Not this time.

Complicating matters further in the case of the Obamas' neighbor (pictured above): the home is a complete 'fixer (as in fixer upper).

"It's Not a Comp If . . ."

Misconceptions About "Comp's"

Perhaps no other term in real estate seems so straightforward, yet is so commonly misunderstood, as the term, "comparable sold property ("comp" for short).

As Realtors and appraisers use the term, a comp has a very specific -- and narrow -- definition: namely, a recently sold, similar property that can be used to price the "subject" home (i.e., the one you're trying to sell).

In practice, to be a comp, a property must have sold within the last six months (preferably, three); be physically nearby (in a densely populated city, usually within a mile); and be relatively similar in style, size, and condition.

Take away any of the foregoing attributes . . . and it's not a comp.

So, in that spirit, I offer the following:

"It's not a comp if . . .

--It sold 4 years ago (even if it's your next-door neighbor)

--It's more than twice as big as --or less than half the size of -- your home

--It's in dramatically different condition

--The styles are different (rambler vs. 2-story Colonial vs. suburban split-level vs. Tudor, etc.)

--It's the same size and condition, just sold --- but is across town

--It's a bank-owned foreclosure (at least it's not a comp until there are lots of them nearby).

Realtors, feel free to send this to your clients anonymously (you're welcome!).

Broken Deals -- "Traditional" Sales

Picking Up the Pieces After a Fall-Through

Fools rush in where angels fears to tread.
--Alexander Pope

"Sale Fell Through!" "Back on the Market!" Great house!

You don't have to spend much time on MLS these days to see evidence of busted deals.

So what exactly is going on? Do any of these deals represent opportunities for future Buyers? (Note: I address broken foreclosure deals in my previous post; this post addresses "traditional" or non-lender mediated sales.)

As economists like to say, it all depends.

"Active" to "Pending"

The first thing to know about a home that was formerly "Pending" on MLS, and that is once again "Active," is that it most likely does not have to do with inspection issues.

That's because the convention is not to switch a home from "Active" to "Pending" until the Inspection Contingency is removed.

So, if the inspection turned up multiple, material defects that caused the Buyer to walk, the home's MLS status likely never would have been switched from Active to Pending.

The second thing to know is that if the deal fell apart because the inspection was a disaster, the Seller is legally obliged to update their disclosure.

So, if the inspection revealed a failing roof and a cracked foundation, the Seller would have to disclose that information to future Buyers.

In fact, that requirement is why Sellers have a strong incentive to resolve any issues with the Buyer at-hand -- and often do.

Financing Failures

So what does that leave?

In the vast majority of cases: the Buyer's financing.

Realtor convention is to switch a home's status to Pending after the Inspection but before the Buyer's financing is finalized, which can take a couple weeks.

The key step in that process is the appraisal, but the bank also needs time to finish vetting the Buyer's finances.

I like to characterize the gulf between a lender's pre-approval letter and a final underwriting commitment as comparable to the one between dating and getting married -- in other words, it's big.

In a rocky economy, there are lots of prospective Buyers who superficially look good on paper, but have credit blemishes (or worse) that pop up when the bank does its due diligence.

Of course, it's also possible that Buyer's finances were fine, but the home didn't appraise; when that happens, the parties can either re-negotiate the price, or the Buyer can increase their downpayment.

If neither happens . . the deal's off, and the house comes back on the market.

Taking Stock

Does that spell opportunity for other Buyers?

It certainly can, for two reasons: 1) to overcome market skepticism, Sellers frequently have to discount the price; and 2) due to the delay in selling, the owner may now have a time deadline that makes them more motivated.

However, the single biggest question after a busted deal (still) is, "how well-priced is the home given its location, size, and condition?" In turn, that depends on the "comp's."

A home that was overpriced before a sale fell through is not automatically a bargain afterwards.