"Why Didn't it Appraise?"

Multiple Choice Quiz

Test your knowledge of today's real estate market, and answer the following question:

Which of the following are to blame when a home does not appraise pursuant to a Purchase Agreement and mortgage application?

(Note: the home being appraised is called the "subject home"; its peers, which establish value, are individually known as "Comp's," or "Comparable Sold Properties").

A. Nearby foreclosures torpedoed the value of the (non-foreclosure) subject home;
B. The appraiser didn't know the area;
C. The appraiser didn't know various negatives associated with one or more Comp's (dated Kitchen, poor condition, bad floor plan, etc.) that depressed their market value.
D. The appraiser was missing the last, fully executed Counter-Offer or Purchase Agreement Addendum -- and therefore was using a too-high price.

Answer: all of the above.

Of the foregoing, the only circumstance that is entirely avoidable is "D."

However, an attentive, hands-on Realtor can also help avert/mitigate "B." and "C." by being proactive.

P.S.: And yes, some homes fail to appraise these days . . . because the purchase price simply isn't supported by valid Comp's.

I'd put that number at 15% or so -- up from 5% a few years ago.

Spiking the Ball . . . on the 2 Yard Line

Q: When Doesn't "Sold" Mean "Sold?"

Answer: when it means "Pending" (as, when it's in front of a home that's for sale).

Huh?

At least in Minnesota, once the Buyer's Inspection has been removed, the convention is to switch a home's status from "Active" to "Pending" on MLS, and to put a "Sold" rider on top of the "For Sale" sign in front of the home.

That's the case even though the home hasn't closed yet -- and the Buyer's loan most likely hasn't been finally underwritten (or even successfully appraised!).

Of course, that's in addition to any title work still to be done, as well as any other outstanding conditions that the Buyer and Seller may have contractually agreed -- or be subject -- to (repairs, obtaining a municipal inspection certificate, etc.).

Isn't declaring such a home "Sold" like spiking the ball on the 2 yard line?

Explanation/Rationale

It can be.

However, once any Inspection issues have been resolved, the odds of a deal closing go up dramatically; from experience, I'd peg the odds at anywhere from 80% to 98%.

Why the range?

If it's a cash deal and the Buyer is richer than Croesus . . . it's virtually a done deal.

However, especially if the Comp's are thin and the sales price lacks recent, nearby precedent, the risk of an appraisal issue goes up.

Too, if the Buyer works for a company that's been hit by the recession, or is otherwise vulnerable to layoffs, there's the added risk that the Buyer will lose their job before closing (or otherwise suffer a major hit to their "creditworthiness").

Less likely, but still within the realm of possibility, are such things as Buyer health issues, an unexpected job relocation, major damage to the home (fire or weather-related) -- or even a simple change of heart (and mind).

"Pending" vs. "Closed"

So, to repeat, why not put up a sign that says "Pending" rather than "Closed" -- or remove the "For Sale" sign altogether?

My take is that it's a mix of the following reasons:

--Psychologically, putting up "Sold" helps cement the Buyer's commitment (see, "change of heart").

--"Sold" better tells prospective Buyers that the house is spoken for, and not to bother the homeowner.

--Marketing exigencies. Whereas "Pending" sounds equivocal and gray, "Sold" is strong and declarative.

Too, because there is a risk that the house won't close, it's premature to remove the sign.

However, once the risk of not closing is effectively zero, i.e., the Seller has been paid, title has transferred to the new owner, and the "For Sale" is removed . . . there's nothing to attach "Sold" to.

Why Do Sellers Misprice?

Lack of Information & Objectivity

Not all Home Sellers misprice -- or would if their Realtor didn't convince them not to -- but enough do that it begs the question: why?

From my perspective, it's usually a combination of three factors (none of which involve vanity or ego).

One. Lack of information (about the Comp's, or comparable sold properties).

A client of mine last year was adamant that his home was worth more than another on his block that had sold for $40,000 more than I recommended pricing his at.

So I asked him, "Did you see your neighbor's updated Kitchen? The new master bathroom? All the new windows in the back of the house?

Answers: 'no,' 'no,' and 'no' -- he'd never been inside. (Memo to fans of Trulia, Zillow, CyberHomes, etc.: they suffer from the same shortcomings.)

Two. Lack of objectivity.

This one especially comes up with homeowners who haven't moved in a long time.

Anything you look at day after day -- let alone year after year -- gradually becomes . . . invisible.

Once upon a time, when I lived in Manhattan, I had a 35th floor apartment with sweeping views of upper Broadway and the Hudson (at least until a developer put up a new, 50 story building across the street).

Yet after a few months, the only time I really noticed it anymore was when guests would visit and be mesmerized by the view.

Or, after I'd been away for longer than a week and returned, the views once again registered for a few days, before turning back into wallpaper (albeit very attractive wallpaper).

The same phenomenon explains my initial meeting with a client a ways back, as we toured her home.

When we got to the master bedroom, I pointed out a conspicuous stain in the ceiling that I recommended fixing.

"What stain?" was her first, incredulous (and honest) response.

Then a second later: 'Oh, that stain . . .'

(Sidebar: the one exception to becoming inured to one's everyday environment: natural light. At least in my experience, you never get tired of natural light -- or used to its absence.)

Three. Lack of information -- about Buyer tastes, market trends, etc.

Another recent client of mine took umbrage at the (rather deafening) chorus of feedback all zeroing in on the home's dated feel.

The windows, the carpet, the Kitchen counter tops, the color scheme, the home's siding -- and on and on.

The owner had spent good money periodically updating those things and keeping them in good repair, but after 30 years in their home, they simply weren't able to relate to Buyers' comments.

Which leaves it to a Realtor they trust to (gently) tell them -- ideally, before they come on the market.

Today's Sellers: Biting Two Bullets

Two Bullets

Would-be Sellers of upper brackets homes now -- the slowest part of today's housing market -- often have to bite not one but two bullets.

The first is pricing their home consistently with "the comp's": similar, nearby homes that have sold recently.

In fact, better than the comp's, depending on what's currently active nearby.

Bullet #2 is ponying up for anything that's out-of-commission (or close) -- like an aging roof, badly dated flooring or walls, etc.

Sellers can certainly skip tackling any deferred projects -- but then they had better expect to price accordingly.

Often times, the needed discount is $2 or more for every $1 in repairs.

Cushioning the blow of bullet #2, especially for long-time owners: they may need to spend a few thousand on cosmetic updates . . . but it's a good bet they paid virtually nothing for their house, way back when.

For example, I recently worked with long-time owners whose home was "only" worth $800k last year (down from perhaps $1.1 million, ballpark, at the peak), but who paid $75k for it decades ago!

What is a "Cooperative Client?"

How Realtors Grade Clients

Clients may have a select few words for their Realtors, but Realtors also have some favorite words for their clients.

No, not %!%*#!

Rather, how "cooperative" they are.

What do I mean by that?

For Sellers, client cooperation boils down to these three things:

1. Pricing. A cooperative client picks a listing price consistent with what the Comp's suggest is fair market value for their home.

Should no offers emerge after a reasonable amount of market exposure (40 to 120 days, depending on the price bracket), they'll entertain a 3%-5% price reduction, as market conditions and feedback indicate.

2. Staging and Prep. A cooperative client repairs anything that's broken, and, if their city has a point-of-sale inspection, does what's required to pass.

Depending on their home's size and condition, they also spend a reasonable amount -- typically anywhere from $200 to $2,000 -- on staging and cosmetic updates (painting, light fixtures, etc.). Or, they expend the equivalent in "sweat equity."

3. Showing-Ready. Once their home is on the market, a cooperative client keeps their home in impeccable condition, and is accommodating about allowing showings.

In addition to the foregoing, a cooperative (model?) client is someone who refrains from calling after hours, unless there's a major issue (negotiating a deal qualifies); is relatively conversant with technology (the easiest way to shuttle documents around is electronically); and is generally appreciative of your efforts.

And guess what?

A client who does all those things makes it easy for their Realtor to do the best possible job for them!

Picking Comp's: Vertical or Horizontal?

What's it Worth? Who Wants to Know?

Pricing well is one of the most important skills a Realtor brings to the table.

In turn, that depends on knowing which "comp's," or comparable sold properties, to choose.

As defined by both Realtors and appraisers, the comp's are the three homes most similar to the "subject property" -- in terms of style, age, square feet, condition, etc. -- that have sold the most recently.

Once you've identified three homes, step 2 is to go through a "compare-and-contrast" analysis juxtaposing each comp with the subject home, adding or subtracting to adjust for the differences (How much? That's another "experience" judgment).

"Vertical" vs. "Horizontal" Selection

By convention, "recently" used to mean the last six months. However, as underwriting standards have tightened in the wake of the housing bust, some banks now insist on three months.

But what if there aren't three good comp's within the last few months? Or even one comp?

That's where it gets interesting.

Appraisers, working for the lender, will typically stick to the shorter timeline and simply look as far afield as necessary to find three similar homes. Call that "horizontal" selection.

By contrast, a good Realtor who knows the area will opt to choose the comp's "vertically," i.e., stay within the immediate neighborhood, and go back as far as necessary to find good sales precedents.

Guess which approach is more accurate?

Inside Information

The latter, because a Realtor who knows the chronology of local neighborhood sales can "connect the dots" going back as far as necessary.

They'll know which homes sold fast, which sold slow, which sale prices were aberrations -- and why.

Armed with that info, they'll have a feel for momentum (or lack thereof) . . . . and can price accordingly.

By contrast, bank appraisers invariably end up comparing geographic apples to oranges.

In their quest to find timely comp's, they'll jump significant -- but invisible -- neighborhood boundaries that render comparisons much more difficult.

Just in Minneapolis and the west suburbs, I can think of numerous, contiguous neighborhoods where you'd never compare a home in one neighborhood with one in another.

Country Club vs. Morningside

To pick just one example, consider Edina's Country Club and Morningside neighborhoods.

Both wonderful neighborhoods, they each have their own characteristic housing stock, supply and demand -- and per square foot selling prices.

Confusing two, disparate areas often leads to homes not appraising when they should -- or Sellers not pricing their homes appropriately.

Don't Go By Asking Prices

Sold! (For 1/3 of Tax Assessed Value)

What: 3BR/3BA walkout rambler with almost 2,600 FSF

Where: 2625 Quentin Ave. South, in St. Louis Park's Fern Hill neighborhood

How much: originally listed for $226,800 on Aug. 5.

When: closed Nov. 18 (Thursday); just posted on MLS this morning.

"Exhibit A" under the category, "don't go by asking price" would be this Fern Hill rambler.

Originally listed for $226,800 back in August, this foreclosure had a tax assessed value of $387,500. That consisted of $158,700 for the land, and $228,800 for the building.

The bank-owner took two, 5% price cuts, then finally got a deal in late October.

It closed Thursday.

So . . . . drum roll . . . . what did the Buyer pay?

Try $130,000.

No, that's not a typo.

Why So Low?

The short explanation is "supply and demand."

The longer explanation is that the house is a tear-down, due to the worst mold damage I've personally ever seen (I showed the house multiple times).

So, you toss out the building value, and focus exclusively on the land.

As I've blogged previously about valuing tear-downs, the analysis -- based on back testing dozens of Twin Cities deals the last 6-8 years -- is to determine the top of the block, add 20% for well-done, new construction, then divide by 3.5.

In this case, the corresponding formula is $400k x 120% = $480k; $480k divided by 3.5 = $137k.

Bingo! (Take off a little extra because of tight credit for new construction, and a soft market for more expensive homes.)

P.S.: and yes, you need to know the "comp's" -- which I do -- to know that the top of the block is $400k.

"An Inconvenient [Housing Market) Truth"

Framing the Choices

In politics, it's often said that "whoever defines the terms of debate, wins."

The equivalent in real estate appraising would be, "whoever decides the geographic area for choosing the comp's, defines home values."

What does that mean?

One of the challenges choosing and analyzing "comparable sold properties" (comp's) is coming up with three, similar properties nearby that have sold recently. Traditionally, Realtors and bank appraisers look back no more than six months; lately, there is a preference for three months or even less.

Unfortunately, that requirement bumps up against what might be called an "inconvenient housing market truth": there are many, many small neighborhoods in the Twin Cities -- some with as few as 100 homes -- that have their own distinct character and identity -- and not a lot of turnover.

If you want to intelligently price a home in one of these smaller neighborhoods, you have to consult previous neighborhood sales. However, because the neighborhoods are so small, there may not be 3 good comp's. In fact, it's not unusual to have to go back a year or even longer to find a similar, nearby sale.

But then, by definition, the previous sale is no longer a comp.

Comparing (Honey Crisp) Apples to (Cortland) Apples

What then?

You have to go farther afield.

Just to illustrate the challenges, consider the Lion's Park neighborhood in Golden Valley.

Lion's Park is located between 169 on the west, 394 on the south, Hiway 100 on the east, and Hiway 55 on the north. Built mainly in the '50's and '60's (with a sprinkling of recent tear-down's), the neighborhood includes perhaps 100 homes that encompass a surprising range of styles and sizes.

So, if you're trying to price a Lion's Park home, the odds are good you'll have to go outside of Lion's Park to find one or more comp's.

But which direction?

Northern Golden Valley, just to the north across Highway 55, borders Crystal and New Hope and is perhaps 20% less expensive than Lion's Park.

Meanwhile, North Tyrol Hills, just to the east of Lion's Park (across Highway 100) is perhaps 20% more expensive.

My guess is that a majority of the time, when a home doesn't appraise, it's because the appraiser is doing the equivalent of pulling comp's from the equivalent of Northern Golden Valley rather than the counterpart to Tyrol Hills.

"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!).

The Whitney

Where: The Whitney (downtown Minneapolis)

What: 2,400 FSF condo with 3 BR/3BA

How (much): ask price - $1.075M; sold price - $675k

When: listed June 4; closed Aug. 13

Asking prices mean a lot less to Realtors than to the general public.

Case in point: this 2,400 FSF condo at The Whitney, a high-end boutique hotel that was converted to condo's in 2006 (a little bit like Minneapolis' version of The Plaza Hotel in NY, except for The Whitney's history as a 19th-century grain mill).

When a condo that lists for $1.075M in June sells for $675k in July (closed last week), you can surmise that the asking price was inflated and/or the Seller was extremely motivated.

I haven't done the comp's, so I'm not going to wager which explanation applies . .

"Psst! Make Me an Offer!"

Overpriced Homes And
Phantom Negotiating Leverage

Is a too-high asking price negotiating leverage?

Apparently, some Sellers today think that it is.

Instead of pricing their homes within the range suggested by the "comp's" (comparable sold homes), they stake out a price as much as 30% above.

Why? Negotiating leverage (presumed, at least).

When their home doesn't sell, as it invariably doesn't, rather than drop their price, they then instruct their Realtor to quietly put out the word that "the price is negotiable."

Memo to these Sellers: 1) the price is always negotiable, no matter what you're asking; and 2) if you price your home 30% above market, and it then sits for 6 months (or 2 years), it's not exactly a secret that you're overpriced.

Sellers who overprice invariably shoot themselves in the foot, for two reasons.

One. Homes aren't sold in a vacuum.

Rather, they're sold in the context of a peer group -- one that the Seller picks, by dint of their asking price.

If your home is really worth $500k, but you ask $650k, guess what? You'll be compared to $650k homes for sale and found wanting.

What happens next is that the overpriced home sits. And sits.

Which leads to . . . . reason #2:

Time on the market is a home Seller's enemy.

Depending on the price range, a for-sale home starts to look shop-worn anywhere between 3-6 months. After a year, there's actually a certain stigma: 'the Jones home? It's been for sale forever.'

Instead of feeling a sense of urgency and overlooking flaws, prospective Buyers circle at their leisure, zeroing in on the smallest blemishes.

The net result?

To overcome Buyers' skepticism, not only does the overpriced home Seller ultimately drop to market value, it typically overshoots on the low side.

The "It's-All-I-Can-Afford" Offer

Buyer's Budget as Negotiating Leverage

I'm seeing and hearing more instances of Buyers, in the course of negotiating for a home, instruct their Realtors (including, sometimes, me!) to tell the Seller that "that's all I can afford."

Is that a smart tactic?

I discourage it, for three reasons.

One. Sellers tend not to believe such representations.

The only way to really prove that the Buyer's offer is 100% of their budget is to put the Seller in touch with the Buyer's lender, then authorize the lender to share confidential information.

Most Buyers, understandably, would be reluctant to do that.

Instead, the convention has developed for lenders to generate a pre-approval letter verifying that the home in question is within the Buyer's budget.

Two. A home's fair market value and a Buyer's budget aren't related.

Whether Bill Gates or Joe Middle Class is the prospective Buyer, a home's value is still the same: whatever the "comp's" say it is. That is, how much the three most similar, nearby homes fetched, most recently. Period.

That's how Realtors assign value. It's how appraisers determine value. And that's how the Seller's expectations will be framed.

Put it this way: imagine your reaction if the Seller raised their price because you could afford to pay more.

(Can this be a factor in negotiations? You 'betcha. How much do you want to wager that ex-Green Bay quarterback Brett Favre, who's reportedly house-hunting locally, is buying through a corporation or other third party?)

Three. It can spook Sellers.

Signaling that the Buyer is at the very top of their budget can just as easily make a Seller skip the deal as bring them to heel.

That's because any hiccup -- like a jump in interest rates, or the home not appraising -- can derail the sale.

In fact, when I represent Sellers, one of my favorite questions to ask the Buyer's lender (yes, I always call) is how "stretched" or "comfortable" the Buyer is buying the home in question.

Hearing that "it's a close call" would hardly be confidence-inspiring.

Better Tack

Instead of putting a spotlight on the Buyer's finances -- except to establish that they're qualified -- I've found that a better tactic is to focus on value.

Specifically, to make the case that, based on the home's location, features, condition, etc., the Buyer's offer represents fair market value. If not more.

And rattle off all the competing, nearby homes for sale and how they (favorably) compare (assuming that that's true; if not, it can boomerang).

As a general proposition, home sellers usually accept the price they think is the highest they're going to get -- not the highest they believe any particular Buyer can afford to pay.

P.S.: One exception to the foregoing can be when the home's price starts to move out of the range that can be financed with a "conforming" loan (up to $417k). Above that, Buyers need a jumbo loan, which is both much more expensive, and harder to obtain.

Multiple Offers

Is it REALLY in Multiples? How to Tell

With multiple offers making a comeback -- especially bank foreclosures that are "priced to sell" (and then some) -- it once again bears asking: 'how do you know if the property you're interested in is really in multiple offers?'

Herewith are the four ways to tell.

One. When it comes to multiple offers, it's not "location, location, location" -- it's "context, context, context."

The only way Realtors -- or appraisers, for that matter -- have to determine value is by looking at similar, recent sales. Called "comp's" ("comparable sold properties"), they typically are the 3 most recently closed sales of similar properties.

So if you're contemplating buying a 1928 Tudor (3 BR's/2BA; 2,100 FSF) in Minneapolis' Longfellow neighborhood that's asking $249.9k, and the last three sales have been $270k, $300k, and $304k . . . it's certainly plausible.

To know for sure, though, you'd have to have some firsthand knowledge of the other Tudor's.

Did they have the same FSF, bedrooms, baths, etc?

Were they updated?

What were the floor plans?

Were the mechanical's, roof, appliances, etc. all new -- or a mess?

Once you're armed with that information, the likely selling range for any given home usually becomes apparent.

Two. Usually, but not always, multiple offers materialize early in a listing.

For the same reason you don't see too many $100 bills lying around, you don't see too many $125k homes linger on the market at $85k -- even in a Buyer's market with lots of inventory and tighter credit.

So if the home in question has been on the market 3 days, and the listing agent says that there are multiple offers . . . you'd certainly find that a lot more credible than if the corresponding market time was 203 days.

The one exception to that is a home that has suffered serial price reductions over a very protracted listing period, to the point where it is now arguably undervalued (again, based on the comp's).

It's not unheard of for multiple buyers to simultaneously reach that conclusion, and enter into a mini-bidding war causing a "bounce" in the home's selling price.

Three. Who's the agent?

If it's a reputable agent, and they say that there are multiple offers . . . there are. Period. End of story.

Depending on my Seller's schedule and wishes, I'll frequently tell prospective Bidders in a multiple offer situation that "all offers will be presented at my office at 2 p.m. Thursday." If they want to know if there are other bidders or not, all they have to do is show up at my office.

Even when the offers are not presented in person, listing agents lie about multiple offers at their peril.

While listing agents typically cannot divulge anything about competing offers, simply how they field questions can be instructive. When there is another offer, the rebuff's tend to be quick and straightforward; when it's a bluff, there's more hesitation and fumbling.

Too, good listing agents know that Buyer's agents will know the comp's. If the home in question is tens of thousands more than the comp's, it's simply not credible that there would be multiple offers. An agent who says otherwise has no credibility -- on this deal, or future ones.

Four. Wait.

Even if there are multiple offers, it doesn't necessarily mean that any of them are strong offers.

And it's certainly possible that an agent marketing a unique, hard-to-price home might succumb to temptation, and (convincingly) fabricate the existence of another offer.

So how can you know for sure?

If you wait a week and the home is "Pending," they were telling the truth.

If they were lying, you'll know because the listing agent will call your agent to see if you're "still interested," and dangle a big price concession.

$425,000 vs. $424,975

Pricing Psychology & the "Too-Precise" Price

Quick, which home is priced more carefully: the one that's $425,000, or the competitor down the street that's $424,975?

You'd certainly guess the latter . . . and you'd be wrong.

It's simply not possible to price real estate with the exactitude of a pound of hamburger, or a tank of gas; even when the "comp's" (comparable sold properties) are what I like to call exceptionally "tight" (vs. loose), the allowed range is still 2% - 3%, give or take.

Going back to the hypothetical $425k property discussed above, that's translates into a swing of $10k - $15k. Where in that range the ultimate selling price falls depends on a host of situation-specific factors: the Buyer's subjective attachment to the home; how well the home is staged and marketed; the Seller's patience (or lack thereof); micro-trends affecting nearby supply and demand, etc.

So why use an artificially precise number instead of a round number?

Two reasons: 1) it stands out; and 2) it suggests greater precision, which may make Buyers believe the price is more accurate -- and firmer.

My take?

Experienced Realtors see the "too-precise price" for what it is -- a gimmick -- and tend to avoid it (thankfully, I've yet to see the $424,974.23 home!).

P.S.: as I've also previously blogged, sales gimmicks are like cockroaches: you seldom see just one.

"Bruised" Apples-to-Oranges

Lender-Mediated Sales Swallow the Market

[Note: the following dialogue, between local mortgage broker Alex Stenback and me, encapsulates a much bigger debate going on within real estate right now: how much do foreclosures and short sales "pull down" traditional sales?]

"When “lender mediations” are 60% of the market, it’s getting tougher to say “just ignore that other market” when it mostly IS the market."

--Alex Stenback, "Behind the Mortgage" (2/11/09)

While you could certainly make the case that lender-mediated sales are metastasizing -- even "blue chip" communities like Edina now have some foreclosures -- from my (Realtor's) perspective, it still seems that foreclosures have a pretty definite geographic concentration.

Obviously, once foreclosures surround you on a given block, it's pretty hard to overlook them and instead grab a "traditional" sale miles away as a comp (believe it or not, that what the tax assessors do!). But that's still the exception, not the rule, in most areas of the Twin Cities.

Bottom line: lumping foreclosures together with traditional sales is a "bruised apples to oranges" comparison.

Downtown Minneapolis Condo Deal?

Deep Discount

Where: Grant Park Condominiums
What: #2710 (penthouse)
Key Stats: 2,017 sq. ft.; 3BR/3BA
How much: $749,900
Originally Listed: 7/26/2005
Original List Price: $1.195M

Even in a slow market, 3 1/2 years is a long time to wait for a Buyer. And eleven(!) price cuts, totaling almost half a million, is a lot of ground to yield.

What gives?

While I've been in the building, I haven't seen this specific unit, nor have I looked at the "comp's" ("comparable sold properties").

With those caveats, you'd guess the owner is suffering from some combination of a too-high initial asking price (they listed just before the peak in 2006); a weak downtown condo market, with lots of upper bracket competition; and a "B" location on the Southeast corner of downtown (the most expensive condos are concentrated further north, on either side of the Mississippi).

So is the price right now?

Without doing more digging, about all you can confidently say is, "it's getting closer . . ."

Comparing (Bruised) Apples to Oranges

To Help Clear Housing Market,
Peg Tax Value to Last Sale Price

“Believe me, it’s not what it is.”
--New Yorker cartoon

That's what's the woman caught in bed with another man, says to her husband standing in the bedroom doorway.

And that's what government authorities are effectively saying to anyone who buys foreclosed properties at a deep discount. Namely, what you paid isn't fair market value, so therefore it won't serve as the new, tax assessed value used to determine future property taxes.

Bottom line: distressed, beat-up properties currently listed for $50,000 or $100,000 will be taxed as though they are still worth $200,000, $300,000 -- or even more -- regardless of what the Buyer actually pays.

Bruised Apples to Oranges

Certainly, poor condition and tight credit explain why many of these properties are sitting unsold, clogging markets nationally. However, the prospect of being stuck with an annual property tax bill of $6,000 or $8,000 -- compared to principal and interest payments of perhaps $4,000 - $6,000 -- is at least an aggravating factor.

Policymakers nationally increasingly "get" that the key to fixing the sick economy is fixing the housing mess. In turn, the key to helping housing is stemming the wave of new foreclosures --and helping the market absorb existing foreclosures. Short-sighted, reality-suspending tax policies make the latter task more, not less, difficult.

The solution is for the new Congress to pass a law requiring local taxing authorities to use the most recent property sale price as the new, tax-assessed value for every sold property, regardless of legal status (foreclosure, "short sale," etc.)

"Invalid" Sales

Such a policy makes eminent sense, for three reasons:

One. It reflects economic reality.

Foreclosed properties sell at huge discounts from non-foreclosed properties for a good reason (more like 15 or 20). They're typically neglected, uninhabited, hard to inspect (the electricity and water can be shut off), and sold "as is." They also can come with a trail of third-party fees and liens that collectively put a legal cloud on title, and can add significantly to the purchase price.

Who wouldn't expect a significant discount to take on such a challenge?

Two. Comparing the sales price of foreclosed homes to non-foreclosed homes -- as government policy now requires -- is like comparing (very bruised) apples to oranges.

In Minneapolis, foreclosures aren't considered "valid sales" for establishing tax values because they involve "duress." (See, "Sticky Property Taxes"). As a result, tax assessors must look for "traditional" (non-lender mediated) sales to calculate the "real" value of the foreclosed property.

Good luck.

In some markets nationally, 50%-75% of all sales are now lender-mediated. While the overall number is lower in the Twin Cities -- approximately 40% -- it masks a wide variation by neighborhood.

In well-to-do areas such as Edina and Wayzata, the percentage of foreclosures is minuscule -- well under 5%. However, in more "economically challenged" areas, such as Minneapolis' Camden and Phillips' neighborhoods, the percentage of foreclosures now appears to be 80% or higher.

You can't price off of a peer group that doesn't exist.

Three. The government's presumption of "duress" is obsolete.

Traditionally, "fair market value" has been defined as whatever a Buyer and Seller, acting at arm's length and without duress, decide it is. By definition, bank-owned properties are deemed to involve duress.

However, the fallacy is that "duress" and "fair market value" are mutually exclusive.

Foreclosed or not, a property that's been on the market for any length of time and fails to sell is . . . overpriced. The solution is to incrementally reduce the price at regular intervals -- as many times as is necessary -- until it is sufficiently attractive to entice a Buyer (or several -- sometimes deeply discounted properties trigger bidding wars once they truly are attractively priced).

It defies market reality for the government to overrule the foregoing price-setting mechanism and substitute its own, artificial procedure(s).

If government really wants to help the housing market, it should focus on removing obstacles in Buyers' path -- not placing more in their way.