Welcome to the June 1, 2009 edition of carnival of real estate.

A lot of people like reading Top 10 lists and I was intending to do a Top 10 list, however this week I didn’t feel like there were 10 submissions worth sharing with you all so here is my:

Top 9 Post Submissions

#1 – Reminding us that real estate is always local and showing us why
Tallahassee Real Estate presents Killearn Lakes Unit 1 Home Prices Holding posted at Tallahassee Real Estate Blog, saying, “A classic example of why most real estate reports are flawed. They lead you to believe that prices are going up or prices are going down, solely based upon the movement of the average sales price. This article shows why it is possible for the average home price to go up, while real home values are dropping.”

#2 – A variation on the same theme
Danilo Bogdnaovic presents Best Condo Investment Opportunities in Loudoun, Fairfax County posted at Loudoun Foreclosures, saying, “Though this post is hyper-local, the reasoning/logic behind it holds true throughout the US and should be considered by all agents and real estate investors (imho).”

#3 – Multiple offers are everywhere today (at least in my market) and we all need to bone up on our sales skills
Dan Melson presents I’m Competing Against Multiple Offers. How Do I Proceed? posted at Searchlight Crusade.

#4 – I too have many objections to Case-Shiller… check out my association’s data for some examples of better info: 1, 2, 3, 4, 5
Dan Green presents Why The March 2009 Case-Shiller Home Price Index Is Good News For Housing posted at The Mortgage Reports, saying, “To economists, the Case-Shiller Index is helpful. To homeowners, it’s almost worthless.”

#5 – Foreclosures impact many families… each house foreclosed means a family affected
Donna Johnston presents “Mommie are we going to have to move?” posted at Talk Charlotte Real Estate Blog, saying, “This hits me right in my heart.”

#6 – This is a little bit of a “duh” post but hey…
Jim Reppond presents What social networks are agents marketing on? posted at The Seattle Specialist, saying, “Internal Top Producer poll that suggests most agents are now using social media to promote their listings – especially Facebook.”

#7 – MI is deductible but sometimes there are better options
NetBiz presents How To Avoid Paying PMI (Private Mortgage Insurance) posted at Your Finish Rich Plan, saying, “List of ways you can void paying for PMI, thus lowering your monthly mortgage payments”

#8 – Green building is increasing in my market, how about yours?
Mark Donovan presents Definition Green Building Product posted at HomeAdditionPlus, saying, “Green home building is a phrase that is often overused and misunderstood. In this article Mark Donovan discusses the process of assessing whether or not a green home building product is truly green for your particular green custom home building project.”

#9 – There’s a sucker refinanced every minute…
nickel presents Beware the “No-Cost” Mortgage Refinance posted at fivecentnickel.com.

That concludes this edition. Submit your blog article to the next edition of carnival of real estate using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

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KARE-11 News provide two chances for worried homeowners to seek help this week.

This week, homeowners will have two opportunities to have their questions answered from the comfort and convenience of their home. On Tuesday, the Minnesota Home Ownership Center is offering the first of its 2009 series of telephone seminars. The following evening, KARE-11 will feature a phone bank of housing counselors during its 10pm newscast.

Telephone seminar offers homeowners chance to ask questions, find out what to do if worried about mortgage
Telephone seminars provide convenient, private access point to information for homeowners who are worried about their mortgage and are just beginning to ask questions about their situation as well as those facing foreclosure. The telephone seminar allows people to participate anonymously from the privacy of their home, work or car. The seminar format is similar to a radio call-in show, including informational segments and questions from callers.

The telephone seminar will take place on:
Tuesday, February 10 from 7:00 to 8:00 pm.
Call in number: (888) 886-6603

Those interested in participating can call in anytime between 7:00 and 8:00 pm.

Housing counselors available during KARE-11 news
On Wednesday, February 11, housing counselors will be taking calls during the 10 pm newscast of KARE-11. Phone lines will be open during the entire broadcast. The phone number will be announced throughout the newscast, which will also feature a segment about a homeowner who successfully averted foreclosure by working with one of the Minnesota Home Ownership Center’s counseling agencies.

For more information about the telephone seminar or KARE-11 segment, call (651) 659-9336 or visit www.hocmn.org.

http://hennepinmn.granicus.com/MediaPlayer.php?publish_id=12

If you have interest, give me a call: 612-251-5599

A phenomenon that has also been picking up in the last few months is the usage of “not a foreclosure,” “not a short sale” and others. It seems that many agents and/or their sellers have come to feel that it is important to note that their properties that are not in a distressed sales situation. In a market where many foreclosures are in horrible condition and a short sale can take 2 weeks to 4 months to negotiate (and only maybe successfully) I would agree that in many cases it is good to distance your property from that market if there’s any chance of misperception. In this quarter’s report we’ve made sure to exclude properties that are listed with those terms.

Take a look at the report!

We’re far from through this crisis, but it seems like every few weeks there is a new data point that shows we’re finding fundamental levels and once we know where are boundaries are, I believe we’ll all feel more comfortable with the future of the housing markt.

The foreclosure process in Minnesota is a long one… often consuming an entire year from when the borrower first misses a payment until the time that the bank assumes control of the home. The Minnesota Home Ownership Center has put together a great flyer on the process and an average timeline.

Right now the Minnesota Legislature is considering a bill to “defer” the foreclosure process for up to an additional year if the borrower of an owner-occupied home makes partial payments (65% of principal and interest amount due). If this bill is signed by Governor Pawlenty, Minnesota could potentially have a 24 month disposition window for some foreclosures.

Problem

A lot can happen to a home in the 12 months from the date the borrower stops making payments. In many cases, the homes fall into disrepair as the borrower knows that any investment of time or money on the property will ultimately be lost when the bank assumes possession. Property taxes and municipal bills are also often neglected… I have seen delinquent water & sewer bills for a foreclosed property above $1000 and delinquent property taxes above $5000. These are all bills that will have to be assumed/paid for by the mortgage company. Also, often times there is a significant amount of trash/debris left by the borrower… it is not uncommon to see a large dumpster in front of these properties full to the brim. Add to all of that the year of non-payment of the loan and the legal expenses to the lender to complete the foreclosure process and it is likely that a lender already has a $10,000 – $20,000+ loss at the time they repossess it.

In Minnesota, we have 5 months of average low temperatures below freezing. If a home in foreclosure is vacated during these months, often the utilities are shut off before the bank secures the property and the home’s plumbing ends up freezing and pipes burst. In good circumstances the water was shut off at the meter or the street (sometimes done by the city from non-payment of the water bill) so that only the pipes need to be repaired, which could cost as little as a few hundred dollars or climb to several thousand, depending on the location and extent of pipe damage. In bad circumstances the water can literally fill the house and cause near complete destruction of the interior of the homes, which then become great incubators for mold when they thaw in the spring. In a house profiled by the Star Tribune, one house once worth nearly $700,000 was resold at auction for only $280,000… a loss of over $400,000… about 60% of the value of the home.

Once the bank has possession of the property, the previous owner has vacated, and any debris has been removed from the property, the bank can go about listing the home for sale. Based on a sample of homes sold in Plymouth and Maple Grove in the last 10 months, when the bank resells the property they will lose 23.4% from the value at the previous sale. All told, banks lose $10’s of thousands of dollars on the average property… and on some, $100’s of thousands!

Current Actions

While the banks are already overloaded with the huge numbers of foreclosures they have been taking on and are even more buried in their short-sale departments, where responses to offers can take months, the more proactive a bank can be with their defaulted borrowers, the more likely it is that they can recover a larger share of their investment.

Regulatory and industry efforts to create work-out agreements between lenders and borrowers has met limited success and while without these programs foreclosures would be higher, the number of foreclosures today and in the near future are still substantial.

The mortgage lenders are trying to ramp-up staffing for their short sale and foreclosure departments, but these efforts are not proactive, but rather reactive.

While it is in the banks’ best interests to work with their borrowers to modify the loan terms and keep the borrower in the home, there are many circumstances where no reasonable workout can be made. Instead of the banks letting these homes go through the foreclosure process, they should attempt to work with the borrower to get the home sold directly from the borrower to a new buyer, with the bank accepting a sales price that only returns a portion of what they lent back to them, which is called a “short sale.”

The approval of a short sale is a long and difficult process that can take a lender 60-90 days to approve once an offer has been submitted. The largest problem with short sales is that many buyers simply do not have the time nor the patience to wait 2-3 months for a response. Further, the process is not the most appealing for sellers either, since they receive no monetary gain from the sale, many borrowers see little value in the enterprise. These short sales are seller-initiated and more than 1/2 of the listings never close.

A New Way to Handle Foreclosures

Lenders can be more proactive with their defaulted borrowers by initiating a short sale process when the probability of foreclosure is high and the likelihood that a lender-negotiated loan modification that will allow the borrower to become current on their mortgage is low.

Based upon my analysis of sales in Maple Grove and Plymouth in the last 10 months, bank owned properties on average sold for 23.4% less than their previous sale but short sale properties sold for only 16.4% less than their previous sale. Taking into account many of the other costs I mentioned earlier in this article, the savings to lenders could easily be in the 10’s of thousands of dollars vs. letting the home go through the standard foreclosure process.

Here’s the overview of the concept:

• For loans in default where the borrow and lender are unable to provide a viable loan modification program, the lender refers the loan to their short sale department.
• The short sale department immediately initiates the approval process for a short sale, including reviewing the borrower’s financials (which they have updated copies due to the failed loan modification program), get BPO’s (Broker Price Opinions) of the property, and send a letter to the borrower detailing this new option.
• The borrower is presented the option to basically do nothing and let the home eventually go through foreclosure or work with the lender to get the home sold via a short sale.
• If the home is successfully sold via a short sale and the foreclosure process is averted, the lender would offer the borrower monetary compensation for their participation and their assurance to maintain the property and leave it in good condition when they vacate.
• If the borrower agrees to the terms, the lender sends out one of their pre-approved real estate agents for a more in-depth valuation, lists the home for sale and actively markets the property.
• There is no cost to the in-default borrower for participation in the program… all costs are borne by the lender.
• When an offer comes in, review and negotiation of the offer can occur quickly since the lender has been working on the file for some time already and can better rely on the advice of the listing agent as it is someone whom they have an existing relationship with and knows their processes.
• The home is sold directly from the in-default borrower to the buyer, giving the defaulted borrower some money to walk away and the lender with substantially fewer expenses, return of more of the original investment, and substantially less risk of damage to the property in the meantime.

Caveats

To discuss a new way to handle foreclosures is not helpful if it ignores the realities in the market. Here are the biggest hurdles (as I see them) that could make such a plan difficult to implement:

• Banks can’t sell real estate
• 80/20 loans where the 20% 2nd lien is not held by the same bank… much harder to coordinate but quite often the 2nd lien holder gets NOTHING from a foreclosure so it is in their best interests to cooperate.
• Mortgage insurance companies that don’t want to get with the program
• Investors/CDOs/etc that add so much complexity and/or bureaucracy that makes it a logistical nightmare
• Already overburdened Short Sale Departments that simply cannot handle more files
• Simple inertia: with so much of this problem centered in large banks, it is likely that only smaller, more nimble banks could
• As Minnesota has one of the longest (if not the longest) timeframes from default to end of redemption, banks may not understand the true consequences of a 12 month process.
• No one to champion the cause. Someone would have to step up and try this as a “guinea pig” before it is likely any other banks would adopt it.

Conclusion

Until these properties cycle through the system and are resold to new buyers they cast a negative effect on neighborhoods, other homes for sale, and other foreclosures too. Waiting for defaulted borrowers to complete the foreclosure cycle when it is all but a sure-thing earlier on in the process is not the best way to protect the investment but rather employing a proactive approach is something can benefit all parties involved and the housing market in general.

Since many times the eventual response from the bank is a no or “you need to bring your offer up x%” or the buyer gets outbid by a later offer, these properties could be tying up significant numbers of buyers who would otherwise be purchasing (and closing!) on another property.  This weekend I was told there were 4 offers on a short sale I was showing to my buyer.  That means 4 houses with ready, willing and able sellers (”traditional sellers”) are stuck waiting for the bank to reject 3 or all 4 offers sometime in the next 30 – 75 days before they’ll get their chance at those buyers.

Traditional sellers have not been listing homes on the MLS nearly as much this year as they did last year and new construction has backed off as well.  Once we eliminate many of these foreclosures from the market and we see fewer of them come on the market, then we are likely to see a draw down in active listings.

While falling inventory for sale isn’t a sign that our market has hit bottom, it is a sign that the market is closer to finding an equilibrium.

Nerd & Model:

Biker & Mom:

Grandma & HipHop:

Hunter & Yoga Gal:

Nerd & Model Outtake 1:

Nerd & Model Outtake 2:

My esteemed colleague believes that since foreclosures and short sales are sold under “distressed” situations, they are not good comparables for other homes for sale.  My counter is that many foreclosures and short sale properties are not in bad condition and so they should sell at a fair market price regardless of their “distressed” situation.

When it comes down to it, foreclosure and short sale listings most often do sell at a discount to regular listings and should have that taken into consideration, but even in a slow market houses priced appropriately are selling quickly, so those are market prices.

What we do find is a substantial disparity on how much of an impact those foreclosures have on the houses around them.  In areas with low numbers of foreclosure and short sale properties, we find that those properties have little effect on the market as a whole.  Where there are a high number of these properties in a single area, we find the the impact is more like an exponential impact: the higher the number, the more substantial the impact each additional listing has.

There are many, many things that my association does well but this is a prime example of a ridiculous message at a horrible time.  I don’t know if there is a single consumer out there today that expects that a house they buy today will double in the next 10 years… and I think most understand that the housing market is not going to move higher for several years.

This ad simply promotes the misconception that REALTORS do not understand what is actually happening in the real estate market today, or that we simply will not accept it.  When sales are down 30%+ from two years ago (and consequently commissions) and we’re seeing more empty desks and less people in the office, I can assure you that we as agents understand that this is a different market with different needs.

Instead of trying to sell promises of sunshine in the middle of a hurricane, the National Association of REALTORS would be much better off to admit that this market isn’t perfect for everyone, but that there are good opportunities out there for certain people in certain situations.

NAR: Please either promote a more realistic message or shut up entirely… I don’t need the kind of help you’re giving me right now.

Based upon MAAR’s Top 100 report for Minneapolis for December 2007, I was able to construct the following chart of average sales prices in Minneapolis communities:

I wish this chart was wrong, I wish it didn’t show such a disparity amongst neighborhoods, and I wish I didn’t have to talk about it.  Alas, not talking about it will not solve the problem and this is an issue I simply could not be silent on any longer.

I have been working on some figures showing the number of homes for sale in these communities that are either in a short sale or foreclosure situation but the data isn’t complete yet and I want to make sure it’s right before I release it.  What I can tell you though is that these communities have been hit hard by the rise in short sales and foreclosures, as can be seen by anybody showing houses in these neighborhoods.

While there are still many homes for sale that are owner-occupied and in great condition, the sheer number of distressed properties for sale have a hugely negative effect on the market for the following reasons:

1. Competition – Simply having so many homes for sale increases buyer’s options, which puts pricing pressure on sellers.
2. Impression – Some homes in a short sale situation and a majority of bank owned properties have been neglected or even boarded up… having a few in a neighborhood brings down the perceived character of the neighborhood.
3. Comparables – Eventually these distressed properties sell and then become comparables for appraisers and future buyers.  Though the condition may be terrible, that isn’t readily apparent in most MLS reports and therefore the appraiser or buyer may believe the home was in better condition that it actually was, thus pulling down the value of homes it is compared against.

As we are still in the middle of the subprime and ARM mortgage fallout, the high inventory and pricing pressure in theses neighborhoods is not likely to moderate for quite some time, which could lead to further price erosion this year.

While this is terrible news for the current homeowners in these neighborhoods, there is supposed to be a “silver lining” to this market downturn: housing affordability in these neighborhoods has headed substantially higher in the last year to the point that many people who could not afford to buy a home years ago can get into a home today.

I just recently closed on a deal with a 1st time buyer who purchased a 3 bedroom, 1 bathroom home with 1 car attached garage just a few blocks off the Parkway in North Minneapolis.  This home had quite a few cosmetic issues to fix but had a new furnace and newer roof and some great built-ins and woodwork.  Her total payment is under what she was paying in rent and her home has a lot more space for her family!

While she was successful, it was a big struggle to get her into the home, mainly because of the catch-22 on the only loan we were able to get for her:

• Like most 1st time buyers, she had little cash upfront.
• 100% financing is almost completely gone, so the next best thing is FHA financing, with a 3% downpayment requirement and upfront Mortgage Insurance Premium.
• This buyer was able to secure some downpayment assistance money and we had the seller pay the closing costs, so her total out of pocket cash to close was approximately $1000.
• To meet FHA guidelines, the home had to be livable at closing.  This means the plumbing, electrical and heating all had to be in working condition and operating for the appraiser’s inspection.
• Like a large number of homes that are bank-owned, the utilities were off when we saw it, but we were able to get the seller(bank) to agree to dewinterize and turn on the heating and water.
• There were items that needed repairs to get it to pass the FHA appraisal and most banks do not permit a buyer to complete any work on the property prior to close, but we were able to secure permission from the listing broker to make minor repairs.
• When the water was turned on we found out that that the water heater was broken and we had to have a plumber install a new one, which was an unexpected expense.
• There was exterior paint on the foundation that was peeling (an FHA issue) but since it was too cold to fix it the money had to be set aside at closing for the repairs.

While this buyer was able to get into this home, most other first time buyers will not be as lucky.  As I said above, most banks will not let anyone do anything to repair the home prior to closing and so if the home is out of FHA compliance for almost anything, the buyer will not be able to purchase that home.  Homes that are in a short-sale position are typically in better condition and sellers would work with a buyer on repairs but if it is anything costly no one will have any money to fix it!

The other issue is the 3% downpayment… many buyers simply do not have that saved, but are more than capable of making the monthly payments.  There are some downpayment assistance programs available but they are a small share of the total market and many loan officers are either unaware of them or in the case of government-sponsored programs, are not approved to use them.  This will put many of the rest of the homes that are in good condition still out of reach.

If a 1st time buyer does have cash, they can go with a Conventional loan & eliminate most of the lender required repairs but most of those loans need a minimum of 5% down payment and if the appraiser or Fannie Mae or Freddie Mac describe the neighborhood as a “declining market,” then the down payment requirement would jump from 5% to 10% for most and the zero down payment loans would go to 5%.

What this all means is that only a limited number of 1st time buyers will be able to take advantage of this “silver lining.”  The rest of this inventory will need to be acquired by buyers who have significant cash: typically rehabbers and landlords.  Rehabbers are likely to remain on the sidelines for a while longer simply because the fundamentals of the market in these areas are still softening and that makes it risky to go in and try to fix it up and sell it for a profit.

That really leaves us with landlords.  As with my buyer, these landlords can come in and buy these homes for less than their rental value and make great cash flow off them.  While that will mean the neglected exteriors of many of these houses will likely get some attention, it could take largely owner-occupied neighborhoods to largely rental neighborhoods and I believe that most people would agree that strong neighborhoods are those that have a good balance between owner-occupied and rental.

This situation needs immediate attention by the community.  In the best of circumstances, a public-private partnership would be formed to help assist more 1st time buyers in acquiring these affordable homes and try to help keep these communities occupied and maintain the balance between owner-occupied and rental.  This assistance could be in the form of additional downpayment assistance or nonprofit rehabbers turning around and selling it to eligible buyers.  Either way this takes money that doesn’t appear to be just sitting around, so this will take a considerable effort to achieve.

What it Is
Earnest Money is effectively a deposit by the Buyer that is offered at the time of the offer. 

How Much
Earnest Money is often 1% of the sales price, but can be significantly more or less depending on the situation.  A quick closing may need less cash, a longer closing more.  This is also a great way to show strength in a low offer as it shows a strong financial position and confidence in the transaction.

Where it Goes
Upon acceptance of the offer, the money is deposited into the listing broker’s trust account where it is kept until closing or until cancellation of the Purchase Agreement.  At closing, the money is credited back to the Buyer on the HUD-1 Settlement Statement.

It’s Purpose
Earnest Money is used to assure the Seller that the Buyer is serious about consumating the transaction and gives them consideration in the event that the Buyer does not complete the transaction, assuming that they did not cancel for reasons permitted in the contract.

How a Buyer can Lose it
If a Buyer cancels the offer due to problems from their inspection or from failure to secure financing, they almost always have their Earnest Money returned.  In condos and townhomes, a Buyer has 10 days from the date they received the association documents to review them and cancel the offer and get their money back if they desire.  If a Buyer gets cold feet and wants to cancel well after completion of an inspection, they may lose their Earnest Money.

Below you will find slides from the Minneapolis Area Association of REALTORS December 2007 Housing Supply Outlook.

When you look at the numbers, the largest increase in inventory is at the lowest end of the pricing segment.  We see that in just 12 months we’ve over doubled the number of homes for sale under $120,000.  Even $120,000-$150,000 saw a 56% increase and $150,000-$190,000 saw a 24% increase.  When you hit $190,000-$250,000, inventory is only up 2.5% and from $250,000-$1,000,000 inventory has actually shrunk!  The 10.5% increase in $1,000,000+ homes is such a small number of units (74) that statistically I don’t think its too significant to the market as a whole.

This is a huge contrast!  The month of supply has also increased, but not nearly as dramatically, as seen below:

If you look closely at what’s happening in the above charts, you’ll find another trend that’s shown in this chart:

Sales in the last 12 months have grown strongly on the very low end of the market (under $150,000) and have fallen at all higher price points.  Metro-wide, sales are down 16%+ so any increase in sales shows a segment clearly bucking the trend.

What does all this mean?  Though the subprime market is supposed to have hurt the 1st-time buyer market, the sales from 2007 show that buyers in this range are more active than they were in 2006.  Does this mean the 1st time buyer is alive and well???  I’d love to hear comments from the peanut gallery.

One thing I’d love to see is a distribution of homes in foreclosure on this price graph… it would be very interesting to see which price points have the highest foreclosures… are you reading this Jeff Allen?

While this sounds like negative news, pricing is all relative.  The only people who suffer in a falling real estate market are the downsizing & downpricing homeowners.  For those who bought in the last few years that are trying to sell today will see red ink on the sell side but will see savings on the purchase of their new home.  Most of all, first time buyers and move-up buyers are definitely winning in this market.

In the Twin Cities, as in many other large metro areas nationwide, we have seen a sharp increase in foreclosures over the last year.  This has been a boon to the business of agents that work with the banks carrying this inventory.  Unfortunately, some of these agents are either too busy or feel they are getting paid too little to take the effort to snap interior photos of the house and also often do not measure room dimensions.  Sometimes the house’s interior is in bad condition, sometimes it is in remarkably good condition.  Either way, consumers want to see layout and general condition before they make the trek out to see the home.

When we have record levels of inventory on the market and many investors waiting on the sidelines, the consumer looking for a home for owner-occupied use is still the best buyer for most homes.  Since these consumers have so many choices, they narrow down their options using the photos and other MLS information provided online.  Fewer buyers seeing the home means less potential to sell the home quickly and at a good price.

Until banks wake up and demand the agents selling their inventory to do more to market the home, they will find that they are not receiving the full benefits of the MLS and are missing many potential buyers.

This is a favorable trend for our market and shows that builders continue to scale back their building from the record levels of a few years ago.  While the new construction market is still weak, this dramatic reduction in new construction will help reduce inventory over the long run and sets the stage for a recovery in the future.

In this slowing market, where inventory is at record levels, Buyers have almost too many choices to make and Sellers have so much competition for each of those buyers, make the same choice that nearly 1 in 5 customers in the Twin Cities make, work with an Edina Realty agent.  Since 1955, Edina Realty has helped Buyers and Sellers through both good and bad markets.

Edina Realty – Now, more than ever.

Aaron Dickinson + Edina Realty = Even Better! 

While this may sound good to sellers, it isn’t.  Inventory is falling but this time of year buyer demand falls faster than your competition.  What this means for buyers is that there is less and less choice this time of year but the homeowners that are on the market may be more willing to negotiate with you.

For the period of January – August 2007, there have been 28,739 closed sales, down 14.9% over last year and down 27% over two years ago.

It’s a slowing market… which is great for 1st time buyers and move-up buyers but not great for downsizing households.  Houses can sell quickly though… just sold one of my listings in 3 days!

On Monday August 27th a listing east of Lake Harriet came on the market for $470,000.  On Tuesday afternoon my clients and I went to see the house.  In the less than 36 hours it had been on the market there were a total of 8 business cards left in the house.  When we arrived there was another agent showing it and while we were there another group came through as well.  I call the agent back that evening to let him know we have interest and he informs me that the house sold that afternoon before we even showed the house!  This home was in top-notch condition in an in-demand neighborhood and was priced to drive significant numbers of buyers through the home… it worked!

Morals of the story:
1. No matter how bad it may be, it isn’t as bad of a market in most areas as people think.
2. A house with the right price, right condition, and right location still sells quickly.
3. Buyers need to be ready to jump on a property if the right one comes along…

It is worthwhile to check in with the buyer’s loan officer every week or two till closing to verify that there’s still money there when you close!

Morals of the story:

• Always get inspections!  I’ve seen how many houses and still missed something big!
• If you’ve got something wrong (or had something wrong) in your house, disclose it!

The homes I had been looking at were primarily ramblers (or ranch, or one story, depending on your area).  Actually, I had a pretty detailed set of criteria:

• One story
• 3/4 master bath or better (full highly preferred)
• Big master bedroom (15 x 12 minimum)
• 1980’s and newer
• 1500+ sq ft on the main floor (bigger room sizes)
• 4+ bedrooms (for roommates, office, guest bedroom)
• Walkout basement
• Big 2 car garage
• .4 acre lot or bigger
• Privacy off back yard
• Inside the 94/694/100/394/494 NW quadrant
• Under $375k

Needless to say I didn’t find much for sale!

What I’ve always hated about a traditional two story home (I call it a center stair two story) is the formal living room.  See, I don’t have a piano, don’t read books (Google is my library), and don’t know why you would sit in a room without a TV/DVD/stereo/computer/etc. so I see it as space that I have to fill with nice looking crap that won’t get used!  I LOVE modified two story homes and those with stairs on one side of the house or the other because it eliminates that room but keeps all the other goodies that a two story offers:

• Separation of bedrooms from living areas
• Big master suites
• Most/all bedrooms on one level
• Bigger room sizes, since foundation size isn’t the issue
• Dramatic curb appeal (when done right!)

Due to the area I was looking, there aren’t really any two story homes with the floorplan I liked, so consequently I was looking at ramblers.  You have to get pretty big on the foundation size for ramblers before you get those bigger rooms and layout.  So, I made an offer on one in a short sale and several months later found out that we were $40,000 off in price and they didn’t want to budge.  So, bye-bye offer!

I went around and looked at some other ramblers, but none of them really caught my eye.  I was very disappointed and had decided that things were not going to work out right now when one of my coworkers suggested a property she had seen.  She said: “Aaron, I know it is priced higher than you wanted to go and it’s a two story, but it is a really nice house and you should take a look at it.”

I got the address, pulled it up online and decided to take a look.  Long story short, she was right… it was a great house!  Went back with another coworker who thought it was solid too, had him write an offer (more on that in a future post) and some back-and-forth with the seller and now I’ve got a new home!

I’m still doing inspections and whatnot so I don’t want to get into details but needless to say I have a lot of things I’d like to tell you.  Stay tuned for updates!

This was a quote from one of my buyers today… and he’s right on the money.  My buyer came in from Germany (the country not the town), flying 1/2 way around the world to look at houses for 5 days.  We had already narrowed down a list of houses to see before he came and quickly found one that met his needs.  Unfortunately the inspection went poorly and we had to walk away.

When we walked away that only left us with 1/2 of a day to find another home.  We requested 4 short notice showings (showings within 2 hours) and were only approved for 1!  Two said they needed 24 hours notice (though no mention of that was listed on the MLS) and the third never answered any of the requests for the showing.  When it was all said and done, my buyer and I had to concede that we were not going to find something for him before he had to leave.

When we were parting ways he gave me that line and it made us both think how crazy it is to be a seller trying to sell a home in this more competitive and slower market when you won’t let a ready, willing, eager and able buyer into see your home!  Something tells me they won’t see a SOLD sign anytime soon.

Moral of the story: You can’t always say “yes” to all showings, but you better make the best effort to say it to every showing you can!

If you are a buyer looking at houses online, what is your first impression about a home for sale in June that still has snow in the main photo?  My guess is that it’s not a good impression… feel free to leave your specific thoughts below.

Market shift: What is the culprit?
by Jeff Allen, MAAR staff

As the Twin Cities residential real estate market enters the busy spring season, it’s becoming apparent that buyer activity will not rebound from its post-boom recess as quickly as many of us had projected and nearly everyone had hoped.

No one should assume that a return to boom-level activity will be quick and easy. After all, we’re fresh on the heels of several consecutive years of unmitigated market expansion. But indicators of buyer demand have begun to noticeably decline again after a brief relative uptick this past winter, with newly signed purchase agreements (pending sales) in March 2007 falling 18.9 percent behind March of last year, and weekly April sales figures reflecting the same decline.

What is the culprit for this sluggish buyer showing? Let’s start by defining what the culprit is not.

Not affordability. After reaching a decades-low point in the middle of 2006, the affordability of our region’s homes has made dramatic improvements due to stubbornly low interest rates and slight declines in home prices. Our market, like the rest of the country, does face some remaining price-to-income disparity issues and will into the foreseeable future. But the simple truth is that homes in the Twin Cities have not been this affordable in two years.

Not interest rates. The popular media has been quick to highlight increases in interest rates, but they are slower on the draw when rates are on the decline. The cost of borrowing money to buy a home remains low—holding steady at 6.1 percent in April.

Not a lack of choice. At the end of March, there were 19,776 single-family detached homes, 5,703 townhouses, 3,281 condos and 540 twin homes on the market for buyers to choose from. While the growth of inventory appears to be slowing as builders and consumers adapt to a changed demand landscape, it’s still setting monthly records.

Those looking for a simple answer to the question of why buyers remain on the sidelines despite an environment that sits so firmly in their favor should look elsewhere. There is no silver bullet, no single or definitive cause. There are many interdependent factors at work. But two such factors are having the largest effects upon our discernibly muted spring home sales season, and likely will into at least the summer.

Consumer confidence. The public’s perception of the housing market is anything but certain right now. Housing is on the tip of everyone’s tongues, but the conversations aren’t usually positive. With overwrought analysis in the popular media, it’s hard to blame them. While affordability is improving and choice is excellent, housing market psychology is immersed in a contrary perspective for now due to a barrage of stories on bursting bubbles, foreclosures, mortgage fraud and subprime lending.

A return to tighter lending standards. New uncertainties in the lending industry brought upon by excessive exuberance in the subprime mortgage market have created a renewed sense of caution to the mortgage community and a new round of hyperactive government legislation. “Riskier” loan applicants are facing a tougher road to financing their home purchases. The net results are a decline in qualified buyers and undue caution from those who are qualified.

It is important to keep perspective and recognize the diamond in the rough. Much like declining home prices leading to improved affordability, a market-wide recalibration period will cause some uncomfortable months ahead but will ultimately benefit our market in the future as consumers, lenders and REALTORS® have their expectations realigned.

Time will tell how prolonged the correctional pause will be, but regardless, be assured that it will not be as severe as market declines seen in decades past that were fueled by recession. The long-term health of the Twin Cities housing market is being strengthened as we speak by the current market experience that some find disconcerting.

• You have to be the best price and best condition.
• Talk to your agent.  If you’ve got questions or concerns, ask them!
• If you’re not getting any showings, check your marketing, check your competition, check your photos, then drop your price.
• Agents can’t make your home sell if you’re overpriced… price is still the #1 determination on saleability.
• Market times are averaging 80-90 days right now… if you’re at that you need to sit down and go over things like you did before you listed.
• If you want to talk to other Realtors that’s fine, but you cannot sign a new listing agreement until your current one is cancelled or expired.  Post-dating the contract doesn’t make a difference… it cannot be signed at all until you are clear of your current contract.  This is a state rule.
• Agents cannot openly solicit you for a listing if you are currently under contract, but can respond to any inquiries you make.

Over the last few months I’ve been selling my inventory rather quickly and with my most recent sale last week I’m down to only 1.5 listings (the “.5″ is a co-list with my good friend, Lisa Dunn).  I’m always trying to keep 3-4 listings active at a time so that means I’m looking for approximately 2 new sellers looking to make a move.

I’ve got some awesome tools for advertising my listings online to get the broadest exposure possible, I have about $600 in camera equipment for great photos, and my full color market brochures really make your house stand out… if you’re thinking about selling, give me a call and I’ll be happy to meet with you to demonstrate how I can sell your home quickly too.

Give me a call. 612-251-5599

Update: Sellers came out of the woodwork in May and early June… I’ve got lots of good inventory now… make sure to check my home page for my current listings.

In March, MAAR issued the 2006 Residential Real Estate Activity Report.  This is available from their web site directly, but I’ve also seen some agents telling web site visitors that they’ll email them the report only after giving the agent their contact information.  This is a free and publicly available report… you don’t need to give up anything to read it.

This new report tool shows some cities that are seeing dramatic additional slowing of sales activity as compared to last year while some communities have quite a bit more sales activity as compared to last year.

These reports will be updated every month and are a great resource for consumers and agents alike.  You can view the reports here.

Houses priced right and in the right condition are selling quickly again… some in as few as 3-4 days in certain areas of the Twin Cities.  This doesn’t mean an end to the housing slump, but it does suggest we’ve turned the corner.

While everyone would agree that it is a boon for buyers, almost all of those people would also say it is a detriment to the seller.  While the competition is high, that also means that it should be much easier to determine at what price a seller’s townhouse or condo will sell for, given its current condition, view/location, and updates.

In this market sellers that try to argue that their’s is worth more than the one next door because of XYZ will struggle but those that look at the competition and the comparable solds and price accordingly will find that the sales process isn’t as bad as they thought.  Buyers can choose the house in the best condition AND with the best price.  If you’ve got that, you’re home free.

Radon is a cancer-causing, radioactive gas. You can’t see radon. And you can’t smell it or taste it. But it may be a problem in your home.

Radon is estimated to cause many thousands of deaths each year. That’s because when you breathe air containing radon, you can get lung cancer. In fact, the Surgeon General has warned that radon is the second leading cause of lung cancer in the United States today. Only smoking causes more lung cancer deaths. If you smoke and your home has high radon levels, your risk of lung cancer is especially high.

I was recently working with a buyer who during the inspection process also requested a radon test because he was planning to put an office in the basement and consequently would be spending a lot of time there.  When we received the results back from the test we found out that the levels were significantly above the EPA action level of 4.0.

At first I thought: “damn, this could be really expensive to mitigate.”  After speaking to my colleagues and to a couple of mitigation contractors, we found out that the process is relatively easy and not very expensive at all.

The process typically involves digging a hole in the foundation about the size of a 5 gallon pail and then installing solid PVC piping from the hole up through the roof line, with something similar in size to a bath fan installed in the piping in the attic.  This fan exhausts the radon gas up and out the roof where it dissipates quickly.  In houses that have a drain tile system installed the installation can typically get the radon levels below 1.0 because of the efficiency of the drain tile at getting a broad suction around the foundation.

Once the system is installed the contractor will run a second test to confirm that the radon levels have been brought down within safe limits.  If the level is still elevated, a larger fan typically resolves the problem.

Depending on the contractor chosen and the difficulty of the work to be done, most projects are in the $1000 – $1800 range and can be completed in a day!

The contractor we used for my client’s home was Brad Nyberg from Quality Radon, 612-521-3580.  He did a great job and has nearly two decades of experience installing these systems and has been training others for many years as well.

These clauses apparently state that if a borrow defaults early in the repayment period or if the loan had underwriting defects, such as bad appraisals, that the originator must buy back the loan.  Needless to say that this allows the big banks to keep the good loans and kick back a large portion of the bad loans back to the people that shouldn’t have lended the money in the first place.

While this process will prevent the big banks from hemmoraging too much profit margin, it will put some (or possibly a large number) of the subprime lenders/originators out of business.  Many of these lenders/originators have limited assets and use corporate lines of credit to finance the loans they close until they can resell them to the bigger banks. 

When these banks send these loans back (for failure to pay), this means that the subprime originator has to borrow against their line of credit, reducing their ability to make new loans.  If enough of these loans get sent back, the mortgage originator may consume all their credit line with these bad loans and may not be able to fund closings on their new ones.

Enter the headache for buyers and sellers: Imagine sitting at the closing table waiting for a wire transfer of the buyer’s funds and come to find out that the buyer has no funds because the originator has no money! This scenario will come true, it is just a question of how many originators will have the problem.

In the last few years lenders really softened up their lending requirements, allowing a lot of low credit score borrows to go “stated income” or “no doc” loans which basically paired up risky borrowers with risky loans.  In the rush to make as much money as possible, some mortgage brokers/originators went one step further and either omitted or falsified information on the applications to get buyers approved that shouldn’t have.

Because we are still in a rising interest rate market and we haven’t exited the housing slowdown, there’s still a long time for these loans to go into default and come to the attention of the big banks that bought them.  As more of these loans come under scrutiny, I think we’re going to see much larger problem than many expect.

If you’re buying or selling a home, it is eminently important that you know where the money is coming from and that the lender will still be in business at closing!

While the number of listings in the market will rise dramatically, this is also the time when we see the largest increase in buyer activity as well.  Last year from January to May we saw supply increase in lock-step with demand such that the ratio of buyers to sellers remained relatively flat until summer.  If trends remain the same this year we should see the same pattern which means more choice for buyers but also quicker turnover of what is listed for sale.

To search for homes that have sold in the last two years, click here.

Beginning today the RMLS is now permitting agents and brokers to display basic information about listings that have sold in the last two years on their web sites.  Up until this point consumers were only permitted to view listings that were currently for sale and consequently did not know what they sold for until the county posted the sales price… in many cases months later.  Now Edina Realty’s new tool pulls in new sold information in almost real-time.

As a real estate agent you may think that I would be concerned about giving up what’s been considered the holy grail of information: comparable sold properties.  Far from it, I’m actually quite excited to see our company and local MLS board progressing forward.

The information that we’re publishing is by and large already published by other sources, most notably the county in which the home resides.  Zillow and others currently use this tax data on their web sites.  The big problems with tax data are that it usually takes several months or more to get the sales information posted and the other information the counties have (beds, baths, garages) is often inaccurate.

Enter the REALTOR.  If the information already publicly exists, why not make it easier for the consumer to get timely & accurate information from us directly?  Some agents look at it as we are giving away the farm; I look at it as a way to increase dialog between buyers, sellers and REALTORS.

Information in today’s society is fluid and many times free, but information is worthless without an ability to analyze and interpret that information.  Just as many people use WebMD to look up their physical ailments and self-diagnose, buyers and sellers now do a basic “diagnosis” of the housing market and get a feel for valuation.  But just like doctors, when it’s time to bring out the scapel, or in this case sell or buy a home, consumers still look to a professional to see that the job is done right.

Why am I so elated with what appears to be bad news?  While this does signal a significant slowdown for builders, this slowdown in activity will help moderate the increasing inventory in our market.

I’ve included a page from a recently published MAAR report which shows the months of housing supply currently on the market in the $250,001-$350,000 price range.  In all but the condominium market, new construction supply is dramatically higher than existing homes.  This exacerbates the stress of lower buyer activity, creating more pricing pressure on both the existing and new construction markets.

With the diminishing numbers of new housing starts, new construction inventory should slowly reduce over the next 6-9 months, which should bring supply down to more manageable levels.  This in turn will help stabilize pricing and bring back consumer confidence in the housing market.

80       Average days on market

43%    More listing on the market than 1 year ago totaling 60663.

41%    Of the inventory that has sold in last 30 days has had a price adjustment

5.3    Months Absorption Rate=the time it would take for all the listings to sell if no more homes were put on the market

8      For every sale that takes place, there are 6 more homes that haven’t sold 
 
18     Showings for every home that sells (From Edina Realty appt center statistics)

Here’s this week’s report:
MAAR Weekly Statistics – August 21, 2006

While these numbers are great, it can also be helpful to look at the market as a whole in summary:

AUGUST 2006 CURRENT RMLS STATISTICS MARKET UPDATE

69       Average days on market

45%    More listing on the market than 1 year ago totaling 60663.

35%    Of the inventory that has sold in last 30 days has had a price adjustment

5.3    Months Absorption Rate=the time it would take for all the listings to sell if no more homes were put on the market

6      For every sale that takes place, there are 6 more homes that haven’t sold 
 
36     Showings for every home that sells (From Edina Realty appt center statistics)

In recent years we have seen a large runup in Average Sales Price during the spring and summer months.  This year was marked by much smaller gains, which has lead to us “catching up” with last year’s price.  While this means that sellers cannot expect any appreciation in their home over last year, it also means for sellers that are moving up that their future home will not cost as much as they expected.

This is not a sign of a bursting bubble, this is only a continued ease in the housing market that is bringing more historically common market times and appreciation back into the market.  We’ve been cooling off for several years now and this has sharply reduce the chances for a dramatic price drop.

Appraisals are not necessarily an indicator of market value
Over the last few years many sellers have refinanced their homes to lock in lower rates or to take cash out for remodeling, a 2nd home, etc. I have seen some appraisals that showed significantly over-inflated values. If I turn my head sideways, squint out of one eye and hold the comparables far enough away, I could have come to that same number! Likewise, some appraisals can be lower than true value since unless otherwise instructed, many appraisers will stop counting once they’ve hit the value necessary for the transaction. While appraisals are helpful, I rarely see them as the definitive answer of true value.

Taxable values can vary greatly
Many people look to the Taxable Market Value in county records as a benchmark for value. Considering that most assessors are in the subject property for just a few minutes, and maybe see the home every 4-5 years, it is easy to see how the taxable market value can be off by 10% or more. I’ve seen many cases where two nearly identical properties that are just blocks from each other have market values that are more than $15,000 apart.

Homes currently listed for sale (and have not sold) are not your basis for value
Though a house like yours just down the street may be listed for $255,000, if one just like yours sold last month for $240,000, you should expect that your house will sell closer to the $240,000 price point. Just because the sellers are asking $15,000 more for a similar property does not mean they will get it. Price yours at $245,000 and interested buyers will come and negotiate with you instead of them.

Sales activity is changing quickly
Because the housing market is changing quickly, your best comparables will be those that have sold in the last 90-120 days. Sales longer than 6 months ago are ancient history.

Each week, look to see what has just been listed for sale, what has received an acceptable offer (pended) and what has closed. Take a look at how your competition is doing; if many homes are selling in 3-4 weeks and you’re already at 5 weeks on the market, it’s definitely time to reevaluate your strategy.

Price it right from Day One
There are probably 2-3 (or more) houses very similar to yours for sale within a mile or two of your house. If you’re priced even $5000 higher than the other comparables for sale, buyers will likely go and negotiate with them and not with you. If you’re priced considerably higher than you should be, many buyers will not even schedule a showing to see your house!

Many sellers decide to “try it at this price and we can drop it later if we need to.” The problem with that is that most buyers will notice that your home has been on the market for a long time and will perceive your home as being overpriced or having some kind of problem even after you bring the price down to the correct level. In addition, the greatest amount on interest in your house will come in the first 30 days on the market… not the best time to be “testing” a price!

Provide a pre-inspection
If you complete an inspection of the house at the time you list it for sale, you get the benefit of being able to fix some of the problems before a buyer sees them. Additionally, this is a great way to stand out from the competition since your house has already been through a thorough examination, buyers will feel more confident about its condition. It may also speed closing as it eliminates one of the steps in the after-offer process.

I think the biggest benefit for sellers is that it eliminates a 2nd round of negotiation after the offer has been accepted. What would be worse than thinking you’re going to walk away with a certain amount of money at closing… only to find out a week after you’ve accepted the offer that there’s a list of items that are in disrepair and the buyer expects you to fix them? In some cases the inspection turns up such large unexpected problems that the buyer will decide to cancel the contract. Talk about a huge, and expensive, disappointment.

Any offer should be taken seriously
Some buyers are submitting lowball offers. While it may be upsetting to see an offer that is considerably below your asking price, remember that this is a negotiation and that you have a ready, willing and able buyer interested in the home. Talk with your agent about presenting a fair and well thought out counteroffer. An effective agent will work hard with both parties to find a solution that works for everyone.

When an offer does come in
Make sure that the earnest money is enough to motivate the buyer to follow through on the deal; 1% of the purchase price is typically appropriate. If a buyer only gives you $500 earnest money and then does not show up at the closing table, you only get $500 for your troubles.

Ask for the lender to provide a final underwriting commitment well before closing. Without a final commitment from the lender, the day of closing may come before you learn that the buyer can’t secure the financing to buy the home.

Check the loan officer/lender’s credentials. A quick call to the loan officer by your agent to verify the information in the pre-approval letter can sometimes uncover problems that you were not aware of. The pre-approval letter itself provides no guarantees whatsoever that the lender will fund the loan.

Some sellers are considering waiting to sell their homes in belief that the housing market will improve.  Yes, the market is definitely in the buyer’s favor right now but this is the beginning of a multiyear trend.  The number of houses for sale has increased each year for the last four or five years, and will probably continue to rise for at least another year.  Houses that are priced correctly do sell relatively quickly.  As interest rates slowly rise, this will put further chill on the market.  Many of the homes that have had to reduce their prices were priced based on 6%, 8% or more appreciation over last year.  In fact, appreciation is 1%-4% and will likely average 2%-3% each year for the next several years. So on $250,000, some of the houses listed are $10,000 or $20,000 high because the sellers think there should be higher appreciation than there really is.  Prices may decline slightly but we are not seeing signs of any dramatic price depreciation… just flat or slight appreciation.
 
The competition that’s in the market means you do need to be competitive with others for sale, and that includes price, location, style, amenities and condition.  So if you price the house with others that have newer appliances, roof, windows, furnace, flooring, etc then you would also need to have those features to be competitive.
 
As a seller it is tougher, but as a buyer you are more in the driver’s seat.  Though you may not get quite a much for your current home, your next home will also be priced lower than it would be otherwise.  If you’re planning a move to a higher price range, it should actually be in your favor.  Additionally, interest rates are expected to rise .5% to 1% over the next 6-12 months, which can take 7%-15% of your buying power away because of the higher monthly payments.
 
So my suggestion would be that if you are planning to move in the next 18 months, then I would strongly consider moving now to take advantage of the good interest rates.  If you’re comfortable for another couple years or more, then I wouldn’t worry about trying to time the market and just move when you’re ready to.