Rick Schwartz: High Definition Real Estate

Things always seem to come down to the last minute. 

The $8000 First-Time Home Buyer's Tax Credit, set to expire on November 30, 2009 has been extended.   1st Time buyers now have until April 30, 2010 to sign contracts on their new home and have 60 days beyond that to close the transaction.

BUT WAIT, THERE'S MORE

In addition to the extension, the program has now been expanded to include "move-up" buyers.  As long as you have occupied your current home for 5 of the last 8 years, you are also eligbile to apply for a tax credit. It's a little less, capped at $6,500 instead of $8,000 but hey - it's nothing to sneeze at.  The following is a summary put out today by the National Association of Realtors.   If you want to explore this further, speak with your lender.

BUT WAIT, THERE'S EVEN MORE!

Yup - one more thing.   In a separate measure Congress has also passed an extension  - through 12/2010 of the new higher limits on conforming loans. 

You can read the definition of Conforming Loans and Jumbo Loans for more detail, but the bottom line of it is that better interest rates are typically available on conforming loans than on jumbo.  By raising the limit for conforming loans, it enable more folks to get better interest rates on larger loans.  This is good!

THE DEBATE!

There's been a lot of discussion in the Real Estate community as to whether extending and expanding these programs is good for the economy in the long term.

There are those who feel that it will provide a "false" feeling of improvement if people buy up houses over the next several months for the tax break. The feeling is that when it ends, we could move back to a very slow market.

Those in favor of it feel that getting people moving into new homes could very well be the impetus needed to jump start the economy. When people move, there is a lot of cash pushed into the economy in the form of moving costs, renovations, furniturepurchases , hiring of contractors - etc. So it may be that things will be better BECAUSE of the temporary burst in home sales that is expected.

Whichever side you fall intellectually on is moot at this point. The extension is here and if you've been thinkikng about buying a house - buy one, while the program is on. This is one more low-pressure system in the Perfect Storm for Home Buyers.

I know that headline sounds like a line of insincere marketing hype.   Unfortunately, in our business, someone is always saying "It's a great time to buy a house". 

LET'S FACE - IT'S NOT ALWAYS A GREAT TIME TO BUY A HOUSE! 

In an "UP" market when inventory is low and prices are high, you will likely find yourself in a bidding war if you are interested in a desirable house. Bidding wars are great for sellers - not so much for buyers.   That's why they call it a seller's market.

A buyer's market exists when prices are down and inventory is up.  If you add in the third piece which is Interest Rates, you get the perfect storm. 

 Right now:

• Inventory is at an all time high and all indications are that it will continue to rise because, sadly, the unemployment situation is expected to add to the already high level of foreclosures that are out there. 
• Prices are at a level where they were prior to the boom of the early part this decade.
• Interests rates are - well, they're just ridiculous!
  

Any two of those three things would make things ripe for buyers - having all three in place creates a situation that simply makes it darn near a sin for qualified buyers to sit it out any longer.

The other thing that makes it EVEN better, is that most home sellers are beginning to understand the market. In the last few months as I show houses to buyers, I find that more and more of the listing prices are very close to market value.  This makes the whole buying process simpler.   The truth that the sellers are realizing is that although they may have to sell their homes for, perhaps 20 - 30% less than they may have paid a few years ago, they will get that savings back as they buy something else with the same kind of depreciated value.

As Realtors we often have buyers tell us that they are "Waiting the market out".   The question I usually ask is this

Which are you waiting for,

INCREASE IN PRICES or INCREASE IN INTEREST RATES?

Excellent interview  from Fox Business Network with Richard Smith, CEO of Realogy regarding where the housing market is headed in the short term. 

He points out, correctly, that the market for home buyers is about as good as it gets.  Low interest rates and high inventory make a perfect storm for buyers. 

The primary focus of the inventory is regarding Smith's opinion on whether or not the $8000 1st Time Homebuyer's Tax Credit should be extended and his opinion of whether or not it WILL be extended.

The interviewers went on to ask him about the prediction of how continued increase in the number of foreclosed properties will impact the market.

Interesting and informative video.

WATCH IT HERE.

If you're out and about today, stop by and say hello.  I'll be at 10 Flintrock Drive in Danbury from 1-4.

4 BR 2.5 Bath with updated everything.   Priced to sell at $479,900.

DIRECTIONS:  Clapboard Ridge (Rte 39) To Flintrock.  House on left.

Can't make it, give me a holler to set up a showing.

Depending who you are talking to about the price of a house you have to be clear what numbers you are using. If you’re not both referring to the same lingo, you could each walk away from the conversation thinking different things and not knowing it. Here are some definitions that may be helpful.

Appraised Value

The Appraised Value of a property is an opinion of the value of a home prepared by an Appraiser. His opinion is based on a number of factors or methods of determining the value. He will look at things such as recent sales of similar properties, replacement cost and his own knowledge of the local marketplace. Lending institutions will typically use the appraised value in determining the total amount of money they are willing to lend when the property buyer is applying for a mortgage.

Assessed Value

The Assessed Value of a home is the value determined by the tax assessor for the local city or town. This value is used by the municipality to determine the amount of tax that the property owner must pay. The Assessed value will often be multiplied by a mil (Millage) rate to determine the actual tax. In other words if the property has an assessed value of $100,000.00 and the mil rate is 5, the tax on the property would be 5 X 100 or $500.

Market Value

The Market Value of a home is the probable price that a house will sell for if it is put on the market. It is determined by an analysis of the market (usually by a Realtor). The analysis should include looking at similar properties that have sold within recent times as well as looking at similar prices for homes currently on the market. In addition, if done properly, the analysis should also include those homes that were put on the market but did NOT sell, and were withdrawn.

List Price

The List Price of a home is a number assigned by the seller when he puts his home on the market. It is essentially what he hopes to sell his property before. It has no formal mathematical relationship to the actual market value of the home. In determining the list price, any reputable Realtor will recommend that it be very close to the Market Value if the seller wishes to sell in a timely fashion.

Sale Price

The sale price of a home is the actual price that the home most recently sold for.

In our Danbury, CT metro area which includes Danbury, Brookfield, Bethel, Newtown, New Fairfield, Ridgefield - all in Fairfield County, as well as New Milford which is in Litchfield County, we have a lot of transplanted New Yorkers who work in New York City. 

Lots of folks also commute from this area to Southern Westchester towns such as White Plains, Yonkers, New Rochelle or Mount Vernon.

Many drive their cars to and from work, but many of them prefer to commute by rail using Metro North Railroad.

What is Metro North?

Metro North Railroad is part of the NY/NJ/CT Metropolitan Transportation Association (MTA) which operates a number of mass transit operations helping commuters in the tri-state area get to, from and around New York City.

The flagship and focal point for Metro North is Grand Central Terminal.  One of the most famous rail stations in the world, Grand Central (GCT) was first constructed in the 1870s in  mid-town Manhattan as an above ground train station where several different Railroad lines could provide access to their riders, eliminating the need for passengers to travel from one station to another by foot or wagon when changing lines for continued travel.

It went through several evolutions until the early 1900s when the platforms and tracks were moved underground allowing for the now familiar GCT building to be built above the platforms.

Some Grand Central Lore

GCT has been the backdrop for many memorable motion pictures throughout its history. Two of the most well known were in Alfred Hitchcock's NORTH BY NORTHWEST - Grand Central was the starting point for Jimmy Stewart's character as he escaped New York City.

Also -who could forget Lex Luthor's lair in the secret tunnels underneath Grant Central in the first SUPERMAN movie starring Christohper Reeve with Gene Hackman as Luthor. It is true, BTW, that there are subterranean levels of GCT below what is accessible to the general public.

Currently there are 57 tracks and platforms operating in Grand Central.  They are about equally divided between the upper and lower level platfoms.  Originally the division in levels was determined by having the primary rail lines operate on the upper and commuter lines running on the lower.  In those days primary rail lines were the main mode of long distance transportation for Americans.

Coming out of GCT, the 57 tracks all merge into 4 feeder tracks which run beneath Park Avenue through Mid-Town, emerging into an elevated line just above 100th Street, which carries commuters north of the city. 

Where Do The Trains Go?

The three Metro North lines running on these tracks are the Hudson Line, Harlem Line and New Haven Line.  All three lines run together until the station at Fordham (The Bronx) where they split into three branches.  Hudson runs parallel to the river carrying passengers as far as Poughkeepsie.  For our purposes here we are going to look at the Harlem and New Haven lines.

If you are hoping to travel from Northern Fairfield County to Manhattan you have a number of options.

The New Haven line, which, oddly enough runs all the way to New Haven, has a few branches that split off along the way and turn in north, deviating from the line's general North East path.

The first branch, as you can see on the chart, splits from the main line at Stamford and continues north for 4 stops terminating in New Canaan.  New Canaan is a great community in the SW part of Connecticut.   The train station itself if located right in the main area of the village.  Some commuters from northern parts of Stamford prefer to come to this station as an alternative to driving into downtown Stamford.

The second branch splits off the line at South Norwalk and runs to stations in Branchville (Ridgefield), Redding, Bethel and Danbury.

The number of trains running on these branches each day is less than on the main lines so commuters have to plan their commuting appropriately.

The other option for folks in the Danbury Metro area is to drive west on I84 about 8 miles into NY State and take the Harlem Line from the Southeast station.   Southeast is a primary hub for trains into NYC and the ride is direct as opposed to the CT branches which mostly require a switch of trains where they connect.

Travelling by train from Southeast will become even easier soon for residents of Brookfield and New Milford CT when the extension of RTE 7 is completed in November.  This extension will give residents an opportunity to travel on a straight shot from the beginning of the highway, on the Brookfield/New Milford line all the way across to NY and the Southeast station.

If you need specific information on schedules, check the Metro North Website.  Generally speaking, though, the options are many based on exactly where you live.

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Quite often, price negotiations turn into very adversarial situations where one party tries to get the upper hand. There seems to sometimes be a feeling that you can win a negotiation by getting your opponent into a situation where he will be somehow harmed if you were to pull out.

Emotional Vs. Financial

This comes about because buying and selling homes not only have a financial component but an emotional one as well. The buyer is buying because he needs or wants a new home, and the seller is selling for the same reason.

Why is everyone moving anyway?

Perhaps your existing residence is too small for your growing family, or perhaps it’s too big now that the kids are grown. Perhaps the economy has put you in a situation where it’s tough to keep up and you are moving to get more control of your finances. Or perhaps you have a new job which comes along with a new commute.

There are lots of reasons why you might need or want to move. Here’s the thing, though. None of those issues has anything to do with the value of the house you are trying to buy or sell. The value is the value. So when you begin negotiating you need to do so strictly from a point of view of what the house is worth. If you can’t afford to buy a certain house, or you can’t afford to sell your house for less than a certain amount – then you should not be doing it.

Your emotional and family needs are important when deciding where and when to move, but once you start negotiating, all that stuff needs to go on the back burner.

No Winners or Losers

A successful house negotiation will not have a winner and an loser. It will be a mutually beneficial business arrangement where both sides have a fair result.

Whether you are the buyer or the seller, your Realtor should begin the preparation for negotiation exactly the same way – by using market data to determine the fair value of the house. If both Realtors are doing their jobs correctly, there should be very little difference in the perception of the home’s value – whichever side you are on.

In a perfect world, everyone would get together in a room and look at all the available data, come up with the right price and that would be that – but we all know that it doesn’t work that way.

The Buyer

You and your Realtor will, together, come up with two numbers. The highest price you are willing to pay and where you will start the bidding.

The Seller

You have already, in a sense, put in the opening bid by setting a list price. Your prep needs to basically working with your Realtor and doing essentially the same as the buyer.

Decide exactly what your lowest price will be and what your first counter-offer will be when you receive the opening offer.

Throw out the "Sticker Price"

The list price, unfortunately kinds of goes out the window at this point. The list price is designed to attract shoppers. Now you need to get down to business and decide how much you are willing to take for your house.

Trust your Realtor

Since conversations between Realtor and Client are confidential, these numbers will not be shared between the two sides. If done properly, however, “what I’m willing to pay” and “what I’m willing to sell for” shouldn’t really be too far off.

Then an opening offer is tendered, there is a series of counter and counter-counter offers and a price is settled on. At the end of it, there shouldn’t be any negative feelings about the number from either side since the ranges were decided ahead of time.

This is another one of those phrases that Realtors hear all the time. It is, quite frankly, a very natural thing to feel and say. You paid good, hard-earned money for your home. You’ve put additional money (and sweat equity) into the house. You’ve lived it in for a period of time and your neighbor who bought at about the same time as you got 120% more than he paid when he sold about 2 years ago.

So why should you give it away? You shouldn’t!

What you have to do is to clearly define what “giving it away” means to you. It’s very subjective. Ask yourself the following questions:

1. Why do you want to sell in the first place?
2. What will you do if you don’t sell?

There are a dozen reasons why people want to sell their homes. Answer it honestly. Perhaps selling isn’t really that important to you. If it is, then move on to the second question – what will you do if you don’t sell? There are only 3 possible answers.

1. You’ll stay in your home
2. You’ll rent your home to someone
3. You’ll move and leave the house vacant

The most common answer is that you’ll stay in your home. If that is your answer then ask the following question 

How long will you stay before your original reason for moving becomes urgent?

If you think you will stay in your house for “a while – until the market turns and houses appreciate again” you should sit down and do some math.

Here’s an example which is, admittedly based on theory – no one really knows what is going to happen in the market. We’re going to start with the hypothetical assumption that the market will continue to depreciate for another 9 months, level off for 6 months and then begin to appreciate again.

Soooo…. using my favorite $100 house, let’s look at a couple of scenarios. First, where you overprice the home and then at what happens if you try to wait it out.

SCENARIO #1. You paid $90 for your home four years ago. Your neighbor who has a similar house also paid $90 four years ago. He sold his home two years ago for $110.

Your Realtor tells you that a good selling price for your house is between $98 and $102. He suggests listing it for $100. You know that you’ll probably have to negotiate a little and sell for $97 or so. You will then have to pay a real estate fee of about $6 so you’ll end up netting $92 which is only $2 more than you paid.

You feel that that is just “not enough” and constitutes “giving your house away” and you are not going to do that.

You decide on listing it for $108, and will negotiate down to $105 if you have to. After taking out a fee of $6 you will net about $99 which is, in your opinion, “good enough” after all, it’s WAYYYY LESS than your neighbor got. You are being very flexible without giving it away.

What happens next is that your house doesn’t sell quickly. The educated buyers who have been looking at houses for a few months, take a look at your house and they know, while it might be a great house, there are others out there that are better values.

90 days go by.

You then, reluctantly tell your Realtor that you’ll lower the price to $102 – which is the top range of what he originally suggested.  Sounds like a plan right?  There's one more wrinkle.

Based on a continued depreciation your house is no longer valued at $100. It is now valued at about $98. A new group of educated buyers (the other ones have already bought homes), visit your house and reject it. There are some other similar houses that are selling for $96 and $97.

Your house sits for another 90 days – and the cycle continues. Eventually the market does bottom out. Your house is now worth about $92 or $93. You decide that you simply can’t sell at that price and you pull your house off the market.

SCENARIO #2.  You hear your Realtor’s original price suggestion of $100 and decide to wait it out. You do nothing for 9 months. The market then bottoms out and your house is now valued at about $92 or $93. You feel that things are on track and you’ll just wait for things to rise again. 

You can see in both scenarios you are sitting there 6 -9 months later with a home that is worth about 7 or 8% less than you could have sold it for when you started the process.

Again I want to reiterate that this is all hypothetical. No one knows what is going to happen.  In our little story, the market begins to slowly appreciate and 12 more months go by and your house appreciated in value by about 5%. This now makes your home worth about $97. You are 21 months from when you started.  If you then factor in the mortgage payments that you've been continuing to make, your net proceeds from this plan will be far, far less than if you had sold it for $97 at the outset.

So – now go back to those two questions.

Why do you want to move and what will you do if you don’t sell?

This, of course, leads again to the third question – how long can you actually wait before you move.

No one really knows when the market will turn and how quickly it will appreciate when it does. In the best of scenarios, however, you need to understand that in all probability, your house is worth more today than it will be tomorrow or in 6 months to a year- and that it could be 1, 2, 3 or more years until it is worth more than it is today.

BOTTOM LINE :

1. Overpricing your home will not help you net more from the sale.

2. Overpricing will probably delay the sale of your home and you will end up selling for less.

3. Holding off until the market turns will not help you net more unless you can wait a very long time.

4. What you WANT for your house is irrelevant to the current value.

5. What you NEED for your house is irrelevant to the current value.

6. What you PAID for your house is irrelevant to the current value.

7. What you OWE on your house is irrelevant to the current value.

8. What your next house will cost is irrelevant to the current value.

9. What your neighbor sold for a year or two ago is irrelevant the current value.

Ultimately, you have no voice in the current value - you only have a voice setting the asking price.

BOTTOM BOTTOM LINE:

The question is not how much you want to net for your house.  The question is whether or not you want to move.

If you do, then you must price the house based on what people are willing to pay.

A lot of people shopping for houses today are moving very cautiously towards making a purchase as they keep their eye on the depreciating prices of houses. Everyone wants to buy at the "bottom" of the market - which is a natural feeling - who wants to buy something today and have it be worth less in 6 months.

One of the challenges with this is that we are not going to know when the bottom hits until we can look back and point at it in our rear-view mirrors. Once prices start to rise at some point, we will know, for sure, when the bottom was. Until then, we're all just guessing - and gambling.

The second thing to consider is really a math exercise. If, for example, there is a home that you like that you can currently buy for, let's say, $250,000. If you wait 3 more months, the price might drop to, let's say $230,000 giving you a "savings" of $20,000.

Makes sense to wait, doesn't it?

Let's look closer at that $20,000. You have to consider what it is costing you NOT to buy for another 3 months. If you are a first time buyer and you are currently renting, that means that you'll be paying rent for 3 more months and not enjoying a tax deduction on the interest you'll be paying in your new mortgage.The earlier in the year you make a purchase, the bigger your deduction will be on April 15, 2010.

If you currently own a home, compare your current interest rate to what you would be paying if you made a move sooner than later. If you're current rate is, let's say, 7% and you can get a mortgage on your new home for 5%, how much will you be saving on your monthly payment.

Of course, the biggest math issue you need to look at it you currently own a home and are waiting is this.  How much less will your house sell for if you wait? Will you net $20,000 less by waiting for a $20,000 savings on the buy-side?

Everyone's situation is going to be unique but you should take the time and do the math to figure out how much it will cost you to wait for "the bottom." You might be surprised.

OK - I admit it. I'm an American Idol addict. From late January until mid May don't bother calling my house on Tuesday or Wednesday nights. My wife and I, (along with our two dogs) are deeply entranced with Simon, Kara, Paula, Randy, Ryan and a plethora of (mostly) bad --->mediocre singers all wanting to have a chance to record the next over-produced, synthesized, homogenized pop hit.

Even the really good singers who win (or come in close) typically are given silly, formulaic songs to record - have you heard Bo Bice's THE REAL THING? Anyway - I digress.

Recently I was having a conversation with a client about pricing his house which we were about to put on the market. I was going through my rhetoric (which you've heard if you've ever read this blog before) about how you have to let the buyers decide what your house is worth - and it hit me that I had heard this dialogue before - from Simon Cowell - albeit in a different context.

If you've ever seen the show, you'll know that one of the best parts is watching Simon interact with the bad singers in the early auditions. Yes - I do know that they exaggerate the whole William Hung thing a bit, picking the worst auditions to put on the show, strictly in the name of ratings - but I really do find it entertaining - but more importantly it provides some real insight into how people's perceptions of themselves are different than reality.

People tend to believe what they want - they come to a conclusion first and then try to justify it based purely on emotion. Here's how the dialogue usually unfolds.

A really awful singer will belt out a tune - something very loud and dramatic - like a guy singing "GIRLS JUST WANNA HAVE FUN" in a bass voice while gyrating around the mini-stage in what appears, sometimes, to be a seizure of some sort. Simon or Randy will try, sometimes in vain, to stop them mid-gyration, but they carry on as long as they can, even in the face of the judges sometimes laughing or holding their ears. Then Simon will say "How do you think you did?"

Invariably the contestant will say they thought they did well. Simon will assure them they didn't. OK - we're finally up to the relevant part.

The singer, will then try and explain that even though all four judges hated their performance, he or she, was actually very good. Their mother, father, sister, brother, uncle or VOICE TEACHER has told them for years how good they were. They may sound terrible here in the audition room, but if they "could have a chance to go to Hollywood" they will show the judges exactly how good they really are.

Think about that for a minute. They are trying to override how bad they sound - not by singing well, but by explaining that in spite of the judge's perception - they really are good.

The simple fact is, that they are, (for the most part) truly convinced that they are good. They are often in shock that the judges don't like the performance. They don't seem to get that it doesn't matter a bit what THEY think.

Truth be told - at this stage of the competition, it only matters what the judges think. They (the contestant) are there, simply to present what they have to offer. Their success or lack thereof is 100% in the hands of the judges - and as the weeks go by - in the hands of the voting public. Same thing with the value of your house.

• You sincerely believe that your house is worth $100.
• The market, however, says that it's worth $90.
• The "comps" support $90.
• The offers that you are getting are in the high $80s.
• No one wants to buy your house for $100.

Therefore, in spite of your own perception - your house is not worth $100. In a free market something is worth exactly what someone is willing to pay for it - not a penny more. So work closely with your Realtor and come up with a reasonable number to put on as a listing price. if you overprice it, you might not even get showings. Or you will get showings but no offers that even come close to the price you've asked.

If it happens once - it might be someone looking to lowball with the hopes of stealing the house. If it happens twice or more, then the price they are offering is very much like Simon's opinion - it's the only thing that matters.