Navigating Today’s Real Estate Market

Most locals know that real estate prices have corrected significantly from their artificially high peak.  As a result, the real estate landscape has changed—here's how those changes may impact buyers and sellers.

Underwater

 You may have heard that many homes today are “underwater”—but that isn’t a reference to flooded basements. 

It means that the house is worth less than what is owed to the bank. Some homes have a second mortgage or a home equity loan in which case more than one bank may be owed on the property. 

A seller in this situation could pay out of pocket the difference between what is owed to the bank and the net proceeds (after expenses) of the sale.  For example, the seller owns a house that can be sold today for $500,000; her expenses to sell the home are $30,000 and she owes $520,000 to the bank.  In order to sell this home she would need to have an additional $50,000 in cash.  A buyer interested in purchasing a house that is "underwater" would want to verify upfront that the seller has that money available and is planning to make up the difference.

Short Sales

When a seller won’t or can’t make-up the difference owed to the bank, it's called a short sale.  I’m seeing this frequently in our marketplace today.  In this case, a seller would go about the traditional process of listing and finding a buyer for their home. 

They must disclose upfront that they owe the bank more than what they’re likely to obtain from the sale.  Once a buyer agrees to purchase the home and signs a contract the seller can then seek approval from the bank to accept the reduced amount—essentially the bank agrees to take a loss.  The process of obtaining this approval from the bank can be lengthy and there’s no guarantee that the bank will say yes. 

The benefits to the seller are obvious, they reduce their loss on the home and in cases where they are unable to pay the mortgage, they also avoid the more damaging effects of a foreclosure on their credit history. 

The buyer? They have to risk their time and money (inspections, legal fees) in trying to buy a house for which the sale must be approved by a third party who may be slow and unreasonable in their decision making process.  A buyer who has a specific date by which they must move—a child starting school, for example—will be at risk of the bank not approving the sale. 

The bank’s decision is usually guided by appraisals that the bank orders, the net worth and credit history of the homeowner, and the bank’s strategic plan for liquidating properties that are underwater. 

The bank will use the appraisal to ensure that the house is being sold at market value and that they are not taking a larger loss than necessary. So a buyer of a short sale is not likely to be getting a bargain—the risk involved is usually not worth the trouble.

Foreclosures

Foreclosures are less prevalent in our marketplace but certainly more common today than in years past. A foreclosure is a property that has been taken back from the seller by the bank for failure to pay. 

Oftentimes these properties have fallen in to disrepair or the foreclosed-upon seller has stripped the home of fixtures, appliances and hardware.  Historically the banks have not been great marketers of homes.  Although they often employ a real estate agent they are usually unwilling to spend any money to stage the home or even in some cases remove trash or repair defects.  Their approach is most often a rock bottom price in order to achieve a quick sale. 

Banks also tend to be inflexible on terms such as insuring clean title or accepting mortgage contingencies from buyers.  For these reasons cash investors tend to be the most likely buyers of these properties.  Their goal is to buy the home cheap, fix it up and re-sell it for a profit.  A traditional buyer who makes an offer and is competing against an all-cash investor will find it difficult to have his or her bid accepted.

I’m often asked if I know of a great foreclosures or short sale from buyers who are looking for a bargain.  Although that may occasionally be the right approach, buying a home from a seller who has acknowledged the home’s real market value may be your best choice.