Six Paths to Success for Buyers in Tight Markets

In low-inventory markets, some buyers are having a hard time finding a home to buy. There are steps you can take to improve your odds of finding a home at a time when interest rates are at record lows and affordability is high.

One approach is to broaden your search. You should be clear about what it is you want to buy. But, homebuying involves making compromises. Just make sure you don’t give in on the essentials. You need a home that will last you for the long term. Avoid listings with major defects that will be expensive or impossible to fix.

The sorts of features you should be willing to give up, if necessary, are house style, or a large yard, which can be a maintenance drain. If you’re having no luck buying in your first-choice neighborhood, check out the adjacent areas. These could be the next turn-around neighborhoods when the overall housing market improves.

You could also do an about-face and consider condos rather than single-family homes. This might have the advantage of shortening your commute to work.

Ask your agent to cull the inventory of expired, withdrawn, and canceled listings that didn’t sell in the last year or two. These may not have sold because they were priced too high. If the sellers are still interested in selling, and aren’t locked into a lease, you might be able to work out a mutually acceptable price.

Be open to making improvements rather than holding out for a home that’s in move-in condition. Major fixers will probably be snapped up by investors to rehab and resell at a profit. This is a competitive market and not one for novice homebuyers.

However, if a listing isn’t receiving attention because of its dated décor, this could work if you intend to live in the property and not try to flip it for a profit. Be sure to work with an agent who has experience with cosmetic renovations, or consult with a decorator.

You’d be surprised what updated plumbing and light fixtures, new paint, floor finishes, appliances and improving the outdoor living can do to turn a dowdy listing into a comfortable abode. Just make sure you don’t tackle too much. You don’t want to over-improve for the neighborhood, and structural issues are taboo.

Don’t exhaust yourself by bidding on a house you can’t get. A home was recently listed for $985,000. Seventeen buyers made offers. It sold for $1.2 million. Underpriced listings are often bid up in a low-inventory market. Wait to make an offer until you find a listing that’s priced within your affordability range.

Don’t be afraid of accepting a backup offer if your bid isn’t accepted. The transaction fallout rate is pretty high in this market. Keep looking for another listing while you’re waiting to see if the first deal goes through.

All-cash offers tend to win in multiple-offer competitions. To be competitive, try to put yourself in a position to pay all cash. If you have savings you can tap and you can secure a private temporary loan from parents or borrow from a 401(k), you might be able to make a cash offer.

If your parents are providing some of the financing, ask them to write a letter that you can provide to the sellers that confirms your source of funds. This should be accompanied with documentation of the parents’ funds. You can refinance into a conventional mortgage later.

THE CLOSING: If the market where you’re looking is too hot, you can take the watch-and-wait approach. The market is always changing. When inventories increase, there will be more opportunities for buyers.

Lack of Homes for Sale Boosts Sales Prices

Tight housing inventory hurts September home sales

A continued shortage of available homes for sale lowered California home sales in September, while the median price reached the highest level in more than four years, C.A.R. reported this week.  Sales in September were down 5.2 percent compared with August and down 1.2 percent compared with September 2011.  The statewide median price of an existing single-family detached home inched up 0.3 percent from August’s $343,820 median price to $345,000 in September.  The September figure was up 19.5 from a revised $288,700 recorded in September 2011, marking the seventh consecutive month of both month-to-month and year-to-year price
increases.  September’s median price was the highest since August 2008, when the median price was $352,730.  The year-to-year increase was the largest since May 2010.
“For the state, at 3.7 months of supply, unsold inventory is still less than half what it would be in a normal market,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young.  “As a result of the constrained supply at the moderate and lower end of the market, sales of homes priced under $200,000 dropped nearly 28 percent, and homes priced $200,000-$300,000 fell more than 15 percent in September.  By contrast, in the upper price range, where inventory isn’t as much of an issue, sales of homes priced $400,000-$500,000 rose more than 14 percent, and those priced above $500,000 increased more than 15 percent.”

Tax-Deferred Exchanges…Just the Basics

Exchange of Property: The transaction must be structured as an exchange, rather than as a sale and purchase.   A qualified intermediary should be involved with the sale of the relinquished property and acquisition of the replacement property.  The investor must sign an exchange agreement, assignment of the purchase contract, as well as other documentation before the relinquished property sells, and the intermediary must hold the proceeds until they are used the buy the replacement property.  As long as the appropriate documentation is signed, the intermediary does not need to take title to the property.

Like-Kind Requirement: The like-kind requirement is fairly broad for real property exchanges.  Basically any real property held for investment qualifies as like-kind.  Vacant land can be exhanged for an office building; a single family rental home can be exchanged for an office building and so on.

Same Taxpayer Rule: The same taxpayer selling the relinquished property must purchase the replacement.

Deferring All Tax: The property the investor is purchasing must be equal or greater in value, equity and debt, but the debt can be replaced with cash.

Timing and Identification: The investor has 45 days from the closing of the relinquished property to identify the replacement property.  The investor can only acquire property which has been properly identified during the 45-day identification period.  If an investor wants to identify more than one replacement, there are several options:  The Three Property Rule: The investor may identify up to three properties without regard to their fair market value; The 200% Rule: The investor may identify any number of properties so long as the total fair market value of all of the listed properties does not exceed 200% of the value of the relinquished property.

Once escrow closes on the relinquished property, the investor has the lesser of 180 days from the date of closing or the date on which the investor’s tax return for the year the relinquished property was sold is due, to close the purchase transaction and complete the exchange.  For exchanges closing in the final quarter of the year, the taxpayer will need to get an extension to file his tax return to get the full 180 days.

I have completed a tax-deferred exchange for my own investment properties.  We sold a four-unit apartment house and purchased a condominium.  The condo needed deck repairs and the seller was going to credit us with $10,000 at close of escrow.  I contacted the intermediary and was told that that $10,000 could be construed as “boot,” which is not allowed in an exchange.  We arranged for a price reduction in that amount, so we were able to complete the exchange.  One of my clients was asked to carry a 2nd trust deed on the relinquished property and was told by his accountant that the note could be considered boot as well.  It is critical to keep in mind that the investor cannot receive any cash (boot) from the exchange.

Be sure to check with your tax advisor before entering into an exchange of investment property and I highly recommend that you use an intermediary.

Go Ahead; Make the Offer

The inventory of homes on the market in the Palos Verdes  is only 40% of the inventory last year; therefore, some homes are getting multiple offers at present. If you find a home you like, make an offer.  My listing partner and I recently put a very desirable home on the market and held it open to the public the Sunday after we took the listing.  We did not advertise in the newspapers, but we put out ten lead-in signs.  We opened at 1PM and planned to close at 5PM.  We had so many people viewing the home that we did not close until 6:30 PM; definitely one of the best open houses ever.  One couple came through and said they wanted to submit an offer through their agent.  They said the house was over priced and asked me what they should offer.  I told them to talk to their agent, as I represent the seller.  Their agent called me and said they might make a low offer or simply wait until the price came down.  I told the agent, “That won’t happen with this property.  It will be sold by the end of the week.”  Another couple came through who really liked the home.  The wife is an agent and I told her not to wait and to make the best offer they could because there were other people interested in the house.  They wrote a good offer and the house sold for near the asking price.  The couple who were waiting for the price to come down were very disappointed and their agent called me urging me to let him know if anything went awry with the accepted offer.  Again, if you find a home you love, make the offer.

I had another listing recently where a prospective buyer asked me to find out what the sellers’ bottom line was because he did not want to go back and forth with offers and counter offers.  I got the sellers’ bottom line and relayed it to the buyer, but he continued to dally.  Another offer came in and I called the dallier.  The bottom line is that he ended up paying a hefty sum more for the home than he would have had he made the offer before another offer came in.

I know that there is still a lot of fear about paying too much for a home in today’s market, but remember that a home is more than just an investment.   Your home is where you will live and not just any home will do. When you find the home that you love, make an offer.

 

Understanding Short Sales

A short sale is a sale of a home that is worth less than the mortgage owed.   Because these properties are often listed at a price lower than their values, you may be able to get a good deal, if you have a tremendous amount of patience.   The problem is that the only motivated people in the transaction are the agents and the buyer.  If you decide to make an offer on a short sale, it will generally be submitted by your agent to the seller for acceptance, subject to the short sale lender’s approval.  This can take months, so I tell the buyers, “This will take a lot of time, so don’t call me up, whining about it.”  There really is nothing you can do to speed up their decision.

It is very important to structure the purchase contract such that it gives the buyer an out of the contract if an acceptance is not obtained within a certain time-frame.  Also, it is best to have the different time-frames for inspections, putting the deposit into escrow, obtaining the loan, and so on begin at lender approval of the deal rather than at seller’s acceptance.  We have a very good short sale addendum that is required for every short sale transaction.

It is very important to have a short-sale property inspected by a professional home inspector.  Many times the upside-down seller has not maintained the property.  Very rarely will the short-sale lender agree to pay for any repairs, so it is a good idea to get a contractor’s bid to repair the items so you will know if  the cost is unaffordable.

The short-sale lender will come after the buyer and the agent for money.  One of my buyers said, “Tell them to go pound sand!”  The lender stopped asking him, but then they came after me for some the commission.  If there is more than one lender, the sale is even more tedious.  Unless the lender in first position comes out with what is expected, they will try to cut down on proceeds going to the junior lien holders.

Someone purchasing a short-sale property should just be prepared and patient and don’t get mad (they don’t care!) and a good agent comes in handy, too.

 

Real Estate News November 2011

 

 

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