Determining home value: What makes a good “Comp” for your home?

Photo of home and patio

In real-estate-speak, a “comp” refers to a comparable property used to help you, the homeowner, determine the current market value of your home.

Most any real estate broker will happily prepare a complimentary CMA for you as a preliminary step to listing your home for sale, but a CMA can also be useful in other circumstances. For instance, you may want a CMA to present to your bank prior to paying for an appraisal when refinancing your home loan, or when helping an elderly parent assess their assets.

It’s helpful to note that not all CMA’s are created equally, i.e. with the same degree of attention and care. Don’t be afraid to ask more than one agent to prepare a CMA for you. Their willingness (especially if you are not yet committed to listing your home) and the quality of the report can help you decide if they are the best agent to help you, whether now or down the road.

What should a carefully prepared CMA look like?

First, it will show homes in the same neighborhood with similar statistics for the basics such as number of bedrooms and bathrooms, lot size, year built, and amount of living space. These numbers need not be exactly the same, but the variance should be within about 10%. For example, a home with 1600 square feet of living space could be compared with others in the range of 1400-1800 square feet.

The architectural style of a home is also significant in determining value. Comparing a two-story home to a home that has one-story and a basement or a split-level will call for some adjustment in the value. This is because buyers (and appraisers) tend to assign less value to a remodeled basement than to a finished second story.

Location within a neighborhood can also affect the value of the home. Is it on a busy street? A corner lot? Across from a run-down property? On a dead-end street? If few homes in your neighborhood have sold recently, you may need to look at home sales in similarly valued areas within a few miles of yours.

Older homes should not be compared to new construction, of course. And homes built more than 20-30 years ago should have similar degrees of remodeling/restoration. I.e., a home with the original 1945 kitchen is not going to compare favorably with a home that has new granite countertops and stainless steel appliance. This is one of the main reasons that it is so difficult for automated (i.e. computer generated) home valuations to be accurate. They lack the advantage of the human eye.

Parking accommodations are also a financially significant factor when calculating property value. Is there covered parking? If so, is it attached? Detached? Garage or carport? Is there space for multiple cars, for a boat or an RV?

A seasoned agent will be able to estimate how much each deviation between the properties being used for comparison affects their respective values. For instance, two properties may be comparable in almost every way EXCEPT one has a garage and the other has no covered parking. The agent should be able to tell you that the garage will be worth an extra “X” number of dollars to the average buyer in your market.

As you can see, estimating the value of a home presents some significant challenges. The number is somewhat of a moving target. Keep in mind that list prices are merely a wish, and sold prices are yesterday’s news. That makes pending sales the most valuable source of information because they indicate the price point at which a buyer was enticed to make an offer today.

Contact me today to request a CMA for your home.

Posted 2/1/17

How’s the Seattle Market in December 2016?

We are still firmly situated in a sellers’ market. New (appropriately priced) listings typically sell in less than two weeks. Many receive multiple offers that push the price above asking.

That being said, we are seeing a surprising number of homes stay on the market long enough to require price reductions. Why?

Although it is partly a seasonal phenomenon, the most common reason is that sellers listen to the wrong advice. Friends, neighbors, relatives, co-workers — all think they know what price you should ask for your home. This often results in overpricing, which eventually leads to a price reduction.

That’s why it’s important to hire and work with an experienced Realtor® who will do careful research and provide you with an educated evaluation of your home’s current market value. Better yet, consult two or more Realtors® until you find one you trust and who gives you confidence in your pricing decision.

Posted December 4, 2016

 

Beware the HELOC

Does this rapidly-inflating real estate market look suspiciously familiar?

With many communities in our country still feeling less than financially recovered from the recession, we have to wonder if the more fortunate (i.e. prosperous) communities have learned any lessons from the bust.

Some financial analysts insist that we are NOT headed for another bubble because banks are no longer giving away money as feely as they were in the early 2000’s. However, another reason that we (collectively) got in trouble is because homeowners used their property as ATM’s by borrowing against their equity from an inflated market. It seems as if that part of the equation might repeat itself.

Because interest rates have remained so low for so long, most homeowners who want to refinance to a lower loan rate, have already done so. That means that financial institutions need to find a way to replace the income they were making from refi’s. Some of the large banks have begun encouraging homeowners to once again tap into their equity by applying for a HELOC — Home Equity Line of Credit — to finance things like second homes, vacations, college tuition, etc.  The beauty of a HELOC is that it can be used for any purpose you wish, or simply left as an open line of credit. Much like a credit card, there are no payments to make until you access that credit. Unlike a credit card, your home is used as collateral.

Bankers know that most people who apply for a HELOC, even if they don’t intend to access the credit, will eventually do so. It’s simply human nature. Make no mistake, a HELOC is the equivalent of a second mortgage.  When home prices stop their drastic rise, or perhaps even go down, those who have added a HELOC to their first mortgage could find themselves underwater. I.e. the total of the loans against the property could be more than the property is worth. Or, at the very least, the lack of remaining equity could thwart plans to purchase another home.

I’m not saying that it is never a good idea to utilize a HELOC — it may very well make financial sense for you — but I am cautioning homeowners to consider how it might impact you if home prices don’t continue their current meteoric rise.

If you’d like to know more, give me a call at 206-708-9800, or talk to a trusted lender.

If you know of anyone who is thinking of selling their home, I would appreciate the opportunity to tell them about my services!

Posted 4/1/16

Multiple offers from a home seller’s POV

If you haven’t sold your home recently, you might be interested to hear a bit about what that experience is like in the current Seattle market.

Once a home has been prepped for sale — which takes very little work in such a strong seller’s market — the agent and homeowner agree on a list price based on sales of comparable properties. This is easier said than done when homes are selling so quickly at ever-escalating prices.

If the agent and seller anticipate multiple offers, they often set an offer review date. That date is usually 5-7 days after the home goes on the market. This strategy typically nets a higher sale price for the seller than if they accept the first offer that comes in.

Appropriately priced homes in West Seattle currently receive anywhere from 3 to 15 offers that meet or exceed the list price and are not contingent on inspection. I.e., buyers have either pre-inspected the property or waived inspection. This essentially results in “As Is” sales.

It is not unusual to receive all-cash offers and/or offers with down payments of 30-50%.

The agent then prepares an analysis of all the offers to determine which are the strongest.You may be surprised to hear that the highest offer price doesn’t always constitute the strongest offer.

Each agent goes about this analysis in their own way. My process consists of creating a spreadsheet showing a side-by-side comparison of the offers on 24 separate criteria!  

A “strong” offer is one that has the best chance of closing quickly and without incident. For instance, if there is a loan involved, the lender should have a good track record for closing on time. The chosen offer will typically have a combination of a high purchase price, reliable financing, and a contract with few, if any, contingencies (i.e. “outs” for the buyer).

The seller also wants to ensure that the buyer will go through with the purchase even if the house does not appraise for the full amount of the offer price. This means that the buyer has the financial means to pay the difference between the appraised value and the offer price, in cash.

Once buyers and sellers have reached Mutual Acceptance — and disappointed the 2 to 14 other buyers — the sale will usually close in 30-45 days when a loan is involved, or as quickly as one week for an all cash sale.

After that, the seller often gets to experience the process in reverse, which is why many homeowners are reluctant to sell.

Any questions? Comments?

If you are ready to buy or sell, give me a call at 206-708-9800

Posted 4/1/16

Homeownership still linked to wealth building

In good times and in bad, homeownership consistently maintains a strong link to the building of personal wealth for Americans. This is the conclusion reached by researchers at The Harvard Joint Center for Housing Studies, after revisiting their previous study from 2009.

 

The report citing the updated analysis, “upholds the bottom-line result from the earlier paper: that homeownership was associated with significant gains in household wealth, even when viewed across the tumultuous housing crisis period of 1999-2013.”

 

The authors reached identical conclusions from both generations of the report.  Namely:

  1. Even during market downturns with extremely volatile house prices, a majority of the home owners who were able to stay current on their mortgages, created substantial wealth for themselves in the process;
  2. Renters who bought homes and stayed current on their mortgages through the recession had some of the largest gains in wealth; and
  3. Renters who bought homes but weren’t able to maintain their payments, were no worse off financially than before they purchased a home.

Content of the updated report can be found at Update on Homeownership Wealth Trajectories Through the Housing Boom and Bust.

Authors of the report commented that, “Taken together, the study’s findings of both the remarkably and persistently low wealth levels of the typical renter and the potential for wealth accumulation when homeownership is maintained underscore the need for policies both to support sustained homeownership as well as to help renters find ways to build wealth outside of homeownership.”

To quote Yogi Berra, “It’s deja vu all over again.”

Home prices show no signs of slowing

If you are thinking of buying a house, but waiting for the home prices to stop climbing, you may as well hunker down.

Recent statistics from the FHFA (Federal Housing Finance Agency) show that although home prices were expected to slow by the end of last summer, they have now risen for 17 consecutive quarters. Nationwide, the increase in August averaged 8%, rather than the 3 to 5 percent economists had predicted.

“The long-anticipated slowdown in home price appreciation did not occur in the third quarter,” said FHFA Principal Economist Andrew Leventis. “The factors that have contributed to extraordinary price growth over the last few years — low interest rates, tight inventories, strong buyer confidence, and improving income growth — continued to drive prices upward in much of the country. However, as prices continue to rise, reduced affordability will be a stronger market headwind,” Leventis said.

Translation? It means that the old adage “time is money” is truer than ever. The longer you wait to purchase a home, the less buying power you will have unless your income increases at a faster clip than home prices. When home mortgage interest rates rise (rumor has it that the Federal Reserve Board has an itchy trigger finger), your buying power will shrink even further.

So if you are serious about wanting to buy a home in the coming 3 to 6 months, your best move is to find a skilled real estate broker (that would be me, 206-708-9800) who can point you to a reputable lender, who can then get you pre-approved for a home loan.

Once you know how much you qualify for, we can get to work finding you a home.

Posted 11/29/15

A bubble or a balloon?

As home prices continue to escalate at a mind-boggling rate, the big question among real estate professionals these days is whether or not this constitutes another bubble. Leading economists seem united in their response that it is not. Their reasoning has to do with governmental safe guards that have been put in place to further regulate the banking industry. “Liar loans” (i.e. loans based on non-verifiable resources/assets) are a thing of the past, they say, so only people who can actually pay their mortgages are getting loans. Furthermore, the irrefutable law of supply and demand will keep prices on the rise.

As average home buyers get priced out of Seattle’s core, they are trading increased commuting times for lower housing costs by purchasing homes north and south of Seattle. However, it seems obvious that this is not a sustainable solution either. We will eventually reach a tipping point where the trade-off no longer makes sense.

Getting back to the question of whether or not we are heading for another housing bubble, perhaps a better analogy is a balloon. Although a balloon can certainly burst, it has an obvious and controllable source of inflation. If you stop adding air, it simply stops getting bigger. Buyers do not have unlimited amounts of money to spend on home purchases. Once the bidding warriors run out of money, prices will have to stabilize.

While competition for a limited supply of homes will undoubtedly keep prices high, at some point, the rate of increase will have to decelerate and market value will become easier to determine. This may be a long way off, however.

The good news is that the balloon scenario is unlikely to result in the recessionary drop in home values we saw in 2007. Rather than seeing their equity disappear, homeowners will simply see much more modest and reasonable gains.

Once again, real estate proves to be a solid investment over time.

I welcome your questions and comments.

Posted November 2, 2015

5 reasons for low housing inventory in Metropolitan Seattle.

18024 3rd Ave SW, Normandy Park

The biggest problem facing the real estate industry right now is low housing inventory. Too many buyers chasing too few properties.

Why aren’t there more homes on the market? There are several reasons.

First, many homeowners are still underwater on their mortgages, so unless a life-changing event occurs, they are likely to delay selling. Loss of a job, relocation due to a job and divorce are the most common reasons for homeowners to consider selling. When this happens, it can be helpful to contact a broker to help assess the current market value of the home.

Second, even if a homeowner is not underwater, they may not have enough equity to leave them with money for a downpayment on a new home. Breaking even is not the goal of most homeowners. In the past, homeowners were able to use the equity created by increasing home values to finance a “move-up” purchase. Those plans may be delayed as they wait to regain lost value.

Third, savvy investors — particularly those with lots of cash — have been snapping up inexpensive properties since the bubble burst. Rather than flipping them right away, many are turning them into rentals until they gain more value. That means fewer properties are available for sale.

Fourth, some banks have been favoring Short Sales and loan modifications, which slows the rate of foreclosures coming on the market.

Fifth, the amount of new construction slowed considerably during the recession because builders couldn’t get financing. Speculative building is risky even in the best of times, so it’s not surprising that it nearly came to a standstill for a while. Once new construction starts up again, there is generally a lag of 18 months to 2 years before the new supply hits the market.

Buyers, on the other hand, have been spurred on by low interest rates and — in the Seattle area — improving economic conditions. The Law of Supply and Demand always, always, always wins out. As a result, we are seeing multiple offers again, with many properties selling within the first week they come on the market. (Note: this is only true for appropriately priced properties. Over-priced properties never sell quickly.)

You may be surprised to hear that real estate brokers dislike multiple offers as much as you do.

If we are representing a buyer, the chance they will be disappointed increases — sometimes, dramatically. It can be quite expensive in terms of time, emotion and money (e.g paying for pre-inspections). Buyers who make unsuccessful offers on several properties become understandably discouraged and may even drop out of the market. It’s no fun for a broker to have to tell their buyer that they didn’t get the house they wanted.

You might think that sellers (and their agents) love getting multiple offers, but it can create problems for them, too. Evaluating the offers and deciding which one to take isn’t as easy as just accepting the one with the highest offer price. Among other things, the broker needs to verify that the would-be buyer actually qualifies for a loan in the amount of their offer. There is also the potential for the offer price to exceed the eventual appraisal price, which usually causes the transaction to fall apart. If the seller, guided by their agent, chooses an offer that doesn’t come together, the seller can lose precious market time and a second offer will often net a lesser price.

Keep in mind that “the real estate market” is always local. It differs from state-to-state, county-to-county, city-to-city and even neighborhood-to-neighborhood. This is why it is important to hire an agent who knows the current market conditions in the area where you want to buy.

What I’ve described here should tell you that most of Metropolitan Seattle is experiencing a seller’s market right now (again, this can change by neighborhood). If you are thinking of making a move, I will be happy to help you assess your options during a no-cost, no-pressure consultation.

Contact me today to help you plan for tomorrow.

Are Short Sales worth the price you pay in time and trouble?

Once upon a time, Short Sales were a little-known phenomenon. Now, they are a staple in the diet of the real estate industry.

Circa 2007, agents and the general public were all forced to climb a very steep learning curve in relation to Short Sales. Now, in 2013, that they have become so common, do we know everything there is to know about them? If only that were so.

For those readers who may not be familiar with the term, a Short Sales refers to the sale of a property that is no longer worth as much as the homeowner owes on the mortgage. This is not necessarily a problem unless the owners are forced to sell for one reason or another. Perhaps they got a new job in another city; perhaps there was a divorce; or maybe they simply can’t afford the payments any longer.

In these situations, the owners may approach the bank that holds their mortgage and propose a Short Sale rather than a foreclosure since it is often less harmful to the homeowner’s credit rating. If the bank agrees, the homeowner puts their house up for sale at current market value. The bank accepts that amount and usually (but not always) forgives the remainder of the debt because it may lose less money selling short than foreclosing. Since the bank is taking a significant loss, it takes control of the sale, including approval of the final purchase price and the buyers. The sellers sign the Purchase and Sale Agreement, but do not receive any monetary benefit from the sale, so their motivation can be pretty low.

In theory, the buyer benefits by paying a purchase price that is less than comparable non-Short-Sale homes. The “catch” for buyers is that the average Short Sale takes several months to close, and a large percentage never close at all. There is very little, if any, room for negotiation with the bank. It is typically a “take it or leave it” situation for the buyer. The property is generally sold “As Is”, and it is seldom in great condition. Buyers are allowed to conduct a home inspection before buying, but it is for informational purposes only. The bank will not (except on rare occasion) complete any repairs or consider any price reduction based on the findings of the inspection. In other words, the bank makes all the rules, and therein lies the biggest problem. Since the banks make the rules, it also gets to change the rules whenever it feels like it. The procedures an agent followed to successfully close a Short Sale last week, can change without notice this week. When this happens, the timeline gets even longer. Sometimes, time for a Short Sale option runs out and the bank forecloses anyway, even if there is a buyer with an active offer on the property. When that happens, the buyer’s offer is terminated. If they still want to buy the property, they must either buy it at auction or wait until it comes back on the market as a bank-owned property. This can mean a delay of several more months since there is a 3-month (or more) redemption period providing the former owner an opportunity to buy back the property.

A client recently asked me if I have much experience as a buyer’s agent, closing Short Sales. I freely admitted that I don’t. There are several reasons why I don’t feel bad about that.

First, I encourage my buyers to look at Short Sales only as a last resort. In most cases, the monetary savings pale in comparison to the additional time and trouble involved in purchasing a Short Sale. It is not unusual for a buyer to make an offer on a Short Sale, wait 3 months for an unsatisfactory response from the bank, then repeat the process again and again. Before you know it, a year has gone by, home prices have increased, interest rates may or may not have increased (they can’t stay this low forever) and the buyer’s still don’t own a home.

Second, I believe it is the experience level of the listing agent that is more critical than the experience of the buyer’s agent when purchasing a Short Sale property. The buyer’s agent simply needs to follow instructions and do whatever the bank requires. The listing agent, on the other hand, has to navigate those ever-changing rules. If s/he doesn’t keep up with the bank’s changes and new requirements, the process gets lengthier, and the buyer usually won’t know why.

It’s probably worth noting that bank employees are typically paid an hourly wage. They earn the same amount of money whether or not your Short Sale closes. They have very little incentive to shorten or simplify the process. (If you are a bank employee and I’m wrong, please tell me!).

Lastly, the percentage of Short Sales that actually close, hovers around the 50% mark. This is due, in part, to the fact that so many buyers withdraw their offers before they even get a response from the bank. A lot of life happens in 90 days; it leaves a lot of time and opportunity for monkey wrenches to get thrown in the works.

Have you bought a Short Sale property? If so, I’d love to hear about your experience. Would you do it again? Would you recommend it to others?

Here’s your chance to share your wisdom using the comment box below.

Bye-Bye Buyers’ Market

Is it still a buyers’ market? Not so much.

Sometimes the local real estate market changes so quickly it can make your head spin! Now is one of those times.

You may think I’ve been sounding like a broken record the last 6 months or so, telling you that our biggest problem in West Seattle real estate is a lack of inventory. I wasn’t kidding, and it’s still true.

In January of 2012 there were 352 Active listings in West Seattle and 84 homes sold. In January of this year, there were 184 Active listings and 98 sold.  That translates into 24% sold in 2012 vs. 53% in 2013! That doesn’t leave much inventory to choose from. Try as you might, there is no way around the law of supply and demand. It will always be true that when supply is low and demand is high, prices will go up. How much and how quickly they will go up is difficult to predict. Until recently (just the past month), buyers were being fairly conservative, refusing to repeat the feeding frenzy of just a few years ago, so price increases have been moderate. Brokers often heard their buyers say, “We won’t be part of a bidding war.” Believe me, brokers don’t like to participate in bidding wars any more than buyers do; everyone emerges with a bad taste in their mouth.

For better or for worse, however, buyers have taken off their gloves and gone back to offering well over the asking price, paying for pre-inspections and anything else they can think of to give themselves an advantage over competitors’ offers. In the past 4-6 weeks, multiple offers on new (and some old) listings have become the norm again. The only saving grace for buyers is that interest rates remain low, which helps keep mortgage payments more manageable.

The good news for homeowners is that you are regaining some of the equity you lost during the downturn. And, of course, if you decide to sell now/soon, you stand a much better chance of getting a reasonable price for your home. Keep in mind, however, that appraisals can be a stumbling block to financing. E.g. a house that goes on the market listed at $300,000 might get bid up to $350,000 but if the bank’s appraiser can’t find other comparable sales to justify that price, the buyers won’t be able to obtain financing and the whole deal will fall apart. This is a very real danger since appraisers are under a much more watchful eye now than they were before the downturn.

Wondering how much your house is worth today? Call me for a free market analysis.

Know some buyers who have been waiting to buy? You might want to give them a nudge. The bottom of the market is waaaaaay behind us.

(Reprinted from my monthly newsletter. Statistics are from the Northwest Multiple Listing Service.)