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Friday, March 7, 2008
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48 comments:
Ahhh...my new home. I like it!
Househunt update of the day:
We are going to look at the house one more time before sending the offer to the bank. The seller wants to change our title/settlement company (no, we're going to keep ours), and wants to change the house to an "as-is" sale. This troubles us, because though we realized they have no money for repairs themselves, we figured there would be further negotiations with the bank about fixing things, and priced our offer accordingly, at the high end of our spectrum.
Since it is a counter offer, we can do anything we want, with no obligation.
We do not see a house as an investment we will cash out on eventually, but we do not want to be upside down on our mortgage as soon as we move in. Is there a certain calculation we can do to make sure the price is a safe one? The guidelines we have used so far is that it is about a 2003 value in a neighborhood of mostly original owners, it is less than $100/sqft, and it is about 11% more than the original owners paid for it in 2000--but they finished the basement and added a deck/porch. Also, since it is not in Manassas, the zip code has not suffered as steep of a decline in values, at least not yet. The starkest number is that sales volume is down 50% from last year, but prices are only down about 10%, and the ave. sale price versus ave. list price is steady at about 90%.
Any further guidelines? Advice on crafting our offer? Advice on the situation in general? And just remember that there is a "drop-dead" date the first week of April, and that we retain the right to withdraw the offer at any time until we hear from the bank.
Thanks for the update, I enjoy following this.
Unfortunately I cant give any advice as far as these types of negotiations because I have no experience in this type of sale.
The "as is" clause is kinda scary though.
If you are putting 20% down, you are probably covering yourself pretty well if its currently priced at 2003 levels.
Tabitha,
I think you'll be upside down on the place as soon as you buy it. You won't be upside down on your mortgage though with the 20% down payment. You will set the new market price and if you tried to sell it the next day someone would be negotiating with you off of that price. As far as protecting yourself, I think all you can do is try to get the best deal possible and hope that less than $100/square foot is at or nearing the bottom. One thing I did when we were about to buy was I tracked the 2008 assessments versus the sold prices over the last 3-6 months. I figured that this was the best apples to apples comparison I could do since one would think the assessments were based on a similar pricing mechanism. This might be one way to figure out if you are getting a "good deal" versus other buyers in the neighborhood.
My wife and I got all the way to the point past the home inspection when we pulled the rip cord on our purchase. We just got cold feet even though places in the area were selling for 25% over the 2008 assessment and we were getting it for about 2% under. Personally I think renting is the better option for us right now, but with 7 kids I think you have (many) other factors at play. The equation I eventually did in my head that convinced me to rent were the worst case scenarios: (1) buy -- housing prices drop another 20%-30% over the next 2 years; (2) rent -- mortgage rates rise, housing prices stabilize. I figured #1 was much more likely to happy as I can't see where any of the fundamentals point to #2 (more likely, if interest rates rise, home prices will drop much further and faster -- this is why the fed is cutting rates in the hope that it will eventually lower mortgage rates).
I don't have any experience with negotiating with banks, but from what I've heard and read you really shouldn't expect to be able to negotiate much or very quickly. I think you guys are approaching this the right way though. Keep your eyes open, don't get attached to the house (he/she who doesn't care, wins) and always have an out (home inspection, HOA docs, etc.)
Good luck.
"The seller wants to change our title/settlement company "
Anyone know what the point of that is?
I don't have any substantive advice.
Just be ready to pull the eject lever if anything looks funny or doesn't feel right.
I've always messed up by not playing hardball enough, so don't go by me.
Tabitha,
Definitely make the sale contingent on the final walk-through. (In case some hideous repair crops up at the last minute). I would absolutely require that it be inspected as well. "As-is" doesn't mean it can't be inspected.
I never understood about settlement/title preferences either, except perhaps to follow the trail of who benefits, or perhaps the fee differences. Maybe Frank can add some insight on that.
We are looking at relocating down to western Loudon, and I am having a hard time finding a realtor that can give me good advice. I am looking for a higher end short-sale/foreclosure. Anybody know whom is considered the top firm out there?
"The seller wants to change our title/settlement company "
Anyone know what the point of that is?
In commercial settlements, it is not un common for one side's attorney to have a tie in with the title company, and thus receive a comission on the premium. I have only done a handful of residential closings, but I suspect the same factors could be at play between the seller's agent, and the title company they want to use.
I knew you guys wouldn't let me down!
*We are only putting down 10%.
*We want to use our title/settlement company because we know the owner and they donate $$ to our favorite local charity at closing.
*Harriet, the final walk-through contingency is a stroke of genius I never would have thought of...and they are letting us do an inspection even though it is as-is. Their agent said they put the clause in there because they have no money for repairs. But I am afraid that they have had no money for anything for so long, what maintenance might have been neglected?
Current plan: see the house, take lots of pictures, take the paperwork home with us, and sit on it for the weekend. Both our agent and their agent are really pushing us to get it in front of the bank ASAP, but jeez, it's not like some bank exec will be waiting by his fax tonight, right?
it's not like some bank exec will be waiting by his fax tonight, right?
From what I've read, depending on the bank it could go before a panel of bank people. I don't think you're going to hear anything quickly, but I hope I'm wrong. Banks need to get smart to the state of the housing market and cut their losses.
Is there just one bank involved or is there another loan with another bank too? If there are two banks this could be near impossible to resolve without foreclosure.
Two banks. Indymac and Citi something. Since the "short sale" amount is more than the original purhase price, they must have refinanced/borrowed against the house. Supposedly foreclosure is imminent.
This is why the offer would have an expiration date.
It we tried at all...
As you probably already know, the problem you are going to run into is that if the second lien holder isn't going to get anything out of this deal, they might not have any reason to ok the transaction.
What a CRAZY market.
S,
We are looking at relocating down to western Loudon, and I am having a hard time finding a realtor that can give me good advice. I am looking for a higher end short-sale/foreclosure. Anybody know whom is considered the top firm out there?
This is based on my current personal knowledge and preferences:
REO Real Estate out of Sterling centers much of their business around foreclosures. The name "REO" sticks in people's minds as synonymous with "Real Estate Owned". I know they are a competent firm. But I only know that they work hard on the sell side (with the banks) and their office listings are worth looking over.
Alex Lohr works out of Haymarket and may be available for western Loudoun. I appreciate her professionalism and I've seen her strength in the higher end.
You also might want to give Merv Forney a call. He's out in Western Loudoun and seems buyer-friendly. He's also available for consulting, I believe, and is more than just a salesman.
Looks like Feb sales in Arlington were 140, down from 200 in 07 but way up from January, both in raw numbers and as a historical percentage.
"Both our agent and their agent are really pushing us to get it in front of the bank ASAP"
Tabitha -
This is where the unfortunate part of working with agents can kick in. Remember, this more than anything else - generally speaking THE AGENTS ONLY GET PAID IF THE DEAL CLOSES!
Up til now, your agent was probably a little more passive, but now that a deal is "in the works" it isnt uncommon for RE agents to become like sharks with blood in the water. Often, both agents collude and put pressure on everyone to get this done NOW! For the first time, they probably both feel they can now see their commision - its out there, waiting for them - they just need to get these people to close!
Im not saying dont trust your agent, but from here on out, dont be surprised if they want you do things and (most importantly) do them quickly! When people wait, they can change their minds, and no agents want that! When that happens - dont be afraid to ask why the rush? Exactly what happens if I dont get this deal out tonight?
Its an unfortunate reality in the RE biz that since these people only get paid if the deal closes, the closer they get to closing, the less they are working for you and the more they are (both) working together to get their commission. Thus, you need to take everything they say with a grain of salt, and ask yourself, what could be in this for them?
"Looks like Feb sales in Arlington were 140, down from 200 in 07 but way up from January, both in raw numbers and as a historical percentage."
Narl - do you have a link? I looked on MRIS, but it was still only showing January numbers. Thanks.
Narl, thanks.
so that's a 30% drop YOY for sales. my forecast was optimistic @ 20% :-)
anyone know the new GSE limit for NOVA?
Another way to look at it would be a 50% increase over January sales.
fd,
I observed some uptick in sales during February to June (compared to July--January) last year in Fairfax Co, only to see sharp fall in sales and prices after that.
Apparently there are enough dual-income families that want to settle down during February--June and that creates as appearance of bounce.
But make no mistake--the y-o-y trend is still down and none should assume any uptick in sales is a sign of stabilization.
Arlington sales uptick --- makes sense to me, since the rates were so low in January.
“But make no mistake--the y-o-y trend is still down and none should assume any uptick in sales is a sign of stabilization.”
The bigger question as I see it is which way is the inner market going? If you believe (as I do) that supply & demand is perhaps the best leading indicator of prices trends out there, you wait with baited breath for each months sales reports.
Until Dec, inner areas “months of inventory” were staying stubbornly low (4-7 months) while the outer areas were hovering around double digits or more, and had been for some time. Then in Jan, sales fell off a cliff while supply remained largely the same. Thus for the first time Arl Alex & DC showed real signs of the serious price pressures that are currently plaguing the outer counties.
The question then was, were the lack of Jan sales an anomaly, or is double digit months of inventory the new normal? Feb sales (& supply) wont tell the whole story, but it will give more evidence to the BH that “the bubble has finally hit the inner areas” or to the HH that “the inner areas are immune” (not my words but some peoples). Either way, I wish Narl would come back and tell us where he got that figure!
Here is the link for the Feb sales.
http://realtytimes.com/rtnews/CN-MKTC?readform?open&id=mris.htm&link=http://mktc.realtytimes.com/mktc/conditionsviewjs/Virginia~Arlington~stacybmartin?open&pID=cnbundle
Sales of 140 and inventory of I think 830 or so is a little under 6 months of supple, not at all bad given the circumstances.
Er, try this, sorry
http://tinyurl.com/2b8gb7
Thanks Narl - I was hoping you had a link to some super secret multiply county data, but this info is definately helpful nonetheless.
I guess we will all have to wait until MRIS comes out with its Feb stats http://www.mris.com/reports/stats/
or wait a few days later when Harriet compiles all their info into her decade of sales reports.
That was supposed to be “multiple” and “definitely”. God I cant function without spell correct!
I find those realtor reports to be the height of stupid puffery in general, but unlikely they would get the numbers wrong when they will be public a few days later. Increased sales confirms what I've seen anecdotally in the Ashton Heights/Lyon Park/Lyon Village area, where most houses not wildly overpriced (i.e. over 2005 prices) or right on Pershing or Wash Boulevard are selling, with a few exceptions.
CRT,
You won't have to wait a few days -- I have them ready to go on the 10th of every month, which is same-day service (like the dry-cleaner). :-)
Harriet--can you confirm the Arlington february numbers--I think Realtors have access to them now?
"I find those realtor reports to be the height of stupid puffery in general"
No Kidding! I am now reading some of these things. No offense to the real estate agents who read this blog, but Jesus you have some really stupid bretheren out there! Listen to this nugget from Diane Sutton:
"There is little doubt that the real estate marketplace is now in transition. Sale volume has begun to weaken and in many markets the days of quick sales and multiple offers are going or already gone."
"The cooling from overheated sales conditions in recent months is helping to bring inventory levels up to the point where buyers have more choices than they've seen in the last five years," says DAVID LEREAH, NAR's chief economist.
This woman is quoting a guy who hasnt been their president for nearly a year now - are you kidding me!
kh & Harriet:
Regarding sellers wanting to use their closing company.... This happens all the time.
Legally in VA the buyer picks, but the seller can bribe you with "bonuses," to use their company. NEVER use a bank's closing company.
They do this for 2 reasons:
1) It is easier for the bank to have 1 point of contact for dozens of sales.
2) If something is fishy, like a deed isn't recorded properly, or bank doesn't really own the place, which side do you want representing you? Exactly. Close calls or problems? The seller wants their lackey's on their side
Some people say it is a rev share, but I don't think that is the real motivation.
I just recently heard a create tip. You can accept their closing company, but hire YOUR lawyer. Or do a split settlement. That way you get their bonus, but you make sure that everything was down right.
Tabitha,
You are going Realtor-less aren't you? Damn Realtors. Heck, all you need is a high school diploma right (actually do you even need that??)
Is this a SHort Sale or a REO bank owned property. If it is a Short sale, just give up now. End of discussion. Close up shop. They are fake listings. Just won't happen (unless the seller has closed at least 3 other Shorts and is doing it right).
If it is a bank sale, as for what to offer, one thing you can have your agent (if you have one) do is look up the bank's past 10 deals and see what % below list they tend to get. SOme banks start aggressively low and get bid up with 4 offers, some price high.
ALso look for all new listings that have hit AFTER the bank initially priced. They tend to always want to be the lowest in the area.
As for the home inspection, you'd be nuts not to have one. Like H said, you can be "as is" with a home inspection. Most contracts
even have a provision to let you cancel the contract if the HI turns up major issues. As for a final walk through, that is great for your (and the default in most contracts), the bank probably won't go for it.
Hey S:
I can give you some names. Before you consider Short Sales, read my blog. They are FAKE and a waste. As for Foreclosures or actually bank owned, yeah sure.
tabitha said: "Is there a certain calculation we can do to make sure the price is a safe one?"
Yes. Compute the price to monthly rent ratio of the house. To do so, divide the proposed purchase price of the house by what you think it could reasonably rent for on a monthly basis (based on comparable rents, for example). If the result is about 135 or less, the price is a safe one.
As an example, a safe price for a house that rents for $2,000 a month is about $270,000 (2k x 135) or less.
The 135 p/r ratio is based on the long-term pre-bubble average for the DC area.
Unfortunately for people who bought during the height of housing mania, p/r ratios got all the way up to 275 to 300. Talk about an unsafe purchase price!
John, so we can assess your credibility, you are saying that the appropriate purchase price for a beautiful SFH in Lyon Village that would rent for 4K a month is...540k?
Yup, you are clearly in touch with reality.
No FD, The other john is saying that for 2,000 in rent you can get a 550,000 to 600,000 house.
Regarding the new conforming loan limits -- looks like DC and surrounding areas qualifiy for the new maximum amount (was $417k, now $729.5K). Calculated Risk has all the details; the GSEs are making it hard to qualify for the new jumbos:
http://tinyurl.com/yvvetd
That is not what he said. He used the 2,000 to 270,000 example directly.
fd,
the appropriate purchase price for a beautiful SFH in Lyon Village that would rent for 4K a month is...540k?
A motivation for us to buy in the early 1990's was that the rent would cost more than the mortgage.
Holy cow--that calculation scares me. The house we're renting right now was built for $475,000 in 2003. According to your calculation, it should only be worth $324,000. Can you offer more details for the reasoning behind the numbers?
And we did not see the house--thankfully, as I am not feeling well today. We'll go by tomorrow. Apparently, the seller is moving out this week.
tabitha,
What John F. attempted to do is derive the value of an asset from its known cash flow. Stock pickers do the same thing with price/earnings ratios. By chosing a multiplier of 135X monthly rent, John F. is saying that the reasonable price of real estate in this area is whatever it takes to make known rent reflect a yield of 8.9% (i.e., 135X monthly rent is the same as 11.25x annual rent, if the value of something is 11.25x its income, then the income is 8.89% of the value). So if the rent is $2,000/mo or $24,000 per year, and if 8.89% is the reasonable yield, then the value of the house is $270,000. The math: $24,000/.0889 = $270K.
I agree with John F's basic approach that price/rent ratios are the best way to determine the value of property, but his use of 8.89% as a yield may be a bit high. This is not a science. The CNN article below suggests the rents in the DC area have historically been 16x annual rent, or a yield of 6.25%. Under this approach, the value of a house with $2,000/mo. rent would be $384,000. Although this process is imprecise in picking the "right" value, it can ferret out overvalued properties; any home that sells for more than 20x rent is surely overvalued and reflects buyers who are speculatively purchasing future appreciation without an underlying fundamental reason.
CNN link: http://tinyurl.com/3yj3la
Best of luck,
TermX
Tabitha,
No calculation is set in stone. You can obviously afford it, and are putting enough down. If you had to move and rent it out, would the rent cover all or most of your mortgage? That is probably an easier question to answer to set your mind at ease.
I don't sit in front of a computer all but out in the field without access so I'm going to reply to each thing as I come across it.
Narl was commenting about sales in Arlington... Sales may appear to be up, what they don't say is that sales also include foreclosures which makes the stats misleading since they don't break it down to which ones are normal transactions versus foreclusures.
crt is pretty much right about agents, they earn there living off of the commissions and that is what motivates them. Once a sale is complete and they have there money, if you default or have problems, tough luck. They got there money... I am always cautious of sales people who push things and I watch the body language carefully. In other times, some of them would have made great snake oil salesmen...
The bit around the market cooling etc. and the woman seems to be a day late and many dollars short... Seems no one in the industry wants to wake up and smell the burnt coffee... some of it is denial... some of it is people running scared...
Frank, Great advice about choosing whose company closes.... And very informative website/blog.
For what it's worth, I came up with a ballpark guestimate for this area of a maximum ratio of $150k of every $1000 of rent.
The assumptions I made are:
PITI is 90% of rent.
20% down.
6% 30-yr fixed.
Property tax of 1%
Insurance of $100/month
Using those assumptions as guidance, I got a ratio of 150:1 -- anything higher wouldn't be cash flow positive. Keep in mind that this is the maximum ratio. Actually, the ratio might be closer to 145, but 150 is a lot easier to do in my head (e.g. $2000 rent -> $300k max).
The townhouse I bought in 2002 came in at 180x rent. That was the first time in my life that owning wasn't cheaper than renting (owning and renting roughly matched in 2002), and I remember at the time I was seriously considering renting instead.
Tabitha said:
"And we did not see the house--thankfully, as I am not feeling well today. We'll go by tomorrow. Apparently, the seller is moving out this week."
Are you saying you've put a bid on a house that you've never been in? I hope I misread this. This is tantamount to proposing to someone you've never met. Please tell me I misread this. It sounded like you were doing all your homework and doing a great job at it. But to do anything prior to actually seing the house is insane.
Lance:
We've seen the house before, but the owners were home at the time. We want to go back alone and take a much closer look, take a million pictures, look it over with a home inspector's eye. If we are going to agree to an as-is sale, we are going to do so with utmost caution.
And we will still get an inspection.
Apt. at 11:30...will get back to y'all after that...
First time poster to the blog here. Want to thank everyone for their comments.
Been looking to buy in the Foxcroft condos in Fairfax City. Been working numbers to decide on whether the current asking prices were right or not.
What is funny is that my calculations of the future trend on pricing there led to the same value using some of the tips here:
- using the 2003 selling price
- rent calculation to determine real value (though I saw a calculation of rent $ x 12 x 10)
In any case it is showing me that the current average asking price $185K is still high perhaps for a 2 br unit. That $145 to 155K is more realistic.
Now to find a seller that can see the light. Am prepared to sit and wait things out here.
Tabitha, Good to hear this isn't your first look at the property.
Tabitha, don't get too fixated on the numbers or squeezing the last dollar out of the deal.
Go with your instincts, use the Force.
More info on price to rent ratios:
http://money.cnn.com/2007/11/06/real_estate/home_prices.fortune/index.htm?postversion=2007110711
"Over long periods housing, like stocks and bonds, follows a set of economic fundamentals. No matter how far prices get unhinged in a speculative craze - and we've just witnessed a blowout - those basic forces eventually regain their grip."
"Many factors determine the value of a house. But over time the most reliable guide to home values is rents."
"Once the fervor [of a speculative bubble] fades, prices must fall to restore their normal, long-term relationship with rents. Rents exercise a kind of inevitable gravitational pull on prices."
"The ratio of prices to rents "behaves much like price/earnings ratios for stocks," says Yale economist Robert Shiller. "Like P/Es, price-to-rent ratios are mean-reverting." In other words, while prices soar from time to time, sending the ratio to exceptional heights, sooner or later the relationship is bound to return to its historical average."
"So what are rents saying about home values today? Fortune worked with Moody's Economy.com to estimate adjustments needed to get prices and rents back in balance. According to our calculations, prices in most markets will fall by double digits over the next five years. We compared prices with the annual rent on similar properties - houses, condos, and apartments with the same number of square feet as the median-priced house in each market."
"Economy.com then compared the current P/R ratio with its average over the past 15 years and calculated how much it would have to decline to return to its historical norm. The average drop for all the markets we surveyed is 28%."
"From 2000 to 2007 the nationwide P/R jumped from 15 to 24, an increase of 60%. The figure went from...11 to 26 in Washington, D.C."
These ratios are a multiple of annual rents. To get monthly price to rent ratio, multiple by 12. DC's price to monthly rent ratio in 2000 would thus be 132.
Here is a link to a chart of the 55 cities:
http://money.cnn.com/magazines/fortune/price_rent_ratios/
Metro area / June 2007 / 15-year avg. / % Correction
Greater Washington, D.C. 26.0 15.9* –38.9
*Note that the 15 year average which Fortune is using as a baseline for "normal" includes about 6 bubble years. This means that the 15-year average is actually overinflated itself. As the article notes, the pre-bubble price to rent ratio for DC was 11 (year 2000). For the current price to rent ratio of 26 to fall back to year 2000 levels (i.e., pre-bubble levels), we would need a 58% correction. Fortune expect's the p/r ratio correction to be comprised of a 25% price correction with the remainder coming from rent increases. With the glut of vacant properties, we'll have to wait and see how much rents actually increase over the next five years.
Also note that Fortune expects DC to have the 10th largest price correction and that we are in store for the 3rd largest correction in the p/r ratio.
Chip,
Looks like a 2/1's asking rent is $1,350.
The lowest-priced bank-owned is $179,900. The condo fee says $381 monthly. (Ouch).
Still, no harm in offering less than asking, especially with a foreclosure.
First off you all are great bunch of folks!
John, thanks for the info. Giving me credence in hanging out for the right deal.
Harriet, I based the $1200 on what was rented last year. The average of 2/1's rented was $1260 in '07.
Did not look at the property you linked to. It is a West facing unit, and my preference is for an East facing unit.
BTW the commuunity seems well managed, and the condo fee includes ALL utilities.
Maybe I need to tell a bit of my back story. Back in '94 when I first looked for property I looked at Foxcroft (then in the $70-80K range). But I had to have my patch of grass. LOL So I bought in Herndon in Reflection Lakes. Had to sell in '05 to pay off debts when I split with my ex.
Was lucky to sell at the top of the market at the time. But I was priced out of rolling the profit into a new place, So I moved in to an apartment not far from Foxcroft.
Now that the market is coming back to reality, I am now able to look at owning again. But I also know that I need to be smart about it given the current marketplace.
The only reason I have not had my realtor submit even my "lowball" offer is that even in the $145-155K range, I am not sure that this is the new value point for the community. In past corrections it seems to have ended up in the $70-80K range.
Even if you factor inflation, the new value point could end up at $115K based on where they have been in the dips after the market shakes out.
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