This year will be the most difficult since the beginning of the real estate recession for conventional sellers. Six of every 10 county homes closing escrow are now short sales or REOs and that percentage will steadily increase. It will be 2014 before the percentage of shorts and REO listings and their subsequent sales will drop below 25 percent.
In our price sensitive market, short sales and REO listings have the advantage sans mortgage. REOs don’t have one and short sale sellers are not responsible for satisfying one at closing. This leaves conventional sellers with a mortgage at a huge disadvantage when pricing their homes.
Buyers who are shopping for the most amount of house for the least amount of price have a good understanding of the price differential between convention sellers and distressed properties. As an example, over the last six weeks REO sales were averaging $109 a square foot, short sales $138 a square foot and conventional sellers $155 a square foot. As the price gap between traditional sellers and institutional sellers increases, the percentage of traditional sales declines.
Homeowners who have equity are faced with an uneven playing field if they decide to sell their home. Their competition has the pricing advantage with federal reimbursements and guarantees of any losses.
There are other alternatives to being caught in the middle of a price slug-fest between REOs and short sales. Perhaps the best option is sitting on the sidelines until shorts and REOs have less influence on the market.
Selling the family home used to be the first and easiest option in response to any significant change in life. An increase in family size — sell and buy a bigger home. Job transfer — call your Realtor. Divorce — sell and split the profits. Don’t like the weather — move. The typical homeowner moved every five to seven years. In 2007 the average homeowner stayed in their house six years. Entire neighborhoods changed ownership within 10 years. It was described as perfectly normal upward mobility. We were all moving on and up to newer, bigger and nicer homes.
Today, when a situational change occurs that would traditionally trigger a “time to sell” response, homeowners should explore other alternatives.
Whenever possible, remaining in place is the best alternative. It may be inconvenient and uncomfortable with more folks living under the same roof but it’s only temporary. Besides, think of all the money you’re saving. Postpone the job relocation if you can. Divorcing couples that once sold and split the proceeds from the sale of their home must now consider long-term joint custody of the house. No longer upwardly mobile, homeowners must adjust to a longer relationship with their home.
Remodeling or a room addition may be a better option than attempting to compete with institutional sellers. Remodeling will give a fresh, new appearance to the old place and a room addition will not only increase space but may improve your equity position in the future. Material and labor costs are more affordable today than what they have been in the past and are likely to be in the future.
If a homeowner must move they should consider temporarily renting their existing home. They could then buy or rent another home at their new location using their rental income to offset their new rent or to help qualify them for another mortgage. Demand for single-family rentals is increasing along with their rents. If a homeowner feels uneasy about becoming a landlord there are well qualified property managers ready to assist.
If a homeowner is determined to sell their home and take the loss, there are a few absolute rules that they will need to follow in order to be successful.
• First rule: “No Buts.” If a homeowner decides to sell their home under these adverse conditions they must enter the fray fully committed to battling it out with the financial institutions that have the backing of the Federal Reserve. No excuses like: “I want to sell my house but … I am not going to give it away.” “I must have enough to buy another home.” “I’m not going to put any money into fixing it up” or “I’m not taking a penny less than …”
• Second Rule: Whatever price your agent tells you your house is worth, reduce it. It will likely not sell at that price. Only 14 percent of conventional sellers are able to sell their home at their original listing price while half of all short sales and REOs will sell at or above listing price. Agents don’t purposely mislead sellers when pricing their homes; they simply can’t help themselves. They are optimists. They believe that by working hard, good things will happen. That isn’t always true. Property values dropped another 13 percent last year. The best marketing efforts are marginalized by aggressive pricing from institutional sellers on similar homes.
• Third Rule: Hire the best agent possible. This is no market for amateurs. If sellers can’t compete straight out with shorts and REOs they need an expert in “Guerilla Marketing.”
• Fourth Rule: Fully disclose. Property defect lawsuits are increasing against sellers who failed to disclose significant issues regarding their home. They may mistakenly feel that full disclosure isn’t warranted on the home since they are nearly giving it away. After all, every home has problems. That thinking could be costly in the future.
Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his Website at kencalhoon.com.