Buying Advice

Why rising rates won’t stop the market

by John Rice

Rates just hit 5%.  They haven’t been that high in many years.

It sounds like the sky is falling but it is not.

Many first time buyers are freaked out over this since they got used to lower rates.

When I bought my first house, I bragged to my friends that I was getting a 6.5% rate.  I locked as soon as they fell from 6.625%.  Most of my friends who had owned their houses for a few years had rates over 7%.

Several years later, I refinanced my third house when rates dropped to 5%.  I could not believe at that time how low that rate seemed.  I currently have a 3.375% rate on that house.

I’ve watched rates go up and down.  The market change from a seller’s market to a buyer’s market to a seller’s market.  If there is one thing I have learned is that the market keeps going.  There are always first time buyers.  There are always people getting transferred, married, divorced, retiring, and running out of space.  Those things will always happen.  The market is really about life and all the stages and events of it.

Something else I have noticed is that the market tends to pause when there is a big change, whether that change is interest rates, rising prices, dropping prices, etc.  It’s like we say “Now isn’t a good time to do this because it is different that it was.”  Then life happens, we get used to the “New” normal and we buy and/or sell.

We are in one of those times now.  Mortgage applications are down slightly, sales are down slightly.  We are entering what is believed to become a balanced market, meaning the number of buyers will be about the same as the number of sellers.  This won’t last too long because like I said, people will get used to 5%.  It will become the new normal.  The market will go on just as life goes on.

Now really is the best time to buy….REALLY

by John Rice

I know, I know……don’t realtors always say now is the best time to buy?  Or sell?  Or do anything?

It is a phrase that is often used to motivate anybody to do something sooner rather than later, but right now really is the best time to buy all year.

Why?

Let’s get the most commonly used reason out of the way:  Rising interest rates.  Yeah, a quarter or half a point doesn’t seem like much, but over the 7-10 years you may stay in your house, it could buy you a lot of other things, especially now that you probably won’t be deducting the interest you pay on your taxes.

The big reason is that the market has slowed down.  Sure, it always slows down some in the fall and winter, but this seems to be even slower than normal.   I haven’t had a showing where there was a line, or somebody coming or going while I was there in quite a while.  Less competition means you have a better chance of getting a house.  Listings are staying on the market longer too.  I am seeing a whole lot less of houses selling in 0-4 days and a lot more in the 5-20 day range.  That is still a really short time.  I am not saying the market is crashing or anything.  Just that the spring and summer frenzy is over.  Most of the people who were going to buy have done so already.  The ratio of buyers to sellers is more balanced than it has been all year.

I suspect it will be a slow winter followed by another frenzied spring and summer.  While I don’t think prices will go up that much next year, there will be more competition from other buyers than there is now.

So, roll up your sleeves and go buy a house, because it really is the best time!

What to do when you have to sell your old house first

by John Rice

I’ve got several clients right now that need to sell their old house before they can buy a new one.  It’s not a fun spot to be in during a seller’s market.

You would think when almost all houses sell quickly that a seller would happily accept an offer from somebody who needs to sell their old house first.  But, odds are the seller is getting multiple offers, so why wouldn’t they pick the one without a contingency to sell?

Time to clarify a few things:  A contingency to sell is when you haven’t sold your old house yet and nobody has any idea when you can actually close on the new house.  A contingency to close means your old house has in fact sold, and assuming the buyer of your old house makes it to the finish line, so will you.

When you make an offer contingent on selling your old house, it is pretty standard for a seller to counter back with what is called a kickout clause.  That means that the seller will accept your offer, but they will keep their house on the market and hope to catch a buyer without a contingency.  If they do, then you’ll have a limited amount of time to remove the contingency and buy the house without having to sell your old one, or you agree to walk away and let the seller and their new buyer enter into a sale together.  If it is impossible for you to remove the contingency and buy the house, then you will lose the house to the new buyer.

For this reason, I am telling my buyers who need to sell their old house first to not even look at a house until it has been on the market for a while.  Let’s say you are the first buyer to see a house and you make an offer contingent on selling your old house.  The seller accepts it with a kickout clause.  You are feeling good.  Then the next day, the seller gets an offer without a contingency.  You lose it.  If you think about it……whether you buy it the first day on the market or the 10th day on the market, the end result is the same:  IF another buyer comes around and wants it, you will get kicked out.  IF no buyer comes along, then it will still be there when you make an offer after every other buyer has had a chance to see it.  There really is no urgency to write a contingency offer due to this reason, and waiting a bit prevents a lot of heartache for you.

So what’s the strategy then?

If you can, the best solution to preventing this problem is to sell your old house first.  You will then be able to make an offer without a contingency.  You stand a better chance of getting the house you want.  This will also keep your from having to potentially sell your house for a little less than it is worth to ensure it sells immediately and you don’t loose your new house.  The downside of this is that you are moving twice.

You can pay a premium for the new house.  Sometimes if a seller is getting a few thousand more than the next offer, they might choose not to kick you out.  The downside of this route is that you are paying a premium for the luxury of not having to move twice.  Moving twice costs you more and is more of a hassle, so maybe it is worth it to you.

Either way is painful really.  There is no easy button to push when you have to sell your old house to buy a new one.  Not in such a seller’s market.

 

The house I almost sold

by John Rice

It is like April of 2005.  I am sitting in a class to teach me how to be a realtor.  It’s all been common sense stuff so far.  I’m the only one who isn’t taking notes and who is wearing shorts.  I am also the only person in that class who is still a realtor.

The day I have been waiting for finally comes.  It’s the day they teach us how to do CMAs, which means Comparable Market Analysis, which means what a house is worth compared to what has sold in it’s neighborhood.

Figuring out value has always been fun for me.  I like the numbers.  I like the fortune telling aspect too.  I love it when I am right, which happens almost all the time.  The only time I don’t like it is when a seller thinks their house is worth more than I tell them.  Usually what happens there is that some other agent gets the listing and I watch them reduce it until it sells for what I had already told the seller.  It’s a hollow victory.

Back to that day.  A line I will always remember was said by the broker of that agency.  He said “If the comparable sale is superior, you subtract value.  If the comparable sale is inferior, you add value.”  Most of the people struggled with this since it is worded counter-intuitively.  Sort of like asking somebody “Is red NOT your favorite color” verses asking “Is red your favorite color.”

By the end of that day, everybody finally understood that if the house you are about to list is better than the comparable sale house, then you need to add value to what the comparable sale house sold for to know what your listing is gonna be worth.  There are assigned values for differences such as square footage, number of bathrooms, etc.  Some of it is subjective too, and that is where experience comes in handy.

And all of this leads me to the real topic of this blog post.  I almost sold a house last weekend.  I looked at the comparable sales in the area for my clients.  All the similar houses had sold for about $170-172k.  The list price on the house they wanted to buy was $172k.  Why did I suggest the value was about $165-168k then?  All of the comparable sale properties had flat and usable backyards.  The backyard for this house was flat for about 3 feet and then sloped steeply uphill.  It needed to be worth LESS than the other similar sized and equally finished houses in the neighborhood.

The seller got a higher offer than the one we submitted.  Good for him.  Bad for the buyer.  I am finding in this fast moving market that agents don’t seem to be doing as much leg work as they used to do.  I suspect that the buyer’s agent just looked quickly and saw that similar sized houses sold for $170-172k and thought it was okay to pay that much.  Looking at all the pictures would have helped.  The buyer is probably happy to have gotten the house, but if they need to sell in a Buyer’s Market, they will realize that buyers who have choices prefer not to have a sloped backyard.

Those same buyers of mine ended up with a move in ready house that has a perfectly flat and private backyard.  It will sell well in any market.

But it appraised for….

by John Rice

I sold a house a few days ago.  The listing agent told me that it appraised for $25k more than the list price.

Which begs the question:  Why didn’t it sell for that?

Because there is a big difference between market value and appraised value.

Market value is what the house is worth to a buyer.  Appraised value is a way to spend $375 and still not really know the market value.  The main purpose of an appraisal is to justify the purchase price to a lender.

Lots of things affect market value, such as floor plan, decor, features, view, lot size, odors, etc.

An appraiser doesn’t care about any of that.  I mean, they aren’t buying the place so it is all about comparing data to them.  Square footage, condition and what has sold in the area recently are what drives appraised value.  Appraised value is often more about the area the house is in than it is about the subject house.  I’ll also mention that in an appreciating market, appraisals are often incorrect because the data they use is recent history.  In other words, the current appraised value is based on the past.  Market value is always in real time.

Which leads me to this house that I sold.

The area around the house has homes that are 20 years old to brand new.  Values are all over the place.  The brand new houses that are the same size as the one I sold go for $50-75k more than what my client paid.  The same size house in the nicest section of the area is a lot more too.  By comparing my client’s new house to the more expensive and brand new houses, I can see how the appraisal was more than $25k higher than the actual sale price.

How did I help my client determine what the house was worth?  I excluded the more expensive houses up the road.  I excluded the brand new homes since that is a unique sale-they are only new once.  I looked at similar sized houses. I looked at the finishes of each house.  Did they have hardwood?  What were the appliances like?  What was the backyard like?  I looked at all the pictures of every comparable recent sale.  Then I thought about it.  I made adjustments for size and condition just like an appraiser, but I also thought about it through the eyes of a buyer.  I then told her what I thought the house was worth and she made an offer.