Category Archives: home seller motivation

Are Real Estate Sales Truly Slower During the Holidays?

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You must have heard it at least once. That real estate is slower during the holidays. It’s an anecdotal statement. But as a real estate professional who has seen decades of transactions, let me give you my anecdotal account.

I have worked on holidays– Christmas, New Years, etc. When people have to move, they have to move. Job relocations, death in the family, etc. These things prompt action. And these events do not wait patiently for important holidays to pass. When these things occur, there will most certainly be real estate sales during the holiday.

While buyers are often still in the dark about the seller’s reasons for selling, some of the reasons for selling could be urgent. If buyers are patient enough, they might be able to have less competition when sending offers.

Sellers will use everything in their power to make the listing sell quickly at the highest price– order pre-inspections, pre sale escrow, make repairs, stage the home. They have tools to convert buyers with the help of their Realtor. With enough activity on a listing, it does not matter if the holiday is happening or not.

A holiday is a break of sorts, just like summer. Sometimes persons uses this opportunity to make life transitions while they have these breaks because they are too busy at work to do it any other time. When school is out, parents my find an opportunity to move and purchase before kids start again.

For people who have full control over their buying and selling activities, looking during the holiday appears as an opportunity, but not always. I have seen both quiet and highly active buying and selling periods during the holiday, so I always tell my clients to keep their expectations in check.

Home Sellers Want to Sell but Where Will they Go?

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Home sellers by now are bombarded with marketing materials asking them to sell their house in the wake of the inventory shortage. They might want to sell to tap into that equity, but they aren’t. Below I propose a theory of why they are not motivated to sell which pertains indirectly to the mortgage meltdown of 2007.

Where will they go? Sellers might have purchased 10 years back and they could be sitting on $400,000+ of equity. The only problem is: what can that $400,000 buy as their replacement home? Despite our recovery from the mortgage meltdown, the meltdown has permanently hampered the surplus income of many working families who lost equity in the 2008 crash. Despite them sitting on a large equity position, the rising values make their future housing less affordable. They may be able to purchase by using the equity as a down payment, but retirees with fixed incomes will not be allotted as much purchasing power as those with dual incomes.

Creating Universal Appeal For Home Listings

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We all know that when it comes time to sell your house, your Realtor will ask you to clean the house, remove the clutter, and even stage the house. The overarching objective is to get your home to appeal to as many buyers as possible. With this strategy in mind many sellers have intended to make the house as neutral as possible. We go over some of the things you can do to make your house appeal to as many buyers as possible.

White or off white walls: It’s no surprise the most popular colors from Kelly Moore and other paint suppliers are off-white, egg-shell white, etc. These colors are popular interior colors to get houses ready for new tenants or to appeal to new buyers. The whiteness of the walls represents cleanliness and also a blank canvas for the future resident to make any future changes.

Filling up the pool or koi pond: Pools and ponds in the backyard are interpreted differently by different buyers. People see a pool and may perceive the cost of maintenance. Others see it as a summer centerpiece. Families with children perceive it as a risk of drowning to their little ones and now they must fence it. Regardless, sellers sometimes opt to fill a pool with dirt and built over it or fill up a pond to have a more neutral layout of the backyard.

Getting drought tolerant or solar: Any green amenities can level up the value of the house and materially increase the listing price of a home by several percentage points. I have seen solar panels increase value of the house as much as 10%. The appraiser will have to count it. Same goes for drought tolerant plants. They can reduce household maintenance costs and utility bills and attract buyers to bid on your home.

Why Realtors Need to Stop Bashing Automatic Valuation Models (AVMs)

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Automatic Valuation Models are algorithms made by companies in order to value millions of homes simultaneously for the sake of providing users with a ballpark figure of how much a house is worth. Typically, nearby homes are used as part of the model and recent sold homes of similar size are placed into a sort of equation that spits out a value that persons can use to estimate the value of the house.

Recently, it is often found in the media that people like to bash AVMs, saying they are inaccurate. I will now investigate why people think this, what role real estate agents play in this, and how we can use AVMs to our advantage.

AVMs have to value millions of homes in a short period of time. You can imagine right away that an endeavor like this will have a higher margin of error versus a real estate agent who will sit down for 2-3 hours to pound out a competitive market analysis (CMA) in order to find out accurately a good list price for the home.

Nevertheless, AVMs still have their place among users who need a quick number when an expert is not available. If someone views ten properties in a particular area and there is no recent sold history, an AVM will step in as a good way to understand the values of that neighborhood. From there, it can be a stepping stone or conversation starter with a real estate agent to find out exactly how much a particular home is worth.

We have now established that AVMs serve a purpose when experts are not available and can be used as conversation starters with real estate agents who can either affirm or deny the findings. We understand that real estate agents are there to verify the AVM’s work. The AVM could be accurate or inaccurate. Its inaccuracies exist in two forms: overvaluing or undervaluing. Whatever the situation, I think professional real estate agents perceive the AVM as a viewpoint that needs to be considered carefully as part of the overall picture of the house. If the general public has access to the AVM and the real estate agent vehemently denies its credibility, then real estate agents and clients cannot see eye to eye on a fundamental level that could cause rifts in the relationship later on in critical junctures of the transaction.

That said, the real estate agent should be charitable to the AVM and determine how the AVM came up with that value. If the AVM is inaccurate, the real estate agent owes the client an explanation of why that is the case. If possible, the CMA should include the AVM as part of the analysis to see where the AVM falls. It could be the case that the AVM falls within the possible market price of the house and it can be credited as a secondary source outside of the real estate agent to justify price.

Imagine if a seller is having a hard time pricing down a listing. An overpriced listing will remain on the market and have sluggish activity—consequences that can eventually be traced back and blamed on the real estate agent. Now imagine that the real estate agent consulted the AVM beforehand and included it as part of the listing presentation. And suppose further that the AVM convinced the client to list the price at a lower price that could allow for more offers (assuming the AVM did come lower as the real estate agent had wanted). The results are beautiful. The real estate agent can refer to another expert opinion—the AVM, to determine that somebody other than herself believes the price should be at a certain threshold, and the seller now has to consider this information wisely.

How will a seller perceive the AVM? Well, if a seller is frequently on her favorite website and that website is informative, then it could be the case that the AVM is well-trusted based on the prior relationship the seller has with that website. Instead of working so hard on earning the seller’s trust, why not confide in the site’s credibility which will allow the real estate agent to beeline directly to the seller and share with the seller the credibility that exists between the seller and the website? Credibility by association is useful here and there’s no point making an enemy of the website if the seller swears by that real estate website. Because you know what they say: the friend of an enemy is also an enemy and a friend of a friend is also a friend. So befriend your seller and befriend your seller’s real estate website, within reason.

Client Question Series: As a buyer, do I need to pay my real estate agent?

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Thank you for the question. The answer is no. For residential and some commercial purchases of real property, you do not need to pay your real estate agent separately in order to purchase a house.

The main reason for this is that it is customary that the seller pays the commission on both the listing side and the selling side. It is important to understand that the seller pays this directly from the proceeds of sale. The agreed upon commission is negotiable and the seller has many opportunities to verify the commission of the sale within the body of the listing agreement. The buyer benefits from this agreement because the seller is paying the commission.

Some say that the commission raises the price in home sales and that the buyer is effectively paying the commission because the buyer is paying the full purchase price. While this may be true, the seller cannot afford to artificially raise the price of the home to cover the cost of the commission. It is important to remember that the home will sell for what the market is willing to pay. If the seller raises the price to cover extra costs, ceteris paribus the home will not sell.

What the FSBO Wants

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For Sale by Owners (FSBO) represent only 25% of the sales of homes, while the other 75% of sales being those sold by Realtors. I want to first explore historical and cultural considerations surrounding this topic followed by a discussion of why FSBOs want to sell by themselves.

I think we exist in a culture that has a tension of Do-it-yourself and Do-it-for-me. People want to save money but also do not want to put in extra effort, and this tension or stalemate often gets people to not act or not act in their best interest.

FSBOs want to sell themselves because it is supposed to be cost-effective. It is supposed to be part of the Do-it-Yourself movement. It’s supposed to be a triumph against commerce and a way to line one’s pockets further with saved cash. And to some extent, these considerations are very representational of how the average consumer thinks today: to go straight to the source, cut out the middle man, and get the product direct.

But if since undercutting practices are so effective, why are 75% of sellers and buyers still using Realtors to buy and sell their homes? At this point, I of course have a long list of praises to sing for Realtors and their activities, but I will spare you the self-praise and give you a shorter list:

  1. Sellers won’t take the time to learn the legal disclosures required in selling a home – There’s tons of paperwork. It’s almost nauseating. But it’s necessary. Real estate law spans back several hundred years and the disclosures and customs are somewhat respected and retained from past rulings, making the corpus of real estate law quite large. It’s no surprise that FSBOs might have a hard time filling out disclosures to deliver to buyers. It’s a lot of headache, not just as a process but the legal implications of doing them incorrectly could very possibly give someone insomnia. If you’re lucky, FSBOs can reach out to Realtors to help them fill out the paperwork, then promise the Realtor to give them the listing if they cannot sell the house themselves. It’s a good gesture and the easiest way to make a friendship. So FSBOs—what are you waiting for? Call your Realtor and ask for help and make them that promise, now!
  2. Showing property takes time and effort, something a full-time seller might not have—While FSBOs can put up a push button lockbox and show the property remotely, there’s really no telling who will want to see the house, let alone figure out if they are qualified. And where are these people calling from? Craigslist? Trulia? Well, some might be serious, but it’s riskier (relatively). It’s riskier than having an agent set up a lockbox where only other agents can access the lockbox. And when a seller is working all day, how likely is it to get those showings in or actually answer buyer questions until that seller becomes available again? A seller that’s hard to reach by a buyer looking for a discounted property will be easily skipped over if other listings exist that are represented by an agent who is typically available specifically for the purpose of answering questions about the house.
  3. A FSBO may say they already have a Realtor, but why are they trying to sell their house on craigslist without any pictures or adequate descriptions?: FSBOs are regular people who want good deals—this is basically what all Americans want. But when a FSBO says they already have a Realtor but they have the ad online, trying to sell it themselves, it is very confusing to me. When advertising a house, you need adequate descriptions and pictures, not a 2 line ad without anything useful. You also need to have the ability to reach out to the largest audience to get the most views on your listing, where views will turn into offers. If a FSBO truly had a Realtor, or at least a good one, wouldn’t the FSBO be advised to list the home on the MLS where the house can be seen by 40,000 people around the state? That is the truth about the multiple listing service and that is something that is worth paying for. Being able to choose an awesome offer out of 10 other very good offers gives you a real quality buyer you can work with. Not choosing the right buyer can cost money and even serious deals, so getting as many buyers as possible is really the best way to go.

Equity Sales are Up

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According to the California Association of Realtors distressed sales report, “…equity sales – or non-distressed property sales – rose further in May, rising to 89.2 percent, up from 88.4 percent in April [2014].” I will first get into what it means to have an equity sale, then continue by comparing this market to previous ones.

An equity sale is quite simply the sale of the house where the seller receives money from the sale. Realtors are trained to estimate the net proceeds for the seller to provide an overview of the costs of selling a house.

In previous years, equity sales were not occurring as much as other sales, such as short sales and REOs, because sellers often were facing a depressed market where their loan value exceeded market value. When a seller decides to do a short sale, their net proceeds is often zero. Of course, not receiving net proceeds from sale is far better than owing somebody (i.e. the bank) money, which is why the short sale was so popular to begin with (i.e. it bestowed debt forgiveness to the seller).

So, what does this mean? This means that 9 out of 10 homes on the market, and viewed by buyers like you, are most likely transactions wherein the seller will receive money from the sale of the property. The seller getting money from the sale in no way affects the buyer’s purchase—the buyer does not pay more to purchase the house if the seller is making money on the house. Sometimes buyers ask how much the seller is making on the house, and to some extent the answer is obvious and finite to two possibilities:

(1)    The first possibility is that the seller is making net proceeds equal to the purchase price, less fees, less existing loans.

(2)    The second possibility is that the seller has net proceeds equal to the purchase price, less fees, assuming the seller owners the property free and clear.

Buyers are people, too, and they sometimes inquire about the seller’s gains. This is natural and if the answer is available, I will share an estimation with the buyer when it is appropriate.

Ethical consideration: If the seller is making money on the property as a flip, do I have an obligation to tell the buyer that the seller is making money on it? Legally, properties flipped within 90 days or less and transferred to a new buyer triggers a disclosure to the buyer that the property has been flipped. Beyond that, there is no legal disclosure required.

As a Realtor, we have access to public records that show us the last transfer date of the property, which means it is apparent to us if the property is a flip, even if the 90 days flip rule has passed and the seller does not disclose to the buyer that it is a flip.

As a fiduciary to the principal, I would disclose that the property transferred between individuals very recently, alluding to the possibility that it was a flip. I won’t get into it here, but the fact that a property is flipped means that we probably need to scrutinize the property on a stricter level in order to make sure the repairs were done correctly. By disclosing this to my client, it enhances my client’s perspective on the property and will make more rigorous the client’s investigation process.

Why Sellers Aren’t Selling Yet: A general landscape of the economy and rational choice theory

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In the presence of housing prices climbing, the stock market at its highest in several years, something uncanny is still among us that we are probably all wondering about: when are home sellers going to sell? I look into several motivating factors as to why sellers have not unleashed the inventory floodgates on us yet.

Step up sellers need capital– there are many sellers who seek a larger space. They purchased a house with the intent to live in it for a few years and upgrade later—this is the definition of what a step up seller is. The basic principle was to buy a property, save capital, then upgrade later. What is happening now is that they have probably saved lots of money by living in a smaller space, however their desire to seller their current property and “step up” to a larger property cannot be fulfilled. While capital was saved, they still lack sufficient funds for down payment or even the larger monthly payments. For this reason, these step up sellers remain financially conservative and await their next financial boon until finding a larger place. And thus explains the postponement to sell.

Sellers trading for like kind don’t want capital gains– It is very possible that sellers who have large amounts of capital will want to relocate to another city for various reasons: new job, short commute times, be closer to family, prefer one city over another, etc.; the equity in their houses could be good enough to pay for another house of similar size. Their financial position might be so good that they could pocket some of the money after making the move. What they may not like, however, are the capital gains that follow the sale of their primary home. Despite single and married tax exclusions of $250,000 and $500,000 respectively, sellers believe that this ought not be to paid out just yet. For example, when one finds a replacement property for their own house and it is of the same value, and the costs of the transaction plus the capital gains they will occur loom large over their heads, it is possible that selling their house is an endeavor left for the future time. This happens quite frequently when sellers have acquired property for very little, making the difference between their sale price and basis price large, which allows them to turn a great profit, but perhaps some of this profit shall be subject to the IRS’ capital gains rules.

Some sellers with equity still have high loan amounts– The rising housing prices have given sellers a reason to sigh with relief as they reflect on their financial situation. Years ago, sellers were underwater. ‘Underwater’ just means having a loan amount higher than the value of your property. With prices rising, the economy converted many of these sellers into homeowners who have equity. However, of the sellers that now have equity, many of them are still closely watching the economy, hoping prices will rise further to get them further out of trouble. While these sellers may have equity, there is still a chance that their equity will not cover the costs to close the transaction of the sale of the property. Due to Realtor fees, escrow, city transfer tax, inspections, concessions, repairs, and other factors, the sale of their property could drain and realize the equity on their property. Not only could potentially the sale of their property require them to have negative net proceeds and pay out of pocket, but the question remains of what their future living situation will be if they move elsewhere.

Short sale sellers refuse to rent– Short sale sellers are sellers who have a bloated monthly payment and have decided the following: since payments are not affordable and loan modification was not possible, I will short sale the property and hire a Realtor to negotiate on my behalf to make the bank pay for the transaction costs of the sale and not require me to pay for the difference between my loan amount and the sales price (which is lower than the loan amount). Needless to say, a short sale is an incredible effective product that can be used to gain momentous advantages to seller who needs a way out from unsustainable monthly payments. If a short seller is so motivated, then what precisely hinders the seller from listing her house on the market?

One theory is that sellers refuse to rent. To sell one’s house and to rent thereafter is a sort of emasculation and taking away of the pride of ownership that got many of these sellers into a house in the first place. To sell one’s house in a short sale is giving constructive notice to the world that one has failed financially and that one must settle for an inferior existence in a smaller apartment, having to rebuild everything that was caused by the poor decisions and loose lending laws in the past. This is clearly an existential consideration mixed in with the pride of owning a home. Are the circumstances of a short sale as dismal as this? As professionals in real estate, we tend not to dwell so much on these aspects of the transaction. In fact, we would disagree entirely. Are we unsympathetic? We are quite the opposite. We support sellers in their decision to make a short sale because the alternatives to the short sale will make the seller worse off. For example, not doing the short sale results in the destruction of one’s FICO and credit score. This manifests itself in missed payments and the foreclosure on one’s record. Both needs to be avoided if one cares about their credit score.

I hope we have made clear the possible types of sellers in the market out there who make up the landscape of our housing market and I hope to have drawn out several considerations on why sellers are not selling yet. While an improving economy promises more opportunities, many sellers still wait and hope for even higher price increases to improve their situation. And if sellers are not the least advantaged in the situation, their saved capital is insufficient to acquire other property or their future capital gains may preclude them from taking action.