Wednesday, October 31, 2007

Three Important Reasons to Buy Your Home Now

You remember me telling you last fall that there may never be a better time to buy real estate in the City of Chicago. Of course I hedged a little - I didn't say there wouldn't be a better time, I merely said that their may not be a better time to buy. I stand by what I said then, the market was primed for purchase, deals were to be had, and rates were low. Prices have held steady.

There are three main reasons that now is such a prime (maybe an ever better) opportunity to buy a home in Chicago.
  1. Inventory is very high. There are so many homes to choose from. If you cannot find a home that suits your style and fits your budget in the current environment, you need to determine if you're being realistic in your search.

  2. Homes have continued to hold their value, but prices have not grown as quickly as they have historically.

  3. Interest rates are still incredibly low, within a point or so of their 40-year low for a 30 year fixed mortgage.
As it relates to inventory, in September 2007 there was almost 13% more inventory in those same 5 key neighborhoods than there was in September 2005. What's more, in that same timeframe, the number of sold properties decreased by over 30%. The ratio of listed-to-sold decreased from 18% to 11%, or a 39% drop, when comparing September '07 to September '05. There are more places on the market and the rate of sales has slowed, that causes serious sellers to work harder to sell their home. For a buyer that means seeing homes in better, more marketable conditions, priced more appropriately, and sellers who may be more willing to negotiate or offer some sort of concessions.

As it relates to home values, the Illinois Association of Realtors reports that

According to IAR’s latest report, the Illinois median home sale price in September was $200,000, up 0.8 percent from $198,500 in September 2006. The statewide average home sale price in September was $264,749, up 4.6 percent from $253,139 a year ago. There were 10,476 total home sales in September 2007, 22.9 percent below September 2006 which logged 13,594 home sales. Year-to-date, sales were down 15.4 percent to 112,278 homes sold January through September 2007 compared to 132,784 homes sold during the same period last year.

“Most Illinois homeowners are experiencing very healthy long-term gains in the value of their homes, and real estate remains the single best investment over the long term providing wealth accumulation especially for those who keep the home for a typical holding period of six to 10 years,” said REALTOR Kay Wirth, president of the Illinois Association of REALTORS. “Market basics are solid and with low mortgage interest rates, strong household formation and job creationmoving forward these factors should bode well for a recovery in the housing economy.”

You can read the full release here.

Despite poor housing news on the National headlines, home prices in the same key 5 neighborhoods have continued to rise modestly in that time by just over 6% (~3% annually)! That means you are buying in a period of modest growth (as opposed to rapid), without fear that you could have paid less for a comparable home in the future, and with confidence that the value of your investment is appreciating.

Finally, we come to interest rates. The national news has reported loudly on the demise of the mortgage industry due to the Subprime Mortgage "crisis". "Not so fast my friend," as a popular sportscaster likes to say, while this has had an impact on the national housing market and could impact many prospective home buyer's ability to get a mortgage, it doesn't have to affect you.

I have seen no issues (correct - none) with qualified home buyers getting a pre-approval for a mortgage. Gone are the days when a borrower with less than stellar credit can get 100% financing with no documentation - and for good reason. However, if you can make a strong down payment 10-20%, or have strong credit, or have a good income and a low debt to income ratio, (at least some combination therein) you will be able to find a good loan deal with a reputable lender. It is more important than ever to work with an experienced lender that closes a majority of their deals in your locality (read: does business predominantly in Chicago). If you don't have a trusted lender, your licensed Realtor can certainly recommend two or more who have done a good job for their clients in the past.

Mortgage rates are currently incredibly low. In the last 40 years, we've seen them bottom out about 1 point below their current price. What's more, 30 year fixed rates are sitting a couple points below the current prime rate. That is a historical rarity rivaled by solar eclipses.

Copyright © 2007
Reprinted with permission

Have you heard the expression "buy low and sell high"? If you've read my blog you have. Actually, if you haven't been living in a cave you have...

Your purchase will put a roof over your head and a place to keep your stuff. It will give you many years of enjoyment. It should also appreciate in value over time.

If you want to buy low - now is the time. The price of homes is relatively low (and I don't see them declining) and the price of money (i.e. mortgage rates) is historically very low. There's plenty to choose from, so you are in the driver's seat.

If you have a home to sell, you may be thinking that the "buy low, sell high" is working against you. On the contrary, if you are moving up, buying a more valuable home, you should sell your old home now (for less) in order to get the great value home now, while prices are high. Its like selling 100 shares of a lower priced stock to buy 200 shares of a more valuable stock right before the market takes off.

Saturday, July 07, 2007

The Hidden Costs of Selling Your Own Home

So you've decided to sell your home. You're moving into something bigger, or you need a yard and a den for the impending little one, or a third bedroom for the second child. Maybe you're moving closer to family or relocating for a new job.

Should you hire a Realtor? How hard can it be to sell a house?

You're a smart and business savvy person. You've sold your own cars in the past. You sold your old bike and your stereo on Craigslist. You know you need a sign, you'll have to put an ad in the newspaper, and then you'll have to answer the phone and show your home. Why pay a Realtor a 5-7% (let's call it 6%) commission? I mean, that's a lot of money!

The reality is that selling your home is much more complicated than that. What's more, you don't actually keep that 6% that you were weighing against the effort required. It costs money to sell your home, pure and simple, and if you're going to spend that money, use it to hire a professional. You cannot afford not to.

Why does it cost money to sell a home? Where are those costs you've overlooked?

  • Co-operating commission - This is the commission or "finder's fee" paid to an broker/real estate agent who brings the selling party a buyer. If you are not willing to pay a co-op commission, you will have a hard time finding a Realtor eager to bring you a buyer. The vast majority of home buyers are now represented by an agent, according to a recent RealtyTimes article, so you've just eliminated most of the buyer population if you insist on not paying a co-op commission. [Incidentally, I've yet to meet a For Sale By Owner (FSBO) who refused to pay one.]

    In 2006, 12% of all home sellers sold "by owner", according to NAR. Almost half of those sold their home to someone they already knew. That leaves about 7% of FSBOs who sold to a stranger. If the majority of those buyers are represented by an agent, that means out of 1000 home sellers, about 25 are avoiding a commission altogether.

    A typical co-op commission in Chicago is about 2.5% (some higher, some lower). Either you pay that, or your Realtor does, if you've hired one. That takes your cost of hiring a Realtor down to 3.5% not the original 6% we'd estimated.

  • Reduced Sales Price - That's right, you will (statistically speaking) sell your home for less money when selling by yourself than when you hire a professional Realtor. According to NAR:
    Homes sold with the help of a real estate professional in 2006 sold on average for 32 percent more than FSBO sales. The median FSBO selling price in 2006 was $187,200, compared with $247,000 for agent-assisted transaction

    Now I don't claim that a Realtor will get you 32% more money for your home than you can get yourself. Maybe its the case that there are more people are willing to try to sell their lower priced home than there are mansion-owners who attempt to "go it alone". That said, we're looking at $187,000 versus $250,000 in home price - that isn't the difference between Gilligan and Thurston Howell in most towns. Let's generously assign 2/3 of that discrepancy to other factors (not agent expertise). That still leaves us with 10% higher sales price for a Realtor than without one.

    Why would that be? Well, a Realtor sells homes for a living, they do this every day. They study the market daily. They have been in half the homes on your block. They know what you're competing with, and what all the neighbor's homes sold for and when. They know how to stage a home to make it most desirable for home buyers. Why? They've sold a lot more homes than you have. They know which features to promote, and how, and where. And, maybe most importantly, they know how to negotiate the sale of a home. They can remove emotion from the equation, they can quote statistics and empirical evidence, and they know how to find those extra dollars.

    Where does that put our 3.5% commission now? You've just cost yourself 6.5% of your home's value by not hiring a professional. Your 6% commission is now -6.5%. We don't need to continue, but we can...

  • Marketing costs - How will your new buyer find you? Will you go on the MLS? If you do, (though you're not technically a FSBO now), you're paying someone a flat rate. I've seen companies that will do this for as cheap as $450, and you can pay as much as you want (I've seen over $1000). This is weighed against your savings of course. What about ads in the paper? What about marketing on all the big websites (the vast majority of home buyers conduct their search online now)? You can post to Craigslist for free - again and again every week - though I've had only moderate success on Craigslist. As an agent, I take advantage of all these marketing vehicles at no extra cost to the seller. How about pictures? Will you take a dozen snaps with your digital camera? I'll hire a professional photographer, and they'll look great. Don't forget to go buy that generic "For Sale" sign for the front yard. Does that scream "this is a deal!" or what? Your agent has a fancy, classy sign for your front yard.

    How will you spread your message? I share all of my listings with literally hundreds of real estate agents, all of whom have buyers in your neighborhood. I email hundreds more local residents with my newsletter featuring your home. And then I mail out full color postcards to "move up" buyers, and those postcards feature those professional photos. Will you do that?

  • Your Time - It's worth something, isn't it? Will you enjoy your weekends with friends and family, or will you sit inside waiting for passers by to come to your open house? How many times will you show your home before it gets painful? The average market time for sold homes in Lincoln Park (as a representative example) is 91 days as of today (this is an MLSNI statistic, and they're the keepers of the data). If you show your home 3-5 times a week (that's pretty average), you'll show it 60 plus times. Does that sound like fun? Of course, you may not not get 3-5 showings a week unless you're really marketing the home.

    You'll show to lots of unqualified buyers too - another waste of time. Your Realtor can screen them to determine if their serious and qualified.

    How about all of those contracts, disclosures, and forms? Many FSBO home sellers indicate that this is the most daunting and time consuming of the process. There's the purchase contract - will it be a CAR contract? Multi-board? Something new, different, and proprietary? Don't forget the Real Property Disclosure, its required. Lead Paint Disclosure? Energy Disclosure? How about riders? Why does the home sale contingency have two different riders? What's a 22.1 and how do you get all THAT information? Your Realtor can certainly help you with that. So could an attorney, but how much will that cost? You don't think he/she's going to do an unrepresented closing for a flat fee do you?
Selling your home seemed like a fun challenge when it first occurred to you, but it can be an overwhelming and emotional process. The thought of "saving" $15,000-$17,000 on a $300,000 house seemed to make it the obvious choice - only you don't actually save anything. The reality is you will net less money and more stress over a longer period of time. How many larger transactions will you make in your personal life? Isn't it worth hiring a professional?

Friday, April 13, 2007

Rent Versus Buy

I recently worked with a Detroit transplant who is about to begin a medical residency in Chicago and she could not decide if she should buy a new home or rent one for a year before buying.

We spent a productive day together, focusing on the South Loop neighborhood (including Printers Row and Museum Campus) to determine what her money could buy in that neighborhood. After a day of surveying the land, as it were, she made a decision.

She chose to rent.

She made the correct decision.

Hold the phone! Here's a real estate agent encouraging someone to rent a home. What's this blog coming too?

As I've said before, and not for the last time, home ownership is a financial decision and an emotionally-enriching personal one. A part of the bundle of rights, provided by the U.S. Constitution, that comes with owning real estate is "use and enjoyment". A home buyer needs to find a home that will make him or her happy. A place where she can study for the boards. A place where he can host Super Bowl parties. A place where they can raise a family. It should be in a neighborhood that meets YOUR needs.

Another part of owning real estate is the financial benefits. There is investment value and appreciation. There's the importance of building equity. Don't forget the tremendous tax benefits that come from paying interest on a loan, property taxes, and thanks to Congress in 2007, even some tax write-off for PMI (mortgage insurance).

There many reasons to rent a home, though fewer than in olden days. If you are moving to a new city and aren't sure what neighborhood is the one for you, you might want to rent. Buying a home is a minimum two to three year proposition. If you're going to move in a year, don't buy. Finally, if you cannot afford to purchase a home, then you should wait until you can.

Financing for home buyers has changed a great deal in recent years, for better and for worse. It used to be that you needed to have 20% of the purchase price to put down in order to buy a home. That all changed. In the last few years, you needed merely to have a heart beat and have paid at least one phone bill in your lifetime to get a loan. Lenders were putting people in homes with zero money down and with loans that did not require individuals to put any equity at all into their home. These arrangements are well suited for some, but were taken on by many more...

This year, the industry as a whole has cracked down to reel in these types of financial arrangements in hopes of avoiding defaulted mortgagees and foreclosed properties. They are creating an environment where home buyers can get the type of mortgage that they can reasonably be expected to manage.

Simply put, if you believe you might be able to afford a home, you probably can. You should find a lender you can trust, or ask a Realtor you can trust to refer you to a lender that they trust. Share your income situation and your credit history with them. If you are risk averse, tell them that you're financially conservative. They will be able to tell you, within minutes, what you can realistically afford, and what that means in a monthly payment.

When you are ready to buy a home - you are financially prepared, you generally know what will make you happy, and you plan to be in one place for at least 30 months - you absolutely should be investing in a home. Your home.

When you do buy it, use it and enjoy it! You can knock down walls or build new ones. Try that in your old apartment!! (Actually, don't.) Paint it. Hang your pictures. Make a home office. Design a new closet layout. Sleep in on Sundays. Call me and thank me. Send me your friends and neighbors! You won't be disappointed.

Thursday, March 15, 2007

Buying a Home Without Representation

Back in the good ole days, if you wanted to buy a home you walked into a real estate office and they showed you "their inventory" - every home that their office had listed. If you wanted to see a house that wasn't listed by that office, you had to go to another office, the one that listed it, and they could tell you the details and sell you the home.

There were many problems with this approach - the onus was on the buyer to find the office, find the home, and do their own bidding. Most significantly, they were dealing directly with the agent that represented the seller. The seller told them to get the most money possible on the sale of their home, and now they've found their mark - YOU!

Things have changed a great deal in recent years.
  • The advent of the Multiple Listing Service (MLS) made all listings available to all MLS subscribers. The buyer was freed from having to find the office of each home they had interest in.
  • The introduction and proliferation of the World Wide Web and widespread internet connectivity made it possible to preview homes from the comfort of your own home, sharing one's likes and dislikes with his or her Realtor prior to making any appointments. No longer does the buyer need to see lofts when looking for townhouses, or vintage style kitchens when looking for granite and stainless steel. Information is widespread and best, free!
  • Focus has increased on improving the experience and protection of home buyers. Most real estate transactions feature two represented sides - a listing agent and a buyer's agent. There are laws in most states defining the roles that an agent can and cannot play in a real estate transaction. In some states, a single real estate licensee may not represent both the buyer and seller in the same transaction. In some, such as Illinois, the agent may represent both sides, accompanied by full disclosure.
One thing that has not changed, is the listing agent's responsibility to his or her clients. When a home seller hires an agent to sell the home, the agent has a fiduciary (read: legal) responsibility to his or her clients' best interests. The agent must protect their private information and motivations, market and show the home, etc, but he is also responsible for bringing the highest price the market will bear. All of the agent's research, marketing, and negotiation are with his/her clients needs in mind.

Why then do I consistently hear stories of individuals who buy a home without representation?! Why do you want to be unrepresented when the seller has hired a professional to negotiate on his/her behalf and represent their needs?

A good real estate agent will take so much of the pain and suffering out of the process and allow you to focus on finding your new, dream home. A Good real estate agent will:
  • Listen closely to your needs and wants, and only show you homes that meet your criteria.
  • Explain the full home buying process to you up front, mitigating the risk of any surprises, like mortgage insurance, high assessments, earnest money, or high closing costs.
  • Schedule appointments for showings, second showings, third showings... etc.
  • Help you to understand and complete forms and write offer contracts.
  • Perform a market analysis to assist you in preparing a reasonable offer on a home.
  • Negotiate on your behalf and in your best interests.
  • Guide you through the inspection process, the attorney review, and coach you to the closing table.
That's a lot of assistance... the best part, it doesn't cost you anything. Repeat - it doesn't cost you anything!

How can that be?

The vast majority of the time, buyer's agent's compensation comes from the listing agent's commission split. The home seller has agreed to pay the listing agent a percentage of the sale price of the home (commission). The listing agent then makes a promise to the market to pay a "cooperating commission" to an agent that brings the sellers a buyer.

So why, then, do so many people opt to make such a large purchase without representation? I haven't figured that one out yet.

Friday, February 09, 2007

How Not to Sell Your Home

I never cease to be amazed at the condition and presentation of homes that I see for sale everyday. When I walk into a home that is being actively marketed, I immediately place it into one of two categories - staged for the purposes of selling or unfit for presentation. It is an unfortunate fact of residential real estate that home shoppers do not want to see how you live in your home, how you decorate, or which faith you believe in strongly (be it Catholicism, Buddhism, Salvador Dali, or the Fighting Irish of Notre Dame). They want a vanilla-flavored home which can be mentally decorated with their belongings, a nearly open space with enough furniture to demonstrate that theirs will fit, but not so much that it fills their view with your personal taste.

A couple weeks back on a Saturday, I visited about a dozen homes with some clients of mine. On three consecutive showings I was amazed at the poor presentation of otherwise very nice homes.

Home #1

The first home was being sold using a discount real estate company whose responsibilities are limited to putting the home on the MLS and receiving any faxed offers. The homeowner was a very nice man who wanted to sell a three-bedroom duplex-down that he and his wife had purchased just 3½ years back. The place was gorgeous – granite countertops, 42” cherry cabinets, stainless steel appliances, and beautiful angled hardwood flooring throughout the home. Even better, the home faced a very large park, which was the only thing that separated the home from Lake Michigan. It was on the lake, on the beach, on a great big green park. It was well priced.

The owner had opted to rent out the home to what was a family of four, and seemed like a family of 18. There were things strewn about the home. There was too much stuff in every room of the house. One of the three full bathrooms was filled floor-to-ceiling with junk. The floors were dirty. One of the renters was home when we came to see the condo, a young teenager, and his video game playing made it difficult to see one of the three bedrooms.

The home was exactly what my buyers were looking for, where they were looking for it, at the price they wanted. Unfortunately for Mr. Homeseller, they couldn’t see themselves living in that home, because it was cluttered with someone else’s junk and filth. The homeowner recognized that it was a terrible way to present the home, and acknowledged that fact several times.

Mr. Homeseller was probably collecting $1600/month in rent, paying $2000/month in mortgage, taxes, and insurance, and devaluing his home by keeping it on the market for months on end in an un-sellable condition. He was costing himself $400/month, but maybe tens of thousands of dollars in resale value by renting his home. The average market time in his neighborhood is about 75 days, or 2½ months. By forgoing less than $5000 in rent, he could likely sell his home in a short period of time at a far higher price, ending up well ahead of the curve. Furthermore, a full-service real estate agent would tell him that from the start, saving him months of frustration and time-consuming showings with uninterested and potentially unqualified buyers.

Home #2

The next home was a condominium in a high-rise building. Only my clients and I were at this home, as the seller’s agent had left the keys at the front desk. When I got the door unlocked and walked in, there was a floor-to-ceiling painting of a young girl slaughtering a sheep directly facing me. I almost knocked over my clients in the process of jumping straight out of my shoes. The home was filled with dark and frightening art work, some of which were classic works of art, but none of which belonged in a listed property. The seller, of course, would be taking these with him, but we never got over the creepiness of the home, which was promptly removed from consideration. My clients never made it to the window and balcony, which featured some of the best views of Chicago’s Loop.

Home #3

The third home on our haunted house tour was also in a high-rise building. The listing agent’s office was located in the lobby of the building, which was a good thing, as she had recorded our appointment for the wrong day. This was the second time she had done this to me in two attempts!

The tenants (owners?) were home when we arrived at the unit. They had been given about 3 minutes notice. Again, the home was very nice, but there were things everywhere. My sellers were extremely tentative about opening closets, walking in the bedrooms, switching on and off lights, etc, because they felt as though they were invading someone else’s home. If you cannot become comfortable in an environment you certainly aren’t going to picture it as your future home. The Pièce de résistance? We had to wait three-minutes to see the second bathroom, as one of the tenants was using it. Talk about uncomfortable…

The Moral

The moral of the story is simply this – homes need to be staged for marketing and selling purposes. I don’t ask my clients to buy new artwork, furniture, or appliances. I do, however, suggest that they rent a storage locker for three to four months to deposit superfluous items, religious artifacts, bold and unusual artwork, and posters they pridefully displayed in college.

I suggest to them that they reduce clutter, that they make any and all minor repairs (which will come up at inspection anyway), that they make themselves scarce during showings, and most of all, that they remember that I am not commenting on their taste, perspective, or lifestyle, but that I am looking at their home exclusively through the eyes of a salesperson.