The Nature of the Real Estate Market

When people ask me how the market is doing, I can honestly answer that it’s not bad. Let me clarify, markets are local. There are definitely some bad markets out there. But if I’m speaking specifically about my local markets, i.e. Hermosa Beach, Manhattan Beach, Redondo Beach, and other South Bay cities, the market really isn’t that bad. There are plenty of buyers out there. There have been multiple offers on some properties. Qualified buyers do get financing. Interest rates are phenomenally low. But one of the biggest differences I do see is a buyer’s attitude toward real estate.  What I mean by that is when the real estate market was exploding and everyone was rushing to get into the game, buyers were somewhat careless about what they bought. They overlooked negative features. If the house was located on a busy intersection, they thought that the noise wasn’t that bad (once the TV was on, the windows were shut and they spoke really loud). If the 4th bedroom was more reminiscent of a modest walk-in closet, they called it an office and threw their old sleeper sofa in there. If the home inspection report provided a laundry list of problems, buyers refrained from asking the seller to do any repairs for fear that they would lose out on another property to another buyer who was a lot less concerned about dry rot, electrical problems, plumbing issues or any other number of red flags. But today, in this current market, buyers have changed their tune. Their threshold for problems or quirks is much lower. They won’t settle for a house just for the sake of becoming a homeowner. They will look and they will move on if they don’t feel the house will properly meet their needs. It’s definitely a buyer’s market and the buyers can afford to be selective.

July’s Trivia Question

If you are the first person to answer the question correctly, you will win a $25 gift card from your choice of the following: Coffee Bean, Starbucks, Home Depot, Target or Barnes & Noble.

Here’s the question. (Post your answer below):

When does a buyer risk losing his good faith deposit?

Do Sellers Always Accept the Highest Offer?

When you make an offer, it’s not always just about the sales price. There are plenty of terms that the seller will take into consideration when selecting a buyer. Here are some terms that can make or break a deal. First, the size of the down payment needs to be considered. Is this buyer going to have a hard time getting a loan? The ideal buyer is an all cash buyer. The seller does not have to worry about the bank giving loan approval. If there is a loan, the smaller it is the better. Conventional financing is much easier to secure than a jumbo loan. Second, is the buyer well qualified? This goes hand in hand with the down payment. If the buyer has substantial assets, and a low debt to income ratio, then there is a better chance to secure the necessary financing. Or if there is a hitch in the loan, it may be possible for the buyer to come up with more money. Third, the buyer’s contingencies and the length of the contingency period are crucial items to consider in an offer. The more contingencies in the contract, the more opportunities the buyer has to cancel. So a more attractive offer is one that does not have as many contingencies or the contingency period has been shortened. Fourth, if the buyer asks for any seller concessions, it weakens the offer. The more the buyer asks for, the less likely the seller will want to accept the offer. And if the concessions have a dollar sign in front of them, it will only serve to reduce the offer price in the eyes of the seller. Last, how long is the escrow period? Each seller will have a preference for a long or short escrow, but normally the shorter the escrow the better. Again, a long escrow just leaves more opportunity for the deal to fall through.Of course, markets are not created equal. Depending if we are in a buyer’s or seller’s market will help determine how negotiable a seller will be. But when a seller is comparing one offer to another, these are definitely some of the points of comparison.I’ve heard some buyers complain that they offered a sales price that was ultimately higher than the final price at which the property sold. Keep in mind that a lot of things go on during an escrow period. It’s always possible that a buyer made a highly competitive offer, but then negotiated the price down based on the home inspection or the appraisal. Or the winning offer may have had other terms that the seller found attractive and just as important as price.

The Importance of Inspections

I recently had an experience with a client that served as a huge reminder of the importance of inspections. Often, buyers do their inspections and identify minor repairs that are needed around the house. It’s normal; they are not buying a brand new home. Sometimes the seller will pay for the repairs and sometimes they won’t, but they can usually come to a satisfactory agreement, and the buyers can press forward and buy the property. In this instance, everything went well with the home inspection. Minor issues were uncovered. The seller was willing to fix most of the items to my clients’ satisfaction. Then we had the mold inspection. The mold inspector detected moisture in a wall on the ground level. He tracked the source of the water to a leak at the exterior wall where the weather proofing had been ripped apart. (The weather proofing contractor would later explain that the weather proofing installed when the house was built was yellow jacket, an inexpensive, not very durable material.) The mold inspector drew the conclusion that the plant roots along the side of the house caused the tear in the weather proofing and ultimately, the sprinklers leaked into the house. This discovery led the seller to reveal that there was moisture in the same wall 10 years ago. The wall was patched but the source of the leak was never identified. The sellers merely cut down the time on the sprinklers, never noticing that the weather proofing was no longer in tact. So it was quite possible that the sprinklers were leaking into the house for at least 10 years.  No matter the fault, we had caught a relatively serious issue, and the seller agreed to replace the weatherproofing and stop the leak.  But there was still the issue of the moisture in the wall. The inspector suggested we open up the wall in order to dry it out and to assess the damage. The seller said no, because they had looked in the wall only 6 weeks earlier while doing some aesthetic patching and said it was dry. My clients were frustrated with this conflicting information. They really wanted the house and were willing to pay for some of the damage, but they wanted to make sure that the cost wouldn’t be astronomical. They even offered to pay for the cost of opening and patching the wall in order to look inside it. After days of negotiating, the seller finally agreed to open the wall. When the wall was opened, we ultimately found that the studs were riddled with mold. And it was possible that the mold extended into the second floor. Repairs would have cost much more than what my clients were willing to spend, and the house would no longer be a good buy. The mold inspection identified problems that never came up on the home inspection report or on the seller’s disclosures. It was only the buyer’s due diligence and thoroughness that uncovered problems that could have been easily overlooked. Had my clients closed escrow and had not spent the time and money to do their inspections, they could have been saddled with some extensive mold and water intrusion problems down the road.

Carbon monoxide monitors

As of July 2011, all homes in California with fossil fuel burning appliances (i.e. gas stoves, gas fireplaces) or attached garages will be required to have a carbon monoxide monitor. Most likely a portable monitor will suffice, and they should be relatively inexpensive. I won’t be surprised if this ends up becoming a compliance issue when buying or selling a home just like it is for smoke detectors and the bracing of water heaters.

Giving a Notice to Perform

When the buyer or seller is not following the stipulations of the contract, you can issue them a Notice to Perform. Once this Notice is given, they will have a certain amount of time to make the required action or you can cancel the contract. The new Residential Purchase Agreement defaults this period to 2 days. So for instance, if the buyer has not removed their contingencies, the seller can issue the Notice to Perform. If two days after the notice has been delievered, the buyer still hasn’t removed their contingencies in writing, then the Seller can cancel the contract and return the buyer’s deposit. Keep in mind, that within this contract, Time is of the Essence. If the seller waited 5 days after the two day waiting period (or one week after they issued the Notice to Perform), they would have to issue a new Notice to Perform to the buyer if they wanted to cancel. In effect, the Notice to Perform has an expiration due to the “Time is of the Essence” clause in the contract.

Backup Offers on Short Sales

Someone asked me today if it made sense to make a back up offer on a short sale. I think it’s a good idea. Short sales can take an average of 4 to 6 months to get lender approval. Several lenders are currently rolling out new systems in hopes of delivering short sale approvals on a more expedited schedule, but until this happens, you should expect a long waiting period. Because it can take a great deal of time, it’s not uncommon for the buyer to walk before the lender makes their decision. Many buyers will find alternate properties while waiting for the bank. So in this scenario, a back up offer would be able to step up and enter into a contract with the seller. Now, don’t get any silly ideas that the process would move more smoothly because the lender has already approved the short sale. If you have ever seen any lender approval letters, you would notice that the lender stipulates that the approval is granted only for this particular buyer. If a new buyer comes into play, the lender will take a few steps back and start much of the process all over again. It could still be several months before you receive your approval letter and are able to open escrow. I did encounter this situation recently. I had clients who made an offer in June 2009. They were not the accepted offer, but we let the listing agent know that we would like to be a back up. In the mean time, my clients continued to look for another property. In October 2009, the short sale approval came through, but the seller had lost their buyer. My clients were next in line. They entered into contract with the seller, and then they waited and waited… until finally we received written short sale approval in the beginning of March 2010. We were able to close escrow in the first week of April, nine months after they submitted their original offer! It always seemed like a long shot and something just sitting there on the backburner, but it turned about to be the best move. My clients have a new home that they love.