Seattle Real Estate Blog by David Monroe

Is there such a thing as an unsellable house?  There’s a wealth of information available on preparing and staging a house to sell, but what about situations where the house can’t be properly prepared or fixed up to sell?  I work a lot with short sales and pre-foreclosures, and in many of these situations the houses aren’t in great condition.  Often times the seller has no motivation to fix up or clean up the house.

One house I recently sold was no exception.  It was in foreclosure and we had to sell it quickly.  The house was only 13 years old and needed new flooring, interior paint, and some landscaping work, but it looked much worse.  The owner had multiple large dogs that were allowed to go in and out as they pleased and the house smelled like a wet dog.  Nearly every room in the house had boxes, clothing, and other personal belongings stacked floor to ceiling, and some of these rooms were so cluttered that it wasn’t even possible to get inside the room.

In the listing, I requested that agents contact me prior to showing so I could warn them of what they were walking into and help set the proper expectations.  I could see the potential of this house, but most buyers and their agents could not.  Some buyers turned around and walked out as soon as they opened the front door.

Critical Feedback

I always request feedback from agents that show my listings.  I received several scathing comments about this house from other agents:  “Get it off the market!”, “You should be embarrassed for listing this house”, “It stinks!”, not to mention some of the direct insults to the seller even though the agents had never even met the seller.

The seller was actually a very nice, thoughtful, intelligent, and hard-working couple.  They got in over their heads on a couple projects, and as a result had a lot of distress in their lives.  They were spending so much time putting out fires in their lives that taking care of the house became a low priority.  Many people are quick to judge because they’ve never been in true distress.  They don’t understand that most people make different decisions when in distress than they would in normal situations.

In the end, this house did sell—The short sale was approved and the bank took a $190,000 loss.  It was sold to a retail buyer, not an investor as many people might assume.  This buyer saw great potential in this house and ended up getting a great deal.

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Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.

Copyright (c) 2010 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).

If you were asked who your lender is—who actually owns your mortgage, what would your answer be?  Your mortgage statement may come from Wells Fargo, Aurora Loan Services, Select Portfolio Servicing, or some other lender, so they must own the loan, right?  It’s easy to assume that the company listed on your mortgage statement is the owner of your loan, but it’s usually not.

The Loan Servicer / Investor Relationship

• The company listed on your mortgage statement is the loan servicer.  The loan servicer doesn’t own the loan.  They are paid to collect, monitor, and report the loan payments, handle property tax and insurance payments, collect late fees, and foreclose on defaulted loans.
  
• The entity that actually owns the loan is the investor.  The investor pays the loan servicer a fee to service the loan for them.

Why Is This Important In Short Sale Situations?

On a short sale, the investor takes a loss, not the loan servicer.  However, a short sale must be “negotiated” with the loan servicer, and the person or entity handling the short sale for the seller is typically not allowed to communicate directly with the investor.  Also, loan servicers are typically paid more to foreclose than to facilitate a short sale.  So, if this is the case, you’re probably wondering why a loan servicer would ever consider a short sale over foreclosure.

The contract between a loan servicer and the investor requires the loan servicer to act in the best interest of the investor.  Since a short sale will usually net the investor more money (a smaller loss) than foreclosing and selling the property as a bank-owned property, the loan servicer will usually entertain a short sale as part of their contractual requirement with the investor.  However, because loan servicers typically get paid more to foreclose, they will often make the short sale process difficult, sometimes even trying to find small technicalities to kill the short sale deal.

First and Second Mortgages With the Same Bank

If you have a first and second mortgage with the same bank, they are probably owned by different investors.  This generally means that each loan is negotiated separately (with different short sale negotiators at the bank), and there may be different short sale requirements and timelines for each loan.   Even the information contained in the short sale package that is sent to the bank could be different on a first and second mortgage serviced by the same bank.

If a short sale is necessary to sell your home, it’s important to make sure you’re working with someone who has short sale experience.  Someone who has experience dealing with difficult lenders will typically have more success and be able to prevent unnecessary delays better than someone who doesn’t specialize in short sales.

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Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.

Copyright (c) 2010 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).

Stop Foreclosure in Seattle, Washington.  There are many real estate agents and investors offering to help stop foreclosure in Washington State.  Have you been approached by an investor claiming that they can help you stop foreclosure?

The general concept is that the investor will help you stop foreclosure by purchasing your house.  This usually involves you owing more than your house is worth, which is the situation I’ll be addressing here.  The investor will make an offer to purchase your house, then negotiate with your lender(s) to get them to approve a discounted payoff on your mortgage(s).  This is known as a “short sale”.  When the bank approves, you get to sell the house, get out from under the debt, stop foreclosure, and save your credit.  Sounds pretty simple, right?  Not necessarily.

First, I’ll clarify that investors are an important part of our real estate market.  I’m an investor myself, as well as a real estate agent.  Most investors I know are honest people trying to make a reasonable living.  However, it’s important to realize when an investor is your best option and when it is not.

When selling to an investor to stop foreclosure may be worth considering:

• The foreclosure auction is just around the corner:  If the foreclosure auction is less than two or three weeks away and you don’t already have a retail buyer in place, an investor may provide the best option (and possibly the only option) to stop foreclosure by getting the auction postponed while the bank evaluates their short sale offer. 
• Your house is a fixer:  If your house needs a significant amount of repairs, a retail buyer may not be able to secure conventional financing, and a cash buyer may be required.  Investors need to make a profit, and purchasing a fixer at a discount and fixing it up can be a good way for an experienced investor to make a profit.  When a house needs a lot of repairs, the bank will often times accept a larger discount in a short sale situation.

When selling to an investor to stop foreclosure may not be a good option:

• Your house is in good condition:  If your house is in reasonably good condition or only needs some minor cosmetic upgrades, the bank may not be able to justify accepting a large discount that an investor would typically require.  The bank will attempt to mitigate their losses, so they may feel that the house could be sold to a retail buyer, thus reducing their loss on the loan.
• You haven’t received a foreclosure notice or the foreclosure auction is more than 60 days away:  If there is enough time to find a retail buyer, the bank may not be willing to accept a heavily discounted offer from an investor.  The bank may believe that less of a discount would be required if the property is listed for sale and sold to a retail buyer.
• Your loan is an FHA or VA loan:  HUD is now using a minimum threshold net receipt to lender percentage of the market value as a basis for short sale approval on FHA and VA loans.  For example, they may accept a different minimum percentage of market value depending on whether your home has been listed for sale less than 30 days, 30-60 days, or over 60 days.  If the short sale proposal does not achieve the minimum threshold, it will not be approved.  If your home hasn’t not been listed for sale and an investor offers to purchase it, HUD may calculate the minimum amount that can be accepted based on a time-on-market of less than 30 days, causing the bank to require a higher net payoff.

Also, many investors offering to help stop foreclosure are wholesalers.  They don’t actually purchase the property themselves.  They “flip” the contract to another investor for a fee (usually several thousand dollars).  This means that they need to negotiate a discounted payoff with your bank that’s low enough for them to make their profit as well as the investor they’re flipping the property to.  The success rate of short sales in this situation is fairly low, except when the house is in very bad condition.

If an investor claims to be a cash buyer, ask them for proof of funds.  If they’re negotiating a short sale on your home, they will typically need to provide proof of funds to the bank to get the short sale approved.  If they really are cash buyers, they shouldn’t have a problem providing proof that they can actually purchase your home.  If they don’t want to show you their bank account balance, sometimes seeing proof of other recent cash property purchases they’ve made can be sufficient.

While the information here may apply in most situations where an investor is offering to help stop foreclosure, it’s difficult to condense all possible scenarios into a single blog post and address every exception.  I encourage you to seek legal counsel from an attorney if you have any legal questions.  Also, I would be happy to share my experience if you contact me.

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Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.

Copyright (c) 2009 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).

Do you qualify for a short sale? You may have determined that you wouldn’t be able to sell your house for a high enough price to pay off the existing mortgage(s), and you’re now considering a short sale. You may be in foreclosure or just one or two payments behind, or maybe you’re current on your mortgage but unable to continue making the payments. You know you will not be able to stay in the home and you need to get out from under the debt.

First, make sure you know all of your options for avoiding foreclosure. I recommend downloading the special report, 8 Ways to Avoid or Stop Foreclosure, if you haven’t reviewed all of your options.

Doing a short sale will take some work and cooperation on your part, even if you use a professional to assist you.  However, the benefits of a successful short sale compared to foreclosure are significant enough that it should be well worth the effort.

Here are some questions to ask yourself (and be honest):

1. Do you have a legitimate hardship that prevents you (or will soon prevent you) from being able to pay your mortgage? Valid hardships include out-of-area job relocation, job loss, pay cut or other income reduction, divorce, significant home repairs needed that you can’t afford, and sudden increase in monthly expenses. There are other acceptable hardships as well, but you will need to be able to demonstrate to the bank that you cannot afford the house.
2. Is your hardship short-term or long-term? If your hardship is short-term (maybe you lost your job, but you were able to regain similar employment a few months later), the bank may require that you attempt a loan modification or other workout plan first.
3. Can you produce two months of bank statements, two years of tax returns, two months of pay stubs, a personal financial statement (a list of what you own, what you owe, your income and expenses), and write a hardship letter when you put your house on the market? This could take a couple hours or more depending on how organized you are.
4. Are you willing to review and accept a reasonable offer on your property within 24-48 hours of receiving it?
5. If you’re still occupying the house, are you willing to allow the property to be shown at all reasonable times?
6. Are you willing to do some basic things to help your house sell, like clean the house, de-clutter, and clean up the yard? If a buyer expects a significant discount just because the house is a mess, the bank may think they can better mitigate their losses by foreclosing, cleaning up the property, and selling it at a higher price as a bank-owned property.
7. Have you filed bankruptcy? If so, you’ll need to ask your bankruptcy attorney if it would be helpful sell the house in a short sale.

If your hardship is caused by you moving out of the area, the bank usually will not consider it a hardship until after you have moved. If you’re being relocated in two months, the bank may not look at your situation as being a hardship now.

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Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.

Copyright (c) 2009 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).
Do You Qualify For A Short Sale?

You’re a few house payments behind, and one day you find that the front door lock and deadbolt have been drilled out and replaced with new ones and the garage door opener has been disconnected. Now you can’t even get into your own house! Who is responsible for this? This must be illegal, right?  After all, you still own the house.

Before you call the police (who will explain to you that they can’t do anything about it), you’ll need to understand that your lender isn’t trying to deny you access to your house. Here’s an explanation of what happened and why:

The Deed of Trust (part of the mortgage documents from the lender) that you signed at closing or when refinancing has a paragraph that states something like, “If the Borrower fails to perform the covenants and agreements contained in this Security Instrument…” (i.e. making the payments), “…or Borrower has abandoned the Property, then Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property… including securing and/or repairing the Property… including but not limited to… entering the Property to make repairs, change locks, replace or board up doors and windows, drain water from pipes, …” You remember reading that, right? (Let’s be honest now…)

So the Deed of Trust, which identifies the property as collateral for the loan, allows the lender to change the locks. The lender typically contracts out to a national field service company which contracts out to a local independent contractor to change out the locks. Some field service companies have a policy to contact the real estate agent if there’s a sign in the yard and offer them a new key for the key box, and other companies have a policy not to contact the agent (which is a bad business practice in my opinion). The problem is that if the field service person calls the agent, it’s after the lock has been changed and damage done to the door and/or frame. Also, the field service person will often times keep the old hardware (which is usually nicer than what they replaced it with). I had a situation recently where the field service person removed a $150 lock set from the door, replaced it with a $20 doorknob, and refused to return the old lock set to the owner.

What happens when they change the locks and don’t contact you or your real estate agent? Usually, calling your lender will get you the information needed to gain possession of the new key. However, some people just drill out the new lock and install a different one. This generally doesn’t take a locksmith—The doorknob can be easily removed once the door is open and replaced with another cheap model from a local hardware store. The next time the field service person goes out to check on the property and their key doesn’t work, they’ll typically call the agent’s phone number on the yard sign. If that happens, just remember that they were just following orders from the field service company and they often times may not agree with all of the company’s policies. They’re usually willing to work with you if you treat them with respect. Also, keep in mind that the local field service person may have to cover the cost of a new doorknob out of their own pocket if you drill out their lock. This may make it more difficult to get your old doorknob and lock set back from them if it has some value.

The lender will take measures to secure the house if they believe it has been abandoned. They need to protect the asset that is securing the loan. If you mention to your lender that you moved or if your house looks like it could be vacant, the lender will generally take measures to secure the house. To assure that this doesn’t happen to you while you’re still living there, here are some things to consider:

• Make sure the lawn gets mowed occasionally,
  
• Pick up flyers and newspapers from the porch and driveway,
• Park your car in the driveway instead of the garage, 
• Think of anything else that could make the house appear to be occupied.

If you have already moved, locking the doorknob lock and leaving the deadbolt unlocked could prevent the risk of damage from drilling out the deadbolt. However, you may not want to do this if you still have valuables in the house or you’re in an area where the burglary risk is high. A damaged door could be a turn-off to some buyers if the house is otherwise in good condition, as it’s one of the first things they see.

The bottom line is that there’s very little you can do to prevent the lender from changing the locks if your house is vacant and you’ve fallen behind on your mortgage payments. However, knowing the process and how to deal with it may help reduce stress levels if it happens to you.

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Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.

Copyright (c) 2009 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).
The Bank Locked Me Out Of My House! Should I Call The Police?

This is part 3 of 3 on pricing your house to sell. This may seem like a lot of information on one topic, but it’s critically important in our current market.

In the previous post, I covered several mistakes that people typically make when setting the asking price for their house. I would like to address one reason why a real estate agent may cause a seller to price their house incorrectly:

Inaccurate Comparative Market Analysis (CMA): Real estate agents typically prepare a CMA to help the seller determine the best asking price for their home based on their situation. The CMA will typically include other houses in the area that have sold or are currently for sale, some market statistics, information supporting the suggested asking price, and other information that will vary from agent to agent. Here are some errors that can lead to an inaccurate CMA:

• Comparable sales too old: In a declining market, comparable sales shouldn’t be more than six months old, and three months is actually better. Just because a house sold for a particular price in February doesn’t mean it would sell for the same price in October. Also, if a comparable house sold four months ago and the market has declined 8% in those four months for that area (King County prices declined nearly 8% from September to January), the comparable price should be adjusted down 8%. Some seasonal adjustments can also be made, which could vary depending on the area.
  
  
• Not putting the proper weight on active listings: In an appreciating market, agents could rely almost entirely on comparable sold properties when determining the market value and still be in the ballpark. However, in a changing market, properties currently listed for sale are the current “pulse” of the market. Comparable sales combined with active listings will give a very good pulse on what direction prices in the neighborhood are headed. For example, if we found three comparable houses in your neighborhood that each sold for $400,000, but two comparable houses on your block just went up for sale at $370,000, it’s safe to say that it could be very difficult to get $400,000 for your house, even though similar houses had recently sold for that amount. The active listings are going to be your competition.
  
  
• Using comparables that aren’t really comparable: Since I’ve been using the term “comparable”, I should clarify what really qualifies as a comparable house. A comparable house is house that is the same style (split-entry, one-story, two-story, etc.), in the same neighborhood (or nearby similar neighborhood if there isn’t enough to work with in your neighborhood), in the same age generation (not comparing a house built in 1965 with a house built in 2007), within 15-20% of the living area size, preferably on a similar-sized lot and in similar condition. It’s easy to miss one or more of these requirements, like comparing a split-entry house with a one-story rambler, comparing basement living space with above-ground living space, or comparing a recently remodeled house with a 30-year old house that has never been updated. While it’s rare to find perfect comparable matches, getting as close as possible then making the appropriate value adjustments for size differences, effective age, condition, lot size, and other features is the generally the best practice for single-family homes.
  
  
• Not making seasonal adjustments: In the Puget Sound region, home sales and prices have historically spiked in the spring, continued to rise at a slower rate through the summer, then flattened out or declined slightly through the end of the year. Since there are typically fewer home sales during the winter months, it could take longer to sell during the winter unless the house is priced more aggressively. Also, don’t automatically assume that you can price your house higher when spring time rolls around. In a normal market, that’s generally the case, but it depends on current market conditions.
  
  
• Competing for the listing: Believe it or not, there are agents that will inflate the value of your house so you’ll list your house with them instead of another agent that estimated a lower value. The agent may even know that it won’t sell for the price they recommended, but once they’ve secured the listing, they figure they can have you reduce the price when you don’t see the expected amount of buyer activity. Beware of an agent that says they can sell your house for a higher price than another agent. While good marketing and agent negotiation skills are important and can help squeeze more money out of the sale when executed properly, if they don’t have a buyer already in place who is willing to pay the asking price, there’s no guarantee that they will be able to sell it for their suggested asking price.

Also, some agents will use a “phantom buyer” to try to secure a listing. They may tell you that they have a buyer that’s interested in purchasing your house, but you’ll have to sign a listing agreement before they can bring the buyer over. If you’re only signing a listing agreement to see if that buyer is for real and you’re not sure if you can trust the agent (maybe because you just met them), you can optionally put an listing expiration date of a couple days out (instead of six months that agent may suggest). If that buyer purchases your house within six months after the listing agreement expires, they would still be entitled to a commission since they procured the buyer.

The market will eventually recover, but if you’re selling your house now, you need to price it based on today’s market. You’ll hear a lot of predictions on when the market will recover, but in order for any market to recover, the underlying problem needs to be fixed first. The last time the Seattle market declined year-over-year was in the early 1980’s. The problem was high interest rates (peaking at over 18%). When the problem was fixed and interest rates went down, the market recovered.

Historically, the real estate market has gone through cycles. If you graph real estate appreciation and mortgage rates together, you’ll find that real estate appreciation generally goes the opposite direction of mortgage rates. When mortgage rates increase, real estate markets slow. When mortgage rates decrease, real estate markets pick up. This is one of the few times in history that mortgage rates are low and the real estate market is also down.

The current problem was caused largely by mortgage companies lending to buyers that were not qualified to buy, and by lenders offering loans that were ticking time bombs—with large interest rate or payment increases scheduled 2-5 years down the road. That created an artificial buyer’s pool and skyrocketing prices due to high demand for houses. There was a lot of mortgage fraud—sometimes committed by the lender or loan officer and sometimes by the borrower. Now many of those houses need to be sold because the owners can no longer afford them, but there are fewer buyers, so that puts downward pressure on prices. Houses sold under distress, like foreclosures, also push prices down. It may be some time before our market gets back to its equilibrium, but it will happen.

One final piece of advice: If you’re meeting with a listing agent and the agent recommends an asking price but you insist on a much higher asking price, and the agent declines the listing because your price is too high, they’re probably right. Real estate agents don’t make money by listing properties. They only make money when they sell properties. Many agents even seem to forget this. If they’re so sure that your house won’t sell at your price that they’re willing to walk away, perhaps they know something you don’t.

Real estate is one of the few industries where everyone thinks they’re an expert, even if they don’t work in the real estate field. There’s a lot of real estate information available on the Internet, on the news, and in newspapers. There are television shows on fixing houses, flipping houses, decorating houses, and shopping for houses. However, the real experts are the real estate professionals who are in the field every day, seeing and experiencing things that you can’t see on TV or in print.

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Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.

Copyright (c) 2009 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).
Overpricing - The Inaccurate Comparative Market Analysis

I promised more on the topic of house prices, so here it is. I’m going to open this with a comment that may seem obvious, but many sellers forget:

“A house priced at market value will always sell.”

This is true regardless of the market conditions, house condition, neighborhood, etc.  So, what exactly does “market value” mean? In real estate, market value is the most probable price that a property will sell for in a free market, assuming:

1. A knowledgeable and willing seller who is not under undue pressure to sell and is acting in his own best interest;
2. A knowledgeable and willing buyer who is not under undue pressure to buy and is acting in his own best interest;
3. The property has been exposed on the open market for a reasonable time.

Most people would probably say, “I already knew that,” yet they still price their home too high. Let’s take a look at some things that cause many sellers and agents to overestimate the market value:

Not accounting for current market conditions: From a historical perspective, real estate always appreciates over the long-term. However, since the peak in mid-2007, median home prices have dropped 20% in King County and 17% in Snohomish County. That means a house that would have sold for $400,000 in King County at the peak in 2007 may sell for closer to $320,000 now. Since we’ve been in a rapidly appreciating market for such a long time, it’s difficult for people to grasp the fact that their house is worth less now than it was a year or two ago.

Basing your asking price on a single high-priced comparable sale: Sellers typically want to get top dollar for their house. Buyers typically want the buy at the lowest price. One mistake that sellers often make is that they find one house in their neighborhood that sold for significantly more than other similar houses sold for, so they automatically figure that they can get the same price for their house. They insist on pricing their house based on that one sale, even if their agent recommends against it. Then they blame their agent when no buyers show any interest. (It could be partially the agent’s fault as well—Maybe they shouldn’t have taken the listing to begin with!)

It’s possible (although rare) for a house to sell for significantly more than other comparable houses. Here are some examples:

• The house may have been priced above market value, but maybe the buyer’s agent convinced the buyer that the house was a good price because the buyer’s agent would receive a high than standard commission on the sale. In this case, the buyer was uninformed (unknowledgeable).
• Someone wanted to move next door to an elderly family member to care for them and none of the other surrounding houses were for sale at the time. The seller had overpriced the house and was not highly motivated, so the buyer had to pay the seller’s price or not get the house at all.
• The amount owed on the mortgage was more than the house was worth and a financially well-off family member purchased the house to get the owners out from under the debt and protect them from damage to their credit (this is rare, but is has happened).
• The seller could have sold the house on very attractive terms. I recently purchased a property where the seller carried back a note for three years at zero percent interest. I paid significantly more for the house than I would have otherwise, because the financing terms were very good.
• The house had a unique feature that a particular buyer was willing to pay extra for.
• The seller inflated the selling price in order to give the buyer a “buyer’s bonus”. Builders do this often, but individual sellers sometimes do it as well. For example, a seller may inflate the price $20,000 and give it back to the buyer in the form of a buyer’s bonus, which can go toward the buyer’s closing costs and/or to the buyer as cash at closing. There are certain limits to this depending on the type of financing the buyer is acquiring.
  
  You may be asking, “How is this a benefit to the buyer? Doesn’t it still come out the same?” If someone purchases a $300,000 house, and the lender requires 20% down, they would be financing $240,000 and would need a $60,000 down payment (we’ll ignore closing costs for now to simplify the calculations). If the seller increased the price to $320,000 and gave the buyer a $20,000 bonus, the buyer would be able to finance 80% of the higher price, or $256,000. Although they would be required to put $64,000 down, they would be getting $20,000 back from the seller, so their net cash out of pocket ends up being $44,000, instead of the $60,000 required at the original price. The house then is recorded as a $320,000 sale, even though it was really only $300,000. Builders like to do this, because they usually have several houses they’re trying to sell, and if they drop the price on one house, it reduces the value of all of their houses in that development. Instead of lowering the price, they just offer a larger buyer’s bonus. However, lenders are starting to crack down on this practice and it assumes that the house can appraise for the higher amount, so we’ll probably see less of it in the future.
  

These are all examples of non-standard sale situations that can occur in any neighborhood, and the reason why you need to review multiple comparable properties when setting your selling price.

Setting your price based on other houses currently for sale: Being aware of other houses in your neighborhood that are for sale is important. After all, they’re your competition. Also, active listings in your neighborhood can indicate if prices are on a downward trend. However, don’t make the mistake of thinking that because someone is asking a particular price, that it must be the current market value. In my neighborhood, very few houses have sold in the last several months. I would see a real estate sign get taken down and would check to see what the house sold for, only to find out that the listing expired or was cancelled. After inquiring why the seller took the house off the market, they would mention something like “The market is too bad. There was no activity—There aren’t any buyers. We’re going to wait until the market improves.” The real problem is that the prices are all too high. They’re all setting their prices at the same level as all the other houses that aren’t selling. This has created a “dead zone” in an otherwise desirable neighborhood.

Keep in mind that overpricing occurs in all market conditions. However, it has the most negative effect in flat or declining markets. If a house is priced 5% above market value when the market is appreciating at 10% per year, the price would be at the approximate market value after six months and could sell at that price. However, if a house is priced at 5% above market value and the market declines 5% over the next six months, the house would now be priced 10% above market value, and the seller has lost 5% of their equity. They would have to drop the price by 10% to sell the house after six months, rather than setting the original price 5% lower and selling it sooner.

Check back soon, because I’ll be adding another post on the topic of pricing. In my next post, you’ll discover how to determine if the Comparative Market Analysis (CMA) that you receive from a real estate agent is accurate, or if it could cause you to misprice your house.

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Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.

Copyright (c) 2009 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).
The Anatomy of Overpricing - Why Sellers Overprice Their Homes

We hear it all the time: "Price your home right and it will sell." But for some reason, even in a slow market (still declining in several areas), most people seem to be pricing their homes well above market value. Why does this happen?

I decided to pull up some market statistics in the Seattle area. I pulled every active listing in King and Snohomish Counties and compared the original asking price (when the house was first listed) to the current asking price (after price reductions, if any). Here's what I found:

• King County: The average price discount (original listing price minus the current asking price) was 7.5%. Also, 46% of all houses on the market had their asking price reduced at least once. This is huge, considering that this includes houses that have only been on the market for days or weeks and haven't had a chance to reduce their price. Also, to complicate the math a bit here, if nearly half of the houses on the market have had price reductions and the average total discount is 7.5% for all houses on the market (including ones that haven't dropped their price yet), then we can conclude that the average price reduction on the houses that have already had a price reduction is double (or closer to 15%).
  
• Snohomish County: The average price discount (original listing price minus the current asking price) was 14.8%. Also, 48% of all houses on the market had their asking price reduced at least once. As with King County, this includes houses that have only been on the market for days or weeks and haven't had a chance to reduce their price. Just like King County, if we run the calculations only on houses that have had at least one price reduction, we find that the average total price reduction for that group is also close to 30%. That’s a pretty staggering number.

In addition to the price reductions on active listings, there's another discount that comes into play: The sold price compared to the last asking price. This is the statistic that most real estate agents will typically give, since it's the easiest to find. In King County houses are selling for around 95% of their last asking price on average (a 5% discount), and in Snohomish County houses are selling for around 96.5% of their last asking price on average (a 3.5% discount). Add this to the average discount from the original asking price to the last asking price, and you have a whopping 12.5-18.3% average discount from original asking price to final sale price. That means that on average, a house that gets listed in King County for $400,000 will eventually sell for approximately $350,000. On average, a house in Snohomish County that gets listed for $400,000 will eventually sell for around $326,800. Of course, that wouldn't be the case if the house is priced correctly to start with, which I'll be discussing in follow-up posts.

There are several reasons why sellers overprice their homes. Sometimes it's the real estate agent's fault (inaccurate comparative market analysis, trying to bid up the listing price to procure the listing, etc.), and sometimes it's the seller's fault (greed, putting too much value on improvements, not knowing current market conditions, emotional attachment to their home, etc.). Certain market trends may cause sellers to believe their house is worth more than it actually is, but that's where the real estate agent comes in--to educate the seller on how these market trends will affect the real value of their house.

Stay tuned for more. I think this is a very important topic, so I have a lot more details to share (including some details that may surprise you).

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Authored by David Monroe, Realtor and Pre-Foreclosure and Short Sale Specialist.
Access Seattle area short sale help and foreclosure resources including selling in foreclosure, and 8 Ways to Avoid or Stop Foreclosure.

Copyright (c) 2009 by David Monroe (Home4Investment Team at Keller Williams Seattle Metro West).
Most Sellers Overprice Their Homes - The Statistics