REAL ESTATE MYTHS WHICH NEED TO BE DETONATED, SPRING 2013

Followers of the RayMax Team over the past few years realize that my blogs try to be brief, provocative, and informative. You can read hundreds of blogs, news reports, video streams, and the like giving you tried and true advise on selling your home or conservatively-hedged “how’s the market” pieces. You will not get any of that in these pages.

This piece is specifically targeted to residents of the D.C. Metro area, particularly Northern Virginia, and more specifically to communities  I follow closely: Alexandria, Arlington, McLean, Vienna, Reston, Herndon, Oakton, Great Falls, and Western Loudoun County. It is not brief, but I cannot do justice to the topics discussed without getting into greater detail.

Allow me to begin by stating what I have been saying most of the past year: We have rarely seen a market with a greater imbalance of supply and demand, favoring sellers, than at any time in our history. Yet sellers and their representatives often continue to sell homes and condos well below what the true market level is, in a market with historical low interest rates and unprecedented demand. For those who are card players, I offer this analogy: what is happening now is like the players in a game of bridge holding 9 spades in hand, a 25+ point count, and allowing the bidding to stop at the two level. In this market, it is a rare opportunity to bid for the slam. For non-bridge players, give me a call: you will get it later.

I am providing standard real estate myths which have been dominating the discussion on the topic of how to sell your home. In debunking them, I realize that I am telling you things that are diametrically opposed to what you may be hearing from your local neighborhood Realtor, most real estate brokers, NVAR, business news media, news pages on Comcast, MSN, or other web sites, etc. But if you scroll back to my past predictions of a strong market while others were mired in discussions of short sales, shadow inventory, and other such boogey-men worries, you will note there is an alternative view to what the status quo is promoting today. I provide one alternative view.

The following is likely what you hear, and why these “facts” are puttting an artificial lid on prices. These  are MYTHS in spring, 2013:

  • Myth No. 1: Appraisal Issues Will Keep You From Getting What True Market Value Should Be, So “List to sell quickly” – I venture to guess that 95% or more of practitioners in selling real estate are saying that to potential sellers right now. I am vehemently opposed to this line of reasoning, and if you are a potential seller of a home today, I offer this advise: Take this statement and bury it; worrying about a potential appraisal before you even list is a guaranteed losing game.                

            Here is the quick fact that everyone seems to have forgotten: Appraisers do NOT determine market value. Market value is determined by arms-length transactions between educated buyers and educated sellers, of which 99%+ seem to be in our market. Your Realtor’s job is to bring the maximum number of qualified buyers to your home quickly, and extract the maximum price and best terms of sale for your home. Any discussion of projecting an appraisal fear while taking a listing, and using this fear to set a lower listing price is inappropriate. Yet I suspect that it is a centerpiece of most listing presentations today, and this factor is creating the “2-bid mentality” I discussed, above.

           So why is this always mentioned as a major concern? The appraiser is a necessary and important participant in the mortgage financing game. Appraisers are not looking to kill sales. They are looking for the Listing Agent’s assistance in why the sale price is justified. This is a great opportunity for a well-prepared agent to show and promote the home to the appraiser, pointing out all the extra features and providing local market intelligence, in the same way one would if selling the house to a buyer! Yet many Realtors do not even appear at the appraisal, and allow the appraiser to enter the home and develop his/her report without any Realtor input! Given that the majority of appraisers do not live in the sales area, and many live in distant places marked by totally different demographics,  Realtor input is a necessary ingredient to helping an appraiser reach an accurate value estimate. If your Realtor is not mentioning this as a standard practice and skill which they bring to the table, don’t hire him/her!

  • Myth No. 2: If the appraisal comes in lower than sales price, I must sell at the appraised value – This is a subset of the above, and equally sticks in my craw as accepted mantra in today’s world. The statement here is blatantly false. Under no circumstance should you be led down that path before listing a home in a red hot market.

            Appraisals will always lag dramatically-rising markets. This is no fault of the appraisers, but a result of the rules they must follow in determining value. This process is backward-looking by design, so one should expect “appraisal problems” and be prepared to overcome these minor issues.

           A basic fact: You are not required to “match”an appraiser’s statement of “value”. In a worst case scenario, if the appraisal comes in low, you can walk and put  your home back on the market. It should never come to this. In most cases, the buyer truly wants your home (particularly if the buyer has been through a multiple offer process) and has enough money to increase a down payment, while leaving the mortgage amount at the level which the lender expects. The lender’s hands are tied by the backward-looking appraisal process, and can only lend based on the appraised value. This limitation should not affect you. Before you ever accept an offer, your Realtor should broach this subject with the buying agent. Otherwise, your run the risk of NOT selling at proper value, but locking yourself into selling at whatever an uninterested third party (the appraiser) says you should sell it for. This is pure insanity, but happens every day of the week. You need to have confidence that the buyer is truly intending to buy your home at the agreed-upon sale price, and that he/she is going to come up with the necessary additional down payment, if required by the lender. Better yet, that the buyer loves your home so much and is so well-qualified, that they will waive the appraisal clause, and the appraisal will be done for the sole benefit and requirement of the lender. If you are considering hiring someone to list your home who is tentative about this subject, disregards the subject or tries to tell you “this is something I cannot control”, or otherwise indicates a strong concern about appraisal issues before a home is even listed (usually done to get you to list lower, under the guise of listing  “more realistically”), don’t hire that person!

       I realize  the above is NOT what you are hearing from most others. But truth trumps mantra at the RayMaxTeam. NEVER ALLOW ANYONE TO TELL YOU THAT AN APPRAISER WILL STOP YOU FROM GETTING TRUE VALUE FOR YOUR HOME AS A MEANS TO GET YOU TO LIST “MORE REALISTICALLY.”

  •  Myth No. 3: Inventory of homes is low, and will remain so, especially with so many homes still “under water” –  Hold onto your seats, because we are going to take a roller coaster ride through this one. Inventory of homes will rise in the very near future, and rise dramatically, as prices spike higher. If you are thinking of selling your home, but need “a little higher price”, begin preparing a strategy for sale NOW. Many of your neighbors are doing just that. As for under water homes and shadow inventory, I have written in the recent past about that being a very minor factor in our markets; it is virtually a non-existent factor in determining price movement now.

            Currently, the low inventory of homes available for sale versus the expanding number of buyers is beyond any ratio realized in existing market data. A well-appointed home in a good neighborhood SHOULD attract multiple offers, and a good agent SHOULD recognize that multiple offers mean not only higher prices, but the ability to be sure that the buyer whose offer you are accepting is not going to “walk” or try to hammer a seller down later if an appraisal comes in lower than sales price. This should be basic to your strategy and discussion when negotiating a final contract. Unfortuantely, in most cases, it is not.

            A likely scenario which  few people are preparing goes something like this: A major uptick in homes being brought to market as sales prices increase; the strong buyer demand continues and cannot be satisfied by the initial supply increase, so prices remain strong; an increase in number of buyers, as those “thinking about” buying to take advantage of historically and absurdly low interest rates jump in because of fear that “they will miss the boat”; this increase will lead to more sellers as prices continue higher. This portends an active and rising market for the foreseeable future.

           The above scenario is never mentioned in popular journals, media, blogs, etc. I put the odds of occurrence at about 50%.

  • Myth No. 4: There is a shortage of rental housing, making investor-driven purchases a driving force going forward– Rents have risen dramatically in recent years, and supply of available rentals is increasing even in the face of low inventory for sale. The “rent versus buy” monthly affordability index has flipped from strongly favoring renters a few years ago to the exact opposite in 2013. Investor-driven projects, especially those driven by Wall Street types who are constructing new projects justified by lower investment “hurdle rates,” will add to this supply. 

            The availability of extremely cheap “lower priced fixer-uppers” has dwindled to almost nothing in the markets I follow. For the one-off, smaller investor, this may not be as lucrative an opportunity in 2013. Note that I was a table-pounder to be on the other side of this in past years, but times have changed.

CONCLUSION: There is no shortage of rental housing in most areas I cover today. As a public policy issue, the availability of affordable rental housing could be an issue, but that is a subject not at issue in this report.

  • Myth No. 5: As prices rise, new supply will grow, putting a natural lid on price increases – We are already seeing this in outlying markets where land is abundent. However, there is very little infill property available in the towns I cover, and the land which exists is prohibitively expensive to build upon. For those wanting to live in places like Reston, McLean, Vienna, or Arlington, new-construction supply will be an almost invisible factor in determining housing prices for the immediate future. In many communities, I expect a continued focus on “tear-downs”; contact me for information on this growing segment of our market.
  • Myth No. 6: Interest rates will go up; interest rates will remain stable, etc. and the gurus have this one figured out – I  have significant experience in worldwide interest rate markets and how they trade. I have yet to meet anyone who can consistently predict the direction, magnitude, and timing of interest rate moves. So I will not even venture a guess, other than to say the following: Interest rates today are at such historically low levels that they are helping to drive a situation in which monthly mortgage payments have dropped to levels which were necessary to buy much lower-priced housing in the past. And the percentage of monthly payments going into principal paydown, i.e., EQUITY, is greater than ever. This drives the value of your home as an investment far higher than many people are considering today. Lower rates will be a contributing factor in underpinning the kind of near-term price surge I have been predicting, and continue to predict.

I WELCOME ALL CALLS, EMAILS, AND REQUESTS FOR INDIVIDUAL MEETINGS REGARDING ANY OF THE TOPICS DISCUSSED.

IF YOU ARE CONSIDERING SELLING YOUR HOME, OR SIMPLY WANT TO EXCHANGE THOUGHTS ON THE REAL ESTATE MARKET, PLEASE GIVE ME A CALL. AS A LISTING AGENT, I TAKE MY OBLIGATION TO ACHIEVE THE HIGHEST PRICE AND BEST TERMS FOR YOUR SALE VERY SERIOUSLY.

 

Ray Wedell, Realtor

Chartered Financial Analyst, CFA

RE/MAX Gateway

703-855-7299

raywedell@comcast.net

www.RayMaxInternational.com

 

 

Advertisements