Selling/buying in this market

One of the questions most often asked of us by sellers or buyers is when will the market turn around? While none of us pretend to have a crystal ball or a magic hat, it is easy for us to see that the Real Estate market in SE-WI will not be changing all that much in the next several months at least, due to a high inventory of homes and tight lending standards.

The market peaked in the Spring of 2005. The years prior to 2005 were marked by a run up in home values like we had never seen before. There were years during this time where property values increased by over 10% year to year. These values were not sustainable as incomes failed to keep pace.

In a survey of Realtors by Homegain in March, 2009 showed that 45% of homeowners think their homes should be listed 10 to 20 percent higher than what their Realtors recommend. Nearly 20 percent of homeowners think that their homes are worth 20 percent higher than their agents recommended listing price. Home buyers are experiencing a similar disconnect on price. According to the Realtors surveyed by HomeGain, only 18 percent of their home buying clients think homes are fairly priced.

This survey underscores that while homesellers may be aware of falling home prices around the country, many believe that the slide doesn't apply to their homes. Many sellers have decided to take their homes off the market or not list at all because they want to wait "till the market comes back". There is a belief by many sellers that the market is going to come back very soon. Unfortunately many sellers are putting off their plans to move on with their life hoping that the market will make a dramatic "V shaped" recovery which has never happened before.

A fascinating thing about the decision process is a sellers unwillingness to part with the lost equity on their current home, even though they will be turning around and purchasing another home under the same conditions. Furthermore, everyone accepts losses in other assets such as the stock market, collectibles and cars but most people find it hard to take a loss in the value of real estate. We constantly witness sellers getting hung up on getting X amount out of their home that they continue to "feed" even a vacant property by paying each month taxes, mortgage, maintenance, etc. You can now find 100s of properties that have been on the market for over 2 years, many of them vacant (not foreclosures).

Most economists predict that once we do finally hit bottom we will only see a more historical norm of 2-3% yearly appreciation on our homes. Do the math - with this kind of reality check it is very easy to see why it is going to take a long time to get to the levels were at prior to the Real Estate correction.

Some food for thought. As of this writing interest rates are outstanding under 5%. If you have wanted to sell your home for whatever reason and are not because you don't want to lose the equity you once had then you could be making a huge mistake. Interest rates are at a once in a life time level. When the economy does finally improve interest rates this low will not last.

It could be 5-7 years or longer before we get back to the levels of 2005. What are the chances that interest rates will be where they are now when that finally happens? When your home finally does get back to 2005 levels so will all the other homes in the area.

Flat Fee is out. Reasons why:

Recently Homeowners Concept switched from being a flat fee company to just charging 1.5% of sales price. Our fee was around 1.5% anyhow as it was a tiered fee structure, so there is very little impact on any of our clients. The reason behind the switch though, was the fact that we needed to disassociate ourselves from the other flat fee companies which have popped up in the last few years and are now showing histories of low success rates while charging the sellers a hefty upfront fee of around $500 (see post of 2/20/09). Most of these outfits are doing just MLS data entry, and they could care less whether the home sells. Thousands of sellers have fallen victim to paying the hundreds of dollars upfront, wasting months or years on the market and having to turn to another broker (ourselves included) to eventually sell.

Homeowners Concept on the other hand is a full service real estate company which offers more marketing, more experience for less commission due to innovative and efficient systems and has been around since 1984. We have also earned the Accredited Business BBB award - one of only two large companies to have this! We have a vested interest in making sure the home gets maximum exposure (percentage wise we spend the most amount of money advertising properties of any company). We actually work very hard for the money.

So many of these flat fee outfits have come to the market the last few years (as of this writing we can find at least 11 in SE-WI) because it is such easy money for little work with no pressure to sell the homes. The proliferation of these is reminiscent of the online FSBO websites that were started as internet became mainstream. Hundreds of them have shut down in recent years as consumers wised up that spending hundreds of dollars upfront to be on "somebody's" website that received virtually no hits, was indeed useless. We feel the same fate awaits the MLS only/limited service companies.

Extremely High Success Rate.

We occasionally get this question asked: How many of your listings do you sell? Answer: All properties, IF sellers allow us to sell their property. You see, sellers control the price of the home on the market. Most sellers are in tune with the current market and listen to our advice on initial pricing, presentation, feedback and any price adjustment that may be necessary. With our expertise and the massive exposure we offer (see 30 points of marketing), all bases are covered. Nevertheless, a small minority of sellers defy the market's call and refuse to make any adjustment to the price or presentation of the home.

This small number of sellers who refuse to face reality sometimes migrate to a high commission agency under the perception that by paying much more in commission a buyer will come along and pay "their price". Reality though is, that buyers DO NOT care how much commission one pays. One can see this by the previous post that sellers find this out the hard way, wasting many more months on the market, then reducing (sometimes multiple times) and paying a high commission at the end. Not a smart move by any means.

In previous years sellers could ask more than the market because as prices rose those sellers would eventually get "their price". Nowadays though the market is stagnant, if a seller wants a higher price than the market analysis by one of our expert agents suggests, or showings and feedback from buyers indicates too high of a price, the property sits. All real estate companies face the same problem with sellers in denial (see article Milwaukee Journal Home section of 3/15/09 ).

With our very low commission structure, sellers have a clear advantage over sellers with a high commission broker because they can afford to lower the price if they want to sell. For an average metro-Milwaukee home of $209,000 the savings between a 6% and our 1.5% commission amounts to $9,400. So if a buyer is looking at two identical properties one at $209,000 the other at $199,600 you know which one is going to get more showings and eventually an Offer. Of course there is rarely identical properties due to so many variables (location, condition, decorating, etc). This is the area where our expertise comes into play. Given the exposure and expertise we offer, there is no way a property cannot sell under our program. Hence the statement above.

Some Sellers Pay Much More Commission, Unnecessarily

Paying a high commission of 5, 6 or 7% gives no advantage whatsoever to a seller as the table indicates.

Homeowners Concept offers massive marketing for properties (see 30 points of marketing) and only employs highly skilled agents that guarantee successful and smooth transactions. Despite all the benefits Homeowners Concept brings to the table there are rare occasions where a seller expires unsold (refused to adjust price to market conditions) and subsequently lists with a high commission broker.

This is a list of sellers and their properties that have left Homeowners Concept in last year and the price that they are currently on the market or sold for with another realty paying FAR MORE in commissions and getting less marketing for the homes (As of 4/1/09).

Evidently a few sellers have the perception that paying more will get the home sold and sold at the price they want. The fact is that buyers could care less how much commission one is paying. Actually by having to pay much less commission a seller could get the home sold by offering a better price to the buyer (see blog post of 2/26/09 for an actual case).

Administrative fee of $595 charged on top of 6%

A few weeks ago we wrote about the excessive administrative fees charged by traditional high commission brokers. Here's the post: Did you know that most high commission companies charge an administrative fee of anywhere from $195 to as high as $499 at closing? THIS is above and beyond the 5%, 6% or 7% commission one pays with these companies. It is a travesty that so many sellers blindly pay these fees on top of an excessive commission. These sellers either do not know any better or they are in a frame of mind of paying over $12,500 for the average priced home that they figure what's a few hundred more. Our administrative fee is only $95 AND you pay much less to sell and have a truly skilled Realtor on your side. Bottom line: a few hundred dollars on top of the thousands ONE SAVES BY USING HOMEOWNERS CONCEPT adds up to a substantial amount of money, especially in this economy. And even if one wants to be a big spender with money why not take the savings and make a big donation to your favorite charity. YOU WILL feel good rather than spending it on unnecessary commissions.
Today we closed on a property whereby we brought the buyer to the table. The listing office is the third largest company in town and they were charging the seller a $595 administrative fee. So even though homes prices are under pressure, some high commission brokers are raising their end fee to even higher level than it should be. It is unbelievable how much sellers get squeezed by the high commission brokers.

Thinking Limited Service? Think again.

Dana Schultz - a past client of ours (one who sold 2 homes using Homeowners Concept and saving thousands in each case) - called the other day. Her daughter had been trying to sell her home in Illinois in an area where Homeowners Concept does not have an office, using an MLS only broker (also known as Limited Service) and having paid $500 upfront just to go in MLS. The property had been on the market for 9 months her daughter had moved to California and she was doing the showings because the service they used did not have the option to show. After a few trips over the IL border to show the home, her daughter decided to cut the price of the home drastically so it can sell ($30K to be exact).

This price cut had spurred some activity but she was wondering whether other Realtors were avoiding the home or talking buyers out of it because it was limited service. This issue has been raised many times by sellers, ever since the MLS only companies came into the market a few years ago. Yet, you will not find an agent admitting such but as our study of the local market showed (see the blog post dated 2/20/09 titled: MLS only companies - an eye opener) many sellers who pay all this money upfront have little success. The companies (known in the industry as "list them and forget them") collect their money upfront (around $500) and have no incentive to sell the home. There is definitely more work for an agent that decides to show and write on a limited service home because the seller is still For Sale By Owner and there is no other agent to assist the seller with the contracts, counters, inspection, closing, etc. As a result this work falls on the shoulders of the selling agent. So putting yourself in an agent's shoes having to choose from a vast selection of homes and looking at the dismal success rates Dana's observation is right on the money.

Rates under 5%, market starting to heat up!!!

As was anticipated, with the Fed action yesterday, the rates took a dramatic drop to the 4.5% range (for exact rates click here: http://www.netcentralmortgage.com/pages/rates.html ). Rates were as low as 4 3/8 for a 15 year mortgage today. Expert say though that this may be the bottom in interest rates because there are fewer lenders in the marketplace now (see Wall Street article -3/20/09)

With the vast selection of properties on the market, the $8,000 tax credit for first time homebuyers and now the even lower rates, many smart buyers are using this opportunity to step up to the plate and buy. In the past 2 days alone we had eleven offers accepted. A number of buyers that were fence sitting are setting up appointments to view properties in the next few days.

If you are in the market to buy, call the central office at 414-258-7778 and we will direct you to one of our very experienced agents that specializes in the area you are looking

How sellers are pressured to pay 6%.

Why do Sellers still list with agents charging 6% (or even 5%), especially in this market where money is tight and a seller may or may not have much of a profit from the sale? At the peak years we heard sellers not really caring about the cost of the commission. When someone had a property bought years ago for $150,000 and they could get $350,000 for it, having to pay 6 or 7% was not much of an issue (they were local companies charging as high as 8% in the mid part of this decade and YES people were falling for it!). Nowadays though, the average seller has much less of a gain in the value of the house to play with, if any at all. So why is it that the high commission brokers can still talk sellers into paying 5 or 6% or 7% commission and to top it off charge them an administrative fee of $300-500 at closing?

This is a continually perplexing question to people in the industry and economists who study the field, and one which probably has several answers. First, many sellers don’t realize that commissions are not fixed. The big real estate companies spend a lot of effort training their agents to focus on the service-side of their pitch and not on their fees. To support their rigid pricing structure, many agents will argue that if you pay less, you will get less. Its all a smokescreen, of course. It perpetuates the perception that if one pays more money for something you are going to get something better. The internet is proving that comparison shopping for an item or service, you can pay less and sometimes substantially less. The real estate industry has done an incredible job convincing people that paying more commission is necessary even though there is absolutely no data to support such claim. Would you buy or pay more for a home because the owner is paying more commission to an agent? Of course not. On any given day, hundreds of homes expire unsold in our local MLS that were on the market with any of the high commission companies. There is no shortage of unhappy sellers who were going to pay 6% and did not sell or sold at a much lower price than they were told. No reasonable person can argue that paying a high commission will give one an advantage over someone who's paying roughly our 1.5% commission. The comparison stats are overwhelmingly close and at times better (such as Days on Market, Solds to Listings, etc). Actually our much lower fee gives a seller flexibility in pricing his property better than the competition and selling quicker, if one so desires.

Loyalty is another reason, as sellers will often return to the agents who helped them buy their house initially. And although we certainly cherish the same long-term relationship with our former clients, we continue to work towards having sellers take a closer look at a comparable service such as ours that will cost thousands of dollars less. Or sellers will list with the agent that is helping them buy another home even though that agent will make twice as much and offer no breaks on the commission (double popping the client is the industry term).

Finally sellers will gravitate toward a relative or a friend who's in the real estate business and sometimes a colleague who is in real estate just part time (talk about getting even less due to inexperience)! One would think that these close relationships would earn the seller a big discount in the commission. NOT SO for the most part. We have listed properties of (smart) sellers who had close family in a traditional realty but could get very little break in the commission (most of the time the agent you list with will end up with about 1/4 to 1/3 of the 6% commission because the listing office, selling office and selling agent will get their cut - in the traditional world about 90+% of the homes are sold by another agent NOT the agent you list with). In the early 90's we actually had a mother working for a traditional broker persuade her daughter to list with us because all she could do was charge her just 4.5% and not make any money!

People are coming around, as the number of listings with high commission brokers is decreasing. Real estate commissions in the United States are higher than any other industrialized nation. That means that home sellers typically pay more for real estate services in the U.S. than the rest of the world, unnecessarily. Everyone in the industry knows that price, exposure and agent experience is what sells homes. That's exactly where Homeowners Concept has an advantage over the traditional high commission model. The proof is in the pudding having completed 25 years in business and sold 23,000+ properties.

Everything you need to know about the $8,000 tax credit

We continue to run into buyers that do not have a clear idea of the tax credit (you do not have to pay back) and how best it can be applied to their situation. Here are the details from the National Association of Realtors:

What qualifies? Any home that is purchased for $80,000 or more qualifies for the full $8000 amount as long as it closes before 12/1/09. If the house costs less than $80,000, the credit will be 10% of the cost.
Who is eligible? Only first-time homebuyers are eligible. A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the 2009 purchase.
How does a tax credit work? Every dollar of a tax credit reduces income taxes by a dollar. Credits are claimed on an individual's income tax return. Thus, a qualified purchaser would figure out all the income items and exemptions and make all the calculations required to figure out his/her total tax due. Then, once the total tax owed has been computed, tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return a person has total tax liability of $9500, an $8000 credit would wipe out all but $1500 of the tax due. ($9,500 - $8000 = $1500).
What happens if the purchaser is eligible for an $8000 credit but their entire income tax liability for the year is only $6000? This tax credit is what's called "refundable" credit. Thus, if the eligible purchaser's total tax liability was $6000, the IRS would send the purchaser a check for $2000. The refundable amount is the difference between $8000 credit amount and the amount of tax liability. ($8000 - $6000 = $2000).
Is there an income restriction? Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals filing Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Married couples who file a Joint return may have income of no more than $150,000.
Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit? Not always. The credit phases-out between $75,000 - $95,000 for singles and $150,000 - $170,000 for married filing joint. The closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. The law provides a formula to gradually withdraw the credit. Thus, the credit will disappear after an individual's income reaches $95,000 (single return) or $170,000 (joint return).
How do I apply for the credit? There is no pre-purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov.
Is there any way to get any cash flow benefits before I file my tax return? Yes, there is. Any first-time homebuyers who believe they are eligible for all or part of the credit can modify their income tax withholding (through their employers) or adjust their quarterly estimated tax payments. Use the IRS Form W-4 (get from employer), increase your deductions so your withholding would decrease and your take-home pay would increase. Those who make estimated tax payments would make similar adjustments. If you lack the downpayment for a purchase now, plan ahead. Use the W-4 form to increase your take home pay so that in a few months you will have the required downpayment (3.5% of sales price for FHA loan)
I haven't even filed my 2008 tax return yet. If I buy in 2009, can I still claim it in my 2008 return? Yes you can! Eligible homebuyers who make their purchase between January 1, 2009 and December 1, 2009 can treat the purchase as if it had occurred on December 31, 2008. Thus, they can claim the credit on their 2008 tax return that is due on April 15, 2009. They actually have three filing options.If they purchase between January 1, 2009 and April 15, 2009, they can claim the $8000 credit on the 2008 return due on April 15. They can extend their 2008 income-tax filing until as late as October 15, 2009. (The IRS grants automatic extensions, but the taxpayer must file for the extension. See www.irs.gov for instructions on how to obtain an extension.) If they have filed their 2008 return before they purchase the home, they may file an amended 2008 tax return on Form 1040X. (Form 1040X is available at www.irs.gov). Of course, 2009 purchasers will always have the option of claiming the credit for the 2009 purchase on their 2009 return. Their 2009 tax return is due on April 15, 2010.
Will I ever have to repay any of the credit back to the government? One situation does require a recapture payment back to the government. If you claim the credit but then sell the property within 3 years of the date of purchase, you are required to pay back the full amount of any credit, including any refund you received from it. A few exceptions apply. Some exceptions apply: If the homeowner who used the credit dies within the first three years of ownership, there is no recapture. Special rules make adjustments for people who sell homes as part of a divorce settlement, as well. Similarly, adjustments are made in the case of a home that is part of an involuntary conversion (property is destroyed in a natural disaster or subject to condemnation by eminent domain by an authorized agency) within the first three years.