In this Hot Sellers’ Market, is Updating a Home Prior to Sale Advisable?

We are currently in the midst of a very hot “sellers’ market” in the Charlotte metropolitan area.  Like many other regions of the country, inventories of homes for sale remain low and buyers find themselves competing to find good values.  A question frequently asked by sellers in this market is: “Should I spend the money to update my home prior to marketing it for sale?  Won’t this maximize my final contract price?”  The answer to the second question is probably “yes.”  But whether it is advisable to spend money on updates, how much money to spend, and whether those expenditures will increase the final contract price sufficiently to make those expenditures worthwhile are more complicated questions.

The answers depend on a lot of variables, such as: Where is the home located?  Is it an older “original” home located in a neighborhood that is seeing a lot of revitalization?  If so, more extensive renovations may be advisable.  The seller would really be taking his or her own home of many years and doing what many flippers do—transforming an “old original” into a desirable modern turnkey property.  But larger renovations only make sense if they are very carefully managed and the home is otherwise positioned to take advantage of a revitalization trend in the particular neighborhood or area.  It doesn’t make a lot of sense to take a home that is worth $250,000 “as is” and spend $50,000 to give it a market value of $300,000.  You would obviously just be breaking even.  But if you are capable of managing the work—using contractors you trust and whose estimates and work you can rely on—and you can take that $250,000 home and transform it into a home you can realistically expect to get $300,000 for after spending $25,000 on updates, the money may be well spent and the aggravation may be worth the reward roughly $25,000 reward.

However, if you have a relatively new track home that has seen ordinary wear and tear over five or six years but has otherwise been reasonably well maintained, it probably does not make sense to tear out the kitchen or renovate bathrooms.  You might make the home look “flashier,” and it will probably sell faster at its market value, but it is very unlikely—even in this sellers’ market—to sell significantly above its market value.  In this case, refreshing interior paint may be advisable and carpet cleaning or carpet replacement might be a good idea, but larger expenditures are not likely to move the final sale price up enough to make them worthwhile.

As in most other undertakings in life and in business, the key to making a truly wise decision on how much to renovate a home for resale is correct, complete and current information about the particular home and recent surrounding comparable sales. If there is such a demand for homes in the same neighborhood or area, it may make little difference to the pool of interested buyers whether the home has been significantly updated.  In fact, it might even be advisable in this market to take a home that the data indicates should have a fair market value of $250,000 “as is” and list it for $260,000 or so without spending any money on updates.  The amount of interest received may help the seller make a decision on whether they want to go through the time, expense and stress of managing contractors and renovations.  The seller might well find that he or she receives multiple offers on that $260,000 listing price in this market, and perhaps even gets an offer above the listing price.

So the honest answer to the question of whether and how much to update a home prior to resale in this hot sellers’ market is “it depends.”  It depends on the facts and recent sales data surrounding the particular home.  The best advice I can give the seller is to partner with a competent professional to gather the information you need to make an informed decision.  Doing so will enable the seller to maximize his or her return on this very large investment.

How Should a Home Buyer Deal with Multiple Offers on Property of Interest?

Any buyer who has actively and seriously been involved in the Charlotte area real estate market in the last year or so knows that the inventory of properties is low and there is no shortage of buyers competing for the best values as they enter the market.  It has become commonplace to see multiple offers on attractive homes in desirable areas within a day or two of a listing entering the market.  The agents for interested buyers are then notified that the seller has received multiple offers, and the request is made for each buyer’s “highest and best” offer by a date and time certain.  Buyers in this market can experience this two, three, four and more times as they find homes they would like to purchase.  How should a frustrated buyer deal with this common situation?

Depending on whether you are an investor looking for another project or a homebuyer searching for your next home, emotion can play a large part in how you proceed with an offer.  It is easy to say, but it is also true—try to leave emotion out of it.  Even if the property “checks all the boxes” and would be the perfect home for you, it will also be a huge investment—maybe the largest single investment you ever make.  The last thing you want to do is get the home under contract by overpaying for it.  So how do you avoid this in a multiple offer situation, where other buyers are almost certainly offering more than the seller’s listing price?

One common mistake buyers often make is to focus too intently on the seller’s listing price.  That listing price should be nothing more than an indication of what the seller would be willing to accept for the home.  It is certainly not a statement of the home’s fair market value.  The focus should be on establishing a reliable estimate of the property’s fair market value (“FMV”), not the listing price.  If fair market value is well below the listing price, the buyer is probably best advised to move on to the next opportunity, no matter how much the buyer likes the home.  If FMV is above the listing price, then making an offer at the FMV is a good way to outbid other buyers, while avoiding the mistake of overpaying for the property.  So how do we estimate FMV?

DO NOT rely on automated valuation models like Zillow’s “Zestimates” in attempting to establish a home’s FMV.  Such automated valuation models often rely on old or incomplete data, and they are frequently far off the mark.  That is a very dangerous way to make the single largest investment of your life.  FMV should be estimated by preparing a “Comparative Market Analysis” (“CMA”) for the home from the latest and most complete database available—usually the local multiple listing service database.  This can be done by a competent buyer’s agent who has access to the database.

Let’s illustrate this with a couple of examples:

EXAMPLE ONE: Buyer loves a home just listed for $300,000.  This buyer has not engaged in the current real estate market much yet, and he assumes an offer of $280,000 will get some traction.  All asking prices are negotiable, right?  He asks his agent to prepare the offer without researching the FMV.  The $280,000 offer is presented, and the agent is promptly notified that there are three other offers and seller is requesting the buyer’s “highest and best” offer by 5PM tomorrow.  The agent prepares a CMA and concludes from recent comparable sales data drawn from homes in the same community that FMV is $305,000.  The buyer doesn’t care what the comps tell him.  He thinks he should not have to pay the seller’s asking price.  He does come up to $295,000.  The buyer is promptly notified that the seller has chosen another offer.  When the contract closes and that accepted contract price becomes public record, the buyer discovers that the seller accepted an offer of $307,000.  His offer wasn’t even close.  Did the successful buyer overpay for this home?  Probably not.  In a market in which prices and FMV are on a steady upswing, that buyer probably paid FMV for the home; and by being willing to look beyond the listing price of $300,000 and bid closer to his estimate of FMV, he was successful in getting that property under contract in spite of the competition from other buyers.  He didn’t “steal” the home, but he didn’t overpay either.

EXAMPLE TWO: Let’s take the same home listed for $300,000 and involved in a multiple offer situation.  But in this case, let’s assume a competent CMA estimates FMV at only $285,000.  Our buyer loves the home and decides to make an offer for the full FMV plus $5,000 -- $290,000 to reflect the upward momentum of the market.  He is promptly notified that the seller has accepted a higher offer, and we later discover that the home sold for $307,000.  In this case, I would assert our buyer was smart to limit his offer to a price supported by the data.  He loved the home, but he took control of his emotions.  He bid slightly above the estimate of FMV to give himself a serious chance of having his offer accepted.  But he knew when to “draw the line.”  The buyer who ultimately purchased this home for $307,000 did overpay.  He did get the home, but it will probably take some time for the FMV to catch up to the price he paid for this home.  I would argue our buyer was smart to set a logical limit on his offer price BASED ON FMV, not listing price. 

That is the point.  In a market where buyers find themselves routinely confronted with multiple offers on properties of interest, the smarter course of action is to check your emotion at the door, ignore the listing price as anything more than an indication of what the seller would accept for the home, and establish a fair market value on which to base his “highest and best” offer.  The buyer may still see several opportunities go to other buyers.  This sort of discipline takes perseverance, consistency and patience.  But our buyer can feel confident that he made a fair, serious offer in each case, supported by the data.  When he ultimately does prevail in getting a property under contract—and he will—he can be comfortable that he did not overpay for the home and feel confident that he made a solid, rational investment.

Put us to work finding, negotiating and closing your next home or investment property.  Take a look at our client reviews. And if you have any questions, please don’t hesitate to contact us. 

Thinking About Selling a Home? There Has Probably Never Been a Better Time…

Anyone who has even casually looked at the metropolitan Charlotte real estate market in the last year or so must have noticed a steady, unrelenting rise in sale prices.  One reason for this is that inventories of properties available for resale remain very low.  This gives qualified buyers less to choose from, and those who really need to find a home find themselves bidding against each other on properties that interest them.  It is not uncommon for homes priced at or above fair market value (as determined by an analysis of recent nearby comparable sales) to receive multiple offers within the first few days the property enters the market.  When this happens, the seller’s agent usually advises all prospective buyers to submit their “highest and best” offer by a date and time certain.  Then the seller and his agent reviews all competing offers received, sometimes accepting an offer well above listing price.  This is common practice in this very “hot” sellers’ market.

Of course, offers need to be screened and managed carefully.  What good is a high offer if it comes from a prospective buyer who has not been pre-qualified for the financing they need to close the purchase?  Likewise, a high offer that is contingent on the sale of the buyer’s home in another state may be a formula for wasted time—especially if that home is not already under contract, pending closing on a specific date.  When your home goes under contract, its status changes in the databases visible to other buyers and any momentum developed with active, otherwise qualified buyers can be quickly lost if you go under contract with a buyer who may just be wasting your time.  It is not enough to expect a hot market will sell your home for you.  There are very important considerations relating to screening the buyer, negotiating and structuring the deal, and preparing the legal documents, for example, that can make all the difference between successfully maximizing your return on investment and getting involved in an exercise in frustration and time-wasting.

Another important feature of the current real estate market is still very low mortgage interest rates—about 3.75% for a 30 year mortgage as of the week of this publication.  This not only makes your current home more affordable to prospective buyers, but it also makes your next home more affordable to you, should you need or desire financing to make your next purchase.

I know, some readers may be saying “Why should I sell now, only buy another home in this current sellers’ market?”  For some people, that may be a very reasonable observation.  But if you are able to maximize your sale price, then find a home that needs repair or updating… or downsize to a smaller home…or move to a great community nearby that may not have seen the sort of appreciation your current home has seen in recent years… it is possible to leverage this market to your advantage.  It really isn’t that difficult, with the help of someone who has the expertise and resources guide you through the process successfully.

The bottom line is this market presents an extremely favorable time for someone to sell a home in the Charlotte metropolitan area.  Whether you are an empty-nester looking to downsize or someone who simply wants to cash out considerable equity you may have built into your current home in recent years and move on to your next dream home, there has probably never been a better time.

Step One in Finding a Home in this Market: Lender Pre-Approval

Many homebuyers enter the current housing market without much of a game plan.  Some drive through neighborhoods looking for yard signs… some search the free web sites like Zillow and Trulia (whose listings are usually neither current nor complete)… some buyers contact a realtor to find prospective homes and shuttle them around, but don’t really understand the offer or contract process.  In this competitive market—and really in any other market—STEP ONE in the process of finding a home should be securing pre-approval from a competent, competitive lender for any mortgage financing the buyer may need. 

There are several very good reasons for this.  First, the buyer needs to know how much of a home he or she can really afford and what sort of contract price he or she can realistically expect to close.  Who would want to spend hours, days and weeks looking at homes and eventually finding one you really love, only to discover you cannot secure the financing you need to make the purchase?  Secondly, most sellers in this competitive market will not even consider an offer that is not accompanied by a mortgage pre-approval letter.  Why would a seller agree to put a home under contract and essentially take a property off the market unless he or she has some reasonable expectation that the contract will actually close?  Third, if there are issues that need to be addressed to secure loan approval (such as credit issues… debt-to-income ratio issues… etc.), the buyer needs to identify and address them BEFORE he or she finds a home, not afterward.

Further, it is important to choose a lender wisely and carefully.  The lender should be a member of the buyer’s “team”—someone the buyer can count on to get the transaction across the finish line.  The buyer should also be satisfied that he or she is being offered the best rate and loan repayment terms available to him or her.  Many buyers don’t know where to begin, so they visit the bank at which they keep a checking account and think they may have the issue covered.  Not so fast.  Lenders, and even individual loan officers, can vary substantially on things like rate and loan terms, but also on things like communications and efficiency of loan underwriting.  This can turn what should be an exciting home buying experience into an exercise in unnecessary stress and frustration.  Care must be taken to choose that lender wisely.

At Eric J. Dorer Real Estate, we have lenders we work with regularly.  We work with them because our experience has been good with them.  We know they are competitive, competent, professional and as painless as possible.  We receive absolutely nothing from a lender, nor do we want anything from them except a smooth, painless, successful transaction.

Step One in finding a home in this market or any other market is making sure you have your finances in order, and that involves getting a mortgage pre-approval letter from a lender you feel confident will be a contributing member of your team in the home buying process.  Pre-approval is usually a relatively quick and painless process involving review of the buyer’s credit, income and debt.  It can take as little as a day, and it costs nothing.  For all the reasons outlined above, failure to do this can ultimately mean frustration and failure in finding a home and getting it under contract.  Securing that pre-approval letter positions the buyer to take some control of the process and move forward to an orderly and successful home purchase.

For Buyers: Research, Preparation, Speed and Perseverance Are Essential in this Hot Sellers’ Real Estate Market

In case you hadn’t noticed, we are currently in the midst of a very hot “Sellers’ Market” in real estate.  This is certainly true in the Charlotte metropolitan area and in many regions of the country.  Of course, sellers love it.  It is possible to “push the envelope” on price by listing a home at or above the most recent comparable sales and watching buyer interest continue, almost unabated.  There is a limit to this, and sellers who price their homes unrealistically high will see interest diminish and may encounter problems getting to closing, if the home does not appraise at the contract price, for example.  Nearly historically low inventories of resale homes are fueling this market; and this lack of inventory and abundance of buyers is concentrated more in the lower and middle price ranges than it is at the higher end of the market.  But it continues to cause challenges and frustration for many buyers.  However, there are ways to deal with it.

First, research is more critically important than ever in this market.  Buyers need to work with an agent who has access to the current database of comparable homes for sale and comparable homes sold.  Those free public databases like Zillow and Trulia won’t help you here because they are neither current nor complete.  When a buyer identifies a home he or she is interested in, the agent should prepare a quick “Comparative Market Analysis” of the home to see what else is currently available, and even more importantly, what comparable nearby homes have recently sold for.  If the listing price of the home you are interested in is unrealistically high, make an offer that makes sense in the context of “the comps.”  If that means you lose the home to other interested buyers, so be it.  Let them overpay for the home and move on.  Don’t get caught up in the frenzy of buyers competing to get a home under contract at any cost.  Set a ceiling price above which you will not go.

Secondly, make sure you are prepared to make an offer.  This involves getting preapproved for the mortgage financing you will need.  Not only does this give you some certainty on what sort of home you can truly afford, it also results in the issuance of a “Pre-approval Letter” by your lender.  This letter can then be attached to any offer made, and this tells the seller they are dealing with someone who is serious-- ready, willing and able to close the purchase.

Third, be ready to move quickly when you have identified a property that makes sense.  You and your agent have done your research, and you are armed with your Preapproval Letter.  With inventory as low as it currently is, when a home enters the market at a reasonable price, you should be aware that you are likely not the only buyer who has noticed it.  Try to get out to the house to view it as soon as you possibly can.  This may require some flexibility in your schedule and that of your agent.  But a delay in seeing the home and making your offer can mean the difference between an accepted offer and having a multiple offer situation in which you are essentially bidding against other buyers for the home.   

Finally, persevere.  Keep at it.  Don’t get discouraged.  Every buyer who has beaten you to a house you wanted is someone who has been competing against other buyers, just as you are.  But he or she kept at it until he or she got a home under contract at a price that made sense.  This real estate market can be frustrating and discouraging to a buyer.  But mortgage interest rates remain very low and, in most cases, it can cost less to own a home than to rent one.  Moreover, paying down a mortgage over time enables the homeowner to build equity and wealth the renter obviously does not build.  Even in this tough market, the reward is still there for those who do their research, prepare themselves, act quickly and decisively and persevere. 

Why is the Seller of Real Estate Well Advised to Retain a Licensed Broker for Representation?

The subject of last month’s blog post was a discussion of Buyer Agency in real estate transactions in North Carolina.  Having covered buyer representation, it seemed appropriate to discuss the reasons a seller of real property would be well advised to retain a competent licensed broker to represent him or her in the sale of such a valuable asset.  Let’s begin by mentioning the consumer information brochure, Working with Real Estate Agents, published by the North Carolina Real Estate Commission.  This document outlines the permitted agency relationships in North Carolina, and the important features of each.  Every real estate agent licensed in the state is required to present this document to a prospective client when the parties begin discussions of matters substantially important to the interests of that prospective client, whether buyer or seller.

Licensed real estate brokers are required to maintain a high level of professional and ethical standards in dealing with a client and the public, and the failure to do so can result in disciplinary action by the NC Real Estate Commission.  But what are some the practical reasons a seller would be well advised to retain a licensed real estate broker?  After all, the seller might save some money by avoiding such a relationship and going it alone, right?

One compelling practical reason for retaining representation is access to the Multiple Listing Service (“MLS”), a centralized database of information for homes in a given geographical area.  This database is used very heavily by buyers’ agents, and a home that is not listed in the MLS may very well go unnoticed by buyers who are ready, willing and able to purchase it.  Further, since most buyers who become aware of a home via the MLS necessarily come with a buyer’s agent, it is very likely that buyer’s agent has made sure the buyer is pre-qualified for any financing the buyer will need to make the purchase.  Otherwise, the buyer’s agent is likely wasting everyone’s time, including his or her own.

Having a buyer who is represented by his or her own agent express interest in the purchase of your property is therefore a good thing because you can be reasonably assured that the buyer is ready, willing and able to proceed to closing.  But a represented buyer negotiating with an unrepresented seller can mean that the seller is functioning at real disadvantage.  The buyer’s agent should be well aware of current market conditions, including recent comparable sales prices… the agent should be quite familiar with the contracts, documents and forms approved by the NC Bar and the NC Association of Realtors… the agent should be familiar with the processes and procedures for accurately memorializing final agreement of the parties and taking that agreement through to closing.  However, if you read the Working with Real Estate Agents consumer information brochure mentioned above, you understand that a buyer’s agent represents the buyer, not the seller.  The buyer’s agent’s duty is to get the best deal he can for the buyer, not the seller.  So a seller who is not intimately familiar with the current market… or the contract and legal documents typically used in a transaction… or the procedures followed to take a deal through to successful closing, is at a distinct disadvantage if he or she is not represented by his or her own seller’s agent—someone who owes all his or her own fiduciary duties to the seller.

A good, professional, ethical real estate broker/seller agent can therefore not only successfully market a home for maximum exposure to buyers who are qualified to purchase the home, he or she can negotiate the best price possible (with the participation and final approval of the seller, of course), has sufficient familiarity with the legal documents typically used in a transaction to make sure that the final documents the parties execute accurately reflect the deal the seller has actually agreed to, and he or she should be fully aware of the processes and procedures that take that agreement through to final, successful closing.  Most transactions in the Charlotte metropolitan area involve hundreds of thousands of dollars… and sometimes millions.  It therefore seems wise to seek the representation of someone who is truly familiar with, and can take reasonable control over, all the variables described above, while being bound by NC law to represent the seller’s best interests throughout the transaction.  It’s really just common sense. 

Abraham Lincoln famously said, “A lawyer who represents himself has a fool for a client.” A similar principle applies to the seller of property who decides to “go it alone.”  You may think you know the current market, but may not be intimately familiar with the legal documents that will protect you in the transaction.  You may have a good working knowledge of processes and procedures typically followed to get your transaction to closing, but not have the ability to get your property maximum exposure to people who are ready, willing and able to buy it. Unless you are engaged full time in the real estate business, it is very unlikely you possess all of the current skills needed to successfully maximize the return on a very valuable—and in most cases—your most valuable investment.

What is “Buyer Agency” in Real Estate and Why Do Some People Resist Using a Buyer Agent?

With rare exceptions, buying a home or an investment property is the largest single investment an individual makes in his or her lifetime.  No rational person would argue that point.  Yet, for reason(s) unknown, some people resist retaining a competent, licensed real estate agent to represent them in finding, analyzing, contracting for and closing such a purchase.  Why? 

In most cases of such resistance, I think the reluctance to retain competent representation arises from a genuine lack of information and failure to understand the functions and fiduciary duties of a buyer’s agent.  A good starting point in understanding the various agency relationships allowed by law in North Carolina is the consumer information brochure published by the NC Real Estate Commission (the Real Estate Commission governs licensure of all real estate agents in NC): Working with Real Estate Agents.  All agents are required to provide this brochure to potential clients before establishing an agency relationship.  A link to that brochure follows:

http://www.ncrec.gov/Brochures/HTML/WorkingWith.html. 

This publication speaks for itself, and I won’t restate it here.  Buyers and sellers of real property in North Carolina owe it to themselves to review this simple document.  It sets forth very specific duties an agent owes a client, and cautions a buyer in bold type  “… until you make this [buyer agency] agreement with your buyer’s agent, you should avoid telling the agent anything you would not want the seller to know.” Why?  This is because, absent a buyer agent agreement, the agent showing a home to a buyer is essentially a subagent of the seller, and owes his/her fiduciary duties to the seller, not the buyer.  Many buyers do not realize or understand this.  But after the buyer and agent reach agreement for buyer representation, the agent’s duties shift to the buyer.

So why do some buyers resist retaining a buyer agent?  Some seem to think that they are limiting themselves somehow by retaining a specific agent.  They seem not to realize that the overwhelming majority of properties available for sale in a given area are listed in the Multiple Listing Service (“MLS”) database and are available to all members of the MLS.  In fact, the sellers of these properties are represented by their own Seller’s Agent, who has placed the property in the MLS system.  That Seller’s Agent owes all his/her fiduciary duties to the seller, not the buyer.  That is, the seller’s agent (and a subagent of the seller in the form of another agent with whom the buyer does not have a specific buyer agency agreement) is obligated to look out for the best interests of the seller, not the buyer.  So not only is it not true that a buyer who retains a buyer agent is somehow limiting the properties available to him/her, but by failing to retain his own agent the buyer is also placing himself at a distinct and precarious disadvantage by essentially going unrepresented into a transaction in which the seller does have representation, and that representation has a clear duty to put together the best possible transaction for the seller.  (This is also true in the case of new construction, by the way.  The agent present at that model home represents the builder/seller, and owes all fiduciary duties to the seller, not the buyer.)

Another possible reason some buyers resist retaining a buyer agent is the buyer thinks somehow a better deal may be had if he “goes it alone” because there will be no commission payable to a buyer agent.  In the vast majority of cases, this is simply not true.  When a property is listed for sale by a seller with a Seller’s Agent, the listing agreement provides for a total commission payable upon sale of the property.  That total commission is paid BY THE SELLER.  In most cases, that commission is split between the seller’s agent and the buyer’s agent, even though the buyer’s agent represented the buyer and owed all fiduciary duties in the transaction to the buyer.  A typical total commission in the sale of real property is 6% of the gross purchase price.  Typically, 3% is paid to the Seller’s Agent and 3% is paid to the Buyer’s Agent.  But if there is no Buyer’s Agent in the transaction, the entire 6% commission would typically be paid to the Seller’s Agent.  So the buyer gains nothing at all by going unrepresented into the transaction.  In fact, he places himself at a distinct disadvantage by essentially trusting the Seller’s Agent (and the seller) not to structure the transaction in a way that favors the seller.

A good Buyer’s Agent is a member of the MLS system and has access to all properties listed in the MLS.  The MLS database can be used to thoroughly analyze properties—generate reports of recent sales of comparable homes… pull up tax and Public Records information for particular properties… etc.  The information available on the large national platforms like Zillow and Trulia are no substitute for this.  In fact, the more limited data available on those sites is also notoriously often outdated and incomplete.  Computer generated estimates of market value, such as Zillow’s “Zestimates” are notoriously faulty because they are based on outdated and/or incomplete information.  They are no substitute for the sort of thorough research a buyer should do when making such a large, important investment.

A good Buyer’s Agent should be fully familiar with the contracts and other legal documents used in a real estate transaction.  He or she should have a thorough knowledge of lender practices and procedures, and may have some suggestions for the buyer on which lender(s) might offer more favorable loan terms in a transaction.  A good Buyer’s Agent has an attorney or two he or she can recommend as the closing agent for the transaction, to make sure the transaction is taken efficiently to closing and the buyer receives good, marketable title to the property at closing.  A good, professional Buyer’s Agent is an invaluable aide to the buyer at essentially all phases of the purchase transaction, from finding the property to negotiating for the purchase of the property to preparing the contract documents to taking the transaction through closing.

So why do some buyers resist the notion of retaining a good Buyer Agent?  I think the main reason for this is a lack of information and understanding.  As always, if you have any questions about this or any other real estate related matter, please do not hesitate to contact me.

Is 2019 a Good Time to Sell a Home in Metropolitan Charlotte?

Timing can be “everything” in many aspects of life.  Anyone who started a business just before the Great Depression of the 1930’s probably did not see much success by no fault of his own.  Timing worked against him.  A child born in the United States during the Baby Boom of the late 1940’s through the early 1960’s likely grew up at a time of prosperity and security.  Most investors in the stock market buy on “the dips” and sell into “the rallies”—which means they buy targeted stocks when prices are heading down and sell as prices are shooting upward.  To the extent that it can be controlled, the timing of events, decisions and actions can have a huge impact on success or failure.  The same consideration certainly applies to the purchase and sale of real property—whether the property is the seller’s principal residence or an investment.

In the metropolitan Charlotte area, the inventory of resale homes, townhouses and condominium units remains low.  Buyer interest remains high and mortgage interest rates remain near historic lows.  All of this, combined with a generally strong national economy, has continued to drive market values of resale homes upward significantly.  In some cases, home values have nearly doubled from their lows less than a decade ago, during the Great Recession.

Will this steady and sometimes dramatic increase in property values continue?  It shows no immediate signs of stalling, although it does appear to have decelerated in the last six or eight months.  Some analysts suggest that housing values have risen too rapidly and created a “bubble” that may burst in the near future, causing values to rapidly fall.  Of course, no one can predict the future.  I personally doubt the Charlotte real estate market has entered a bubble.  But I do see some slowing of the rapid price appreciation seen in recent years.

So is 2019 a good time to sell a home or investment property in the Charlotte area?  Just as some investors attempt to wring out every dollar of potential profit by waiting for the stock market to peak before selling, some sellers of real estate may be tempted to wait until values have peaked—and the only way to know prices have peaked is by waiting for prices to begin reversing and heading downward.  Selling into a market whose momentum is moving downward is a mistake many investors make.  So, to answer the question, 2019 is probably a very good time to sell a home or investment property.  I have institutional investor clients who have come to precisely that conclusion and are currently selling properties they bought during the recession and rented for several years.

                                            

There is no way to predict when the current Charlotte real estate market will peak.  But current economic circumstances—low inventory… buyer demand… low mortgage interest rates…have created an environment very favorable to sellers.  Timing can be everything.   

Zillow and Trulia… Don’t Rely on Them for Your Research

Our company motto is “Solid analysis identifies great opportunities.”  But analysis is only as accurate and reliable as the data used to perform it.  I frequently hear buyers and sellers claim that they have “done their homework” by checking listings and sales on the large national realty search engines like Zillow and Trulia.  These sites are easily accessible, they’re free to use, and they may even provide a quick automated estimate of property value—something Zillow calls its “Zestimate.”  BEWARE.

How do you think Zillow and Trulia and the other “free” aggregators of real estate listing information make money?  Did you ever wonder how they can offer their information free to the public?  Their primary source of income is by selling home buyer and seller information—commonly called “leads”—to real estate agents.  Agents pay large monthly sums to have these national internet firms channel leads for certain zip codes to them.  The “top agents” you see recommended on these sites may be very good, but they are paying to appear there.  (The exception to this is where a listing you see is actually listed in the local MLS system by that particular agent.  In that case, these sites usually place that agent’s contact information on their site, along with a couple of other “recommended” agents or “top performing” agents.)

The big problem with sites like Zillow and Trulia is their information is generally NOT COMPLETE and it is often NOT UP TO DATE.  It is not complete because many MLS systems (the Charlotte Metropolitan Listing System among them) which create the original database of real estate sales information in a given area refuse to allow their listing data to automatically be fed to these national sites.  The listing agent must specifically request this information be fed by their MLS system to these sites, and many agents—myself included—refuse to do this.  That means there are many more properties on the market at any given time than you can find on Zillow and Trulia.  It also means that the data you use when you do your research using these sites is incomplete and, therefore, inaccurate.

Why to local brokers choose not to allow their listings to go out to Zillow and Trulia?  After all, you would expect that more national exposure could only serve to promote a listing.  One of the primary reasons brokers refuse to allow their listings to go out to these large national aggregators of listing data is the inaccuracy of their computer generated estimates of value—those “Zestimates.”  Zillow will not disclose how they arrive at these estimates.  Many brokers have seen Zestimates for their listings that they know are wildly inaccurate, and many have attempted to induce Zillow to change them to reflect the true data.  Zillow typically refuses; or if any change is made, it is made so slowly that the damage has already been done. 

Can you imagine doing the research to price a home for sale, arriving at a listing price of $325,000 after thorough analysis, and then seeing your property listed on Zillow with a Zestimate of only $285,000?  Or, alternatively, would you want to be the homebuyer who sees a home listed on Zillow for $275,000 with a Zestimate of $310,000, only to discover after a more complete analysis by your agent that the market value of the home is closer to $265,000?  Since the purchase and sale of a home is usually the largest single investment an individual makes, mistakes such as those above can have a huge impact on an individual’s financial health.  Of course, the same consideration applies to investors.

So beware of the large national real estate search engines like Zillow and Trulia.  Yes; their information is free to the public, but it is often worth about what you pay for it.  It is incomplete and often outdated.  Yes; they do make things easy by providing tools like automated valuation models.  But they do not reveal how they calculate those valuations, and their valuations are frequently wildly inaccurate.  Just as solid analysis can identify great opportunities, incomplete, incorrect or outdated analysis can lead to huge mistakes. 

The “Comparative Market Analysis” and Why it is Essential for Homebuyers and Sellers

Our company motto is: “Solid Analysis Identifies Great Opportunities.”  One of the critical tools in the analysis of residential real estate is called the “Comparative Market Analysis” or “CMA.”  The information summarized in a CMA is essential to any buyer in determining whether a purchase makes sense.  It is also a crucial tool for sellers in determining market value of a home for resale.

In order to create a CMA, you need to have access to a database of recent home sales that are comparable to the one you are researching—comparable in terms of location… sq.ft. of heating living area (“HLA”)… number of bedrooms and baths… etc.  Most realtors have access to this database in the form of the Multiple Listing System or MLS.  It is possible to use the MLS to filter search results using a myriad of criteria, such as the specific things mentioned above, and many more.  Of course, the closer you come to finding an identical or nearly identical home to the one you are researching, and the closer in time the sale was, the more reliable an indicator that “comp” is of the value of the home you are researching.

Properties vary widely—even within the same subdivision.  There are different models, different upgrades, different lot sizes, locations within a subdivision, homes with garages near homes without garages, etc.  The difficulty of finding reliable “comps” for homes that are located in more rural areas or are not located in subdivisions of similar homes is greater for obvious reasons.  But, regardless of the difficulties encountered in creating a reliable CMA, the CMA is a critical tool in any analysis of a property—whether buying or selling. 

A CMA takes the data from the MLS, filters the “comps” based on the criteria used, and thereby suggests a market value.  Of course, the time frame used in preparing the CMA is also very important.  A CMA using data from a year ago is a less reliable indicator of current market value than a CMA that uses data from the last 180 days.

An example of a CMA prepared for the Madison Park subdivision near Uptown Charlotte appears below.  Madison Park is an area of older homes that have been experiencing much renovation in the last several years because of the subdivision’s proximity to Charlotte’s city center.  It is still possible to find an “old, original” home built in the early 1960’s that has not been significantly update in 40 or 50 years, buy it at a reasonable price, renovate the home and thereby build equity into the home.  The CMA summarizing sales in the last 180 days of homes with at least three bedrooms/two baths and between 1,400 and 1,700 sq.ft. of HLA follows:

  

You can see from the above CMA that comparable homes in this Madison Park community closed in the last 180 days at prices ranging from a low of $305,000 to a high of $440,000.  The average sale price in that 180 day period was $360,806 (average sq.ft. of HLA was 1,561, giving us an average per sq.ft. price of $231.06).  Based on this information, if we were to find a home in Madison Park that needed about $40,000 in updating, and we could get that home for $305,000 or so, all other things being equal, would this be a decent deal?  The somewhat oversimplified answer is “yes.”  $305,000 + $40,000 would take us to an “all in” price of $340,000.  The average closed sale was almost $361,000.  And since our house will have been newly updated, our end value would probably be closer to the high end of the sales, rather than the average.  Do you now understand how powerful this information can be?

To give us a more complete picture, we would want to review the MLS reports for all the homes appearing in this CMA.  A link to those reports follows below:

Click the following link to view the Residential:
https://matrix.carolinamls.com/DE.asp?ID=6547313349

“Solid analysis identifies great opportunities.”  This is more than just our company motto, it is a demonstrably true statement.  But analysis is only as good as the data used in the analysis and the person doing the analysis.  Real estate “bought well” can create great wealth.  Real estate bought or sold poorly can be devastating to wealth.  Mistakes are therefore to be studiously avoided.  If you are thinking of buying or selling residential real estate in the greater Charlotte area, feel free to contact us.  We would be very happy to help.      

What Exactly is a “Short Sale” and Why Are There So Few in the Current Market?

I still encounter new investors and home buyers looking for a new residence who ask me if I can find them a “short sale.”  In order to understand the question and why short sales are much less common in 2019 than they were in 2010, let’s go back to basics.  What exactly is a “short sale.”  Here is a concise, if not academic, definition: A short sale is the sale of a property for an amount less than the seller owes on his or her mortgage(s).  An example might be helpful.  John has his home for sale for $200,000, but he still owes $220,000 to the lender on his mortgage.  If the lender consents to this sale and agrees to release its mortgage in exchange for the proceeds from a $200,000 contract to sell John’s home, John will be selling his home “short” of the full amount needed to satisfy that mortgage. 

There are a few of important things that must be present in a short sale.  First, as noted above, the mortgage lender must agree to it.  Why would they agree to allow the sale of a property against  which they have a valid, binding security interest (“mortgage”) for less than they are owed?  They would do this when, among other things, (a)the home is worth less than the outstanding balance owed on the mortgage, and (b)the seller (their mortgagor) is not able to pay the difference between the value of the home and the balance of the mortgage, usually due to some hardship such as extended unemployment, bankruptcy, etc. 

In 2010, in the wake of the “Great Recession,” short sales were relatively numerous.  Real estate values had seen a huge decline from their highs in 2007 or so, many homeowners were experiencing extended periods of unemployment or underemployment, and personal bankruptcies were up.  A home that had been purchased new in 2006 for $450,000 might be worth only $325,000 in 2010 and the $425,000 mortgage taken by the buyer in 2006 was then secured against a property that had nowhere near sufficient value to cover it.  Moreover, the home buyer who felt in 2006 that he could afford the high monthly payments on that mortgage was suddenly looking at continuing to make high monthly payments on a home he felt would never be worth what he was going to have to pay for it over the next 26 years or so.  Many people decided just to walk away from their homes under those circumstances and allow foreclosure. 

Others homeowners had lost their jobs in the Great Recession and had no ability to continue making high mortgage payments associated with pre-recession purchases.  They were likely to discuss with the bank the notion that they would try to sell their home to “get out from under it,” but would need the bank to cooperate in the sale by agreeing to accept less than it was owed on its mortgage to allow the sale to close.  These circumstances describe the bulk of short sales.  Why would a bank agree to this?  They would agree because, at that time, they could incur thousands in legal expenses to foreclose, adding to the amount they were owed.  Then they would only be able to sell the home after foreclosure for a fraction of what they had spent.  If the debtor was unemployed or bankrupt, there would be very little likelihood that the bank would recover from the debtor/homeowner any amount beyond the proceeds from the sale of the home.  So they simply decided to “cut their losses” and agree to the short sale.  It certainly wasn’t what the bank wanted, or even what it was legally entitled to, but it was better than a larger loss.

So why do we see fewer, if any, short sales in 2019?  The answer is relatively obvious.  In 2019, property values have recovered a great deal from their lows at the depths of the recession.  Those homeowners who were willing to walk away from their homes because they owed so much more than their homes were worth in 2010 and 2011 have already done so.  Those homes have long since been resold at prices that were adjusted to match the market in 2011 or 2012.  Lending practices also changed after the Great Recession.  Lenders that were willing to loan $300,000 to anyone “who could fog a mirror” in 2005 or 2006 began to use much more strict loan underwriting standards and practices in 2009 and 2010.  (Those requirements have been relaxed in the last year or two, leading some experts to wonder if we may see another housing bubble in the future.)  So those homes that can even match the definition of a short sale are far fewer in 2019 than they were in 2010.  It is much less likely today that a home seller owes more on his home than it is worth—largely because lenders are less likely to make loans in excess of appraised value and because market values in general have continued to go up significantly year-over-year in the last two or three years. 

Are short sales then a thing of the past?  Not entirely.  But they have become increasingly rare in 2019, and as the market—at least in Charlotte—continues to see steady year-over-year increases in property values, the fact scenario that typified or defined the “short sale” nine or ten years ago will also be increasingly rare.   

For more information about the greater Charlotte, NC, real estate market, contact us directly at (980)875-0950 or visit www.EricDorerRealEstate.com.