A New Housing Strategy?

With all the hype about the housing and mortgage crisis in the news, one would have to wonder why anyone would actively enter the real estate market during this tumultuous period.  Tumultuous as it is, there are still a good number of reasons for people to want to acquire a new home and leave the one they presently occupy.  Some of these reasons could include one or more of the following: the desire to downsize due to an empty nest, the preference to send children to a different school, an interest to change neighborhoods, the need to reduce the travel distance to work, the requirement for more bedrooms/bathrooms/garage capacity, the option for RV accommodation, wanting more or less property/land area and many more.  The fact is people tend to turn their homes every three to five years and the aforementioned list of reasons for doing so is just the tip of the iceberg.  The real question people are grappling with is if now is the time to start the process.  If it is, then what kind of strategy should they employ?

Over the past several months I have had numerous people asking me for input, because they want to buy a new home and sell the one they now occupy.  The scenario has usually unfolded as follows.  First my clients make an offer and deposit earnest money on a replacement home, and then disclose that they have a home of their own to sell.  Next, they enlist a Realtor to market their current home, set a price and wait for someone to come and take it away from them, so they can move on to the new home.  In the end, no one comes to look at the home they are selling, and before you know it someone else will snatch up the home they wanted to buy before they can react.  With this kind of outcome being so commonplace, I thought it might be time to examine this process to see if there might be a better approach.

There are some facts about the current real estate and mortgage markets that are undeniable. Homes are simply not selling for the prices they once were, and most buyers are not able to get the financing they need from the very few lenders who remain in business.  What most people do wrong is list their homes at prices that are unrealistic, thinking that they will need to make a large profit from the sale of their home in order to afford the new one they want to buy.  Pricing your current home too high and grinding real estate people to take lower commissions are not the proper tools to use in a buyer’s market.  The process of making a killing from the sale of your home and buying a new one at the top of the market has been reversed.   The proper course of action is to pressure the developers from whom you would buy, since they are living in the same world as you and are suffering from the same circumstances. 

Developers are sitting with construction loans on their books that cost a great deal of money every day that their homes remain in inventory.  Some of these homes in their inventory are finished and ready to be occupied, because their buyers walked away from their deposit monies.  This happened because their buyers were either unable to sell their current home, obtain a mortgage for the new one or both.  As a result many of these developers are offering incentive packages for large sums of money that can be used for down payments, closing costs or upgrades.  If you come in as a buyer at this point, these monies could be credited to you and improve your ability to acquire an attractive mortgage with very little in up-front costs.  Being aware of this situation makes it obvious that the real opportunity lies on the “buying side” and not the “selling side” of the transaction.  What you think you are losing by selling your current home could be made up several times over on what you have to pay for the home with which you replace it.  Remember, how you handle yourself with the developers is what matters most and not the way you make demands on the realtors selling and prospects buying your current home.

Everyone involved in this stressful process needs to be more realistic.  If all the parties connected to the two transactions are not in concert, the chances for the outcome coming together properly will be remote at best.  Everyone’s expectations must be adjusted properly.  Realtors should be more realistic about the length of time necessary to sell your home in the current marketplace.  Developers, who are anxious to accommodate anyone who will buy their excess inventory, should be flexible enough to take the pressure off the process for you as a buyer.  Buyers of your home should accommodate you by giving you adequate time to move out of your current home, since they are probably getting it at a bargain price. 

If you are convinced that your mortgage balances are greater than the price your current home will bring, all bets are off.  If you are reasonably sure that this is NOT the case, my suggestion is that you do the following:

1.      You must get Pre-Approved for financing in advance.  Find out what your maximum loan amount can be and do so on a Full Disclosure Basis (verified income and assets).  Sub-prime (no doc – stated income) loans are virtually non-existent at this point; so don’t fool yourself by listening to mortgage people who are anxious to take your business off the street with unrealistic offers.  Remember we can help you analyze this stuff.

2.      Once you know your lending limit, shop in the new developments with your loan commitment letter in hand until you find what you want and don’t settle.

3.      Find out from the developers what they will do for you in the way of incentives, i.e. down payment money, closing cost money, upgrade money, etc.  If someone walked away from their earnest money and upgrade deposit money, you might be the recipient of these credits if you work it right.  Remember, this is where your financial gain is to be made, so make your efforts count.  Don’t list your current home until you know what the developers will do for you in the way of incentives for the new house you want to buy and get that in writing if possible.

4.      Have an appraisal performed on your current home to be sure of its value.  Tell the appraiser that your attorney told you to appraise all your large assets as part of the process of finishing your new will and/or family trust.  Under these circumstances the appraiser is more likely to strike a higher value, since it is not connected to the process of a real estate sale.  Having this done in advance will help you set the asking price when you ultimately get a realtor involved to sell your current home.  It will also make it harder for your buyer to offer something less than your home’s appraised value.  Any offer for your home that you seriously consider should state that the final price must be the greater of the offered price or the appraised value, and you will need to stress this with the realtor you ultimately select.  Now you can properly estimate the amount money you will realize from your home sale, which can be used toward the purchase of your next home.   Remember, if there appears to be a shortfall, the developer incentives could possibly make up difference for you.

5.      Now that you have both sides of the transaction in rough estimate form, do the math.  The math should include the proper compensation for the people selling your home (usually 4% to 6%).  To be safe, subtract about 7% to 8% from the sales price on your home to get a “net sale” figure.  Don’t be greedy!  Know your walk away number from the start, and if it doesn’t make financial sense don’t do it?  Remember we can help you analyze this stuff.

6.      If it does make financial sense, you should talk to people you know and trust that will refer you to three realtors you can interview.  Be firm with these representatives, interview each of them thoroughly and don’t grind them to take a smaller commission.  Many of them have been a long time between commissions these days.  If you don’t pay them right, they won’t perform for you and performance is all that matters.  It won’t do you any good to negotiate a low commission if your house does NOT sell? 

7.      After selecting your realtor, use the appraisal you acquired to set your price, as it will take arbitrary market analysis language away from your realtor’s presentation.  Keep in mind that this appraisal is what a trained professional, who does this kind of thing for a living, says the value of your home really is at this point in time.  If the homes values were based on market analysis work from realtors, then mortgage lenders would not require values to be established by licensed appraisers.

8.      Tell your selected, real estate agent that you require all prospective buyers to be screened before showing your home to ensure they are qualified for a mortgage and are very serious about buying a home.  Don’t waste time with prospects that don’t have the financial tools or the emotional motivation in place.

9.      Make sure you clean up and remove the clutter from your home to make it show well.  People will always pay more for something that looks clean and neat over something that looks sloppy.  If the clutter is removed, your potential buyers will find it easier to visualize their furniture and personal possessions in your floor plan.

10. Once you obtain an offer on your current home, demand the most flexible closing time frame possible, and share this information with the developer with whom you are working to buy your new home.  Make sure all the parties are fully informed.  At this point (and no sooner) you should be able to make a formal offer on the new home you desire and do so from the developer who has what you want, offers the most favorable incentives and will afford you the most flexibility as you move forward.

Following these steps should enable you to move forward with very few surprises.  If you can’t fit into this profile or any of the parties to the two transactions won’t work with you properly, you should probably wait or start over.  If you would like to explore this procedure further, don’t hesitate to call us, as we would be happy to help you sort this process out thoroughly.  Dialing (775-851-7900) could turn out to be the safest call you could make.  Remember we can help you analyze this stuff.

If you are interested in reading any of our previous article, just click on the link below and have at it!  You may find something else that we are involved with that could benefit you or someone you know. 

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