Well, homes didn't cost a penny in 1975 but they sure were much cheaper. If we had those prices today, you wouldn't need a mortgage, just a nice down payment and a credit card

As previously mentioned, I am a collector of real estate stats.  A few years back I saw a chart in a Sun Gazette newspaper showing average sale prices since 1975 in Northern Virginia.  Since then I have added to that chart and have computed a annual appreciation or depreciation and rolling 5 year and 10 year averages.

Now, as they say in the investment business, past performance is not an indicator of future results.  And as Warren Buffet has said, “In the business world, the rear view mirror is always clearer than the windshield.”  Still, I think there are important takeaways from the chart below.

It is interesting to note that since 1975 there have only been 4 years when the average price dropped and only one year (2008) when it was a double digit drop.  And except for the last 3 years, there has not been a rolling 5 year period where prices have declined.

I try to encourage folks to take a long term perspective on housing prices and not be concerned about whether a year or two after a home purchase the prices are likely to rise or fall.  Neither matters.  One needs to buy a home with the idea of holding the home for a 5 to 7 year period as a minimum.  If the anticipated hold period is shorter  than that, the purchase should be deferred.  (Note I said own the home, not live in the home.  It is a perfectly fine plan to buy with a plan to live in the home for a few years and then rent it out.)

The transaction costs of buying and selling are so high that the home not only needs to appreciate so that one is not upside down but also enough to cover the transaction costs.  While only the last few years show a negative 5 year rolling average, there are a few 5 year periods where the appreciation could have left a homeowner at a roughly breakeven point after transaction costs are factored in.

So again, while the past is no guarantee of the future, as long as the Federal government stays in Washington DC, I have confidence that over the long term,  from a financial perspective, this area more often than not will be a great place to own a home.

You can see the chart here with this link to the Sun Gazzette.  Well, you can sort of see the chart – it is rather blurry.  If I find a better link, I will switch it out.   For the years pre-1995 the chart above and the chart in the newspaper should match.  For some of the more recent years, there may be a small discrepancy between my numbers and the chart.  I would attribute that  to additional data or a recalculation of data  that may have come available after the the article was published.

Average Sale Prices Since 1975 In Northern Virginia is a post from: Vienna, Oakton, Fairfax, Reston, Centreville VA Real Estate Blog

I am often asked if the assessment is reflective of market value and the answer is  – not really.

On the Fairfax County website it does state, “The Constitution of Virginia requires real estate assessments to represent fair market value.”  So why did I say the assessment does not reflect the fair market value of your home?  Well, let me ask a key question.  Did the tax assessor come into your home?  Unless you know the individual and they came to your holiday party, the answer is probably no.  Thus two different  4 bedroom, 2 1/2 bath homes in the same neighborhood that are the same size and sit on a lot of similar size will have the same assessment even though one has a new kitchen, granite counters, fresh paint, gleaming hardwood floors and the other has original appliances, worn and tired carpet, peeling paint and a CAC unit that went out last summer.  Obviously the market value of these two homes is dramatically different but the assessment will be the same.

Additionally, it would be nice if the assessors had all the info they needed to make a fair assessment but they don’t.  I can not tell you how many finished basements I see that are not reflected in the tax records.  Additions and decks are almost always in the tax records but that extra bath in the basement, the finished attic, the new furnace and many other items are often not which is another reason it is hard to use assessments to determine value.

Furthermore, assessments are static and the market is dynamic.  I can not say with certainty what the value of a home will be in November but I can, with 100% accuracy tell you what the assessment will be.   The further we get into the year, the less relevant the assessment becomes.

HOW I USE THE ASSESSMENT IN EVALUATING HOMES

If  I am evaluating a condo, townhome or detached home subdivision with similar models, I really have no need for the assessment as there are usually enough settled sales to give guidance on a fair market price.  However, if the property is rather unique like some of the contemporaries one might find in Reston or in  places like Arlington or Alexandria where several neighborhoods boast older charming homes that over the years have been uniquely remodeled,  I sometimes use the assessment as my last evaluation tool.  The assessment is not an absolute value but can, in some circumstances, be used to help determine value.

On unique properties, I will use the best available comparables and make adjustments for various features such as number of bedrooms,  living space, lot size, basement type, garages, and many more.  I will get to a price and then adjust that number up or down based on current market conditions and a bit of gut feel.  Once I get that final number, I will often go back and sort of “check my work” via the assessment.

At different parts of the market cycle, homes are selling above or below the assessment by some percentage.   In complicated cases,  after getting my number, I will take the settled price of the comparables and determine the percentage they sold above or below the assessment.  I will then average out those differences and  apply that number to the the assessment of the property I am evaluating.  If the resulting number is close to the number I came up with, it reinforces my original calculations.   If it is not, I will review my initial analysis.  The initial analysis carries the biggest weight by far but I may massage the number based on the assessment analysis.  Bottom line, pricing a property involves both analytics and a bit of intuition combined with market experience  No one method holds all of the answers but when several lead to the same result it builds confidence.

YOUR ASSESSMENT AND TAXES

The other comment I hear about assessments concerns tax bills.  In the past few years when assessments went down, folks thought their tax bill would go down at the same percentage.  And when prices were rising, folks were happy they were building equity but worried their taxes would become unmanageable.

Reality is that when prices decline, it is likely that the tax bill will go down but not as much as one thinks. The local government depends heavily on real estate tax revenue so when assessments go down, tax rates inch up to cover the budget.   The individual homeowner does not save as much as anticipated.

Conversely, when prices rise, we sometimes see headlines that the tax rate is being cut.  Hey, it makes the politicians look good.  Even though the total tax collected is up they can proclaim they cut the tax rate.

Actual numbers:   In Fairfax County in 2002, before the real estate boom, the rate was $1.21 per $100 of assessed value.  At the peak, in 2008, the rate had dropped to $0.89 per $100 of assessed value. When prices declined, the rate rose and in 2011 stood at $1.07 per $100 of assessed value.

Bottom line, whatever my tax may be and regardless of whether the assessment reflects market value or not, I would rather open that envelope and see rising values than falling values.

Photo credit:renjith krishnan

My Real Estate Tax Assessment Changed. What Does It Mean? is a post from: Vienna, Oakton, Fairfax, Reston, Centreville VA Real Estate Blog

The flow of inventory goes up and down each month but like a roller coaster, follows the same path each year.

I must admit, I am a bit of a stat nut. I have detailed sales and inventory data for the Northern Virginia market for the last 15 years and additional sales data going back to 1975.   (Using baseball parlance, I might border on being called a seamhead) Don’t worry, it is safe to read on.  My  blogs  will never get too deep into a statistical interpretation of the market.   I will leave that to others.  Under the Market Stats tab above are several good resources for those interested in viewing a stunning array of charts and graphs.  Here we will just review very simple data that can help a buyer or seller in deciding what time of year may be best to act.

First, when people ask is now a great time to buy or sell, they are really asking if the market is hot or cold and are thinking short term.  Well, I think that is a fine question to ask but it should not be a major factor in deciding whether to buy or sell.  No one can accurately predict the short term fluctuations of the market. (But I can’t resist and do have some thoughts on that below).  A buying decision should be made when one feels the market in 5 to 7 years will be stronger than it is today.  Unless one is a flipper, the short term movement is just noise.  And selling is so personal that when a situation dictates a change in residence, one just needs to hire a great agent (preferably me) to help generate enough interest in the home to maximize the sales price and minimize the time on market and the transactional stress of moving.

However, the time of year one  chooses to sell or buy may be a factor to consider.  Depending on one’s goals, it may be best to buy or sell at a point in the year when inventory is plentiful or, conversely, there are sometimes advantages to buying or selling when inventory is low and many buyers and sellers are taking a few months off.

Unlike predicting price movement, the flow of inventory is fairly consistent year to year.  The number of homes available and number sold may differ dramatically each year but the low points and high points are fairly consistent.

Look at the two charts below to see what I mean.

I have touched on some of the ways to play the annual flow of the sales and inventory in the blog “Moving Up is Hard to Do.”  In general, for buyers if one is looking for a very specific type of home, the odds are increased during the peak inventory periods.  For sellers, I often point out that the early part of the year when inventory is low, can be a far better time to sell than folks think.  Many buyers start the year with a resolution to buy a house and those actually looking in the 1st quarter have slim pickings.  A well priced and presented home really stands out in that environment.

One other note on the charts above.  Notice that in 2011, except for January, inventory was substantially below the 10 year average.  This trend is continuing this year and is one reason I believe that upward pressure on prices is likely.  Until inventory expands back to more historical levels, the market should favor sellers.

If you would like to talk about your situation in detail and determine the best time of year for you, give me a call or shoot me an email.  I am always happy to talk real estate.

Sales and Inventory In Northern Virginia By Month is a post from: Vienna, Oakton, Fairfax, Reston, Centreville VA Real Estate Blog

I read with great amusement Gene Weingarten’s column in this Sundays Washington Post magazine titled, “Soft Boiled Detectives, A suburban police blotter”  which featured excerpts from the weekly Vienna VA police reports.  (link below)  Ripped from the headlines were stories about a dispute between a landlord and his tenant over which toilet each should use (they shared the house) and another about an intoxicated individual with sushi in his pants.

The Vienna police reports are emailed out Friday to those interested.  I get a copy and can tell you these stories are true.  I have a friend in town who also gets these reports and it is often a race to the phone to see who can call first to laugh over the week’s goofiest “criminal.”

Let me say, that I, as a citizen of the town, am happy to have Mr. Weingarten write an article where the mock up of a Vienna police badge states “Honor, Integrity, Boredom.”  Yes, there is crime in the town.  We have had more than what I think is our fair share of bank robberies. But as far as citizen safety is concerned, Vienna is a great place to live.  I am perfectly content to reside in a town where the police have to deal with restaurant patrons upset at the pace of service at an all you can eat steak promotion instead of having police faced with an abundance of property crimes, assualts, murders and rapes.

Mr. Weingarten  missed one other story.  In the September 30 police report was an entry that read, “An alert citizen reported a suspicious male subject near an unoccupied home.  PFC Ruddy located the individual and learned that he was…”    Let me save the end of that report for a little later.    For now, know that the alert citizen was me.

Here is the story behind the story.  On Friday, September 23, my wife and I had just returned home a dinner celebrating our wedding anniversary.   It was a warm night and the kitchen window was open.   Our neighbors on that side of the house were away for the weekend so we were a little alarmed when we heard someone at the top of their driveway talking into a cell phone.  We listened and a man kept saying,  “RD3283.”  There would be some silence and then we would hear it again , “RD3283.”  We heard this repeated at least a dozen times.

I went outside to look around and saw this disheveled guy probably in his mid 20s at the top of the neighbor’s driveway on a cell phone.  I looked for a car, assuming that he was calling a towing company or giving someone a license plate number but I did not see a vehicle.  Thinking that perhaps this guy was a little deranged, I went back into the house and called the police suggesting they send a patrol car around particularly since the neighbor’s house was vacant.

Then shortly after hanging up the phone, my wife called out, “He just went into our back yard and hopped over the fence into the creek.”

I again called the police and relayed this updated info suggesting to them that perhaps he was on his way to the homes on the other side of the creek.  Within about 4 minutes we saw flashlights in our backyard.  We had not even heard the police approach.  From our family room window, we saw them pull this guy out of the creek, put him up against the fence and frisk him.  With their flashlights shining into his eyes, they interrogated him for some time and he was visibly shaken.

An officer came to our front door to ask if we were the ones who called in the complaint and we said we were.  She told us that he was not drunk or under the influence and that there was no worry.  He was part of an online hide and seek game and the “RD3283″ was a location code that others could use to find him.  She wanted to know if we wanted to have trespassing charges filed and, of course, we said no.

Well, in my 23 years of living here, that is the only time I had to call the police and I hope it stays that way.

On a more serious note, here is the 2011 Town of Vienna Annual Police Report. You will see that crimes against people,  property crimes and misc “group B” offenses were all down in 2011.  Up?  Traffic citations and parking tickets.  If that has you concerned and you would like to find a home where you can walk to the wonderful shops and restaurants of Vienna, give me a call and I will be happy to help.

Click here to read Gene Weingarten’s column.

Photo credit:  Simon Howden

Tales From The Front Lines: Crime (???) in Vienna is a post from: Vienna, Oakton, Fairfax, Reston, Centreville VA Real Estate Blog

Should a landlord get on the Section 8 track?

There was an article in this month’s issue of Update Magazine, the trade magazine for the Northern Virginia Association  of Realtors on the ins and outs of Section 8 housing.  I will summarize the key points and add in my experiences with Section 8 tenants .  (A link to the full  article is at the end of this blog. )

Technically, the program used by low income families to cover housing expenses is called the Housing Choice Voucher Program but is commonly referred to by the old name of Section 8.  Based on income and family size, a family is eligible to receive housing assistance for all of their rent including utilities.  If there is some income in the household or the rent exceeds the county limits, only a portion will be covered.

Should a landlord open up their property to Section 8 tenants?  Below are the pros and cons.  First, though, a landlord should know that this is an option.  When selecting a tenant it is perfectly fine for a landlord to require that any occupants have the financial resources to cover the rent and decide not to accept any non-occupant co-signers or 3rd party payment programs.  (This is the same policy that can come into play with student housing.  A landlord can decide they don’t want Mom and Dad on the lease and that the student must have income to support the rent.)  The key is to be consistent.  A landlord needs to make that decision early in each rent cycle and apply it equally to all applicants.

WHY MOST LANDLORDS LIKE THE PROGRAM

The Section 8 program has  many, many positives.

1) The rent is on time every month.  It is directly deposited into the landlord’s bank account by the county or city on the same day each month.

2) Because these tenants are low income and not all landlords accept section 8, they don’t have many housing options.  They tend to stay a long time thus eliminating the biggest landlord headache – vacancy.

3) They have incentive to be good tenants.  If the lease is terminated due to lease violations or they are evicted, they will very likely lose their subsidy.

4) Increasing the rent is just as easy, if not easier than with a non-section 8 tenant.  Often I find that landlords are reluctant to increase the rent on a good paying tenant as it is more important to keep the property occupied than risk vacancy for another $25 or $50 per month.  Well, with a Section 8 tenant, if the comparable rentals show an increase is justified, the county usually has no issue increasing the subsidy.

WHY OTHER LANDLORDS DO NOT LIKE THE PROGRAM

1) If the tenants family situation or income changes, the subsidy gets adjusted.  If they lose their job or have hours permanently cut, the subsidy will increase but if they get a raise or find a well paying job the subsidy will decrease and the tenant will need to cover more of the rent.  Or if a family member leaves the household (child gets married, takes a job in another city, graduates HS or college and moves out, etc) the subsidy will change.  This can make rent collection tougher for the landlord.

2) The house needs to be inspected by the local government prior to the start of each lease and annually after that.  The inspectors are looking for health and safety issues.  Most of these any landlord would want to address but this can be a hassle some wish to avoid.

3) There may be maintenance issues that a financially independent tenant would deal with but a Section 8 tenant can not afford.  Some of those items are the ones that often crop up in the county inspections.  Others are lease obligations a section 8 tenant can’t cover – more below.

4) While the security deposit is the same for both Section 8 and non-Section 8 tenants, if there are excessive damages upon move out, one would be hard pressed to get reimbursed from the Section 8 tenant.

WHAT DOES THIS MEAN IN REAL LIFE?

I do quite a bit of work helping investors buy rental property.  I do not do property management (happy to refer you to a few fine companies if that is what you need) but I do list rentals for my clients and have worked with several section 8 tenants over the years.  For the most part they have been quite good. Very few have had a 100% subsidy.  Most are in the 80% to 90% range.  Thus the landlord does need to collect some rent from the tenant.   Usually, the guaranteed part covers the mortgage which is of great comfort to my landlords. And collecting the remaining amount is typically not any more of an issue than with non-section 8 folks.  Remember, section 8 tenants want to maintain good standing within the program.  Late payments put the subsidy at risk.

I had a client several years back buy an investment property with a Section 8 tenant in place. She is still there  sending him $25 each month and having the county pay the rest.  The lack of turnover and thus the lack of turnover expense (paint, new carpet, etc) is a huge benefit in these situations.

On the other hand, as mentioned above, the tenant may not be able to handle normal maintenance expenses that are required in the lease.  One of my landlords encountered such a situation but fortunately they averted a large expense.  This Section 8 tenant somehow got an infestation of bedbugs.   The lease clearly states that extermination of insects and other pests is a tenant expense.  This women had no money to call an exterminator.  Per the lease the landlord was not required to exterminate but the landlord and I saw how this could easily have developed into a  landlord expense.  Bedbugs, like all pests, don’t respect condo unit walls.  If this infestation had spread to other units, I could see the landlord becoming involved.  Also, if it was left untreated and the tenant moved out, the landlord would be stuck with the bill with  no practical way to recover that expense from the tenant.  Fortunately, in this case a social service agency stepped in and helped the tenant get new furniture and eliminate the problem.

The same type of issue could surface with clogged drains which are also in the lease as a tenant expense.

And once, just once,  one of  my Section 8 landlords had to terminate a lease.  This was a 3 generation family -  Grandmom, daughter  and granddaughter.  The voucher was in the name of  Grandmom.  At some point during the tenancy the daughter  and granddaughter moved out reducing the subsidy.  This put Grandmom in a position of no longer being able to afford the place.  She needed to leave and relocate to smaller unit where her new subsidy would work.  When she left, well, let’s say it didn’t look all that great.

CONCLUSION

Even considering those two incidents, I personally fall on the side of opening up rentals to Section 8 applicants.  Yes, there are issues that could crop up but they can occur in a regular rental as well.  (Hey, had one a few years back where the applicants were absolutely pristine on paper.  I drove by the house one day well into the lease term and the police had the house surrounded with guns drawn.  One never knows.)

But, to me, the key issue for a landlord in renting property is getting paid a fair market rent and keeping the home occupied.  Section 8 tenants offer some of the best odds of accomplishing those two goals.

I have personally been willing to accept Section 8 tenants on the rentals I own so I have put my belief into action but for each and every landlord,  the decision rests with them.   I advise but do not decide.

The full article can be read here:  NVAR Update Magazine.  This will take you to the full magazine and you will need to scroll thru the articles to get to the voucher article.

Picture credit:  koratmember

The Pros and Cons of Housing Choice Vouchers (Section 8 Tenants) is a post from: Vienna, Oakton, Fairfax, Reston, Centreville VA Real Estate Blog

For a more thorough analysis, I would recommend clicking on the Real Estate Business Intelligence link under the Market Stats tab above.  There you can not only look at a variety of charts and graphs but can drill down to very specific sub markets including zip codes.

The chart below gives you a good overview of how 2011 compared to 2010.  The numbers reflect activity in Fairfax County, Arlington County and the cities of Alexandria, Falls Church and Fairfax.

PRICES

Condos only increased by a few dollars but the other categories were nicely positive.  Overall, prices increased 2.75%.

While not a scientific study, I have noticed a different appreciation rate and activity rate at different points in the market cycle among the 3 types of housing.  The assumption here is that buyers would like to buy as big a home as possible.  Many buyers between the townhome and detached market would prefer a detached home.  And those fluctuating between a condo and townhome would prefer a townhome.  Of course, there are many buyers with a lifestyle that fits perfectly with a condo. (empty nesters moving down, those who travel frequently, etc.)  And a good number of buyers never want to do yard work.  They just want a luxury townhome.  But a large number of buyers want as much home as they can get.

So, when prices have appreciated rapidly, detached homes, the most expensive category of the 3, get out of the reach of many buyers and they fall back to townhomes.  And the townhomes get too expensive for buyers who then opt for a condo.  (In 2004 when prices were getting quite high, condos appreciated 28.9% for the year and detached homes were at 20.1%.  In 2005, the numbers were 24.4% for condos and 19.8% for detached homes. )

Conversely,  when prices have pulled back, some first timers will bypass condos since they can afford a townhome.  And some townhome buyers realize they can afford a single family.  I think that is where we are now.  Look at the prices of detached and townhomes which are stronger than condos.

A caution here – don’t think that detached homes appreciate better than condos.  Over a period of a few years, everything equals out.  The market as a whole will go up and down the same amount.  It is like flock of geese flying south in a V.  Different birds take the lead at different times but they all arrive at their destination at the same time.

INVENTORY

This continues to be the story.   For every month from February thru December the inventory was less in 2011 than in 2010.  The fall off was greater than 10% for September thru December.

Interest rates remain historically low.  My sense is that buyers will start to reenter the market this year.  Reports of appreciating prices will spark many to act now.  With limited inventory, more buyers in the market will mean multiple contract offers and prices rising a bit more.  I am not – repeat not – suggesting we will be back to the crazy days of 2004 but buyers + no homes to buy = multiple offers.

SALES ACTIVITY AND MARKETING TIME

Note that number of units sold was off in all 3 categories.  And here, just as suggested above in the price section, it shows the greatest drop in activity was the condo market.   Second was townhomes and the smallest decrease was in detached homes.  I believe this is another indicator that prices have bottomed.

Average marketing time for a home in December was 69 days compared to 66 days a year ago.  This number seems off to me.  I have observed that properly priced and properly presented homes sell much quicker than that.  Of course there are homes that linger on the market since they are overpriced or need too much work for the price asked.  So, in total, the average days on market is 2 months but that should be beatable with proper marketing.

The average sales price to the original list price was 95.2% in December 2011 compared to 94.9% in December 2010.

Overall, I think the 2012 market will be robust with above average price appreciation and, at least in the early part of the year, buyers will be fighting over limited inventory.  Hopefully, this will spark a few more sellers to jump in and even things out a bit.

Whatever  happens, I am here to discuss your situation and strategize the best way to approach the market.

As always feel free to call or email with any real estate questions.

Photo credit: digitalart

A Recap of the 2011 Northern Virginia Market is a post from: Vienna, Oakton, Fairfax, Reston, Centreville VA Real Estate Blog

When moving up, the time of year may be a factor to consider.

Often homeowners move up because of a life event.  Perhaps two single homeowners are getting married and need to sell their current homes and buy a home better suited to their new life.  (A Realtor’s dream – 3 transactions!!)  Or perhaps an expanding family requires more space.  Or a wonderful career opportunity pops up outside of Northern Virginia.

However, other  moves are discretionary.  The homeowner has the financial resources to move to a new home and desires to do so for a variety of reasons;  more space, bigger lot, smaller lot, more amenities, better schools, etc.  The actual timing of the move is not critical so these folks often ask, “How is the market?  Should I do this now or wait?”   There may be some personal financial factors that dictate the proper response but the market is not really a factor.  Here’s why.

DON”T TRY TO TIME THE MARKET

If one is selling and buying within the same market at relatively the same time, whatever market cycle we are in will make a homeowner feel like a winner in one of the deals and not as great in the other.  If it is a buyer’s market,  a great deal is to be had on the purchase but on the sale one might feel like “we gave it away.” In a seller’s market, the sale price might be more than expected but on the buy side after fighting off multiple bidders, a buyer may feel they “overpaid.”   Taking the whole picture into account,  it probably worked out just fine.

Occasionally there are certain segments of our market that are out of step with the rest of the area but generally the tide rises and falls fairly equally throughout the region.  (A recent exception was that the foreclosure crisis hit harder in the western suburbs causing prices to fall deeper there.  On the other hand, those areas have appreciated more this year than closer in areas.)

Except for investors (see  Investors, time to do a 1031 Exchange?) and retirees leaving the area, it is really hard to take advantage of market imbalances.  There will likely be financial pain on one side and euphoria on the other.  When the time is right, just do it and don’t over think the market.

DO THINK ABOUT THE TIME OF YEAR.

The chart below shows the flow of inventory throughout the year.   This follows a relatively similar pattern year in and year out and can influence the best time for you to make a move.

For those just buying and not selling, the time of year does not matter.   A buyer just needs one home and that home could be out there in times of low inventory just as easily as in time of high inventory.  But if both selling and buying,  there may be reasons to consider the time of the year.  The key question is are you buying first or selling first.  (See “Moving Up Is Hard To Do”  for a discussion of the pros and cons of each.)

Buyers need to decide if they are looking for a hard to find home – very specific features in a specific location – or looking for a type of home relatively common in our market.   If it is a  unique home  and the plan is to sell first and one ends up needing to look in the first two or the last two months of the year, the home may not be found before settlement on the current home.   If the search is flexible, the timing may not matter as much.

I have always found that January and February are much better months for sellers than one would think.  Inventory is low yet many folks start the year searching for homes.  This is one part of almost every year where there are more buyers than sellers.  So if  the plan is to sell first, this is a good time to put a home on the market.  If it sells during this period  then the search will start as inventory builds.

Now, if the plan is to buy  first and sell second, try to avoid putting a home on the market in late July or August.  Yes, homes sell then but the peak season has passed.  Out of town vacations not only mean time off from work but time off from looking for a home.  So many buyers are out of the market during the summer.  I have found it is even harder to get a home sold in the middle of the summer than the period between Thanksgiving and New Years.  Look at the bump in inventory in September.  Part of that is due to homes not coming off the market in August.

There are many more ways to play the annual flow of the market.   If you are thinking of selling your current home and buying a new home, let’s talk and develop the best strategy for you.

Move Up Thoughts Part II: Timing The Market is a post from: Vienna, Oakton, Fairfax, Reston, Centreville VA Real Estate Blog

Whether moving up or downsizing, the question is always whether to sell first or buy first.

Instead of  modifying the words to the 60s classic,  “Breaking Up is Hard to Do,”  I could have used the words from a classic 70s TV theme song  – Movin’ on Up.  (“…Movin on up to the East Side, A Deluxe Apartment in the Sky…”  Many of you know the name of the  show and the rest of the lyrics.  For those that don’t click  Here for the link that will bring you up to speed.  But I am warning you,  this is one of those songs that could get stuck in your head all day. )

It may have been easier to move up to the East Side in the 70s than it is to move up in Vienna VA in 2012.  It can be done but in this lending environment, it becomes more challenging then it was just a few years back.    However, in any market environment, the same question exists – sell first or buy first?  Let’s explore the pros and cons of each.

Buy First/Sell Second

To do this one must be able to a) carry two mortgages at once and b) have enough cash to put down on the new home without selling the old home.  Many people may think they they don’t have the resources to go this route but there are ways to work it out.   If one can make it work,  I believe it is the better way to go.

Buying a home is a huge undertaking both emotionally and financially.  Many people moving into a move up  home plan to stay there for a longer period of time than the 1st home.  Making the right decision is critical and buying first allows one to take as much time as needed to find the right home.

Of course, the down side is the possibility of having a double mortgage and being responsible for maintaining 2 homes for an undetermined period of time.   Executed properly, we can minimize the overlap but it is still an unknown.

In our current Northern Virginia market, with inventory extremely low, this option has less risk than in a strong buyer’s market.   Closely analyze the time it takes to sell a home in your neighborhood, double that time for safety reasons and if you can cover it, this may be a good strategy.   However, you also must know your psychological make-up.  I have seen people make poor contract decisions on their existing home when using this strategy.  Sometimes, they take less for the house than they wanted because they are worried about carrying costs.

Overcoming the Income Issue

So what if one does not have the income to cover two payments?  There are a couple of options here.

If one is close to being able to carry two mortgages but the issue is other outstanding debt, it may be worthwhile to restructure or retire that debt.  For instance, if there is a relatively high car payment yet the remaining  balance is low, it may be wise to pay off the car even if it means putting down a little less on the new home.  Removing a $500 car payment can allow one to get another $100,000 in mortgage.

If the down payment was going to be on the low side and it was determined that an FHA loan was the best way to go, FHA rules allow a non-occupying relative to be a co-signer so one could use their income to get over the hump.  For many obvious reasons, this may not be the best way to go but I have seen cases where families are about to expand and there is no way the current home will work so the homeowners have received help from family members.

Overcoming the Down Payment Issue

The lack of cash is a little easier to work with.

If there is equity in the current home and one has an untapped  home equity line , that money could be used for the down payment.   If there is no existing home equity line, check with your bank about opening one.   For reasons too complicated to go into here, it may be difficult to open one once you are deep into the home purchase process but doing so before should not be a problem.  Check with your bank for their guidelines.

I have seen buyers get loans from their 401Ks or IRAs to get over this hump.  This is a little riskier as there are payback requirements on 401Ks (but interestingly, many lenders do not count that in your debt ratio) and if an IRA withdraw is not paid back within a certain time frame, there are tax consequences.  Certainly check with your 401K or IRA administrator and a tax professional to determine if this makes sense for you.

And last, there are gifts.  Under FHA rules, all of the downpayment and closing costs can be a gift from a blood relative.  Conventional loans require a percentage of your own funds in the transaction and limit the amount of the gift if the buyer’s own funds are less than 20% down.  But if the buyer is using 20% of their funds for a downpayment, the gifts from a relative are unlimited.

Sell First/Buy Second

For those who are very conservative, this option allows a good night of sleep.  The current home is sold and there are no worries leaking pipes in the old, vacant home or leaking funds from the bank account for that old mortgage.   Plus, you can qualify for more home without the mortgage from the old home on your credit report.

However, the logistics here can be  problematic.  This strategy works best for those buyers who a) have a place to hang out for an extended period – relative or friends house or b) are willing to rent for a short period and  c) are not looking for a very “specific” type of home but have a more open ended home search.

Why do I say this?  Let walk through this process.

Say, you  get the perfect contract on your existing home – maybe even have a bidding war and get more than you expected – but that buyer needs occupancy in 30 days.  It is very unlikely you will find a suitable home in that time.  Even if you do, can that seller allow you occupancy that quickly and can your lender process that quickly?  You need to have a temporary housing option available.

Unless the buyer is relocating from out of town with a family arriving in a few weeks or some other deadline situation, it is unlikely a buyer would demand such a quick close.  For move up sellers,  it is ideal if the buyer of their home  has some flexibility on occupancy.  If so, my favorite way to work this out is to use the “seller continued occupancy addendum.”  In essence what happens is that the current home settles in 60 days and the seller has their money in hand.  Then they have the right to stay in the home up to 60 days after settlement and pay “rent” to the new owners equal to the new owner’s mortgage payment or some other agreed to number.

So, once the contract on the current home is ratified, the sellers start to look for a new home.  If they find one that can settle the same day as the old home, fantastic.   If enough notice can be given, the rent back is not needed.  But if more time is needed, it is available and the seller avoids a double move.  Now if the seller can not settle before the end of the rent back, a double move will be required.  The buyer’s lender will only allow a 60 day rent back before they consider the new owner a landlord which has all kinds of negative implications for the new owner’s financing.

Not every buyer can work with sellers on a continued occupancy arrangement.  It works best when the buyer is currently renting.  If that buyer is also moving up, the deal may get too complicated for this strategy.  And there have been times when, based on the personalities involved or the tone of the negotiations,  a landlord/tenant style relationship is not advised.

Again, know yourself psychologically.  Some buyers are looking for very specific features in a very specific location.  When the current home goes under contract, that style of home may or may not be available.  For those types of searches it is really best to buy first.  If one needs a home that is hard to find, the time pressure can cause undesirable compromises to be made (unless temporary housing is available.)

Other buyers I work with have a very wide open home search and are searching for a type of home commonly available without many geographic restrictions.  This strategy tends to work better for these folks.

Conclusion

So, no right or wrong answer here.  Deciding whether to buy first or sell first is very situational.  Financial parameters, psychological parameters and the dreams and goals one has for their future home all come into play.

Some of you may ask why not a contract contingent on the sale of the current home or a contract contingent on a home of choice for a seller?   Yes, they are possibilities but in this market, they are not desirable for reasons I will save for another post.  Many sellers  and buyers will not work with these and it really limits one’s  housing choices.

Thoughts or comments?  If you have done a move up, how did it work out?  Was it stressful?  Would you do it in the same order again?

Moving Up Is Hard To Do is a post from: Vienna, Oakton, Fairfax, Reston, Centreville VA Real Estate Blog

On to the stories.

WHERE WILL THE WEDDING GUESTS STAY?

Jerry and Melanie were getting married in late July.  A big wedding was planned with many out of town guests including immediate family from outside the US.  Jerry and Melanie were looking to find a home and settle before the wedding as they had told their immediate family that they would not need a hotel but could stay in their new home.  I had already helped other members of Melanie’s  family buy homes so when Jerry and Melanie were ready, I got the call.

We started our home search early in 2010.   Nothing was quite right so we dipped our toes into the short sale market.

I informed Jerry and Melanie that short sales have a very uncertain timeline and there was no guarantee they would settle before the wedding.  One way to increase the odds was to find a short sale that previously had a contract.  In these situations, if the home had been under contract for some time, it is possible that the short sale bank completed a substantial part of their research and the wait time would be much shorter.

So mid March we found such a home.  The listing agent was an experienced short sale agent (I check the body of work of each listing agent I work with so I can understand their experience and areas of expertise.  This often helps in developing a negotiating strategy).   The agent stated in the listing  that the short sale was already approved and they just needed a new contract with the approved price and terms.  We decided to proceed and wrote the contract exactly as instructed.   We knew that if we pushed on any of the significant numbers, we would send the contract into another review and time here was important.  The wedding day was a little over  120 days away.

So, 30 days after ratification we were told verbally that the bank approved the contract and that it should be about a week or so before we have the official written approval letter.   Two  weeks go by and no letter.  The listing agent frantically tried to get the negotiator on the phone and eventually did only to find that the case had been reassigned to another negotiator who had not yet reviewed the file.   I had been telling the listing agent that it was rather urgent that the case get approved quickly – wedding, out of town guests, etc.  We decided to  send a copy of the wedding invitation to the negotiator to show that we were not playing games.

In May, the same thing happens.  We were verbally told that the we should have the official approval letter in a few days. Then the negotiator quit and the case was reassigned.  Back to square one.   The buyers are now embarrassed that they won’t have a a place for the relatives to  stay.  They don’t really know what to do.

A similar situation happens in June.  I didn’t like the way things were proceeding and was thinking that there may be things going on behind the scenes with the sellers and/or the bank that we were not being told.    I  suggest to the buyers that we move on to another home but they really liked this home and decided to rent an apartment for the first few months of their marriage while they waited for the bank to approve the deal.  The relatives were told to book hotels.  They had a spectacular wedding.  (I was actually honored to be invited and had a great time.)

Well, by mid August the deal is still not approved and finally the buyers have had enough.  We voided the contract and found another home, a foreclosure, and proceeded to settlement without any drama.

Often times,  common sense goes out the window with short sales.  The history of the short sale home they wrote on shows what I mean   It was put on the market as a short sale in in December 2009.  It received a contract right away.  After tiring of waiting the first set of buyers walk away early March.  We write our contract at $308,000 and eventually back out mid August.  The home sits on the market for a few months and then the price is reduced to $292,000.  Mid December 2010, another contract is received but that one falls out in February 2011.  Quickly a 4th contract is written in mid February and that one eventually settles in May of 2011 for $292,000.  So due to bank inefficiencies and delays, it takes from December 2009 until March of 2011 to get this home settled. While I do not know the terms of the other contracts, had the bank acted swiftly with our contract they could have settled about 9 months sooner for $16,000 more.

THE COMMUTE IS KILLING ME.

Anthony and Rachel owned a home in western Prince William County on a large lot but their employment was in Fairfax County.  The commute was long and getting longer.  They wanted to trade acreage for a shorter trip to work.  They met one of my past clients who referred them to me and we started to look for that closer in home.

Fortunately for Anthony and Rachel, they were in a position to buy without having to sell their current home.  We looked and looked  for just the right home and nothing seemed to fit the bill.  We then came across a home that had promise.  It  was close to their work but it was a short sale.  However, unlike, newlyweds Jerry and Melanie,  Anthony and Rachel were not on a strict timeline and willing to wait.  They wrote a contract which was accepted.

As usual we waited and waited for approval and finally 5 months later,  we got written approval.  The title company updated the title work they started 5 months earlier and a problem surfaced.   By definition, anyone involved in a short sale is in financial distress.  Well, an updated title search shows that Mr. and Mrs. Seller had  judgments against them.  After all of this waiting, that could have been a show killer as prior to settlement, a seller must clear all judgments that could possibly attach to the  house.  But fortunately for Anthony and Rachel, Mr. & Mrs. Seller owned the house as Tenants by the Entirety which is available to married couples and means that only debts signed by both husband and wife can potentially attach to the house.  In this case, the title company received documentation to indicate that judgments were individual judgments and thus can not attach to the house so we proceeded to settlement.

The point here is that when a seller is in financial distress, their financial affairs can take a few twists and turns that are unknown to those involved in the real estate transaction. That can put an end to a deal if the amounts are so large that the short sale bank will not reduce the amount they want to collect to to allow for these debts to be paid.  If the short sale is a condo with high monthly condo fees, a large balance could accumulate quickly.

HOW LONG MUST I LIVE IN MY PARENT’S BASEMENT?

George had recently graduated college and secured a well paying job in his field.  I had known George and his family for over a decade and helped them on another transaction in the early 2000s.

George had a relatively small geographic footprint for his search.  It was the best compromise between the night life and activity of DC and his job in the western suburbs.  Again we looked at regular sales but nothing clicked.  We then saw this one short sale that was very attractively priced at $250,000.

This home had previously had a contract and the first buyer tired of waiting.  The listing agent, a very experienced short sale agent, tells us that the price had been approved and the bank was also willing to pay a significant amount of closing costs.  We write the contract as directed and it is ratified with  settlement in 60 days.  The listing agent said she has worked with this particular bank on many short sales and they process quickly.  Well, George was living at his parent’s home so time was not an issue but he really wanted a place of his own as soon as possible.

In 30 days, we do got a verbal that the price is approved and the written letter should come shortly.  In another 30 days we got the written approval.  Settlement was scheduled for at the end of the following month – a bit later than originally anticipated but, still, all seems fine.  Based on receipt of the written approval we moved forward with a home inspection and George’s bank ordered an appraisal.  (I structure all of my short sale contracts so that the buyers do not put out money – other than the earnest money – until the short sale approval letter is received.)

Then the seller decided that he did not like the terms of the bank approval letter.  The letter had required him to pay back some of the shortfall over a period of years.   Upon receipt of the letter, he accepted the terms and passed the letter along to us for us to start our side of the deal.  But now he wanted to renegotiate with the bank and see if  he could work out a lump sum settlement on the outstanding balance.  If he couldn’t work that out, he stated he may not move forward.  Somehow he worked out the renegotiation rather quickly but that still required a change in settlement pushing it out another 3 weeks.  Now, we are about 110 days between contract and settlement but still doable based on George’s living situation.

Then,  an issue with the rental  home the seller is moving to surfaced and we neeed to delay settlement another 2 weeks.  The bank was getting very upset with all of these delays and threatening that there could be no more delays or the terms of the deal will change.  The pressure was  on.  We settled  and George had his first home.

There are two lessons here.

First, I can not imagine the stress and pressure one is under when facing a short sale or foreclosure.  Often, there is a sense of relief when things appear to be resolved but once reviewed the terms may not be as attractive as originally thought.  Sellers may change their mind at various points in the process and that can delay or kill the settlement.   I have a colleague who finally got approval on a short sale after 6 months of waiting but the  seller was told that bankruptcy would be a better  idea.  That seller filed bankruptcy which stopped the short sale.

Second, short sale sellers are behind on their payments and their credit is obviously not good.  Some are able to move in with relatives or have other handy housing solutions.  But most need to find a sympathetic landlord.   Usually that is their one and only housing option so  a change in the occupancy date of the seller’s new home results in a delay of settlement on the short sale.  In the above situation, we were asked to settle earlier and allow the seller to stay for a week or so.  This may have been okay if the buyer was a seasoned investor.   However, a very complicated situation could have developed if the short seller’s rental fell through and he had no place to go.  A young first time buyer could not be put in that situation so we did not agree to work with the request.

Bottom line,  short sales can work.  And in many  cases, I feel the folks get a home at a very attractive price.  I don’t think they can turn these around and flip them for a substantial profit but they are moving in with some built in equity.  On the negative side, these transactions are full of surprises that are really out of the control of the agents and buyer.  Not for the feint of heart.

In upcoming weeks there will be more “Tales From the Front Line” posts on other topics or issues.  Stay tuned.

Photo Credits:  Wedding rings and character on the ladder coming up from the basement- Salvatore Vuono; Traffic jam – EA

Tales From The Front Lines: Short Sale Shorts is a post from: Vienna, Oakton, Fairfax, Reston, Centreville VA Real Estate Blog

Many buyers ask me about buying foreclosures or short sales thinking they are the “best” deals.     I have helped buyers, particularly investors, make great below market acquisitions but just because a home is a foreclosure or short sale does not mean it is a great value.  And, more importantly, depending on your situation and goals, distress property may not be the right type of property to consider.

Below is a brief review of the pros and cons of foreclosures and short sales.  I also have some comments on court ordered sales, another type of distress sale but one that is not as prevalent as the other two.

Foreclosures.

For most buyers foreclosures are a valid avenue to pursue.   The process of buying a foreclosure is the same as a regular sale.  There is an easily identifiable owner (the bank), negotiations often are wrapped up in a few days (with the exception being that the banks typically are not available holidays and weekends) and settlement can occur within the normal 30 to 60 day time frame.

The downside is that the homes convey strictly as is and the banks will make no repairs.   Home inspections, radon tests, mold inspections, termite inspections are all encouraged by the banks but they are strictly to allow the buyer to understand the condition of the property.  If the condition is not to the buyer’s liking, they can back out and get the earnest money returned.  There are no credits or repairs that will be executed by the bank.  And they do not care about whether appliances are there or not.  (I once had a buyer contract for a foreclosure and when we did the home inspection there was a washer and dryer in the house.  When we did the pre- settlement walk thru they were gone.  The bank said sorry, buy the property as is or back out and we will keep the earnest  money.  Appliances are personal property, not real estate.)

Are the prices better than the market?   In my opinion, slightly but most of the price differential is  sweat equity.  The banks have the local listing agent (and sometimes more than 1) do a market analysis.  The cost of any repairs are built into the price and there may or may not be some additional allowance for unknowns.  But if you can do the repairs yourself, you  come out ahead as you get tremendous savings on the labor.

Another reason to buy a foreclosure is that it may get a buyer into a neighborhood they could not otherwise afford.  Say a home is in a $500,000 neighborhood but because of the work  needed, it is priced at $450,000 and $450,000 is the top range the buyer can afford.  Well, that home could be a very wise purchase.

One mistake buyers make is to think the banks will come way down off the asking price to get rid of inventory.  That may be the case in cities around the country that are rather depressed but not in Northern Virginia.  Between October 1, 2011 and today, there were just 345 settled foreclosures in Fairfax, Arlington and Alexandria.  They ranged from a low of $72,100 to a high of $900,000.  The average list price was $316,745 and the average sale price was $313,974 – not much of  a difference.  In fact, 108 of the homes sold ABOVE list price while only 18 sold for more than 10% less than list.  The scarcity of inventory has  buyers fighting over what is out there

(FYI, I do not list foreclosures but have helped buyers on dozens of foreclosures over the last few years.)

Court Ordered Sales

The most common type is a bankruptcy sale ordered by the court.   There is a local bankruptcy attorney that has referred several of these to me so I am quite familiar with the process.  These cases only get referred to a Realtor when there is equity in the property and that equity can be used by the court to pay off the other debts of the homeowner.  In this case, the buyer negotiates directly with the homeowner and once an agreement is reached, the contract is forwarded to the court for review.   Settlement can not take place until about two weeks after the court approves the sale.  So, one has to plan for at least a 45 to 60 day time frame between contract and settlement.   There is nothing that can be done to speed this up.  The bankruptcy attorney for the homeowner will get it on the docket as quickly as possible.  Now, I have never seen one of these sales denied by court.  If the the Realtor, homeowner and bankruptcy attorney work together, it is just a rubber stamp by the court.  The bankruptcy attorney knows what numbers will or will not work so the homeowner is well advised to speak with their attorney before officially signing the contract.

Now in a bankruptcy sale, of course, the homeowner is struggling financially so the possibility of the homeowner executing any repairs is probably pretty slim.  However, after a home inspection if there are issues that surface, there can be a 2nd negotiation conducted to either reduce the price and/or have the seller pay closing costs.  All of this needs to be done before the contract is presented to the court.

The issue is these cases is that the timing between contract to settlement is based on the timing of the court so buyers on a tight timetable should not pursue these homes.  Additionally, the homeowner is often living in the property and needs to find a new place to live.  This is extremely hard while in the middle of a bankruptcy so a buyer should be prepared for potential delays involving occupancy.

Short Sales

Well now we come to thorn in the side of every Realtor.  I strongly urge all buyers to pursue every other angle before pursing a short sale.  They are a vast wilderness full of pits, traps and winding paths that lead to nowhere.

First, by definition, a short sale means that the homeowner owes more on the property than it is worth and is behind on their payments.  Instead of having a  foreclosure or bankruptcy on their credit record, they decide to pursue the short sale route.  Sometimes there is one bank involved and sometimes the seller has a 2nd trust as well.

Prices on short sales are set by the seller and listing agent and often look extremely attractive.  Furthermore, you can make just about any offer you want on a short sale and it is likely  the seller will sign it.  Really what do they care?  They are not making any money at full price so 10% or 20% off full price is the same to them.  And for reasons too complicated to go into here,  it may be in their best interests to sign any contract presented to get the process started.

So once, the contract is signed and ratified, it is sent to the bank or banks for review.  The bank needs to approve both the seller and the contract.  The seller needs to submit all of their financial data to the bank so the bank can be assured that they are really in distress, unable to make the payments and not just taking advantage of the system.  Often this first part is done (or partially done) before the home goes on the market but some sellers, listing agents or banks start this once the contract is ratified.

Then once the seller is approved, the bank needs to understand the value of the home.  The bank will hire local Realtors to give them a BPO  (broker price opinion).  They may even hire an appraiser.  This is where that supposedly good deal starts to look less attractive.   It is not uncommon for a bank to counter the contract price and force a number that is closer to market.  This can happen weeks or months after the contract was ratified. Of course the buyer does not need to accept and can walk.  If  a home is valued at $500,000 and the contract states the sale price is $400,000, the banks will not work with that as they feel they would be better off letting it go to foreclosure where they can get a better net – even after all of the carrying costs.

Then after that is resolved, there is continuing negotiation between the 1st and 2nd trust holder as to how much of a loss each will take.  There may be negotiations between the bank and the mortgage insurers or negotiations between the bank and other investors.  And, maybe  somewhere along the way perhaps the bank negotiator is reassigned, a new person looks at the file, orders another BPO, wants updated financials from the sellers  and the whole process starts all over again.

Bottom line, when you contract for a short sale you

a) do not know when you will settle( definitely will not be 30 days but will probably be 2 to 4 months or more from the contract date)

b) can not lock in an interest rate since rates are only good for 60 days and you need to wait for bank approval to be within that window (it’s possible that rates will go up while you are waiting making the purchase less attractive) and

c)  have no idea of the final price until the banks have fully reviewed the file and even then they reserve the right to change their mind until they issue the approval letter.

Bottom line,  folks on a strict timeline or a strict budget should stay away from short sales.  Investors or those with open ended timelines can pursue these.  For me, it is always frustrating working short sales as there is nothing I can do to speed up the process.  Everything goes through the listing agent.  As a buyer’s agent, the seller’s bank is not authorized to speak to me so I can not get any progress reports directly from them.  Everything depends on the professionalism and experience of the listing agent.  Some are fantastic while others have done very few of these and don’t know how to guide the deal through the system.  Personally, while I have helped many buyers purchase short sales, I have never listed one nor do I plan to. (If you need to sell via the short sale process, still give me a call.  I will refer you to agents I know who are experts in working these deals from the listing side.)

By the way, in the end, after waiting for months, you may not settle. The bank may not  approve the sale.  The homeowner may suddenly decide bankruptcy is the better option or some homeowner judgment or lien surfaces to stop the whole process and force a foreclosure.

Check out this recent post on real short sale situations I have encountered: Tales From the Front Lines:  Short Sale Shorts

There is so much more I could get into on distress sales.  If you would like to learn more, please give me a call or write a comment or question below.

A Distress Property Primer is a post from: Vienna, Oakton, Fairfax, Reston, Centreville VA Real Estate Blog