East Bay Real Estate Focus

Beginning in 2007, foreclosures rocked the real estate world. Like an out-of-control freight train, they began to decimating the market, peaking in 2009. Like any new phenomenon, myths and rumors began propagating like mushrooms as consumers struggled to understand the new reality. Although many misconceptions have come and gone, we still encounter 5 myths on a regular basis.

1.    There is going to be a flood of new foreclosures to the market.

This rumor has appeared every year since 2008 and has been routinely debunked. However, recent announcements that the Feds reached a settlement over the robo-signing scandal have reignited speculation. The idea is simple: since the cork is now out of the foreclosure bottle, we’ll soon see another flood of REOs inundating the marketplace.

Personal opinion: don’t hold your breath.

Banks have learned that by controlling inventory, they can affect local prices. By releasing homes in measured amounts, they realize higher prices than if they released a glut of homes. In addition, they’ve learned that if they can mitigate their losses by agreeing to a short sale, everyone wins, including their bottom line.

2.    You can go direct to the bank to buy a foreclosure.

Every few weeks I’m asked how to buy foreclosures direct from the bank. Someone knows a friend being foreclosed on and they want to step in and grab the house before it hits the market. Don’t we all. In reality, banks have a simple system – they first offer properties on the courthouse steps. The rest they assign to asset mangers who then hire local Realtors to put them on the market along with all the other homes. Want an REO? Pay cash at the courthouse steps or get in line with the rest of us when they hit the local MLS (Multiple Listing Service).

3.    You can get a killer deal by submitting lowball offers on foreclosures.

You would’ve thought this myth would be dead by now. Unfortunately, like Elvis sightings, it just won’t go away. Here’s the truth: Banks want REOs sold in 30 days or less so they typically appear on the market priced slightly under comparable properties. If they don’t get a quick sale, they’ll lower the price after about 30 days. Lowball offers are ignored and are, quite frankly, a waste of everyone’s time and effort. You might get a deal by offering a lower price on a foreclosure that’s been sitting on the market over 90 days, but keep in mind, there are good reasons it’s been there so long. Such as, “It’s a complete dog.” Got cash? It DOES NOT mean you’ll get a lowball offer accepted either. Seriously.

4.    You can’t use foreclosures when doing an appraisal.

Or short sales, for that matter. No longer true. In fact, in many neighborhoods, that’s all that’s there. Therefore, foreclosed or distressed sales represent the actual value of homes in the area and HAVE to be used to appraise other properties. Don’t like it? Get over it. Times have changed and the ways neighborhoods are valued have changed as well.

5.    Foreclosures are only impacting the bottom end of the market.

Used to be true, however, while foreclosure rates on the lower end of the market have actually decreased, not so on the upper end. According to Daren Blomquist, vice president of RealtyTrac, while the market share of foreclosed homes under $1 million is shrinking, properties valued over $1 million are rising – up 115% since 2007. Additionally, multi-million dollar foreclosures (properties valued upwards of $2 million) have increased by 273%. While some well known jetsetters have melted down and lost everything, others are choosing to strategically default. They see it like liquidating a poorly performing portfolio - they have enough resources to cut their losses and move on. Historically, banks have been reticent to foreclose high-end homes and absorb a large loss. Defaulters are now forcing their hands and mansion foreclosure rates are moving on up.

Myths control behavior, and this has never been truer than in the housing market. Savvy buyers will understand the importance of working with knowledgeable agents in debunking myths, studying market trends, operating with solid facts and …

Actually closing transactions.

They were a wonderful young couple – stars in their eyes, hope oozing from every pore and excited about purchasing a home they could call their own. After meeting with them for a number of weekends, looking at countless properties (many of which they loved), and watching them, week after week, make no decision to write an offer on any of them, I finally commented,

“It doesn’t appear to me that you are willing to buy a home at this time.”

“We’re confused,” they admitted. “We’ve seen some gorgeous houses that are everything we want, BUT … we have some serious questions.” “Let’s talk,” I said, and, over coffee at the local Starbucks, listened as they shared three fundamental concerns.

Since I deal with home buyers on a regular basis, I frequently hear the same three queries. They may be framed differently by each person, but at core, they all are asking the same three questions.

Question #1: “I’m hearing that home prices may continue to fall – why should I purchase a home now?”

It’s a great question with more to it than initially meets the eye. I bought an old car a number of years ago – I thought I got a fantastic bargain until I suddenly realized that the ongoing maintenance bills were killing me. The initial price might have been very low, but the overall cost of ownership was extremely high. Many home buyers miss this critical fact:

Price is not the only consideration – total cost of ownership, in fact, is more important than the initial price.

As an example, a buyer purchasing a home for $375,000 with 20% down will have a mortgage of $300,000. If they lock in at a rate of 4% fixed for 30 years, monthly payments will be $1,432.25 and the total cost of the loan will be $515,610.00.*

For the sake of this argument, let’s assume the market falls 5% over the next 12 months. If the buyers hold off buying for a year, their price would be $356,250 ($18,750 lower). Their loan would be $285,000 and, if rates stay the same, their payment would be lower … by only $71.62 a month ($1,360.63). However, if rates rise by only a single percentage point, the monthly payment increases to $1,529.94 – $97.69 more per month than if they’d bought at the current price of $375,000. While this may not seem like much of a difference initially, over the life of the loan they’d end up paying $550,778.40 – $35,168.00 MORE that they’d pay by buying now.

And … this scenario DOES NOT include the cost of renting for an additional year or income tax deduction savings.

So how likely is it that rates may change in the near future?

John Dutra with RPM Mortgage provides some insight: “Although Federal Reserve Chairman Ben Bernanke insists that rates may remain stable for some time, the Fed has also confirmed a rise in rates if inflation becomes an issue. Current rates are coupled to world-wide economic factors – specifically what is going on in Europe’s Euro-zone.” Dutra adds, “Should Greece become stable and Europe manage to stabilize the Euro, the result in America will be an increase in the American Consumer Confidence. If that soars, ultimately rates will go up.”

The reality is, we honestly don’t know where we’ll be in a year.

You could do what some are trying to do and second guess the market, but I’ve seen so many buyers try that and fail. And there is always a price tag associated with that failure – sometimes a hefty one.

Recommendations:

· Don’t try to “second guess” or “time” the market. Even seasoned investors get it wrong. Frequently.

· Meet with a lender who can help you run projections based on your personal data – they can help you estimate projected monthly payments, factor in income tax savings and more. You’ll have some real data with which to make your decision.

Question #2: “If I buy now, when can I expect to see appreciation?”

Historically, buyers didn’t purchase homes because of the potential for appreciation in value. Freedom from tyrannical landlords was at the top of the list. The idea that fueled the immigration fires for many moving to the United States was the thought that you could actually own a piece of America – and with that concept came the ideals of freedom to do with your property as you wished. Later on, as an additional benefit, the government included tax interest deductions.

Appreciation was never the primary goal: if it occurred, it was a bonus, not the ‘raison d'être.’

Additionally, historic rates of appreciation were often very low. Somewhere in our history, however, probably beginning the middle of last century, the idea of appreciation began to foment in our nation’s consciousness. As we headed into the 21st century, the perception that, “If you buy it, appreciation will come” was firmly cemented into most homeowner’s minds. With the rampant price escalations of 2003-2006, potential appreciation predominated almost everyone’s thinking and became the primary reason to buy a home. Ill-prepared buyers purchased out of fear that, “If we don’t get in now, we’ll miss the boat.” Amateur “investors” looked at potential short-term gains and leapt in hoping to score big.

Spiraling home values changed the way we thought about appreciation and not in a good way: it set the stage for the housing collapse that began mid-2006.

An increase in the value of your property might make you feel more secure or add depth to your balance sheets. Unfortunately, appreciation really only matters when you (1) sell, (2) refinance or (3) add an equity line of credit. The greater your equity at the point of sale, the greater your options. Additionally, banks like to see at least 20% equity in your home when you refinance or add a line of credit.

Buyers whose primary goal is potential appreciation are buying for the wrong reason and could easily become disillusioned by the current market. In fact, they could, by focusing on the wrong things, miss out on one of the best buying opportunities in the past century.

Soap box aside, let’s try to answer the actual question of, “When will the market begin to appreciate?” To be brutally honest, no one really knows. Our initial projections showed parity in 2014, however, we’re now pushing this date back, perhaps to 2016.

And no one knows what 2012 will bring - 2011 had some nasty surprises including:

· Mid-term elections and the resulting change of power in the House,

· Japan’s earthquake and ensuing tsunami,

· The Arab uprisings,

· The shocks in oil pricing,

· Europe’s Sovereign debt crisis,

· Greece’s collapse and default,

· Our own debt ceiling debacle,

· The downgrading of USA’s long-term debt,

· Ensuing volatility in the stock market,

· Threats to remove the interest deduction,

· Increased protests locally and abroad.

These events and their fallout threw all projections to the wind and redefined uncertainty. Factor in the impending 2012 presidential election and there are enough issues in the queue to keep unrest simmering and the prospects of appreciation in check for quite a while to come.

If potential appreciation is one of your core reasons for buying, you could be waiting a very long time.

Recommendations:

· Remove potential appreciation from your list of reasons to purchase.

· Examine the remaining reasons to buy: security, the ability to do with your own home as you wish, income tax advantages and so on.

· Sit down and write out a “Pros and Cons” sheet that will help you make your decision – it would be a good idea to sit down with a Realtor and/or lender to get their help with the list.

Question #3: “Is it better to rent or buy?”

Time Magazine named their 2011 Person of the Year “The Protestor” making this past year “The Year of the Protestor.” It could easily have been called “The Year of Confusion.” With all of the chaos coupled with the uncertainty of the real estate market for the past few years, many in 2011 opted to sell their existing home and ride out the uncertainty. There are no shortage of reasons for this:

· Fear of losing more equity,

· Drastic income reductions making debt service difficult,

· Job loss or uncertainty about future job prospects,

· Adjusting rates making increasingly high payments untenable,

· Deferred maintenance due to lack of funds spiraling out of control,

· Trying to second guess the market.

Many have bailed, concluding that current market risks outweigh any projected benefits. Some, tired of maintaining their properties, have sold, relishing a return to rental homes where landlords get to deal with issues, not themselves.

An entirely different group, however, previously unable to buy because of sky-high prices, view current depressed prices and unbelievably low interest rates as opportunity knocking! They’ve grown weary of standing on the sidelines watching everyone else buy. They can’t wait to get their own home, and they are lining up in droves to get their slice of the American dream in 2012.

So which is better, owning or renting? It TOTALLY depends on WHY you are buying.

Looking for short term gains or quick profit? Don’t bother. That’s how we ended up in this mess to begin with. With any luck, we’ve learned enough not to go back there again. And if you have to commit financial suicide to make the monthly payments, it’s not worth it – too many things could go wrong, including losing your health. If, however, you want to be free of rentals with their restrictions and petulant landlords, the ability to paint your home any color you wish, renovate to your heart’s content, own the dog of your dreams, benefit from the significant income tax deductions and benefit from long-term upside potential AND … you can afford it …

Then you qualify to own.

Additionally, national studies show significant social benefits accompanying homeownership. I’d recommend you read the study, but in general, those who own their own home (when compared to renters):

· Live in areas with lower crime rates,

· Have higher academic potential,

· Are perceived to be happier,

· Tend to be in better health,

· Are perceived as having more focus and purpose.

Lastly, and this is the icing on the cake, it’s becoming possible in many area for it to cost less to own than it does to rent. While this also should not be the primary goal of owning, it is definitely a benefit worth pursuing.

Recommendations:

· As suggested above, write out a list of Pros and Cons – make sure you have all the facts before making a decision.

· Meet with a lender to get pre-approved – you will get the information you need to make informed decisions. You won’t know if you really can afford to buy until you’ve had a lender look at everything and provide you with all your options.

The young couple? Proud owners! In fact, as I checked in on them the other day, they were wondering why it took them so long to decide. Although it took them a while, in the end, after reviewing all the data, they made the plunge ...

And are VERY glad they did.

*NOTE: all numbers are approximate and are not a guarantee or promise of any kind. See your lender for information specific to your situation.

In identical fashion, there is still no substitute for buyers actually walking through a home for sale.

We’d love to think that we can make the entire process virtual. Savvy listing agents have learned that the more pictures and information they post online, the better a home’s exposure and chances for a sale. As an example, just a few short years ago our MLS (Multiple Listing Service) could only facilitate one picture per listing. Then it moved up to 9. Just recently, the ante has been upped to 30. Add in virtual tours and the like and it’s possible to go armchair shopping with your iPad or smart phone from the comfort of your family room armchair.

In the words of a buyer as we were recently touring a home: “Those online pictures put a LOT of lipstick on this pig.”

Even with all our technological advances, there’s still a need … for boots on the ground. A great way to accomplish this is the ubiquitous “Open House.” Although many doubt the effectiveness of Open Houses in the new internet-based real estate world, buyers still need to get inside homes, walk through all the rooms, see what’s behind Door #2, check out the closets, garage and even open cabinet doors and drawers to ensure everything is working as it should. Ironically, many agents in our area are starting to push their buyers towards open houses, thinking that if a buyer can visit a home without them, they can be off doing something else. I disagree with this approach, but it is gaining popularity.

Allowing visitors to poke through Open Houses and peer into every nook and cranny can cause serious problems for unwary sellers.

The primary issue with Open Houses is the inability to control who comes to visit. It’s common knowledge that looky-loo neighbors swarm to open houses like ants to a church picnic. Others, however, target Open Houses with more than idle curiosity – they come to see what they can steal. Some come to scope out the home – if they see things they like, such as expensive art, they’ll monitor the house and come back later. And sellers, if not properly trained, can unwillingly contribute to the removal of their own valuables. While recently visiting an open house in an upscale neighborhood, I spotted the seller’s diamond-studded NBA championship ring sitting in plain view for all to see … on the master bathroom counter. I took it downstairs and handed it to the listing agent, who almost had a seizure.

Whether a planned robbery or crime of opportunity, the end result is still the same – the items are gone and the sellers are victims.

To lessen the potential for our own listings, we made a decision a number of years ago to train our sellers to protect themselves and their valuables during the sale of their home. Prior to going on the market, we provide a Security Coaching Session and a Detailed Checklist to ensure our sellers are protected as much as possible.

Here are the top 12 ways Sellers can protect their home while on the market:

1.   Remove All Identifiers:

All family pictures, awards, certificates should be removed. You want guests to look at your home, not your family pictures. And you most certainly don’t want to give away your personal information by proudly displaying it on a wall where someone can take a discrete picture of it with their phone and then use the information later for harmful purposes – such as setting up a false credit card account in your name.

2.   Remove All Valuables:

Locate them in an off-site secure location. You are going to need to pack all of your belongings to move anyway – we suggest that you start now. Art, knick-knacks … anything you value.

3.   Remove Obvious Targeted Items:

Make sure items such as jewelry boxes, safes, strongboxes, gun safes and other obvious targeted items are packed in an offsite, secure location.

4.   Remove Prescription Drugs:

Take them with you when you leave the house. Have them in a box or container and simply keep them in the trunk of your vehicle while you are gone. Prescription drugs are the #1 target for thieves and frequently the easiest items to take – they will often lock the door to the bathroom as if they are using the facilities and then go through everything unhindered.

5.   Remove Extra Keys, Garage Door Openers:

Or any other devices that will provide access to your home. Frequently they are left lying around or are hanging in a place where someone could grab them and stash them in their pocket.

6.   Secure Financial and/or Legal Documents:

Credit card or banking statements, legal documents, wills, insurance policies, etc. Make sure that any documents that will give away personal information are properly safeguarded.

7.   Secure All Electronics:

Turn off computers. It’s also a good idea to make sure they are password protected. Remove extra laptops, cell phones, iPads (any tablets), thumb drives, portable hard drives and any other personal electronic devices.

8.   Secure Desks or Filing Cabinets:

If there is anything important inside (blank checks, anything with personal information, etc.), lock them and keep the keys in a safe location.

9.   Check EVERY Drawer and Cabinet Door:

Open every single one everywhere in the home to ensure there is nothing valuable inside. This includes furniture drawers such as a dresser in the master bedroom.

10.  Refrain From Leaving Out Any Cash, Jewelry, Small Valuables:

Anything you personally value that can be picked up with one hand. As an example, I’m amazed at how many times I see cash laying out in plain view in the master bedroom.

11.  Items Up and Out of Children’s Way:

Unfortunately, parents frequently let children roam through the house on their own or don’t hang onto them as they should. Additionally, make sure all toys – especially in children’s rooms – are up and out of reach. There are many reasons you don’t want visiting children playing with your children’s toys, including health and safety issues.

12.  Check EVERY Window and Door Upon Returning Home:

Make sure they are all properly secured. A ‘visitor’ may unlatch a window or door, hoping to return later and have easy access. Include the side door to the garage, if applicable.

Thieves targeting open homes frequently come in pairs: one keeps the open house agent busy while the other roams freely throughout the home looking for items to steal. While we’ve never had a theft from any of our listings, we understand that it could happen in a heartbeat and so we continue to work hard to prevent it from happening for the first time. We recommend you do the same.

Be wary and safe: you lose your privacy when selling your home – make sure you don’t you’re your valuables as well.

I moved to the San Francisco Bay Area in 1983 and like most newbies, couldn’t wait to experience my first earthquake. With no idea what to expect, my emotions ranged from apprehension to intense curiosity. I didn’t have long to wait – three months after we arrived, I boarded a plane to fly to a conference in Los Angeles. Within seconds of the wheels leaving the ground, a voice came over the cabin speakers stating, “This is the Captain speaking. The Bay Area just experienced an earthquake – we’ll keep you updated as we get more information.”

In the immortal words of Maxwell Smart, “Missed it by THAT much …”

Since then I’ve weathered many temblors and have grown “accustomed” to the ground moving from time to time. It’s the simple reality for those of us who’ve lived here a while and gone through events such the Loma Prieta Quake. The moving and shaking is an integral part of living in one of the best spots on the globe.

Newcomers, however, have many concerns about buying a home in an earthquake zone.

And rightly so. For many buyers, it’s the great unknown, especially since fault zones crisscross the Bay Area. The recent shaker on the east coast coupled with the devastating quakes in Japan and Haiti have heightened buyer paranoia. As a result, local Realtors are frequently asked about earthquakes and many don’t know where to go to provide accurate information. Consequently, many buyers are afraid to buy a home close to an established fault.

They reason that the closer you get, the higher your chances of losing your home in a major seismic event. I’m not sure that’s true.

In 1989, the Loma Prieta earthquake rocked the Bay Area. The epicenter of the quake was in Forest of Nisene Marks State Park in Santa Cruz County, an unpopulated area in the Santa Cruz Mountains approximately 2–3 miles (3–5 km) north of unincorporated Aptos and approximately 10 mi (16 km) northeast of Santa Cruz.

You’d assume the worst damage would have been at the epicenter. You’d be wrong. While it’s true that nearby San Cruz suffered severe damage, the most notable devastation was over 70 miles away. When the shaking was done, the Marina area of San Francisco had sustained major destruction, the upper section of the I-880 Cypress Freeway Viaduct section in Oakland had collapsed, crushing numerous cars and their occupants on the lower section, and an upper section of the Bay Bridge had fallen to the deck below.

There are numerous faults impacting the Bay Area. Since the San Francisco East Bay sits right on top of the Hayward Fault, running from Fremont northeast up through Richmond and into the bay, I’m frequently asked about earthquake safety in relationship to the Hayward Fault. Although I can’t give a definitive answer, I do have some opinions.

If past earthquakes affecting the Bay Area have taught us anything, it’s that a serious shaker will affect areas far away from the epicenter.

Therefore, if there’s a significant quake on the Hayward Fault, it’s a fair bet that it, like the Loma Prieta event, will affect locales at least 70 miles away. If you draw a 70 mile radius circle on a map using the center of the fault (San Leandro) as the center, it will impact THE ENTIRE BAY AREA, not just the Central County.

Concerned about a specific fault (such as the Hayward Fault) and its impact on your potential purchase?

Here are FIVE critical things to understand:

1.    Understand the Impact Radius.

If you are genuinely concerned about earthquakes and the potential impact on your home, you might consider looking to buy somewhere outside the 70 mile radius of any fault that provides you with concern. And therein lays a significant problem: because this is California, that could easily put you inside the radius of another fault. Thinking you might be safe outside California? The recent quake on the east coast has shown us a simple fact: earthquakes aren’t just limited to the west coast of the United States. They can hit anywhere.

2.    Understand the Building Implications.

Earthquakes typically don’t kill, but man-made structures do. For Bay Area residents, earthquakes are a ‘routine’ part of our day-to-day existence. We understand that our local homes can be affected based upon the type and severity of the temblor. While a short, sharp jolt might rattle your teeth and knock items off walls and shelves, a long rolling quake may not feel as severe but it could literally push homes off their foundations.

Older Bay Area homes have little or no seismic protection as originally built. In reality, some still aren’t anchored to their foundations – I found one just last week – a darling Oakland bungalow built in 1925.  To protect Bay Area residents, upgraded earthquake-resistant building codes have been factored into home designs over the past 30-40 years.

The newer the home, the better the codes and the better the protection from earthquakes.

One of the changes is to build homes on concrete slabs instead of having elevated foundations and cripple walls. When the Loma Prieta quake hit in 1989, I was living in a 1978–era home built on a slab. I felt the entire house move up and down and watched in amazement as every interior door opened and shut, opened and shut until the shaking subsided. I did a quick check after the event was done and discovered that there was no measureable damage of any kind to my home.

California is working hard to beat earthquakes. Located in Stockton, California, the Tyrell Gilb Research Lab is actively designing and testing earthquake resistant structures. Opened in July, 2003, it is designed to perform large scale systems testing. Their quake simulator shakes structures up to 3 stories tall and 25 feet long. Shear wall systems can be tested to 5 stories in height and 50 feet in length. Their motto is, “One test is worth a thousand expert opinions.” In July, 2009, they tested a full-scale, seven-story wood-framed condominium tower in a simulated 7.5 magnitude earthquake. It not only survived, but escaped the test with barely a scratch. This unprecedented research highlights the importance of earthquake-resistant construction, and will ultimately improve the construction and safety of wood buildings in the U.S. and around the world.

Everything learned in the Stockton facility goes into the statewide Universal Building Code to ensure that all new homes built in California have the best protection possible.

I recommend that you make yourself aware of the level of seismic protection in your home. If you live in an older home, start with a property inspection by a qualified seismic specialist. Based on their report, you may want to consider upgrades. At the very least, ensuring that your property is bolted to its’ foundation. Cripple walls? Consider reinforcement. Cracked foundations? Have them repaired. Since this is an active seismic zone, there are many contractors here in the Bay Area specializing in seismic upgrading.

Want to make upgrades on your own? There is a tremendous resource provided by the Association of Bay Area Governments (ABAG). They provide a complete Standardized Plan Set designed to help homeowners upgrade the seismic readiness of their homes. Their website states, “This plan set is a standard for strengthening homes to better withstand earthquake shaking. When approved by the local building official, the plan set may be used to strengthen older homes without the need for an engineer to develop costly site-specific plans and design calculations. This plan set provides a low-cost method to help improve an older home’s chances of surviving an earthquake.”

You can even take seminars at the Building Education Center to learn how to seismically upgrade your home (See Seminar #7 – taught by Engineer Tony DeMascole and Retrofitting Contractor Jim Gillett).

3.    Understand Liquefaction

If you’ve ever purchased a home in California, you’ll see a section in the Natural Hazards Disclosure showing the level of liquefaction for your home. It’s defined by the USGS in the following way:

“Liquefaction takes place when loosely packed, water-logged sediments at or near the ground surface lose their strength in response to strong ground shaking. Liquefaction occurring beneath buildings and other structures can cause major damage during earthquakes. For example, the 1964 Niigata earthquake caused widespread liquefaction in Niigata, Japan which destroyed many buildings. Also, during the 1989 Loma Prieta, California earthquake, liquefaction of the soils and debris used to fill in a lagoon caused major subsidence, fracturing, and horizontal sliding of the ground surface in the Marina district in San Francisco.” (Click here for a Liquefaction Flash Animation)

Homes built in areas with higher liquefaction potential are at greater risk for damage during a major seismic event. For this reason, California State law mandates that every real estate transaction for any home (4 units or less) be accompanied by a Natural Hazards Disclosure. These disclosures ensure that potential buyers are informed about seismic hazards and potential liquefaction zones.

4.    Understand Your Insurance Options

And then there’s the matter of insurance. Thinking that your homeowner’s insurance policy covers earthquakes? You’d be wrong. You might also assume that everyone living in an active fault zone would have an earthquake policy. Again, you’d be completely wrong. In reality, it’s estimated that less than 10% of Bay Area owners have quake insurance. While very costly and with a high deductable, if you are concerned about an earthquake’s potential to damage your home, it’s an option you want to consider.

5.    Understand the Truth

Informed buyers are those who take the time to research all the facts before buying. It’s critical you do so – there are many urban legends out there and outright fantasies as well. The USGS (U.S. Geological Survey) has conveniently provided a site designed to differentiate between fact and fiction (Click here to access the site). And read the Natural Hazard Disclosure provided by the seller of any home you are interested in – the information in the report will be the most accurate and up-to-date data available (as long as the report is current – if it’s older than 6 months old, ask for an updated version).

The next quake? It’s truly not a matter of if it will happen, but when. Since no one knows when or where it will hit, we have some practical advice:

Prepare now so that when the shaking is over, you AND your home are left … STANDING.

Important related websites:

USGS Earthquake Site

Bay Area earthquakes within the past week

Latest Earthquakes in the World - Past 7 days

Association of Bay Area Governments (ABAG): Earthquake and Hazards Programs

Association of Bay Area Governments (ABAG): Seismic Upgrade Standardized Plan Sets

Association of Bay Area Governments (ABAG): Liquefaction Maps and Information

Tyrell Gilb Research Laboratory Video Library

List of other Earthquake Websites

California Geological Survey Web Site

California Geological Survey - Alquist-Priolo Earthquake Fault Zones

QuakeInfo.org

California Seismic Safety Commission

CGS: Interactive Seismic Hazards Zone Map

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If you’ve lived any length of time, you’ve seen trends come and go – especially in the arena of homes. Remember “Country” when pink and blue pastels were as popular as Farrah Fawcett posters on teenage boy’s bedroom walls? Or during the dotcom era when McMansions popped up everywhere like mushrooms? I remember when Golden oak cabinets graced every kitchen and Corian countertops and seamed-in sinks ruled. Colors, textures, favored materials, sizes of homes … it’s all changed. And will change again. And again.

In reality, the only constant we have … is change.

Trends have always been shaped by external events. We like to think that we’re the captains of our own destiny, but, truth be known, we’re all swept along by whatever currents are moving around us. Used to be that currents were defined by local issues: now, more often than not, the trends impacting our lives are being shaped by global events.

As an example, it’s becoming obvious that we’ve mortgaged our souls and the time to pay the piper has arrived. Therefore, current buyer wants and perceived needs reflect the idea that money will not be as readily available in the future as it’s been in the past. Like a slowly tightening belt, salaries are trending lower, bonuses are becoming less frequent (if at all) and interest rates are threatening to rise in the near future. Taxes are likely to increase, fuel costs are soaring … even a casual observer can see where this is headed.

Consequently, active home-buyers are now looking for different things than buyers just a few short years ago. Although there are still a lot of buyers out there, their priorities have changed and prospective sellers need to pay attention now more than ever.

Here are the top 3 buyer trends we’re seeing:

Trend #1: Good Value

It’s fun to walk into a McMansion with their soaring ceilings, expansive rooms and lavish amenities. Who wouldn’t want to live there? Apparently, a growing list of people. Large spaces are hard to keep clean without an army of maids and, with rising energy costs, they’re becoming very expensive to heat and cool. And would someone explain to me why a young couple with no kids actually needs 4,200 square feet? While beautiful to look at and great at making a statement that “you’ve arrived,” in reality, unless you’re fortunate enough to have unlimited amounts of disposable income, they’re simply not practical.

With grandiose on its way out, economy of scale is moving in.

Glitz is being replaced with value. Buyers are now looking for homes that not only represent a good value when purchased, but also won’t be too expensive to operate in the future as well. We’re officially in the Goldilocks Era with buyers looking for homes, “not too big, not too small, not too expensive, not too cheap … just right.”

Implications for Buyers:

· If this description resonates with you, you are not alone. Which means there are many other buyers out there looking for the same homes you are.

· Don’t expect a bargain. Expect to pay market rate for a nice home that meets your criteria.
 

· If it’s REALLY nice, expect to compete with others in a multiple offer shootout. Difference between now and the heyday back in ’05? Instead of paying tens of thousands over asking, the margins will be much lower.

Implications for Sellers:

· Trying to sell a McMansion? Good luck getting even close to your initial investment unless you live in a location that trumps common sense.
 

· Selling a normal home? Make sure your home is priced correctly for the market. Buyers won’t even visit homes they sense are priced too high – if the price doesn’t make sense out the gate, they’ll click to the next online listing. In about 10 seconds flat.

Trend #2: Great Condition

When REOs (foreclosed homes) first appeared in significant quantities with their “AS-IS” requirements, their arrival spawned a new breed of buyers. These hardy individuals looked past the obliterated carpets, dingy walls, missing items and trashed interiors to see … potential. I’d frequently hear comments such as, “Look honey, we can make it our own!” Many of these buyers not only had cash in the bank to pay for their down payment, they could afford subsequent upgrades as well. The return of FHA loans fueled this movement as the low 3.5% down payment meant additional available cash could be diverted to improvements.

FHA loans are still going strong, but appetites for fixing up homes after the purchase are waning. As the first wave of buyers bought distressed homes and fixed them up, their friends watched the process and concluded, in droves, “That’s not for me.” Banks have also realized this and the overall condition of REOs hitting the market today is vastly superior to the offerings of just a few years ago. Some banks now routinely carpet, paint and install new appliances to ensure their repos are in move-in condition.

Currently, homes that sell the fastest are those that are move-in ready AND are also perceived as a good value.

With incomes down, many buyers are stretching to just get in the door: they don’t have the money or desire to fix things up once they’re in. And, since many are working harder and longer just to keep their jobs, time has become a premium and fewer owners actually have time available to “do-it-themselves.”

And here is the rub: the criteria of “move-in ready” has changed.

Granite counters and dual pane windows now top the list of “norms” expected by buyers. New flooring, paint, upgraded kitchens and bathrooms are all items buyers want to see when selecting their new digs. Properties featuring these items move to the top of the list and, if priced correctly, move on and off the market in a very short period of time. Think it’s a buyer’s market? Think again. Well prepared, correctly priced homes in our area can usually garner multiple offers within a week.

Flippers have begun to shine in this market because, of all available homes for sale, their products usually look the best. They are vacant, meaning they are very easy to show, and, if the flipper knows their stuff, have all the criteria ‘move-in ready’ buyers want to see. There are some problems with flips (click here for more details), but in a world of frumpy REOs and short sales that are impossible to view, flips are usually the brightest beacon on the block. Buyers are more than willing to pay more for homes that can be occupied the day escrow closes with “required improvements” limited to items such as changing out light bulbs.

Implications for Buyers:

· If you want a move-in ready home with the amenities you love, expect to pay the going rate.
 

· If it’s REALLY nice, expect to pay slightly over market price. (See Buyer Implications in the previous section)

· Make sure the sellers pulled all the appropriate permits for their upgrades. With many cities in dire financial straits and looking for income, some (eg. Oakland) have code enforcement personnel out scoring the streets. Fines can be heavy and may turn your dream purchase into a nightmare.

Implications for Sellers:

· Pay attention – the tide is turning and buyers want to buy homes that are “turnkey.”
 

· Hire a Realtor that understands this – as an example, we own a staging company that also provides project management through a licensed general contractor. A skillful, trained stager can suggest improvements and upgrades that will make your home sizzle, yet not cost you a bundle. If done right, an investment of a few thousand dollars can reap huge dividends. We discovered time and time again that sellers willing to properly prepare their homes will not only get a quick sale, they’ll get top dollar as well.
 

· RESIST THE URGE to price your home above the market. Because of Trend #1 above, it’s a surefire way to fix up your home and then get no takers. It’s like getting all dressed up with no place to go. A total waste of time.

Trend #3: Bargain Basement Deals

Seen as a “right of passage” for many buyers (and some cultures), a “totally screamin’ deal” provides the necessary ammunition for bragging to family and friends. And brag they do. In fact, some pontificate so much about the virtues of a bargain that others in their circle of influence will resist buying a home they like simply because it might not be as good a deal as the one their best friend’s cousin’s boss’s barber’s aunt’s fishing buddy found. Three years ago. In a different city.

Consequently, I’ve encountered MANY buyers who refuse to buy a home they love and can easily afford simply because they do not believe it is a good enough “deal.”

Forget that it is where they want it to be. Never mind that it has all the amenities they are looking for. Or that their kids can walk to the best school in town. They pour through local tax records and previous sale prices and if another comparable home has sold for less, regardless of the amenities, conditions, location, etc., they will not offer more for the home they love than the price per square foot of the previous deal. Market increasing? Doesn’t matter. Long line of buyers out the door during the Open House? Inconsequential. Already 6 offers on the table? They will still write their offer at their “deal” price … and lose out every time.

I call this misplaced optimism and it’s a classic case of buyers trying to out-think the market.

They’ve forgotten the purpose of buying a home: to provide shelter, maximize tax deductions, long-term appreciation potential and so on. Instead of buying a home, they are fixated on buying … a deal. And, while they may actually get lucky and find one no one else has discovered, they might also win the lottery. Not. Truth be known, there are MANY buyers out there like this and they are showing up in droves at any nice house and writing untold offers hoping to score.

For many of these buyers, no deal actually means … no house.

Implications for Buyers:

· Get real. Expect to pay market rate for a nice home that meets your criteria. If you are consumed with getting a deal, go to BIGLOTS!.
 

· As stated above, if it’s REALLY nice … expect multiple offers. If you want the house, you will need to go over asking price.
 

· Instead of viewing the price as “the deal”, view the long-term benefits as “the deal” – tax savings, quality of life, potential appreciation and so on.
 

· Resist the urge to waste everyone’s time.

Implications for Sellers:

· Don’t be insulted by the lowball offers that come floating in. Counter back to reality. You never know, they may have simply been testing you. If they disappear, don’t lose any sleep over it.

· If you’ve done your homework and followed the suggestions in Sections 1 and 2 above AND are priced properly, market value offers will come. If they don’t within a few weeks, adjust your price until they do.

As in every aspect of life, things change. In this case, global events are causing buyer tastes to migrate towards frugality. In reality, it’s a good move and sellers need to be paying attention. With the market transitioning yet again, if you want to sell your home to today’s buyers, you’ll need to take the time to position your property so it comes in line with …

What buyers are actually buying.

As foreclosures and short sales exploded onto the real estate landscape, business as usual almost disappeared. Transitions and severe changes were forced on the procedures involved in the sale of homes and buyers and their agents struggled to keep up. One of the most significant changes was the way Requests for Repairs were handled.
 
Or NOT, in most cases.

As “distressed” properties appeared on the market, “AS-IS” sales moved from being a quaint sideshow to the main event. Historically, most transactions allowed the buyer to ask the seller for repairs. It was a normal part of almost every deal – once inspection reports and disclosures were reviewed, there was usually a “mid-point” negotiation where the buyers asked the sellers to make repairs. Using the Request For Repairs form, these negotiations became an integral part of the contract.

Enter the banks.

Unwilling to spend any more money on properties already in the red, banks and their asset managers or short sale negotiators refused to pay for any repairs. They forced “AS-IS” stipulations on buyers along with a “Don’t like it, leave it” mantra.

It was a rude awakening for many buyers who, after viewing a distressed foreclosure, wanted new carpets, holes patched, appliances installed, roofs fixed, termite clearances and the like. Banks said, “NO!” In many cases, due to FHA property condition stipulations, buyers with FHA loans had to look hard to find a home that would actually make it through the lender’s scrutiny.

With the flood of foreclosures receding, we are once again seeing “normal” sales appear like the first flowers of spring … and they come with the possibility of requests for repairs. Problem is, it’s been so long since we’ve been able to ask for remedies to problems that many buyers are totally unfamiliar with the process.

Consequently, we’re seeing “requests” that are totally unrealistic.

It’s time to reexamine the rules of engagement.

Rule #1: It IS reasonable to ask for roof and termite clearances.

Buyers have historically asked for roof and termite clearances. To facilitate this, most roof and termite inspections actually come with costs associated with the found damage so that everyone knows, up front, how much the repairs and resulting clearance will cost. With regard to termite reports, in the bay area, it’s customary for the seller to cover Section 1 repairs (any active infestation of termites or other wood-destroying insects or organisms like dry rot fungus typically resulting from water intrusion). Buyers have historically covered Section 2 items (items that, if left unmitigated, could lead to Section 1 damage). (Click here for an explanation of Section 1 and Section 2 items)

When it comes to roof reports, good roof inspection companies will offer a warranty along with their recommended repairs to ensure that the roof, once repaired, will remain watertight for a specified period of time. Warranties range from 6 months to 2 years, depending on the condition of the roof and the company doing the inspection. Occasionally, a roof will be in such poor repair that it will be impossible for a roofing company to provide meaningful short terms repairs. In these cases, they will categorically recommend a new roof. If it is determined that a new roof is required, buyers will want to factor this into their negotiations.

Rule #2: It IS reasonable to ask that the home’s primary systems be working correctly.

While the roof and termite reports deal with specific issues, the property inspection deals with the overall condition of the property’s systems (electrical, plumbing, HVAC, foundation, etc.). As such, a property inspection report is broken down into separate categories for each system in the home and provides an overview of the system’s condition along with any specific issues identified. Property inspection reports DO NOT come with the associated costs to remedy any issues found.

It is reasonable to request that the home’s primary systems be functioning correctly (electrical, plumbing, heating). You want to make sure you can turn on lights and use the outlets without getting a shock. It’s OK to request that toilets flush properly, sinks and showers operate correctly and all the plumbing is watertight. The heater should be working correctly, foundation should be sturdy, windows and doors should be able to be opened, closed and locked and so on.

Rule #3: It IS NOT reasonable to ask for upgrades.

It is NOT, however, considered acceptable to ask for upgrades. Homes are built to the building code in place at the time of construction. As an example, homes built in the mid-20th century did not require electrical systems to be grounded. Typically, outlets in these homes accept two prong plugs: hot and neutral. As the 20th century progressed, increasing consumer protections instituted better electrical building codes. Receptacles in homes built to newer electrical codes accept 3 prongs: hot, neutral and ground. When buying an older home, you are buying an electrical system that is not in compliance with current electrical codes. In fact, depending on the age of the home, it may contain knob and tube wiring, screw in fuses, 50 amp services and the like. While it is OK to ask the seller to ensure that the existing electrical system is working correctly for the date it was built: it is NOT acceptable to request that the electrical system be upgraded to current codes.

When buying an older home, you are buying it with the applicable building codes as of the day it was built OR the day any permitted upgrades were constructed.

With this in mind, you should not be asking sellers to upgrade galvanized pipes to copper or PEX tubing, install new furnaces if the old ones are still working safely (even if they are the old gravity style furnaces), seismically retrofit foundations, replace single pane windows with dual pane products and so on.

You also should not be asking that the sellers remove products with materials deemed hazardous.

If you believe the home contains asbestos, you may order an asbestos inspection, but you cannot reasonably request that the asbestos be removed. In reality, a significant number of homes in the bay area have asbestos in some form in the home (ventilation or furnace ducting, acoustic ceiling texture, sheetrock mud, floor tiles, fireproofing materials, roofing and siding, some textured paints and so on). The same thing applies to lead-based paint: you can inspect, but sellers cannot be expected to remediate old lead paint.

Rule #4: It IS NOT reasonable to ask for cosmetic changes.

Thinking of asking your prospective bride to get a nose job before you will marry her? Or lose 50 pounds? What are the chances of that happening? Right. Any relationship based on these types of requests is doomed to fail.

In the same way, requests for cosmetic changes to a home are considered tacky …

And you can totally expect the buyer to turn a deaf ear to such requests. I’ve seen buyers request that houses be repainted, carpets be replaced, wood floors be refinished, pools be removed … and so on. And in 100% of the cases I’ve seen, these types of requests were not only refused, they insulted the seller in the process. And as I’ve learned from experience, the more amiable you can keep the entire escrow process, the better your chances are of being satisfied with the outcome. When buyers and sellers start going head-to-head, no one comes out a winner.

Follow the rules and keep it realistic: if you ask too much, you run the risk of alienating the seller … and ending up with nothing at all.

Short sales have been a key player on the real estate playing field for a few years now, but buyers just now entering the market still find them very confusing. There’s good reason: of all the potential types of transactions, short sales lead the pack with misunderstandings, myths and misconceptions. This makes them the granddaddies of real estate urban legend generators for producing the highest number of misconstrued opinions and factoids.

In our local market, short sales have taken over the lead from REOs and now dominate the distressed property pack. As an example, in Hayward, California, short sale listings have soared to 46% of active listings, while REOs (bank owned foreclosures) have dropped significantly to less than one quarter of local inventory (23.44%).*

With short sales representing such a high percentage of currently active properties, it’s important to understand them.

Here are the eight myths you need to know and understand:

Myth #1: Short sales are short.

Nothing could be further from the truth. In a short sale, the word “short” refers to the fact that a homeowner is selling their home for less than they owe on their mortgage(s): they’re “short” of the funds required to pay off their obligations. In all other ways, these sales are actually long: long on aggravation, long in potential pitfalls … and they typically take a very LONG time to close (in spite of all the recent lender hype to the contrary).

While the average transaction is approximately 6 months from offer to close (we know that some, especially Wachovia loans, can actually close in a very short period of time), we’ve seen them go 18 months. And that’s IF they close. The odds of a successful close on a short sale, while greater than they used to be, are still … long.

Myth #2: Short sales are bargains.

You’d think so: they’re typically the lowest priced properties on the market. Why? Because buyers, aware of the potential difficulties, usually put these at the bottom of their list. Listing agents, knowing this, try to make homes selling short as attractive as possible. Instead of focusing on property condition, they usually lower asking prices far enough below market averages to entice a buyer. Problem is, before a short sale is approved, an appraisal is performed by the bank.
 

Many buyers don’t understand how this can be (see Myth #3): they don’t understand that the ultimate selling price doesn’t typically matter to a seller (since they are losing everything anyway), so an upside down homeowner will frequently agree to almost any price just to get an offer. Unfortunately, in a short sale, the homeowner does not have the authority to set the final price. Don’t like it? You can try negotiating, but good luck with that. In many cases, once the price goes back up to normal, bargain-hunting buyers bail. In other cases, the price is readjusted higher than the buyers can afford, causing the deal to implode and forcing the home back on the market – this time, with an “approved” price.

Myth #3: Short sale homeowners set prices.

Au contraire, mon ami. This is the most confusing aspect of short sales. Buyers cannot understand why the price of their accepted offer can change once they get into escrow. They assume that they can negotiate with the seller, come to an agreement and then wait for their keys. Many get a rude shock when the bank comes back with a higher price. Buyers often cry, “FOUL!” because no one explained to them who really sets the price: it’s not the seller … and it’s not the bank, either. In reality, it’s the investor behind the loan. In most cases, the bank is only servicing the loan for an investor and it’s this “hidden entity” that gives final approval. Or not. Frequently, the investor is operating by a set of guidelines that seem to make absolutely no sense at all.

Myth #4: Short sale sellers are motivated to sell.

Put yourself in their shoes: their credit is getting trashed, they’re losing their home, they’re being publically humiliated, they’re going to have a hard time finding accommodations that will accept their bad credit (and in MANY cases, their pets) … and then factor in the fact that many of them have not been making mortgage payments of any kind for months …

Why would they be in a hurry to move?

In many cases, they’re not. Which can add to the further confusion and frustration of a short sale. And brings up the next myth.
 

Myth #5: Short sales are easy to access.

We all have pet peeves. Mine include people calling and not leaving a message, folks walking behind my car while I’m already backing up, Caltrans sweeping during the day, cell phones ringing during events (church, movies, etc.)… and so on. Buyers have pet peeves as well, and their No. 1 complaint is…

Short sale listings with no lockboxes and viewing by appointment only.

It’s a VERY real problem. Realtors can get into foreclosures and most normal sales with ease: they all normally have lockboxes. You go direct with REOs and normal sales usually have showing instructions like, “Call, leave a message, go, leave a card.”

An increasing number of short sales, however, state “Appointment only — no lockbox.” No homeowner phone number is give and, in MANY cases, the listing agents don’t answer their phones, return calls or respond to texts or emails.

This is VERY real, it happens every day and totally frustrates legitimate buyers who want to see short sale homes.

Call me old-fashioned, but I’ve always thought that the reason for listing your home was to get it sold. To sell, you need offers. For that, you usually need to let people in — when they’re available — not when or if it’s convenient for the seller, but when it works… for the buyer. And since short sales are the most difficult homes to sell, you’d assume sellers selling short would go overboard to ensure their properties were accessible.

It seems the exact opposite is true.

I frequently ask listing agents why their short sales are “appointment only.” They usually say: “The seller doesn’t want to be inconvenienced.” What? They’re losing their home, will have their credit trashed, will be forced to move — and they don’t want to be inconvenienced? In reality, I place the blame squarely on the shoulders of the listing agents. I believe many agents do a disservice to their sellers by (1) not  explaining things adequately, (2) providing incorrect information to their sellers as to how the process works and (3) by allowing sellers to dictate how showings should happen.

The only exception should be short sales with renters who make it extremely difficult to show the home.

Which brings up another question: if, as a seller, you are selling your home short, then why would you allow a renter to remain? What can you possibly hope to gain by allowing the renter to stay? Again, there is an exception – Section 8 renters who have a government contract. However, that should be the ONLY exception. (Did I mention this was a pet peeve?)

Cooperative short sellers who remain in their homes have a lockbox with a key in it and their phone number(s) listed for buyer agents to call for access. Homes that are easy to access are the ones most agents choose to show AND the ones that get offers.

Done right, a short sale can be priced right, attract offers and be off the market in a relatively short period of time. And then there is a long wait while the bank processes the short sale during which the sellers can do whatever they want to do — without being “inconvenienced.”

And without TOTALLY frustrating buyers.

Myth #6: Short sales are sold “AS-IS”.

On the surface, this is true. “AS-IS” means don’t expect the seller or the bank to contribute ANYTHING towards the property condition. No repairs, no cleaning, nothing. Zip. Nada. Rien. Niente. Zilcho. And this frequently includes delinquent HOA fees.

Problem is, the buyer is usually selling because they can no longer afford to live in the home. Forget the fact that they haven’t been making payments and could possible be squirreling money away somewhere out of sight to the bank and others – you will never see any such funds - should they actually “exist.” And don’t forget that since they haven’t been making payments on anything, they’ve also stopped maintaining their digs. And will continue to do so AFTER you get your offer accepted and submitted to the bank.

Here is where it gets a bit dicey: it’s not really sold “AS-IS” because, in many cases, property condition can be substantially WORSE than when you saw it and agreed to buy it.

And, as a parting shot, the sellers may take “stuff” with them when they leave. Like appliances that were specified in the contract. Or light fixtures. Or … whatever. Think you can get them to bring those items back? Guess again. You’ll more than likely have to take them to small claims court – good luck with that. And, supposing they “dent” a wall moving out … who fixes it? Or who cleans the property after they leave? It won’t be them, that’s for sure. They have absolutely NO incentive to do so. I can count the number of clean short sales I’ve seen after the sellers moved out at close of escrow … on one thumb. And we’ve closed a bunch.

Buyers can understand that a property might not be clean when they get the keys, but they often want other assurances when buying a short sale. Which brings up the next myth.

Myth #7: Buyers are protected when buying a short sale.

Truth is, and even though I stated it in the previous myth:

THERE ARE NO GUARANTEES.

No guarantees that:

· That they will receive the property and its contents in the same condition as when they originally viewed it and got their offer accepted.

· That all the appliances will be there.

· That there will be no damage.

· That there will not be any additional costs required to close the deal.

· Etc.

Buying real estate is fraught with inherent risks – and short sales are the all-time risk leaders – you accept those risks when you chose to enter a short sale transaction. Buyers ARE NOT protected when buying a short sale – and their only recourse may be small claims court. If at all.

Myth #8: Buyers can recoup costs if a short sale collapses.

It’s a sad fact that while some approved short sales may make it into escrow, they don’t successfully exit the other end. Any number of things can and do go wrong. In reality, this is true of any transaction, but is even more probable for a short sale. And here is the caveat:

Money expended by the buyer during a short sale escrow WILL NOT BE reimbursed to the buyer should the deal collapse.

This can include money paid for:

· Inspection Reports

· Appraisals

· HOA docs

· Any money they may have invested to get the property up to par so it would qualify for an FHA loan

· Etc.

There is no one to pay. The title company is usually not the party at fault. Neither of the Realtors made any money on the failed transaction, the bank will not pony up a penny and … the seller doesn’t typically have any money either.

As stated in myth #7, there is RISK involved in buying any form of real estate.

So if you are the timid sort who holds things close to your chest and are not willing to lose any funds, then, quite frankly, short sales are probably not for you.

And here’s the final irony: some short sales do actually close in a very short period of time. And some end up being actually incredible bargains. And there are those who buy lottery tickets who actually WIN! Just don’t get your hopes too high …

Those are the exception rather than the rule.

*Data for April, 2010 - TrendGraphix.com