Part of being a good real estate professional is knowing your local market intimately. It sounds obvious, but it is imperative that you are aware of trends, subtle neighborhood differences or any other factor that can affect value. Education is key.
Whilst reviewing homes for sale in my town recently, I came across a potential short sale that "rang a bell" with me. Sure enough, it was a home that I remembered had gone back to the bank back in early 2008. Here it was again, just three years later, being offered as a short sale. It was a little jarring so I decided to investigate. I realize prices had not really done much of anything in that time; well slightly down, but how was it possible to be back in trouble so quickly?
A bit of history. The home sold in mid 2003 for $320,000, and then was re-sold at the end of 2004 for $400,000 even. This is in keeping with what we know of pricing trends back then. Prior to 2004, prices were mostly flat-lined and it was in late 2004 that we began to see "investor" fueled increases in a few states. Flash forward to February 2008 and we see it being foreclosed upon with a total indebtedness of almost $450,000. More than the original sales price. Safe to assume the owner, like many others, had re-financed to release some of his "equity". Which wasn't really there. House-as-ATM strikes again.
The bank then sold the house some five months later for $400,000. I remember thinking at the time that the price seemed high. And therein lies the problem. That last owner simply paid too much, but as he put down 25% the bank was less than stringent in its appraisal. That last selling price was identical to the 2004 selling price, even though the reality was that prices had dropped to pre-2002 levels. Because of the large down-payment the bank figured they were safe. Well they were wrong! As ever, price is everything.
It reminded me of another case in 2006. I had a client looking for vacant land to build his dream home. He found a 5 acre parcel priced at $639,000. Wary that the market had likely peaked, we offered $450,000. The seller countered at $539,000 and actually wrote this on the counter-offer, "And not a penny less!" I advised my client against it, given the market conditions, and we walked away. Three years later, the land sold for $272,000. Glad we dodged that bullet!
By the way, four years later in 2010 he bought a 4000 sq. ft. home with a pool on 4 acres for $850,000. A home that had sold for $1.5 Million when he was looking at land. I love a happy ending, don't you?