Category — McMurdie's Real Estate Rules

WHAT IS THE NUMBER ONE mistake a seller can make?  It is overpricing the house.

The Silicon Valley Real Estate Blog itemizes some of consequences of overpricing.  There is actually an old real estate phrase for the rather common phenomena of owners overpricing homes in a declining price market.  The phrase is “chasing the market down.”

Owners who chase the market down go through this sequence:

First, owners know their home is the best in the neighborhood, they bought it, so naturally it is the best value.  When picking a listing price in a declining market, they insist on a price 5% or more above comparable recent sales.  Most of the other sellers in the area do the same.  In the current declining market there is about one buyer for every 6 homes on the market.  Five homes will NOT sell,  and only one will will sell.

Second, after 60 days on the market, some bright seller and agent, realizes their home is not going to sell unless the price is reduced.  The price is reduced 10% to 5% below market.  The house sells in a few days.  This is the one home being sold in six.

Third, a few sales occur over four months, and prices are now 5% below what they were when our homeowner put his home on the market 5% over fair market.  Our homeowner now reduces the list price 5%, for example from $720,000 to $684,000.  This is a $36,000 price reduction, and the owner hates it.  But our seller is still 5% over fair market value, as are all the owners just listing their homes, and only one home in every six will sell.

Forth, after six months the owner is absolutely convinced the agents incompetence is the reason the house has not sold.  The owner fires the agent, and lists the house with a different agent who agrees the house is worth $684,000, but to be “safe” the house is listed at $670,000 with the new agent.  In the intervening two months the house has declined in fair value another $16,000, or about 2%, consequently the home is still overpriced and will not sell.  And so the sequence goes, and a year later the fair market value may have declined 20%,  $144,000 in our example, and the same house still has not sold and is now listed at $580,000.  The are over 400 homes in Alum Rock actively listed today that have “chased the market down.”  Really.

McMurdie’s Real Estate Rule No. 324:  in a market declining .5% a month or more, sell only if the property must be sold, and then price the real estate 5% or more under the fair market value to avoid chasing the market price down along with saving interest and other carrying costs.  Get ahead of a declining market if you must sell.

In our example, the owner and agent should have first listed the home instead of at $720,000, at $648,000, or 5% below it $684,000 competitive market value.  The house would have sold within a few days.  The sale would have been one home that sold, and not one of the five homes that didn’t sell.

Today there is 12 months of unsold listings active on the market.  Any inventory over 90 days is a declining market.  Twelve months of inventory is a steeply declining market.  Homes listed today at competitive market will probably decline another 10% in value by the end of 2008.

Normally owners “chase the market down”.  Instead of “losing” 5%, or $36,000 in our example, they’ll loose $144,000, or 20%, and all the carrying costs.  It is a little bit like watching Buffalo stampede over the cliff.  Only a small percentage of Buffalo are smart enough to take the easy way down.

Silicon Valley Real Estate Blog has my full sympathy.

MY GARAGE has many storage features. Sixteen feet of cabinets with workbench on top; all pegboard walls with 40′ of storage shelves above; metal cabinets, and storage in the rafters, and yet it is full! If your garage is in chaos, you might want to call in a garage storage expert to get all those storage items off the floor.

Here is my garage:

Here is what I’m going to do: reorganize all existing storage, throwing away 10 types of tile I have just in case I of something; taking to Goodwill the five pieces of extra luggage I have not used in five years; 10 fishing poles might be too many; there are bazaar kitchen appliances like the instant ice cream maker, the universal juicing machine, the deluxe bread maker, the wizbang unused turkey oven, two countertop electric skillets, and the calfragalistic crockpot, all of which could go somewhere along with several discarded coffee makers. Then I’ll throw out a couple of unused exercise machines I should use, but don’t.  And note the miter saw on the workbench that could go.

You can call an expert to organize your garage, and pay several thousand dollars to have it done for you.  But there is a less expensive way to do this.  Call a kitchen contractor and see if he will install a set of recycle kitchen cabinets in your garage.  For under a thousand dollars you can have a $10,000 set of kitchen cabinets. Install shelving above eye level all the way around the garage wall.  Prices in the $2500 range for the cabinets and storage shelves is about right.  More storage can be added, or pegboard.  This is a less expensive way of curbing the chaos in the garage.

If you are handy at all, an organized garage is a prerequisite to efficient jobs around the house.  Start in the garage first.  If you need a list of tools, all the tools a handyman needs, send me an email me for McMurdie’s tool list!  A basic set of tools, list A,  runs about $185 including handy dandy bucket.  The complete A&B list of handy tools costs about $850 today, including circular saw, jig saw, and cordless drills.  These are all the tools handy owners needs.   The supercalifragilistic woodworking tools in List Magnum XX,  including band saw, table saw, router, nailing guns, super sawsall, laser beams, and the fun stuff costs about $14,000.  And they’ll all fit in your garage with the cars!

See ya at the hardware store!

INVESTING IN TODAYS REAL ESTATE market has entry level investors scared.  Equity Scout has the Five Approaches: rebalance, lift & shift, speculate, bargain hunt value, and hold.  After years of experience I recommend value bargain hunting, and hold options.

If you happen to be a deep pocket regional investor with 150 apartment units, hotel, office building or the like Lift and Shift makes sense.  But then it does in any market as regional opportunities vary.  Rebalancing rarely makes sense as any investor’s calculators will reveal.   Investors can speculate in any market.

If it is probable the prospective investment will return cash income far into the future it is really hard to go wrong.  Rental income values can be readily calculated.

McMurdie’s Real Estate Rule No. 14: Never, ever count on price/value increases.  Never assume in any fashion, or use a computer program that does not have a zero entry value for future appreciation.  If you get it, that great.  If you doubt this formula, look at the market now.  If you used 00 as future price appreciation when you purchase the current market has 00, zero, effect.  Just go to the bank and deposit your money.

THE ODYSSEUS MEDAL award by Bloodhound blog. Who is the most important person in the world in a real estate transaction? It is the person with the money! Ha! Remember McMurdie’s Real Estate Rule No. 37: the most important “person” in a real estate transaction is the person putting in the money. Read the whole post at Bloodhound.

THERE IS ALWAY SOME INVESTOR who gets the bright idea that the best way to buy foreclosures is to buy out the seller-in-foreclosure’s equity before the sale occurs! This violates McMurdie’s “First Man” Rule. (See the Rule below.) Real estate foreclosures have taken place in California for over 150 years. There is close to 900 years of legal precedent and history behind statutes regulating foreclosures. Investors new to foreclosures, discovering the difficulties, suddenly have an epiphany, “why don’t I just buy the seller-in-foreclosure’s equity, own the property, and cure the default!” Brilliant!

One key aspect of foreclosures is a prospective equity buyer, the prospective foreclosure buyer, cannot simply purchase the property without triggering the due-on-sale clause contained in almost all deeds of trust, also triggering possible pre-payment penalties. Consequently foreclosure investors who purchase the seller-in-foreclosure’s equity always characterize themselves as “lenders” in contracts and in dealings with the defaulted seller.

What the equity investor wants to do is sell the house and pocket the equity as profit while paying as little as possible to the defaulted seller. This cannot economically be done paying costs of sale and title, and paying off existing loans. A straight sale will not work. To disguise the transaction, the foreclosure equity buyer becomes a “lender” with the right to take title.

Due to overreaching by foreclosure investors in the 1970s, California enacted perhaps the most draconian home equity sales statutes in the nation to protect sellers-in-foreclosure. It applies to all principle residences, one to four units, with a recorded Notice of Default pursuant to a trust deed. All manner of loans, sale-and-leasebacks, equity sales, and other ‘deals’ whereby the seller transfers title are covered by this legislation. It provides for the owner receiving back the FULL VALUE OF THE PROPERTY from the equity purchaser from the date of the first violation. It also provides the former seller-in-foreclosure with INTEREST ON THE VALUE OF HIS EQUITY from the investor, and other penalties.

Anyone interested in buying foreclosures should be familiar with these California statutes [Civil Code Section 1695 et seq.]. The legislation does provide for legal Equity Purchase (EP) Agreements that protect the seller-in-foreclosure from overreaching by any investor dumb enough to enter into a EP Agreement.

The practical aspect of this legislation is foreclosure buyers should not attempt to in any way to acquire title to a home occupied by a seller-in-foreclosure without observing this law. If the seller-in-foreclosure is not occupying the residence (one to four units), then the statute does not apply. Then the investor can, carefully, buy out the seller-in-foreclosure.

However, there are major legal risks as the seller’s equity of redemption is being given up. Buyers who intend to occupy the residence are also exempt from this legislation.
There are some investors who follow a ’system’ of buying out the equity of sellers-in-foreclosure.

In the current market there are going to be significant number of investors who violate these statutes and lose money. Buying out the equity of a seller-in-foreclosure not occupying the property as a residence should be done on a straight forward purchase contract with all facts disclosed and the agreement of lenders. Any other approach invites litigation. Any equity purchase contract, including those with sellers not in residence, should be in similar form to a Equity Purchase Agreement.

Investors I have met buying the equity of sellers-in-foreclosure are new to foreclosure buying and lack the necessary knowledge to understand the foreclosure process and legally use it. And there are some who prey on immigrants and disadvantaged homeowners.

Remember McMurdie’s Real Estate Rule No. 5: never assume you are the First Man to invent a bright new real estate investment idea. Chances are you’re not. Find out. Buying the equity of defaulted sellers by disguising yourself as a “lender” is not a bright idea. Discover the rules and procedures of foreclosure buying in Parts III-V in this series to follow!