Archive | April 2013

Seven reasons why private sellers should not be selling their homes

This week’s article was contributed by John L. Bradfield, and originally appeared on his blog “This ‘n That”. John is a Real Estate professional with 20 years’ experience in this industry. He is based in Hermanus, the whale-watching capital of the world.

Private sellerAt first glance, selling your home privately can seem like an attractive proposition. You’ll save the agents commission, right?

In fact many private sellers are home owners in financial trouble, and are hoping to avoid paying the agent’s fee in order to clear an outstanding mortgage loan without “paying in”.

The reality is that many of these homes end up as “distressed sales”, and are auctioned by the bank at greatly reduced prices.

Sadly, in many of these cases the result can mean even greater financial hardship for the unlucky owners. In some cases the shortfall translates into a long-standing debt that will represent a financial burden for many years to come.

Many of these unfortunate experiences come about because private sellers are misinformed about the role of estate agents and about what an experienced realtor can bring to the process. Without access to relevant data, private sellers sometimes begin by overpricing their homes — based on other overpriced homes in the same area. There are a few pitfalls to avoid. Here are seven of the most important reasons why private sellers should not sell their homes:

7. Lack of time

Selling a house involves a great deal of time. Someone must be on hand to handle all enquiries any day of the week, including weekends, to show the house, work with prospective buyers, and deal with paperwork. You may be working full-time or you could be relocating. You could find it difficult to devote the necessary time to selling your home. This can result in lost opportunities that may be scarce in the current market. A full-time estate agent can devote the necessary time to showing your home, dealing with prospective buyers, and taking care of the paperwork.

6. Lack of objectivity

From a purchaser’s perspective, an estate agent brings an air of objectivity to the sale. One of the reasons that private sellers may find it difficult to deal with potential buyers, is a lack of the required detachment. The private seller’s natural emotional involvement with the home can leave potential purchasers feeling awkward and inhibited while viewing. An estate agent can help to assess potential offers from an objective and expert perspective, offering professional and researched opinions to help overcome the purchaser’s objections in a reassuring way.

5. Lack of security

Private sellers are faced with the problem of giving out their personal information to strangers. As a private seller you will have no screen between you and a potential buyer or a potential scam artist who may be trying to trick you into gaining occupation of your home. Even worse, you may be faced with a criminal inside your home who could try to steal things while looking around, or perhaps “case” the property and security systems for a much bigger crime at a later date. Estate agents deal with potential buyers on an ongoing basis, can preserve your privacy, and can usually tell if something doesn’t feel right, thereby preventing potential problems of this kind.

4. Working with unqualified buyers

In the current market less than 50% of potential buyers will qualify for a home loan. It’s sometimes difficult for private sellers to ask the probing questions that are required to thoroughly check out the financial capabilities of potential buyers. Sometimes a buyer has not properly investigated how much cash is required upfront for the deposit and transfer fees, leading to a failed transaction. A professional estate agent is trained to do a proper assessment that can save time and expense down the line.

3. Paperwork and legalities

Apart from the need to achieve familiarity with sale agreements and other legal documents, private sellers are faced with liability issues when dealing with buyers one-on-one. Laws dealing with property sales have increased and become more complicated in recent times. The new Consumer Protection Act is the most recent example of these.

A professional realtor is trained to deal with these legalities and provides the seller with the security of knowing that these issues will be properly taken care of. When drawing up the Deed of Sale, certain details can be contentious. An experienced estate agent can recognise the pitfalls and traps in any given situation, and do the drafting of special clauses in such a way that both parties are protected from nasty surprises or disappointments later on.

2. Lack of exposure

Private sellers must carry the costs of advertising and marketing, whether they sell their homes or not. Most private sellers don’t have the knowledge or resources to create enough awareness, and for these reasons they will not have the ability to select the most effective advertising methods, and will not have access to a wide enough pool of potential buyers. However, a professional estate agent has access to an existing database of buyers, and to national and international referral and marketing channels.

1. Inexperience in negotiation

Possibly the most important aspect of selling a home involves the concept of price negotiation when an offer is received. The agent’s fee is percentage based, so the bigger the sale, the higher the fee. Typically, buyers approaching a private sale feel that the private seller’s saving in commission should accrue to them, and not to the private seller. A good estate agent is a trained negotiator and is skilled in the art of maximising the selling price of your home. For these reasons an estate agent will often achieve a higher net value than a private seller at the end of the day.

Visit the BetterBond website for more information about bonds and estate agents.

Advice from best-selling author Seth Godin: how to think about buying a house

MoneyYou don’t see a lot of ads trying to sell you on spending too much money on a house. It’s more subtle than that. The marketing is all around us, and has been for years. The enormous social pressure and the expectations that come with it lead to misunderstandings and confusion. Here’s my advice to someone in the market:

  1. In an era where house prices rise reliably (which was 1963 to 2007), it was almost impossible to overpay for a house. It was an efficient market, and rising prices cover many mistakes. Investing in houses in the USA was a no-brainer. More leverage and more at stake just paid off more in the end. This consistent, multi-generational rise taught us more than an ad every could: buy a lot of house  with as little downpayment as you could.
  2. A house is not just an investment, it’s a place to live. This is the only significant financial investment that has two functions. Things like cars and boats always go down in value, so most of the time, if you’re investing, you’re doing it in something that you don’t have to fix, water, fuel or live in. You shouldn’t fall in love with a bond or a stock or a piece of gold, because if you do, you won’t be a smart investor. The problem (as people who sell and fix and build houses understand) is that you just might fall in love with a house. What a dumb reason to make the largest financial investment of your life.
  3. The psychology of down markets is irrational. Rising house prices might be efficient (many bidders for a single item lead to higher prices), but when there aren’t so many bidders, irrational sellers (see #2) don’t lower their prices accordingly. So, inventories get longer and it’s easy for the prospective buyer to think that a certain price is the ‘right’ price because so many people are offering houses at that price. Just because someone offers a price, though, doesn’t mean it’s fair in a given market.
  4. Along the same lines, anchoring has a huge impact on housing prices. If someone offers a house for $800 000 and you think it’s worth half that, you don’t offer half that. No, of course not. The price is a mental and emotional anchor, and you’re likely to offer far more.
  5. The social power of a house is huge. When you buy a big house or an expensive house, you are making a statement to your in-laws, your family, your neighbours and yourself. Nothing wrong with that, but the question you must ask yourself is, “how big a statement can I afford?” How much are you willing to spend on personal marketing and temporary self-esteem?
  6. Debt is an evil plot to keep you poor. If buying a bigger house (or even a house with a living room or a garage) is going to keep you in credit card debt, you’ve made a huge financial error, one that could cost you millions.
  7. By the time you buy a house, you probably have a family. Which means that this is a joint decision, a group decision, a decision made under stress by at least two people, probably people that don’t have a lot of practice talking rationally about significant financial decisions that also have emotional and social underpinnings. Ooph. You’ve been warned. Perhaps you could add some artificial rigor to the conversation so that it doesn’t become a referendum on your marriage or careers and is instead about the house.
  8. If you have a steady job, matching your mortgage to your income isn’t dumb. But if you are a freelancer, an entrepreneur or a big thinker, a mortgage can wipe you out. That’s because the pressure to make your monthly nut is so big you won’t take the risks and do the important work you need to do to actually get ahead. When you have a choice between creating a sure-thing average piece of work or a riskier breakthrough, the mortgage might be just enough to persuade you to hold back.
  9. Real estate brokers, by law, work for the seller (unless otherwise noted). And yet buyers often try to please the broker. You’ll never see her again, don’t worry about it. [Let me be really clear about what I wrote here, just in case you’d like to misinterpret it: When a prospect sees an ad or goes to an open house, she is about to interact with a broker. That broker, in almost every case, is hired by the seller and has a fiduciary responsibility to the seller to get the very best price for the house. There are exceptions, like buyer’s brokers, but those brokers, as I said, note that they are representing the buyer–how can you represent someone without telling them? Many brokers like to pretend to themselves that they are representing both sides, and while that’s a nice concept, that’s not the law.]
  10. You’re probably not going to be able to flip your house in nine months for a big profit. Maybe not even nine years. So revisit #2 and imagine that there is no financial investment, just a house you love. And spend accordingly.

I’m optimistic about the power of a house to change your finances, to provide a foundation for a family and our communities. I’m just not sure you should buy more house than you can afford merely because houses have such good marketing.

SETH GODIN has written fourteen books that have been translated into more than thirty languages. Every one has been a bestseller. He writes about the post-industrial revolution, the way ideas spread, marketing, quitting, leadership and most of all, changing everything.

‘Deposit drag’ keeps market on a choke-chain

House built from moneyEveryone in the property market knows that the current deposit requirements for home loan approval are among the biggest obstacles to increased home sales and faster property price growth.

But just what the extent of the deposit obstacles might be has not been quantified until now, with the release of new statistics by BetterBond, SA’s leading mortgage originator, which show how the home buying plans of many consumers are being delayed by many months due to rising deposit requirements.

The BetterBond figures, which represent a quarter of all residential mortgage bonds being registered in the Deeds Officeand include applications to, and bond grants from, all the major lending banks in SA, show that in the 12 months to end-February, homebuyers and owners in SA took up more than 80 000 new home loans, with more than 96% of those loans going towards the purchase of an existing home or the construction of a new one.

In addition, the average purchase price of the properties on which these bonds were granted rose 8,5% year-on-year to R867 000.

“But although these are healthy signs that the residential market is in recovery,” says BetterBond CEO Rudi Botha, “we believe it would be gaining momentum much faster if it were not for the fact that the size of the deposits that prospective homeowners are expected to pay is also increasing – and not in proportion to the rate of home price increases.”

For example, he says, the average value of the bonds granted in February, at some R745 000, was only 6,7% up on the average value in February 2012.“In other words, the bond value gain is not keeping up with the home price gain – and the discrepancy is explained by the increase in the average deposit required, which has gone from 16,1% of purchase price a year ago to 16,7%. This has boosted the actual cash requirement for the average deposit from about R129 000to around R145 000.”

Meanwhile, the average household income of bond applicants has actually remained static over the past year at around R46 000, so for those who do not have equity in an existing property and need to save a deposit, the time that would be needed to do so has gone from 28 months to 32 months (assuming they are able to save 10% of their income per month).

And this four-month delay appears to be the minimum extent of the ‘drag’ that current deposit requirements are having on the market.BetterBond statistics show that the average purchase price for first-time buyers has risen more than 16% to R677 922 in the past year, while the average deposit requirement has gone from 8,6% of purchase price to 10,1%.

During the same period, the average income of first-time buyers applying for home loans has only risen about 5,5%, with the result that the estimated time it would take the average first-time buyer to save up a deposit, at the rate of 10% of earnings per month, has gone from about 17 months to 23 months.

“It will of course take much longer for those who cannot save as much, or those who plan to buy higher priced properties,” notes Botha. “Our stats show that those seeking to buying a first home priced at between R1m and R1,5m would now need 54 months to save a deposit – as opposed to 44 months a year ago – a very long wait during which they are very likely to lose out on the interest rate and home price advantages of the current market.”

International news: US market on the mend

Housing marketWhen the housing bubble burst in the US, it plunged the economy of the country – and the rest of the world – into a recession from which it has yet to recover.

But now, just five years later, many economists believe that the housing market will be one of the primary drivers of growth in the US economy over the next couple of years.

Moody’s Analytics, for example, is forecasting somewhere between one million and two million housing “starts” this year, which it estimates will create more than one million new jobs.

“There’s a lot of pent-up demand for housing, and very little supply,” says Celia Chen, housing economist for Moody’s Analytics. “As demand continues to improve, home builders will have nothing to sell. They’ll have to build. And growth in building will mean adding not just construction jobs, but also manufacturing jobs to make the appliances and furniture needed in the new homes, which in turn drives up overall consumption.”

Meanwhile Joseph LaVorgna, chief US economist of Deutsche Bank, explains that one of the most significant indirect effects from a housing recovery is the “wealth effect” on consumers due to an increase in home prices. “Better home values can affect both consumer psychology on spending as well as their actual finances. Even small moves in home prices can have large effects on consumption, because housing comprises such a significant share of household assets.”

But is demand really rising enough to prompt the expected building starts, or drive up prices?

Well, according to the National Association of Realtors (NAR), the inventory of pre-owned homes for sale was at a seven-year low of 1,74-million in January. This represented a 4,2-month supply, down from a 4,4-month supply in December, and NAR chief economist Lawrence Yun says the reasons for the drop include slow and steady job gains, record-low mortgage rates and higher consumer confidence.

“The number of potential buyers who stayed on the sidelines accumulated during the recession, but they started entering the market again early last year as their financial ability and confidence steadily grew, along with home prices, and lower inventory levels now are encouraging multiple bids from buyers.”

In addition, many of the distressed homes that were adding to inventory have been absorbed in the past year by individual investors, private equity groups and hedge funds aiming to renovate them and rent them out – and hurrying to buy before prices really start to rise again.

Indeed, RealtyTrac, an online foreclosure marketplace, reported recently that distressed properties, which include foreclosures and short sales, accounted for 43% of all US pre-owned home sales last year. What is more, the prices of such sales were 2% up, on average, compared with 2011.

And speaking of prices, the latest Standard&Poor/ Case-Schiller Home Price Index shows a 6,8% year-on-year gain in December, while the latest Zillow market report indicates a national average home price increase of 0,7% in January – the 15th consecutive month of gain – and predicts a further 3,3% increase over the course of 2013.

Zillow puts the current national average home price in the US at $158 100. The boom-time peak, in April 2007, was $193 900.

Tell your sellers: focus on the first impression

Open Gate in Picket FenceHomeowners often ask their estate agents what pre-sale upgrades are likely to give them the best return on their investment, in the form of a higher sale price – and the answer, at the moment, is not a kitchen or bathroom makeover, but exterior updates that improve curb appeal.

This is the finding of the 2012/2013 Cost vs Value Report published by Remodeling magazine, which annually surveys thousands of agents and valuers before listing the 35 most cost-effective home improvement projects for home sellers.

Some of these don’t apply in SA because of the different home construction methods used, but many do, including the one right at the top of the list this year, which is front door replacement – preferably with a steel door. This, it is estimated, will deliver an 85,6% return on expenditure when the home is sold.

Also among the 10 most cost-effective midrange projects were several other exterior upgrades that would be applicable here, including the addition of a wooden deck to the entertainment area (estimated 77,3% return); the replacement of an old garage door with a new one (75,7%); the replacement of steel window-frames with wooden ones (73,3%), the replacement of steel window-frames with vinyl ones (71,2%) and the addition of a composite (non-wood) deck (67,5%).

A minor kitchen remodel, done right, can also bring a good return of around 75%, but both major kitchen and bathroom remodels will give sellers a return on their investment of less than 60%.

In short, the best bet for sellers in the current market is really to focus on improving the “first impression” of their properties. In addition, the magazine notes, the use of durable, low-maintenance materials in the suggested replacement projects appeals to homebuyers who are increasingly looking to reduce both the operational and maintenance costs of their homes.”

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