The Contingency Sale – Protecting Your Interests – Part 2

The Contingency Sale – Protecting Your Interests – Part 2

Last week’s blog discussed the increasing use of contingency sales where buyers’ offers are coming in “contingent” on the successful close of escrow of the buyer’s residence. This practice should not be automatically shunned as it has been over the past decade, but neither should it be readily agreed to without doing our homework.

This week I look at how the seller and their agent can diminish the negative risks of the contingency sale. Here are some basic safeguards that sellers can take to prevent getting stuck in a losing situation.

Mike’s best seller practices in order of safeguard:

  • Should you take a contingency sale? The answer lies in the “honest” assessment about which home (yours or the buyer’s) has the greater likelihood to sell first. If your home has been languishing on the market with few or no offers and the buyer’s home that they need to close on will be a slam dunk quick sale, then certainly consider their offer. In all instances, you and your professional Realtor should do a thorough investigation as to the facts of the buyer’s current deal.

This includes interviewing the related parties to the transactions including agent, lender, and Title Company to determine the viability of the deal hanging together. Because if their deal falls apart, your deal falls apart and you get nothing (except angst) plus you‘ve lost time.

  • Consider taking a contingency on a home if the buyer’s home is already in escrow, and through its “Due Diligence” (inspections) period including the negotiating period which can stretch out to 10-15 days or more. This assumes the buyer’s buyer does not also have a home to close on. You can allow this, but it’s very tricky. Much investigation needs to go into the quality of the other deals. This includes interviewing all other affected Realtors, lenders and title company officers and reviewing sale documents to make sure there’s no hidden hooks that can pierce the deal. I’ve been in escrows that have had up to four other homes that needed to close before my client’s home could close. These are possible, but harrowing and not for the faint of heart.
  • Consider taking a contingency if the home just went into escrow and has not yet gone through its Due Diligence period. This can also work, but a few more questions need to be addressed about their property itself to determine if it should pass an inspection from the buyer. Again, this is a duty of you and your professional Realtor.
  • Consider taking a contingency if the buyer’s home is NOT in escrow, if in your opinion and that of your Realtor’s, the buyer’s home is more likely to sell before yours. Is their home well priced, not unusually odd, in good condition, good location, etc. It’s still a matter of the odds. Your Realtor is usually best suited to make this determination.

 

Question: How long should you give the buyer’s to sell their home? It should be within one-two days of their closing. They will need to transfer funds to close on your home. The problem with #4 above is that it’s an unknown until they get their home in escrow. There should be a definite cut-off date.

Question: Can I accept another offer while under contract to sell to another? Usually not, unless you include a clause known as a “Contingency Release Clause.” This clause allows the seller the opportunity to take a new buyer’s offer after first giving the existing buyer the right to eliminate their contingency (72 hour right of refusal) and proceed to close escrow. This needs to be set up when the deal is first structured.

There are a number of other issues that should be addressed as well, but as you can see this is not something that should be either lightly accepted or rejected by a seller. There are a number of benefits in this package, but each deal needs to be weighed on its own merits. And as always, we recommend that buyers and sellers consider having legal counsel review these documents.

If you or someone you know would benefit from our expertise, by all means have them contact us. We’ll be happy to help. It’s what we do!

Pricing Moves Up! Further Increases to Continue!

Although not great news for Phoenician buyers, sellers and prospective sellers of single family homes across the Valley can start their happy dance. For the monthly period ending April 15th, the Valley’s prices have moved up 2.1(% since March 15th.  The new average sales price per SqFt is 133.49 averaged for all areas and types of housing across the MLS database, which is what we refer to as “the Valley.” Last month it measured $130.70. This is on top of a 1% increase from mid-February to mid-March.

Other indicators are also falling into line to bolster the continued strengthening of what might soon be a very active Seller’s market:

Current Listings:      22,574           One Month Ago:     22,934           (1% Drop)

Pending Listings:        8375                          “                     8,048           (4% Increase)

Sales Per Month:        8368                           “                   6655            (26% Increase)

Avg Market Time:       88 Days                      “                    95 Days       (7% Drop)

Pending Sales PSF:    $138*                          “                    $134            (3% Increase)

Months of Supply:         3.3                           “                        4.2            (21% Drop)

*PSF = Price Per SqFt

Based on a number of stats, including the Pending Sales price per SqFt, we can, with relative certainty see that the May report will have another bounce in values.  Aside from the obvious negative buyer ramifications of rising values, further property increases will continue to release more homeowners to be able to sell who have still been underwater (home value less than mortgage debt).

MUBs (Move Up Buyers) May Be Back in the Buying Hunt!

Besides some recent evidence that Millennial buyers are moving off the buying sidelines onto the real estate playing field, another block of mostly idled buyers, known as MUBs, (Move-Up-Buyers) may now be suiting up to play as well. If so, our market will continue to heat up – even more.

MUBs will be a large number of new buyers that will fill in the buying blanks of higher price ranges above those of the millennials who would typically be buying in the more affordable lower price ranges.

MUBs have been mostly inactive due to a foreclosure or short sale or not having enough equity in their home to close the sale without having to write a check. A rising market and improved credit are enabling this new freedom. As mentioned in past blogs these previous homeowners get released from the “penalty box” starting this year and will continue for an additional 2-3 years following 2015.

Importantly also is the current willingness of sellers to accept offers from buyers “contingent” on the sale of their existing home. You can thank a healthy and normalized market for that.

How do we know this is happening? Take a look at Michael Orr’s (ASU) recent Cromford Report chart comparing normal non-distressed sales under contract today (April 13th) compared with the same date last year in 2014. We can see where demand is highest:

 

Price Range Under Contract Annual Growth
Under $100K 587 -6%
$100K-$150K 1771 +5%
$150K-$200K 2440 +33%
$200K-$300K 2940 +29%
$300K-$400K 1389 +41%
$400K-$500K 660 +35%
$500K-$600K 329 +44%
$500K-$800K 287 +14%
$800K-$1M 118 +10%
$1M-$1.5M 122 +7%
$1.5M-$2M 60 +7%
$2M-$3M 33 -23%
Over $3M 32 +115%

 

Interesting enough the lower ranges are down, but this is due to lack of inventory. Under contract homes from $150,000 to $600,000 pricing have enormously increased. The $300,000 to $600,000 (move up range) and even the $600,000 to $1,000,000 range all are experiencing double digit increases. And the market with the largest increase? Amazingly it’s over $3 Million.

For sellers, the good news continues. For buyers, the prices you see today, will be soon changing upwards. And if that happens, you’ll have the MUB’s to thank – or curse.

Diminishing Supply – Increasing Demand – The Market is on the Rise!

Son and business partner, Jonathan got his first live taste on the state of the buyer’s market out there making an offer on he and Sarah’s first home. He is one of those millennials that will practice what we’ve been preaching which is to get off the sidelines and start looking. You’ll have to tune in later to find the outcome, but suffice to say, the house they made an offer on within two days had two other offers on it. He’s learning first-hand about multiple offers and buying strategy. Oh yea, and home buying emotions.

…regular home buyers are leading the surge rather than investors. This may yet change, but currently it’s a stronger and safer market.

Considering what’s happening in the market-place, it’s no surprise. As we’ve been suggesting for several months and likewise advocating for buyers longer than that, buyer’s need to take action if they want in on the current bottom of the market, for it is moving forward and upward.

Consider These Market Stats:

  • Active Listings: 19,835 versus 23,096 last year – down 14.1% – and down 6.0% from 21,103 last month
  • Under Contract Listings: 10,039 versus 8,173 last year – up 22.8% – and up 16.4% from 8,628 last month
  • Monthly Sales: 7,174 versus 5,825 last year – up 23.2% – and up 38.8% from 5,170 last month
  • Monthly Average Sales Price per Sq. Ft.: $134.78 versus $135.18 last year – down 0.3% – but up 0.6% from $134.04 last month (Prospective Buyers, memorize this number)
  • Monthly Median Sales Price: $207,000 versus $198,050 last year – up 4.5% – and up 2.0% from $203,000 last month (Prospective Buyers, memorize this number).                   (Thanks to Michael Orr of ASU and the Cromford Report for these timely numbers)

You’ll note our highlighted instruction above for buyers to memorize the Monthly Average Sales Price per square foot and Monthly Median Sales Price. I think these numbers will be a new price appreciation benchmark, as they will begin to rise considerably shortly due to increasing sales, (demand) and further supply decrease. Another Caveat Emptor (Buyer Beware).

What’s so healthy about this market versus our frenetic market in 2005, is that right now, regular home buyers are leading the surge rather than investors. This may yet change, but currently it’s a stronger and safer market. Amen to that!

Oh and by the way buyers, the standard 30 year fixed rate mortgage, has just dropped to a two year low at 3.71%.

Sales Prices Moving Up – The Times They are a Changin’

First things first, we welcome a new team member, Barbara Anderson, to the Bodeen Team and the HomeSmart Elite group. Though new to our group, Barb is not a novice to real estate. She is however getting back into the game after a prolonged absence in the education field. Barb and hubby Bruce just celebrated their 44th wedding anniversary.

Barb joined us yesterday for her first HomeSmart Elite monthly meeting. It was indeed timely as our keynote speaker, Director Michael Orr of ASU’s W.P. Carey School of Business presented the Elite Group with encouraging homeowner data and trends indicating that change is already afoot in our local real estate market. You will be hearing about this starting now in the local news.

The Bodeen Team subscribes to Mr. Orr’s market data which we view in real-time each day. Our subscription grants us permission to reproduce his information to you. I would say that there are few, if any entities in the country that have the amazing statistical data that Orr does. He starts each meeting with the caveat that his background is mathematics, and his passion is real estate trends and numbers.

And I should clarify that the news was positive for homeowners but not so much for buyers who are still on the sidelines, unless they decide to become a homeowner sooner rather than later. That to me was the important take-away from this meeting yesterday.

Michael provided us with a whimsical chart (see below) showing us his “Market Cycles.” As you can see, he believes we are re-entering a period of “Optimism” which last occurred 12 years ago in 2003. This period historically preceded the Three E’s: Enthusiasm, Exhilaration, Euphoria. This is when sales and appreciation happened at dizzying intensity. It was an exciting time, but it wasn’t fun.

Another very interesting chart shows the annual rate for U.S. Household Formation. According to this chart, the number of newly formed households radically spiked in the last quarter of 2014. This, among other issues (see Summary below) could create huge demand.

There are a number of reasons why Orr is so Seller Bullish

  • Supply is well below normal (83% of normal)
  • Demand is low but growing (95% of normal)
  • AZ loan delinquency below normal at 4.5%
  • Foreclosures below long term average
  • Lending rules starting to loosen
  • Entry market heating up
  • High end market cooling down
  • Economy and jobs continue to improve
  • Time to change from relief to optimism

He also didn’t see any slowdown for single family detached rental demand as he points out that we have only a 25 day amount of rental inventory available. And, he adds, is in the higher priced end. The supply for home rentals priced between $900 and $1200 per month is down 50% from a year ago.

So there we have it. In the words first memorialized in song by Bob Dylan, ‘The times they are a changin.’  Hang on.

Preparing Your Home to sell

     Few things in modern life can be as frustrating as having a home on the sales market week after week and month after month without it selling.  We are currently in a real estate market that’s neither hot nor cold, but bordering on a buyer’s market. The average market time for a Phoenix Metro area single family detached home that has not sold is 134 days.

In Part 1 of our home sales series, we discussed the importance of timing the listing to go on the market. We made mention that timing may be different based on the type and location of the neighborhood and the amount of buyers that are typically drawn to it.

Last week we learned that correct home pricing trumps all marketing and home preparation. This week we will learn the importance of condition and staging to get the best selling price in the shortest amount of time possible.

     There are many good articles and HGTV programming that extol the benefits of staging a home to sell. Indeed many companies and services have sprouted in the past 10 years for just this purpose. How needful, how helpful is it to have your home staged? Much, but it may not be as difficult as you think.

     In my 35 PLUS years of experience I can boil down staging advice to a half dozen “its” in the order of importance. 

 

1)      Clear it.

2)      Clean it.

3)      Fix it.

4)      Lighten it.

5)      Appeal it.

6)      Stage it.

 

1)      Clear it: We are a nation of stuffers. Ideally, this step should be taken well in advance of your listing period. One of the (albeit few) advantages of moving is the golden opportunity to get rid of stuff. E-Bay or relatives for the good stuff, Garage sales or Goodwill for the rest. If you’re selling everything, you may want to consider going the “estate sale” route. You won’t make a ton of money but you get rid of everything in one fell swoop.  And there is a lot to say for that. With a few exceptions, remove all clutter including family photos and wall posters. Clean and organize closets. Pack everything you’re not using. You’ll have to pack it soon anyway.

2)    Clean it:  If you’re not one that knows how to or wants to thoroughly clean a home, hire a professional to clean all the nooks and crannies. Believe me, people notice, appreciate, and mention cleanliness when they see it. Make the kitchen, bathrooms, and hard surfaced floors shine. Find and eliminate all odors. Ask someone who doesn’t live in the home to give it their nose test. We’re too use to these smells but someone from the outside will notice. If there are pet or smoking odors, get rid of them, even if you have to remove and replace carpet and pad.  As the old commercial puts it, “You can pay me now or pay me later. In experience, strong negative odors will prevent, or at best delay, a home sale. Some buyers will ask to leave right away. What about odor masking such as scented candles? It may help, but it’s not the best. Masking is often a red flag for people to wonder what the sellers are hiding. Some owners have loaned out their pets to friends or family members while the home is on the market. And clean the windows – yes, inside and out! The bottom line is that many buyers will judge the condition of your whole house by its cleanliness.

3)    Fix it:   The Arizona residential purchase contracts stipulate that all the mechanicals (moving components) be in working condition prior to close of escrow. Plumbing (including leaks), electrical, appliances, heating and AC, and pool cleaning apparatus needs to be repaired if not in working order. Replace all burnt out bulbs and make sure the doorbell is operative. Repair any fences/gates and give them a fresh coat of paint or stain if necessary. Though not a requirement in the contract, having a roof that’s in good order is a huge help come inspection time. Replace any cracked windows or broken screens. Repair caulking in tubs and showers.

4)    Lighten it:  Natural light is a huge feature in a home. Whatever we can do to increase it, will help our sales efforts. Often times it’s as simple as having window coverings open. Painting walls can have the dual benefit of a positive fresh scent and lightening up a dark room. And always have lights on when the home is being shown.

5)   Appeal it:  Curb appeal is talked about a lot by us Realtors, and for very good reason. It helps us get potential buyers into your home and you can’t sell your home unless buyers take the time to go see it!  Many buyers do “drive-byes” and if a house looks great from the outside, there’s a good chance they will want to go see it – and vice versa. All buyers typically view online photos and the quality of those photos is perhaps the most important reason why a buyer may or may not see a home. So a fresh coat of exterior paint, always trimmed and mowed lawns, and a clean yard will help bring those buyers into your home. Make sure all debris, toys and lawn equipment are removed. Trim shrubs and eliminate dead trees and branches.

6)    Stage it: The tough part is already done including, clearing, cleaning, painting, fixing. Now the question, should we stage it? Maybe yes, maybe no. This is where a Realtor professional’s experience can be a big time help. Once all the above has occurred, you may not need to stage, but in most cases some staging advice is important. We provide the services of a professional interior designer who literally goes room to room suggesting what can be done to enhance the show-appeal. She may recommend painting (and which colors to use), item removal, cleaning if necessary, and item addition (if important). (In this staging section, it may be possible that your home could benefit by doing some updating, which falls under remodeling. This is an entirely separate issue and article that we’ll address soon)

Bottom line? Prepare well and your home will sell well!