Ever since the groundhog predicted an early spring, most of us have been eagerly waiting for the little guy to be proven right. And while the weather makes it a day-to-day affair to know if winter is truly over, from the real estate data coming out lately it seems that spring truly has arrived early.
February 2011 statistics show that in the Baltimore region, home sales were up 7% over February of 2010. Down in the Washington metro area, which includes nearby Montgomery and Prince George’s Counties, pending home sales in February increased a whopping 33% over the same month a year earlier. The median home price in February 2011 in the DC region was $300,000, down from $309,000 the year before — but Baltimore’s median home price in February 2011 was $205,350, down from February 2010′s by 9.54%. So, Baltimore metro still remains a much more affordable alternative for Washington-area homebuyers, even with price declines, and a lot of the activity here has come from DC residents looking for less expensive housing, a trend we expect to continue.
All of this is good news, unless you happen to be selling a home right now. From a seller’s perspective, the overriding issue is the number of distressed properties currently flooding the market and driving prices down. Most buyers enter the market eager to snap up a bargain, but not fully informed as to exactly what it means to them to buy a distressed property, or the differences between the types of distressed property currently on the market. So here’s a brief overview to get you up to speed.
The largest category of distressed properties include homes listed for sale that are “under water” — where the owner owes more than the house could currently sell for in the market.
Short sales are where a seller, who is under water, also doesn’t have the money to make up the difference and has to ask the lender to forgive the amount of the shortfall. Short sales get their name from this seller’s shortfall, not from the amount of time they take to settle — which is anything BUT short. Generally, the seller is still in the home and has listed the house as a short sale in consultation with their bank or institutional lender. The mortgage is still in place, as are all the investors who bought into that mortgage once it went to the private equity market. Sometimes there is a second mortgage, and yet another set of investors. Before a property can reach the settlement table and transfer to a new owner, the current seller has to negotiate a contract with a qualified buyer and then start to make the case to the lender(s) that he/she will require financial assistance to sell the property. If the lender(s) accept the fact that the seller is truly in distress, they then have to go to their investors and get them to agree to take the loss. All of this has to take place before the lender can notify the buyer if the contract offer will be acceptable — even if the contract has been signed by the seller.
This process is long and tedious. Buyers and their agents can only wait on the sidelines while the lender(s) and investors go back and forth with the current owner to satisfy all the paperwork requirements. In today’s market it is not unusual for a short sale to take more than three months to settle, nor is it uncommon for a buyer to wait three months to discover that their offer will not be accepted by the lender at all. Most first-time buyers, who are dealing with a landlord who needs a specific date upon which his rental apartment will be vacant, cannot consider short sales as a viable option.
Foreclosures are where the lender has evicted the previous owner, passed the loss along to the investors who are now out of the picture, and has taken ownership of the property. Foreclosures are usually listed for less than market price, which is why they tend to drive down property values in the area.
Foreclosures present a completely different set of challenges from the buyer’s perspective. With the previous owner and the investors gone, the chain of authority for decision making is much clearer, but the bureaucratic nature of most lenders removes much of the give and take you’d find in a real negotiation. Listing prices are usually set with a businesslike efficiency, and routinely reduced on a four to six week schedule if no qualified buyer has surfaced. In between reductions, there is usually little flexibility on price. Many buyers think the bank will be desperate to negotiate and get rid of the property, only to have their opening low offer rejected in short order because it is too far below the current listing price.
A majority of foreclosures also need some level of renovation before they can be occupied. While this can be a great way to get a newly renovated house at a good price, many first time buyers are not ready to handle the purchase experience and then jump immediately into working with a contractor to complete a four to six week renovation.
If you’re a buyer in this market, do your homework, and you can truly use the current distress to your advantage and end up with equity in your new home from day one. But be realistic about your goals and your abilities, and if you don’t think your life will allow you to deal with the uncertainties of a short sale or the responsibilities of a renovation, stick to conventional non-distressed listings with individual sellers where the timeframe and the purchasing process is much more predictable.