Some buyers may assume that bidding wars for houses are a thing of the past, relegated to the annals of the real estate bubble. If our recent experience is any indicator, competitive bidding is still alive and well. In fact, even in the depths of the real estate downturn, competitive bids never actually went away. They simply became less frequent. I took a look at all of the offers that findwell submitted and received in the Seattle area during 2009, and we experienced competition on ~15% of those offers during 2009. The real estate market is slowly on the mend, and we fully anticipate that there will be more competition for homes in 2010 than we saw last year. While it won’t near the frenzy that we saw during the housing boom anytime soon, the good houses will get snapped up in bidding wars. Here are some strategies for winning a home in a competitive bid situation.

Which homes will bring out competing bids?

Buyers who are new to this market will often assume that it is still a buyer’s market and they may leisurely browse and bid on listings since they “are not going anywhere.” Supply and demand is highly-localized. Some Seattle metro areas remain a buyers market, but as you move closer in to major employment areas, many neighborhoods are experiencing very balanced markets at the moment. There are also quite a few neighborhoods that actually demonstrate a seller’s market, with less than 6 months of active inventory at any given time. The market seems split in two at the moment, with a smaller percentage of homes selling very quickly, and other homes lingering on the market for months at a time. Buyers are being picky, and the homes that linger either suffer from a less-than-desirable location, awkward floor plan or poor design. Often they are also over-priced. But there is a category of homes that are in good locations, in good condition and are attractively priced. Those homes may sell within days, and you need to be on your toes. If you have been surfing listings online and find a home that jumps out at you because of its attractive price, location and quality, then that home just jumped out at 50 other folks who are going to try and see it and perhaps bid on it.

Here is a statistic to remember. So far in 2010, 39% of homes in Seattle, Bellevue, Redmond and Kirkland have sold in 0-30 days. 25% of homes sell in 14 days or less. Not all of those will have competition, but the shorter a home is on the market, the more likely it is that they received multiple bids.

How to win a competitive bid

Winning a competitive bid is not always an easy task, and may not be for the faint of heart. Here are some ideas to help you craft strong, winning offers when you face competition from other home buyers.

1. Time is of the essence – Successful bids will often happen at lighting speed. Call you agent for a showing immediately when you see the home hit the market. Sometimes you need to place your bid the day it comes on to be successful. Some sellers will feel loyalty to the earliest bid, if all other terms are equal.
2. Money talks – All things considered, the highest offer price will almost always win. Your attractive down payment and large earnest money deposit won’t mean a lot to the seller if they can pocket an additional $10,000 from another buyer. All cash offers can win at times, but only if a quick closing is critical to the seller. A higher offer with a mortgage will still beat a lower offer that is all cash in many instances.
3. Confident you will close – In today’s tight lending environment, sellers want confidence that you are the buyer who is most likely to close their loan. Nothing is as disappointing as having a transaction fail because the lender couldn’t get the loan done. Larger down payments, strong employment, loan pre-approval and significant earnest money are all signals that you are a strong buyer.
4. Minimal/shorter contingencies – An offer that is not contingent on the results of your inspection or your financing can be very compelling for a seller. In this market, many competitive situations still allow for financing and inspection contingencies, but you should include only what is necessary and make sure that your contingency timelines are very short. Getting your inspection completed quickly or allowing a short timeframe to get your financing in order can help you to win against other offers.
5. Escalation versus “highest and best offer”  - There are two methods to increase your bid to beat others. One involves an escalation clause, where you make a lower bid that “escalates” to a higher number, beating competing bids by some amount up to that limit. Alternatively you can just pick the highest bid you are comfortable with and take your chances. There are compelling reasons to try an escalation clause, as it can help you avoid paying significantly more than a competing bid. However, in the eyes of a seller, a straightforward offer appears stronger. Let’s say the house is listed for $450,000, and there are multiple competing offers. You could offer $460,000 and see what happens. Or you could offer $450,000 with an escalation to $460,000, beating a competing offer by $1,000 up to that limit. Those offers are essentially the same if people are bidding up to $460,000. However, sellers will see the straightforward offer of $460,000 to be stronger than the escalation, since you didn’t start your offer at a low amount.
6. Easy to Work With – You don’t write this into the offer, rather it is the story that your agent tells during the offer process. Sellers (and their agents) want to work with buyers who will be easy to work with. You want the seller to know that you will be fair, reasonable and reliable throughout the closing process. This can be equally important for your choice of agent. Other agents want their sellers to work with agents who are clear communicators, polite and professional. You agents should provide a neatly written offer, be very clear about your offer terms, and instantly reachable to help answer questions. Agents who are pushy, rude or ultra-aggressive when trying to get them to accept your offer will not be the ones that are chosen. I have seen this first-hand twice in the past month, where I won offers for my clients because I was perceived as the more professional and polite agent. (The offer terms were nearly identical in both cases.)
7. Intangibles – If all of the above are identical in competing offers, they are going to pick one from a variety of intangible factors. Sellers are often highly emotional about their home, particularly if they have lived there for many years and raised their family there. They want their home to go to someone who will enjoy the home like they did or will care for the home in the same way. Sometimes it pays to “personalize” the negotiation by writing a letter. Tell them why you love the home, a little about yourselves, and how much you appreciate the way they cared for the home. Include a family picture. Yes, this approach can be cheesy, but it can definitely help to put a personal face on the buyers to make the seller feel more comfortable with their choice.

Bidding on a home in competitive situations is unnerving and stressful. It pays to have a strong agent at your side who has coached many buyers through the same process. They can help you to write a “clean” offer, with the best possible terms, and can make sure that your offer is communicated effectively to the listing agent and seller. They can also help guide you on price, telling you how high the bidding may go, but also limiting your bid so that you are not overpaying.

The single most important advice I can offer in a competitive bid situation is to not bid more than you are comfortable with. Set your upper limit and stick to it. Getting wrapped up in the competition may leave you feeling that you overpaid or may have you regretting that you went way over your budget. Losing a competitive bid for a home is always disappointing, but there are always other houses out there.

Home buyers, sellers and real estate agents like to banter about price per square foot when comparing homes and estimating their value. It is an easy number to calculate and an easy concept to grasp. But how valuable is the figure when valuing a single, unique property? The short answer is that it is only somewhat valuable. If you are going to use this metric in the home buying (or selling) process, you need to be aware of its limitations and pitfalls. You need to question the accuracy of the data being presented, account for the uniqueness in each piece of real estate, and be sure that you are comparing very similar properties in the process. Looking at an average price per square foot for a neighborhood and then multiplying for the home you are looking at is likely NOT a reliable way to figure its true market value.

Who measures the square footage of a home?

I have yet to meet a home seller who has actually measured the square footage of their home. Real estate agents will almost never measure a home themselves, as it opens up a huge liability if they misrepresent the correct square footage, even inadvertently. Most square footage numbers are sourced from a previous listing, a recent appraisal, county tax records, or a floor plan originally provided by the builder.

Different regions of the country and different MLS’s may have different ways of displaying square footage. In Western Washington, the Northwest MLS sets the guidelines. Your local MLS may behave differently. As listing agents, we are supposed to enter the Approximate Square Footage for every listing. The Approximate Square Footage is the total of both finished and unfinished “living area”. The living area can be above or below grade, and does NOT include the garage. It also doesn’t include any non-contiguous or unheated areas. For example, a one story home has 1000 sq ft on the main level, 700 sq ft of unfinished basement and a 300 sq ft garage in the remainder of the basement. The square footage should be listed at 1700 sq ft in this example. Our MLS has a separate area to mention the breakdown of finished versus unfinished square footage as well, but it is optional.

Is the square footage accurate?

Square footage data is often littered with inaccuracies, so beware. Most notorious are older homes that may have been remodeled or expanded over the years. Records from the county tax assessor may be based on the original size of the home and fail to report the remodeling over the years. There is not a great mechanism for the government to keep accurate records of these changes, and data entry errors are common when transcribing from century-old records.

There is a specific methodology for measuring square footage, and it is relatively straightforward for rectangular homes with an easily-measured footprint. (Exterior measurements are most commonly used, and wall thicknesses are included in the calculations.) Many homes have difficult to measure spaces that can easily cause mistakes. For rooms with sloped ceilings, you need to account for the actual “usable” space. Bay windows and circular floor plans may add challenging measurements. Open areas and staircase openings need to be deducted from the upper floor. You get the idea.

Home building is imprecise by its nature. Architects create precise drawings that are translated in the field during the building of a home. Building materials and craftsmen are imperfect and may improvise and “shim” their way to a close approximation of the architect’s drawing. These “as-built” imperfections do materially impact the overall square footage, so the home may have deviations from the area measured in the original floor plan.

Is the square footage believable?

Agents and sellers often misstate the square footage of a home. Sometimes it is intentional deception and sometimes it is not. Just today I came across a home that under-reported its square footage by 700 sq ft because they didn’t include the unfinished basement. Another home overstated it by including the garage. Other times there is no square footage listed at all. Perhaps the sources of data are known to be inaccurate and no one wants to step up and provide an accurate measurement. It pays to be skeptical of square footage data.

Is price per square foot a meaningful comparison for homes?

Sometimes price per square foot is meaningful, and sometimes it is useless. It does have value when comparing similarly-sized and similarly-configured homes in a very specific area, giving general trends for the neighborhood. It is nearly useless when comparing smaller and larger homes, since smaller homes tend to command a higher price per square foot than larger homes. It is also useless in the face of unique features like views, busy streets, premium lots, property condition, etc., that may vary from house to house.

The mathematicians out there will simply say “This neighborhood is averaging $200/sq ft for sold homes. This home is 2500 sq ft, so the value is naturally $500,000. The 2000 sq ft home next door should be worth $400,000. ” Home buyers and the real estate market simply do not function that way. Maybe the floor plan of the 2500 sq ft home is awkward with lots of unusable space compared to the 2000 sq ft home, or maybe the smaller home has outstanding views or really cool finishes. A smaller 4-bedroom home may have considerably more value than a 3-bedroom home with very large rooms. In these instances the smaller home can be worth the same or more than the larger home. Huge differences in square footage do result in value difference, but moderate differences are easily overwhelmed by other factors like floor plan usability, available light and bedroom/bath configuration. I can’t tell you how many times we have come across 3000 sq ft homes that are loaded with extraneous and unusable spaces, while a smaller 2500 sq ft home is far more appealing with the same general configuration. Simply using $/sq ft averages is not going to get you to the answer for market value.

Can price per square foot be used for building costs?

When building a home, it can provide a useful gauge of construction costs. Home construction requires building materials and labor, and it is a safe assumption that by adding square footage, you are proportionally adding to the costs of building materials and labor to assemble them. Builders often use these figures to estimate construction costs on new projects, based on their recent history. There are many factors that work against this calculation that need to be accounted for. A fancy kitchen may cost $50,000 to construct, while an empty bonus room of the same size may only cost $5,000. A tiny bathroom with elaborate finishes may add $25,000 to the bill, while contributing very little to the overall square footage. Let’s say you are building two 4000 sq ft homes with identical exteriors and footprints. The first home has 1 kitchen and 3 bathrooms. The second home has 2 kitchens and 4 bathrooms. Price per square foot will definitely be higher for the second home in this example, even though the homes are exactly the same size with the exact same finish levels.

How should I value a home?

Estimating the value of a home is more complex than using average $/sq ft. You need to account for the unique characteristics of each individual piece of property and either credit or debit the value of the property as appropriate, based on recent sales of similar homes. Size of the home is important, but you absolutely must account for factors like finishes, layout, location and style. Price per square foot is simply a rough gauge to point you in the right direction.

Every home listing has a property description. It is a short paragraph prone to flowery prose and grand descriptions of the home for sale. In our case, we have only 500 characters to convince and entice you to come and see the home, so it is packed full of the top features and describes the potential lifestyle you will lead if you purchase this particular home.

We tour hundreds of homes every month and read the marketing description for each one. It became clear to me that sometimes these short descriptions lack the depth and accuracy needed to properly evaluate a home. For those who don’t shop for homes every day, I thought I would provide a handy translation guide to help you interpret property descriptions during your home search.

1. “Greeting the morning sun” = Home gets scorching hot in the summer first thing in the morning.
2. “Gardens and backyard await your inspiration" = We don’t like yard work. The overgrowth and weeds are about to be your problem.
3. “Just awaiting your touches” = The floor plan is a monstrosity, but we’re sure you’ll figure out what to do with it.
4. “This home boasts thoughtful spaces” = I’m not sure, since I didn’t realize that structures were sensitive and able to express their caring feelings. What is the opposite, “This home boasts inconsiderate spaces?”
5. “Perfect to add a 2nd story” = The house is tiny, and we know you would like a bigger house. We’re hoping that you buy it without actually researching how much a 2nd story addition actually costs.
6. “Bold, designer colors” = We picked up some crazy colors of remnant paint from the local paint store at a discount. I’m sure you will like our eclectic tastes.
7. “French doors link master to luxurious deck” = The only way for you and your guests to enjoy your back yard is to traipse through your bedroom.
8. “Intriguing potential with separate basement entry” = You can’t get to your basement from inside the house. You could try to put an apartment downstairs, but we are pretty darned sure that local zoning laws don’t allow it.
9. “Huge lot with lots of privacy” = Sure, the house is on a big lot, right on major thoroughfare with loads of traffic. Privacy is assured because nobody will walk by the house with all of those cars whizzing by.
10. “Up and coming neighborhood” = We hope you don’t mind that some of our neighbors operate automobile scrap yards in their back yard.
11. “Exercise caution when entering. Do not walk on deck.” = No translation needed. Refreshingly honest.
12. “Fairy tale cottage” = “My what a small home you have!” (400 sq ft)
13. “Priced below assessed value” = The home was last assessed in 2005 when it was worth 20% more than it is today, so we’re still overpriced.
14. “Huge yard perfect for gardening” = No gardening has ever taken place in this yard, but you are welcome to give it a try to clean up the mess.
15. “European flair with ceramic tile” = Last time I checked ceramic tile has been commonplace outside of Europe for many decades.
16. “See the Space Needle from bedroom” = Exercise your calves while enjoying a panoramic view of the top 5 feet of this famous Seattle landmark.
17. “Lower level includes laundry, 3/4 bath and 1 car garage” = The lower level 3/4 bath is actually inside the garage.
18. “En-suite powder room in master” = We decided to put a toilet in our bedroom closet.
19. “Investor Alert” = No sheetrock on the walls, no carpet on the floors and no appliances. Bring your checkbook.
20. “Bring your imagination” = Bring your Sawzall.
21. “Consider this a rare opportunity” = We haven’t received an offer in over a year.
22. “Gourmet kitchen” = You are probably a poor cook and gourmet food may never come out of this kitchen, but it does have granite countertops.
23. “Unspoiled entrance” = I’m not sure about this one, but I do know that I certainly wouldn’t want a home with a spoiled entrance.
24. “An I-90 corridor position” = The freeway is right in your backyard.
25. “We’ve kept the home and deck to see the picture postcard view” = The house is unsafe and ready for demolition, but we want the buyer to pay for demolition.
26. “Olde climbing trees” = Spellings of British and American English words diverged sometime in the 18th century. Get with the times.

One of the most critical pieces of buying a home is the home inspection. Hiring an independent inspector allows a buyer the opportunity to evaluate potential defects and deferred maintenance items in the home that they are purchasing. I have never encountered a home that does not have some issues, even new construction, so an objective inspection can surface those issues and help you negotiate with the seller for potential resolution. However, the inspection negotiation can be a trying and difficult negotiation, often more complex and heated that the initial negotiation about purchase price.

What are my options when I find repair items during the inspection process?

If your contract includes an inspection contingency, that contingency will outline a negotiation process. During that negotiation, you can ask the seller to fix items that need repair, you can ask the seller for a credit to compensate you for the future repairs, or you can request a hybrid of these two options. In the standard inspection contingency being used in Washington, the seller then has 3 days to respond to your requests. They can accept the requests, reject the requests, or offer an alternative proposal. Our contract then allows another 3 days for the buyer to respond if the seller has rejected or made an alternative proposal. In our inspection contingency, the buyer maintains control of the process and does not lose their opportunity to purchase the home if they request repairs. The seller can say no, and then the buyer has a chance to terminate the agreement if they wish.

The key to successful negotiation

The purchase of a home is often an emotionally-charged process for the buyer and seller. Dollar amounts are large, deadlines are tight, and there is often a lot at stake for both parties. When purchasing a home, you need to remember this and be prepared for the psychology of negotiation. It is human nature that no one wants to “lose” a negotiation. A win-win negotiation allows both parties to feel that they have given something, but the other party also has made concessions. Buyers want to feel that they are getting a fair deal and sellers don’t want to feel like they are being taken advantage of. If you remember this one point during your inspection negotiation, the chance for a successful outcome for both parties will increase.

The seller should fix everything, right?

Many buyers, especially first-time homebuyers, expect perfection in the home they are buying. They are spending hundreds of thousands of dollars and don’t want to have to deal with home repairs. The natural reaction to an inspection report is to make a list of all issues that were found and then demand that the seller fix them or monetarily compensate for the fixes. Depending on the home and the seller, this may or may not be the right approach to a successful inspection negotiation.

You can often achieve perfection with new construction, as builders will allow you to make a punch list and often have warranties that cover the home for a limited period of time. But for an existing home, you need to come up with a strategy that addresses your major concerns, yet gives you the greatest chance of negotiation success with the seller. Every home has issues. Some of them require immediate attention, but some of them are ongoing maintenance items. You need to evaluate the price you are paying for the home, the age of the home, and the severity of the issues that were found and come up with the best strategy for a successful negotiation. Sellers of older homes often won’t fix everything, particularly if you negotiated a large discount on their price.

Strategies for negotiating a home inspection

Every home and every seller is different, so you need to gauge the situation. Here are the most common scenarios that we see, and the inspection negotiations that go along with them.

1. The issues are already priced into the deal – Sometimes sellers will build the repairs into their price or tell you that the home is priced for an “as-is” sale. They will be upfront and say “we know the home will need a new roof and our price reflects that.” If you think the price is fair for the condition of the home and agreed that the repairs are included in the original negotiation, then your inspection simply will confirm those issues and you can move forward. If there are new or unknown issues that the inspection surfaces, you will want to negotiate on those items.
2. Focus on the major items – The most common result from an inspection is a laundry list of items that need attention. Often sellers will be reluctant to fix every single item on the list. Many inspection items are ongoing maintenance items and are simply part of owning a home. When presented with a long list of repairs, we like to focus on the “big ticket” items that require a significant cost to repair. Let’s take a look a a simple example. We’d focus our inspection negotiation on items #1 & #2 in this example, being willing to concede on the low-cost repairs.
   1. Electrical breaker box is a recalled model and represents a fire hazard – Estimated repair cost $1800
   2. Hot water tank is 15 years old and will likely leak soon, causing water damage to interior – Estimated repair cost $800
   3. Bedroom door doesn’t latch properly – Estimated repair cost $25
   4. Guest bedroom needs a smoke detector – Estimated repair cost $15
   5. Gutters need to have leaves cleared out – Estimated repair cost $100
3. Only minor issues found – Some homes are in great condition, and your inspection may only result in 5-10 minor items. In this case, it can be appropriate to ask for all of the minor items to be fixed. Sellers may feel like they are being “nickeled and dimed”, but a savvy seller will not let a good deal get away over a few hundred dollars of tedious repairs. A buyer purchasing a home in great condition should also not get hung up on a list of minor items if the house is a fair deal.
4. Take on important repairs yourself – Sometimes major repairs are needed that are fundamental to the integrity of the home. They are costly and time-consuming and sometimes prone to poor workmanship. Let’s say there are electrical hazards that need to be rewired, with a cost exceeding $4000. The seller wants to get the repair done quickly and cheaply, and may use substandard, unlicensed or unpermitted electricians to accomplish the repairs. The buyer has different needs, and wants the work done to the highest quality and to code. In situations like this, it can be wise for the buyer to request a credit towards their purchase price and hire their own contractor to facilitate repairs. Another approach is to request the work to be completed and paid for by the seller, but the contractor will be selected by the buyer, who then has a chance to review the completed work prior to closing.

What about inspections for new construction, short sales and bank-owned homes?

Home purchases from a builder, a financially-distressed seller or a bank are special cases, and inspection negotiations will not proceed the way they do with a typical home seller.

1. New construction – Builders often will not allow an “inspection contingency”. Once you sign a contract to buy the home that they are building, you are usually locked-in to the purchase, except for some instances when you cannot obtain financing. Such contracts are definitely slanted in favor of the builder, but the logic here is pretty easy to understand. Builders will offer limited warranties on their homes and any issues that surface during an inspection will likely be covered by such a warranty. They don’t need to allow a contingency, since they will be obligated to fix the issues anyway. Builders also allow you to do a punch list of final items during their walkthrough, giving the buyer an opportunity to have minor cosmetic issues resolved.
2. Short sales – In a short sale, the seller is trying to sell the home for less than they owe on their mortgage and doesn’t have money available to cover the balance. They request that they bank take a lower payoff for the mortgage because they cannot afford to sell, yet desperately need to sell. People in this situation are often in financial distress, whether that be from unemployment, an unexpected injury, or looming bankruptcy. If a seller doesn’t have any money to cover their daily living expenses, they also are not going to have money to cover a list of repairs. You will be stuck with an “as-is” purchase in most instances. You need to be comfortable that the purchase price is low enough to take on the list of repairs that will become your problem when you buy the house.
3. Bank-owned  - When a home is foreclosed by the bank, they will hire brokers to help them sell the home on the open market. They will spend a modest amount of money to clean up the property and make it at least presentable in order to sell. When you negotiate with banks, they will often have strongly worded contracts that insist you are buying the home “as-is”. Most banks will stick to their “as-is” provisions, and they are not in the business of rehabilitating homes. We have seen banks occasionally negotiate or offer to fix very major issues, so you should try to negotiate, but stick to only the really big problems. It is a waste of your time to ask a bank to fix a broken light switch or leaky faucet. They will say no.

Look at the big picture

Try not to forget the big picture when you purchase a home. An inspection is a crucial piece of due diligence to protect yourself, but take a practical approach to your inspection negotiations. It’s too easy to get hung up on small issues or the emotionally-charged negotiations. If it is a good house at a good price, and you are not being asked to take on excessive risk, it may still be worthwhile to purchase the home. Working with a competent real estate agent and a qualified home inspector can help you through this process.

We received a solicitation in the mail today from a home inspector in Covington, WA. This one blew me away with its blatant disregard for home buyers, so I will let him speak for himself.

These two quotes from Bill Easter at Move Smart Home Inspections are stunning:

1. “I’m not a Deal Killer”
2. “we don’t knit pick the property to pieces!”

The home inspection is a critical piece of the home buying process and ensures that the buyer is protected against hidden defects. The only home inspectors we will recommend are ones who always knit-pick the property and who are not afraid to be a “deal killer.” Some deals deserve to be killed because of the poor condition of the property, and any inspector who is not willing to make that call is not worth their inspection fee. The American Society of Home Inspectors (ASHI), which this inspector is a member of, is pretty clear on this point in their code of ethics:

“1B) Inspectors shall not inspect properties under contingent arrangements whereby any compensation or future referrals are dependent on reported findings or on the sale of a property.”

An ethical home inspector represents only the buyer and is not hired to make the real estate agent happy by “keeping the deal together.” Any home inspector who is unwilling to adhere to these basic ethical premises should not be hired.

Last week, Congress and the President approved new legislation that extends the first-time home buyer tax credit and expands eligibility to existing homeowners. The legislation is known as the Worker, Homeownership and Business Assistance Act of 2009. The IRS has more details on the tax credit here.

If you plan on buying a new home between now and April 2010, you will definitely want to take advantage of the credit if you qualify. First-time home buyers can save up to $8,000 and existing homeowners may also qualify for a $6,500 credit to buy a new home.

How much is the tax credit?

The tax credit is 10% of the purchase price of the home, up to the following maximum limits:

• First time home buyers = $8,000
• Existing homeowners = $6,500

Who is eligible?

To be eligible, you must be buying the home to be your primary residence. You also have to live in the home for at least three years, otherwise you will be required to pay the credit back on future tax returns. The tax credit is limited to homes with a purchase price of $800,000 or less.

• Eligible Buyers
  • First-time home buyers who have not owned a primary residence at any time during the three years prior to the date of purchase.
  • Existing homeowners who have lived in the same primary residence for any 5 consecutive years during the prior 8 years.

Income limitations

The new law increases income limits to qualify for these tax credits.

• Credit phases out for Individual Taxpayers with modified adjusted gross income between $125,000 and $145,000
• Credit phases out for Joint Taxpayers with modified adjusted gross income between $225,000 and $245,000

Deadlines

To take advantage of the tax credit, you must enter into a binding contract for purchase of your primary residence on or before April 30, 2010 and close the purchase by June 30, 2010. For purchases in 2010, taxpayers have the option to claim the credit on either their 2009 or 2010 tax return.

In order to meet these deadlines, it is important to allow yourself enough time to locate and negotiate the purchase of the home. Our typical home buyer takes between 1-2 months of home shopping to locate a home. Allowing time for you to shop and negotiate a purchase agreement, we recommend beginning your home search at some point in early February. You want to allow plenty of time to find the right home and also allow time in case there is competition for homes in your price range.

The US Senate approved a bill today that will extend and expand the first-time home buyer tax credit that is set to expire on November 30, 2009. Contrary to what some real estate agents are reporting, the extension has not been approved yet. It still needs approval from the House of Representatives and President Obama. Whether or not you agree with the credit, it does have strong bi-partisan support in Congress and is likely to be passed by the House as well. President Obama has also voiced support, so the passage of the new tax credit, while not a done deal, is extremely likely at this point.

The details of the tax credit, as passed by the Senate, include extending the credit for first-time home buyers until April 30, 2010. It also expands the credit by offering a $6,500 tax credit to existing home owners to purchase a new home, provided that they have lived in their home for 5 consecutive years in the previous 8 years. It also raises the income limits of the program to $125,000 for individuals and $225,000 for couples.

For home buyers worried about hitting the November 30 deadline, it looks like you will get a reprieve. For home buyers looking to purchase in the next few months, it appears that you may get an added benefit from Uncle Same. Stay tuned and I will post again when the law has been approved and the final details are available.

UPDATE (11/5/09, 11:00AM): The House of Representatives just passed the tax credit extension, so its approval is now simply waiting signature by President Obama.

UPDATE (11/7/09): President Obama signed this bill into law extending and expanding the home buyer tax credit. See this post for complete details.

In a real estate transaction, there are normally two real estate agents. One agent represents the buyer and one agent represents the seller. In rare cases, the same agent facilitates the transaction for both the buyer and the seller. This is know as “dual agency”. Not all states allow dual agency, but it is allowed in Washington state. When dual agency exists, the potential for conflicts of interest between the agent and their clients are substantial, particularly when negotiating price. The agent must be impartial and questions like “how much should I offer?” or “what do you think the house is worth?” must be left unanswered by the agent.

I came across a stunning example of a dual agency agreement today from a long-time agent in Seattle. Here is what it said:

“I understand that the property listed at 12345 Any Road NE is listed by Agent A. I have elected to utilize her services on the purchase of this property and not obtain a separate buyer’s agent. I understand she represents the sellers in this transaction.”

If you called Agent A to see the home that she listed, she will happily show you the home, but then try to get you to write an offer and sign this agreement. She tries to get you to use her services and not use a separate agent, and then she represents only the sellers in the transaction. The contract fails to mention the important part, which is she will be paid DOUBLE the commission if you don’t get your own agent. (She gets to keep the commission for both agents.) She gets paid double for making sure that the home sells for the highest possible price for the seller, while potentially knowing damaging information about the buyer’s situation. This is motivated by pure greed. Do not sign such an agreement if you value the advice you will receive from your real estate agent, since any advice she gives is “representing the seller.”

In most cases, dual agency is a bad idea. Any agent who agrees to a dual agency arrangement should be forthcoming about their compensation and must remain impartial, otherwise the buyer is subjected to a severely one-sided negotiation.

Last week we closed one of the messiest and most stressful transactions we have ever encountered. It was a short sale with two lien holders. Lien holders are the banks who owned the mortgages on the property. In a short sale, those lien holders are asked to release their interest in the property for a payoff less than what they are owed. Often lien holders will lose $100’s of thousands in this process, but it can be more appealing to them than a foreclosure. It is certainly more appealing to a seller than having a foreclosure.

Our buyers got the home that they loved at a good price, but not without a lot of pain and unexpected hurdles. Here is a blow-by-blow recap to see just what sort of obstacles you might have to overcome with a short sale.

• Long timeframe – The property was originally listed in November 2008. They didn’t receive lien holder approval until September 2009, a full seven months later. We didn’t engage on the property until August, so we got lucky and the short sale approvals came through shortly after our offer. This is longer than normal for a short sale, but you need to be fully aware of the delays possible in a process like this. Often there is nothing you or your agent can do to make things move faster. Putting more aggressive deadlines on your offer won’t make anybody move faster.
• Purchase price – The listing agent notched the price down eight times before it sold. Remember, the list price is set by the seller and listing agent as a “guess” on what it will take to receive an offer and also obtain bank approval. The bank had no input on the pricing, so when the final approval came, it was a full $25k higher than our offer at list price. The increased price was non-negotiable, since it had already gone through months of negotiation with the listing agent to get to that point.
• Junior lien payoff – A 2nd mortgage is a junior lien that doesn’t get paid until the 1st mortgage is paid off. In our scenario, the 1st mortgage approved $5k of the proceeds to go to the 2nd mortgage holder. The 2nd mortgage holder wanted 4x that amount to release the seller of their obligation. The only way this would work was to have the buyer pay the remainder, which is what the 1st mortgage instructed us to do. Because it couldn’t be part of the sale proceeds, it also couldn’t be part of the purchase price. The buyers’ cash to close went up dramatically.
• Short sales are negotiated between the seller and their lender – You may feel like you are negotiating the deal with a bank. Technically you are not. You negotiate with the seller, but the actual short sale negotiation is between the seller and their lender. This is an important nuance to remember when the negotiations don’t go your way.
• Make it legal – An unconventional payoff of the 2nd lien needs to be disclosed and approved by all parties to the transaction. If you hide it, you are potentially committing mortgage fraud. None of us wanted to participate in a fraudulent transaction, so it required consultation with numerous lawyers and title companies before we finally found a solution. We found an escrow officer experienced in short sales that was able to craft a HUD-1 Settlement Statement that adequately disclosed all of the money being transferred and was ultimately approved by all parties in the transaction.
• Inexperienced short-sale agents – The listing agent was a self-proclaimed “short sale expert”. As we found out, that expertise involved precisely two successful short sales and a lax attitude toward the legalities required by real estate settlement law. His choice of escrow agent seriously compromised our ability to close the transaction in a fully legal manner.
• Delayed inspection – Inspections can cost $500+, and this one required an additional septic inspection. The buyers didn’t want to spend money on an inspection without having the transaction approved by the bank, for good reason. We knew that the roof needed repair. When bank approval arrived we promptly inspected the property to find that the roof was in worse shape than originally thought, not to mention a pesky rodent issue that needed attention. It would have been nice to evaluate these conditions earlier in the process, but that requires spending money on an inspection that may go nowhere.
• “As-is” really means “As-is” – Sellers in a short sale often have little or no money. In our case, they were facing bankruptcy. When our inspection brought up issues that needed fixing, there was no money available to contribute from the seller. The banks don’t technically own the property and will not pay for repairs in a short sale. The logical next step was to ask the 1st mortgage holder to reduce their payoff amount to account for the big issues. Our numerous attempts at negotiation were met with coldly with one sentence: “NO – short sales are as-is”. Maybe you will get lucky and the sellers have some money to help with repairs, but assume that the buyer will have to pick up the tab for repairs. We’ve actually had better luck negotiating repairs on bank-owned properties than on short sales.
• Tell your lender – Keep your lender informed on the details of the transaction. They need to approve it as well, and any unusual terms of the deal must surface early. We had to escalate our requests to an underwriting manager to get final buyoff on the buyers’ loan.
• Watch for extension fees – The whole process got bogged down and we needed a two week extension for the bank approvals. Like banks are apt to do, they added a “per-diem” fee for each day it was extended to cover their holding costs. (about $1500) The seller had no money, so that left three parties able to pay: the listing agent, the buyers’ agent and the buyers. We ended up splitting this last minute surprise between the three of us to get the darned thing closed.
• Big banks will do as they please – You are simply one file amongst hundreds on the desk of the bank’s negotiator. Sane and logical negotiation tactics that work in a regular sale will fall on deaf ears at these banks. If your transaction fits their guidelines, they will approve it. If it doesn’t fit their guidelines, they won’t. Their guidelines don’t always make sense, but they are not going to change them just for you. Remember, you are just another file to them.
• Why won’t they accept our offer? – You may get in a situation where your offer appears more advantageous to the lenders than going to foreclosure. In the case of the 2nd mortgage, they would be paid nothing if the property was foreclosed, right? Not entirely true. Some banks have their own mortgage insurance which pays them an amount in the case of foreclosure, so they may get something. They may also be able to retain a judgment against the borrower for what they are owed. You also need to remember that banks’ motivations for writing off losses change month-to-month and quarter-to-quarter. They may be more or less motivated, depending on how they want to report their financial results for any given time period.

So what do we recommend if you do choose to pursue a short sale?

1. Make sure it is the right house – Short sales are full of risks and hassle. It needs to be the right house for you to go all the way through the process. If you are at all unsure about the house, continue your house hunting while the short sale approval is taking place.
2. Work with actual short sale experts – When things get messy, it can pay to have an agent, lawyer and escrow officer versed in short sales at your side. If you need to seek legal counsel in the process, by all means spend the extra money.
3. Be honest about the condition of the home – You may end up with the home “as-is.” Be honest about the condition of the home upfront and you won’t be surprised months later with a surprise set of repairs.
4. Patience – If you don’t have the patience to see the transaction through to completion, don’t bother. There is no magic recipe to make the big banks move faster, and no amount of pestering seems to impact their process.

When you buy a home, one of the items you can negotiate with the seller is that you ask the seller to pay for all or a portion of your closing costs. Closing costs are the fees that you pay to buy a home, such as origination fees for your loan, recording fees or appraisal fees. Closing costs are NOT part of the purchase price and are separate from your down payment. Let’s take a look at a fictitious example.

In this example, the buyer is purchasing a home for $300,000. They plan to make a down payment of 20% ($60,000) and will take out a loan for 80% of the purchase price ($240,000). The buyer is also required to pay their closing costs, which in this simplified example come to $4,250. The total amount of cash that this buyer would provide to close the transaction is $64,250.

Now, let’s say that as part of our negotiations to purchase the property, the buyer requested that the seller pay for their closing costs. During the negotiation, buyers have to work off of estimated closing costs, so it is difficult to pin down the exact total. Let’s look at three examples of seller-paid closing costs for this transaction.

• Seller-paid closing costs = $2,000
• Buyer pays their remaining closing costs of $2,250, plus their down payment of $60,000.
• Seller-paid closing costs = $4,250
• Buyer pays zero closing costs and only has to bring $60,000 for their down payment.
• Seller-paid closing costs = $5,000
• Buyer pays zero closing costs and still has to bring $60,000 for their down payment. Lenders will NOT allow closing cost contributions to be contributed towards a buyer’s down payment.
• Seller only pays $4,250 towards closing costs, since there are no more closing costs to pay. Although the seller conceded an additional $750, they get to retain that amount.

The last example is the troubling one. If a buyer requests that the seller pays for more closing costs than they actually incur, the buyer will LOSE this money, even though the seller made that concession during the negotiation. Lenders will not allow this money to reduce the purchase price or down payment. There are two strategies to avoid this unfortunate circumstance for the buyer. First, try to be as accurate as possible when requesting closing costs to be paid by the seller. If you are unsure, err on the side of “not enough” and pay the remaining costs yourself, even if it is a few hundred dollars. Second, you may be able to use these additional seller contributions to “buy down” the interest rate on your loan. As a home buyer, you don’t want to lose out on a concession that your seller is willing to make. Spend time discussing your negotiation strategy with your real estate agent so that you don’t lose out on unused seller-paid closing costs.