Homebuyer’s Beware of that New Car Smell

The salesman hands you the keys and says “take it for a spin”. You are now sitting behind the wheel of that new car you’ve been dreaming about. You melt into the seat, the radio plays softly and the smell, oh that new car smell!

Buying a new car and a new house have many emotional similarities with one exception, there is no Lemon Law for that new house you just spent several hundred thousand dollars acquiring. It’s yours with all of the amenities and all of the problems. “Problems, what problems” you say?

Buyer beware the house of cards

Look past the new kitchen and shining hardwood floors

The lure of a new house with its freshly painted grass, manicured flower beds and new granite kitchen is hard to resist, but underneath all of that spit-shine and polish, are you Buying a House of Cards?

Real estate flips, buyers and investors who buy a property, fix, remodel and resell have become commonplace in the last few years. Thanks to the highs, then lows of the real estate market, distressed properties for sale, short sales and bank foreclosures have offered increased opportunities for wealth. These properties are usually very easy to spot.

5 Common Characteristics of the Flip

  1. A Shiny New Appearance – new paint, new windows, new yard, refinished hardwood floors, new kitchen, remodeled baths.
  2. They are Vacant – the previous owner probably lost the home due to the inability to pay the mortgage
  3. Few Disclosures – don’t look for a lot of comments and in depth explanations. It’s hard to define the history of that 80 year old house when you have owned it for 3 months.
  4. Short Sale or Trustee Sale -the current owner purchased the property through a Short Sale or Trustee Sale. It’s much easier to add value and make money if you buy below market price.
  5. Entity Ownership -lastly, the current owner maybe a corporation or some form of Business entity.

Okay, we have identified the characteristics of the real estate flip, but so what?

At this point, most home buyer’s would walk in and immediately succumb to the new car smell. But what is under the hood, what kind of gas mileage are we talking here?

Systems of the House

It’s very easy to address the things you see and have an immediate attraction. But what about the things you may not be so familiar with. What about the systems of the house, more specifically the electrical, plumbing, foundation, HVAC (heating, ventilation and air conditioning) and the roof.

These are the not so glamorous parts of the house. These are items its harder to place a value on because as a home buyer you tend to place a value on the things you see. You can see the value in a new kitchen, but can you see the same value in new copper plumbing?

Chances are you cannot and this is why that shiny new home may have some underlying issues you need to carefully investigate. Real estate investors / flippers are in it solely for one reason…profit. The more money they put into the house, the less that goes into their pocket.

New roofs are expensive as are new copper pipes. There is a certain amount of money someone will invest to turn it around and make money, so you put it into the amenities that add the most value.

The best way to protect yourself is to hire a very good and thorough home inspector. But don’t just stop with a general inspection, check the fireplace and the sewer lines. These require specialized inspections and may prove very costly later on if you are facing repairs.

Of particular note, if some parts or areas of the house, don’t exhibit the same quality as the remodeled interior, that may be a tip off. The owner may have reached their budget and decided to leave those repairs up to the new homeowner.

If that’s you, just make sure you have investigated the condition of the house as best you can. Lemons are for ice tea!

Short Sale Terms to Ease

As the number of homes entering foreclosure in Pasadena continues to increase, homeowners are looking for some relief in the process known as a short sale. A short sale occurs when the proceeds of the house are not enough to pay off the existing mortgage balance. This process allows the homeowner to sell the property as usual, however it is sold with a contingency that the final approval must come form the bank.

Pasadena foreclosure filings are approaching 700 units

Pasadena foreclosure filings are approaching 700 units

Ask most real estate agents their opinion on short sales and you’re likely to receive a negative response. The reason …… a short sale usually consumes a lot of time and resources and there is no guarantee that the bank will approve the sale. The other reason that you are not likely to hear….the agent does not have the training or information involved on how to successfully complete a short sale.

Short sales can be encumbered by two loans on the property, usually a first and second and many times these are with two different lenders. If the loans are with the same company, there is an excellent chance that department within the same bank do not talk to each other. The negotiation and follow up skills of the real estate professional are critical.

Short Sale Submission Packet

Lenders are being inundated with reams of paper and short sale proposals, however there is certain documentation they require and they usually require it correct the first time or you may find your proposal back at the bottom of an ever growing pile.

Before an offer is received, lenders typically want to see 2 years of tax returns, two recent months of bank statements, recent pay stubs, a personal financial worksheet, a hardship letter explaining why you cannot make your house payment and the listing agreement. If your self employed they will want a profit & loss statement.

Once an offer is received, they require a HUD – 1, showing all of the costs as well as the final proceeds, the buyers pre-approval letter and proof of funds. I usually go a bit further and provide an explanation showing how many properties in the area are in foreclosure including a market analysis and also the complete listing detail of the property so that they can see how long it has been on the market and the price it was offered, as well as price reductions that were taken.

New Timelines Announced

As mentioned above, the time involved in a short sale can be extreme. However, it looks like all of that is about to change. new short sale guidelines announced by the Treasury Department are going to dramatically reduce the amount of time involved in the bank approval process. Previously decision times could come anywhere from 60 days to 6 months, however under the new guidelines banks will be required to inform the parties involved in 10 days. This is major legislation. I believe it will have much more impact than any of the previously designed assistance geared towards helping homeowners in distress and the less than favorable results that have been achieved.

Will California Extend The New Home Tax Credit?

Will California Lawmakers Extend the Home Buyer Tax Credit on New Construction?

Will California Lawmakers Extend the Home Buyer Tax Credit on New Construction?

The State of California may be laying off school teachers, furloughing state employees and attempting to come up with some creative accounting to address the budget deficit, but one thing appears to be sacrosanct. Real estate, or more specifically home buyers who are purchasing new construction may receive “most favored” status as the program that was limited in rebate funds seeks an extension. The program originally budgeted at $100 million appears to be out of money. The proposal is to extend it until March 2010.

Checking the California Franchise Tax Board website the $100 million now appears to be allocated. They will continue to accept additional applications to account for duplicates and invalid applications, but once they receive their number of 12,000 applications, the number will be disconnected. They currently have approximately 11,000 applications.

Is the Incentive Producing Incremental Sales?

I think the question on everyone’s mind would be “What is the State getting for its $10,000?” With signs beginning to point to a turnaround in the real estate market, is it necessary to extend the tax credit? The credit only applies to homes/condominiums that have not previously been lived in. In Pasadena, that limits the program to primarily some of the new condo projects in town. With interest rates at very competitive rates, is there a need for additional incentives? New home builders have also been more creative in selling their inventory as buyers have found themselves with increased negotiating power.

Why the Tax Credits?

I would surmise the intent of the tax credits is twofold (1) to move some of the existing housing inventory and (2) to increase the tax base and ultimately the contributions to the general fund. Why incentify someone who is buying a previously owned home, where the taxes are already being paid and quite possibly the change of ownership will reduce the property taxes since the new value is less than what the current owner paid.

My guess is this may be a hard bill to pass. It’s going to be tough to justify based on the current political climate and economic conditions.

Pasadena’s Million Dollar Homes For Sale

30% Of Pasadena Homes for Sale are >$1MM

30% Of Pasadena Homes for Sale are >$1MM

There has been much talk lately about the Pasadena real estate market and where home prices are headed. An article appeared this week in the Pasadena Star News in which I supplied many of the statistics that were used in the feature story. I have also chronicled the increasing activity we see in the under $500,000 price arena, including how many buyers are running into frustration as they are up against multiple offers. Despite the fact that you can get an FHA loan with a 3.5% down payment just doesn’t guarantee that you will find someone willing to accept your offer.

But now lets flip the coin and look into Pasadena’s other housing market. This is a market you don’t hear too much about. It just doesn’t make news if a recent home sold at $3,250,000, down $500,000 from two years ago. As of today the available inventory of homes for sale over $1 million is about 100. Looking back at the Pasadena real estate market report for May, we saw 324 single family homes available for sale; therefore 30% of the current available inventory in Pasadena is over $1 Million. Now consider the homes sold in May, and only 10% of them were over $1 million.


A recent discussion with two mortgage lenders assured me that loans are available provided you have the necessary down payment, which in this case is 20%. What we are really experiencing is a tale of two housing markets. Going back and looking at the beginning of the financial crisis in early to mid 2007, we saw just the opposite. The market for low end homes all but shut down and it seemed the only homes that were selling, were the more expensive high end.

Since all of the focus has been on kick starting the housing market and getting many of the foreclosed homes sold and off the banks financial statements, don’t look for any incentives on luxury homes. This market has to be self sustaining because the mood in Washington, oh well I think you know the mood in Washington.

Below are all of the homes currently listed for sale in Pasadena over $1 million. It’s best if you create your very own VIP account and set up a custom search. You can also subscribe to buying and selling newsletters and have new properties sent to you via email once they arrive on the market.

Buying Real Estate Below Market Value

On a recent article, I explained my thoughts on making a low ball offer and why I felt this was a bad strategy to pursue. There is a low offer and then there is a ridiculously low offer. I explained that you might even afford yourself the opportunity to pay more for your property. In this article we will change hats, and look at how to increase your chances of having your offer accepted, and still be able to save money.

Increasing Your Chances

If your intent is to buy a property with an FHA Loan, a 3.5% deposit and a 60 day escrow, let’s just say you have about as much of a chance of having your offer accepted as the likelihood of the no money down loan returning to the real estate market. Never say never, but you will see why this is not likely to work.

Real Estate Concessions

Convince the Seller w/small Concessions

There is enough material here to fill a book, but in an attempt at brevity some things were left out of the previous article. At an attempt of impartiality, this created a good opportunity to issue the sequel and correct many of the mistakes that homebuyers make. With a little more in depth analysis, here are a few tips if you aspire to be a deal maker, and achieve your purpose of buying a house below market value.

Insult Then Compliment

Mom, if you reading this the next couple of paragraphs are for written just to draw an analogy.

When I was in middle school I was sent to the vice principals office for a certain acts of behavior that were Less that acceptable. Punishment was in the form of a couple of pops on my rear end. The paddle looked like a giant stick you would use to stir paint. It was about 2 feet long and a half inch thick. The stinging was severe and if done today, the provider would find himself severely disciplined if not terminated and brought up on charges. That was a different time. Ah yes, the good old days.

After the punishment, the vice principal would shake my hand and imply “No hard feelings, right?” So what could this possibly have to do with buying real property?

The lesson here is after you make an offer well below the asking price and market value, you need to shake the seller’s hand and offer something in return. You need to find some issue, some point of agreement upon which you can begin to find common ground. Your low offer will immediately convey negative thoughts to the seller and that you are indeed the bad guy. Therefore you must begin to reverse that perception and show the seller that you intend to and can work with them to a mutually satisfying end.

Everything is on the Table Except Price &Terms

In a previous career, we used to joke that everything was negotiable with the exception of price and terms. Is there anything else other than price or terms? If you base your entire offer on price, then you should be flexible with your terms. Here are some suggestions for increasing the odds your offer will be accepted:

  1. Money – the old adage that cash is king is true. Cash indicates intent and that you mean business. If your offer is not accepted, it shows you have ability to move on. Cash is definite and you have also removed the loan contingency and eliminated another barrier to closing the deal.
  2. Escrow Period – is a quick escrow needed to avoid foreclosure or is 60 days in order to allow the seller the opportunity to find a new place to live?
  3. Deposit Money– this one can be ill advised, so you will have to use your own judgment or seek professional advice, but releasing some of the deposit may allow the seller the intermediate funds they need and increase their motivation to leave.
  4. Tenancy – again an iffy situation, but allowing a seller to remain in the property 30 – 45 days after escrow closes could seal the deal.

People do have motivations other than money. The key is finding out what they are and how to effectively utilize them into your offer and allow you to shake hands with the seller.

Why the Low Ball Offer is Bad Real Estate Strategy

The process of buying real property can elicit different responses. Or maybe I should rephrase that to read the planning phase of buying real estate. During the beginning most people are very positive and eager to get started. They’ve looked at a few houses, read the newspaper ads and looked online. They have a good idea of

The Initial Offer Sets the Tone?

The Initial Offer Sets the Tone?

the market. They are familiar with pricing and what they can afford. It’s now time to take all of the information you have gleaned and put it to paper. Then something goes awry. A real estate hemorrhage occurs, creating a mental bypass. Maybe we’ve watched too many shows on HGTV and The Learning Channel, or seen more real estate infomercials on late night TV. All of a sudden people begin to make negotiating errors that may cost them the property.

No Counter Offer Required

Prior to making an offer some initial research should to be done. The amount the seller paid for the property is typically available along with the current loans. A comparative market analysis should be performed to give a potential buyer an idea of what the property is worth. Also another good indicator is how many days the property’s been for sale. Now once you have gathered this information, the seller’s motivation may ultimately impact what you end up paying.

How Low to Go

What makes a lowball offer? I believe an offer 20% below the market value definitely qualifies. No matter the seller’s motivation, most homeowner’s are not likely to sell a house 20% below the listing price. Of course there are exceptions to every rule, (homeowner in foreclosure and property is not listed for sale) but a home that is marketed with a real estate agent is highly unlikely to sell at such a steep discount.

We will use for this example a property listed at $500,000 and has been on the market for 60 days. You make the first offer at $380,000.

The Path to Failureville

Here are several reasons this strategy will lead to failure:

  1. Personality – real estate, no matter what everyone likes to refer to as a business decision is fraught with decision based emotions. Lots of emotions. A low ball offer can be insulting to the seller. For a contract to take place, a meeting of the minds has to exist. You have just driven away from the meeting. You have stated the property is worth less than the market price.
  2. Credible – if an agreement is going to take place, the other side has to want what you have. At the very least they have to agree to continue talking. A low offer accomplishes none of these.
  3. Negotiating – by opening the offer process with an extremely low offer you have backed yourself into a corner, giving yourself an “all or nothing”, “take it or leave it” situation. Negotiation concessions are best given in very small increments. If you are just throwing out an arbitrary offer to see what the seller will accept, be prepared to pay more. Instead of agreeing to $5000 more in price you are now agreeing to as much as 10 times that amount. Sellers usually have an idea what they will be willing to accept. An offer of $380,000 is easily dismissed by the seller; however an offer of $450,000 would make the seller give it some serious thought. As a buyer, does your counter offer go from $440K to $450K or does it go form $425K to $450. By using the second scenario, you have informed the seller your concessions will be very small.
  4. Competing Offers – your low ball offer has just given increased credibility to the offer the seller refused last week which was higher but still less than the seller expected.
  5. Card Laid, a Card Played – a seller will seriously question your intentions with a ridiculous offer below market price, you may not be given the opportunity of a counter offer. Now you have two options, (1) either walk away from a property you had hoped to purchase or (2) open negotiations with yourself. That’s right; the next more serious offer will be coming from you.

In the past when we have represented the seller and receive an embarrassingly low offer, we usually notify the buyer’s agent to forward over the comparables they used. We let them know that once we receive them we will be happy to review our pricing. At this point we commonly hear, “it’s just an initial offer and to please counter us back”.

Haven’t you just indicated your offer was not really serious, which is what the seller probably thought anyway?