While some aspects of the real estate market may be more difficult, lower home prices represent a golden opportunity for agents and consumers willing to venture into the market. However, the challenge still remains as to how to convince these apprehensive buyers — who see the price changes as both a blessing and a warning sign — that now is a perfect time to buy.
By Meghan Boyer
The current real estate market is generating uncertainty, skepticism and even fear among potential buyers and sellers who are concerned about market prices. With home prices in flux, buyers may avoid purchasing because they are waiting for prices to drop further or because they are concerned with the quality of reduced-price homes. Additionally, many sellers are in the difficult position of having to sell their homes for less than they paid for them. Lower prices, however, can be an opportunity for consumers willing to venture into the market. The challenge for real estate professionals is to allay client fears by explaining what is happening in the market, performing market research and finding the best prices available.
No one can predict the future, which is why agents need to focus on what is available to clients now, says Lori Wyatt, broker and co-owner of Dwell One Realty Inc. “It’s difficult to say what the market will be doing in a year, so you have to let clients know it is a great time to buy currently and prices probably won’t go much lower,” she says. In fact, the market opportunities available now are unlikely to reoccur in the near future.
“I believe this could prove to be the best opportunity in our lifetime to become a homeowner or buy that home that just a few years ago was out of financial reach,” says Mike Zapart, a dream home consultant at Fresh Horizon Realty. “Prices are down, interest rates are at historic lows and developers are doing whatever it takes to attract buyers.”
The Lowdown On Low Prices
Home prices in the real estate market are reacting to a number of challenges in the industry, agree professionals. Previous overzealous buying, bloated inventory, increased numbers of investor and non-owner occupied units, tightened lending guidelines and the troubled U.S. economy have created a “œperfect storm of challenges” in the market, says Zapart. Developers and sellers now “must compete with waves of foreclosures,” he says.
Foreclosures and short sales affect the market value of surrounding homes, notes Wyatt. If a home is worth $150,000 and a nearby home sold in a short sale for $130,000, even though the first property is worth $150,000, it is difficult to get the bank to appraise it for the full amount if a comparable home in the market sold for less, she says, describing the situation as a “spiral effect.”
The short sale home may be damaged or need extensive renovations, but financial institutions do not take such factors into consideration, and “everyone in the market is impacted by that lower sale,” says Wyatt. Prices are “artificially deflated,” agrees Richard Gammonley, CEO of the Gammonley Group. “If you are a buyer, you will look back and say, ‘Wow. We just bought at cost. It’s just insane,” he says, estimating that prices have decreased an average of 20 percent to 30 percent overall.
The price decreases, however, can vary by area. Wyatt has seen average price reduction of 10 percent in some Chicago neighborhoods, and decreases of 20 percent in others. Zapart has witnessed a decrease in price of 18 percent to 25 percent throughout Chicago and the surrounding suburbs. ”A home, like anything else, is only worth what someone else is willing to pay for it,” says Zapart. To determine resale pricing, Zapart reports that he does an intense market analysis by looking at comparables, market trends and velocity of transactions. Developers also have to consider the market when setting unit costs and determining the best times to lower prices.
It is time to drop a price “when your lender calls,” says Gammonley. “It’s a function of the lender and the borrower.” Developers have to do something to stimulate sales if they have not sold anything in six months, he adds. “It’s tough to compete when others are dropping prices,” says Gammonley.
Pricing For Buyers
Deflated home prices are an opportunity for many buyers, especially those purchasing their first homes. “The smart guys out there know this is artificial and they won’t see prices like this again,” says Gammonley. First-time home buyers have many positive incentives to make a purchase in this market, says Wyatt, noting most of her recent sales are first timers. “It’s an easier sell for first-time buyers with the $8,000 [government] credit and lower rates and prices, rather than someone taking a $30,000 hit on a home,” she says. Whether purchasing their first home or their second or third, buyers may be concerned that the lower home prices may mean lower product quality as well. Such fear is unfounded, says Gammonley. “You can’t use paper in the foundation,” he says. Developers are professionals that must adhere to building codes and regulations. “The structure and the building itself will still be there, but maybe you will get a lesser grade of hardwood or thinner granite,” says Gammonley. The minor amenities may change, but not the structural quality of a building. Though market prices have decreased overall, some buyers have been waiting before purchasing a home to see if prices drop further. “In the first quarter of 2009, as the market seemed to be in a free fall, buyers were paralyzed by this fear of buying today and watching prices continue to tumble,” says Zapart. Waiting too long, however, could cost buyers more as the marketand prices turn around. Zapart estimates the bottom of the residential housing market occurred in March, and Gammonley places it in May or June.
If the property price does change, it is important to manage buyer expectations. “We never guarantee that we are buying a home at the absolute bottom or that we have a crystal ball as to where pricing may go,” says Zapart. “What we do stress is that with all the information we had at the time, their home represented a tremendous value. “ Pricing For Sellers Pricing opportunities for buyers unfortunately may mean some sellers receive less for their homes than they would like. “Helping sellers come to terms with what their home is now worth is at times difficult,” says Zapart. Wyatt agrees: “There is no easy way to tell someone they will be writing a big fat check at the closing table,” she says. Some sellers may not understand (or want to admit) what their homes are worth in the current market. Wyatt recently worked with homeowners who wanted to get what they paid out of a property when they sold it and priced it accordingly. “They asked me to put it on a Web site where people could comment,” she says. “They got a lot of comments about how overpriced the property is and finally gave me a price reduction.” The property likely will sell now, but the owners will lose money at closing, Wyatt says. Properties that are not priced correctly “will languish on the market,” says Zapart. Some frustrated sellers will blame their listing agents, but “if they would have taken the advice of their listing agent, they may have sold their property months ago at a higher price than they can now receive,” he says. To help sellers understand the value of homes in today’s market, Zapart encourages them to visit listed homes in their area to get an idea of what is available and at what price.
It also is important to have candid conversations with sellers, says Wyatt. “If you are in a situation where you don’t have to sell, don’t sell,” she says. Some homeowners are in situations where they must sell their properties and they are willing to negotiate with buyers more than homeowners who do not have to sell. “I used to candy-coat things, but you just don’t get anywhere,” she says.
More For Agents
While uncertainty continues to be prevalent in the housing market, there is no doubt that opportunities exist for real estate professionals though they may have to work harder to seize them. “In previous lifetimes when the market was better, people were less concerned about where the market is and what they should be paying,” says Wyatt. Buyers now want agents to prove to them that they are not going to overpay for a property. “I am doing two to three times the work for the same deals I was doing two years ago,” she says. Though agents may be working harder, there are opportunities for reward in the difficult market with incentives ranging from higher commission rates to cash bonuses for agents who close sales. Some developers give agents higher commissions for bringing sellers to their properties, says Gammonley.”You want to give an agent incentive to get them in your building,” he says, noting that agent commissions range from 3 percent to 3.5 percent. If a client likes two properties equally and both have similar attributes but one is offering 3.5 percent commission, that is enticing to agents, Wyatt says. “On almost every one of my listing I am offering 3 percent cooperative commission. In every situation I say we should do this because it will give us an edge,” she says. Agents also may receive bonuses for sales. “We have offered bonuses up to $10,000 for a closed transaction,” says Zapart. “I have found cash is king. We have tried vacations, prices, you name it. In the end, the agents I have discussed this with desire cash,” he says. Despite the challenges in the market, Wyatt continues to feel hopeful that it is turning around, and in the meantime agents can still close deals. Though some aspects of the market may be more challenging, it is a great time for first-time buyers and those able to take advantage of the reduced prices. C.A.
Lori Wyatt Broker/Co-owner Dwell One Realty Inc. 312.656.9999 loriwyatt@dwellonerealty.com
Mike Zapart Dream Home Consultant Fresh Horizon Realty 224.715.8778 mikez@freshhorizonrealty.com
Richard Gammonley CEO Gammonley Group 708.352.4040