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Westcoe Realtors, Riverside California…No matter where you get your real estate information…TV, radio, Internet, etc…some pundit is either telling you it is a buyers market and you can hack and slash prices because sellers are desperate, OR someone is telling you the exact opposite…that the bank repos are generating multiple offers and bidding wars.  The question is…who is right?  Well, the answer is that both positions are correct, but to understand why, we need to analyze some statistical information from our local MLS.

The first thing everyone needs to know is that in our greater Riverside area, we have basically two real estate markets:  the one over approximately $350,000 and the one under $350,000…and they are two completely different animals.  This is why you can get conflicting reports from the local real estate pundits, because they are trying to describe two separate markets as one, and that is not accurate.  We have two markets, and they each have two separate rules by which buyers and sellers must play.

Lets take the high side first…and please understand that this $350,000 dividing line is not set in stone.  It is a guesstimate that is a fairly accurate place at which to divide this market. 

SO…what is happening in this “high” range?  Well, sales are happening, but in a totally different way than in it’s low range cousin.  There are fewer repos in this range, which by definition means you have more individual sellers than banks.  The sales and escrow process is more professional, business is conducted at a normal pace and volume, and the pace of sales is slower and more orderly.  In short, this is the market most buyers and sellers are used too…not the one I will describe in a minute when we get to the lower price range.

In this upper range, there are more sellers than buyers, and as a result, simple supply and demand will dictate that the buyer has the upper hand when it comes to the purchasing process.  The negotiation process favors the buyer (as a general rule) since there are fewer buyers than there are homes for sale….and a statistical analysis of some MLS data bears this out.

For the month of August, 2008, in this higher price range, there were 84 closed escrows, at which 37% closed at or above the list price.  Conversely, that means that 63% of the homes that closed were at a negotiated price somewhere below the original list price.  For the month of September, there were 123 closings in this price range, with 29% closing at or above the list price.  Again, that means that 71% had a negotiated closing price at less than the list price.

Now let us compare the above with what is happening in the price range that is below the $350,000 list price.

This market is truly the exact opposite of what is described above.  This price level is dominated by bank repos, and is chaotic, hectic, a mess, and extremely frustrating for any buyer attempting to purchase a home.  Since the banks represent some un-Godly high percentage of homes for sale, eventually a buyer will be dealing with the bank on a prospective purchase…and that is generally a nightmare.  All people working on the bank side of the equation are massively overworked and under enormous pressure. The result is that there is generally horrible communication and a very erratic purchase and escrow process.

However, this is the market where “all the action” is taking place….and that makes sense because there are more people who can purchase for under $350,000 than above it.  This becomes apparent when you see that almost every purchase of a bank repo elicits a minimum of 5 offers to purchase.  The banks know they have numerous buyers to sift through, and as a result of this demand for their bank repo, the banks do the best they can to create a bidding war between all these buyers…and why not?  From the banks perspective, they are losing hundreds of thousands of dollars on their properties, so who can blame them for trying to get as  much as they can for the sale of their repo?  The bottom line is a very frenzied market of people who are all trying to purchase the same type of property.

So what are the statistics?   For the month of August, 2008, there were 377 closings, of which 64% of those properties closed at or above the list price.  For September, there were 367 closings, 72% of which also closed at or above the list price.  As you can see, this is an enormous difference from the numbers quoted above.  This lower price range real estate market has very little to do with the higher range market.  As mentioned at the outset of today’s blog, we have two distinctly different markets in the Riverside area.

So now what?  Well, for-warned is for-armed.  If you are a buyer in either of these two markets, you now have concrete information that will help you with your purchasing decisions.  In the upper market, you control the action…in the lower market, strap on your helmet because you are going to get hit a few times until you can get your home. In either case, hang in there…the values you are getting today will be worth it.

Westcoe Realtors, Riverside California…For those of you who may have missed out on the Superman comics as a child, there was an alternative place called “Bizzarro World” that essentially mimicked Superman, except everything was basically backwards.  The Bizzarro Superman meant well but generally goofed things up, and always made a mess of our world (as well as an interesting story line) when a time warp allowed him to visit.  Good intentions were often overshadowed by the disasters created when the Bizzarro Superman tried to “help” the real Superman.

Any of this sound familiar with our current financial world?  Welcome to the Bizzarro World of finance.

All politics and political parties aside, as well as any feelings you may have about whether 700 billion dollars is appropriate to bail out the financial institutions who created this mess (OK, perhaps a small amount of sarcasm there), the question of the day is…just what does all this mean to real estate right here at the street level in good old Riverside, California?

Well, as best as we can tell, the answer is…..not much….which one of my banker friends tells me is precisely the point.  While I will spare you the philosophical arguments, the net result is that at our every-day retail level for housing financing, nothing much has changed.  Financing is still available, and the only caveats to getting it is that you need to have some sort of down payment (anywhere from 3.5% on up), and the ability to demonstrate that you can actually make your payments on time.  Not too much to ask, really.

As for foreclosures, they still drive our housing bus at the moment, and it will take some time to see if the government bail out of the financing industry has any effect on the number of repossessions already here, and in the pipeline.  My guess is that it will take some time to see any results in this area, but what do I know…I still think 700 billion is a lot of money.  Essentially, for now, it appears that all real estate business is proceeding along as normal…assuming there is any definition at all of the term “normal.”

In the end, do not despair…at least with regards to housing and the availability of funds at our local level.  Yes, Congress still needs to pass this aforementioned 700 billion number and give ultimate power to the Treasury Department, and everyone knows if it can be messed up, Congress is certainly capable of doing so…but let us all hope the “experts” know what they are doing.  In the meantime, all is well with the local markets, and we hope it stays that way.

Westcoe Realtors, Riverside California…There is a nifty little paragraph in the standard  Residential Purchase Agreement (paragraph 16 for those who prefer the numerical reference) labeled LIQUIDATED DAMAGES.  It is not a long winded explanation as some other references in a standard contract, but  it does affect who gets the money on deposit in case the escrow fails to close, and like the saying goes, dynamite comes in small packages…so beware to both the buyer and seller.  We thought a detailed discussion here might help those who are concerned, confused, or both regarding this important part of your real estate contract.

First…some background.  Prior to the advent of this ”liquidated damages” portion of the contract, when an escrow failed to close, there was always a dispute as to whom was at fault…and more importantly, who was to get the money on deposit.  No matter the real reason or culprit for the escrow fall-out, both parties generally retreated to their prospective camps and dug in for the eventual battle between good and evil.  The seller would insist they were entitled to the money for whatever reason, and the buyers would become equally entrenched in their belief that the money should revert to them.  In the end, the money languished in escrow until either an agreement could be reached, or the matter wound up in court (see blog of 5/27…What Happens to the Deposit Money When Escrow Fails to Close).  To avoid all this “interpretation-of-the-law” stuff, the Liquidated Damages clause was invented and added to all standard real estate contracts…BUT IT MUST BE INITIALLED BY BOTH THE BUYER AND SELLER TO BE VALID.  You have a choice on whether it is an agreed upon part of your contract.

In generalized terms, what this clause states is that since damages cannot be foretold at the beginning of the escrow period, both parties agree to use the amount of the deposit as the actual damages to be given to the seller…thereby avoiding any interpretation at a later date.  Limitations are placed at no more than 3% of the sales price (any excess money is to be returned to the buyer), and the property must be a single family dwelling of 1-4 units.  The intent here was to establish the “worst case scenario” up front, and then if the property failed to close due to the buyers default, then everyone knew what the damages would be.  Sounds fair and reasonable…and at times, it is.

So what is the problem?  Well, like so many contractual issues, sometimes we solve one problem and create the possibility for a few others.  Let’s look below at some of the issues here from the standpoint of both the buyer and the seller.

BUYERS PROSPECTIVE

In essence, what this paragraph now does is completely limit your damages should you decide to bail out of the contract after your 17 day inspection period has expired…even if you cancel at the last minute.  The seller is agreeing to not sue you, but to accept the deposit money instead.  Clean, simple, and neat.  Depending on the size of your deposit, you can get complete relief from any continuing legal issues the seller may have with your failure to complete the contract for as little as one or two thousand dollars.

In essence, this paragraph was designed to make you a bit more reticent to cancel a contract by imposing a penalty on you if you bailed, but in reality, it gives you a total way out of the transaction without risking a lot of money.  We realize that you don’t want to lose any of your deposit money, but read below in the “sellers” section to see why this can be a large benefit to a buyer.

SELLER’S PROSPECTIVE

Obtaining the buyer’s deposit may, on the surface, seem like a good thing..but understand fully what you are agreeing to do.  The intent of this clause was to protect sellers from the buyers arbitrary decision on day 44 of a 45 day escrow to simply decide to walk away and say “I’m sorry.”  The originators of this part of the contract rightly felt that was  not fair to a seller to just get “dumped-on” so late in an escrow, so the Liquidated Damages clause was designed to get the seller some money if the buyer simply breached the contract and walked away.  However, beware.

In the above example, let us assume that the buyer has $2,000 on deposit, and on day 44 they bail out for whatever reason.  You have now just won the right to the $2,000 deposit if all parties have initialled this clause in your contract.  But what if this $2,000 is merely a drop in the bucket for what your actual damages are?  What if you and your spouse have quit your jobs, hired a moving truck, have already packed (since you are closing escrow tomorrow), put deposits down on your new home, sent the kids ahead, etc.  Sound far fetched?  Not really.  Is the $2,000 even remotely going to cover the costs you have incurred…and will continue to incur while you resell the home?  Of course not, but you have agreed ahead of time that it will, so you are stuck.  You have waived your right to sue the buyer…and while no one is litigation happy, sometimes the threat of litigation gets people back on track.  But you do not have that here…you have a buyer who can literally walk away and leave you with a mess for a mere $2,000.  Doesn’t sound fair, does it?

So what should buyers and sellers do?

In the theoretical world, it would be nice if everyone was fair about situations that arise in a real estate transaction, but we are not that naive.  If you are a seller, the solution is to refuse to initial the Liquidated Damages clause unless the buyer has a large enough deposit that it will hurt if they walk away…and benefit you should they do so.  You are limited to 3% of your sales price, SO IF YOU SIGN THE LIQUIDATED DAMAGES CLAUSE, MAKE SURE YOU ARE GETTING ENOUGH MONEY TO COMPENSATE YOU FOR THE POTENTIAL LOSSES THAT COULD OCCUR IN THE WORST CASE.  Also, by making the deposit large enough to hurt the buyer if they walked away, then perhaps you can get them to rethink their decision to “walk away”, and save the transaction…which is the best thing that could happen anyway.

 In the end, while we are advocates for our clients, no matter whether buyer or seller, the best real estate transactions are fair to both parties.  Remember…pigs get fat, hogs get slaughtered!  The buyers deposit should be large enough to signal that they are serious about purchasing the property, since the seller will have the home off the market and make plans to move based upon the buyers promise to purchase.  If the buyer fails to close for a legitimate reason…well, that happens.  But if the buyer has removed all contingencies, and then fails to close, there should be a financial repercussion because the seller will no doubt incur some potential large costs to go back to square one.

We hope this real estate situation never happens to you, but if it does, at least now you are aware of all the ramifications of deciding up front on what happens to the deposit.