Let’s get the boring stuff out of the way.  By definition, and escrow officer is a neutral third party who has the responsibility to transfer the title of a home from seller to buyer once both parties have done everything they said they would in the purchase agreement.  The “escrow” is the time it takes to accomplish this…usually 30-60 days.

First, this means an officer cannot take sides.  They cannot favor the seller over the buyer, or visa versa.  As an example, they can answer every question you may have about what certain paperwork means, or how the time line is proceeding, etc., but they cannot give you any advice about what you should do if the answer could affect the other party to the escrow.  That is your agent’s job.

Secondly, no matter how late your escrow may be after it’s originally scheduled closing date, they cannot simply close an escrow and transfer the title “until everything is done that the buyer and seller agreed to do when they agreed to the purchase contract”.  Their responsibility is to make sure EVERYTHING is done, not just MOST of it.

The moral of this story is that yelling at your officer because the escrow is late in closing won’t do you any good…by law, they must make sure everything is complete.

Now…let’s talk about what an officer does, and more importantly, the TIMING of what an officer does.

Think of your officer as the hub of a wheel…a wheel connected by those pneumatic tubes like they have at a drive thru bank.  There are lots of tubes in this “escrow wheel”…an escrow instruction tube, a title tube, termite tube, home inspection tube, loan process tube, home warranty tube, perhaps a roof or septic certification tube, a tube for paying off bills that pop up (alimony, child care, tax liens, credit cards, court judgements, etc.), a tube for amendments, documents, grant deeds, and deeds of trust, and many more tubes depending on the type of escrow.  Bottom line here is you get the point….lots of tubes all pointing at your officer.

However, what is critical that you know, is that not all these tubes arrive at the officers desk at the same time.  In fact, most of these tubes are being handled by someone else, and then only arrive at the officer’s desk once they are completed by another party…and many times, this arrival is at the last minute.

As an example, the loan process can be a pain in the you-know-what, and no matter how good the lender is, it can take 2-3 weeks for the buyers new lender to approve the buyer for the loan.  During this time, your escrow office has no idea how the loan process is going, because they have not received anything their “tube” yet.  In fact, they wouldn’t expect too.  The officer knows the “new loan tube” comes towards the end of the escrow period, so they are not worried about it.  

Therefore, when you as a seller or a buyer, call your officer and ask how the loan is going and they tell you they have no idea, they are not stupid or unprofessional, or uncaring…they are simply doing their job, and in this case would refer you to the new lender, who will be able to answer your question.  Remember…they only know what is happening if they have received information in the appropriate “tube”.

However, as another example, the buyers deposit almost always arrives in its “tube” very early in the escrow process…so the officer would put a call into the real estate agent if it was missing for too long.

Some of the items in an escrow are ordered and completed by the agents involved.  This would include the termite report and any corrective work, a home inspection requested by the buyer, a roof or septic certification, or a home warranty policy to name a few.  These are typically handled by the agents involved, and when they are completed, they are “tubed” to the officer so the officer knows they are completed.

In the end, as the escrow nears completion, things can get a little hectic.  The “tubes” get very crowded, stuff is pouring into the officer daily or hourly, and it is the officers  job to keep it calm, sort it all out, deal with all the money, and then officially close the escrow.  Keep in mind if just one “tube’ fails to deliver what is needed on time, the entire wheel comes to a stop and cannot go any further until what is late arrives…and since some of the other “tubes” that are ready are time sensitive and expire soon, then everyone hopes the late arrival gets there before another “tube” expires.

I could go on for days about all the “stuff” that can happen in an escrow, but here is the bottom line:  A good escrow officer is worth their weight in gold.  They juggle tense sellers, even more tense buyers, crazy real estate agents, “tubes” spitting information and documents at them like machine gun bullets, and manage to stay calm while arranging all the details and minutia necessary to make sure the closing is accurate.

It is not an easy job, but they know what they are signing up for when they get in the business, so you don’t need to feel sorry for them…but if you understand all that they have on their plate, and know that a good officer is doing the same thing for approximately 20-30 other files at the same time, then perhaps it might help you understand what is happening in your next escrow.

We hope so…and good luck.

Don’t blame the appraisers totally…the rules and regs have changed so much since the 2007 meltdown, that they are handcuffed as to what they can do…or go ahead and blame them if you like, but the bottom line here is…As a seller, what can you do when your appraisal comes in low?

While every situation is different, there are a few generalities that may help if you find yourself in this position…and we will begin with your real estate contract.

If your contract was written with the appraisal contingency intact (meaning the buyer cannot purchase the home unless it appraises for at least the sales price), then here are your options:

1.  You drop your sales price to the new lower appraisal price.  This might be OK if the difference between the two values is minimal, but if it is a large difference, then this option is definitely no fun.  However, it might be better than losing the sale completely…your choice.

2.  The buyer agrees to pay the difference between the two prices in cash.  In this case, no fun for the buyer, but perhaps better than not having the home at all.  Sometimes the buyer would be willing but just doesn’t have the spare funds available, or sometimes the buyer simply will not pay over the appraisal price.  As we said, every transaction is different. 

*As a note, who gives in between options 1 and 2 is generally dependent upon who wants to make the sale more.  If the buyer HAS TO HAVE the home, then perhaps they will find the money.   However, if THE SELLER IS DESPERATE TO SELL, then maybe the seller comes down off the sale price.  Again, every situation has it’s own set of rules.

3.  The buyer and seller do a combination of the above two options.  Here, the buyers and sellers realize no one is happy with the result, and they meet somewhere in the middle…with the seller dropping the price some, and the buyer paying some extra in cash.

4.  The escrow falls out because none of the above options can be achieved.  This is ultimate worst case scenario, but such is real estate life sometimes.  However…SELLERS BEWARE…if your appraisal was for an FHA loan, then you are stuck with this value for 6 months…so be careful with how fast you dump this escrow and look for a new buyer.  Check with your Realtor, but if the majority of the homes in your area are selling with FHA financing, then if you won’t take the lower FHA appraisal price, then you are going to have to sell withconventional financing only…and that may eliminate the majority of the buyers in your area.  So…be careful here.  As Crosby, Stills & Nash once said…”Love the one you’re with”.

As an aside, there is a process for getting the appraisal reviewed with the hope that it will be increased, but the chances of this happening are right up there with a lotto win.  The VAST majority of the time, it is a total exercise in futility…sort of like arguing with a judge in court.  It might make you feel better, but in the end, you won’t get anywhere.

Now, if your purchase contract was written with the appraisal contingency removed, or “capped”, then your options are better.

If the appraisal contingency was removed, then no matter what the appraisal value is, the buyer has agreed to pay the balance in cash.

If the appraisal contingency is still in the contract, but has a ”cap” (ie: the buyer has agreed to pay a set amount above the appraisal value if the value indeed comes in low), then your sales price would be the appraisal value plus the cap.  As an example, if the sales price is $300,000, and the buyer has stated in their purchase contract something to the effect: “Buyer agrees to pay up to $10,000 over the appraisal price up to the contract price of $300,000″, then if the appraisal price comes in at $280,000, then the sales price would be $290,000 ($280,000 plus the $10,000 cap).  If the appraisal value came in at $295,000, the buyer would only have to pay $5,000, because that’s all they would need to do to remain with the $300,000 sales price.

Why would a buyer either remove or ”cap” the appraisal contingency?

Simple.  In many areas, the demand for homes is far greater than the supply, creating a huge competition for buyers…and if there are  many offers on a home, or the buyers are tired of getting beat out by another buyer for a home, then this is what a buyer may have to do in order to get a home in today’s super-heated market.   These buyers realize that value is simply what someone is willing to pay for home…and they are willing to pay the contract price, no matter what the lender’s appraisal says.

So there you have it.  Remember, every situation is different, and check with your Realtor if you find yourself wondering down this road…but hopefully this will help you understand your options if you find yourself dealing with a low appraisal.

Take care, and thanks, as always, for reading our blog.

We get asked that a lot in these days of dwindling and scarce listing inventory, and we decided to check the stats from our local Riverside area MLS…and here is what we have found.

REPOS…As of today, April 30, there are 33 bank owned properties for sale in our Riverside area, and for the entire month of April, there were also only 33 bank repo closings.  As a percent, the repos represent 9% of all that is for sale, and 11% of all that closed in April.

SHORT SALES…Again, as of today, there are 30 short sale properties for sale in our area, and for April, there were 78 short sale closings.  When analyzing the percentages, the homes for sale represent 9% of all that is available for sale, and the closings jump to 27% of all that closed escrow during April.

STANDARD SALES…Here is the bulk of your market, as there are currently 284 standard sale homes for sale as of today, and the closings for April were 180…which makes the percentages 82% of all that is for sale a standard seller, and 62% of all that closed in April was a standard seller.

So what does all this mean…besides the fact that “regular, standard” sellers are back in full force?

For the REPOS,  this part of the market has been sliding for months, and will only get smaller in the months to come.  Banks have been under enormous pressure from the Feds to work with sellers on short sales for quite some time, and it is finally catching up.  Therefore, there will be more short sales as opposed to repos because the banks are far more cooperative in this area than they were just 1 year ago.  Also, as home prices increase almost monthly, many home owners who were seriously under water 1 year ago now find themselves in much better shape, which means fewer repos down the road.

SHORT SALES are pretty much in the same boat.  They now only represent 9% of the listings for sale (same as the repos), and the reason they are up to 27% on the closings is because many of those April closings have been in escrow for a very long time, representing months of work.  Therefore, there is a lag between the short sales for sale now (the 9%) and high percentage of closings.  We would expect that if you ran these same stats about 90 days from now, the listing perentage and the closing percentage would be much closer together.  Again, the rising home prices are helping many sellers simply gain equity and become a standard seller…if not now, then in the near future.

Lastly, STANDARD SELLERS are back to stay in two very important ways.  First, those sellers who were under water but were willing to wait for the real estate market to return, now see some very bright light at the end of the tunnel, and are willing to wait until they get some equity back.  This is a wonderful part of the real estate market, and will also mean fewer and fewer of the short sales and bank repos.  The second part of the standard sellers are those who were never under water, but wanted to wait until they recovered some of their “lost” equity…people who put their lives on hold until the real estate market improved.  We are now seeing them come back, as they have been ready to move for a few years, but now feel they can do so without getting hammered on their home price.

To summarize, it is very clear that today’s market isn’t anything like our real estate market of just a few years ago.  Banks, either as repos or short sales, are no longer driving the bus.  Regular sellers are returning, things are “normalizing”, and when we all hoped a few years ago for a rebound to the real estate market, this is what a rebound looks like.  Enjoy it….it will be here for a while.

SO…today we will answer all of your questions you posed to us, along with a few others that our clients seem to ask us all the time.  Hope you enjoy…and while all the answers to the questions below should work for whatever county you live in, double check  for your area if you have a totally specific issue.

1.  How are California property taxes computed?  In it’s simplest form, your annual property tax will be 1-1.25% of the sales price of the home when you bought it.  The 1% is the base rate for all home purchases, and the .25% will cover any smaller fees pertinent to your area, like water district fees, street light fees, school district fees, etc.  As an example, if you paid $300,000 for your home, your annual tax bill base will be $3,000, and then with the add-ons for your area, it could rise to a maximum of $3,750.  Check with the County Tax Assessor in your area for the extras in your County.

2.  Can my property taxes rise every year?  Yes, by a maximum of 2% of the previous years annual amount.  Using our example above, if your annual tax bill was $3,500, then the most it could be the next year is 2% above that, or $3,570….and if the county continued this 2% increase the following year, then your property taxes would be $3,641 and so on.

3.  When are property taxes due?  Property taxes are paid twice per year in equal payments.  One installment is due February 1, but you have until April 10 before you are considered delinquent, and the other installment is due November 1, and you have until December 10 before being late.  What confuses most people is that the County will call the payment you make in December the “First Installment” and the payment you make in April the “Second Installment.”  What can we say…it’s the government!  As a note, the penalty for being late is 10% of the amount due, so get your payments in on time.

4.  If I sell my home, what happens to the taxes I have already paid…or have yet to pay?  When you close escrow on your home, all taxes will be prorated by the escrow company, and you will only pay for the days you owned the home.  As an example, if you closed escrow on May 1, and you had already made your tax payment in April, then escrow would have the buyer reimburse you the two months taxes (May and June) that you had already paid in April.  The same goes if you closed escrow on February 1, and had not paid your taxes yet.  Then, escrow would charge you as part of your closing costs one months property taxes from January 1 to January 30.  The bottom line here is that you will only pay for the time you own the home, and not any further.

5.  Can you explain what an impound account is and who has to have one?  Some people prefer to pay their taxes with their monthly payment instead of having to make the two larger payments due in April and December.  If the annual taxes on your home were $3,600, then that is the equivalent of $300 per month, and this amount would be added to your payment (actually, it would be a little more than the $300 so the lender has a surplus…a pad), and your lender would make the semi-annual tax payment for you.  The same goes for your homeowners insurance..they add the monthly amount of your annual insurance payment to your house payment and pay that as well.  When you purchase your home, if you have a down payment less than 20% of the purchase price, your new lender will require you to have an impound account…if you put down 20% or more, you have the option to have an impound account, or simply do it yourself.  

6.  Why does my lender give me a refund from my impound account some years, and then raise my payment a little in other years to get more money in the impound account?  First, understand that any lender doing an impound account for you is using your money to pay the property tax bills and the homeowners insurance.  In other words, they collect and then pay…not pay and collect.  So…when you first bought your home, the lender estimated the amount of money they would need to “seed” your impound account…to make sure they had enough of your money to pay the first tax bill due.  When you get a refund from your account, that means they over estimated that amount due up front when you closed escrow, or over estimated the amount they needed to collect in your monthly payment.  This is called a surplus, and they will give some of your money back to you.  If they have underestimated the amount of money they needed, then they will raise your payment to get them back to where they need to be.  They could also raise your payment to cover the 2% property tax increase we discussed in question 2 above, or to cover an increase in your homeowners insurance policy.  It can be a bit of a see-saw, but they are simply trying to maintain a pad, without it getting too large or too small.

7.  If I do not impound my property taxes, can I pay the entire annual amount with my ”first installment” payment in December?  While this may be an answer that has some income tax implications for you, the simple answer is yes…the County would be delighted to take the entire amount in December instead of getting half in December and half in April.  Trust us…any government entity is happy to have your money as soon as you want to give it to them!  This is your call, and as we said, you might want to check with your accountant on this.

8.  What is Mello-Roos?  When a builder typically builds a tract of homes, there is a massive amount of money they must put out before they ever are ready to sell the finished product.  As examples, sewers, grading, curbs and streets, street lights, electrical, etc.  Sometimes this makes it hard for developers to build a tract, because this could amount to millions of dollars that is spent years before they can ever get any money back from the sale of the home.  It’s a cash flow thing.   Mello-Roos was designed for a builder to borrow money for all this infra-structure, but have you, the buyer, pay it back on your property tax bill.  In theory, this allows a builder to build the home with less money up front and sell the finished home to you for less money.  Who knows if that is really the case, but that is the theory. 

9.  How do I know if the home I am buying has a Mello-Roos “loan” on it?  Easy…the seller needs to tell you, or get a copy of the tax bill.  It will show whether there is one or not.  On your tax bill, they are commonly called Community Facilities District, and it will have a reference number.  All you need to do is call the County and give them  this number, and they will tell you what it was for, and how long it has left to run.

10.  Does Mello-Roos last forever…like property taxes?  No.  Each Mello-Roos “loan” is for a different time period, but typically they are for anywhere from 10-20 years.  After that, the annual payment falls off, and whomever owns the home at that time will get a reduction in their annual tax bill.

So…that about does it for commonly asked property tax questions.  We hope this has helped you, and if there is something else about property taxes that you don’t find answered here, by all means let us know.  We really are here to help.

So…what you will find here will hopefully simplify the maze that is your Supplemental Tax Bill.

To begin…when you get this bill in the mail, DON’T BLOW IT OFF!  Do not assume it was paid in your closing escrow (it wasn’t), or assume that because you have your taxes impounded, your lender will pay it (they won’t).  You need to pay this additional tax.  It is yours, it is fair, and it must be paid.

Let’s start with property taxes and how they are computed.  To simplify…your property tax will be 1% of your sales price.  If you paid, for example, $300,000 for your home, then your annual tax bill will be $3,000.  There are a few local items that can be added on to your bill (it varies from area to area…some have none, some have more), but they will never be over 1/4% of your tax bill, so the maximum amount of your bill can be no higher than the original $3,000 plus $500, for a maximum total of $3,500 per year.  Also, please understand that this $3,500 can only increase by 2% per year maximum.

Next, understand that the County’s Tax Year is a fiscal year from July 1-June 30, and taxes are paid twice per year…but only the government would call the time frame from July 1-December 31 the “first half” taxes, and the time frame of January 1-June 30 the “second half”.  I swear, if government can make it confusing, they will.

OK…enough of the technical stuff…let’s explain your Supplemental Bill.

Basically put, a Supplemental Tax Bill is a one time bill that pays the county the difference between what the taxes were for the old seller, and what they are now for you as the new buyer.  This amount is prorated from the time you closed your escrow until the time the county figures out that you are the new owner, and can print out for you your new, up-to-date property tax bill.  This is a mouthfull, so let’s try an example.

Let’s say that the old sellers tax bill was $2,000 per year, and as in the example above, you purchased the home for $300,000 and now have a new tax bill of $3,000 per year…or $1,000 higher than the old seller.

When your escrow closed, the escrow company made sure that the seller paid the property taxes up to the close of escrow date, and that you the buyer, paid your share until the next property tax bill is due…but these escrow prorations are done at the seller’s OLD $2,000  amount ($5.47 per day), not your NEW $3,000 amount ($8.21 per day).  They have to do it this way because the $2,000 amount is the official tax amount until the County say otherwise…and it will take the county a while to catch up to your purchase and issue a new tax bill. 

SO…from the first day you move into your home with it’s $3,000 tax bill, you are behind because escrow only prorated your amount due at $5.47 per day, when it is actually $8.21 per day once the County catches up with you.  In essence, you will owe the County Tax Collector $2.74 per day from the day you closed escrow until the day they re-configure their records and issue a new tax bill reflecting your new annual amount of $3,000 per year. 

NOW HERE’S THE KICKER…depending on the month of the year you close your escrow, it could take the County up to 18 months to get their records straight…which means in our example above, you would owe 18 months (540 days) times that $2.74 daily rate…or around $1,475.  It could also be a shorter time frame as well…it simply depends on the month of your escrow closing.

REMEMBER…this not a penalty, but merely you catching-up from day 1 of your ownership of the home until the date the new tax records can reflect your new, $3,000 annual tax amount.

The bummer about a Supplemental Tax Bill is that almost all buyers have forgotten about it when it comes snarling at you in the mail…because at it’s fastest rate, it will take 9-10 months for you to get it.  Also, if you are having your taxes impounded (you pay them monthly in your payment, and then your lender pays them when due),  your lender is collecting that monthly money for the amount you will owe on your first tax bill due, not what you owed from the day you closed escrow until when the new bill is issued.  Therefore, DO NOT send your Supplemental Tax Bill to your existing lender…they will simply send it back to you unpaid.

In the end, we get that this can be horribly complicated, and we have tried to simplify it for you here.  In it’s most basic form, just understand that no one is taking any money from you that you don’t owe…it just takes them a long time to tell you that you owe it…

…AND REMEMBER, DON’T BLOW IT OFF WHEN YOU GET IT…because if you think the amount is high (and mostly unexpected because you forgot), the penalties only make it worse if you ignore it.

Take care, we hope this helps, and if it doesn’t, contact us…we will be happy to talk you through it.

However, we had one of our clients this past week who wanted to see the actual statistics on just what has happened to the inventory…so we thought we would share them with you all.  Sometimes, it’s easier to understand when the numbers are actually right in front of you.

So…below is a list of the active properties for sale in the Riverside area on the the 1st of each month, as reported in our local MLS data base….and yes, I know the column is crooked when this gets posted.   Trust me, it’s straight when I type it.  Computers…gotta love them.

2012                                                                    2013

January     1104                                               January     405

February   1108                                               February  387

March         950                                                 March        373

April            795                                                 April          326

May             670

June           583

July            524

August       461

September    439

October     443

November     429

December   411

Ok…crooked I assume, but there they are in all their glory.  These numbers easily show the rather steady decline in the amount of properties available for sale to the home buying public.   As we have said, the reasons for this are the far (way far) fewer bank foreclosures, the increase the number of short sales (and their resulting longer processing time), and the slow return to the selling market of “regular” sellers who have equity and are voluntarily selling for whatever reasons homeowners decide to sell.

What is interesting to note is that in just the 4 months of 2013, our inventory is down almost 20%…which is a HUGE drop considering the 405 number in January was already down a large amount from the year before.

As a note, when you consider the amount of homes that are selling in our Riverside area (273 last month in March), then at that pace, if no new homes were listed for sale in this month of April, then we would exhaust our available inventory in just 1.2 months.  This “1.2″ number represents what is called the “absorption rate”, and this current absorption rate is the lowest we have seen in almost 7 years. 

As a comparison, the absorption rate in March of 2011 was 3.7, and in March of 2012 it was 2.1…so 1.2 is a large decline…which is just another way of telling you that as long as inventory remains scarce, then buyers are simply going to have to “duke-it-out” when it comes to bidding on the best homes available. 

It stinks, and we as real estate professionals don’t like it either, but for the moment, it’s what we’ve got…so buckle up, strap on your helmet, and we’ll ride it out together.  Hope these numbers help you understand exactly what is happening out there.

Good luck…and thanks for reading.  We really appreciate your support.

This difference is called “interest in arrears”, and allow us to explain.

In it’s simplest terms, when you rent a property, you pay up front for the right to occupy the home for another month…when you buy a property, the bank cannot charge you interest on the money they lent you (essentially, your house payment), until after you have used the money.

So for a rental, you pay and then use…for a purchase, you use and then pay.

As an example, in a rental, your January 1 payment is for the month of January, and allows you to use (occupy) the home for another month…and then you do it again for February, etc. 

When you own a home, your January 1 payment is essentially for the month of December, because you used the banks money for December, and they can now charge you interest, which is calculated into your January 1 payment.  Remember…use and then pay…use and then pay.

So now let us break this down for you when you purchase a home, and then again when you sell the home.

When you purchase a home, let us say that you close escrow on the 15th of the month, and your payments will be due on the 1st of every month.  Here is what happens.  In all of your closing costs, one of them will be 15 days “prepaid interest”, which is the interest you would owe on the loan for the next 15 days.  This is the only time a lender can charge you interest ahead of time.  This 15 days of interest gets you to the 1st of the next month, and then the clock starts as described above for your payments. 

As an example, if you closed escrow on June 15, then there would be 15 days interest on your loan included in your closing costs.  This covers you to July 1.  Then when the clock started on July 1, your first house payment wouldn’t be due until August 1.  In essence, you would have 45 days from the close of escrow before you make your first house payment.

Pretty cool…but what happens when you sell your home?

Well, now you have to “catch-up”.  Take the example above, where now when you close on June 15, you are the seller, not the buyer.  In this case, you make your regular June 1st payment (remember, it is the opposite of rent, so your June 1 payment covers from May 1-May 30) and then you will be charged 15 days of interest by your lender at close of escrow…this 15 days covering from June 1 until the close date of June 15.

In the end, we understand that this can at first be a little confusing, so always try to remember the simple way we explained it above…When renting, you PAY AND THEN USE…when owning a home, YOU USE AND THEN PAY. 

This seems to help all our clients, and hopefully will work for you too.  Take care, and thanks for reading.

In any case, now that the media is bombarding homeowners with all this “new-found euphoria” about the rise in prices, some sellers are making the HUGE mistake in assuming that when it comes to rising prices and equity, one size fits all.  What we want to explain today is that while all sellers have every reason to feel good about what is happening in real estate these days, there needs to be some understanding and common sense applied when making generalizations. 

In simple terms, the rising tide of home appreciation is indeed lifting all boats (homes), BUT NOT AT THE SAME RATE…and this is critical for all homeowners to understand.

There are a lot of slices that make up the “price-rising pie” for anyone who owns a home, and each situation can be completely different from another.  However, as a general rule for any homeowner to understand, your individual rate of appreciation will be largely affected by the location and price range of your particular property.

Location is obvious.  Every town, be it Riverside or some place in Ohio, will have neighborhoods that are perceived to be better than others.  It could be distance to shopping or schools, or age of the home, or proximity to another city for commute purposes, or amenities in your home or neighborhood, or lot size, or size of the home, etc.  We could go on for days, but most homeowners understand what we are talking about.

However, when it comes to price range, some homeowners don’t understand that the further your home is above the median selling price, the less activity you will have, which means that potentially the less appreciation you will get…for now.

As an example, in 0ur Riverside area, if we put a home up for sale under around $375,000, and assuming the list price is justifiable, there will be more activity on that home than one priced at around $500,000…there are simply more buyers who can afford a payment on a $375,000 or less home than can afford the payment at $500,000.  Therefore, the appreciation rate on the lower priced home will be higher…there are more people fighting over the same home.    Appreciation (rising prices) will occur faster at the lower prices for an area, and slow a bit as the price range increases.

Now, if you are in a higher price range, don’t get weird here…your time is coming.  It’s just that in order for you to sell your home, you will need some of these $375,000 sellers (in our example) want to trade up to your $500,000 home…and those sellers moving up are coming, just not as fast as the lower price range buyers.

Think of it as rungs on a ladder.  You cannot get to the higher rungs without first using the lower rungs, and not all people want to keep climbing higher on the ladder.  Some are quite fine at a middle rung…some want to move up.  If you grasp this concept, then you will understand that when the media reports huge price increases across the board in real estate, they are mostly referring to the lower end price range, and not the higher range.  The higher range will generally be a little less than what is reported.

Naturally, “low and high” price ranges vary drastically from city to city, but it is always a relative equation.  The lower price range must heat up and then the higher price ranges will follow.

We hope this helps a little with your trying to figure out what is happening with your specific home, but if you want a more detailed picture, just call us.  We are glad to give you the data on your home  without any sales pressure…honest.

Take care, and as always, thanks for reading our Westcoe blog.

So…today, we need to add the following caveat to what is happening in our market.

As a buyer, you MUST come to grips that the appraisal price only sets the maximum loan amount your new lender will let you borrow…IT IS NOT AN INDICATION OF THE VALUE OF THE HOME YOU ARE TRYING TO PURCHASE.

Right now, appraisers are handcuffed by all the new rules and regulations they must comply with in order to issue an appraisal value.  We won’t bore you with them, but suffice it to say that even the most experienced and liberal appraisers simply cannot keep up with the massive tide of rising prices.  They are not allowed to give credit for an increasing price market, but must instead only use past closings as an indication of current value.

As an example, suppose your neighbor just closed escrow on his home (which for our example here is identical to yours) for $300,000.  Now, about 1 month later, you put your home up for sale at $305,000, and you get 6 offers (that is not unusual at all), with the final acceptance from one of the buyers at $310,000.  Great…congratulations.

However, when the buyers new lender orders an appraisal, the appraiser will look at your neighbors just closed indentical property, and in all probability, will give yours the same $300,000 appraised value.  It doesn’t matter that you had 6 offers, it doesn’t matter that your buyer will pay $310,000…they don’t care.  The appraisers guidelines dictate that they can give no weight to the amount of offers, but only to the most recent closed comparable sales…hence your value will be the same $300,000 your neighbor got.

So what happens?  In this market, your buyer will probably make up the difference in the appraisal price and the sales price with cash, and you will more than likely close at your $310,000 price…and that will now be the new comparable sale for the next seller down the street who wants to sell a month from now.  Our point here is that the appraisal value did not represent the true value of the home, but is used only as an indicator of what the bank will lend to the new buyer.

To complete our example above, if the buyer was putting 10% down on the $310,000 purchase price, then they had $31,000 cash, and were looking for a loan of 90%…which would be  $279,000.  However, with the appraised value only being $300,000, then the lender will only lend 90% of $300,000 (which would be $270,000), which means the buyer will now need $40,000 in cash instead of the $31,000 they planned on….bummer, but such is life in the real estate world these days.

The bottom line here is that while this is no fun for a buyer, there is absolutely nothing you can do about it, so you might as well accept that this is becoming the only way to buy a home in a real estate market that is this hot.  Once the market cools off, and the appraisers can catch-up to the values, then this will change…but let’s be very clear here…that cooling off is at least 2-3 years away.

Yes, you could get lucky and find a house where the appraised value is the same as the sales price, but you can’t count on that…especially if you are trying to purchase a home below approximately $400,000.  In this range, you are really competing with so many other buyers that one of them is going to have the extra cash to pay above the appraisal.  Sorry…we would love to tell all buyers that this was not the case, but we cannot.

So…hang tough, and we know it’s rough, but for now, our sales prices are truely determined by what a willing buyer and willing seller are able to agree upon…and the bank is simply along for the ride.

Take care, and as always, thanks for reading.

So…as a buyer, what do you need to know?  Well, let’s see if we can’t simplify some of this for you.

1.  The time it takes to get an answer on your offer…In a short sale, it can take anywhere from a few days to a few months, depending on where the seller is in the negotiation process with the existing lender…and if there are two different lenders, then the time frame just went up.  With a standard sale, you should be able to get an answer in a couple of days.  So…a short sale is far more uncertain, because you could be waiting 1-2 months and then find out that the bank will not accept your offer.

2.  Traditional house repair items…In a standard sale, if there are normal repairs that need to be made to the home, most of the time, the seller will get them done to satisfy either the home inspection report, or what is necessary to satisfy the appraisal items noted on the buyers appraisal.  In a short sale, the seller won’t pay for a thing because they are not getting any money at the close (sometimes they can get a few thousand from the bank to move, but that’s it)…so the buyer of a short sale can expect to have to pay for some work that traditionally would be done by the seller.  Also…BEWARE…if the house has major problems, and you (the buyer) will need a new loan to purchase your home (in other words, you are not an all cash buyer), then pass on getting involved with a home like this.  The appraisal required by your new lender will call out for all these major repairs to be done before the close of escrow, and since the seller won’t do them, who will??  Not you as the buyer…which means after all the waiting, your sale will fall out since the new lender won’t lend without the work being done, and no one has the money to do the work…a serious real estate Catch 22.

3.  Home Warranty plans, termite work, yard clean up, etc.  In a standard sale, since the seller has a vested interest in actually closing the escrow so he can get his money, most of the things noted here are done by the seller.  They generally provide a clear termite report, provide a home warranty policy, and will do whatever clean up is needed…either inside or out.  In a short sale, the seller could care less about what you need, and therefore all of the above is generally left to the buyer to get done.

4.  The sales price…Due to the above hassles on behalf of the buyer, in most instances, the short sale should be at a slightly lower price to compensate the buyer for all of the uncertainties and items not generally provided by the seller.  This doesn’t always happen, but many times it will.  Every situation is different, but there has to be some reason a buyer puts up with all this junk, right?

In the end, our suggestion is that it really doesn’t matter what type of property you purchase, only that you know what comes with each type.  Short sales are fine if you know what you are in for…we sell them all the time.  However, if you are a buyer that has a certain time frame in which you need to move, or want your home really sharp when you move in, or want all the items fixed by the seller before you close the escrow, then perhaps a short sale is not for you.

Again, all we want for you is to be informed…the rest is up to you.  Good luck.