The question about what happens when an appraisal comes in lower than contract price comes up often. Sellers do not have to sell the property to the buyer at a lower appraisal price. This article from Florida Realtors, written by Joel Maxson is Associate General Counsel for Florida Realtors, sums up this issue quite well:
“If a contract includes both a financing contingency and appraisal contingency, where does one end and the other begin? There’s substantial overlap in the two contingencies, but they have very different rules.”
What’s going on in real estate in covid-19 times? Real estate was deemed an essential activity in Florida, and real estate is still being bought and sold! Things have slowed down. Time will tell just how much because things that were in the pipeline prior to covid-19 progressed and most went to closing.
We did see significant numbers of sellers pull their homes off the market at the offset of the pandemic. However, there are still many people who have to move whether its for job transfers, divorce, moving to assisted living or decreasing real estate holdings. We entered this time with a very low housing inventory and there still continues to be more buyers than sellers. Thus far, we continue to see home prices rising.
The number of closings in March was similar to last year. However, in the past week closings for single-family homes are down 37% and for condominiums more than 50%. My sales personally are down 21% for the same period last year.
The real estate industry is adapting with new ways of doing business. This month I had my first closing using a remote (online) notary to execute the closing documents. Meetings are being held with Zoom videoconferencing and video home tours are increasing. Showings can still be conducted easily in vacant homes as well as owner occupied homes with precautions such as gloves and masks.
The data indicates that real estate will be the least affected and among the first market segments to rebound. Why? Unlike the last recession, this one is not caused by the real estate market. And since then, homeowners have been staying in their homes longer and have more equity in their homes. (See my prior Blogpost)
Want to Read more on the covid-19 real estate market –
Waiting for Price Cuts Due to the Pandemic? Keep Waiting
Fla. Home Showings Pick Up After Bottoming Out on April 7
by Michelle L. Anderson, MBA, January 29, 2020
The low housing inventory has been driving up home prices and creating a seller’s market. In December 2019, the inventory in Pinellas County dipped to a supply of 2.3 months – way short of a balanced market of 5.5 months. We are talking supply and demand here.
One reason for the low inventory is that homeowners are staying in their homes longer than they did previously. Reasons may include longer lifespans and changing lifestyles of the baby boomer generation, homeowners wanting to capitalize on a rising market or changes in consumer’s mentality following the past housing bust of 2007-2008. From 2001 – 2008, Americans held their homes for an average of only 6 years. According to an article in the Wall Street Journal*, “More homeowners staying put has helped cause housing inventory to dwindle to its lowest level in decades, which has also helped push up prices on homes for sale. Adjusted for population, the inventory of homes for sale is now near the lowest level in 37 years of record-keeping.”
The good news is that we may be seeing a shift. In 2018, the nationwide average was 13 years, which shifted down to 10 years in 2019*. In Florida, the rate is lower – 8 years. Florida homeowners likely hold homes for a shorter period because they are bought as 2nd homes, bought later in life, or are purchased by those who come from other states and later decide to return to their state of origin.
Conventional thought has been that a homeowner should hold their home on average at least 5 years to break even. This number fluctuates with the market. Currently in St. Pete, the average break-even point is at 3 years. From this perspective, I think it bodes well for the financial health of Americans that they are staying in their homes longer. If in homeowner doesn’t hold their home up to the break-even point, they may have actually been better off renting. To calculate break-even points by area, down-payment and home price, this online calculator can be used.
Housing Inventory Turnover
Another way to analyze housing inventory trends is to calculate the inventory turnover rate. This rate can be useful when comparing neighborhoods within an area and what the expectation for new homes coming on the market may be. It is a way to determine if a neighborhood’s residents tend to stay put.
The neighborhood turnover rate is the percentage of homes in a neighborhood that sell each year. The rate is calculated by dividing the total number of homes in a neighborhood by the total number of homes that sold in that year. I calculated the turnover rates for a few St. Pete Neighborhoods:
Central Oak Park – 12% (of 1,727 homes on North Streets)
Historic Kenwood – 8.3% (of 814 homes)
Historic Old Northeast – 8.3% (of 534 homes)
Broadwater – 21% (of 378 homes)
Old Southeast – 16% – of 247 homes
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*National Association of Realtors, How Long Do Homeowners Stay in Their Homes, Jan. 8, 2020
*Wall Street Journal, “People Are Staying in Their Homes Longer—a Big Reason for Slower Sales,” Nov. 3, 2019
When I am working with a buyer and an offer is being made, the buyer will ask, “What should I offer?” To respond to this question, my first step is to provide the buyer with comparable properties that have sold recently and collectively we form an opinion on what the home is worth. If the home needs some repairs or updating, that is taken into account on the price.
The next question from the buyer may be, “How much lower can we offer?” Let’s say for example that the home is priced at $250,000 and after reviewing the comparable sales it is determined that the home is in fact worth $250,00. The next consideration should be how long the home has been on the market (keeping in mind that we are in a seller’s market). If the home just went on the market, the chances are much lower that the seller will accept a lower offer. In addition, there is a chance that another buyer may submit an offer. In our current market, homes that are priced right sell quickly!
Say the house has been on the market for 60 days. How low of an offer is advised? In low-medium priced homes, anything that is 90% below asking price is considered a low-ball offer. Some may think it doesn’t hurt to try, but in fact it can. I have personally experienced sellers rejecting low-ball offers and declining to even counter. If the buyer truly is only willing to pay the lower price, than by all means make the offer with the awareness that it may be strongly rejected. In my role, whether I represent the buyer or the seller, I try to maintain amicable negotiations throughout the process. A low-ball offer, even if it leads to successful negotiations can start things off on the wrong foot.
I did an analysis of all the home sales in a specific area of St. Pete (Central Oak Park Neighborhood) for the last 60 days (mid-March – May). The average sale price for these homes was 96.5% of the asking price. That tells us that sellers are getting very close to asking price and they are not accepting low offers! The except is those homes that are overpriced and not selling at all!
So what would I advise offering on that $250,000 house that has been on the market 2 days? If the buyer says they really want the house, then offer $250,000. If it has been on the market 2 weeks and the list agent says that no other offers are currently expected, then offer $240-245,000. If it has been on the market for 60 days, then an offer of $230,000 would not be unjustified in my opinion.
Buyers typically want to buy low and sellers want to sell high. Working with both buyers and sellers balances my perspective. In some cases I have been selling a client’s home while at the same time procuring a new one. I ponder their expectations for selling their home above market value and not accommodating their buyer’s repair requests while at the same time submitting a low offer on their new home and expecting the seller to make repairs!
How to value a pool comes up a lot in my work with buyers and sellers. Putting in a new pool averages about $80,000 but appraisers do not value pools based on their cost. Typically, if a buyer wants a home with a pool, it is more economical to buy a home that already has a pool rather than add one. Since we are in Florida, one might think that pool homes would be in abundance. However, finding homes with pools is not as easy as you might think in St. Pete.
Right now, there are 766 single family homes for sale in St. Pete priced under $500,000. 84 of these homes have an in-ground pool. Furthermore, only 33 of these homes are not in a flood zone. I had two different appraisers gave me their guide for making home valuation adjustments. For a home priced at $250,000, one appraiser gives $8,000 – $15,000. If the pool has a screened enclosure, they add another $5,000. Another appraiser’s guide stipulates a $12,000 – $25,000 adjustment and also another $5,000 for a screened enclosure.
Working with buyers and sellers, I have had a sense that pools are reflecting a higher value to buyers in the St. Pete market than just a $15,000 adjustment, so I took a closer look at the statistics.
In the last 6 months (October 2018 – March 2019), 111 single-family homes with pools that aren’t in a flood zone sold under $500,000.
Data calculated on all homes recently sold under $500,000 with an in-ground pool:
|Average sale price||Average sale price/SF|
|With pools – not in a flood zone||$299,000||$186.13|
|With pools – in a flood zone||$329,000||$198.13|
|Without pools – not in a flood zone||$204,798||$166.01|
|Without pool – in a flood zone||$248,500||$178.oo|
Pools homes definitely sell for more. Based on my analysis, in-ground pools add $50,000 – $80,000 to a home’s value.
This leads me to another point – homes in St. Pete that ARE in a flood zone sell for more. Obviously, waterfront property commands a higher price. However, many of the homes in a flood zone aren’t actually waterfront. Some of the nicer neighborhoods in St. Pete are close to the water. In those neighborhoods, you also find homes that were built later than their counterparts built in the 20s, 40s & 50s and these homes have larger square footage, garages and POOLS! The central parts of St. Pete tend to be older and were not built with pools.
Title insurance “insures” the title of the property. Title insurance makes the title marketable and insures the homeowner against claims to the title. Examples of title issues are claims from prior heirs, instances of bad foreclosures and prior liens such as construction or tax liens.
For example, a friend of mine bought a bank-owned house in Maryland that had been foreclosed on. After she did extensive renovations on the house, it was discovered that the prior foreclosure had been improper. The former owner was not provided with the due process that is required to foreclose a home. This occurred during the housing recession when large numbers of homes were being foreclosed on and there were many instances of process and paperwork errors. Luckily, my friend had title insurance that protected her, and the problem was resolved (and not at her expense).
Most buyers will not buy a house without title being insured. And, the vast majority of lenders require that both the buyer and seller have title insurance. The title policy purchased by the buyer protects the buyer and the lender while the seller’s policy protects the seller.
So for sellers – a seller’s policy is required unless you have a cash buyer, and even cash buyers often want title insurance. There’s nothing that makes it mandatory for the seller to pay for the owner’s policy, however, it is customary and requiring the buyer to pay it would be a disincentive to the buyer. After all, they are already paying for their own policy. I personally have not encountered a seller asking for a buyer to pay for both policies.
Other closing fees fall under recording & transfer taxes and doc stamps and are government fees. The title company that handles the closing and conducts all the liens searches, obtains title policy and holds the escrow funds also has a closing fee of a few hundred dollars. A seller’s title policy is typically $5.75 per every $100,000 of the sale price plus $5.00 per every $1,000. Recording and transfer fees to the seller are typically .70 cents per every thousand dollars. When working with sellers, I provide an estimated closing statement that details these fees.
Many home buyers begin the home buying process with a mindset of wanting to find their “dream house.” They come with a long list of criteria that is often unattainable or is unattainable in their budget. The best approach is to prioritize needs and wants and determine what things aren’t necessary and what things can be done to the home after it becomes yours. Sometimes these priorities change during the process of looking at homes.
For example, a buyer may start with a list like: 3 bed, 2 bath, 2-car garage with a pool and an updated kitchen. Perhaps they find a house that meets all their requirements except it doesn’t have a pool, but it does have room to add one. Or, a buyer wants to be in a certain neighborhood and their list is similar – 3 bed, 2 bath with a garage, but they want a craftsman bungalow that doesn’t need a lot of work. Craftsman bungalows that don’t need a lot of work are not in abundance. Instead, they opt for one without a garage, that has a parking pad off the alley.
When I initially started my home search for my current home in St. Pete, I did not want to undertake extensive renovations. However, after looking for a while and not finding the right house, I opted to buy a home at a lower price point that needed an entire kitchen renovation. By doing it myself, I got to design the kitchen that I wanted, and that included the Spanish tiles that I wanted!
To read more on this subject, view this article Real estate Q&A: Looking for your dream house? Here’s help
Back to Econ 101 and Supply & Demand –
Most of the nation is currently in a seller’s market and has been for some time. While it may seem obvious this means that the market favors home sellers over buyers, what does it really mean?
A seller’s market means that there are more buyers than sellers active in the market. The inventory of homes is low. This creates a competitive marketplace where homes sell at a faster rate and often get multiple offers on the same home. This is also contributing to the increase in home prices (think supply and demand). In a seller’s market, buyers have less bargaining power. Currently, a buyer may feel they don’t have an abundance of homes to chose from and in some cases are waiting for new homes to come on the market.
To gauge just how strong of a seller’s market we are in and what direction the market is heading, look at the month’s supply of inventory. The industry standard for a balanced market is 5.5 months of inventory. The statistics below are provided by Florida Realtors (Association).
Pinellas County (St. Petersburg/ Clearwater) – Median Sale Price & home inventory
The above chart shows that the median sale price for single family homes in Pinellas County have gone up 8.7% in the past year and the inventory has gone down 14.8%. The median sale price of condominiums and townhomes went up an ever greater amount of 14.4% and the inventory was down a whopping 17.6% over the prior year.
To read more on a seller’s market, read my Blog “The Best Time of Year to List a House for Sale,” which explains the absorption rate and it’s correlation to seller’s and buyer’s markets.