The first of a three part series exploring an owner’s options when they decide they want to sell their real estate. Today’s featured property is part of a trend toward WTF listings in Quail Hill.

Irvine Home Address … 111 PAGEANTRY Irvine, CA 92603
Resale Home Price …… $1,449,000

{book1}

Hey look me over
Tell me do you like what you see?
Hey,I ain`t got no money
But honey I`m rich with personality
Hey,check it all out
Baby,I know what it`s all about
Before the night is through
You will see my point of view
Even if I have to scream and shout

Baby, I’m a Star — Prince

Every man’s home is their shining star. Some dress it up with elaborate pretense; others pare it down with sublime beauty, but every owner adores their star just the same.

Whenever you are parting with a superstar they should be yanked from your grasp by an aggressive bidder who recognizes the regal beauty of your magnificent gem….

Ooooh…

Channeling the fantasies of sellers everywhere….

Sellers almost universally believe their properties are more valuable than comparable properties if for no other reason than it is theirs, and they are entitled to a premium. You can imagine that pregnant moment for a listing agent when the seller is about to blurt out a price they want to offer… is it going to be reasonable or 40% over comps? Yikes!

Sell a Home Series

Today is the first of three parts where I examine the conditions, circumstances and options owners face when they want to sell their homes:

Sell a Home: For Sale By Owner

Sell a Home: Cash Listing Services

Sell a Home: Conventional Brokerage Listing

{book2}

What Do Sellers Want to Accomplish?

The answer sounds easy: sell their house, but there is more to it than that. The terms and conditions of the sale matter greatly, and when examining a seller’s deeper motivations, we see they want to accomplish three important things:

1. Sell their home and maximize their net gain
2. Get through the process with a minimum of effort and stress
3. Avoid legal and financial liability for problems with the transaction

When sellers ride off into the sunset cash-in-hand, they want to believe the transaction is complete and they got the most money with the least stress and effort. If they believe that, they are happy; if it is true, even better.

Sell their home and maximize their net gain

The net is what matters. When the seller gets his check from closing, he has no ties to the property, and the check is the sum of his remaining equity after all fees and costs have been paid, including the hefty realtor commission. Commissions are high enough that sellers are motivated to search for alternatives to eliminate the 6% fee coming out of the closing check.

In the end, agents must justify their fees to remain in business. Apparently, for all its flaws, this business model endures. Someone somewhere must be obtaining some benefit, so let’s see what those benefits are.

Get through the process with a minimum of effort and stress

Nobody wants to work or have any stress. If people could sit at the pool sipping Margaritas while someone sold their house and came back with a check, most people would chose to do that (have you been to a Lexus dealer?) To the degree sellers are willing to engage themselves in the process — work — they can save themselves money.

Many sellers have special expertise, they may have a real estate license, or they may just be brave and smart and know they can do it themselves. Sellers will find comfort (or stress) to the degree they have expertise in marketing and sales of real estate. If they have never done anything like it before, there is much to learn.

Avoid legal and financial liability for problems with the transaction

Nobody wants to have long-term financial liability. When a seller has that closing check in hand, they want assurance (or insurance) that the buyer cannot claw back at the money in that closing check later on.

Most people do not think about the liability involved because the transactions are usually handled through licensed brokers who have standardized forms they know how to fill out to ensure the transaction is proper. Brokers carry errors and omissions insurance to make sure an insurance company with deep pockets is there to step up if a serious problem occurred, and brokered transactions are generally financed transactions which will also have property liability and title insurance in case there are hidden claims on title (a big problem for trustee buyers). With the layers of liability protection in most transactions, sellers are secure. When they go FSBO, they need to figure out the insurances and liabilities on their own.

What prevents sellers from accomplishing their goals?

Sellers face four main obstacles achieving their objectives:

1. Finding a buyer who will pay the most money
2. Capturing the interest of motivated buyers who find the property
3. Conducting the negotiation in a way that maximizes revenue
4. Managing the documents necessary to properly complete the transaction

I will go over each of these goals as we explore an owner’s options. Real situations illustrate these obstacles best.

What are owner’s options for selling their property?

There are (3) main paths owners can take when they want to sell their properties:

1. For Sale By Owner (FSBO)
2. Cash Listing Service (MLS access)
3. Conventional Brokerage Listing

For Sale by Owner is much maligned by realtors for a simple reason; each FSBO is a commission lost. They see an FSBO as a failure; I see them as someone who used their skills and talents to their advantage.

When I worked for a homebuilder in Florida, I designed and general-contracted my own house. I suppose I should be hearing from the American Institute of Architects and the Building Industry Association for cutting them out of a transaction, but I doubt they care. When I built my house, I saved 10% or more because I used my industry training to my advantage. Why shouldn’t FSBOs?

Eliminating the brokerage commission is tempting, and many people explore that option (like you today). If they did not already know, FSBOs soon discover the range of tasks and responsibilities that befall them acting as their own agents.

The Six Challenges of FSBO

There are six major obstacles an owner must overcome to sell their own home:

1. Selling property is time consuming
2. Marketing is difficult
3. Negotiation is difficult
4. Escrow is difficult
5. Offers/buyers tend to be bottom fishers
6. Buyers are difficult to find

Any of these six challenges cause owners who consider FSBO to either (1) change their minds or (2) attempt FSBO and fail to sell their property. The latter outcome is a complete waste of time and energy — which many owners go through before they explore some level of agent assistance.

Selling property is costly and time consuming

What is the value of a seller’s time? There is a time requirement to complete the tasks necessary to sell a property. Some FSBOs think that all they have to do is put up a Craigslist ad and wait for competing offers over their asking price to be emailed to them within hours, probably not going to happen.

When sellers decide to work with an agent, sellers still must (1) keep the property clean and (2) staged to a reasonable degree and (3) be flexible with showings; however, the marketing, negotiation, and paperwork tasks are handled by the agent — at the agent’s expense. If a owner goes FSBO, all the tasks related to the sale must be performed by the owner — and paid for by the owner.

If the property is staged and professionally photographed, and possibly even maintained at the expense of the agent, it is an expected part of doing business, but when owners are faced with these same tasks (the ones that cost money), few FSBOs do what is necessary to present the property at all much less do it well.

Marketing is difficult

Whether a task is easy or difficult depends on the talent and experience of the individual, but in social environment, the difficulty of a task can be noted in the results it produces. Have you noticed FSBO presentations are uniformly bad? Some of the awful ones I have profiled are not outliers. Go to Redfin and look for the little pink houses and see for yourself. Marketing is a major challenge for most FSBOs.

Negotiation is difficult

Some people are skilled negotiators, and others consider it conflict to be avoided. This is an area where a good agent really can make a difference, but it is a challenging thing to get sellers to believe. Sellers all want to believe they are great negotiators who will obtain top dollar; unfortunately, most sellers are far too emotional about their own property, and they fail to close the deal because of it. Some get offended by a buyer’s comments about their questionable taste and refuse to negotiate — the list goes on. After a few deals fall apart, the emotions of fear creep in, and FSBOs often succumb to a lowball offer below price levels they rejected earlier.

Most sellers are not seasoned negotiators who handle these transactions routinely and are trained not to let their emotions get the better of them (many agents aren’t either). Part of the advantage of routine handling is access to and familiarity with standard forms. Agents have standard forms parties recognize that helps facilitate negotiation by calling attention to important deal points and simultaneously providing escrow instructions that make the transaction close quickly.

Escrow is difficult

Many FSBOs get a deal with a handshake, and they are shocked when it does not close. There are many pratfalls that prevent deals from closing, the most important of which are financing and inspection. There are a myriad of details and disclosures most FSBOs know little about. Without assistance in preparing the documents, even preparing escrow instructions will be difficult as key terms may be missing or contradictory.

Services are available to help sellers with the three difficulties listed above, but this assistance often comes at a price. Sellers who go FSBO do so because they want to make more money. Few recognize where there is a need to spend a few dollars efficiently, so they spend nothing at all, and they do not get the help available to them to close the deal.

Offers/buyers tend to be bottom fishers (and FSBOs are the bottom)

Because FSBOs rarely present themselves well, they actually become targets for bottom fishers. Professional flippers in particular are fond of buying from FSBOs. The flipper reasons the seller has 6% more they can drop the price and still close the deal (which using the FSBOs own logic, they do); therefore, FSBOs are perfect targets for lowball fishermen. A patient flipper can catch a frustrated FSBO with an offer just before they give up; they know the FSBO is more likely to take the deal in the hand rather than two in the 6%-off bush. Professional flippers and bottom fishers make a living off FSBO frustration among other opportunities they exploit.

Buyers are difficult to find

By far the biggest problem faced by FSBOs is the difficulty in finding buyers. If they are not on the MLS, nobody sees them. The odds are long of finding the buyer willing to pay the most money by marketing a non-MLS property on Craigslist or with a printed flier. This is the primary reason FSBOs fail.

Once FSBOs realize nobody willing to pay market value is finding their property, they explore ways to get onto the MLS.

Cash Listing Services

Tomorrow, I am going to explore the good and the bad of cash listing services and discount brokers.

FSBO is a good option

I may be overselling the bad case, but I want to be clear and
accurate about the perils facing sellers trying to sell on their own. There is money to be saved here, and if owners
have the expertise to sell a property and save the extra money, they
certainly should do so; I know I will when the time comes again, but I
suppose since I am a broker now, that doesn’t count as FSBO anymore.

{book3}

Today’s featured property was not effected by the bubble, and it has appreciated at 5.4% per years since 2004… WTF?

Irvine Home Address … 111 PAGEANTRY Irvine, CA 92603

Resale Home Price … $1,449,000

Income Requirement ……. $298,665
Downpayment Needed … $289,800
20% Down Conventional

Home Purchase Price … $1,064,500
Home Purchase Date …. 2/27/2004

Net Gain (Loss) ………. $297,560
Percent Change ………. 36.1%
Annual Appreciation … 5.4%

Mortgage Interest Rate ………. 4.96%
Monthly Mortgage Payment … $6,195
Monthly Cash Outlays ………… $8,130
Monthly Cost of Ownership … $5,900

Property Details for 111 PAGEANTRY Irvine, CA 92603

Beds 5

Baths 4 full 1 part baths
Size 3,700 sq ft
($392 / sq ft)
Lot Size 7,800 sq ft
Year Built 2004
Days on Market 5
Listing Updated 11/26/2009
MLS Number S597065
Property Type Single Family, Residential
Community Quail Hill
Tract Sien

This rare, CUSTOM Plan 1 has been ENLARGED to 5 bedrooms–THREE of which are HUGE bedroom SUITES–with one suite + retreat down–4.5 baths, an upgraded tech center, situated on a PREMIUM CORNER LOT w/unparalleled PRIVACY & peek-a-boo views on one of the highest streets in Sienna w/a direct access 2-car garage + long driveway. The chef’s kitchen has a center island breakfast bar + nook, stainless steel appliances with a six-burner gas cooktop, granite counters, full designer tile backsplash, under-cabinet & recessed lighting, double ovens, microwave, a built-in fridge & walk-in pantry. The great room has a fireplace w/brick surround, built-in media center & an added 6 ft. picture window. The opulent master has a built-in media center & sitting area. The ENORMOUS BACKYARD includes a built-in BBQ w/Viking grill, covered patio, flagstone hardscaping w/a raised outdoor seating area, a fountain, & children’s play area. Quail Hill offers award-winning schools & a multiplicity of amenities.

rare, CUSTOM Plan 1? Do those words put together seem incongruous to you? Get your rare, custom tract home here….

My data source shows a couple of HELOCs on this property, buy nothing else. It may be owned free-and-clear and the HELOCs are emergency access to equity funds (a good arrangement if you limit it to true emergencies). These owners have plenty of room to negotiate, if they really want to sell the house, the price will need to come down significantly.

Do houses double in value every 8 years? The rate of appreciation is volatile, but the stable rate of appreciation in Irvine is 4.4%, and it takes houses 16 years to double in price.

Irvine Home Address … 6232 SIERRA SIENA Rd Irvine, CA 92603
Resale Home Price …… $1,269,000

{book1}

Fly, robin fly
Fly, robin fly
Fly, robin fly
Up, up to the sky

Fly, Robin Fly — Silver Convention

California real estate prices take flight fueled by kool aid intoxication and a firmly held belief that trees really can grow to the sky. The reality is that prices cannot go up faster than incomes without (1) raising debt-to-income ratios and (2) lowering interest rates.

We inflated prices beyond the limits of people’s ability to service debt, so the Federal Reserve has lowered interest rates to compensate. They can’t hold rates down forever.

The discussions about appreciation always come back to the question, “How quickly should house prices appreciate?” Today we are going to explore that question plus a related one, “How long should it take for a house to double in value?” Once we answer the first question, the answer to the second question is applied mathematics.

How Fast to Appreciate

Home prices do not go up by magic. I discussed this at length in Ownership Cost: Income, Payments and House Prices:

“Wage inflation is the slow increase in aggregate wages over time in
a given area. Wage inflation is a driver of price inflation because
workers will use wage increases to bid up the cost of goods and
services they demand. in a housing market, wage growth pushes up prices
as follows:

Assume a worker is earning $100,000 and can borrow $400,000 to bid
on property in today’s market. In one year, if this worker gets a 3%
raise (not this year), he will be making $103,000, and if other terms
do not change, he will be able to borrow $412,000. If he has also
increased his savings, the amount he can bid on real estate has also
increased by 3%.

A property that might sell for $500,000 today can sell for $515,000 in one year and it is no more expensive in terms of its financial impact; debt-to-income, savings impact, time of amortization — the key
variables remain the same. This is “normal” home price appreciation.”

If this is the mechanism at work, then what is the rate of wage inflation, and why do prices in California go up faster than wage inflation?

Wage Inflation

Since 1975, wages have grown by 4.3% annually in Irvine. This is well above the national average of 3.3%. This explains much of the health of our local real estate market and the long-term growth in prices we have witnessed.

Wage inflation has primarily caused the long-term rate of home price appreciation in Irvine to stand at 4.4% — at least that is the rate from 1984-1998, the last period that spans two market bottoms (see below).

Irvine, CA, Projections from Historic Appreciation Rates, 1984-2026

What is your prognosis for long-term wage growth in Irvine? Will we continue to outpace the country by 1% per year indefinitely? Will outsourcing and offshoring cause our wage growth to be below its recent 4.4% rate of growth? Over the long term, wage growth equals home price appreciation.

Declining Interest Rates

One reason we have seen prices rise faster than the general level of inflation and the local level of wage growth is due to the long-term trend of declining interest rates over the last 25 years.

Declining Interest Rates, 1984-2006

Note that I am only looking at interest rates since they stabilized after the inflation fiasco of the 70s. I don’t need to add the drama of the huge interest rate spike of the early 80s to make the point.

Lower interest rates make for larger loans. Part of the 4.4% yearly appreciation rate in Irvine over the last 25 years is due to steadily decreasing interest rates.

Debt-to-Income Ratios

Another reason for price increases greater than wage growth is our ever-increasing debt-to-income ratio. Since the late 1970s, lenders have been testing the limit on the DTIs people can handle before they default. Each time lenders enable borrowers to cross the threshold of 32% DTI (based on market aggregates), the market will continue higher due to irrational exuberance and kool aid intoxication until the music stops.

Take a look at the chart below that graphs the aggregate debt-to-income ratio in Irvine based on the national contact interest rate, Irvine income data and Irvine median home price data. The shaded areas have been added to show some key thresholds.

When the government first engineered loan modifications, they tried to modify people to 38% DTIs — which was a big drop for many — but the number is just too high, and borrowers redefaulted at very high rates. The recent rounds of loan mods have been at much lower DTIs.

Each time the aggregate market DTI moves above 32% (1979, 1987, 2003) the market enters its manic rally phase when prices move higher when they should be moving lower (contrast with 1994). Thirty-two percent represents a Ponzi limit in residential lending. Each time lenders develop a loan program to push DTIs higher (interest-only loans, Option ARMs), they simply create a Ponzi Scheme that inevitably collapses. When the market DTIs get down below 32% into the green range, prices stabilize near 28% DTIs — at least when the FED isn’t buying mortgage debt and directly controlling interest rates.

Doubling Time

So back to the original question, “how long should it take for a home to double in price? In Irvine, a home should appreciate at 4.4% per year to match wage growth. At 4.4% growth, a home will double in price in 16 years.

If you buy a home during a period of debt-to-income payment affordability, and sell during a period of very low affordability (time the bubble), you can make significantly more than 4.4% — as today’s 11.5% attests; however, the opposite is also true.

If you buy during a period of very low affordability, you may be at or below water for a very long time. People who bought in 1988, 1989 and 1990 saw no significant appreciation for a decade. What will be the fate of those who bought from 2003-2009? I have profiled many of them….

At 3.3% it takes 22 years for prices to double, at 4.4% it’s 16 years, at 7.2% it’s 10 years.

Many have made the analogy about trees growing to the sky to illustrate the problem of very high or differential appreciation rates. For those of you that like charts and graphs, below I show what prices will be like in 20 years if we step back to 2000 prices as a base (like the chart above) and project forward to 2030.

It is human nature to project short term uptrends to infinity. Californians believe they are capable of producing unlimited appreciation working within limited incomes, limited borrowing and limited savings. Prices occasionally appreciate quickly, and lenders enable unlimited HELOC spending which taxes the limits of homedebtor avarice, pride, lust, envy and gluttony. Wishful thinking enabled by lender greed; the California housing cycle.

Irvine Home Address … 6232 SIERRA SIENA Rd Irvine, CA 92603

Resale Home Price … $1,269,000

Income Requirement ……. $233,563
Downpayment Needed … $253,800
20% Down Conventional

Home Purchase Price … $429,000
Home Purchase Date …. 4/10/2000

Net Gain (Loss) ………. $763,860
Percent Change ………. 195.8%
Annual Appreciation … 11.5%

Mortgage Interest Rate ………. 5.00%
Monthly Mortgage Payment … $5,450
Monthly Cash Outlays ………… $7,540
Monthly Cost of Ownership … $5,590

Property Details for 6232 SIERRA SIENA Rd Irvine, CA 92603

Beds 4
Baths 0 full 3 part baths
Size 2,550 sq ft
($498 / sq ft)
Lot Size 6,625 sq ft
Year Built 1972
Days on Market 6
Listing Updated 11/18/2009
MLS Number S596070
Property Type Single Family, Residential
Community Turtle Rock
Tract Bm

10+++One of the best ever to come on the market in Turtle Rock Broadmoors! Charming single level custom home completely remodeled with over 750 sq. ft. added in 2008. Looks like it is right out of a magazine! Excellent floorplan with HUGE state of the art kitchen designed by well known designer Lynn Pries. This dream kitchen opens to HUGE family room w/high ceilings….HUGE Bedrooms..4th bedroom currently used as an open office area that can easily be converted. Quality craftsmanship throughout featuring all new windows,french doors, gorgeous wood floors, raised ceilings, remote control skylights, wainscoting, 2 air conditioners, epoxy garage floor, etc. etc. Enjoy relaxing on the darling porch with a custom brick fireplace and white picket fence. Worth your wait to finally buy without building your own. Architectural plans included for future expansion if needed! Sought after neigborhood! Best Irvine Schools: University High and Bonita Canyon Elementary. No Mello Roos & Low assoc.

neigborhood?

This property was purchased on 4/10/2000 for $429,000. The owners used a $130,000 first mortgage and a $299,000 downpayment. They did increase their mortgage debt during the last nine years like everyone else did, but they only took out and spent about $300,000 — which was their original downpayment. They spent their initial equity, but the bubble has enriched them, and if they sell now before the high end collapses, they stand to make about $750,000.