Offers in a Buyer's and Seller's Market

You want your offer to be good enough to attract the seller's attention, but not so high that you overpay for the property. What's the magic number?

Different markets require different strategies. In a buyer's market, you often have the luxury of offering below the list price. You and the seller can then negotiate until you reach a mutually acceptable price. A seller's market is a different story. If you're in a multiple offer competition with other buyers, you may not have a chance to negotiate with the sellers. In this situation, your first price may have to be your very best offer.

Regardless of the market conditions, you need to understand local market value to feel comfortable with your offer price. The best way to learn market value is to look at a lot of listings of the kind of home you hope to buy. These might be homes you see at Sunday open houses, or listings that you see with your real estate agent.

Let your agent know the addresses of any listing you see that might work for you. Ask the agent to let you know the sale prices of properties that are comparable to the one you are interested in. You can refer to this data when you are ready to make an offer.

House hunting tip: It's useful to look at the relationship between the list price and the selling price of listings you've seen. For example, if homes are selling, on average, for 97 percent of the list price, you might use this percentage as a gauge. If you think a property is well priced, you could offer 4-5 percent below the asking price and plan to negotiate a price that's approximately 3 percent below the list price. Your agent can provide you with additional comparable sales information for sold listings that you didn't see.

What do you do when there aren't any guidelines? In a hot seller's market, properties often sell for considerably more than the list price. A seller here in Gilroy recently listed his home for $799,000. He received 12 offers and the home sold for $872,000. A Morgan Hill home seller recently received 6 offers on a home listed for $759,000. The property sold for $810,000. It was hard to predict in advance how high either of these properties would sell.

In both of the above examples, the winning buyers has enough cash in the form of deposit and down payment to make up the difference between the appraised value and the final accepted price. Over list price offers require the finesse that only an experienced real estate agent in this kind of market can offer.

The closing: There's an element of guesswork involved in any offer to purchase real estate. It helps to work with a trustworthy agent who knows local market value and who can advise you how much to offer.

LTV = Loan To Value ratio

This is one acronym you had better understand.

One of the factors lenders consider before they approve a mortgage is the loan-to-value ratio (LTV). The LTV is the loan amount expressed as a percent of either the purchase price or the appraised value of the property. So, if you make a 20 percent cash down payment on a property you're buying, the LTV is 80 percent. Or, if you're buying a property for $250,000 and the mortgage amount is $200,000, the LTV is 80 percent (the $200,000 loan amount divided by the $250,000 purchase price).

A mortgage with a high LTV is one where the mortgage amount is high relative to the borrower's cash down payment or to the equity in the property. For example, if the LTV is 95 percent, the mortgage amount is equal to 95 percent of the purchase price and the buyer's cash down payment is equal to only 5 percent of the price. From a lender's perspective, a high LTV mortgage is more risky than one where the LTV is low. When borrowers make a large cash down payment, or have a large equity in a property, they are less likely to default on the mortgage. Borrowers with less equity in a property have less to lose which puts lenders more at risk.

Lenders often require borrowers of high LTV loans to pay mortgage insurance to protect the lender from a buyer default. This increases the cost of the mortgage. High LTV loans can also carry a higher interest rate and they are often more difficult to qualify for. Some lenders require borrowers to have a larger monthly income to qualify for a 95 percent LTV mortgage than is required of borrowers with a 20 percent cash down payment, even though the loan amount is the same.

Sellers also have reason to be concerned about the buyer's LTV. If the buyer's LTV is high and the appraised value of the home comes in lower than the purchase price, the transaction is put in jeopardy. Part of the mortgage approval process involves an appraiser's report of the current market value of the property. If the appraised value comes in lower than the purchase price, the lender will base the LTV on the lower of the two amounts.

Let's say you're putting 5 percent down on a $250,000 property. You need a mortgage for $237,500. The appraisal comes in at $245,000 and the lender is only willing to lend 95 percent of the appraised value, or $232,750 - $4,750 less than you need to close. You may have to withdraw from the transaction unless you have an additional $4,750 cash to apply towards the purchase.

High LTV buyers are at a disadvantage when they are competing with other buyers. If given the choice, most sellers would prefer to accept an offer from a buyer with a large cash down payment because there's less risk of the deal falling apart. To be more competitive, you may need to look at homes in a lower price range or accumulate more cash, or both.

Selecting an Agent to Represent You

Maybe you've been looking at open houses for months, but you haven't hooked up with an agent yet because you're not sure you're really going to follow through and buy a home.

Then one Sunday afternoon you find a home that changes your motivational level -- it has everything you'd hoped to find in a home. But, you're not alone. The open house is buzzing with activity. You're sure the listing will sell fast.

You call a friend who's a real estate agent and ask him to represent you. There's just one hitch. He's a real estate broker from another part of the state. Although it's perfectly legal for your friend to represent you, is it a good idea?

Recently, a couple tried to buy a home in Oakland. Their brother, a broker in Southern California, represented them in a multiple offer competition. They didn't get the property; their offer wasn't competitive with the other five offers.

The out-of-area agent couldn't counsel his clients about what price to offer because he knew nothing about local property values. The agent also didn't know local custom regarding closing costs.

The City of Oakland imposes a transfer tax of 1.5 percent of the purchase price. Normally, this is split 50-50 between the buyer and seller. The out-of-area agent's offer asked the seller to pay the entire tax. This amounted to thousands of dollars.

In Southern California, sellers usually pay for the title insurance and escrow fees. The Southern California agent wrote his clients' offer according to local custom in his area. In Oakland, however, the buyers usually pay these fees, which also amount to thousands of dollars.

Sellers are obviously looking for the best price. But, aside from price, there's another issue with an offer that's written contrary to local custom. It causes the sellers and their agent to wonder what else the out-of-area doesn't know about local real estate that might adversely effect the transaction.

Also, buyers can gain a competitive edge by having their agent present their offer in person to the listing agent and/or the sellers. An out-of-area agent usually faxes the offer to the listing office.

You might wonder why a buyer would be so foolish as to allow an out-of-area agent represent him or her -- particularly if it diminishes the chances of successfully negotiating a purchase. Sometimes, buyers do it because their agent friend promises to kick back part of the commission to them.

It's natural to want to save money. But, it becomes foolhardy if it jeopardizes the purchase, or results in a shoddy real estate deal. If your agent isn't local, you must hope that the seller and the seller's agent are especially diligent.

Who is going to look out for your best interests? Who'll tell you about local soils conditions, slide areas or toxic waste dumps? State laws differ on how much sellers are required to disclose. Regardless of what the law requires, to be protected, you'll need to do research to make sure you discover all the conditions that might effect your decision to buy the home.

Good agents have a wealth of information about local conditions and property values. They also know the best inspectors, title and escrow officers, loan brokers, insurance agents, and contractors who can give estimates. An out-of-area agent isn't likely to have this type of information.

Rather than work with an out-of-area agent, have that agent find out who would be the best local agent for you, and refer you to him or her.

Questions Buyers Should Find Answers To (Before Buying!)

Take this checklist along when you visit a home and talk to the listing agent. Make note of your own observations, watch for defects, and ask about anything you may not see on your own.

• What is the visible condition of the property? Poor exterior condition may spell problems inside.
• Does the house require major repairs or replacements? Major repairs, such as a new roof, can be costly. Consider these costs if you decide to make an offer.
• How old are the mechanical systems? Consider the cost of replacing older systems if you decide to make an offer.
• Has the house been well maintained? Ask if the sellers have kept any maintenance records.
• Where is the house located on the block? Corner lots can be spacious, but exposed to more traffic and noise. Interior lots can be quieter but too close to neighbors.
• How is the house sited on the lot? Be sure the area around the house is graded properly to provide good drainage.
• Are there noteworthy architectural features? Front porches, gables or other details add value to the property.
• Are there noteworthy landscaping features? Established trees, shrubbery and perennials add value to the property.
• What is the condition of the houses on either side and across the street? If neighboring properties are too run-down, they may affect your resale value.
• What is the surrounding neighborhood like? Look for evidence of a sense of identity, and pride of ownership in the other homes.
• How close is it to shopping and schools? Nearby services can also add value.
• Are there community amenities nearby? Parks or recreation centers can add value to the property.
• How long has the house been on the market? A long time on the market may indicate problems with the house or neighborhood that you need to know.
• Why does the seller want to sell? If there's a problem with the house or the neighborhood, assess the situation carefully.

Homeowner's Insurance Issues

Today, getting preapproved for a loan may not be enough to prepare you to be a bona fide buyer. You also need to know that you're insurable.

Years ago, lining up homeowner's insurance was one of the last things you did before closing a sale. Now, buyers are finding that it's wise to make it one of their first priorities.

Homeowner's insurance is required to close any home purchase where a new mortgage is involved. A mortgage lender won't give you a loan unless you have hazard insurance on the property with the lender named as an additionally insured. If you can't get insurance, you can't have the loan.

Very few purchase contracts presently include insurance contingencies that make the purchase contingent on the buyer's ability to obtain acceptable homeowner's insurance. But, that situation could change, given current conditions in the insurance industry.

Homeowner's insurance carriers have recently been hit with skyrocketing costs due to an increased number of mold and water-related damage claims. In an effort to control costs, carriers have become hyper-diligent about who they will insure, and what properties they will insure.

For years, insurers have scrutinized applicants to make sure they were a good financial risk-checking credit reports and scores. Now, they also look at your claims record to see if you're a good insurance risk.

HOUSE HUNTING TIP: Insurance carriers are also checking out the property to make sure its claim record is clean before they'll agree to write a policy. This means that you could have a squeaky-clean record, but you could be denied insurance if a claim or two has been filed on the property you're attempting to buy within the last 5 years.

Most insurers participate in a claims-sharing database, the Comprehensive Loss Underwriting Exchange (CLUE). CLUE reports detail every claim made on a property during the last 5 years. A homeowner can obtain a copy of the Clue report on his home online at www.choicetrust.com for less than $15. A buyer cannot directly access the Clue report on a property unless the seller provides a copy. However, an insurance agent who has access to Clue can, and will, check the claims record.

Insurers are also tightening up with already insured homeowners. Long-time insured customers may not be renewed if they have submitted a claim in the last year. To make matters worse, what you think is a casual inquiry, the insurer may interpret as a claim. A woman who had been with an insurer for over 10 years, called to ask if damage caused by a leaky roof would be covered by her policy. The insurer said that it would. The insured never made a formal claim. She replaced the roof and repaired the damage herself. The insurer dropped her at the next renewal date. Her benign inquiry qualified as an unpaid claim.

If you call your insurer for general information, be sure to begin the conversation by saying: "This is hypothetical."Before you go house hunting, talk to an insurance agent to see if you're insurable. First-time buyers should consider taking out a renter's insurance policy. Insurers will often write homeowner's insurance for their existing customers.

THE CLOSING: If your purchase contract doesn't include an insurance contingency, find out if the house is insurable at a price you can live with before you remove your inspection contingency. You can probably find insurance to cover a home with a bad CLUE report, but the cost may be prohibitive.

What’s In – What’s Out with Homebuyers in 2006

In Gilroy and the surrounding area, here’s a sampling of what we think are In, No Longer In and Almost Out:

What’s In

• Granite. Slab is the best, tile is seen as a downgrade, but better than ceramic tile.
• Marble floors. Entries, bathrooms, formal living rooms and dining rooms.
• Stainless steel. Appliances and sinks.
• Built-in refrigerators. Hot brands include Sub Zero and Viking. “Appliance Suites” are all the same brand of appliances in the kitchen, including refrigerator, range, dishwasher, compactor, microwave.
• White/very light carpet.
• Requiring shoes to be taken off at the front door. (It's in, but we - personally - hate this requirement!)
• Bamboo wood floors. It could overtake maple as the favorite light-colored wood flooring in 2006.
• "Wired" homes. DSL. wi-fi, surround sound in every room.
• Big, bedroom-size master bathrooms. Large tubs with jets, separate large shower.
• Big, bedroom-size walk-in closets, with closet furniture/organizers, sometimes with an island drawer cabinet.
• High Ceilings. Cathedral or 10- or 12-feet replaces 7- or 8-feet high in all rooms.
• Wine “features” including wine refrigerators with zoned cooling, wine rooms/cellars with sealed doors and temperature & humidity controls, wine racks.
• Negative space pools.
• Ranch or one-level homes. Baby-boomers are discovering their utility in droves.
• Carbon Monoxide detectors. Home inspectors red flag homes that have only smoke detectors. Inexpensive and lifesaving, install one on every floor of a home before opening to homebuyers.

What’s No Longer In

• The real estate bubble. It’s a correction with a slowing of movement, but very little decline in prices.
• Single-rod closets. Buyers want the most storage in the least amount of space. Organizers accomplish this.
• Ceramic tile, whether in the kitchen or bathroom.
• Wet bars.
• Dark rooms with small windows. Natural light can overrule a lot of other problems in a home.
• Wallpaper. Take it down (carefully) and paint.
• Narrow staircases.
• Mirrored backsplashes in kitchens and everywhere else
• Gas grills that need their own tank. Buyers prefer the gas piped from the house so they don’t have to replace tanks.
• Dropped ceilings. It might have updated a bungalow in the 1950s, but today buyers want as much vertical space as possible.
• Draperies.
• Flipping. Inventory of unsold homes is increasing, signaling weakening demand by all buyers. If you are holding properties to flip, prepare to hold onto them until inventory is reduced. Consider renting them out until market heats up.
• Smoking. Especially not inside the house.

What’s Almost Out

• Laminate flooring that looks like hardwood. Not only can buyers tell it’s not wood, the noise it makes is often the deal killer during property showings.
• Kidney-shaped pools.
• Huge lots. Vast expanses of manicured lawn.
• Low and average height ceilings.
• Mini blinds.

In the beginning...

The inagural posting is in progress. We are real estate agents in Gilroy, and we are interested in being able to pass on some information we have about real estate. Real Estate in Gilroy is ever-changing, just as it is all over the state and nation. We will use this site to convey information about the real estate market in Gilroy, as well as in general. Look over what we have to say, then post your comments. At the very least, let us know you visited!

We are Team Patereau, made up of Susan and Rick Patereau. We are real estate agents with Intero Real Estate, in Gilroy. You can visit our website to get our bios and other buyer/seller specific information. Here's the link: www.teampatereau.com.

W're working on postings that touch on the following topics:

• Appreciation of Real Estate - how relevant are the published figures to your property, and what should your expectation be when you are trying to use the information.
• The Valuation Formula - putting your numbers in a chart vs. having a professional from your area prepare a Comparative Market Analysis (CMA)
• Moving into a Buyer's Market, from a Seller's Market - what do Sellers have to do today to sell their property.

There are other topics to discuss. Let us know what you want. Post it here.