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Advice on helping sellers to price properly
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SamChady
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PostPosted: Wed Jan 24, 2007 5:39 pm GMT    Post subject: Advice on helping sellers to price properly Reply with quote

I am in the market to buy, and I know several of the sellers personally. They are all pricing at 2005 levels. I have tried speaking with them, but I have failed because they are not rational, and they of course think I am trying to buy the property for a lower price, so my advice falls on deaf ears.

One of the multi-families I am looking at has major heating/electrical problems, and would cost about $100K to fix (all new ducts, furnaces, new electrical service and all new wiring, all new insulation.) To top that off, the bathrooms and kitchens are really sad and I could spend another $100K doing those over. I brought this up gently, and he acted as if it was a personal insult to him and was in complete denial. I showed him Zillow and all he did was to look at the expensive places in the area as comparisons. I can't tell, but I would expect that those places had been updated since 1940, and were probably to code. I showed him that the heat did not work properly and even some of the plugs were hanging out of the walls and I swear he was blind to it. I can't prove that these things don't work without an inspection, which of course I can't do until he accepts an offer, which he will not.

This is not an isolated case - I have come up against this several times. Is time the only cure? Does the reality of the market have to sink in on its own? Do any real estate agents have advice? Do people have to get so beaten down and desperate before they sell at a reasonable level? If time is the only cure, I will wait, but I honestly feel its in their best interest to sell now at a low price, then waiting and losing money by holding a property, and then selling later even lower perhaps.
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Thu Jan 25, 2007 3:23 am GMT    Post subject: fatigue Reply with quote

Fatigue is an issue for a lot of the housing stock within the 128 belt. It is a toal wildcard. Many who live in older areas are used to having mice, rotted wood, some leaks, drafts, etc. Beware of the fresh coat of paint on the fundamentally flawed structure. It doesn't take very long for building systems to fail if they are not properly maintained. If you do buy a fixer-upper make sure you get a good deal and that you have a very large cash reserve to field the inevitable. If you are cash rich and cash flow poor a fixer-upper might be the right situation. Wooden houses were not made to last forever and some of our housing stock is like old 386 computers. Don't let a seller off the hook for years of neglect.
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mdp22



Joined: 28 Jan 2007
Posts: 4

PostPosted: Sun Jan 28, 2007 5:59 pm GMT    Post subject: Gripe re: sellers in dreamland, frustrating serious buyers Reply with quote

Sellers (and their agents) living in dreamland of 2005 prices is a real problem for prospective buyers to which I don't know a solution. Here's my experience.

My fiancee and I are trying to buy a townhouse in Metrowest. Not as a "good investment," but as a place to live and a badly-needed tax break. Rental apartments just don't provide us the space we need or environment we want, and moving twice (once to a bigger apartment, and again if we finally bought in a few years) is annoying. Quite frankly, I don't care if the value declines an average of 1.5% each year for the next 5 years; I still come out ahead as long as interest and property taxes are still deductible. (I do care if it drops 50% like it did in the early 90s, but that's for another thread.)

We've found the right place, but the sellers have no grasp of reality. It was on the market all through 2006, and they only dropped their asking price 10%. The sellers took it off the market in late November. It is vacant. The sellers bought it in the 90s and would make a huge profit at any reasonable price.

We recently made an offer $20000 above what a larger end-unit with the same specs in the same complex sold for in late summer. The sellers' unit is a middle unit. This offer was also $5000 less than what a larger end-unit with one less full bath but one more garage space, one more fireplace, and one more deck sold for at the end of December. The $ per square foot numbers for the complex for the last year, considering the half-dozen or so sales of units with the same number of bedrooms, also supported our offer. But our offer was a more than $50000 below the sellers' last grossly unrealistic asking price.

Our offer was rejected without counter. The sellers and their agent think the market is going to pick up in spring and plan to re-list the unit at $10000 ABOVE their November asking price. The sellers' agent discounted the two comparable units I described above saying they were
sold "under duress" with a "history of excessive price drops." The seller's agent then sent our agent a lengthy realtor-hype email saying
that their November asking price was "an excellent opportunity to purchase an undervalued property and insulation against further market price declines."

It is very frustrating as a serious potential buyer. I hate to buy a lesser place, knowing that these sellers will eventually have to grasp reality if they want to sell the property, but I also don't want to wait as their unit sits through a second spring market hoping that they will find reality soon. It they or their agent would just apply some logic, we could probably come to an agreement. Maybe the problem with the market isn't a lack of serious buyers but a lack of serious sellers.
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AgentGrn



Joined: 28 Sep 2006
Posts: 82

PostPosted: Mon Jan 29, 2007 3:30 pm GMT    Post subject: Reply with quote

Once the reality and the panic finally set in, nobody's going to want to be in real estate as an investment. It'll take some time to work out, unfortunately, but it'll be to early to tell 2007's direction until at least the spring season starts.

2006 was kinda flat, this year doesn't look promising either ... as far as appreciation goes, that is.
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SamChady
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PostPosted: Fri Feb 02, 2007 8:56 pm GMT    Post subject: Another story to vent about Reply with quote

Just looked at another multi-family. The owners quoted me $625K. They were told 2 years ago by a real estate agent that the place was worth $600K, so they figured it was now worth more! My jaw dropped.

The place was a dump, with all fixtures from 1950, except the wallpaper, carpet, and paint from about 1975. The owner was smoking inside when I met him and the place smelled strongly of smoke.

Based upon the area, square footage, and bringing it to code, I would pay about $400K. Its going to be on the market a while.
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Rock
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PostPosted: Fri Feb 02, 2007 9:36 pm GMT    Post subject: Reply with quote

Take the median income of your area, multiply by 3, then you have a price to start from. Anything above that is icing on the cake.
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Fri Feb 02, 2007 10:41 pm GMT    Post subject: 3 times salary Reply with quote

I think we need more accurate rules of thumb and ones that make sense for people with different time horizons. For instance, if you're in your 50's you might not want to buy a house that is 3 times your salary and you most likely don't want a 30 year mortgage. Then step back and ask yourself what is the average age relative to the average salary. You'll find that in the actual segment of home buyers, the average salary is much lower than the "3 times" thing. This babyboom thing has skewed the numbers somewhat because the average salary corresponds with a higher age. If you don't mind a little work, monitor what price range are homes selling in your target area. If a pricepoint is crowded with buyers, the decline will be less. You'll find that there are fewer and fewer people being able to afford the homes in the $600k to $1 million range. Then once these high end homes start to backslide and the guy sees a house that was for sale for $800k now at $650k, another guy will later see a $600k house selling for $500k and so on and so on.
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admin
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Joined: 14 Jul 2005
Posts: 1783
Location: Greater Boston

PostPosted: Fri Feb 02, 2007 11:16 pm GMT    Post subject: Reply with quote

The 3X rule of thumb is also probably not universally applicable across all locales. Perhaps this is because people are willing to pay a premium to live near a particular city or perhaps those near the city have higher incomes and housing is the natural sink for extra income (which is what Adam Smith thought). Whatever the reason, it isn't unreasonable to adjust the rule of thumb for Boston.

Based on the previous analysis of incomes versus housing prices in the Massachusetts, it looks like the ratio has typically been around 4.5X rather than 3X. Prices have wildly deviated from the historical norm during the bubble, going as high as 7.5X, with the most recent data point still at a lofty 7.2X. Here's a graph to illustrate:



Comparing the recent ratio with the historical norm always puts me off to current prices because I see it as taking so many more extra years of my life to obtain than it should. It's not just the three extra years of income (which would be bad enough), but probably some multiple of that when you factor in taxes and the cost of financing.

- admin
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vuky



Joined: 12 Nov 2006
Posts: 7

PostPosted: Sat Feb 03, 2007 1:55 pm GMT    Post subject: Re: Gripe re: sellers in dreamland, frustrating serious buye Reply with quote

mdp22 wrote:
Sellers (and their agents) living in dreamland of 2005 prices is a real problem for prospective buyers to which I don't know a solution. Here's my experience.

My fiancee and I are trying to buy a townhouse in Metrowest. Not as a "good investment," but as a place to live and a badly-needed tax break.


The tax break in the end will be a lot less than you expect. The trick with interest and property taxes is that you have to itemize your deductions and forgo standard deduction. For a married couple standard deduction is I believe now 11k (up from 10k in 2005). So if your interest and taxes are 25k a year your net deduction is 14k since you would have gotten the 11k regardless.
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john p



Joined: 10 Mar 2006
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PostPosted: Sat Feb 03, 2007 5:06 pm GMT    Post subject: median income Reply with quote

Is the median income shown on the graph for an individual or for a household?
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admin
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Joined: 14 Jul 2005
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Location: Greater Boston

PostPosted: Sat Feb 03, 2007 6:39 pm GMT    Post subject: Reply with quote

Quote:
Is the median income shown on the graph for an individual or for a household?


It's for a household.

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lyson22211
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PostPosted: Sat Feb 03, 2007 6:52 pm GMT    Post subject: Confused Reply with quote

My fiancee and I are trying to buy a townhouse in Metrowest. Not as a "good investment," but as a place to live and a badly-needed tax break. Rental apartments just don't provide us the space we need or environment we want, and moving twice (once to a bigger apartment, and again if we finally bought in a few years) is annoying. Quite frankly, I don't care if the value declines an average of 1.5% each year for the next 5 years; I still come out ahead as long as interest and property taxes are still deductible. (I do care if it drops 50% like it did in the early 90s, but that's for another thread.)

Sorry, but I find your post and thought process very confusing. You want to buy a townhouse for more space and for a "badly needed tax break". The space issue I can understand, but why do you feel the need to put yourself in debt just to get back a few thousand dollars at the end of the year? It sounds as though your finances are stretched thin, and unless you are currently overpaying for rent, a mortgage (along with taxes, insurance, maintenance) is probably going to cost you alot more every month than your current rent.

You say that you don't care if prices drop 1.5% each year, but you do care if it drops 50%. How do you know that prices are only going to drop 1.5% and not 50%? I would be willing to bet that the probability that prices drop 50% is much greater than the probability that prices only drop 1.5% a year. Are you willing to take that risk? Sounds like you are.

You say that you don't want to move twice because that is "annoying". Well, in the end which would be more annoying, moving twice or buying now just to get a tax break and have more space and then watch the value of your home plunge 30, 40, 50% or more?
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kdog



Joined: 03 Jan 2007
Posts: 7

PostPosted: Sun Feb 04, 2007 2:52 pm GMT    Post subject: Re: Gripe re: sellers in dreamland, frustrating serious buye Reply with quote

vuky wrote:
mdp22 wrote:
Sellers (and their agents) living in dreamland of 2005 prices is a real problem for prospective buyers to which I don't know a solution. Here's my experience.

My fiancee and I are trying to buy a townhouse in Metrowest. Not as a "good investment," but as a place to live and a badly-needed tax break.


The tax break in the end will be a lot less than you expect. The trick with interest and property taxes is that you have to itemize your deductions and forgo standard deduction. For a married couple standard deduction is I believe now 11k (up from 10k in 2005). So if your interest and taxes are 25k a year your net deduction is 14k since you would have gotten the 11k regardless.


Yup. A good way to look at the issue is that the tax break on mortgage interest balances out the added expense of property taxes plus a small condo fee. In the end, the tax argument for buying doesn't hold much water. A possible exception might be if it significantly alters your tax bracket. In general, don't expect to come out way ahead by buying a house - we originally thought buying would have great tax benefits until we actually ran the numbers.
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mdp22



Joined: 28 Jan 2007
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PostPosted: Sun Feb 04, 2007 3:37 pm GMT    Post subject: Re: Gripe re: sellers in dreamland, frustrating serious buye Reply with quote

vuky wrote:

The tax break in the end will be a lot less than you expect. The trick with interest and property taxes is that you have to itemize your deductions and forgo standard deduction. For a married couple standard deduction is I believe now 11k (up from 10k in 2005). So if your interest and taxes are 25k a year your net deduction is 14k since you would have gotten the 11k regardless.


When you already have deductions that add up to just a bit below the standard deduction (state income tax, excise tax, charity donations, unreimbursed business expenses, other misc. deductions), then the tax break for home expenses works pretty well. Because you don't have to "make up" the standard deduction, pretty much all of the mortgage interest and property taxes result in direct tax savings.

I agree that people that simply sum their anticipated mortgage interest and property taxes and multiply it by their current marginal federal rate to estimate "savings"without considering the standard deduction or the possible change in tax bracket are misguided.
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mdp22



Joined: 28 Jan 2007
Posts: 4

PostPosted: Sun Feb 04, 2007 4:16 pm GMT    Post subject: Re: Confused Reply with quote

lyson22211 wrote:

Sorry, but I find your post and thought process very confusing. You want to buy a townhouse for more space and for a "badly needed tax break". The space issue I can understand, but why do you feel the need to put yourself in debt just to get back a few thousand dollars at the end of the year? It sounds as though your finances are stretched thin, and unless you are currently overpaying for rent, a mortgage (along with taxes, insurance, maintenance) is probably going to cost you alot more every month than your current rent.

You say that you don't care if prices drop 1.5% each year, but you do care if it drops 50%. How do you know that prices are only going to drop 1.5% and not 50%? I would be willing to bet that the probability that prices drop 50% is much greater than the probability that prices only drop 1.5% a year. Are you willing to take that risk? Sounds like you are.

You say that you don't want to move twice because that is "annoying". Well, in the end which would be more annoying, moving twice or buying now just to get a tax break and have more space and then watch the value of your home plunge 30, 40, 50% or more?


My thought proces is this: now is the "appropriate" time in my life to buy a residence: I have a job and a future family; we need some more space; living in apartments gets old as does having annoying welfare-parent neighbors whose multiple kids run amok unsupervised and whose housing is being subsidized by my rent check. I'm the classic case where the realtor-hype claims "any time is a good time to buy a house if you're going to stay," except the hype is obviously BS because the early 90s were clearly not a good time to buy a house.

My point was that I'm not looking for an "investment," I'm looking for a place to live. My financial calculations are not counting on appreciation, unlike seemingly every buyer/seller who fancies himself a speculator/flipper in the market. The speculators and flippers and irrational sellers (and buyers) from the bubble have made the goal of "just a place to live" much messier. Because the area market is so screwed up, and because sellers are stuck in a dreamland of early-2005 prices, all these risks that you describe exist. I don't know that prices aren't going to drop 50% like they did in the early 90s. So instead of just buying a place to live, I have to treat it like an investment and worry about such things. Having a down payment completely wiped out and being upside down in a house for years is not a pleasant prospect.

If the sellers in my original post had a realistic grasp on the market and were willing to sell at a competitive late-2006 price, I would be willing to assume the risks above for the tangible and intangible benefits. But I'm not willing to assume the risk (and stupidity) of buying at spring-2005 prices in spring-2007. So they don't get a sale, and I don't get a place to live. Nobody wins.

In contrast, my friends in the midwest are able to get out of school, get a job, get married, and buy a place to live. Their eyes aren't glazed over with fantasies of 25% annual appreciation, but neither do they have any serious concern about being upside down in the house.

No wonder young families are fleeing MA. If our jobs weren't here, I'd consider the same, and I've only been here a year.
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