Sally's Key West

How To Sell Your House in Today's Market

There is hope. The formula is ancient: product and price. Sellers who really want to sell, need to lower prices till they generate ACTIVITY (i.e., phone calls and showings) and keep lowering till they generate ACTION (i.e., offers). To get to contract and closing, be willing to negotiate. Fix anything the buyer needs to have fixed to have a safe home (tenting, upgrade electric, plumbing repairs, roof, dead trees.) Remain calm.

It is now officially a Buyer's Market. Good deals sell first. The formula Hal and I have used successfully for getting showings and offers on a stagnant property is to:
1. Lower the price 10% at a time until the phone starts ringing: ACTIVITY.
2. Keep lowering the price 10% at a time until you get offers: ACTION.

How often? Every 2 weeks is not too often to lower the price, but timing is dependent on time of year and seller's motivation. In high season, when you have the most activity, every two weeks might not be fast enough! You will know you are close when the phone starts ringing. You'll know you are there when you get offers.

If you are insulted by any offers, you need attitude adjustment. Nobody cares if you are insulted.

There are buyers in our market right now and they want to buy. The hold up is price. Sellers are still in denial about the direction of the market - they can't let go of the big number and they think any minute this baby is going to turn around.

Unfortunately, this ship is too big and wieldy. And it's run into an iceberg called Subprime Mortgages. It's just not going to be able to bounce back. Last I looked there was a four year inventory on the market... And with so many lenders in trouble, there are a lot of buyers who can't buy because there's nobody to finance them! Not everyone has $100,000+ cash these days. Surely this is not news.

Fortunately, REALTOR®s I've spoken with lately are coming to grips with reality. No paycheck will do that to a person. Trust me, I got first-hand knowledge of this. As REALTOR®s stop cheer-leading, reality will spread.

OK: this isn't bad news either. Reality is the ONLY HOPE for a turnaround in this market. Inventory has to clear out. A lot of it will clear out via foreclosure. That's a fact. If you are a seller who can still avoid foreclosure, take the money you can get and move on.

Today, the price has to make sense to the buyer. For sellers stuck in 2004's market when seller's ruled, today's price will NOT make sense. It will be shocking. But for sellers who really want to sell, it's time to bite the bullet. It's not your market anymore.

Blathering Endlessly

Lipstick On A Pig

We have a fun quasi-political yahoo group here in Costa Rica. Thor, a group member wrote in after the Fed pumped billions into the market. He asked, "Lipstick on a pig or timely rescue?" I'm thinking:

Lipstick on a pig. Since buyers* have to actually qualify for a loan these days (have good credit AND an income), all the rate cutting in the world is not going to get these buyers into a loan.

Plus, properties have to appraise for the loan amount and prices have dropped too far too fast for that. Rate cutting won't help this either - too late.

And since all that paper (loans already in place) sold as AAA rated securities has dropped so much in value because too many borrowers have defaulted... it's just too little too late.

It's hysterical that the Fed printed up billions of dollars to flush into the system in their ill-fated attempt to save it. They used these billions of dollars to buy up these bundles of loans that nobody else wanted. Like spending $100,000 for a toilet seat. I'd rather have the toilet seat. At least it has a use.

Besides, all this rate cutting and printing up money by the Fed steals the value of all the dollars the ordinary citizen is working so hard to "earn." Since most of us don't really understand the devilish details of how money really works, we think the Fed is rescuing us. When in reality they are stealing from us.

*By "buyers" I'm referring to borrowers who are already into the property and need to refi because the adjusted rate is too high. They didn't have the income the first time - except for "stated" income - and don't have it now. There are no NEW buyers out there shopping for property...

This isn't bad news, right? Just a point of view.

Letters On Home

Dear Sally,

I have enjoyed your site since finding it a few months ago and I want to thank you for the spreadsheet on recent sales.

I lived in KW for a year in 1986 while I was doing some writing - renting the first floor of a beautiful peach-colored Victorian in old town. I believe it could have been purchased for about $200,000 back then but that was $200K more than I had to spend at the time. After the year, as planned, I needed to leave KW to make a living again so I returned to the real world. I have rarely been so sad and have always hoped to return to live permanently in KW one day.

Now I have retired from practice and live in south Florida where I am again writing. I have been looking at properties in Old Town on the internet, hoping that some bargains would pop up due to conditions, but I don't see it. In fact, even if someone GAVE me a house like my old house, which I estimate would now sell for at least $1.5 million, just paying the taxes and insurance would be unaffordable! Unless the politicians do something meaningful about R.E. taxes and insurance or the prices fall through the floor which honestly I never expect to happen, I guess I will have to content myself with renting for a couple of months a year in KW and keeping my seaside townhouse, along with my low Save Our Homes - protected tax assessment.

Thanks again for the information,
Janet

--

Dear Janet,

You really touched me and I feel the same as you. I don't own real estate there and I'd like to again. Hal and I were talking about this last night. He thinks property will drop back to $100/sf... I think that's a stretch but he's the smart guy! We both feel, no matter where it drops to, that it will stabilize somewhere around where it was in the early 2000's and go from there. We'll see. Prices are falling now, though.

Insurance will have to drop - people just can't afford it. Also, I believe a new insurer will pop up that will take higher risk for lower money because there is a market for that.

Taxes will have to drop as well. They are ridiculous and are literally breaking the bank. The city will threaten getting rid of the fire department - always the first ploy to scare people into keep property taxes high. But it won't work this time: people are going to be too broke and feeling too much pain. You can't get blood from a stone and the city will just have to cut back on Code Enforcement! And free dental for city employees...

Thank you for being a reader. I look forward to owning a place in Key West again one day. Even Hal does and I thought he was really done... guess you can't ever be "really" done with Key West. See you there one day.

All the best,
Sally

Pollyanna Makes A Comback

I'm going to stop posting bad news on my blog because it doesn't change anything. Everyone pretty soon is going to know the bad news quite personally: because either they or someone they know is going to lose it all. I know several people. For those of us over 50, this couldn't be less amusing.

Since it's too late to change the path, and since my advice, while appreciated by some, is mostly ignored and resented, I'm dropping the bubble. Pollyanna has returned. And why not?

At the end of the bubble, when I told newbie spec buyers not to buy, nobody wanted to hear that. They wanted to "get in" to make their million. They all knew this was never going to end. What planet was I from?

When I told sellers the end was near and they were not going to make a zillion, just a million, they looked at me like I was nuts: "Are you nuts?" they said. Then they hired another REALTOR® who could talk the talk. This happened over and over again. None of the listings I lost the summer of '05 have sold. They are all now listed for less than they actually could have gotten then. It is no consolation at all.

A few sellers did list with me, even after I told them the dream price was no longer on the table. My seller customers can list wherever they want (big of me, eh?) But I speak up if the asking is nuts. What I get is a pat on the head and orders to list at the dream price. "Ok," I say, "but don't say I didn't warn you."

All of those properties are still on the market, too. (Except one. Thank you, Jean Dillon. That referral check was lovely to get.) This is really no consolation, because those referral checks would be perfectly lovely to get right about now.

Since all the dire predictions and confirmations aren't going to change anything, I'm stopping. It's depressing. There's PLENTY of good stuff to say about Key West. I loved it for 30 years, I still do.

So. You still want the bad news? Read those guys under SO'Bring News (under the clock in the right column). For local bad news, read Cayo Dave, my husband and Rock first.

From now on, I'm all sweetness and light. Just like the good ol' days.

P.S. I will still post sales data. That's always interesting and unavailable anywhere else.

Comments on Cramer

I posted the Cramer video on another blog and got this comment (among others):

"I'm probably a moron for not understanding the market, but it sounds bizarre when someone says that results from one company kicked off a wave of fear and selling (or something to that effect). It all seems like some sort of chicanery.

Also, how is the government going to do something about crappy loans that have already been made? Will dropping the interest rate a little magically allow people to not default on loans?"

Posted by Arp, 10 August 2007 at 08:39 AM

Excellent question, because at first glance, we think, "Of course, it will help." But Arp is right: how can it?

Hal [my husband], who does understand the completely incomprehensible market and banking, currency, etc., explained that Cramer has trust in a simple solution. Cramer has been the benefactor of the Fed's manipulation in the market. He's seen that work over and over in stimulating the economy.

Dropping the interest rate will only prolong the inevitable. The crux of the problem is rampant speculation driven by easy money. Up until just a few months ago, if you had a pulse, you got a loan for 100%.

People saw their neighbors make $50K on a spec condo or house or lot or whatever... so said people took out an easy (read crappy) loan (often against their primary residence) and bought a flip property NEVER meaning to hold it for long, usually no more than six months.

At some mysterious moment, the notion that "it didn't matter what you paid for a property, you were going to make money when you sold it" took hold and grew roots. True appraisals went out the window. Prices were rising so fast, comparable sales data was hard enough to come by. An appraiser had to stretch the adjustable items to make comparable sales work. And forget the cost and income approaches.

IF you wanted a sale to close, you could not use the cost approach ($/sf replacement costs). If it costs $200/sf to build a new town house that is selling for over $400/sf... can a bank justify that?

Nor could you use the income approach (possible rental income). If you can only get $1500/month for a ranch style 3/2 house in new town, how can you justify a $750,000 sales price? If you borrowed 100%, your mortgage payment with taxes and insurance, would be close to IF NOT MORE THAN $7,500/month. Show me the math that makes this a smart move.

It's only smart if you buy and sell as a speculator: quick in, quick out. For awhile this was working beautifully and people were hitting big. As word spread, more and more buyers HUNGRY for the hit started shopping for property. They were willing to pay more than ever before because a) "the guy down the street paid a million for a dump and made $50k in 6 months" and b) they were competing against other hungry buyers. Biggest offer wins. And...

C) If said buyer had a pulse, the money would be there.

Properties were being bought and sold at higher and higher prices based on nothing more than the fact that you could get a loan for any price. People were making that pot of gold - often just by selling it to the next speculator in line! I watched it happen. Property "values" were going up so fast, six months was long enough to make a quick $50k. The common denominator was that ALL these buyers meant to sell that spec for their pot of gold.

The problem becomes evident when EVERYONE is jumping on this bandwagon and inventory starts skyrocketing like prices have. It's not just speculators selling, but homeowners, too. Suddenly, regular homes are bringing sales prices higher than anyone ever dreamed. Homeowners are getting rich. It just takes one or two sales to get a neighborhood all fired up and pretty soon every house on the street has a for sale sign in front of it. And why not?

Here's why not: when inventory goes up, buyers have more choices and prices fall as sellers are forced to become negotiable to snag a buyer. Lowest list price wins.

As those sellers fail to sell and run out of money to keep paying that extra mortgage, foreclosures start to appear. As foreclosures appear, lenders get jittery - some of them in downright pain like Countrywide is today. So they raise rates to get more money on the loans that are paying, plus make it harder for the unqualified to get a loan hoping for fewer foreclosures down the road. To get a loan today, you need a pulse AND an income.

Tighter controls on lending has two immediate consequences (certainly more, but from my point of view, these are the two that strike me first):

1. Since the bulk of buyers these days are still inexperienced newbie speculators hoping to make their pot of gold, they are mostly unqualified. You and I would no more lend these people money than lend it to the guy sleeping on the street. Without easy money, these baby specs cannot buy. Hence, the pool of buyers is drastically reduced. NOW you have high inventory and fewer buyers. The fun is subsiding.

2. The people who already have these loans and can't sell their spec property, need to either walk away OR refinance. The rates they got two-five years ago are adjusting up and they can't afford them. Unfortunately, with tighter controls they CAN'T refinance because the truth of their creditworthiness comes to light. PLUS they now own a property that is no longer worth what it was when they got that 100% loan in the first place. Said loan being based solely on the value of the property.

Lowering the interest rate a little MAY delay the inevitable. But it won't stop it. We are already too far down that road.

What is the inevitable? Plenty of foreclosures. Banks owning plenty of property. Some banks failing under the weight. My hope and my prayers are that it happens fast, so recovery can begin. There's as good a chance it will happen fast as that it will be long and drawn out, like some of the more dour among us predict. I don't know. No one knows. If there's one thing we do all agree on, it's that timing a market is not possible. I'm going with FAST.

Rise And Fall

Looking up a property for a buyer, I stumbled onto this property's history.

Historically, Key West property values go up on average 5% - 10% per year. If you are extremely diligent and lucky, maybe you can do 12%-15% over the long haul.*

The questions on everyone's minds these days, like it or not, are:

1. How low will she go?
2. When?

To sell this property in today's market, an educated guess would be to calculate a 10% increase in value every year since the last sale date. For any hope of having an accurate picture, you HAVE to start in the mid-90's. Starting with a sale price for anything after '99 would be too far off the mark, IMHO.

A completely accurate picture would be to calculate from day one... but those figures are much harder, if not impossible, to come by.

Since this is an old town property, we can use a 10% annual appreciation. Old town properties ALWAYS do better than any other area of Key West, including waterfront. Accordingly, today, this property might sell for $560K. Unfortunately, about 5% less than the current owners paid. Perhaps it will sell for more. But ALL evidence points to the fact that $780K is too far off the mark.

That price needs to drop by at least 10%. Re-listing for anything over $699K would be a waste of everyone's time.

You have to factor in other considerations. Like: is it waterfront? Add value. Is it multi-family? Add value. Close to Duval AND quiet? Add value. Surrounded by like properties? Add value. Surrounded by lesser properties? Subtract value. Worst house on the block? Add value! Is it renovated nicely? Add value. Over-improved? Subtract value. Like that.

If you really need to sell a property in this market here's the SOBR formula: start at 10% less than where you are now. If you have no calls in 30 days, drop it 10% more. YES: I SAID 10% MORE. And keep dropping it every 30 days until you start getting offers. Everything else is talk. Drastic? Yes. But, realistic. This is business. The days of emotional real estate buying and selling are over.

If you are the seller, ask yourself what you would pay for your property in today's market.

As the Yoda of Key West real estate, Curtis Wild, drummed into my head over a decade ago: "There is a price at which a property will sell today." If you want to sell it today, you have to price it for today's market. Not 2004's...

*If you got in and out a couple of times in the last five years, you might very well have done considerably better. And you would be bumped off any statistician's list.

I Will NEVER Miss Another Cramer:

Chicken Littles SO Unappreciated!

Once again, my Panama blog friend has interesting news... this time on Spain. Read it all here.