On The Other Hand

I am writing this in September of 2011 at a time when we are being barraged by doom and gloom from all sides. So what better time to write about what s coming for San Diego because it is really quite exciting!  

Background: At the risk of oversimplifying, the reason values are down in San Diego (and yes, they may go down further) is that San Diego is not exempt from the worldwide recession/credit crunch.

Here's what happened: In the run up to the crash in 2008 there was an excess of cash in the economy (excess liquidity) which means that if banks only lent to credit worthy borrowers (not just home buyers but also corporations and governmental entities) they would be left with too much cash on which they would be receiving no return nor would they be able to generate loan commissions. So, they lowered the bar and started lending to non-creditworthy borrowers. This of course caused the crash of 2008. Now the pendulum has swung the other way. Whereas prior to 2008 they were stupidly lending, now they are stupidly not lending (except when absolutely forced to on solid gold deals). Meanwhile, large corporations and financial institutions are hoarding cash like never before. The consensus among the sources I have checked is that the number is somewhere in excess of $13 Trillion. That is nearly the size of the U.S. Federal deficit! This combination of extremely tight credit and hoarding of cash is strangling the economy.

 Four reasons why San Diego will out perform most other regions of the country when it comes to real estate values: 

• San Diego County is built out! This happened at the same time the crash happened in 2008 which is one reason why most San Diegans aren't aware of this game changing fact: There are no more parcels of raw land large enough to build more subdivisions. This means that San Diego is no longer a developing county. It is a redeveloping county. This means that in order to add new housing stock, we must knock down low-density housing and replace it with high-density housing. Whereas the pipeline for making raw land habitable is 10 years, the pipeline for redeveloping low density housing is decades long.

•  San Diego County has a housing shortage! Approximately 20,000 families with at least one family member who works in the county cannot live in the county not because they can t afford it but because THE HOUSING DOES NOT EXIST! These workers live in Riverside County, Imperial County, and Tijuana. The vacancy rate is as close to zero as it can get and the apartment market is the only  Seller s Market  of all the real estate sub markets. To make things worse (or better depending on your point of view) the housing shortage will get worse at the rate of 10,000 units per year for the foreseeable future due to population growth and the good outlook for job growth in San Diego County, which brings us to the third reason

• The best weather in the world!

 Three ways to capitalize on this amazing confluence of mega-trends in San Diego:

• Buy as much of the best San Diego real estate as you possibly can! Right now is the best buying opportunity in San Diego since the Korean War. We are in the good ole days right now. This is the time people will tell stories about decades from now  stories about how incredibly cheap things were in 2011-2013  or stories about how they wish they had bought during that time.

• If you are thinking of cashing out of your San Diego real estate, DON'T! Hold on to it and rent it out (the rental market is very strong due to 1 and 2 above). Time solves everything in real estate. If this isn t possible for you  if you must sell because you are out of time - call me!

• On the other hand, if you have equity and would like to relinquish your current property in order to acquire a better San Diego property this would be a perfect time to do it since interest rates are so low. Obviously you will have to accept a disappointing price on your current property but you will more than make up for it on your replacement property.

Sources: My main sources are Economists Alan Nevin and Gary London.  

 Here' s what will happen: While we don t know how long this credit crunch/cash hoarding will last, we do know that it won t last forever. At some point the $13 Trillion will start to flow and the credit pendulum will get back to the middle ground. Optimistic economists say this will be in 2014/15 - after the presidential election. Pessimistic economists say that it will be more like 2018/19. When this happens we will begin to pull out of the recession. This will launch San Diego s time in the sun!

The best way for most people is to first determine whether the project is feasible WITHOUT falling in love with any particular house. If it is feasible then you put your current house on the market SUBJECT TO SELLER OBTAINING SUITABLE HOUSING. When you get an acceptable offer you negotiate a 2 week "Looking Period." If you find an acceptable house in that period then both houses can be put on the same closing schedule allowing you to move out the day before your buyer moves in. If you don’t find a suitable house within 2 weeks, you request another 2 weeks from your buyer or they may cancel – buyer’s choice. I once had a situation like this that extended 2 weeks at a time from mid August to Thanksgiving before the right house came on the market. If the buyer does choose to cancel, the house goes back on the market and you sit patiently until you get another buyer. NOTE: I have described this process in common language but this is actually done in writing as part of a carefully written purchase agreement.

There are other ways to solve the problem none of which work as well (or at all) for most people:

 

• You can move twice. Sell your house, move to a rental, and then move into your new house when you find the right one. The advantage is that you retain maximum negotiating power both as a buyer and as a seller. The disadvantages are that you have to move twice and you are selling your house without knowing exactly which house will replace it.

 

 

• You may be able to get a "Swing Loan" aka "Interim Loan". The advantage of this is that it makes some of your equity available for your purchase. The disadvantages are that you don’t get all of your equity out, loan fees are expensive, and you are still left with a vacant house to sell. Can be risky.

 

 

• You can put the cart before the horse by falling in love with a house, put an offer in on it contingent upon you selling your current house. The only advantage is the emotional comfort of falling in love with your next house before you let go of your old house. The disadvantages are: most sellers won’t even entertain an offer contingent on selling another house, it trashes out your purchasing power (in the event that the seller would entertain such an offer), and it trashes out your negotiating power as a seller.

 

 

• You can liquidate investments to fund the purchase and then replace the cash when the old house sells.

 

 

• A wealthy friend or family member can act as the bank for interim financing.

 

In terms of your negotiating power and your stress level, the worst thing you can do it to fall in love with the new house first. If you find yourself in this regrettable situation (sometimes life just happens) you will need a seasoned agent more than ever. And under no circumstances should it be the agent representing the seller of the house you want to buy (See my earlier blog about how to choose an agent).

Once you have settled on the best agent to represent the sale of your home, THEN settle on the price. As you do this, keep these points in mind:

 

• Price and value are not the same. Value is determined by the market. Price is determined by the seller. Before you go on the market you can only guess at what value the market will assign to your house. If the price you set is at or close to market value, then you will get lots of showings and a decent offer within a couple of weeks. If you set the price below market value, you will get even more showings and multiple offers within the first week. If you set the price above fair market value, you won’t get many showings and you will have to lower the price after a month or so. By then, you will have stigmatized your own property because many buyers will wonder why it hasn’t sold – what’s wrong with it? In truth, the only thing wrong with your house is the price but buyers aren’t necessarily that rational. Starting out too high just means that the process will take longer, you will take on more stress and you won’t receive any more money – and maybe less – than if you had started out more realistically.

 

 

• When there is demand in the system, the pricing mechanism of the market works perfectly. Currently in San Diego, demand is strong but very wary of overpaying and very quality conscious. Residential real estate is unlike any other commodity market in that it is a completely level playing field and all the players have equal access to market information and no one entity can manipulate values by withholding inventory or flooding the market. Consequently, houses and condos, with rare exception, sell for exactly fair market value as of the day they close escrow. We see that nice, well priced houses go into escrow within 2 or 3 weeks.

 

 

• The market doesn’t care how much you need out of the property.

 

 

• Once you are on the market you start getting feedback about what the market thinks of your house at its price. Weight this data more heavily than the comparables that you used before you were on the market.

 

 

• The lower the price the more attractive the house. Yes, the house actually looks better to buyers when the price is lower. For example, I once had a house listed at $1.25 MM. We reduced the price in $50K increments until is sold for $950K. At the higher price levels buyers said that the house was a "nasty fixer" and they didn’t like the "dinky kitchen" and were "offended by" the family room addition. As the price got under $1 MM, buyers found the house to be "a wonderful old Spanish" and the kitchen became "funky but I like it" and the family room became "a real bonus".

 

 

• "Value Range Marketing" throws ambiguity into the mix - never a good idea. Plus it makes it easier for sellers to kid themselves about the true value of the house.

 

Mistake 1: Not interviewing at least 3 agents. It is a huge mistake to not shop around. Don’t take the easy way out and list with an agent who you just happen to know and like. You may want to include that agent in the interview process but don’t hire without shopping.

Mistake 2: Interviewing agents whose credentials don’t meet the absolute minimum requirement: full time agent who has successfully represented sellers of similar homes in your area for at least 5 years.

Mistake 3: Not actually speaking with past customers. Ask them to tell you stories about what their agent did that worked or didn’t work for them.

Mistake 4: Choosing the agent whose opinion of value is higher than the other agents you interviewed. This is a mistake because the house is going to sell for exactly the same no matter what agent you choose – the market dictates that number. (I am assuming that you are only interviewing agents who meet the minimum requirement stated in Mistake 2 above.) You should hire the agent who is actually the most professional and has the best reputation in the community and commands the most respect from the wider agent community (see below). And if his or her price opinion isn’t the highest, hire him/her anyway and use the highest price recommendation you received if there is any reason to believe that the number isn’t absolute fiction. If the number is too high it will only cost you a few weeks of market time and then you can lower the price to what it should be.

Mistake 5: Choosing the agent who seems to have the best marketing program. First of all, if you are only interviewing agents who meet the minimum criteria (see Mistake 2 above) there will be no significant difference among the marketing programs of the competing agents. Secondly, and more importantly, public focused marketing is IRRELEVANT to your need to sell your house for the most money with the least hassle. Sound counter-intuitive? It is until you consider this: Because the Multiple Listing System enjoys 100% participation of agents and because the public has total access to viewing the housing inventory via the internet, any prospect who is searching for a house in your area/price range will click on your house within hours if not minutes of it going live in the Multiple Listing System. So that completes the whole purpose of marketing – making certain that the relevant people know that your house is for sale. Does it make a difference as to how good your house looks on the Internet? Of course! But you shouldn’t even interview an agent whose listings don’t look great on the Internet. If marketing isn’t relevant, “blowing on the embers” is. I’m talking about how the inquiry is handled when a prospect does show interest in your property.

Mistake 6: Choosing the agent who sells the most in your area. Volume is no predictor of customer satisfaction. It is very common for the volume agents to be very good at promoting themselves and doing listing presentations but not nearly so good at “blowing on the embers” or negotiating or paying attention to detail or being particularly sensitive the special ways in which you need to feel served.

In summary: Pick the agent who:

• is a master negotiator based on many years of experience.
• is backed up by a team who complements each other’s strengths and weaknesses.
• has a great reputation within the community.
• is highly respected by his/her peers.
• causes you to know that you will take his/her advice even if it is painful because you know it will be in your best interest.

One final note: What is really at stake in this decision is not how much you will get for your house. It is about what kind of experience you will have along the way, the absence of drama, and the absence of litigation.