Monday, March 01, 2010

Sacramento Real Estate Market - March 2010 Water Cooler

Post off-topic links, observations, and stories about the Sacramento real estate market here. Please read the comment policy before posting.


OntheSidelines said...

I am having a problem with an appraisal coming in too low ($30,000) below the sale price. I expected it to be a little low, but this is really off.

It appears appraisers have swung competely opposite of the years where properties could appraise for whatever needed.

What are your thoughts? Is there anything that can be done?

husmanen said...

OntheSidelines. Yes I have heard of this happening more and more lately. There are different points of view on the validity of the current appraisals, but given what we had there was sufficient reason for change.

Also, the 'problem' may depend on if you are a buyer or seller. I am guessing a buyer, given your name.

Last year there were a lot of complaints about appraisers too, now looking at the numbers for some of those houses it appears the appraisers were better at predicting the value. Could also be a negative feedback loop, just like before, but in the opposite direction.

In the end, affordability, rental-parity and the general economy will dictate the value. Although, the slide has lessened there are lags before things plane out, and a bounce back up is probably not in the cards.

The $30k you mention, is that 1%, 10%, 50% or more of the total asking price?

If you are a buyer wouldn't this strengthen a renegotiation of your bid. Come to think of it, I believe this happened to someone on this blog before.... Anyone, Anyone...

Word Verification: bumsadly

Deflationary Jane said...

Hus once again covers the important stuff like rental parity and affordability. Find out what the other houses in the area really rent for, not the Craiglist fantasy lease rate.

Last year, people were knowingly bidding over the value of the house in order to get in front of the other bidders. Then they would run the appraisal and try to talk the bank down. The banks caught on and they now expect you to cover the difference.

The other thing is everyone got all pumped up thinking they can squeeze the remaining buyers before the FTHB credit runs out. Problem is that squeeze runs both ways. If they want to sell this year, they'd better come down to the appraisal or be ready to let the house sit on the MLS for a long time.

As you can see, I haven't lost my bearish view. There are deals but you are going to have to work a lot to find them.

David said...

A seller's reaction to an appraisal below contract price will vary depending on his/her circumstances. A buyer has limited options.

Leaving out all cash buyers (not our primary audience at this site), what you are left with is borrowers. The bank will use the appraised value it its LTV calculations, meaning it will lend you X percent of that. You have two options -- negotiate with the seller to reduce the contract price or pony up a larger down payment than you expected.

Let's assume a $300K house because the math is easy. Conventional financing means you put down $60K and finance 80% of that. Now you have an insane seller who won't lower the contract price despite the appraisal coming in at $270K. The bank will lend you 80% of $270K (=$216K). You will pony up $84K instead of $60K, a difference of $24K out of your pocket and a substantial risk in the current market.

Don't like it? Walk, no, RUN away from this seller who is obviously not interested in selling his/her house right now.

This happened to us in the fall of '08, even before HVCC went into effect. The seller challenged the appraisal (he is a realtor) and got nowhere. He refused to lower the price and we avoided a $30K+ loss by walking away and watching the market continue to decline.

Fast forward one year. The appraisal was $18K below contract price (approximately 6%). The seller made a show of protest but caved within 48 hours.

Buyers have sellers by the short curly hairs. If they won't deal with you, go deal with somebody else. One more piece of advice -- get a bulldog to be your buyer's agent and you will have much less stress.

mopar777 said...

You're right sidelines. Appraisers are so tight these days they squeak when they walk. I'm sure many of them were taken to the woodshed after the good ol' days of gifts on the side for "making the mark." My duplex in Orangevale just appraised for 7% more than a comperable sale across the street went for in 1991!

mopar777 said...

That just happened with me late last year with my duplex purchase David. My buying agent ended up filing a DRE complaint against the listing agent and their relationship became completely adversarial. On closing day the listing agent was nowhere to be found and a lady at the title company in Vacaville was more or less forced to act on her behalf. I signed all the documents on the hood of my agent's car that was parked on a side street off of folsom-Auburn Road.

OntheSidelines said...

Yes I am a looking to buy and have been active since the beginning of the year.

The $30,000 under sale price is about 1%.

I figured my options were limited to having the sale price lowered by the seller or puting more cash into a home that is still over-valued.

As you can probably guess, there is no way I would over pay, I definetely feel values are still dropping.

The seller's agent paid for another appraisal, I should hear about it today. They don't want to lower the price and still believe it's worth more.

I am ready to walk, I'm just waiting on the appraisal data.

husmanen said...

On the Sidelines. Good to hear you are ready to walk, but what if the appraisal comes back that it is $30k higher? The appraisers value should be a validation (or not) of your own analysis.

What do your numbers look like? How did you arrive at your numbers?

Is the $30k really 1%, which would make the house a $3 Million dollar villa. In that price range there is a lot of negotiation. But I suspect that was a typo and it is 10%.

If it is 10% of the purchase price and you pay asking ($300k), but the actual market value is actually 10% less and for some reason you have to sell in the near future, say less than 5 years, you could be in a world of hurt.

For example, you pay $300k and put 20% down (loan $240k) but it is actually worth $270k and it goes down another 10% then it is worth about $243k. Then you decide to sell, which costs 6% on $243k, leaving you with $228k.

This would be a loss in less than five years of a total of about $70k ($60k down plus about $10k loan($2k of principle paid))

After only two months of looking on the market do you feel this house is the best deal for you?

Lucky said...


you talk about finding a Bulldog of an agent. I agree 100% with this.

How does someone find a good agent? i am coming in to the city, and don't know too many people. I want to find a good local agent, but i think that until I use this person or have someone I trust recommend their services it will be difficult to tell how successful this person will be.

I am not even looking for suggestions on specific agents, instead I am looking at suggestions on how to find and evaluate local agents. I know where I live they have a local realtor assoc. that awards for sales levels and customer satisfaction feedback - but it is subjective. I guess once I find a lawyer I can ask the lawyer for suggestions of people that they have worked with and found to be on the ball.

Any suggestions?

David said...

Lucky, think about five questions you want to know the answers to from your realtor. For example, "What is the sales price per square foot trend in this zip code over the last year?" Then find the answer yourself. Screen your prospective agents by asking them those questions during your first real conversation. Don't argue, just write down their answers and compare with your answers later to help you decide.

Sales awards probably won't help you, but you can ask how many successful transactions that agent has recently closed representing buyers (not sellers) in your price range. Make sure you choose an agent with years of continuous and recent experience in the neighborhood where you want to live.

Another important consideration is responsiveness. When you call her mobile phone at 7:30 p.m. on Sunday, does she get back to you by 8:30 and apologize for taking so long? Good, hire her.

husmanen said...

So, I talked to a BofA employee located in CA on the phone the other day about some charges on one of my accounts. She dismissed the charges as invalid after seeing my down-payment fund.

We spoke for a few minutes while she got everything together. She mentioned she is planning on buying a home ASAP because prices are going to go up.

I said "interesting", but in the area you are looking, what are the rents and how does that compare to PITI?

She didn't know and she said she would find out because it makes sense that the mortgage should cover the costs.

We finished our conversation and she thanked me for the talk.

Crazy that the concepts are still out there, but there are a lot of people that benefit from a sale - none* of which you should ask the question "if it is a good time to buy".

* some rare exceptions do apply ;-)

patient renter said...

DJ - so when do you close? Have any reno or decor plans? Are you still into Danish/MCM pieces?

Deflationary Jane said...


You never want to ask a woman if she has plans for the house. I wrote 6 paragraphs and then realized I had turned into a sterotype >; )

and yes, I still love my MCM but it doesn't go with the house.

Deflationary Jane said...

I missed the first part PR. I closed already. I was even in the city building dept today.

sbg said...

I wanted to poll everyone here on what their preference is - FHA or conventional 20% down, assuming you have enough cash. If it makes any difference, we are looking for properties in Folsom and made a couple of offers. As far as time frame on how long we plan to live here, I really do not know but hopefully long enough. I factored in the pros and cons for both FHA and conventional, but I am having a hard time coming to a conclusion. The only thing that scares me, as many would have figured, is further drops in price - how much and how long?

patient renter said...

I wrote 6 paragraphs and then realized I had turned into a sterotype >; )

Ahhhh, there's nothing wrong liking what you like.

I still love my MCM but it doesn't go with the house.

Reading apartmenttherapy you would think that MCM can go with just about anything :) Some of it does seem a bit forced, but I'm not going to be able to avoid it myself regardless of what kind of house I end up owning.

patient renter said...

FHA or conventional 20% down

For me, the bigger downpayment, smaller loan and shorter loan term the better, so probably not FHA. I don't plan on buying until the downside risk is more or less gone though, so I'm probably not a good person to compare against.

husmanen said...

FHA or conventional 20% down

That is a good question, and I am looking forward to other responses. I have been contemplating that myself.

But when I look at it, the only reason I would consider FHA would be that I am looking at an exit strategy. Which means I am not serious, market is still out of whack, the downside risk is too great and the negative impact on me and my family is too large.

So I should wait.

If you estimate prices on homes based on FHA loans and then rental parity you will get a strong signal that the market is over valued. But I don't think this is a valid comparison investors would probably not be using FHA loans.

Deflationary Jane said...

If you are going FHA, you need the property to be in a certain condition and price range.

If you are thinking of the REO, the competition is fierce. If you are looking at a S/S, you will need all of the stars to align to get it to go through.

Conventional (10% to 20% depending) opens you up to properties where there may only be 3k worth of repairs but the house will sell for a lot less then 3k off. Conventional fixed seems to put you at the top of the heap for deals.

And of course cash means you can do whatever you want.

PR, I'm keeping my MCM classic pieces but selling off the lesser items. I have a bathroom and a kitchen to remodel. My splurges so far are lots of subway tile, a gas tankless water heater, and a complete set of blueprints of the house >; )

David said...

FHA vs. conventional -- what I learned in our two-year house hunt.

Forget any REO property. Maybe 1 in 10 will qualify for FHA financing, and it's just not worth it unless you have all the time in the world to find the wheat amid the chaff.

Try to get the seller's agent to show you the home. Do not hire the seller's agent as your agent. It's up to you if you want to disclose that you already have an agent, but you will find the seller's agent is likely to suddenly become cold and distant.

Do not commit to any financing -- just tell the agent you have different options and can't make up your mind until you know more about the house. Then have another showing with your buyer's agent and let the two agents talk to each other before you write the offer.

If the seller's agent says they are not accepting offers using FHA financing, RUN AWAY! That most likely means the seller knows there is a serious defect that will be revealed during the home inspection process. Don't get me started about truth in disclosure statements.

If you go FHA, bid high. You have to give the seller some reason to accept your offer over an all-cash or conventional one. DO NOT try to give your offer an edge by avoiding contingencies -- they are about the only protection you have.

This one I can't stress enough -- use some of the cash you have hoarded to pay for inspection of everything BEFORE YOU WAIVE ANY CONTINGENCIES. That puts all the defects on the table and makes it possible to negotiate credit for repairs. Your high bid will also help you in that respect.

Depending on what you learn and how the negotation goes you can walk away bruised but not battered and still get your good money back because you didn't waive the inspection contingency.

The only use for seller disclosures besides bird cage liner is to help you determine what kind of seller/agent combination you are dealing with. If the disclosures say the house is pristine and your inspections reveal tens of thousands of dollars in defects, well, that should tell you something.

FHA takes longer to close. DO NOT commit to a 45-day escrow. Even if you have your financing locked early, you'll likely have to ask for an extension and risk losing your good money if the seller drops a notice to perform on you. Some unscrupulous sellers use this as a source of income, fleecing would-be buyers by waiting for you to make a mistake and unilaterally terminating the contract. Rely on your buyer's agent to protect you from this.

That's all I can think of now, and this is starting to sound like a rant anyway.

Louie said...

An advantage to FHA is that the mortgage is "assumable," meaning if you decide to sell the home, a "qualified" buyer can assume the loan at the same interest rate. This would prove valuable if interest rates go up. And don't they have to?

Also, my agent just told me about the rehab 203 option on the FHA, which is an extra $30K to make repairs that make a home "habitable." Does anyone know how whether those work well or are a pain, and whether lenders generally go for that?

Jacob said...

20% down for me and a 30Y fixed and I plan to make the 15Y payment. That way I don't have to make the higher 15Y payment if something happens.

Deflationary Jane said...

If you want to ensure that the house sells to the first cash offer after yours, just say the words FHA 203K.

I Love Sacramento said...

Hello, I have been a lurker on here for some time. I am really in a pickle and need some advice. I am not from here and no one I know here knows much of anything about real estate in Sacramento.

I placed a bid on a one bedroom condo, in east Sac/Riverpark - about a block and half from Sac State. Its a small complex - only 9 units.

Listing price was 85k. Two offers had fallen through previously because of financing. I submitted a full-price offer (plus about 2500 towards closing) and it was accepted. My financing is fine - I'm putting down 20%. Appraisal comes back at 70,000k. Damn!
After a rather crazy day - my agent (who is also the seller agent) said the sellers are willing to accept the 70k price, but no assistance with closing.

I'm definitely excited about the price drop, but I'm nervous what this means for my potential resale value. Including me, the complex will be about 60% owner-occupied.

I have the inspection scheduled for later tomorrow, but I'm having some doubts - I love it, think it is a good deal, but will I be able to sell it down the road?

ANY advice will be WARMLY received.

The condo is in 95819.


husmanen said...

I Love Sacramento. Welcome to the blog!! I lurked for a long time before I came on board. Actually, there are other blogs that I still lurk on, over 4 years for some.

Anyway, as you may know my first question will always be about rental parity. You mentioned the complex is 60% owner occupied. If the other 40% is not vacant do you know what the rents are? That rent should cover ALL your costs of ownership, e.g. principle, interest, taxes, insurance, HOA fees, maintenance etc.

That’s where I always start, if this doesn’t pencil out then I would stop. BTW, with 20% down I get a PITI of about $400 per month. Let’s just say your HOAs are $275 per month. That puts the costs at $675 per month, without your own maintenance. So are there 1 bd/1ba renting for greater than $676 per month?

Deflationary Jane said...

I can tell you aren't from here. Woodside right? Those condos are in 95825, not 95819. There is a lot for sale there cheap. Your building may have 9 units but the area right in there has a lot of bad condo conversions for sale for less then 70k. That area also has a bad reputation for crime and section 8 housing.

If your unit is the one I think it is, the HOAs are 345 for a 700 sqft place. Ask the folks here about special assessments before you even consider a unit with a HOA in a distressed area.

Back to rents-
The immediate area is covered by rentals. Even if you could break even on the monthly, the competition in the area for tenants would put you in the hole fast. On top of that, if CSU keeps jacking up fees, that will leave even less money for rent. Have you considered what the costs to evict someone will run you?

Me personally, I wouldn't touch it. This is why I think anyone coming here to buy based on hype is in big, big trouble. You'd do better keeping that downpayment money in saving at .08%

patient renter said...

DJ's intuition is alomst scary.

A comment on the hype DJ speaks of. We've talked a lot about it in the past, but it still surprises me the extent to which people think that just because prices have dropped from their bubble inflated highs that everything is a potential good deal. It is not so.

Until prices are again inline with historical affordability metrics (are people not aware that this has not occured yet?) all risks should be considered when buying.

RV6Flyer said...

I found the condo in 95819 on MLS

5911 Newman Ct Unit 1, Sacramento, 95819

HOA is $275

I hope you like the sound of trains going by at all hours and the sound of young and dumb sac state kids partying at all hours. The condo is located in the odd area made by the tracks, H st, J st, and Carlson. It is surrounded by apartment complexes catering to the sac state kids who don't want to live in the dorms. I did the financing for one of the complexes years ago and what a disgusting pit it was.
With the new fancy dorms at sac state, rents will be pressured since kids can get something nicer with a meal plan for the same price as living off campus.
I would run away from this pile of you know what faster than a scalded cat.
On the other hand, you will probably be able to rent the condo for $725 per month. In about 20 - 30 years Sac State is going to purchase that block of land for expansion. You might see a return on your investment then.

T said...

To answer the FHA vs Conv

I choose FHA in this market. Less of my $ mixed in. I don't mind the premiums - I see it as a cost of doing business.

In sum, I used FHA as a ultra-low-skin-in-the-game exit strategy. If we had to bail for some reason, I wouldn't cry about the 3.5%. If we were in it for 20%, I'd be crying for sure! Especially considering the collateral damage.

PS: We had absolutely no problem buying REO with FHA. We even got 3.5% closing costs paid, so even less $ in the game. AND we are at 4.5%. Post-tax benefits, we are on par with my last rental, which was in a multi-unit (large townhome) and -400 sqft. We also hit the low-water mark for the neighborhood.

husmanen said...

Ask for an opinion and you will get it. Also, if you give us enough info we will find what you are referring to, e.g. my reference to the $275 HOAs per month.

Anyway, I think the others had very good comments about the area and rental pressure. If you don't decide to move forward you can always rent one of the condos and see if the partying and the trains bother you.

Any other thoughts? And I wish you the best of luck!!

Buttroot said...

I have been lurking on this blog long enough to remember when the major contributors were considered crackpots by many, and not the geniuses we see them as today. (Lander is my personal Jesus)

The advice from this blog led me to sell my interest in my Arden Park home (95864) in 2005 as part of my divorce. I am still patiently waiting for the end of the post bubble madness before I get back in - hopefully in the same zip.

One mistake I made was carrying the financing (as part of a divorce settlement). There used to be a lot of options to sell a note, but as you might expect, not so much now. It’s a 10 year interest only note at 5.12% with a balloon due in 2015.

While it’s actually been a great investment so far (comparatively), my biggest concern is that prices may drop significantly in 95864 (hello option ARM) rendering the note less attractive.

I would like to find a way to convert it to a down payment and buy once the fundamentals are back to historical averages. Do any of the usual suspects here have any advice on how to pull this off?

Louie said...

DJ said: "If you want to ensure that the house sells to the first cash offer after yours, just say the words FHA 203K."

It's pretty disappointing to hear this statement considering I have my eye on a fixer that needs to drop some in price before I make an offer. The 203K would have allowed me to use my savings to remodel the home.

My lender says that any conventional lender will need a home to be "habitable" before closing the deal. What would constitute unhabitable? Broken windows? A rotten wall in the bathroom? Mold growing on the bathroom walls? A large crack in the ceiling? How messed up can a home be before a lender says no?

Deflationary Jane said...

Conventional isn't as strict as FHA. For instance, FHA won't take a place without a stove. But conventional will proved their is normal space where the stove would go and the venting is good.

FHA is picky on things like peeling paint, dry rot, electrical, stuff like that. If an asset manager get offers using these loans, that's a signal that the structure has major issues and they will unload it for cash as fast as they can. I've seen it in action.

I bid 10% over list on a place that needed a 203k because the kitchen had been stripped of appliances and fixtures and a bad addition of the back porch. The asset manager took an all cash offer for 2/3 of list within a week.

The thing that sucks is how a 203k funds. You need a GC going in and it pays out the repair costs like a construction loan by deliverables. They are a huge pain in the a$$. A 203 streamline is better but still problematic.

paranoid renter said...

What is MCM?

Jennifer said...

Mid-century modern. Google can probably give a good idea of what it's all about.

Anonymous said...

I am a first time buyer "looker" and I want others input on going FHA or conventional. I have enough for 10% down, but that would take most of what I would use to fix up the place or my safety cushion.
How much more likely would a seller go with a conventional vs FHA? And for that matter, since we are bidding against investors in this market with cash offers, how much lower would a seller take a cash vs conventional vs FHA. Specifically referring to bank owned REO.
Thanks for your input.

slow burn said...

I don't recommend buying if you use all of your savings as a downpayment- you will have no saftely cushion for emergencies.

In a normal housing market, you won't have to bid against anyone. The sellers will be begging you to buy their house.

Having to bid against investors just shows the housing market has a long way to go before hitting bottom.

I was hoping to buy again in 2 years. At this rate, it may be 5 years or more before things are moderately normal again.

paranoid renter said...

Mid-century modern. Google can probably give a good idea of what it's all about.

Thanks Jennifer. Looks like the kind of stuff you get at Design Within Reach ( I like their stuff, and was about to buy a bed from them when I found out that the max load that the queen bed could handle was 350 lb (and the mattress would count towards that). Most beds are usually rated at 500-800 lb at least.

The stuff looks good, but I don't think it will hold up.

There may be other manufacturers that sell more durable stuff...if you happen to know of any let me know.

patient renter said...

With many buyers among us nowadays, can anyone comment on how fetching a low purchase price does or doesn't effect property taxes?

Ben S. said...

Regarding FHA vs the alternatives, my wife and I are trying to buy our first home with FHA and it's been unsuccessful so far. It seems like if we offer at listing price, without asking for any seller concessions, then we should get it! Is FHA really so difficult that they'd rather take cash at less than asking?

wrong moves said...

I am well aware of the opinions of short sale properties on here, but I'd still like to know if anybody knows the "nuts and bolts" of how a transaction would work. We had an offer accepted on a really nice property for 290K. It is currently rented for $2000. I only add that because I know some of you like to know. Anyway, does the bank have to even know the property is being listed before the sign goes up? Seems like we are just waiting for the bank to do an appraisal. We don't have any other irons in the fire, we can wait on this one or walk to another property, either way is fine. I'm just trying to be more knowledgeable.


husmanen said...

PR. Regarding taxes, I called Sac County Tax Assessor and asked them if they base the taxes on the price of the sale. They said yes, except if it appears to be way off market, for example $1.

You could check the taxes on properties that sold recently on Sac County from the tax assessors site. That should give you the data you need.

Wrong Moves. Your rental parity comparison is very strong, you are in the money by nearly $500 per month if you decided to rent out the place (PITI:30yr, 20% down, 5% int). Good to have patience on this one.

If the short sale has only one loan on it the deal could go through with little problem.

David said...

@Ben S -- I won't repeat my entire rant about FHA (scroll up to see it). Talk to your agent about how to get an FHA bid accepted. Notice I said YOUR agent, not the seller's agent. If the seller does not welcome you with open arms, run away because there's something wrong with the house that he/she does not want to disclose. Keep looking and ignore homes that have obviously deferred maintenance like most REOs.

husmanen said...

You guys will love this one.

Just did some research on a neighbor’s home that was bragging about how long they have lived there without paying – 18 months and counting. This is the first time I have a concrete example and I was shocked – their story is true. Here’s the scoop:

• 18 months without paying
• NOD filed over 15 months ago
• NO NOS filed
• Owners have been bouncing around different mod programs
• Owners have purchased a house in another area in the mean time
• Owners plan to rent out the place until actual foreclosure
• They have potentially saved $45,000

If a NOS is filed today, they still have another month before the next auction date is set. I usually see auction dates postponed a minimum of three (3) times. So they have at least four (4) more months.

Probably longer as they are trying the latest loan mod.

It’s a weird wild world and I see this as become more and more common in the future.

David said...

hus, does your neighbor have a second lien?

husmanen said...


Deflationary Jane said...


that is wild. My title recorded on the 1st and sure enough on the 2nd a NTS was posted on my door. I don't know how long the sellers had been neglecting the mortgage and impounds but the house did go from NOD to NTS in a about 120 days.

Now where I am moving from, it's not uncommon to see a tax lien over 15k where the borrower hasn't paid on the place for over a year. Are they only going after the properties they think can turn around fast? It wouldn't surprise me.

Sold in '05- Bought in '09 said...

My former neighbors, who bought in the spring of '05, have been riding it out without payments for 19 months and counting. They made their last payment in July 2008 and then used a shady law firm/modification company to try to get a principle reduction (comps in that neighborhood should put their house value at approx. 260k vs 475k owed). The mod company outfit closed up shop and vanished last summer, but apparently they bought them some serious time payment free. They received their first NOD in December of 09 and then had their first direct contact with the bank. The bank just offered them a mod but without principle reduction (or letting them see the terms on paper for that matter) so they're going to just sit tight and see how long the sale takes. For those of you with public record access the address is 1732 MAGENTA DR, ROSEVILLE 95747

- CD

smf said...

No biggie...

We had neighbors who finally left their house TWO years after last payment.

The more expensive the home, the longer you can stay w/o paying.

husmanen said...

Here's a rental parity for you.

3004 Aberdeen, EDH
Sold 2007, $975k
Asking Rent: $2800/month

If you bought it in 2007 with 20% down with a fixed 30yr loan at 5% your PITI would be about $4,100. That is a down payment of $200k. Just the taxes alone are over $1000/ month, plus HOAs of $35/month.

If that is the going rent for the area, even the two short sales on the same street are overpriced at
$565k and $599k, $3150/mon and $3356/mon rental parity.

Inversely, with that rent the house pencils out to about $430k.

Sounds about right.


husmanen said...

Flipping at the high end.

2242 Amherst Way, EDH

If I remember right this house sold at auction for the low $400s less than a month ago.

Now it is on the market asking $534k.

A house about two doors down rents for about $2400/month, which equates to at house value of about $430k (20% down, 5% int, 30yr etc).

When it sold I initially thought, how nice someone bought a house that meets rental-parity.

Now the flipper. That sounds like very risky work, but since interest rates are low the desire for returns are pushing people.

When interest rates go up, they could have a double impact on the market. (1) reducing prices and (2) reducing demand as many with cash will put it into safer places.

OntheSidelines said...

An update on our appraisal issues. The seller's appraisal came in the same as the original.

The seller took about a week to make a decision, we hung in because we had nothing to lose. Just told us he would lower the price to the appraised value. So sale price works out to 10% under asking price.

Next problem is now dealing with the small amount of pest inspection repairs needed ($1400) and the seller's unwillingness to split the cost.

It never ends!

I do feel for the seller who MUST sell in this market...but not that much!

sbg said...

OntheSidelines....I assume you are dealing with a regular seller and not a short sale.

How does it work in the case of a short sale? Are banks just as willing to lower the price to match the appraisal values? Can banks reject the new offer and seek other buyers, knowing that the property is not worth more than the appraisal value?

David said...

@Sidelines -- depending on your financing, pest repair may be a mandatory seller item. In addition, $1400 is not a lot of work to quibble over. Almost every one I've ever seen came in minimum $1500, so you should both be happy this is not an obstacle. Maybe there's a concession you can wring from the seller in return for eating the pest repair.

OntheSidelines said...

Yes this is a regular seller, I'm not sure what a short sale or bank owned might be like. Everything I have heared is "bring you best offer" which would make me think there isn't a lot of room for negotiation.

I proposed to the seller a 50/50 split of the pest repairs and they declined. Before I had the chance to react, the seller's agent said she would pay their half.

David said...

@Sidelines -- the agent kicking in $700 tells me he/she really needs this deal to go through and you are in the final stages of negotiation. I don't know your particulars, but I would lean toward taking the $700 hit. If another snag comes up you can point to your flexibility and accommodation on this issue, then try standing your ground. Best wishes.

sbg said...

@Husmanen - what do you think about the following properties which are currently in the market in Folsom?

335 Turnpike Dr
168 Vierra Circle

They both are about the same square footage and both have pool/spa. How do these compare with rentals in the area?

sacramentia said...

"I proposed to the seller a 50/50 split of the pest repairs and they declined. Before I had the chance to react, the seller's agent said she would pay their half."

Sounds like you've found the "best and final" if the seller is willing to walk over $700.

Dave Hoggan said...

Sounds like the typical reseller. They never learn.

The Anonymous said...

Husmanen -- no offense, but your near single minded assessment of a homes value based on rental parity appears misguided.

There are places in the USA where rental parity will never ever be reached.

For example, where I live on the east coast, one can rent a rundown place in a "up and coming" neighborhood for 1500 a month (18K a year). However, these places routinely sell for 450K or so. Why you ask???

Turns out, there is a near insatiable demand for the underlying land from developers who routinely buy these lots for 450K, scrape the house, subdivide into 2 1/4 acre lots, build 2 homes that sell for 600K a piece (1.2 million total).

Unaware of this, I sat blindly by for years, plugging in "rental parity" and assuming each home would fall into the 270-300K range. Only after 5 years of watching this happen over and over and over again, did I realize that in this case, rental parity will never ever be achieved.

Not saying that your overall advice is incorrect. Im pretty sure that in 90% of circumstances across the USA, rental parity is infact an achievable outcome. However, I think your advice on rental partity should come with a caveat that there are certain areas with high underlying land value where rental parity will never happen.

husmanen said...

The Anonymous. Admittedly, there are areas where speculation on land prices will overshadow rental parity, especially if it is contained by rent control or an under developed property. This could occur for many many years. I agree with you that at least 90% of the US would adhere to the rental parity metric in the long run.

An example, my current rental was purchased in the bubble for $420k and the rent is about $1500, the LL speculated on the house and the land. Comps are at $290k, pretty close to rental parity.

And rental parity is not my only metric, although it is a very useful and easy one to pull out of your hat. I use other methods that an ‘investor’ may use (Gross Operating Income, Debt Coverage Ratio, CAP Rate and Economic Value) and take general macro economic metrics too (income/affordability/jobs etc).

The ‘investor’ metrics are a little over the top and do not add much more than the rental parity.

When an ‘investment’ starts to lean towards speculation is when future returns are based on past results when the market has changed. If the only profit or revenue you are banking on is based on future increases in value you are a speculator. With high risk comes high reward and high costs of failure.

So with your case of the lots being split and new homes built, what would the new homes rent for? If they rent anywhere near $3000 per month the investor made a correct calculation on the land value and rental parity. If not the new purchaser of the $600k home is also speculating and not covering their costs – could end badly unless the spiral up continues endlessly.

husmanen said...

The Anonymous, here is a good example. I have a family member that lives in a Southern California beach community. The house was purchased in the 1940s, it is owned outright and has had no upgrades.

When they pass away the house may be a tear-down with a new 3000+ sqft house built. To help my family I ran some numbers on the house to try to figure out the best way for the family to proceed.

Current rental parity = $2500 / month = $450,000

New Replacement House rental parity = $4000/month = $1,000,000

Recent Sale on Street = $1,000,000

Current Tear Down Market Value = $600,000
New Replacement House Cost = $450,000 (3000 sqft @ $150/sqft)
Total Cost or Asking Price = $1,050,000

Current potential total profit/loss = - $50,000 loss

The current data tells me that when my family member passes away the family should sell the house in AS-IS condition and pocket the $600k. If they believe the land value (tear down value) will continue to go up more than inflation keep it.

But whatever they do, do not build a new house on the lot and try resell it now, the added value does not recoup the costs.

sbg said...

Is it a good assumption that most appraisals that come lower than the sale price occur with FHA loans? I mean if you are putting 20% down, the bank would be more comfortable in coming with the appraisal at the sale price, as there is less risk involved for the bank due to higher downpayment. Do you think the way appraisals are done depend on whether it is short sale, REO , or regular sale?

wilk916 said...

@sbg - For whatever it is worth, I am closing very shortly on a house (not short sale or REO). I went FHA with 3.5% down. The appraisal came back 3% over the purchase price. In theory these appraisals should be non-biased, correct?

@Anonymous and husmanen - I think rental parity is a great way of estimating the lower bound on the price of a particular property or community. There can be a variety of reasons why a house can sell over rental parity (not all of them irrational as Anonymous points out). If, however, prices reach rental parity then you cannot expect them to go much lower since renters in the area start to become potential buyers. This flux of renters becoming buyers works in two ways. Firts, it increases the number of would be buyers in the area (purchase demand) and, second, it decreases the number of renters in the area (rental demand). This combination would then put upward pressure on the price-to-rent ratio in the area. Just my two cents.

husmanen said...

@wilk916. Congrats!!

What you wrote is true regarding those that will jump in when the prices go below rental parity.

In the old days, pre-2001 that meant that you would also have a down payment of 20%. Also, in the old days you probably saved and even borrowed from friends/family to get you in.

wilk916 said...

@husmanen Thanks. My wife and I are happy with the deal. I'll provide more information next week after we close (don't want to jinx it). I took away a lot of good info from this forum and feel I can contribute with my own story. In particular I have some anecdotal evidence on FHA vs. Conventional which was a decision I struggled with for a bit...

Louie said...

I'm very close to submitting an offer on the home I described at the end of the Feb. watercooler thread. It is a 2000 sq ft. home on a large lot in Sac, the comps are probably running around 240K in good condition, but it is a fixer. I will need to gut the bathrooms, replace everything in the kitchen, paint, and do a lot of other smaller projects. However, we like the floorplan and the potential. It is a Short Sale.

It sat on the market for about 170 k, and when I finally spoke to the selling agent, he told me he'd just gotten a cash offer of 145k, and needed our offer by Monday if we wanted the house. They will accept an FHA 203K rehab loan, which as a first-time buyer, I would use to rehab it.

Here's my quandry: when I spoke to him, he didn't ask whether I had an agent, and I didn't tell him, because I figured he might not talk to me, and I like to do things myself. So I got the impression he thought he would double up on his commission, and thus suggested that something around 150k would get us the house.

Since then, I spoke to my agent, who has called him, without a return call as of yet. So my question is, what is the likelihood that I lost a competitive advantage over the cash offer by having an agent to take half his commission?

I'm thinking of offering 155K. What are my chances of beating a 145k offer with that? Thanks for any input!

ash said...

Louie- my best friend is a real estate agent and I used to submit offers through him. It turned into a waste of time with competitively priced properties like the one you have. The listing agent knows it is an easy sell at the price and will 100% try to double his commission if he can by finding the buyer as well. How do I know this? ---

My father and I are real estate investors in the area- my dad offered $160k on a duplex in fair oaks with his agent. I offered $150k 2 days later directly through the selling agent.

My dad never got the call back.

I got the duplex- lol for 10k less

real estate agents and people respond to incentives- if you give a real estate agent a double incentive to work with you he will- and pretend not to see the other selling agents offers for as long as he/ she can without being busted ethically.

Louie said...

Good to know, thank you. Its too late now to go in without an agent, and I would feel bad if I had to ditch my agent. (I would certainly pay him via another channel).

How serious of a conflict of interest is it when an agent represents both? Is it mostly just a matter of pushing paperwork through, or are there things that a dual agent might overlook in serving my interests so they can get the deal done?

sacramentia said...

Just want to second what ash is saying. I had an offer lost in the "spam filter" last week by not going through the listing agent, even though it was for more than the final accepted offer. Real Estate agents are in general are not ethical.

The banks could make more by just putting the homes on eBay and accepting offers directly about 3 weeks after listing.

husmanen said...

I just contacted my agent and she confirmed that the house we were beat out by a LOWER BID was a 'double-dip'. There may be more truth into this than I thought.

Does that mean everyone should drop their current agent and just use the sellers agent? NAR will eventually implode if this is true.

husmanen said...

Even more fishing things going on. My agent told me of a house that another client put in an all cash offer with 2 day close and it didn't get accepted. They had 45 bids.

She thought it must have went for much higher.

It sold for over 10% LESS to another all cash buyer.

That was a bank repo and those are our tax dollars at work. Not good.

Anonymous said...

That occurs with all types of sales, REOs SSs and regular?

husmanen said...

What was I saying "fishing things going on", what I meant to say was 'FISHY"

In a regular market it is up to the buyer who they sell to.

If there are tax dollars involved going with a lower bid should not be acceptable, especially in cases where all things are considered equal.

Buying Time said...

Well, I suppose the bright side to them accepting a lower all cash offer, is that the borrower won't be defaulting on a FHA loan.

Sadly, in our home search we ran into more unscrupulous Agents than honest ones. At this point, I have almost no respect for the profession.

smf said...

She thought it must have went for much higher.

It sold for over 10% LESS to another all cash buyer.

This has been going on for quite a while. You'd think the market is improving with those 45 bids, but how many of them were 'real' bids. There were supposed to be TWO other offers on our house, nowhere to be seen when we closed.

Had a friend bidding on another house with another offer. RE agent insinuated that the house was more than $20K over asking. Ended up selling for asking price.

All cash offers are usually accepted regardless of any high priced financed offer simply because all cash has better chance of actually finishing transaction.

husmanen said...

SMF, what makes this situation weird is that my agent's client was offering all cash too, BUT 10% over the price that the other cash offer got the home for.

I agree that many of the stated number of offers are pure fantasy, but two cash offers on the table and you take the lower one?!

One can always choose to take a lower bid, but with a REO that is using our tax dollars and 'choosing' to take a lower all cash offer of two all cash offers - something is not right.

Could be 'double dip' by the selling agent or some other interesting side bet.

wilk916 said...

"...client put in an all cash offer with a 2 day close and it didn't get accepted...
...It sold for over 10% LESS to another all cash buyer."

Wow. I've never heard of this. It makes sense that agents would like to work both sides of the transaction but ignoring a higher cash bid is outrageous. I have to imagine (err... hope) that the Feds have a clue that this is going on? As a tax payer this kind of stuff makes me a little ill...

sacramentia said...

SMF - Not likely on a home like you bought, more likely on properties that are significantly (20%+) under market value. They show up on the mls for a day or two fri/sat. The banks give the agents a few days after setting the price to get the home on the mls. If the price is very low there is plenty of time to gather offers and hold the 'best and final' before the agent returns for work Monday morning.

I think this is far more widespread that is acknowledged, just like the number of people in the process of doing a strategic default by not paying the mortgage. Between these two groups you have a positive feedback loop that will ultimately destroy almost all housing debt in the affected markets before it ends.

Louie said...

Assuming the house is a fixer, can anyone envision a scenario in which an agent acting for both parties, didn't act in the best interest of the buyer? Perhaps by not including appropriate contingencies? Or not ordering appropriate inspections?

husmanen said...

WOW! This is the biggest hit I have yet to see by a bank.


Loan Amount:$1,092,882.15
Opening Bid: $242,250.00
Sold: $242,250.01

LOSS: $850,633.14

That loss may be equivalent to about a dozen houses in the middle tier areas.

WOW again!!!

patient renter said...

Hus - that is a massive hit, but was it just a lot? I don't think that area is built out yet.

RPeck said...
This comment has been removed by the author.
singleguy said...

Divorced and share title on a 4br 2100sf house in the Pocket with a $45K mortgage, comps put it at about $330k. Any advice on whether to sell in the next couple months or to refinance and buyout the ex?

husmanen said...

PR. You are right, this area is not entirely built out yet. I think it is a partially developed lot. My guess is that they got a large construction loan, started work, and then life and the economy happened.

Singleguy. That is an interesting one, since the bubble has deflated unevenly in many areas it makes the call more specific and unique. During the bubble years it was like shooting fish in a barrel, and I would have said ‘sell and rent’ NOW. But that is not the case right now.

My old adage… what would it rent for? If the rent would be >$1800/mon than it is worth at least $330k or more depending on the rents. That $1800 should cover a ‘normal’ buyer (20% down, 5% 30yr, fixed) paying Principle Interest, Taxes and Insurance.

If you can’t rent it for $1800/mon then the current price may continue to go down.

Assuming you split everything 50/50 sell it for $330k and split the funds after paying off the $45k loan you would have to pay her $142.5k. If you borrowed the $142.5k the P&I would be about $1k/mon, taxes $344/mon and insurance $83 – totaling $1427/mon.

You could (a) live there for $1427/month, (b) rent it out for $1800 or (c) sell it now or in the future.

Really depends on what you want to do.

husmanen said...

Just watched this house* sell at auction for about $370k a few weeks ago and now it is on the market at $439k. It was a Short Sale at $390 I believe, obviously it didn’t go through.

Lets see here, rents in the area range from $1800 to $2400/month. This could rent for about $2100 per month, equating to a $380k house with 20% down, 30yr fixed at 5%. Now if you really want to live here you could add some value to that rental figure and say you would pay $2300 per month = $420k.

Getting pretty close to rental parity.

This is encouraging, now if I could only get someone to buy one of these auction homes for me with a predetermined fee, say $20k. It would be a win-win situation.

* 2278 Cardiff Cir, El Dorado Hills, CA 95762

Lucky said...


I actually met someone whose buys houses at auctions. It is pretty crazy how it works - it feels like capitalism at it's purest sense. The problem is that you don't know what house is going to be auctioned, and when.

I don't know if you meant it, but I could always get you in contact with this person if you wish.

husmanen said...

Lucky, thanks for the info. I should look into this further.

I realize buying on the court house steps is very risky and should be rewarded. Yes, there is an inconvenience of the auction date perpetually moving but some pretty high impact risks are involved such as:

• Making sure you are buying the 1st mortgage (1st lenders position), 2nd and 3rd Mortgages (these would get wiped out if you bought the 1st mortgage)
• Back taxes, property and IRS (tax liens up to four months after)
• Back HOA fees
• Mechanic Liens (if not subordinate to 1st foreclosing)
• Incomplete permits
• Current homeowner damage
• If occupied, owner not moving out and having to use the Sheriff/Police to evict

Before the auction, an auction flipper would run a title/lien check and prepare cashier’s checks in various denominations for bidding.

Also, there seems to be no rhyme or reason to the price the banks put on the opening bid, sometimes it is lower than the loan amount and is bid up other times it is so high the bank gets it back. Most properties still go back to the bank because of the latter.

From what I can gather a court house flipper is usually looking for a minimum of 10% ROI. That would mean I/WE would have to get a pretty good deal.

I should put some numbers together on specific houses I watch and see if it would make sense for me acting as if I was an auction flipper and was going to sell to a person like me. Let me think about this.

Lucky said...


The person I know told me of the same risks. Sometimes you end up buying a dud and complete POS. Having people living in the house hasn't been as big of a hurdle, from what he told me - but he didn't elaborate.

He did say that using common sense on the numbers that one can pretty well determine if a sale is for the first or second mortgage. I didn't discuss the others, like liens and back taxes.

He asked if I was interested in buying something through him, for a fee obviously. I don't need a house yet as I am still unsure about when I am moving to the Sacramento area. I will be moving, but it might be in 2010 or 2011 fall. I don't want to buy just for the sake of buying. At the same time, I could buy something and keep on turning my money over until I find something I like.... too complicated.

The deals that he has told me about are unreal. I do believe him, but I take everything with a grain of salt.

You have to be a risk taker to be involved in the auction process. It may work out well, but it may blow up in your face too. I think in the long run, after doing multiple houses to weed out the poor performers, this could provide a good ROI.

husmanen said...

Here is a great post regarding the latest 'nuclear' option to 'save' the housing market. The meat is in the middle.

Principal reductions are a public relations diversion

husmanen said...

I have been thinking about paying a fee to a person/company that would purchase a home at auction for me to live in (not an investment property).

Since there is considerable risk involved there should be reward. Lets run some numbers and see if it is worth it:

Assume ROI for person/company buying at the auction steps is 10% and my risk reward is 10% less than estimated market value based on rental parity. Also, assume I identify the home (s).

Here is the scenario:
Rental parity $2,200/month
Est. price based on rental parity = $400k
1st Loan Amount = $750k
Risk Comp. for Auction Buyer = $34k
Risk Comp for Me = $40k
Max Bid Amount = $326k
My Total Cost = $360k
Auction Buyer Total Comp = $34k (10.4% of $326k)

Now lets see here. I get a $400k house for $360k making my monthly payment (PITI) $2000/month. The auction buyer gets $34k or 10.4% for doing all the background work and the bank takes a hit of $424k.

Hmm, could be worth it if I was able to ‘view’ the house beforehand. Any thoughts?

husmanen said...

Treasury Bills have moved quiet rapidly in the last few days:

Date 5 yr 10 yr
4/1/2010 2.59 3.89
4/2/2010 2.67 3.96
4/5/2010 2.75 4.01

Could interest rates be far behind?

Roy said...

Seems government is going to use our tax money to reduce the principles of those who are being foreclosed. What would be the impact of current trend. I can see house price is going down now.

norcaljeff said...

I too bid on a property recently. My agent said the bank and listing agent were begging for offers. They had one offer and it was FHA and they didn't want that. I went in just over list with 20% down and perfect credit and pre approval letter. 5 days later the agent said sorry, we're taking an all cash offer. Ok, so coincidence or was the agent double dipping again? Who knows if my offer was even submitted. More Market MANIPULATION!