Wednesday, February 17, 2010

The Offer and Acceptance Game. . .

Dave and I are trying hard not to get attached to any one house; and of course, the one that really gave us that 'this is it' feeling is the one that will be hardest to get.  We've seen several homes that we liked enough to live in, but there is a big difference between that and finding a home that you not only would like to live in, but can also see your furniture and life in.

Real estate agents talk about how they know their clients have found a home when during the showing they walk around and talk about what paint colors they would use, how they would remodel, and where they would place their furniture.  We ran around this house with a virtual eye, repainting each room and hanging photos on the walls, talking about how our unborn children could play in the trees outside and what a great place it was for entertaining.

We also made note of every aspect of the house where the current owners had failed to love it as we would; broken light switches, stained and frayed carpet, a non-functional hot tub, unfinished patching on the walls, exterior features (siding, deck) left unstained and unattended for years, broken windows, cracks near the ceiling beams, broken tiles, ruined sinks, a noisy furnace begging for attention, and a dangerous and uninsurable wood shake roof.

There is no hiding the fact that both the roof and the furnace would need to be replaced before closing or by move-in day, and there is no question that this home is in desperate need of some modern updates and TLC.

The home I speak of is what I affectionately call the 'Charlie Brown House', the oldest and most dated home in a very expensive, desirable, and beautiful neighborhood of 2 acre lots dotted with large contemporary mountain homes.

We started inquiring with the selling agent to get more information about this home and find out what the story behind it is.  It is listed as 2575 square feet and $385,000 which is a smidge out of our price range.

It has been empty and on the market for nearly a year, so that was our first clue that there might be a story behind this house.  Failure to sell is usually the result of at least one flaw in the listing:  bad location, priced too high, or poor condition.  Well, this home has a triple whammy!  The location is a beautiful desired neighborhood, but it is on the fringe of the city and a bit of a drive to anywhere.  The condition is fair at best, and we know the price is outrageous.

Utilizing, we dug up some valuable information:

a.  The house was purchased in 1997 for $263,000 (over $100,000 less than their asking price)

b.  The house specs from when it was built in 1988 indicate the square footage to be 2400, later modified by the homeowner to be 2575.  Would not generally be suspicious, however the home has had no additions that might increase it's measurements.

c.  Looking strictly at comps (that is, comparables: recently sold and for-sale homes in the neighborhood priced per square foot), this home is oddly priced at roughly $145 per square foot, right in line with the top three houses in the neighborhood: all large high-end custom homes in great condition with modern finishes.  That outrageous number goes up, surpassing the price of the nicest homes in the neighborhood, if you look at the discrepancy mentioned in line b and base the math on the homes true size, 2400 square feet.

If this house were priced correctly, it would need to be listed at a price consistent with the three lowest (not to mention most similar in size and condition) homes in the neighborhood; in theory, it should be offered at around $320,000.

So, why would an otherwise well-known and reputable selling agent, who knows the area, be offering this house at an inflated price that is not at all in line with local sales?

*We* think the answer lies in that magic word: HELOC.  In 2003 when mortgages were easy to get and a Home Equity Line of Credit was extended to any homeowner asking for one, the sellers of this home did an 'assumed' estimation of the size of the house to inflate it's value.  That inflation in value resulted in a hand shake from the bank, who turned a blind eye and extended them funding on what would otherwise be nonexistent equity in their home.

A few years later the homeowners, for what ever reason, need to move and sell the property: the only problem being that they are very likely upside down in their mortgage.  In other words, they owe more money on the house now than it is worth, especially considering the fact that their HELOC was obviously not used to take care of the home and increase or maintain it's value.

So, as potential buyers, we contact the agent and find out that there has never been a written offer. . .only verbal offers, and that the sellers are 'unwilling' or otherwise 'unable' to budge on the price.

Being the saavy couple that we are, we ignore their statement and forwarded a verbal offer of $320,000 (after necessary repairs to the roof and furnace are completed, of course). . .washed down with a big fat comps spreadsheet we made that illustrated clear as day the price discrepancy.

Not only were we rejected, but their story and tone changed.  All of a sudden they tell us that there had been a written offer once. . .a written offer of $380,000 that put the home under contract, and that they will not accept any offer of less than that amount.  But what happened to that?  Why did it fall through?

Now, understand that no bank will finance a mortgage if the selling price is more than the home is worth: a homeowner entering a big loan like that in an upside-down position spells disaster for the banks who want to avoid short sales and foreclosures.  Even if somebody did go under contract for $380,000, it would fall through when the appraisal came in (and it will come in at less than $350,000 guaranteed).

So, knowing that the homeowners are in over their head, the agent writes the listing up as a 'sweat equity property' (are you scratching your head yet?) and offers it with a renovation loan.  If they can get a buyer to offer $380,000, and then finance with a renovation loan of $425,000 (the difference being used to fix the roof and furnace), then the sellers get to walk away scott-free from their HELOC and the banks (having never seen the home) assume that the price is right and look past the above mentioned appraisal/mortgage discrepancy.

Were it otherwise, and they accepted an offer of less than $380,000, the home owners would have to come to the closing with cash in hand to cover the difference: we are positive they don't have the money.

See, we've got the agent on high alert now, because he's found a potential buyer who is not only smart and saavy, but knows and understands the game they are trying to play.  He removed his listing from, and is on the defensive with us and responds in a manner that tells us he really would like us to just go away.

Of course, that just adds fuel to the fire here.  We want to play!  Somehow, our amazing agent convinced him to let us approach this from a not-so-traditional manner.  They are allowing us to pay for an appraisal to be completed before we place an offer; and confident that the appraisal will come in to our favor we are having it done by a local outfit who knows the area and will rely on comps and condition to base their final decision.

In another plea for us to go away, the selling agent told us that even if the appraisal comes in at our offer price of $320,000, they are unable to accept an offer of less than $340,000.  That's a huge red flag that we are right on with our above assumptions. . .and when that day comes (and it will), Dave and I will march into their lending bank and show them proof of the square footage discrepancy and our attempts to purchase their home, thus preventing the owners from needing to enter a short-sale situation.  The bank, seeing the problem with their mortgage and not wanting to enforce or pay for a foreclosure, would also be on our side.

They don't want to play this game with us. . .

Gosh, as dumpy as this place is now, there is SO much potential. . . .

No comments:

Post a Comment