How many times have you looked on a real estate site, and noticed the asking price of a home is completely different than the site’s estimate of their opinion of value? This drives real estate professionals crazy, and you know why? The information is inaccurate and misleading. Click on this LINK to learn more….
Listing your home as a For Sale by Owner isn’t as easy as you think. The main goal of every For Sale by Owner (FSBO), is to sell their home for the highest dollar amount without paying a commission to a Realtor. On the surface, this seems logical and a financially prudent thing to do. But, for those who are struggling to sell, these are the Top 5 Reasons why your home is not selling.
1) PRICE. Take a look at the cartoon caption above, to see how people will view your home. This is the most accurate explanation of perceived home value. It is difficult to be objective in determining a list price, because the majority of Sellers will increase their list price because of a replacement cost, upgrade costs and/or sentimental value. It is difficult for Sellers to understand, replacement costs (new roof, new HVAC, new appliances) add little value. Home upgrade costs rarely provide 100% return of investment. Sentiment has zero value.
2) PHOTOS. I can immediately identify a FSBO online by the poor photo quality. This is not a point and shoot type of photography. Photo’s can either make or break a buyers first online impression and subsequent interest of the home.
3) STAGING. If your home isn’t staged and decluttered to enhance size and functionality of rooms and closets, then you are throwing away big $$.
4) RESTRICTED SHOWING TIMES. The majority of sellers don’t have flexibility for private showings. Qualifying potential buyers is difficult because you want as many people as possible to see your home. Identifying a qualified buyer vs “tire kickers’ can be overwhelming and often brings anger and frustration when buyers don’t show up for their scheduled appointments.
5) NEGOTIATIONS. Negotiating an offer requires expert knowledge about the current real estate market. Expert knowledge involves knowing all the comparable homes that have sold and are currently listed (interior details), sold information of comparable homes (arm’s length transaction, fire sale, job transfer, etc. that affects appraised value), economic conditions (past and future), accurate financial posturing by the buyer, etc. Once you go into contract, then what? If you don’t know the next several steps required by both Buyer and Seller, the deal will more than likely fall apart. Once it does fall apart, you get to start all over again. (Question: When does a Seller get to keep the earnest money deposit?)
The majority of For Sale by Owner properties, sell for less money and can take longer time to sell. The worst thing you can do as a For Sale by Owner? Not being a serious seller. Often, I see For Sale by Owners “testing” the market by overpricing their home to entice that one unrepresented buyer who is willing to pay more than market value for their home. Yep…. That doesn’t work.
To learn more about Earnest Money Deposits and when a Seller gets to keep the money, click HERE
The truth about Earnest Money Deposits (Escrow)
- Escrow Deposits are held in a Trust Account either with a Title Company, or Attorney
- Title Company/Attorney cannot release Escrow Deposit to either party without a signed cancellation of contract.
- If buyer and seller cannot come to an agreement to release escrow funds, Title Company/Attorney files an Interpleader with the Courts. This will allow a Judge to decide who should be awarded the escrow.
- Judge will review all factual evidence (contracts, contingency removals in writing, letters of declination; basically everything in writing) to determine who should receive disputed escrow funds.
- Once Judge orders the disbursement, Title Company/Attorney fees, court costs and filing fees will be deducted from the refunded escrow amount.
- Judges orders are final.
- By the end of the process, the fees associated with the escrow dispute, can sometimes be more than the original escrowed dollar amount. In this case, the losing party must reimburse the court.
With all of the contingencies defined within the contract, then why are there “Escrow Disputes”?
The #1 reason for an escrow dispute, is because the terms and conditions of the Sales and Purchase Agreement were not met within the contingency time frame. The rule of thumb with contracts is, everything must be in writing. All contingency removals must be in writing with both parties signing the document. If a contingency must be extended, an Addendum to the Sales and Purchase Agreement must be completed with signatures prior to the expiration of the original contingency deadline.
Buyers and Sellers (as well as real estate agents), either get too busy or impatient with the details and will instead, make verbal requests. RESIST TEMPTATION OF VERBAL REQUESTS! Real Estate is 100% of what is in writing, so make sure all due dates are met, all requests are in writing (with all required signatures), and both parties abide by the terms of the Sales Agreement.
Part 1 referenced making a partial escrow deposit. Allow me to explain. Let’s say the Seller is requesting a $5,000 deposit. I would encourage the Buyer (Buyer’s agent) to negotiate paying $2,500 at the time of contract and the other $2500 after all contingencies have been removed. This way, it helps to keep both parties equally engaged in the performance of each step of the contract. Just make sure these terms are included (written) in the signed Sales Agreement.
These are general recommendations. As always, remember to seek the advice of an Attorney. Please note, each sales agreement will have different terms and conditions; but one thing that all contracts have, are performance timelines/deadlines. Make sure you are fully aware of all contingency timelines and make sure all contingencies are removed in writing within the timeline period.
Escrow deposit is also known as, Earnest Money Deposit (EMD). Earnest means “in good faith”.
This is a small portion from a buyer’s down payment. Depending upon the sales price of the property, as well as if the real estate market is hot (or not), a rule of thumb is, to put down as much as you are willing to risk. Allow me to explain….
As a former Managing Broker for a large real estate company, I have had more than my share of mediating Escrow Disputes. The number one reason why there are disputes is because the consumer lacked understanding about how escrows are handled, as well as their real estate agents’ lack of experience and knowledge of the escrow process.
1) In the state of Michigan, there is no dollar amount, nor percentage, required for an escrow deposit. I recommend making a partial payment in the beginning. More about this in PART 2.
2) Escrow deposit (Earnest Money Deposit) is a Good Faith intent to purchase, in the form of a monetary deposit; subject to specific conditions/performances that are defined in the Sales Agreement. The conditions of purchasing a home are called Contingencies, such as: Home Inspection, Financing, Title Commitment Review, Title Insurance Review , Attorney Review, etc. Each Contingency has a specific period of time for performance. THIS IS CRITICAL. ALL CONTINGENCIES MUST BE INCLUDED IN THE ORIGINAL SALES AGREEMENT.
a) It is recommended that both Buyer and Seller allow a period of time (typically 3-5 business days) to have their attorney review the terms of the Original Sales Contract. This MUST be included as a Contingency.
b) Inspections typically have a 10 – 14 day performance period. In the State of Michigan, Home Inspectors must be licensed by the State. This means, the inspection AND the results of the inspections PLUS any repair requests, MUST be completed and submitted to the Seller, within this contingency period. ALL requested repairs MUST be in writing in the form of an Addendum (to be attached to the Original Sales Agreement) within the contingency period. NO VERBAL REQUESTS
c) Financing process typically takes anywhere from 30-45 days depending upon time of year. (If there are holidays within the Financing time frame, expect the entire process to be delayed; especially the months of November, December and January.)
Each offer you make on a property needs to be based upon a personalized, overall individual strategy. Although an escrow deposit is expected at the time of the offer, make sure you are very comfortable with the dollar amount at risk. Never sign a contract unless you fully understand the terms and conditions of what you are signing. It is always recommended to have your offer contingent upon your Attorneys Review and Approval.
Click HERE for Part 2: Escrow Disputes
The short answer, is yes….. and no. Still confused? Let’s break it down.
A finished basement is one of the most popular home improvement projects for homeowners. A basement is below grade; and in Michigan, walkout basements are also considered below grade and are not calculated in the overall square footage in an appraisal.
Finished basements are popular because it provides additional living space. Whether a finished basement provides one room or multiple rooms, the average rate of return of investment, is only 70%. The rate of return could be less than 70% if it is considered an over improvement.
Scenario 1: Homeowner invested $50,000 into basement improvements, adding a bathroom, bedroom with an egress window, and a family room. Although homeowner expanded the living space square footage, the value for this improvement would be based on the following: increased room count, increased bedroom count and increased bathroom count. The highest value in the Ann Arbor Area for a finished basement for appraisal purposes is $25,000. Some appraisals will provide additional value for the extra rooms for $10,000. This brings the total value for the finished basement to $35,0000; 70% of the original cost.
Scenario 2: Homeowner invested $100,000 into basement improvements. Using the same improvements from scenario 1, homeowner added a movie theater and kitchen. The appraisal came in at $25,000 for the finished basement PLUS$10,000 for the added bedroom, bathroom and finished family room. But wait, you have an additional movie theater room AND a kitchen; that should be worth something….right? Wrong. The movie theater and kitchen would be considered an over-improvement and provides no additional appraised value. In this scenario, the investment provided a 35% return….(Hey, I didn’t create the rules. You can thank the Federal Government’s very strict appraisal Standards and Guidelines)
Here is another way to look at this. Two identical houses were built at the same time. One house was built with standard building materials and the other house was built using gold. The cost of the second house was substantially more than the first house. Since gold is not considered “standard”, the appraiser could only provide a value for standard materials used. The lesson? Cost to build a house (or improve a house) has no consideration for appraised value.
Although finished basements may have the same appraised value, the finished basement with the added movie theater and kitchen will have a higher saleability value than the house without it. You may be able to ask more money for the added features, but at risk is the Appraisal. If a house doesn’t appraise, the buyer will either pay the difference between the appraised value and the contract price, or, be forced to cancel the sales contract if Seller is unwilling to negotiate a lower sales price. Keep in mind, some mortgage rules will not allow the Buyer to pay the difference between the Appraised value and Sales Contract price. It all depends on the type of mortgage.
To further confuse you, appraisals are calculated differently than values for property tax purposes. Remember the story of the two houses where one was built with standard materials and the other one built with gold? Yep, you guessed it. The tax assessor will tax the house built with gold much higher than the one built with standard materials. And the house with the home theater and kitchen? Yep…. those over-improvements will be taxed too.
It’s important to know the difference…..
When listing your home for sale, sometimes it is difficult to separate real life from reality TV. How many of us enjoy watching episodes of House Hunters and Fixer Upper? The lure of professionally decorated homes you see on HGTV and the reality of a lived-in home are two completely different things; yet most buyers expect to see beautifully decorated homes when they tour homes for sale.
Most buyers find it difficult to see past every day, lived-in home environments. The paint color is all wrong, the formal dining room has been converted to a children’s playroom, or the home decor of owner’s furniture is “blah” and outdated. These all have an emotional impact on a buyer and many times, a great home is missed because the buyer got caught up in the “cosmetics” instead of the homes great potential.
To help buyer’s overcome this reality shock, it is important to know this Number 1 Rule: Cosmetics are the easiest thing to change in a home.
Pictured below is a photo of a kitchen prior to our Home Staging Services. The kitchen was very dated, cluttered and dark. The homeowner had a budget of $500 to update her kitchen.
With a limited budget of $500, we focused on making the kitchen feel brighter and bigger by painting the cabinets with a Clay based paint. For added durability, a protective clear coat was applied over the paint. Walls were painted a soft gray. A light was added above the sink. Everything else was elbow grease and getting rid of the clutter. As you can see below, these simple changes added instant value.
When selling your home, it is important to have an honest assessment of these cosmetic factors. Cosmetics include: paint, furniture, flooring, clutter, cleanliness, window coverings, light fixtures, appliances, etc.
As for Homebuyers, don’t get side tracked in how a home is decorated. Look at the architectural details of the home. Room size, traffic flow, room location, kitchen functionality, garage size/space, and the location of the home itself, are things that cannot be changed. Eliminate the “stuff” that will be going away when the owner moves. Resist the temptation of judging a room based on the paint color, as most buyers repaint their homes anyway.
Potential Homebuyers should tour the neighborhood to get a sense of their potential lifestyle. Introduce yourself to the neighbors. Get a true sense of what your life would be like in your new home.
As for Sellers, having a strategy in place to sell your home for the highest dollar amount is essential BEFORE you list your home. Avoid the frustration of price reductions and wasted time on the market without a sale. Not having a Strategic Plan could cost you time and money.