John Murphy’s MEDINA REAL ESTATE REPORT

I just read this post on HousingWire regarding a survey of baby boomers conducted by the National Association of Home Builders and the AARP.  The majority of baby boomers say they intend to stay in their current home if they can.  Those that are planning to move generally would like to move to either warmer climes or in to a one level house or both if they can.

The value of the 4000-5000 SF 2 story walkout would seem to me to be under pressure for some time to come given the demographic shift going on.  Yes, there are a number of young people getting ready to move in to the housing market, but from everything I’ve been reading, given that people are marrying later (or staying single) and having fewer children, it seems likely that the demand for these big homes will remain sluggish for for a while.

As we head in to the final month of the year, I thought I would take a look at the distress inventory for Plymouth.  It’s currently running at 16.8%.  That’s based on 78 distress properties out of a total of 465 for sale.  Plymouth has been running about 12-17% for the past few months although the trend is slowly growing in terms of more distress sales.

I have mentioned several times that if you’re buying property today, you should look at the distress inventory first.  It appears I’m not the only one who thinks that way given that distress sales represent twice as much in the pendings as they do in the active inventory.

Plymouth Listings for Sale

• Overall market: 465 properties for sale

• Average Days on Market: 171
• Average Asking Price: $383,175
• Lowest Price: $60,000
• Highest Price: $2.95 million

• Average Days on Market: 167
• Average Asking Price: $250,020
• Lowest Price: $60,000
• Highest Price: $700,000
• Distress sales represent 16.8% of overall inventory

Plymouth Listings Pending

• Overall pendings: 47 properties

• Average Days on Market: 158
• Average Asking Price: $315,976

• Average Days on Market: 107
• Average Asking Price: $253,713
• Distress sales represent 31.9% of all pendings

We have seen the competition rising from distress sellers and it appears to only be increasing as we wind up 2008.

For a list of these Plymouth distress sales, please send me an e-mail or go to www.PlymouthDistressHomes.com.

Real estate agents are not seen as being valuable in the eyes of the real estate consumer because as a whole, we are not valuable!  Today’s consumer has reason to be skeptical about real estate agents.  Consumers think agents made too much money and it was too easy during the boom years.
I have been one who has believe for some time that the real estate profession will be fundamentally different when we come out on the other side of this real estate correction.  I do not believe the leaders of the past will be the leaders in the future.  The business models must change from being a broker/agent centric model to being a consumer driving model.  And no, it’s not enough to just build a useful website to call yourself a consumer driven real estate brokerage.

The fact is most real estate agents and Realtors are nonperforming and they are gumming up the works.  They won’t get out of the business and the big brokers and real estate boards won’t drive them out either.  And don’t forget state governments whose Commerce Departments get to collect licensing fees…and there is the entire professional education establishment who gets paid to keep all these agents educated (30 hours every 2 years) even if these agents don’t sell anything!  It’s not in their economic interest of the big brokers, the real estate boards, the state governments or the professional education establishment to drive agents out of the business.

For example, the Realtor boards typically charge $350-$400 per agent for membership.  The various MLS’s also charge about $350 per year per agent.  It’s much better to have 18,000 subscribers even if 90% of them are essentially nonperforming.  They still pay their dues.  The big brokers benefit because they have commission splits of 50/50 for newer agents or those who don’t do much sales production.  Most don’t make it past the annual $30,000 - $40,000 they need to earn to achieve a bigger commission split.  The turnover is exceptionally high in this industry.  I’ve heard numbers somewhere between 50-80% each year.  Why would consumers trust us?   Can you imagine if attorneys, accountants or doctors had that kind of turnover?  Granted, we don’t require an extra 3-4 years of schooling, but there are definite steps that should be put in place to massively thin the herd in my opinion.

According to John Tuccillo, former National Association of Realtors chief economist, who wrote an article for REBAC’s November/December magazine (Real Estate Buyers Agency Council - of which I am a member) he stated that:

Even in the best years of the boom, the average Realtor was making only about $30,000, and that was before expenses and taxes.  Given the incomes being earned by the top and even very good producers, it’s  likely that more than half of the membership of the National Association of Realtors were making nothing from marketing real estate.

So you end up with the consumer vs. Big Real Estate (big brokers, boards of Realtors, Commerce Departments, professional education establishment).   But here’s the issue…it is now a consumer driven market and everything associated with Big Real Estate is going to need to change whether they like it or not!  As President Elect, Barack Obama said in his campaign, “Change is coming!”

It’s time to let the professionals sell the real estate and the rest should either go away or work under the direction of an experienced and productive agent.  This will be significantly better for the consumer.  It’s time for all these other agents to go away who are desperate to make a sale and therefore offer a lower commission rate.  Many buyers and sellers think this is a good thing because they believe they are saving a few dollars and they had it so much commission discussion in the media over the past couple of years.  The value a good agent brings to the table is worth much more than a 1% commission reduction.  The fact is, in a fast market, it may not have made much of a difference frankly whether you paid 5,6,or7% to sell your home.  Today’s market is different.

Which brings me to some analysis I’ve done based upon some estimated numbers of agents in the Twin Cities and the overall transaction volume.  I don’t have the exact numbers, and I am certainly willing to correct these if someone finds errors in my calculations, but it’s my understanding that the way the real estate business is being segmented is that the top 10% of agents are doing about 90% of the business.  With that as the basis for this analysis, it’s important to consider who you are going to hire when it comes to buying and selling your homes.  (Note, even within this top 10% of agents, there are several REO agents (those who specialize in bank owned property) who are selling between 300-500 homes this year).
The charts below provide the following estimates for 2008:

• 18,000 agents approximately in the Twin Cities
• 76,000 transaction sides
• Top 10% of agents closed 38 transaction sides
• Bottom 90% of agents closed 1/2 of 1 transaction on average
• Top 10% of agents closed $9.1 million in transaction volume
• Bottom 90% of agents closed $113,000 in transaction volume

(To enlarge any of the charts below, just click on them)

It used to be common practice a year or two ago that buyers and sellers would hire their brother/sister, cousin or friend to help them buy and/or sell a home.  That is increasingly less common today unless that brother/sister, cousin or friend really knows what they are doing.  If you’re going to sell your half million home today, why would you have an inexperienced or non-productive agent represent your interests in this marketplace?  Poor listing and purchasing strategies are costing buyers and sellers between 5-20%.  I see it all the time.  And yet, you’re willing to risk a very expensive, leveraged asset to save a point or two?  It’s short sighted and I would ask you to reconsider if you’re thinking that way.

Good agents bring significantly greater value to the transaction today than the 6-7% they may charge.  If you don’t think so, then perhaps you’re not talking with the highly productive and valuable agents who are out there today.  Given the numbers that about 90% are not productive, it’s probably likely you’re view of agents is skewed by the unproductive and low value agents pervasive in today’s market.

The market is changing and I believe the consumers will continue to seek out highly valuable, highly competent, highly productive professionals to help them with their increasingly complicated transactions in this market.  It’s time for the vast majority of agents to go find something else to do.

The S&P/Case-Shiller Home Price Index was released yesterday.  The trend in home prices continues to soften according to the S&P/Case-Shiller Index.   The Twin Cities showed a slight decline in September from August.   The index is showing the Twin Cities is down 14.4% year over year.

The 10 City and 20 City composite indexes are down 18.6% and 17.4%, respectively.

Here’s the 10 City and 20 City composite graph from the S&P press release: (Click on the graph to enlarge)

Below is the data table with all 20 cities: (Click on the graph to enlarge)

I have been tracking the data for the past several months.  See graphic below.  (Click to enlarge the graph):

Below is the same information but I am just showing the Twin Cities performance versus the 20 City Composite Index:

(Click on the graph to enlarge)

Only time will tell if we are bottoming right here in the Twin Cities or not.

I have spoken recently with a few FSBOs - short for For Sale By Owner.   Those who choose this route do so generally to try to save on the 6% commission cost to sell their home.  The reality is, in a best case scenario they may be able to save 2%, but even that is questionable and I’ll show you why.  (For the sake of this discussion, I would include limited service listings as well where the agent or public comments on the MLS say that any interested party must contact the seller directly including requests for showings as well as offers).

Any agent who has brought the buyer for a FSBO property knows that it is going to take a lot of extra work on the agent’s part to see that this transaction successfully closes.  Because the buyer’s agent has to deal directly with the seller, there is not another licensed professional to make sure the transaction moves forward smoothly.  I will certainly show FSBO properties and limited service listings, but I’m not going to go out of my way to encourage my buyers to make offers on those properties.  It’s often too much work, but more importantly, I have to deal directly with the seller.  There is no buffer.  9 out of 10 times those properties are overpriced…sometimes way overpriced.  There is no buffer of another agent.  This is a major issue.

The fact is that buyers also don’t like dealing with sellers.  Buyers would much rather hire an agent to go deal with the seller.  So the seller is hoping they can sell their property without having to pay any commission, but the likelihood of that is very slim.

Because working with FSBOs requires more work, most FSBOs list their properties on the MLS with a 3.0% payout or higher.  When properties are listed with an agent, they tend to have payouts of 2.7%.  Some are 3.0 - 4.5%, but those are a little more out of the norm.  The general practice is 2.7% and that’s because on a 6.0% listing, the listing broker keeps 3.3% if they sell it and they pay out 2.7% to the buyer’s broker.   So with a FSBO, they really should pay at least 3.0%.   It then costs them about 1.0% to get the property listed, buy signs, put it on the internet, take professional pictures, produce brochers, hold open houses etc. etc.  That doesn’t include time spent following up with prospective buyers or trying to get feedback from agents who just want to list your home.

So all told, a FSBO’s costs are likely going to be in the range of 4%…not zero percent.   They pay out 3.0% and it costs them 1% to market it.

They save 2% and on a $350,000 home, that’s $7,000.  That’s a lot of money.  But here’s the catch.  If the home is not priced right, and in most cases it is not, it’s likely going to cost the owner far more than the $7,000 he had hoped to save.  On top of that, if it’s not priced right, he will extend the period of time his home is on the market further hurting his final selling price and driving up the frustration level with the selling process.  Since he’s not in the market every day to know what’s going on with competiting properties as well as what some of the issues are with getting transactions completed today, he’s at a significant disadvantage.  I would argue that disadvantage will be far more costly than 2%.

And here’s the other catch…when I’m looking at a FSBO, right away I suspect the home is priced too high.  But let’s just say the home is priced right.  If my buyer isn’t in a competitive situation, which most likely he’s not, then I’m going to take 3% right off the top of the home because I know that this FSBO is thinking he’s saving 3% by not hiring me - or another agent to sell his home.  So, that savings, in my opinion, will go right back to my buyer in a reduced purchase price.  In the negotiations, the seller is also at a disadvantage because he doesn’t have someone who is in the market to bounce ideas off of and take cousel from.

Most FSBOs end up hiring an agent.  I can understand the lure of wanting to try to do it on your own, but in this marketplace, it’s extremely difficult to do unless you’re willing to just list your home way under market value and let the offers come flying in!

One of the things that I have observed over the past 6 months or so with falling home prices is the seller who reduces the price of his home quickly, tends to get an offer within 2 weeks of the last price reduction.  If it’s priced right from the beginning, they get offers quickly as well.  Of course when sellers are reducing their price, no one really knows which one will end up being the final price reduction that triggers a buyer to write an offer. Many sellers as well as agents, tend to get hung up on a price and try to stick to their guns and wait for an offer.  This is a very damaging and defensive position to take. The market has so fundamentally changed that you’re at a big disadvantage if this is your position.

When a property is overpriced and out of range from getting an offer, any interested party can usually just sit back and wait for the seller to either get more realistic and start lowering their price, or they become desperate and pull the plug on the price.   Buyers know that the likelihood of someone else purchasing this property while the price is still high is very low.  For example, if a seller has his home listed at $375,000 but the real market value for the property is $325,000, the buyer will just wait until the seller lowers his price in to a range where the buyer feels they can strike a deal with the seller while not overpaying for the home.  The seller may drop his price to $359,900 and then perhaps $349,900.  If he goes to $339,900, then the buyer is likely to make an offer because at that price, there may well be someone else interested in the property and the buyer doesn’t want to lose out on it.

So, how fast should you reduce?  I tell my clients that they should be prepared to reduce within 18-21 days of the initial asking price and every 18-21 days thereafter until we receive an offer.  Some agents feel that 30 days is enough time.  I guess that’s okay, but not optimal.  60 days.  Forget it.  You’re really hurting yourself in this market. If the initial asking price is too high, you’ll know it by the feedback and lack of showing activity.  If the activity is high, but there are no offers, then the price has to be reduced.  No matter how nice your home is, in a buyers market, homes are seen as commodities because in all likelihood, there are 30-40 just like yours for sale.

Sellers have to offer the best price/value ratio in your specific market segment if your home is going to sell.Pricing homes today appears to be more art than science, but I wanted to set out to try to figure out if there is an optimal time when sellers should be reducing the price of their home.  Do more offers come in right away?  Does it take 30 days?  60 days to get an offer based upon the last price reduction?

I took a look at homes (single family, townhomes, twinhomes, and condos) that sold (i.e. closed) in Plymouth, MN between September 1, 2008 and November 14, 2008.   143 properties closed.  I then went through an manually noted the date of the last price reduction and then calculated the number of days between the last price reduction and when a home pended (went of the market - no more showings).  I then subtracted 5 days because on average I am estimating that it is taking 6 days from the time an offer comes in and gets negotiated and when a buyer completes their inspection and agrees to move forward with the transaction.  The findings of this study were most interesting and I have tried to put the results in graphical display below.

I broke the categories out in to 3 segments based upon when sellers received offers

1. Within 21 days since initial asking price or last price reduction
2. 22-43 days since initial asking price or last price reduction
3. 44+ or more days since the initial asking price or last price reduction

Nearly 38%, (54 properties) of all the sold transactions had an offer within 21 days of their last price reduction and on average they received it 8 days from the last price reduction.   The next group was 34% of the total (49 properties) that received an offer between days 22-43 with an average time of 30 days from the time of their last price reduction.  The last group represented 28% (40 properties) with an offer coming in more than 44 days past their last price reduction and this group had an average of 78 days.

Those who reduced more quickly also received selling prices higher than those who took longer to reduce.  The breakout is as follows:

• 21 Days or less: 96.91% of asking price
• 22-43 Days:  96.02% of asking price
• 44+ Days:  95.74% of asking price

The property segments generally had similar pricing demographics with the exception of the 44+ group had a couple of higher priced homes and this was a smaller segment with only 40 homes compared to the others with 49 and 54 respectively.

The market is a dynamic and with all the ongoing changes from the banks as well as the government, sellers and their agents need to aggressively monitor the situation and adjust pricing accordingly.  This is not a market to be cautious or hesitant when it comes to pricing.  If you want to sell, you have to proactively price your property in order to get an offer today.  If you’re worried about pricing it under the market, if it truly is priced under the market, you will have multiple offers.

Here’s an update on some of the thinking above so I’ll append this blog entry with some additional data that I think is particularly insightful for sellers.   I combined the first two segments (0-21 days and 22-43 days) to create one group.   What’s most important to note is the following:

• 72% of the market of pended homes received offers within 43 days of the last asking price.
• On average, these homes received offers within 19 days of their last asking price.

The main point is sellers should be reducing the price of their homes every 3 weeks in my opinion based upon the research above.

Bank foreclosures and distress sales of all kinds continue to provide both challenge and opportunity for today’s real estate consumer.  Lately I have been inundated with requests to receive information about foreclosures and distress sales — both how to purchase them as well as where to find the best lists.

Some of you may already be receiving my customized distress sales lists on a daily or weekly basis.  I have spent time and energy to create a highly customized search methodology that mines the MLS for all the foreclosures and distress sales.  You’ll be hard pressed to find this anywhere whether it’s from a public real estate/broker site or another agent.  If you would like to receive your own customized search, please fill out the form at www.DistressSalesTC.com.

Purchasing a distress sale or foreclosure is a different deal than purchasing from a normal or traditional seller.  If you’re in the market to buy, you absolutely should be considering the distress sales and foreclosures first, but you have to have the right strategy including the proper mind set and expectations going in.

Because distress sales and foreclosures are becoming such a large part of the market - 20 to 30% in some areas - I have developed a Bank Foreclosure/REO Buyer representation specialty in my real estate practice.  Having invested significant time and money in training and education in the distress sale market, I am much better able to help my buyers and sellers understand this growing segment of the marketplace.  I am also part of a nationwide real estate network where I am able to tap in to the latest information and trends going on in the foreclosure and distress sales markets across the country.

This segment of the market is changing rapidly and it’s driving every segment of the real estate market.  For example, did you realize that the banks are starting to change their strategy when it comes to listing property?  Do you know what constitutes a good offer today - one that the banks will review and possibly accept?  There are many things that need to be taken in to consideration when evaluating whether or not to make an offer on a bank property.

Given the fast changing market and all the questions I have received, I thought it would be helpful if I created a report that had some of the key information in it for you to quickly get up to speed on bank foreclosures and distress sales.  I have created a free - no obligation 6 page special report entitled, “Twin Cities Bank Foreclosures - 10 Things You Need to Know Now.”  (click the link which will then open another page.  Please click the link again to open the pdf file).  If you’re unable to open the attached file, you can e-mail me or fill out the form at www.HowToBuyTwinCitiesForeclosures.com.  The information is based upon my knowledge from my national network and research, as well as my extensive training and experience in this area.  This year I’ve been able to help 5 clients find incredible deals by purchasing bank owned homes or short sales.

With regard to the overall Twin Cities real estate marketplace,  it continues to see some improving activity compared to last year when the subprime crisis began in earnest September 2007.  For commentary as well as the latest detailed report from the Minneapolis Area Association of Realtors, click here.

The S&P/Case-Shiller Index just came out again today.  I will try to get the new data tables published this afternoon.

Most homes on the market today remain overpriced.  It seems more often than not neither the agent, nor the seller want to go where they should to price the property to sell.  A good agent will proactively and aggressively discuss pricing strategy with his/her seller if they really desire to get the property sold.

Today’s market requires sellers to price their property under market value if at all possible.  It’s just far too difficult to price homes above a declining market and then trying to constantly find the market with several price reductions.  Too often I’ll see someone make somewhat regular price reductions and then after 5 or 6 months of no action, they’ll then take a big reduction to definitely get the home under market value.  At that point, it’s a bargain to many, and the home finally sells.

Below is a depiction of how Realtors used to price property in 2005 and before when we had a rising market:

Here’s what I see a lot of in today’s market.  The home is priced above the market from the start and with a declining market, the delta between your initial asking price and where the market is, grows by day.  That’s why sellers might say that they are already down $35,000 on their asking price or 6% already.  Yes, but it’s still not at the market price.  The faster you get it to market price, the better off you’ll be.  The chart below depicts where the vast majority of properties are positioned in today’s Twin Cities market:

The chart below depicts what I would describe as the optimal pricing strategy in today’s market.  Yes, I know this is very difficult for sellers to come to grips with, but given the competition from normal sellers, new home builders, and now the banks, this is the strategy that will get your home sold.  If your home doesn’t have an offer in the first 21 days on the market, a price reduction will be necessary.  The latest you should try to hang on to your present price is about 30 days, but that will ultimately cost you in a lower selling price.

The faster you are able to get to the true market value of your home, the faster you’ll get an offer and the higher the selling price will be.