- The Washington Times - Friday, September 1, 2000

This may seem the wrong time to discuss desperation sales, considering how active the Washington market is these days and how much it favors sellers.
A significant number of homeowners, however, find themselves in this bind: They need to sell, but their home has not gone up in value since they bought it. It may have even lost value, so that the home is worth less than is owed the bank. That is known as being "upside down."
Paying money out of your pocket to sell a home certainly is a bitter pill to swallow. How can a seller make the best of such a troubling situation? How can you avoid it in the first place?

How it can happen

"You need to buy right so you can sell right," says Ed Crowley, a seasoned Realtor with Long and Foster's Bethesda Gateway office. "If you overpaid for a home in the first place, selling becomes more difficult."
Today's market is ripe with possibilities for buying wrong. With a small number of homes for sale and plenty of eager buyers bidding against one another, prices are escalating. Particularly frustrated and well-heeled buyers can easily pay $10,000 to $30,000 more than market value for a home these days.
Many buyers in the market today have profited handsomely from the stock market and the high-tech industry. If they want a home now, they can afford it.
"But they can put themselves in a dangerous position," says Julia Kriss, chairman of the board at the Northern Virginia Association of Realtors. "If they find a home they like, and need to move in 30 to 60 days, they might figure paying an extra $5,000 can't hurt, as long as they get the property they want."
In a sense, they're right. An extra $5,000 on the price of a home will only add $30 or so to your monthly payment. So what's the big deal?
Buyers who overpay, knowingly or otherwise, may be setting themselves up for the same problem many homeowners experienced in the early 1990s.
It started in the late 1980s, when many home buyers paid too much for properties because home prices had become inflated in a profound seller's market. Lots of sellers made a mint because of the rapid and aggressive appreciation of Washington-area real estate. But a few years later, things were different.
"I wouldn't say prices fell in the early 1990s," Mr. Crowley says. "It was really more of a price correction."
Whatever you call it, many homeowners found themselves upside down. They paid more for their homes than they could sell them for.
It happened in the District as tens of thousands of residents left for the suburbs, flooding the market with vacant real estate. Home prices in the District dropped sharply in the early 1990s, only recovering in the past few years.
"Fortunately, I don't think prices are as unrealistic now as they were in the late '80s," Mr. Crowley says. "And many people today have learned their lesson from that period."
Also, most buyers now work with a Realtor known as a buyer's agent. Buyer's agency was just emerging a decade ago, so few home shoppers at that period benefited from the expertise of a real estate agent.
Even with the help of a Realtor, it is still possible for careful buyers to find themselves upside down. Moving soon after buying within two years is an easy way to put yourself in a bind.
You also might find your property value dropping because your neighborhood is in decline. Nearby homes in poor condition can affect your property value significantly. Other factors to impact property value include foreclosures and a predominance of rental properties.
When your neighbors' homes begin selling for less and less, the market value of your home drops along with them.
Homes in new developments can sometimes experience similar fluctuations, too, as John and Margaret Page discovered.
"We bought a brand-new town home in Alexandria in 1991, just before the market slowed down," Mr. Page says. "Immediately after we moved in, the same models began selling for $30,000 less than we had paid."
That's a big gap to overcome, especially in the early 1990s, when appreciation was minimal. Homeowners who can wait for property values to rise do not have a problem. Unfortunately, the Pages did not have a good deal of time.
"Our family outgrew the town home pretty quickly, so we moved out and rented a house across town," Mr. Page says.

What to do

Obviously, the Pages would have lost a big chunk of money if they sold back then. Knowing that they would own the property for quite some time, they softened the blow by refinancing when interest rates were low.
"We even paid a little more to buy the rate down," Mr. Page says.
Now, with a 6.5 percent fixed-rate mortgage, the Pages had to rent out the property and wait for its value to rise.
"The best option for many home owners who are stuck is to let time cure the problem," Mrs. Kriss says.
Renting can be a bit of a gamble, however, so know what you are getting into.
"If you don't have an accountant already, get one to do an analysis of all the costs and tax factors involved in renting," she advises.
If you are able to rent the home for, say, $100 more than your monthly mortgage, you might think you have an easy $1,200 profit coming each year. Factor in the interest-rate deductions, and it might seem quite profitable to be a landlord.
Not so fast. What if you lose a month's rent between tenants? That could be an entire year's profit down the drain. Or perhaps you'll wind up with messy renters, who damage the home and force you to shell out repair dollars.
The Pages understood these risks, but had no other option. So they were careful.
"We ran credit checks on all our applicants," Mr. Page says. "There was one guy who really wanted it, but he had a very, very bad credit report. Fortunately, we found a couple who became wonderful tenants."
The Pages also talked to the current and former employers of their prospective tenants, and their former landlords. Such precautions are no guarantee, but they are wise steps to take before you rent.
Novice landlords also should enlist the help of a Realtor who specializes in rentals. Your agent will be able to determine the market value of your property and guide you through the potentially sticky process of writing and enforcing a lease.
If renting seems too much of a gamble, and selling the home seems the only way to go, how can you unload the property without losing your shirt?

For Sale By Owner (FSBO)

A big cost associated with selling a home is the Realtor's commission. Most sellers pay a 6 percent commission, which is usually shared by the seller's agent and the buyer's agent. Some companies are even charging 7 percent these days, which is $10,500 on a modest $150,000 home.
That is why selling the home yourself can be so tempting, especially if you are upside down.
"In the past month, I have pulled two FSBOs out of the fire," Mrs. Kriss says. "I have seen some cases where it is successful, but I have also seen many disastrous examples."
The downsides to selling yourself can be manifold. Sales negotiations and contracts can be tricky. You can fall into many legal potholes; you could even lose $10,500 simply because you lacked savvy bargaining skills.
"FSBOs are flying blind," Mr. Crowley says. "They are denying themselves expert assistance, and they run a big risk of having the home on the market for a long, long time. That costs money, which they don't have to spare."
Your 6 percent or 7 percent savings also can evaporate because of the American tendency to bargain hunt.
"A lot of FSBO shoppers are looking for a deal," Mrs. Kriss says. "They expect to get your home for 6 percent less than it is worth."
If you choose to hire a listing agent to sell your property, you might be tempted to ask for a commission reduction. Some Realtors will work for a lower commission, but they might not be top-notch professionals.
"I will shop for a discount designer dress," Mrs. Kriss says. "I will shop for shoes on sale. But I will not shop for discount laser surgery on my eyes, or for one of the major financial decisions in my life. I pay a professional to provide their services when I need their experience and knowledge."

Other options

Another tempting way to get out of a jam is a sale by auction. The prospect of eager buyers bidding against one another until you are in the clear sounds exciting, doesn't it?
"There are certainly some situations where auction makes sense," Mrs. Kriss says. "They were used by many folks in the slower markets of the early '80s and '90s. But this is not really the best market for an auction. Any buyer in this market will wonder what is wrong with the home, why it is being sold at auction."
"Today's buyer is very savvy and very value-conscious," Mr. Crowley says. "He isn't going to put an offer on an overpriced house. And his buyer's agent is going to advise him not to. The agent's job is to get the best possible price for the buyer, not to bail you out of a bad situation."
If you simply have to sell, squeeze every ounce of value out of your home.
"The things that are absolutely critical are condition, price and location," Mr. Crowley says. "You can't do anything about location, but you can work with the other two."
Your home must show well if you are to sell well. It should be clean, tidy and kept up. Fresh paint and a carpet shampoo are inexpensive makeovers that have a big impact.
"The home has to be drop-dead beautiful," Mrs. Kriss says. "There is a new generation of inexperienced buyers in the market today who don't have the skills or inclination to fix up a home. Many buyers in this younger generation don't want a big Harry Homeowner project ahead of them, and they can afford a home that is in move-in condition."
Pricing your home right also is important, and this is when the wisdom of hiring a Realtor becomes most apparent.
"You have to price it right in today's market place," Mr. Crowley says. "That can only be determined after a thorough market analysis. You simply cannot price it higher than it ought to be, because buyers today are smart."
They also are eager to find a home to buy, which will work to a seller's advantage.
"Even though the home market is hot, my adage is this: Sellers should not show their greed; let the buyers show their need," Mr. Crowley says. "There are a ton of homes on the market right now that are overpriced. Don't be one of them."
Mrs. Kriss advises a slightly different strategy:
"A seller who is upside down should list their home at their break-even point, even if it is overpriced. You may have to lower the price to get a buyer, but you never know. You might get lucky."

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