March, 2009

Along with the ospreys returning to Shelter Island for St Patricks’ Day came the customers set to buy a home. March was an active month from both rental and sales perspectives, a sharp turn from prior months and the most active since September 2008.

The business of real estate is truly a study in human nature. Whether on the buyers’ side it is attributed to a human’s need to nest and find a home, or whether on the sellers’ side it is a testament to their good initial investment, it is a complex business before one even visits the property.

The Buyers' Perspective

Since the middle of September, 2008, many buyers had been “on the fence”. Activity picked up during February around Presidents’ Day with both old and new buyers scoping out properties on Shelter Island and leases getting inked for rentals.  I am fortunate to work with some of the sharpest clients and customers with a far greater understanding of the economy than I could ever have, and even more fortunate that they are patient in explaining the intricate details that dig deeper than most of the frequently inflammable coverage in print or on TV.

The big question that everyone still wants the answer to is: when is the bottom of the market? Up until now, I have answered that having a crystal ball would be great, that no one can really say, but one of my customers who is actively looking to buy told me that the biggest mistake many buyers make is thinking that they can time their purchase to the market, something that leads them to erroneously believe that they have the luxury of time on their side resulting in their missing out on some great deals.

A professor I once studied with told me that he believed there are two types of buyers: those who think they can time the market, jumping in and out at will, waiting for prices to hit bottom; and others who think that the timing will find them, as long as they stay in the market and continue to search. His theory was that the doing the latter probably is the wisest, since if one pays attention and remains consistent in their search, they will see the incremental changes and find something that suits them. Those who want to time their purchase always wonder how low prices will go and by the time word is out that the market has hit bottom, it’s already on its way up.

This brings to my mind the classic diagram demonstrated in real estate classes with a line being drawn on a pad and the instruction of: say “stop” when you think the market has bottomed out. Well, of course, who can say? And then the line is drawn upward—tell me when the market has peaked. Well, naturally who knew when it peaked during the bubble?  Peaks and valleys are recognizable only in the rear view mirror.

My professor told me: you know when the market has bottomed out when its on its way back up and you know the market has peaked when its on its way down.  People who purchase at the very top of the market are just plain unlucky and people who purchase at the bottom are just lucky. The wise buyer is realistic but not greedy—they can recognize that the market has dropped but accept the fact that no one can see the end and no one can determine how quickly the market will begin to rise again, so they concentrate on what they can count on happening.

This made me think of a real estate book I once read where the term, “smart zone” was used for the buyer who understands that making a killing is a matter of luck and not planning, and who is only looking to get a sensible deal.

The Sellers' Perspective

On the sellers’ side, pricing and appealing to the buyers in the “smart zone” is crucial. On Shelter Island, as in many other parts of the country, there are few transfers over a 12 month time frame that stand up to the present market; Indeed there have not been any closings that were negotiated since the middle of September, although there are two properties that have gone into contract, both all-cash, one inland and the other waterfront.

In today’s market buyers are perplexed when looking at what’s listed for sale: one has been listed for over 3 years at a boom price; another was just listed at a more realistic price and yet a third is somewhere in between. Frequently buyers ask: “where did this price come from” and “what am I missing here?”

The analysis stage of working with a prospective seller can take hours of research, as I wrote in my last newsletter. It is frequently disappointing to the homeowner to hear that what they thought they could get is far from what my analysis reads.  Sometimes a homeowner starts to debate which can lead to frustration on both sides.

I try to tell them that pricing in a buyer’s market, is important since we want the property to jump out at the starting gate making the best first impression price-wise, being the first house in that category that is shown, and ultimately out-smarting other sellers in that category.

What I use to come up with a market value frequently takes into consideration failed deals, offers not accepted, overpriced listings used to sell another one priced more competitively, plus assessments and several other threads related to transfers.  Sellers upon hearing a market analysis then have to make a decision: where shall we list this house?

In a market that is dropping, sellers worry about pricing too low, but pricing correctly helps a property stand out. If a seller prices “to the market” and the market continues to slide, the property is essentially priced too high very quickly, and the seller winds up reducing the price and “chasing the market”.

My old professor said: “Sellers are in a race against time-the best price is what you get now. Sellers should price to the market they’re headed into”

What's Happening Now

Right now on Shelter Island, it appears that the sellers of properties listed after mid September are more receptive to offers, even those one might categorize as low offers. At the present time, I am working on 2 properties in contract: one inked during the summer of 2008 whose purchasers continue to navigate tricky financing waters despite having excellent credit, and the other listed only a few weeks ago with receptive sellers and a qualified buyer; and 3 that have had accepted offers and are in a pre-contract stage. Having worked through several accepted offers during October/November which didn’t pan out because of financing complications, I am hopeful that these will progress to the next level. 

Anomalies

In keeping with the strange times we live in, clients and customers I am working with are encountering anomalies that one didn’t hear of in the very recent past…Two examples: A bank who has given a commitment to a buyer and is over-interpreting a clause, saying financing cannot be given because the ferries connecting Shelter Island to the mainland are privately owned and that the bank cannot sell the loan to Fannie Mae. It turns out the rule was written for properties on small private islands in the middle of huge lakes etc and does not apply to Shelter Island!…A full priced offer that has been enthusiastically accepted by the seller, who then learns that the total of his outstanding mortgages is nearly $100k more than the listed price…

Interest Rates

One of the bankers at Wells Fargo that I work with in the Southampton office last week said with all assurance that the interest rates, while presently historically low, will gradually rise to where they were in the late 1980’s, something that has been echoed by other contacts I have who follow economic trends. Strange as these days are in the real estate business, there are good opportunities to be found for buyers in “the smart zone” and for sellers who have the courage to listen to sound advice and price their homes correctly.

The Rental Market

On the Shelter Island rental circuit, largely because of inclement weather during weekends in March, there were numerous postponements that have yet to be rescheduled—as I write this, teeming rain keeps me company.

Since mid February, I have executed leases totaling $165k with another $30k looking to be signed.  There were several distinct trends in March: tenants 1) putting in low bids, 2) waiting to see if higher end rentals will become desperate to rent and reduce, 3) creating veritable laundry lists of requirements then shooting down all prospective listings for a scheduled tour, because the sight-unseen properties don’t meet their requirements.  

Inland properties with no pools up to $22k for MD-LD have largely been rented already, and waterfront properties priced competitively have done well. As is the case every year, the clean, uncluttered, depersonalized houses are getting the tenants.

Because of the economy, homeowners who have never rented in the past are putting their homes on the rental circuit. When giving price suggestions for various time frames, I provide comparable listings to homeowners. Frequently, the suggested prices are too low for owners to list their homes for rent.

A prospective tenant looking for a rental online may be disappointed to learn that many listings advertised are no longer available—indeed, many properties on a popular rental website have long since been sold, already rented or even torn down!  One of the best features of the Corcoran database is the real time accuracy—once a property has been leased, the time frames are checked off as “rented” and the correlating time frame for that rental is removed from the internet. Each listing agent is required to update the listing every 30 days, otherwise the listing is removed from the website.

Taking the Plunge

There are unknown factors in the sale market and the same is true for the rental market: one can never know when they begin or when they end, so a wise landlord should be prepared to gauge their decision on the quality of the tenant and whether the numbers make sense to them.

To be continued!........