Deal… or No Deal?

It’s a confusing, crazy real estate market out there. Whether you’re planning to buy a house, or itching to sell, here’s our expert advice on getting the most for your money.

“Watch your step,” Dave Larson calls to me from his back door as  I make my way up his icy driveway on a snowy day last December. “I sold the snow blower in June.” He sold it because in the sunny days of summer, Larson and his wife, Sue, were optimistic that they would be moving long before winter set in. They were eager to start a new chapter in their lives in North Carolina, where they could escape the cold winters and find a smaller house close to their daughter and her three children. By December, that optimism had shriveled and blown away with the autumn leaves.

The Larsons have plenty of company. Homeowners across the state put their homes on the market for what seemed a reasonable price, only to find that buyers, if they bothered to show up at all, expected to spend much less. “We started out at $484,900 in October of 2006,” says Dave. It seemed fair enough for a three-bedroom home on an acre and a half in a quiet corner of Scituate. “We have an in-ground pool, a hot tub, two fireplaces, an in-law apartment above a heated two-car garage,” he says. “The woods out back go on for miles. In the morning we see flocks of wild turkeys in the yard; the other day we saw an eight-point buck.”

They found few who would even look, and those who did found fault. “One complained that there were no streetlights on the road. Another said the neighbors’ houses were too close,” says Sue. “It was unbelievable.” They gave up trying to sell on their own and found an agent, and then a second agent. By December, anxious to get moving, the Larsons had reduced the price to $349,900 and finally gotten a nibble. “Our agent said to us, ‘Take this offer and run!’” says Sue. “And that’s exactly what we intend to do.”

Not long ago, Rhode Island’s real estate market was the hottest in the nation. Between 1999 and 2004, the median price of single-family homes in the state just about doubled. Buyers were eager to catch the wave, driving the demand for risky products such as interest-only and adjustable-rate mortgages. Then the juggernaut faltered. Nationally, the economy cooled down, and prices leveled off. Last summer, the crashing subprime mortgage market reached national crisis proportions. Foreclosure rates rose as adjustable rates ratcheted upward and strapped-for-cash owners couldn’t meet payments.

In Rhode Island, as of late last year, about 1 percent of homeowners faced foreclosure, though up to 6 percent were considered to be on the brink. Those homes go back on the market, adding to the supply and driving prices down. By last October, the median price of a single-family house in Rhode Island was $236,000, about a 10-percent decline from a year earlier. It was the lowest price recorded in almost three years, according to The Warren Group, a Boston firm that tracks real estate data across New England. Last September, almost 7,000 houses were on the market, a ten-month supply, and buyers were scarce.

“Mortgages are harder to get right now,” says Richard Godfrey, executive director of Rhode Island Housing. “I think that’s a good thing. The mortgages being offered now are a little safer.” But it means there are fewer buyers to go around. Also, some buyers are waiting on the fence, hoping prices will drop even more. Other potential buyers who are already homeowners face the challenge of selling their own property if they want to trade up. And investors who were eager to flip properties in the ascending market are nowhere to be found when there’s a decline.

It all adds up to more sellers competing for fewer buyers, driving prices even lower. Forecasts by the Mortgage Bankers Association project a continuing decline in sales and prices nationwide through 2008 before the market starts to slowly recover in 2009. Last December, the New England Economic Partnership predicted the Rhode Island market would decline about 5 percent a year for two more years.

Paul Hogan, president of Hogan & Stone, says he expects a gradual recovery to start as soon as this summer. “There are positive signs that many of the expected foreclosures can be prevented by renegotiating the terms instead,” he says. “And the pipeline for new homes is shutting down.” As the housing supply falls back into balance with demand, he says, the market should respond as prices level off.

The Rhode Island market has another thing going for it—quality of life. “We’re spoiled,” says Ron Phipps of Phipps Realty in Warwick. The coastline, the restaurants, the access to Boston and New York—all of those values remain. And the cost per square foot for saltwater frontage is the lowest in the region, Phipps says. He expects that regional demand will grow faster than supply, and Rhode Island still has room for prices to go up in the future.

Meanwhile, the statewide market reports mask local variations. Olneyville and Washington Park have been hit hard, while the East Side has held steady. Jamestown and Little Compton, where sales are scarce, have escaped the decline altogether. Last September, median sales prices in those towns grew 37 percent and 46 percent, respectively.

Condominium, waterfront and second-home properties all vary from the averages. Homes in the $3 million-plus range generally hold their value. It’s a volatile and complex market, but opportunity lurks. For those with the means to do so, Godfrey says, “Now is a great time to buy.”

As for the Larsons, in December, it is finally time to sell. Their front lawn in Scituate is covered in snow as their daughter calls from North Carolina and says it is seventy-five degrees and sunny outside. More important, her kids are asking when they will see their grandparents again. Like many families in the real estate market, the Larsons have accepted the fact that money isn’t everything. They will have to take less than they had hoped for, and the profit they expected has evaporated, but in the end, being close to family matters more to them. “We’re ready to go,” Sue says, smiling, and Dave nods in agreement.

 

Buy Low

Advice from the experts on getting the best deal.

[1] Find a good agent
Buyers might be tempted to think they can go it alone, with so many choices and online listings ready to browse. “But working with a great realtor can make such a difference,” says Bridgette Soby, a sales agent with Lila Delman, based in Newport. “A realtor knows the neighborhood, knows the market, knows the sellers and the history of the house, and has so much inside info to offer,” she says. She suggests buyers start their search for an agent at www.riliving.com. Realtor listings are searchable by town, with links to websites.

[2] …And get a good lawyer
Not everyone knows that state law presumes an agent represents the seller, not the buyer, though this law will change May 1. Since an agent’s commission is based on the price of the house, the higher the final sale price, the bigger that commission will be. You can save money by hiring a real estate lawyer, whose fee remains the same regardless of what the house goes for. Plan on spending several hundred dollars for your lawyer to review the documents.

[3] Don’t wait for prices to drop
Buyers need to look at the long term. Even if housing values continue to decline for a few years, that really doesn’t affect your bottom line unless you have to sell. There are more homes on the market now than we’ve seen in a decade, says Godfrey, so there are lots to choose from. If you can find a place that suits you at a price you can afford, why wait? Interest rates now are low, but if they rise over the next few years, that could wipe out any gains from waiting for a lower price. And if you plan to live in the house for at least seven to ten years, you will likely ride out most market fluctuations, Godfrey says.

[4] Don’t be shy
“Go ahead and make whatever offer would work for you,” suggests Soby. Buyers tend to think they shouldn’t go too far below the asking price, but you never know, especially if the house has been on the market for a while and the owners are anxious to move. “Just get things rolling,” she says, and don’t be surprised if you get a positive response. Keep in mind the Larsons, who eventually came down $135,000 from their original asking price.

[5] Be ready to bargain
“Everything is negotiable,” says Soby. So if you really wish the seller would throw in that dining room set or the living room curtains, go ahead and ask. You can also make an offer with the contingency that your own house must sell first. “When the market was hot, a lot of sellers wouldn’t take those kind of offers,” she says. Now that things are slow, any offer is worth a look. But if you can move right away, that is definitely to your advantage. “Some owners will make price concessions in return for a quick closing date,” she says.

[6] Consider a condo
Condominiums are still popular, especially among home owners looking to downsize, says Phipps. Overall, condos have been less affected by the sinking market; in the third quarter of last year, the average price for condos in Rhode Island actually rose nearly 5 percent from the year before, though units took longer to sell. That uptick, however, may simply reflect that more high-end units are on the market. Soby says there are plenty of condos in the $200,000 to $300,000 range, some within walking distance of downtown Newport and beaches. “There are some good deals out there,” she says. Hogan says condo prices in Narragan-sett are down about 15 to 18 percent from their peak. If you’re considering a condo in a larger development, ask how many units the developer still owns and how many are rentals. When do the leases expire? Once they go on the market, will those rentals be developed to the same standard as the ones being sold now? You don’t want to find yourself the only homeowner surrounded by transient tenants.

[7] Stay focused on the essentials
In a market where buyers are so scarce, some agents have tried offering incentives to attract their attention. Phipps has tossed in a sailboat or a lease on a luxury car to help properties stand out in a crowded field. Remember that what you really want is a good home at a good price, so don’t get distracted. Phipps says he’s found the incentives helpful, but the bottom line still comes out the same. “Right now, the only thing that’s moving properties is price,” he says.

[8] Forget about flipping
Bargains can be found among the foreclosure sales, but buyers need to shop carefully and be prepared to hold the property for the long term, says Karen Hurst, a broker associate with Storm Realty of Warwick. Most homes that have been foreclosed on are sold as-is. “It’s definitely a buyer-beware market,” she says. “This is not a time for flipping.” On the other hand, this may be a good time to invest. There are plenty of multifamily homes on the market, and the prices are low. “I’ve seen some good deals out there,” says Soby. A two-family house off Broadway in Newport, within walking distance of downtown, sold recently for $325,000, she says. “At that price, you can make a profit renting both units. Not long ago, you could make that work only if you lived in the house.” Rents are still very strong across the state, and Godfrey says he expects demand will keep them high for the foreseeable future. (See “Do you really want to be a landlord?,” page 47.)

Sell High

How to move the merchandise in a slow market.

[1] Call in the pros
For sellers, the challenge is to attract buyers and stand out from the crowd; the days of simply hosting an open house and choosing among offers are gone. The Larsons tried selling their house on their own but found in this market they needed an agent’s help.

There’s an industry saying that 20 percent of real estate agents do 80 percent of the business, so hire someone who has the best track record of selling houses in your market and who has a good website with detailed information about properties that are listed. An agent will be familiar with other comparable houses in your community, will know what buyers are looking for, and can help ensure that your house will be competitive. Consult friends and relatives for recommendations.

[2] Hire a professional stager
Most agents will advise sellers to take down family photos, remove clutter, add fresh paint in neutral colors, be sure the house is spit-polish clean and fresh, and all maintenance is up to date. If that’s not enough, you can enlist a professional stager. Stayci Fast, owner of New England Home Staging, says she can help owners see their home from a buyer’s perspective. She offers a two-hour consultation for $200. A more elaborate makeover focuses on the priority rooms—kitchen, family room and master bedroom—updating the focal points and furnishings with a fresh, designer look. Most homes can be staged effectively for $2,000 or less, Fast says. (See “Market Value,” page 65.)

[3] Set the right price
You may have a number in your head that you think your house is worth, but the real price of a house is determined by the market—it is only worth what someone will pay for it. If you want the house to move, be prepared to lower the price. Unless you bought in just the last few years, you can probably still turn a profit, even if it’s not as big as you might have hoped for.

[4] Add some frills
Consider what luxe conveniences would close the deal if you were buying. At upwards of $10,000, installing central air conditioning isn’t cheap, but it can be an irresistible selling point, especially when you’re showing the house in the dog days of summer. And who wants to schlep dirty laundry all the way down to the basement? This may be the time to install a washer and dryer in an upstairs room or closet.

[5] Keep your perspective
Remember that there’s more than money involved in your decision to move. Do you need more space for a growing family? Are you ready to get out of the city to a quieter place—or the reverse? Is it time to downsize, or retire? It might be worth it to cut the price, take the loss, and move on, or if you need more space, building an addition and staying put may be more feasible than pulling up stakes.

[6] Consider waiting
If you reach your rock-bottom price and no offers appear, there’s not much more you can do. “Waiting may be the best strategy,” Phipps says. He’s optimistic that the local market will rebound within two or three years. If state officials follow through on a plan to extend the Boston commuter rail to Green Airport and Wickford, it could provide an extra boost. “A house that sells for $270,000 in Rhode Island today would go for over $400,000 in a Boston suburb,” he says. “When the commuter rail was extended to the South Shore in Massachusetts, the market overall went up about 10 percent.” He expects at least that much of an impact here, and perhaps much more for waterfront property. Hurst agrees. “If you don’t have to sell now, don’t,” she says. “Wait a year or two. I suspect the mortgage situation will loosen up, and mortgages will become easier to get again.”

 

Do you really want to be a landlord?

Sometimes renting out property can seem like the answer to a problem. Can’t sell that house? Rent it! Can’t afford a single-family, or hoping for a hedge against future market downturns, or just looking for bargains? A duplex or triple-decker can be tempting. With the current drop in prices, and mortgage rates still low, it might seem a wise investment. But keep in mind that being a landlord is a job, and you need to learn your legal responsibilities and fulfill them. For most houses built before 1978, lead paint may be an issue, and it’s up to the buyer to do due diligence and be sure the home is in compliance with the latest lead laws. Rules that took effect in 2005 require landlords to take a three-hour class about lead hazards. Information is available at www.hrc.ri.gov; the state’s lead hotline, 222-LEAD; or via email at leadinfo@admin.ri.gov.

You also will need to know the laws about discriminating against tenants, the legal procedures for handling evictions and more. Rhode Island Housing offers courses for new landlords; call 888-722-1461 for information.

And being a landlord is not for everybody. Here are some pros and cons:

Pros

  • If you have to move, can’t find a buyer and want to put the sale on hold for a year or two in hopes of a market turnaround, renting a vacant property can help reduce your losses.
  • If you have trusted friends or family members who want to rent from you, a duplex or triple-decker can work out for everyone.
  • Over the long term, rental income might help subsidize your retirement after the mortgage is paid off.
  • There are significant tax advantages to being a landlord that can beef up your bottom line.                

Cons

  • Bad tenants can damage your property or fail to pay on time, and eviction, if it comes to that, is time-consuming and frustrating.
  • You’re on call 24/7 to deal with emergencies, from clogged toilets to icy driveways. Remember to consider what your time is worth when calculating the costs and benefits.
  • Even after the mortgage is paid, taxes and maintenance costs will eat into your rental income. Be sure you are realistic about expenses.
  • As an investment, there’s no guarantee that your rental property’s value won’t decline in the future.