Chapter 1
Create a Master Plan
In This Chapter
◆ Creating your plan
◆ The big decisions you need to make
◆ Getting everything in place for the sale
◆ The stages of a sale
When you sell your home, it can be that one chance in your lifetime to make a huge financial profit. Good planning saves you money. It also makes you money—and a lot of it! On the other hand, mistakes and delays could cost you a lot. You may surround yourself with professionals, or you may try to go it alone. Either way, for you to maximize your profit when the deal is complete, it is crucial to take an active role from the beginning.
The more prepared you are from the start, the smoother the process of selling your house. The entire experience is much less stressful and much easier on you and your family.
In this chapter, we help you to create that plan. Some of the things you need to do are: understand why you’re selling, establish a personal time frame, know where you’re going after you sell, determine if it’s the right time to sell, determine whether or not to use a Realtor or sell it yourself, get paperwork organized, physically prepare the home, and understand the stages of a sale.
Reasons for Selling Your Home
To create a good plan for selling your home, start with becoming clear about the reason that you are selling. Not only will it help focus you, it will also have a big impact on the next home you choose to buy, and that will affect your financial bottom line. Now, your reason for selling may be obvious to you, but in reading on, you may see that you possibly have more than one reason. Keeping all of the reasons in mind will help you make good decisions.
Having clarity about why you are selling is important for the rest of your family, too. You’re all leaving this home together. When everyone rallies for a common cause, the result is always better.
Here are some common reasons why homeowners sell:
◆ Lifestyle change (death, divorce, marriage, retirement, youngest child is graduating from high school)
◆ Job relocation
◆ Taxes are too high
◆ Personal bankruptcy
◆ Testing the market to see what the home is worth
◆ Unhappy with the location or neighborhood
◆ Unhappy with the school system
◆ Bored with or no longer love the property
◆ Need a bigger kitchen
◆ Need more bedrooms
◆ Need more bathrooms
◆ Want a finished basement
◆ No room for an addition
◆ Want to scale down and have less living space
◆ Cannot keep up with the maintenance; ownership is too much work
Seller Alert
If you put your home on the market and then find that you’ve changed your mind or feel that you’re selling for the wrong reasons, you have the legal and ethical right to withdraw it from the market at any time, provided that you have not signed a contract with a buyer.
Where Are You Going?
There is a saying in residential real estate circles that “there is no such thing as performing just one transaction.” This is almost always true. The minute you buy your first home, the odds are that you will always be a homeowner, until your old age. It’s true that some homeowners will sell and then rent, or move into assisted living. But the majority of sellers always buy another home. This means that you are likely to conduct two transactions in approximately the same window of time.
While most of us understand this idea in theory, we still tend to judge each purchase or sale alone, as an individual transaction. But they’re not really individual transactions when you have made them in the same time period. We forget that, while we may have lost money on the sale, we may have made it up on the purchase of the next home.
To illustrate the point, think of boats in a harbor, rising and falling with the tides. No matter how big or small the boat, they all move up and down at the same rate. Now, think of your community as the harbor. All the homes in it will rise and fall with the market at about the same percentage.
Let’s say that you are looking for a larger home (or “trading up”) in your community. At the moment, the market has fallen 10 percent. You actually stand to make a tidy profit after selling the smaller one and buying an even bigger one. The following shows you how.
You lost $30,000 in value on the home that you sold, but the seller of the home you bought lost $60,000 in value. By making two transactions, you made $30,000 after both trades were completed. Not a bad return when all you could think about was losing $30,000 in the sale of your current home.
Trick of the Trade
If you are thinking of “trading down” to a smaller house because you feel that your current one is “too much work,” consider the possibility that you may still want a lot of space but are just growing weary of yard work and all the outdoor maintenance required. An alternative could be a townhouse or very large condo that has all exterior upkeep included in the monthly maintenance fees.
Is It the Right Time to Sell?
This is perhaps the biggest question that homeowners ask themselves. It’s a valid one because everybody is worried about losing money if they sell at the wrong time. But what is the wrong time or the right time?
Let’s talk about the three different types of markets in which you may be selling your home and how to spot them.
Selling in a Buyer’s Market
A buyer’s market is also known as a falling market. In a falling market, home prices are coming down and it therefore favors buyers.
There is an understandable perception that you will lose money selling your home in a buyer’s market. You don’t have to! With the exception of some extraordinary circumstances, like an environmental or economic disaster in your community, there are only a few reasons why you would actually lose money when selling. These reasons include:
◆ You’ve made too many expensive upgrades.
This is also known as overimproving. The result is that your home now costs more than all the homes around it, and buyers are fearful of buying the most expensive home in a building or in a neighborhood. They want to know that their home is among its peers and not among the smaller, less valuable homes. For more information on strategic renovations and home improvements, see Chapter 2.
◆ You’ve owned it a short time and the market has fallen since your purchase. If the market goes down right after you bought it and then you found yourself needing to sell after a short period of time owning it, you could lose money. Short-term ownership is always risky. If you must move and prices have fallen dramatically, try to keep the property and rent it out until the market bounces back enough for you to sell without loss.
def·i·ni·tion
Overimproving is when the owner has put a substantial amount of money into improvements on the home, such as an addition or expensive kitchen, and the size or location of the home cannot support the expense. The outlay of dollars does not come back to the homeowner when it’s sold.
Seller Alert
If renters are in your home when you do finally put it up for sale, it is like a double-edged sword. You will get monthly income to offset your mortgage and taxes, but beware: renters can have a negative impact on the sale price. Homes that are “owner-occupied” tend to show much better than homes with renters in them because the owner always has a much deeper and vested interest in its appearance, condition, and how much it sells for. Renters don’t care because they aren’t making any money from the sale. Further, they can be uncooperative, as they may be frustrated about the inconvenience of showings and the possibility of having to find a new place to live. This often comes across to buyers viewing the home and can be a turn-off.
◆ You owe too much on the home.
This means that the amount of money that you borrowed is simply more than what the home is now worth. In order to sell, you must make up that difference to the bank. If you’ve ever heard of a seller needing to “bring cash to the closing table,” this is what it means. The amount of money that the buyer borrowed in order to purchase the home was probably too high in the first place. If the homeowner went on to borrow even more against the home during ownership and then the home’s value falls, disaster strikes. The sale price will not cover the debt to the bank.
How to Recognize a Buyer’s Market
When the real estate market is coming down and beginning to favor buyers, it’s usually pretty clear to most homeowners. But how can you tell which way the market is headed when it’s not so obvious? The answer is by looking at the speed at which homes are selling.
Sometimes, you just have to count. To measure the speed, you want to count the number of days that it takes for the majority of homes in your area to receive an offer and go under contract. This is a real measurement called days on market (DOM), and it is a powerful tool used by all real estate professionals. What you’re looking for is the average DOM among all the homes that are similar to yours in size, style, condition, and price.
Calculating the Average Days on Market
834 ÷ 7 properties = 119 Avg DOM
Take the total number of days on market (834) and divide by the total number of properties (7) to find the average DOM. In this case, it is taking about four months for homes in the area to sell.
This statistic may sound familiar to you. In the news and on TV, it is referred to as the absorption rate, which is another fancy term for how fast homes sell. While our measurement talks about “days” on the market, absorption rates usually get reported when they are measured in “months” and the market is in some trouble. For example, news headline might read, “The current absorption rate in the United States is 8½ months.”
def·i·ni·tion
The absorption rate is the average length of time it takes for homes to sell. It can be reported for all homes in the United States or for homes in a certain region.
How to Recognize a Transitional Market
What if some homes are selling quickly and others are taking months to sell? The trends are all over the place and you’re not really sure what kind of market we’re in. That’s a sign of a transitional or changing market. But sooner or later, the market will choose which way it’s going—up or down.
If you are selling in this type of market, you could be a big winner because you sold just before the market tanked—or you could regret having sold your home just before the market took off. The patterns that reveal which way the market is about to go are what economists and financial analysts on Wall Street spend all day trying to figure out. It’s extremely difficult to predict, and anyone who could would make billions of dollars.
Selling in a Seller’s Market
A seller’s market, also known as a rising market, is when home prices are going up. These types of markets can get crazy and seduce you into selling even when you are not ready. Some homeowners want to test the waters by putting their home on the market just to see how much they could get. They may not have thought through where they are going or that it will be expensive to buy in that kind of market as well. When they do get a terrific offer, suddenly they are scrambling to find a new place to live.
How to Recognize a Seller’s Market
Most homeowners know pretty quickly when their community has moved into a seller’s market. Good news travels fast! When the market shifts over to favoring sellers, it usually begins in fits and starts. There are stories and anecdotes that go around about how this home or that home received multiple offers and got 10 percent or more above the list price.
If the market continues in this manner, the stories become more common. The local media may report on the trend. The Realtors in your community will begin to talk about it with their buyers. They’ll point out homes and quote the big sale prices. The buyers who understand the market in your area will realize what they need to do in order to buy a home there. Suddenly, the big sale prices are the norm because the buyers—for the moment—don’t mind paying them.
Now the supply seems to be getting smaller and the buyer pool appears to be getting bigger. The buyers begin to get competitive with each other—which only makes them want a home even more. They want to win.
Seller Alert
Be careful when trying to time the top (or bottom) of any market cycle. There is only one way to know when we’ve hit the top, and that is when the moment is behind us—and usually not until it is weeks or months behind us.
Many sellers assume that they will automatically make a profit in a rising market. Much of the time, they will. But again, how much money you walk away with depends also on what you are buying. If you are moving to another, more expensive community, your bottom-line profit will clearly be smaller after you purchase the new home.
But let’s look at an example of selling and then buying within the same community in which you now live. Perhaps you’ve been in your home for 35 years. Your last child is about to go to college and the house is too big to keep up, but you want to stay in town. You are looking to buy a smaller home or to scale down.
Now, let’s assume that it’s a seller’s market, where prices have risen 10 percent. That cute little craftsman bungalow you had your eye on is now more expensive than you anticipated. You were hoping to have a much smaller mortgage to go with your much smaller home. After considering the cost of moving and taking on a still sizeable monthly mortgage payment, you may conclude that it is not worth it to sell and trade down.
Yet, even in this scenario, you will likely come out ahead after making both the sale and the purchase in the same community.
The following shows how it works:
You are paying $30,000 more than you planned to pay on the small house, but you have received $60,000 more than expected on the home you are selling.
What appears to be a bad time to sell can actually be a good time when you consider where you’re going and what your “net” will be after the two transactions are completed. The first thing to do, always, is to decide where you are going and how much it will cost you to get there.
Preparing to Sell
Selling a home is about a lot more than just staging and pricing. The process begins weeks or months before that. The following sections discuss some things to consider when you are getting ready to sell.
Setting Your Time Line
When you are at the stage of simply contemplating the sale of your home, it is smart to take out a calendar and estimate the month or week that you would like to have your home come on the market, how long it will take to prepare it properly, when you would like to close on a sale, and when you’d like to move.
These dates might not coincide with when a buyer actually makes an offer on your home. But estimating target dates is helpful when you make decisions along the way. For example, if your home is not selling and you want to be out of it by a certain date, you may be more motivated to make a strategic price reduction early on. Without a time line, you’re sort of adrift and hoping for things to just “work out” in line with your needs.
Getting Your Papers in Order
Paperwork is a necessary evil when selling real estate. When it is not in order, it will cause delays and probably money. For example, let’s say that you have misplaced your survey and there is some question as to whether the neighbor’s fence is encroaching on your property. The bank, title company, and/or attorneys will not close until there is legal proof of the boundaries of your lot. You have to order a new survey and have your property staked and measured. This can take a few days or a few weeks.
The documents that you need in order to sell your home depend on the laws in your state. In any state, the more documents you have and can share with the buyer, the better. But you may only be required to provide one or two. Following is a checklist of some common types of paperwork that could be helpful to have at the ready.
❑ Your mortgage: When you sell, your mortgage will be paid off with the proceeds from the buyer. Whoever is conducting your closing (an attorney or a title company) will be in contact with your bank or lender and will therefore need that information.
❑ The deed: This is the written document that allows you to transfer ownership of real estate.
❑ The survey: This is the precise measuring of the boundaries of your property and is used as a legal description of it.
❑ Homeowner’s insurance: This covers major perils to the property, like fire. It is required by banks and lenders to protect their loan on the property, but it also protects your investment in the property.
❑ Home warranty insurance: You may want to offer this to a buyer. It covers the new homeowner and insures major components of your home, such as electrical, plumbing, heating, and major appliances. It is not required of you. It can, however, be attractive to a buyer, particularly in a difficult market.
❑ Environmental remediation documents: Some environmental hazards include underground oil or septic tanks, radon, asbestos around piping, termites, mold, and more. If you have remediated any of these problems, the paperwork will be needed by the buyers—and their attorney, if they are using one.
❑ Closed permits for upgrades and additions: Buyers will want to be sure that all permits you pulled for work on the home were closed. This means that the township or municipality where you live was notified that you were doing major work and it was inspected by them when the work was finished.
Seller Alert
When you do work on your home and pull the appropriate permits, the local municipality will automatically become aware that you have made capital improvements, which means that it has the right to raise your property taxes.
Additionally, your property taxes may have needed to be adjusted after the work was complete. If you don’t have closed permits, then your work was not inspected and your property tax amount may not be up-to-date, as well.
❑ Instruction manuals and warranties: It is not legally required that you provide instruction manuals and warranty paperwork for appliances that will remain in the home after you sell. It is, however, a nice thing to pass on to the new homeowners.
Getting Your Home Ready
When you make the decision to sell your home, it’s amazing how fast the big day arrives when you actually put it on the market. Your to-do list can get long in a hurry! Suddenly, there are a million little repairs to be made and clearing out to be done.
The more organized you are up front, the less stress you will feel once your home is on the market. Repairs can take a long time to get done because you are either doing them yourself and need time to accomplish all of it, or you are hiring a handyman or contractor and they tend to be booked a few weeks in advance. Allow enough time for all the work to be done.
If you choose to sell your home in as-is condition, with all its flaws unattended to, they will be reflected in a lower sale price—usually significantly lower. If it does sell, some repair issues may still come up in the inspector’s report. You may have to make them in order to keep the deal together.
Consider making repairs like the following before putting your home on the market:
◆ Leaking roof, faucets, and pipes
◆ Backed-up drains and running toilets
◆ Faulty stoves, furnace, or hot-water heaters
◆ Loose railings
◆ Ripped screens
◆ Debris-filled or broken gutters
◆ Carpet stains
◆ Uneven sidewalks
◆ Loose or broken fire escapes
◆ Doors that creak or won’t close
◆ Broken sash cords in windows
◆ Cracked window panes
Doing a Presale Inspection
Many sellers today are conducting inspections on their own homes before putting them on the market to help them determine what repairs to make in advance, possibly getting them a better sale price. It also gives buyers a higher level of comfort when it comes time for the inspection of the property.
If you perform an inspection, you might also be able to share the report if the buyer asks for a particular repair that you may not agree with.
When you speak with an inspection company, following are some questions to consider asking:
◆ Are they licensed in the state where my home is located?
◆ Are they certified with any national organizations such as ASHI (American Society of Home Inspectors)?
◆ How long has the company been in business?
◆ How many inspections has the individual inspector performed?
◆ How long will the inspection take?
◆ What will be inspected at the property?
◆ What environmental tests will they perform?
◆ How will the systems be evaluated and rated?
◆ May I see a sample report?
◆ How soon will I receive a written report?
Seller Alert
If you live in an area where they use oil heat (even if your home is not heated with oil), it is a smart thing to have your property scanned for evidence of old, abandoned underground oil tanks. Do this well before you put it up for sale. The cost is nominal. Most buyers have a search performed before they will close and, if they find one, it can seriously jeopardize the deal through delays and/or the buyer backing out altogether. We cover this and many other environmental issues in Chapter 16.
The Stages of a Sale
Every sale has certain stages that a buyer and seller must pass through on the way to closing. The sequence varies from state to state, and some of them don’t even apply in certain states. We discuss them individually and what your role is in each.
Offer Accepted
Most real estate contracts are in writing. In some states, they are required to be in writing. The buyer (or the buyer’s Realtor) draws up the offer and signs it. It then comes to you for consideration. If you accept it, you then sign it. It is typical for there to be some money put into escrow at this early stage. It can be $100, $1,000, $5,000, or much more. This is called earnest money.
def·i·ni·tion
Holding money in escrow means that a disinterested third party holds it until all the terms and conditions of the agreement are met. It is typically held by a title company or an attorney and it will be held in a trust bank account. Sometimes a real estate agency will hold it until closing. The money itself is called earnest money and represents the good faith of the buyer to proceed with the purchase.
Attorney Review
Some states have a legally imposed period of time wherein a buyer has the right to have an attorney review the contract that you have both signed. It could be a three-day period or more. In that period, the buyer often has the right to back out of the deal without giving a reason. This law is designed to protect buyers. You, on the other hand, also have the right to back out of the transaction and not sell to that buyer or to sell it to another buyer.
The Deposits
As we said in the previous section about when the offer is accepted, the first part of a buyer’s deposit comes along with the offer itself—the earnest money. The next portion of his deposit money, according to the contract, may come anywhere from 10 days to a few weeks later. The final portion of the deposit money comes on closing day.
The Inspection
Depending on the state, the inspection is done either before the buyer makes an offer or after the offer has been signed and accepted. If it is done after the offer has been accepted, then the buyer has the right to ask you to make certain repairs. If you decline to make them, the buyer has the right, once again, to back out of the deal. This portion of the contract is called the inspection contingency.
def·i·ni·tion
An inspection contingency in a real estate contract usually states that the buyer will only go through with the sale if an inspection is done to the satisfaction of the buyer. The sale is literally contingent upon the inspection happening and any needed repairs being successfully negotiated by the buyer and seller. If the buyer requests repairs and the seller refuses to make them, the contract is voidable and the buyer may back out of the deal with no penalties.
The Appraisal
The buyer’s bank, or lender, will send an appraiser out to your home to appraise the value of your home. He will decide if the buyer paid too much or more than he thinks your home is worth. This is what happens when a home “does not appraise.” The appraisal is always a condition of the loan, and the bank will not lend money on a home that it has not evaluated. The appraisal happens soon after you have signed the buyer’s offer.
The Final Mortgage Commitment
When a buyer is prequalified or even preapproved, he is only partway through the process of getting a loan. Once you have accepted his offer and the lender sends out the appraiser to your home, the lender also sends the buyer’s file to what’s called its “underwriting department” for a final stamp of approval. This is the department that determines if the buyer is ultimately qualified to borrow. It is only then that the buyer truly has final approval for the loan.
The Walk-Through and Closing
Either on the day of the closing, or perhaps the day before, the buyer will do a final walk-through of your home to be sure that it is in the same condition that it was in when he last viewed it. He also wants to be sure that you have vacated the property without leaving behind any belongings or debris. Most real estate contracts stipulate that you are to leave the premises in “broom-clean” condition. If there is anything that comes up during the walk-through, it must be settled and negotiated immediately in order for the closing to take place.
Seller Alert
Sometimes the buyer cannot physically be present at the walk-through. He may send his Realtor to do the walk-through for him.
The Least You Need to Know
◆ Your master plan and knowing where you are going will have an enormous impact on your financial bottom line.
◆ Buying a bigger home is often a smart move when the market is coming down.
◆ To figure out which way the market is headed, study the speed at which homes in your area are going under contract.
◆ Do not underestimate how important it is to have your paperwork in order before putting your home on the market.
◆ Consider performing a presale inspection to establish necessary repairs and to be in a stronger negotiating position with your buyer.
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