Things Honolulu Sellers Need To Hear
March 2nd, 2009 categories: For Sellers
Last week I helped a buyer purchase a property. One of the keys to getting the buyer the property at the price the wanted it at, was a cover letter that outlined some of the realities the sellers face in this market. Note that the sellers broker thanked me for writing the letter. Also, I have changed the price and figures to protect the innocent. The basic letter is posted below and I hope that it will give you insight into our market.
“Thank you for the counter offer. Attached with this letter is a counter offer that incorporates your addenda and other changes. The price of $750,000 is their bottom line. So that we can be very clear about why you may want consider the offer, I have taken the liberty of writing a few thoughts concerning the current market and issues that may be of concern.
1. We are very clear that the seller has a mortgage amount of $711,000. It is understood that nobody likes selling a property at a loss or when funds must be brought to the close of escrow. I would like to quantify the numbers. Normally closing costs on condos are around 7.0%. I am not aware of any other costs that the seller may be exposed to (late fees, prepayment penalties, etc). I am going to assume there are no extraordinary costs.
a. At 7.0% in closing costs means the sellers break even point is approximately $764,500.
b. The following is a projected cash flow that may apply to the seller.
$3,185 in interest on the mortgage (assuming 5.375% interest only)
$500 monthly maintenance fee
$225 monthly taxes
$310 monthly management fee
$4,220 a month in total expenses
$3,100 monthly rent
<$1,120> monthly negative cash flow
If you don’t sell to this buyer and do not close until the end of June you could experience $4,280 in negative cash flow.
c. If the market drops 2% between now and when you have an accepted offer you are exposed to an additional $15,000 in lost market value.
d. Here are other potential costs that could be incurred.
i. Tenant hold over.
ii. Damage discovered after the tenant moves.
iii. A buyer who needs seller credits in order to close (conventional guidelines allow a seller credit of 3% which equates to approximately $22,500)
iv. Mortgage payments between tenant move out and the close of escrow (estimated at $106 per day).
2. The buyer is willing to take the tenant and close on March 31st. This eliminates the seller’s exposure to all of the above.
3. The down payment of $255,000 is 34% of the purchase price and very strong. Note that this down payment and the quality of this buyer gives you the surety that you will not have to deal with a low down less qualified buyer.
4. Regarding financing, over the last 6 months we have seen significant shifts in its availability. Over the next three months, it is very possible that we will see significant shifts in qualifying ratios and further availability of financing. If lending guidelines should shift again, it is possible that real estate values will go down more.
5. As you know appraisers are becoming more conservative with their appraised vales. It is very possible that as you get closer to June, you could experience problems getting the appraisal to come in. I have noticed that as the amount of the down payment drops, the possibility of appraisal problems begins to rise. With a down payment of 34% and by closing sooner, you eliminate you exposure to a problem appraisal.
6. Though you cannot see much risk in accepting the tenants, it is possible that the buyer will have to deal with a difficult tenant at the end of June. Note that by selling to this buyer, your seller is effectively transferring the responsibility for vacating the unit to this buyer. If the seller sells to another buyer that will close when the tenant moves, there is no guarantee that the seller will not run into problems themselves.
7. The buyer can rely on the tenant’s deposit should there be problems. If there is no problem, this amount should be perfectly fine. However, in the case of damage to the unit, holdover tenant or other unforeseen issues with the tenant $3,100 does not go very far.
8. I am generally an optimist. After 26 years of selling real estate, I do not see any indication that the market is going to improve between now and the end of June. By accepting this offer now, your client may be insulating themselves from further declines in market values (note the above additional $15,000 loss if the market drops 2%).
With all of this said, accepting this offer could be a difficult business decision, but given the market, hind sight may prove this to be a very good offer. Thank you for attempting to make this work. Ed, feel free to call me at 808-737-2093 if you have any questions.“
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