If first domino won't fall, market can get jammed

SMART MOVES

November 01, 1992|By ELLEN JAMES MARTIN

Gridlock.

It's not just a phenomenon of the roadways, but also of the housing market.

When cars are bumper to bumper and the leader in the line doesn't move, no one behind moves. Similarly, if the first house in a chain doesn't sell, all other potential transactions behind it can be stalled indefinitely.

"It's not uncommon for a lot of real estate deals to be interlocking," says Sally Holbart, who sells homes through the Bethesda office of Coldwell Banker.

Jan and Jonathan may want to buy the stone-sided mini-mansion but can't afford to do so until they unload their Tudor. Aileen and Alberto may be ready to buy the Tudor but can't until they're rid of their townhouse. Louise and Larry may be eager to purchase the townhouse but need the cash from that unsold condo apartment.

And so it goes.

"Until the first domino falls, none of them fall over. As it so often happens, your ability to move up the line depends on your selling your existing property first," says Norman D. Flynn, a realty executive and formerpresident of the National Association of Realtors.

In a market where sellers have their way, the dominoes fall quickly. But in markets where buyers have their way, the dominoes fall more slowly. Whether you're a buyer or seller, the buyers have their way, the dominoes fall more slowly. Whether you're a buyer or seller, the trick is to keep from getting caught in situations where unconsummated deals prevent you from moving expeditiously to your housing goal or expose you to excess financial risk.

"The worst-case scenario is when you buy a new home and simply cannot sell the old home. In this case, you're left with an alligator eating your leg. You have the new house payment but still have to pay on the old mortgage, as well as your real estate taxes, heat and light," Mr. Flynn cautions.

To keep yourself out of such messy situations, real estate experts offer these pointers:

* Avoid using a "contingency contract" to try to buy another home before you've sold your current property.

In a buyers' market, buying before you sell is a hazardous idea because of the danger of being saddled with two properties when you can afford to carry only one. Out of a desire to buy first, many are tempted to put an offer on their new home that is contingent on the sale of their old one.

But such contingency contracts have disadvantages for the buyers of homes as well as their sellers, who often demand more money to accept such a conditional offer, says Ms. Holbart, the Bethesda agent.

"You're going to wind up paying more for a house when you buy on a contingency contract. And when you go to sell yours, your back is up against the wall in your negotiations because you must sell quickly," Ms. Holbart says.

Contingency sales contracts are a major cause of gridlock, real estate experts say. This is especially true when several such contracts interlock.

If you're worried about closing on the sale of your home before you have another property in hand, the smart thing for you as a seller to do is to ask for a different sort of contingency in the contract your buyer writes. Tell your buyer you want 90, 120 or 150 days before closing -- whatever you think it will take -- to find your next property. That should give you the comfort you need to sell before you buy.

* Don't push the limits on the timing of your home sale.

"If you're not realistic about how long it's going to take to sell your home, you're going to put a lot of pressure on yourself," Ms. Holbart cautions.

Do you need to be out by a certain date because of a job transfer or the need to enroll your children in a new school or yourself in a new college program? Then give yourself even more latitude than you think you will reasonably require to sell your home.

To estimate what's reasonable, ask your realty agent to give you a set of key statistics known as "days on market" or "DOMs." What you're looking for here are the number of days between listing and sale that it required owners of like properties in your community to liquidate their homes in recent months.

Giving yourself as much marketing time as possible should not only spare you the stress that so often comes with gridlock situations, it should protect you from the danger of being compelled to accept a low ball offer, simply because you're under time pressure.

* Price your home realistically from the outset

Lots of people think they'll start high and drop later. What they fail to grasp is that an overpriced house will miss bona fide buying opportunities in the key, early months after their home is listed.

Suppose you list your condo apartment on Dec. 1 for $10,000 over the competition and a fictional buyer named Georgine decides she wants to buy just your sort of property that very month. Her agent pulls listing cards for several such homes, but Georgine quickly eliminates your condo on the basis of price. Instead, she goes on to purchase your neighbor's condo, which was realistically priced from the beginning. Come January, you may drop your price, but you'll still have missed the chance for a quick sale to Georgine.

By setting the price too high from the beginning, all you do is waste time and throw away selling chances, says Mr. Flynn, the realty executive.

"What creates a lot of gridlock is when people think there's gold under their property. In reality, it's not you but the market which determines the value of your property," he says.

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