All posts by Tomie Raines Housing News

What is an arm’s length transaction in real estate?

Buyer Information, Seller Information

What does arm’s length mean in real estate?

An arm’s length sale in real estate is a transaction between an unrelated seller and buyer. In this type of transaction, each party acts independently and in their own best interests. The property is exposed on the market for a reasonable length of time and is unaffected by special financing or sales concessions. Therefore, the sale price most likely reflects the market value.

What does non-arm’s length mean in real estate?

A non-arm’s length sale in real estate is a transaction between a seller and buyer who have a connection by marriage, family, work, etc. Because of their relationship, each party may not be acting in their own best interests. Therefore, the final price may not reflect the market value of the property.

The 7 sale types in real estate

The type of sale can provide some clarity into whether the transaction was (or currently is) an arm’s length transaction, whether a comparable sale should be used, or whether an adjustment is warranted for the terms of sale for a comparable. By knowing the type of sale, you are better able to reconcile a current opinion of market value that falls above or below a current or recent transaction for the subject property.

For appraisals required to be Uniform Appraisal Dataset (UAD) compliant, you must indicate the type of sale for the transaction. You may report any other relevant information regarding the sale type in the appraisal report, including whether more than one sale type applies.

Here are the seven valid sale types, explained in detail below:

  • REO sale
  • Short sale
  • Court ordered sale
  • Estate sale
  • Relocation sale
  • Non-arm’s length sale
  • Arm’s length sale

REO sale

A Real Estate Owned (REO) transaction is a sale of a home that has been foreclosed and the lender is the owner/seller of the home. The transaction is between the lender and the buyer. Usually these homes are sold “as is” and typically are priced to sell relatively quickly. Sometimes the home is in poor condition or may require extensive repairs.

Short sale

Unlike an REO or foreclosure sale, the homeowner still holds title to the property, but sells short for less than what is owed on the property. Usually, the homeowner is suffering some type of financial hardship which is preventing them from meeting the mortgage payments. The homeowner and the lender must agree to accept a shortage and must approve the sale. Sometimes these sales require extended time to negotiate with the lender and obtain approval for the sale, and there may be some additional costs or outstanding liens that need to be paid off.

Court ordered sale

A court ordered sale may be the result of a dispute among the owners, divorce, death of one of the owners, or a foreclosure where the borrower defaulted on paying the mortgage. Once the redemption period expires (if applicable), the court will issue an order directing the sale or other disposition of the property. This is the point at which the owner has lost control over the ability to sell the property. The property is sold by an official (trustee or sheriff) appointed by the court, usually to satisfy a judgment or implement another order of the court.

Estate sale

The estate is the real estate owned by a decedent at the time of his or her death. The estate is probated so that the real estate can be sold and the proceeds are distributed to the decedent’s heirs. The sale is handled by a representative (executor) named in a will and/or appointed by the probate court.

Relocation sale

Larger companies hire a relocation company to sell the property of an employee that is being transferred or moved to another state. The relocation company may buy the property at an agreed upon price with the corporate employee, then in turn sell the property to the market in an “as is” condition. Often, the property is attempted to be sold quickly, so the property may not be exposed as long as competitive properties in the market.

Non-arm’s length sale

As stated above, a non-arm’s length sale is a real estate transaction in which the seller and buyer have a connection by marriage, family, work, etc. As a result, this type of transaction’s final price may not reflect the market value of the property. Lenders and appraisers view this type of transaction as riskier because the parties involved are not necessarily acting independently of each other.

Arm’s length sale

As explained above, an arm’s length sale is defined as, “A transaction between unrelated parties who are each acting in his or her own best interest.”1 For this type of transaction, the property is exposed on the market for a reasonable length of time and payment is in cash or its equivalent. The property sold is unaffected by special or creative financing or sales concessions. This type of sale is the least risky to the lender and is most likely to be closest to market value.

What is market value?

In general, market value is defined as the most probable price a property should bring in a competitive and open market. This definition requires an arm’s length transaction with each of the parties acting in their own best interests. Additionally, it requires that the buyer and seller are not acting out of undue haste or duress and that the real property has been exposed on the market for a reasonable period of time.

Reference: The Appraisal Institute, The Dictionary of Real Estate Appraisal, 6th. Ed.

Why You Should Test the Air Quality of Your Home

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If you’re wondering if those sniffles and low-grade headaches you or your family are experiencing could be due to air-borne allergens, you may be surprised to learn that there could be another cause. According to the Environmental Protection Agency (EPA), 90% of our time is spent indoors, so breathing problems could be caused by poor air quality in your home. If you test the air quality in your home, you may get some surprising answers.

Purchase air quality sensors that test for the following:

  • Humidity: can increase the potential for mold and mildew growth.
  • Temperature: high temps can cause insufficient humidity and health risks.
  • Volatile organic compounds: chemical pollutants can come from building materials, carpet, and other installations.
  • Particulate matter: dust mites and other allergens are airborne.
  • Air quality index: this measurement is provided by the EPA for both indoor and outdoor air quality.

Air quality sensors test for toxins, harmful gases, and pollutants as well as specific problems such as carbon monoxide, a toxic gas. The sensors take in air, run algorithms to capture the number of particulates, store the data and prepare it for analysis and read out.

The EPA recommends that you monitor your health symptoms for a few weeks to identify improving or worsening symptoms. If you’re nauseous and confused, carbon monoxide may be present, while allergies tend to present with a scratchy throat or watery eyes. Lastly, buy a good air purifier to help remove particulate matter from the air.

Yes, Winter is a Great Time to Sell Your Home

Seller Information

Cold weather won’t deter a motivated homebuyer. Corporate relocations often take place before the new year and those employees want to find a home now. Buyers want to get their children enrolled in school before the second semester begins. Homebuyers may feel they have a better chance of finding a home while their competitors nest at home until the snow melts. 

You also have a timeline to sell, move, and settle into a new place, perhaps for a new job, birth of a child, up- or down-sizing, etc. Why not sell when there’s less competition from other homeowners who’re waiting to sell until spring?

There are a few things you’ll need to do to make your home attractive for cold weather shoppers:

Decorate for coziness. Some homes are at their best in the winter. Pull out your most fabulous afghans and quilts. Throw some logs on the fire, or keep the gas or electric fireplace on for showings.

Fill the home with evocative aromas. Cinnamon, cloves, and oranges boiling on the stove will stimulate pleasant memories. Use a pine or lavender-based cleanser on your floors and surfaces.

Make a place for muddy shoes. Buy a box of booties and put them next to a chair for homebuyers to put on. Taking their shoes off will make them feel welcome and more comfortable.

Keep the drive, sidewalks, and walkways cleared. Snow drifts are dangerous and could discourage homebuyers. Keep your Berkshire Hathaway HomeServices network professional informed of road conditions.

How to Navigate High Mortgage Interest Rates

Buyer Information, Finance and Taxes

Mortgage interest rates are hovering at the highest levels in over 23 years, causing mortgage demand to sink to a 27-year low. Waiting for home prices to come down has had little success for homebuyers due to an unprecedented imbalance in housing supply. What can you and other homebuyers do to increase your buying power?

One advantage of higher interest rates is that they can make you money in other investments until you’re ready to buy your home. Start with a debt consolidation loan to pay off high-interest credit cards. Do some research to learn where it’s best to park some cash in savings, the term of the investment(s), and penalties for early withdrawals, if applicable.

High-yield savings accounts. Most savings accounts have variable annual percentage yields (APYs), which means the return is linked to Federal Reserve overnight funds rate changes. Currently, you can get yields between 4.00% and 5.00% APYs while a traditional savings account is 0.50% or less.

Certificate of deposit (CD) accounts. The average 12-month CD is about 1.49%, still much higher than a typical savings account. But many online financial institutions are paying 4.5% to 5% .

Corporate bonds. To raise capital, some corporations issue debt securities which means you’re loaning money to the company in return for regular income payments and the return of your initial capital when the bond reaches maturity. The benefits are lower risk for investment-grade corporate bonds, lower volatility, and greater diversification that’s not tied to the stock market.

3rd Quarter Stats… Lower sales volume with higher prices.

Current Lansing Area Sales Statistics, Finance and Taxes

Third Quarter 2023 sales statistics (July – September) showed that the average sales price of Lansing area homes increased from $231,429 to $240,458 as compared to the third quarter of 2023. This 3.9% represents an average home value increase of $9,029.

Third Quarter 2023 Sales Statistics

The fact that there were 977 fewer sales to date in 2023 (-18.6%) represents a low number of homes being offered for sale…not from any lack of enthusiasm on the part of buyers. Just about any properly priced home will receive multiple offers and be off the market within a few days. For established sellers, there is a serious reluctance to give up a 3.5% mortgage in order to enter into a now 8% mortgage on a different home. This, and unstable economic conditions is the main reason is the low number of homes to choose from.

Fall sales continue to brisk and show no sign of slowing as we move into November. Traditionally, sale begin to slow as we enter the holiday season.

Lansing Area Market View – October 30, 2023
 676 – currently listed homes for sale in the five county greater Lansing area.
 261 – homes with accepted offers. (Awaiting inspections and/or appraisal.)
 311 – homes listed as Pending. (Have completed inspections and will soon close.)
 4690 – homes that have closed since January 1, 2023. 

Current Mortgage interest rates (one percentage higher than second quarter)
  30-year fixed – 7.83% ($722 per $1000)
  15-year fixed – 7.15% ($900 per $1000)

What to Consider When Selling a Home “As Is”

Seller Information

It’s no secret that homebuyers prefer move-in ready homes that have been repaired and updated. The Wall Street Journal reports that fewer homebuyers want fixer-uppers because of high mortgage interest rates and construction loans. Since the seller has disclaimed the home, the cost of repairs and updates are unknown. Some mortgage guarantors like FHA and VA have certain safety and home integrity requirements, which means that if the seller doesn’t make the improvements needed, the homebuyer won’t be approved for the mortgage loan.

Yet, there are times when the seller simply doesn’t have the financial or practical means to make repairs and improvements. So, what can the seller expect from the marketplace?

Selling a home “as is” means selling the home in its current condition to relieve the seller of most of the responsibilities and costs associated with selling a home. As-is sellers still need to meet minimum state and federal disclosures, such as filling out a seller’s disclosure that declares known defects and problems in the home, but this can have a sobering effect on homebuyers. A balanced market, or one in favor of buyers can reduce the selling price of an as-is home as much as 15% to 20% below market value and takes longer to sell, exacerbated by carrying costs such as mortgage payments, HOA fees, utilities, and more.

Lower offers can also be expected from investors who pay cash, as they have purchase and resale formulas that must be met before they’re interested.

Emerging Trends in Real Estate

Market Update

Will home prices go up or down? Will mortgage interest rates rise or fall? Will there be a recession? Will there be enough homes to buy? While the housing market adjusts to market realities, the questions remain the same.

Macro and micro economics drive homebuying, such as inflation, borrowing costs, supply and demand, housing availability and local jobs, which is why housing markets are highly individual. Nationally aggregated statistics on housing sales such as home prices and mortgage interest rates only indicate trends, and even those may or may not apply to your local market conditions.  So, what do the trends indicate?

Inflation and the Federal Reserve

Inflation appears to be ticking upward again, prompting the Federal Reserve to announce that borrowing rates to banks will continue to rise. Banks respond by raising their borrowing rates to consumers and businesses, resulting in higher mortgage interest rates as well as rates for credit cards and other loans. To reach the Fed’s target rate of two percent inflation, several things need to happen, for consumers to spend less, housing prices to decline and unemployment to increase. Rates are currently the highest they’ve been in over 20 years.

Borrowing rates vary according to two things: Federal Reserve overnight borrowing rates to banks based on local market conditions and the risk of foreclosures in a given area. If inflation continues to rise, the Fed has suggested it may hike rates again in September.

Mortgage interest rates

Over 40% of U.S. mortgages originated in 2020 and 2021, when mortgage rates were at record lows, which explains why homeowners are reluctant to sell their homes and take out new loans at twice the interest rate – over 7%.

To illustrate the difference, a home costing $450,000 with 20% down and at 3% in 2021 cost about $1,518 per month in principal and interest alone.  In 2023, the same home with 20% down and at 6.8% would cost you $2,347 per month – an increase of $829 in just two years.  If you carry the loan to its term – 30 years – you’ll pay a total of $546K at 3% including principal and interest, and $844K at 6.8%.

What many consumers may not realize is that published rates on mortgage rates are idealized as if the borrower has the best credit scores, a 20% down payment, and a solid work history. In reality, mortgage interest rates depend on many factors including debt-to-income ratio, the home you’re buying, your local market conditions, the terms of your loan, your lender’s underwriting practices, and more.

Supply and demand

The continuing shortage of homes for sale has multiple causes, but the most obvious reason is that the country is not building enough houses for the number of households that are forming. Between 2012 and 2022, 15.6 million households were formed, but only 8.5 million single-family homes and 3.4 million multi-family homes were completed. The gap between single-family housing starts and household formations grew from 5.5 million in 2021 to 6.5 million in 2022.

Housing is still suffering a hangover from the 2008 housing crisis, as it took years for home prices to recover from devastating 30% losses. In the meanwhile, lenders tightened lending practices to comply with stricter consumer qualification rules from Fannie Mae and Freddie Mac, government-sponsored entities tasked with buying mortgage packages from banks and putting them into securities. This replenishes money to the banks so they can lend to homebuyers.

Homebuilders are still recovering. Not only were commercial loans harder to get, but consumers weren’t buying homes while prices were falling in the decade following the housing recession. Subsequently, builders put their money toward multi-family apartment complexes or in luxury homes, leaving a serious shortage of affordable entry-level and workforce single-family homes.

During the pandemic, many workers worked from home and found they wanted a different lifestyle. They flocked from urban centers to suburbia and to small towns to find larger, more comfortable homes. Those who purchased homes at record low interest rates are finding three to four years later that their homes are worth much more money, but they’re reluctant to buy another home at today’s higher prices, coupled with interest rates that more than doubled since 2021.

From July 2021 to July 2022, there were 6.4% fewer homes listed on the market as homeowners declined to list their homes for sale. Coupled with builders pulling back on housing starts in 2023 by nearly 20%, homebuyers may face tighter inventories of homes for sale. Realtor.com anticipates that lack of inventory, plus higher mortgage rates and still-high home prices will cause the number of homes for sale to drop 5% and that housing sales will fall 15.8% to about 4.2 million homes sold this year. If that happens, it will be the lowest number of homes sold since 2012. 

Homebuyers’ Five Biggest Complaints

Buyer Information, Seller Information

Homebuyers have one simple expectation – that when they go out with their agent to shop for a home that the seller is ready for them to buy. 

That means no sticking drawers in the kitchen. No leaning fences. No rust-stained plumbing fixtures. We could go on, but maybe we need to make it clear.  If you have even one of following “turn-offs,” your home won’t sell. 

Overpricing your home

Overpricing your home is like trying to crash the country club without a membership. The ones who belong know that you don’t and you’re going to get some negative feedback. The worst feedback, of course, is silence. That could include no showings and no offers. 

The problem with overpricing your home is that the buyers who are qualified to buy your home won’t see it because they’re shopping in a lower price range. The buyers who do will quickly realize that there are other homes in the same price range that offer more value.

Smells

Smells can come from a number of sources – pets, lack of cleanliness, stale air, water damage, cooking, and much more.  You may not even notice it, but there’s not a buyer in the world that will buy a home that smells unless they’re investors looking for a bargain. Even so, they’ll get a forensic inspection to find out the source of the smells. If they find anything like undisclosed water damage, or pet urine under the “new” carpet, then they will either severely discount their offer or walk away. 

Clutter

If your tables are full to the edges with photos, figurines, mail, and drinking glasses, buyers’ attention is going to be more focused on running the gauntlet of your living room without breaking any Hummel figurines than in considering your home for purchase. 

Clutter and too much furniture confuse the eye, making it really difficult for buyers to see the proportions of rooms and to try to imagine themselves living there. If they can’t see what they need to know, they move on to the next home.  

Deferred maintenance

Deferred maintenance is a polite euphemism for letting your home fall apart. Just like people age due to the effects of the sun, wind and gravity, so do structures like your home.  Things wear out, break and appear rickety. Especially with an older home, it’s your job as the homeowner to keep your home in good repair.  

Your buyers really want a home that’s been well-maintained. They don’t want to wonder what needs to fix or how much repairs will cost. 

Dated décor

The reason people are looking at your home instead of buying brand new is because of cost and location.  They want your neighborhood, but that doesn’t mean they want a time capsule of a home.  Just like they want a home in good repair, they want a home with updates that complement the home’s era and brings it into the modern era. 

Harvest gold and avocado green from the seventies; soft blues and mauves from the eighties, jewel tones from the nineties, and onyx and pewter from the oughts to be all colorways that can date your home.  Textures like popcorn ceilings, shag or berber carpet, and flocked wallpaper are also undesirable.  

When you’re behind the times, buyers don’t want to join you.  And your Berkshire Hathaway HomeServices network professional can’t get you the price and terms you want. He or she can work miracles, but only if you follow their advice and get your home up to speed – the speed of today’s market. 

Choosing the Home with the Right Square Footage

Buyer Information

Homebuyers are feeling the sticker shock of higher prices, but it’s not just inflation. They want bigger homes. In 1949, the average size of a new single-family home was 909 square feet, while homes grew to 2,480 square feet by 2021. Homebuyers want more than they had before, including more space, energy-efficient appliances, and smart home technologies, all of which is making homes more expensive.

But how much living space does a family really need? According to the National Association of REALTORS®, a typical home purchased recently is 1,800 square feet with three bedrooms and two bathrooms and was built in 1986, but that may not be enough space for some homebuyers. While it’s totally subjective, a good rule of thumb is that each person should have 200 and 400 square feet of living space. So, a family of four would be comfortable with a home of about 2,400 square feet.

To help you choose the right-sized home, consider your family’s needs. Small children can comfortably share a bedroom, but teenagers need more privacy. Aging parents are safer in single-level homes or a downstairs owner’s suite, preferably with a separate entrance and living area. You may need more space if you’re working from home and need a home office, a playroom for kids, a bigger kitchen, or an owner’s suite with his and her baths.

Whatever you choose, make sure the layout and square footage also aligns with how much you want to maintain and pay for utilities. 

Will Your HOA Allow Your Home Business?

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Homeowners’ associations (HOAs) are formed by the owners of units within a community to manage, maintain and improve quality of life for residents and increase their property values. And there are four things all HOAs hate—strangers, traffic, safety issues, and anything that might cause declines in property values, such as home-based businesses.

Out of 32.5 million small businesses, about 19 million are home-based or began at home, according to The U.S. Small Business Association. Following the pandemic, many workers found that they want to be their own bosses, but this is a growing issue for HOAs that prohibit homeowners from using their properties for commercial purposes.

While it’s fine to have a home office business such as accounting or search engine optimization, your HOA won’t allow you to use your home for obvious commercial use such as manufacturing, storing large equipment, or making or receiving frequent deliveries. HOAs don’t want people coming and going to your house, or for trucks and cars to crowd the streets and parking spaces. It makes your neighbors feel put upon, inconvenienced, unsafe, and less confident in the security of their community.

As an existing homeowner, you should have a copy of your HOA’s governing documents and by-laws, covenants, conditions, and restrictions—so you can see where your HOA stands on the issue. If you’re considering choosing a home in an HOA-managed community, make certain you review the association documents as a condition of your inspection.