By KERRY CURRY

A foreclosure reduces the value of a house by 27%, on average, and accounts for a much steeper price drop than other forced sales, according to a study by an Massachusetts Institute of Technology (MIT) economist and two Harvard University researchers.

In comparison, when a house is sold after the death of an owner, the price drops 5% to 7% on average. When an owner declares bankruptcy, the value sinks 3%, according to the report.

The research, “Forced Sales and House Prices,” has been accepted for publication in the American Economic Review.

In the study, MIT economist Parag Pathak and Harvard researchers John Y. Campbell and Stefano Giglio examined 1.8m home sales in Massachusetts from 1987 through March 2009.

The researchers believe their discovery of the gaps between the price reductions is key to isolating the effects of foreclosures. Because the declines in value are so disparate, yet occur among comparable homes in the same times and places, the reductions in value are not all attributable to the same overarching economic conditions, the researchers believe.

“It’s not surprising that there is a discount due to foreclosure,” said Pathak. “But it is surprising that it’s so large.”

In addition, sellers trying to sell their non-distressed, occupied properties in a neighborhood that has a foreclosed home on the market will take a price hit, according to the report. The researchers estimated the value of a home drops by 1%, on average, if it is within roughly 250 feet of a foreclosed home. MIT said the paper represents the first time economists have been able to clearly quantify how much nearby foreclosures affects prices of inhabited homes.

“This can happen for multiple reasons,” Pathak said. First of all, he notes, “If you live near a foreclosed house, it may not be maintained.”

Neighborhood appearance enhances real estate value. Secondly, even without visible deterioration, such homes, when resold quickly for a discount, can affect neighborhood values because homebuyers and real estate brokers look at comparable sales when making an offer.

“First, houses are productive only when people are living in them,” the report said. “Owning an empty house is equivalent to throwing away the dividend on a financial asset. Second, houses are fragile assets that need maintenance, and are vulnerable to vandalism. Unoccupied houses are particularly vulnerable and expensive to protect. Third, short-term rental contracts involve high transactions costs, resulting from the moving costs of renters and the need of homeowners to protect their property against damage,” the report said.

Christopher Mayer, Dean of the Columbia Business School in New York, said in a press release on MIT’s website that he believes the study will open up more research on whether foreclosures cause other foreclosures, a process he calls “contagion.”

Although the paper suggested only minor decreases in values of neighboring homes, Mayer questions whether there may be a tipping point “at which a neighborhood starts to fall apart.”

By Joe DiPaola

This is a Buyer’s Market. Buyers want to fall in love with both the house ~and~ the deal. You must be realistic in your expectations. You must be prepared for a difficult selling process.

The market focus is price. Correctly pricing is the most critical step now to selling your house. And that price is no longer based on your estimate of value—it is based on Buyer’s estimate of value. And, what you “need” to net out of a sale bears little or no relationship to whether it will sell.

If you want to sell your house, there are several practical steps that you should take which you will not like. Be prepared to take them.

1. Price to beat your competition. Do a radius search of all active listings within a certain radius (0.25 or 0.5 miles) of your house. That is your competition. The larger the inventory of active listings within that radius, then the lower your price will have to be to attract Buyers. For example, if there are 15 homes within that radius which approximate the features and specs of your home, you will need to be priced among the 3-5 lowest to get meaningful Buyer traffic. Your home needs to offer more, and be priced less, than most if not all of your competition. It’s about Buyers now–it’s not about you.

2. Stay ahead of your competition when it comes to price. Watch what the competition is doing. Your price can get stale, and you won’t know it unless you regularly check the competition. If price reductions by your competition take prices to new levels that are significantly lower that yours, then your Buyer traffic will disappear. You do not necessarily have to reduce your price to match the first big reduction. But if 25-30% of your competition reduces price, you need to reduce to stay competitive.

3. Offer concessions/credits. Most lenders will allow Sellers to offer up to 3% to Buyers at COE as credits for things like repairs, improvements, and/or non-recurring closing costs. Offer them. There are not as many Buyers in the market, and some of those Buyers may need closing assistance.

4. Lower your expectations with respect to Buyers. Buyers will be less qualified, offer less down payment, and demand more from Sellers. Be prepared for that. Do not automatically reject marginal buyers – instead, work with a marginal Buyer to help him/her qualify and purchase. Do not automatically reject contingent sales offers–instead, work with a contingent Buyer to give him/her an opportunity to sell and remove the contingency. Margiinal Buyers and contingent Buyers may ironically become “good” Buyers—because they are likely to try hard to suceed in the purchase, less likely to demand Seller concessions during escrow, and less likely to jump from escrow-to-escrow.

5. Except for painting, clean-up, basic repairs, and staging, do not spend money on alterations or additions. If you are getting ready to sell, make sure that your home is staged properly, is clean and presentable, and is freshly painted. But now is not the time to make alterations or additions, or to spend money on improvements that you always dreamed of making to your home. It’s better to give Buyers a credit at close of escrow (COE), or to drop the price the equivalent amount.

6. Be prepared to make concessions during escrow. In a Buyer’s Market, Buyers are much more likely to demand repairs or other concessions during escrow. Be prepared to negotiate, and to make repairs or give a credit.

7. Use a discount (1-1.5%), full-service realtor as your listing broker. While I am a discount broker, I am not telling you to use my service specifically. What I *am* telling you is that many times there is no difference in quality between a discount full-service broker and a traditional broker. The only difference is price. So, save yourself some commission money on the listing side.

8. Don’t be desperate; don’t buy into the notion that only the large, traditional brokerages have Buyers. If a large, traditional brokerage tells you that they have Buyers, and that they only show Buyers their own listings, then they have broken the law several ways. First, they have breached their fiduciary duty to their Buyers (if they even have any). Second, they have violated Department of Real Estate (DRE) rules. Third, they have committed a violation of the California Business and Professions Code. Brokers have a statutory and common law duty to show Buyers all possible listings which might fit the Buyer’s criteria. Brokers who use improper and illegal tactics to trap Sellers into listing with them are using a “pocket listing” strategy to try to “double-end” the deal. Remember, in a down-turning market, brokers have less sales, too—so they get more desperate to “double-end” each sale. Large, traditional brokers have certain things to offer Sellers—but use of illegal and improper tactics is not one of them.

9. Offer a healthy (2.5 to 3%) co-operating broker commission. Now is NOT the time to try to save on the co-operating (Buyer’s) broker commission. While I recommend that you save money on the listing (Seller’s) broker side, I do not recommend that you cut the co-operating (Buyer’s) broker commission. You need Buyers—and you want to encourage agents to bring them to you. Cutting the co-operating broker commission will only hurt your chances. Brokers are not supposed to look at the co-operating broker commission rate, and are supposed to show Buyers all properties that fit their buying criteria. But the sad reality is that some agents will steer Buyers away from listings where the co-operating broker rate is low, because it means less money for them.

In otherwords, I recommend using a discount, full-service broker on the listing (Seller’s) side, but to NOT cut the co-operating (Buyer’s) broker commission.

10. If given a choice, close escrow in the shortest time reasonably possible (i.e. 30 days) . If you have a 60 or 90 day escrow, then that’s 60 or 90 days during which prices can drop further, and during which Buyer can have a change of heart and try to jump escrow.

11. Be patient–your house will be on the market for quite a while. The average selling time is no longer 7-10 days—it is now 45-60 days, and getting longer. It will take patience and nerves of steel on your part to get through the process.

12. Don’t argue with Buyers over little things. Don’t argue about little things with Buyers–that’s being penny-wise but pound-foolish.

13. Don’t waste your money on newspaper ads or special promotions. Make sure that your property is correctly listed on the MLS, and that the listing is also populating to MLS secondary and IDX sites with full address. Put your listing on free classified internet sites with full address (Craigslist, Oodle, Trulia, etc.). But don’t spend money on traditional advertising (newspapers, magazines, etc.). Instead, price a little lower–every little bit helps.

14. If you are thinking about re-financing, then do so before you list. Some lenders will not re-finance a property that is currently being offered for sale on the MLS. Even if a lender will re-finance while the property is actively listed, doing so just “invites” a pre-payment penalty from the lender. So re-finance before you list. And, make sure that you have no pre-payment penalty.

By Joe DiPaola

The following are the “property condition” and “proximity” real estate disclosure documents used by Realtors in a typical residential real estate resale transaction. For the most part, the forms refer to California Association of Realtor (CAR) Forms:

CAR Form SA Seller’s Advisory (2 pages)
CAR Form BIA Buyer’s Inspection Advisory (2 pages)
CAR Form HID For Your Protection Get A Home Inspection (1 page)
Car Form TDS Real Estate Transfer Disclosure Statement (3 pages)
CAR Form DBD Data Base Disclosure (1 page)
CAR Form WHS Water Heater Statement of Compliance (1 page)
CAR Form SDS Smoke Detector Statement of Compliance (1 page)
CAR Form SSD Supplemental Statutory and Contractual Disclosures (1 page)
CAR Form SPQ Seller Property Questionnaire (3 pages)
CAR Form SBSA Statewide Buyer and Seller Advisory (10 pages)
CAR Form FLD Lead Based Paint and Lead Based Hazards Disclosure (2 pages)
CAR Form MCA Market Condition Advisory (2 pages)
CAR Form RGM Radon Gas and Mold Notice and Release Agreement (1 page)
Earthquake Hazards Report (1 page)
Earthquake Booklet: “Home Owners Guide to Earthquake Safety and Environmental Hazards” (54 pages)
Booklet Receipt: “Home Owners Guide to Earthquake Safety and Environmental Hazards”
(1 page)
Preliminary Title Report (from Title Company)

Sellers will want to make the following additional physical condition disclosures, where applicable:
A Pet Damage and Pet Odor Disclosure
An Asbestos Disclosure
An ABS Pipe Disclosure
A Carbon Monoxide Disclosure
A Geological/Soils Disclosure
A Survey/Boundary Disclosure
CAR Form MHTDS Manufactured/Mobile Home Transfer Disclosure Statement (3 pages)
CAR Form HOA Homeowner Association Information Request (2 pages)

To save time and money, I recommend using a professional service to prepare a Natural Hazards Disclosure Report for Seller, such as:
Geo-TechSolutions.com
CalStateReports.com

Depending on the contract negotiated between the parties, Sellers can become contractually obligated to provide a Pest Control Inspection Report, Section 1 and/or Section 2 Clearance (CAR Form WPA Wood Destroying Pest Inspection And Allocation of Cost Addendum). Realtors/Sellers can check the license status of Pest Control Companies by going to the California Structural Pest Control Board at: http://www.pestboard.ca.gov/license.htm

This list is for educational and informational purposes only, and is not meant to be exhaustive. There may be other disclosures required in a transaction, but this list describes the forms that are typically required to disclose the physical condition of the property and/or its proximity to adverse conditions in a residential real estate resale transaction. Please consult with a Realtor or Attorney about your transaction.

Real Estate Transfer Disclosure Statement

Question:
What is the Real Estate Transfer Disclosure Statement?

Answer:
A Real Estate Transfer Disclosure Statement (“TDS”) is a form prescribed in Civil Code ss 1102.6. Sellers of residential property with 1-4 units have been required to furnish this completed form to prospective purchasers. Sellers and licensees may comply with this law by utilizing C.A.R. Form TDS-11.

The Real Estate Transfer Disclosure Statement describes the condition of a property and, in the case of a sale, must be given to a prospective buyer as soon as practicable and before transfer of title. In the case of a transfer by a real property sales contract (as defined in Civil Code Section 2985) by a lease coupled with an option to purchase, or by a ground lease coupled with improvements, the TDS is to be delivered before the execution of any of the foregoing.

The seller and any broker(s)/agent(s) involved are to participate in the disclosures. If more than one broker/agent is involved, the broker/agent obtaining the offer is to deliver the disclosures to the prospective buyer unless the seller instructs otherwise.

Delivery to the prospective buyer of a report or opinion prepared by a licensed engineer, land surveyor, geologist, structural pest control operator, contractor, or other expert (dealing with matters within the scope of the professional’s license or expertise) may limit the liability of the seller and the real estate broker(s)/agent(s) when making required disclosures. The overall intention is to provide meaningful disclosures about the condition of the property being sold or transferred. (Cal. Civ. § 1102.4)

Question:
What types of real estate transactions are covered by this disclosure law?

Answer:
These disclosure requirements apply to transfers by sale, exchange, installment land contract, lease with an option to purchase, option to purchase, or ground lease coupled with improvements, of real property (or a residential stock cooperative) improved with 1-4 dwelling units.

Question:
Are there any transactions involving one to four units property for which the seller is exempt from the necessity of providing a Real Estate Transfer Disclosure Statement?

Answer:
Yes. Certain types of transfers are specifically exempted in Civil Code ss 1102.1. They are as follows:

Transfers requiring a public report pursuant to ss 11018.1 of the Business and Professions Code and transfers pursuant to ss 11010.8 of the Business and Professions Code where no public report is required.

Transfers pursuant to court order (such as probate sales, sales by a bankruptcy trustee, etc.).

Transfers by foreclosure (including a deed in lieu of foreclosure and a transfer by beneficiary who has acquired the property by foreclosure or deed in lieu of foreclosure).

Transfers by a fiduciary in the course of the administration of a decedent’s estate, guardianship, conservatorship, or trust.

Transfers from one co-owner to one or more other co-owners.

Transfer made to a spouse or to a child, grandchild, parent, grandparent, or other direct ancestor or descendant.

Transfers between spouses in connection with a dissolution of marriage or similar proceeding.

Transfers by the State Controller pursuant to the Unclaimed Property Law.

Transfers or exchanges to or from any government entity.

It should be noted, however, that a real estate licensee still has a duty to conduct a reasonably competent and diligent visual inspection of accessible areas in almost all of the above situations. In other words, although the seller is exempted from having to provide a disclosure statement in certain situations, a licensee must conduct this inspection, and disclose the results of the inspection, in almost all residential transactions involving one to four units.

Question:
Must a Transfer Disclosure Statement be provided to a purchaser of a new residential property that is not part of a subdivision, such as a new home being built on a lot?

Answer:
Yes. The disclosure statement must be provided to purchasers of these types of new homes.

Question:
Does the Real Estate Transfer Disclosure Statement requirement apply to “For Sale by Owner” transactions?

Answer:
Yes. The law applies even if there is no real estate licensee involved in the transaction.

Question:
Who must fill out this Real Estate Transfer Disclosure Statement?

Answer:
The seller must fill out sections I and II of the form. If any real estate licensees are involved in the transaction, the listing and selling agents usually fill out sections III and IV, respectively, based on the results of the careful visual inspections they have conducted.

Question:
On 1-4 unit transactions where the seller is exempt from providing the Transfer Disclosure Statements, but where the real estate licensees involved are required to conduct an inspection, should the licensees provide the buyer with a completed TDS form?

Answer:
No. The real estate licensees should never fill out the seller’s portion of the Transfer Disclosure Statement. If they wish to, any agent involved in the transaction may disclose the results of his/her inspection on page 2 of the TDS form, or he/she can make the disclosure on a separate piece of paper.

Question:
Are the real estate agents responsible for checking and commenting on the accuracy of the seller’s portion of the TDS form?

Answer:
No. The agents do their own inspection and disclose their findings, on the TDS or elsewhere, whether or not their findings agree with the seller’s portion.

Question:
What about landlords or relocation companies who have never lived in, or even seen the inside of their residential property (1-4 units)? Are they exempted from having to fill out the disclosure statement?

Answer:
No. A seller in this situation must fill out the disclosure statement to the best of his/her ability.

Question:
Who is responsible for delivering the disclosure statement to the buyer?

Answer:
If two or more real estate licensees are acting as agents in the transaction, the selling agent must deliver the statement to the buyer, unless the seller has given other written instructions for delivery. If only one licensee is involved, that licensee must deliver the statement to the buyer. If no real estate licensees are involved in the transaction, the seller is responsible.

Question:
When does the disclosure statement have to be delivered to the buyer?

Answer:
If possible, it would be preferable to provide the completed disclosure statement to the buyer prior to his/her signing the offer to purchase. If the buyer receives the disclosure statement after execution of his/her offer to purchase, the buyer will have a three or five day period to cancel the transaction.

Question:
When should the prospective buyer of a new home, that is not exempt from the TDS requirement, receive the completed form?

Answer:
The buyer should get the TDS before he/she enters into the contract to purchase the home, even if it has not yet been built. In other words, no special rule applies.

Question:
Does a buyer have a right to cancel the transaction when the Transfer Disclosure Statement is furnished after the buyer has signed the offer to purchase?

Answer:
Yes. “If any disclosure, or any material amendment of any disclosure . . . is delivered after the execution of an offer to purchase, the transferee (buyer) shall have three days after delivery in person or five days after delivery by deposit in the mail, to terminate his or her offer by delivery of a written notice of termination to the transferor (seller) or the transferor’s (seller’s) agent.” (Civil Code ss 1102.2.)

Question:
What if after the disclosure statement is furnished to the buyer but before the close of escrow, an error or omission in the disclosure form is discovered?

Answer:
The Real Estate Transfer Disclosure Statement may be amended, at any time, in writing, by the seller or his/her agent. However, if any material amendment to the disclosure statement is delivered to the buyer after he/she is already obligated under the contract, he/she has three days, if delivered in person, or five days, if deposited in the mail, to rescind the contract. In other words, if the statement is materially amended at any time after the execution of the contract, the buyer has a right to back out of the transaction.

Question:
Is it mandatory that a Real Estate Transfer Disclosure Statement be provided to a buyer in applicable real estate transactions, or can a buyer waive his/her right to receive the form?

Answer:
The law states that the seller must provide the disclosure statement to the buyer. This requirement can not be waived.

Question:
What happens if the seller refuses to fill out a Real Estate Transfer Disclosure Statement?

Answer:
The statute provides that if the seller willfully or negligently violates any of its provisions, the seller will be liable to the buyer for any actual damages which result from such a violation. If the licensee responsible for delivering the disclosure statement cannot obtain it, that licensee must advise the buyer in writing of the buyer’s right to receive the statement.

Question:
If a seller gives this form to the buyer, does that mean that he/she does not have to provide other disclosure statements?

Answer:
No. All other disclosures mandated by local, state, or federal law must still be provided to the buyer, in addition to the Real Estate Transfer Disclosure Statement.

Question:
What is the liability under this law of a real estate licensee or seller who fails to comply with the disclosure requirements, either by making intentionally inaccurate statements or omissions, or by failing to deliver it promptly.

Answer:
The Real Estate Transfer Disclosure law provides that anyone “who willfully or negligently violates or fails to perform any duty prescribed by . . . (this law) . . . shall be liable in the amount of actual damages suffered by a transferee (buyer).”

Question:
Under this disclosure law, can a closed transaction be invalidated for failure to comply?

Answer:
No. The Real Estate Transfer Disclosure law specifically states that a completed transaction will not be invalidated by non-compliance. However, failure to comply can result in liability.

Question:
Does the seller have to provide a TDS if he/she sells the property “as-is”?

Answer:
Yes. There is no exemption to providing the disclosure statement for an “as is” transaction.

Question:
What is the seller’s responsibility when the TDS states that an item is “not working,” while the purchase contract warrants that it is operable? For example, let’s say the seller states in the Transfer Disclosure Statement that the dishwasher is not functioning. On the other hand, in the deposit receipt the seller warrants that “all built-in appliances are in working order.” Is the seller responsible for fixing the dishwasher?

Answer:
Yes. The seller is responsible for living up to his or her contractual obligations. The Transfer Disclosure Statement is not part of the contract; its only function is to provide information to the buyer to enable the buyer to decide whether or not to go through with the transaction. Even if the buyer decides not to cancel based on the TDS with some negative disclosures, the buyer does not waive any of his/her rights under the purchase contract.