Listing: Understand Your Target Market

One of the hard things to get through to sellers is the characteristics of the sort of buyers they need in order to have a successful transaction. If a given set of prospective buyers can't afford the property, they might look anyway. They might even make an offer, and it's possible the offer might even be accepted. But in the current loan environment, the necessary loan won't fund, so the transaction isn't going to actually happen.

Furthermore, it's a good idea to know the income characteristics you're aiming at by the price you set. If you set a price of $400,000, what does someone who can afford a $400,000 loan make? You'll know better than I who makes and does not make that kind of money in your area, but you should know it. I know it for San Diego. This isn't the kind of knowledge that comes from 10 minutes on the internet. I know what professions do and do not make the required money, and what professions for which it's a matter of where a particular prospect falls on that profession's pay scale, but it's taken me years to learn, just for San Diego, and every city is different.

Most areas have their own character. Some neighborhoods have a working class character, while others attract highly paid professionals. Some have an artsy orientation, others are very matter of fact. Properties have their own characteristics. The one property in the neighborhood with a panoramic view of the area is not going to appeal to the buyer who's looking for any hole in the wall, so long as it's in that neighborhood so their kid can go to Super High. Put property character and neighborhood character and the price you want to obtain together, and if you're a listing agent, that had better give you an idea of exactly who you're hoping to attract to your property. Like all targeted marketing, you won't turn away someone from out of the targeted demographic, so long as they can actually get the transaction done, but you don't have to be in the business long to discover that you'll do better by appealing to the degreed professional who makes the money to qualify based on Debt to Income Ratio for an 80 to 100 percent Loan to Value Ratio loan, than you will targeting the fry cook who's saved and invested for twenty years and is all of a sudden ready to buy the property, now that he has a 70 percent down payment. That fry cook may show up on their own anyway, but how many people do you know who save that much over that long a period and then want to spend it all on real estate? As opposed to the newly married professional couple who've been in their careers a couple years each, have a little bit of money saved, and now they want to stretch their budget as far as they can?

As I type this, I can do a thirty year fixed rate loan at 6% with a total of one point. Since the equivalent rate for a 5/1 hybrid ARM is 5.75, I'm thinking most folks are going to want that thirty year fixed when I offer them the option. This is going to change a little bit every day, but in most cases, it's not going to be significant change. Things like interest only loans will stretch their qualification a little bit, but those are best approached with a trembling hand for purchases, and you're better off planning for the buyer being advised that the property may be too expensive for them in such an instance, and having a plan in place, than you are hoping that everything goes perfectly for you to sell to an unsuspecting buyer.

Not all loan amounts are the same. Once the loan amount goes over $417,000, the conforming loan limit in effect right now, the current loan environment is that 100% financing goes away for A paper borrowers. You might be able to get them 100% financing on a sub prime loan, but the rate/cost tradeoff will be even higher than the A paper rate of 6.625% for one point on non-conforming loan amounts. Subprime is kind of in never never land right now. If you read between the lines of what their reps are saying, they want A paper borrowers who don't know they can get an A paper loan. And nobody wants to touch 100% stated income loans, no matter how good the credit score. Fact. You can live with it and plan for it, or you can fight it and still lose.

So what I'm going to do is compute the monthly cost of housing on purchases of a given size, together with the income to qualify. I'm going to assume this is California, with California property tax rates. Furthermore, I'm just going to make a flat allowance for Homeowner's Insurance plus Association dues of $250 per month. It's not exact, but it'll put you in the right ballpark. With a specific property, you can get closer, or course.

Let's start with 100% financing, a 100% loan with PMI, because that's the only way to do it right now. This limits us to conforming loan amounts. Here's what it takes:

In other words, a family who wants to buy a $400,000 property without a down payment needs to be making almost $89,000 per year. Them's the facts, and that's not including any existing debt service they may have. Credit cards, car payments, student loans, etcetera. If other debt service is $500 per month, you raise the income to qualify by over $1100, and the yearly income by $13,000 plus change. San Diego's Area Median Income is a little over $64,000, and a family making that much money can afford a loan of about $280.000 - if they don't have any other debt. If they have a huge down payment, of course, it's easier, but how many people have you encountered recently with huge down payments?

Now, let's consider people who actually have a 20% down payment. Most likely, they bought a condo a few years ago and now they've sold it, but they had enough equity in the condo to account for that 20% down on the more expensive property. Or they sold the condo and bought a starter home, and now they've sold that and are looking to move up again. This is without PMI, and having some equity means that not only are the terms of the loan more favorable, but you don't have to borrow as much to buy a property that costs the same, and so a property of the same value is much more easily affordable.

Once again, this assumes there's no other debt service involved. But if you've got a home with a $700,000 price tag, you're still looking at trying to lure in a buyer family that makes at least $10,000 per month. These kinds of buyers are not going to go for old carpet and a carpet allowance. They want your seller to have already dealt with it. Even if it's the cheapest, most beat up property in Rancho Santa Fe, on the smallest lot, the sellers are still going to take a hit on the price for not dealing with it themselves.

For a successful listing, you need to know your target market. Some people do buy properties that are apparent mismatches between their lifestyle and the property, but not many. As listing agents, we not only need to understand what is and is not a match before setting off to attract a buyer, and recommending appropriate measures to the owner before it goes on the market, we are much better off concentrating our marketing efforts where they are most likely to succeed.

Caveat Emptor

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