I recently posted the following on Active Rain and wanted to include it here, since this is a more localized forum, and since this sort of issue is coming up frequently these days. Caveat Emptor, as they say… buyers beware… well, sellers should beware too… misleading a seller about the value of a home just to get the listing, and sellers giving listings to agents that simply promise what ever the seller wants to hear, is bad business… especially for the seller.

We hope this sort of thing has costs to the agents that do it… we know there are costs to the sellers. See our site for discussions about valuing a property, and be realistic, whether that means don’t sell, sell, refinance, or how to finance when purchasing your next home.

You know, I realize that many of the recent first time home buyer sales have used 100% financing to acquire their new homes, and that without that sort of loan program, many of these buyers would not have been able to purchase their homes at all. Never the less, I am pleased that it is becoming harder, if not impossible, to obtain that sort of financing now. 

Why, you ask?

We have seen a tremendous increase in foreclosures in our market, and the vast majority of those are houses that were purchased with no money down in the last 3 years. Years ago, when I bought my first property, there was no such thing as 100% financing. Virtually all home buyers had to come up with at least 10% down on the purchase. Most came up with more than that. Whether by intention or by accident, this resulted in home owners starting out with at least that much equity in their homes. So whether the value of the home went up, down, or stayed the same, the home owner could sell the house without having to fork over cash at the closing. Not so any more.

In our area, we were competing for a listing with several other agencies, in an area called Island Park, in Portsmouth RI, and virtually all but one came in around the same value for the CMA… all but one. All were lower than the owner expected she could sell the property for. All but one. The one of course that won the listing is the one that came in high on the CMA, at exactly the price the owner wanted to sell at. This owner has no ability to afford the payments on the current mortgage, and with late payments, cannot refinance either. We know this because we were working with the owner on the mortgage side as well as on the real estate side. Of course, the now listing agency referred the client to another mortgage lender, as it turns out, at the same office as our agent.

The problem with this, in our opinion, is that the listing agency has basically misled the client on the value of the home, just to get the listing. The home owner will be unable to purchase another home, and most assuredly will not get the price they are asking.

But the agent will soon enough tell the seller that the house cant sell at the asking price, and will most likely tell them to reduce the price… a strategy used by some unethical agents in every market, I imagine, just to get the listing. Of course, if they do sell the house, the woman will have to rent.

How is this relevant to the “no money down” issue I started this post with? The listing agent has told the seller that they can get that sort of financing on the new purchase. Of course, they have no idea about her credit situation, her late payments, or the fact that if she sells the house for less than she wants, she will still need to come up with cash at closing. She cannot come up with that cash, and the sale will, in all probability, be for less than she owes on the house.