Because of these obstacles, many of tomorrow’s homeowners are using today’s single-family rentals (SFRs) as stepping stones to homeownership. According to the National Survey of Renters, more than 52 percent of renters—including 60 percent of single-family renters and 44 percent of apartment dwellers—said they anticipate becoming homeowners in the next five years.

Additionally, families with three or more members (64 percent) and children under 13 (69 percent) were more likely to become homeowners than the 43 percent of renters who have no intention of becoming owners.

The findings of the survey suggest that families are using SFRs as a step toward homeownership—whether they’re would-be first-time buyers or families displaced by foreclosure waiting to buy again when they can afford to do so.

Families can stay in these SFRs for several years as they prepare financially for homeownership. As they wait, they can enjoy many of the amenities of owning a home, including large floor plans, strong communities, backyards, security, privacy, and proximity to schools and recreation.

Using a SFR as a step toward buying a home means new buyers are better able to tackle the obstacles that await them in the real estate market:

Big down payments

The average down payment today is 9 percent, according to Lender411.com, an online mortgage marketplace. That average includes the large number of FHA loans that require down payments of only 3.5 percent. Many lenders require much larger down payments.

Rules limit who is allowed to give buyers the funds to make down payments; in most cases, the person giving the gift must be a family member or friend with a verifiable, long-standing relationship. The lender will likely require that the down payment is truly a gift and not a loan that will need to be paid back.

These rules leave many buyers on their own to raise the money required for a down payment on a house. While renting their homes, these future buyers have a chance to save that money.

Tight lending standards

According to Ellie Mae’s latest Origination Insight Report, the median FICO score on closed loans was 746 in the first quarter of 2013. In that same quarter, the loan-to-value ratio—the mortgage amount compared to the appraised value of the property—was 80 percent, and the debt-to-income ratio—how much a borrower owes compared to how much they earn—was 23 percent.

Those are tough standards for many young buyers to meet. While not impossible, they will need to get their finances in order, and renting gives them the breathing room to do that.

Low inventories of homes

Inventories of homes for sale are about 40 percent lower today than they were two years ago. In some areas—Northern California, Phoenix, and Denver— the shortage of listings is more severe.

Homes in the lower price tiers, including starter homes for first-time buyers, are especially scarce. First-time buyers with limited pocketbooks are finding themselves on the losing end of bidding wars or unable to compete with cash buyers. Many future buyers continue to rent, waiting for their dream home to hit the market.

While some renters surveyed enjoy that lifestyle and plan to remain renters, many more plan to use SFRs as the first step in their journey toward homeownership.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

Mortgage lenders that made bad loans paid dearly with massive losses that drove some, like Countrywide and Washington Mutual, out of business. The survivors changed their lending practices dramatically, raising standards on credit worthiness and ability to repay and requiring better documentation.

The result is that many homeowners who could qualify for a mortgage to buy or refinance a home in 2005 could not today. Many say that the higher standards have gone too far. For example, from 2001 to 2004, approximately 40 percent of residential loans went to homebuyers with credit scores above 740. Currently that number is in the 50 percent range. Economists at the National Association of Realtors estimate that an additional 500,000 to 700,000 home sales could be made if credit conditions return to normal.

However, many policy makers and lenders disagree. Most view the tougher standards as necessary to reduce risk for lenders and ensure that financing is available for mortgages. There’s no doubt that the tougher standards have helped to stem the flood of foreclosures. Defaults on mortgages have declined about 20 percent a year over the past two years, and foreclosures are expected to return to pre-crash levels in two or three years. Federal regulators are making permanent some of the increase standards, including those addressing the ability to repay and the requirements for down payments, in two rules now being finalized. These are known as the QM (qualified mortgage) rule and the QRM (qualified residential mortgage) rule.

If you are thinking of applying for a purchase mortgage to buy a home, or if you are a homeowner seeking to refinance, here are the key standards that you will have to meet.

• Down payments. Last year, the median down payment for all homebuyers was 9 percent, but it was only 4 percent for first-time buyers, most of whom used FHA financing. The QRM rule will encourage lenders to make loans to borrowers who put more down (perhaps 10 percent or more, though a final figure has yet to be determined). Borrowers who put down less will pay higher mortgage interest.
• FICO score. The median FICO score for all mortgages closed in February was 745, according to Ellie Mae, a mortgage-servicing platform that processes more than two million mortgages a year. By comparison, about 60 percent of all mortgages approved before 2004 had FICO scores of 740 or lower.
• Loan to value ratio (LTV). The LTV is a metric that helps your lender determine whether the value of the home you are buying is high enough to cover most of the cost of the loan it is making in the event you should default. The median LTV in February was 80 percent, which means the loan is equal to 80 percent of the appraised value of the home.
• Debt to income ratio (DTI). The DTI is a key metric used to determine a borrower’s ability to repay. All documented income sources are used to compute income. Debt is expressed two ways: all outstanding debt, including consumer debt and alimony, and all debt plus the debt to be incurred by the mortgage for which the buyer is applying. The median DTI in February was 23 percent for all debt except the prospective mortgage. With the mortgage added in, the median was 35 percent.

Mortgage approval rates on the rise

Over the past year, mortgage approval rates have risen nearly 20 percent despite the fact that there is still virtually no evidence that lenders are relaxing underwriting standards.

In February, lenders approved 56.8 percent of all mortgage applications, including purchase mortgages and refinancings. This represents an increase of 18.6 percent from the 47.9 percent approved a year ago. Approval rates have also risen quickly in recent months. For 2012, the average closing rate for all mortgages was 49 percent, 15.9 percent below the February closing rate.

Homebuyers are doing markedly better getting approved than they were 16 months ago when Ellie Mae began releasing its data on mortgage originations. Some 61.7 percent of homebuyers were approved for a mortgage in February 2013 compared to 55.2 percent in November 2011. Better preparation, credit repair, and documentation probably account for the improvement.

Despite the improved percentage of approvals, mortgages are taking a little longer to process than a year ago. Purchase loans took 47 days to close in February, slightly longer than the 45 days it took a year ago, while refinancings are taking 50 days now compared to 44 days a year ago.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

Slim pickings are changing the dynamics between sellers and buyers. When there aren’t many homes on the market from which to choose, buyers have few options—and more chances to make a big mistake by overpaying for a house or settling for a home that they don’t really like.

On the other hand, this is the time for you and your family to decide together what you really do want in a new home in terms of location, size, and amenities. Before you start looking, make a list of must-haves and would-be-nice-to-haves, as well as things that are not essential. This may be the most important purchase you will make in your lifetime, and making a mistake will either cost you a great deal of money or cause you a great deal of regret.

Six tips for house hunting in an inventory drought

1. Scour the listings. Use several good listing sites, not just one. Make sure at least one is a broker’s site, preferably one of the dominant brokers in your market. Sign up to be alerted whenever a new listing is posted in the neighborhoods you are considering.

2. Expand your scope. Can you add some territory to your house-hunting locations? The wider your search, the more houses you will be able to consider.

3. Hire the number one buyers’ agent in your market. Real estate agents specialize by territory and by skill set. Some specialize in short sales and foreclosures, while others specialize in distress sales. Realtors who are certified buyers’ agents can use the Accredited Buyers’ Agent designation (ABR). Hire a buyers’ agent who has access to new listings in your target area before they are posted by the MLS.

4. Go to open houses. Try to meet other agents active in your target area. They are likely to know of listings before they hit the Internet.

5. Don’t get turned off by a poorly created listing. At best, photos and words convey only a general sense of what a house is like. At worst, they can turn you away from a property that just might be the right one for your needs. Look at listings with a critical eye. If the property has the basics you seek, visit it. Badly done listings often keep great houses from selling; by doing due diligence, you just might find a hidden gem.

6. Give yourself plenty of time. With the onset of the spring buying season and increasing prices, inventories have been rising lately. Total housing inventory at the end of February rose 9.6 percent to 1.94 million existing homes available for sale, which represents a 4.7-month supply at the current sales pace. This is up from 4.3 months in January, which was the lowest supply since May 2005. With economists predicting improving prices, more and more sellers are likely to list their homes through the spring and early summer months.

Start looking early, and look at a lot of homes. Be patient as more homes come onto the market. Keep looking for the right house until you find it, and don’t compromise by stretching yourself too far financially or not getting what your family needs. The market should continue to improve, and more homes will be available next spring.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

In California and Arizona, sales contracts are being consummated in 24 hours or less. These flash sales attest to the frenetic fever that’s infecting the hottest real estate markets, where inventories are 30 percent to 60 percent lower than a year ago.

What’s going on? In economics class, we were taught that demand coupled with short supplies results in higher prices, encouraging owners to sell and restoring equilibrium. In real estate markets, however, it’s just not that simple.

Here are the three major reasons that sellers aren’t selling even when prices are rising.

1. They owe more than their houses are worth. Though rising values are lifting many homeowners out of negative equity, 10.4 million homeowners (21.5 percent of all residential properties with a mortgage) were still in negative equity at the end of the fourth quarter of 2012, according to a recent CoreLogic report. Of the 38.1 million residential properties with positive equity, 11.3 million have less than 20 percent equity. These borrowers, referred to as “under-equitied,” may have a difficult time obtaining new financing to refinance or buy a new home due to underwriting constraints.

Under-equitied mortgages accounted for 23.2 percent of all residential properties with a mortgage nationwide in the fourth quarter of 2012. That’s a grand total of 44.7 percent of homeowners with a mortgage. Negative equity is a bigger problem in hot markets like California, Arizona, and Florida than elsewhere because those markets experienced greater swings in home values over the past seven years.

2. They can’t afford to buy. Most home sellers are also homebuyers. In hot markets, move-up buyers are having almost as hard a time as first-time buyers finding affordable houses. Unless they have owned their existing home for ten years or more and will realize a significant profit, move-up buyers may find themselves ending up with a loss.

3. They can’t get financing. Many move-up buyers are having the same (or worse) problems getting financing as first-time buyers. They haven’t been in the mortgage market since the tough new lending standards were enacted. FICO scores and down payments are higher, debt-to-income and loan-to-value ratios are lower, and, most importantly, documentation is tougher today, especially if you’re self-employed, paying alimony, co-signatory on another loan, or retired.

If move-up buyers can’t buy, they don’t sell. The result is a huge logjam in the housing ladder that makes it harder for first-time buyers to find starter homes and for empty nesters to sell the family home for something smaller.

Time will make all the difference. For seven years, most owners have postponed thoughts of selling. Although prices are rising suddenly in some markets, it doesn’t mean that homeowners are prepared to respond quickly. Families don’t easily make a major decision like selling their home and moving to a new one. Even when the decision is made, there are many steps involved in the process: preparing to sell, finding a new home, and rearranging the family’s life. It can take months before a house is ready to be listed.

Time will also see rising values lift more owners out of negative equity to put them in a position where moving will be possible. Sellers will sell in good time, and real estate markets that seem out of control today will return to a degree of normalcy.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

Foreclosures are definitely on the decline as fewer homeowners are defaulting on their mortgages. The backlogs of foreclosures that built up during the Robogate mess are largely depleted, and more and more homeowners who find themselves in financial trouble are using short sales to get out from under their mortgage debt and move on. In January, only six states and 13 of the largest 100 metro areas reported a year-over-year increase in the foreclosure rate.

In most real estate markets, prices are rising on foreclosures, selection is thin, and home buyers find themselves competing with aggressive investors willing to pay all cash. Experts believe within two or three years we’ll be back to “normal,” e.g., the way things were before housing crash in 2006. Of course, there always have been foreclosures to be found, just not very many—nothing like the 4.2 million foreclosures that have come onto the market since 2008.

Yet there are still foreclosures to be purchased—about 1.2 million are still in the processing pipeline, delayed due to state laws or legal challenges. Some 61,000 foreclosures came onto the market in January, 17.6 percent fewer than a year ago.

Location, location, location

For a variety of reasons, foreclosure inventories and prices vary greatly by geography. Different state laws can slow down foreclosure processing; most of the 1.2 million backlogged foreclosures are located in a few of these states. Local economic conditions still are creating new foreclosures in certain markets. Demand is being driven by investors eager to do deals before prices rise higher. Most of the largest investors are located in the states where most foreclosures have occurred: Arizona, California, Florida, and Nevada.

Recently, RealtyTrac published its recommendations for the ten best places to buy foreclosures in 2013, based on available inventory and the average foreclosure discount (the difference between the median price of foreclosures and the median price of all home sales in the market). To select the best places to buy foreclosures in 2013, RealtyTrac scored all metro areas with a population of 500,000 or more by summing up four numbers: months’ supply of foreclosure inventory, percentage of foreclosure sales, foreclosure discount, and percentage increase in foreclosure activity in 2012.

Topping the list of best places to buy foreclosures in 2013 was the Palm Bay-Melbourne-Titusville metro area in Florida with a total score of 394: 34 months’ supply of inventory, foreclosure sales representing 24 percent of all sales, average foreclosure discount of 28 percent, and a 308 percent increase in foreclosure activity in 2012 compared to 2011.

Five other Florida cities ranked among the top 20 best places to buy foreclosures: Lakeland, Tampa, Jacksonville, Orlando, and Miami.

In addition, the list includes five New York cities, based largely on big backlogs of foreclosure inventory and big increases in foreclosure activity in 2012: Rochester, Albany, New York, Poughkeepsie, and Syracuse.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

While prices are moving upwards, inventories of homes for sale are continuing to fall, which is normal for the winter months. What’s not normal is how much inventories have declined in the past two years and how thin the supply of homes has become, measured on a year-to-year basis. On the huge Realtor.com national database of listings, inventory levels through January were down more than 40 percent from two years ago and were still declining.

In normal times, increased demand drives up real estate prices. These days, lack of supply is the primary driver behind rising prices. A continued scarcity of homes is in the seller’s interest, but buyers want a healthy supply for two reasons: a wider choice and a restraint on prices. At the end of the day, sustained low inventory levels decrease sales and discourage buyers, and everyone suffers.

Low inventories are impacting the lower-priced end of the housing market much more than the top tier. Entry-level homes, starter homes, and distress sales (foreclosures and short sales) are the hardest find. Luxury homes are selling in about 200 days while move-in ready foreclosures (REOs) are selling much faster.

Low inventories result from several factors. The most important is the simple fact that prices have not yet risen enough since the housing crash to create an incentive for sellers. One out of five of all homeowners with a mortgage, about 10.6 million, still owes more on their home than their mortgages are worth. They simply can’t afford to sell.

Even though home values rose last year, the 33.5 million homeowners who bought between 2001 and 2006 would take a loss if they sold today, and they’re not selling unless they have to. Home values lost 34 percent between 2007 and 2009, and they have a long way to go to recoup the loss. Increased demand from investors who see the end coming for large numbers of foreclosures, processing delays in some states, and steady decline in defaults all are reducing the numbers of foreclosures available.

Here are some tips for buyers looking for a home this spring:

• Increase your down payment as much as you can, even if your lender doesn’t require it. A larger down payment earns points with sellers, especially if you are competing against investors paying all cash.
• If you find a house you really love, consider making an offer over the list price. To do so, you might have to increase your down payment as suggested above because otherwise you risk an appraisal of less than the amount you need to borrow, which could kill your deal. A higher offer might put you in a better position than competitors and leave you with a property that should continue to appreciate in the months to come.
• If you are in the market for a foreclosure or short sale, hire a Realtor certified in distress sales. Look for an agent with the letters “SFR” after his or her name. To become SFR certified, Realtors must complete a one-day education program, either in-person or online, as well as three one-hour webinars.
• Do some research to find the agency that seems to handle most of the foreclosures where you want to buy and hire one of its agents. Often, agents within a brokerage will know about new foreclosures or short sales before they are listed. If they can sell you the home, they will make a commission from the lender as well as the buyer’s commission.
• If you’re handy or have friends in the construction and remodeling business, consider a damaged foreclosure. Unlike move-in ready foreclosures, damaged foreclosures are actually languishing in many markets and their prices are falling. HousingPulse reports that the average price for a damaged REO property sold in January was just $88,100. That was not only 17.1 percent below the average damaged REO price recorded a year ago—$106,300—but also the lowest level ever recorded by HousingPulse in its four-year history.

Buying a house in this environment can be tough. Don’t fall in love with one until your offer is accepted and your mortgage is approved. For those willing to work at it, though, the rewards will pay off for many years to come. Real estate people are always saying, “Now is a great time to buy a home.” This time, they’re right.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

However, as powerful and pervasive as it is, online real estate has its failings—some obvious and some known to only a few. Buying a home is the most expensive decision most of us make, so to avoid a mistake that could become very costly, every buyer should know how online house hunting really works.

Put simply, there are three kinds of sites carrying large numbers of real estate listings: the fancy national sites like Realtor.com and Zillow, regional sites published by multiple listing services, and sites sponsored by agents and brokers with local listings. However, they all get their information from the same source: the multiple listing service (MLS).

Not all properties are listed

There are more than 800 multiple listing services that are run by local boards of Realtors. However, not all homes are listed on a local MLS, such as the 9 percent of all existing homes sold last year (about 444,000 homes) that were sold by owners (FSBOs). That number is expected to grow as markets transition from buyers’ to sellers’ markets in the months to come. Right now, you can find FSBOs in your market on several websites where owners pay to have the FSBOs listed.

In addition, many wealthy and celebrity owners are keeping a growing number of homes, largely luxury properties, off of the listing services and Internet sites for privacy reasons. These are called “pocket listings,” and real estate agents use open houses and other techniques to target wealthy buyers while keeping details like asking price out of the news.

Finally, new homes may not be listed on an MLS or sites that rely on an MLS for their listings. However, you can find them on sites specifically offering new homes or sites sponsored by builders.

Concern over accuracy

All real estate sites convey the impression that their listings are complete, accurate, and current. However, a recent study found otherwise.

The WAV Group, a real estate consulting firm, recently studied different kinds of real estate sites and found that that local brokerage sites are the most accurate, up-to-date, and comprehensive. WAV Group CEO Victor Lund said, “We analyzed a sample of more than 6,000 listings in 33 zip codes in 11 markets, comparing the data on various websites against 14 local multiple listing services. The findings are clear: Real estate brokerage websites showed by far the most homes for sale, recognized which homes were no longer for sale, and displayed new listings much earlier.”

The study found that local real estate brokerage companies display 100 percent of the brokerage’s agent-listed homes for sale compared to about 80 percent for the national portal sites. Moreover, brokerage sites show newly listed homes for sale seven to nine days earlier than national portals, and they almost never show a home listing as active that has already sold. About 36 percent of listings that appear as active on national portals are no longer for sale.

The study also looked at the number of days between when an agent initially lists the home in the MLS and when it appears on consumer-accessible websites. Real estate brokerage sites update directly from the MLS, typically every 15 to 30 minutes. On the other hand, while some listings are updated sooner, the median delay between when a home was listed on the MLS and when it appeared on the portal sites was nine days for Trulia and seven days for Zillow.

The source of brokers’ advantage is direct access to local real estate databases. Every day thousands of properties go up for sale on an MLS. Tens of thousands more listings change price or make other changes that are material to their value and that appeal to a buyer. Unless a listing database is updated every 24 hours, vital information could be three or more days old before it appears on a buyer’s screen. Buyers and sellers using a database that is updated more frequently could have a competitive advantage over those using sites with older data.

Even though sites run by real estate brokerages carry the most accurate, current, and complete listing information, they rank only fourth among the most-popular sites visited by buyers, behind MLS sites, Realtor.com, and agents’ sites, accounting for only 39 percent of all buyers, according to the National Association of Realtors.

Tips for house hunting online

• Recognize that finding the right house for your budget and needs will probably take months. Be patient but be attentive. Check listings several times a day.
• Use several sites, but make sure at least one is a leading local brokerage in your market. You don’t usually have to use the services of that brokerage in order to access its listings.
• Sign up for email notifications of new listings and price changes so that you can keep abreast of new opportunities.
• Go to open houses and meet real estate agents in the area where you want to live. Tell agents what you are looking for and they will likely notify you of new listings—even before the listings are posted.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

In 2013, should the fragile housing recovery proceed as most experts expect, we could see a handful of markets cross over the line from buyers’ markets to sellers’ markets. A number of things about the way homes are bought and sold could change as a result, and it’s worth reviewing some of them, as it’s been six years or more since most real estate consumers encountered sellers’ markets.

When buyers’ markets return to sellers’ markets, the gap between sellers’ asking prices and final sales prices shrink—and may diminish altogether.

Normally, sellers’ markets are created by increased demand. However, today’s real estate economy is acting very differently than normal. Severely declining inventories, rather than rising demand, are driving the recovery. It’s harder for low inventories to maintain the recovery, which is why most experts characterize the current situation as unstable. However, low inventories can create sellers’ markets just as quickly as high demand.

Here are some signs of sellers’ markets that haven’t been seen for several years (and for which to keep an eye out in 2013):

No incentives to attract buyers. When sellers are in charge, they’re not going to spend any more than they have to in order to attract buyers. Sellers may no longer be offering reduced sales prices, paying a portion of closing costs, making repairs, or offering home warranties, all of which are popular incentives that have been used recently to entice buyers.

Pressure on real estate commissions. There is no such thing as a standard real estate commission. The percentages that sellers pay their brokers are negotiable, and in a sellers’ market, the seller has the upper hand. Options like minimum service brokerages that simply list homes on the MLS for a fee, or fee-for-service brokerages, are popular during sellers’ markets. Both listing agents and buyers’ agents feel the pressure during sellers’ markets.

More homes are sold FSBO. More sellers tend to go FSBO (For Sale by Owner) in sellers’ markets, when it’s much easier to attract buyers. They’d rather not pay for professional help that they may not need. Real estate professionals counter that FSBO homes take longer to sell and sell for less than non-FSBO homes. Last year, at the bottom of the housing crash, only 9 percent of recent sellers reported selling their homes as a FSBO. In 2003, the FSBO market share was 14 percent. In 2006-2007, at the height of the housing boom, owners sold 12 percent of homes, according to the National Association of Realtors.

All cash or pre-approval. Buyers without either cash or a pre-approval letter from their lender won’t get in the door with a seller. Slightly more than half of buyers are getting approved for a purchase mortgage these days. Why should sellers take a chance on a buyer who might be wasting their time when there are others who are financially prepared? Don’t house hunt beyond your computer screen until you’re pre-approved. What will you do if you see the house of your dreams and you’re not ready to make a serious offer?

With offers, the devil is in the details. Offers, which are contracts that include the buyer’s written proposal, are more than a price. Real estate lore is full of stories about buyers who made the highest offer but lost out on a home they loved because of something that seemed like a detail at the time. Sometimes it works the other way. My wife and I won our current house over a dozen others when we agreed to let the owner rent back for two months. Sometimes you can make concessions that signal your willingness to deal, or you can increase your deposit to show that you are serious.

Inventory heaven. Higher prices result in more listings. Inventories have been slim in the past two years because sellers have been waiting years for the right price. In a sellers’ market, buyers may be overwhelmed by options on their favorite listing sites, and they’ll find house hunting can be a full-time job.

Low appraisals. One of the downsides of a sellers’ market is the tendency for appraisers to undervalue a property. This happens more frequently when prices in a local market have been rising quickly and appraisers may use comparable transactions that took place months before that don’t reflect the latest price trends. Low appraisals can be a nightmare for buyers, who risk losing the home if they can’t secure financing as required by their offer. See Ten Steps to a Fair Appraisal for more information.

In true sellers’ markets, buyers make offers above asking price, and competitive multiple bid scenarios develop that sometimes fall prey to emotion. In these cases, prices can become unrealistic and can influence other transactions in the local market. Soon the push-pull of supply and demand will bring the market back to reality, but both buyers and sellers can get caught up in these scenarios and find themselves paying or receiving something different from what the marketplace might have dictated, minus human emotion.

However, we’re still a long way from the furious insanity that characterized the boom years.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

For investors, who account for one out of every five homes sold in America, 2012 was a year of change. The inventory shortfalls that drove price increases around the country were particularly acute among foreclosures, as lenders slowly increased processing in the wake of the Attorneys General agreement. Several dozen well-financed hedge funds entered the REO-to-rental business, spending billions to acquire distressed properties. The result was fierce competition in some markets for available foreclosures and short sales, driving up prices and squeezing out first-time buyers. As a result, the investor market share in home purchases fell from 27 percent in 2011 to around 20 percent as the year ended.

Overall, however, 2012 was a good year for investors. Demand for single-family rentals remained strong, and rents rose in most markets. Financing was affordable and available for individual investors. Cash flows and returns were good. It was the year that residential investment truly came into its own, helped by Warren Buffet’s comments on CNBC: “If I had a way of buying a couple hundred thousand single-family homes and had a way of managing them, I would load up on them and I would take mortgages out at very, very low rates…. If I was an investor that was a handy type, which I’m not, and I could buy a couple of them at distressed prices and find renters, I think that’s a leveraged way of owning a very cheap asset now, and I think that’s probably as an attractive an investment as you can make.“

Real estate investing trends to watch in 2013

The geography of foreclosures is changing. The “sand states” of California, Arizona, Nevada, and Florida, which dominated foreclosures and investor activities from 2007 until this year, are no longer the best markets to find the best deals—with the possible exception of some Florida resort markets. Today the action has moved to the Midwest and Northeast, home to most of the judicial states where slow processing has piled up inventories and higher unemployment. New Jersey, Illinois, Ohio, Wisconsin, Connecticut, and New York are reporting greater foreclosure discounts—the difference between foreclosures and “normal” home sales—than sand state markets. Want a good deal on a foreclosure? Try Milwaukee, Baltimore, Philadelphia, Cleveland, or Hartford.

Short sales are where the action is. For the first time ever, sales of properties in some stage of foreclosure (pre-foreclosure sales) outnumbered sales of bank-owned properties (REO) in the third quarter, as short sales continue to gain market share at the expense of REOs and sales of completed foreclosures at auction. With a few exceptions where large backlogs of foreclosures have piled up, as with the markets cited above, in most markets short sales are where the action will be in 2013. Find a Realtor expert in the short sale process to help you find deals.

Rising home prices have a silver lining. Prices are rising fastest at lowest-price tiers, especially foreclosures and short sales, because of tight inventories and increased demand from hedge funds. Higher prices cut into investors’ profit margins in the short term, but in the long term they increase the value of investment properties, making it easier to borrow more money and to sell at a greater profit. Rising values also raise rents because rents and home prices move hand in hand. Prices are projected to rise at a slower pace in 2013, from 1 percent to 3 percent, compared to the 4 percent to 6 percent experienced in 2012.

Tight lending standards will keep single-family rental demand strong. As the economy improves, more young people are forming households and will want to buy a home. However, many first-time homebuyers are experiencing nightmares getting financing; only half of all applications are being approved today. Potential buyers are forced to rent until they can qualify for a mortgage, bolstering demand for rentals, especially single-family rentals, which are more popular with young families.

Hedge funds will increase the value of single-family rentals. While the big money from Wall Street is compiling portfolios of hundreds of properties by buying foreclosures right and left, it’s also hungry for properties that have been renovated and rented. If you own one, you might get an offer you can’t refuse.

The coming months could be the best yet for real estate investors, whether for individuals or for the investment partnerships loaded with private equity cash that are active in many markets today. If you’re thinking of trying your luck at real estate investing, the stars could be aligned for you in 2013.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.

1. Don’t rely solely on website valuations from Zillow, HomeGain, Trulia, or other real estate websites. The automated valuation models (AVMs) are only estimates based on a limited amount of information.

2. Ask your real estate agent to prepare a competitive market analysis (CMA) or a broker’s price opinion of the property before you make an offer.

3. If you are selling a home, consider going one step further and having your own appraisal done before you price your home for sale. Appraisals usually cost less than $1,000. If you live in a community where prices are fluctuating or where there are a number of foreclosures, doing your own appraisal will help guide your pricing decisions. It will also be a good point of reference when a buyer’s lender conducts its own appraisal.

4. Lenders hire appraisers, not buyers, even though buyers pay the appraiser’s fee at settlement. However, buyers can save a lot of headaches and improve the quality of the appraisal by taking steps to be sure that they are working with a qualified professional. Most lenders will work with buyers to get a fair appraisal. If they are not willing to do this, it could be a bad sign for a future relationship that may last 15 or even 30 years.

5. Many state licensing agencies make available online the names of appraisers who have been disciplined. It’s easy to check out whether the appraiser your lender is using is on the list.

6. Request that the appraiser have a residential appraiser certification and a professional designation. Examples include the Appraisal Institute’s senior residential appraiser (SRA) or member of the Appraisal Institute (MAI) designations.

7. Buyers should tell lenders to find an appraiser who comes from the same county or a neighboring county. One of the most frequent complaints about low appraisals is that appraisers were unfamiliar with the local market.

8. If you are the seller, meet the appraiser when he or she inspects your home. Share the CMA or appraisal you had done. Go over all upgrades and improvements that you have made. Make sure the appraiser knows about important pending neighborhood improvements such as roads, commuter rail lines, schools, parks, or shopping centers. Are major employers expanding? Are new companies moving to town? Remember, you want to do all you can to get the highest appraisal so that the buyer can get the financing necessary to meet your price.

9. Both buyers and sellers should question a low appraisal. Review the appraiser’s credentials. Review the appraisal to see if any short sales or foreclosures were used as comps. Ascertain whether improvements to the property were taken into account.

10. Often, lenders will agree to a second appraisal if the first is so low it will kill the deal. Ask to have a more current comp included that reflects current real estate market conditions.

Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.

Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.