"We're entering a period that's very much a buyer's market," says Wade Ragas, a real estate consultant with Real Property Associates Inc. "This isn't a short-term, 90-day problem. This oversupply condition may last a while, maybe for years."
Selling a home in a buyer's market is a challenge. When there are more homes for sale than people looking to purchase property, buyers become valuable. With so many homes to choose from, purchasers have the upper hand in transactions: If a seller doesn't comply with what a buyer wants, the customer can easily turn his attention to one of the many other properties available. The owner of another house being sold may not only comply with what the buyer wants but sell at a reduced price as well.
The oversupply of homes on the market isn't just in flood-damaged areas where former residents are looking to sell cheap and get out. All over the city, especially in undamaged neighborhoods, the buying market is hot.
"I like to tell this story," says Sterling Joe Ory, a RE/MAX agent and New Orleans Metropolitan Association of Realtors secretary. "Recently, there was a UNO economic summit where they gave an unusual statistic. During the oil glut in the late '80s and early '90s, we had an unbelievable amount of property on the market. We have roughly the same amount today. However, now we've got a lot more sales and good retention of property value."
This statistic seems promising since oversupply usually leads to a reduction in property value as sellers are forced to lower their prices to compete for scarce buyers. But New Orleans' unique post-Katrina situation has made undamaged property more costly than before, which, in some highly sought-after neighborhoods, cancels out the price-reducing effect of oversupply. Despite that trend, Ory warns against over confidence in all real estate transactions. Property value retention may be good, he says, but in the end the market is unpredictable and both buyers and sellers need to be careful.
"The real estate market is very healthy. However, it's not very stable," Ory says. "There's bubbling of activity in pockets of price ranges and neighborhoods that's constantly changing."
In a city with so many properties available and regular fluxes in prices, how does a buyer find the perfect new home? And how does a seller stand out with so much competition? For buyers, now is the ideal time to find a real estate deal, since sellers are likely to reduce prices to get noticed.
"If you're a buyer, it depends on the area, of course," says Vince Giordano, owner of Metairie-based Exit Crescent Realty. "I would look at properties that have been sitting on the market for a while. The more motivated the sellers, the more likely you're going to walk away with a deal."
When a house has been on the market for a long time, sellers can become desperate, which gives buyers leverage in bargaining. Realtors use the market absorption rate to predict how long a house will sit on the market before it sells. For example, if there are 15 comparable houses for sale in a neighborhood and three are purchased in a month, it will be five months before all the houses are sold -- and that's if no new properties are put on the market.
Slow market absorption gives buyers a huge advantage, but that doesn't mean they will automatically find a great house at a great price. Smart buyers can take other steps to entice desperate sellers to give them the deal they want.
"Get pre-qualified for a loan," Ragas advises potential buyers. "That heightens your credibility. Look into how to secure insurance. See if you can transfer insurance from your current home, or if your insurance company will cover a new purchase. The biggest problems are that buyers aren't able to finance purchases, or they can buy homes but can't get insurance. If you can overcome these obstacles, you're in a real good position to bargain."
Even though buyers are in demand, they still need to be cautious. Dorian Bennett, owner the New Orleans branch of Sotheby's International Realty, advises potential buyers to do some research before they make offers on a piece of property, especially if they're new to the area. "You first have got to decide where in the city you want to live and what you can afford," he says. "Anytime you come from a different place, things are new. New Orleans has all sorts of variance."
Working with a good full-time realtor can eliminate some of the guesswork when searching for a home in a new city. "You really need an experienced agent," Ory says. "There are just innumerable chances to trip up nowadays, with insurance, taxes, financing and inspections." A professional realtor will also know how neighborhoods are changing. In New Orleans, an area could look completely different in five years, Ory says, and it's important to take the changing nature of the city into account when making a major decision like buying a home.
Recently, the most popular areas for buyers have been places that haven't changed much since Katrina: the French Quarter, Garden District, Warehouse District and the Faubourg Marigny. These popular areas are on high ground and sustained little damage from the storm. Most importantly, "they still look like they did pre-Katrina," Bennett says. But homes on high ground are likely to come with a hefty price tag. A study released by Ragas' consulting firm states that undamaged Orleans Parish homes actually increased in price by more than 25 percent from pre-Katrina 2005 to late 2006. This post-storm increase in selling prices explains why property values have been retained in the current buyer's market.
While neighborhoods That didn't flood are ideal for families who want a move-in-ready home, the best prices can be found in Orleans Parish's damaged areas. Here, homes were selling more than 55 percent cheaper in late 2006 than in pre-Katrina 2005, according to the study.
Even though land is cheap in Lakeview and its surrounding neighborhoods, Giordano warns potential buyers of damaged homes about putting too much money into rehabilitating properties. He says buying a house in a Katrina-affected neighborhood might not be the best investment. "It's a risky proposition," he says. "We don't know if these areas are going to stabilize." The city is always changing, and no one knows if the most flooded areas will ever be completely restored, he adds.
The uncertain future of neighborhoods that flooded also makes selling properties in these areas difficult. As Giordano points out, a destroyed, half-occupied neighborhood is not the most attractive place for the few buyers who can afford to make a risky investment.
"If you're married with kids and you're looking to buy in the $450,000 range, are you going to go somewhere in Metairie or Kenner where there was little damage, or are you going to go for a damaged area?" he asks.
To overcome the obstacles of selling in a buyer's market, realtors advise sellers, especially those in unrestored damaged areas, to make their home look as good as possible, hire a reputable real estate agent and set a competitive price. "I'm sure every agent would tell you the primary thing you have to do is make sure your price is appropriate," Giordano says.
"Here in New Orleans, the $350,000-plus market is already challenging. Once you add in damage, it just gets harder."
When they put their house on the market, Ragas says, sellers should already have an idea of a price they are willing to accept below what's listed. Beyond that, he tells sellers to "make sure the exterior looks good, and declutter the house. You're going to be moving out anyway, so think about a mini-storage facility. If things are obviously broken or not maintained, you really need to deal with them. Trust the advice of a realtor. They are usually able to tell what needs to be fixed."
Most agents also advise sellers in neighborhoods that flooded to be wary of out-of-town developers. Since Katrina, some large developers have come to New Orleans trying to buy up property cheaply. Large-scale investors unfamiliar with the city can make selling a house in a damaged area frustrating. Giordano says he has seen big investment groups make offers on houses, sit under contract, then, at the last minute, walk away from the deal claiming their loan wasn't approved. He says this has happened more than once.
"There's not a whole lot you can do in Louisiana," Giordano says. "The contracts really benefit the buyer. It's difficult to prove buyers are breaching contracts. It's easy for them to get a lending company to say a loan wasn't approved."
If a deal falls through at the last minute, sellers have to wait even longer for their homes to be bought. To prevent something like this from happening, Giordano advises sellers not to jump into contracts too quickly.
"Have patience," he says. "If you get an offer, make sure your agent gets as much information as possible about the potential buyer. I highly recommend that you contact the buyer's lender and make sure they're reputable."
To avoid messy contracts with big investors, sellers should ask developers about their current projects and find out what their plans are for the property in question. Ask why the developers are interested in the neighborhood. If the investor has a solid answer and current New Orleans projects underway, he or she is more likely to be trustworthy. Some large-scale developers, however, don't know the city and try to run their businesses from out of town. When they realize the intricacies of New Orleans' neighborhoods, many abandon their projects.
"The biggest thing I've noticed about out-of-town developers is there is too much (to understand about the city)," Ory says. "It's too complex. They don't know the difference between Uptown and Lakeview. A lot of mid-level developers think there's a finite set of property in a contained area. That's just not the case."
Some developers have followed through on buying property, however, and Ory says smaller groups that know the city are more likely to complete sales than big out-of-town companies. "I'm personally seeing local developers and small developers buying," he says. "I've sold so many properties to small developers. I'm selling flooded properties like hotcakes. Small-scale investors understand New Orleans and know how to buy a home, rehab it and still turning a profit. Ory says small, locally based developers often will buy and renovate entire blocks in flooded areas.
Sellers overall will find their task much easier once buyers return to the city.
Bennett says the reduced population of New Orleans following Katrina has affected his company, which deals primarily with luxury properties. "We're having a hell of a time with Old Metairie," he says. "Old Metairie was composed mostly of doctors, attorneys and professional people. They're not coming back. People have established lives in other cities. They're never coming back. That just knocks out the market."
If trying to find a buyer becomes too frustrating, Ragas suggests you rent out your property. "If you want to move and get on with your life, why not rent for a year?" he says.
Bennett offers one more piece of advice for antsy sellers: "Help all the organizations that are trying to bring New Orleans back. They're going to bring the market back too."