Inman

Sign here to acknowledge your home value may drop

While the debate continues over the existence of housing bubbles and potential fallout from a fizzle or pop, real estate agents in some sizzling markets are asking consumers to sign a disclosure form stating that home prices can – and do – go up and down.

In October 2004, the California Association of Realtors announced the release of a new disclosure form, the “Market Conditions Advisory,” which states, “In light of the real estate market’s cyclical nature it is important that buyers understand the potential for little or no appreciation in value, or the actual loss in value, of the property they purchase.”

The form also states that it is “impossible to predict future market conditions with exact accuracy,” and describes “hot” versus “cool” real estate markets. Many real estate markets in California have not experienced a cooling trend in the past 10 years. “In a less competitive or ‘cool’ market there are generally more sellers than buyers,” the form states, “often causing real estate prices to level off or drop, sometimes precipitously.”

The form also states that in a “hot” market, “some buyers may offer more than originally planned or eliminate certain contingencies in their offers.” Buyers are responsible for determining a price to offer on a property, and “If your offer is accepted, you may have ‘buyer’s remorse’ that you paid too much,'” the form states.

The unprecedented boom in the U.S. housing market, which analysts say is largely fueled by historically low interest rates and new types of loan products, has drawn investors, speculators and renters alike to purchase homes before the window of opportunity is closed.

This buying frenzy has also sent prices through the roof in some markets, and real estate experts largely agree that the real estate market cannot continue this feverish pace indefinitely. There is a difference of opinions, though, on how and when the boom will end, and whether it will normalize, whither or implode.

June Barlow, general counsel for the California Association of Realtors, a trade group with about 165,000 members, said the new disclosure form in California “is stating the obvious to real estate professionals. But it may not be obvious to buyers. Real estate markets are cyclical and they change and you really can’t predict it.”

The disclosure form also advises buyers against making non-contingent offers on a home by waiving loan, appraisal and inspection contingencies. “There is inherent risk in writing a non-contingent offer,” the form states. “Only you, after careful consultation and deliberation with your attorney, accountant or financial advisor, can decide how much risk you are willing to take. It is your decision alone and cannot be made by your broker or real estate agent.”

Even so, buyers in some competitive, super-heated markets have waived contingencies in an effort to elevate their offers.

Barlow said that several brokers in the state had developed their own Market Conditions Advisory forms, and the association’s form draws from those forms already in use. “(Previous forms) were all over the map in terms of what they contain and what they don’t,” she said. “When we see a certain type of form used all over the state we try to take the best of all of them and make it so it’s not confusing.”

Barlow said she is not aware of any lawsuits filed by home buyers specifically over a drop in home value after purchase, and the form is intended as a preventative measure. “Whenever you have a situation where a buyer is unhappy, then every minor problem with the house becomes major when the value has dropped.”

It is always problematic, she added, when homeowners lose equity. “They look for someone to blame. When the market has changed, there is no one to blame. We just want them to go in with their eyes wide open.”

While the association has existed through many real estate market cycles, Barlow said the association has not previously developed such a disclosure form. The association’s development of the form has more to do with the prevalence of similar forms in the marketplace than it does with the existing market cycle itself, she also said.

Bill Jilbert, president of Coldwell Banker Success Realty, said his company adapted the California association’s Market Conditions Advisory form this year for its clients in the Phoenix metropolitan market.

Jilbert said that the market in the Phoenix area was so over-heated that the company thought it would be a good idea to explain to clients about possible risks of price fluctuations. “Our fear was that down the road, if and when the market does cool, they would forget…this was their independent decision,” Jilbert said.

The company introduced the form in February, and buyers and sellers are asked to sign – the California form does not require a seller’s signature. Just as buyers may have remorse if they later feel they overpaid for a property, sellers could wonder if their property was priced right if they sell to someone who immediately resells the property at a higher price, Jilbert said.

“Because the market is so frenzied…what it’s worth today has no reflection on what it’s worth tomorrow,” he said. To his knowledge, no one has refused to sign the disclosure form, he said.

The Coldwell Banker Success form states, “Real estate markets are cyclical and what goes up may well come down. (The buyer) needs to decide what they are willing to pay for a property in light of market conditions and their own financial resources.”

While the Phoenix metro market has slowed slightly in the past couple of months, Jilbert said it is still common to see 10-20 offers on a good property within the first 24 hours.

There has never been a need for a Market Conditions Advisory form in past real estate cycles in Arizona, Jilbert said, because the market conditions have never been so extreme. “In Arizona this is the most over-heated real estate market we’ve ever had. In the past, we’ve had runs but nothing like this one. People haven’t been doing the things they’re doing (until now).” He said he expects the market to return to a more balanced state in 2006, “at which time the form will probably become unnecessary.”

Bill Aboumrad, owner and manager of RE/MAX Executives, which has 12 offices in California’s Greater San Francisco Bay Area, said his company uses the form in all of its contracts. The California form, he said, “is geared toward being in a competitive or hot real estate market. If market conditions change somewhere down the road (the form) may not be quite as critical.”

Mary Pope-Handy, a Realtor for Intero Real Estate Services in California’s Silicon Valley region, said that even before the California Realtor Association released its Market Conditions Advisory form, she has used other, similar forms. “I have been using it for at least two to three years and I think much longer,” she said, “and most of the companies in my area use it, too.”

Her local Realtor association has its own Market Conditions Advisory form, which was last revised in January 2004. This form states, “Bay Area housing values have experienced repeated up-turns – with extraordinary price increases in some cases – and downturns, where home sale prices descend, in some cases dramatically. Your real estate agent cannot predict market swings, and whether and to what extent real property purchased today will, in the future, appreciate or depreciate in value.”

Rob Authier, CEO for the Massachusetts Association of Realtors, said the association hasn’t ever launched disclosure forms relating to fluctuating prices. “Those (real estate) cycles exist but we don’t have that kind of disclosure form. Realtors have no role in telling people what they should pay,” he said.

Authier also said he hasn’t heard of any individual brokerages using such forms in Massachusetts.

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