Sarah Jarvis Team at One South Realty

at One South Realty

Market Values

‘I’m So Awesome’ (and how you can tell if a Realtor actually is)

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Agent: “I don’t mean to brag … but I’m awesome.”

Agent: “I sell soooo much real estate, and all of my clients love me. Look at this awesome review someone just left me on Zillow. Did you see it? Did you?!? Here it is again.”

Agent: “And just so you realize, I am an expert in your neighborhood, as well as the one just down the road. And, the one next to that one, too. As a matter of fact, I am an expert in Chesterfield, Henrico, Hanover, New Kent, Petersburg, Ashland, Short Pump, Goochland, and Chester. “

via GIPHY

Agent: “And in case you weren’t aware, I am also an expert in condos, luxury housing, land, foreclosures, relocation, first-time homebuyers, and commercial property, too! Oh, and new homes. And waterfront property. And historic homes.”

Agent: “I’m really good.”

Agent: “And I really don’t want to toot my own horn too much, but did you know that I sold millions of dollars of homes in my career? Like Multi-Millions. Like Multi-Multi-Millions…”

Agent: “Oh, and I love people. And houses. And pets. And Richmond.”

Realtor Marketing Sucks (Usually)

Please, make it stop.

As an industry, we do an absolutely terrible job of communicating our value proposition. What we call marketing is generally nothing more than bragging about our sales numbers (or even worse, the dreaded ‘HUMBLEbrag’) instead of explaining how our industry works and what is actually going on.

In lieu of debunking myths, offering true analysis, or identifying trends, we choose to thump our chests in a ‘look at me’ manner, tell everyone who will listen how many homes we have sold and put our face all over everything imaginable.

Sad…

The Realtor Award

Words like Platinum, Ultra, Mega, Master, and Million are the typical categories of ‘achievement’ –– which sounds more like a superhero convention or the latest scratch-off ticket from the lottery, if you ask me.

So why is it shocking that we (as agents) brag about sales levels to the public?

Somewhere along the line, our industry made the nonsensical assumption that those who sell the most properties are also the best Realtors.

Realtor Award Ceremonies sound more like superhero conventions or the latest lottery game … Mega, Ultra, Platinum …

Sorry, but that simply isn’t true.

Yes, getting things sold is an integral part of the job, but the manner in which you do so is equally as important –– if not more so –– and unfortunately, it goes largely unrecognized.

Measuring Success Correctly

So guess what we are going to do? Yep, we are going to take a look at some of the metrics that matter far more than just sales volume.

As we have stated many times before, MLS is a phenomenal database. Odds are, if you ask MLS an interesting question –– and if you are remotely fluent in database management –– you can make it spew out some fascinating answers.

MLS Data can be used to analyze agent and brokerage performance, not just housing and neighborhood values …

These answers can range from something simple like ‘what was the average sales price in a community last year’ to the far more complex, ‘what is the premium attached to new infill construction in an area whose average home is 100 years old?’

Tracking Agent Performance

So yes, we can ask MLS some quite interesting and powerful questions about housing and neighborhoods, but we can also use the data to analyze individual agent (and brokerage) performance, too.

Wait, what?!? You can look at individual agent and brokerage performance??

Yep.

screenshot from MLS of price reductions.
Few realize that the CVRMLS allows you to search for properties where the price has been reduced. You can then sort by the agent or by the brokerage to see who might be overpromising a price in order to secure a listing.

MLS offers the ability to examine both agent’s and brokerage’s historical performance when it comes to protecting their sellers, marketing times, how many of their listings require price reductions, as well as how many of their listings never actually sell.

MLS tracks a lot of groovy data.

So, without calling out anyone in particular, we thought we would just look at how we are doing relative to the rest of the market, and let our results speak for themselves.

Price Reductions and How Realtor’s ‘Buy’ Their Listings

Did you know that Realtors may ‘occasionally’ tell you that your house is worth more than it actually is in order to get you to list with them?

Why? Because telling a seller that their house is worth more than it actually is means likely securing the listing. Conversely, telling a seller their home is worth less than what the other agent says likely means losing the listing to the other agent.

As an agent, there is nothing more frustrating than when you tell a seller a realistic asking price and see them list with another agent at a higher price –– and watching the house sell later at the price you suggested after several price reductions…

Most agents know that listing a home at an unrealistic price isn’t overly problematic since you can generally convince a seller to reduce the price later. The problem is when you don’t win the listing and thus, inflating the listing price –– with the disingenuous intent of asking for a reduction later ––  is a strategy some agents employ in order to secure as many listings as possible.

The practice has been going on since the dawn of time –– it is called ‘Buying Listings.’

As an agent, there is nothing more frustrating than when you tell a seller a realistic asking price and see them list with another agent at a higher price –– and watching the house sell later at the price you originally suggested.

But the good news is that MLS tracks which companies and which agents reduce the price most often.

Tracking Price Reductions

No, we are not going to say who the most frequent offenders are –– but we are going to see how One South compares to the rest of the market.

One South’s listing prices are reduced at roughly half the rate of the overall market.

–– Per CVR MLS

We took a sample of 1,000 of the most recent sales in the City of Richmond (949 to be exact) and counted the number of instances where a seller had to reduce their price before selling the property.

  • Across the entire data set, 23.6% of the time, a seller reduced their price at least once before receiving an acceptable offer (which was actually a little bit higher than I thought, but again, another post for another day.) The highest number I saw for a brokerage was just over 40%.
  • When I went back and looked at the number of times One South Realty sellers had to reduce their price, it was less than 17% of the time.
  • Interestingly, the majority of the price reductions came from a single investor we work with who lists high and reduces quickly and incrementally as a part of his strategy. When we remove the investor, the number drops to 12% (or half of the market average.)

The bottom line is that One South agents don’t tell our clients what they want to hear in order to get the listing with hopes of reducing the price later, we tell them what they need to hear to get it sold the first time.

Measuring the Discount Sellers Take

Without trying to sound like one of those personal injury ads that talks about how they will fight for you, we are about to do exactly that by saying –– ‘We fight for our clients!’

How can we realistically say that and it not be hyperbole? Because we can measure it.

$4 Million Dollars …

Since One South opened in 2008, we have substantially outperformed the market when it comes to seller discount. In other words, our sellers capture a higher percentage of their asking prices than the rest of the market captures.

So, not only can we say that we fight for you, we can actually tell you by how much.

One South’s clients have saved over $4M since 2008 by capturing a larger percentage of their asking prices …

–– Per CVRMLS

The chart below shows what percentage of the ORIGINAL Listing Price the seller received.

Primary
Year		Seller Yield
(Market)		Seller Yield
(One South)		Difference
200997.1%97.7%+0.6%
201094.1%96.5%+2.4%
201193.3%93.2%(0.1%)
201295.1%96.4%+1.3%
201396.7%96.6%(0.1%)
201496.9%97.8%+0.9%
201597.6%97.6%+0.0%
201698.0%98.5%+0.5%
201798.6%100.0%+1.4%
201898.8%100.0%+1.2%
201998.4%100.0%+1.6%

In our decade of existence, we have beaten the market average by nearly a full point (.9% to be exact)!

When you apply that to all of our listings, we have literally saved our clients well in excess of $4M since opening a little over a decade ago.

Not too shabby.

Pricing homes correctly is certainly helpful, but so is market acumen and process knowledge. Being able to defend a home’s value by understanding construction, the competitive landscape, zoning, development trends, architecture, history, and builder reputation (to name a few) means the seller benefits.

The chart above demonstrates this fact well –– regardless of which way the market is moving –– the agents at One South have consistently driven more value for our sellers than the competition has for theirs.

Our Pricing

So, the naysayer would question the statistic above and say that we tend to price properties lower and thus, get a higher percentage of the asking prices.

We outperformed the market at our greatest rate when the market was in its worst conditions.

The facts don’t exactly bear that out. Take a look at the per foot prices for One South versus the market.

Year$/SF
Market		$/SF
One South		Difference
2009$124.00$170.00+37.1%
2010$114.00$157.00+37.7%
2011$108.00$150.00+38.9%
2012$111.00$153.00+37.8%
2013$114.00$161.00+41.2%
2014$118.00$155.00+31.4%
2015$122.00$159.00+30.3%
2016$127.00$177.00+39.4%
2017$134.00$171.00+27.6%
2018$139.00$170.00+22.3%
2019$147.00$179.00+21.8%

We generally sell homes anywhere from 20% to 40% higher on a per foot basis than the overall market.

So, not only do we get a higher percentage of the asking price –– we are getting higher percentages of asking prices at some of the more expensive price points in all of the Metro areas.

And, do you know what really stands out to me? During the darkest depths of the Great Recession (2009 to 2013), we outperformed the market by our widest margins. In other words, when the market was at its worst, we protected our client’s property values the most.

I think that is pretty cool.

Summary

So, did we just violate our promise not to brag by telling you about how great we are?

Yeah, probably. Sorry, it had to be done.

But, note that we didn’t brag about how much we sell, rather we chose to highlight the manner in which we sell –– and how it benefits our clients.

Know that we will stay focused on helping our clients gain a professional’s feel for the market while counseling them through an opaque and fluid process –– so that they develop the best strategy possible.

If we do that and do it well, then we don’t need to brag.

Uncertainty

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I have never met someone who loves uncertainty.

Making decisions under pressure, not having the luxury of all of the facts, guessing about the future  –– these are all unnerving feelings. But they are all a part of every real estate transaction.

Guess what I do for a living?

I am a broker of real estate. I am a purveyor of uncertainty.

Uncertainty is the Constant

Do you know the only guarantee that comes with buying a home? You own it. Most everything else is largely out of your control.

Your job could change.

Your health could change.

The economy could (ok, will) change.

The school district could change.

They could build an interstate in your backyard … or expand the airport nearby.

A parent might need to come live with you … or a child might move back in.

I could go on and on.

Yet, we ask ourselves to make one of the most important financial decisions of our lives when we really have no clue as to what tomorrow may look like.

Feels a little unsettling, doesn’t it?

So, if you are feeling overwhelmed by the sheer weight of the decision, here are some things to make you feel better.

The Market Tends To Rise

With the exception of The Great Recession (‘08 to ‘11) and the Great Depression (‘29 to ‘35), home values, in the aggregate, have risen.

Has every neighborhood and every house gone up in value? Of course not, but when you look at the overall market, the answer is that in roughly 80 of the last 90 years, home values have gone up year over year.

That is pretty consistent performance.

And just so you realize –– there has not been a 10 year period where home pricing was lower overall.

Hopefully, that should make anyone who takes a long view of housing feel better.

2008 Is Unlikely to Repeat

Many buyers, especially those who are entering the market for the first time, only know the results of the cataclysmic financial crash of 2008, and not necessarily the cause(s). While the fear of it repeating seems only logical, the conditions that led to 2008’s crash are nothing like the conditions of today.

One of my favorite scenes, ever (NSFW tho). The Big Short is a must watch if you want to see the 2008 crash from the inside out. And RIP Anthony Bourdain…
 

2008’s crash was about ridiculously loose underwriting (i.e – the creation of unqualified buyers) and a corresponding massive overproduction of unnecessary housing to keep pace with the artificial demand, coupled with some extremely fraudulent practices by Wall Street. Right now, getting a mortgage is more difficult than it has ever been, housing inventory is still down by 60 to 70% and the Dodd-Frank regulations have taken steps to ensure the fraudulent activities of 2008 don’t happen again anytime soon.

Could another unforeseen event cause an economic calamity? Of course, but NOT owning a home isn’t the defense.

Owning is Risky. Renting is Riskier.

Ok, so my house value is probably safe (especially over the long term,) but what happens if I buy a bad house? What if I buy a home that is poorly built or poorly renovated and requires thousands of dollars in repairs? Like what if the AC goes bad the day after I move in and I have to replace the entire unit?

All of that could happen for sure (home inspections tend to mitigate this occurrence), but I would ask the question –– what happens if you don’t buy a home and keep renting? Something worse, that’s what.

The cost of renting is far greater than the cost of even some of the most expensive repairs. Renting now costs anywhere between $12,000 to $30,000 per year … and getting worse. And, with home pricing increasing at roughly 3-6% per year, the cost of waiting 12 months is arguably anywhere from $25,000 to 50,000 depending on your rent and the price of the home you are purchasing.

In my nearly 3 decades in this business, I have yet to see an unexpected $25,000 repair, much less a $50,000 one.

So the risk of ownership, while it isn’t $0, it is far less than being a renter. Don’t believe me, ask your landlord’s opinion.

Perfect Information Simply Isn’t Available

Above, we only touched on the uncertainty of ownership and not the uncertainty inherent in the process.

Think about what goes through your head when you are involved in a transaction –– What is the right offer?? How many offers are they going to get?? Am I paying too much?? Will they accept less?? What if the market shifts?? What if my inspector misses something?? What if the appraisal comes in low?? What if my loan gets denied?? Is my escalator too high or not enough?? What if the perfect house comes out right after I go under contract??

While they are all legitimate questions, there are few concrete answers –– even after the fact. The lack of perfect information means never really knowing the answer for many of the questions we all wish we could answer. At the end of the day, you have to make peace with the vagary of the process and trust that making decisions without all of the facts is not as risky as it might feel.

Summary

While it is in our nature to want to avoid uncertainty, those who succeed the most in this world embrace the uncertainty around them and take advantage of it.

via GIPHY

Knowing that everyone is uncertain somehow makes your own uncertainty far easier to accept. For every question you have, so does everyone else –– and this puts us all in the same boat.

Is ownership for everyone? No, of course not.

Does every transaction work out? Again, no.

And are past results a guarantee of future performance? Nope.

But, right now there is nearly $16 TRILLION in home equity in the US.

via GIPHY

SIX-TEEN TRILLION DOLLARS!

That is $16,000,000,000,000 (if you would like to see it written in numeric form.)

$16T is a substantial number.

Owners get the benefit, renters do not.

So don’t overthink it. Acknowledge the uncertainty, do your homework, and take the long view. Good decisions in housing are surprisingly easier than you might think.

The Myth of the Inside Deal

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An ‘Inside’ Deal. An ‘Off-Market’ Sale. The ‘Pocket’ Listing.

All of these are terms for the idea that (in certain neighborhoods) the best homes are acquired before they hit the market. They are sold either from a seller directly to the buyer (i.e. without an agent), or by an agent who never markets the property in an effort to control who purchases it.

Bigfoot walking and waving
This video proves that Bigfoot is not a myth …

As a buyer, when you are struggling to find the perfect home in a tight market, the idea that houses might be getting sold behind closed doors is extremely frustrating.

In the Know

The perception that houses are selling from one insider to another is most prevalent in communities that are considered to be ‘exclusive’ or are in the shortest supply. The premise is that unless you are somehow ‘in the know,’ you will never hear about the home’s availability and thus never have the opportunity to purchase it.

In order to determine how many properties transferred without the use of a Realtor, you can simply compare the number of transfers in the public records to the transfers of properties in MLS…

This feeling of frustration is compounded when it feels like every time you make an offer on a home, so does everyone else. Getting outbid time and time again makes every buyer feel that there has to be a better way.   

But is there?

How Common is the Inside Sale?

So how often does an insider deal occur? How can you track events that you don’t really know about? Well, it turns out, you can track it quite easily.

screenshot of tax records
The City of Richmond has a shockingly good website for Property Assessments and Transfers. You can find it HERE

Any time a property changes hands, whether with a Realtor or not, the transaction is recorded in the public domain. Stated differently, property transfers are matters of public record –– meaning they are recorded with the city or county where the property is located.

Anyone has the right to go to the assessor’s office and see property transfers. Or, if you have enhanced access to the public records as a part your local MLS (like Realtors do!), you can easily query property records from the comfort of your laptop.

So Let’s See What We See

In order to determine how many properties transferred without the use of a Realtor, you can simply compare the number of transfers in the public records to the transfers of properties in MLS.

MLS and tax printout
The list below shows all of the recorded sales in both MLS and the Tax Records for 2018 in Windsor Farms. The Sale Date column shows the date of sale in MLS and recording date in the Tax Records. As you can see, each Tax entry has a corresponding MLS entry. As a matter of fact, MLS picked up on a sale that the Tax Records did not.

As the above chart shows, the number of properties that changed hands without the use of a Realtor in this example was literally zero. Nada. Zilch. And bear in mind that this list if from one of Richmond’s most prestigious neighborhoods AND during one of Richmond’s most inventory-starved periods. The idea that some great swath of housing is changing hands clandestinely between anointed buyers and sellers simply isn’t supported by actual data.

The Full Shot

So if the large majority of the properties are changing hands with a Realtor involved, how many times is any individual agent controlling both sides of the transaction? In Realtor vernacular, when only one agent works the transaction and picks up both sides of the commission, it is called a ‘full shot.’

In reality, the idea that agents will change their behavior in order to earn both sides of the commission is a bit archaic…

This practice was far more common in days past when the idea of the Buyer’s Agent was still in its infancy and the Zillow’s of the world had yet to democratize listing information.

dice showing 12
The ‘Full Shot’ is largely a thing of the past.

How can you count ‘full shots’? Well, by using MLS to compare Agent ID’s and counting the occurrences where Buyer’s Agent ID = Listing Agent ID.

In 2018, in all of Zone 20 (Richmond’s Near West End) where home prices are the most expensive and the inventory the most constrained, only 7 of 355 (1.9%) of the sales were executed by the same agent (and only one agent did it twice.)

Pretty low, huh?

In reality, the practice is so fraught with conflicts of interest that in this litigious day and age, few agents are willing to take the risk. Furthermore, many brokerages have gone so far as outlawing the practice altogether.

Most good agents who are approached by a purchaser on their own listing will refer it to another agent for the duration of the transaction –– especially when multiple offers are expected.

So approaching a listing agent directly in hopes that the allure of a larger commission will somehow enable you to win the deal isn’t really a winning strategy either.

The Myth Persists

Every agent loves the public to think that they have inside information about available properties or can somehow find a deal ‘off-market’ that will be the perfect house and at the perfect price.

Elvis walking

Sorry to bust my own industry’s bubble, but that perception really isn’t accurate.

It is estimated that nationwide, 95% or more of homes transfer from seller to buyer with at least one agent involved (our example above showed that to be 100%.) Of those transactions, 95% or more involve the use of a Buyer’s Agent and a Seller’s (or Listing) Agent (our example above showed that to be 98%.)

Again, the perceived existence of a closed market simply isn’t supported by facts.

Off Market? No Thanks

The few off-market deals that do occur are typically when a seller who isn’t interested in selling is convinced by a buyer to sell.

How does a buyer convince an unwilling seller to change their minds? By offering a really high price, that’s how. Almost any seller can be convinced to sell their home if the buyer is willing to so grossly overpay that the seller would be foolish not to accept.

A quick note –– The ‘off-market’ sale is far more common in commercial real estate than it is in residential real estate. Often times, an investor, typically on the back side of a 1031 Tax Deferred Exchange, will make an unsolicited offer to another property owner whose property is not currently on the market. The purchaser would rather pay a premium for the acquired property than pay the taxes that are due on the existing one. The 1031 Exchange makes this possible and results in many commercial deals occurring ‘off-market.’

So … if, as a buyer, overpaying is your goal, then yes, we can find you an off-market home quite easily. But for the overwhelming majority of buyers, making intelligent financial decisions is the goal and thus, overpaying for an off-market deal is not the best path to ownership.

The Best Way

The best way to purchase into an extremely constrained or highly-competitive market is simply to be prepared to act quickly, make your best offer early, leverage your cash reserves, and be as flexible with your terms as possible.

Slow playing negotiations in a seller’s market isn’t going to win you many deals…

I wish there was a magic tactic, but there isn’t. The market for ‘good’ properties (close in, good schools, renovated, architecturally engaging, little new construction in the area) is heavily tilted in the seller’s favor. Slow playing negotiations in a seller’s market isn’t going to win you many deals.

scary forest pathway
Sometimes the path can seem daunting, especially in the most competitive times of the year. Stay the course.

And for those who are using highly leveraged mortgages to purchase, attempting to buy into a highly competitive market is especially difficult. Sellers, when they fear that a bidding war will drive the contract price above the likely appraised value, will simply take the highest cash (or substantially cash) offer to minimize the likelihood of the deal collapsing later due to a missed appraisal.

And for those who are using highly leveraged mortgages to purchase, attempting to buy into a highly competitive market is especially difficult…

Therefore, if you are a using highly leveraged debt (90% or more) to buy into a highly competitive community, you will experience some frustration, especially during a frothy spring market. Be patient, diligent, and intelligent about how you conduct your search –– and you will persevere. It just might take a while.

The Way it Works

The advent of Zillow (and Trulia, and Realtor.com, and others,) as well as increasingly sophisticated versions of MLS, means that the buyers know almost as soon as the agents do when new listings hit the market. Buyers only miss opportunities when they (or their agents) are slow to react or simply not paying attention.

MLS client gateway
Our MLS had an auto-notification function that sends any new listing immediately to all clients who have searches set for a property with the specified parameters. Furthermore, Zillow, Trulia, and other search sites don’t receive new listing information until well after MLS has alread sent out notifgications.

Furthermore, sellers have also figured out that the best way to get top dollar for their home is to expose it to the market, not hide it. Almost every property that is sold in an ‘exclusive’ or sought-after community is announced for sale for a period of time (aka – ‘coming soon’) to allow for demand to build. When buyers compete, sellers win.

When a seller (or their agent) undertakes actions that will decrease the likelihood of a bidding war, they are shooting themselves in the financial foot.

In Closing

I know I speak for Realtors when I say that I wish we had more ‘inside’ information than we do –– but the good news for the public is that we don’t. Our value comes not from having access to inside information (as in days past,) but from helping our clients interpret the ridiculous amount of information that is now available to everyone.

Does the occasional property change hands off-market? Of course they do, but the off-market sale makes up such a small percentage of the market that it’s not worth trying to chase.

An agent’s value comes not from having access to inside information (as in days past,) but from helping our clients interpret the ridiculous amount of information that is now available to everyone…

The bottom line is that in the overwhelming majority of cases, properties change hands through traditional channels and via traditional methods –– and thus the best thing a buyer can do is work with an agent that they like and trust, and who communicates with them in the manner that they prefer.

So find yourself a good agent who understands your needs, your goals, and, most importantly, your constraints –– and I can guarantee you that you will have the best outcome.

The Escalator Clause

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The Escalator Clause

A quick market update –– As I write this in January, we have already been involved in several multiple bid situations with not just our buyer clients, but with one of our listings, too.

So to repeat, it’s January … of 2019, and the market seems to think it is April … of 2017.

To quote the great Roger Daltry, “Meet the new boss. Same as the old boss.”

 
The Who’s Don’t Get Fooled Again still resonates 40 years after its release, doesn’t it?

When the market is tight and demand exceeds the number of houses that are available, prices tend to rise. And when inventory conditions are extremely tight and multiple buyers want the same home, many buyers will employ a clause that will raise the price of their offer based on what the next most competitive offer states.

This additional contract language is called (in most circles) the Escalator Clause.

What is an Escalator Clause (or EC)?

An EC basically states that a purchaser will, under a specific set of circumstances, increase (or escalate) their offering price based on what the highest competitive offer says.

Pro’s Tip –– The best way to win a bidding war is to not get in a bidding war. When you are in a highly competitive market, act decisively early. When you take your time to go see that new listing, or let negotiations drag, the likelihood of another buyer submitting a competitive offer increases. When two buyers want the same house, the seller alwasy wins …

Instead of simply offering a higher fixed price, the EC creates a conditional offer that can automatically increase based on the price and terms offered by the other offer(s).

Clear as mud, right?

Well let’s explore the EC, step by step.

The Contract Price

In the large majority of purchase offers, the buyer will offer a contract to the seller that states:

  • the price they are willing to pay
  • the terms under which they are willing to pay it
  • the condition of the home that they are willing to accept at settlement
  • the targeted date upon which settlement will occur

These elements, plus many others that are not particularly important to this discussion, are included in any contract offer to purchase a home.

Disclaimer: No two contact situations are the same and thus it is impossible to discuss every possible combination of scenarios. The scenario described below is somewhat typical, but competing offers can vary by price, escalation language, finance types, closing dates, inspection caps and a multitude of different factors. Additionally, the number of offers can have a dramatic impact on the strategy behind how the Escalation Clause is written.

In cases where your offer is the ONLY offer made on the property, a few rounds of back and forth between the two sides are typically required to get the remainder of the terms worked out to each side’s satisfaction –– and an EC isn’t required.

But what happens when two (or more) offers come in on a property? That is when one side (or sometimes both sides) may employ an EC.

Pro’s Tip –– We wrote about bidding wars from the seller’s perspective here in ‘How to Start a Bidding War.’

The EC Contract Price

So while the contract includes a firm price, the EC makes the offer price conditional on several factors including:

  • what the next best (competitive) offer is
  • what the maximum offer is
  • how much the offer will exceed the competitive offer by

Let’s use real numbers.

So let’s say the home is listed for $300,000 and the seller receives two offers.

  • Offer A states that the purchasers will pay $300,000 for the home. It does not contain an escalator clause.
  • Offer B states that the purchasers will pay $295,000 for the home but it contains an EC that states that, in the event that a bonafide competitive offer is also submitted, Offer B will escalate the price to $2,000 above the other offer, but not to exceed $310,000.

In this scenario, Offer B escalates to $302,000 under the terms of the EC.

Disclaimer –– Sellers are under no obligation to accept a higher offer. Furthermore, they do not have to supply a reason why they accepted the offer they did. So even if you escalate your offer to an amount greater than the other offer, a seller may still choose to accept the lower one. While it is not typical to take less, it is probably more common than you think and can be incredibly frustrating.

The Maximum (or Walkaway) Price

Note in the prior example that the EC stated that their offer will not exceed $310,000.

So in effect, regardless of the other offer, in no case will Offer B go above $310,000. This basically puts a cap on the escalated offer so that the purchaser is protected and insanity doesn’t ensue.

This maximum (walkaway) number is critical in protecting the purchaser.

In cases where the purchaser is using a low down payment loan, an offer that escalates the contract price well in excess of the asking price may introduce a scenario where the appraisal will be lower than the contract price. If the purchaser has insufficient funds to cover the difference, the loan will likely be denied and the purchaser could find themselves in a pickle.

Pro’s Tip –– In especially hot market segments, often times two or more offers contain escalation clauses. Winning in a ‘multiple-offer-with-escalators’ scenario requires a cool head and an experienced agent.

Another point to note is that losing a home by a small amount when you would have been willing to pay more is a tough pill to swallow. If you set your maximum at $310,000 and lose to an offer of $311,000 –– but would have paid $315,000 –– it stings. So we always counsel our clients to make the maximum offer the price that, if you lose to a higher offer, you walk away without a pang of remorse.

Sometimes, the other side just wants that house more than you do and there is nothing you can do but tip your hat to the winner and start the search process over again.

The ‘Beat It’ Number

This is key –– the ‘Beat It’ number is the amount by which you will make your offer exceed the competitive offer.

Using the above scenario, if Offer B’s EC said that they would exceed the other offer by $50, would that be enough to change the mind of the seller? Probably not, especially if the other offer contained a bigger down payment or other seller friendly terms.

But what if you exceeded the other offer by $100 –– would that do it? Or What about $1,000 –– is that enough? Or is $5,000 higher required to make the seller take your offer over another one?

Pro’s Tip –– Often times, you make an offer only to find out that during the negotiation process, another offer comes in. In this scenario, you can add an EC to your offer if you feel strongly about winning.

The answer is that no magic formula exists to tell you the correct answer. Just know that the amount by which your EC exceeds the next best offer is case specific and should take into account the strength of the other terms in your contract.

Choose the Beat It number carefully –– the amount by which you will exceed the other offer needs to be enough that the seller accepts yours, but not so much that you are throwing money away or placing yourself in financial distress.

Conclusion

As we discussed in our last blog, the market is on the leading edge of a ‘return to normalcy’ where bidding wars and multiple offer scenarios will become less commonplace. That said, we aren’t there yet and many market segments (affordable/close-in) are still largely undersupplied. Expect to continue to see the need for the EC in these segments.

multiple offers
How do you win an 12 offer scenario? It isn’t easy, but it can be done. A well conceived Escalation Clause will likely be required.

Furthermore, the use of the EC is not the only tactic a buyer (and their agent) can use to win competitive offers. We tell our clients that a contract dedicates two paragraphs to price, but another 10 pages (or more) to the remaining terms. Each one of those terms creates an opportunity for a shrewd buyer to offer the seller a concession that can improve the value of the contract.

So don’t feel that you always have to use an EC to win –– especially if you are a cash buyer or can offer other seller friendly terms.

At the end of the day, the EC is an advanced technique and if applied incorrectly, can cause a buyer to unnecessarily pay more. But when in the hand of a seasoned pro, a properly written EC allows the purchaser to pay as little for the home as possible, despite the pressue of a competitive multiple-bid scenario.

2019 and the Return to Normalcy

By

2019 is going to be a transitional year.

In the same way that you might take your foot off of the gas when you see a yellow light in the distance, 2019 will likely be a year where we see some segments of the real estate market lose a bit of their momentum.

‘A Return to Normalcy’ was a phrase used by Warren Harding during his presidential campaign in the 1920’s to define the period of recovery after WWI …

For many, a slower pace will feel extremely odd. All we have known for the past 5+ seasons is rampant price increases and bidding wars. That said, 2019 is likely the year that the frothiest behaviors will subside –– at least in some segments (which we will touch on in a few paragraphs.)

In reality, what we are beginning to see is not a market in decline, but rather <gasp> the leading edge of a normal market.

Disclaimers

First, I need to disclaim a few things.

  • Nothing in this post is guaranteed to happen tomorrow, or probably even the next day –– most of the observations are longer-term in nature and represent a shift in direction, but not a bootlegger’s u-turn.
  • Also, recognize that an individual house value behaves differently than a set (or segment) of houses. Colors, condition, architectural style, yard, appliances –– they all matter to individual buyers and sellers and can impact the value of an individual home. But the behaviors being discussed below refer more to how groups of homes behave in the aggregate.
  • And lastly, any number of unforeseen events could change things –– and fast. Politics, trade wars, real wars, oil prices, and/or natural disasters all have massive impacts on our economy as a whole. And corporate acquisitions, sales, and/or relocations can all have impacts on our region, specifically.

So with that bit of throat clearing, I proudly bring you the ‘What is Going to Happen in 2019’ prediction post (and if you want to see how I did in prior years, you can find 2018’s post here.)

A Return to Comparative Normalcy

What is normal, anyway? Well, we wrote about that very question at the end of 2018. But the takeaway is that ‘what is normal’ is more of a relative question than an absolute one.

via GIPHY

If you asked ‘1993 Rick’ what I thought of a 5% interest rates and 5% appreciation, I would have been giddy with the excitement of how many properties we were about to sell. But when you ask ‘2019 Rick’ the same question, I think, ‘Yeah, 5% rates and 5% appreciation is sure going to be slower than the 4% rates and 10% appreciation of 2016.

The lesson –– it’s all relative.

Does Anyone Remember?

To give you an idea of what a historic version of normal will look like, imagine a market with the following metrics:

  • 6 to 8% mortgage rates (instead of 3.5%)
  • 3 to 4% annual appreciation (instead of 8 to 10%)
  • 45 to 60 day marketing times (instead of 7 to 14 days)
  • 2 to 4% seller discounts (instead of multiple buyers with escalator clauses)

You see, the period from 1990 to 2005 looked a lot different than 2005 to 2018.  

If you asked 1993 me what I thought of a 5% interest rates and 5% appreciation, I would have been giddy with the excitement of how many properties we were about to sell…

And, yes, I get it that many of the inputs are different (demographics, population trends, preferences, architecture, inventory, regulation, materials), but the period of 2005 to 2018 was about as unprecedented as one could imagine.

Honestly, I think a little more stability in housing is a good thing. NASDAQ levels of volatility in housing just isn’t healthy for anyone.

Segments Matter

So in our end of the year meeting at One South, we spent a lot of time on the idea of market segments. Segmenting (stated differently) is nothing more than looking at smaller samples of how connected sales behave, and not aggregating all housing into one analysis.

Pro Tip here –– If you ask an agent, ‘How’s the market?’ and they don’t ask a qualifying statement like ‘Which segment?’ or ‘What area are you referring to?’ then you need to find a new source of your information.

In the same way that New York’s housing market behaves differently than Orlando’s, the new construction market in western Chesterfield should behave differently than Bellevue does –– and this will be key in understanding the new market.

Segments and the Impact of Population

For years, the City of Richmond’s population was in decline. Chesterfield and Henrico were experiencing explosive growth, but the City was not.

Around 2000, the City population trend officially reversed.

In the latter 1990’s, you could feel it starting to happen. VCU was gobbling up properties by the handful and many of the long ignored Downtown neighborhoods began to see construction activity and new businesses popping up.

The population of Henrico and Chesterfield now need to compete with the City for residents and can no longer sustain their growth based on the City’s exodus.

When the 1990’s gave way to the 2000’s, the City’s population began to stabilize at just below 200,000 residents. As we now enter 2019, the population of the City is approaching 230,000, and (by most studies I have seen) is projected to continue to grow.

The Impact of Growth

For the last 5 years, extremely tight City inventory levels and incredibly competitive bidding wars (the worst we saw in 2018 was 18 offers on one house near Carytown, no joke!), especially at the lower price points, has been the norm.

What do you get when your supply is fixed and demand increases? Price appreciation, that’s what.

The growth rate within the City has not only equaled the growth rates of the surrounding counties, but might have actually exceeded them. Any agent who works the more urban markets will tell you that the impact of the growth has been dramatic.

So as long as this trend continues, if you own property in the City, you are probably sitting pretty.

The Behavior of Various Segments

Now when we compare pricing for various segments, what we tend to see is the areas where pricing is the most affordable and closer to the urban core have appreciated the most dramatically. Areas that are further out and/or more highly priced are the ones where pricing has gone up at a slower rate.

Now, with all general statements, there are going to be exceptions, but overall, the statement holds true.  Take a look below at 5-year appreciation rates in different areas of the Metro.

Appreciation_Rates_
These figures only include resale properties, not new ones.

As you can see, the appreciation rate differs greatly.

Does that mean that you have made a mistake or are subject to deflation in the coming years if you live in a suburban area with new construction? Not at all. It just means that you shouldn’t expect that your neighborhood will behave the same as the one with a lower price point or on the other side of town.

And the Reasons, Please?

What do Fox Hall, the Deep Run High School District, and Hallsley all have in common? Fairly high prices to begin with and a great deal of new construction nearby.

What do the Museum District, Bon Air, and Church Hill have in common? Relative affordability and great difficulty in building new homes on any sort of scale.

Simply put, we can’t build houses where we need them most AND we can’t build them at the prices that the market can easily afford.

As we have stated many times before, the ability to provide housing is easiest where land is plentiful. So in areas south and west of Route 288, as well as points east in Henrico, where large tracts of undeveloped land are available, it is far easier to create new communities of scale.

Building is Getting Harder

But as any builder will tell you, not only are they being forced to build further away from the urban core, their costs are skyrocketing (both materials and labor) and the mandates placed on them by the counties are increasingly burdensome.

Take a look at the chart showing what has happened to the cost of construction (labor + materials). The builders aren’t lying when they tell you how much their costs have increased.

Furthermore, the arrival of several national builders is going to change the way new homes are sold in Richmond. DR Horton, Schell Brothers, and Stanley Martin each have the financial backing to build more homes in a quarter than most of the local builders could hope build in a year. The big national builders can gobble up lot inventory, they have their own sales force, and have the capital to build new models for each section of the communities in which they sell.

The Return of Strategic Mortgage Decisions

Let’s shift from home prices to borrowing money.

For the better part of a decade, choosing a mortgage product has been pretty much a no-brainer:

  • What mortgage product do you choose when 30-year fixed rates are at 3.5%? You take the 30-year fixed rate because of the 30-year guarantee.
  • What mortgage product do you choose when 30-year fixed rates are at 4.5%? You take the 30-year fixed rate because of the 30-year guarantee.
  • What mortgage product do you choose when 30-year fixed rates are at 5.0%? You probably still take the 30-year fixed rate because of the 30-year guarantee.

But what happens when 30-year fixed rates are at 6.25% but a 5 year adjustable is at 5% and you only plan on being in your home for 5 to 7 years? The question becomes trickier, doesn’t it?

Welcome to the new (ok, old) world of mortgage finance.

In the 1990’s, we saw clients make the fixed vs adjustable mortgage decision all of the time.

But since rates cracked the 5% floor in 2010, taking the risk of an adjustable mortgage seemed unnecessary.

Where are we currently? We enter into 2019 with rates hovering around the 5% mark. And while no one can claim to be a master of perfectly predicting interest rates, the majority of industry experts feel that 30-year rates between 5.3 and 5.8% (or even as high as 6%) by year’s end are a real likelihood.

So as the spring market emerges and the demand for money increases, the shrewd buyers will keep an eye on the mortgage products OTHER than the 30 year fixed rate mortgage to see how large the spread is.

At some point, the spread between fixed and adjustable mortgages may justify selecting shorter term mortgage products –– especially when the expected hold period is less than 10 years.

Cue the ARM (the Adjustable Rate Mortgage)

Wait, did you just say that ARM’s are good?!? I thought that ARM’s were the thing that caused the financial crisis in 2008?!?

Well, if you don’t underwrite an ARM properly, then yeah, an ARM is not a good product. But no mortgage is safe if it isn’t underwritten correctly –– ARM or otherwise.

So let’s not blame the ARM, let’s blame the true culprit –– shoddy underwriting.

The blue is the percentage of loans underwritten in each year since 2001 that were considered Sub Prime. As you can see, the percentage of Sub Prime is far lower than in the years preceding the crash in 2008.

In the financial crisis of 2008, a great deal of focus of was placed on the Sub Prime mortgage industry. And there was no more abused loan product by the Sub Prime industry than the ARM.

Today’s Arms are Actually Underwritten

The difference today is that the ARMs issued by Fannie Mae, Freddie Mac, and FHA are underwritten properly and also contain caps on the adjustments so that extreme swings in interest rates do not dramatically increase the risk of default. The Sub Prime ARM’s were neither underwritten with any rigor, nor were they capped in such a way as to minimize risk. (And in many cases, they were designed to fail, but that is another topic for another day.)

As an example, a 5/5 adjustable with a 2% cap means a mortgage with a fixed rate for 5 years with a maximum adjustment of 2% at then end of year 5, with another 5 years of the new rate before another adjustment. Is that overly risky? Not when applied correctly it isn’t.

What makes an adjustable mortgage product appealing? The rates tend to be lower –– especially the higher that the 30-year fixed rate becomes.

And while the spread between fixed-rate and adjustable rate products is not quite to levels that justify the switch, it might not be too far off in the future.

So if your loan officer suggests you take a look at an ARM, don’t reject the idea simply out your memory of 2008. An ARM, like a screwdriver or a shovel, is simply a tool. When you use a tool appropriately, they tend to work quite well.

Since 1991

So we (Sarah and Rick) have been in real estate –– as agents, brokers, lenders, developers, owners, and rehabbers –– for longer than we would like to admit. And consequently, we have had front-row season tickets to the booms, several busts, and each subsequent recovery.

We have had front-row season tickets to the booms, several busts, and each subsequent recovery…

What does that mean? It means our advice is based on experience that dates back to the early 1990’s.

  • In 1991, the median sales price of a home in the US was $120,000. It is now $315,600
  • In January of 1991, 30 year mortgage rates were 9.56%. They are now 4.75%
  • In 1991, the average rent was $649. It is now $1,450.
  • In 1991, there was no Zillow and no Trulia. As a matter of a fact, there was not even an online MLS

What else does it mean? It means our team is extremely excited to see times ahead where good decisions will rule the day, and not just momentum.

  • We love the fact that strategic decisions about mortgage are required, and not just blindly electing a 30-year mortgage, regardless of the situation
  • We love the fact that the need to make purchase decisions under multi-offer pressure will likely subside
  • And we love the fact that the data now exists to really help demonstrate the best course of action, and decisions are made based on information, not conjecture

Welcome to 2019, the leading edge of normal.

804.201.9683

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I am Kendall C. Kendall, Client Care Coordinator for the team. I am a licensed Realtor and it is my job to answer questions and schedule showings for the properties shown on our sites. Here's our call policy.
kendall@richmondvamls.net

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With over a decade of mortgage industry experience, Chris knows what it takes to provide the very best service for each of his clients and truly believes in forming lasting relationships with his customers.
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