One South

The Coronavirus Post

March 11, 2020 By Rick Jarvis

I didn’t think I’d ever write a blog like this, honestly.

The idea that, in less than 2 weeks, a heretofore unheard of virus, named similarly to a beer you drink on vacation, could essentially toss a monkey wrench into our lives … well, that wasn’t really on my radar.

Worldometers.info/coronavirus is a fabulous resource for this

But it has, and here we are.

So if you would like to know what we are hearing and seeing relating to real estate and the local market, here you go (and if you make it to the end, there is something funny awaiting you!)

A Week Later…

Last week, we held a meeting about COVID 19 and went through a slide deck laying out what was known and what the future would likely bring.

I think that the presentation got a lot of stuff right, but maybe I took a bit of an optimist’s view of things? The events of the last few days have convinced many of us that a bit more caution is probably appropriate. (Oh, and I do know how to say ‘authoritarian’ despite how badly I butcher it in the audio)

An Economic Sickness

One of the most difficult things to do in this day and age is to separate the signal from the siren. Twitter, Facebook, YouTube, and an endless supply of blogs and media outlets mean that pretty much anyone with an opinion has a platform. Essentially, this means that you can find a narrative to reinforce your world view.

So, whether you fall in the camp of ‘this is the black plague and we are going to die’ or the ‘this is the common cold and this all about nothing,’ the fact remains that COVID is a virus for which we have no immunities, and as long as it is around, we will need to engage in economically damaging actions in order to contain its spread.

Stated differently –– the only way to combat the spread of COVID is to decrease face-to-face interactions substantially –– which really hurts commerce.

And that is the core issue.

Richmond’s Economy

In 2008, Richmond got beat up pretty badly … but so did everywhere else. In the grand scheme of things, our market hit was in line with the average across the US. Places like Florida, Arizona, and California all took much bigger hits.

In COVID 2020, Richmond will probably be hurt less than many other places due to the fact that very little of our overall economy depends on travel and tourism. Richmond’s economy is underpinned by government, education, banking, and many other white collar jobs.

Places where travel and tourism are integral parts of the local economy will feel the impact of Coronavirus tremendously and those segments will likely be in shambles for the foreseeable future.

WaPo and NY Times have written several articles about the RVA Food scene.

That said, Richmond’s restaurant scene is one of the country’s most prolific, and I am concerned about its ability to survive a prolonged slowdown intact. The best way to not come in contact with an infected individual is to avoid public places –– like restaurants. I sincerely hope that those who have the power to reduce the heavy tax burden borne by our restaurant community do so.

The restaurants are going to feel the pain first, the worst, and probably the longest.

Real Estate

From our perspective (real estate), we have not seen a notable difference –– yet –– but we do expect things to change in the following ways:

Sales Activity –– If you look at the YTD numbers, the market was roughly 20% ahead of last year in terms of transactional volume. Our MLS has tracked roughly 800 more contracts in 2020 than it had during the same timeframe in 2019. Demand was robust and inventory had dropped to all-time lows.

I would be hard-pressed to imagine this rate will maintain itself at the same pace. Expect activity to slow down, but rates being as low as they are will continue to drive many into the market.

Mortgage Activity –– Up until the financial market’s crash beginning a few weeks back, mortgage originators were already super busy with the spring market’s volume. And then, rates dropped to unfathomable levels, which triggered the most refinance business ever.

In other words, the mortgage industry was operating at full capacity BEFORE the refi boom and now it is operating at 150 to 200% of capacity. No business can continually operate above their capacity levels –– and especially not if ‘work-from-home’ becomes the norm.

Expect delays.

Underwriting –– Yes, demand is robust, but the good news is that demand isn’t ‘fake demand’ like it was in 2008 –– it is real. Underwriting guidelines are reasonable and no ‘subprime-type’ lending is propping up the market. In other words, legit buyers are in the market, and they are using fixed-rate mortgages. That is a good thing.

Mortgage underwriting is healthy.

Fundamentals –– If you watch the embedded video above, you will get a sense of where the underlying market fundamentals are. In short, despite the recent turmoil in the financial markets, the real estate market is healthier than it has ever been:

Low inventory means no overhang if demand slows
A nationwide deficit of 3.5M new homes means demand is still far greater than supply
Low mortgage rates mean increased buying power
Low oil / gas prices mean more disposable income
Lower global demand means material prices for builders may come down
Better home equity means enhanced ability to upgrade
Low unemployment means more buyers

And, did I mention the stimulus that DC is pumping in the market as we speak? It is 2008-esque.

Right now, the market will likely slow some (it is inevitable) but once things return to normal –– Look Out! It will be insane.

Recommendations

Based on what we know and what we think is still to come, here is what we feel are the best courses of action:

All buyers and sellers –– please have patience and above all else, HAVE A PLAN B. Mortgage companies are going to miss dates and that has a domino effect. Also, employers might look at reducing staff (or at least hours) which can impact a buyer’s qualification –– even after the contract has been ratified and loan application submitted. Expect delays and even higher-than-normal contract fall out.
Sellers at upper price points –– be patient. The upper-end buyer tends to have more exposure to the financial markets and likely has lost a significant percentage of portfolio value. Expect traffic to slow and buyers to be cautious. So if you need to sell and sell now, moderate your stance on lower offers and inspection items.
Sub $400k buyers –– there was less than 2 months of inventory in early March at the middle and lower price points. Multiple offer scenarios were common with in excess of 10 offers in many cases. Even if 50% of the demand goes away, that is still 5 offers. Don’t expect the more affordable price points to change dramatically.
Mortgage borrowers –– get in front of the loan process. The system is moving as fast as it can so don’t expect it to be able to pull off miracles if you are behind in your paperwork and documentation. Get your stuff to your lender early and respond to requests immediately. I cannot stress this enough.
And to everyone regardless of price or side –– work together to get deals done. If your counterparty needs time, give it. If you need to offer a rent back or restructure an offer to make up for a loss of cash in the market, you should. Renegotiating during the contract will become more commonplace in the interim –– so maintain a big picture view. Situations are changing rapidly and playing hardball will not yield the result you are looking for.

Summary

The sooner we can get this damned virus out of our system, the better for all of us. Yes, I get it that more people die from car accidents, cancer, and other maladies than COVID, but as of right now, we have to deal with it to move forward.

As I like to tell my kids, many times things aren’t your fault, but they are your problem, and telling me what should have happened isn’t going to fix the issue. Fix the problem now, get mad about it later.

That is what we all need to be doing.

No, you needn’t sweat the real estate market falling off a cliff –– this is not 2008. In 2008, the market was leveraged to the hilt and largely incapable of fixing itself. In 2020, the market was far healthier when Corona showed up.

Once this clears, we will return to a real estate market with fundamentals as strong as ever. And as a matter of fact, real estate may even benefit from the virus due to stimulus packages and a global economy in a recession. Despite how we look at the end of this thing financially, I guarantee it looks better than everywhere else on the planet.

So remember to take the long view. The hype is real, but hopefully short term. It may take a few months and some substantial behavioral changes to stop the spread of this thing, but we will.

Laughter is the Best Medicine

And lastly, a bit of levity.

Yesterday, the talking heads on CNBC almost lost it when the one announcer asked a guest if he ‘likes stimulus.’ Sorry for the adult humor, but this really struck me as funny (fast forward to about :22 to get to the funny part) and I think they found it funny, too.

Sources:

worldometer.info/coronavirus –– This site has become my go-to for all things COVID. It shows the numbers in the aggregate and by country. Yes, China and some other countries might not be entirely forthcoming in their reporting, but you can get a sense of where all of this stands.

Web Traffic –– This site tracks web traffic to various websites and I am keeping an eye on Zillow’s traffic to gauge the public’s attention to housing. As this blog is written, I don’t see a dip in traffic, but that could change.

One South COVID Presentation –– The market stats are good at showing market strength. This presentation was from March 4, and the spread of the virus was not as prevalent in the US at the time ––perhaps a bit more pessimism should have been included in retrospect. Also, I have now learned how to say ‘authoritarian’ better than I did in the video…

Real Estate Negotiations Aren’t What You Think

January 23, 2020 By Rick Jarvis

I think we all recognize the tough, gruff, and staunch business owner as a negotiator archetype. You know the ones –– they sit across the table, fists clenched, barking ‘take it or leave it,’ and constantly drawing lines in the sand. They threaten, cajole, and otherwise issue demands fully expecting the other side to cave in and accept the exceptionally one-sided offer.

We also hear about the power-broker talent agents in their silk suits –– working from some expansive office on the 50th floor –– concocting devilishly devious plans to get their client the lead role in a blockbuster movie with the multi-million dollar payday.

But are they real?

Perception or Reality?

michael douglas GIF — Gordon Gekko sure loved information …

Popular lore –– history, literature, film –– they have all taught us that a great negotiator is equal parts Ari Gold, Don Corleone, and Gordon Gekko. Time after time, we see the negotiator depicted as a user of bravado, intimidation, inside information, and Jedi-mind tricks in order to get their way.

Sorry to disappoint you, but negotiations in real estate do not, in any way, shape or form, resemble Hollywood, Wall Street, TV, the NFL or even the Godfather.

Let’s look at the differences.

Perfect information

Do you realize how much access to information levels the playing field? When all parties have the same database at their fingertips (MLS), any informational advantage is negated.

information GIF — We all have access to the same housing information.

The buyer, seller, both agents, as well as the appraiser (and even Zillow!) –– they all draw from the exact same housing data. Thus, the difference between what a home is worth and what people will pay for it is not large.

Years ago, before online MLS and Zillow, you could occasionally exploit an informational advantage. But today, the ability to convince someone to sell their home at a 10% discount to fair market value (or even a 5% discount) is pretty much nil and the true lowball offer generally gets laughed right out of the room.

(Quick Note –– Don’t mistake a 5% discount from asking price for a 5% below market sale. If someone’s property is priced 5% above market and you negotiate a 5% discount, that isn’t a negotiation.)

The Sheer Number of Transactions

Do you know how many really good NFL QB’s will become free agents this winter? Maybe 2?

Any idea how many Hollywood blockbusters are in production? A couple? A handful?

Or how many Internet startups will go public this year? 3? 5? 10?

GIF by SB Nation — Think a good QB makes a difference? Just ask the Jets about the infamous Butt fumble…

But do you know the number of homes that transfer in our region this year? Oh, about 25,000.

Yeah, that changes things a bit.

When there are 25,000 transactions in any marketplace, no one feels compelled to make any single deal. Buyers and sellers know that there is a high likelihood that another opportunity is only days or weeks away –– and thus, feeling the pressure to accept a well below (or well above) market offer isn’t there.

When the number of transactions is in the thousands, the impact of negotiation delines significantly.

The Similarity of Housing

The difference between Tom Brady and the worst QB in the NFL can be a Super Bowl victory or last place. The difference between Leonardo DiCaprio and Tom Arnold can mean box office smash or flop. But is the difference between 1234 Main Street and 1235 Main Street really that much?

Of course not.

In theory, each home is unique. In reality, the difference between one house on a street and the next one isn’t nearly as great as the difference between actors, quarterbacks, or even IPOs.

When you are looking at the 5 housing options between $350,000 and $375,000 –– all of which have 4 bedrooms and a 2 car garage –– are you really going to be irreparably harmed if you only got your 2nd (or even 3rd) choice? In the grand scheme of things, not that much.

Besides, you can look at a variety of sources and predict the frequency that similar homes will come to market –– and act accordingly.

Face to Face or Inbox to Inbox?

In the old days (before the World Wide Web!), face to face presentation of offers was fairly common –– and perhaps there was a little more posturing between agents over deal points.

Today, that practice is largely non-existent.

Atp Tour Reaction GIF by Tennis TV — Ever watch negotiations?

Offers today are generated digitally, signed digitally, and delivered to the other side digitally. Yes, agents might chat a bit on the phone, but the notion that one agent sits down across the table from the other and some type of point/counter-point back and forth negotiating tennis match ensues is archaic.

Market Imbalance

Lastly, the idea that you, as a buyer, can sit back and play coy and eventually end up with the house you want is extremely low. Why? Because there is a housing shortage and odds are you are one of about 10 people seeking the exact same thing.

When inventory creeps below 3 to 4 months, buyers don’t have much leverage.

Remember, a market tends to be populated with as many sellers as there are buyers –– but an auction (intentionally) has but one seller being pursued by as many buyers as possible. And trust me, buyers do not like auctions.

Due to the prolonged inventory shortage, purchasing real estate in this day and age far more resembles an auction than it does a balanced market.

Then What in the World Are We Supposed to Do?

Ok then, wise guy. If none of the negotiating techniques that every other industry seems to use work, then how do you do it?

For Buyers

work student as homework grades GIF — Do your homework

As a buyer, it is simple –– do your homework so you know values, act quickly and decisively when the time comes, leverage your cash reserves to make your loan as appealing as possible to the seller, and use the other terms of the contract to tip the bid in your favor.

Things like –– flexible closing dates, rent backs, and fast inspections –– all of these are ways to make your offer more appealing than your competition’s.

For Sellers

And if you are a seller, do everything you can to create a bidding war –– when multiple buyers compete for your home, you will end up with not only the best price, you will also end up with the best terms.

When you entice a 2nd, 3rd (or more) buyer to any buying process, the buyers are no longer negotiating exclusively with you, they are negotiating against each other (I cannot express how much this is and TO YOUR BENEFIT!) Negotiating against a third party undermines almost all of the purchaser’s leverage. USE IT TO YOUR ADVANTAGE!

Far too often, we see sellers undermine their own position with poor timing, backchannel sales efforts, poor/unclean property conditions, and/or pricing the home at a premium (in order to ‘leave some room for negotiations.’) When a seller misses the opportunity to exert pressure on their ENTIRE buying pool, they miss out on more money AND better terms.

Having more than one offer is ALWAYS the optimal situation for the seller.

Summary

Look, is there an art to writing an escalation clause? Or an inspection addendum? Or a way to write an ‘as-is’ addendum that doesn’t put you at risk? Or a way to look at MLS and get a sense for demand?

jimmy fallon whisper GIF — Want to know our secrets to win negotiations? You’ll have to ask.

You bet.

And is there an art to positioning the offer? Or the perfect time to deliver it? Does the lender matter? And does the agent’s reputation matter?

Of course.

And, as a seller, is there a way to create a multiple offer situation on your listing?

Again, yes, if you know what you are doing.

But we will reserve our best tactics and strategies for our clients and not publish them in a public forum.

That said, the key is to know a) what is the value of what you are buying and b) where you stand in the market. None of these techniques matter if the fundamental offer isn’t already strong.

Without understanding both sides of the equation, making a good decision is next to impossible and no negotiation tactics can change the outcome.

What to Expect in 2020

January 1, 2020 By Rick Jarvis

Forgive me, readers, for I have sinned. It has been 4 months since the last blog. Got busy, you know? Had a lot going on this year.

But that said, there is no better time to jump back on the writing horse and no better topic than the predictions for the coming year, which has become a bit of a tradition on the blog.

So without any further adieu, here are the things we are keeping an eye on and some trends we are seeing (and feel we will continue to see) as we move through the next 12 months.

Navy Hill

For those of you who are not aware of Navy Hill –– well, you should be. Navy Hill is the proposed redevelopment of the Richmond Coliseum and the surrounding blocks into a new 18,000 seat arena plus beaucoup office, residential, and retail space.

When completed, it stands to be the most transformative project the city has seen in 50 years.

To say the least, it is a pretty big deal.

Opposition is Loud

Any development project will bring with it its share of opposition, whether it is a simple townhome project or a large planned community –– that is the nature of development.

But when you start talking about a project on the scale of Navy Hill ($1.5B, if you are asking), then the opposition increases exponentially.

And thus it is with Navy Hill.

So as the noise gets louder, make sure to separate logical and thoughtful opposition from the ‘I don’t like change’ opposition. Sometimes it is difficult to tell the two apart.

Decision on 2nd Dominion tower looms large over Navy Hill project

Want to know more? Our good friends at Richmond Biz Sense are, as always, on top of things.

So 6th Street Marketplace Redux?

So what makes this project different than, say, the 6th Street Marketplace debacle of the 1990s, or the ‘comedy-of-errors-effort’ at building a baseball park in Shockoe Bottom, or even the horrible deal cut with the Redskins for training camp?

Well, two basic reasons:

The development team is extremely accomplished at sports arena/ballpark redevelopment
The city isn’t acting as developer, they are SELLING the land to a private development group

The TIF (not the TIFF!)

The basic deal is that the city is selling the land to the developer and then using a form of financing called a TIF Overlay District (Tax Incremental Financing) to pay for the new arena and infrastructure.

The tax revenues from the improved values in the district would be what pays off the debt –– and once paid off, the city would not only own the arena outright, but they would have an insane amount of new tax revenue flowing into their coffers.

Good News. Bad News.

The good news –– the City will NOT be the developer. The City of Richmond has repeatedly shown that they are terrible at playing developer. And (more good news), they will have activated a tremendous amount of taxable land in the middle of Downtown that currently brings them no revenue.

The bad news –– well, what if it doesn’t work as planned? And don’t the schools need money now?

Yeah, there is that …

Ambitious, But Transformative

The plan is ambitious for sure, but the development team is extremely accomplished. The lead architects were involved in some of the most high profile sports arena developments in the US –– Quicken Loans (Cleveland Cavaliers), Staples Center (LA Lakers, Clippers, and LA Kings), and America West (Phoenix Suns) to name a few.

Another project from Future Cities. The new home of the Golden State Warriors

I, for one, would love to see it happen. The number of concerts, sporting events, and other entertainment productions that skip Richmond currently is frustrating –– especially for a lifelong Richmonder accustomed to seeing of the best shows ever right here at our own Coliseum.

Furthermore, the idea that something like 10 Downtown blocks are currently NOT providing revenue (it actually costs money to maintain so it is technically a drain on revenues, but who cares about such minor details) to a city in such desperate need of fixing its crumbling schools also appalls me –– especially when you see the impact that a sports/entertainment district anchored by office, retail, and residential development has had on other cities.

Yes, the schools are in dire need of additional funding, but so is every other department. When your revenues are fixed, paying Peter means robbing Paul.

So stay tuned –– there is a lot more to be said and written about Navy Hill.

Moving East

Have you ever really looked at a map of Richmond’s development?

If you have, you are one of the few.

**Red** means old. **Green** means new. Can you see the difference in the direction of development?

By and large, it moves from the fall line of the James River (i.e. Downtown) and moves primarily up the river (west and north) and out Midlothian Turnpike, Hull Street, Broad Street, and along 95.

What it does not do is move east at anywhere near the same pace as it does in the other directions (see the map.)

Well, that is starting to change.

The Rise of the East

Back in the days when the cleanest air and water were upwind and upstream, moving west made a lot of sense.

Today, the impact of pollution isn’t nearly the same as it was in say, 1930, and thus the need to continually go west isn’t nearly as strong. And the quest to find reasonably priced housing that isn’t 45 minutes from urban Richmond is leading the change in attitudes.

The first chart shows the $/SF of the two easternmost high schools in Henrico County (Varina and Highland Springs.) Look not at the amount per square foot –– but the rate of change –– when compared to the two westernmost high schools in Henrico (Godwin and Deep Run.)

Bet you didn’t expect that, did you?

Now, take a look at what is happening in the North Church Hill neighborhoods, as well as those to the east of Chamberlayne between Laburnum and Brookland Parkway.

Notice anything? Oh, just pricing that is up anywhere from 3 to 5x since 2011.

Wait, did you say 300 to 500% since 2011?!? Yep.

Affordability

What is driving the change? Affordability (well, at least for now.)

As the prices for entry to the Fan District, Museum District, West End, and even the new home communities in Midlothian and Moseley are reaching into the middle to upper $400’s, people, especially the first-timers, are looking for housing that is both affordable and close in.

Check out the pricing for new housing in four of Chesterfield’s largest new home communities on the chart below:

Cue ‘the east.’

Pricing below $400k, 10-15 minute commutes, and a rapidly growing amenity base are what is underpinning the growth –– and as more and more investment occurs at points east of 95, the better the appreciation will get.

The smart investors are already there.

Inventory

A Growing Metro

Question –– do you know what the rate of population growth is right now in the Richmond region? (And by region, I mean the City of Richmond and surrounding counties)

Regional Demographics

Some interesting stats about our region.

Answer –– Depending on what you read, the population growth in the region is between 1% and 1.5%.

Now that doesn’t sound like a big number until you do the math.

1.3M people x 1% = 13,000 new people each year.

That is a little over 1,000 people per month.

And that is roughly 35 people per day.

Think about that number for a second –– 35 new people per day are moving to Richmond. WHERE IN THE WORLD ARE THEY GOING TO LIVE?

Now you see the problem.

Median Income

Want me to blow your mind even more? The median income in our region is $65,000.

$65,000 translates to roughly a $250,000 to (maybe) $300,000 home in terms of buying power.

Guess what? There is less than 2 months of inventory below $300k in the Richmond region.

Spoken differently, there is twice as much inventory ABOVE $300k than there is below it.

So here we are.

Crisis Mode

Several years ago, we wrote about the coming affordability crisis in housing. Well, it is finally here –– and inventory (or the lack thereof) is the primary culprit.

To quote the great Roger Daltry –– Meet the new boss, same as the old boss! (and I start the video right at his famed scream …)

So until we either find another 1,000 acres in the middle of the city (not going to happen,) or we rewrite mortgage financing to allow for vertical development (not happening fast enough,) we are going to keep seeing prices spike –– especially in the more affordable segments.

Manchester

We were just in Manchester doing a video shoot for one of our listings and man, it has gotten tall. Like really shockingly tall. And I would like to think that I know a lot about Manchester and even I was shocked.

It is tall.

< Don’t believe me? Check the references to ‘Manchester + Tower‘ in Richmond Biz Sense >

For those who do not know much about Manchester, you should. It is basically becoming an entirely new city.

The Terraces at Manchester recently sold for $30M

The amount of development that has occurred in manchester is unprecedented, especially by Richmond standards. Towers, towers, and more towers are now the norm, as is new retail, new residential, and new office.

And did I mention the towers?

Housing

So what impact do you think all of this development had on house prices in Manchester? Yeah, you guessed it –– they went UP!

If you haven’t been to Manchester in a while, I highly suggest you walk the T Pot Bridge, grab a beverage at Legend, and take a look. You won’t believe the activity.

What We Didn’t Talk About

So we left off several topics in hopes of a) making this post of reasonable length and b) leaving something else to talk about over the coming year.

But here are some of the things we did not touch on:

iBuying –– having a company like Zillow buy your home
Building Costs –– still going up!
Politics –– sorry, I don’t have the stomach to write about it
Scotts 2.0 –– the Westwood Tract redevelopment (i.e. the industrial neighborhood just west of Scotts Addition)
Sauer Center –– can I please just have my Whole Foods?!?
2020 Census –– should be interesting, to say the least

So look for us to tackle a few of these topics in the coming months.

And Finally …

2019 was another banner year for One South. We got a lot done.

Performance Metrics

We broke our prior year’s record for transactional volume.

We cracked the Top 10 in volume (by office) in our MLS.

And we still outpace the market averages in pretty every important metric:

Median Days to Sell –– 8 days
Median Percentage of Asking Price –– 100% (yeah, that’s not a misprint)
$/SF –– $31 above the market average
Price –– $30k above the market average.

AND we have continued to conduct our business in an ethical manner (i.e. –– another year of a spotless record with all of the governing bodies.) That makes me especially proud of not just One South’s agents, but of the management team and staff who play a huge role in both our agent’s success and our consumer’s experience.

So to summarize –– more transactions at higher prices with smaller discounts and at a faster rate than the market, all while maintaining the highest level of ethical behavior –– not too shabby.

Expansion

We also grew geographically.

Our new office in White Stone, moments from the Rappahannock River

We recently opened another satellite office in White Stone, Virginia (along the Chesapeake Bay) and are in the process of partnering with a videography firm to even better promote the listings we carry and the neighborhoods we frequent (more on this soon.)

Commercial

And did I mention how well our commercial team is doing? Just read Biz Sense and you will get a sense of how well …

Salomonsky sells Shockoe Slip apartments building for $8M

Oh, just another $8M sale…

The One South Commercial team continued to grow their name and presence with more high profile sales, additional team members, and a new best for volume.

In Closing

We fully expect 2020 to be another banner year for us as the economy remains strong, interest rates low, and our region continues to attract new residents.

Most prognosticators expect the market to get started even earlier this year (but that also depends on the sellers and the weather, so stay tuned.)

And while we expect to see a bit of a slowdown around the election (it happens every election year), don’t sweat it –– just plan accordingly.

Thanks and we look forward to serving you in the coming year!

Uncertainty

May 14, 2019 By Rick Jarvis

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.

Back on the Market

February 1, 2019 By Rick Jarvis

Agent: Congratulations! You are under contract!

Client: Great! So we are done, right?

Agent: Not exactly. Anywhere from 10% to as high as 20% of contracts fall apart for one reason or another.

Client: Wait, what?!? There is as much as a 20% chance that the contract I have on (or for) my house will fall apart?!? How can I make any plans going forward with that much uncertainty?!?

Agent: Let’s talk about why.

The Back on Market Statistic in MLS

First, let’s talk about where we get the data.

The Multiple Listing Service tracks a lot of statistics –– one of which is called ‘BACK ON MARKET’ (or BOM).

BOM measures the number of homes whose status changes from ‘PENDING’ (meaning under contract) back to ‘ACTIVE’ (meaning ‘available for sale.’)

This is the home screen of MLS that shows agents a quick update of the day’s (or week’s) activities.

Computing the Failure Rate

A random sample of a week in middle January yielded the following results:

569 homes went PENDING
65 came BACK ON MARKET
65/569 = 11.4% contract failure rate

(A quick note –– a week later, the number of ’Back On Market’ properties, jumped to nearly 14% with 40 of 295 coming back to Active status from Pending –– so this metric will change week to week.)

Released and Temporarily Withdrawn

Now if you note the screenshot, you will see where RELEASED and TEMP(orarily) WITHDRAWN are also highlighted:

RELEASED –– meaning that the listing agent and owner have agreed to part ways.
TEMP WITHDRAWN –– meaning probably what you think, the home has been removed from the market for an unspecified period of time per the seller’s request.

Both of these status changes (66 Released + 38 Temp Withdrawn = 104) often come on the heels of a failed contract –– and thus the count of the Back on Market is most likely higher.

Between 10% and 20%

So, yes, somewhere between 10% and 20% is the correct number.

This number will vary based on what time of year you examine, what price point you are in, and what geography you study and of course, what percentage of the Released and Temp Withdrawn homes you assume were the result of a failed contract.

Why Don’t Homes Close?

A 10% fallout rate is a big number. A 20% fallout rate is even bigger.

When you are making irrevocable (and expensive) commitments that depend on a successful settlement, 80% certainty doesn’t feel great, does it?

It shouldn’t.

Let’s discuss the reasons.

The Primary Reasons

Homes don’t go to settlement for any variety of reasons –– but they generally fall into one of the following categories:

Lender incompetence
Appraisal less than the sales price
Inspection issue
Agent incompetence
Cold feet

Let’s discuss each.

Lender Incompetence

I cannot stress this enough –– work with a lender with the following characteristics:

They are local (not Quicken, USAA, or some other internet lender)
They are tied to a bank (meaning they have ‘shelf loans’ or other specialty products)
They do a lot of business with the agent (you will be on the top of the pile and receive favorable treatment when positive underwriting interpretations are required)
They have a full range of products (many lenders only have a limited product menu and will try to place you in the wrong product because they don’t have the correct option)
They have a ‘Lock and Drop’ feature (meaning that if rates drop during the lock period, you receive the lower rate)
They are not your Credit Union (contrary to common belief, CU’s do NOT give better rates and their representatives are typically not licensed)

Furthermore, when it comes to niche purchases (condos, rehabs, multi-family) or complex underwriting (divorce, business owner, commission income) using a mortgage company with specialists in the specific loan type is critical.

Alas, few borrowers (or agents) know how to find those who specialize in the specific niche required.

The Dreaded Internet Lender

To the Sellers –– if you are a seller and you receive a contract from a purchaser who plans to use an internet/non-local lender, accept the contract at your own risk and do not be surprised when, at the 11th hour, you get the dreaded ‘we have a problem’ message.

To the Buyers –– if you are a buyer and in a multi-offer scenario, using Quicken (or USAA) is an almost near guarantee that you will not be the winning bid. Why? Because listing agents know how difficult and unreliable internet lenders are.

Internet lenders can be decent for refinancing (mostly because a missed closing date isn’t overly penal,) but for purchasing a home, they just carry too much risk.

Cheaper Isn’t Better, It Isn’t Anything

A rate that is ½ point lower that closes late (or not at all), is not a better rate –– it is actually more expensive!

Late closings trigger penalties, loss of deposits, and a handful of other emergency decisions (hotel stays, storage units) that eat up any savings that the rate promised.

The bottom line is that the local lender puts their reputation and well-being on the line every time they issue a pre-qualification letter. If their organization can’t perform as promised, they don’t just lose the current deal, they lose the rest of them.

An Appraisal Issue

When prices are accelerating rapidly (especially in the spring), comparable sales lag where the market is.

Looking at past sales is like driving while looking out of your rearview mirror.

In other words, when you are trying to establish the fair market value of a home in March of 2020 –– and the sales comps are from the fall of 2019 –– you will not find the sales from yesterday you need to justify the price today.

But unfortunately, that is how the appraised value is determined –– via PAST sales.

We like to say that using comparable PAST sales to establish value TODAY is like driving while looking out of the rearview mirror –– it tells you where you were, but not where you are going.

When you, as a seller, have accepted a contract on a home where there were multiple bids, odds are, the sales price has been pushed above the value at which the home will appraise. When a loan is subject to appraisal (as many loans are), an appraisal below the sales price places the loan in jeopardy.

Appraisal Math

Applying some numbers –– if the purchaser is putting 10% down on a $300,000 sales price and the appraisal comes in at $290,000, the seller is responsible to make up the difference –– in other words, they have to find an additional $10,000 in down payment.

If the purchaser has no excess cash (or is unwilling to access it), then the seller is forced to either:

lower the price to the appraised amount
accept the loan denial and put their home back on the market

The bottom line is, as a seller, you have to look at the type of financing the purchaser is using –– and specifically how the appraisal contingency is worded –– to properly judge how susceptible you are to the appraisal causing the contract to not move forward.

A good agent knows how to assess the risk.

Inspection Issues

Inspections are the bane of almost every agent’s existence.

Essentially, you have buyers who feel like they overpaid (and feel entitled to a perfect home,) sellers who see every issue as cosmetic, and inspectors who feel it necessary to point out every flaw, including that the doorbell is not at the correct height (not kidding.)

On the other end of the inspection report are agents who know very little about construction and contractors who both disagree with the inspector’s assessments and cost estimates, and are trying to generate even more business for themselves by spooking the clients –– all trying to decide if a $100 piece of siding is rotten or just soft.

It is maddening.

Call it pride, call it short-sightedness, or simply stupidity, but way too often we see $500 worth of inspection items torpedo $300,000+ sales

($500 / $300,000 = .0016, in case you wanted to see how inconsequential that amount actually is.)

No Home is Perfect

At the end of the day, as a buyer, be prepared to take the home with a few issues –– especially given the market conditions. Are we saying that a cracked foundation, a failing 50 year old roof, and radon readings in the 100’s are not issues? Of course not. But when minor carpentry issues, a few questionable double taps on your main circuit panel, and wobbly toilet are found, it is ok. Don’t freak out.

And a final note for sellers –– I have yet to see a house that comes back on the market get a better offer. Digging in to save yourself $1,000 only to cause your buyer to flee is a poor strategy. You are almost always better off to work with the offer in hand, even if it means swallowing your pride and working out a deal that feels one-sided.

Agent Incompetence

My first broker was fond of saying that, as an agent, when you have a willing buyer and a willing seller, get out of the way.

It is one of the truest statements he ever uttered.

Far too often, in an effort to either feed an ego or justify the commission, agents will engage in activities that complicate or sabotage the transaction. Speaking too much, introducing doubt, blaming the other side, making mountains out of molehills –– all of these actions put unnecessary pressure on a transaction when there needn’t be.

The net result is it exhausts everyone’s emotional energy to such a point that the sides oftentimes become unable to work through an issue that normally would not derail the transaction.

It happens far more than it should.

Cold Feet

And yes, every once in a while, a simple case of cold feet (i.e. –– Buyer’s Remorse) is the culprit.

Typically, buyer’s remorse occurs when a) the deal is too one-sided, or b) the purchaser didn’t fully do their homework before finding themselves under contract to purchase a home.

Agents and Uncertainty

As an agent, it is absolutely your responsibility to make sure the buyer understands their decision:

Educated and confident buyers make decisions that stick
Buyers who never developed a true understanding of market conditions tend to walk away

Agents –– if you want your deals to stay together, empower and involve your clients.

Summary

So yes, not all deals go to settlement.

Statistically speaking, somewhere between 10% and 20% will fall apart for one reason or another. And thus, some percentage of sellers will have to go ‘Back on the Market’ after experiencing the frustration of a contract that did not stick.

So, as a seller, how in the world do you defend against being left at the altar?

Well, that is Part II of the series …

One South

A Week Later…

An Economic Sickness

Real Estate

Recommendations

Summary

Laughter is the Best Medicine

Sources:

Perception or Reality?

Perfect information

The Sheer Number of Transactions

The Similarity of Housing

Face to Face or Inbox to Inbox?

Market Imbalance

When inventory creeps below 3 to 4 months, buyers don’t have much leverage.

Then What in the World Are We Supposed to Do?

Summary

Navy Hill

Moving East

Inventory

Manchester

What We Didn’t Talk About

And Finally …

Uncertainty is the Constant

The Market Tends To Rise

2008 Is Unlikely to Repeat

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…

Owning is Risky. Renting is Riskier.

Perfect Information Simply Isn’t Available

Summary

The Back on Market Statistic in MLS

Why Don’t Homes Close?

Lender Incompetence

An Appraisal Issue

Inspection Issues

Agent Incompetence

Cold Feet

Summary

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How Do I Schedule a Showing?

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