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Rick Jarvis

The Heyday of Housing

April 2, 2019 By Rick Jarvis

Euro-inspired Tudors.
Nouveau interpretations of traditional forms.
The new rise of Modernist architecture.
And, of course, a healthy dose of Richmond-centric designs in our most timeless neighborhoods.

It is the heyday of housing.

It Was the Best of Times …

Never before do I remember such a time.

When first licensed in the early 1990s, homebuilding was shifting. The transition from square brick and clapboard boxes of the 1960s and 1970s to the vinyl-clad ‘Transitionals’ was in full effect.

Open floor plans, two-story family rooms, and the luxury master bath all became the norm, in direct opposition to the boxy and formal residential architecture so prevalent in prior decades.

Oak Park
Oak Park was one of the first communities to embrace a return to classic forms.

Then, for the better part of the next 15 years, we continued to build in this manner –– and we didn’t really deviate.

As a matter of fact, the only noticeable change we made in our construction from the late 1980s until the middle 2000s was to build increasingly larger homes on increasingly smaller lots … until … 2008 … and …. BOOM! And, well, we all remember what happened.

In the post-Great Recession recovery, housing styles changed yet again, and this time, I think we all recognize that the change is a good thing.

The Return to Authenticity in Architecture

Many moons ago, we wrote a blog called ‘A Return to Authenticity.’

The blog (written in 2011) discussed the tendency that during times of distress (and 2008 to 2011 definitely counts as distress), people tend to migrate back to the classic and the timeless. Looking at housing design in the post-recession years, you can see the trend for sure.

Biringer Builders has taken the classic form to a new level with exteriors as well thought out as the interiors. Their interpretation of the American Farmhouse is truly striking.

The re-emergence of Tudor, Craftsman, Four Square, and American Farmhouse styles is evident in almost all new neighborhoods and at all price points. Communities such as Hallsley have taken these designs to a new level with some truly extraordinary homes being constructed, especially in the more recent sections.

The bottom line is that developers (as well as county planners) are finally allowing more diversity in residential design which, in turn, is empowering a new crop of talented builders to flex their creative muscles. The results are far more interesting than the homogenous vinyl-clad and garage forward boxes of the pre-recession world.

Government Mandates and Building Codes

Over the past decade or so, the minimum standard for building homes has increased –– substantially.

Huntt's Row
Framing requirements and fire separation have not only made attached housing safer, but they also have gone a long way to dampen sound transmission between units.

More robust structural requirements, increased efficiencies in mechanical systems, heightened insulation standards, better electrical safety stops, more durable materials –– all of these have led to better built, safer, stronger, more energy efficient and longer lasting homes than their predecessors. And (for the most part) that is a good thing.

But, what happens when you increase mandates and minimum standards? You increase expenses.

All of these escalating requirements have made it increasingly difficult to bring affordable housing to the market. While there is no doubt that the average new home is far superior to the new home of yesteryear, it is also far more expensive to build, and it is raising the threshold for entry into homeownership … but perhaps that is another post for another day.

Infill. Adaptive Re-use. Renovation. Addition.

In addition to the renaissance in suburban new construction, a noticeable transformation in the mature urban areas is in full force as well.

As the city of Richmond continues to reverse the decades-old trend of population decline, the number of people who are moving into the city has never been higher. When demand is increasing and supply is fixed, prices rise –– and never has it been in more evident than in the more affordable sections of Richmond.

North Church Hill, Highland Park, Brookland Park, and Barton Heights have seen median prices increase by as much as 300% in the last decade. Why? It is all about demand.

O Street Project
The O Street project was a great example of adaptive re-use / infill in Church Hill. The homes were priced at a more affordable level than many new infill projects are.

How to best solve the issue? Urban infill/adaptive re-use, full-scale renovation, and addition are how.

  • Projects such as 7 West, Huntt’s Row, Jefferson Green, the Meridian, and Citizen 6 are examples of adaptive re-use and/or infill.
  • Numerous homes in urban communities have undergone total renovations in order to revive their contribution to the community.
  • Many current owners are electing to simply add on to their existing homes in lieu of incurring the cost of moving.

At the end of the day, the housing stock in the urban core is in demand like never before … and the building community has taken notice.

The Luxury Townhome

Another interesting development for Richmond is the emergence of luxury townhomes.

For years, the townhome was considered an affordable alternative to the single-family detached home –– a sort of starter home if you will. Townhomes were definitely not considered an option for the empty-nesting downsizing buyer –– and absolutely not in suburbia.

West Broad Village and GreenGate changed everyone’s opinion.

West Broad Village
West Broad Village changed the way Richmond thought about the Luxury Townhome.

The upscale and luxury suburban townhome has sold incredibly well when placed in the ‘new urbanist’ mixed-use developments of Western Henrico. The ability to sell one’s 5 bedroom, maintenance intensive, 30-year-old colonial and move into a luxury ‘town’ that is walkable to high-end grocers, green spaces, restaurants, and other supporting retail is appealing to many –– especially when a residential elevator can minimize the annoyance of stairs.

So for many, the new version of ‘Downsizing’ refers more to the downsizing of maintenance responsibilities than downsizing the actual size (and price) of the home.

Expect to continue to see more and more of our housing market dedicated to the construction of upscale and luxury townhomes in areas that had traditionally been the bastion of detached single-family housing.

An Acceptance of Modernism

7 West, Citizen 6, the new modern section being built in Rountrey, South Bank Ridge (coming soon!) and the spectacular modern home being built 5404 New Kent Ave –– all of these are examples of residential architectural design that 10 years ago would have been shunned by a traditional Richmonder.

Modern Richmond book
The Modern Richmond tour has been so successful that it has spawned a book.

No more.

The appreciation for modern architecture has never been higher and the quality of architect who can truly design these types of homes has never been better.

The recognition of and appreciation for the modernist movement has actually led to the immensely popular Modern Richmond tour AND the imminent publication of a book detailing the history of Modern Richmond tours.

What We Didn’t Talk About …

This post could have been far longer.

We didn’t touch on the new technologies that builders are using to not only help them design housing, but to test it, refine it, and engineer out the inefficiencies.

South Bank Ridge
The South Bank Ridge project will offer some of the most spectacular architecture imaginable.

We also didn’t touch on the consumer experience, which has improved by leaps and bounds in the past decade. Every successful builder knows that the internet gives the disgruntled consumer a voice and the ability to punish transgressions unmercifully.

Simply put, the region’s best builders recognize that building a great home isn’t enough anymore, they also need to provide an interactive, participatory, and transparent process to ensure the consumer’s experience is a positive one.

Summary

At the end of the day, we are in a great era for housing. Housing today has better bones, better materials, better equipment, and is better architected than in days past –– there is no debate.

That said, building is not just a job, it is a responsibility to the future of Richmond, and more than ever before, the building community recognizes that fact. I believe that when we look back in 50 years, we will look back with a fondness for the quality, design, and diversity of what was being built today.

The Myth of the Inside Deal

March 8, 2019 By Rick Jarvis

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.

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.

A contract, you don’t have.

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:

Pick 2 …
  • 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. 

Quicken Loans Arena, anyone?

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

50% off!

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 …

How to Lose Your Dream House (with your agent’s help)

January 28, 2019 By Rick Jarvis

How to Lose Your Dream Home

Earlier this year (January to be exact) I was at the office on a Monday evening while one of our agents was wrapping up the details on a contract for a home she had listed.

She was notifying the agents who had made the losing offers (there were 10) and I overheard a rather testy exchange on the phone with one of the agents whose clients had made a particularly weak offer.

After the call, we discussed what had transpired –– and below you will find step-by-step instructions on how to not win a competitive offer situation and cost your client a home they really wanted.

The Home

I think it is important to understand the home in question.

The home was an uber-cute classically-styled 1930’s era bungalow an oversized lot in an area experiencing rapid price appreciation. The home is well situated in the direct path of investment and development, and had recently undergone a tasteful upgrade.

The price would be considered quite affordable by today’s standards (less than $300,000) and was located quite close to the urban core.

For anyone seeking a smaller, cute, move-in ready home, it checked a lot of boxes –– it oozed charm, was quite close-in, and had tons of upside.

Market Conditions

nothing offer GIF

Now, if you are even remotely aware of the inventory conditions, you would know what the description above meant –– it meant that the house would be in high demand and that multiple offers (like a LOT of offers) were pretty much a certainty.

In fact, over 10 offers were received.

Know Your Inventory

Right now, the inventory in the City of Richmond is at all-time lows, with less than a 4 month supply overall. However, when you look specifically at the market segments below $400k, the supply drops to less than 2 months (1.4 months as this post is written).

1.4 months of inventory –– let that sink in for a moment.

To give it perspective, experts say that 6-8 months of inventory is considered a balanced market (i.e. the number of sellers equals the number of buyers) –– so the number of available homes could increase by 500% and the market would only be considered ‘balanced’! 

That is insane.

So even if you are not a statistics nerd, the fact that about 50 people toured the open house (including the ones who lost their ‘dream house’ with their less than compelling offer) should have driven this point home quite vividly. 

Apparently, it didn’t.

Contract Structure

nicksplat rugrats GIF
10+ contracts in January –– what does that tell you?

Most people feel that the sole purpose of a contract is to establish a price for the home. While price is certainly one of the elements of a purchase offer (and a critical one at that,) the contract also establishes the remainder of the terms for the sale –– of which another +15 pages (plus several addenda) are required to establish them all.

So there are several key points (other than just price) that can be leveraged to create a far more attractive contract for the seller when a highly competitive offer situation is expected including:

  • Will the price change in the event of multiple offers? (i.e. escalation clause.)
  • How the property will be paid for / financed (mortgage, cash, amount of down payment)?
  • How any appraisal issues will be handled?
  • How the inspection will be handled?
  • When not just settlement –– but possession –– will occur?

In other words, there are a lot of other levers to pull to create an attractive offer.

Winner vs. Loser

So, assume for a moment that the price of the home is $300,000 and a seller receives multiple offers (again, the sellers of this home received more than 10 bonafide offers.)

The winning offer stated:

Want to know more about Escalator Clauses? Read here…
  • A price of $300,000 with an escalation up to a maximum of $315,000 if a higher offer was submitted
  • 10% down payment, but the appraisal contingency was waived and a lender letter was submitted showing the proof of funds to make up the difference if the appraisal was lower than the contract price
  • A cap on inspections so that only large items would be requested to be addressed
  • The several items that were not supposed to convey with the sale were correctly excluded from the sale
  • A post-settlement possession was also offered to the sellers (but not needed by the seller)

The folks who lost submitted the following offer:

  • $295,000 with no escalation clause
  • Conventional financing with a 20% down payment
  • No waiver of appraisal 
  • No modification to inspection 
  • Zero reference to the items that were not supposed to convey
  • Seller to pay for a Home Warranty

Not Even Close

So when the agent was called and told that they had not won, they were incredulous and argumentative about why they were not allowed to up their offer.

Sorry, but when you have several offers in hand that exceed the asking price, calling the 8th place contract and asking them to raise their offer isn’t a consideration.

The fact that they did not seem to comprehend that is what feels incredulous to me. 

Losing Professionally and Graciously

Now, I wouldn’t think that this would need to be said but apparently it does –– when, as an agent, you make every mistake possible with your offer and you are notified with a phone call that you didn’t win –– don’t be combative.

The following was the basic gist of the conversation –– and all of the supposed points were made in aggressive and accusatory tones:

  • Why weren’t the buyers given a counteroffer?? Well, because there were about 7 better offers.
  • Why didn’t you ask for our highest and best offer?? Again, you were the 8th best of the 10+ offers. 
  • Why weren’t we informed of the multiple offers?? Well, listing agents are under no obligation to do so, but the line out of the door at the open house should have been a clue –– and 1.4 months of inventory should have been another. Oh, and by the way, the inclusion of a properly structured escalator clause is a perfect way to hedge your bet (which you did not include.)
  • Why was the listing agent being non-communicative?? Well, because analyzing 10 offers and presenting the best ones to the seller takes considerable time –– and your offer was one of the least competitive of the bunch. Sorry if you didn’t receive a call within 5 minutes of the contract expiration time to inform you that you finished behind 7 other offers. When the best contract was signed, you got a call.

Sarcasm aside, do you know what being chippy about losing did? Do you think it changed the outcome? Of course not. It simply put everyone involved on notice that this specific buyer’s agent was difficult to work with. I can assure you that their attitude will not help their chances when all other contract terms are held equal and the seller needs to choose between two offers.

Lesson? Or Blame?

Is it possible that this agent was acting at the behest of their client and their strategy recommendations were ignored? It’s possible, but highly unlikely given the agent’s overreaction. The overall tenor of the conversation made it fairly obvious that the agent had recommended the strategy and now had to go back to the client with egg on their face.

Furthermore, I can almost guarantee you that the buyer’s agent placed the blame at the feet of the listing agent with some sort of ‘they screwed you’ message. I can only hope that their client is astute enough to sniff out where the blame actually should be placed.

Blaming the other side is certainly convenient, but a very damaging long term strategy. Richmond is a small town and the agent community is even smaller –– word travels. Your reputation (good or bad) can impact the market’s willingness to work with you and your future clients. 

Advocating hard is both expected and respected by your peers –– being a jerk isn’t. 

Summary

At the end of the day, this market is in an extreme place –– and extreme conditions must be navigated with strong methods. Using 2015 contract structures with 2019 comps in January of 2020 is not a recipe for success –– especially not in the ‘affordable-urban’ market.

As we have stated repeatedly, the market conditions we are in, particularly at the middle and lower price points, is unprecedented, and best practices that were generally accepted even a few short years ago no longer apply. 

Everyone acknowledges that losing the perfect home stings –– whether you are an agent or a buyer. But it happens to all of us and will continue to be a part of this market for the foreseeable future. All you can do is prep your clients, take your best shot, and accept the outcome –– graciously. 

That said, being wholly unaware of market conditions or winning strategies is not an excuse for poor behavior. Take your lumps, learn the lessons, modify your strategies, and make the adjustment. 

The good agents do.

The Escalator Clause

January 12, 2019 By Rick Jarvis

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.

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