Sarah Jarvis Team at One South Realty

at One South Realty

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Did You Just Hire a Realtor, an Agent or a Salesperson?

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Realtor? Salesperson? Agent? You decide...I wish to start this article out with a disclaimer — This is my opinion only and I do not speak for anyone else. I also know that these comments will probably generate some level of disagreement with those in my industry and I am OK with that.

So here goes…

My industry is filled with three types of people

  • Realtors
  • Salespeople
  • Agents

Lets discuss the differences.

The Realtor

Technically speaking, a REALTOR is a member of the National Association of Realtors and is licensed either as a broker or real estate salesperson. A Realtor will (ok, should) always abide by the Code of Ethics and is versed in all of the complicated agency, disclosure, and fair housing laws as well as the protocol for how to handle the inevitable grey areas that lie on the edge many sticky situations.

I have been involved in many deals where the cooperating broker, a Realtor in the purest sense of the word, spent more time on protocol than they did on the analysis of the market value. Their client, in my opinion, made a poor financial decision.

That said, I have also been involved in deals where the cooperating broker spent very little time on the technical part of their craft (the Realtor side, if you will) and put their clients at risk.

It cuts both ways.

Understand that in no way am I criticizing being a ‘Realtor,’ rather I am simply pointing out a Realtor (once again, in the purest sense) sees their world and the conflicts that comprise it through the lens of very a strict interpretation of proscribed rules and guidelines. Sometimes this protocol focus ignores the larger picture.

It is unfortunate.

The Salesperson

In the real estate industry (or any commissioned sales industry for that matter) there are sales gurus.

Attend any Mike Ferry Organization or Brian Buffini seminar (or Matt Ferrara, or Ben Kinney, or any other one of many and, in the interest of full disclosure, I have paid to see them all) and you will hear their ideas on how to make more money.

All of the scripts, activity goals, scheduling, etc. are all designed to increase the attendee’s earning potential.

Usually, a combination of increased people skills, basic scripts, and a diligent commitment to prospecting for new leads (via calling people you know and/or those you do not) should lead to increased income. Their (correct) theory is simply if you find more people to talk to and do a better job of telling them what they want to hear, you will increase your income. More opportunities x more skills = more income.

But at who’s expense?

The true salesperson, while they are doing nothing illegal or even immoral, hold their own ‘lead generation’ activities in the highest regard. Many times the teachings of the sales guru strongly suggest to NOT take any phone calls other than those related to prospecting for extended periods time each day. Closing issue? Call you back at noon. Termite not ordered? Please leave a message. Loan package is wrong? I am sorry, but Mr. Salesperson is busy right now.

Needless to say, it is not a client-centric philosophy.

Am I saying you should NOT hire the salesperson? No. I am saying that don’t be disappointed when your salesperson acts like one.

When the metrics of deal count and sales volume become the sole measuring sticks of success, then the advice offered must always be questioned as to who stands to benefit most.

That said, I have always found that those who are busy are usually busy for reason –– they are good at what they do. I have also found that a certain level of detachment and objectivity from my advisor comes from a certain level of financial achievement. Much of the best advice I have ever received came from folks who had little need for my business. Any advisor who needs my business, well, I am not sure their advice is best for me, either.

While the advice from the true salesman should be filtered and vetted, it is many times very accurate and based on a great deal of experience.

The Agent

The agent is a combination creature who is part Realtor, part salesperson, and part trusted advocate. Agents get deals done.

An agent, in my opinion, has a loyalty to the correct outcome for their client.

Agents may be very aggressive and disciplined in their lead generation practice (like the Salesperson) but still hold their client’s interests above their own. Agents fully understand the Realtor Code of Ethics (like Realtors) yet manage to adhere to these principles without getting in the way of the best outcome for the client.  

At the end of the day, an agent will always try to help their client find the best available deal through the best available means.

An agent always asks themselves, is my client making a good decision? If they are making a bad deal, then they will try to talk them out of it.  If they are making a good deal, they will try to keep them engaged in it –– all of the while conducting themselves in a manner consistent with the Code of Ethics.

They likewise are successful enough to be able to give competent advice without their own financial pressures influencing the recommendations.

Conclusion

I think it is pretty obvious by my tone that I feel the best person to hire in a real estate transaction is the AGENT. A good agent, like a good attorney, accountant, insurance broker, or mechanic, is someone who will be in your life for a long time. I know that those clients who consider me their ‘agent’ call me constantly with questions as mundane as ‘do you have a good leaf guy’ to as complex as ‘help me understand the legal aspects of non-compliance in a mandatory HOA.’

The all-time great speaker Zig Ziglar once said (and I paraphrase) that if you help enough people get what they want, you will always be taken care of.  There is a lot of truth in that statement, especially in the real estate business. The ‘agent’ community in Richmond contains a great deal of talent whose ability to positively impact a transaction is robust.

Interview many and find the one who you would consider putting on your team for life.

What I Learned From Flipping Houses

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Flipping.
Renovating.
Fixer-Upping.

via GIPHY

No matter what name it goes by, buying a home, fixing the problems both large and small, and reselling it is something that we all love to do. Taking what was old, dilapidated, run down, dated, and/or under-improved and making it cool, hip, and modern is pretty much every real estate person’s dream.

But all of the HGTV mojo aside, flipping houses teaches you a lot — mostly through the mistakes you make — and I can honestly say that the number of times I have bought/renovated/sold houses has made me a far better agent for my clients than anything else I have ever done as a Realtor.

Here are just a few of the lessons I have learned:

You Make Money When You Buy — AND When You Sell

The old adage goes something like this — “you make money when you buy real estate, not when you sell.” Which is another way of saying that you have to acquire the property correctly in order to make the money when you sell it. Paying too much when you buy a home prevents you from making any money when you sell it.

But a great deal of effort goes into selling a property, too. From staging to timing to negotiating, knowing how to maximize value on the sale side can be equally important. Often times, those less versed in the art of selling leave significant monies on the table unnecessarily. Spending some time understanding the fundamentals of marketing a property correctly can increase the yield by 2-5%.

HGTV is the Devil

Yes, I watch it — and yes, it is addicting. Everyone in my family, including the 5 year old, loves the before and after shots and seeing the tearful homeowners when they walk into their new, completely rebuilt, award winning and fully furnished renovation.

But it is a total fantasy being passed off as an easy reality.

The expectations that are set about a) how easy it is to find properties to renovate, b) how inexpensive it is to renovate the homes, c) how risky it is to do so, and d) how hard it is to find great contractors is borderline criminal.

The reality is that finding — and acquiring — good deals is extremely difficult. Likewise, renovation is both more time consuming and far more expensive than most understand. The number of horror stories I hear versus the number of fairy tales has got to be 10 to 1 (or worse!)

Don’t let HGTV set your expectations.

The Market Overestimates the Costs of Cosmetic Repairs and Underestimates the Cost of Structural Repairs

If I had a nickel for every time a client was scared off by a home that needed paint and carpet or thought that a basic kitchen renovation would cost $50,000, I would have a lot of nickels.

Conversely, if I had a nickel for every time thought it would cost $500 to ‘open up the kitchen into the living room,’ I would have quite a few nickels then as well.

For whatever reason, people tend to see damaged sheetrock, stained carpet, and kitchen cabinets from the 1970’s and assume the worst. In reality, these items can be purchased and installed with relative ease and at low costs. But when you begin to open and/or move walls, things get expensive quickly. Anything structural requires all of the trades in order to complete the task. Moving a wall  is only somewhat complex, but when you move a wall, you generally need to relocate plumbing and electrical as well as re-do the sheetrock, paint the entire room, and fix the floors.

So if you plan to open walls, add baths, or finish additional space in a home, make sure to pad your estimates.

Know Your Values AND Your Costs

Back to my pile of nickels — if I had a nickel for every time I heard a seller tell me how much something costs as a justification for a higher price, I would have a really big pile of nickels.

The argument goes something like this — if I put in an exotic granite for $25,000, then my home is worth $25,000 more than my competition. Or, if I put my floor joists 12” on center instead the customary 16” on center and it cost me $3,500 more, then the home is worth $3,500 more than the competition.

I’m sorry, but it doesn’t work that way — the market does not necessarily value things in the same way that owner’s do.

Those who make the most money in real estate inherently understand that the cost of an item (or a material) and its value are not necessarily one and the same. Sometimes, a simple but cool $50 light fixture can impact value far in excess of its cost much in the same way that a $30,000 surround sound system will rarely pay you back.

Knowing how to make these types of choices wisely is an art and those who get the cost/value ratio the best, generally make the most money in their renovations.

Summary

Without a doubt, the renovations we have done personally have made us far better advocates for our clients. Having lived it — breathing in the dust, dealing with lenders, organizing the contractors, hearing the feedback — sharpened our sense of how to best buy, renovate, and sell.

It is this knowledge we pass on to our clientele each and everyday.

2017 Predictions

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2017 already — sure got here fast, didn’t it?

It seems like only a few short months ago, we were under 2 feet of snow and wondering if we would ever be able to get our cars out of the driveway. But the snow did melt — and then it got hot (like REALLY hot) and then, there we were with short sleeves on for Thanksgiving.

untitled-design

Go figure.

But it was an interesting year on a lot of levels, not just weather. Anyone notice the little election thing that just happened? Who wants to go through that again??

This past politial season was the most contentious I remember — it was insane. And I am not sure we are going to see anything resembling normalcy coming out of DC for the forseeable future. Political affiliation aside, the next several years will look different than the past several for sure. I think we are all still trying to figure out what that means — stay tuned.

And while the national election was one we will all remember for quite some time, the local elections were also pretty interesting. Did you know we also had more turnover at City Hall than in any year prior? Hopefully, some new blood will help take us where we need to go, but that’s another post for another day.

So in 2017, What Do We Expect?

At One South, we spend a lot of time not just helping our clients transact real estate, but trying to help them understand the strategies behind their decisions. And in doing so, we need to be looking out over the horizon and making sense of the thousands of inputs that drive our marketplace — local and national economic conditions, pricing, inventory, interest rates, government regulation, devleopment momentum — just to name a few. Simply put, we feel it is our duty to stay in touch with the goings on that impact our market.

Last year, we published our predictions for 2016 to give our clients the insight they needed to make the best decisions during calendar 2016. We are proud of both how well they were received and more importantly, how accurate they were. So we decided to do it again.

This year, we elected to put out our thoughts in audio form (with some bullet point highlights) to make them a little quicker and easier to absorb.

Enjoy!

What are we expecting for pricing this year?

Cautiously optimistic with moderate gains, especially where inventory is constrained. Higher price points are probably less likely to see the same gains as lower price points.

  • Pricing is likely headed up, but not as fast. Inventory and interest rates will be the ultimate arbiter of pricing.
  • Resistance at higher price points in Richmond (we call these ‘Market Caps’ and you can read about them here)
  • Some other markets are showing some weakness (NY, SF) at the uber-upper price points

(To learn more about how to navigate the spring market, read this)

What is the forecast for mortgage interest rates?

Rates are already rising a bit, but any substantial inflation still seems a ways off. The global economy is still somewhat sluggish and Brexit’s impact will be long lasting as they untangle the UK from the EU. Ironically, Europe’s uncertainty is probably decent for the US in the short run as investors look for safety.

  • Uncertainty may be mistaken for inflation and part of the post-election bump in rates.
  • Shorter term mortgage products will emerge as alternatives to the 30 year mortgage we are used to seeing in the middle to upper 3’s.

A quick note — all bets are off if the new administration chooses to restucture their relationsip with Fannie Mae or Freddie Mac as some have suggested they might. If these two entities are fundamentally modifed, the entire housing landscape will change considerably.

(And here is a good primer on how interest rates are determined)

The current inventory situation…

Inventory is still an issue and has caused increasingly active spring markets. The distribution of sales has become more and more centerned around the early and late spring.

  • Inventory is still extremely tight, especially where new houses cannot be built
  • Where new homes can be built, inventory is more in balance
  • ‘Affordable’ is still lacking

The following graph shows the number of available homes for sale in any given month going back 10 years.

The number of available homes is off over 50% from its height in 2008/9.

Pretty crazy, isn’t it?

The following graph shows the number of houses ‘under contract’ during any given month going back 3 years.

From January to May, the number of homes under contract increases by 100% and then falls quickly once the summer hits. And each year the peak has increased.

You need to be prepared.

How will the political climate impact the industry?

I think we are all still guessing but most of the initial indicators are for a more ‘business-friendly’ mentality from DC.

  • Think of the new administration as more likely to repeal rather than add more regulation
  • Regulation tends to hurt the little guy and stifle competition
  • Expect a more ‘business-friendly’ environment

(Here is what we wrote about Dodd-Frank and the CFPB last year)

What is up in the world of new houses?

home building remains healthy for the most part, but higher priced new homes are not as strong as those in the middle and lower price points. Oh, and we need more affordable new homes.

(for a little more on dealing with a new home builder, here are some of our thoughts)

How about new new projects within the city?

A lot of really good choice right now.

What to avoid doing as we head into 2017 ?

If you are entering the market for the first time in a while, it is not what you remember. The spring market is hyper-competitive.

  • Waiting too late to get started/not being prepared
  • Relying too heavily on Zillow
  • Relying on one data point/anecdotal evidence rather than looking at the big picture
  • Assuming that the fall market is similar to the spring one

(Here are some tips about how to use the sales data to your advantage)

Things to be cognizant of as we head into 2017?

Lots of development momentum in a lot of Richmond’s areas. Scott’s Addition is on fire and Manchester is poised to become its own city.

  • Repeal versus new processes
  • Broad Street has never been healthier
  • Scotts Addition
  • Ballpark
  • Manchester

(For more on some of the things we think are important in the future of Richmond, read this…)

Thanks for reading and if you have any other questions, please let us know and we will be more than happy to answer them!

Good luck to all in 2017 and if we can help in any way, reach out to us.

Sarah, Rick Jarvis, and Team

Winning in the Spring Market

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Just so you know — its coming — and it is not going to be pretty.

‘And what, exactly, are you referring to?’ you may ask.

I am referring to the spring market — and if you are planning to buy a home this spring, you need to get prepared to be a part of what is going to be a likely unpleasant experience.

Are you prepared?
Are you prepared?

Wait, what?!? Buying a house is supposed to be wonderful and satisfying and amazing and fulfilling! It is where are going to raise our family and put down roots. We are going to have a green yard and a white picket fence and the birds will chirp, the flowers will bloom, music will play, and we will skip through the front door to our dream house and make our entire family dinner on holidays and have friends over for barbecues! And we will get a 3% mortgage and build equity and experience the American Dream! What are you talking about?!?

Sorry to burst your bubble, but that is not the case.

Buying a home should be all of the things mentioned above, and more. And it still can be — if you know what you are doing. But if your expectation that you, as the buyer, are in charge, then you will be sorely mistaken.

Warning that this is a bit of a long post, but an important one. Just know that buying a home in the spring market — for the best price and best terms — is not a 3 paragraph article.

The Concept of Market Balance

Seller's know it is a seller's market -- expect them to act like it.

Generally speaking, markets can either be ‘Buyer’s Markets’ or ‘Seller’s Markets,’ depending on which side market conditions favor. As the names would suggest, a buyer’s market is when there are more sellers than buyers and the buyer’s get to dictate terms. And as you can imagine, the converse could also be true.

Many different metrics exist to measure market balance — but the number one measurement to determine who has the power is inventory. Real estate inventory is measured in months of supply, which tells us that if no new homes were to come to the market, how long would there be an available supply of homes to buy.

Inventory is computed using two factors — the number of available houses and the rate at which they are being absorbed.

  • 1,000 homes for sale / 100 per month being absorbed = 10 month supply
  • 1,000 homes for sale / 200 homes per month being absorbed = 5 month supply
  • 500 homes for sale / 250 homes per month being absorbed = 2 month supply

The market is generally considered “balanced” when you have roughly 6 months of supply. Anything less is considered a sellers market and anything more is a buyers market.

Other metrics to consider include seller discounts, marketing times, and of course, pricing.

What do these charts tell you?

As you can see, inventory across the region is incredibly low. We entered a seller’s market in 2013 and it has only gotten more pronounced.

The discount sellers are willing to take to sell their home also ebbs and flows throughout the year — by sometimes as much as 3% or more.

And the difference in marketing times is striking, too. As the spring market accelerates, the times houses spend on the market decreases by a factor of 3.

You guessed it, we are in a pretty strong seller market.

Buying in a Seller’s Market

So I haven’t scared you off yet?

Great! Just remember that while difficult, buying a quality home in a seller’s market, especially when you are in an inventory constrained sub-market (the Fan and Museum Districts, Near West End, Bellevue come to mind), can be done if you know what are doing.

Lets talk about the best way to go about buying in what is an extremely strong seller’s market and come out of it with the house you want, at the best price achievable, and with your sanity still somewhat in tact.

Adjust Your Mindset

A cool head and an objective heart are keys to navigating the spring market.

What we tell our buyers when buying in a strong seller’s market is to adjust your expectations — on all fronts. Seller’s behave differently (ok, poorly) when they have the upper hand and you need to be able to deal with it. They respond late, don’t honor dates, refuse to make repairs or reasonable concessions and often times just act kind of jerky.

The need for objectivity in your actions is key. While house hunting is emotional, fight the urge to get angry when things don’t go your way. A house is an asset, nothing more. There are literally hundreds of thousands of them in our market and anywhere between 15,000 to 20,000 transfer in any given year. Don’t take it personally.

Any house that is worth owning is going to have multiple buyers seeking it and odds are, you need to understand that the likelihood of having to navigate a multiple offer situation is high.

Know Your Market

Right alongside of having the correct mindset in terms of importance is knowing the marketplace.

Looking online is not enough to really grasp where values are going to be this spring. You have to put your work in and get into houses. It takes time and it takes energy (both yours AND your agent’s) but without doing your homework, you will not be able to pull the trigger on the home when the opportunity presents itself.

And note that not all submarkets are created equally.

It is important to remember that the strength of individual markets may vary. Don’t assume that your friend’s experience in Midlothian will mirror yours in Jackson Ward. 23220’s inventory is far different than 23113 — so make sure to look at the fundamentals of the specific market you are buying into. Your agent should be able to use the propriety tools within MLS to help you assess your specific market’s balance.

Beware Comparable Sales

Buyer: ‘But the house down the street sold for $365,000 last fall. We want to offer $365,000.’
Agent: ‘That was last fall — this is this spring.’

All comparable sales are not created equally.

I often ask people if they drive their car looking in the rearview mirror. Their answer is invariably ‘no’ — yet the real estate market asks you to do exactly that. Values for houses are largely driven by what happened in the past.

It is unfortunate.

A past sale (comparable sale) is not a constant, it is simply one measurement of what market conditions were in a prior time period. A myriad of factors — the interest rate, inventory, absorption, buyer and seller motivation — all were inputs to the sale and likely differ from current conditions.

You can’t necessarily use last season’s values as the gospel when it comes to a fair offer price when the market is accelerating. It is best to pay particular attention to the listings under contract to get a sense of the spring pricing levels (you can read more about that here.)

Be Prepared, Move Fast and Offer High

All battles are won before they are fought -- Sun Tzu

Q: What is the best way to win a bidding war?
A: Don’t get into a bidding war.

The speed at which a good home in the spring gets shown and receives offers can be unnerving.

Waiting to go see the new listing until when it is ‘convenient’ eliminates the ability to buy it before anyone else has had the chance. When a new home hits the market that matches your parameters, stop what you are doing and GO SEE IT!

I have seen far too many people wait until the weekend and find themselves in a bidding war that could have been avoided had they gone in on the day it hit the market.

Winning with Terms

A contract is roughly 10 pages and only one is dedicated to price

Remember, a contract is made up of price AND terms (and we wrote an entire post about this very topic here).

While price matters, the remaining terms can matter a great deal, too. Understanding what the seller needs and using that to your advantage is key. As a matter of a fact, we wrote a post about using ‘currency’ to buy a home (you can read that one here) and it discusses using terms to strengthen an offer that cash cannot.

First and foremost, sellers crave certainty (at least the smart ones do) and offering a contract with as few contingencies as possible is a great way to win the deal when in competition. Waiving of appraisal clauses, capping inspection requests, and large down payments can go a long way in making your offer preferable over others.

Also know that offering flexible closing and/or possession dates can be extremely effective, especially when the seller needs to go find another home. If the seller needs you to close quickly, then be prepared to do so and if the seller needs to rent back for a week, be open to the idea. The more you make them jump through hoops for you, the less likely you are to win the deal.

Highest and Best

In most cases (not all, but most) when there are multiple offers and several are similar, the listing agent will call the agents of the 2 to 3 best offers and tell them ‘Highest and Best.’ This term generally implies that you have one chance to sweeten the offer (or stand pat) and the seller will choose the best one.

Just remember, when you are confronted with a call for ‘highest and best,’ this means you are probably close to having the winning bid — and that is a good thing. Sometimes a small price adjustment and tweaking some terms might do the trick.

But often times, the call for ‘highest and best’ means you might have to use the …

Escalator Clause

Escalator clauses need to be thought through carefully

Ok, so you went to see the new listing on day one — just like you were supposed to. When you were done, you immediately walked down the street to the local coffee shop and wrote the contract. You offered full price, are willing close in 30 days, waived the appraisal clause, and agreed to absorb the first $5,000 in repairs discovered in an inspection. You also included a handwritten note to the sellers telling them how much you love the house and are going to care for it AND agreed to allow them to rent back for free for 30 days for a mere $100.

And guess what, they got 5 other offers besides yours. Really?!?

If you still want to win the home for the least amount possible, you probably need to employ an escalator clause. An escalator clause is used when a buyer’s final price is determined by the next highest offer. Generally speaking, an escalator clause will declare that a buyer is willing to pay $X for the house but if another offer is higher, then the escalator will exceed the next best offer by $Y amount with a cap of $Z, regardless of the next best offer.

When you introduce that many new variables into the equation, the possibilities increase exponentially. Just know that each situation is unique and there is not a single winning strategy. Using the escalator clause properly is a practiced art and when used correctly allows the buyer to purchase the property for the lowest price possible, given the competition.

And while we would love to go into our strategies behind the use of the clause, we don’t want to give away our secrets as we might be using them to help you win a deal this spring …

You Don’t Always Know

If you give it your best shot and lose, so be it. Someone just wanted it more than you did.

The most unnerving part of the entire multiple offer scenario is operating in the dark. In any competitive situation, you really are making educated guesses in an information vacuum.

Most times, you don’t know what the other offers are (unless you win and are using an escalator clause and get to see the next highest offer.) Sometimes the listing agent will tell you (in hope of driving the price higher), but most of the times you are trying to extrapolate as much information as you can and use whatever nuggets of intel you can garner to help construct an offer.

Sorry, it is just the way it is — but the key takeaway is that so is everyone else.

I have seen clients offer on a home, lose the bid, and get mad at the agent. While I understand the frustration in a loss (especially if the buyer has lost multiple times), it is rarely the agent’s fault. If another bidder wants to win, they will.

Remember, your agent does not control the other offers made and does not control the seller’s motivation for accepting the offer they choose. All you can do is make the offer you are comfortable with and let the chips fall where they may.

Use a Reputable Lender

A reputable and experienced lender is a huge part of winning offers.

So you up your deposit, offer more than full price, AND include an escalator clause. As a part of the offer, you include your pre-qualification letter through LoanCo.com, the Internet’s #1 Lender of Residential Mortgages. The sellers take the other offer.

I cannot stress this enough — using Lending Tree, USAA, Quicken Loans, or any other online lender will lose you the deal almost every time. Similarly, using your college roommate’s friend from Baltimore to do your loan is also a terrible idea (and no, their rates are not cheaper. Despite what they advertise, they are not — especially once you miss a closing date — but that is another post for another day.)

Any decent agent will tell you that the use of an online or out of market lender is a recipe to lose the deal. Agents all know the local lenders and they know us — when they screw up it hurts their business and damages their reputation. When we see an online or non-local lender, we know that no one in the deal, buyer, seller, or agent has any sway or influence and when the issues arise, there is no recourse.

If you want to win, shop for you mortgage locally.

Summary

Yes, this is a long post — but buying a home in the high velocity market is, in itself, a complicated process. Frankly, it is a nuanced and subtle skill that few agents truly understand.

Much in the same way that the tools don’t make the carpenter — a license does not make an agent. Choose an agent who understands the strategy of winning offers in the hyper-competitive environment. An agent with a record of helping clients not only securing the home the seek, but doing so at the best price DESPITE the competitive landscape is worth their weight in gold.

Use their experience to help you navigate the complex set of decisions that drive winning in the spring market.

Market Caps

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marketcaps‘Too big for the street.’
‘Overbuilding.’
‘The white elephant.’

All of these terms are a way of describing a home that somehow is out of place from a value perspective. Perhaps it is too nice or perhaps too big — but the home exceeds what the market would be willing to pay for it based on its location.

What is a Market Cap?

Imagine a neighborhood of modest vinyl sided 2,000 SF two story homes with 1 car garages whose average sales price is $300,000. And then imagine you see a 4,000 SF 5 bedroom home, made of brick, with exotic hard wood floors, central vacuum, pool and hot tub and a 3 car garage sitting right in the middle. Do you think that the brick home will sell for $600,000? I doubt it.

A market cap is nothing more than a price above which people are unwilling to pay in a certain area — regardless of how good the deal may appear or how many features the home may have. Generally, the egregious violations of the market cap concept are relatively easy to spot — as in the example above.

But finding market caps can become far more difficult when you are looking at infill opportunities or substantial renovations.

How Do You Find a Cap?

Finding market caps is as much art as it is science, but if you know how to look, spotting caps can become relatively easy.

The Multiple Listing Service (MLS) tracks all sorts of statistics — from home size, age, features and materials to a tremendous amount of data about geography, prices and marketing times — and we can use the data to look for radical changes in behavior.

Take a look at the chart below — when you plot the marketing times for houses against the % of asking price that sellers receive in the Lee Davis High School District, you see radical changes in buyer behavior above $500,000. Both marketing times spike and % of ask plummet — effectively saying that the market is substantially less willing to pay more than $500,000 to live in this area of town. And when you creep above $600k, the resistance is even more pronounced.

 

Lets compare Lee Davis to Midlothian High School — you see a gradual softening in demand become far more pronounced in the middle $500’s.

And finally, to Deep Run High School — you see pretty consistent demand until you reach the $700k mark — at which point demand begins to soften.

 

As you can see, geography influences caps. Each area has a price above which buyers are hesitant to pay and it can be found by looking for sharp departures in market behavior.

Why Do Caps Matter?

Using the examples above —

  • Would I buy a home for $800k in the Lee Davis HS District? Not if I knew I might need to sell it quickly or in the near future.
  • Would I feel comfortable with spending $200,000 on a renovation on home in Salisbury (Midlothian) that I bought for $400,000? Probably …
  • If I were a builder, would I build 10 new $1M speculative homes in the Deep Run HS District? Nope.

At the end of the day, we all need to be cognizant of where caps exist, if for no other reason than to protect our investment. Just because the home will appraise or just because the ‘per foot’ value seems to be in line does not mean the market will agree when it comes time to put the For Sale sign in the front yard.

Be aware.

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How Do I Schedule a Showing?

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kendall@richmondrelocation.net

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