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An Insider’s Look at Online Search

October 21, 2014 By Rick Jarvis

Want to know the best way to search for homes online? See the chart below.

The explosion of online search sites has changed the landscape for both the public and Realtors as it relates to searching for a home…both good and bad.

The good is that the information the public seeks is far more available than it ever was. The bad news is that not all search sites are created equally.

At the end of the day, the ‘closer’ the site is to the local MLS, the more accurate it is. Without going into boring technical details, the MLS (Multiple Listing Service) is the most accurate database of both available homes and sold ones. Not only do Realtors use MLS, Appraisers use it as well due to its accuracy.

The public may only have access to the MLS database via a ‘Client Portal.’ This can only be set up by a licensed Realtor who is a member of MLS and the information therein cannot be displayed publicly.

IDX Search sites (the one you are on right now) is a very close approximation of the FOR SALE (not SOLD) properties available and pulls its data directly from MLS. Since an IDX feed is published by the MLS, it is subject to a very specific set of rules as to how it can be used and its accuracy is directly related to many of these rules. Generally speaking, an IDX search site will be accurate to within a day or two of real time meaning any change in a property status will be reflected usually in no more than 48 hours from the change. IDX does not show sold data.

Trulia and Zillow do not receive data directly from MLS and thus are far less accurate in both property availability and status (ACTIVE, SOLD, UNDER CONTRACT). While they have numerous tools available to help predict values and market conditions, by their own admission, are only able to predict values within 10% of the actual value roughly 60% of the time. It should also be noted that the search results are skewed by who pays to be at the top of the list. In effect, T and Z act more as a message board and far less like the true database they claim to be.

Make sure to understand the strengths and limitations of the site you choose to use.

If you’d like us to set up a ‘client portal’ for you that gets you direct access to MLS, just click here.

Understanding Mortgages

August 17, 2014 By Rick Jarvis

The power of compound interest... — The power of compound interest…

I once heard someone say (and I thought it brilliant) that when you decide to buy a house, you are not only buying a home, but you are also buying the money to buy the home. What they were implying is that the price you pay for the money you borrow (the interest rate) will have a significant impact on much your financial life.

How Much Interest Did I Pay? WHAT?!?!

Ok, a $300,000 loan at 5.5% over 30 years requires a payment of $1700/mo (before taxes and insurance) and over the course of the 30 years, you will have paid $317,000 in interest. In effect, a 5.5% mortgage makes the amount of interest you pay for the money you borrow as expensive as the asset itself. While interest rates dipped below 5% and stayed there for a considerable period of time, the sub 5% interest rate is historically more rare than Haley’s comet. The impact of interest will become increasingly more impactful soon as a rate of 8.25% (where they were in 2000) will mean the interest you pay is actually 2x the amount you actually borrow …

American Finance

The majority of American finance is driven by the monthly payment.

Almost all of our bills arrive 12 times a year, from credit cards to utilities to cars to Netflix and thus, we think in terms of impact to our monthly finances. We are a month to month society whose entire debt structure is driven by how much we can afford per month. Ask your local lender for any type of loan and the first question will be about your monthly income…same for the local Chevy dealer. With almost every loan driven by the monthly implication of the payment on monthly income, it is no wonder we think in terms of monthly payment.

So, lets take a look at what is REALLY going on inside of a mortgage and not just what the monthly payment is.

The 30 Year Mortgage

First, the 30 year fixed mortgage in the amount of $300,000 originated in January of 2000

$1,703/mo payment
$613,000 in total payments over the life of the loan
$313,000 in total interest paid over the life of the loan
Last payment due in December of 2029
After 5 years, the balance is still over $277,000
After 10 years, the balance is just over $240,000
After 15 years, the balance is just under $200,000

In 15 years, you have paid off just under 1/3 of your mortgage.

The 15 Year Mortgage

Now, lets explore what happened if you chose a 15 year mortgage in lieu of a 30 year mortgage.
The 15 year mortgage was computed at 4.75%…15 year mortgages tend to trade at .75% less than 30 year mortgages:

$2,333 monthly payment
$420,000 in total payments over the life of the loan
$120,000 in total interest paid over the life of the loan
Last payment due in December of 2015
After 5 years, the balance is $204,000
After 10 years, the balance is $100,000
After 15 years, the balance is $0

How Do They Compare?

Consider these points:

The difference in payments over 15 years ($2,333-1,703 x 180 payments) is $113,000.
The savings in interest is $193,000 over the life of both loans ($313,000 – $120,000)
The debt is paid down by $200,000 in 15 years fewer ($200,000 vs $0)
The $113,000 you invested in your mortgage swings $393,000 in your favor in 15 years.

Stated differently, the ‘extra’ $603 per month you make in payments is really the same as being invested in an investment product whose PRE-Tax rate of return approaches 15%. Additionally, the favorable tax treatment that real estate receives will increase the return by several points (depending on your tax rate). A 15%+ rate of return on cash with little to no risk would make Warren Buffet sit up and take notice.

Amortization_Schedule_Calculator — Use ‘Loan Amortization Calculators’ to help your analysis of potential mortgage products.

Let me repeat…the difference between $2300/mo and 1700/mo is close to $400,000 in 15 years!

So when you look at the impact of mortgage on your purchase, you see that the structure of your debt can make a HUGE impact on your net worth.

Personally, I get frustrated when I hear people talk about the monthly payment with little, if any, discussion about the impact on the actual debt. Much of our collective indebtedness can easily be attributed to a lack of fundamental understanding of mortgage principles, by both the public and the lenders who provide the advice.

Choose Wisely

Am I saying that everyone should use 15 year mortgage products? No. I am saying to secure the maximum amount of debt with little to no understanding of its impact is foolish. Many legitimate reasons exist to stretch your debt to the maximum…but many reasons not to also exist. Question your strategy.

Conventional underwriting looks at your income relative to you payment and not to the actual debt amount. Mortgage companies underwrite you more on how much debt you can reasonably service and not really at how much you can reasonably repay. It is a huge difference.

The takeaway advice is this … spend as much time understanding the loan you seek as the house you buy. Numerous mortgage calculators exist to help you better understand the impact of rate and term on mortgage interest – (List of Mortgage Calculators here)

Looking at homes online (or in person) is a lot more fun than poring over numbers, but securing a poorly structured mortgage is far more costly in the long run than even a poorly constructed home.

How the New Home Building Industry Actually Works

August 10, 2014 By Rick Jarvis

We have talked at length about building a new home in a series of posts.

In this post, we are going to talk about what is really happening when you decide you are going to build a home (or buy a new one) in Richmond. First, we need to offer the following disclaimer – this post is full of generalizations and therefore, not applicable to all situations. We fully recognize that all scenarios will not play out as we describe below…but far more will than will not.

Enjoy…

Reality One – Builders Don’t Love Buyer’s Agents

Builders operate in one of two ways (with regard to sales people) – they either employ a brokerage to represent them OR they hire their own sales people. Regardless of whether or not they pay a salary to their employee or commission to their listing agent, they generally will pay their representative MORE if a buyer’s agent is not involved.

What does this mean? It means that the builder has incentivized their sales team to try to eliminate the buyer’s agent. What does that tell you? Not all builders do this, but most do.
Why do builders do this? Builders win when the consumer has less information and does not understand the process, values or their options.
How to defeat this practice? Get a GOOD and EXPERIENCED buyer’s agent. Every decent builder will have their site agent/representative try to register you…make sure you tell them you are working with a buyer’s agent. Once the site agent knows you have an advocate, they will pester the agent (not you) for follow up and communication will be far more respectful. It changes the tone of the conversation from ‘sales-y’ to ‘informational.’

Reality Two – The Model and the ‘Spec’ Will Tell You What You Need to Know

A nicely decorated model in a subdivision in Chesterfield... — A nicely decorated model in a subdivision in Chesterfield…the kitchen alone probably has $20,000 in upgrades over and above the base price.

Builders tend to fall into two buckets – those who build cheap vanilla boxes and those who build all-inclusive (more) expensive homes. The vanilla box builder will offer a very low entry price, which is attractive, but you will quickly find that everything is an upgrade, and the inexpensive price is not as inexpensive as it seems. (The SPEC home, or speculative home, is a home a builder is building without a buyer, in the hopes one will emerge prior to completion.)

How can you tell quickly? Walk into the model home and then walk into a completed ‘SPEC’ home. If you do not see the same floors, kitchens, backsplash and master baths, you will know you have walked into a situation where everything is an upgrade.
Why does it matter? This is a builder who knows they will win the battle when they get you into their ‘Sales Center’ for your selection session. The ‘selection coordinators’ who help you pick out all of your finishes are trained to upgrade you. Upgrades of $100 here or $500 there don’t seem like a lot until you realize, by the end of the session, you have added 10% or more to the price of your home. The vanilla box at $160/SF just jumped to $180/SF.
How to defeat this practice? You can go to the sales center BEFORE you sign the contract and price the upgrades into the original contract. You do not want to be doing math and feeling pressure while surrounded by the builder’s staff. You will lose. The fewer decisions you have to make on the builder’s turf, the better off you will be.

Reality Three – The Effective Life of Materials

The home was constructed by Lifestyle Builders in and sold in 2005. — The home was constructed by Lifestyle Builders and sold in 2005. It was located by using the MLS access to tax records.

Building codes generally govern how your home is constructed. The improvements to municipal building codes (think – ‘increased regulation’) has helped remove shoddy work from the marketplace (not completely, but largely.) And while instances of true shoddy construction practices have been reduced substantially, the use of subpar materials has not. Almost all materials look good when they are new, but the durability is really what you need to vet, especially on the exterior. The selection of materials is the primary way a builder can cut costs without the consumer having any real idea the practice has occurred.

Why does it matter? The reasons are obvious…you want your home to last. While no home is time proof and all homes require maintenance, siding beginning to fade in 2-3 years from closing is totally unacceptable. Needing to paint trim within 2-3 years means the painter used the least expensive paint they could and wood rot is imminent.
How do you defeat the practice? Realtors have the ability to search for homes based on past owners, making it easy to identify homes built by builders which are 3, 5 or 10+ years old. A quick trip to see a few houses at various ages will tell you a TON about the builder.

Reality Four (and this one is key) – A Buyer’s Agent is an Investment

Many buyers feel that if they do not use a buyer’s agent, the builder will automatically give them a 3% discount. This belief is far from true.

In most cases, the TYPICAL compensation offered to a buyer’s agent for a newly constructed home is 2.5%. Additionally, the listing agent (in most cases) will receive part (or sometimes ALL) of the commission which would have been paid to the buyer’s agent. So, the net effect of forgoing the use of a buyer’s agent is at best 1 – 1.5%…and there is no guarantee that the builder will offer it to you!

Why does this matter? Information matters and so does experience. Having access to perfect information is worth its weight in gold and no matter how much Zillow and Trulia tout their services, their core information is 60-70% reliable (and that is being kind.) Denying yourself access to information and advocacy for a POTENTIAL 1% discount seems foolish. Having an agent who can not only provide you with the most accurate information, but also a deep pool of process and product knowledge, well exceeds the 1%.

How do you find a good Buyer’s Agent?

You already have…meet the One South team

Negotiating with Your Builder

August 9, 2014 By Rick Jarvis

Any successful builder is, by default, an extremely accomplished negotiator. Show me a builder who is poor negotiator and I will show you an ex-builder.

Builders spend most of their waking hours in a confrontational environment. At almost every level of the building process, from lot prices to wood floor pricing to rezoning to salaries to commissions, negotiating is required. Do anything all day every day, especially when your survival depends on it, and you will get better at it. A builder who has been building for any period of time is adept in knowing not only where they stand in any given market, but how to defend their turf with well-honed negotiating skills.

It has been said that builders don’t really negotiate their prices, and while that may be true, it is not necessarily accurate. In reality, they negotiate, just not in the ways that most people think.

Below are some things to keep in mind when entering into negotiations for a new home:

recognize your ‘type’ of builder and know they will fight hard to protect values, especially where they own multiple lots
builders secretly love ‘the change order’ despite what they say
seriously consider buying a ‘spec’
its business, nothing more

Builder Types

Builders tend to fall into two basic categories based on size (or sales volume) and each one will tend to negotiate differently.

Volume Builders (or ‘Track Builders’) sell hundreds of homes a year. They are sophisticated organizations with many moving parts (often in multiple markets) and they behave more like Target and less like Bob’s Used Cars. Volume Builders tend to offer packages or incentives to get homes sold (‘$20,000 in upgrades for all contracts prior to June 30′ or ”hardwood floors in the downstairs for all contract ratified by September 30’) and be less likely to negotiate significantly on any individual home. Their willingness to cut price is driven by a formula and not by a gut feel.

Volume builders also tend to work off of a ‘base + upgrade’ pricing model as opposed to an ‘all-inclusive’ model. They generally build large stripped down boxes inexpensively and then try to sell you every imaginable upgrade when you make your selections. I have seen buyers walk out of selection sessions with 25% higher contract prices than when they walked in. Beware.

A few additional notes – true Volume Builders are managed businesses with quarterly (or yearly) production and sales goals meaning they are typically more aggressive towards the end of a reporting period. Since they buy lots in bulk, they need to protect values in their neighborhood and thus prefer to give upgrades in lieu of price concessions. Volume builders also need efficiency to protect their margins so being able to close out a section and consolidate their crews has value to them. Asking for upgrades, buying the last home in a section and/or towards the end of the quarter (or year) increases the likelihood of a slightly better deal.

The Custom Builder constructs fewer homes but at (hopefully) larger margins. Generally speaking, they build better houses (although not always true) and operate at or above the average price ranges in any metro area. They hate to be in competition with Volume Builders and will leave neighborhoods when the ‘volume guys’ show up.

Custom Builders do not keep a large stockpile of lots and thus less vested in keeping pricing high in a neighborhood. This generally means they don’t really have a strong preference between price concessions or upgrade inclusions. Since they tend to operate in the upper price points, they may have more room to move on price but still maintain a sufficient profit margin. Don’t be afraid to probe a bit with the initial offer.

The Change Order

Builders say they hate change orders but in reality, many take it as an opportunity to renegotiate. A change order is the method by which you and a builder amend the contract to allow for something not in the original contract (add a half bath, change the granite color, put a pedestrian door in the garage, etc.)

When you contract to build a home, the builder prices based on his costs today but delivers the product to you in the future. The 6-12 months of construction time means the builder holds the risk of price increases for materials, labor and interest carry from for a significant period of time. If material prices spike (and make no mistake, prices do fluctuate in the building materials market), the builder does not have the right to come to you and ask for a higher price. Change orders, at least on some level, allow them the opportunity to recapture some lost profit.

Try to keep change orders to a minimum as they benefit the builder far more than they benefit you.

Consider Buying a Spec

The ‘spec’ home (SPECulative home) is a home a builder begins in the hopes a buyer will emerge at some point prior to completion.

[ ‘SPEC’ Homes For Sale ]

Generally speaking, a ‘spec’ will have more options/upgrades included and with a builder more motivated to make a deal. As the home approaches completion, a builder’s motivation will increase. Typically, construction lenders will only allow builders to have a limited number of unsold properties standing at any given time and thus an unsold spec both costs a builder interest carry cost AND prevents them from profiting on another home. One should also note a builder will usually ‘spec’ their better floor plans, meaning the market feels favorably about the design.

While the ‘spec’ may not exactly what you want, it is often the best deal at any given time in the marketplace.

It’s Just Business

Remember, builders not only negotiate with you, the buyer, but with sub-contractors, suppliers and developers. Consequently, their methods may be a bit gruff so don’t be put off by blunt or standoffish behaviors during negotiations. To any good builder, a contract is simply another business decision and they treat it as such. (As a side note, builders are generally pretty straightforward folks and they don’t like tricks…if they feel as if you are not negotiating in good faith, they will be less likely to meet your number.)

For the average buyer, there is far more emotion attached to a home purchase and many times the feelings at the end of the contract negotiation are more contentious than they should be. Odds are, the builder does not feel the same angst as you.

Summary

The decision to build a home should not be taken lightly and requires far more thought and preparation than purchasing an existing home. Entering into negotiations with a builder is also far more complex than buying a resale and in most cases, the builder enters into the engagement with superior experience and knowledge. But remember, ‘negotiating’ with a builder is not what makes the decision to build a good one or a poor one. Making a good decision comes from understanding what you are trying to accomplish, setting limits and knowing where you stand.

We go into far greater detail about many different aspects of home building in the series of posts you can find here...

Things You Should Know When Building a Home

August 9, 2014 By Rick Jarvis

For many, building a new home is still the American Dream.

While some may argue, I strongly believe owning your own home offers a sense of stability, accomplishment and arrival…and owning a NEW home, even more so. Any time a builder hands you a set of keys and you walk through YOUR door into YOUR foyer for the first time is a pretty powerful moment.

That said, with so many options and decisions to be made along the way, the stress associated with building can be overwhelming and having a experienced counselor or advocate to help navigate the process is prudent. Having been in the real estate business since the early 1990’s means I have gone through the new home building process many times…as agent, client and even as a builder. Needless to say, the points made below come from experience, both personal and observational, and I like to think I have a deep reservoir to draw from.

Points to Consider

So what would I like to convey in this post? A lot…

Below is a list of several key points to keep in mind when considering the building process. While this list could be significantly longer, here are a few of the ones I feel are most important:

build with a purpose in mind
know neighborhood norms
spend a ton of time on lot selection
beware the builder’s ‘Selection Center’
know your builder’s reputation
understand cost vs value

We will expand on some of these points in more detail in a series of posts about new home building.

Build with a Purpose in Mind

We commonly ask people ‘is this the house you are going to die in?’ It sounds morbid, but what we are really asking is whether or not you will ever have to sell it.

If you feel you will be in the home for the rest of your life, then build what you want. You can put in his and hers platinum bidets and build the showroom dedicated solely to your antique Bolivian stuffed animal collection without having to worry about resale down the road. In effect, the longer the time horizon of ownership, the more liberal you can be with your decision making.

Homes in the Citizen 6 infill project contained downstairs dens with full baths that could easily become downstairs master bedrooms.

Since few of us are in a such a position, build with an eye to the investment aspects of the home. Treat each choice as a business or investment decision. If you are building a home to take you through the next 10 years of your life, build accordingly. If you are building within a neighborhood of older homes, choose a design which is consistent in style and scale with the surrounding homes. If you are building a home to take you well into your golden years, build a home with flexible interior mobility in mind.

If you know what you are trying to accomplish by building, decision making becomes far easier.

Know Neighborhood Norms

If 90% of the homes in the neighborhood have vinyl siding and laminate tops, do not build a brick front and install granite tops. If you are in a neighborhood with colonial styled homes, then don’t freelance and build a contemporary home. Likewise, if you choose the 3400 SF home in the 2400 SF neighborhood, your ‘per square foot’ value will be limited.

An all brick home with a matching brick retaining wall is inconsistent with the vinyl clad neighboring homes of the subdivision.

The adage about big fish/small pond (at least in real estate) is not necessarily a good thing. Being a little nicer (or bigger) than the norm is probably okay, but when you are 10% or more than the average within your neighborhood, you are approaching a danger zone. (You can read about our study on new versus resale home pricing here.)

Lot Selection is Key

One of the best agents I know (Sarah Jarvis!) drives this point home with her building clients. Buyers tend to focus on the home and less on the lot…which is a mistake. Anyone thinking of building a home should spend a great deal of time on selecting a great lot.

The local county airport is hidden from view but can impact enjoyment of the lots in its flightpath

Remember, the only thing that cannot be duplicated in your home is land upon which it sits. Siding colors, kitchen cabinets, floor plans, deck sizes…all of these items can replicated. A lot is unique (at least in theory) and so many external factors can impact the lot value going forward.

Builders (and developers) often assign ‘lot premiums’ for the lots they feel have more value and I have always felt they get it wrong more than they get it right. It is an opportunity for a shrewd buyer (and agent) to find hidden value. So much goes into a good lot…privacy, orientation, buffer, street layout, future development, drainage, utilities, RPA’s, BMP’s and a host of other factors. Google maps and county websites make this easier than before, but thoroughly vet your lot selection.

Beware the Selection Center

Would you buy a remote for your shower? I saw someone do just that during a selection session... — Would you buy a remote for your shower? I saw someone do just that during a selection session…

Depending on your builder’s size and skill, they may have the dreaded ‘Selection Center.’

The Selection Center is where you go to choose all of the extra bells and whistles you can have in your new home. For new home buyers, it is akin to being an 8 year old at Disney World on Christmas morning who just won the Powerball.

So while you head to the selection center to make many choices (mostly colors of flooring and designs of kitchens), you often times end up finding out what you are NOT getting in the standard package that you thought you were getting (‘But the model had the soft close drawers and central vacuum!!’) Generally speaking, the larger builders will sell the home at a base price and with the goal of increasing your price anywhere from 10-25% at the selection center. Just know that the ‘Design Specialist’ who is there to assist you is pretty skilled at getting you to upgrade.

How you sequence negotiations from the onset can help eliminate the risk of being sold every bell and whistle at your selection session so prepare accordingly. Remember, the fewer decisions you have to make on the builder’s turf (selection center) the better off you will be.

Know Your Builder’s Reputation

The tax record shows a property built by Ryan Homes in 2009. A skilled Realtor knows how to find older examples of a builder's work. — The tax record shows a property built by Ryan Homes in 2009. A skilled Realtor knows how to find older examples of a builder’s work for their clients to by and view and see the type of materials they use.

The internet has made researching a builder far easier…spend time on it (see this set of reviews, for example)

You will never find a builder with a perfect reputation but you will find many are far better than others. Many sites exist with reviews of every aspect of a builder’s processes from material quality to customer service to repair request responses. Understand a builder’s strengths and it will help you achieve a better outcome.

Additionally, I believe that the most powerful way of judging builder quality is to find 5-10 year old homes constructed by the same builder and visit them as ultimately, time reveals flaws. MLS and/or tax records will allow you to search prior owners and ask your Realtor for a list of previous sales roughly 10 years old.

Understand Cost Versus Value

Builders price items based on cost but the market judges items in terms of value…and they are almost never the same. The key in home building is to avoid things whose cost is greater than their value and to build things whose value is greater than their cost.

An experienced agent will have a sense of whether or not a certain feature will add value. Lighting, for example can add panache and impact for a relatively small cost while exotic hardwood floors can be extremely pricy and while interesting, probably do not provide a great cost/benefit ratio. Likewise, the more expensive an upgrade is, the more universally accepted it needs to be. Unique granites and tiles are expensive to install and even more so to change.

Lean on your agent for guidance on the value of upgrades. It is ultimately your decision, but strive to make an informed one.

Summary

Overall, many ways to maximize your new home’s value while minimizing the risk associated with building exist. The items above only scratch the surface.

We go into far greater detail about many different aspects of home building in the series of posts you can find here...

An Insider’s Look at Online Search