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How Much Does $1 Cost? A Critique of Real Estate Commissions

August 28, 2018 By Rick Jarvis

How much would you pay for one dollar?

No, it isn’t a trick question. And no, I am not looking for a finance major to explain time value of money or fungibility or another economic argument about scarcity, risk, or inflation.

Seriously, how much would you pay?

The answer is (wait for it) $1.

So What is 3% Worth?

Now, let’s take the same argument to the real estate world — how much would you pay for 3%?

When you decide you want to purchase a home and you enlist the help of a buyer’s agent, more often than not, the buyer’s agent will be paid roughly 3% of the transaction in the form of a commission. (Disclaimer: Commissions vary by property and company. This post is in no way an attempt to state that 3% is an industry standard.)

“Rarely does the 3% cost of the service equal the value provided by the agent.”

As a purchaser, you don’t really feel it, since the commission is typically paid from the seller’s proceeds. The commission line item is on the seller’s side of the ledger and feels far more onerous to the seller than it does the purchaser.

But I can safely say this: Rarely does the 3% cost of the service equal the value provided by the agent.

Cost Doesn’t Equal Value

So imagine a world where every product or service was the same price. Would you drive a Hyundai or a Mercedes? Would you eat McDonalds or Ruth’s Chris? Would you shop at WalMart or Nordstrom?

The answers are pretty obvious.

“Do you think that the quality of the advice matters – especially when all advice costs the same?”

But when it comes to working with Realtor, every agent costs essentially the same. So why not use the opportunity to choose the best one?

Wouldn’t you like to work with an agent who knows the value difference between a warrantable and non warrantable condo and the impact on property values? Or what about an agent who can demonstrate the 3 year appreciation rate difference between North Church Hill and Bon Air. Or could tell you at what point the marketing times spike and seller discount doubles in the Lee Davis High School district? Or James River High School?

Do you think that the quality of the advice matters – especially when all advice costs the same?

Meryl Streep or Lindsay Lohan

Warren Buffett said it best: “Price is what you pay. Value is what you get.”

Very few industries operate where price and value have as little correlation as real estate sales – and for the shrewd client, this disconnect presents opportunity. Each and every buyer has the opportunity to work with the Realtor equivalent of LeBron James for the same price as J.R. Smith (sorry Cavalier fans, too soon?)

So spend some time researching your Realtor. It is the one place in life where you really have the opportunity to drink Dom Perignon for the same price as Budweiser.

How to Start a Bidding War

August 5, 2018 By Rick Jarvis

Asking Price Means Everything and Nothing at All

Question — of the last 1,500 sales in the City of Richmond, do you know how many closed exactly at the asking price?

Answer — only 268!

So basically, 6 out of 7 times, the price paid and the price asked were not the same. I sincerely doubt that there is any other industry that operates this way.

Our Expectations

If you think about it, what does price really mean in real estate, anyway? According to the numbers above, 82% of the time, price only serves as a mere suggestion and offers no guarantee that what you want for your home is what you will get for your home. As a matter of a fact, there is a 43% chance you might actually get more, if you price it correctly.

For the astute seller, that can be a huge advantage.

When we go to the grocery store, we don’t negotiate for a price of milk. And when we go to the mall, we don’t negotiate the price of a pair of jeans.

So why then, does the asking price for a home and the closing price so rarely equal one another? Because each home is unique and that makes the market highly imperfect.

What Auctioneers Know

For the astute seller, that can be a huge advantage.

I once had the pleasure of watching an auctioneer analyze a potential purchase of unsold condos in a project that was struggling. Their company specialized in buying large swaths of unsold properties at a discount, and then reselling them using advanced auction techniques that drove pricing back up to a level where it earned a tidy profit for their company.

If I can get three (or more) people in the same room that want the same thing, then I get above market value and I get the most seller friendly terms.

It was the following statement that resonated with me — ‘If I can get two people in the same room that want the same thing, I always get market value for the asset. But if I can three (or more) people in the same room that want the same thing, then I get above market value and I get the most seller friendly terms.’

It was a remarkably simple and powerful observation.

Price Determines Behavior

Far too often I have seen sellers use the logic that pricing a property high gives them room to negotiate down and still receive their best net price.

What ends up happening when a home is priced above its value:

The people who need to see their house never end up seeing it because they feel that they cannot afford it.
The people who can afford it aren’t interested because the home doesn’t have the necessary features.

Think of it this way – imagine a 4 bedroom home with 2.5 baths and a 1 car garage priced more like it has 5 bedrooms and a 2 car garage. The buyers who can afford it won’t look at it because it lacks the 5th bedroom, and the buyers who need 4 bedrooms won’t even see it because it is above their budget.

So what ends up happening? A series of price reductions follows and the opportunity to create competition for the property is squandered.

So what ends up happening? Buyer traffic is low and urgency is non-existent. Typically, a series of price reductions follows and the opportunity to create competition for the property is squandered.

Multiple Offers Means Competition … and Possibly, Escalation

As a seller, the goal is always to have multiple offers submitted on your property – the competition amongst the buyers generates a really good price and seller friendly terms.

12 offers on one house. Do you think the seller got some friendly terms?

Competition amongst the buyers generates a really good price and seller friendly terms.

In many of the hotter markets, a multiple offer scenario generally means that several of the offers will contain an ‘Escalation Clause.’ An escalation clause basically says that the offering price will rise to the level of the next highest offer and then exceed it by a stated amount.

So when you have multiple offers with escalation clauses, they end up creating their own little auction. More often than not, competing escalation clauses drive the offers not just above the asking price, but substantially above the asking price.

Remember, Offers Contain a Price AND Terms

When it comes to making (or accepting) an offer on a piece of real estate, the contract that binds the buyer and seller contains about 2 paragraphs on price, but another 10 pages that discusses the terms. Financing terms, inspection times, personal property, contingencies, title, settlement dates, possession dates, closing costs — all of these items (and more) are a part of the purchase agreement and can drastically change the overall value of the contract.

[ You can read a lot more about writing winning contracts here ]

While you may not think about an inspection and its impact on price, when the buyer is willing to absorb the first $5,000 of any inspection items found, a shrewd seller will understand how that clause alone can impact the proceeds that they are likely to receive.

In other words, it is always about more than just price and knowing how to create the pressure on the buyer to offer the best price AND terms, is critical in maximizing the value in the offer.

Summary

Creating a bidding war is not possible in all scenarios. Properties that are unique or highly priced have a limited buyer pool and creating enough competition to cause a bidding war is difficult.

Don’t let a price discourage competition for your home. Do everything you can to encourage it.

But in areas where buyers are prevalent and inventory low, competition should be leveraged. A property that is both priced correctly and marketed correctly (as well as in pristine condition) will will result in a competitive scenario. And a good agent can help you not only find the perfect price to get multiple parties interested, but bring it to the market in such a way that all interested parties feel compelled to act immediately.

When the market competes, you not only get the best possible price, but you also get far more favorable terms.

Don’t let a price discourage competition for your home. Do everything you can to encourage it.

Why July Defines One South Realty Group

August 5, 2018 By Rick Jarvis

I will always have a soft spot in my heart for July.

My wife is a July baby.
My oldest daughter was born in July.
5 years ago, in July, we moved from our old office into our brand new renovated office in the Fan.

And ten years ago in July, we should have gone out of business.

Before the Bubble

In case you don’t remember, 2008 was the year everything changed for the real estate market. The economy that began to really gain speed in the early 2000’s still seemed to be robust, and though we were beginning to see some weakness at the upper price points, development was healthy and opportunities were all around us.

In the last half of 2007, we had made the decision to open One South. We saw an opportunity for a more progressive brokerage that had both a residential and commercial aspect to it. Everyone thought we were crazy. Perhaps we were; or perhaps just crazy enough to make it work.

We were actively recruiting, making hires, finalizing logos, and doing all of those tasks that you do when you are opening a company.

We were equal parts optimistic and oblivious.

One South is Born

So on January 2, 2008, we opened the doors and went to work. Our new signs went up on properties, our logo was proudly displayed on Main Street, and the Realtor community was asking ‘Who are these guys and where in the heck did they come from?!’

For the first 6 months of the year, we went gangbusters. We had convinced some really great agents to come over and were making a bigger splash faster than I would ever dreamed possible.

We represented numerous redevelopment projects — The Emrick Flats, The Reserve, Tribeca Brownstones, the Cary Mews, and the Marshall Street Bakery — and had quickly developed a reputation as the go-to city development folks. It was a great position to be in.

And then it happened: we had a purchaser of one of our condo units get their loan denied for no real reason. It was 2008 and the middle of July. And for the first time, I sensed that something was bad was happening and it was bigger than we could imagine.

July of 2008

When you are a Realtor in the spring, you are busy.
When you are a Realtor in the spring trying to sell and recruit, manage, market, hire, and grow, you are really busy. And you are aren’t really paying attention to the nightly news and the reports of rising defaults in the subprime sections of mortgage.

So when, on July 30th of 2008, former President Bush signed the Housing and Economic Recovery Act that gave the Treasury Department the ability to prop up a collapsing banking industry, it was the first inkling that this wasn’t a blip on the radar but rather, a long and cold winter was coming.

For a company as small as ours, with no history and little working capital, we had big problems on our hands.

We Were Lucky, and Good

Maybe it was fate, maybe it was intelligence, or maybe a little of both, but we had aligned ourselves with smart people and smart bankers. We all recognized that we needed to figure out the best way to get our collective exposure down and get the unsold units we were marketing sold and sold fast. And if Fannie Mae and Freddie Mac were not going to make loans, we needed to figure out a way.

We worked together. Price adjustments, creative incentives, some good hard nosed selling, and a dogged determination to succeed got us through and even earned us several new engagements. We developed a bit of a playbook for solving problematic projects (that we still use today) and earned the equivalent of a PhD in mortgage finance.

Slowly but surely, we managed to maintain growth despite a market that lost 30-50% of its value and a Realtor population that dropped by nearly the same amount by the end of 2011.

July of 2013

But by 2012, we could feel the change coming.

Inventory levels were falling. Prices were leveling out. Banks were coming out of receivership.

We decided to double down on ourselves and started looking for our next home. In December of 2012, we were able to secure 2314 W Main Street, the old Kicker’s HQ, known to all for the soccer player murals on the side of the building and construction began.

7 months later, in July of 2013, the renovation was complete and we took possession of a 8,000 SF mixed use industrial chic renovation in Richmond’s Fan District.

It was a proud moment and a testament to how far we had come.

July of 2018

We recently had an event in our space to celebrate One South’s 10th birthday. We invited many of our architect, contractor and developer clients who had allowed us to help them dream and execute their vision through the creation of new housing.

And in doing so, it gave us time to reflect back on what we had done in our first decade:

We opened with 5 agents and 1 staff member. We now are basically 100 agents and staff in two locations.
We sold a little over $20M in real estate in our first year. Last year we sold over $200M in real estate.
When we opened, we had 4 projects we represented. That count now exceeds 30.
Maybe 5% of our business came from the commercial side in 2008. We now have about 35% of our business come from our rapidly growing commercial team, including two $20M+ sales this year.
And finally, we have been named in Richmond Biz Sense’s RVA 25 for the past two consecutive years as one of Richmond’s fastest growing firms (the only real estate brokerage to make it back to back!)

July of 2028

So as we prepare for fall of 2018 (is it really August already?) and continue to fight the inventory shortage, we are full steam ahead.

We continue to work on creating a better experience for our clients and our agents, and to grow our own knowledge and capabilities. The real estate market is ever changing and the minute you think you have it figured out, you find yourself playing catch up.

We can’t wait to write the July update in 2028.

It’s Okay to Pay More

June 26, 2018 By Rick Jarvis

I know it sounds like it goes against everything in your core. Real estate is negotiable and a good deal means a big discount. Right?

Well, that is not necessarily true any more.

Price is Not Value

The price of anything — a house, a car, a gallon of milk — is the owner’s estimate of what they think their product can command.

But the value is what the market is actually willing to pay.

Ask yourself this: If every house on the market was simply labelled as ‘available’ with no set price, how would you, as a buyer, behave? In this market, that might be the best way to think about it.

Musical Chairs, Sorta …

Do you remember the game of musical chairs — where there is always one more person than there are chairs. Well, instead of ten people and nine chairs, imagine the game with ten people and one chair.

This is what the market has become. It’s a ridiculous comparison, of course, but it applies. Low supply and high demand means prices rise — and right now, the supply of homes has never been lower.

Show Me the Numbers

The fact there is an inventory shortage is pretty well known. The issue is very few understand how extreme it has become.

Check out how much the market has changed:

In May of 2008, there were 11,000 homes on the market and 1,200 under contract (a 9 to 1 ratio.)
By May of 2011, there were 8,800 homes on the market with 1,200 under contract (a 7.3 to 1 ratio)
By May of 2017, the numbers were 3,800 and 2,300. The ratio had fallen to a never before seen 1.65 to 1.
And now in March of 2018, 3,000 and 2,100 is where we stand for a ‘you have got to be kidding me’ ratio of 1.42 to 1.

And when you look at some of the mature urban markets, especially those that are supposedly affordable, those markets have actually inverted with more houses under contract than there are homes available!

Per the chart above, the Museum District and Windsor Farms area has only one house for every three buyers! (April 2018 shows 18 active listings vs. 56 pending sales.)

Competition is fierce, to say the least.

There is No Fix

Here’s the bad news, there really isn’t a fix.

For one, we are not going to build our way out of this problem.

Housing can only be built (in any substantial quantity) in areas where there aren’t already houses. In other words, the only place we can build houses is in the outer suburbs — further and further away from the urban core. And for many, what is quickly becoming a 40 or 50 minute commute simply isn’t an option.

On top of that, the price of home building materials has never been higher and the labor pool has never been smaller, resulting in correspondingly large cost increase in new construction.

Two, owners where houses are few and far between are electing to simply stay put. Why? Because once you sell a home, you have to go buy another one – and why would any seller in their right mind sell their home only to have to go and buy another one in this crazy market? Especially if they have a 3% 30 year mortgage and their equity is rising as rapidly as it is?

The situation we are in is going to be here for quite some time.

The Lesson — Don’t Mistake Tactics for Strategies

The decision to buy or sell is a strategic one. But how you buy or sell is a tactical one.

Paying over asking price does not mean you or your agent is a bad negotiator — nor does waiving inspections, or appraisals, or offering rent-backs (provided you are not putting yourself in financial danger!) All it means is that you are doing what you can to secure an asset that is in demand.
We get it, the inventory crisis is causing some of the most extreme market conditions in history, which is unnerving to navigate. And yes, we fully acknowledge that it takes a time or two to really figure out what you need to do to win.

But just know that the smartest people in any room want to own the most valuable assets available and will do what it takes to secure them. And for the best houses in the best neighborhoods, there is going to be intense competition. You have got to come correct if you want to win the battle.

I know it is difficult to hear, but today’s market doesn’t resemble the markets of the past – even the very recent past. Make sure to adjust yesterday’s strategies to today’s conditions and don’t mistake paying asking price or above with a poor decision.

The Inventory Divide, and Why it Matters

May 17, 2018 By Rick Jarvis

A Home is an Asset

For those who know me, I’m not about the ‘house of your dreams’ narrative – I am pretty objective in my approach. I want my clients to understand the underlying value of what they are purchasing and not allow emotion to override logic.

Statue of Liberty — America is the land of opportunity, right?

That said, I fully acknowledge there is a powerful emotional aspect to buying a home. Regardless of whether it is your first, third, or even the twentieth home, each connect you to a specific period in your life. Selling a home feels like closing a chapter, and when you buy one, a new chapter begins.

Sticks, Bricks, and a Vehicle for Wealth Creation

In the simplest sense, a home is nothing more than a stack of sticks and bricks on some dirt that keeps your stuff dry …

Yet despite the emotional attachment, in the simplest sense, a home is nothing more than a stack of sticks and bricks on some dirt that keeps your stuff dry. While we want to attach value to the colors of our walls, the shape of our exterior, and the brand of our appliances, in the grand scheme of things, housing is no different that any other asset whose value goes up or down given economic conditions.

And 2007 through 2011 notwithstanding, owning a home has created more wealth for the masses than any other asset class in history.

This is what has me worried.

No Crash on the Horizon

To begin, I am not worried about another crash. I have lived through two of them (1987 – 1992 and 2007 – 2011), and the current market looks nothing like the last two that crashed.

The current market looks nothing like the last two that crashed …

In both of the prior crashes, the economy was overheated and there was a tremendous oversupply that had been created to try to keep pace with a dizzying demand.

Currently, the economy is solid, employment is high, inflation is still shockingly low, and while the world is never fully at peace, there is relatively little global unrest (at least compared to prior periods) – and inventory is at all time lows.

Is there a correction coming? I think that some are beginning to predict a slight pullback at certain price points in 24 to 36 months. But I firmly believe that a crash is not imminent.

The Housing Divide

A home is quickly becoming an asset that only the wealthy can afford …

No, my worry is as follows — the price of housing is at the precipice of exceeding affordability for the average American, preventing an entire segment of the population from ever having access to home ownership.

[ And this recent article in The Atlantic seems to back the same narrative – especially Section 6 ]

In effect, a home is quickly becoming an asset that only the wealthy can afford, and, over time, will lead to a deepening of the divide between the ‘haves’ and the ‘have nots.’

Take a look at this chart.

Never has the discrepancy been greater, and I think that is a tragedy.

The blue line represents home ownership levels. In other words, what percentage of the population owns their own home.
The green line represents the median price of a new home.

Notice a trend??

Pricing is accelerating despite historically low ownership levels. The obvious implication is that as prices rise, fewer people will be able to buy – and we can see this playing out right before our eyes. Right now, due to a host of factors which we will touch on below, housing prices are increasing at a rate that is pushing ownership beyond the reach of far too many people.

Never has the discrepancy been greater, and I think that is a tragedy.

Time to Build More, Right?

An economist would argue that the problem will solve itself: As prices rise, more producers will be attracted to the market and supply will increase.

But that simply isn’t happening.

Take a look at this chart showing the number of new homes being built:

Again, notice a problem?

Despite the fact that housing is undersupplied and pricing is accelerating, we are still drastically under-supplying a market that desperately needs relief.

The Problem is Systemic

The problem is about price AND location …

Perhaps the underlying problems were already manifesting themselves as early as 2000 and we simply didn’t see it as the rapid price increases were masked by a insanely lax lending standards. But the issues are more than visible now.

Effectively, the problem is about price AND location. We cannot add supply at anything approaching a reasonable cost, and we absolutely cannot do so in areas where the populous wants to buy.

Issue One – Construction Costs are at an all time high

Building costs are through the roof (no pun intended.) Construction material costs have skyrocketed and the construction labor market pool simply isn’t there, causing extreme wage pressure.

When your material costs are up 30% and your labor pool down 50%, costs spike. And I don’t see an quick solution.

Issue Two – Governmental Mandates Mean Higher Costs

The collective increases become substantial – and the end user ends up footing the bill!

Each bill that is passed to make housing better is done so with good intentions – I honestly believe that. No one wants the US to build substandard and inefficient housing – AND no one wants to see another financial crisis, either.

However, each time Congress, the state legislature, or our local board of supervisors adds another layer of regulation, the cost to build a home goes up.

Each increase in the building code or protection baked into the financial markets is done so with the aim of increasing the quality, safety, accessibility, and energy efficiency of our housing stock. But with each mandate comes increased expense. A percentage point here and an increased fee there never seems like a lot on its own, but over time, the collective increases become substantial – and the end user ends up footing the bill!

Issue Three – Demographic Shifts

Demographics show a population that increasingly wants to live in cities. Urban schools are getting more funding, the commutes are shorter, public transportation is expanding its reach, and the entertainment districts are improving. But yet, the city is the hardest place to build houses.

An incredible 20,000 people came to Richmond in 5 years – and we built a mere 854 houses for them

To give you a sense of the problem – per the 2010 census:

The population in the city of Richmond increased 9.3% from 2010 to 2016, or by roughly 20,000 residents.
In the same time frame, MLS tracked 854 new home sales within the City of Richmond.
- Stated differently, 854 new homes / 20,000 new people = 4.2%
For comparison’s sake, Chesterfield built just under 5,000 new homes in the same frame, or closer to 17% of their need.

Somehow, I don’t think 4.2% of the overall need being satisfied by new housing is going to fix the problem.

Issue Four – Gentrification

If you really want to see a mind-blowing statistic, look at these screenshots straight from the Richmond MLS.

The northeast section of the City of Richmond (Highland Park, North Church Hill, Union Hill) is in the midst of one of the most rapid price increases in the history of the city.

Inside of this zone:

This happened to prices in 5 years:

While that benefits some owners, it leaves many others wanting.

The New Normal

It is easy to build another million dollar home on a cul-de-sac in the latest community 10 minutes further out than the last one – but that is not the cure.

Am I saying that everyone should own a home? Hardly. We tried that once (2007) and it didn’t seem to work out very well.

But I do believe that a housing model in which ownership is reserved for only the elite is an equally dangerous model. America is the land of opportunity and when the idea of owning a home becomes an unattainable pipe dream, that is not a good answer either.

Look, it is easy to build another million dollar home on a cul-de-sac in the latest community 10 minutes further out than the last one – but that is not the cure. We have got to solve the need for reasonably affordable / attainable housing in neighborhoods that aren’t 45 minutes from the urban core.

The next generation of potential homeowners deserves the same opportunity as prior generations did to use housing as a fundamental way of building wealth. Everyone wins when our population has the ability to determine their own financial destiny.