Sarah Jarvis Team at One South Realty

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Uncertainty

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I have never met someone who loves uncertainty.

Making decisions under pressure, not having the luxury of all of the facts, guessing about the future  –– these are all unnerving feelings. But they are all a part of every real estate transaction.

Guess what I do for a living?

I am a broker of real estate. I am a purveyor of uncertainty.

Uncertainty is the Constant

Do you know the only guarantee that comes with buying a home? You own it. Most everything else is largely out of your control.

Your job could change.

Your health could change.

The economy could (ok, will) change.

The school district could change.

They could build an interstate in your backyard … or expand the airport nearby.

A parent might need to come live with you … or a child might move back in.

I could go on and on.

Yet, we ask ourselves to make one of the most important financial decisions of our lives when we really have no clue as to what tomorrow may look like.

Feels a little unsettling, doesn’t it?

So, if you are feeling overwhelmed by the sheer weight of the decision, here are some things to make you feel better.

The Market Tends To Rise

With the exception of The Great Recession (‘08 to ‘11) and the Great Depression (‘29 to ‘35), home values, in the aggregate, have risen.

Has every neighborhood and every house gone up in value? Of course not, but when you look at the overall market, the answer is that in roughly 80 of the last 90 years, home values have gone up year over year.

That is pretty consistent performance.

And just so you realize –– there has not been a 10 year period where home pricing was lower overall.

Hopefully, that should make anyone who takes a long view of housing feel better.

2008 Is Unlikely to Repeat

Many buyers, especially those who are entering the market for the first time, only know the results of the cataclysmic financial crash of 2008, and not necessarily the cause(s). While the fear of it repeating seems only logical, the conditions that led to 2008’s crash are nothing like the conditions of today.

One of my favorite scenes, ever (NSFW tho). The Big Short is a must watch if you want to see the 2008 crash from the inside out. And RIP Anthony Bourdain…
 

2008’s crash was about ridiculously loose underwriting (i.e – the creation of unqualified buyers) and a corresponding massive overproduction of unnecessary housing to keep pace with the artificial demand, coupled with some extremely fraudulent practices by Wall Street. Right now, getting a mortgage is more difficult than it has ever been, housing inventory is still down by 60 to 70% and the Dodd-Frank regulations have taken steps to ensure the fraudulent activities of 2008 don’t happen again anytime soon.

Could another unforeseen event cause an economic calamity? Of course, but NOT owning a home isn’t the defense.

Owning is Risky. Renting is Riskier.

Ok, so my house value is probably safe (especially over the long term,) but what happens if I buy a bad house? What if I buy a home that is poorly built or poorly renovated and requires thousands of dollars in repairs? Like what if the AC goes bad the day after I move in and I have to replace the entire unit?

All of that could happen for sure (home inspections tend to mitigate this occurrence), but I would ask the question –– what happens if you don’t buy a home and keep renting? Something worse, that’s what.

The cost of renting is far greater than the cost of even some of the most expensive repairs. Renting now costs anywhere between $12,000 to $30,000 per year … and getting worse. And, with home pricing increasing at roughly 3-6% per year, the cost of waiting 12 months is arguably anywhere from $25,000 to 50,000 depending on your rent and the price of the home you are purchasing.

In my nearly 3 decades in this business, I have yet to see an unexpected $25,000 repair, much less a $50,000 one.

So the risk of ownership, while it isn’t $0, it is far less than being a renter. Don’t believe me, ask your landlord’s opinion.

Perfect Information Simply Isn’t Available

Above, we only touched on the uncertainty of ownership and not the uncertainty inherent in the process.

Think about what goes through your head when you are involved in a transaction –– What is the right offer?? How many offers are they going to get?? Am I paying too much?? Will they accept less?? What if the market shifts?? What if my inspector misses something?? What if the appraisal comes in low?? What if my loan gets denied?? Is my escalator too high or not enough?? What if the perfect house comes out right after I go under contract??

While they are all legitimate questions, there are few concrete answers –– even after the fact. The lack of perfect information means never really knowing the answer for many of the questions we all wish we could answer. At the end of the day, you have to make peace with the vagary of the process and trust that making decisions without all of the facts is not as risky as it might feel.

Summary

While it is in our nature to want to avoid uncertainty, those who succeed the most in this world embrace the uncertainty around them and take advantage of it.

via GIPHY

Knowing that everyone is uncertain somehow makes your own uncertainty far easier to accept. For every question you have, so does everyone else –– and this puts us all in the same boat.

Is ownership for everyone? No, of course not.

Does every transaction work out? Again, no.

And are past results a guarantee of future performance? Nope.

But, right now there is nearly $16 TRILLION in home equity in the US.

via GIPHY

SIX-TEEN TRILLION DOLLARS!

That is $16,000,000,000,000 (if you would like to see it written in numeric form.)

$16T is a substantial number.

Owners get the benefit, renters do not.

So don’t overthink it. Acknowledge the uncertainty, do your homework, and take the long view. Good decisions in housing are surprisingly easier than you might think.

The Escalator Clause

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The Escalator Clause

A quick market update –– As I write this in January, we have already been involved in several multiple bid situations with not just our buyer clients, but with one of our listings, too.

So to repeat, it’s January … of 2019, and the market seems to think it is April … of 2017.

To quote the great Roger Daltry, “Meet the new boss. Same as the old boss.”

 
The Who’s Don’t Get Fooled Again still resonates 40 years after its release, doesn’t it?

When the market is tight and demand exceeds the number of houses that are available, prices tend to rise. And when inventory conditions are extremely tight and multiple buyers want the same home, many buyers will employ a clause that will raise the price of their offer based on what the next most competitive offer states.

This additional contract language is called (in most circles) the Escalator Clause.

What is an Escalator Clause (or EC)?

An EC basically states that a purchaser will, under a specific set of circumstances, increase (or escalate) their offering price based on what the highest competitive offer says.

Pro’s Tip –– The best way to win a bidding war is to not get in a bidding war. When you are in a highly competitive market, act decisively early. When you take your time to go see that new listing, or let negotiations drag, the likelihood of another buyer submitting a competitive offer increases. When two buyers want the same house, the seller alwasy wins …

Instead of simply offering a higher fixed price, the EC creates a conditional offer that can automatically increase based on the price and terms offered by the other offer(s).

Clear as mud, right?

Well let’s explore the EC, step by step.

The Contract Price

In the large majority of purchase offers, the buyer will offer a contract to the seller that states:

  • the price they are willing to pay
  • the terms under which they are willing to pay it
  • the condition of the home that they are willing to accept at settlement
  • the targeted date upon which settlement will occur

These elements, plus many others that are not particularly important to this discussion, are included in any contract offer to purchase a home.

Disclaimer: No two contact situations are the same and thus it is impossible to discuss every possible combination of scenarios. The scenario described below is somewhat typical, but competing offers can vary by price, escalation language, finance types, closing dates, inspection caps and a multitude of different factors. Additionally, the number of offers can have a dramatic impact on the strategy behind how the Escalation Clause is written.

In cases where your offer is the ONLY offer made on the property, a few rounds of back and forth between the two sides are typically required to get the remainder of the terms worked out to each side’s satisfaction –– and an EC isn’t required.

But what happens when two (or more) offers come in on a property? That is when one side (or sometimes both sides) may employ an EC.

Pro’s Tip –– We wrote about bidding wars from the seller’s perspective here in ‘How to Start a Bidding War.’

The EC Contract Price

So while the contract includes a firm price, the EC makes the offer price conditional on several factors including:

  • what the next best (competitive) offer is
  • what the maximum offer is
  • how much the offer will exceed the competitive offer by

Let’s use real numbers.

So let’s say the home is listed for $300,000 and the seller receives two offers.

  • Offer A states that the purchasers will pay $300,000 for the home. It does not contain an escalator clause.
  • Offer B states that the purchasers will pay $295,000 for the home but it contains an EC that states that, in the event that a bonafide competitive offer is also submitted, Offer B will escalate the price to $2,000 above the other offer, but not to exceed $310,000.

In this scenario, Offer B escalates to $302,000 under the terms of the EC.

Disclaimer –– Sellers are under no obligation to accept a higher offer. Furthermore, they do not have to supply a reason why they accepted the offer they did. So even if you escalate your offer to an amount greater than the other offer, a seller may still choose to accept the lower one. While it is not typical to take less, it is probably more common than you think and can be incredibly frustrating.

The Maximum (or Walkaway) Price

Note in the prior example that the EC stated that their offer will not exceed $310,000.

So in effect, regardless of the other offer, in no case will Offer B go above $310,000. This basically puts a cap on the escalated offer so that the purchaser is protected and insanity doesn’t ensue.

This maximum (walkaway) number is critical in protecting the purchaser.

In cases where the purchaser is using a low down payment loan, an offer that escalates the contract price well in excess of the asking price may introduce a scenario where the appraisal will be lower than the contract price. If the purchaser has insufficient funds to cover the difference, the loan will likely be denied and the purchaser could find themselves in a pickle.

Pro’s Tip –– In especially hot market segments, often times two or more offers contain escalation clauses. Winning in a ‘multiple-offer-with-escalators’ scenario requires a cool head and an experienced agent.

Another point to note is that losing a home by a small amount when you would have been willing to pay more is a tough pill to swallow. If you set your maximum at $310,000 and lose to an offer of $311,000 –– but would have paid $315,000 –– it stings. So we always counsel our clients to make the maximum offer the price that, if you lose to a higher offer, you walk away without a pang of remorse.

Sometimes, the other side just wants that house more than you do and there is nothing you can do but tip your hat to the winner and start the search process over again.

The ‘Beat It’ Number

This is key –– the ‘Beat It’ number is the amount by which you will make your offer exceed the competitive offer.

Using the above scenario, if Offer B’s EC said that they would exceed the other offer by $50, would that be enough to change the mind of the seller? Probably not, especially if the other offer contained a bigger down payment or other seller friendly terms.

But what if you exceeded the other offer by $100 –– would that do it? Or What about $1,000 –– is that enough? Or is $5,000 higher required to make the seller take your offer over another one?

Pro’s Tip –– Often times, you make an offer only to find out that during the negotiation process, another offer comes in. In this scenario, you can add an EC to your offer if you feel strongly about winning.

The answer is that no magic formula exists to tell you the correct answer. Just know that the amount by which your EC exceeds the next best offer is case specific and should take into account the strength of the other terms in your contract.

Choose the Beat It number carefully –– the amount by which you will exceed the other offer needs to be enough that the seller accepts yours, but not so much that you are throwing money away or placing yourself in financial distress.

Conclusion

As we discussed in our last blog, the market is on the leading edge of a ‘return to normalcy’ where bidding wars and multiple offer scenarios will become less commonplace. That said, we aren’t there yet and many market segments (affordable/close-in) are still largely undersupplied. Expect to continue to see the need for the EC in these segments.

multiple offers
How do you win an 12 offer scenario? It isn’t easy, but it can be done. A well conceived Escalation Clause will likely be required.

Furthermore, the use of the EC is not the only tactic a buyer (and their agent) can use to win competitive offers. We tell our clients that a contract dedicates two paragraphs to price, but another 10 pages (or more) to the remaining terms. Each one of those terms creates an opportunity for a shrewd buyer to offer the seller a concession that can improve the value of the contract.

So don’t feel that you always have to use an EC to win –– especially if you are a cash buyer or can offer other seller friendly terms.

At the end of the day, the EC is an advanced technique and if applied incorrectly, can cause a buyer to unnecessarily pay more. But when in the hand of a seasoned pro, a properly written EC allows the purchaser to pay as little for the home as possible, despite the pressue of a competitive multiple-bid scenario.

2019 and the Return to Normalcy

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2019 is going to be a transitional year.

In the same way that you might take your foot off of the gas when you see a yellow light in the distance, 2019 will likely be a year where we see some segments of the real estate market lose a bit of their momentum.

‘A Return to Normalcy’ was a phrase used by Warren Harding during his presidential campaign in the 1920’s to define the period of recovery after WWI …

For many, a slower pace will feel extremely odd. All we have known for the past 5+ seasons is rampant price increases and bidding wars. That said, 2019 is likely the year that the frothiest behaviors will subside –– at least in some segments (which we will touch on in a few paragraphs.)

In reality, what we are beginning to see is not a market in decline, but rather <gasp> the leading edge of a normal market.

Disclaimers

First, I need to disclaim a few things.

  • Nothing in this post is guaranteed to happen tomorrow, or probably even the next day –– most of the observations are longer-term in nature and represent a shift in direction, but not a bootlegger’s u-turn.
  • Also, recognize that an individual house value behaves differently than a set (or segment) of houses. Colors, condition, architectural style, yard, appliances –– they all matter to individual buyers and sellers and can impact the value of an individual home. But the behaviors being discussed below refer more to how groups of homes behave in the aggregate.
  • And lastly, any number of unforeseen events could change things –– and fast. Politics, trade wars, real wars, oil prices, and/or natural disasters all have massive impacts on our economy as a whole. And corporate acquisitions, sales, and/or relocations can all have impacts on our region, specifically.

So with that bit of throat clearing, I proudly bring you the ‘What is Going to Happen in 2019’ prediction post (and if you want to see how I did in prior years, you can find 2018’s post here.)

A Return to Comparative Normalcy

What is normal, anyway? Well, we wrote about that very question at the end of 2018. But the takeaway is that ‘what is normal’ is more of a relative question than an absolute one.

via GIPHY

If you asked ‘1993 Rick’ what I thought of a 5% interest rates and 5% appreciation, I would have been giddy with the excitement of how many properties we were about to sell. But when you ask ‘2019 Rick’ the same question, I think, ‘Yeah, 5% rates and 5% appreciation is sure going to be slower than the 4% rates and 10% appreciation of 2016.

The lesson –– it’s all relative.

Does Anyone Remember?

To give you an idea of what a historic version of normal will look like, imagine a market with the following metrics:

  • 6 to 8% mortgage rates (instead of 3.5%)
  • 3 to 4% annual appreciation (instead of 8 to 10%)
  • 45 to 60 day marketing times (instead of 7 to 14 days)
  • 2 to 4% seller discounts (instead of multiple buyers with escalator clauses)

You see, the period from 1990 to 2005 looked a lot different than 2005 to 2018.  

If you asked 1993 me what I thought of a 5% interest rates and 5% appreciation, I would have been giddy with the excitement of how many properties we were about to sell…

And, yes, I get it that many of the inputs are different (demographics, population trends, preferences, architecture, inventory, regulation, materials), but the period of 2005 to 2018 was about as unprecedented as one could imagine.

Honestly, I think a little more stability in housing is a good thing. NASDAQ levels of volatility in housing just isn’t healthy for anyone.

Segments Matter

So in our end of the year meeting at One South, we spent a lot of time on the idea of market segments. Segmenting (stated differently) is nothing more than looking at smaller samples of how connected sales behave, and not aggregating all housing into one analysis.

Pro Tip here –– If you ask an agent, ‘How’s the market?’ and they don’t ask a qualifying statement like ‘Which segment?’ or ‘What area are you referring to?’ then you need to find a new source of your information.

In the same way that New York’s housing market behaves differently than Orlando’s, the new construction market in western Chesterfield should behave differently than Bellevue does –– and this will be key in understanding the new market.

Segments and the Impact of Population

For years, the City of Richmond’s population was in decline. Chesterfield and Henrico were experiencing explosive growth, but the City was not.

Around 2000, the City population trend officially reversed.

In the latter 1990’s, you could feel it starting to happen. VCU was gobbling up properties by the handful and many of the long ignored Downtown neighborhoods began to see construction activity and new businesses popping up.

The population of Henrico and Chesterfield now need to compete with the City for residents and can no longer sustain their growth based on the City’s exodus.

When the 1990’s gave way to the 2000’s, the City’s population began to stabilize at just below 200,000 residents. As we now enter 2019, the population of the City is approaching 230,000, and (by most studies I have seen) is projected to continue to grow.

The Impact of Growth

For the last 5 years, extremely tight City inventory levels and incredibly competitive bidding wars (the worst we saw in 2018 was 18 offers on one house near Carytown, no joke!), especially at the lower price points, has been the norm.

What do you get when your supply is fixed and demand increases? Price appreciation, that’s what.

The growth rate within the City has not only equaled the growth rates of the surrounding counties, but might have actually exceeded them. Any agent who works the more urban markets will tell you that the impact of the growth has been dramatic.

So as long as this trend continues, if you own property in the City, you are probably sitting pretty.

The Behavior of Various Segments

Now when we compare pricing for various segments, what we tend to see is the areas where pricing is the most affordable and closer to the urban core have appreciated the most dramatically. Areas that are further out and/or more highly priced are the ones where pricing has gone up at a slower rate.

Now, with all general statements, there are going to be exceptions, but overall, the statement holds true.  Take a look below at 5-year appreciation rates in different areas of the Metro.

Appreciation_Rates_
These figures only include resale properties, not new ones.

As you can see, the appreciation rate differs greatly.

Does that mean that you have made a mistake or are subject to deflation in the coming years if you live in a suburban area with new construction? Not at all. It just means that you shouldn’t expect that your neighborhood will behave the same as the one with a lower price point or on the other side of town.

And the Reasons, Please?

What do Fox Hall, the Deep Run High School District, and Hallsley all have in common? Fairly high prices to begin with and a great deal of new construction nearby.

What do the Museum District, Bon Air, and Church Hill have in common? Relative affordability and great difficulty in building new homes on any sort of scale.

Simply put, we can’t build houses where we need them most AND we can’t build them at the prices that the market can easily afford.

As we have stated many times before, the ability to provide housing is easiest where land is plentiful. So in areas south and west of Route 288, as well as points east in Henrico, where large tracts of undeveloped land are available, it is far easier to create new communities of scale.

Building is Getting Harder

But as any builder will tell you, not only are they being forced to build further away from the urban core, their costs are skyrocketing (both materials and labor) and the mandates placed on them by the counties are increasingly burdensome.

Take a look at the chart showing what has happened to the cost of construction (labor + materials). The builders aren’t lying when they tell you how much their costs have increased.

Furthermore, the arrival of several national builders is going to change the way new homes are sold in Richmond. DR Horton, Schell Brothers, and Stanley Martin each have the financial backing to build more homes in a quarter than most of the local builders could hope build in a year. The big national builders can gobble up lot inventory, they have their own sales force, and have the capital to build new models for each section of the communities in which they sell.

The Return of Strategic Mortgage Decisions

Let’s shift from home prices to borrowing money.

For the better part of a decade, choosing a mortgage product has been pretty much a no-brainer:

  • What mortgage product do you choose when 30-year fixed rates are at 3.5%? You take the 30-year fixed rate because of the 30-year guarantee.
  • What mortgage product do you choose when 30-year fixed rates are at 4.5%? You take the 30-year fixed rate because of the 30-year guarantee.
  • What mortgage product do you choose when 30-year fixed rates are at 5.0%? You probably still take the 30-year fixed rate because of the 30-year guarantee.

But what happens when 30-year fixed rates are at 6.25% but a 5 year adjustable is at 5% and you only plan on being in your home for 5 to 7 years? The question becomes trickier, doesn’t it?

Welcome to the new (ok, old) world of mortgage finance.

In the 1990’s, we saw clients make the fixed vs adjustable mortgage decision all of the time.

But since rates cracked the 5% floor in 2010, taking the risk of an adjustable mortgage seemed unnecessary.

Where are we currently? We enter into 2019 with rates hovering around the 5% mark. And while no one can claim to be a master of perfectly predicting interest rates, the majority of industry experts feel that 30-year rates between 5.3 and 5.8% (or even as high as 6%) by year’s end are a real likelihood.

So as the spring market emerges and the demand for money increases, the shrewd buyers will keep an eye on the mortgage products OTHER than the 30 year fixed rate mortgage to see how large the spread is.

At some point, the spread between fixed and adjustable mortgages may justify selecting shorter term mortgage products –– especially when the expected hold period is less than 10 years.

Cue the ARM (the Adjustable Rate Mortgage)

Wait, did you just say that ARM’s are good?!? I thought that ARM’s were the thing that caused the financial crisis in 2008?!?

Well, if you don’t underwrite an ARM properly, then yeah, an ARM is not a good product. But no mortgage is safe if it isn’t underwritten correctly –– ARM or otherwise.

So let’s not blame the ARM, let’s blame the true culprit –– shoddy underwriting.

The blue is the percentage of loans underwritten in each year since 2001 that were considered Sub Prime. As you can see, the percentage of Sub Prime is far lower than in the years preceding the crash in 2008.

In the financial crisis of 2008, a great deal of focus of was placed on the Sub Prime mortgage industry. And there was no more abused loan product by the Sub Prime industry than the ARM.

Today’s Arms are Actually Underwritten

The difference today is that the ARMs issued by Fannie Mae, Freddie Mac, and FHA are underwritten properly and also contain caps on the adjustments so that extreme swings in interest rates do not dramatically increase the risk of default. The Sub Prime ARM’s were neither underwritten with any rigor, nor were they capped in such a way as to minimize risk. (And in many cases, they were designed to fail, but that is another topic for another day.)

As an example, a 5/5 adjustable with a 2% cap means a mortgage with a fixed rate for 5 years with a maximum adjustment of 2% at then end of year 5, with another 5 years of the new rate before another adjustment. Is that overly risky? Not when applied correctly it isn’t.

What makes an adjustable mortgage product appealing? The rates tend to be lower –– especially the higher that the 30-year fixed rate becomes.

And while the spread between fixed-rate and adjustable rate products is not quite to levels that justify the switch, it might not be too far off in the future.

So if your loan officer suggests you take a look at an ARM, don’t reject the idea simply out your memory of 2008. An ARM, like a screwdriver or a shovel, is simply a tool. When you use a tool appropriately, they tend to work quite well.

Since 1991

So we (Sarah and Rick) have been in real estate –– as agents, brokers, lenders, developers, owners, and rehabbers –– for longer than we would like to admit. And consequently, we have had front-row season tickets to the booms, several busts, and each subsequent recovery.

We have had front-row season tickets to the booms, several busts, and each subsequent recovery…

What does that mean? It means our advice is based on experience that dates back to the early 1990’s.

  • In 1991, the median sales price of a home in the US was $120,000. It is now $315,600
  • In January of 1991, 30 year mortgage rates were 9.56%. They are now 4.75%
  • In 1991, the average rent was $649. It is now $1,450.
  • In 1991, there was no Zillow and no Trulia. As a matter of a fact, there was not even an online MLS

What else does it mean? It means our team is extremely excited to see times ahead where good decisions will rule the day, and not just momentum.

  • We love the fact that strategic decisions about mortgage are required, and not just blindly electing a 30-year mortgage, regardless of the situation
  • We love the fact that the need to make purchase decisions under multi-offer pressure will likely subside
  • And we love the fact that the data now exists to really help demonstrate the best course of action, and decisions are made based on information, not conjecture

Welcome to 2019, the leading edge of normal.

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.

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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