Sarah Jarvis Team at One South Realty

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Pricing a Home is Predicting Buyer Behavior

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Dear Property Owners,

The entire real estate world is doing you a disservice.

Sincerely,

Past Sales

Beautiful cyber woman with silver ball

Our industry is set up to determine values of homes based on the sale of other homes considered to be ‘similar.’

The determination of what is similar is largely based on location, size, features as well as timing. Sales occurring in the recent past are weighted more heavily than those in the distant past. This method (commonly referred to as the ‘Comparable Sale Method’ or using ‘COMPS’) is the primary basis upon which home values are estimated.

What is a Comp?

The logic behind the use of the COMP goes something like this – if House A sold for $X, House B sold for $Y, and House C sold for $Z, then your house should sell for some weighted average of the three, provided the COMPS used are the most appropriate ones available.

The Competitive Market Analysis (or CMA) that a Realtor performs to determine pricing uses this ‘COMP-based’ method, as does the formal appraisal performed by your bank to determine loan conditions. The Assessor’s office uses a similar method when it assesses your home for tax purposes (they look at neighborhood sales) and Trulia and Zillow use a combination of COMPS and assessments to (incorrectly, usually) arrive at their estimate of the value for your home.

But is this the best method?

The Future or the Past?

Lets ask this – Do you drive a car by looking in the rear view mirror? The answer is obviously ‘No’ as most of us spend most of their time looking out the FRONT window (or looking down at their cell phones, but that is a different issue.) We look out of the front window because we are concerned with where we are going and the dangers our journey presents. Stated simply, we are more concerned with future events than past ones.

We (Realtors, Sellers, Buyers, Bankers, Appraisers, Homebuilders) have all been trained for so long to look at the COMPS for guidance and COMPS are events which have occurred in the past.

Take a look at the chart below – it tracks the trailing 24 months of homes going under contract.  

Do you notice any seasonality? Yeah, me too.

What happens if the three COMPS you used to price your house in June were from April? Or December? Do you think you have made a correct pricing decision?

Comps are Easy, Unfortunately …

The core issue is this – COMPS are easy to measure and thus prevalently used.

It is unfortunate.

The COMP is not a fact, per se, it is a result. The reasons someone else paid a specific amount for a home at a point in the past is a combination of many complex inputs which do not lend themselves to easy analysis. Inventory levels, interest rates, consumer confidence, seasonality, the ‘Wealth Effect’ created by the DOW and NASDAQ, mortgage rules, Dodd-Frank, job growth (regionally/nationally/internationally), population trends … all combine to influence buyer behavior.

When you look at the number of pending sales generated in 2010 (chart below), do you think think that April did a good job of predicting May?

This is not to say that using COMPS to help price a home is without merit as understanding what has happened recently is a good place to start. If you can determine a point from which to begin your analysis, it is of great help. Establishing patterns in past behavior has value…it is just that using COMPS exclusively falls short, especially in a dynamic market. The quicker the market shifts, the less value any individual COMP has (see the example above.)

Pricing Should Look Both Directions

Ultimately, a pricing model is not complete without some projection of future events and relatively simple tools exist to help drive the analysis. While predicting the future is far more challenging, it is not impossible, especially given the almost universal access to information we all have. The tools we use for analysis are cheap and easy to use and some level of predictive intelligence is achievable in almost all situations.

Pricing any asset for sale SHOULD be undertaken with the mindset of ‘what behavior from our audience are we EXPECTING?’ and that can only be achieved by looking into the future, as murky as the view may be.

An Insider’s Look at Online Search

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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.

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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.

Is the 7/23 Dead? Nah…It’s Just Resting

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From 1995-2006, I was a 7/23 addict.

The ‘7/23’ was a loan product with a fixed rate for 7 years which became an adjustable rate product at the end of the 7th year. With the fluidity of the market, people were moving constantly and building equity quickly mattered greatly.

The Hybrids (7/23, 5/1, 7/1, 3/1…and others)

From a lender’s (and Realtor’s) perspective, the 7/23 was the best product ever dreamed up as it offered the best of both worlds – a lower rate and fixed payment.  Effectively, a 7/23 offered the stability of a fixed rate product at rates roughly 2 points below the 30 year mortgage for the first 7 years, at which point it would become a 1 year ARM (adjustable rate mortgage.)  The 7/23 was especially popular with those who knew their first purchase was likely to be a 10 year or less hold and/or move up buyers.  If you were not going to be in the home for 30 years, why pay for the privilege of a rate for 30 years, right?

The 7/23, and with it, a host of other hybrid products which blended fixed periods of varying lengths and less frequent adjustments (than the standard 1 year adjustable products) made a lot of sense.

And then 2008 happened…

The Crash and The Fed’s Impact

When the market crashed in 2008 and the Fed began to buy down the rates, the low pricing on fixed rate products made adjustable products largely obsolete.  Why take the risk of rate adjustment when you can lock a 4% rate for 30 years?  It made no sense to do anything than lock for as long as possible.  Adjustable rate products got placed on the shelf along with the McMansion and the Humvee and we have sort of forgotten about them.

Until now…

The New Mortgage Market

We are coming to the end of an era, folks, and it is the end of the 4% 30 year fixed mortgage.  Janet Yellen (the Fed Chief) has more or less announced the Fed’s stance is about to change and with it, the last of the 30 year fixed rate mortgages will be originated in the early spring of 2015 (probably.)  We will look back in 20 years with our real estate grand kids on our collective real estate knees and tell them the story of the 4% 30 year fixed mortgage products and how they used to rule the lending world.  Our kids will gasp with amazement at the idea that mortgages used to be 3.875% 1+0.  We will also tell them about $70/SF for housing…and pagers…and flip phones…but I digress.

As the Fed begins ease the Quantitative Easing (see what I did there??) which has kept rates so low for so long, we will begin to see rates spread back out more than the 3/4 rate point they are currently.  The market does not really drive pricing (the Fed does) and when they (the Fed) decide lift their foot off of the brake and let the market go back to driving the long bond, then we will see rates rise, especially the further out the commitment (i.e. 30  years).  As rates rise, adjustable and hybrid products will become more and move in vogue.

So What Do We Do?

What does all of this mean?

It means this – decision making is returning to lending.  Right now only real decision a borrower needs to make it when to lock (watch this  VIDEO on ‘Rate Protection’ some lenders offer, kinda cool).  Soon, borrowers will need to understand all of the mortgage products available to them as the difference between the long term and short term rates will increase the complexity of the decision.

Take a look at the rate sheet from 1995 and tell me, what would you have done in January (and let me help, the difference between the 30 year and the 1 year ARM is $454/mo)?

 

HSH_S_National_Monthly_Mortgage_Statistics_-_1995
Rates can move quickly and good lenders understand market forces

 

Good question, eh?

In 10 years, you would have payed over $50,000 in additional interest if you chose FIXED over ARM.  That number decreases dramatically if your payment adjusts up but what if it adjusts down?  Will it go up…or down…and when??  What will happen??  HELP!!!  The bottom line is you need a true pro to help you decide.

Lenders and Guidance

I think the key in all of this is to be presented with facts, options and guidance.  With the prevalence of online sources quoting rates without any knowledge of the market, the customer is the loser.  Quoting a rate is not providing information, despite what the online lending portals want you to believe.  I cannot tell you the number of times a client has had a miserable experience when they tried to use a ‘lender’ with an 800 number and a 5 digit extension whose hours are obviously not east coast.  It NEVER (repeat, N-E-V-E-R) works out.

What are the characteristics of a good lender?

  • A robust and talented crew (often called the ‘Secondary Market Group’) paying attention to Wall Street, The Fed, Congress, Oil, Employment, Housing, weather and about every other input to the market which can drive rates.  They keep the originator up to date when the market swings (and I cannot overstate the importance of their information and the benefit our clients)
  • A direct line to their underwriting department so that they can promise a date by which your application is reviewed and approved
  • A direct line to their processing department so you can see where the loans are and when you can expect paperwork delivered
  • A talented, ethical and diligent group of loan officers who make sure their company can deliver as promised and to meet the timeline you need

Oh, and by the way, they should have some awfully low rates, too.  The best ones always do.

The lenders we work with have all of these talents and skills for sure.  It is why we recommend our clients work with them.

Does yours?

How the New Home Building Industry Actually Works

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iStock_000034020680Small_jpgWe 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

 

 

 

Most Superior Awesome Peerless Pinnacle Realty

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Elite Pinnacle Moon Realty has a nice ring to it...
‘Above Everyone on the Moon Realty’ has a nice ring to it…

We (Realtors) try way too hard.

Our industry, at some point in our past, quit naming real estate brokerages after the founders of the company (or their market location) and began using adjectives and adverbs implying increasing levels of superiority. Glance at any roster of companies in any MLS Board and you will see a list of names suggesting perfection, self-actualization and/or rapture.

I can only assume that there are more than a handful of clients who have experienced less than an ‘elite’ or ‘superior’ experience (or worse) from ‘Super-Duper Elite Realty’ or ‘Awesome Real Estate’ (I actually found a company branding under ‘Awesome Real Estate‘ in Florida!)

Put down the Thesaurus now and step away.

_____ Realty

If we really wanted to name our companies accurately, we should try giving them names like:

  • Consistently 20 Minutes Late Real Estate
  • Never Returned Your Call Properties
  • Probably Should Wash My Car if I am Going to Show Property Today Realty
  • Ill-Prepared Associates

I know I could go on creating names for quite a while and I am sure the public could, too.

Focus on Service

The practice of naming a company after an action verb or superlative term which rarely describes the level of service provided only calls attention to the lack of connection between the promised and delivered results. It hurts us all.

So maybe, instead of trying to outdo ourselves with names that ring extremely hollow, notably arrogant and often just plain ole dumb, maybe we should be focusing on providing what the public wants … knowledge, insight, analysis, value, transparency. Focusing on what our clients want seems so obvious but for some unknown reason, we call ourselves ‘elite’ when our service levle is the exact opposite.

Portals or Agents?

The big news in our industry is the increasingly powerful impact of the online portals of Trulia, Zillow and some ‘yet to be named’ company currently in its beta test somewhere in a garage in Silicon Valley. As we spend our time trying to create a name that makes us appear more important than we actually are, these behemoths, stocked with drawerfuls filled with cash and workstations filled with Stanford graduates, are currently in the process of creating REAL value for the client. And guess what, they are doing it (or at least the public feels that way.)

At One South, we are attempting to do the same thing (adding value, not renaming our company to Superior Elite Best Thing Ever Realty.)  By using the data provided to us by our MLS, applying advanced analysis AND local knowledge (something Trulia and Zillow’s computers in California and Washington will never have), we provide our clients with true insight into the marketplace.

For now, we will keep our boring name and focus on providing our clients with the intelligence and analysis they need to make informed decisions.

 

 

804.201.9683

How Do I Schedule a Showing?

I am Kendall C. Kendall, Client Care Coordinator for the team. I am a licensed Realtor and it is my job to answer questions and schedule showings for the properties shown on our sites. Here's our call policy.
kendall@richmondrelocation.net

804.305.2344

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The Sarah Jarvis Team agrees to provide equal professional service without regard to the race, color, religion, sex, handicap, familial status, national origin or sexual orientation of any prospective client, customer, or of the residents of any community. Any request from a home seller, landlord, or buyer to act in a discriminatory manner will not be fulfilled.

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Chris Lester
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804-307-7033
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