Financing

The Coronavirus Post

March 11, 2020 By Rick Jarvis

I didn’t think I’d ever write a blog like this, honestly.

The idea that, in less than 2 weeks, a heretofore unheard of virus, named similarly to a beer you drink on vacation, could essentially toss a monkey wrench into our lives … well, that wasn’t really on my radar.

Worldometers.info/coronavirus is a fabulous resource for this

But it has, and here we are.

So if you would like to know what we are hearing and seeing relating to real estate and the local market, here you go (and if you make it to the end, there is something funny awaiting you!)

A Week Later…

Last week, we held a meeting about COVID 19 and went through a slide deck laying out what was known and what the future would likely bring.

I think that the presentation got a lot of stuff right, but maybe I took a bit of an optimist’s view of things? The events of the last few days have convinced many of us that a bit more caution is probably appropriate. (Oh, and I do know how to say ‘authoritarian’ despite how badly I butcher it in the audio)

An Economic Sickness

One of the most difficult things to do in this day and age is to separate the signal from the siren. Twitter, Facebook, YouTube, and an endless supply of blogs and media outlets mean that pretty much anyone with an opinion has a platform. Essentially, this means that you can find a narrative to reinforce your world view.

So, whether you fall in the camp of ‘this is the black plague and we are going to die’ or the ‘this is the common cold and this all about nothing,’ the fact remains that COVID is a virus for which we have no immunities, and as long as it is around, we will need to engage in economically damaging actions in order to contain its spread.

Stated differently –– the only way to combat the spread of COVID is to decrease face-to-face interactions substantially –– which really hurts commerce.

And that is the core issue.

Richmond’s Economy

In 2008, Richmond got beat up pretty badly … but so did everywhere else. In the grand scheme of things, our market hit was in line with the average across the US. Places like Florida, Arizona, and California all took much bigger hits.

In COVID 2020, Richmond will probably be hurt less than many other places due to the fact that very little of our overall economy depends on travel and tourism. Richmond’s economy is underpinned by government, education, banking, and many other white collar jobs.

Places where travel and tourism are integral parts of the local economy will feel the impact of Coronavirus tremendously and those segments will likely be in shambles for the foreseeable future.

WaPo and NY Times have written several articles about the RVA Food scene.

That said, Richmond’s restaurant scene is one of the country’s most prolific, and I am concerned about its ability to survive a prolonged slowdown intact. The best way to not come in contact with an infected individual is to avoid public places –– like restaurants. I sincerely hope that those who have the power to reduce the heavy tax burden borne by our restaurant community do so.

The restaurants are going to feel the pain first, the worst, and probably the longest.

Real Estate

From our perspective (real estate), we have not seen a notable difference –– yet –– but we do expect things to change in the following ways:

Sales Activity –– If you look at the YTD numbers, the market was roughly 20% ahead of last year in terms of transactional volume. Our MLS has tracked roughly 800 more contracts in 2020 than it had during the same timeframe in 2019. Demand was robust and inventory had dropped to all-time lows.

I would be hard-pressed to imagine this rate will maintain itself at the same pace. Expect activity to slow down, but rates being as low as they are will continue to drive many into the market.

Mortgage Activity –– Up until the financial market’s crash beginning a few weeks back, mortgage originators were already super busy with the spring market’s volume. And then, rates dropped to unfathomable levels, which triggered the most refinance business ever.

In other words, the mortgage industry was operating at full capacity BEFORE the refi boom and now it is operating at 150 to 200% of capacity. No business can continually operate above their capacity levels –– and especially not if ‘work-from-home’ becomes the norm.

Expect delays.

Underwriting –– Yes, demand is robust, but the good news is that demand isn’t ‘fake demand’ like it was in 2008 –– it is real. Underwriting guidelines are reasonable and no ‘subprime-type’ lending is propping up the market. In other words, legit buyers are in the market, and they are using fixed-rate mortgages. That is a good thing.

Mortgage underwriting is healthy.

Fundamentals –– If you watch the embedded video above, you will get a sense of where the underlying market fundamentals are. In short, despite the recent turmoil in the financial markets, the real estate market is healthier than it has ever been:

Low inventory means no overhang if demand slows
A nationwide deficit of 3.5M new homes means demand is still far greater than supply
Low mortgage rates mean increased buying power
Low oil / gas prices mean more disposable income
Lower global demand means material prices for builders may come down
Better home equity means enhanced ability to upgrade
Low unemployment means more buyers

And, did I mention the stimulus that DC is pumping in the market as we speak? It is 2008-esque.

Right now, the market will likely slow some (it is inevitable) but once things return to normal –– Look Out! It will be insane.

Recommendations

Based on what we know and what we think is still to come, here is what we feel are the best courses of action:

All buyers and sellers –– please have patience and above all else, HAVE A PLAN B. Mortgage companies are going to miss dates and that has a domino effect. Also, employers might look at reducing staff (or at least hours) which can impact a buyer’s qualification –– even after the contract has been ratified and loan application submitted. Expect delays and even higher-than-normal contract fall out.
Sellers at upper price points –– be patient. The upper-end buyer tends to have more exposure to the financial markets and likely has lost a significant percentage of portfolio value. Expect traffic to slow and buyers to be cautious. So if you need to sell and sell now, moderate your stance on lower offers and inspection items.
Sub $400k buyers –– there was less than 2 months of inventory in early March at the middle and lower price points. Multiple offer scenarios were common with in excess of 10 offers in many cases. Even if 50% of the demand goes away, that is still 5 offers. Don’t expect the more affordable price points to change dramatically.
Mortgage borrowers –– get in front of the loan process. The system is moving as fast as it can so don’t expect it to be able to pull off miracles if you are behind in your paperwork and documentation. Get your stuff to your lender early and respond to requests immediately. I cannot stress this enough.
And to everyone regardless of price or side –– work together to get deals done. If your counterparty needs time, give it. If you need to offer a rent back or restructure an offer to make up for a loss of cash in the market, you should. Renegotiating during the contract will become more commonplace in the interim –– so maintain a big picture view. Situations are changing rapidly and playing hardball will not yield the result you are looking for.

Summary

The sooner we can get this damned virus out of our system, the better for all of us. Yes, I get it that more people die from car accidents, cancer, and other maladies than COVID, but as of right now, we have to deal with it to move forward.

As I like to tell my kids, many times things aren’t your fault, but they are your problem, and telling me what should have happened isn’t going to fix the issue. Fix the problem now, get mad about it later.

That is what we all need to be doing.

No, you needn’t sweat the real estate market falling off a cliff –– this is not 2008. In 2008, the market was leveraged to the hilt and largely incapable of fixing itself. In 2020, the market was far healthier when Corona showed up.

Once this clears, we will return to a real estate market with fundamentals as strong as ever. And as a matter of fact, real estate may even benefit from the virus due to stimulus packages and a global economy in a recession. Despite how we look at the end of this thing financially, I guarantee it looks better than everywhere else on the planet.

So remember to take the long view. The hype is real, but hopefully short term. It may take a few months and some substantial behavioral changes to stop the spread of this thing, but we will.

Laughter is the Best Medicine

And lastly, a bit of levity.

Yesterday, the talking heads on CNBC almost lost it when the one announcer asked a guest if he ‘likes stimulus.’ Sorry for the adult humor, but this really struck me as funny (fast forward to about :22 to get to the funny part) and I think they found it funny, too.

Sources:

worldometer.info/coronavirus –– This site has become my go-to for all things COVID. It shows the numbers in the aggregate and by country. Yes, China and some other countries might not be entirely forthcoming in their reporting, but you can get a sense of where all of this stands.

Web Traffic –– This site tracks web traffic to various websites and I am keeping an eye on Zillow’s traffic to gauge the public’s attention to housing. As this blog is written, I don’t see a dip in traffic, but that could change.

One South COVID Presentation –– The market stats are good at showing market strength. This presentation was from March 4, and the spread of the virus was not as prevalent in the US at the time ––perhaps a bit more pessimism should have been included in retrospect. Also, I have now learned how to say ‘authoritarian’ better than I did in the video…

Real Estate Negotiations Aren’t What You Think

January 23, 2020 By Rick Jarvis

I think we all recognize the tough, gruff, and staunch business owner as a negotiator archetype. You know the ones –– they sit across the table, fists clenched, barking ‘take it or leave it,’ and constantly drawing lines in the sand. They threaten, cajole, and otherwise issue demands fully expecting the other side to cave in and accept the exceptionally one-sided offer.

We also hear about the power-broker talent agents in their silk suits –– working from some expansive office on the 50th floor –– concocting devilishly devious plans to get their client the lead role in a blockbuster movie with the multi-million dollar payday.

But are they real?

Perception or Reality?

michael douglas GIF — Gordon Gekko sure loved information …

Popular lore –– history, literature, film –– they have all taught us that a great negotiator is equal parts Ari Gold, Don Corleone, and Gordon Gekko. Time after time, we see the negotiator depicted as a user of bravado, intimidation, inside information, and Jedi-mind tricks in order to get their way.

Sorry to disappoint you, but negotiations in real estate do not, in any way, shape or form, resemble Hollywood, Wall Street, TV, the NFL or even the Godfather.

Let’s look at the differences.

Perfect information

Do you realize how much access to information levels the playing field? When all parties have the same database at their fingertips (MLS), any informational advantage is negated.

information GIF — We all have access to the same housing information.

The buyer, seller, both agents, as well as the appraiser (and even Zillow!) –– they all draw from the exact same housing data. Thus, the difference between what a home is worth and what people will pay for it is not large.

Years ago, before online MLS and Zillow, you could occasionally exploit an informational advantage. But today, the ability to convince someone to sell their home at a 10% discount to fair market value (or even a 5% discount) is pretty much nil and the true lowball offer generally gets laughed right out of the room.

(Quick Note –– Don’t mistake a 5% discount from asking price for a 5% below market sale. If someone’s property is priced 5% above market and you negotiate a 5% discount, that isn’t a negotiation.)

The Sheer Number of Transactions

Do you know how many really good NFL QB’s will become free agents this winter? Maybe 2?

Any idea how many Hollywood blockbusters are in production? A couple? A handful?

Or how many Internet startups will go public this year? 3? 5? 10?

GIF by SB Nation — Think a good QB makes a difference? Just ask the Jets about the infamous Butt fumble…

But do you know the number of homes that transfer in our region this year? Oh, about 25,000.

Yeah, that changes things a bit.

When there are 25,000 transactions in any marketplace, no one feels compelled to make any single deal. Buyers and sellers know that there is a high likelihood that another opportunity is only days or weeks away –– and thus, feeling the pressure to accept a well below (or well above) market offer isn’t there.

When the number of transactions is in the thousands, the impact of negotiation delines significantly.

The Similarity of Housing

The difference between Tom Brady and the worst QB in the NFL can be a Super Bowl victory or last place. The difference between Leonardo DiCaprio and Tom Arnold can mean box office smash or flop. But is the difference between 1234 Main Street and 1235 Main Street really that much?

Of course not.

In theory, each home is unique. In reality, the difference between one house on a street and the next one isn’t nearly as great as the difference between actors, quarterbacks, or even IPOs.

When you are looking at the 5 housing options between $350,000 and $375,000 –– all of which have 4 bedrooms and a 2 car garage –– are you really going to be irreparably harmed if you only got your 2nd (or even 3rd) choice? In the grand scheme of things, not that much.

Besides, you can look at a variety of sources and predict the frequency that similar homes will come to market –– and act accordingly.

Face to Face or Inbox to Inbox?

In the old days (before the World Wide Web!), face to face presentation of offers was fairly common –– and perhaps there was a little more posturing between agents over deal points.

Today, that practice is largely non-existent.

Atp Tour Reaction GIF by Tennis TV — Ever watch negotiations?

Offers today are generated digitally, signed digitally, and delivered to the other side digitally. Yes, agents might chat a bit on the phone, but the notion that one agent sits down across the table from the other and some type of point/counter-point back and forth negotiating tennis match ensues is archaic.

Market Imbalance

Lastly, the idea that you, as a buyer, can sit back and play coy and eventually end up with the house you want is extremely low. Why? Because there is a housing shortage and odds are you are one of about 10 people seeking the exact same thing.

When inventory creeps below 3 to 4 months, buyers don’t have much leverage.

Remember, a market tends to be populated with as many sellers as there are buyers –– but an auction (intentionally) has but one seller being pursued by as many buyers as possible. And trust me, buyers do not like auctions.

Due to the prolonged inventory shortage, purchasing real estate in this day and age far more resembles an auction than it does a balanced market.

Then What in the World Are We Supposed to Do?

Ok then, wise guy. If none of the negotiating techniques that every other industry seems to use work, then how do you do it?

For Buyers

work student as homework grades GIF — Do your homework

As a buyer, it is simple –– do your homework so you know values, act quickly and decisively when the time comes, leverage your cash reserves to make your loan as appealing as possible to the seller, and use the other terms of the contract to tip the bid in your favor.

Things like –– flexible closing dates, rent backs, and fast inspections –– all of these are ways to make your offer more appealing than your competition’s.

For Sellers

And if you are a seller, do everything you can to create a bidding war –– when multiple buyers compete for your home, you will end up with not only the best price, you will also end up with the best terms.

When you entice a 2nd, 3rd (or more) buyer to any buying process, the buyers are no longer negotiating exclusively with you, they are negotiating against each other (I cannot express how much this is and TO YOUR BENEFIT!) Negotiating against a third party undermines almost all of the purchaser’s leverage. USE IT TO YOUR ADVANTAGE!

Far too often, we see sellers undermine their own position with poor timing, backchannel sales efforts, poor/unclean property conditions, and/or pricing the home at a premium (in order to ‘leave some room for negotiations.’) When a seller misses the opportunity to exert pressure on their ENTIRE buying pool, they miss out on more money AND better terms.

Having more than one offer is ALWAYS the optimal situation for the seller.

Summary

Look, is there an art to writing an escalation clause? Or an inspection addendum? Or a way to write an ‘as-is’ addendum that doesn’t put you at risk? Or a way to look at MLS and get a sense for demand?

jimmy fallon whisper GIF — Want to know our secrets to win negotiations? You’ll have to ask.

You bet.

And is there an art to positioning the offer? Or the perfect time to deliver it? Does the lender matter? And does the agent’s reputation matter?

Of course.

And, as a seller, is there a way to create a multiple offer situation on your listing?

Again, yes, if you know what you are doing.

But we will reserve our best tactics and strategies for our clients and not publish them in a public forum.

That said, the key is to know a) what is the value of what you are buying and b) where you stand in the market. None of these techniques matter if the fundamental offer isn’t already strong.

Without understanding both sides of the equation, making a good decision is next to impossible and no negotiation tactics can change the outcome.

I Can’t Wait for Another Recession …

September 2, 2019 By Rick Jarvis

I have to admit, I would love to see another recession.

Uhhhh …. you are in the real estate business. Why in the world would you want to see another recession?!?

The real reason? So we can stop talking about it.

Talk. Talk.

The talk of the next recession has been on the lips of every naysayer since 2015, as home prices spiked and bidding wars became the norm. ‘Oh no!’ they all said, ‘Here it comes again. It is just like 2008!’

In the immortal words of the 80’s English synth pop band, Talk Talk –– ‘All you do to me is Talk Talk.’ Just sayin’

The recession of 2008 was unprecedented, at least in my lifetime. I am sure that those who lived through 1929 might argue, but what happened to not just our economy –– but the world’s economy –– was unlike anything we have ever seen. To see a repeat of 2008 so soon feels unlikely –– especially when the fraudulent behavior that was at the root of the crash is not anywhere as prevalent as it was.

No, it is nothing like 2008. Not only are the conditions wildly different, but no two recessions are the same.

Disclaimer

Now, I am not for all of the negatives that come with recessions –– I don’t want to see anyone lose a job, lose a house, lose their savings, or even their sanity. The last recession caused all of those occurrences and caused them in spades.

I also hate that in the last moments before a recession, fraud tends to be at its highest and many of our most vulnerable are left holding the bag

I also hate that in the last moments before a recession, fraud tends to be at its highest, and many of our most vulnerable are left holding the bag –– with little to no recourse against those who committed the acts (but that is another post for another day.)

So, no, I am not for the traumatic impact that a recession can have. I am only for the idea that once we have the next one, we can go on with our lives and stop living in fear of its arrival.

F-1 / Category 5 / 7.0 Richter

One of the problems with recessions is that no single definition of a recession exists. Well, that is technically incorrect, one does –– 2 consecutive quarters of negative GDP to be precise –– but, absent of that, we don’t really have a way distinguishing one from another. There isn’t a recession severity meter like there is for earthquakes, hurricanes or tornadoes that tells us what to expect.

We all know that a Category 5 Hurricane is really, really bad –– flooding, strong winds, loss of utilities, massive property damage (and this was written before Dorian struck the Bahamas, btw…) –– and thanks to modern weather modeling, we have a pretty good idea when one is coming, where it will land, and how severe it will be.

There isn’t a recession severity meter like there is for earthquakes, hurricanes or tornadoes that tells us what to expect

In other words, we get ample notice and have time to prepare –– oh, AND we have the ability to insure our property against the event.

Imagine if we could predict a recession like we could a hurricane –– ‘Next Tuesday expect to see a plummeting stock market, sagging house prices, accelerating unemployment, and declining wages. We expect the recession to make landfall in the lower Manhattan area late in the afternoon and last until September 15, 2026, at 2 p.m., before finally moving back offshore!’

Unfortunately, nothing exists to tell us when the bad economic times will arrive, what segments will be impacted, or how long they will last. There is no way of telling if it will be a true ‘Category 5 level’ event that leaves destruction in its wake or more of a Tropical Re-Cession (see what I did there?!?) that never makes it to shore.

And rest assured, when it comes, we can’t just call our friendly State Farm agent and ask for a check.

Therein lies the fear.

How Scared You Feel = How Old You Are

For those who are 40 years old or younger, the only recession that they have lived through was a humdinger. The Great Recession was the worst recession on record –– rife with bankruptcy, foreclosure, fraud, and collusion. House prices fell by 30-40% and new home building essentially ceased.

Hey Virginians, remember the earthquake of 2011? While it was an earthquake by definition, I am not sure San Franciscans would agree…

But ask a ‘50 something‘ (and, yes, I am now a ‘50 something.’) if they remember the Recession of 2000?

Wait, there was a recession in 2000?

Yes, there was and it lasted for two years. I think unless you worked for a tech company and your millions in stock options became worthless, you really don’t recall much of a hiccup in 2000. But according to the definition, we had one.

Ask the ’60 somethings’ about the 1987 crash and subsequent 5-year malaise –– and they will remember it vividly. It was sudden (Black Monday, anyone?), pronounced, and eventful with great consternation in the Savings and Loan industry (again, led by fraud) that led to a fall in other segments. It also featured a great deal of overbuilding in the speculative office market.

Each Recession is Different

But do you know what happened to house prices in 2000? Nothing really. They actually went up, albeit at a slower pace.

Note the grayed areas (recessions) and the impact on house prices.

What about 1987? House prices stayed relatively flat to slightly up.

Wait, what?!? House prices went UP in a recession?!?

Yep.

In the same way that each Category 5 hurricane is different (size, speed, rain, wind, path) so is each recession.

And therein lies the rub.

A Recession is ALWAYS a Fear

As a good and experienced veteran of the real estate business told me, ‘You should absolutely be worried about a recession … because you should ALWAYS be worried about a recession. That is what they do, they come and then they go. The question is not if –– or even when –– it is how prepared are you for its arrival and what do you do when it shows up.’

He’s 100% correct.

You should absolutely be worried about a recession … because you should ALWAYS be worried about a recession

In the same way that you stock up on milk, bread, gas, and water when the hurricane is coming, you should do the same with your financial life. Dial back the speculative bets, become a little more liquid in your investments, and don’t go on spending sprees.

At the end of the day, a recession is coming, in the same way that rain is coming, winter is coming, and old age is coming –– it is part of the cycle.

Down Market = Opportunity

Am I saying that you should sell everything you own, crawl down in the shelter, and hunker down until 2027?

A good decision in a down market is largely the same as a good decision in an up market, it just may take a bit longer to pay off

No, of course not –– beyond its inevitability, don’t let the pending arrival of challenging financial times scare you into panic mode.

Fortunes (large and small) tend to be made in down markets and thinking about the strategies you might employ when you see the signs is the first step to not only navigating the down times, but thriving in them.

And above all else, remember that a good decision isn’t impacted in the long run by an up or down market –– a good decision in a down market is largely the same as a good decision in an up market, it just may take it a bit longer to pay off.

Summary

As we have written about many times before, the fundamentals that existed in 2008 and those of 2019 (and beyond) are completely different. When the next recession comes –– whether today, tomorrow, or March 3, 2024, it will start in a different sector, last for a different duration, and impact us all differently.

Don’t fear the inevitable –– be prepared to take advantage of it.

The Myth of the Inside Deal

March 8, 2019 By Rick Jarvis

An ‘Inside’ Deal. An ‘Off-Market’ Sale. The ‘Pocket’ Listing.

All of these are terms for the idea that (in certain neighborhoods) the best homes are acquired before they hit the market. They are sold either from a seller directly to the buyer (i.e. without an agent), or by an agent who never markets the property in an effort to control who purchases it.

Bigfoot walking and waving — This video proves that Bigfoot is not a myth …

As a buyer, when you are struggling to find the perfect home in a tight market, the idea that houses might be getting sold behind closed doors is extremely frustrating.

In the Know

The perception that houses are selling from one insider to another is most prevalent in communities that are considered to be ‘exclusive’ or are in the shortest supply. The premise is that unless you are somehow ‘in the know,’ you will never hear about the home’s availability and thus never have the opportunity to purchase it.

In order to determine how many properties transferred without the use of a Realtor, you can simply compare the number of transfers in the public records to the transfers of properties in MLS…

This feeling of frustration is compounded when it feels like every time you make an offer on a home, so does everyone else. Getting outbid time and time again makes every buyer feel that there has to be a better way.

But is there?

How Common is the Inside Sale?

So how often does an insider deal occur? How can you track events that you don’t really know about? Well, it turns out, you can track it quite easily.

screenshot of tax records — **The City of Richmond has a shockingly good website for Property Assessments and Transfers. You can find it** **HERE**

Any time a property changes hands, whether with a Realtor or not, the transaction is recorded in the public domain. Stated differently, property transfers are matters of public record –– meaning they are recorded with the city or county where the property is located.

Anyone has the right to go to the assessor’s office and see property transfers. Or, if you have enhanced access to the public records as a part your local MLS (like Realtors do!), you can easily query property records from the comfort of your laptop.

So Let’s See What We See

In order to determine how many properties transferred without the use of a Realtor, you can simply compare the number of transfers in the public records to the transfers of properties in MLS.

MLS and tax printout — The list below shows all of the recorded sales in both MLS and the Tax Records for 2018 in Windsor Farms. The Sale Date column shows the date of sale in MLS and recording date in the Tax Records. As you can see, each Tax entry has a corresponding MLS entry. As a matter of fact, MLS picked up on a sale that the Tax Records did not.

As the above chart shows, the number of properties that changed hands without the use of a Realtor in this example was literally zero. Nada. Zilch. And bear in mind that this list if from one of Richmond’s most prestigious neighborhoods AND during one of Richmond’s most inventory-starved periods. The idea that some great swath of housing is changing hands clandestinely between anointed buyers and sellers simply isn’t supported by actual data.

The Full Shot

So if the large majority of the properties are changing hands with a Realtor involved, how many times is any individual agent controlling both sides of the transaction? In Realtor vernacular, when only one agent works the transaction and picks up both sides of the commission, it is called a ‘full shot.’

In reality, the idea that agents will change their behavior in order to earn both sides of the commission is a bit archaic…

This practice was far more common in days past when the idea of the Buyer’s Agent was still in its infancy and the Zillow’s of the world had yet to democratize listing information.

dice showing 12 — The ‘Full Shot’ is largely a thing of the past.

How can you count ‘full shots’? Well, by using MLS to compare Agent ID’s and counting the occurrences where Buyer’s Agent ID = Listing Agent ID.

In 2018, in all of Zone 20 (Richmond’s Near West End) where home prices are the most expensive and the inventory the most constrained, only 7 of 355 (1.9%) of the sales were executed by the same agent (and only one agent did it twice.)

Pretty low, huh?

In reality, the practice is so fraught with conflicts of interest that in this litigious day and age, few agents are willing to take the risk. Furthermore, many brokerages have gone so far as outlawing the practice altogether.

Most good agents who are approached by a purchaser on their own listing will refer it to another agent for the duration of the transaction –– especially when multiple offers are expected.

So approaching a listing agent directly in hopes that the allure of a larger commission will somehow enable you to win the deal isn’t really a winning strategy either.

The Myth Persists

Every agent loves the public to think that they have inside information about available properties or can somehow find a deal ‘off-market’ that will be the perfect house and at the perfect price.

Sorry to bust my own industry’s bubble, but that perception really isn’t accurate.

It is estimated that nationwide, 95% or more of homes transfer from seller to buyer with at least one agent involved (our example above showed that to be 100%.) Of those transactions, 95% or more involve the use of a Buyer’s Agent and a Seller’s (or Listing) Agent (our example above showed that to be 98%.)

Again, the perceived existence of a closed market simply isn’t supported by facts.

Off Market? No Thanks

The few off-market deals that do occur are typically when a seller who isn’t interested in selling is convinced by a buyer to sell.

How does a buyer convince an unwilling seller to change their minds? By offering a really high price, that’s how. Almost any seller can be convinced to sell their home if the buyer is willing to so grossly overpay that the seller would be foolish not to accept.

A quick note –– The ‘off-market’ sale is far more common in commercial real estate than it is in residential real estate. Often times, an investor, typically on the back side of a 1031 Tax Deferred Exchange, will make an unsolicited offer to another property owner whose property is not currently on the market. The purchaser would rather pay a premium for the acquired property than pay the taxes that are due on the existing one. The 1031 Exchange makes this possible and results in many commercial deals occurring ‘off-market.’

So … if, as a buyer, overpaying is your goal, then yes, we can find you an off-market home quite easily. But for the overwhelming majority of buyers, making intelligent financial decisions is the goal and thus, overpaying for an off-market deal is not the best path to ownership.

The Best Way

The best way to purchase into an extremely constrained or highly-competitive market is simply to be prepared to act quickly, make your best offer early, leverage your cash reserves, and be as flexible with your terms as possible.

Slow playing negotiations in a seller’s market isn’t going to win you many deals…

I wish there was a magic tactic, but there isn’t. The market for ‘good’ properties (close in, good schools, renovated, architecturally engaging, little new construction in the area) is heavily tilted in the seller’s favor. Slow playing negotiations in a seller’s market isn’t going to win you many deals.

scary forest pathway — Sometimes the path can seem daunting, especially in the most competitive times of the year. Stay the course.

And for those who are using highly leveraged mortgages to purchase, attempting to buy into a highly competitive market is especially difficult. Sellers, when they fear that a bidding war will drive the contract price above the likely appraised value, will simply take the highest cash (or substantially cash) offer to minimize the likelihood of the deal collapsing later due to a missed appraisal.

And for those who are using highly leveraged mortgages to purchase, attempting to buy into a highly competitive market is especially difficult…

Therefore, if you are a using highly leveraged debt (90% or more) to buy into a highly competitive community, you will experience some frustration, especially during a frothy spring market. Be patient, diligent, and intelligent about how you conduct your search –– and you will persevere. It just might take a while.

The Way it Works

The advent of Zillow (and Trulia, and Realtor.com, and others,) as well as increasingly sophisticated versions of MLS, means that the buyers know almost as soon as the agents do when new listings hit the market. Buyers only miss opportunities when they (or their agents) are slow to react or simply not paying attention.

MLS client gateway — Our MLS had an auto-notification function that sends any new listing ***immediately*** to all clients who have searches set for a property with the specified parameters. Furthermore, Zillow, Trulia, and other search sites don’t receive new listing information until well after MLS has alread sent out notifgications.

Furthermore, sellers have also figured out that the best way to get top dollar for their home is to expose it to the market, not hide it. Almost every property that is sold in an ‘exclusive’ or sought-after community is announced for sale for a period of time (aka – ‘coming soon’) to allow for demand to build. When buyers compete, sellers win.

When a seller (or their agent) undertakes actions that will decrease the likelihood of a bidding war, they are shooting themselves in the financial foot.

In Closing

I know I speak for Realtors when I say that I wish we had more ‘inside’ information than we do –– but the good news for the public is that we don’t. Our value comes not from having access to inside information (as in days past,) but from helping our clients interpret the ridiculous amount of information that is now available to everyone.

Does the occasional property change hands off-market? Of course they do, but the off-market sale makes up such a small percentage of the market that it’s not worth trying to chase.

An agent’s value comes not from having access to inside information (as in days past,) but from helping our clients interpret the ridiculous amount of information that is now available to everyone…

The bottom line is that in the overwhelming majority of cases, properties change hands through traditional channels and via traditional methods –– and thus the best thing a buyer can do is work with an agent that they like and trust, and who communicates with them in the manner that they prefer.

So find yourself a good agent who understands your needs, your goals, and, most importantly, your constraints –– and I can guarantee you that you will have the best outcome.

Back on the Market

February 1, 2019 By Rick Jarvis

Agent: Congratulations! You are under contract!

Client: Great! So we are done, right?

Agent: Not exactly. Anywhere from 10% to as high as 20% of contracts fall apart for one reason or another.

Client: Wait, what?!? There is as much as a 20% chance that the contract I have on (or for) my house will fall apart?!? How can I make any plans going forward with that much uncertainty?!?

Agent: Let’s talk about why.

The Back on Market Statistic in MLS

First, let’s talk about where we get the data.

The Multiple Listing Service tracks a lot of statistics –– one of which is called ‘BACK ON MARKET’ (or BOM).

BOM measures the number of homes whose status changes from ‘PENDING’ (meaning under contract) back to ‘ACTIVE’ (meaning ‘available for sale.’)

This is the home screen of MLS that shows agents a quick update of the day’s (or week’s) activities.

Computing the Failure Rate

A random sample of a week in middle January yielded the following results:

569 homes went PENDING
65 came BACK ON MARKET
65/569 = 11.4% contract failure rate

(A quick note –– a week later, the number of ’Back On Market’ properties, jumped to nearly 14% with 40 of 295 coming back to Active status from Pending –– so this metric will change week to week.)

Released and Temporarily Withdrawn

Now if you note the screenshot, you will see where RELEASED and TEMP(orarily) WITHDRAWN are also highlighted:

RELEASED –– meaning that the listing agent and owner have agreed to part ways.
TEMP WITHDRAWN –– meaning probably what you think, the home has been removed from the market for an unspecified period of time per the seller’s request.

Both of these status changes (66 Released + 38 Temp Withdrawn = 104) often come on the heels of a failed contract –– and thus the count of the Back on Market is most likely higher.

Between 10% and 20%

So, yes, somewhere between 10% and 20% is the correct number.

This number will vary based on what time of year you examine, what price point you are in, and what geography you study and of course, what percentage of the Released and Temp Withdrawn homes you assume were the result of a failed contract.

Why Don’t Homes Close?

A 10% fallout rate is a big number. A 20% fallout rate is even bigger.

When you are making irrevocable (and expensive) commitments that depend on a successful settlement, 80% certainty doesn’t feel great, does it?

It shouldn’t.

Let’s discuss the reasons.

The Primary Reasons

Homes don’t go to settlement for any variety of reasons –– but they generally fall into one of the following categories:

Lender incompetence
Appraisal less than the sales price
Inspection issue
Agent incompetence
Cold feet

Let’s discuss each.

Lender Incompetence

I cannot stress this enough –– work with a lender with the following characteristics:

They are local (not Quicken, USAA, or some other internet lender)
They are tied to a bank (meaning they have ‘shelf loans’ or other specialty products)
They do a lot of business with the agent (you will be on the top of the pile and receive favorable treatment when positive underwriting interpretations are required)
They have a full range of products (many lenders only have a limited product menu and will try to place you in the wrong product because they don’t have the correct option)
They have a ‘Lock and Drop’ feature (meaning that if rates drop during the lock period, you receive the lower rate)
They are not your Credit Union (contrary to common belief, CU’s do NOT give better rates and their representatives are typically not licensed)

Furthermore, when it comes to niche purchases (condos, rehabs, multi-family) or complex underwriting (divorce, business owner, commission income) using a mortgage company with specialists in the specific loan type is critical.

Alas, few borrowers (or agents) know how to find those who specialize in the specific niche required.

The Dreaded Internet Lender

To the Sellers –– if you are a seller and you receive a contract from a purchaser who plans to use an internet/non-local lender, accept the contract at your own risk and do not be surprised when, at the 11th hour, you get the dreaded ‘we have a problem’ message.

To the Buyers –– if you are a buyer and in a multi-offer scenario, using Quicken (or USAA) is an almost near guarantee that you will not be the winning bid. Why? Because listing agents know how difficult and unreliable internet lenders are.

Internet lenders can be decent for refinancing (mostly because a missed closing date isn’t overly penal,) but for purchasing a home, they just carry too much risk.

Cheaper Isn’t Better, It Isn’t Anything

A rate that is ½ point lower that closes late (or not at all), is not a better rate –– it is actually more expensive!

Late closings trigger penalties, loss of deposits, and a handful of other emergency decisions (hotel stays, storage units) that eat up any savings that the rate promised.

The bottom line is that the local lender puts their reputation and well-being on the line every time they issue a pre-qualification letter. If their organization can’t perform as promised, they don’t just lose the current deal, they lose the rest of them.

An Appraisal Issue

When prices are accelerating rapidly (especially in the spring), comparable sales lag where the market is.

Looking at past sales is like driving while looking out of your rearview mirror.

In other words, when you are trying to establish the fair market value of a home in March of 2020 –– and the sales comps are from the fall of 2019 –– you will not find the sales from yesterday you need to justify the price today.

But unfortunately, that is how the appraised value is determined –– via PAST sales.

We like to say that using comparable PAST sales to establish value TODAY is like driving while looking out of the rearview mirror –– it tells you where you were, but not where you are going.

When you, as a seller, have accepted a contract on a home where there were multiple bids, odds are, the sales price has been pushed above the value at which the home will appraise. When a loan is subject to appraisal (as many loans are), an appraisal below the sales price places the loan in jeopardy.

Appraisal Math

Applying some numbers –– if the purchaser is putting 10% down on a $300,000 sales price and the appraisal comes in at $290,000, the seller is responsible to make up the difference –– in other words, they have to find an additional $10,000 in down payment.

If the purchaser has no excess cash (or is unwilling to access it), then the seller is forced to either:

lower the price to the appraised amount
accept the loan denial and put their home back on the market

The bottom line is, as a seller, you have to look at the type of financing the purchaser is using –– and specifically how the appraisal contingency is worded –– to properly judge how susceptible you are to the appraisal causing the contract to not move forward.

A good agent knows how to assess the risk.

Inspection Issues

Inspections are the bane of almost every agent’s existence.

Essentially, you have buyers who feel like they overpaid (and feel entitled to a perfect home,) sellers who see every issue as cosmetic, and inspectors who feel it necessary to point out every flaw, including that the doorbell is not at the correct height (not kidding.)

On the other end of the inspection report are agents who know very little about construction and contractors who both disagree with the inspector’s assessments and cost estimates, and are trying to generate even more business for themselves by spooking the clients –– all trying to decide if a $100 piece of siding is rotten or just soft.

It is maddening.

Call it pride, call it short-sightedness, or simply stupidity, but way too often we see $500 worth of inspection items torpedo $300,000+ sales

($500 / $300,000 = .0016, in case you wanted to see how inconsequential that amount actually is.)

No Home is Perfect

At the end of the day, as a buyer, be prepared to take the home with a few issues –– especially given the market conditions. Are we saying that a cracked foundation, a failing 50 year old roof, and radon readings in the 100’s are not issues? Of course not. But when minor carpentry issues, a few questionable double taps on your main circuit panel, and wobbly toilet are found, it is ok. Don’t freak out.

And a final note for sellers –– I have yet to see a house that comes back on the market get a better offer. Digging in to save yourself $1,000 only to cause your buyer to flee is a poor strategy. You are almost always better off to work with the offer in hand, even if it means swallowing your pride and working out a deal that feels one-sided.

Agent Incompetence

My first broker was fond of saying that, as an agent, when you have a willing buyer and a willing seller, get out of the way.

It is one of the truest statements he ever uttered.

Far too often, in an effort to either feed an ego or justify the commission, agents will engage in activities that complicate or sabotage the transaction. Speaking too much, introducing doubt, blaming the other side, making mountains out of molehills –– all of these actions put unnecessary pressure on a transaction when there needn’t be.

The net result is it exhausts everyone’s emotional energy to such a point that the sides oftentimes become unable to work through an issue that normally would not derail the transaction.

It happens far more than it should.

Cold Feet

And yes, every once in a while, a simple case of cold feet (i.e. –– Buyer’s Remorse) is the culprit.

Typically, buyer’s remorse occurs when a) the deal is too one-sided, or b) the purchaser didn’t fully do their homework before finding themselves under contract to purchase a home.

Agents and Uncertainty

As an agent, it is absolutely your responsibility to make sure the buyer understands their decision:

Educated and confident buyers make decisions that stick
Buyers who never developed a true understanding of market conditions tend to walk away

Agents –– if you want your deals to stay together, empower and involve your clients.

Summary

So yes, not all deals go to settlement.

Statistically speaking, somewhere between 10% and 20% will fall apart for one reason or another. And thus, some percentage of sellers will have to go ‘Back on the Market’ after experiencing the frustration of a contract that did not stick.

So, as a seller, how in the world do you defend against being left at the altar?

Well, that is Part II of the series …

Financing

A Week Later…

An Economic Sickness

Real Estate

Recommendations

Summary

Laughter is the Best Medicine

Sources:

Perception or Reality?

Perfect information

The Sheer Number of Transactions

The Similarity of Housing

Face to Face or Inbox to Inbox?

Market Imbalance

When inventory creeps below 3 to 4 months, buyers don’t have much leverage.

Then What in the World Are We Supposed to Do?

Summary

Talk. Talk.

In the immortal words of the 80’s English synth pop band, Talk Talk –– ‘All you do to me is Talk Talk.’ Just sayin’

Disclaimer

F-1 / Category 5 / 7.0 Richter

How Scared You Feel = How Old You Are

Each Recession is Different

Note the grayed areas (recessions) and the impact on house prices.

A Recession is ALWAYS a Fear

Down Market = Opportunity

Summary

In the Know

How Common is the Inside Sale?

So Let’s See What We See

The Full Shot

The Myth Persists

Off Market? No Thanks

The Best Way

The Way it Works

In Closing

The Back on Market Statistic in MLS

Why Don’t Homes Close?

Lender Incompetence

An Appraisal Issue

Inspection Issues

Agent Incompetence

Cold Feet

Summary

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How Do I Determine What I Can Afford?

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