Financing

How to Lose Your Dream House (with your agent’s help)

January 28, 2019 By Rick Jarvis

How to Lose Your Dream Home

Earlier this year (January to be exact) I was at the office on a Monday evening while one of our agents was wrapping up the details on a contract for a home she had listed.

She was notifying the agents who had made the losing offers (there were 10) and I overheard a rather testy exchange on the phone with one of the agents whose clients had made a particularly weak offer.

After the call, we discussed what had transpired –– and below you will find step-by-step instructions on how to not win a competitive offer situation and cost your client a home they really wanted.

The Home

I think it is important to understand the home in question.

The home was an uber-cute classically-styled 1930’s era bungalow an oversized lot in an area experiencing rapid price appreciation. The home is well situated in the direct path of investment and development, and had recently undergone a tasteful upgrade.

The price would be considered quite affordable by today’s standards (less than $300,000) and was located quite close to the urban core.

For anyone seeking a smaller, cute, move-in ready home, it checked a lot of boxes –– it oozed charm, was quite close-in, and had tons of upside.

Market Conditions

Now, if you are even remotely aware of the inventory conditions, you would know what the description above meant –– it meant that the house would be in high demand and that multiple offers (like a LOT of offers) were pretty much a certainty.

In fact, over 10 offers were received.

Know Your Inventory

Right now, the inventory in the City of Richmond is at all-time lows, with less than a 4 month supply overall. However, when you look specifically at the market segments below $400k, the supply drops to less than 2 months (1.4 months as this post is written).

1.4 months of inventory –– let that sink in for a moment.

To give it perspective, experts say that 6-8 months of inventory is considered a balanced market (i.e. the number of sellers equals the number of buyers) –– so the number of available homes could increase by 500% and the market would only be considered ‘balanced’!

That is insane.

So even if you are not a statistics nerd, the fact that about 50 people toured the open house (including the ones who lost their ‘dream house’ with their less than compelling offer) should have driven this point home quite vividly.

Apparently, it didn’t.

Contract Structure

nicksplat rugrats GIF — 10+ contracts in January –– what does that tell you?

Most people feel that the sole purpose of a contract is to establish a price for the home. While price is certainly one of the elements of a purchase offer (and a critical one at that,) the contract also establishes the remainder of the terms for the sale –– of which another +15 pages (plus several addenda) are required to establish them all.

So there are several key points (other than just price) that can be leveraged to create a far more attractive contract for the seller when a highly competitive offer situation is expected including:

Will the price change in the event of multiple offers? (i.e. escalation clause.)
How the property will be paid for / financed (mortgage, cash, amount of down payment)?
How any appraisal issues will be handled?
How the inspection will be handled?
When not just settlement –– but possession –– will occur?

In other words, there are a lot of other levers to pull to create an attractive offer.

Winner vs. Loser

So, assume for a moment that the price of the home is $300,000 and a seller receives multiple offers (again, the sellers of this home received more than 10 bonafide offers.)

The winning offer stated:

Want to know more about **Escalator Clauses**? Read here…

A price of $300,000 with an escalation up to a maximum of $315,000 if a higher offer was submitted
10% down payment, but the appraisal contingency was waived and a lender letter was submitted showing the proof of funds to make up the difference if the appraisal was lower than the contract price
A cap on inspections so that only large items would be requested to be addressed
The several items that were not supposed to convey with the sale were correctly excluded from the sale
A post-settlement possession was also offered to the sellers (but not needed by the seller)

The folks who lost submitted the following offer:

$295,000 with no escalation clause
Conventional financing with a 20% down payment
No waiver of appraisal
No modification to inspection
Zero reference to the items that were not supposed to convey
Seller to pay for a Home Warranty

Not Even Close

So when the agent was called and told that they had not won, they were incredulous and argumentative about why they were not allowed to up their offer.

Sorry, but when you have several offers in hand that exceed the asking price, calling the 8th place contract and asking them to raise their offer isn’t a consideration.

The fact that they did not seem to comprehend that is what feels incredulous to me.

Losing Professionally and Graciously

Now, I wouldn’t think that this would need to be said but apparently it does –– when, as an agent, you make every mistake possible with your offer and you are notified with a phone call that you didn’t win –– don’t be combative.

The following was the basic gist of the conversation –– and all of the supposed points were made in aggressive and accusatory tones:

Why weren’t the buyers given a counteroffer?? Well, because there were about 7 better offers.
Why didn’t you ask for our highest and best offer?? Again, you were the 8th best of the 10+ offers.
Why weren’t we informed of the multiple offers?? Well, listing agents are under no obligation to do so, but the line out of the door at the open house should have been a clue –– and 1.4 months of inventory should have been another. Oh, and by the way, the inclusion of a properly structured escalator clause is a perfect way to hedge your bet (which you did not include.)
Why was the listing agent being non-communicative?? Well, because analyzing 10 offers and presenting the best ones to the seller takes considerable time –– and your offer was one of the least competitive of the bunch. Sorry if you didn’t receive a call within 5 minutes of the contract expiration time to inform you that you finished behind 7 other offers. When the best contract was signed, you got a call.

Sarcasm aside, do you know what being chippy about losing did? Do you think it changed the outcome? Of course not. It simply put everyone involved on notice that this specific buyer’s agent was difficult to work with. I can assure you that their attitude will not help their chances when all other contract terms are held equal and the seller needs to choose between two offers.

Lesson? Or Blame?

Is it possible that this agent was acting at the behest of their client and their strategy recommendations were ignored? It’s possible, but highly unlikely given the agent’s overreaction. The overall tenor of the conversation made it fairly obvious that the agent had recommended the strategy and now had to go back to the client with egg on their face.

Furthermore, I can almost guarantee you that the buyer’s agent placed the blame at the feet of the listing agent with some sort of ‘they screwed you’ message. I can only hope that their client is astute enough to sniff out where the blame actually should be placed.

Blaming the other side is certainly convenient, but a very damaging long term strategy. Richmond is a small town and the agent community is even smaller –– word travels. Your reputation (good or bad) can impact the market’s willingness to work with you and your future clients.

Advocating hard is both expected and respected by your peers –– being a jerk isn’t.

Summary

At the end of the day, this market is in an extreme place –– and extreme conditions must be navigated with strong methods. Using 2015 contract structures with 2019 comps in January of 2020 is not a recipe for success –– especially not in the ‘affordable-urban’ market.

As we have stated repeatedly, the market conditions we are in, particularly at the middle and lower price points, is unprecedented, and best practices that were generally accepted even a few short years ago no longer apply.

Everyone acknowledges that losing the perfect home stings –– whether you are an agent or a buyer. But it happens to all of us and will continue to be a part of this market for the foreseeable future. All you can do is prep your clients, take your best shot, and accept the outcome –– graciously.

That said, being wholly unaware of market conditions or winning strategies is not an excuse for poor behavior. Take your lumps, learn the lessons, modify your strategies, and make the adjustment.

The good agents do.

The Escalator Clause

January 12, 2019 By Rick Jarvis

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.

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.

iBuying

January 5, 2019 By Rick Jarvis

handshake hello GIF by Laurène Boglio — Our computer would like to purchase your home.

Ever heard of iBuying? If you haven’t, you can say you heard about it here, first, because it is the newest trend in real estate sales and it is on the way to a market near you –– probably.

So what exactly is iBuying? Well, no one definition exists but generally speaking, iBuying is nothing more than a company (or fund) that buys houses from people directly –– at some amount of discount –– for cash, and typically with a quick closing.

iBuying, in effect, replaces the traditional method of an individual owner putting a sign in the yard and selling to an individual purchaser at a market price.

How Does it Work?

2001 a space odyssey GIF — I’m sorry, Dave. I can’t value your home.

In most cases, the owner of a home will go to an iBuyer website, enter information about their home, and wait for the iBuyer to tell them what they would be willing to pay. The iBuyer company will look at its valuation algorithm and make the seller an offer.

Each iBuyer has a slightly different method, but typically, the offer comes with a mandatory site visit from some representative to verify the condition of the property and the features, size, etc. and to make sure that the information given by the seller is accurate.

If everything checks out, the offer can be accepted and closing will occur quickly and for cash.

Yes, it can be that simple.

The Premise (ok, ‘The Catch’)

The catch is this –- the offers come with a discount.

The iBuyer will use an algorithm that establishes likely market value, but then subtracts the cost of commissions, any required repair money, some carrying cost, and a little bit for profit.

But even if the offers are discounted, they are all cash and come with a quick closing.

The thought is that the offer will be close enough to what a typical seller would net on the sale of their home and, thus, the seller take less to avoid the hassle of the selling process –– and to have the certainty of knowing their home is sold.

i want out house GIF by South Park — Sometimes, iBuying makes sense.

In effect, if the seller believes the ‘hassle to discount’ ratio is in their favor, then they should (in theory) accept the offer. If not, then they can sell via the traditional process.

It is a fascinating idea and one that is taking hold in several markets.

The Players

There are several national players who are attempting to scale this business as we speak –– Zillow Offers being the most notable, but there are others. Knock, OfferPad and OpenDoor are making a lot of noise, while Redfin and a few other brokerages have either launched or are launching their own version of an iBuying program.

And aside from the behemoths mentioned above, local franchised versions also exist –– ’We Buy Ugly Houses’ and Homvestors are forms of iBuying as well, although couched in a more of an opportunistic wrapper.

Heck, even some local investors (typically tied to a local brokerage) have established funds to do roughly the same thing.

The Game

Ok, before you go out and rejoice, thinking that you can trick a computer into making you an above-market offer on your 7 bedroom 1 bath Elvis Pressly themed home that is in need of $50,000 of siding and roof repair, that is not how it works.

The national iBuyers have what is called a ‘Buy Box’ to determine which properties qualify to be purchased. Typically, the ‘Buy Box’ will only include properties that their algorithms can value with a high degree of confidence –– and shy away from the ones that they cannot.

iBuyers will also tend to shy away from thin market segments (i.e. luxury housing) where pricing means fewer buyers and longer marketing times.

So the typical Buy Box will include properties that are newer, more homogenous, less expensive, and otherwise easier to peg a value accurately. Properties that are older, historic, have unique features, are expensive, in need of massive repairs, or are otherwise difficult to determine a fair value for will fall outside of the Buy Box and not qualify for an offer.

So don’t get too excited about an iBuyer coming in and taking your problem property off of your hands at a premium –– they won’t.

Uses and Models

iBuying has applications for sure –– mostly for cases where ‘certainty’ is required or where other factors prevent the home from transferring via conventional means.

If you are a contingent buyer trying to upgrade into a hot market segment, it might make sense to use an iBuyer to sell your home so that you can qualify for the next one
If showing your home repeatedly is burdensome, then selling to an iBuyer makes sense
If you are in need of selling quickly to take a new job, or move to another market, iBuying might also make sense

But in cases where the seller can wait, or where bidding wars are likely to occur, an iBuyer really isn’t necessary.

The Real Uses

So do you know why Zillow really wants to have an iBuyer platform? And Redfin? And the others?

Leads.

A seller inquiring about the value of their home is nothing more than a potential seller raising their hand and identifying themselves as a potential client –– and for any brokerage, that has tremendous value.

So even if the offer is rejected, the lead can still be referred to an agent in the iBuyer network for a referral fee.

Kinda brilliant, isn’t it? You bet it is.

Successful?

The iBuying idea is still rather new and thus, the concepts have not been fully developed and the numbers being reported are not vetted.

https://www.slideshare.net/MikeDelPrete/phoenix-ibuyer-report-teaser

Phoenix is one of the primary testing grounds for iBuying.

A recent article claimed that iBuying represented as much as 3% of the accepted offers in markets where they were operating, but that is largely a self-reported number (as well as a self-serving one) so it remains to be seen.

But even if the iBuyer does not buy in a large number of homes, the leads generated are still of great value to the Realtor community. So for iBuying to be successful, it doesn’t have to just monetize the homes they purchase –– it has to monetize the leads it generates.

Richmond and iBuying

The big players aren’t in Richmond in force, but they are somewhat close (Raleigh, NC) and in some parts of Charlotte.

The closest iBuyer markets are in North Carolina, but no markets in the northeast are in operation.

Some locals are playing in the space here locally, but no one of any real scale.

And since Richmond is an old city with aged housing stock, the likelihood that any iBuying platform would identify Richmond as a target-rich market is low. When you look at the map above, you see no iBuyer presence in the older housing markets of the northeast.

But that said, at some point, we will see some version of the iBuying model enter our market.

Questions Abound

So stay tuned, there are still many questions to be answered.

suspicious thinking GIF by SpongeBob SquarePants — Hmmm …

One of the biggest is ‘what will iBuyers do with the homes they buy?’ Some will simply resell them and others will employ a buy and hold strategy. If that happens, will it put even more pressure on inventory?
The other question is how will iBuying impact appraisals? If the nearest and most recent comparable sale was an iBuyer sale at a 10% discount, will that impact the value of the surrounding properties?
What happens when iBuyers compete with one another? Will the competition between iBuyers squeeze the profits out of the model to such a point that they exit the market?
What if an iBuyer ends up with enough inventory that it can act like CarMax and offer trade-in options? Supposedly, that idea is being discussed.
Lastly, if and when the market goes through an adjustment, are iBuyers going to be willing to purchase assets that are declining in value? Just ask developers and builders what happened to their balance sheets in 2008 – 2012 and how much fun it was to hold onto housing when it was going down in value by 10% a year for 3 straight years? Hopefully, that adjustment is nowhere near, but most felt that way in the years leading up to the recession, too.

I don’t think anyone has the answers yet.

Summary

The iBuying idea has merit, but there is a lot still to be determined.

That said, the key point is that there is a lot of money backing these firms so the iBuying model is going to be here until someone figures it out.

Like a hammer or a lawnmower, iBuying is nothing more than a tool and it has its specific uses. Learning how to use the tool properly will come with time and practice for all involved.

Having a choice is never a bad thing for the consumer and iBuying will provide the public options that they didn’t have before.

Frogs Rent

November 28, 2018 By Rick Jarvis

For most homeowners, I think it is going to be difficult to let go of the last few years.

‘Our house appreciated $75,000 in 5 years!’
‘Really? Our house went from $300,000 to 400,000 in 4 years!’
‘Not bad, but ours went from $150,000 to $400,000 in 3 years!’

Unfortunately, we won’t be saying that as often as we used to anymore.

A Return to Normal Appreciation

Being a homeowner, especially a first-time homeowner, has been a lot of fun for the past 5 years. The rate of appreciation has been substantial for most everyone in the post-bubble market. No matter where you live or what you bought, if you signed the closing statement in 2012, you are up anywhere from 20 to 40% in the years since.

But as we approach the end of 2018, we can expect to see future appreciation rates on housing return to the norms of the 1990’s and early 2000’s. And for those who know nothing about the good old days, I am talking about 2 to 4% in any given year (and yes, I realize how boring that sounds.)

That said, imagine if all of this topsy-turvey upsidedown-ness hadn’t happened, or even if prices had fallen over the last five years. Would you have been better off if you hadn’t bought at all?

The answer is simply –– nope.

Why? Because renters always lose in the long run.

Boiling a Frog

There is an old adage about boiling a frog (and no, I have not done this before so don’t call PETA). But it goes like this: If you put a frog in a pot of boiling water, it will immediately hop out. But if you put a frog in a pot of cool water and then put it on the stove, the temperature change is so gradual that the frog will stay in until it is too late.

And for this reason, frogs rent.

If you’re a renter feeling upset because I just compared you to a frog, don’t. For many, renting does make sense. Temporary situations, an uncertain future, recovery from a financial catastrophe, etc –– these reasons all make sense.

But if you are going to be here for a while, are trying to make a smart investment, or are otherwise in a position where you could own but don’t, then you are exhibiting frog-esque characteristics.

Tracking Rents

Zillow, for all of its warts (see what I did there?), has managed to aggregate a lot of really good data and they make it available if you know where to look. And besides tracking housing values (for which they are primarily known), they also track rents.

Take a look at this (use the drop down menu to find RVA, or to look at other markets):

Since 2011, rents in Richmond VA have gone up from an average of $1,179 per month to $1,391 per month. That’s nearly an 18% increase if you are scoring at home. And that chart is for the Richmond region as a whole. Areas such as Shockoe, Manchester, and Scott’s Addition are up by a much larger percentage.

Now, let’s think about the other side of the equation. Do you know how much of your mortgage you would have paid off in the same time period? If you had a 30-year mortgage at 4.5%, you would have paid off anywhere from 10 to 12% of your mortgage in the same time frame.

So even if your home had not grown in value by a single percentage point, owning would mean your payment would have remained the same, your debt would be 10 to 12% lower, and you would have also picked up a nice little tax write-off for the interest you had paid (but please consult your tax advisor to find out how much the Mortgage Interest Deduction would have saved you.)

It doesn’t take a math major to figure out that a fixed payment, lower debt, a nifty tax break, and the potential to eventually not have a house payment once your mortgage is paid off are all pretty good things.

Ribbit.

Elective Renting is a Poor Strategy

The housing market is rapidly putting the finishing touches on its post-bubble recovery and is approaching a time where housing appreciation will revert to the more normal rates of the 1990’s and early 2000’s. The promise of steep appreciation will not be what makes housing the sole reason for ownership as we move into the next decade.

Instead, the reason that housing will be one of the best assets you can own will be related to the reason it has always been a great asset –– its long-term value as a part of your portfolio will dwarf the short-term savings associated with renting.

So don’t fall for the ‘well, I should have bought 5 years ago so I should wait for the next bubble to pop’ logic. You will be far worse off.

Don’t believe me? Ask your landlord.

Getting Out of the Pot in 2019

So as 2018 comes to a close, be thinking about the fact that you will soon be getting a note from your management company notifying you of your new water temperature … errrr … rental rate for the coming year. If the landlord does their job right, the increase won’t make you leave –– it will be just enough to make you grumble, but stay.

Interest rates are beginning to edge up after years of staying below trend and house prices are still creeping upwards, too, albeit at a slower pace. Waiting for prices and rates to drop to 2012 levels again is simply not a winning strategy.

Is it getting a bit warm in here? Or is it just me …

Things I Have Been Thinking About

September 26, 2018 By Rick Jarvis

For those of you who follow the blog, you know that most times it is a pretty deep dive into a topic usually related to inventory, pricing, or strategy.

Today’s blog is not one of those. This is a shallower dive on a few different topics that we’re keeping tabs on right now. I hope you enjoy!

Facebook and Fair Housing Laws

Facebook just got nailed for violating Fair Housing Laws.

Yep, good old Facebook can’t seem to get out of its own way lately.

Their ad targeting platforms are so good that they give anyone the ability to include — or exclude — any group based on every imaginable demographic, geographic or psychographic attribute. So if you would like to advertise to everyone except a specific religion, sex, familial status, race, or age, Facebook makes it possible.

The same vehicle that was supposed to connect us all and provide a forum for discourse actually provides really awesome tools to do the exact opposite.

Irony.

Opportunity Zones

Much like Historic Tax Credits were all the rage in the 2000’s, the Federal Government’s new Opportunity Zones have developers and investors extremely excited.

The basic gist of the program is that if you purchase a property in a designated ‘opportunity zone,’ it exempts exposure to the capital gain tax, either partially or wholly, depending on how long you hold it. And while all of the details are not fully fleshed out, it also appears that the opportunity zone program will also make it easier for partnerships who use the 1031 Tax Deferred Exchange technique to break up without penalty.

In layman’s terms, Opportunity Zones provide powerful incentive to free up a ton of capital currently trapped due to tax reasons and deploy the proceeds into areas that need a little push to jumpstart the revitalization momentum. Great idea, right?

In theory, yes.

But what is funny is that they used 2010 Census data to determine where the Opportunity Zones should be. Guess what? Scott’s Addition, with rents now approaching $30/SF, is in an Opportunity Zone.

Yes, there are many needy areas that will benefit greatly from the program. But Scott’s Addition? Really? Whoever was in charge obviously didn’t sign the bill while on the roof of The Hof, while playing shuffleboard at Tang and Biscuit, while drinking a cider at Blue Bee, or having a meeting at Gather, or an IPA at Ardent, or over dinner at Brenner Pass …

Classic.

The 2020 Census

The 2020 census is right around the corner and I think everyone wants to know what the population of the City of Richmond will actually be. We have heard estimates that the growth rate has been anywhere from 2 to 5% per annum, depending on which study you read.

From the 1970’s to the 2000’s, the City’s population was either declining or flat. When your population isn’t growing, the supply of housing, office space, and retail space can remain constant. But when your population begins to grow, you have to start thinking about the impact that has on demand for space.

Fast forward to today and you have roughly 230,000 residents in the City –– which is not as many as the 250,000 residents of 1970, but when you consider that the average number of people per household has dropped by an entire person, we might already have a housing need greater than we did in 1970.

And for a city that has no legal authority to expand, Richmond has to make due with what it has. That can pose a big problem.

Right now, developers are repurposing almost any available property they can find into residential apartment space. And while that has helped provide a solution for the renter, it has shifted the burden to office, retail, and industrial spaces, especially as the business climate has improved. If the Scott’s Addition rental rates are any indicator, the shortage has already begun…

And for anyone who has tried to purchase (not rent) an ‘affordable’ home in Richmond, you know how difficult that has become, too. In the last 5 years, homes priced below $400k in the Fan, Museum District, Jackson Ward and Church Hill have increased by $30/SF and marketing times have been cut by more than half.

Affordability is already wreaking havoc on the residential market, and it seems to be now bleeding into the commercial market as well.

Lastly, A Clean Bill of Economic Health

Last week, a bunch of (arguably) smart people got on a stage in Richmond and said that the economy is strong nationally, as well as regionally.

That makes me feel good because most economists believe that this growth cycle has already surpassed any previous growth cycle in our history.

The fact that we are already in uncharted territory should make everyone nervous, except that it doesn’t. Everything looks pretty solid.

All I can add is that the housing factors that caused the crash in 2008 simply do not exist right now. So if a crash is imminent, it will not come as a result of the housing sector.

So if it all falls apart tomorrow, you can’t blame residential real estate and shady mortgage practices this time!

That’s All, Folks…

So that is it for now.

You may now return to your regularly scheduled programming.

Financing

How to Lose Your Dream Home

The Home

Market Conditions

Contract Structure

Losing Professionally and Graciously

Lesson? Or Blame?

Summary

The Escalator Clause

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

What is an Escalator Clause (or EC)?

The Contract Price

The EC Contract Price

The Maximum (or Walkaway) Price

The ‘Beat It’ Number

Conclusion

How Does it Work?

The Premise (ok, ‘The Catch’)

The Players

The Game

Uses and Models

The Real Uses

Successful?

Richmond and iBuying

Questions Abound

Summary

A Return to Normal Appreciation

Boiling a Frog

Tracking Rents

Elective Renting is a Poor Strategy

Getting Out of the Pot in 2019

Facebook and Fair Housing Laws

Opportunity Zones

The 2020 Census

Lastly, A Clean Bill of Economic Health

That’s All, Folks…

804.201.9683

How Do I Schedule a Showing?

804.305.2344

How Do I Determine What I Can Afford?

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Contact The Sarah Jarvis Team

804.201.9683

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