Sarah Jarvis Team at One South Realty

at One South Realty

Listing

Price or Terms – Which are More Important?

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In the real estate business, the focus of almost every conversation is price.

‘How much are they asking for their house?’
‘What is the assessment?’
‘What does Zillow say it is worth?’
‘They paid WHAT?!?’
‘The offer is for HOW MUCH?!?!’

You never hear:

‘I can’t believe the rent back was for 3 days!’
‘The due diligence request was TOTALLY reasonable and allowed for the correct framework for agreement.’
‘Wow! What a shrewdly written escalator clause!’

Listen, the price a property transfers for is obviously important, but it is not the only part of making a good deal. Many other factors contribute to the making of a really great deal, other than what someone paid.

Price or Terms, You Decide

A real estate contract is made up of two things – the PRICE for the property and TERMS under which both sides must abide. It is the former that garners all of the attention but it is the latter that matters more in many cases.

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Look at it this way – how much space in the contract is dedicated to each aspect?

In Section 4 of Page 1 of the Richmond Association of Realtors Residential Purchase Agreement, you will find the following language discussing price:

“The purchase price of the property is __________, which shall be paid to the seller at settlement, subject to the prorations described herein…

The standard contract then goes on for another 8 pages to cover the other items that go along with the purchase of a home!

Just to clarify – the purchase price is handled with one sentence yet the rest of the contract is 8 pages long. And just so you realize, the contract is 8 pages BEFORE adding the required disclosures and any addenda.

Does that tell you anything?

Did you realize the ‘Standard Provisions’ alone run from A through K? Did you realize that Section #21 is labelled ‘Other Terms’ and is blank? Did you realize we can add as many addenda to the contract as we need to?

Wow.

Terms

The contract cover numerous bases:

  • Financing
  • Inspections
  • Title
  • Numerous Disclosures
  • Closing
  • Fees
  • Representation
  • Default

While it is not standard practice to negotiate each of these individual points in a standard residential contract, there is room to push and pull in order to either create wiggle room or close some outs (depending on which side you are on.) When you begin to examine other types of real estate contracts (commercial property, leases, options, land, new homes) then you introduce elements that fall outside of the generally accepted norms.

At One South, we pride ourselves on having a great deal of exposure to contract structures and practices due to our experience in many different arenas. Here are some things to think about.

Know Your Outs

Getting into a contract is easy but getting out can be hard, expensive, or worse – both!

Knowing on the way in, how you can get out, is important. And while you should not enter into a contract with someone for anything if your expectation is to get out later, if circumstances change and a seller is not in a giving mood, you may have to exercise an out.

In any contract, there are points where contracts can be far more easily ‘blown up’ than other points. Likewise, the closer you get to the settlement date the harder (and more expensive) it becomes. Understand the potential points in a contract where you can extricate yourself without penalty (or even lawsuit) before signing on the dotted line.

Know What Matters to Both Parties

This was an actual event — while driving home from vacation, my middle daughter in the front seat turned to my eldest in the back seat and said, ‘My sunglasses are in my bag in the back. If you get them for me, you can borrow my headphones.’  My eldest reached into the back and, without incident, got both the sunglasses and headphones. This NEVER happens in my house. NEVER. Any request made by one daughter to the other is generates a heated negotiation that usually involves me either turning up the TV or leaving the room.

This time, for reasons I am still unsure as to why they happened, it was different. My younger led with an offer of value to receive value. It was a stunning display of WIN – WIN. As a Realtor, I had never been so proud of my young negotiator.

via GIPHY

 

The lesson is as follows — we all value things differently. My middle daughter does not hate my choice in music nearly as bad as her sister so her headphones were of far more value to the elder one. But since she was sitting in the front seat and we were driving west in the afternoon, sunglasses were important. It was a perfect trade.

For someone who is attempting to sell a home and buy another one, time and flexibility matter. Allowing a seller not only the time, but the certainty to go out a buy their next home is HUGELY important to them. The use of a ‘Rent Back’ agreement is appropriate.

I once saw a seller of a large lot home toss in the John Deer tractor for free … and the purchasing suburbanite with a push mower ate it up! The ‘Bill of Sale’ is the correct tool in this scenario.

Being able to pay in a currency that matters more to them than you is always smart.

The Richmond Association of Realtors offers us over 150 different contract forms to use.
The Richmond Association of Realtors offers us over 150 different contract forms to use.

Understand Contract Structures

A contract is a flexible and malleable instrument … it can do a lot of things. Having been exposed to not only the common practices in the residential market, but the commercial and development market has given us insight into a wide range of techniques.

In the recent spring markets, multiple offers were far too common. Securing the winning offer when 3 or more people are bidding is hard. Most offers in a competitive situation include escalation clauses. Writing an escalation clause that secures the property while simultaneously paying as little as possible is an art.

Another example might be a using study period (in lieu of property inspections) and/or other phraseology to limit exposure for both parties. Often times, limiting both upside and downside is a technique that can provide a framework for a buyer and seller to reach an agreement.

Lastly, when working with buyers that need to sell a property before they qualify for another, the ‘Contingent Upon Sale’ and/or ‘Right of First Refusal’ contract is often required. It is critical to not only understand the differences, but the correct application of these contracts to best serve the client.

I shudder to think of the number of times a bid was lost or a price was escalated unnecessarily from faulty structure or from not understanding contract options.

At the end of the day, trade price for terms and you will win far more than you lose.

Conclusion

This post could have been faaaaaaarrrrrrr longer.

It is hard to say demonstrate competent contract writing in blog form as each set of circumstances is unique. The subtleties and nuanced structures should vary by the parties involved, marketplace conditions and each individual’s goals.

And while expressing what we know succinctly is challenging, I think it is fair to highlight some of deals we have negotiated to give you a sense of the depth of our experience:

We know a thing or two about using the contract to our client’s advantage.

 

 

 

What Are You Going to Do to Sell My Home?

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It is probably the most asked question by the selling public when interviewing agents for the sale of their home.  I think it is often misunderstood.

how are you going to

Each agent has a standard response to this question (it is usually some type of list) where they will tout all sorts of activities designed to impress the seller.  Some are these actions are critical and some, well, not so much.  As a matter of a fact, I once saw an agent that had broken down the home selling process into ‘113 Simple Steps’ (I kid you not.)  I always wondered if skipping a step meant failure, but I honestly didn’t have the heart to ask.

While choosing an agent to represent you in the sale of your home is important, it is not simply about tasks (otherwise ‘Mr 113 Steps’ would win every time), it is about applying the correct tools to the correct situations.

Below you will find some questions to ask and a list of things we can do for you.

What Type of Sale is Required?

In theory, all housing is unique.  In realty, much housing is very similar.

Selling contemporary infill, high performance new suburban and 20 year old town homes all require a different mix of tools.
Selling contemporary infill, high performance new suburban and 20 year old town homes all require a different mix of tools.

How an agent would approach a sale in Founder’s Bridge is largely the same as in Tarrington.  That said, selling a condo in a historic warehouse will differ greatly from selling a home on 15 acres in Goochland. The key is knowing what works in which segment.

The geographic location, the time of year, the price of the home, the type of property, the buyer’s likely profile and the age of the home all drive the correct mix of techniques.  A spring open house in the Museum District for a property priced below $400,000 might mean 100 people or more touring the property in a 2 hour period while an open house on the same day in rural Hanover County might not generate a single tour.  Similarly, putting a vinyl sided colonial built in 1992 in Estates and Homes magazine is probably not money well spent.

Just know that the ‘one-size-fits-all’ technique employed by many agents is the wrong way to go about it.  Find an agent with not only a big tool kit, but an understanding of when to use each.

To Team or Not To Team?

One of the trends in our industry over the last decade has been the rise of the real estate ‘Team.’  Teams named for the lead agent or for some esoteric concept have sprouted up everywhere. In my opinion, teams are a good thing.

It seems like all pictures of teams require the 'arms crossed' pose. Why is that?
It seems like all pictures of real estate teams require the ‘arms crossed’ pose. Why is that?

The rise of the team is important because it acknowledges that at each level of real estate, increased specialization is beneficial.  From pricing to marketing and syndication strategies to contract administration to understanding the nuanced requirements of selling in historic or mixed-use environments, the more specific knowledge a team can bring, the better the level of service for the client.

At the end of the day, the collective value brought by a team based approach is generally better than the ‘one agent island’ employed by the majority of agents in any given market.

How Important is Zillow to Selling a Home?

When Zillow was launched in the 2006 (and cousins Trulia and Realtor.com soon thereafter), it changed our industry.  By bringing the home search process out from behind the MLS curtain and putting it on public display, it forever changed the public/Realtor dynamic.

The percentage of buyers and sellers using agents is as high as it has ever been. Zillow and Trulia seem to think otherwise.
The percentage of buyers and sellers using agents is as high as it has ever been. Zillow and Trulia would like you to believe otherwise.

The narrative that Zillow, Trulia and Realtor would have you believe is that they disrupted the SALES process … which is, in fact, untrue.  The percentage of For Sale By Owner is at its lowest point in history and the percentage of buyers employing a Buyer’s Agent is at its highest.

What Zillow changed is the SEARCH process … not the SALES process.  It is a subtle, yet an important distinction.

This is the key takeaway –  these platforms that allow Realtors to promote properties almost instantly across a network of websites have changed how we, as agents, acquire new clients, but it has not really changed how properties are sold.  When we (Realtors) adopt an aggressive digital strategy that heavily leans on Z/T/R, the reality is that we benefit more than you do.

Be careful in mistaking an agent’s Zillow strategy as a marketing plan for your home – they are two different things.

Word_Cloud_GeneratorSo How Can You Tell the Professionals?

When you know how to correctly apply the tools, your metrics improve.

We will put our metrics up against any other company in the Metro:

  • Our marketing times are low
  • The pricing to our sellers is above the Metro average in terms of price AND of ‘price per foot’
  • And the ratio of the sold price to list price is nearly a full percentage point higher than the market average

You can read more about the way One South compares to our competition here…

Examining how well a brokerage performs on these metrics will go a long way in determining how well they know which tools work best for any given situation.

The List of Stuff We Do

All that said, if you just want a big giant list, here it is …

  • The MULTIPLE LISTING SERVICE is a big part of our every day.  Keeping the database current takes time and know that agents are fined or otherwise punished for non-complinace.  Oh, Zillow and Trulia would not exist if it was not for the data contained in MLS.
  • We spend an inordinate amount of time on the VALUATION of properties.  We help sellers understand values and we help buyers understand values.
  • We PROVIDE INSIGHT, GUIDANCE and PERSPECTIVE.  Of all of the things we do, trying to explain how we are going to help you navigate an unforeseen issue before it arises is hard.  Sometimes, problems are easy to predict  (short sales are more likely to have title issues, old houses are more likely to have inspection issues, condos are more likely to have lending issues) but being able to handle the last minute issue that can derail closing is what we do every day.
  • We hold OPEN HOUSES for our clients and we will often do OPEN HOUSES for the brokerage community to introduce new properties to the marketplace.
  • One of the primary ways we raise awareness  is via the E BLAST where we send new listings, price changes and other updates to the brokerage community.
  • ZILLOW – see the section from above.  Managing Zillow, as well as TRULIA, REALTOR.com and the hundreds of other sites vying for the public’s eyeballs takes a great deal of time and effort to do right.
  • People still love a well done PRINT BROCHURE.  Despite the digital movement and the ubiquity of online information, the public wants one … so we continue to create them.
  • PROFESSIONAL PHOTOGRAPHY is a must.  While cameras, cameraphones and a host of other ways to capture and improve images exist, when the pros shoot it, it just looks better.  Use them.
  • The LOCKBOX helps record who goes in when and reports a ton of information.  We should place one on your front porch/door/railing to provide protection for your key.
  • Often, on the sign, we will place an INFO BOX so that when someone walks/drives by, they can grab a shortened version of the brochure and find out some basic info on the house.  The Zillows and Trulias of the world have largely rendered the need for the info box obsolete
  • Some swear by the VIRTUAL TOUR while others are more ho-hum about it.  Well done photography can often times be stitched together to create the VT, but nothing replaces an actual tour.
  • Individual PROPERTY WEBSITES can be very important, especially when the property rises to a certain level.  If the home is architecturally important or very specific details are required to tell the story, the a site dedicated to the property should be created.  We do this in-house, typically.
  • The rise of VIDEO in our industry is unmistakable.  The problem is, well done video is hard, expensive and time consuming.  In a market where properties are moving quickly, video may not be worth the effort.  It depends on the goal.
  • In any given day, especially in the spring, ANSWERING INQUIRIES thoughtfully and correctly has consumed the day.  An agent’s job is to answer the inquiry (from both the public and peers) in such a way that generates showings.  It is an art.
  • You would be surprised how much time is spent SCHEDULING.  Life goes on despite a For Sale sign in the front yard and trying to coordinate everyone’s schedule (buyer, seller, agent, family, inspector, contractor, insurance agent, appraiser, running late, running early, need to reschedule) can be as time consuming as any activity we do.
  • Any good agent is also adept at SHOWING.  A typical showing will take close to 2 – 3 hours ‘all-in’ when you include preparing, printing, travel time, actual demonstration of the property, turning lights on (and off) and locking up.  And often times, we show up, meet the client and show the property only to find out afterwards that they are already working with a Buyer’s Agent who they never called to show them the property.
  • Obtaining FEEDBACK that is relevant and valuable is also an art.  It takes time and you have to be diligent.  Buyer’s Agents are busy and don’t normally have the time to stop what they are doing and tell you why their client did not like your home.  Good listing agents are diligent about the feedback loop.
  • We NEGOTIATE CONTRACTS and then we NEGOTIATE INSPECTIONS.  Remember, contracts are combinations of a price AND terms.  Many tend neglect the terms in exchange for price and it is a shame.  So much seller benefit can be gained by focusing on the terms of a deal.  Without going into too much detail and giving away all of our secrets, we firmly believe in negotiating with a plan in mind.  Know where you stand.  Know the market.  Know your goals.  Negotiate accordingly.
  • Lenders/Loan Issues delay closings more than any other reason.  COORDINATING WITH THE LENDER is the most critical thing we do while the home is under contract.  Making sure the lender has copy of all of the paperwork, contract, addendum, pest report, necessary inspections, addenda, HOA Docs and every other piece of paper they need in order to get the loan underwritten and in the closing queue to make sure we do not miss a date.  As a matter of a fact, One South views this piece as so critical, we have an entire staff dedicated to making sure that the lenders have what they need from us.
  • COORDINATING WITH THE CLOSING ATTORNEY is as equally important.  They need the same things as the lender (plus a few others) and with the volume of sales flowing through the system right now, getting everything to the closing attorney promptly (or making sure the Buyer’s Agent did) is a big part of representing you client.

What Did It Sell For?

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The ability to look into the future to see trends is pretty cool...
The ability to look into the future to see trends is pretty cool…

Early each spring, the trees begin to bud, the birds and squirrels begin to be seen with more and more regularity and the real estate market begins anew.  About the time the first day a short sleeved shirt seems appropriate, the pressure to decide whether to buy a home (or sell one) rises and everyone in the marketplace begins to look for clues about what pricing will do this year.  Soon, the buyers and sellers begin their oft-repeated mating ritual where each side tries to figure out how much, if at all, the pricing has advanced from last year.

The Multiple Listing Services (MLS) is the primary resource for housing information.  It records 95%+ of the residential transactions that occur in our marketplace and in doing so, gives us tremendous insight into how buyers valued properties.  That said, the transactions recorded by MLS have by their very nature occurred in the past and thus offer only a partial view of the future.

Looking into future in any industry is of great value.  It sure would be great if we could predict the future of real estate market, wouldn’t it?

Understanding MLS Statuses

While MLS allows for 9 different statuses which describe the availability of a specific property, there are generally 3 that matter most – ACTIVE, PENDING and SOLD.

  • ACTIVE means the property is currently available FOR SALE
  • PENDING means the property is UNDER CONTRACT between buyer and seller with agreed upon price and terms but has not transferred.  The terms of the sale are not public knowledge
  • SOLD means the property has TRANSFERRED and the price and terms are now public knowledge
The ability to search the MLS by status can provide valuable intel about where the market is and where it is heading
The ability to search the MLS by status can provide valuable intel about where the market is and where it is heading

The key difference is that the pending sale terms are not fully disclosed until the property closes.  So, in theory, little real intel can be gathered from a pending sale until it officially closes usually 45 – 90 days from the date it went under contract.

Or can it…

Sales are Seasonal

The seasonality of real estate is undeniable.

Each spring, the rate at which housing is absorbed begins to rise and continues to rise until reaching its peak sometime in the June/July time frame.  In most years, the number of sales recorded from January to June will represent roughly 60% of the sales of the entire year.  Furthermore, the 4 month period of March through June typically yields 40% or more of the entire year’s sales.

So, a large majority of the housing decisions made during the year are being made without the benefit of knowing the details of the sales in PENDING status.  But that does not mean that we cannot make some educated guesses.

What We Can Tell

In MLS, the only information that is entered when the status changes from active to pending is which agent sold it and on what day the contract was accepted.  So when the property pends, the number of days the property was marketed freezes allowing us to look at how long it took for the property to sell.  This statistic is called ‘Days on Market’ and measures the time between when the property was brought to the market and when it went under contract.

As one would expect, there is a correlation between the number of days it took the property to sell and the percentage of the asking price the seller received.  Using the last 12 months of sales between $400k and 800k in the Greater Richmond Metropolitan Region, you can see a trend develop:

sales_prices_huntts_row

The obvious conclusion is that the longer the amount of time the property spends on the market, the bigger discount a seller is forced to take.

Applying the Data

In a nutshell, if you are trying to look at MLS in March for guidance, you are not going to find many closed sales from the current year … they just haven’t happened yet. Being able to draw insight from the most current available data (the PENDING inventory) is incredibly helpful in creating winning strategies.  Using the chart above to guide your offer (or counter-offer) will help you understand the probable prices at which key sales will close.

The Magic of MLS

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We love our Multiple Listing Service (MLS.)

In terms of importance, think of it this way – it is a curated database that has recorded in great detail upwards of 95% of the real estate transactions that have occurred in our marketplace dating back decades. The accuracy of the database is protected by spot checks, self-policing and stiff penalties for incorrect use (both accidental and intentional.)  I challenge anyone to find a more accurate database that is as all-enomcpassing as the local MLS.

iStock_000049986426_XXXLarge_jpg

Why MLS Matters

When you realize that the local MLS database helps guide millions of people in the acquisition and sale of what is typically one of the biggest, if not THE biggest assets in their portfolio, you begin to understand its importance.

[ Want a direct link to MLS?  Click here to learn how ] 

People tend to think of MLS in terms of letting Realtors know what is on the market and what has recently sold … which MLS does and does quite well.   But most don’t often consider what else it can tell us and how to use that knowledge to guide us.  The idea of ‘Big Data’ is entering its golden age as the software required to do first rate analysis of the data is becoming simultaneously cheaper and more powerful. It will not be long before SAS or IBM brings the capability to analyze large swaths of data to the layperson level and I, personally, can’t wait.

But until we can buy access to the software cheaply enough AND MLS allows unfettered access to the records (they currently have strict limits on downloads), the best we can do is use the existing tools in MLS to analyze smaller data sets to try to find answers to some really neat questions.

Below are some statistics that are easily computable in MLS, yet rarely used.

List Price to Sale Price Ratio (LP/SP)

The price a seller is asking for a home and the price it sells for is generally not equal.  In most markets, the seller and buyer negotiate a price that is below the asking price by some number.  In some instances (most commonly in the spring and in a highly sought-after market,) the price may get bid up above the original asking price if multiple offers are received.

Now the statistic itself, for most markets, tends to stay somewhere in the 94-98% range.  In the darkest days of 2009-11, we did see some instances of sub 90% LP/SP, but that is rare.  A general rule of thumb is that 3% below ask is a good number to model.

Now, many choose to use the LP/SP ratio when coming up with an offer OR when estimating their proceeds from a sale.  Both of these uses are legitimate and informative.

That said, the statistic delivers another very powerful message that is not oft-discussed.  Assuming for a minute that a buyer will generally negotiate up by roughly the same amount a seller will negotiate down, most offers will come in anywhere from 92 – 95% of the actual asking price.  This implies the asking price for a home must be within 8% of the actual value of the home in order to receive an offer.  Otherwise, the buyer is likely to focus on other homes for sale.

It is amazing the number of sellers who fail to realize that the practice of raising the price to allow for future concessions often times prevents them from receiving an offer.

Inventory

We spend a great deal of time at One South following the inventory in the marketplace.

Inventory levels matter.  The chart above shows the number of homes available relative to the number of homes being absorbed.  Inventory is measured in time (months) and effectively states that if no new homes were to come to the market, how long would we have, given the current rate of absorption, before we ran out of homes to buy.

In economic terms, buyers collectively act rationally.  Acting ‘rationally’ means they will be attracted to the best value available in any given marketplace.  The more options there are relative to the number of buyers in the market, the less power any individual seller has.  Often times, sellers tend to look to the past to price their home and pay little to no attention to current market conditions (we wrote an entire post on this exact topic here…) and almost always ignore the impact of seasonality.  Taking into account inventory makes for far better pricing (and negotiating) decisions.

Market Activity

One of my personal favorite metrics to track is the number of pending sales.  When a home is placed under contract, it is considered to be in ‘Pending’ status in MLS.  The rate of new pending inventory in a strong indicator of market activity.

The chart below includes the rate of closed sales as well as new pending sales.  As you can tell, the pending sales tend to occur anywhere from 45 – 60 days prior to closed sales.


Most national statistics track closed sales and in doing so, deliver reports on market conditions that lag the actual market conditions.  When we hear government sponsored statistics discussing market health, it can be misleading as the activity being reported is generally 3 – 4 months old.  Keeping an eye on the pending inventory will give you a far better picture of where your market stands currently.

Conclusion

We touched on a few of the easier but still insightful statistics.  But with just a little thought and some basic knowledge of how to download data, some amazing observations can be made.  We have helped our clients price some truly special properties and accurately predict buyer behaviors that would not be evident without some in-depth analysis.

MLS can help you find:

Challenge your agent to deliver you real insight, not just ‘comps.’  MLS is a wonderful database and asking it the correct questions will yield some great intel.

 

How to Execute a Simultaneous Sale/Buy

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So you want to buy a new home, eh? Great! We can help.
But you have a house to sell, too. Great! We can also help with that.
But you can’t buy the new home until you sell the existing one. Got it.
And you don’t want to settle for a new home that you don’t absolutely love. No sweat.
And you don’t want to move twice. Understood.
And you don’t have to move so if you don’t get what you want, you can just stay put. Noted.

buy and sellSelling and Buying at the Same Time

We hear these statements all of the time … and trust us, we really do understand.

As the market rebuilds itself and more and more people are getting back to a position where the value of their homes has recovered, we hear the aforementioned wishes more and more. But correctly executing the sale/buy transaction is harder than it sounds … and it is about to get harder. Likewise, one person’s best way might not be another’s best way. This is not a ‘one size fits all’ type of transaction.

Let’s look at what to consider.

Everyone is Different

First and foremost — no simple answer exists.

Everyone has a different view of financial risk, and thus, no one solution exists ...

If anyone has a single ironclad way of handling this scenario, I have yet to meet them. Not only is each situation unique, but everyone has a different view of financial risk. What may feel comfortable to one buyer may feel unnerving to another. The possible combination of factors – price, income, equity, interest rates, timing, distance (and many more) – makes recommending a single ‘step by step’ pathway both irresponsible and short-sighted.

At the end of the day, you need to consider many factors. By understanding the concepts and their risk/impact, you will give yourself a framework to help discover YOUR best path.

A Framework for Understanding

Remember, it is a portfolio decision, involving a buy AND a sale ...
First and foremost, you need to realize you are making a portfolio decision. The sale of a home and subsequent purchase of another is nothing more than rebalancing your overall financial picture, at least as it relates to housing, and decisions made on one side impact the other. These two seemingly independent events need to be considered in conjunction with one another and should not be separated. Many people want to look at the two transactions as independent of one another, but they are not.

Unless you are moving from one market to a completely different one or selling and moving into a long term rental, replacing one asset with another simultaneously means similar market conditions on both sides (with some exceptions, obviously.) If it is a seller’s market when you sell, it is when you buy. The reverse is also true. Don’t expect otherwise.

Months of Inventory – Richmond Region

For more information about market conditions, check out our STATS page

Pick a Side

One side of the transaction is more important than the other ...
That said, you have to recognize that one side of the transaction is more important than the other.

Typically, when trading up from the starter home to the 5 bedroom home that will take you through the next 20 years, the home you are buying is more important than the one you are selling.

Act accordingly.

Timing is Everything

The sale/buy is about precise timing.

A properly executed sale/buy means the execution of many complex things all at once – closing, funding the mortgages, payoffs, wire transfers and movers (to name a few.) Make sure your team (Realtor, lender, attorney) is not only experienced, but experienced in working with one another.

A missed date in a sale/buy can get incredibly expensive extremely quickly and guess what – you are the one who carries that risk.

Contingent? First Right?

Sellers in accelerating markets hate both ‘Contingent Contracts’ and contracts with a ‘Right of First Refusal.’  Being either a contingent buyer or first right buyer in most cases, means overpaying, and is a poor strategy.

More on this later.

Liquidity is Power

Many financial advisors have scared their clients by not understanding the housing implications of their advice ...
Liquid assets are your friend. 401k, stock accounts, home equity loans, other retirement funds … all of these have value either as collateral for a loan or in their ability to be turned into cash.

Make sure you fully understand the impact of accessing these assets (taxes, penalties, borrowing rates, vesting) before blindly refusing to use them. It should also be noted that many a financial advisor has scared clients by not understanding the housing implications of their advice. Asking your financial advisor is prudent, but filter that advice they give you.

Use Your Math Skills

Furthermore — remember it is a math problem.

Don't try to save $1,000 on one side to cost yourself $3,000 on the other side ...
Often, we hear clients say ‘well its too expensive to borrow against my 401k’ when in actuality, the cost of accessing assets like the 401k is far cheaper than the alternatives. Don’t try to save $1,000 dollars on one side and cost yourself $3,000 somewhere else. If liquidating a stock position makes you a stronger buyer, seriously consider it.

Use Your Strength

Likewise, the more strength you have as a buyer, the better deal you can drive.

Remember that an offer is a combination of price AND terms. Being a good buyer is more than just price. Down payments, closing dates, inspection, appraisal and sale contingencies are all part of the contract and can make your offer more attractive than someone else’s in a competitive offer situation. The better the home you are buying, the more offers it will generate.

Vet Your Lender

A good lender is a must.

The use of a non-local lender always costs more in the long run ...
If you use an internet lender or some other lender tied to your stock portfolio, money market account or insurance carrier, prepare to have a miserable and expensive experience. I cannot state this loudly enough – the use of a non-local lender will cost you substantially more in the long run. Do not worry about how great their incentives are to get you to use them, don’t do it. Nothing they can offer you will make up for the expense of missing the closing date on a simultaneous transaction. If you are talking to one now, hang up the phone, close your internet browser and step away. Non-Local lenders never ever ever work out. Never. Ever. Never. And, once again,  you are the one who loses, not them. If you take nothing else from this post, remember this point … please.

Penny Wise and Pound Foolish

Beware the tendency to be ‘Penny Wise and Pound Foolish.’

Many times I have seen a seller (who is under contract to buy) make a dangerous decision about an minor inspection item and put their own sale at risk. Buyers are still skittish and being too aggressive on a small item, regardless of how right you may be, means losing big in the end. If you have removed your own contingencies and spent money with your lender, inspectors, insurance broker and appraiser, losing the contract on your house over a small inspection item will feel incredibly foolish in hindsight. Be extremely careful about everything you do that can give your buyer an out when trying to execute the simultaneous transaction.

Do Your Homework BEFORE it is Due

Speed is critical, and so is market knowledge.

Do your homework, get prepared and rehearse!
Minimizing the time between when you find the perfect house, get it under contract and have yours on the market minimizes your risk. Knowing the market means immediately recognizing a good deal and being prepared to act gives you the greatest chance for success. Do your homework, get prepared and rehearse.

  • Keep your home ‘show ready,’ even if not on the market
  • Get pre-approved, not just pre-qualified, and keep it updated
  • Have the ability to go see a newly listed home within 24 hours
  • Be ready to pull the trigger and negotiate quickly
  • Have your team ready and understand the costs

Expect Competition

Expect the best listings to have multiple offers and prepare accordingly ...
In a market starved for inventory, your value as a buyer is far less.

Don’t expect the new listing in the perfect neighborhood to negotiate price much (if any) and don’t be surprised if there are multiple offers. As a matter of a fact, expect the best listings to have multiple offers and prepare accordingly. And the more you lallygag with making an offer, the more competitive offers will magically appear.

Wait or Act?  You Decide …

Waiting makes ‘Trading Up’ more expensive. The long term prognosis for both interest rates and home pricing is heading up. If you are moving up, then waiting until the home you are selling appreciates some more (probably) means buying a more expensive home at a higher interest rate. Yes, your $200,000 home might go up by 5%, but so did the $500,000 home you want to buy. Do the math.

Get Housed Right!

Do not discount the cost of being ‘Housed Incorrectly.’

If a recent job change has created a 90 minute commute or a change in familial status means you have too much (or too little) space, it causes stress. The impact being in a house that no longer fits is not without actual cost or mental/emotional cost. The creation of unnecessary stress and expense is unwise.

Accept the Idea of Moving Twice

Be prepared to move twice.

No one wants to hear this but know that making a decision about your next 10 to 20 years is worth a short term rental or week in a hotel. No one makes their best decision when they are under pressure. Removing the ‘I refuse to move twice’ condition from decision means more and better options as well as a stronger bargaining position. Buying a home that does not fully fit so you didn’t have to move twice means going through the process again … how big of a pain would that be?  Not only would be a big pain, it would be an expensive one, too. If moving twice gets it right, do it.

The Sale/Buy is Harder than Ever!

Similarly, the ability to execute a simultaneous buy/sale is about to change and may force you to move twice.

The implementation of the CFPB’s mandated new closing protocol will occur in late 2015 and change how closings are handled. Many of the changes create timing issues that are going to impact the ability to close consecutive transactions. The old way is no more and the protections that are now built in on the buyer’s behalf takes away about half of the flexibility to correctly execute the simultaneous buy/sell. For sell/buys using highly leveraged mortgages, or closings where multiple people are executing simultaneous buy/sells (think of a long line of dominos,) it will be even harder.

Plan B

Have a backup plan in place.

Do you want the know the best way to lose big in a negotiation? Have no alternative, that’s how. Playing chicken with a lender, mover or builder gets awfully difficult when you have no backup. And know that the your lender, mover and/or builder plays the negotiation game every day … you might play it once every decade. They are better at it than you are.

The Use of Contingent and First Right Contracts

Above, we referenced the ‘Contingent Contract’ and ‘Right of First Refusal’ (ROFL) contracts. In theory, they make perfect sense.  In reality, they don’t get you what you want. Contingent contracts and ROFR rarely work.

First, a contingent contract effectively says to the seller – ‘I will buy your home when I sell mine.’ The seller takes their home off of the market and waits for the buyer’s home to sell. We very rarely recommend for our sellers to accept a contingent contract.  If we do, it is only with draconian constraints and penalties for non-performance by the purchaser. The idea of taking a salable home off of the market during the spring season is colossally stupid and thus, it should not be done without proper protection.

In a ROFL, the buyer effectively says to the seller – ‘I will buy your home when I sell mine, but you can still market the property. If someone else brings you a contract, then I will either figure out a way to buy it or step aside and let the next group buy it.’ Only in the rarest of scenarios do we recommend for a seller to accept a ROFR.

When the market is stout, like it is now, these contracts are basically worthless. A seller is looking for someone without a contingency so they they can get on with their move. In order for you to convince the seller to accept a contingent contract, you pretty much have to overpay to get them to accept your contract.

Similarly, if you are in a ROFR or contingent situation, you have to price your home aggressively or risk losing the property you want to buy. So you end up overpaying for the purchase and underselling on the sale. That is just dumb.

Either way, the contingent contract or the ROFR, the buyer usually pays more and receives less … I am not sure why people try to use these techniques.

Conclusion

At the end of the day, we recommend figuring out how to buy without the use of the contingent contract or ROFL. In this market, these contract structure present risk greater than the reward in almost every case.

If you cannot buy without selling, we recommend selling first and strongly considering the dreaded concept of moving twice. The position of strength you will gain by doing so will far outweigh the short term nuisance. If you can figure out a way to make the timing work, then great, but a temporary move lets you shop from a far stronger position.

And lastly, if you want to move once, make sure you can act quickly and have a backup plan in place, just in case. Know that in doing so, you are limiting your options and placing additional risk in the transaction.  The coming changes to closing practices are going to muck up the system tremendously and create chaos.  The financial penalties to lenders will make them even more cautious than they are currently and the idle moving trucks in your driveway is not their primary concern when faced with up to a $1M PER DAY fine.

Understanding the inherent risk in this type of transaction is key and hopefully, this article has brought to light the difficulty and danger in correctly navigating the simultaneous buy/sell.

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Chris Lester
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