One South

What to Expect in 2020

January 1, 2020 By Rick Jarvis

Forgive me, readers, for I have sinned. It has been 4 months since the last blog. Got busy, you know? Had a lot going on this year.

But that said, there is no better time to jump back on the writing horse and no better topic than the predictions for the coming year, which has become a bit of a tradition on the blog.

So without any further adieu, here are the things we are keeping an eye on and some trends we are seeing (and feel we will continue to see) as we move through the next 12 months.

Navy Hill

For those of you who are not aware of Navy Hill –– well, you should be. Navy Hill is the proposed redevelopment of the Richmond Coliseum and the surrounding blocks into a new 18,000 seat arena plus beaucoup office, residential, and retail space.

When completed, it stands to be the most transformative project the city has seen in 50 years.

To say the least, it is a pretty big deal.

Opposition is Loud

Any development project will bring with it its share of opposition, whether it is a simple townhome project or a large planned community –– that is the nature of development.

But when you start talking about a project on the scale of Navy Hill ($1.5B, if you are asking), then the opposition increases exponentially.

And thus it is with Navy Hill.

So as the noise gets louder, make sure to separate logical and thoughtful opposition from the ‘I don’t like change’ opposition. Sometimes it is difficult to tell the two apart.

Decision on 2nd Dominion tower looms large over Navy Hill project

Want to know more? Our good friends at Richmond Biz Sense are, as always, on top of things.

So 6th Street Marketplace Redux?

So what makes this project different than, say, the 6th Street Marketplace debacle of the 1990s, or the ‘comedy-of-errors-effort’ at building a baseball park in Shockoe Bottom, or even the horrible deal cut with the Redskins for training camp?

Well, two basic reasons:

The development team is extremely accomplished at sports arena/ballpark redevelopment
The city isn’t acting as developer, they are SELLING the land to a private development group

The TIF (not the TIFF!)

The basic deal is that the city is selling the land to the developer and then using a form of financing called a TIF Overlay District (Tax Incremental Financing) to pay for the new arena and infrastructure.

The tax revenues from the improved values in the district would be what pays off the debt –– and once paid off, the city would not only own the arena outright, but they would have an insane amount of new tax revenue flowing into their coffers.

Good News. Bad News.

The good news –– the City will NOT be the developer. The City of Richmond has repeatedly shown that they are terrible at playing developer. And (more good news), they will have activated a tremendous amount of taxable land in the middle of Downtown that currently brings them no revenue.

The bad news –– well, what if it doesn’t work as planned? And don’t the schools need money now?

Yeah, there is that …

Ambitious, But Transformative

The plan is ambitious for sure, but the development team is extremely accomplished. The lead architects were involved in some of the most high profile sports arena developments in the US –– Quicken Loans (Cleveland Cavaliers), Staples Center (LA Lakers, Clippers, and LA Kings), and America West (Phoenix Suns) to name a few.

Another project from Future Cities. The new home of the Golden State Warriors

I, for one, would love to see it happen. The number of concerts, sporting events, and other entertainment productions that skip Richmond currently is frustrating –– especially for a lifelong Richmonder accustomed to seeing of the best shows ever right here at our own Coliseum.

Furthermore, the idea that something like 10 Downtown blocks are currently NOT providing revenue (it actually costs money to maintain so it is technically a drain on revenues, but who cares about such minor details) to a city in such desperate need of fixing its crumbling schools also appalls me –– especially when you see the impact that a sports/entertainment district anchored by office, retail, and residential development has had on other cities.

Yes, the schools are in dire need of additional funding, but so is every other department. When your revenues are fixed, paying Peter means robbing Paul.

So stay tuned –– there is a lot more to be said and written about Navy Hill.

Moving East

Have you ever really looked at a map of Richmond’s development?

If you have, you are one of the few.

**Red** means old. **Green** means new. Can you see the difference in the direction of development?

By and large, it moves from the fall line of the James River (i.e. Downtown) and moves primarily up the river (west and north) and out Midlothian Turnpike, Hull Street, Broad Street, and along 95.

What it does not do is move east at anywhere near the same pace as it does in the other directions (see the map.)

Well, that is starting to change.

The Rise of the East

Back in the days when the cleanest air and water were upwind and upstream, moving west made a lot of sense.

Today, the impact of pollution isn’t nearly the same as it was in say, 1930, and thus the need to continually go west isn’t nearly as strong. And the quest to find reasonably priced housing that isn’t 45 minutes from urban Richmond is leading the change in attitudes.

The first chart shows the $/SF of the two easternmost high schools in Henrico County (Varina and Highland Springs.) Look not at the amount per square foot –– but the rate of change –– when compared to the two westernmost high schools in Henrico (Godwin and Deep Run.)

Bet you didn’t expect that, did you?

Now, take a look at what is happening in the North Church Hill neighborhoods, as well as those to the east of Chamberlayne between Laburnum and Brookland Parkway.

Notice anything? Oh, just pricing that is up anywhere from 3 to 5x since 2011.

Wait, did you say 300 to 500% since 2011?!? Yep.

Affordability

What is driving the change? Affordability (well, at least for now.)

As the prices for entry to the Fan District, Museum District, West End, and even the new home communities in Midlothian and Moseley are reaching into the middle to upper $400’s, people, especially the first-timers, are looking for housing that is both affordable and close in.

Check out the pricing for new housing in four of Chesterfield’s largest new home communities on the chart below:

Cue ‘the east.’

Pricing below $400k, 10-15 minute commutes, and a rapidly growing amenity base are what is underpinning the growth –– and as more and more investment occurs at points east of 95, the better the appreciation will get.

The smart investors are already there.

Inventory

A Growing Metro

Question –– do you know what the rate of population growth is right now in the Richmond region? (And by region, I mean the City of Richmond and surrounding counties)

https://www.grpva.com/data-reports/regional-demographics/

Some interesting stats about our region.

Answer –– Depending on what you read, the population growth in the region is between 1% and 1.5%.

Now that doesn’t sound like a big number until you do the math.

1.3M people x 1% = 13,000 new people each year.

That is a little over 1,000 people per month.

And that is roughly 35 people per day.

Think about that number for a second –– 35 new people per day are moving to Richmond. WHERE IN THE WORLD ARE THEY GOING TO LIVE?

Now you see the problem.

Median Income

Want me to blow your mind even more? The median income in our region is $65,000.

$65,000 translates to roughly a $250,000 to (maybe) $300,000 home in terms of buying power.

Guess what? There is less than 2 months of inventory below $300k in the Richmond region.

Spoken differently, there is twice as much inventory ABOVE $300k than there is below it.

So here we are.

Crisis Mode

Several years ago, we wrote about the coming affordability crisis in housing. Well, it is finally here –– and inventory (or the lack thereof) is the primary culprit.

To quote the great Roger Daltry –– Meet the new boss, same as the old boss! (and I start the video right at his famed scream …)

So until we either find another 1,000 acres in the middle of the city (not going to happen,) or we rewrite mortgage financing to allow for vertical development (not happening fast enough,) we are going to keep seeing prices spike –– especially in the more affordable segments.

Manchester

We were just in Manchester doing a video shoot for one of our listings and man, it has gotten tall. Like really shockingly tall. And I would like to think that I know a lot about Manchester and even I was shocked.

It is tall.

< Don’t believe me? Check the references to ‘Manchester + Tower‘ in Richmond Biz Sense >

For those who do not know much about Manchester, you should. It is basically becoming an entirely new city.

The Terraces at Manchester recently sold for $30M

The amount of development that has occurred in manchester is unprecedented, especially by Richmond standards. Towers, towers, and more towers are now the norm, as is new retail, new residential, and new office.

And did I mention the towers?

Housing

So what impact do you think all of this development had on house prices in Manchester? Yeah, you guessed it –– they went UP!

If you haven’t been to Manchester in a while, I highly suggest you walk the T Pot Bridge, grab a beverage at Legend, and take a look. You won’t believe the activity.

What We Didn’t Talk About

So we left off several topics in hopes of a) making this post of reasonable length and b) leaving something else to talk about over the coming year.

But here are some of the things we did not touch on:

iBuying –– having a company like Zillow buy your home
Building Costs –– still going up!
Politics –– sorry, I don’t have the stomach to write about it
Scotts 2.0 –– the Westwood Tract redevelopment (i.e. the industrial neighborhood just west of Scotts Addition)
Sauer Center –– can I please just have my Whole Foods?!?
2020 Census –– should be interesting, to say the least

So look for us to tackle a few of these topics in the coming months.

And Finally …

2019 was another banner year for One South. We got a lot done.

Performance Metrics

We broke our prior year’s record for transactional volume.

We cracked the Top 10 in volume (by office) in our MLS.

And we still outpace the market averages in pretty every important metric:

Median Days to Sell –– 8 days
Median Percentage of Asking Price –– 100% (yeah, that’s not a misprint)
$/SF –– $31 above the market average
Price –– $30k above the market average.

AND we have continued to conduct our business in an ethical manner (i.e. –– another year of a spotless record with all of the governing bodies.) That makes me especially proud of not just One South’s agents, but of the management team and staff who play a huge role in both our agent’s success and our consumer’s experience.

So to summarize –– more transactions at higher prices with smaller discounts and at a faster rate than the market, all while maintaining the highest level of ethical behavior –– not too shabby.

Expansion

We also grew geographically.

Our new office in White Stone, moments from the Rappahannock River

We recently opened another satellite office in White Stone, Virginia (along the Chesapeake Bay) and are in the process of partnering with a videography firm to even better promote the listings we carry and the neighborhoods we frequent (more on this soon.)

Commercial

And did I mention how well our commercial team is doing? Just read Biz Sense and you will get a sense of how well …

Salomonsky sells Shockoe Slip apartments building for $8M

Oh, just another $8M sale…

The One South Commercial team continued to grow their name and presence with more high profile sales, additional team members, and a new best for volume.

In Closing

We fully expect 2020 to be another banner year for us as the economy remains strong, interest rates low, and our region continues to attract new residents.

Most prognosticators expect the market to get started even earlier this year (but that also depends on the sellers and the weather, so stay tuned.)

And while we expect to see a bit of a slowdown around the election (it happens every election year), don’t sweat it –– just plan accordingly.

Thanks and we look forward to serving you in the coming year!

Uncertainty

May 14, 2019 By Rick Jarvis

I have never met someone who loves uncertainty.

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

Guess what I do for a living?

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

Uncertainty is the Constant

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

Your job could change.

Your health could change.

The economy could (ok, will) change.

The school district could change.

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

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

I could go on and on.

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

Feels a little unsettling, doesn’t it?

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

The Market Tends To Rise

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

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

That is pretty consistent performance.

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

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

2008 Is Unlikely to Repeat

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

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

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

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

Owning is Risky. Renting is Riskier.

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

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

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

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

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

Perfect Information Simply Isn’t Available

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

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

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

Summary

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

via GIPHY

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

Is ownership for everyone? No, of course not.

Does every transaction work out? Again, no.

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

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

via GIPHY

SIX-TEEN TRILLION DOLLARS!

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

$16T is a substantial number.

Owners get the benefit, renters do not.

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

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 …

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.

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.

One South

Navy Hill

Moving East

Inventory

Manchester

What We Didn’t Talk About

And Finally …

Uncertainty is the Constant

The Market Tends To Rise

2008 Is Unlikely to Repeat

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

Owning is Risky. Renting is Riskier.

Perfect Information Simply Isn’t Available

Summary

The Back on Market Statistic in MLS

Why Don’t Homes Close?

Lender Incompetence

An Appraisal Issue

Inspection Issues

Agent Incompetence

Cold Feet

Summary

How to Lose Your Dream Home

The Home

Market Conditions

Contract Structure

Losing Professionally and Graciously

Lesson? Or Blame?

Summary

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

804.201.9683

How Do I Schedule a Showing?

804.305.2344

How Do I Determine What I Can Afford?

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