Why I Avoid Love Letters Attached to Offers

I understand the trend of sending a personalized note when placing an offer on a property especially when there may be a multiple offer situation. I as a broker adamantly refuse to open and review such attachments to an offer and I advise my selling clients to avoid yet it is their decision.

As a listing broker I provide a service to my clients. In the event of a multiple offer situation (which may also suggest the residence is priced below market thus the strong interest) I review the offers, present the offers and will opine which I believe may be strongest and the one to proceed with.

Choosing the strongest offer may include a verifiable pre-approval letter. A larger down payment leading to a potentially easier loan process. Other variants may include a check for the earnest money or down payment provided with the offer versus an IOU i.e. to be tendered three days after mutual execution of contract.

Personally I am not a fan of waivers of appraisal and inspections. Yes such waivers may be attractive to a seller however if issues arise and worse one enforces specific performance there is generally ill will at the closing and worse potential litigation in the future.

Back to Love Letters, I hate them. Again I understand the psychological comfort associated with composing and sending with an offer. I as a buyer have too been tempted but also know as a Broker the strongest offer is the winning offer. As I advise clients in a multi-offer situation; I do not care what is the highest price offered I want the offer that will close.

As a Listing Broker the Love Letter puts us brokers in jeopardy of potentially violating multiple local, state and federal laws concerning Fair Housing. Many letters come with pictures of the prospective buyers. Such letters usually include detailed information concerning occupation, ethnicity, family structure, disabilities and so forth. Such information, even being exposed momentarily, while you may not be bias may alters one’s subconscious decision-making process.  This is why I advise do not open or review Love Letters when working with sellers.

As a Buyer Broker I understand the desire by clients to enhance their position in a multi-offer situation. I always advise buyer clients to have their paperwork done prior i.e. pre-approval if a loan is procured, have inspectors and others lined up prior to be able to offer an expedited schedule and subsequent close and to not have an emotional attachment to real estate as options are always available.

The following distributed by the Colorado Real Estate Commission and Department of Regulatory Affairs transcends boundaries. I have shared the advisory with peer Brokers in both Colorado and New York: Real Estate Broker Licensee Advisory: Buyer Love Letters

Some readers are familiar with my personal journey concerning our present NYC residence. We had actually looked at another apartment that we truly loved. A spacious duplex (2 levels) in a neighborhood we truly desired. I literally walked by the building multiple times day and night checking out our future apartment. Not to provide details but the deal fell apart. Were we feeling dejected? Yes.

However we continued to look and found the apartment we are in at present. We truly love our apartment including the wood-burning fireplace, our building, the staff, management, private courtyard and our neighbors!

I continue to walk by the other apartment building (on way to my NYC office) and now realize beyond the apartment, the building was not as desirable as where we are now. The monthly Maintenance/HOA dues is much higher, staff and management did not seem overly welcoming and we are in the same neighborhood on what many peers suggest is a nicer street with fewer cars and cross-traffic.

While I challenge myself with the mantra “Things Happen for a Reason and Will Work Out in the End”, it is true. In real estate we sometimes get caught up in the emotion and perception of what will make our lives complete, wholesome and happy. I should know, as a real estate broker I am one of those salesmen. I do believe home ownership is important on many facets from wealth generation to stability to tax benefits. However there are always opportunities when you least expect and why we should all keep open minds when working in real estate and please avoid The Love Letter.



Could Greenwich CT be a harbinger of the overall luxury housing market

Greenwich CT. may not be the most familiar community to those of us who live west of the Mississippi. A wealthy commuter suburb for Manhattan, Greenwich has historically been one of the gilded enclaves of wealth and prosperity for multiple generations looking for a beautiful leafy green suburb and attractive state income tax laws. Yet recently Greenwich and other wealthy commuter suburbs of New York City have witnessed challenges to their historical demand for luxury housing.

Over the weekend The Wall Street Journal ran an article titled ” Wealthy Greenwich Home Sellers Give In to Market Realities”. The lead paragraph reads as follows:

After four years on the market, and three price cuts, a stately Colonial-style home on Greenwich, Conn.’s tony Round Hill Road is being sold in a way that was once unthinkable in one of the country’s most affluent communities: It is getting auctioned off. Once asking $3.795 million, the four-bedroom property will be sold May 18 with Paramount Realty USA for a reserve price of just $1.8 million.

Even the wealthy are not immune to price adjustments. According to Realtor.com there were 45 properties in Greenwich priced at more than $5 million that had their price reduced by 10% or more in the 12-month period between April, 2018, and March, 2019. Not to worry Greenwich continues to be one of the wealthiest communities in the United States and its reputation is intact.

However there are winds of change that may be longer-term concerning wealthy suburban enclaves and their demand for the upwardly mobile and those who have attained status of being counted within the wealthiest 1% of earners.

Property Taxes: The revised federal tax code reduced deductions concerning real estate taxes. While many pundits believed the revision was to penalize the New York Tri-State region where many suburban communities have tax bills exceeding $10,000 annually even on a modest home, the reality is here in Metro Denver the $10,000+ real estate tax bill is becoming more common in neighborhoods such as Denver Country Club and in suburbs including Cherry Hills Village and Castle Pines.

Changing Lifestyle: While the pinnacle of affluent home ownership used to be a large home with acreage surrounding for croquet and lawn tennis more and more affluent are flocking to the inner-city i.e. Billionaires Row in New York City, One Hyde Park and even here in Denver high-rises such as The Four Seasons in Downtown Denver as well as homes in Cherry Creek North known for their enormous size on lots more akin to a postage-stamp.

Concerning Greenwich the news gets worse: The median price for a home in Greenwich dropped by 16.7% last year to $1.5 million in the fourth quarter of 2018. On the luxury end of the market, characterized by the top 10% of sales, prices dropped by 18.8%. 

In addition, the average time a luxury home sits on the market in Greenwich is 357 days from its most recent price adjustment. The only segment of the market performing well appears to be smaller, entry-level homes close to the train station, which are being snapped up by a new generation of buyers. The lowest priced condos currently on the market in that area start at around $330,000, according to Zillow.

Should we be concerned in Metro Denver? Maybe. The blockbuster sales of 2016 and 2017 have not been replicated in 2018 and 2019.  In prior blog posts I have provided evidence based on public sales records how some sellers are taking real dollar and inflation adjusted dollar losses on their luxury homes in the most in-demand neighborhoods of Central Denver and Cherry Hills Village.

Of note with the stock market continuing to gain value and the economy seemingly running on all 8 cylinders seems to defy logic that luxury real estate should be lagging. While I do not read tea leaves I do review sales data; if I were considering dropping a few million on a home in Metro Denver at present I may want to take a breather.

Foreign Investment in Colorado Real Estate Should we be Concerned

A few weeks ago local Channel 7 news ran a story about foreign investment in Colorado Real Estate titled: Foreign investors continue their real estate spending spree in Colorado. I am glad the producers included the word “continue” in their story as this is not a new phenomenon. Back in the late 1980’s my thesis for undergrad in Political Science was titled Direct Foreign Investment in Downtown Denver an era when Canadians were slowly divesting from commercial real estate downtown and surprisingly Europeans, specifically Germans were purchasing. Of note this was a time when our local economy was on the skids post oil boom in the mid 1980’s.

Also foreign investment in real estate within our mountain resorts is goes back to the development of our modern ski resorts with Vail and Aspen starting the trend and foreign investment can be seen throughout our mountain resorts.

Of note the article seems to focus on Denver and how foreigners are purchasing real estate at above market rates and thus placing additional stress concerning demand and by simple economics pushing prices higher. However the story did not look at the pitfalls of such investments concerning our local economy.

While many will suggest to look at Vancouver as a cautionary tale concerning foreign investment I could not agree more. With a large influx of Mainland Chinese buyers using Vancouver real estate as both an investment and monetary shelter it is not uncommon to see homes and flats vacant for most of the year. Yet due to this purchasing activity Vancouver has become unaffordable to many of the locals. The local government is pursued a speculation tax to address the issue. Other popular attractive destinations around the world including New Zealand seem to be following Vancouver’s lead to try to dissuade foreign buyers.

Yet on the flip side foreign buyers can also have disrupt segments of the market with nothing to do with affordability. In New York City condo towers presently under construction on Billionare’s Row* AKA West 57th Street believed the demand from foreign buyers specifically Russian and Chinese was sustainable; it’s not and losses happen. Related in New York City there is support for a pied-a-terre tax to provide capital for the city’s aged mass-transit system.

Even Mansion Global an influential read for those in the luxury housing market advises in a recent article how to attract foreign buyers in a slowing demand marketplace: Strategies for Sellers as Chinese Buyers Scale Back on Foreign Real Estate Investment.

Granted there are other macro economic forces at play as well including the value of the US Dollar against other currencies i.e. when the US Dollar is weak our real estate looks even more enticing to foreign buyers just as US based buyers flock to Mexican real estate when the Mexican Peso is weak.

Back to Denver; I would be concerned. At present we may have pockets of foreign money purchasing residential rental properties and thus may be adding stress to our already over-heated housing market (based on the divergence between local housing costs and local income levels). My concern is more macro i.e. if the US Dollar continues to strengthen or if there is a world-wide recession; foreign money can take flight as easily as it comes in.

While I do not believe foreign investment in Denver’s residential real estate market is a concern due to the limited capital investments against the full local real estate economy there are places in China now known as Ghost Cities where speculation’s negative extranalities are on full display.

* Full disclosure, I used to reside part-time in a co-op located adjacent to Billionaire’s Row. Our building actually sold our air-rights to the developer of adjacent 220 Central Park South. In the 13 years of ownership, when sold generated a profit of just shy of 500% partially due to timing and mostly due to luck.

Yes There Are Still Bargains in Real Estate. How about $75 PSF

While traveling on the East Coast last week probably one of the most intriguing bargains in the real estate market sold and closed at $75 per square foot! Yes $75 PSF Finished. While many may assume the house is a wreck or was sold for land value or is inhabitable; all such assumptions are incorrect.

Actually the home located at 50 Poplar Drive, Farmington, CT is a bit gaudy for my personal tastes however the home does offer 21 bedrooms and 35 bathrooms, as well as a movie theater, gym, indoor pool and basketball court. The strip club room complete with stage and stripper poles may have alienated some prospective buyers yet one can always renovate. The location; while located in Connecticut, away from the popular  commuter rail lines and inland thus no water views.

Now for the history. The home was once owned by boxer Mike Tyson (who tried to sell the home for $22M in 1997). In 2003 as the national economy was heating up, rapper and entertainer 50 Cent paid $4.1M to Mike Tyson to take the mansion off his hands. Then 50 Cent invested millions into the house concerning renovations.

The real estate market has not been kind to 50 Cent. He first listed the home in 2007 at the height of the real estate boom, one year prior to the Lehman Brothers implosion and the start of the world-wide recession. The downward price adjustments continued soon after:

  • Initial Ask – 2007:  $18,700,000
  • 7/2009: $10,900,000
  • 1/2011: $9,999,999
  • 10/2015: $8,500,000
  • 7/2016:  $5,995,000
  • 12/2017:  $4,995,000
  • 3/2019:  SOLD for $3,900,000 or $75 PSF

In general the larger the home and cost the fewer prospective buyers. Within Denver the largest most luxurious homes usually sell for less on a per square foot basis than smaller homes on the same block or neighborhood. While the average home in the United States has steadily increased in size, there is a limit.

Of note in 1950 the average American home was 983 SF, in 2014 it was 2,657 SF .

While anomolies include the blockbuster sale at 220 Central Park South in New York or the Hongtian Chen residence purchased for $270,000,000 USD in Hong Kong; most real estate experts agree bigger is not always better and the larger the home and pricing and more finite the market. BTW: the Central Park South and Gough Hill Road (where a nice rental is available) homes are priced beyond traditional jumbo mortgage options. 



Do Not Be Lured Into a False Sense of Business Acumen By Low Interest Rates

The dominant story in the real estate industry last week was the drop in interest rates on mortgages. The timing for many is welcome i.e. the beginning of the traditional spring selling season. While I can advise yes lower interest rates may make a transaction more palatable with a lower monthly payment I would be remiss not to mention lower interest rates usually signal an economy that may be challenged in the foreseeable future. In economic principles lower interest rates are considered a tool to increase economic activity. In addition while housing prices have stabilized and in many markets adjusting downward many believe housing prices are still inflated overall.

The above brings me to the topic of not only interest rates but also the timing of the market. In a conversation with my CPA last week we discussed how so many seem to have forgotten about the Great Recession. It was not that long ago when distressed properties dominated the MLS, short-sales were common, credit scores were dropping and homeowners were literally walking away from their homes knowing what they owned on their mortgages far exceeded the present value of the home.

Which brings me to today’s blog. A lovely home in tony Cherry Hills Village just came on the market. Located in Old Cherry Hills, the 8,100-square-foot residence and guest house (above the 5-car garage) is located at 1120 E. Tufts Avenue. The home is listed at $4.5 million ($778.28 PSF above grade), by Cherry Hills standards while not the most expensive, not a bargain either. At present there are 37 active listings within Cherry Hills Village ranging from $900,000 to $22,000,000, the Medain PSF above grade asking is $492.98):

The 7-bed, 9-bath residence is just over 8,100 square feet and sits on 1.28 acres. The 1,600-square-foot basement features a home theater, bedroom and bathroom. All seven bedrooms have bathrooms en suite, and the master suite boasts a balcony overlooking the property.The two-story home is surrounded by a professionally landscaped backyard complete with an orchard, vegetable gardens and a pool pavilion.

As mentioned there is a one-bed, one-bath guest house with a kitchenette and its own fireplace atop the five-car garage.

I am a bit of a statistician and when looking at real estate I try to take the emotion out of the equation. My feeling is a residence’s value should at minimum keep up with inflation; any gain beyond is icing on the cake. Yes there are limited various tax advantages yet also costs concerning maintenance and upkeep of a residence. Of course pride of ownership may trump all the perceived challenges of home ownership (and of note a wise person once said “If you have a mortgage you do not own the home, the bank does”).

Back to the residence on the market. Trust me if I hit Powerball I am a potential buyer. Yet how did the sellers financially on the house during their tenure of ownership?

  • The owners of record paid $3.96M for the home in 2006.
  • The asking in 2019 is $4.5M. On its face a potential profit of $540,000.
  • Impressive over 13 years or $41,000/year gain during ownership.

Yet let’s consider the following. Even if the seller sells for $4,500,000 when one factors in commission of 6% and Closing Costs of approximately $10,000 the net to seller is $4,220,000, still an impressive gain.

However, the $3,960,000 paid in 2006 when adjusted for inflation is $4,965,000 in 2019 Dollars or $465,000 below thr asking which equals an average home in Metro Denver. Thus the home did NOT keep up with inflation.

Now let’s assume the seller had a mortgage and placed 20% down on the purchase price. Of note in 2006 mortgage interest rates were at a 4-year high with the average 30-yr rate at 6.75%, or 3.75% higher than rates quoted last week. The Principal/Interest/Taxes and Insurance (PITI) on the $3,168,000 would exceed $22,000/month! High mortgage interest rates usually signal a strong economy and in 2006 the national economy was booming as few would have believed two years later the economy will go into the worst downturn since the Great Depression of the 1930’s.

For the prospective buyer concerning potential write-offs; real estate taxes as of 2019 can only be deducted up to $10,000. The real estate taxes on the residence for 2017 were $24,472.

The message here is: I assume the sellers when purchasing their dream home in 2006 assumed their home would only increase in monetary value, their mortgage rate (assuming they obtained a mortgage) was within expectations and even at 6.75% was half of the rate of the early 1990’s. Overall a positive investment of both capital and lifestyle. At asking of $4.5M the seller will profit slightly yet when reviewing the 13 years of ownership, the residence was a financial loss in terms of inflation adjusted dollars. 

A home should first and foremost be considered shelter not an investment. I am worried with the sudden downturn concerning mortgage interest rates of last week; are buyers purchasing based on a monthly payment in a still inflated housing market versus sound financial judgement and future wealth aspirations.