I am One of Those Real Estate Brokers Who Supports the Ban on Coming Soon. Yes I am in the Minority

You probably have seen the rider located on top of the real estate sign in big letters advising Coming Soon. As you walk or drive by you may be excited as you have had your eye on the home for a while or you pull out your phone, plug in the address in search of a listing price and low and behold, nothing comes up.

While many listing real estate brokers will suggest the Coming Soon sign is in their sellers’ best interest, I am one of the few that disagree. Full disclosure I too have used Coming Soon riders with the explicit permission of my selling client memorializing the tactic in our Listing Agreement and explaining the pros and cons (For one client who was more concerned about privacy and security we decided to present in MLS however no sign was placed in the yard per seller’s directive).

Let me first outline what I believe are the arguments against Coming Soon:

Limited Exposure: The Coming Soon rider advises the home is coming to market HOWEVER until the residence is listed in the Multilist Service exposure is quite limited. Once within the MLS the Coming Soon sign is moot. Thus, while a broker may suggest Coming Soon will increase awareness and excitement there may be an ulterior motive. See Benefits Your Listing Broker

Fewer Offers: While it can be fast and convenient to sell to the first person who inquiries about a listing, most sellers are hoping for the best offer more than anything else. But when a listing does not go into the MLS, the number of people seeing it is significantly reduced.

Instead of encouraging multiple offers for various parties, a “Coming Soon” listing ensures that only a limited number of potential buyers will even be aware of the listing.

This is in fact why For Sale By Owners (FSBO) listings usually do not sell, sell for below potential and/or are placed eventually with a broker, see the following blog post: When the For Sale By Owner does Not Work Out.

Your Business Relationship May be Revised: Concerning 99.9% of my listings I am an agent of the seller; thus, my fiduciary duty is to my seller. While there is the slight chance I may have the opportunity to represent a prospective buyer for the listing in which case I become a Transaction Broker (of note in such a situation I would refer my prospective buyer to peer broker who will provide their fiduciary duty to their buyer). If I were to become a Transaction Broker, I then become a neutral party. Yes, I believe in the Chinese Wall concept HOWEVER we are human beings and our knowledge no matter how neutral we desire to be will influence our practices.

Benefits Your Listing Broker: The main benefit of a ‘coming soon’ listing is for the listing agent. By limiting the exposure of the listing, the agent almost guarantees he or she will be the one to sell the property. Few other agents will learn about the property, so it dramatically decreases the competition faced by the listing agent. The potential for the Listing broker is the potential to collect a double commission i.e. seller-side and buyer-side.

Now my personal thoughts and experiences:

When I list a property, I always place text in the Listing Agreement advising if the situation arises where I am both the Listing and Selling i.e. Buyer Broker my commission is lower. I feel this is fair as I am not comfortable double-dipping or receiving commission as the Listing Agent and Selling/Buyer Agent also known as the co-op commission.

Pocket/Whisper Listing: Somewhat related is when a broker receives a listing and does not promote in the MLS. The broker may be advising a few cronies or similar with the blessing of their client i.e. I wish to retain privacy, I do not want strangers in my house, a full marketing program may be detrimental to my lifestyle and so forth.

My concern with the above is 1) is the Broker truly securing the highest and best price for the listing and 2) Is the broker engaging in what we call in the equity markets Insider Trading i.e. working off information that is not public.

I know a peer broker who has a reputation for engaging in pocket/whisper listings and then boasts about the sales to secure other listing clients. While the sale prices this broker is securing may be impressive is that broker truly securing the highest and best price for the listing? Who knows as the listing was never on the open market?

What formed my views concerning Coming Soon and Whisper Listings that goes against the majority of real estate brokers? The Art Market!

Seriously, I collect art. Up until a generation ago in New York City it was common for galleries to present a show for an artist they exclusively represent. When one would inquire concerning the price for a particular piece the gallerist would either advise “It’s not for sale”, It’s been sold” or some other variation of the theme. The point is the gallerist was 1) Controlling and manipulating prices for their client i.e. the artist and 2) most likely was selling to preferred clients at pricing that may or may not be market and/or with the intention of turning art into a commodity.

Knowing this was a problem in March of 1998 The New York City Department of Consumer Affairs announced it would enforce a city law requiring the price of paintings and sculptures in art galleries to be ”conspicuously displayed” within sight of customers. This was a follow-up concerning what is known as the Truth in Pricing law, which New York City enacted in 1971 stating all retail stores must ”conspicuously display” prices ”by means of a stamp, tag or label attached to the item or by a sign at the point of display, which indicates the item to which the price refers.”

Has the situation resolved? Questionable i.e. retail prices may be displayed however for in-demand works the gallerist has probably already sold the work prior to one of their preferred clients. Not so different than Coming Soon and Whisper/Pocket Listings.

Thus, where do I acquire art? Auction Houses. Seriously the Auction Houses are truly connecting buyer and seller in a transparent market-driven situation i.e. willing seller and willing buyer in an open and transparent market.

This is how I view a listing in the MLS; it is available for everyone to view. Subsequently the market or lack thereof will advise the true value of the residence. If under-valued a bidding-war may happen. If over-priced there will be a lack of offers and subsequently a potential price reduction.

OK cynics I know where this is going; Auction Houses have had their own issues concerning price-fixing on commissions, undisclosed financial positions and so forth. These issues continue and consumer protection laws continue to evolve to regulate and disclose such practices.

I see the same with the banning of the Coming Soon practice. I completely understand how many brokers are in opposition of the ban and arguing it is not in the best interest of their clients.

However, I beg to differ; I believe the ban is actually in the best interest of all clients i.e. evening the playing field and subsequently for Listing Brokers insuring we are securing the Highest and Best Price for our client’s listings. While we can argue the Coming Soon is a service for our clients the reality is it benefits the Listing Broker and I would argue may infringe on our ethical obligations to not only our Listing Client but also to the general populace that regardless of our fiduciary duty we are duty-bound to treat fairly and ethically.

 

Seller Hate to Break it to you Brokers Cannot Manipulate the Market

There is an old adage in the real estate brokerage community:

“What is the price? Whatever the client/seller desires.”   

Granted it is more complicated; variables include seller’s intentions and motivations, micro (inventory) and macro (interest rate environment) influencers and on and on. Yet regionally in Denver and I hear across the country there is a sense the overall real estate market is cooling. Yet have sellers received and digested the message?

On my way home from Downtown Denver to Cherry Creek North I usually take the same route, a minor eastbound one-way arterial. The avenue is mostly residential with a few minor neighborhoods serving retail entities. The avenue separates the neighborhoods of Cherry Creek North and Congress Park, both quite desirable yet each possessing their own neighborhood characteristics and thus market demand and attraction concerning different demographics.

I have watched the listings on this avenue for years as a barometer of the overall market. As a busier one-way conduit; in strong sellers’ markets inventory seems to move quickly. In a balanced or buyer markets those same residences seem to languish transacting at 15% to 20% below comparable residences on the surrounding neighborhood streets i.e. less to minimal traffic impact,

One listing has caught my eye as I see the sign placed predominantly on the corner. The house itself is for lack of a better term generic. It is pre-WWII, traditional design i.e. bungalow, fenced yard and so forth; very similar to the housing stock in the immediate neighborhood which is in demand due to easy pop-top and expansion options.

Here are statistics from the MLS concerning the house:

  • Style: Bungalow c. 1920
  • Above Grade: 1,809 SF (including an attic that
  • Basement: 861 SF
  • Total/Finished SF: 2,670/2,550
  • Condition: Fixer-Upper. In move-in condition and state of repair. However, $100,000 would take it from dated to contemporary.
  • Last Sale: 7/2012 Asking $525,000 sold for $500,000
    • Which at the time I felt was a bit aggressive, I would have been at $460,000+/-
  • -The local market at the time was just starting to see increased activity post Great Recession.

In the course of my daily commute I see the house daily. Thus, I was curious when the house came on the market in July 2019 listed by a well-respected real estate firm and experienced broker. Asking $819,000

From what I could visually ascertain not much had been done to the house in the 7 years it was off the market i.e. interior condition similar, exterior and landscaping similar. To go from $500,000 to asking $819,000 in 7 extremely bullish years for housing is not that much of a leap i.e. 60%+/-, yet such gains usually included cosmetic updates and so forth.

Thus, the home comes on the market asking $819,000 in July 2019

The first price reduction is within 14 days to $750,000, a sizable adjustment in both real dollars and percentage off initial ask.

Within the next 30 days the listing is withdrawn and the following month the listing expired. The last asking before being taken off the market, $750,000

Driving by I notice the sign has been removed. As I never did see an additional sign advising Under Contract or Sold; I assumed taken off the market.

In late September a new listing sign is placed in the exact same prominent position with a competing brokerage. The following morning, I check the MLS:

The asking price: $845,000!

Now we all know one of the definitions of insanity which is repeating the same actions yet expecting a different outcome. I literally scratched my head as a broker as I am actively pursuing listings, asking myself if the house did not sell at $750,000 during a stronger selling season what is the logic of placing the listing on the market at $845,000?

Did the listing broker not know the pricing history and I assume lack of activity from the prior listing? A prominent corner and thus broker name visibility is a value however visibility and name recognition may be moot when the listing does not sell.

Just shy of 4 weeks later there is a price adjustment to $825,000.

Three weeks later the asking has adjusted downward again to $790,000 where it is at present.

Of note, the prior broker who had the listing was last asking $750,000 before the listing was withdrawn and subsequently expired. During the ensuing months the market has softened even further. Thus, not sure the logic at $790,000 at present when three months prior asking $750,000 it did not sell.

I never question another broker and their actions; we as brokers take orders from our clients. We can advise, provide guidance, handhold and so forth, however at the end of the day the client and their motivation or lack thereof is what guides our actions.

My gut is this house if/when it sells will transact closer to $700-$725 and may break below $700 if there are shocks to the macro market i.e. slip in equity markets, interest rates and so forth.

Yet I was curious as there was another house on the same avenue that sold a while ago, thus I did some research:

The house I was curious about is literally two blocks east and instead of a west orientation it has an east orientation i.e. not receiving car headlights during the evening and night AND not a signalized intersection. I had seen the house, similar size and condition, here are the stats:

  • Style: Tudor c. 1921
  • Above Grade: 1,869 SF (including an attic that
  • Basement: 662 SF
  • Total/Finished SF: 2,531/1,869
  • Condition: Fixer-Upper. In move-in condition and state of repair.
  • Last Sale: 1/2016 Asking $495,000 sold for $457,500.
  • 34 Days on Market
  • -The local market at the time was just starting to see increased activity post Great Recession.

I remember at the time of the sale thinking that’s about correct for the location, size and condition of the house. During the following year I witnessed the new owners updating the landscaping, installing new windows, roof, façade work and I assume interior updates as well.

The same home post one year of work during 2016 came back on the market as follows:

  • May 2017: Asking $535,000
  • Sold for $540,000 (-$11,500 concession, thus actual sales price $529,500)
  • 17 Days of Market

During one year of construction and updates this house went from $457,500 to $529,500 or a $72,000 gain. Impressive, definitely however I do not know how much was invested in the fix-up and subsequent sale. The point is the house sold for $529,500 during what we now know looking back believe may have been the pinnacle of the recent metro-area run up in prices post Great Recession.

I believe at $530,000+/- the buyer received a decent deal. As the house abuts an arterial this will always be a challenge concerning resale. However due to surrounding neighborhoods and comparable inventory, again this buyer did OK and maybe even better than OK longer term.

Concerning the other listing, not sure when a similar home two blocks east with similar  size and condition sells for $540,000 before concession during the pinnacle of the market cycle; how that justifies an initial asking of $845,000 now at $790,000 (of note asking was $750,000 three prior months prior and the house did not sell).

There is a reason brokers do a Competitive Market Analysis (CMA). We desire to ascertain a true attainable value and we look at various indicators including past sales, active on the market, expired and withdrawn listings and so forth. From this we present our sellers with what we believe is an attainable sales price.

Concerning the active listing; I am NOT the listing agent. I have never spoken to either agent that has or is listing the property nor have a spoken to the seller. Yet as a broker and prospective purchaser I would question the asking and subsequently if I were to obtain a mortgage the results of the appraisal.

As mentioned, I believe if/when the house sells it will be in the low $700’s and I would not be surprised if it transacts in the upper $600’s. For the buyer at those prices, long-term should do OK as I do not have a crystal ball. The one who benefits the most; the purchaser of the Tudor 4 blocks east which would realize a comparable gain of 25%+/- even though purchased at the pinnacle of the market.

Will keep all posted. Of note, every broker including myself has taking on a listing that is over-priced to the market with the assumption we will sell it, or we erroneously believe we have some unique knowledge and marketing abilities to achieve the inflated ask. The first broker took the listing and was not successful. Will the 2nd listing broker be more successful? Will advise.

All, a Happy Thanksgiving, see you next week.

 

 

 

 

 

With Declining Home Ownership Rates in Metro Denver Investment in Rentals is a No Brainer. Or Is It?

Mile High City homeownership rates have fallen from more than 72 percent in 2005 to 53+/- percent today (and see graph above, a divergence from national trends).

Now there are some caveats including the following:

In 2005 home ownership was skyrocketing as interest rates were attractive, there was a herd mentality concerning home ownership values increasing, many questionable loans and so forth. Many of the issues were flushed out in the ensuing Great Recession a few years later.

(Anecdotally I remember one client purchasing a residence in my neighborhood of Cherry Creek and securing a 125% Loan to Value Mortgage. Thus, the client was able to borrow 125% or 25% above what the home was appraised at. In simple math the home appraised at $400,000 they were able to borrow $500,000. The client at the time advised they were not concerned as housing values were rising and so forth. You can guess the ending in 2009.)

Back to the homeownership downward trend in Metro Denver. There are structural reasons for this downward trend including but not limited to:

  • In-migration skews to a younger, less financially secure population thus placing the demand on rentals versus purchase (even though a comparable condominium purchase may be more cost-effective inclusive of tax benefits and long-term equity appreciation versus a rental).
  • These new and newer exclusively for-rent apartment buildings has driven Denver housing construction; just drive Speer Boulevard between Cherry Creek and Downtown or walk around Cherry Creek North. The result new homes are not being built within the City HOWEVER I would argue being within a physically mature city the actual increase of new single-family homes would not move the needle as there would have to be a move towards higher density zoning across the board and/or expansion of the City Limits to provide more land for the new homes.
  • The final argument I hear is the lower wages and student debt is keeping many prospective buyers on the sidelines. Even with low interest rates the lack of entry-level inventory is of course a factor.

Back to my concerns: Yes, Denver is an attractive place to live. Yes, it is affordable when compared to coastal cities however that affordability is being challenged and yes in addition to employment opportunities there Is quality-of-life.

Now for the reality and this is what my concern is:

  • Affordability or Lack Thereof: As I have mentioned prior there is a serious disconnect between average income and cost of housing i.e. affordability. Unless incomes increase faster than housing costs, home ownership will continue to be challenged, thus rentals should provide resilient.
  • Lifestyle: Yes, Denver has an enviable lifestyle from 300 days of sunshine a year to activities from cultural and recreational to satisfy almost anyone. However, when the 2020 census comes out it will be interesting to review the true in-migration versus out-migration as multiple peers at Title Companies have advised me of the out-migration of sellers due to cost-of-living, erosion of lifestyle i.e. congestion, crime, gentrification and so forth.
  • Mobility of the Younger Employees: While I believe there will always be demand to live in an urban center the reality is many of today’s workers can and are mobile. They are not tied to a desk or an assembly line. Many work from home of coffee shops. Their flexibility allows potential relocation at will.

I can go into why home ownership is important from the macro i.e. equity appreciation and wealth building over time to the macro i.e. stability of a neighborhood/city and regional economy.

So, what brought out my concerns? It was a leisurely conversation with a real estate investor that went as follows:

While I own my home and have many investment rental properties in Denver I am cashing out and moving my capital elsewhere. The following is a synopsis of our conversation:

I can spend $550,000K on a duplex in a neighborhood that is on the verge of gentrification in various close-in southwest neighborhoods of Denver i.e. the next LoHi and Highlands.

After a quick clean-up and fix I can probably rent both sides at $1,500/side or $3,000 month. Thus, quick back of the napkin math, my $550,000 investment is generating $32,500/yr. (inclusive of vacancy factor). Approximately a 6% cash-on-cash return.

However, I can go to Kansas City, Salt Lake City, Minneapolis and other cities. For that same $550,000 I can purchase 4 duplexes of 8 units total in similar up-and coming soon to gentrify neighborhoods. Yes, my rent will be less i.e. $1,000/month. However, for the same $550,000 I am generating $84,000 or 15% cash-on-cash return. In addition, I believe there will be higher equity appreciation in both percentage gains and dollars over the next decade and I have diversified my investment from two units to 8 units.”

I as a broker can argue with some authority the renters of today will eventually become homeowners of tomorrow. Yes, I too hear millennials are trending away from home ownership, desire life experiences and so forth. I also hear that business cycles have ended and this time it’s different i.e. an economy that continues to expand with low-interest rates and rising productivity.

I have the view millennials will eventually purchase i.e. home, family, stability. Also, some millennials have assistance from family concerning down-payment assistance and financing. I have come across this with buyers in the expensive Country Club neighborhood whose parents assisted or purchased outright so their grandchildren can be enrolled at Bromwell.

We also forget the inheritance factor. There are parents and grandparents out there that are sitting on hordes of equity in their residences and cash in their accounts and unless they can take it with them after passing; coupled with low inheritance taxes those monies will flow into the system eventually.

Long-term I see homeownership rates will rise not only in Denver but across the United States. Yes, there will be some regional demographic shifts but overall while lifecycles and stages have revised somewhat, I believe there are minor variations and not generational shifts. I believe the next recession which I assume will be mild will usher in homeownership opportunities coupled with increased inventory from investors small and large unloading their rental properties. Thus, increased inventory will push prices down. The desire for pride ownership coupled with tax advantages and potential for wealth accumulation will I believe convert renters into owners as millennials and Gen Z rise in age.

While we can use algorithms and statistics to raise awareness, concerns and predictions the realty is hindsight is 20/20. While we have experienced changing demographics and generational desires the post-WWII desire to own a home I believe continues and we should not confuse micro variations versus long-term trends.

Short-term, I believe housing costs in Denver including Metro Denver will plateau and in the upper-middle and deluxe/luxury markets prices and demand will actually decrease. I believe we will enter a market closer to equilibrium concerning supply and demand, wages will increase as housing costs plateau, speculative investing will decrease and we shall have a balanced market. Timeframe: 2-5 years, sooner if we enter a national or world-wide recession.

Would the Appraiser Purchase the Residence based on their Stated Valuation?

Or, more basic; would the appraiser put their money where their opinion is?

Please note I will not be providing the address of the residence of this blog post. However, the following is my recent experience concerning a discordance between appraised value and market value.

The subject residence is a charming home with three (3) bedrooms on the main level with a ¾ i.e. shower only renovated bathroom. (Of note when only one bathroom in residence always retain a bathtub as some buyers desire at least one bathtub). The kitchen is dated with lower grade appliances, older cabinetry yet a charming breakfast nook; overall basic functionality. The basement is technically 70% finished i.e. carpeted however the bedroom is nonconforming as it does not have proper egress or a closet. Overall the residence has been maintained well with updated mechanicals, newer roof, radon mitigation. While the neighborhood is a high-demand area; the residence fronts onto a 4-lane arterial roadway with no on-street parking. Approximate traffic counts i front of the residence exceed 45,000 cars/day.

Prior to placing on the market, I did a Competitive Market Analysis (CMA) and procured  a value range of $645,000-655,000 partially based on the identical home two doors north selling for $620,000. The comparable home, an estate sale did have deferred maintenance issues yet also offered a full bathroom. Thus, based on that sale and the upgraded condition of my prospective listing I felt $650,000 was reasonable and a bit of a reach as the market had cooled since the sale of the comparable home at $620,000.

The seller a corporation/trust enlisted the services of a licensed appraiser to assess the value before placing on the market. The appraiser came in with a value of $750,000. I reviewed the appraisal; while the comparable I had advised prior was included; the appraiser used comparable properties in the adjacent neighborhood on residential streets with no vehicular impact and inclusive of on-street parking. I advised we can place on the market based upon appraised value but doubtful we will have activity.

One full month on the market and one showing (from a broker listing a residence up the street). While I still professed my confidence concerning my CMA coupled with advising the market was slowing, the seller did agree to reduce the price. While not going into details, the asking was still above my CMA. Showings increased but far from strong interest which I dictate as 4+ showings/week.

Subsequent reductions brought the asking price to within my CMA range. However, the market continued to slow as demand decreased and supply increased. Showing activity increased and offers were received. One was for $630,000 from an investor who terminated the offer after inspection due to cost to renovate and flip. Other offers were received; all below $600,000, a mix of fix and flippers submitting low-ball offers and one potential owner-occupant.

In discussion with the seller I did NOT suggest a price reduction. I did suggest we stay at asking or consider taking off market. As a fiduciary corporation/trust the seller engaged the services of another appraiser as they were mystified to why the house is not selling or worse not even generating offers close to asking.

The updated appraisal with a different appraisal: $740,000!

I was flabbergasted. 1) The appraiser actually called me and asked if I could provide comparable sold’s as he was having challenges finding comps. 2) when I reviewed the appraisal, comparable properties were from distinctly different neighborhoods, beyond the standard one-mile distance and design i.e. 2 floors, multiple bathrooms and so forth were including in the comparable list for valuation and 3) not one comparable residence was located on the same roadway and 4)  there was NO valuation adjustment downward as the home is positioned on a regional arterial and not a typical residential street.

Thus, as a real estate broker I went to my MLS and went back two (2) full years to assess valuation based on sales on the same street i.e. using the street frontage within 1.5 miles north and south of the residence and only comparing single-family residences. I even included the Zillow Zestimate which I find to be inaccurate when there are unique factors i.e. busy road and so forth which advised $636,000.

Most of the properties included at minimum 2 bathrooms. The majority had basements which were truly finished including proper egress and additional bathrooms. Most of the sales had updated kitchens. The median closed sale price during the two years prior was $624,000.

While I believe in variations as real estate is not static, I also ran the sold data on a Per Square Foot (PSF) basis and again, in-line with the median of $624,000. To add insult to injury the local market’s  valuation pinnacle was 12 months prior and has since been dropping.

If my listing was priced based on the past median sales, I believe it would have received additional showing activity. It was agreed to take the residence off the market (and I was in total support as I do not believe in a race to the bottom) when the following occurred:

A neighboring property transacted as follows, the following is from the email I sent to the seller:

  • A bungalow with the fully finished basement designed as their master bedroom and full bathroom with the main level having 2+ additional bedrooms and a bathroom. The finished SF is 2,000, updated kitchen and so forth. It is at a signalized elevated corner, not sure if that is a negative. The following is the recent sales history:

    7/14/2017: Sold for $545,000 ($570,000 in 2019 inflation adjusted dollars)

    Went in market 4 months ago at $630,000.
    Last asking was $599,900.
    Closed for $565,000.
    -116 days on market

    Based on my back of the napkin math assuming a 6% commission i.e. 2.% broker co-op, 3.2% listing agent and closing costs, their net was in the $530,000 range or a loss of $15,000 from purchase to recent sale not factoring inflation.

Additionally, on that same block a home which is presently under contract came on the market at $875,000. Larger that my listing including a full renovation and an at-grade lower-level with its own kitchen, ¾ bathroom and living room w/ fireplace was reduced to $648,500 and went under contract. My prediction, that home will close at $620,000 +/-.

The message in this blog is the following

  • When a residence has challenges i.e. location, fronting/backing-up to a major street/arterial or other detrimental factor(s) best to place on market during upturns of usually known as a “Seller’s Market”.
  • While an appraiser may provide an opinion concerning valuation based on their professional expertise and experience, they are not infallible. My CMA diverged from both appraisals HOWEVER the market always dictates the valuation and the market has in this case advised the appraisals were off-base by 15%.

As a broker with 25+ years of experience I have been through various market conditions. I have witnessed residences located on busy streets usually experience reduced market valuation and demand by 15%-20% (i.e. if the same residence was located on a conventional residential street the value would be 15%-20% higher).

Such residences do offer advantages including being able to afford to live in a neighborhood that may otherwise be out of reach HOWEVER the attractive price when compared to the rest of the neighborhood may impact the sale later as identified above as few of us ever truly by low and sell high.

While I understand the value of an appraisal sans bias, I truly believe brokers with experience concerning CMA’s may be a better option for many sellers and buyers in the marketplace. Of note appraisers look 6 months back, many CMA’s including mine are based on past and present market conditions including comparable on market activity, days of market, supply/demand and other criteria to provide an accurate snapshot of the market for both sellers and buyers.

Just one brokers frustration…… I assume the listing will come back on the market in Spring 2020. Will I be the listing broker? Doubtful. However I did advise the seller that the Bungalow resale as noted above and the Tudor under contract will most likely be used as comparable valuations by educated, well-represented buyers and possibly in an appraisal if a buyer is financing i.e. the appraisal contingency. Thus not out of the woods just yet.

Remodeling Impact Report 2019

The National Association of Realtors (NAR) recently released their 2019 Remodeling Impact Report. The report, which examines homeowners’ reasons for completing the projects ranked, also provides the costs and seller recovery values for many of the tasks.

The annual report does provide insights into the home ownership demographic concerning their desired improvements and thus potentially predicting the future market concerning sellers and buyers. It is no secret with housing prices in some markets having risen exponentially since The Great Recession has changed the traditional cycles concerning move-up and move-down buyers. Thus entry-level homes have become scarce yet the upper-end of the luxury market has been challenged for the last few years as move-up buyers are staying in their homes and embarking on structural and cosmetic improvements versus moving.

While not surprising new roofs and kitchens continue to be popular as roofs are a basic and important structural component of the home and updated kitchens provide not only satisfaction while in-residence also is desired by potential buyers and usually provides one of the highest ROI when selling.

Of interest in the report is closets: “This year, we saw the estimated cost of closet renovations increase from 2017; however, we also saw an increase in the cost recovered from this project,” Brandi Snowden, director of Member and Consumer Survey Research at NAR, “Because homeowners are staying longer in their homes, we see them investing more elaborately than in the past.”

Another effect of homeowners staying in their residences longer is they’re choosing to invest their money in projects that they’ll use on a daily basis, and that will improve the functionality and livability of their home.

Aside from kitchen renovations and upgrades and closet renovations, other interior projects hugely popular with both homeowners and REALTORS® this year are HVAC replacements, new wood flooring, bathroom renovations and adding new bathrooms.

As far as exterior projects, the REALTORS® surveyed in the report note that new roofing was most popular among homeowners, and, in their opinion, would add the most value to a home.

Of interest during the last two years I too have updated my kitchen with new cabinets, countertops and backsplash. I too had two bedroom closets updated with Elfa from The Container Store. In my former home I had a phenomenal walk-in closet designed by California Closets and was a joy for 25+ years. My next projects are an updated bathroom and refinishing of the wood floors presently hidden under worn wall-to-wall carpeting. While I know I will be in residence for the immediate future I also know the improvements when designed in a timeless, classical manner, I shall be able to recoup the cost invested and enjoy during my residency.

 

Size Does Matter in Real Estate Part II

Seller and buyer have come to a resolution.

As advised last week I had a unique situation. While representing a buyer for a condo in Denver I was perplexed concerning the actual size of the unit as follows:

  • The MLS/Listing Broker advised the unit was 1,080 SF*
  • The Assessors Office advised the unit was 994 SF
  • An appraiser I use for measuring advised 975 SF

*The 1,080 SF measurement was off a valuation appraisal completed a few months prior.

The difference between my appraisers measurements and the marketing materials was 106 SF. While the number does not sound large at $515 PSF the value of the difference exceeded $50,000! In addition 100 SF equals a 10’ x 10’ room or potentially a 2nd bedroom.

Some background, seller and buyer agreed to transact at a PSF of $508.78 based on the 1,080 SF per the listing.

The resolution: an independent appraiser was hired, his measurement 1,026 SF.

After some back and forth between seller and buyer (my client) the final amount concerning the sale will be $520 PSF. The negotiation and final sales price was a fair compromise between seller and buyer.

Yes my buyer is paying slightly more on a PSF basis however the price is based on the revised downward size. The seller is divesting of a unit that is actually smaller than they believed however on a PSF basis; securing a price that is in-line with their original ask. Thus I believe will be a win-win for all at the closing table.

The message here is this, the Square Footage Disclosure in Colorado actually advises one to consider getting their own independent measurements. From experience builders plans and actual measurements can vary. Assessors while generally connect can be off by 10% in either direction. Independent appraisers can come up with different numbers even though technically using the same standards for measurement. The following is a screen shot of the text from the Square Footage Disclosure used in Colorado:

Screen Shot 2019-09-30 at 1.42.27 PM

Thus if in doubt laser measuring devices are inexpensive and I would strongly suggest hiring an independent appraiser that both parties can agree on. In a marketplace where $500 PSF can be the norm the reality is every square foot counts. While the phenomenon is new to Denver, in major cities like New York, Los Angeles, San Francisco and others were PSF exceeds four figures on average appraiser measurements are nothing new and are sometimes added as a contingency in the sales contract.

At the end of the day both parties are satisfied. My buyers looked at many properties and this unit met all their checkboxes. The seller while selling a slightly smaller condo is actually receiving more on a PSF basis than his original asking price. Thus a win-win for all.

Next week why negative interest rates are detrimental to real estate.

 

 

When New York City Real Estate Sneezes does the rest of the Country Catch a Cold

The deluxe and luxury housing market is a unique indicator concerning the housing market and overall economy. The first indication of green shoots during The Great Recession was the activity in luxury housing as affluent, equity-comfortable buyers were able to purchase luxury housing for at the time bargain-prices.

Since The Great Recession deluxe and luxury housing has buoyed the market in part due to desired profit margins, return on investment and demand due to historically low mortgage rates (even for jumbo loans) and until recently expansive tax advantages.

However it seems the deluxe and luxury housing market is suddenly feeling a chill.

While each market is unique New York City may be a good bell-weather. Demand always outstrips supply i.e. housing vacancy rarely exceeds 1%. While not the country’s most expensive housing market; it is a market with the most diverse housing opportunities across its 5-boroughs.

What is your reaction to the following headline: “A quarter of the new condos built since 2013 in New York City have not yet found buyers, according to a new analysis of closed sales.” Yes folk’s that is 25% or 1 out of 4 and that statistic is actually optimistic.

Among the more than 16,200 condo units across 682 new buildings completed in New York City since 2013, one in four remain unsold, or roughly 4,100 apartments — most of them in luxury buildings, according to a new analysis by the listing website StreetEasy.

While the situation is not as dire as 2008 when projects stalled post-Lehman and new buildings are still on the rise evidenced by active cranes in all 5 boroughs, but there are signs that some developers are nearing an inflection point. Prices at several new towers have been reduced, either directly or through concessions like waived common charges (HOA for the rest of the country) and transfer taxes, and some may soon be forced to cut deeper. Tactics from past down cycles could also be making a comeback: bulk sales of unsold units to investors, condos converting to rentals en masse, and multimillion-dollar “rent-to-own” options.

A secret many of my peers in the brokerage community know a growing share of condos sold in recent years have been quietly re-listed as rentals by investors who bought them and are reluctant to put them back on the market. Of the 12,133 new condos sold between January 2013 and August 2019, 38 percent have appeared on StreetEasy as rentals.

Again New York City is a unique market however on my morning drive through Cherry Creek to Downtown along Speer Boulevard or 8thAvenue I see multiple cranes on the horizon. I am also seeing rental complexes advising a free month’s rent. More telling is what I consider the post 8PM test, looking at buildings that are dark or have lights on, however not a stick of furniture within view.

While I cannot predict the future I believe within the next 3-5 years we shall all bear witness that sellers of rental buildings between 2015-2018 transacted at the top of the cycle as buyers may have over-paid while chasing returns to exceed those available in a low interest-rate environment. Added concern for my readers: Real Estate Investments Are Never ‘Recession-Proof,’ but Some Are Safer Than Others.

Unfortunately statistics lag behind present and actual market conditions. Personally my listings are sitting on the market longer, showing activity is less robust and offers are coming in below asking; quite the reversal of our recent hyper-active multi-offer marketplace. Again I am suggesting a Yellow Light for caution moving into the Fall and Winter.

 

Does the Stock Market Know Something We Do Not Concerning Real Estate

While many pundits advise the equity markets and housing markets do not necessarily go hand-in-hand. Yes the wealth-effect when we are in a bull market may increase confidence concerning purchasing. Post Lehman meltdown the crash in the housing market was not immediate, taking 12-18 months before the carnage would become apparent.

Yet at present some would suggest we are in a goldilocks market i.e. the equity markets are close to record highs, interest rates are still attractive with some sub 4% available and asking prices especially in the upper tier of the housing market have stabilized and in many markets showing signs on weakness.

While many analysts look at the health of housing via homebuilder stocks; for example concerning the health of the luxury housing market many analysis look at Toll Brothers. I am going to take a different tack, what about the brokerages?

For the immediate future housing transactions is still the domain of real estate brokers. I do admit the newer online brokerages i.e. Redfin and Zillow are unique models and of interest yet also far from disruptor status but I digress.

Concerning Real Estate Brokerage Stocks here are three that I believe capture the activity of the resale housing market nationwide. Please note descriptions are from their corporate marketing materials:

Realogy: Realogy Holdings Corp. (NYSE: RLGY) is the leading and most integrated provider of residential real estate services in the U.S. that is focused on empowering independent sales agents to best serve today’s consumers. Realogy delivers its services through its well-known industry brands including Better Homes and Gardens ® Real Estate, CENTURY 21®, Climb Real Estate®, Coldwell Banker ®, Coldwell Banker Commercial®, Corcoran Group ®, ERA®, Sotheby’s International Realty® as well as NRT, Cartus®, Title Resource Group and ZapLabs®, an in-house innovation and technology development lab.

Redfin: Redfin got its start inventing map-based search. Everyone told us the easy money was in running ads for traditional brokers, but we couldn’t stop thinking about how different real estate would be if it were designed from the ground up, using technology and totally different values, to put customers first.

Zillow: Zillow is the leading real estate and rental marketplace dedicated to empowering consumers with data, inspiration and knowledge around the place they call home, and connecting them with the best local professionals who can help. Zillow serves the full lifecycle of owning and living in a home: buying, selling, renting, financing, remodeling and more. It starts with Zillow’s living database of more than 110 million U.S. homes – including homes for sale, homes for rent and homes not currently on the market, as well as Zestimate home values, Rent Zestimates and other home-related information. Zillow operates the most popular suite of mobile real estate apps, with more than two dozen apps across all major platforms.

All three of the companies above are listed on the New York Stock Exchange. Historically equity market experts have suggested the stock market looks 6-12 months into the future concerning pricing and activity. Of course there are anomalies i.e. earnings reports, news and so forth. However let’s look at the 52 week performance of the companies noted above:

Realogy: Closed at $4.75 on Friday August 30th

52-week range: $4.52 – 21.61

Redfin: Closed at $16.89 on Friday August 30th

52-week range: $13.50 – $23.47

Zillow: Closed at $34.43 on Friday, August 30th

52-week range: $26.38 – $51.47

All three stocks are on the lower-end of their 52-week price range.  Thus is the market advising these real estate brokerage stocks may be seeing pain in their future or is this a buying opportunity? Personally if I were a betting man I would be shorting all three stocks. Related, for those who may remember The Big Short i.e. the investor who bet against the sub-prime market and made a fortune; he is short Zillow: The “Big Short” investor that bet against subprime has a new target: Zillow

For those who feel I am off-base and wish to invest in real estate stock may I suggest an real estate ETF such as The Real Estate Select Sector ETF (XLRE)

I hope all had an enjoyable Labor Day Weekend/Holiday, let us reconnect next Monday.

 

Bidding Wars Seem to Have Given Way to Détente

While I have been suggesting the real estate market has been softening over the past year, maybe longer I have had peers advise I am off base and to be honest anecdotal information has been challenging to come by. Yes we have more inventory on the market (check). Prices have stabilized and in some markets have come down from peak levels (check) with the caveat more inventory naturally leads to price stability (true). Interest rates at 3-yr lows do not seem to be impacting the buying market (check) yet refinancing is strong.

I believe the most compelling data to support my views concerns Bidding Wars of lack thereof. In the not too distant past bidding wars were commonplace. Listed properties would literally receive multiple competing offers. Brokers would advise in their comments “Please submit highest and best offer with cash or pre-approval letter ”. Some prospective buyers would actually waive contingencies including but not limited to inspections and appraisals, foolhardy in my professional opinion. I even heard of situations of offers placed site-unseen; the rationale, if it does not work out I can always place back of market and sell for a higher price.

Of note I always advised clients both seller and buyers to avoid bidding wars as in the end no one is happy. The buyers who were outbid feel rejected. The seller has to review multiple offers, many similar to each other and make a decision based on tangible and intangible data. I am not even going to mention the Love Letters; as a broker I will not read them and I advise my sellers not to either and buyers not to compose and send. Here is a link concerning The Colorado Real Estate Commission Advisory concerning Love Letters sent to the Brokerage Community: https://content.govdelivery.com/accounts/CODORA/bulletins/224e551

According to the real estate brokerage Redfin, of note the following concerns their brokers; they advised only 11% of the properties for which their agents submitted offers in July 2019 had multiple bids, down from 46% in July 2018. Of note Redfin the 11% number is the lowest share since 2011 (and for those with short memories in 2011 nationally we started to climb out of The Great Recession).

Concerning Denver we went from 49% to 14% (see chat below). I can attest as I have multiple listings that are sitting on the market, all priced mark to market, yet still awaiting a buyer.

The following chart from Redfin (based on their activity concerning offers for their clients shows that change in percentage of offers involving multiple bids or more commonly known as a bidding war:

Location:                 July 2018       July 2019

National:                    46%               11%

San Francisco            72%                35%

San Diego                   62%                21%

Boston                        64%                16%

Los Angeles                65%                16%

Philadelphia              37%                14%

Denver                       49%               14%

Phoenix                      48%                14%

San Jose (CA)             80%                13%

Sacramento               39%                9%

Washington               40%                9%

Raleigh NC                 29%                9%

Portland OR               37%                9%

Chicago                       31%                8%

Seattle                         41%                8%

Atlanta                       35%                8%

Austin TX                   39%                8%

Las Vegas                   31%                7%

Dallas                         43%                7%

New York                   41%                6%

Houston                      38%                5%

Miami                         30%                1%

Will bidding wars more commonly known as multiple offers continue? Of course. If a property is listed below market and/or has demand i.e. design, neighborhood and so forth a multiple offer situation can happen. I know brokers who purposely list properties below market as a strategy (with their clients permission) to generate interest and buzz. The downside, offers may not come in and it is always more challenging to adjust a price upward versus downward.

As a broker my suggestion to clients is to price mark to market as noted above with my listings. If priced correctly based on comparable sales, condition and so forth the laws of supply and demand shall prevail. Let us hope the chart above advises the return to a more rationale less speculative marketplace. Coupled with historically low mortgage interest rates some excellent opportunities may arise.

What Usurps Low Mortgage Rates Concerning Housing Activity? Confidence

While I truly understand as a broker the continued optimistic view of housing espoused by my peers; hey its our bread and butter. Yet even with last week’s downdraft concerning mortgage interest rates the housing market did not suddenly spring back to the activity levels of last year and asking prices did not all of sudden increase. There is a fundamental reason why activity did not spike; it’s called confidence or lack thereof.  Let me explain:

  • First: Mortgage rates have been falling sharply over the last three months, which should be incredibly positive for the housing market, but so far reaction has been muted in both home sales and new home construction. Granted part of the drop was due to the inverted yield curve and discussion concerning a Recession on the horizon but the point is…..The average rate on the 30-year fixed is now well below 4%; it was above 5% in November 2018. The drop in rates has not produced a home-buying spree for either new or existing homes.

 

  • Second: The drop in interest rates did have impacts specifically concerning refinancing activity.  This is a mixed message as refinancing may suggest prospective sellers may actually be staying in a home versus selling and moving up or down from their existing residence HOWEVER most who refinance will conduct a cost-benefit analysis i.e. months to recoup the investment and then subsequent savings. Thus due to refinancing one would assume housing availability would be further constrained. However……

 

  • Third: The further drop in mortgage rates did nothing to encourage people to buy, as there was no change in intentions to buy a home, and instead there was a 9 point jump in those that said it’s a good time to sell a house—the most since 1992 when this question was first asked. Of note I am in the same boat as I have literally stopped looking for now and am not enticed by the attractive interest rates.

Consumer confidence fell sharply in August, according to a just-released report from the University of Michigan. The report said consumers felt they needed to be cautious about spending in anticipation of a potential recession. That bled into housing. Again coupled with the gyrations in the equities market, continued volatility concerning tariffs and asking prices that has remained at 2018 levels the Fall season may be worth watching (I suggest from the sidelines) as recession fears and become a self-fulfilling prophecy.

A quote I have used this week with clients both looking to purchase and those looking to sell has been the same: “Sellers believe it is 2018, Buyers believe it is 2020 and at some point the two shall meet in the middle”.