Tuesday, March 27, 2018

WHAT TO EXPECT WHEN YOU'RE INSPECTING

Let’s face it – in the context of all the hopes, aspirations and emotion that goes into buying a new home, there’s one day that has the potential to undermine the whole thing.    

Inspection day.

Not always, but often enough that it is worthwhile to psychologically prepare for the ups and downs that emanate from inspection day.

Here’s the backstory.  After weeks, months or years of discussion, you’ve decided you want to buy a new home.  Then, after weeks, months or (sometimes in the current Denver market) years of looking at homes and writing offers, you found “the one”.  And then even managed to get your offer accepted.

There’s joy.  There’s excitement.  And there might even by that nervous niggle known as buyer’s remorse.  Should you really have outbid (insert number here) other buyers to get this home under contract?  It’s one bedroom short of what you wanted.  It’s on a busy corner.  It’s too far from work.  There could have been a past water leak which might have resulted in a deadly mold colony forming on the backside of the basement walls which will trigger respiratory issues in your pets and eventual death for your children. 

Deep breath.

We get it.  There’s a lot that goes into buying a home.  And part of this process, like life itself, requires that you eventually master your own emotions.

So inspection day arrives.  You show up at the home and meet the inspector.  Perhaps you’re testing for radon as well.  Or getting the sewer line scoped.  Or checking to see if there’s asbestos in the popcorn ceiling.

There’s a lot riding on the inspection, and it is important. 

But know this… in 23 years and more than 500 inspections, I’ve never had a home without at least a few inspection issues.  In fact, the most “perfect” home I ever sold came with three correctable items.  (Back in the foreclosure era, for comparison, I’ve had homes with as many as 70 items called out on an inspection report - gulp.) 

Every home is different.  Some have a history of being extremely well cared for.  Some, unfortunately, have a history of being neglected.  But in all this history of building homes, the “perfect” home has yet to be built.

There are some common, basic items that come up on almost every resale home.  Here’s a quick summary of what to expect when you're inspecting: 

HVAC – It’s never a bad idea to have the furnace and AC units cleaned, serviced and certified, especially if they are more than five years old. 

ROOF – If a roof is more than 10 years old, it’s common to have a few torn shingles or other minor maintenance items.  If the roof is older, ask for a certification.  If it’s more than 20 years old, it needs to be replaced. 

SEWER LINE – Prior to the late 1980s, sewer lines were almost always clay pipe laid in 3 to 5 foot segments, sleeved together with rubber joints.  These lines were designed to shift and move with routine ground settlement.  Root intrusion is not uncommon, nor is it the end of the world if your line has a hairline crack (or two). But if the line has a significant break or bellies where it is supposed to be flowing, you’ve got a legitimate concern.

FOUNDATION – Basement slabs are usually independent from a foundation.  The foundation is the square that the home rests upon.  The slab that makes up the basement floor is simply concrete poured over dirt.  Cracks in the basement slab are usually not a big deal, as long as they are less than one-quarter inch and there’s no evidence of water penetration.  Cracks in the foundation wall can be a bigger concern, and evidence of water coming in through the walls can be a significant warning sign.  Again, most home inspectors will consider cracks of less than one-quarter inch to be normal.  Cracks larger than this warrant further investigation and evaluation.

ELECTRICAL – For newer homes, the questions around electrical usually center around whether or not the builder (or original owner) installed an electric panel sized sufficiently for the home.  In older homes, there can be a host of electrical concerns, including whether the panel is sufficiently sized, whether outlets are grounded and whether or not the original manufacturer is still in business.  Federal Pacific, Zinsco and Stab-Lok are all manufacturers who were sued out of existence for faulty panels.  If your breakers don’t trip when they are overloaded, you have a problem. 

DRAINAGE – As my primary home inspector has me saying in my sleep, “water is the enemy of houses”.  You don’t want water running toward the foundation, or pooling against it.  Grading is usually an easy fix, as long as there is not existing damage that has already occurred.

PLUMBING – Polybutylene plumbing was manufactured for a short period of time by the Shell Oil company in the late 1980s.  Branded as “the pluming of the future”, it was significantly cheaper than copper and used by builders all over the country… until it was discovered that this plumbing material reacts badly with the mineral content in tap water and literally corrodes from the inside out.  There are only a small handful of subdivisions in Denver where polybutylene is known to exist (Powderhorn, we’re calling you out), but homeowners need to think twice about buying a home with plumbing that is pretty much guaranteed to fail at some point.

SMOKE/CO DETECTORS – These should be on every level of your home, and they should work.  Having said that, about half of the homes I have inspected have faulty or failing smoke detectors or lack CO detectors altogether.  Easy to fix, but commonly ignored. 

BROKEN WINDOW SEALS – For windows manufactured more than 10 years ago, and especially those that are south or west facing, clouding and broken seals are extremely common.  In simplest terms, these windows have two panes of glass, separated by a thin rubber seal around the perimeter.  Over time, and especially when exposed to intense sun, these rubber seals can deteriorate.  At that point, moisture gets in, the glass fogs, and the window has effectively “lost its seal”.  This is generally a cosmetic issue.  Sometimes we simply tolerate it, but other times you may have to have one or both panes of glass replaced to fix the issue.

CRACKED CONCRETE – Again, wisdom from my longtime home inspector.  “There are only two kinds of concrete in Colorado.  Cracked concrete, and concrete that is going to crack.”  Cold weather, moisture and 100 “freeze-thaw” cycles per year pretty much guarantee that a crack or two is inevitable.  Again, is the concrete cracking (relatively easy to repair by caulking and monitoring) or heaving?  Heaving is the more serious issue, and when you find heaving, often there is an underlying water issue that must be addressed. 

RADON – Radon is a colorless, odorless gas that is caused by the breakdown of uranium in the soil.  Unfortunately for us, in Colorado, radon is a common occurrence.  Radon is almost always concentrated in “below grade” areas like basements, in part because it is heavier than air and sinks to the lowest point in a home.  As uranium breaks down in the soil around the foundation, the gas that is released works its way through cracks, windows and other openings where it accumulates and sinks.  When testing for radon, inspectors will leave monitoring equipment in the basement (or lowest living area of a home) and results will be calibrated over 48 – 72 hours.  If the reading comes back at 4.0 pCi/L, the EPA recommends that the radon be mitigated.  Fortunately, if your home does test high for radon, mitigation is fairly easy.  A certified radon mitigation company can either modify the sump or drill a separate collection chamber underneath the floor, which is then sealed off with a vent pipe extending from the collection pit to the exterior of the home.  There is a fan inside the pipe that pulls air and gas from underneath the floor 24 hours a day, 7 days a week and these systems have proven to be about 98% effective in reducing radon levels down below the EPA threshold of 4.0 pCi/L.

This is not a comprehensive list of all inspection items you may run across.  But it touches on most of the common ones.  The important thing to keep in mind is that some issues are cosmetic, some can be corrected with proactive measures, and some are flashing red warning lights that should not be ignored. 

The job of your home inspector is not to tell you whether or not to buy a home.  That decision is yours.  The home inspector’s job is to find and identify every potential concern that could affect the health, safety, livability or resale value of your home.  We then work together to make sure you have enough information to make an informed decision. 

As I said at the start of this post, inspection day can be a day of emotional swings.  If you know this before your inspection begins, you’ll be better prepared to think logically and rationally through the process. 

The good news is… inspections are done for your benefit, not your detriment.  Hiring a qualified, competent home inspector is a good use of time and resources.

And who knows?  Maybe, just maybe, you’ll be that first client who finds and buys a truly flawless home!

Monday, January 22, 2018

SECURITY CAMERAS

You see them everywhere,these days.
  
Security cameras.  

Thanks to Nest, Ring, Netgear and others, home security monitoring devices are now affordable, accessible and mainstreamed.  

Every week, I walk into homes with cameras on the front porch, cameras over the front entry and cameras (sometimes hidden) in kitchens, bedrooms and home offices.  

Cameras with microphones.

"Just as a precaution, watch what you say", I am now telling my clients on a regular basis.  "Let's discuss the pros and cons after we look at it."

In the age of digital monitoring, privacy is a thing of the past. 

I have spoken and written many times before about how our market is evolving into a suburb of California, and I base those thoughts on having grown up in Southern California and having worked in that market from 1994 - 2005.  

Home prices then were twice (or more) what they were in Denver, affluence was everywhere and technology (and paranoia) were on the cutting edge.  I routinely saw first-generation home security systems in Orange County homes back in 2003, 2004, and 2005, as doctors, attorneys and those in law enforcement routinely wired their homes with security cameras and monitoring systems.

Just as I am doing now, I used to caution my clients against speaking too loudly when touring homes, lest their comments be picked up by the seller.

The truth is, people's comments when looking at homes can be ruthless.

Whether it's insulting the decor, slamming the lack of cleanliness or questioning whether or not work was done with permits... buyers (and agents) can say things that sellers can take very personally... things that will cause your offer to get tossed in the trash if you are not careful.

So the less that is said, the better.

The digital revolution is happening so quickly in home security that privacy laws really haven't kept up.  In California, it is illegal to record another person without their consent, yet the courts have wavered on the subject of whether comments recorded while touring another's home require active consent.

In Colorado, I know of no laws governing this, and so I advise my clients to simply "watch what you say".

Last summer, I was touring a home in DTC which featured empty bedrooms, minimal furnishings and nothing but men's clothes (about half full) in the closet.  

My client asked if I thought the sellers were divorcing, and whether such a vulnerability might lead the seller to consider a lowball offer.  I emailed the agent to ask about the sellers' motivations.  

"My client is not interested in being lowballed," he said in a phone conversation the next morning.  "He's pretty upset that you even brought it up."

I asked how he knew what we had been discussing, and he said every word had been recorded.  At that we lost all interest in the property, and frankly, I'll never look at another one of this agent's listings again.  

Last week, I was shocked into reality again as I was showing a home on a snowy morning.

"Please remove your shoes", said the seller through a speaker mounted in a kitchen security camera as we entered the home.  We were literally being watched (and heard) as we walked through the front door.  We felt completely violated.  Total buzzkill.  

I have now trained my eyes to look over doors, next to windows or in cluttered home offices for cameras that may be mik'd up.  Nest even has a security camera that looks exactly like a home thermostat.  

As is happening throughout our society in the digital age, privacy is increasingly a thing of the past.  It's time for the legislature to address this issue, because right now, it's becoming a real problem.  

Sunday, November 12, 2017

OCTOBER ENDS WITH LOWEST ACTIVE INVENTORY ON RECORD

Seasonality is a fact of life in the Colorado real estate market, with inventory peaking every August or September and then cratering to a low point in January or February.  

A look at the latest market statistics confirms that it's business as usual in the Denver metro real estate market.  The inventory of active listings fell 16.2% from September to October, dropping from 7,546 to 6,325.

While the decline in inventory from September to October is normal, a more accurate way to assess the market is to view statistics on a year-over-year basis.  In that regard, the inventory of homes for sale plunged by more than 17%, from 7,676 one year ago to 6,325 today.  

That is the biggest aggregate year-over-year drop since June of 2015, when the inventory of homes fell by nearly 21%.  But even more telling is that this represents the fewest number of homes for sale at the end of October since the Denver MLS was formed in 1985!

What does this mean?  

With supply falling at a faster than normal clip, the logical conclusion is that the market is going to be even more starved for inventory than it usually is to start 2018... which means another season of bidding wars and buyer frustration is on the horizon.  

The absorption rate fell from 1.53 months in September to 1.35 months in October, evidence that homes were selling at an even faster pace in October than they did in September.  

The hottest sector of the market remains the $250k-$400k bracket, where the absorption rate dropped all the way to 0.70 months.  This means with no new inventory, every home on the market would be sold in about 21 days. 

Nationally, the absorption rate for homes is just shy of 4.00 months.

Like a doctor tracking vital signs, I track the monthly numbers closely to assess the overall health and directional trends of the Denver market.  As 2017 wraps up, the market is even tighter today than it was a year ago, suggesting that the 7.2% appreciation rate we've seen over the past 12 months is not an unrealistic projection for the coming year as well.    

Thursday, October 19, 2017

THE PERILS OF FULL EMPLOYMENT

It’s plainly evident that we are living in magical economic times in Denver.  Soaring home prices, jobs aplenty, massive positive migration and an elite place as one of America’s most vibrant, dynamic and economically flourishing cities. 

And all of that is true.  For better or worse, Denver has been discovered, and the Mile High City of today bears little resemblance to the smaller, more affordable and much-easier-to-navigate city I fell in love with back in 2005.

Growth has it challenges, though, and we’ve documented them before.  Traffic, air quality, lack of affordable housing and a rapidly growing divide between rich and poor are all "big city issues" which Denver must now tackle.  

While it goes without saying that growth beats stagnation and prosperity beats austerity, living in a region with 2.2% unemployment presents another challenge – finding competent vendors to do work at reasonable prices.

There’s more to this conversation than you might think, because truth is, after six solid years of equity growth with total gains rapidly approaching $150 billion in the metro area (or more than $50,000 per person!), there is totally unprecedented wealth along Colorado’s Front Range. 

If you own real estate, you have equity.  And that means nearly two-thirds of the residents in the Metro Denver area are feeling pretty good about things these days.

What that translates to in the goods and services arena is demand… lots of demand. 

Which means if you want to hire a contractor, landscaper, roofer or simply get a radon mitigation system installed in your home… you’re going to probably have to wait a while before someone shows up, and if you’re not careful, you’re going to pay way more than you expected.

Getting vendors to do timely work at reasonable prices seems easy enough… but it’s not. 

Think of landscapers.  For years during the economic downturn, landscaping companies saw almost zero demand for their services.  No homes were being built, no one had equity, and in a grim economic environment the last thing homeowners struggling to stay current on a mortgage were going to do was spend money on planting trees or building a deck.

Today, however, think of the abundance.  According to real estate research firm Hanley Woods, more than 12,000 single family detached homes will break ground in the Denver metro area in 2017.  That’s 12,000 homes that need plumbing, electrical work, concrete foundations and driveways and, yes, landscaping.

So here’s the skinny of it… there’s more work out there than most companies can handle, and builders selling retail products under time-sensitive conditions go to the front of the line.  If you’re paying $650,000 for a new home, does it make that much difference to the builder if installing a new driveway costs $4,000 or $6,000?  Probably not. 

But if you’re a homeowner looking to replace a failing piece of concrete, there’s sticker shock.

I recently sold a home built in the 1970s that needed tuckpointing work on the brick exterior and the chimney.  Nothing extensive, just patching some holes where the mortar had deteriorated over time and freshening up a few areas on the south side of the home that had taken decades of direct sunlight.

My regular tuckpointing company was scheduling more than six weeks out, which didn’t work for this property… and so I began searching for other vendors.  Long story short, the first company bid the job at more than $2,800.  The second company, a two-person operation with solid online reviews and evidence of insurance… said they could knock out the job in one day and bid $850. 

That’s absurd.

I recently had a client who purchased a new home call me asking for a landscaping referral.  A maple tree which the builder had planed in his front yard had died and he wanted it replaced.  Landscaper number one bid $1,700… and landscaper number two bid $575.

Stories of this nature are everywhere.  When contractors have more work than they know what to do with, they can price inflate all they want and chances are they will find someone willing to pay it. 

Another buyer of mine recently closed on a resale home which had the water heater replaced as part of the inspection negotiation.  A few days after he moved in, he noticed a valve was leaking and he asked for my help.  We called the plumbing company which installed the unit back out to fix it.  Long story short, turns out the plumber really wasn’t a plumber at all.  He was a bartender who had been hired by the plumber to help keep up with the overwhelming demands of the business. 

Needless to say, we weren’t happy.  I called the owner of the company and had him send out another plumber - a real one - to fix the valve.  I’m assuming the bartender turned plumber is installing another water  heater with a leaky valve somewhere in the metro area as we speak.  

The point is… do your diligence.  Check referrals.  Double check your pricing.  And realize that in a market as hot as Denver, competent people are going to be in high demand. 

I would rather wait six weeks for a job to be done right by a trusted vendor at a fair price… then hire tomorrow and re-do the work six weeks later anyway.  

Friday, September 22, 2017

FALL IS THE SEASON FOR FIRST-TIME BUYERS

Back in the spring, I counseled many of my first time buyers to take a sabbatical. 

Wait until the fall, I said.  From mid-January until the 4th of July, if you're looking for something under $400k and you don't have 20% or the backing of the bank of mom and dad, you're mostly roadkill.  

It will calm down after the 4th of July, I predicted, and once Labor Day gets here, you'll actually have a fighting chance to get something nice without having to claw your way past 10 other motivated buyers.

Well, Labor Day has come and gone and the market has indeed downshifted.  

The market has thinned out, appreciably, just as it did post Labor Day in 2013, 2014, 2015 and 2016. 

Predictably, the Denver Post has published an article putting buyers "on alert" that the real estate party in Denver may be coming to an end.  "Time will tell if the dip is seasonal or the beginning of a turning point...."

But let's take a moment to recalibrate here. 

The reason I have pulled housing data on a monthly basis for nearly 20 years is so I have a baseline for understanding what's normal and what's not.  Seasonality it normal.  Inventory peaks in August or September every year, then thins out until mid-November, when the market shuts down for the holidays.

The real test for our market every year comes in mid-January, when first-time buyers come out of hibernation and begin swarming when inventory is at its low point for the year.  

It's that crazy January through June imbalance - no homes for sale and thousands of first-time buyers chasing after scant inventory - that drives the lion's share of appreciation each year. 

The disparity between listings and buyers intensifies all spring, usually leading to such frantic conditions that in most years, sellers can get away with murder in March and April. 

I have written nearly 40 "failed offers" in 2017, and I can tell you for a fact that the spring market nearly fried my soul.  I wrote offers this spring on homes with 43 offers, 31 offers, 27 offers and several others with 20 or more.

Unless you have cash or are fully prepared to waive the appraisal clause, why would you even waste your time fighting through that market? 

But every year, buyers are drawn to the spring market like moths to a flame.  And so we write crazy offers with modified or waived appraisal clauses, "as is" provisions, and earnest money "hard" up front in a desperate attempt to get something, anything, under contract.

Why?

The time for first-time buyers is the fall, not the spring. 

I see it in the market already.  While there are still some homes drawing multiple offers, the frenzied season is over.  Call it burned out agents, burned out buyers, shorter days or perhaps just this region's ongoing obsession with the Broncos, but the buyer pool has thinned appreciably as the days have started to shorten.

For first-time buyers, the right move was to wait.  Some took my advice, some didn't.  But the smart move is to get after it now and try to find something before the holidays, because come January, it's highly likely the crazy wheel will start up once again.  

And at that point, if you don't have the guns to compete, you'll find yourself on the outside looking in once again. 

Tuesday, June 20, 2017

THE NEW AGENT PILEUP

A recent article in Westword summed it up well... with 20,926 active real estate licensees working the Denver metro area and fewer than 7,000 active listings on the market... there are a whole lot of real estate salespeople with skinny dogs.

As a rule, I don't let markets dictate my success or failure.  I worry about what I can control, which is my actions, my hours and my disciplines.  In 23 years I've lived through great markets and bad ones, both in California and Colorado, and I know that long-term success is not defined by markets.  It's defined by relationships.  It's defined by giving the best advice you possibly can to people you care about deeply and then going the extra mile to help them achieve the best possible outcome.  

But there's no denying that what's going on in real estate-crazed Colorado these days has disruptive tendencies.  Did I mention that the Denver MLS hit a 32-year low for inventory in February?  

In straight "raw" numbers, 21,000 active licensees splitting up 7,000 active listings comes out to 0.33 active listings per agent... or about one listing for every three agents.  That would be bad enough.  But we know the real world of real estate doesn't work like that.  

The "80/20" rule made famous by Pareto has proven time and again to be a "90/10" rule in real estate, with 90% of the transaction volume accruing to 10% of the agents.  That would mean the top 2,100 agents in the Denver metro area control about 6,300 listings - or about three active listings per excellent agent.  That's a totally believable extrapolation.

If true, then, that means the other 18,900 active real estate licensees in Denver are clawing it out for the remaining 700 active listings.  

Holy smokes.

I literally get a knot in my stomach every time I drive by a real estate office promoting its "Real Estate School", usually with a freshly printed vinyl banner hanging over the entrance to the building.

Look, I worked in a corporate real estate management setting for many years and I was part of the largest (and fastest growing) Century 21 franchise in North American from 1994-2005.  I helped train hundreds of new hires in a 1,500 agent firm and I'll let you in on a poorly kept secret:  nationally, 50% of new real estate licensees will quit in the first 12 months and three out of four will never renew their license at the end of its first term.

It's the ultimate turnstyle business, and many real estate companies are seemingly happy to collect desk fees and miscellaneous office costs for a few months until one day their beat-down, non-producing newbies slink out the back door and never return.

Because of this, our real estate program was designed to separate the 75% that were going to fail from the 25% that had a chance to produce - and we wanted to make this distinction quickly.  We had a one-month immersion program with highly scripted days (beginning at 8 a.m.) which included 3 to 4 hours of direct prospecting every afternoon.  

We supported our new trainees fully... gave them scripts, told them what to say, coached them through objections and even accompanied them on appointments... and they either did the hard things that were indicators of success, or they didn't.

After three weeks, we knew who profiled for success and who profiled for excuses.  And so 21 days in, you either earned an invitation to continue working with us, or we gave you the business card for the career development department at one of our competitors.

We had the courage to enforce standards, and our company prospered because of it.  

There's another dirty little secret in real estate, and it's that good agents are generally not fond of those who don't produce.  This is a hard, demanding business and there's no room for half-hearted agents or half-hearted efforts.  Agents who fail to perform reflect badly on us all, and so productive agents look at non-productive agents the same way Nolan Arenado might look at sharing the infield with an error-prone, .160 hitting shortstop.  

Dude, you're messing us up.

Even before the great inventory shortage of 2017, huge changes were taking shape in the real estate world.  Technology is empowering the consumer and marginalizing lousy agents.  

The whole reason I have been affiliated with RE/MAX for almost my entire 11-year run in Colorado is because the RE/MAX model demands that agents put their money where their mouths are.  Write a check for $1,500 a month, keep everything you earn.  Simple, straightforward, and serious.  

Is $50 per day a lot to pay for brokerage services?  Maybe.  

But if it means you are surrounded by the industry's top agents, those who believe in their abilities and are willing to spend $50 a day to promote the values of that iconic red, white and blue balloon, I'd say it's worth it. 

I wish this industry had higher standards, and I wish more companies would be honest with people who think they want to get into this business.

A great die-off is coming in the real estate agent world, and now is not the time for HGTV-loving romantics to be getting into the mosh pit.  

I don't mind if you want to try your hand at real estate.  There will always be room for excellent people.  But if you haven't truly counted the cost, if you haven't sought out mentors and top-producers who will tell you the whole story, I wouldn't want you to go through the experience.

In my 23 years as a broker, I have found that real estate is a proving ground, not a playground.

Life is short.  Rejection is hard.  And in this business, only the strong survive.

Monday, April 24, 2017

A PERMANENT LOW INVENTORY MARKET

There's been a lot of wild swinging and panicked desperation among buyers throughout the Denver  housing market in the spring of 2017, but especially in the sub-$400k price range.

Right now, in the entire Denver MLS, there are fewer than 1,700 total homes for sale below $400,000.  For comparative purposes, at this time in 2011, there were more than 15,000 homes for sale below $400,000.

The inventory is gone, and it's not coming back.

There are several reasons for this, but chief among them is the fact that if you purchased a home in this price range in 2011, 2012, 2013, 2014, 2015 or even 2016... you have an asset that increased dramatically in value with an interest rate near historic lows during an era when rents in many areas of town have nearly doubled.

To illustrate this shift in the market, between 2006 and 2012, I helped 55 clients buy homes for less than $200,000.  Since 2013, I have helped four.  

For those lucky 55 who bought homes under $200,000, regardless of how small their down payments were (and all have long since petitioned their lenders or refinanced to get out of mortgage insurance to further improve their cash flow positions), no one has a payment higher than $1,100 per month.  Yet many of these entry-level homes would easily rent for $1,600... $1,800... or even $2,000 per month today.  

The bottom line is if you own one of these cash flowing beasts, there is absolutely no reason to sell.  

And because I am wired to tell the truth instead of chase commissions, I have spent significant time and energy over the past few years encouraging my younger clients to hold onto these homes rather than selling them, because by renting them out and applying the full rental amount to their monthly housing payments... it's possible to own and control a huge financial asset free and clear within 10 to 15 years.

Great for your popularity and position as a trusted advisor, but generally terrible for business.  

As a result, I have several clients who are under 35 who own two, three or even four properties... all purchased during this historic surge in Denver home values.

The fact is, there is no new construction coming online anywhere under $400k anytime soon.  And as a result, you have a fixed inventory of homes in this price range, while population growth of nearly 2% per year has brought a net gain of nearly 100,000 people per year into Colorado since 2012.  

If you own and control a home worth less than what the builders will build for, you're set. 

Now the market is going to struggle with these new realities, because historical norms don't hold up in the face of new realities.

When I got into the real estate business 23 years ago, the average time homeowners stayed in a home before selling it was less than six years.  And for two decades, I based many of my business model decisions on the belief that if I sold a home in 2007, it was likely to turn over again in 2012 or 2013. 

Take great care of people, stay in touch, create value, be a resource... and boom, the listing is yours a few years down the road.

Not happening anymore.  The latest figures from NAR show that, on average, owners are staying in their homes more than nine years.  And with each passing year, that average time in the same home increases.  In a zero inventory market like Denver, those time periods will only get longer.  

In the past 11 years, I have helped nearly 250 buyers in Colorado purchase homes, more than 20 buyers per year.  After seven or eight years of racking up these numbers, I should have a listing pipeline that sets me up for life.  

In the past two years, however, I have had a total of 14 past buyer clients sell their homes... eight in 2015, and six in 2016.  Under the old model, I would easily have twice this number... but the truth is for tons of owners, it simply makes more sense to hold than to sell.

That's one reason why we ended February with less than 5,000 homes on the market in the Denver metro area for only the third time in 32 years.... with a population that's nearly double  (3.2 million in 1985 versus 5.6 million in 2016) what was here when the Denver MLS was launched in 1985.

This spring has been brutal on buyers, and on buyers' agents, frankly.  I have written 28 offers in the first four months of the year and 23 of those contracts went down to defeat in multiple offer situations.

Listings below $400,000 routinely draw five to 15 offers, buyers routinely modify or waive appraisal clauses, and the entry-level housing market itself has literally turned into an auction between the have's and the have not's.  Guess who wins?

The buyers coming here with good jobs from out of state... the buyers with significant cash reserves and a willingness to pay beyond past values... and the buyers backed by the almighty resources of Mom and Dad... win.  

The traditional entry-level buyers with 3% or 5% down, not much extra cash in the bank, and a conservative financial mindset... get trampled.

I have talked extensively with my clients about how much this market reminds me of California in the 1990s, when the population exploded, the job market surged and home prices doubled in a 10-year period.  

People stopped moving because they couldn't afford to move up.  Staying became the new going.  Inventory became permanently constrained and the only remedy for market equilibrium was perpetual rising prices.  

Homeowners pulled cash out of their homes and made improvements.  Poor neighborhoods became middle class neighborhoods.  Middle class neighborhoods became upper middle class neighborhoods.  And well off neighborhoods put up wrought iron fencing, hired security guards and became exclusive "gated communities". 

Meanwhile, people who didn't own got completely left behind, and a permanent underclass was formed.

I'm not saying the parallels are 100% aligned between California in the 1990s and Colorado today... but they are close.

I've seen the future, and I left it 11 years ago to come here.  

We are in a permanently constrained low inventory market, and you better figure out how to deal with it... or start scouting for other states that offer better affordability.  

Wednesday, February 22, 2017

SO YOU WANT TO BUY A CONDO

The roadkill market is back, and it's scarier than ever.

If you have followed my writings for any period of time, you know that there is seasonality to the Denver market.  Sellers rule from January until about the 4th of July, the market balances from mid-summer until Labor Day, and from September through the end of the year buyers actually have a fighting chance to buy something without having to outbid scores of competitors or waiving appraisal clauses.  

Well, it's February, and we all know what that means.

Buyers everywhere, nothing for sale.

I know we've had a strong, appreciating market that has been rolling since the end of 2012.  I know prices are up, on average, 45% overall in the metro area.  And I know that some of the more affordable areas of town have seen prices increase anywhere from 65% to 100% since the market bottomed in 2011.

None of it matters.

What I do is look at the numbers and I let them be my guide.  Being a student allows me to know the vital signs of the market.  I study inventory numbers, the ratio of active listings to under contract properties, absorption rates and historical norms.  I keep the data on laminated cardstock spreadsheets in a book that is six inches thick which sits in my office.  I study it like a doctor looks at x-rays.  

Here's what I know.

A flat, non-appreciating market will have about twice as many active listings as homes under contract.  Less than that, and you have price pressure.  More than that, and you had better start carving on price because values aren't likely to hold.

So let's do a little digging into the metro area attached-home market.  

As we all know, we don't have many condos for sale because since 2005, Colorado has had one of the most notorious construction defects laws of any state in the country.  Build a condo complex with leaky windows, cracking drywall or drainage issues... and you can be sued with uncapped liability based on a simple majority vote of the HOA board members.  In some cases, that means as few as two homeowners in a 100-unit complex can trigger a lawsuit against the builder.

Builders have responded by... no longer building condos.  

Today, literally 95% of the new construction product being built in Colorado comes in the form of single family detached residences.  The profit margins are better, the demand is there, and you're much less likely to get sued.

With the exception of about three luxury high rises downtown, everything you see going up in the city today is an apartment building.  And that will continue to be the case until the legislature finally does something to counteract this litigators' wet dream.     

So we have an artificially limited and highly constrained inventory of condos and townhomes for sale.  Which means demand for them is intense.

Let's look at a few snapshots inside the market. 

In Littleton, below $275k, there are currently 64 townhomes or condos on the market.  59 of those are under contract.

In Lakewood, there are 81 townhomes or condos on the market below $275k.  74 of those are under contract.

Let's try Arvada.  Here, there are 33 townhomes or condos on the market below $275k.  32 are under contract.  (I can't imagine how bad that one unclaimed unit must be!)

In these three cities, 92%... 91%... and 97% of the units listed below $275k are under contract.

Based on the 2-to-1 ratio of a flat market (which has been repeatedly substantiated by two decades of experience), prices would stop appreciating when the percentage of homes under contract falls below 33%.  Those current percentages, once again, are 92%... 91%... and 97%.

This is highly, highly discouraging if you are a financed buyer dependent on a property appraising in order to get the deal done.  Just as it was highly discouraging in the spring of 2013, 2014, 2015 and 2016.  

So let's go a little further east.  Surely there has to be a more affordable market than Littleton, Lakewood or Arvada.  Those are popular westside locations.

Okay, let's try Aurora.  No one can dispute that Aurora is known for being an entry-level market with a far higher percentage of townhomes and condos than other cities in the metro area.

And sure enough, if you search today, you'll find 301 attached units currently listed in Aurora below $275k.  245 of which (82%) are under contract.

So your chances of finding something below $275k are probably a little bit better in Aurora, but it's all relative.  When more than 80% of the inventory is under contract, prices are going up... and they are going up a lot.  

If you are looking to buy a townhome or condo under $275k and you see these numbers, you have two choices.  

Step up, be emboldened by the fact you know values are going up significantly again this year, and fight.

Or delete your Zillow app, sign another lease and wonder why you aren't making any financial progress in life when your homeowner friends are piling up significant equity gains every month.

I can't tell you what to do.  You have to decide for yourself.  I've advised those with limited resources or queasy stomachs to sit tight until the fall, because eventually this red hot spring market will begin to flicker and you'll have less competition simply through attrition and the seasonal patterns of our market.

But you'll pay more in the fall.  And it's going to be hard to sit on the sidelines when everyone else is diving in.

For months I have thought that higher rates would slow things down.  That people would be less willing to pay 2017 prices plus see payments pushed even higher by rising mortgage rates.

So far, it's not stopping anyone.  

If you are thinking about buying a townhome or condo under $275k, you need to detach from your preconceived notions of what things are worth.  When demand overwhelms supply (again), prices go up (some more).  Which means paying $255k or $260k to get something now when the comps say it's worth $250k is a defensible move.

Of course we'll continue watching the numbers.  One of these days, the pattern will start to crack.  Or it won't.  

Maybe rates will go up, people will stop moving here or Trump will launch a nuke.

Or maybe this market will just keep rolling along at 10% per year, driven by a sizzling job market, a great quality of life and the continued exodus/arrival of educated young people and overtaxed Californians.  

It's going to be another spring of bidding wars, short tempers and high drama.  Those who don't have a plan are going to lose.  Those who spend their time looking back are going to lose.

Those who trust the numbers are going to write strong, aggressive offers that are designed to knock out the competition.  Those who do that will still have time to win in a market that's going to heights it's never seen before.  

Wednesday, February 1, 2017

THE BUYERS ARE BACK, BUT SELLERS ARE NOWHERE TO BE FOUND

January was an interesting month in the Denver real estate market.  No listings, lots of political distractions and a sense of uncertainty about how higher interest rates and rapidly shifting government policies might impact the market.

The story is still unfolding, but here’s my take.

Active inventory in the metro area as of yesterday dipped below 5,000 homes for the first time in two years.  We started the year with 5,111 homes for sale and closed the month with 4,992. January and February of 2015 were the only two months in the history of the Denver MLS - which dates back to 1985 - when we had fewer than 5,000 active listings on the market.

If it feels like there's nothing for sale, there's not.  

The bidding wars are back. 

In both 2015 and 2016, the market went from frenzied in the spring to strong during the summer to just okay during the fall.  At no time has this market ever gotten close to being “soft” (the longest I have carried any of my listings in four years is 23 days), but the best window of opportunity for buyers to purchase without having to outbid the mob has been August through January. 

Right around Labor Day, I actually went back to several buyer clients who had given up during the spring and encouraged them to re-engage during the fall.  Some did – and bought homes.  Some didn’t – and now they are talking about getting back into the market right as the crazy wheel starts spinning again.  Sigh.

Higher interest rates are a big deal to me, but apparently many buyers are not as concerned as I am. 

Maybe that’s because they believe (with justification) rates are heading even higher as more regulations are rolled back and Trump tries to drive the stock market to 25k.  If that’s the thought process, then yes, it makes sense to get after it now.

My take on it has been that even if demand remains constant with the past few years (and demand has been through the roof), higher rates are going to end up impacting the rates of appreciation we have seen in recent years. 

In other words, if rates were constant at 3.5% and prices went up 10% over the course of a year, payments on a 30-year mortgage at 90% LTV would go up about 10%. 

If rates increase from 3.5% to 4.5% and prices are flat, payments still go up about 10%.

The logic here is that higher rates have the potential to significantly cut into the consistent price gains we have seen as demand has swamped supply. 

Therefore, I think you need to be more cautious in your assumptions about where this market is headed.  I think 5% appreciation (on average) is a reasonable baseline for 2017.  I think a whole bunch of other people (and backslapping real estate agents) are still pounding the drum for 10%, and that’s just not going to happen. 

The problem, though, is this market is still being driven by a lot of greed and a lot of emotion.

Quite frankly, you shouldn’t be doing the same things you were doing (or advising) last year because the market is different now.  Higher rates mean less appreciation. 

That doesn’t mean prices are going down, and that doesn’t mean you shouldn’t buy. 

But it does mean you need to be more careful about overpaying for homes, and you need to willing to detach emotionally if you want a square deal. 

Four weeks into the new year and I already have clients who are getting impatient with the lack of inventory and level of demand. 

Yes, this market is frustrating as heck if you’re a buyer… but please don’t forget that patience isn’t a crime.  

In the long run, logic always beats emotion.  Be educated, be prepared, be cautious... but when something good shows up, be ready to swing like you mean it.  

Tuesday, January 24, 2017

TIME TO LIST

For as long as I’ve been in real estate, the biggest buyer surge relative to listings on the market takes place between mid-January and the end of March. 

Why so?

I’ve always felt it was because sellers tend to more beholden to the school calendar and the “conventional wisdom” that the time to sell is in the spring.

However, the numbers tell a different story.

Take a look at these inventory shifts between January and February over the past few years:

January 2016 – absorption rate of 1.85 months, active-to-under contract ratio of 0.93
February 2016 – absorption rate of 1.07 months, active-to-under contract ratio of 0.73

January 2015 – absorption rate of 1.81 months, active-to-under contract ratio of 0.96
February 2015 – absorption rate of 0.95 months, active-to-under contract ratio of 0.67

January 2014 – absorption rate of 2.52 months, active-to-under contract ratio of 1.19
February 2014 – absorption rate of 1.45 months, active-to-under contract ratio of 0.85

In normal months, these ratios will only move a few basis points… but the evidence clearly shows that the buyers show up swinging after the first of the year, while most prospective sellers are just starting to take down their holiday decorations. 

I’ve seen it at street level as well.  Already in 2017, I’ve written three contracts for buyer clients which lost out in multiple offers. 

While not as intense as 2016, the surge is still real.

I’ve always believed the psychology of the market is that buyers – especially first-time buyers – spend the holidays formulating plans and making decisions about the coming year.  If they reach the point of deciding to buy, they want to start sooner, not later. 

And so as quickly as they can find a few new listings and an agent to show them around, they start swinging.

As a seller, the absolute best time to list is when the choices are limited and the buyers are plentiful. 

There are other compelling reasons to list early in the year:

Relocations – many relocations are on hold during the holidays, but those relocation buyers hit the ground running in January

Landscaping – if you have an older home with questionable landscaping, the time to sell it is when there is snow on the ground and everyone’s lawn is brown

Lot Orientation – by the same token, if your backyard faces due west and bakes in the summer, buyers aren’t thinking about this in February

Air Conditioning – if you don’t have it, it matters less in the winter

Driveways – a south facing driveway is a more valuable asset in the winter than it is in the summer

Noise – both road and neighborhood noise are less of a factor in the winter, when windows are closed and the focus is on indoor living

Of course, diligent agents will note all these things, and with good representation a buyer will know exactly what’s going on.  But I also talk to people all the time (who were represented by other agents) who say “we never thought about that when we bought”, or “if we had known, we would have reconsidered”. 

The job of a good agent is to make sure you know everything there is to know and that your eyes are wide open – regardless of the time of year.  I often tell my buyer clients, “My job is to think winter all summer, and summer all winter.”

With the being said, I know the odds of selling a home – any home – are a lot better in the first three months of the year than in the last three months of the year. 

The best time of the year to list a home for sale is now.  Right now.  

Wednesday, December 7, 2016

RE/MAX ULTIMATE TEAMS EVENT IN DALLAS

Earlier this week, I traveled to Dallas for the 2016 RE/MAX Ultimate Teams Event. 

This two-day program attracted nearly 600 team leaders or aspiring team leaders from RE/MAX offices in the US and Canada.  The demographics of the group were extremely impressive, as attendees averaged 17 years in the business and average 2016 income of over $280,000.

In short, these were the best and most successful agents in the RE/MAX system.

RE/MAX has been slow to support teams, quite candidly, because the formation of teams usurps power and revenue from the RE/MAX corporate model, which has long been focused on attracting successful, experienced, and entrepreneurial top-producing single agents. 

Consolidating the production of multiple agents under the banner of a single team leader threatens a business model that is largely dependent on individual agents each paying monthly fees to be a part of the brand.  But to their credit, RE/MAX International has finally recognized that team-building is not only here to stay, but long-term it’s going to be the only sustainable model in real estate.

With technology creating a 24/7 marketplace, it’s increasingly difficult for single agents to keep up with the demands of a 24/7 real estate business cycle.  The best long-term answer is to create a structure that supports constant availability and provides exceptional service at all times.  

Much of the two-day event was like drinking from a firehose.  Power panels featuring top-producing team leaders, financial experts preaching the importance of strict budgetary discipline and an intensive three-hour seminar on Tuesday with Brian Buffini, whose referral-driven real estate sales model has been at the center of my success and whose globally-renowned coaching organization works with many of the top agents in the world.

“You don’t form a team for leverage,” Buffini told the crowd.  “It’s not so you can have more time at home, or even so you can work fewer hours.  The only acceptable reason to form a team is when you consistently have a surplus of leads that you yourself cannot handle.”

The most important hire is the first, because your personal assistant will either provide the structure and support to grow or keep the entire enterprise from getting off the ground.  

“Hire a fit, not a friend”, Buffini said. 
 
The three hiring filters for that personal admin (in order) are character, competence and chemistry. 

“You need all three for a successful hire", Buffini continued, “but in the end, character wins out.  Competence can be learned, but character is innate, and without it nothing else matters.” 

Buffini also emphasized that building a successful team requires leadership, not management. 

“Management is telling people what to do, “Buffini said.  “Leadership is doing the right thing, regardless of circumstance.  Leaders must lead, or they will eventually lose their teams.” 

The goal of any successful team leader should be to help each team member reach his or her goals.  If those goals don’t align with the success of the team, then the hire was a mistake from the beginning.

Most highly successful agents and team leaders are control freaks, and I certainly can relate to that.  But Buffini said that unless control freaks learn to grow and delegate, they rarely build successful teams.

“You've got to be broken of your controlling ways," Buffini explained.  "The cure to being a control freak is constant feedback.  You must have the humility to seek out feedback, internalize what you hear, and proactively empower those on your team.  Even if that means allowing them to make mistakes so they can grow.”

Buffini cautioned that for 90% of team leaders, there is no annual four week beach vacation.  There is no endless flow of passive income.  Being a team leader is about creating opportunity for others to succeed and building an enduring, trusted brand.  Only after years and years of hard work can a successful team leader look at easing out of the sales equation and handing the reigns off to a team of subordinates. 

Ultimately, being a team leader means that the buck stops with you, always.  

“Leading a team of six is far harder than running a company of 600,” Buffini said.  “No matter what happens, the leader has to take responsibility and set a daily example of what is expected.  No matter what happens, the leader must own it.  No matter what goes wrong, regardless of who dropped the ball, the first and most mature response from a good team leader will always be ‘it is my fault.’