Wednesday, August 29, 2018

THE EMOTIONAL MARKET IS GONE, THE LOGICAL MARKET IS HERE

There's a change that's been taking place in our market over the past few months, and it has a feel as palpable as the crisp morning air or the turning of the fall leaves.

Buyers have checked out, and many sellers (and agents) are chasing a market that no longer exists.

The current inventory of homes for sale in the Denver metro area - about 8,200 - is up more than 60% since April.  And pendings - the number of homes under contract - has fallen by 2% during the same period of time.

That's a real change, much more pronounced than in past years.

Here's how the market has transitioned from April (peak frenzy) to August (peak inventory) over the past three years:

2016
April Active Inventory:  5,996
April Under Contract:  8,427

August Active Inventory:  8,287 (+ 33%)
August Under Contract:  9,717 (+ 15%)

2017
April Active Inventory:  5,565
April Under Contract:  7,493

August Active Inventory:  7,733 (+ 39%)
August Under Contract:  7,786 (+ 4%)

2018
April Active Inventory:  5,013
April Under Contract:  7,175

August Active Inventory:  8,266 (+ 64%)
August Under Contract:  7,016 (- 2%)

Viewed another way, the inventory of homes always picks up through the summer months and peaks around Labor Day.  New inventory becomes much more scarce after Labor Day and the inventory generally declines through the end of the year before bottoming in December.

But contracts should also increase during the summer months, simply because we've had such strong spring markets the past few years and more listings should result in more sales.  

Not happening this year.

The spread between the growth in actives and pendings was 18% in 2016, 35% in 2017, but is at 66% this summer.  

Now before you reach for the panic button, some context.

Since April, the overall absorption rate has increased from 0.94 months of inventory to 1.63 months of inventory.  Which simply means at the current pace of sales (still strong), if we did not get any new inventory coming online all existing homes would be absorbed by the market in about seven weeks.

Five months of inventory is considered a flat, non-appreciating market.  And the last time we had more than five months of inventory was July 2011.

A year ago at this time, the absorption rate was 1.41 months, and last September it jumped up to 1.62 months (very similar to now) before dipping back down as new listings dropped off at the end of the year.

The difference this year is that we've had a lot more inventory coming online, without a corresponding increase in buyers.

What this tells me is that a whole lot of people (mostly investors) who bought homes between 2010 and 2015 have decided to start cashing out... and that's a trend worth watching.  

At street level, the market is different right now.  Homes are no longer automatically selling in a weekend with multiple offers, and the number of people visiting open houses has dropped appreciably.

It's my theory that we've simply reached a pain-point, especially for first-time and entry level buyers, who are taking the double hit of record high prices and interest rates pushing 5%.  

The same home that was $400,000 and sold with a 3.5% interest rate three years ago ($2,280 PITI payment with 5% down) would likely be $475,000 with a 5% interest rate today (nearly $3,100 PITI payment with 5% down).  

That, ladies and gentlemen, is a payment 36% higher than just three years ago for the exact same home.

Buyers feel this, whether they've done the exact math or not, and they are starting to pull back.

Unfortunately, most sellers I talk to are still holding onto headlines from April and May, when the market was radically different.  

And with the number of real estate licensees having doubled in seven years, the situation isn't helped by the number of newbie agents running around with no idea how to navigate anything but a frenzied, multiple-offer driven market.  Misinformation and, frankly, disinformation is prevalent.  Way too many agents are chasing sales instead of investing in relationships, and that's a short-sighted strategy that leads to extinction.   

If you're buying, you need to be extra attuned to seeking value right now.  The market dynamics are still healthy, but you no longer have to chop off body parts or sell your firstborn to get a home under contract.  

If you're selling, you now need to decide if your goal is to sell your home or stare at a for sale sign blowing back and forth in the wind for the next three months.  

The market is changing.  And to succeed, you must change as well.  

Friday, May 4, 2018

ALL ABOARD THE CRAZY TRAIN

There's no shortage of things to complain about in the Denver real estate market these days, but one of the most frustrating aspects of working with buyers is all of the obstacles they face in simply trying to get an offer written and presented fairly in front of a seller.

From the "Coming Soon" scams to the open house games to the agents who fail to set deadlines to the agents to set deadlines but don't enforce them... it's easy for a buyer to lose faith in the process.

Here are four things that making buying a home - and representing a buyer - highly frustrating in the Denver market.

COMING SOON - This is probably my least favorite thing in the market today.  Because listings are assets and everybody who has been in the business more than five minutes is trying to form a team and funnel buyer leads to those newbie agents, "Coming Soon" riders have become as common as dandelions growing unchecked in the summer sun.

The basic premise of "Coming Soon" riders is that listing agents want to leverage the excitement of a new listing hitting the market to field buyer phone calls.  At a bare minimum, one objective is to find new buyer clients, usually so they can be handed off to the brand new, inexperienced agents working on behalf of the team leader.  It's awesome for the team leader, who often will take 50% of the commission from the new agent if that agent somehow eventually swerves into getting a home under contract.

But the other objective is often to try and "double end" the deal.  In real estate, it's customary for a commission to be paid to the agent representing the seller, with another commission being paid to the agent who brings the buyer.  But what if one agent manages to connect the buyer and seller together in the same transaction?

Jackpot.

So here's the question... why, in the hottest real estate market in Denver history, would a seller settle for accepting an offer after just three or four buyers have seen the home?  Is it not obvious that you would almost always be leaving thousands of dollars on the table by not exposing the home to the 21,000 agents and tens of thousands of buyers accessible through the MLS?

Unless you're an 84-year old widow, and you don't understand the market or the process.  Or unless you're an out-of-state investor who has no way of monitoring what kind of exposure your longtime rental home is actually receiving from the sketchy agent you found on the Internet.  Or maybe your industrious agent told you they would lower the commission by one percent if they found the buyer.

One last thing... until a property is actually listed in the MLS, there are essentially no rules governing commission, disputes or brokerage relationships (and this includes all of the "Coming Soon" listings now posted on Zillow).  Putting the property in the MLS subjects that home to the rules of the MLS, rules which are designed to promote transparency, due process and fairness to all parties. 

The vast majority of the time, "Coming Soon" riders are designed to promote the listing agent and the interests of his or her team... not the seller.  And that's partly why so many people have a negative view of those in the real estate brokerage community today.

OPEN HOUSES - Let me be clear - open houses are a viable marketing strategy (for both the listing agent and the seller) and there is a place for them. 

If there is transparency and the seller's best interests are placed first.

But here's what they very often have become.  Marketing events designed to produce buyer leads for the listing agent's team (at best) and biased, unfair exposure events (at worst) which often result in listing agents and teams focused on double-ending the deal instead of securing the best price and terms for the seller.

As I have mentioned in previous posts, the number of agents in the Denver metro area has mushroomed from barely 10,000 after the Great Recession to more than 21,000 today (thank you HGTV).  Everywhere you look, bartenders, valets, shoe salesmen and line cooks are walking away from gainful employment to take out a real estate license in pursuit of all the "easy money" to be made in real estate.

(Fact check: nationally, 50% of all people who take out a real estate license will quit in the first year.  Three out of four will never renew their license at the end of their first licensing cycle.  This is the ultimate turnstile business, with endless scores of freshly minted agents bursting through the front door to trumpets and fanfare, only to slink out the backdoor months later, destitute and in debt.)

If the purpose of holding an open house is to gain additional exposure for the seller. leverage interest into better offers and terms that benefit the seller, while still adhering to the ethical and professional requirements of board membership and the MLS, then great, let's do them.

But if the goal on Saturday morning is to find a buyer (who may or may not be the best qualified), share the details of other offers with that buyer to improve their standing, and then persuade the seller to take that offer... you shouldn't have a license.  

Again, this is not the case with every open house, and open houses are far more legitimate than "Coming Soon" riders, in my opinion.  But there's still a significant segment of the agent population that functions and behaves as if their primary job is to maximize their own earnings, not promote the seller's interests. 

And when you see it weekend after weekend, instance after instance, it's easy to become pretty jaded about what's going on.

DEADLINES / NO DEADLINES - Lastly, there's incredible frustration for agents and buyers alike right now caused by lousy or non-existent communication.

Case in point... just this past weekend, I saw a new listing come up that was a near bullseye match for an investor client.  The property hit the MLS on Wednesday night with no notes about when showings would begin or when offers would be considered.  I immediately called to set a showing for Thursday and moved my schedule around to accommodate it.

The next morning, I got a call from the showing service.  "No showings on that one until Friday, sir." 

Okay, that's fine.  We'll make it work. 

Except that Friday was completely booked for me and my client travels for work on Fridays.  But alas, I see they are holding an open house on Saturday.  So we'll go before the open house and take a look then.

Which we did.  And as we were finishing up our showing, the rookie agent recently hired as a member of the listing agent's team showed up to host the obligatory open house.

"Have you set a deadline for offers on this?", I asked. 

She didn't know. 

"Do you know if the sellers need a rentback?"

She didn't know. 

"Do you have any offers?  Anything else we should be aware of?"

Nothing.  

So I called the listing agent, who was obviously busy with other clients (or perhaps playing golf).  I went into her voicemail.

Two hours later, I received a call back.  

"We've got multiple offers and we're going to present them tonight," she said. 

Okay... so at this point we cancel dinner plans (as happens almost every weekend in our household), call our client, and tell him we have two hours to pull an offer together. 

He has dinner plans as well, and now the question is... does he throw his family in the trash along with me to try and pull an offer together, or does he choose to kiss this one off in order to ensure domestic tranquility? 

Long story short... domestic tranquility wins. 

"Why can't they give us a deadline in advance or some kind of guidance so this isn't a flipping rodeo?" he asks.

From me... silence. 

I don't know why people can't communicate.  For the past four years, virtually every home I have listed has been marketed the same way:

"Showings begin at noon Thursday and will continue until noon on Monday.  Offers due by 6 p.m. Monday with a response deadline of 12 noon Tuesday.  Seller to review offers Monday night.  Disclosures uploaded in MLS.  Please call with any questions."

Fair, concise, understandable and respectful of people's time. 

I called the agent and explained I had a cash buyer, very motivated, and that he had been waiting for a home in this particular neighborhood for over a year.  He could accommodate a seller rentback, he wouldn't need an appraisal and he could close in 15 days.

"Can you get us an offer by 6 p.m.?", she asked.

I told her my client had Saturday night plans that were going to be hard to change.  He was debating whether to cancel to try and get his hat into the ring on this home.  It added stress on top of stress in an already stressful situation.

Thirty minutes later, my client called me. 

"All of this is just too rushed and out of control," he said.  "Forget it, we'll wait for the next one."

I texted the seller's agent to let her know we were dropping out.  She didn't reply.  

You would think that is where the story ends.  But no, in the Denver real estate market, there's always more to the story.

Several hours later, I received another text from the listing agent. 

"We're going to keep taking offers until 2 p.m. tomorrow, " she wrote.  "My sellers want a cash buyer or a larger appraisal guarantee, so let your buyer know he still has a chance." 

It was 9:18 p.m. on a Saturday night.

I texted my client at 9:20.  "Sellers are extending their deadline until 2 p.m. tomorrow.  Still interested?"

No response from my client.  The next morning, I texted again.  "Any interest in getting in one more time and having another look?  We still have a window of opportunity to get this done."

He called.  I'll save the extended details, but in his mind, he was being played.  He didn't think the seller actually had offers (he does), he felt they were trying to rush us into an over the moon offer Saturday night (they weren't, necessarily) and he now felt like they had overplayed their hand and were trying to pull us back into the bear trap.

The issue was... my client was mistaking lousy, disorganized communication and general incompetence for blatant manipulation. 

"I really don't like the way this feels," he said, echoing a thought I've had every weekend for the past six years.  "I don't know what to believe."

And with that, we officially dropped our pursuit.  

If there was one piece of information I wish buyers could easily access, it would be an "honesty and integrity" rating for the listing agent. 

There are plenty of good agents out there, and when I show their listings, I do so with the extra confidence of knowing that the playing field is level, my time is being respected and my client will have a fair shot. 

I just closed a deal for a buyer who won out in a five-offer situation.  The home was marketed with a firm beginning and end time for showings, a clear deadline for offers to be submitted and a clear time frame for seller acceptance.  All disclosures were uploaded to the MLS, the agent took and returned phone calls promptly, and everyone was kept informed throughout the process.

We had enough time to pull comps, discuss strategy, clear our plans with the lender and write our best offer.  We wrote an above-list price offer, doubled earnest money, let a portion of it go hard upon acceptance, included an appraisal guarantee and wrote a thorough cover letter.  We submitted it one hour before the deadline and called the agent to confirm receipt.  

Because my buyer was confident, qualified, educated and given time to process information, we could confidently put our best foot forward. 

In large part because of our own communication and how clean our offer was (despite the fact it was financed), the sellers chose to go with us.  

We sailed through inspections and the property appraised at value.  We closed on time and everyone got what they wanted.  It was - dare I say it - an enjoyable process.  It was how real estate is supposed to work.

Ultimately, the listing agent sets the tone for the transaction.  And that tone can be one of professionalism, structure and a focus on treating everyone fairly... or it can be a greedy grabfest of trying to leverage everything for personal gain.  

In a market increasingly driven by greed and despair, many agents have ethically lost their way.  And when this extended market run is finally over, they will be the first ones to discover that longevity and integrity go hand in hand.   

Tuesday, April 24, 2018

NOT DENVER ANYMORE

Five years ago at this time, I had four buyers under contract... at sales prices of $143k, $210k, $226k and $300k.

Today, I have four buyers under contract... at prices of $462k, $610k, $738k and $835k.  

Notice any difference?

In fact, in all of 2013, I closed three deals above $500k.  

This year, by the end of May, I will have closed seven transactions above $500k. 

These numbers may reflect the state of our current market, but they also represent a changing of the guard in Denver.  We've moved from an affordable mid-sized city that welcomed young, motivated workers from the middle third of the country to a playground for well-off Texans, a refuge for overtaxed Californians and a growing demographic powerhouse in the eyes of small, medium and large-sized employers who can't seem to get here fast enough.  

In fact, according to the latest US Census numbers, almost two-thirds of our total migration now can be sourced to Texas and California.  And while President Trump may want to build a wall separating the US from Mexico, there is a rapidly-forming economic wall going up between Denver and its less affluent neighbors to the east.  

Denver is changing, and if you last lived here 10 years ago you would be stunned at how radically different the landscape is today.  Architecturally, economically and politically.    

The rules of real estate have changed, too.  It's not just a stronger market and a desire to sell higher-end homes that have changed the dynamics of my business.  It was a conscious decision to position myself in front of where the market was headed.  

Five years ago, the Denver market was literally dripping with opportunity for first-time buyers.  The last remnants of cancer caused by years of toxic lending was finally being purged out of the market, with home prices dragged down to levels well below replacement cost due to foreclosures and short sales.

Interest rates were in the 3's, mortgage payments were cheaper than rent, and you could buy a home for $300k that would cost $375k to rebuild if it burned down the next day.  

Value was obvious, yet many buyers remained reluctant.  So I focused on the most coachable, motivated and open-minded buyers I could find.  First-time buyers.

In fact, during this era I regularly hosted first-time buyer seminars on Thursday evenings at the local library.  On Saturdays and Sundays, I held open houses on listings that weren't mine just to invite people to these workshops, hoping I could educate and coach them up into buying a first home.  

And with most sellers having little or no equity, there was no move-up market.  So trying to sell a $400,000 home and buy a $600,000 replacement home on the other side was pretty much a waste of time, energy and marketing dollars (although that was about to change).

As an agent, you fished the shallow end of the pond because that's where the fish were.  

And as a result, I closed a mind-numbing 41 deals in 2013, driven almost entirely by the obvious value found at the entry level.

Here's a snapshot of my business from 2013:

$0 - $250k:  25 transactions
$250k - $400k:  12 transactions
$400k - $600k:  2 transactions
$600k - $1M:  2 transactions

As the market evolved and began to rally strongly in 2014, the focus moved from first-time buyers to sellers who were starting to recover equity and had a real opportunity to move up.  I changed my approach and started engaging in serious conversations with past clients about the value of selling (or keeping) their first home and buying something larger.    

The inventory of homes for sale continued to plummet, falling from more than 23,000 in 2011 to less than 7,000 by the middle of 2014.  A huge shift was taking place, yet many were still missing it, or poisoned by skepticism born out of the Great Recession.  

With move-up buyers the hot new ticket, my price points also increased.  I began listing more starter homes and helping people buy move-up properties.  The composition of my 37 deals in 2014 looked very different than just one year earlier:

$0 - $250k:  13 transactions
$250k - $400k:  16 transactions
$400k - $600k:  5 transactions
$600k - $1M:  3 transactions

The point is, as a successful agent you have to read the pulse of the market and then make adjustments.  As Wayne Gretzy once famously said, "you skate to where the puck is going... not where it has been."

By 2017, our market had arrived in a completely different space, dominated by big dollar transplants and established owners with huge amounts of equity.  According to RE Colorado, from 58,000 closed sales in the Denver MLS last year, the average down payment was more than $66,000.  

Which means if you didn't have big money (or significant equity), you didn't have much of a chance.

Skating to the puck now means you have to get in front of people with resources and equity, or you will find yourself chasing after a market that no longer exists.  The playbook from 2013 is as useless today as that old VCR sitting in your basement. 

Skate to where the puck is going.  

I'm not saying this to be clever.  And I'm not saying this with glee over how much money is in the market today.  I'm saying this in the most serious tone possible.  

My first 11 years in the business, I lived and worked in Southern California, where homes prices nearly tripled while the agent population increased by 150% (sound familar, Denverites?).  I watched countless new agents burst through the front door with optimism and bravado, only to see them slink out the back door a few months later, license in hand, defeated and broken.

The only variable that ensures survival is work ethic, fueled by reputation and integrity.  In the era of HGTV, too many people think real estate is a game.  That selling houses is "fun".  That "Fixer Upper" is real life.  Way more people want to talk about Chip and Joanna Gaines than Ray Dalio or Warren Buffet.  

This is work, serious work.  With more money involved than ever before.  And more outsiders crashing into the market and disrupting traditional business models than ever before.  

Evolve.  Work.  Evolve.  Work.  Evolve.  

Do this and you will survive.

In 2017, my business looked completely different from just a few years earlier.  Last year, I closed 35 deals.  

Here is what that distribution of business looked like:

$0 - $250k:  3 transactions
$250k - $400k:  12 transactions
$400k - $600k:  12 transactions
$600k - $1M:  7 transactions
$1M and Up:  1 transaction

The point is, if you are doing the same things today that you were doing five years ago, chances are you're either already out of business or inches away from that dreaded back door departure.  

And while I want to help first-time buyers (and I mean that with every fiber within me), all too often this market chews them up and spits them out.  Along with their agents.  

Although empirical evidence counsels against it, I'm still occasionally taking on first-time buyers and playing the stop, drop and run game... chasing after new listings as soon as they hit the market and writing offers that are regularly flattened like a mouse in front of a Mack truck by high net worth out-of-staters, equity rich current owners or buyers being financed by The Bank of Mom and Dad.

All you can do is Just Keep Swinging.

But the much larger share of my business these days is tied to the financially stronger buyers who run this market.  I watched this progression in Orange County two decades ago, and I am watching history repeat itself again today.  We're a high cost market, fueled by jobs and demography, and you can wish all you want for the old days, but they're not coming back.   

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.