Sunday, February 23, 2014

THE $73.97 PER DAY QUESTION

"Are you in, or are you out?"

That's the real question for buyers in the Denver real estate market right now.  

I'm sorry to have to go into "tough love" mode, but as a broker, figuring out whether your buyers are contenders or pretenders is one of your primary responsibilities these days.  

This past weekend, I wrote an above list price offer on a south Denver home for well-qualified buyers one day before the property hit the open market (yes, I got us in early) and we didn't even draw a counter offer.

The seller chose to sit on our offer until the crowd came storming through the next day.  At the end of that first day, the scorecard read multiple offers, cash buyer, game over.  

Back to the drawing board.

But at least these buyers are contenders.  They wrote an extremely solid offer that would have been a slam dunk three years ago.  And even in this hot market, I thought we had at least a 50/50 shot.

The inventory of homes for sale in Denver now sits below 7,000.  In 2007, there were 31,000 homes for sale.  In 2010, there were 23,000 homes for sale.  In 2013, we peaked at 10,000 homes for sale.  As of February 10, the number of homes for sale in the Denver MLS was 6,026.  

Why the plunge?  As I've discussed repeatedly on this site, it's a combination of no more foreclosures plus limited new construction (especially at the lower price points) plus a large number of "boomerang buyers" (Foreclosure 1.0 people) looping back into the market, coupled with low rates, a rapidly improving economy and massive Colorado population growth over the past five years.

Whereas the market was full of headwinds from 2006 - 2010, today's buyers are walking into a market with gale-force tailwinds.  

Buying a home in 2014 bears absolutely no resemblance to the process of buying a home in 2007 or 2010.  Sellers (especially at the lower price points) clearly have the upper hand today and buyers who don't realize this aren't really buyers at all, at least as I see it.  They are pretenders.

With the median home price in Denver now right around $270,000 and 2013 appreciation of 10%, the median equity gain for homeowners in the metro area last year was $73.97 per day.  That's every day.  For the past 365 days.

Truth is, for most people at the median price, equity gains more than offset mortgage payments in 2013.  Think about that for a moment.  Free mortgage payments for a year.  That is simply remarkable.

If you are looking to get into the market as a buyer during 2014, you had better have some conviction.  Because those who truly want in are running right over the timid when it come to taking advantage of this bright season for housing.  

Nothing lasts forever.  In reality, those who bought a year ago will do better than those who buy today.  Rates are higher.  Prices are higher.  But the tailwinds are still firmly blowing, and the benefits remaining are reserved for those who get in while time and demographics remain on your side.

Friday, February 21, 2014

POCKET LISTINGS

Here comes the nonsense, again. 

With the Denver housing market on fire during the first six weeks of the year (again) and listing inventory now officially at a 39-year low (unbelievable), some practices many professionals consider “questionable” are creeping back into the market.

One of these practices is the “pocket listing”.  A pocket listing is a property that a broker lists for sale but never enters into the MLS.  The agent, in effect, keeps the listing in his or her pocket and does not broadly market it through the MLS.

Why would an agent do this? 

Most times, unfortunately, the answer is outright greed.  If an agent can get his seller to sign a disclosure authorizing the agent to withhold the property from the MLS, that agent effectively becomes the only one who can represent the buyer.  It means the agent is one or two opens houses from a double-ended deal, and a fat payday.

And many sellers, unfortunately, are so poorly educated by the agent they don’t even know what they are signing, or why it might be desirable to have 14,000 dues-paying MLS members with buyers having access to their property instead of just one.

If you are selling a home, and you were interested in the highest and best possible price, why would you willingly give up access to 13,999 other brokers being able to show and sell your property?

You can see why there is controversy around pocket listings.  Agents freezing other agents out of transactions is never looked upon favorably, and from an ethical standpoint, you have to wonder how many sellers (who are often older, or living out of state, or may simply be clueless about this) really understand what is happening. 

I saw a similar practice during the final days of the housing boom in California back in 2005.  Several agents began listing homes in the MLS so that they were fully marketed to all brokers… but with a buyer’s agent commission of $1.  Yes, one dollar.

Agents have long memories.  If, as an agent, you decide to go down this road, you need to realize that other agents are going to remember how you chose to do business when times were good.  Because when the market changes, and it will change one day, your reputation is all you have.

While our market continues to sizzle and significantly lift Denver’s overall economy, the smash and grab mentality of agents pursuing pocket listings is one trend I could live without. 

Wednesday, February 12, 2014

THE "AS IS" SALE

Part of being an effective negotiator is realizing who has the leverage in a negotiation.  Conditions can change – and they do – which means the side that may have the advantage in one market may be at a total disadvantage in another market.

That’s pretty obvious, but it’s amazing how slow people are to adapt.

Right now, due to record low inventory, surging prices and extremely strong buyer demand (especially below $300,000), sellers have the upper hand.  Homes at the lower price ranges are getting a ridiculous number of showings, and properties that are priced with some modicum of common sense and which aren’t completely falling down are regularly going under contract in a day or two.

That’s a far cry from 2007-2010, when buyers wouldn’t even imagine the thought of writing a full price offer and homes languished on the market for months at a time.  (Distressed inventory also made up nearly 50% of the active market during this time, too, as opposed to 5% today)

So realizing that times have changed, you have to change.

If you’re a buyer, that means recognizing you are likely to be in competition for any good property, which means you need to tone it down with your list of demands and realize that there will be no future equity gains for you if you don’t find a way to own a piece of something.

With sellers, that means you might be able to sell your home on an “As Is” basis, meaning you are telling buyers that “what you see is what you get”.  No repairs.

Now every situation is different, and so this isn’t a universally applied principle.  It’s a tool – one of many in the negotiation toolbox. 

If I have a buyer and we’re looking at a clean property that’s sure to attract intense interest… I am now talking to my buyers about the “As Is” purchase.  We still get to do inspections, and we still have the right to cancel if something unforeseen turns up in inspections.  But if the house is what we think it is, we’re telling the seller in the contract that we are prepared to go forward “As Is”, subject to an inspection for buyer’s knowledge only (but retaining our right to cancel).

For many sellers, who dread the inspection process (we’ve all heard horror stories, right?), it’s much easier to say yes to the “As Is” buyer than someone who might carve you up and cause you heartache by nitpicking, or worse yet, tearing you apart on inspections.

If you can reasonably expect 5% appreciation in the coming year (which is a strong probability at the lower price points), a $250,000 purchase will net $12,500 in equity gains in the coming year.  If you forego $2,000 of possible repairs to secure a $12,500 gain in 12 months, that still makes plenty of sense. 

This past week, I closed on my first “As Is” listing in many years.  I sold a ranch home built in 1971 that had a fair amount of deferred maintenance – nothing fatal, but a lot of little things.  Old paint, old carpet, old wood trim, aluminum wiring, an older roof, old appliances, an older furnace. 

Because of the price point and the location, I knew we would get a lot of showings. 

If my sellers started to address these issues, my fear was that it would only make the other deficiencies more glaring.  If he painted, the carpet would look bad.  If he updated the appliances, the dark wood would be out of place.  If he replaced the furnace, why not the roof? 

In this case, we decided that whoever would buy the house would probably want to do a total remodel, so why gum up the works by starting a handful of projects?

So did we discount the price?  Not really.  We just braced for the fact that this house would not be for everyone. 

What’s different today is that when you have a dozen motivated buyers coming through in the first two days, you don’t need all 12 of them to love your house or love your price.  You just need one. 

And so that “As Is” strategy, which would have been unthinkable 24 months ago, is now a viable option for many sellers. 

Again, I must emphasize that every situation is unique and these strategies are not universally applicable.  But in some situations, they make all the sense in the world, whether it’s writing an “As Is” offer for a buyer or offering a property strictly “As Is” for the seller. 

The “As Is” sale is merely another tool in the negotiation toolbox, albeit one that hasn’t been broken out on a widespread basis in many, many years.  But then, we haven’t had a market like this in many, many years.

Change is a fact of life.  The market has changed.  You must be willing to change your thinking as well. 

Thursday, February 6, 2014

RETHINKING 2014

In the end, markets boil down to two things:  supply and demand.

Now supply can be affected by many things, including the economy, tax laws, materials shortages, labor shortages (or surpluses), weather patterns, government mandates... lots of things can affect supply.
Demand can also be affected by many factors, including demographics, the economy, interest rates, and psychology.  

The point is that supply and demand are living, breathing concepts and their intensity varies with time.  You could almost say that supply and demand is like a weather pattern, in that it will always be changing to some extent.

Through the first five weeks of this year, the temperature in the market has definitely gone up, again.

As of mid-January, our inventory of homes for sale in Denver has fallen to fewer than 7,000 and it's getting dangerously close to the all-time low (dating to 1985!) of 6,682, which was the inventory count on March 31, 2013.  

Meantime, buyers have come charging out of the gates again in 2014, fearing that rates are bound to go up and that prices will continue to rise.  

Marketwide, there is just 2.52 months of inventory today.  Two years ago, at the start of 2012, we had 5.88 months of inventory on the market in Denver.

The chart accompanying this post is quite telling. The blue line shows the number of homes for sale (supply) at any point in time going back to 2004.  The red line (demand) shows the number of homes under contract at any point in time.  

I tell my clients that the white space in between the two lines reflects your ability to negotiate.  Notice anything?

Of course, it's plainly obvious that the market today looks absolutely nothing like the market of 2007, or 2009, or 2011... in fact, in two decades as a broker (including 11 years in a red hot California market), I have never seen the velocity that we have seen in this market over the past 18 months.

I listed a home last week that had 12 showings and multiple offers within 48 hours.  I put a home under contract for a buyer on Friday that had three offers within 24 hours.  

When you consider that a good number of the homes on the market are either conspicuously overpriced or suffering from piles of deferred maintenance (or both), the universe of homes that are actually salable is even thinner than these numbers suggest.  

In a normal market (which we haven't had in over two years), you will normally see a ratio of about 2 homes on the market to each one under contract.  Today, we have 6,800 homes on the market and 5,700 under contract.  That's an overall ratio of 1.19.  

Below $250,000, however, that ratio falls to 0.64.  From $250,000 to $400,000, it's 1.23.  

What that means is that below $400,000 there literally is nothing for sale and yet buyers are seemingly everywhere.  

And what does that mean?  

For 2014, it means prices are going higher.  Again.  

We truly are living through a golden age for real estate in Colorado.  And depending on whether you own or rent, you are either loving it or hating it.