ZILLOW RISING

Consumers continue to vote with the feet.

In 2010, Realtor.com and Zillow were neck and neck in the online real estate eyeball war.  Realtor.com averaged 7.0 million unique visitors per month, Zillow was at 6.9 million.  Today, while both companies have logged impressive growth due to the explosion of mobile devices, Zillow has more than doubled Realtor.com's monthly traffic, most recently reporting 45.1 million unique visitors while Realtor.com attracted 22.0 million.

So what happened?

Zillow is a publicly-traded company based in Seattle that has built a consumer-centric real estate experience around transparency, disclosure and massive amounts of data that previously was not easily available to the general public.

Realtor.com is operated by the National Association of Realtors, a trade group (to which I belong) that has spent years trying to obfuscate data, limit disclosure and keep the power of information the hands of Realtors, not consumers.

Do I need to go any further?

I may be a Realtor by trade, but on the subject of data and disclosure, I am a Zillow Man.

Which is one reason Realtor.com and NAR are both in huge trouble organizationally. 

When you are living in an age of transparency and people do not trust your brand, you are toast.

So why is Realtor.com failing so badly?  Consider the debate that has been going on for years inside NAR's Chicago-based headquarters regarding agent production and disclosure. 

Consumers want to know what agents sell.  (Most) Agents don't want you to know what they sell. 

Why?  Because the average Realtor closes seven deals a year.  Why does the average Realtor close seven deals a year?  Because selling homes is hard work, with incredible stress, long hours, ridiculous ups and downs and plenty of drama on the best of days.

That's why half of all agents who take out a real estate license quit in the first year.  Over 70% of agents who take out a real estate license will never renew it at the end of their first license cycle.

This is a hard business that chews up newbies, spits them out and leaves smoldering wreckage behind.  If you want to live in Fantasyland, go back to watching HGTV.

Unless you are in the top 20%. 

For 20% of the agents, those who are tenacious, experienced, creative and consumer-centric, the market is not a savage jungle.  The long hours are accepted as part of the job.  The interruptions are anticipated and planned for in advance.  The drama is avoided by drawing on past experience to anticipate problems before they show up and addressing them early instead of letting them blow up your deal at the 11th hour, or worse yet, at the closing table.

So if you are in this top 20%, you welcome disclosure.  You welcome transparency.  You want people to know how many homes you sold and how many hours you work, because in a digital world where consumers demand full information you will win.

The problem is that when 20% want disclosure and 80% do not, the dinosaurs win. 

That's why many agents like myself are done with Realtor.com.  I began building my presence on Zillow five years ago, first asking past clients to review me, then submitting my production history for verification and publication. 

Being an early adapter, I purchased the domain ZillowReviews.com in 2010, which now directs web visitors directly to my Zillow profile.

I have over 80 client reviews posted online, information on over 200 past transactions and a complete biography that allows consumers to make informed choices.

All without spending one penny for advertising, since Zillow leverages this platform to build its own brand integrity and because they know consumers want it.  (Of course, Zillow's telemarketing sales reps hound me constantly trying to get me to buy paid advertising, which I have no interest in, but that's another story for another post)

Meanwhile, NAR charges me $1,000 per year to build and promote a lousy website, throw cocktail parties for politicians and run ridiculous television ads telling buyers "it's time to get off the fence".

If I'm an average Realtor and I see this going on, I'm not happy.

But if I'm a superior agent, one who looks out for his clients, builds strong systems, embraces technology and leans into being fully transparent, I'll just go where the eyeballs are, because my profile functions as a giant client-attracting magnet.

Consumers will continue to become better educated, with or without Realtor.com. 

If an agent wants to crush it in today's market, I would first start by building a strong Zillow profile and promoting it to new clients.  If you want to go a step further, create a profile on Yelp and solicit reviews there as well.  In fact, go anywhere online where consumers can find unfiltered information and establish a presence.

If you are an agent who is great at what you do, consumers are dying to find you.  Let them.

WHAT GOES AROUND...

Over the weekend, I wrote my 27^th failed offer of 2014. 

That, in a word, is unbelievable.  But it’s consistent with the great Denver Real Estate Rush of 2014, where record low inventory and a seemingly limitless pool of buyers has made Denver real estate the hottest thing going. 

But this story isn’t about the market.  It’s about agents.  And arrogance.  And reputations. 

In Kindergarten, most of us were taught the “golden rule”, which goes like this:  Do unto others as you would have them do unto you.

Somewhere along the line, over 30 or 40 or 50 years of living, most people forget this, and trade it in for the contemporary rendition of the “golden rule”, which goes like this:  He who has the gold makes the rules.

I like the first rule better than the second.

On Friday afternoon, I showed a new listing in the Berkeley area of Denver (red hot) and, of course, my clients liked it.  Okay, loved it.  So early Friday evening, we got together and wrote an offer. 

Now what that really means is that I spent an hour Friday showing them the house and taking video… then two more hours researching history, pulling comps, and writing a contract.  Then I called the agent (voicemail) and left a message asking if he had offers and if any kind of deadline had been set for “highest and best” submittals. 

Then I invested two more hours with my buyers Friday night (skipping yet another meal with my family and foregoing all other plans) driving to their house, reviewing the history of the home, formulating the offer and signing the contract documents.   

Then I drove back to my office and wrote a cover letter, got on the phone with the lender and obtained a pre-approval letter.  Then, finally, at 9:30 Friday night, I emailed a complete, competitive and thorough purchase offer off to the agent (with an escalator clause that would take us up to $10,000 over the list price).

 

Saturday morning at 8:30, I called to let him know we had submitted the offer.  Voicemail.

I followed that up with a text, asking him to confirm receipt of the offer.  No response.

Two hours later, I called again and left another message.  No response.

Two hours later, I texted again, asking him to confirm receipt and asking him to let us know if there was a time we could expect to hear something back.  He replied back an hour later, simply, “Multiple offers”. 

I picked up the phone and called again, wanting to explain the flexibility my clients had with closing dates, the strong qualifications of my buyers, and the criteria around the “escalator clause” we had included in our offer.  Voicemail.

By this time, it was pretty evident to me that this agent wasn’t interested in engaging with us.  As I said to my (financed) clients on Friday night, while we had written a very strong offer, the fact remains that “cash is king”, and if a similar cash offer was to show up, we were probably not going to be successful.

At 2:30, I took one last shot at reaching the elusive Mr. Multiple Offers.  Nothing. 

Finally, at 5 p.m., a text message flashed across my screen.  “Under Contract”.

And there it ended.  Thanks, buddy.

Now, submitting a well-written offer $10,000 over list price doesn’t automatically guarantee my clients are going to get the house.  It doesn’t even mean we are going to be countered.

But whether there were three offers, eight offers or 15 offers on this house, every single agent blew off other commitments and invested significant time in an attempt to deliver a good faith contract to this agent and his seller.  Regardless of whether you are going to work with us or not, pick up the phone (or send us a text) and acknowledge our efforts, dude.

Here’s what I know, based on 19 years in the business.  What goes around comes around. 

This is not the first time such a scenario has played out this year.  In fact, it’s pretty common.  There are lots of rude, arrogant, real estate brokers out there who don’t value anyone’s time but their own.  I can tell you many of their names.

When you take the time to write an offer on one of my listings, whether I have three offers or 30, I promise I am going to call and acknowledge your offer, and thank you for your time, and find out if there are any mitigating factors or other pieces of information that would be helpful for my seller to know when considering the offer your have submitted. 

I am also going to be respectful of the fact that most agents who are actually working skip meals, miss family engagements and have splintered social lives because of the high urgency nature of this market.   No matter what the market looks like, there is still a place for civility, respect and basic professional courtesy. 

When the market turns one day, and it will, all you will have is your reputation.  And that reputation will sustain you, or sink you.  Agents have long memories, and one day, the shoe will be on the other foot.

YOU GET WHAT YOU DESERVE

Would I?  Could I?  Should I?

Conventional wisdom has it that you don’t talk about politics, religion or money in polite company.  But with tax day having come and gone exactly one month ago, I have to admit I have spent a lot of time over the past four weeks pondering the financial realities of trying to run a legitimate business in a cutthroat industry.

In a hot real estate market, bleacher bums think that making money must be easy.  “Everyone’s buying homes”, they say.  “Even my unemployed cousin just got his license!”

Great. 

There are some hard, cold realities in real estate.  I know this because I have lived it, but in my 19 years as a broker, I have also spent many years in senior management, studying the numbers, training new agents, and watching most of them vanish from sight over time as the novelty of working nights, weekends and 100% on commission wears off and the bills come due. 

Truth is, fifty percent of agents who take out a license will quit in the first year.  Three out of four first-time licensees will never renew their license after their first license cycle is up.

I apply the Pareto Principle (commonly known as the “80/20 rule”) to most things in life… but in real estate, it’s even more extreme.  According to NAR, 93% of all sales are closed by 10% of licensed agents. 

Yes, I am firmly in that 10%, and yes, it took a long time to get there. 

The sad reality is that most people derive their opinions about real estate based on their interactions with the 90% of agents who suck.  The odds are pretty high for consumers that, if they don’t know what they are doing, they are going to end up hitched to a substandard agent.  And it might happen a few times in a row. 

If you don’t know the difference between cost and value, you might spend your entire life eating Big Macs and shopping at Walmart.  And while an occasional Big Mac or trip to Walmart might not kill you (at least, immediately), when it comes to the biggest financial decisions of your life, you owe it to yourself to raise your own standards.

If I earn a $10,000 commission for selling a home, do you think I’m on easy street?  Do you think I’ve got it made?

What if I told you that federal payroll taxes last year (income, FICA, medicare) ate up 31 cents on every dollar I earned?  That insurance took up another 8.4%?  REMAX brokerage fees took 8.1%?  State taxes took 4.8%?  Marketing took up 4.3%?  Add it all up – taxes, insurance, brokerage fees, marketing costs, MLS dues, car expenses, cell phone bills… and the bottom line is that only about 32 cents of every dollar earned actually passed through to my bank account.

Those are a lot of hands planted deeply in my pockets.

Again, you’re never going to win talking about money.  It’s divisive, I get it.

But it takes an extremely skilled and hard-working individual to succeed in real estate when the overhead looks like that.  That’s why so many people get into trouble with the IRS, or put people in their cars without insurance.  Or tell white lies to try and get a sale closed.  Or work with clients they can't stand.  It’s hard to play by the rules and win.

The next time you think about buying or selling a house, I encourage you to do your homework before you enter into an agreement with anyone.  Are they in the top 10% of the industry?  Can they document a proven track record of superior results?  Are they ethical at all times?  Do they care about you?

It’s not that hard to find out.  Go to Zillow and pull up an agent’s profile.  Read their reviews.  Ask your friends who have recently bought or sold homes.  Search license history through the state real estate registry. 

Although it sometimes rubs people the wrong way, I believe most people get about what they deserve in life.  If you had a lousy experience with a real estate agent, maybe it’s because your own standards simply weren’t high enough. 

The good news is there’s time to change that, starting now.  

SELLER'S REMORSE

In a hot market where homes are selling for all-time high prices and buyers are being forced to make quick, emotional decisions in order to compete, you would think the issue of “buyer’s remorse” might be a real issue.

But it’s not. 

In fact, if the topic is “remorse”, I think you may find more sellers wrestling with this issue than buyers.

Fact is, anyone who has purchased a home over the past few years has seen sizable equity gains with the added benefit of incredibly low, fixed-rate payments thanks to our continuing low interest rate environment. 

While many buyers have felt anxiety about our market during their negotiations, I honestly cannot think of one client in recent memory who was anything but happy (and already firmly in the black) 60- 90 days after closing on their new home.

Earlier this week, however, I received an interesting email from a client who sold a home with me about 16 months ago.  It was a vintage farmhouse on an irregular, oversized rectangular lot in a mixed use area of Arvada, full of quirks and backing to an apartment building.  It had just two bedrooms and measured barely 1,000 square feet, with a mud room slapped on the back and a single tiny bathroom that had made every morning feel like rush hour on I-25 for my seller and her teenage daughter.  It was garageless, with only a broken down shed and a pasture of unkempt native grasses in the backyard which provided the infrastructure for someone’s small livestock operation many years ago. 

We listed the home for $204,000, and over 21 days we had about a dozen showings. 

“Too quirky.” 

“Don’t like the proximity to the apartments.”

“Needs another bath.”

“No garage.”

Finally, we received an offer.  Although it was only about three weeks, it felt a lot longer, in part because the feedback made it sound like this was the strangest house ever.  It really wasn’t, but in more cautious times, buyers weren’t afraid to nitpick.

We sold it, but only after some extended negotiation and a few additional concessions.  My client was relieved that it was finally sold, and I was happy to help her get on to the next chapter of her life.

Fast forward 16 months and the quirky farmhouse has been listed for sale in a zero inventory environment.  No improvements, other than taking down the shed in back and cutting down the tall native grasses behind the home.  The only real difference?  A supercharged market the likes of which we have never seen before. 

Listed for $250,000, the home received multiple offers in the first 48 hours and eventually sold… for $260,000.

“What just happened here?”, asked my seller in her email.

What just happened here is that between January of 2013 and May of 2014, an armada of buyers showed up in Denver.  Thousands of them were first generation foreclosure households (estimates are that somewhere between 30 and 40 first generation foreclosure households are hitting their eligibility point for getting back into the metro area market every day), thousands others were renters tired of rising rents and shrinking square footage, while thousands more had just settled in to town from California, Texas, Illinois and other large feeder states that are pumping up Colorado’s population like never before.

This massive demand surge has launched the greatest housing rush in memory, and it’s not going to settle down until more inventory shows up or buyers are altogether priced out of the market. 

Will it eventually slow down?  Of course – it has to. 

But has it happened yet?

Nope.  Buyers need to know that as long as inventory remains low and buyers outnumber sellers, prices will continue to go up.  But more and more, you’ve got sellers thinking about holding out a while longer, wanting to ride things all the way to the top.  Not wanting to feel seller’s remorse for selling too soon.

That reluctance to sell creates a self-fulfilling prophecy, where sellers don’t sell because prices are rising and prices rise because sellers aren’t selling. 

So when does the top arrive?  In my mind, you’ll see it first in the inventory, because when buyers finally grow weary and the market top arrives, sellers will sense it and begin throwing their homes on the market en masse.  Buyers will become skeptical and their skepticism will be met with even more homes for sale.  The market will eventually stall out, normalized conditions will return, and logic will once again have a place at the table. 

Until then, you need to pay attention to the inventory.  If you’re watching the numbers, you will see it beginning with a subtle shift, then a larger trend, and then, finally, after it is firmly in motion and/or already happened, the Denver Post will report on it. 

But right now, the story remains nothing for sale and a seemingly limitless pool of motivated, qualified buyers.  That tells me we’re not done yet, and that multiple offer mayhem will be the norm for at least a while longer.  

WEAPONS OF RISK AND EXPENSE

In a market where multiple offers are common and cash buyers are showing up in huge numbers, it is becoming increasingly difficult for buyers to get financed offers under contract. 

We are 125 days into 2014, and by my count, I have written 24 offers for financed buyers this year that have not been accepted.  Every one of those was a multiple offer situation.  

This is a stunning turn of events.  The Denver real estate market remains as hot as any in the country, and I am amazed every single weekend at the massive numbers of buyers out swarming the market as I am showing homes. 

Because the same question comes up week after week – “How do I make my financed offer more competitive?” – I am going to share a number of strategies that have been effective in 2014.  Keep in mind that many of these strategies involve risk, and they are not for everybody.  But if you find a property that is truly worth competing for, here are some winning negotiating tactics than can help you break free from the pack:

INCREASED EARNEST MONEY – The earnest money deposit is effectively a down payment on your down payment.  If you purchase a $300,000 home with a 10% down payment, your total down payment is $30,000.  If the seller is requesting a $5,000 earnest money deposit, that $5,000 is held upon contract acceptance by a neutral third-party title company and credited to your down payment at closing.  Earnest money is refundable under numerous scenarios, including a cancellation of the contract based on inspections, appraisal, title, HOA documents, or the inability to obtain financing. 

Increasing the earnest money deposit does not necessarily create more risk for a buyer, since that money is generally refundable (unless otherwise specified in the contract) based on the triggers outlined in the paragraph above. 

Increasing your up-front deposit, say from $5,000 to $10,000, can imply a seriousness to the seller which is helpful in your negotiations without greatly increasing your risk.  It’s still credited to your down payment, and it’s still refundable, but it implies a higher level of commitment. 

Some buyers are going as far as committing their entire down payment ($30,000, in this case) as earnest money.  That’s dangerous, because it’s a lot of money, but obviously effective in standing out from the crowd.

STAGGERED EARNEST MONEY RELEASE – Ready to step it up?  Offer to allow portions of your earnest money to go “hard” and become non-refundable early in the process.  For example, if you have a $5,000 earnest money deposit, propose that $1,000 of the earnest money go “hard” after inspections; $2,000 goes “hard” after the appraisal; and the balance goes “hard” upon loan approval. 

Yes, you are now committing real money that will be lost if the deal doesn’t close.  Can you lose money under this scenario?  Absolutely.  If you want to compete, however, you may need to accept this risk.

PAY TO PLAY – Ready for some real craziness?  Then how about letting a portion of your earnest money go “hard” and become non-refundable the minute the seller signs the contract? 

In the scenario above, with a $5,000 deposit… you could propose that $1,000 goes “hard” upon acceptance; $1,000 goes “hard” after inspections and the balance goes “hard” after the appraisal. 

This means before any inspection, before any appraisal, before you really have any detailed information about the property (other than what is available through public records and the MLS), you are committing non-refundable money (at least $1,000, in this case) to the transaction. 

If you choose to do this, you had better be confident about your financing, because you are putting your neck (or wallet) out from day one.  For serious buyers only.

THE “AS IS” SALE – This has become increasingly common in 2014, and I actually wrote about this back in February (when I listed and sold a home “As Is”, before it was trendy).  If you have a comfort level with the condition of the property, we include a clause in the contract that says “Inspections are for buyer’s information only.  Seller shall NOT be asked to make any repairs.” 

This takes pressure off the seller, but remember, the seller has virtually all of the leverage here.  An “average” offer isn’t likely to cut it, and if the home has serious defects, your only recourse is backing out of the contract altogether.

NO APPRAISAL CLAUSE – In a market with double digit appreciation, appraisals are an issue.  That’s because appraisers look backwards, at past sales, while buyers are looking at present demand (or even projected future value) when throwing themselves contractually at new listings. 

2014 will go down as the year of appraisal hell for real estate brokers.  Truth is, it’s really hard to get homes to appraise in this market, where values for lower end homes have been going up as much as 1% per month. 

The lender will only finance based on the lower of the contract price or appraised value.  So what does this mean in real life?

If you offer $300,000 for a home and propose a 5% down payment, your down payment is $15,000 and your projected loan amount is $285,000.  But if the property appraises for $290,000, the lender is only going to lend on 95% of the appraised value, or in this case, $275,500.  Since the contract purchase price is $300,000, your down payment requirement just went from $15,000 to $24,500.  If you don’t have the money to cover the difference, and the seller won’t lower the price (in a hot market, he won’t), you’re dead.

So buyers who have sufficient reserves for an increased down payment (or buyers who are on good terms with their parents, who may have the money) are increasingly waiving the appraisal contingency, which obviously is highly appealing to a seller who wants top dollar and minimal risk. 

And what seller doesn’t want top dollar?

THE ESCALATOR CLAUSE – Are you scared yet?  If the previous suggestions haven’t put a good shock into you, maybe this one will.  It is essentially the real estate equivalent of the “nuclear option”. 

An “Escalator Clause” written into an offer essentially says that the buyer agrees to beat any bona fide written offer submitted by a certain deadline by a fixed amount, say $1,000, all the way up to a certain capped limit.

What does that look like in real life?

If a property is listed for $250,000 and there are multiple offers, it is increasingly common to see clauses that say “Buyer agrees to beat any bona fide purchase offer submitting in writing by 12 p.m. tomorrow by $1,000, up to a maximum cap of $262,000 (or whatever number you are willing to go to).  Buyer agrees to waive appraisal objection rights and, in the event of a low appraisal, shall bring in any additional required down payment funds from a lender-verified source, with confirmation of such funding provided to seller and seller’s agent within 24 hours of receipt of appraisal.”

There are other variations of how that can be written, but you get the idea. 

This is serious stuff, and it’s not pleasant to talk about.  It is my sincere hope that you won’t have to break out these “weapons of risk and expense” in your negotiation… but it’s possible you may need to.

In 19 years as a broker, I have never seen more cutthroat competition among buyers than I have seen in 2014, and frankly, if you are working with buyers, it sucks. 

If you are looking to buy in 2014, you have to ask and answer two questions:

Where do I think prices will be a year?

Where do I think interest rates will be in a year?

If, based on your own study and research, you believe the answers to these two questions are “higher than today” and “higher than today”, you may need to break out and carefully incorporate these strategies in your next negotiation.

Because there’s a good chance the buyers you are competing with have already done so.