APPRAISAL PLUS

Here’s the current state of the market… I listed two homes this month, they were on the market a total of six days (combined), drew 86 total showings and 17 total offers.  All 17 offers over list price, and eight modified or waived the appraisal clause. 

In any other market, all 17 of these offers would have been winners.  But in this unforgiving low-inventory, high-demand environment, 15 of the 17 offers ended up as losers, with those buyers headed back to the drawing board (or the next open house) to continue their search.  

With both of these properties, our top offers were clearly beyond where these homes were going to appraise.  And since I represent the sellers, and it’s my job to get them the best price and terms possible, these deals basically now live and die with what buyers choose to do with the appraisal clause.

In short, any financed buyer is going to need a formal property appraisal.  And under traditional lending guidelines, the buyer’s lender is going to offer financing to that buyer based on the LOWER of the contract price or the appraised value.

Let me explain how this works.

Let’s say a property is listed for $285,000.  But in our supercharged multiple-offer environment, a  motivated buyer chooses to offer $300,000 for the home.  If the buyer plans on making a 10% down payment, that’s a $270,000 loan with a $30,000 down payment.

But let’s say the appraiser then does his site visit, compares the home to others that have sold in the area, and comes back with an appraised value of $290,000.  That means the lender is only going to loan 90% of $290,000 (the appraised value) instead of 90% of $300,000 (contract price).

90% of $290,000 is $261,000… but since the contract price is $300,000, that buyer would now need to bring in $39,000 instead of $30,000 for a down payment.  Is the buyer willing to do that?  And does the buyer have the means to do so?

This is the stumbling block for many transactions right now, and it’s the first topic of conversation between agents when it comes to evaluating offers. 

In the “old” days, before Denver became what it is today, a low appraisal was bad news for the seller, because 99% of the time the buyer would ask the seller to lower the contract price to match the appraisal, and with no other offers or buyers on the horizon, sellers would often capitulate.

Today, however, when a property fails to appraise, 99% of the time the seller is going to say “tough luck” (or some other variation of toughness) and the buyer is going to have to figure out how to come up with the money or lose the house.

The purchase contract states that any financed buyer has the right to get an appraisal.  The contract also further states that if the property fails to appraise, the buyer has the right to terminate the contract. 

Of course, all contract clauses can be modified by mutual agreement, and that’s where motivated buyers obtain separation from the pack.

In this environment, financed buyers basically have three choices when it comes to the appraisal clause:

WAIVE THE APPRAISAL CLAUSE – the most motivated and serious buyers will waive the appraisal clause up front.  This basically says “no matter what the property appraises for, I am willing to proceed with the contract, and make up the extra down payment required by the lender from my own funds if it fails to appraise.”  If you were selling and wanted a committed buyer, wouldn’t this be the offer you choose?  This type of offer is even more impactful when it shows up with a bank statement showing the buyer has the cash to back up his words. 

MODIFY THE APPRAISAL CLAUSE – modifying the appraisal clause says, up front, that if the property fails to appraise for the contract price, the buyer agrees to pay some fixed amount ($5,000… $8,000… $15,000… whatever number fits the buyer’s tolerance for a shortfall) above the appraised value, not to exceed the contract price.  In our example of a $300,000 contract price, let’s say the buyer agreed in the original offer to pay $8,000 above the appraised value, not to exceed the contract price.  If the property appraises at $290,000, all parties have agreed up front that the final contract price will be $298,000, with the buyer bringing in any extra funds required by the lender to cover the shortfall.

KEEP THE APPRAISAL CLAUSE – by not addressing the appraisal clause, the buyer is essentially saying if the property fails to appraise, the deal is toast unless the seller lowers the price to match the appraised value.  In this market, that’s not likely to happen.

For sellers looking at anywhere from three to 12 offers on any good piece of real estate, the appraisal clause is a critical determining factor in which offer is going to be chosen. 

As someone who lists a fair number of homes, this is where the rubber meets the road when it comes to evaluating offers.  Show me a buyer willing to write an offer representative of the market, with the fortitude to modify or waive the appraisal clause, and I’ll show you someone who is going to be under contract soon. 

Keep the appraisal clause intact, and I’ll show you a buyer who is going to see his contracts landing in the circular file again and again until all the serious buyers have come through.  Then, when prices are higher and the competition finally thins, it will be your turn, assuming you have the stomach to deal with months of rejection and you’re okay with paying five to 10 percent more than you would have paid by taking more committed action sooner. 

Which brings us back to a simple truth.  Buying a home is serious business, and it’s your job to be seriously educated.  If you believe in the law of supply and demand, that higher prices are inevitable when every home is drawing multiple offers and there is a 31-year low in inventory, that unemployment of 3.2% in the metro area and 270 people per day moving to Colorado will continue to positively impact the market… then it only makes sense that the smart move is to do whatever it takes to buy sooner rather than later.

To be jelly-legged about the appraisal clause is to say you don’t trust the market, you don’t trust the numbers and you don’t trust yourself to make a sound decision.  If that’s the case, then walking away now and signing another lease is probably the better move, because if you don’t have the fortitude to compete, it’s best not to climb into the ring.  

SAYERS AND DOERS

Colorado’s overall population increased by about 1.7% last year, from 5.7 million to 5.8 million. 

But there’s another subsector of the population that’s growing at a clip about five times faster – and that’s the number of licensed real estate agents now pouring into the business.

Four years of a thriving market, rising home prices and an endlessly-looping array of so-called reality real estate programming on HGTV has convinced a lot of people that, yes, you too can sell homes for a living.  (While driving a nice car and working just six hours a week!)

The first year I sold real estate in Colorado – 2006 – there were more than 17,000 dues-paying MLS subscribers in the metro area.  By 2010, after the scorched earth markets of 2007, 2008 and 2009… there were barely 10,000 agents left.

By my own informal count (done by searching the last names of agents in the MLS by each letter of the alphabet), I tally a total of 16,948 subscribers to the Denver MLS today.   

That’s up 8.2% from one year ago (15,682) and 14.3% from two years ago (14,821). 

The only thing keeping up with surging Denver home values is the commensurate rise in new real estate license applications.  

Now we need to talk about some cold, hard facts. 

The real estate business can be a difficult, unforgiving place.  In fact, NAR reports that 50% of agents who take out a license don’t survive their first year in the business, and nearly three out of four will not renew their license at the end of their first three or four year licensing cycle.

Part of this is because, regardless of how big you talk or what you aspire to do, your paycheck every two weeks is exactly… zero.  In fact, you probably owe money, since your broker is going to ding you for a desk fee, MLS access and an electronic contracts subscription fee.  Plus you have licensing fees, marketing costs and E&O coverage to pay for.  Not to mention the gas, insurance, and maintenance costs for your rolling mobile office. 

Real estate is the ultimate turnstile business, with scores of agents enthusiastically bursting through the front door, only to slink out the back door months later, broken and (often) broke. 

I am an adherent to Malcolm Gladwell’s well-known theory that mastery of any subject takes a minimum of 10,000 hours of devoted study and practice.  That’s five years, full-time. 

I have consistently ranked in the top two percent of agents in Colorado by (get ready for this)… working about 12 hours a day, about seven days a week.  And doing a great job for my clients, whom I care about deeply and invest in fully.

It takes two things to succeed – a good plan, and a tenacious, badger-like work ethic. 

In my old corporate life, I mentored and trained new agents coming into the business for the world’s largest Century 21 franchise.  Truth is, it takes less than a week to figure out if someone has what it takes to succeed in real estate. 

The world is broken down into “sayers” and “doers”.  Sayers say they are going to do something.  Doers do it. 

Sayers are plentiful, doers are few.  Sayers are dreamers, doers are realists with dreams. 

Saying is easy.  Doing is hard.  Identify if someone is a sayer or a doer, and you’ll know very quickly if they’re built to last or destined to crash.  

COULD YOU AFFORD THE HOME YOU ARE LIVING IN TODAY?

Lately, I’ve been posing this hypothetical question to more and more of my past buyer clients.  Simply put, if you had to purchase the home you are living in today at today’s prices, could you afford to do it?

For more and more of them, the answer is no.

With homes prices posting double-digit percentage growth gains for four consecutive years, many homes in the metro area (especially at the lower price points) have gone up 50% or more in value since the start of 2012. 

So the question becomes… if you paid $250,000 for your home in 2012 and it’s worth $375,000 today, could you afford to buy it? 

If the answer is no, it means you aren’t moving anytime soon. 

I’ve seen this dynamic in Southern California, where I grew up and spent my first 12 years as a real estate broker.  The home I grew up in cost $42,000 when my parents bought it in 1972.  Today, Zillow estimates the value of that home (which we sold more than 15 years ago) at $833,645. 

In that type of environment homes eventually became so expensive that no one could afford to move… which is a big reason subprime financing became so popular (and abused) in the early 2000s. 

People wanted to buy bigger and nicer homes… but under traditional qualifying guidelines, there was no way to do it.  So subprime financing essentially allowed people to make up their income, buy what they wanted to buy, and supplement their insufficient incomes over time by sucking home equity out of their appreciating properties to cover the difference.

Worked great, until the whole system crashed.

Today, there is no subprime financing… and so if you can’t qualify, you’re not going to be able to buy. 

Which means a whole lot of people are never going to move, either until they die, win the lottery or move out of the metro area. 

That means the available inventory of resale homes will remain artificially low, which means demand will continue to outstrip supply… and that will go on until prices get so high that businesses and those looking to relocate here from even higher cost states decide to go elsewhere.  Then prices level off and the cycle pauses.  

(Note that I said "pauses", and not "reverses".  As long as buyers are forced to have real jobs, real credit and real down payments in order to purchase a home, the market has legitimacy and foundation  When you don't have that, the market becomes a house of cards.)

There’s not really a clean solution to any of this. 

I believe inventory is going to be low for a long, long time.  And with tens of thousands of educated transplants living in apartments and holding good jobs, the demand for resale housing is going to remain very strong.

What that means, going forward, is that when it comes to housing, the same dollars are going to get you less and less as time goes by. 

Which means buying sooner rather than later is not only a good idea, it’s imperative.  

ABOUT BROCK OSWEILER

99.9% of the time, this blog is about nothing but Denver real estate.  Today is that 0.1% of the time it’s about something different. 

Broncos quarterback Brock Osweiler has signed with the Houston Texans.

Many of you know that at the end of 2015, my youngest daughter Elizabeth spent a total of 17 days at Rocky Mountain Hospital for Children, going through a series of three major surgeries that resulted in the loss of about half of her left lung due to a congenital birth defect. 

What was supposed to be a four-day bump in the road for a 15-year old high school freshman ended up turning into nearly three weeks of high stress drama, with numerous setbacks and complications that led to two additional surgeries and quite a bit of uncertainty about whether this chain of events would morph into a long-term hospitalization with potential lifelong repercussions. 

Her first surgery was on December 18^th, which was also her 15^th birthday. 

That day had started with great promise – Elizabeth went to the Jefferson County DMV at 8 a.m. to get her driver’s permit.  It ended late that night with her in grueling post-op pain, about one-third of her diseased left lung having been plucked, pulled and otherwise chiseled from her rib cage during a complex surgical procedure that took more than three hours to complete. 

The original proposition had been to either do this surgery on her birthday, with the promise of being home for Christmas.  Or celebrate her birthday at home but spend Christmas in the hospital.

As it turned out, Elizabeth spent her birthday, Christmas, and New Year’s Day hooked up to tubes, wires and breathing machines while being carted in and out of surgeries in a holiday season we will surely never forget.

So what was a dark time for everyone changed suddenly about 10 a.m. on Christmas morning when there was a tap on the door of room 4403.  A face ducked in, a face belonging to Brock Osweiler, quarterback of the Denver Broncos.  He was a wearing a #17 jersey and a blue and orange Santa hat, which almost brushed the top of the door frame as he made his way into our room.

“Is this Lizzie?” he asked. 

And with that, the room suddenly came to life. 

“I’m Brock,” he said.  “Does anybody here like the Broncos?”

His wife, Erin, walked in with a large bag full of gifts.  Good stuff… headphones, an iPod Touch, board games, blankets, socks, stocking caps, Broncos gear. 

Elizabeth smiled, and Victoria and Sherry looked at me in disbelief.

Soon, we were talking about the NFL, about whether Arizona State would be a good college choice for Victoria, about how he and Erin first met, about Lizzie and her prognosis for recovery, and what it felt like to have 300 pound linemen intentionally falling on your legs.

The Osweilers gave us about 10 minutes of their time, but it wasn't rushed, it wasn't choreographed and there were no PR people pushing them out of the room to make the next photo op.  I was struck by how legit it felt.

The girls took selfies with their suddenly new best friend, and Erin talked with Sherry about the pain of watching a young girl go through hard times in the middle of the Christmas season.

Finally, we took a group photo and Brock and Erin departed, moving on to the next room to share some holiday cheer with another family in distress.  

It almost felt like a dream, and as we processed what had just happened, both Sherry and I felt  gratitude and amazement at how we had been blessed in such an unexpected way at such an unexpected time.. 

It was Christmas morning, after all, and don’t players have families too?

Later on, one of the charge nurses told me it was at least the fourth time during the season that the quarterback had shown up, unannounced.  No camera crews, no media people. 

Just Brock and Erin, with an intern from the Broncos helping to hand out gifts that for us turned out to be nearly $500 worth of merchandise.

The nurse said that many of the athletes who show up at the Children’s hospital are doing community service, working off DUI’s or doing penance for fights at the strip club.  Not Brock Osweiler.

Three days later, Osweiler played the biggest game of his career, a high stakes Monday night matchup against the Cincinnati Bengals.  It was still unthinkable to me that on Christmas Day, 72 hours before a football game that would not only determine the Broncos’ playoff fate but make or break his long-term contract chances, Brock Osweiler was spending his off day at the hospital, lifting the spirits of sick kids and their families.

Elizabeth has never been much of a football fan, but on that frosty Monday night in our cold hospital room, she was glued to the television. 

It looked bad early on, with the Broncos falling behind by two touchdowns.  As the team struggled, the pain in her chest seemed to intensify.  Her spirit was again deflating. 

But in the second half, magic happened.  And the Broncos rallied back, with Brock leading a spirited comeback and then engineering an overtime drive to win it.

There were late night whoops and hollers all up and down the pediatric floor at RMHC.

The girl who never cared about football suddenly couldn’t stop talking about it.  We high-fived in the dark hospital room and when we finally dozed off to sleep, Elizabeth in her hospital bed and me at her side on a cold vinyl sleeper couch, we were both feeling better than we had been in many, many days.. 

Some other amazing things happened over the next few weeks.  Elizabeth finally got out of the hospital during the second half of the fateful Broncos – Chargers game on the last Sunday of the season, leaving the hospital in a wheelchair right about the time Brock was being pulled in favor of Peyton Manning.  

Two weeks later, through the extreme generosity of a long-time business associate, Elizabeth attended her first football game by sitting in the front row of the lower level for the Broncos divisional round playoff game, directly behind the Pittsburgh Steelers bench.  These were legacy seats which had been passed down from generation to generation for 50 years, and they were offered to Lizzie free of charge in a tear-jerking display of kindness.  I got to share that remarkable day with her, one of the most memorable experiences in my 16 years of being a dad. 

We took pictures of both Brock and Peyton during warm ups and cheered like crazy for the Broncos throughout the game.  Elizabeth couldn’t believe the noise from the crowd or the way the stadium shook in the fourth quarter.  She left the stadium transcendently happy. 

You can question whether Brock Osweiler’s on-the-field resume is worth $72 million, but you can’t question the integrity of his resume off it. 

Osweiler’s autographed picture has been taped to Elizabeth’s bathroom mirror for the past nine weeks.

His sudden departure has turned into a tough life lesson, that sometimes people move on even when staying seems to make all the sense in the world.  

WAVES OF NEW BUYERS, A TRICKLE OF HOMES FOR SALE

The Denver housing market is not getting any easier to navigate for buyers.

Last week, the Denver Post reported that month-end inventory in February fell to an all-time low of 3,963 active listings, the lowest number ever recorded since the Denver MLS was formed in 1985.

Fact check: in 1985, the population in the Denver metro area was 1.6 million.  In 2015, the population in the Denver metro area topped 3 million for the first time.

There are so many ways to parse the numbers, nearly all of them painful if you are a prospective buyer, and especially so if you are trying to buy a home below $400,000.

With 3,000,000 people in the metro area and 3,963 homes for sale, that’s one home on the market for every 757 people. 

But with fewer than 1,400 homes for sale below $400,000, that works out to one active listing below $400k for every 2,142 people.  Let me restate that… for every 2,142 people living in the metro area, there is one home below $400k on the market.

Can you see why prices are soaring?

Colorado experienced record population growth last year with a net gain of 101,000 new residents.  That works out to 270 people per day, every day, with half of those ending up within 40 minutes of Denver. 

While 101,000 people moved here last year, fewer than 10,000 new homes were constructed in the metro area.  If half of the people who moved here end up within 40 minutes of Denver and each new household has 2.5 residents, on average, that means the pool of people renting homes or apartments in the metro area increased by more than 25,000.  

And with unemployment in the metro area at 3.3%, surging rents and skyrocketing home prices, it's safe to say most of those apartment dwellers aren't looking to rent for the rest of their lives.  They will essentially make up the next wave of buyers.

No matter how you look at the numbers, they all tell the same story.  Denver is going through a painful gentrification process which is not only driving out those who used to be our entry-level buyers, it's now taking aim at what has historically made up our middle class as well.