STILL WAITING ON SENSIBLE CONSTRUCTION DEFECTS REFORM

Denver has an affordable housing shortage, and it’s extreme. 

We’ve talked before about how Colorado’s so-called “Construction Defects Law” has shut down the condo market.  In short, the 2005 law essentially creates “uncapped” liability for associations to sue builders with a simple board majority vote if there is a construction defect.   

As a result, everything you see going up downtown is an apartment building, not a condominium complex.  And with construction costs at all-time highs (with the highest-ever land, labor and material costs), rents have soared like never before.

In 2007, 25% of all new construction in the state was condos.  Today, condos make up just 3% of all new construction.

It’s one of the things that has kept our housing market strong.  Limited inventory plus ridiculous rents plus low mortgage rates makes owning a home – even at prices 30% - 50% higher than they were three years ago – more attractive than paying sky high rents.

Eventually, there will be a bill passed by the legislature that will soften this law, and shortly thereafter you will see thousands of apartments converted to condos in relatively short order.  In fact, if and when this law passes, you will probably see prices fall in the short term due to the sudden glut of more affordable housing options. 

If you own a condo today and you’re thinking about selling, this should be part of your thought process.  Right now, demand is high and supply is low.  That creates an obvious selling opportunity.

Next year, or in 2017, or whenever the legislature finally takes some of the teeth out of this law, condo inventory will surge.  Because of the reduced inventory of rentals, rents will probably stay high.  But buyers will suddenly have lots of choice, instead of none, and the predictable result will be a softening of prices. 

It will also be harder to sell an older condo, because developers will be forced to price more aggressively to compete with thousands of new units coming online.  Old units will look, well, old.

Our market is already starting to shift, and I am expecting that to continue into 2016.  Appreciation of 12 – 15% per year for three straight years just isn’t sustainable.  Five percent appreciation would be a great year, in my opinion, given the massive run-up in prices since 2012.

Will the market collapse?  Not as long as lenders remain militant about ensuring buyers have real jobs, real down payments and real credit.  The market crashed in 2008 because thousands of buyers had no skin in the game and no reason to stick around when things got tough.  That’s not the case today.

But too many people have short memories, and I believe too many people are buying homes (or attempting to move up) first and foremost because they want to make money.  Don’t fall for that trap.  You should be able to afford what you buy, like where you live and stick to a budget.  The ones who get burned when the market cools down will be those who let greed drive their decision-making.

The Denver housing market today is a lot more complicated than it was three years ago.  To make smart investments, you have to think more critically because the margin for error is much slimmer.  You can’t rely on past performance to dictate future results.  That’s naive thinking, and you can’t be lazy right now.  You’ve got to think critically, look beyond the headlines, and make a decision for yourself as to what you think the Denver housing landscape will look like in 2016 and beyond.

If you currently own a condo, you need to know that there is future volatility around that investment.  What it ultimately looks like will be determined by what the legislature does with Construction Defects Reform.  But if you’re thinking about selling, you know what the landscape looks like today.  Tomorrow is anyone’s guess.

COOLING DOWN

The Denver market is transitioning.  You can see it in the numbers.

For only the second time in the past 68 months, inventory actually increased on a year-over-year basis over the past 30 days.  Yes, you read that right… for 66 of the prior 68 months, year-over-year inventory has fallen.  So this is a noteworthy development, for sure.  

As I have said before, interpreting these numbers requires some context.  Denver is still the #3 ranked housing market in the country, according to Zillow, and second according to Case-Shiller.  We are healthier than 90% of the markets in the US, and with an unemployment rate of less than 4% in Denver, the Rocky Mountain region remains an economic powerhouse. 

We have become the “go to” market for Millennials (thank you California) and companies have come flocking to Colorado for its comparative low-cost, low-regulation business environment.

Home values in Denver have appreciated by a mind-blowing $18 million per day since the beginning of 2012, with the average home going up in value by $76,000. 

The news has been so good for the so long that many people have come to accept these conditions as the “new normal”.  Except that would be flawed thinking.

A closer look shows that our magical four-year run in housing is starting to wind down.  Just take a look at the numbers:

The current inventory of homes for sale – 8,747 – has essentially doubled since the January low of 4,420.  Last year, by comparison, inventory rose only 37% between January and October.

For homes priced below $250,000, the absorption rate has doubled since June… from 0.33 months of inventory (unprecedented demand) to 0.69 months (still very healthy, but not the same). 

Absorption rates have also doubled in the $250k - $400k range, from 0.48 months in May to 1.01 months today.  In fact, absorption rates are up at least 70% in all price points since the spring, meaning it is taking about twice as long to sell a home now as it did in our epic, crazy, frenzied spring market. 

Because the headlines always trail what’s happening on the street by several weeks, most people are not aware of how conditions have changed in the last 60 to 90 days.  But changing they are.

I have seen it with my own listings… fewer showings, fewer offers and (generally speaking) less qualified buyers.  The buyer pool is thinning, and what drove double digit appreciation was demand.  As that demand calms down, so will prices.

For the first time in two years, I recently accepted an offer with FHA financing, down payment assistance and the seller contributing money toward closing costs.  That doesn’t happen in a red-hot market. 

For the most part, the days of selling your home in a weekend with multiple offers are over.  The days of giving buyers 96 hours to submit offers – “highest and best due by 5 p.m. Tuesday” – are over. 

We’re headed back to traditional real estate, where (gasp!) it might actually take a few weeks to sell your home, and where (double gasp!) you might actually have to negotiate with your buyer to close the deal.

Agents who can’t articulate this information to their sellers are going to continue to overprice their listings, and buyers will continue to look but not swing.  Listings will sit longer, grow stale, and languish on the market.  2016 is shaping up to be a solid year for alcohol sales in the real estate industry.

There are still buyers out there, and there are still reasons to buy.  Rates remain a gift from the Fed.  Owning is still cheaper than renting in most parts of town.  But the days of double-digit offers, buyers waiving appraisal clauses and taking homes “as is” are mostly over.

At these prices, buyers want quality and value. 

If you are selling, you need to get in front of this.  The market has been one-sided for so long, we’ve forgotten what normal looks like.  For too long, it’s been too easy. 

Next year, not every seller is going to get their home sold.  And many of the newbie agents who have come racing into the real estate world are going to get their first cold, hard taste of the “real” real estate business, the one where education, communication and negotiation replace raw emotion as the primary drivers in our real estate market.  

HESITATION

First, some perspective. 

The Denver housing market is still terrific, as strong as any in the nation.  In fact, on a scale of 1 to 10, we have been in the 9 to 10 range for overall strength and fundamentals for nearly three years.

Denver and San Francisco have been running neck and neck during 2015 as the top-performing housing markets in the country.  And what do we have in common?  Young, educated, highly employable workers and jobs for anybody who wants to work.

None of that has changed.

But there has been a change in the past 60-90 days, and it’s time to start exercising just a bit of caution. 

I often tell people that the last place you want to go for real estate news is the Denver Post, because there is no real reporting there.  The Post is good for reporting headlines from press releases put together by Zillow and Trulia.  The Post is good at talking to the same five high profile Cherry Creek / Wash Park / Highlands-based agents who talk about their million dollar clients and the hottest new restaurants in town. 

But the heartbeat of the market is found in much grittier places, on the street and closer to where most people live.  The best way to gauge a market is to list a working class neighborhood home for sale and then watch what happens.

And what’s happening now is different than what happened in April or May.  While the showings are still coming, the offers are not… at least not in the same numbers. 

For example, I recently listed an estate sale home priced $10,000 to $50,000 below other recent sales in the neighborhood due to its overall dated condition.  While it wasn’t being given away, it wasn’t priced near the top shelf, either. 

Showings?  No problem.  Thirty five of them in four days, consistent with all the craziness we have come to expect in 2015.  But the offers?  Not so much.

Ultimately, we ended up with just three offers… a cash buyer, more than $30k below list, and two conventionally-financed buyers with smaller down payments. 

But no over-the-moon offers, no escalators, and no one willing to waive the appraisal or let a portion of earnest money go hard upon acceptance. 

I guess we have gotten so used to crazy that when normal comes along, we barely recognize it. 

It is my belief that the frenzy we saw in the spring would have generated six to 10 offers on this home, but the late summer reality turned out to be something less.

I had a similar experience with a condo I listed downtown last month.  Priced right, turnkey condition, an easy sale.  And in one weekend, 14 showings… and just two offers. 

I do think you can use this anecdotal information to judge a change in the climate. 

Prices are high, the highest they have ever been.  Sellers are squeezing this market for all it’s worth, so value is very hard to find.  There is a lot of arrogance and greed driving things, and that type of market rarely sustains for long. 

As we move into fall, buyers are becoming a bit more selective, a bit more patient, and a bit more willing to say no to properties that don’t check all the boxes.

It’s very possible that a slowdown is taking shape, and you have to start being a little bit more careful… whether you are buying or selling.

The fundamentals of the market are still strong – watch the unemployment rate, because that will tell you the overall health of the market – but it’s not like it was three to six months ago.  And with the holidays coming, it’s likely to cool off further as the year winds to a close.

Homes are still selling, and buyers are still out there.  But you’re going to have to look at things differently in 2016, because we are moving back toward a market where selling a home actually requires work and buying a home will once again be contingent on comps and actual value, not simply emotion and greed.     

COST VS VALUE

Life is too short to be cheap.

Now I’m not in favor of mindlessly blowing money, far from it.  But I think a fundamental skill for anyone to develop is discerning the different between cost and value.

Cost is what you pay.  Value is what you get.

But for many people, the conversation begins and ends with cost.  Determining value requires higher level thinking, and some just can’t get there.

I recently went on a listing consultation and after the appointment, as I was walking to my car, an elderly lady called out to me from her front porch across the street.  “Sir, are you a real estate broker?”

We sat down and chatted, and as it turned out, she had been recently widowed.  She now wanted to sell her small starter home and move back to Nebraska to be closer to her kids.

I’ll skip the details, but over the next few days we had several conversations about what she needed to do to get the home ready, what the strategy would be for pricing and marketing it, and how we would approach things if we received multiple offers, which was likely at this entry-level price point.

Finally, the conversation turned to commissions.  “What do you charge?”, she said.

“Six percent”, I replied, “which is split between my brokerage and the brokerage that brings things the buyer.  I pay for staging and photography, plus I’ll handle all aspects of marketing, negotiations, and follow up.  I’ll get the word out to as many people as possible before we list, I’ll follow-up with everybody while we’re on the market, and I’ll do everything in my power to leverage the offers we get to help you end up with the most money possible when it’s all said and done.  It’s my job to make this simple, keep stress off of you and manage the entire process.”

She paused. 

“Six percent?”, she said.  “I know I can find someone who will list it for less.”   

And she can.  Absolutely.  And I can find a bottle of wine for $3.99, a hamburger for a dollar and we can pick some old French fries out of the trash can.  A well rounded meal for under $5.

In life, most of the time, you get what you pay for.

And when you focus on cost, you miss half of the equation. 

What if you pay $20,000 for a car that breaks down after 100,000 miles?  But what if you could pay $25,000 for a car that runs well for 200,000 miles?  Which actually costs more?

If you have 45 showings and seven offers on your house, can you screw that up? 

Those who focus on cost will simply go with the highest offer.  Those who focus on value will look at it differently.  Of these seven buyers, who is actually likely to close on the deal?  Who is qualified and who is not?  Who is motivated and who is not?  Who has a problem-solving agent and who has a hot-tempered screamer representing them?

Who will take the time to vet each offer?  To call the lender?  To Google search the buyers.  To profile the agent?  To talk about potential challenges up front, so we can address future sticking points before signatures have locked us into a binding agreement?

I am a huge believer that most of what exists in our lives is stuff we attracted.  Want to be cheap?  Get ready to hang out with cheap people.  Want to be greedy?  Welcome to a lifetime of tug of war.  Want to be dishonest?  Get ready to be lied to.

People who focus on value know that the true measure of value isn’t the size of the seed, but rather the size of the tree that comes from it. 

Can two agents list the same home, but one agent gets $290k while another can get $300k?  Absolutely.  It’s called marketing, strategy and negotiation. 

Who’s smarter?  Seller A, who pays a 5% commission and gets $290k?  Or Seller B, who pays a 6% commission and gets $300k.  One focused on cost, the other on value.

In my worldview, cost is secondary to value.  I strive to surround myself with problem-solving people who spend their time building relationships and networks.  I spend time with people who are honest, reliable, hard-working and committed.  I look for people who invest in other people and who are willing to do the right thing, whose ethics are unwavering and non-situational.  I look for connectors, not takers.

If you find and build a network of people like that, you’re going to win. 

In the end, it doesn’t matter if you pay 5%, 6% or 10% to someone to sell your home.  The only thing that matters is what you walk away with at the end of the day.  And how you feel about the process.

This lesson goes so far beyond real estate, because it’s also how life works.  Be careful about what (and who) you invite into your life, because chances are whatever you make room for will eventually fill that space.

Whether it’s good or bad.

HOME RUNS AND STRIKEOUTS

Each year, 50% of all new real estate agents will quit the business.  And nearly two-thirds of all new agents will not renew their license at the end of their first licensing cycle.

It’s a hard business, far harder than it looks on HGTV or at a Sunday open house.  The average income for a Realtor in 2014 was $45,800 but the median was $38,747, which means 50% of licensed agents earned less than this, before expenses.  Most serious agents are working 60 or more hours a week. 

It’s a business that features huge momentum swings and surprising twists.  There are big victories and demoralizing setbacks.  There is competition everywhere you look and never-ending pressure to perform. 

It’s a stage that few can master, which is why NAR reports that the top 10% of agents do approximately 80% of the business.  (Your goal, obviously, is to do whatever it takes to firmly entrench yourself in that top 10%!)

A few years ago, I made the easiest $12,000 of my life.  I was holding an expensive horse property open on a Saturday afternoon.  A young couple showed up, new to the area but in love with the idea of owning some land with a view of the Rocky Mountains. 

But because an elderly parent was coming with them, they had to have a main floor master, which my property did not have.  But… because I had been tracking the inventory around my listing… I knew that there was a new ranch home that had come on the market around the corner just one day earlier.  It had many of the same features… almost a half-acre of land, mountain views, zoned for horses… and so I pulled the blinds, shut down my open house for 20 minutes and took them to what turned out be the home of their dreams. 

Less than 24 hours later we were under contract, and 21 days later we closed.  Like that, I had a $12,000 commission check.

That is a home run, and it makes for a great story.  But for every home run, there is a strike out.  Or three.  Or an occasional fastball off your helmet.

A few weeks ago, I lost three listing clients in the same week.  One was an older couple looking to downsize out of a half-million dollar home they had owned for 30 years.  The second was a long-time landlord renovating a rental property.  The third was a past client looking to sell and move up.  Total value for the three homes was roughly $1.4 million.  All three sellers were loyal and firmly committed to me.

I had invested significant time and money into each.  I had coordinated with vendors to repaint and replace carpet.  I had brought my stager into one and spent significant time and money coming up with a staging plan for the other.  I had scheduled photographers and built my schedule around our targeted launch dates. 

And then, with three phone calls two days apart, all three sellers froze up.  One was dealing with job uncertainty, one lost her nerve over finding a suitable replacement home, and one decided to refinance, pull cash out and hold on to the house.

The world doesn’t care about your sob stories, and you can’t dwell on what goes wrong.  All you can do is pick yourself up, immediately, and get on to another productive task. 

But defeat is hard to process and it can hang on you like a millstone, if you let it.  It’s been said that if you can’t handle failure, you won’t know success.  

Paper cuts are part of the business, as are sleepless nights and occasional wipeouts.  So are triumphant paydays and the periodic serendipity of being in the right place at the right time. 

The only things you can control are your preparation, your actions and your responses.  Focus on doing the things you can control well, and the impact of random flameouts is minimized. 

But it’s easier said than done.  It takes courage to step up to the plate and swing hard.  It takes courage to compete and risk failure.  It takes courage to get out of the car and walk up to the front door of a house you have never seen at 7 o’clock at night, not knowing for sure who or what stands on the other side.

Master your fear and you will master your future.  You can think about the home runs or think about the strikeouts.  I can tell you what the home run hitters think about, and it isn’t walking back to the dugout with the bat still perched on their shoulder.

HOUSE MONEY

Since the beginning of 2012, home values in Denver (just the city, not the metro) have increased by a mind-numbing $18 million per day. 

That’s $18 million per day, every day, for roughly 1,200 consecutive days.  Add it all up, and that’s $23 billion in freshly-minted equity just in the city of Denver.   

I have never seen anything like it.  In 21 years as a broker, including the high-flying subprime days back in Southern California in the early 2000s, I’ve never seen the economic landscape of a place change so fast or so dramatically.  (You see the manifestation of this everyday between 7 - 9 a.m. and 3 - 6 p.m. on I-25, among other places)

It’s safe to say that, right now, this city is literally floating on an ocean of cash.

So you’ve got an awful lot of people today who are feeling pretty good about things, flush with equity with nothing but good vibes about the housing market. 

Which is kind of dangerous.

Buying a house is not supposed to be like hitting a jackpot or winning big at the roulette wheel. It’s supposed to be a long-term investment, slow and steady, with a few tax advantages thrown in to make it a long-term winner.    

That’s not how many people are looking at it right now.

Twelve years ago, I remember going to a coaching seminar where a well-known, prominent real estate personality in Southern California told me “People say that in Orange County, you need a second job to afford a home.  But the truth is, owning a home in Orange County is like having a second job.”

That was fatally-flawed thinking, yet many people fell for it. 

Greed is a powerful emotion, and it’s being felt like on both sides of our market right now.  Sellers want the cash, and many buyers want a piece of the action. 

But the problem is, people suddenly seem to have selective amnesia about the housing market and they are basing their decisions solely off what’s happened over the past 36 months.

Houses make generational price shifts like this only one every 20 or 30 years.  Usually when some radical variable is injected into the market, like a major employer moving into town, a significant change in the tax laws or (in our case) the Federal Reserve printing money with reckless abandon for five years, then loaning it out at 60-year lows.

Think about this… in 1944, when the VA first began making 30 year home loans, the initial interest rate on a mortgage was 3.5%.  Today, 71 years later, rates are barely above this initial launch point, in a market where home prices have increased 30% - 50% since the Federal Reserve fired up the printing presses in 2009.

Does that sound fishy to you?

Truth is, the government benefits a lot from a hot housing market.  There’s property tax revenue, there’s the wealth effect (creating equity so that people will spend more, generating more jobs and tax dollars) and there’s the overall job security that befriends politicians when the economy is doing well. 

There is innovation in our economy, and technology has created new markets and amazing new growth opportunities.  But on the other side, millions of jobs have been lost, destroyed or outsourced to workers in other countries. 

We are moving into an 80/20 world, where most people will scrap to get by while a much smaller group leverages education, technology and cheap money from the Federal Reserve to soar to new economic heights. 

In five to 10 years, we’ll look back and know if this extended season of low rates did more harm than good. 

I am of the belief that the Fed’s drastic intervention in 2008-09 was warranted and necessary, but low rates became a comfortable drug-of-choice as artificially low borrowing rates started spinning off more and more economic benefit. 

The bottom line is that since the Great Recession, those with access to assets and credit have made a killing, while those without them have fallen further and further behind. 

There’s a recklessness in the market right now that concerns me, because too many people are walking around feeling like shrewd investors, when in reality many of them just had good timing.  In a hot market, everyone’s a genius.

I’m not telling people to get out of the market (yet) or refrain from buying.  But I am telling people to slow down, evaluate things carefully, and get their emotions under control.  We’ve been in frenzy mode for three years, and it’s going to look different in the future.  Your decisions need to be reasoned and sustainable, not just an emotional byproduct of playing with house money.

ODDS AND PERCENTAGES

So there we sat, five o’clock in the afternoon, 11 offers spread out before us.

Two were cash, six others with 20% or more down, three were bringing in 10% or less.  The top offer (with escalators) was $21,000 over list price.  Both of our 5% down offers were more than $15,000 over list, but neither removed their appraisal clause, so we felt tethered by what the appraisal might come back at.

“Where do we start?”, said my seller, a bit overwhelmed by the 40+ showings her sub-$300k home had received over a long weekend.  “Who gives us the best chance to get this home sold for top dollar?”

And therein lies the question that is the reason low down payment buyers (or anyone with limited means) are up against such a wall in the Denver market today.

When I work with sellers, I have two primary objectives:  get my seller the most money possible, ethically, and mitigate risk.  Very often, cash wins that debate.

“The cash buyer isn’t quite as high as our top financed offers,” I said.  “But the benefit here is that there is no appraisal, and I don’t think there’s any way your home can appraise $21,000 over where we listed it.  We could take a financed offer for a million dollars, if we had one, but if the buyer doesn’t have resources beyond their down payment, the appraisal is going to determine how high that buyer can actually go.”

There were other considerations on the table.  Personally written notes, lender letters, bank statements.  Because I have been on the other side of this madness so many times, I wanted to make sure each offer was given fair consideration.

But, fact is, when you have 11 offers, there is an overwhelm factor.  And dealing with the potential of a low appraisal is just another piece of overwhelm which most sellers just aren’t interested in, if they can avoid it.

“This cash buyer wrote a personal note,” I said, “and I think it’s legit.  She wants to be closer to her grandkids, who live in the area.  She knows this street and this neighborhood.  It makes me feel like she knows what she’s getting into.”

The home itself was a beautiful little brick ranch, built in the 1940s, on an oversized lot with large trees, plenty of lawn and gardens of flowering perennials that blossom all spring and summer.  It was small, only two bedrooms, and that was my only concern about its marketability.  But location trumped utility, and buyers were swinging hard for the opportunity to own it.

“At least seven of these offers are really good offers,” I said.  “Large down payments, experienced agents, reputable lenders.  I don’t think we’re going to go wrong no matter which way we go.”

“Do you think there’s a chance it could appraise for the top number?” my seller asked, again.

“Highly unlikely,” I replied.  “When we comp’d it out, we landed close to our original list price.  The difference between where we listed it and where we are is driven by the emotion and frenzy that exists in the market today.  Appraisers don’t often award value for emotion and frenzy.”

Truth is, all eleven of these offers might have worked, and four years ago, even the bottom offer would have been strong enough to work with.  But this isn’t four years ago.

“It’s your call,” I told my seller.  “My job is to make sure you have all the data, offer advice when asked, and do everything in my power to get us to closing in one piece.  Which one do you like?”

After some discussion, my seller wanted to go with one of the cash buyers.

“It feels like it would be easier,” she said.  “And this process has already been stressful enough.”

We looked at our cash buyers and decided which one was stronger.  Not just on qualification, but on motivation.  We went with the buyer who had grandkids around the corner.

“She’s tethered to the neighborhood and this makes a lot of sense for her,” my seller said.  “Plus it matters to me who lives in the house.  We’ve worked really hard to take care of it and I’d love to see someone out in the yard, enjoying her grandkids.”

We then talked about what it would take to get the deal done. 

This buyer had included an escalator clause in her offer, which would have driven her offer up to beat our highest offer by $1,000.  Because of the bidding war, that number was now a really big number for the neighborhood.  And it was likely well over what an appraiser would say the home is worth, even though the cash buyer had waived her appraisal clause.

“Whenever possible, I like to keep some goodwill in the deal,” I said.  “A lot of buyers are feeling flat out abused in this market, and I understand that.  When you have to outbid 10 other buyers, you start to question if you have really ‘won’ anything at all.”

I do believe goodwill matters in a transaction, and wherever possible, I want it be a win-win for both sides.  Too many buyers come out of this negotiation process feeling like they have been mugged, which often results in very nasty inspection negotiations as they try to get some of their money back.  That’s why a higher number of contracts than ever are falling out during the inspection process.

“It’s your call to make,” I said to my seller, “but I’d like to figure a way to make her feel good about this.  Whether it’s throwing in some patio furniture, offering to have the windows washed and the home deep cleaned, or shaving a little money off the top offer price, I think it’s important that we make her feel like she won.  What do you think about that?”

After some discussion, my seller and I came up with a plan.  And we presented that plan, along with our decision, to the buyer’s agent.  Within hours, a revised contract was signed and we were under contract.

For ten other agents, the news was not so good.  Many of them had very well-qualified buyers.  Most had given up some or all of their weekend, working with buyers in a sellers’ market.  All had put hours of labor and significant emotional energy into trying to put yet another deal together, only to lose out again.

I am no fan of this market and the way it is working.  I wrote over 50 “failed” contracts of my own last year, often letting portions of the earnest money go hard upon acceptance, waiving appraisal contingencies or agreeing to take homes “as is”.  Doing whatever it takes to get strong consideration.

Sometimes these strategies have worked.  Sometimes they haven’t.  All you can do is compete. 

I believe everything in real estate (and life) comes down to odds and percentages.  There are no absolutes.  There are things you can do that increase the chances of writing a successful offer, having a good relationship with your kids or living to be 100 years old.  You strive to find strategies and activities that move the odds in your favor, but there are no guarantees.

For buyers today, this market is very hard to navigate.  For financed buyers, it’s even worse.  Emotional exhaustion is all around, and working with cash buyers feels easy for sellers overwhelmed with showings and offers. 

It may not be fair, but that’s how it is.  In the hierarchy of offers, it’s very hard to be easier than cash.

WHEN GREED RUNS A MARKET

In April, I got a call from a past client.

“I was working in my yard,” he said, “and the neighbor behind us said he was thinking about selling his house.  I told him he should talk to you.”

At the time, I had a buyer client with serious interest in this same neighborhood and so I took the initiative, first writing a letter introducing myself and then following up by dropping a comprehensive marketing package on his front porch a few days later. 

“I may have a buyer with serious interest in your home,” I wrote.  “But whether it’s the right fit for my client or not, I would be happy to sit down and help you assess your options.”

That weekend, I ended up getting together with this prospective seller, and we spent nearly two hours talking through the market, the process of preparing a home for sale, and how his home matched up with others in the neighborhood. 

“I have a lot of stuff and don’t really want to go through all the work of getting my home ready for market,” he said.  “I would be interested in selling to your buyer if the terms were right, and if he would give me time to get moved out after closing.”

We talked about a potential sales price of $290k - $293k, which was an honest interpretation of market value.  In fact, it was a generous interpretation of market value, because in my preparations for the meeting, I had discovered that the seller took out a new loan for $218,400 just four months earlier. 

Using basic math skills, I reverse-engineered that number and determined that his home had likely appraised for $273k at the time, since $218,400 is 80% of that number.  I asked him if that was the case, and he confirmed for me that the home had appraised for $273,000.

“So if I could get you $20,000 more than your home appraised for four months ago, you would consider that fair?”, I asked.  He nodded and said yes.

Every piece of real estate is different, and there is always a subjective component to value.  Truth is, this was a very middle of the road house in terms of condition.  While it had good square footage, the shag carpet was from the 80s, the paint was from the 90s the last time it was deep cleaned was around the turn of the century. 

The seller was a bachelor, which was part of the reason he was ready to downsize into something that required less maintenance. 

I brought my clients through to see it a few days later, and while they liked the location and the square footage, they also saw it needed updating. 

“We would have to spend $20k just to get the kitchen updated,” they said.  “It’s a nice house, but we just can’t pay $290k for it.”

With that, the negotiations broke down, and my buyers went back to pounding the pavement and the seller pulled back to assess his options.

Not long ago, that home finally showed up on the market with another agent… listed at $310,000.  That’s 13% over an appraisal which is less than six months old.  That’s 6% over my ceiling for the home from 30 days ago.  In short, it’s not a supportable price.  No appraiser will be able to get there, and anyone who offers that much is simply not doing their homework.

Stories like this are a bit demoralizing, not only because I worked hard to try and fairly piece a deal together, but because I hate it when greed becomes the focal point in pricing a home.    

His home isn’t worth $310,000, and the agent who listed it knows it. 

Yet I see more and more of this all the time, homes priced at numbers that are just not realistic.  Yes, if you have a spectacular home in a great neighborhood in impeccable condition, you can break through the neighborhood’s value ceiling and get a shelf-topping offer. 

But when people offer ordinary homes at top shelf prices, eventually buyers figure it out.  And they vote with their feet as they walk right back out the front door and mentally erase your home from their mind.

When this market slows down – and it will slow down – it won’t be because we ran out of buyers or because the economy turned.  It will be because sellers (and agents) let greed get the best of them.    

HOT MARKET, OR OVERHEATED?

The headlines are all good. 

“Denver Leads the Nation in Rising Home Prices.”  

“Denver Housing Market Still White Hot”

“Denver’s River North in Feeding Frenzy”.  

But beneath the surface, other storylines are starting to emerge:

“For Denver-Area Families, Home Buying a Growing Struggle”

“Priced Out of Denver?  Buyers Head for the Springs” 

“Jump in Mortgage Rates New Challenge for Already-Stressed Buyers” 

So what is the reality of the Denver housing market? 

In May, the absorption rate in the Denver MLS fell to 0.87 months, obscenely below the 5 month baseline economists look for in a balanced market and another all-time low for the region.  For homes below $400,000, the frenzy is even more intense – just 0.48 months of inventory – meaning that at the current pace of sales, every home listed before $400k would be snapped up in less than 14 days, regardless of price, condition or location.

Research I recently conducted on some popular west-side neighborhoods showed that over one-third of the homes sold in May closed at $10k or more over list price.  Already this year, I have listed homes with top offers $73k, $51k, $33k, $24k and $21k over list price, not to mention four others that all went over list.  In fact, only one of my 11 listings during the first half of this year failed to sell above list price, and that was a supersized home in a more modest neighborhood that established a highwater pricing mark for the subdivision. 

Appraisals are now an issue all over town.  Prices have risen so much and so fast that appraisers can’t keep up, and buyers who don’t have extra reserves to deal with a low appraisal are at a significant competitive disadvantage.

The hot new trend among buyer agents isn’t escalator clauses (that’s so 2013), but rather appraisal triggers (“If property fails to appraise at contract price, buyer shall pay $5k, $15k, $25k, etc. over appraised value”).

 

It’s all good, right? 

Maybe.

I said in a post last year that I would track two key numbers in 2015 – inventory and unemployment – to gauge the health of the Denver metro housing market.  And both of those numbers are still holding up well. 

But those numbers are numbers I would use to support current value, not the crazy offers that are coming in thousands of dollars beyond current market value on some properties. 

The truth is, it’s not healthy when your market is appreciating at 15% per year.  That simply isn’t sustainable.  I am increasingly convinced that many buyers are making bets on the future when writing their offers today.  And while that may work out, it may not.

To some people, being a good salesperson means persuasively guiding people to take certain actions so that the salesperson gets paid.  To me, it means setting people up for success.  And that’s a very different definition.

In 21 years as a broker, I have coached my clients to make reasoned decisions supported by numbers and logic.  Now, many buyers rely on elbowing their way to the front of the line by willingly overpaying in order to get a house.  Not the same thing. 

I am hopeful that our market stays strong and that Denver keeps shattering records for home values and appreciation.  That would be great.  Right now, the fundamentals still look strong.  But they also looked strong four years ago, when prices were far more affordable than they are today.

Buying a home can still be a good investment, but the margin for error is not what it was 12, 24 or 48 months ago.  An investment of this size should be supported by logic, but many buyers are simply doubling down on a hot market.  

CONSUMER FINANCIAL PROTECTION BUREAU - WHAT YOU NEED TO KNOW STARTING IN OCTOBER

Big and potentially disruptive changes are coming to the mortgage and real estate world starting October 3, courtesy of the Consumer Financial Protection Bureau (CFPB).

These changes are important, and failure to understand the consequences of non-compliance are going to blow deals, cost some buyers their earnest money and will likely spark all kinds of new litigation.  As with any new legislation, there will be unintended consequences.   

Let’s talk about the details, because they are important. 

Historically, lenders have relied on two key documents at closing to explain costs and fees to buyers… the Truth-in-Lending (TIL) disclosure and the Real Estate Settlement Procedures Act (RESPA) disclosure. 

Starting October 3, these documents will go away and be replaced by a new “simplified” form which better discloses costs and fees.  From what I can tell, the new form is an improvement.  Hat tip to CFPB.

Now for the hammer… the new regulations include disclosure triggers than cannot be waived, modified or amended.  Most critically, buyers with mortgage financing must now have their CFPB-mandated disclosure forms with all closing costs and fees delivered electronically (with proof of receipt) not less than THREE business days prior to closing. (Today, it is not uncommon for buyers to see these final figures for the first time at the closing table)

If you don’t receive the electronic form three business days prior to closing, you don’t close.  No exceptions.

If you receive your closing documents by PDF, instead of through an electronic program with a confirmation of receipt feature, it adds another three business days to the process… meaning that a PDF copy of your closing documents would require SIX days advance notice, or you don’t close.

Same for documents delivered by mail… they must be sent out six business days prior to closing, and acknowledged at least three business days prior to closing. 

So what’s the big deal if you don’t close on time? 

Not much, other than defaulting on your contract, blowing your deal and potentially losing your earnest money! 

If you commit $5,000 in earnest money on a home with a closing date of October 30… then complete your inspections, appraisal and obtain final loan approval… but for whatever reason the lender cannot produce your final closing document package until October 28… you are in huge trouble, because legally you cannot close (and the title company will not close the deal) until three business days have elapsed, which would be no earlier than October 31.

Problem is, the contract says you’re closing October 30.  If the seller wants to, he can keep your earnest money, cancel your contract and laugh all the way to the bank.  At which time you will hire a lawyer, sue your lender and go nuts over the government’s desire to “protect you”. 

So what if your earnest money is $50k, instead of $5k?  Too bad, it’s gone. 

What if you’re trying to sell your home so you can purchase an upleg property, with both deals scheduled to close on the same day?  If deal #1 has a compliance issue (at absolutely no fault of your own) and can’t close, then deal #2 is dead, too.  Both buyers potentially lose their earnest money. Call it the “Litigators Full Employment Act of 2015”.

Realistically, the new regulations will add six to ten business days to the time required to do a loan, because there are also new “front end” disclosure requirements that the lender must meet. 

Going forward, when a buyer applies for financing, the lender will have three days to get initial disclosures to the buyer, with origination fees that cannot change after acceptance and other new “frozen” fees like appraisal and discount points.  Once accepted, these fees are firm, or the entire re-disclosure process must start over. 

When the lender sends out the initial disclosure package, the borrower will have 10 days to accept the terms.  If the buyer doesn’t sign an acknowledgement accepting the terms, the lender must generate new disclosures and the process starts over. 

So here’s some of how CFPB will change your real estate transaction.

First, the disclosure requirements and notification rules mean mortgage companies are going to have to hire more people.  That will raise costs.

Second, because appraisal fees cannot change once quoted (and some appraisals are more complicated than others), look for these fees to rise overall.  And look for appraisers to turn down challenging assignments, unless a higher appraisal fee has been quoted up front. 

Third, look for train wrecks, especially in the first few months.  Lenders will have trouble meeting these deadlines, and both Fannie Mae and Freddie Mac have made it clear that any loan which violates CFPB protocols will be ineligible for purchase on the secondary market.  So unless your lender has a few million dollars tucked away in an office drawer, don’t be looking for exceptions to these rules to be made.  It isn’t happening.

For those buyers who like to shop lenders during a transaction, have at it.  Just be totally prepared to lose your earnest money and the house you pledged it against if your lender can’t perform.  It’s going to happen.

One unintended consequence of the government’s desire to “protect” those getting a mortgage loan?  Cash buyers will have even more command of the market, as sellers look to eliminate the new layers of risk that CFBP will introduce. 

For agents, there are ways to adjust to the new CFBP rules.  But they, too, are going to involve risk.  Rentbacks will become more common negotiating ploys, to ensure that sellers purchasing upleg homes are not put at risk by CFBP delays on the sale of their existing homes. 

Sellers' agents are going to demand that the Loan Objection Deadline come earlier in the process, to ensure that earnest money goes "hard" before CFBP disclosure deadlines kick in at the end of the contract period.  

Big earnest money deposits are going to become riskier.

And buyers who have “loyalty issues” (those who like to shop lenders while under contract) are going to be playing with fire if they switch mortgage companies once under contract. 

The bottom line is what used to be a 30 day contract needs to become a 40 day contract (which, by the way, increases the buyer’s cost of locking in an interest rate).  Appraisals and inspections need to be ordered and performed quickly after going under contract, to ensure that there’s room in the back end of the contract process for the CFBP’s mandated disclosure periods.  “Domino transactions” (closing on one house to buy another) will be far riskier, because of the increased potential for unforeseen delays caused by the new disclosure timeframes and requirements. 

Will we survive the new CFBP rules?  Yes, we will. But we will have to adjust.

Navigating the new minefield of disclosure dates and deadlines will claim casualties.  Some deals won’t close.  There will be collateral damage, at least until everyone staffs up and adapts procedures to account for the new rules. 

If you’re planning to finance a home after October 3, you need to have a candid conversation with your lender about CFBP and what it means.  And when that email shows up in your inbox with your mortgage disclosure documents, you better not wait around to open it and confirm receipt. 

Because you, too, are now on the clock. 

THE DATA WARS

For most consumers, real estate is about houses.  For the real estate industry, it’s about data. 

Specifically, who controls that data, where it is displayed and who has the rights to use it.

Although it may sound very “dry” and technical, the fight over who owns and controls listing data is huge.  Let me start by giving you a brief history.

Up until about a decade ago, the evolution of real estate data was slow and gradual.  Back in the 1980s, properties that were submitted to the local multiple listing service were displayed in actual books that were distributed to real estate offices on a weekly basis.  MLS 1.0.

In the 1990s, MLS systems moved online, thanks to this little breakthrough called the Internet.  Agents became subscribers of their local MLS systems, viewed listings online, and the MLS 2.0 was born. 

About this time, the National Association of Realtors (NAR) made a colossal and stupid mistake… the organization signed an “evergreen” (perpetual) agreement with a company called Homestore to share all listing data from all MLS systems with a site called Realtor.com.  Short of criminal fraud or selling the company, Homestore (now known as Move, Inc) had indefinite, open-ended data rights to all MLS information. 

Homestore then went to work on slapping together Realtor.com, a clunky, stupid, confusing site that was littered with advertising, technical glitches and careless inaccuracies.  Consumers (and most Realtors) hated it.

So in 2005, along came Zillow.  Privately financed, with clarity about what the consumer (not NAR or Homestore) wanted.  The only problem Zillow had… no access to MLS data.

So Zillow built a site that initially worked off of nothing but public records.  County assessor sites, tax rolls, public trustee’s offices… anywhere it could go to find basic real estate data, it went. 

From that string of patched-together data, the dreaded “Zestimate” was born.

And over time, Zillow built a pretty powerful consumer-centric site with lots and lots of data… but not the ONE THING it needed to become complete, which was MLS listing data.

From 2008 to 2011, based on the strength of its platform and significant infusions of private capital, Zillow got traction and the site grew rapidly even without real-time MLS listings.  During this stretch it surpassed Realtor.com as the number one most heavily trafficked real estate website in the world, a stunning (but predictable) blow to the arrogant leadership at NAR and Realtor.com, who continued to focus on advertising and its data monopoly over the consumer experience.

Finally, as more and more sellers and agents began clamoring to have their listed homes displayed on the most popular real estate website in the world, one-by-one local MLS systems began cutting deals to share their data with Zillow, which quickly leveraged that data into even more eyeballs, more traffic and more growth. 

Zillow’s ability to sell “premier agent” and “featured agent” packages boomed, scores of telemarketing sales agents were hired, and real estate agents like myself began getting calls (which continue to this day) two to five times a week by Zillow’s tenacious agent-harassment specialists, offering “incredible opportunities” to buy sponsorship of local ZIP codes with online display ads that cost $1,800 to $5,400 per month.

Zillow’s revenue boomed ($323 million in reported income last year), Realtor.com tanked even worse, and agents were left to wonder who in the online world they could trust. 

All to say, it’s gotten nasty and chaotic in the arena of online real estate.  Agents and brokers are upset that listing data is being sold by local MLS systems (which are created and supported through agent subscription fees) to outsiders, mostly because of the ongoing failure of Realtor.com to deliver a consumer-centric product.   

From all of this disorder… a significant opportunity for change has materialized, almost out of nowhere.

Enter “Upstream”, a new initiative from NAR that would create a single MLS portal for agents to use when uploading property data online.  As it is being described, it will allow individual agents – not brokerages, not MLS systems, not Zillow – to decide which sites can display those listings online.  That is a huge potential game changer, and a serious blow to Zillow, which continues to have to fight for access to MLS data that the public now demands and expects.

If agents control where the data is displayed, Zillow (the great disruptor) is suddenly disrupted.  It’s an intriguing and ironic possibility, and one that could seriously and quickly damage Zillow’s $6 billion market cap on Wall Street.   

The stakes are high and the consequences are real. 

Now the question… how long will it take to create NAR to create the Upstream platform?  Will it work the way it is intended?  Or will the whole initiative crash, like so many other things NAR touches? 

I get it.  Consumers just want to buy and sell houses, and have access to data online.  But in the world of agents, brokers, tech firms and yes, even Wall Street, real estate data is a gold mine, and battles will be fought for control of it. 

The winners will get rich, the losers will go broke and agents will continue to question NAR’s relevance, wondering how the data genie got out of the bottle so easily in the first place.