HIGHLIGHTS AND LOWLIGHTS

New Year’s Eve is upon us, and as I look back over 2014, there is so much to talk about.

First and foremost, I am incredibly grateful for an amazing year.  Record sales volume, a near-record for personal transactions, and definitely a record for most number of offers written!  And I can say with complete integrity that, as a whole, I have never worked with a better group of clients.

The market of 2014 was also the most fevered, competitive and cutthroat marketplace I’ve seen in a long time.  There were some terrific victories and takeaways, as well as some things I’d be just as happy to forget about.

Here are some highs and lows of the year that was…

HIGHLIGHTS

- Successfully helping relocating clients from California, New Jersey, Illinois, Florida, Washington, New York, Minnesota, Louisiana, and Texas make the move to Colorado;

- Hitting a year-end total of nearly 80 “Five Star” reviews on my Zillow profile, currently the fourth highest number for any single agent in Colorado (thank you Zillow Reviewers!);

- Holding a spectacular Client Appreciation Event in September at the Denver Botanic Gardens which drew over 100 friends and past clients on a gorgeous fall afternoon;

- Two outstanding Client Appreciation Events with suites at Coors Field, although our June 8 game turned into an unfortunate mashup of tornado warnings, rain delays and Clayton Kershaw domination of the Rockies;

- The most expensive home I sold this year was a breathtaking $704,000 Willow Springs Spanish style villa in the foothills of Morrison;

- The most unique property I sold this year was a $538,000 custom-built panoramic mountain view home in Evergreen constructed high into the hillside of a 15 acre, south-facing parcel with its own hiking trails and rock outcroppings;

- I turned three “backup” offers into successful contracts by putting together highly competitive, incentivized bids on homes that were already locked up by other buyers who, as it turns out, were not as committed as we were;

- I sold homes three doors apart to two brothers who apparently really wanted to live close to each other;

- I helped a client purchase a historic commercial building in the Baker neighborhood who plans to change the zoning, renovate it, and convert it into an architecturally stunning residential unit; 

- While all listings were good listings in 2014, I had three listings draw 10 or more offers (all of which sold $10k or more above list price), sold my listings for 98.9% of original asking price and sold them all in an average of 5.6 days on the market – not 56, 5.6!

LOWLIGHTS

- In the red hot market of 2014, I wrote a total of 46 “failed offers”… which probably matches the number of unsuccessful offers I wrote from 2010 – 2013 combined (I had never bothered to count them up until this year!);

- Buyer clients were sometimes forced to deal with low appraisals, sellers who refused to fix anything and unreasonable listing agents who routinely left money on the table for their sellers by cherry-picking easy to work with cash buyers over well-qualified and often more motivated financed buyers;

- Thanks to “Coming Soon” signs and agents more committed to double-ending deals than serving their sellers’ interests, a large number of properties sold without ever hitting the MLS – a serious disservice to most sellers and something flat out unfair to buyers;

- Escalator clauses, taking homes “as is” and letting sizable chunks of earnest money sometimes go hard as early as seller acceptance became necessary practices for committed buyers;

- Too many conversations with listing agents that ended with unprofessional overtures of "take it or leave it";

- Too many prospective sellers who chose to stay put because they were shocked to find out that the upleg homes they wanted to purchase had also gone up in value;

- Too many buyers who threw in the towel after weeks or months on the hunt because the market was just too competitive;  

- Too many conversations with everybody that ended with "it's already under contract".  

One sad lowlight was sitting at a closing table as my buyers purchased from a young couple who had lived in their home 22.5 months, just 45 days short of hitting “tax free” status on a $60,000 capital gain.  

Their agent had said nothing to them about the consequences of selling before their two year anniversary, which led to some anxious moments and uncomfortable contortions at the closing table as the title company informed the sellers of the tax hit they were about to take.    

The painful twist is that I had actually brought this issue up the day we submitted the contract, because I pull ownership and encumbrance reports and title history every time I write an offer.

The agent said she didn't know about it, didn't think the sellers would care, and left it at that.  Turns out, they didn't care because they didn't know.  Next April 15, that lack of knowledge is going to cost them a five-figure check, made payable to the IRS. 

Which leads to the best advice I can give anyone looking to buy or sell a home in 2015, because it's the same yesterday, today or tomorrow… get good help!

THE TWO NUMBERS I WILL BE WATCHING IN 2015

I have always thought of myself as a contrarian, someone who thinks “summer all winter” and “winter all summer”.

With that in mind, and given how hot our real estate market has been for the past 36 months, it's wise to begin looking for signs of change. 

Truth is, almost of the important indicators – employment, migration, inventory, demographics – are in alignment and in amazingly good shape for continued growth and appreciation.  But no cycle can last forever.  Change has to happen, eventually. 

So the real question is not if, but when, things will start to turn.   And when things turn, what will that look like?

If the market turns in 2016, then buying in 2015 may not be a wise decision.  But if the next market turns in 2018 or 2019, and prices are 20% or 30% higher than they are today, then jumping in now with rock bottom interest rates still makes a lot of sense.

Hindsight is always 20/20, and that’s the problem.  We all know today what we should have been doing yesterday.  It’s a lot harder when you peer into the future, and that’s why it’s critically important to get good help.

As many of you know, in the fall of 2004 I began to see things happening in the Southern California real estate market that were “pattern breakers”.  Specifically, I saw marginally-qualified subprime buyers (a new dynamic) entering the market at a time when inventory was trending flat (instead of dropping off, as it usually did during the fall and winter months).  The change was subtle to most, but discernible to those who were paying close attention to the numbers.   

This one-two punch of previously-excluded buyers coming into a slower moving market signaled to me that the end was near… and so within six months I sold my home, packed up and started a new phase of my life in Denver, just months before the California market imploded.

My eyes are wide open again, because what we have seen in Denver since the start of 2012 has been historic.  Specifically, we have seen appreciation of between 20% and 50% in just three years (with lower-priced homes scoring the biggest gains), while inventory has plunged to an all-time low.  The median-priced Denver home has seen $60,000 or more of gain in 36 months, a potentially scary scenario for buyers entering the market today.

Zillow reports metro Denver real estate gained $26 billion of value in 2014, after roughly $21 billion of gains in 2013.  If you own a home, the wealth effect of all this newfound equity not only allows you to sleep well at night, it’s starting to finance a lot of new stuff, like cars, boats and European vacations… just as it did in California back in 2005.  

Meantime, rents are also soaring, which is interesting because the rental market usually flattens out when the housing market gets hot (as people transition from renters to owners).  This time, rents and prices appear to be moving in tandem, which is in large part due to the fact we had virtually no new construction between 2008 and 2013 and our statewide population growth has been so strong over the past few years, with a surge in educated and immediately-employable Millennials leading the way. 

So what signs will I be watching for that might signal change in the months to come? 

When you cut through all of it, I believe there are two key numbers to watch:  inventory and unemployment.

Let’s start with inventory… as of today, there are 5,600 homes for sale in the Denver metro area.  That’s down from 18,000 homes in 2011, 23,000 in 2010 and more than 31,000 homes for sale in 2007.  In fact, the December inventory has reached an all-time low for the Denver MLS, which dates to 1985, when the population was less than half of what it is today. 

Remember that I study numbers, and have done so for 20 years.  What’s going on right now is so breathtaking there are hardly words to describe it.  For comparative purposes, in a “normal” market (60 to 90 days to sell a well-priced home, 3% to 4% annual appreciation) you would typically have about twice as many homes for sale as you have under contract at any point in time.

With 6,458 homes currently under contract in the Denver MLS, you would need approximately 13,000 homes for sale to hit market equilibrium.  That means that even if the current inventory doubled, with no increase in the number of contracts, you would still have a seller’s market! 

So the first number to watch is inventory, although we are so inventory-starved there appears to be no problem heading into the new year.

The second number to watch is the unemployment rate.  In virtually every housing recovery, housing growth and job growth have gone hand in hand, with job growth leading the way.  Today, the unemployment rate in Denver is a ridiculous 3.6%, and in Colorado it’s just 4.1%.

Anything below 5.0% is a strong job market, with wage growth a near certainty.  The government considers an unemployment rate of 6.0% to be full employment.  California, by contrast (an overpriced housing market once again falling into stagnation), is struggling under the weight of a 7.3% unemployment rate, with many of those unable to find jobs now leaving for stronger employment markets like Denver.

I also believe you should be watching for changes in underwriting guidelines, as the credit-integrity of today's buyers provides the foundation for tomorrow's market.

There are many other factors that can influence a housing market (interest rates, vacancy rates, fuel prices, etc.) but I believe the two numbers that best encapsulate what’s going on with all of the others are inventory and employment.

Watch them, because where they go, the housing market is sure to follow.   

PRICING IS AN ART, APPRAISING IS A SCIENCE

If I go the grocery store and buy an apple, I know that it’s going to cost somewhere between 75 cents and a dollar.  It’s pretty easy to determine value, because I can just compare what King Soopers is charging versus what Safeway is charging for the same variety, and make a decision from there.

Generally speaking, apples are apples.

Valuing a house is a lot more complicated.  There are many variables that go into determining the value of a home.  Condition, location, amenities, schools, proximity to shopping, access to roads and public transit, neighboring re-development… there are countless components that go into the overall value proposition found in a home.

These days, with home prices skyrocketing in Denver, appraisals have become a real issue.  With lower-priced homes especially, somewhere between 25% and 33% of all financed deals are hitting snags on the appraisal, mostly because appraisers look backwards (at past sales) while buyers are simply trying to outbid the masses to get a home under contract before prices go up even further. 

Which leads to a question… how accurate is an appraisal, and does an appraisal really determine what your home is worth?

I meet with appraisers regularly, as I don’t leave things to chance and strive to engage appraisers personally on each and every one of my listings.  If you have properly marketed a home and have multiple offers, you can pretty much bet the appraisal is going to be a challenge. 

So showing up with a list of improvements and upgrades, hand-selected comps and (hopefully) a stack of competing offers goes a long way toward getting a home to appraise at the contract price.

But does an appraisal determine value?

Appraisals serve an important role, which is (mostly) protecting the lender’s interest in a transaction.  No lender wants to loan $400,000 on a $375,000 home.  That’s bad business. 

While the buyer pays for the appraisal, in my opinion that appraisal is mostly for the benefit of the bank.  The buyer’s agent ought to be the one looking out for the buyer.  The appraisal serves as a backstop to make sure there is some basis for the contract price, but if a low appraisal is news to the buyer’s agent, chances are that agent is either clueless or not looking out for the buyer’s interest.

Now let me tell you where the appraisal process comes off the tracks.

I had a client reach out this week who purchased a starter home for $212,000 back in March.  She knows the market is hot, because we talk regularly, and she knows that interest rates have dipped again.  Therefore, she wanted to know if there was any chance of refinancing with a 20% equity position, which would allow her to drop her mortgage insurance and significantly lower her monthly payment.

Now I follow her neighborhood closely and I know exactly what I would do if I was listing her home today.  I would have no hesitation putting her home on the market at $235,000 to $240,000, because I believe buyer demand is so strong (and her home would show so well) that she would get it.

But an appraiser is going to see things very differently, because the only two model matches to hers which have sold since March were a trashed out HUD home (for $199,000) and a marginally-updated resale (for $223,000).  Both of these homes needed work, but as comps, there they sit, gumming up the works.

If an appraiser is simply asked to do an appraisal, without the compensating factor of three or four offers in hand in the high 230s (or even 240s), the appraiser is going to default to using these two comps.  Sure, he or she will make some basic adjustment for condition, which may add $10,000 or $15,000 of value, but could an appraiser take closed sales of $199,000 and $223,000 and get to $240,000? 

Highly unlikely.

Truth is, the more reliable indicator for what your home is worth in today's market is determined by what a ready, willing and able buyer will pay for it.  And that may be very different than the value an appraiser comes up with, if that appraiser has nothing else to go on but past sales.

That’s why hiring a strong listing agent is so incredibly important.  Leave that appraisal to chance, and you may get a random outcome.  But show up with four offers in hand, a list of improvements, interior pictures of the discredited model matches, a list of area homes that have similarities (and have sold at higher prices) and a copy of your resume, showing that you are closing a large number of deals and that you have been doing this for 20 years… and you very often will get the benefit of the doubt, and the higher price for your seller.

Pricing a home to get top dollar is an art.  Appraising a home is much more of a science.  There is an inherent conflict between the two, and it’s the listing agent’s job to bridge the divide. 

For my past client, I don’t think her home is quite ready to appraise at a high enough number to drop her mortgage insurance.  But could she sell it at a price that's 12-15% above what she paid for it nine months ago?  That’s a different question, because in this market, properly staged and marketed, I believe she could.  

LATEST INVENTORY DROP SAYS THE SURGE WILL CONTINUE

Here it comes, again... the inventory of homes for sale in Denver today is down nearly 30% from a year ago, while the number of homes under contract in the past 30 days is up over 24% from the same period in 2013.  

These are strong, strong numbers that demonstrate our market is losing none of its momentum going into 2015.

As you know, I have been a student of housing market data for nearly 20 years.  Every month, I pull my own data from the MLS, studying active inventory, homes under contract and the number of homes that have sold.  I look at distressed inventory, foreclosure filings, and employment figures.  

These charts and spreadsheets form the basis of my buyer and seller consultations, because the numbers always tell an important story.    

When inventory began diving in 2011, I saw it early and encouraged my buyers to get serious.  When inventory continued falling in 2012, I challenged my buyers to swing fast and hard, before prices started climbing.  In 2013, as double digit appreciation became the norm in many parts of town, I showed people it was "real" because demand was far outstripping supply and both job growth and migration supported higher prices.

And as 2014 comes to an end, it is happening again. 

Even in the face of bidding wars, cash offers and record-high prices, inventory is diving again.  It's down 29.50% from one year ago, which again reflects massive demand swamping limited supply.

Here's the trend, month by month, since the summer:

- June.. 7,957 homes on the market, down 3.20% from June of 2013 

- July... 8,663 homes on the market, down 5.70% from July of 2013 

- August... 9,406 homes on the market, down 6.20% from August of 2013 

- September... 8,783 homes on the market, down 17.10% from September of 2013 

- October... 8,302 homes on the market, down 19.80% from October of 2013 

- November... 6,865 homes on the market, down 29.50% from November of 2013

When our market is ready to cool off, it will look 180 degrees opposite from what is happening today.  There are currently 7,470 homes under contract in the Denver MLS and only 6,865 homes for sale, a ratio of 0.92 homes on the market to each one under contract.  In a "normal" market, that ratio would be 2 to 1.  In November of 2010, just four years ago, it was 4.64 to 1.  

Absorption rate, which should be around five months in a normal market, is currently 1.42 months, a strong seller's market.  For entry level homes, below $250,000, it's 0.49 months.  For homes between $250,000 and $400,000, it's 0.92 months.  When absorption rates fall below three months, appreciation is essentially guaranteed.  When it's below one month, continuing price appreciation is automatic.  

It is my contention that the three year period between 2011 - 2013 will go down in history as the best Denver metro home buying opportunity in our lifetime, especially at the lower price points.  Three years ago, there were more than 4,500 homes on the market priced under $250,000.  Today, there are 927.  The reason?  Homes under $250,000 basically don't exist anymore.  

When this market starts to tire out, if it does, the first place you'll see it will be in the inventory.  On a year-over-year basis, it will start leveling off, then climbing slightly.  The minute you see that, you will know it's time to start changing your approach.  (And, factually speaking, that will happen.  The question is, how much higher will prices go before we hit that point of equilibrium?  And what will interest rates look like at that time?) 

The other key indicator is the jobless rate.  With unemployment in the Denver metro area at just 3.7% (and just 4.3% statewide), everyone who wants a job has one.  And when people are employed, they buy houses.

It is confidence, more than affordability, that drives markets.  If affordability drove the market, then everyone buying today would have bought in 2009 or 2010.  Affordability is nice, but employment matters more.

The average Denver area home has appreciated over $57,000 in the past two years alone.  Over $16 billion in new equity has been created in the metro area, unleashing spending power that is creating jobs and opportunity for anyone who wants it. 

Constructions projects are everywhere you look.  Companies are coming to Denver in record numbers.  Consumers are spending.  Oil, gas, technology, tourism... it's all booming.  

There will come a day when this market stabilizes.  When prices level off.  When supply balances with demand.  When things get back to "normal".  I am watching closely for signs of a market top, but right now, there are none.  The numbers say this is real, and it's not done yet.

My last four listings priced under $300,000 have drawn a total of 37 offers.  Thirty three of those buyers are still out there, frustrated, looking for homes.  

If you're not prepared to fight with other buyers, don't bother coming off the sidelines.  Because it's competitive right now, and only the most motivated buyers will prevail.  

If you own, these are the best of times.  And if you don't, it's quite possible you may be watching your opportunity for home ownership sail off into the Rocky Mountain sunset.

WHAT ABOUT THE NEXT GENERATION?

Many years ago in Southern California, I had an interesting conversation with an agent colleague of mine who revealed he had systematically acquired five different single family homes as rental properties over the span of about six years.

“Impressive”, I said, “you’ve got yourself set up for an early retirement.”

“No,” he replied, “it’s not that.  I’ve got five kids under 14, and if we didn’t buy these now, by the time they’re old enough to need homes of their own there will be no hope for them here.”

That was an eye-opening conversation, and it has resonated with me for a long time.  It was one of the reasons we purchased rental properties in Fort Collins immediately after moving to Colorado almost a decade ago, but now I’m getting really worried about whether my kids will ever be able to afford a home of their own as Denver’s housing market continues spiraling to new heights.

Earlier this week, I wrote an offer on a $169,000 listing in Lakewood for an investor-client who has already purchased two rentals in the past few years.  We offered $13,500 over list price, as is, with some other candy thrown in to try and sweeten the offer.

Turns out we were one of 35 offers submitted on this property, and of course our paltry little $13,500 premium over list price failed to make the cut.  I asked the agent if we were in the top 10 offers, and she said she really didn’t know.  They looked at the cash offers first, picked their winner, and tossed everyone else aside. 

We could have been 5^th, 15^th, 25^th or 34^th.  I suppose it doesn’t really matter.

The era of sub-$200,000 housing in Denver is completely over.  Soon, the era of sub-$250,000 housing may be over.  The numbers I ran earlier this week out of the Denver MLS showed just 927 homes (attached or detached) on the market below $250,000.  Three years ago at this time, there were 4,561. 

The absorption rate for homes priced below $250,000 is currently 0.49 months.  A “normal” market, which would mean 2-3% appreciation and 60 to 90 days to sell your home, is 5 to 6 months of inventory. 

I have been keeping my own monthly inventory statistics from Denver MLS data dating back to 2007, and I kept similar numbers from Southern California MLS data for nearly a decade before that.  The 0.49 months of inventory is the lowest absorption rate I have ever seen at any price level in any market in my entire life.  And that absorption rate stands at 0.49 months despite the fact that most homes in this price range have already gone up 25% to 50% in value (sometimes more) in just the past three years. 

It’s unbelievable.

When you have this kind of total imbalance between buyers and sellers, prices can only go up.  There is widespread panic among many first-time buyers, who (thanks to new technology) now see new listings show up on their mobile apps Wednesday, only to be under contract on Thursday. 

I understand both sides of this.  I just listed an entry-level home in Wheat Ridge that drew 44 showings and 12 offers in five days.  I just listed another sub-$200k home that had 24 showings and 11 offers in three days (with a top offer $37,000 over list – I kid you not!).  

I do not know how long this can continue, but the panic among buyers below $250,000 is at a fevered pitch.  When does it end?  How much must prices rise before buyer demand cools off?

Now one thing to understand fully is that we still live in a tiered market. 

What that means is while the absorption rate below $250,000 is 0.49 months, between $250k - $400k it’s 0.92 months.  That’s still crazy hot, but there is at least a little bit more breathing room for buyers.  From $400k - $600k the absorption rate jumps to 2.51 months, still a seller’s market but getting closer to normal.  From $600k to $1 million, you have 4.63 months of inventory.  Now you are talking 2-3% appreciation and 60-90 days to sell your home.  Above $1 million, the absorption rate is 10.09 months… no appreciation at all to speak of there, with prices flat or even declining.  That’s the only price bracket where buyers have the upper hand. 

So now I am thinking about my kids again.  In 10 years, will Denver be totally out of the question for them?  Or will they live in a tiny little micro-apartment downtown?  Or perhaps a small condo along the light rail line? 

Will Denver be full of real estate “equity millionaires”, like San Francisco or Santa Barbara?  Or will all this settle down at some point? 

For all the good vibes around Denver real estate these days, I don’t like what’s happening.  I believe this boom is real, and it has legs.  But I don’t like what it means for the next generation of kids who have grown up here, who may need to leave for Omaha or Oklahoma City to find something resembling the life they will leave behind in Denver.

DMAR METRO MAYORS FORUM

Growth, sprawl and affordable housing were among the hot button topics at the Denver Metro Mayors Real Estate Forum held Wednesday at the Wheat Ridge Recreation Center. 

Mayors Bob Murphy (Lakewood), Joyce Jay (Wheat Ridge) and Marc Williams (Arvada) were joined by Jefferson County Commissioner Don Rosier in a wide-ranging 90 minute discussion about the key issues driving the Jefferson County real estate market.

In a market where prices have risen 20 to 30 percent in just the past three years, affordable housing remains a critical issue.  And Colorado's controversial "construction defects law", which essentially creates uncapped liability for developers of multi-family residential housing, remains one of the biggest challenges to creating much needed entry-level housing inventory.

"The trial lawyers in this state have essentially killed multi-family construction," said Rosier, who is hopeful that a newly-elected group of legislators will enact reform during the 2015 legislative session.  As a result, virtually all of the high rise construction going on in Denver these days is apartments, not condos.  

Lakewood mayor Bob Murphy spoke of his city's recent well-publicized efforts to mitigate the impact of the construction defects law at the city level.  "We haven't built a condo in Lakewood in six years," he said.  "That has got to change."

Lakewood's measure, which passed the city council on a controversial 7-4 vote last month, gives developers and builders the right to repair defects before facing litigation and would require condominium association boards to get consent from a majority of homeowners - rather than just the majority of the board - before filing suit.

Until a more sensible statewide law is passed, Murphy said, the affordable housing shortage in the Denver metro area will only intensify. 

Mayor Joyce Jay of Wheat Ridge pointed to a number of infill developments in her city currently under construction or in the planning stages which specifically target older residents.  A new development under construction at 24th and Vance will create 50 new housing units, while another infill development for patio homes near 32nd and Wadsworth will offer seniors lower maintenance patio homes.  

"We've got to find a way to create new housing options for seniors to free up single family homes in many of our older neighborhoods," she said.  "If seniors can't move out, younger people can't move in."

Because of the soaring costs of land, labor and construction, urban density is here to stay.  Going forward, she said, more developments will be based on sustainability, efficiency and access to FasTracks, which will transport thousands of people each day to and from Union Station.

Arvada Mayor Marc Williams talked about much of the new development and redevelopment going on in his rapidly-growing city of 110,000 residents.  Massive new single-family construction projects in Leyden Rock, Candelas and Whisper Creek are putting huge pressure on the city's infrastraucture and transportation corridors, while redevelopment of the Arvada Triangle (now known as the Ralston Creek area) will include dense urban infill projects including apartments, condos and mixed-use neighborhoods.  

"One thing we're going to see going forward," Williams said, "is with thousands of convention visitors coming to Denver each year, more and more of them are going to get out of the city, hop on the Gold Line and make day trips to places like Olde Town Arvada."

Another topic of much discussion is the county's overall graying population.  

"We have the largest number of residents 60 and older of any county in Colorado," said Rosier.  "And that number is going to double in the next six years."

Senior housing options are a front-burner item for almost every city in Jefferson County, because the homes seniors are in today could be freed up for younger families (with larger incomes and more spending power) if seniors simply had better options on the other side.

Each of the mayors talked about up and coming areas of their cities.

Nearly 75 acres of land in Denver's Federal Center will soon be redeveloped to accommodate between 700 and 1300 new homes.  Ryland Homes has significant plans for the Green Gables area, including patio homes, apartments and mixed use neighborhoods with residential units over retail spaces, similar to those found in Belmar.

But affordability is not an easy problem to solve.  Land costs are higher.  Labor costs are higher.  Material costs are higher.  Permitting and environmental impact costs are higher.  Infrastructure will be paid for by homeowners through special taxing districts.  The net effect is that building the same home today is significantly more expensive than it was just four or five years ago, and those costs are passed directly through to the homeowner.

"We simply don't have $200,000 entry-level homes anymore," said Rosier.  "I fear those days are gone for good."

KNOCKOUT OFFERS

“Showings begin at 12 p.m. Thursday.  Offers will be reviewed at 2 p.m. on Monday.  All offers must be received by 12 noon on this date.”

So read the broker showing notes of a property I listed not too long ago.  It’s an increasingly common tactic… putting a desirable home on the market for a fixed period of time and letting agents and buyers fight, gladiator style, to the bitter end. 

This particular home ended up with 12 offers, all of which were over list price, including two cash buyers. 

It is no fun to be a buyer in the Denver market these days.  Insane competition and limited inventory lead to competitive shootouts on a daily basis, with buyers including escalator clauses, waiving appraisal contingencies and often agreeing up front to take the home “as is” – especially for homes under $300,000, where there is simply no inventory to speak of.

For lower down payment buyers, the chances of landing a turnkey home in this price range are becoming increasingly remote, as cash buyers, large down payment buyers and “appraisal waivers” repeatedly win the day.

I ran into one of these situations a few weeks ago with one of my buyers, but rather than take the words appearing in brokers comments section of the MLS at face value, we challenged them. 

For this particular listing, which hit the market on a Friday morning, the sellers said they would not review any offers until Monday night.  Which seemed to be a shame, because my client truly loved the home and was willing to fight to get it.

Now every buyer is different, and the playing field in real estate (as in life) is often not level.  Those with cash or enough money in the bank to waive appraisal clauses have a significant advantage.  And that was the case with my buyer on this home.  He was making a sizable down payment and could live with a low appraisal, although I felt the home was priced right for this market and that we could probably get it to appraise.

So we wrote what I call a “knockout offer”.  We swung hard, swung fast and gave the seller a short deadline to accept on the premise that my buyer had a very short timeframe for closing on a home and needed to get one locked down that weekend. 

Our offer was pretty terrific: $3,000 over list, as is, no appraisal objection, buyer pays for title insurance, earnest money was doubled ($1,000 of which went “hard” upon acceptance with another $2,000 going “hard” after the inspection), and closing in 21 days.  Plus we included a bank statement to show we had the resources to deal with a low appraisal, should one occur (it didn’t). 

The total investment of the over list price offer, title insurance and “as is” provision probably added about $5,000 to the seller’s list price.  Truth is, it was my belief that had this property been shown over the weekend, with multiple offers a foregone conclusion, it may well have cost my client more than $5,000 out to outbid the herd on Monday, not to mention he could lose the property all together.

And so with a short deadline for acceptance and some strong persuasion on our part, the seller accepted our “knockout offer”.  The property went under contract that night and weekend showings were cancelled, sparing my buyer his date with the gladiator’s ring. 

I listed another home recently using the same “fixed time frame” listing period strategy, only to have another agent issue a knockout offer (or what he considered to be a knockout offer) for my property.  It was $11,000 over list price with a 20% down payment.  But it didn’t waive the appraisal clause, it didn’t let any of the earnest money go hard until the Loan Objection Deadline, and it didn’t offer to take the home “as is”.

A great offer?  Yes.  A knockout offer?  No.

Knockout offers are not for the faint of heart.  I don’t necessarily recommend them, unless it is an extraordinary property and you are truly willing to put your money where your mouth is.

More than anything, you need to know that they exist, that people are trying them and they are (sometimes) having success with them. 

The red-hot Denver real estate market is a rough and nasty place these days, and buyers are willing to do fairly desperate things to get a good home under contract.  I have never seen anything like this in 20 years, and I’d personally be pretty happy if things would just calm down a little bit and we could get back to something a bit more normal.

But I don’t make the rules, nor do I make the market. 

My job is represent my clients (both buyers and sellers) with all the skill and creativity I can muster, ethically, in hopes of getting them the very best outcome possible.    

Cash buyers and large down payment buyers do have an advantage, though, and some are willing to write knockout offers to prove it.

THE SIX MONTH RULE

I showed a home on Monday that was listed three days earlier for $219,000.  Good neighborhood, clean property, updated with a newer roof, newer windows, and a new furnace in the basement. 

The sellers weren’t looking at offers until noon on Tuesday, so we were still okay on timeframes. 

The problem with this house, at least from my perspective, is that it was simply too obvious.  These days, if there is nothing blatantly wrong with a house and the price is anywhere close to reasonable, especially at the lower price points, a bidding war is simply a foregone conclusion. 

And so as we turned the corner and walked into the kitchen, there they were… 31 business cards from 31 different agents.  I called the seller’s agent to get the scoop – 14 offers in hand, and counting.  Multiple all-cash buyers. 

“If your buyer can’t waive the appraisal clause,” she said, “don’t bother.”

And there you have it.  The story of the Denver housing market in 2014 for buyers under $250k. 

It’s demoralizing, really, whether you are a buyer or an agent.  The fact is that 31 agents (at least) showed this home before I got there, 14 of them wrote offers, and in the end… one gets a paycheck (but only if his buyer is all-cash or willing to waive the appraisal clause).

For all the good news you hear about the Denver housing market, there’s another side to it.  And that is the high number of agents (especially buyers’ agents) who are literally being starved out of the business by the amount of competition in pursuit of limited inventory.

When markets get crazy and emotional (like this one), bad behaviors become more common.  While most agents have integrity and strive to do the right thing, not everyone plays by the rules.  

This leads to some agents lying about cash offers, some agents lying about their buyers’ (supposedly) strong motivation, some agents making up stories about why this house or that house is “the one” for this buyer.  Some agents will say their buyers plan to take the home “AS IS” (if it’s not written in the contract, don’t assume it is so), some agents will say their buyers have mom and dad on speed dial if the property doesn’t appraise, and so on, and so on, and so on. 

It is a good listing agent’s job to verify all of it.  Verify the down payment funds, verify who the lender is, verify the buyers’ story, verify the agent’s production history, verify where the money is coming from if it’s a cash deal. 

Here’s what I know, based on 20 years of doing this:  when the agent wants the deal more than the client, you are in trouble. 

If you are planning to buy or sell a home, I think you need to pay attention to this. 

Does my agent have the integrity and resources to look out for my interests, or is my agent simply desperate for a deal – any deal - so he can make his next car payment.

I’ve thought about this a lot, and I really believe if your agent doesn’t have six months of cash reserves in the bank, you may want to consider walking.  Seriously.

Now I don’t know how easily you are going to be able to verify this, or if your agent is going to be willing to drive over to Wells Fargo with you this afternoon and have the teller print out a balance receipt in your presence, but I am not kidding around.  Agents/people with no money do desperate things.  Agents who don’t sell houses do desperate things.  People living beyond their means do desperate things.

A license doesn’t guarantee ethics.  A lack of ethics increases that odds you eventually won’t have a license, but a license itself simply means you are clear of felony convictions and you passed a test.  That’s not the same thing as ethics. 

“Does this agent want the deal more than I do?”

That’s the question you need to ask yourself.  If you can’t answer it or aren’t sure, you need to back away, fast. 

Buying or selling a house is a big deal with serious financial consequences.  If your agent can’t afford to think about your needs first, you are in a bad spot. 

If asking for a bank statement is too uncomfortable, then simply ask the question:  Do you have six months of cash reserves in the bank to get you through the down times in the market? 

Maybe you want to require 12 months.  Heck, maybe 24 is your number.  Go crazy.  See what your agent does with the question. 

But take it seriously, and don’t automatically count on others to have your back.  However you choose to do it, make sure the people who say they are on your team are actually on your team.

CALLING OUT THE SELLERS ON THE SIDELINES

Hindsight is always 20/20, and one day soon everyone will have this market figured out and it will be plainly obvious that we were supposed to be buying… I mean selling… I mean digging a bomb shelter in the backyard (hopefully wrong on that last one). 

No one really knows what tomorrow holds, but the one thing you can bank on is that no set of conditions lasts forever.

A few weeks ago, I wrote a very well-reasoned article entitled “Are Sellers Overplaying Their Hand?”.  Of course, since no one is selling right now, I’m guessing no one read it.

But I’ve been thinking about it a lot, because I’m highly frustrated with the number of sellers who do seem to be quite comfortable overplaying their hand, to the detriment of buyers but also quite possibly to themselves. 

As I share with my clients, while I can provide all the data, reports, insight and historical perspective of 19 years in real estate… ultimately, decisions are yours.  And no one wants to sell right now, because prices are going up.

"I’m getting rich by not selling,” people seem to be saying, “so why would I change course now?”

As I said, no one knows what tomorrow holds.  But here’s what I do know.  An awful lot of people with reasons to sell are not selling.  For example, I have a client whose mother died almost a year ago.  She lived in a little ranch home in Denver which she owned free and clear, and rather than rent it out (headache, in the mind of my client), they are just sitting on a vacant home and watching its value go up $2,000 per month or more. 

Easy money.  "Why sell?"

The concept of social proof is an important one to understand.  It’s pretty simple.  People take cues from those around them.  Robert Cialdini has written an amazing book that talks about this called “Influence: The Psychology of Persuasion”.  It’s one of the best books I have ever read and I strongly recommend it.

In real estate, it works like this.  When there are lots of buyers in the market, everyone wants to buy a home.  These new buyers are validated by all of the activity they see, so they follow the herd.

But it works the other way as well.

Right now, inventory remains near an all-time low and sellers are stubbornly refusing to put their homes on the market.  As I referenced earlier, there are people literally holding vacant homes off the market because they feel it’s more profitable to pay property taxes and holding costs on an empty home than it is to sell it in a hot market and potentially miss out on more appreciation.

One day, interest rates will rise.  In fact, last week, rates took their biggest one day jump in six months.  The Fed has announced that it is getting out of the mortgage bond-buying business by the end of the year.  The economy in many parts of the country is doing well, if not flat-out surging (like in Denver).

Wall Street is hanging on every word coming from the Fed, as more and more people think rate hikes have to be coming soon to slow down an economy that truly is performing at a much higher level than two or three years ago.

When rates go up, affordability falls further, and buyers will think longer and harder about whether they really want to pay 20%, 40% or even 50% more than the guy next door is paying for the same house just because the guy next door took action three years ago, when prices and rates were both crazy low.

At that point, whenever it may happen, the market will begin to tip.  And when people start to feel this shift taking place, every vacant house being held off the market will suddenly have a For Sale sign in the yard within about a week.  I have seen this phenomenon before (California, 2005) and it is predictable. 

When will this happen?  I don’t know.  But will it happen?  Yes.

Now I don’t see values crashing.  Not when all buyers have real down payments, real jobs and real credit scores.  But 10% appreciation is not sustainable.  There will be a slowdown, which is why it is so important for buyers to hunt for value, even if it means being extra patient.   

But sellers need to recognize that the wind is at their back, right now.  This is the easiest market to sell a home in since Denver was part of the Territory of Kansas 150 years ago (or something like that).  You want to sell when prices are up, buyers are plentiful, and (most importantly) when there is little or no competition.  

To those sellers sitting on the sidelines, I say… your window of opportunity to sell for top dollar is wide open.  But when it closes, I believe it will close faster than you think, and lots of sellers who have overplayed their hands will be stunned to learn that not every home sells in a week, with multiple offers, over list price.  

DELUSIONAL PRICING

Long, long ago, like a year ago, the Denver real estate market was still a relatively sane place. 

Yes, it was a hot market.  Buyers far outnumbered sellers.  Prices were clearly rising. 

But because Denver remains a place where very few agents actually KNOW the numbers, our market has often been moved more by myth and rumor than by factual data.  And there’s a lag time to people figuring out what is actually going on, because there is zero “reporting” in the local media, just the lazy regurgitation of press releases from real estate companies and interviews with the same pod of talking-head industry insiders and DU professors who may or may not have any idea what is actually happening at street level.

After three years of solid, consistent recovery, however, we moved into new territory this spring.  Overheat mode.  Basically, everything that wasn’t falling down suddenly had multiple offers.  Hideous homes that had no prayer of selling three years ago went under contract, often “as is”.  For good homes, multiple offers became an expected norm, appraisal clauses were waived and buyers agreed to anything short of auctioning off their children in order to land a desirable piece of real estate. 

Even though the market began its sharp turn three years ago – and you could see it, if you actually tracked and followed real numbers – because of this lag time between what I will call “street knowledge” and “mass audience knowledge”, buyers could still find value. 

Many sellers felt it was still a buyer’s market, even when it wasn’t.  Many agents had no idea that they could price listings $10k, $15k or $25k over the most recent comp and sometimes actually get it.

So value lingered, even after the market had clearly moved from a buyer’s market to a seller’s market.

But that advantage only lasts so long. 

The good news, in Denver, is that the lag time wasn’t a few days or a few weeks.  I would argue it was a year or more before word fully got out that the buyer’s market had ended and a brave new era of seller-domination had begun.

Today, I am sad to report, the seller’s market is no longer a secret.  Even the most reclusive, disengaged, off-the-grid sellers knows buyers are everywhere and nothing is for sale.  And that means we have entered an era where delusional pricing is an increasingly common reality.

What is delusional pricing?  In my mind, it’s any home listed more than 10% over the most recent comparable sale.  If the last sale in your neighborhood of a model match was $300,000 and you price yours at $315,000, that's defensible.  If you price it at $330,000, that’s delusional.

And delusional pricing is now everywhere.

It’s not helped by desperate agents who have no listings and are sick of working with buyers.  Agents who fall into this category will say anything – anything – to get a listing, even if it’s $25,000 or $50,000 overpriced. 

What these agents know is that either, a) maybe somebody is desperate enough to waive their appraisal clause and pay the big number, or b) although it may be uncomfortable and take a few months to beat the seller down on price, eventually the home will sell.

It’s hard to compete against these tactics, which is what they are. 

I always tell my sellers that advising is my job, but pricing is their job.  It is, after all, their home.  I will show them comps, give them suggestions on how to prepare it, help them stage it, professionally photograph it, digitally market it, proactively engage with agents and buyers, creatively and skillfully negotiate contracts, and fight like crazy to get the best possible outcome… but pricing it is their call.

Within reason.

I believe that in a hot market, time is too valuable to let crazy people take over your ship.  If a home is worth $400,000 and somebody wants to list it for $425,000, that can be done.  Leave room for the market to come to you, but don’t be crazy. 

But if the same seller wants $475,000, I’m not interested.  Somebody else can take the punishment.  There are enough other motivated people in the market that you don’t have to hit yourself in the head with a hammer for six months to close a sale, with a broken relationship and unkept promises as your transactional legacy. 

Now every listing is unique.  Just as in life, some people are reasonable and some people are not.  There are good agents and lousy agents.  There are ethical people and there are people who think taking advantage of others is part of the game.  This is why it's really important to assemble a team of people you trust to help navigate these waters.

As a buyer, if you find a home that’s priced reasonably and you have faith in the market, then by all means get in there and swing hard.  Being on the sidelines is costing you money.  The median home value in Denver increased by $74 per day last year, with similar numbers likely this year as well.  Every day you continue to rent, you are paying someone else’s mortgage while your future mortgage becomes more expensive.

For you, time is money.

But if the pricing is crazy, you don’t have to play along.  Put a red line through it.  Wait for something else.  Be proactive and knock on some doors.  Try another neighborhood.

The problem with delusional pricing is that it feeds upon itself.  When Neighbor Smith sees that Neighbor Jones listed his $250,000 home for $325,000, Neighbor Smith now believes his home is worth $325,000. 

That’s wrong.  Your home is worth what a ready, willing and able buyer will pay for it.

Delusional pricing is like a cancer that gets into the market, spreading false perceptions of reality and emboldening others to become delusional.  That’s one of the maddening themes of 2014, especially over the past few months. 

A list price is not a sold price, and wishing won’t make it so.  

A MARKET THAT DOESN'T EXIST ANYMORE

Let me put one thing out there, right off the bat.  In 2014, my average closed sales price is $331,000.  I’ve closed a half-dozen sales of $500,000 or higher, and I’ve sold nearly $8 million in real estate so far this year.  I’m very happy with my mix of clients, and I successfully help people at all different price points.

Having said that, I don’t make decisions about who to work with based solely on price.  Because my business is 90% referral-based, relationships are the true currency of my business.  And so I make decisions about who to work with based not just on commission potential, but also on my assessment of the person I’m talking to and whether or not I can actually help them.

Yesterday, I spent nearly two hours in dialog with a referred prospect who wants to buy a home on the west side of town.  All good, except he wants to keep his principle and interest payment under $1,000 per month. 

The problem with that, when you run the numbers, is that the payment he’s looking for equates to a purchase price of about $200,000.  And that, unfortunately, is a market that doesn’t exist anymore.

Here are the facts.  Denver is as hot a real estate market as there is in the country, and it has been for two-plus years.  Active inventory – currently about 8,700 homes in the metro area – is down a whopping 17% from a year ago, down 48% from three years ago and down 72% from 2007, when there were more than 31,000 homes listed for sale in the Denver MLS.

Transactions are up.  A lot.  Over the first eight monthly reporting cycles of the year, there have 47,516 homes to go under contract in the Denver MLS.  During the corresponding period one year ago, there were 41,383.  That’s an increase of 13%.

If you go back to 2011 and measure contracts in the same period (26,155 vs 47,516), the number of contracts in the first eight months of the year is up 81%.  That's frenzied.  

Here’s what it means.  When inventory isn’t there, and buyers are everywhere, prices go up.  We’ve had no inventory, by the standard of historical norms, for two solid years.  And with inventory nosediving once again in August, down 17% YOY, market conditions appear to only be getting tighter. 

So there’s less for sale, prices are already up significantly, and guess what… buyers are still kicking down the gates trying to get into the market.  What’s happening here is not, and has not been, a small deal.  It’s huge, so huge and ongoing that Denver is rapidly becoming a “high cost” market.

As I wrote a few weeks ago, a major factor in this is the Fed’s intervention into the bond market since 2009, which has created artificially low rates that have made refinancing an obvious choice for anyone (especially in 2012-13) with equity and a job.  The net result of that intervention, a policy the Fed will terminate by the end of this year, is that we have a generation of recently-refinanced homeowners who are addicted to low payments, which is what you get when your monthly payments are based on a 3% or 3.25% or 3.50% mortgage for the next 30 years. 

For these people, selling and moving up makes little sense now, because they will be hit twice… once with a higher interest rate, but also with home values that have gone up 20% or more.  For many of them, adding an extra bedroom or picking up a larger yard would recast their existing payments upward by 45% to 60%, and that’s just not worth it.

“We’re not going to list, but do you know the name of a good contractor?  We want to finish the basement.”

So these people simply aren’t selling, and that’s making our price escalation even more dramatic.

The gentleman I dialoged with yesterday is a nice guy.  Thoughtful, intelligent, trying to do the right thing.  But the bottom line is I don’t have the ability to go back in time.  Try as I may, I cannot find a magic wand.

The search I ran for him yesterday… 3/2 single family detached homes, under $200k, in Littleton, Lakewood, Wheat Ridge, Morrison, Golden, Arvada, Broomfield or Westminster… turned up eight homes.  Eight.  How awful must those eight be to linger on the market when five years ago, there would have been 200 or more sub-$200k homes for sale at any point in time?

You can say you want to buy a fixer, you can say you are willing to do some work, I hear it all the time.  Until you walk in and there’s standing water in the basement, holes punched in the drywall, pet urine in every square inch of carpet, mold growing in the closets and foundation cracks in three of the four walls. 

Then, suddenly, most people reconsider this romanticized vision of "buying a fixer".

I went back and ran some amazing numbers to demonstrate for this prospective buyer how dramatically things had changed.

Between 2008 and 2012, over a five year period, I personally helped 64 buyers purchase homes in the Denver metro area for less than $200,000.  That's more than 12 per year, on average.  Then in 2013, the number fell to four.  This year, I’ve had one buyer successfully purchase a home for less than $200,000.  One.

I’ve had several others who thought they were in the market to buy, only to chase after fleeting inventory for weeks or months, constantly beaten out by investors or cash buyers (or those armed with the resources of The Bank of Mom and Dad), before eventually capitulating and signing another lease or moving back in to their parents’ basement.  For them, game over.

The era of sub-$200,000 house in Denver is a thing of the past.  It lasted for a hundred years, but in 2013, the clock finally ran out.  Today, $250,000 is the new $200,000.  If you can’t write that check, then you may want to start looking for a roommate.

The next big booms are coming in the outlying areas… the Firestones, Daconos, Brightons and Strausburgs.  Places where, if you’re willing to drive and take on projects, you might still have a chance for less than $200k.

But the game has changed, and if you didn’t get in when you had the chance, the window isn't  just closing, it's almost nailed shut. 

This isn’t the Denver you grew up in or knew even 10 years ago.  It’s a bigger, more sophisticated, wealthier, increasingly metropolitan place.  It’s drawing people from everywhere, but especially from California, where high taxes, crummy schools and ridiculous home prices are driving people toward saner places. 

Places where the sun shines bright and there’s lots to do.  Places where there are good jobs and plenty of opportunity for anyone who is willing to work.  Places where it’s possible to enjoy an amazing sunrise or a remarkable sunset almost every day of the year.  Places like Denver.

Places like that are really awesome places to live.  They just don’t have homes for less than $200,000 anymore.