RE/MAX ULTIMATE TEAMS EVENT IN DALLAS

Earlier this week, I traveled to Dallas for the 2016 RE/MAX Ultimate Teams Event. 

This two-day program attracted nearly 600 team leaders or aspiring team leaders from RE/MAX offices in the US and Canada.  The demographics of the group were extremely impressive, as attendees averaged 17 years in the business and average 2016 income of over $280,000.

In short, these were the best and most successful agents in the RE/MAX system.

RE/MAX has been slow to support teams, quite candidly, because the formation of teams usurps power and revenue from the RE/MAX corporate model, which has long been focused on attracting successful, experienced, and entrepreneurial top-producing single agents. 

Consolidating the production of multiple agents under the banner of a single team leader threatens a business model that is largely dependent on individual agents each paying monthly fees to be a part of the brand.  But to their credit, RE/MAX International has finally recognized that team-building is not only here to stay, but long-term it’s going to be the only sustainable model in real estate.

With technology creating a 24/7 marketplace, it’s increasingly difficult for single agents to keep up with the demands of a 24/7 real estate business cycle.  The best long-term answer is to create a structure that supports constant availability and provides exceptional service at all times.  

Much of the two-day event was like drinking from a firehose.  Power panels featuring top-producing team leaders, financial experts preaching the importance of strict budgetary discipline and an intensive three-hour seminar on Tuesday with Brian Buffini, whose referral-driven real estate sales model has been at the center of my success and whose globally-renowned coaching organization works with many of the top agents in the world.

“You don’t form a team for leverage,” Buffini told the crowd.  “It’s not so you can have more time at home, or even so you can work fewer hours.  The only acceptable reason to form a team is when you consistently have a surplus of leads that you yourself cannot handle.”

The most important hire is the first, because your personal assistant will either provide the structure and support to grow or keep the entire enterprise from getting off the ground.  

“Hire a fit, not a friend”, Buffini said. 

 

The three hiring filters for that personal admin (in order) are character, competence and chemistry. 

“You need all three for a successful hire", Buffini continued, “but in the end, character wins out.  Competence can be learned, but character is innate, and without it nothing else matters.” 

Buffini also emphasized that building a successful team requires leadership, not management. 

“Management is telling people what to do, “Buffini said.  “Leadership is doing the right thing, regardless of circumstance.  Leaders must lead, or they will eventually lose their teams.” 

The goal of any successful team leader should be to help each team member reach his or her goals.  If those goals don’t align with the success of the team, then the hire was a mistake from the beginning.

Most highly successful agents and team leaders are control freaks, and I certainly can relate to that.  But Buffini said that unless control freaks learn to grow and delegate, they rarely build successful teams.

“You've got to be broken of your controlling ways," Buffini explained.  "The cure to being a control freak is constant feedback.  You must have the humility to seek out feedback, internalize what you hear, and proactively empower those on your team.  Even if that means allowing them to make mistakes so they can grow.”

Buffini cautioned that for 90% of team leaders, there is no annual four week beach vacation.  There is no endless flow of passive income.  Being a team leader is about creating opportunity for others to succeed and building an enduring, trusted brand.  Only after years and years of hard work can a successful team leader look at easing out of the sales equation and handing the reigns off to a team of subordinates. 

Ultimately, being a team leader means that the buck stops with you, always.  

“Leading a team of six is far harder than running a company of 600,” Buffini said.  “No matter what happens, the leader has to take responsibility and set a daily example of what is expected.  No matter what happens, the leader must own it.  No matter what goes wrong, regardless of who dropped the ball, the first and most mature response from a good team leader will always be ‘it is my fault.’”

BLACK SWAN COMPS

The theory of “black swan events” is a metaphor that describes hard-to-predict events which result in a shock to the system and disruption of the status quo.  These unforeseen events often result in immediate shocks to markets, political structures or societal norms. 

In real estate, a black swan event happens when a home sells well above or well below the established range of values for a neighborhood.  Sometimes there’s a good reason for the range-breaking sale… and sometimes there is not.  I call these “black swan comps”. 

I recently listed and sold a gorgeous, impeccably-updated newer home at an all-time high price for its neighborhood… a black swan comp since it closed $24,000 higher than any other previously closed sale and more than $70,000 above a similar square footage home which sold across the street only a few weeks earlier. 

From the beginning, as my sellers and I discussed strategy and how to competitively price the home, our number one topic of concern was with the appraisal.  I made it clear that getting this home to appraise for a financed buyer anywhere near our listed price was going to be a significant challenge, and that the appraisal was going to be moment of truth inside this transaction. 

Unless… we could find a cash buyer, in which case we might be able to sidestep an appraisal altogether.

Most appraisers are cautious by nature, especially in a rapidly-appreciating market, and so even though this home had remarkable updates, including reclaimed wood flooring, custom kitchen and bath remodels and extensive landscaping improvements… persuading an appraiser to push up so far above other closed sales in the area was no sure bet.

Things rarely go as planned in real estate, but in this case, we caught lightning in a bottle… and found a full-price cash buyer the first weekend we were on the market.

Long story short, the deal eventually closed at full price, which led to some very happy clients, a very happy listing agent, and lots of very happy neighbors.

It’s unlikely that another home is going to sell above this number any time soon, because quite simply, I don’t think there’s another home in the neighborhood so fully and beautifully upgraded.  And so the closed price on this home is now a data point with a limited shelf life - probably six months, which is about as far back as most appraisers will go in searching for area comps.

It’s entirely possible that the inclusion of this black swan comp will add $15,000 - $25,000 to the value of other homes in the neighborhood…. but only for as long as this home sticks on the grid as a recently closed comp.

Which is why it’s important for brokers to exercise supreme diligence when sifting through recent sales in a neighborhood. 

When a great home sells for a record price, there’s a window of opportunity for everyone else to “leverage up” off the value of that closed sale.  And so an experienced listing agent will call this to the attention of potential sellers so that they do not miss the opportunity.  It might mean pushing things forward and listing a home a few weeks earlier than planned, but if it adds five figures to the market value, it may well be worth it. 

Six years ago, we saw the opposite effect… when one distressed short sale or bank-owned home would undercut the value of other area homes by thousands of dollars.  Smart buyer agents would try to leverage down off this negative black swan pricing for as long as the home stuck on the grid of recent sales, while listing agents pulled their hair out trying to wish away the bad comp.

The bottom line is that timing, strategy and market knowledge count for a lot in real estate.  There are single, short-term events that can temporarily add or shave tens of thousands of dollars to or from the value of homes in a neighborhood. 

Good agents can identify these black swan events and use them to the benefit of their clients.  Less experienced agents often miss them (or willfully ignore them), and as a result, cost their clients a lot of money.

SHOCK TO THE SYSTEM

Last week’s election of Donald Trump as 45^th President of the United States caught much of the country by surprise.  The bond market also failed to see it coming, and as a result, Wall Street is recalibrating quickly based on expectations of fewer regulations, tax cuts and higher interest rates.

The impact on the housing market is potentially unsettling.

In just seven days, the 10-year T-Bill has leaped by nearly 50 basis points, which equates to a .50% increase in 30-year mortgage rates.  For a $400,000 purchase with a 20% down payment, that equals a monthly payment that is suddenly almost $100 higher in just seven days. 

Put another way, over 30 years your interest costs just increased by more than $33,000.

This is a very significant development, especially in a high-cost market like Denver, which is already struggling with unprecedented affordability issues.

Much of the anxiety reflected in the bond market is based on Trump’s promises to repeal or amend Obamacare and get American workers back to full employment.  All politics aside, one key consequence of Obamacare's employer mandates to provide coverage for those working more than 30 hours a week is that millions of American workers are now chronically underemployed. 

Major corporations like Home Depot and Target have reduced hours in order to dump employees onto Obamacare exchanges, while other companies have simply increased overtime and wages for existing employees while staying away from adding new full-time labor.

As such, economic growth in much of the country (with Denver a notable exception) has been stagnant, and that has allowed the Federal Reserve to justify keeping rates at historically-unprecedented lows.  

This is part of the angst that fueled the Trump movement, and if Obamacare mandates are overturned and employers once again begin hiring full-time help, that growth is perceived as inflationary.  Add to that the prospects for lower taxes and fewer regulations, and the groundwork is already in place for much more explosive economic growth than the country has experienced in recent years. 

Of course, economics (like politics) is complicated business and we can have long debates about the merits, truths and consequences of different policies.  But this is why the market is suddenly freaking out – no one knows for sure what the landscape will look like in 12 months.

The immediate impact is higher rates, and that’s bad news for housing.  Long term, I’m still resolutely optimistic for the Denver market, because we offer employers a diverse, well-educated, youthful workforce that is equipped for our evolving economy.

But you can’t deny that double-digit appreciation has been fueled in large part by interest rates in the 3’s.  Those days appear to be over and so, realistically, do the days of double-digit appreciation gains for housing.   

THE SLIPPERY SLOPE OF NON-PERMITTED WORK

Permits matter.  

Or at least, they matter a lot more than they used to.

Here in Colorado, there are more than 30 different types of home improvements that, per code, should require a permit.  Here's a partial list:

Interior:  Air conditioning, basement finishing, boiler replacement, electrical service upgrades, evaporative cooler installations, furnace replacement, gas fireplace installations, garage conversions, kitchen remodeling (if plumbing or electrical components are touched), water heaters and any other type of work that affects plumbing or mechanicals.

Exterior:  Additions, carports or garages, driveways (new or repoured), decks and patios, fencing, enclosing covered patios, adding a shed (always be aware of property line setback requirements), window replacement (lead-based paint mitigation is required for homes built before 1978), skylights, siding, solar panels, and of course, re-roofing.  

As you can see, the list of items that technically require permits is quite long.  I would say that, based on my experience, required permits are pulled less than 50% of the time.  The number one reason people pass on permits is to try and save a few bucks, but sometimes that desire to save money ends up creating a lot of future problems.  

Up until about 10 years ago, insurance companies were a lot more tolerant of non-permitted finishes.  But then Hurricane Katrina happened.  Then the housing market crashed.  Then the stock market crashed.  And then a relentless series of hailstorms pelted the Midwest, including many parts of Colorado... and suddenly, profit-minded insurance companies became a lot more serious about finding ways to avoid paying claims.  

Permits are not that expensive, in my opinion.  Most times, city inspections and closed permits cost anywhere from $100 to $1,000, depending on the work.  Sometimes it takes the city inspector a few days to get out to the house.  Sometimes permit inspectors will nitpick repairs.  It adds time and money to the cost of remodeling, and so some contractors and homeowners just roll the dice and skip it.  

Increasingly, though, I have become more and more committed to educating my clients about the need to pull permits.  In Colorado, the purchase contract states that buyers purchase homes "as is, where is", meaning that they inherit all faults and assume liability for issues with the house.  (A new owner can always sue a former owner for non-disclosure, but that is a very hard lawsuit to win most of the time)

If your basement floods due to faulty plumbing work and there were no permits pulled, many insurers will now deny the claim. Same with basement fires, kitchen fires and roof leaks.  If no permits were pulled, the insurance company has an opportunity to get out of paying a claim. 

There are other reasons permits matter.  Increasingly, some lenders don't want to loan on homes with unpermitted additions.  These lenders will instruct appraisers to give the extra space no dollar value, because (in theory) the city could require the addition or improvement to be torn out or redone.  

There is also a legal component to this, especially if you are a landlord.  If you have a finished but unpermitted basement and your tenants are injured or killed in a fire, or poisoned by carbon monoxide from a faulty furnace installation, get ready to be sued.  And insurance may not cover you.  

Even appraisers disagree about whether value should be given for unpermitted additions or finishes.  Appraisers are not required to check for permits.  You may have one appraiser who gives a finished basement full value, but five years from now a more conservative appraiser (who may have been burned overvaluing unpermitted work) may slash or wipe out your value altogether. 

And if you want to sue your home inspector for not identifying unpermitted work, be aware that most inspectors have a liability clause in their agreements that limits recourse to the cost of the inspection, which won't come anywhere close to addressing the cost of redoing an unpermitted basement finish or illegal garage conversion.    

There are many variables here, and the time to educate yourself is before you have crossed that line.

Tens of thousands of homes in Colorado have unpermitted finishes and owners and tenants live comfortably unaware of the liability that may exist.  

You can make your own decisions about whether unpermitted work is right or wrong for you.  Truth is, almost every home has some work done requiring a permit that was done without one.  But as I often say to my clients, most things in life (and real estate) come down to odds and percentages.  You have to determine your comfort level with the risks and liabilities of unpermitted work.  

THE FALL MARKET AND A WINDOW OF OPPORTUNITY

As I have chronicled before, the fall market of 2016 is behaving almost identically to the fall market of 2015.  This is relevant because the fall market of 2015 - loosely defined as the period from Labor Day to Thanksgiving - presented the absolute best opportunity for buyers to get into Denver's red hot market last year without having to fight through bidding wars, utilize escalator clauses, chop off body parts or engage in other one-sided strategies in an extreme seller's market.

The same thing appears to be happening again this year.  Listings that routinely drew 5 to 10 offers in a weekend during the spring are now drawing a lot less interest... sometimes one or two offers, and sometimes none at all.  

I've seen this with my own listings, and I have started advising some of my prospective sellers to sit tight until January unless they absolutely have to sell now.

A year ago at this time, I was concerned about this uptick in inventory and overall calming of the market.  

But once January arrived, the buyers came out swinging yet again, leading to one of the most frenzied seller's markets I've seen in 22 years.  

Let's look at a couple of numbers to show how this pattern has played out over the past few years, focusing on the ratio of "active listings to homes under contract" and the overall absorption rate.

(As a quick refresher, a "balanced market" has an active to under contract ratio of about two-to-one and an absorption rate of about five months - these are the ratios where prices generally stop appreciating and the market goes flat)

April 2013... Active to under contract ratio of 0.73, absorption rate of 1.30 months
October 2013... Active to under contract ratio of 1.51, absorption rate of 2.73 months

April 2014... Active to under contract ratio of 0.68, absorption rate of 1.06 months
October 2014... Active to under contract ratio of 1.05, absorption rate of 1.60 months

April 2015... Active to under contract ratio of 0.62, absorption rate of 0.89 months
October 2015... Active to under contract ratio of 1.04, absorption rate of 1.58 months

April 2016... Active to under contract ratio of 0.71, absorption rate of 1.06 months
October 2016... Active to under contract ratio of 0.96, absorption rate of 1.57 months

What you can clearly see is that the spring market of 2013 was insane, with tons of buyers and little for sale.  In the fall, while the market stayed very healthy, the ratios showed there was a lot less buyer-side competition.

Same scenario in 2014.  Buyers calmed down and backed away in the fall, only to come roaring back into the market at the start of 2015.

Last year, the same thing happened again.  The active to under contract ratio increased from 0.62 in the spring to 1.04 in the fall, only to slingshot back down to 0.71 in April of 2016.

For historical perspective, in case you were wondering... the last time our market had an active to under contract ratio of more than two-to-one was January of 2012, when the ratio was 2.06.  The last time the absorption rate topped five months was August of 2011.  And if you trace things back, you'll see that window of time was pretty much the exact moment when our market began its dramatic turnaround.  

The lesson here is clear.  The imbalance between buyers and sellers is most advantageous to the sellers in the spring, and most advantageous to the buyers in the fall.  

If you are looking to buy something before prices surge again next year, the time to get it done is now.  My clients know that one of my favorite sayings is "the numbers always tell a story", and the story the numbers are telling today is that fall is the right time to buy a home in Colorado.  

THE COMPETENT AND THE GRATEFUL

Real estate is an emotional business.  Crazy emotional.  It can be a boom-bust world of big wins, painful losses and lessons learned.  It's a roller coaster, whipsaw, loop-de-loop lifestyle.  And it gets the best of many of us.

Like anyone else who has done this full-time for 22 years, I've ridden the highs and the lows.  

But after two decades, I've mellowed.  I've learned that there's a lot of stuff that happens that is simply beyond my control.  To be sure, those of you who know me know that to the best of my ability, I try to manage every variable that I can.  

But sometimes, people or circumstances can simply lurch in ways that cannot be predicted.  

Often, there's so much emotion wrapped up in a real estate transaction.  Buyers are running up against the end of a lease, sellers are trying to navigate the challenges of moving kids during the school year, lenders are dealing with ridiculous underwriting requirements and appraisers are fearful that one bad appraisal could cost them their livelihood.

Agents worry about all of it.  Trying to keep everyone moving in the same direction is like the proverbial herding of cats.  But how you go about doing it, how you communicate with buyers, sellers, lenders, appraisers, attorneys, underwriters, title closers and everyone else involved in a real estate transaction... makes all the difference.

Real estate agents come with all sorts of emotional profiles... and I've met them all.  You've got the controllers, the bullies, the ego-maniacs and the posers.  You've got the paranoid (everything is bad), the inverse-paranoid (everything is good), and the bi-polar (everything is good... oh wait, everything is bad!).  

But there are two profiles I look for above all else - the competent and the grateful.

Competence speaks for itself.  Competent agents know how to solve problems when they arise, but they also know how to head small issues off before they become larger problems.  They understand the contract, they understand the law, they understand the market and they understand human emotions.  They usually sell a lot of houses, because their services are always in demand.  

This is why I pay so much attention to who the other agent is when offers show up on my listings.  The highest offer is not the best offer if the entire transaction is likely to end up in ditch, upside down with the tires spinning.  

I'm looking for Proven Results (which happens to be the name of this blog).  I'm looking for agents who know what they are doing, because guess what... good agents usually have educated, qualified, reasonable clients.  

But there's another component to surviving this crazy business, and all too often I find it overlooked or missing entirely.  It's gratitude, the simple realization that we are blessed to have the privilege to help people through this process with the opportunity to earn a good living along the way.

When I work with buyers, I take my responsibility to advocate for them very seriously.  But at the same time, I remember that (under most circumstances) it's the seller who is paying the bulk of my commission.

Thus, whenever I have dialog with the other side of a transaction, it's always from a position of respect with a focus on solutions.  

Seek and destroy negotiations are for losers.  Zero sum games suck.  Take-it-or-leave-it strategies should only be used as a last, final resort in the most dire of circumstances.

I don't want to hang out with people who build themselves up by tearing others down.    

It's critically important that you surround yourself with people you actually want to be around.  If you don't like the vibe you are getting from your clients, you should not be working with them.

Often, "no" is the most empowering word in the English language.  

I'm going to continue to sell a lot of houses.  I'm going to approach this business with firmness, seriousness, competence and respect.  And I'm also going to be grateful and I'm going to express that gratitude every chance I get.  

Most people respond well to gratitude.  It's disarming.  It builds trust.  It takes and shows confidence to express it.  I'm grateful for the other agents, the hardworking lenders, and the clients on the other side of the deal.  

That doesn't mean every transaction goes smoothly.  But I'm not consciously going to give other people the power to determine how I feel.  Gratitude will be my weapon of choice, and I will use it whenever possible to make people feel like they are meaningful, heard and respected.    

DODD-FRANK AND $1,000 APPRAISALS

If you're buying, selling or refinancing a home these days, chances are you're hearing a lot of complaining about appraisals.

The cost, the turnaround the times, the difficulty of even finding an appraiser to take the assignment... sometimes it feels like the whole world of appraisals has turned into a bureaucratic, over-regulated cesspool.

In fact, for the first time, I just had a client pay $1,000 for a rush order appraisal, which basically meant getting it turned around in 14 days.  

But before you complain to me (or your lender) about the soaring cost and uncertain response times of appraisers, it's worth a few minutes to explain why this is happening.

Long story short, after the subprime financing meltdown and Great Recession of 2008-2009, government regulators began doing an autopsy on the housing market collapse and much of the blame, rightly or wrongly, was ultimately dropped at the feet of the appraisal industry.

Too many incestuous relationships between independent contractor appraisers and value-dependent subprime loan originators, weak licensing standards and a lack of regulatory oversight were cited as primary reasons so many bad loans were made during this toxic era.

Agreed.

In fact, one of the main reasons I picked up and left California at the end of 2005 was the unhealthy and unsustainable practices of the mortgage finance industry.  

In much of Southern California, where I lived, home prices had doubled inside of seven years... not necessarily because of economic conditions or a massive migration of new residents who could afford $700,000 starter homes... but because in the subprime era, people could buy homes not based on qualification, but simply desire.

Hence, the market flooded with low quality, over-extended buyers.  Values surged.  The bubble inflated.  I lost faith in the market.  And then I sold my house and moved to Colorado.

But I digress.  

In the aftermath of the mortgage meltdown, the Consumer Finance Protection Bureau (CFPB) was born and became federal law in July of 2010.  Often referred to as "Dodd-Frank" (named after the architects of the new bureaucracy, who also signed off on virtually all of the polices which led to the subprime meltdown... but again, I digress), the new agency created sweeping new regulations for the mortgage, appraisal and finance industries.

Among the key provisions... 

1) Appraisers valuing homes with loans that would be sold to Fannie Mae or Freddie Mac (more than 80% of all mortgages are sold to Fannie/Freddie) would need to give up their independent contractor status and become employees of Appraisal Management Companies, a new entity that would pool appraisers together and make random appraisal assignments to avoid conflicts of interest between individual appraisers and mortgage companies and originators.

2) Appraisal Management Companies would be allowed to mark up the cost of appraisals to cover their administrative, licensing and management fees.

3) Licensed Appraisers would now be required to have at least an Associate's Degree (AA) and Certified Residential Appraisers would require at least a Bachelor's Degree (BA) in order to keep their licenses.

In addition, continuing education requirements increased and a new disciplinary process was put in place that would ensure appraisers who overvalued homes would face reprimand, suspension or revocation of their licenses.

So, six years later, here's what you have.  

In some states, as many as half of the licensed appraisers have quit or been regulated out of the business.

Appraisal Management Companies now add as much as 40% to the cost of an appraisal for "administrative, licensing and management" fees.

Individual appraisers routinely turn down assignments for any property that isn't a "slam dunk" on value for fear of having their work audited.

And many of the most experienced, most competent appraisers have opted out of the mortgage finance chain to preserve their independent contractor status.  These appraisers now focus on doing work for private lenders, divorce and estate attorneys, and others with appraisal needs that don't funnel into the Fannie/Freddie pipeline.

The bottom line is that an appraisal which may have cost $400 five years ago will cost $750 to $1,000 to obtain today.  And instead of getting an appraisal in a week, it could take a month to see a finished report.

I'm not telling you if it's good or bad... I'm just telling you why it is.  You can draw your own conclusions.  

"Reforming" anything always comes with unintended consequences.  It's debatable whether you are getting a better, more accurate appraisal than before Dodd-Frank.  But it certainly is going to cost you more, and it's going to take a lot longer to arrive.  

SEASONAL CHANGES ARE COMING

As the days begin to shorten and we see the first tinges of fall color, the Denver housing market is also transitioning into autumn.  

 

Nothing dramatic or worthy of extreme anxiety… but a shift, nonetheless.

The market is in the process of a seasonal slowing, and it’s apparent at all price levels.  But before you panic, you must first understand how overheated and frenzied this market has been during the first half of the year (and for most of the past five years, for that matter).

Let’s start our dissection by looking at the market in terms of price points.  

Below $250,000, which is always the most heated sector of the market, there are 814 listings for sale  in the greater Denver metro area and 1,904 under contract.  Under normal market conditions, which means 2% - 3% appreciation and 45 to 60 days to sell a home, you would see about twice as many homes for sale as you have under contract.

With 814 active listings, that means 407 homes under contract would represent a balanced market.  There are 1,904, or nearly five times that amount.  Listings continue to generate multiple offers, bidding wars, and record high prices, with little relief in sight. 

In the $250k - $400k price bracket, there are 1,942 homes for sale and 4,077 under contract.  Again, a balanced market would have about 971 homes under contract… there are four times that many.  Prices will continue going higher.

From $400k - $600k, there are 2,538 homes for sale and 2,464 under contract.  A balanced market would have about 1,232 under contract.  Here you can start to see the market drifting toward more modest appreciation.  It might take a few weeks to sell a home in this price bracket, even if it’s priced right and shows well. 

From $600k - $1 million, there are 1,866 listings and 992 homes under contract.  That’s a noticeable change from the patterns with the less expensive homes, and it suggests that price appreciation is stalling out above $600,000.  Here, you need to mentally budget for 45 to 60 days of market time.  

Interestingly, while the inventory of homes in the $600k - $1 million price bracket (1,866) is very similar to the $250k - $400k bracket (1,942), in the past 30 days there have been nearly five times as many homes placed under contract in the $250k - $400k range than in the $600k - $1 million bracket.  

Selling a home in this price range is work, it will take patience, and the buyer pool will drive a harder bargain. 

Above $1 million, you have 1,127 homes on the market and just 280 under contract, which is not a positive indicator.  In fact, here you have 4.03 homes for sale to each one under contract, well above the 2-to-1 baseline ratio of a balanced market.  Despite the great economy in Denver, selling a $1 million home is a very difficult proposition and there is little evidence that prices are going to move higher anytime soon.  

There is nearly eight months of inventory here, so if this is your bracket and you’re looking to sell, you had better be ready to start carving on price because there is much more competition among high-end sellers than you may realize. 

The best way to interpret these numbers, in my opinion, is on a year-over-year basis.  There are lots of seasonal fluctuations in the Denver market, and you can get faked out pretty easily if you compare spring numbers to numbers in the fall. 

When you look at this market on a year-over-year basis, the similarities to August of 2015 are pretty remarkable. 

The overall inventory one year ago was 8,358 homes for sale… today it is 8,287, a decline of 1.2%.

The overall absorption rate one year was 1.29 months of inventory… today it is the exact same 1.29 months.

And one year ago, marketwide, there were 0.90 homes on the market to each one under contract… today that ratio is 0.85. 

In fact, the trendlines also look almost exactly the same as they did a year ago.

The overall absorption rate has increased from a low of 0.87 months in May to 1.29 months today.  A year ago, it increased from 1.00 months in May to 1.29 months in August. 

In July of 2015, 6,456 homes went under contract.  In July of 2016, the number was 6,423.

The fact is, when you study the numbers, you can see what’s coming… a seasonal slowdown that may very well mirror what happened last year.  By October, homes that attracted 5 to 10 offers in the spring may only draw 1 or 2, which gives buyers a lot more leverage than they had just a few months ago. 

But I do think the headlines are going to be more ominous than they were last year, and I think the election will play a role in that.  There is an unprecedented amount of negativity in our political arena today, and while you could probably say that in every election of the past 20 years, this one really does take the cake. 

I believe the psychology of the market is more fragile now that it was 12 months ago, and so it will be very interesting to watch what happens here in Colorado during September, October and November. 

As always, the numbers tell a story.  Right now the story is… things look just like they did 12 months ago, no better and no worse.  Entry-level homes will remain in high demand, while high end homes carry much more vulnerability to a market correction.

A SINGLE AGENT WORLD

As someone who has carried a broker's license for 22 years, I've seen a lot of changes in the real estate business.  Contracts used to be hand-written on carbon paper, then came the advent of the fax machine, then came email, and then came electronic contracts.  Now my clients sign documents on their phones.

MLS books used to be dropped off at real estate offices every Thursday.  Then databases moved online to subscriber-based systems, then data was aggregated wildly and without sufficient oversight to 1,000 different websites, and now data is ubiquitous to the online world, sometimes accurate and sometimes not.

I believe that another round of huge changes are coming to the real estate world, driven by technology, innovation, greed, and the black hole of "leadership" at NAR, which has sat idly by on the sidelines while disruptors like Zillow and Trulia (now merged) have rushed in and, by many metrics, taken control of the industry by taking control of the consumer's online experience.  

(Interestingly, Denver is one of only a few major markets that currently has no licensing agreement with Zillow or Trulia, meaning that agents must manually upload new listings and manually take them down from these sites after they sell... which means the integrity of Z/T's data-feed in Denver is an absolute mess.)

There are serious flaws and problems with this, and you could write a 100 page thesis paper and still not address them all.  NAR extracts confiscatory annual dues from agents (usually $500 or more per year per agent in most markets), then uses that money to run television ads, lobby Congress for favorable housing legislation and hold lavish parties for itself from its Chicago-based high rise headquarters.

We can't rely solely on a myopic, fat cat, dues-fed organization that spends its time and resources inefficiently wining and dining politicians to protect our interests. 

Zillow, on the other hand, raises huge money by selling advertising to agents.  It uses that money to improve its technology, strategically advertise and promote its "Premier Agents", who qualify for that lofty title simply based on their ability to write a sizable monthly check that clears the bank.  

(Disclosure item:  Although I have nearly 100 past client reviews currently posted to Zillow, I have never spent a dollar on paid Zillow advertising, much to the chagrin of scores of Zillow advertising reps who have been relentlessly telemarketing me for years.)  

Zillow spends no money on lobbying Congress or seeking favorable legislation for homeowners.  It cares little about consumers, or real estate brokers, for that matter.  It wants nothing other than eyeballs on its website and profits for its shareholders and fully-vested senior executives.

NAR is a self-absorbed trade group.  Zillow is a self-absorbed creation of Wall Street.  And many agents are funneling thousands of dollars each year at both, but really being served by neither.  

It creates anxiety, for sure.  In some ways, it mirrors our country's political landscape, with dueling parties both serving their own interests while the real needs of its constituencies go unmet.

But I digress.  

Because of this lack of leadership, I believe the traditional role of real estate agents is going to change significantly over the next few years.  Increasingly, the two-agent system (seller's agent and buyer's agent) is likely to morph into a single agent functioning as a transaction manager, with Zillow serving as the primary matchmaker.  

There will be less representation and more facilitation.  It will also change the nature of negotiation so that it becomes less about advocacy, and more about getting the deal done.  It will put agents in the uncomfortable and ethically-questionable space of trying to serve two masters, and it will unleash a whole new batch of ethical and moral confusion.  

The tradeoff will be that consumers pay a single commission (instead of two), and because the public often under appreciates the value of a good broker, consumers will think they are saving money by eliminating one agent from the transaction when in reality they will be doubling down on the ethics and competence of a single broker, who will earn half a traditional commission for doing twice the work only if the deal closes.  

I am convinced this is the model Zillow is working to perpetuate, because it will create a class of "Super Agent" who has no choice but to advertise on its site, which will match home buyers, home sellers and so-called Premier Agents to put the deals together.  

It will seize control of the industry while keeping the legal liability and fair-housing responsibilities pinned to individual agents and brokerages.  It puts them at the center of the transaction financially while minimizing their exposure to litigation and lawsuits.  It's a beautiful Wall Street-crafted model that any one-percenter would love. 

As the number of agents declines, NAR will see its membership (and revenues) dissipate.  Its influence wanes and Zillow becomes the pre-eminent voice for real estate.  Lobbying and legislative advocacy go away.  Tax policy changes and the tax-advantaged nature of real estate erodes.  Values are negatively affected.  Brokerages close amid sharply decreased profitability and the industry consolidates.  Zillow doesn't care, any more than Enron or AIG or Bernie Madoff cared.  

When leaders fail to lead, chaos ensues.  You just saw it play out with Brexit, you're seeing it in the current US election, and soon enough, in my opinion, you'll see it begin sweeping over the real estate industry.

Could my opinions of Zillow and NAR change?  Sure, if their behavior was to change.  If I saw a serious commitment to making the world a better place for buyers, sellers and real estate brokers, of course I would get behind it.  But for now, I can't count on that.  I'm just trying to strategize my own place in a rapidly changing real estate world.

WHAT WOULD HAVE TO HAPPEN FOR PRICES TO STOP APPRECIATING IN DENVER

The market in Denver has been frantic for so long, it's hard to remember what "normal" looks like. 

But there is a baseline for normal, and to provide some context into what that looks like and what things look like today, it's worth a few minutes of analysis.

Over the past 10 years, the average springtime inventory of homes for sale in the Denver MLS has been just over 15,000.  The high water mark was 2007, when there were more than 31,000 active listings, and the low was in 2015, when there were 6,302 homes for sale at this time of year.  

Today, the active inventory stands at 7,122 homes, which includes both attached and detached homes.

In a "normal" market, well-priced homes take 45-60 days to sell, sellers average three to five showings a week and values go up 1% to 3% per year.  It's slow, boring and deliberative.

Today, as everyone knows, any reasonably-priced listing in the Denver metro area under $400k will sell in a weekend with 20 to 40 showings, and values have been going up in excess of 10% per year for almost four solid years.  It is not uncommon for good listings to draw five to 15 offers with serious buyers often waiving inspection, appraisal and/or financing contingencies to secure a contract.

It is high stress, high risk (if waiving or modifying contingencies) and high drama in a market that is increasingly driven by fear, desperation and greed.

So with all of this emotion sweeping over the market, are we setting ourselves up for a fall?

For equilibrium to exist in a market... that point where prices stop appreciating and the market flattens out... there will be about twice as many homes for sale as there are under contract.  The turning point in this market really traces back to January of 2012, which was the last month where we technically had a "buyers' market".  At that time, there were 10,333 homes on the market and 4,831 under contract, a ratio of 2.14 to 1.

Today, we have 7,122 homes on the market and 9,747 under contract, a ratio of 0.73 to 1 (more homes under contract than on the market).  To hit equilibrium, where prices level off and appreciation stalls, we would need more than 19,000 active listings.

There is no way that is happening any time soon.

Let's dig a bit deeper.  Using the 2 to 1 theory of a balanced market, at any point in time about 33% of the total inventory would be under contract.  If you look at homes prices under $300,000 in the entire Denver metro area, 81% of listed inventory is currently under contract.  As such, the likelihood of higher prices is essentially 100%.

In the $300k-$500k price range, 67% of the listed inventory is under contract.  This is not as high a percentage as you see in the sub-$300k market, so reasonably speaking, appreciation will continue here but not be as strong as at the entry level.

In the $500k-$800k bracket, 48% of the listed inventory is under contract.  This suggests much more mild appreciation, probably in the 4% to 5% range.

And when you go above $800,000, only 31% of the listed inventory is under contract, which means luxury homes may not be appreciating at all.  Buyers here need to be very selective and pay extra attention to location, which is the biggest driver when it comes to holding value on higher priced homes.

The market has always functioned in "tiers", and because there is always more demand for entry-level housing (which builders can't and won't build because it simply isn't profitable), your greatest appreciation will continue to be at the lower price points.

If you're a first time buyer, unfortunately, it also means that competition is going to remain extremely intense for a long, long time.  And prices are likely to go a lot higher before they even start the process of leveling off.  

WHAT IT'S WORTH VS WHAT SOMEONE WILL PAY

There's a new reality in the Denver real estate market, and if you're looking to buy, you must come to terms with it. 

Homes aren't selling for what they are worth.  They are selling for what someone is willing to pay.

I recently listed a home in Lafayette that my client purchased as a short sale in 2012 for $196,000.  Fast forward 48 months, and my carefully crafted CMA came back with an adjusted approximate market value of $322,150 - a 65% jump in value in four short years. 

Knowing this crazy market, however, I knew that that number was likely only a starting point. 

We could easily list it at $330,000... or even $335,000... and we would probably generate multiple offers.

After weighing the pros and cons of a bidding war, my clients decided their interests would best be served by inducing one.  So we listed it at $325,000.

The first offer showed up before showings even began - $335k, cash, closing in 21 days.  The buyer gave us four hours to respond.  I advised my clients to pass.

It was our intention to be on the market four days, reviewing offers on day five, and I didn't want to shortchange the process.

And sure enough, the offers came.  Nine of them, in total. 

Using (and promoting) the first $335,000 offer as a benchmark, I soon had an offer at $339,000.  Shortly thereafter, $342,000.  A day later, $350,000.

At this point, the conversation shifted to the appraisal.  We knew it was highly unlikely to appraise at these numbers, so the question became...what happens if (when) it doesn't appraise?  I picked up the phone and began posing this question to agents. 

Soon enough, the revised offers began showing up.  $345,000, willing to pay $7k over appraised value.  $348,000, as-is, waiving the appraisal clause entirely.

Then, $355,000...but not addressing the appraisal clause.  A cash offer at $358,000.  Another offer at $350,000, as is.  $347,000, willing to pay $10k over the appraisal. 

I could go on, but you get the picture.  Ultimately, we ended up with a top offer of $365,500 (not a misprint), waiving the appraisal clause, as-is, with a 60-day rentback to my sellers. 

I am not making this up.

Of course, the home ended up appraising short of the mark, and the buyers were forced to significantly increase their down payment.  They grumbled.  They didn't like it.  But they also realized that with values in this neighborhood increasing by $100 or more per day, starting over wasn't automatically going to make their situation better.

Fast forward a few weeks, and another home in the same subdivision with similar square footage was listed...at $379,900.  They were piggybacking off of our over-the-moon price, and they knew that several of the buyers who had swung and missed at ours would likely show right back up for this one. 

One of my clients asked me about this home and we viewed it together.  I told her the backstory with my listing and what a CMA would reasonably support.  The home was perfect for her and she wanted to write on it. 

A reasonable offer would have been the middle ground between what ours appraised for what this one was listed at.  But I know that “reasonable” doesn’t work in this market, so we pushed the numbers up a bit higher. 

She offered $368,000, agreeing to pay up to $7,000 over appraised value if it failed to appraise.

We sent it to the seller’s agent, who promptly tossed it in the recycle bin.    

That home went under contract with multiple offers, likely at or above list price.  It has no chance of appraising.  Apparently the buyers don’t care. 

Now all of this happened in Boulder County.  Boulder is nuts.  Home prices have soared so far in the city of Boulder that nearby suburbs like Longmont and Louisville and Lafayette are literally on fire.  Maybe these buyers are smart, even paying unsupportable numbers. 

Because a year from now, history may judge them wise.

But it's difficult to process all this.  If you're logic-based, your hard drive is about to crash.  In the Denver metro market of 2016, two plus two equals six.  Or seven.  In Lafayette, it might equal eight. 

Will this change at some point?  Of course.  It has to.  The question is, do things flatten out in four months, or in four years? 

As I've written about before, the history of the Denver market is like a staircase, not a rainbow.  By that I mean, if you go back 30 years, the history of our market is price surges followed by pauses, not crashes.  Even the wipeout of 2007 - 2009 looks tame when you view it in the long term. 

One last piece of perspective before we hit the "post" button.  If you're coming here from St. Louis, this market looks terrifying.  But if you're coming here from California (as so many are), it still looks cheap. 

If you're from Denver, however, you're probably feeling a mix of fear, confusion and maybe even sadness.  It's never looked like this before.  Many of the middle class neighborhoods you grew up with and spent time in are no longer affordable.  Moving up is out of the question.  Holding on is the new moving up. 

It's great to have equity, but mobility is nice too. 

Large numbers of buyers from two, three and four years ago could not afford the homes they are living in today.  Which means they aren't going to be selling any time soon.  Which means inventory stays low. 

Low inventory supports higher prices, and so the cycle continues.  Until people finally decide it's time to go somewhere else. 

JUST KEEP SWINGING

What do you say to buyers in the face of multiple offers, bidding wars, cash-rich weed growers and well-heeled out-of-staters overrunning the Denver housing market?

Just keep swinging.

What else can you do?  The numbers in our market today are so lopsided – less than two weeks of inventory below $400k, double-digit price appreciation for a fourth consecutive year, 270 people per day moving into the state, with over half ending up within 40 minutes of Denver – that you either keep swinging or start packing.

I know it’s frustrating.  Believe me, I know.  This past weekend, I wrote offers for four separate clients which all ended up in the recycle bin.  One was $25k over list price.  Another was for a cash buyer, 14 day closing, $7k over list price.  One agreed to pay $5,000 over appraised value.  And a fourth was $11k over list price. 

Zip, zip, zip, zip.

The problem with checking out is that, for the foreseeable future, the median home price value is going to continue increasing by $94 per day.  That’s how much values have gone up in the past year, according to the most recent report from the Denver Metro Association of Realtors. 

That’s $1,000 or so every 10 days.  About $3k per month.  About $34,500 in the past year, according to DMAR.

Are these numbers scary?  Of course.  They are terrifying. 

But you have to pull back and be objective.  You have to trust the numbers.

The ten-year average for listings on the market in the Denver MLS is about 15,000.  Today there are 5,996.  In just the past 30 days, 5,667 homes went under contract.  Overall, there are more than 8,400 homes currently under contract, or essentially 140% of the active inventory.  Historically speaking, that figure should be about 33%.

Economists consider five months of inventory to be a “balanced” market, where buyer and seller demand square up.  Five months is 150 days.  We currently have 14 days of inventory below $400k!  

For bonus points, the unemployment rate in Denver is 3.2%, rents have also been rising at a 10%-plus clip and the Rockies are (however temporarily) tied for first place.  Strange days, indeed.

I’ve never seen a market like this in 22 years as a broker, but then I’ve been saying that for about four solid years.  Denver is not becoming a big city.  It is one.

There are plenty of lousy things about our explosion into a big city metropolis which I grieve on a daily basis.  Traffic, for one.  Homelessness and gentrification, for two more.  Massive and generally thoughtless big box apartment buildings blotting out the skyline.  And schools that are totally unable to keep up with the surging population, especially on the west side of town. 

But it's not all bad news, either.  Anyone who wants a job has one.  The metro area is literally floating on an ocean of equity and cash.  Older neighborhoods are being reborn as homeowners pour significant amounts of money into long-delayed maintenance and home improvements, further increasing area values.  Lawns are green.  Paint is fresh.  The kids are alright.  

If you’re one of those frustrated also-rans in the housing derby, I feel your pain.  Emotionally, it’s easy to think about quitting.  (FYI, this past Monday morning, I thought about quitting)

But if you believe the numbers, this thing is a long way from over.  Demand is so overwhelming in relation to supply that the top of this market is likely years, not months, away.  There is nothing that suggests this trend is reversing any time soon. 

It sucks to lose and lose and lose.  Resilience is a learned behavior.  And right now, you have to be resilient.  Even if it hurts to press on. 

THE LONG GAME AND THE SHORT GAME

When it comes to a career in sales, there is one question that will govern how you act, who you work with and whether you will enjoy (or hate) your job. 

Are you playing the long game or the short game?

The short game is all about the here and now.  This deal.  This client.  This listing.  It’s about your next meal, your next car payment or whether the baby will have milk tomorrow.  It’s contentious, often adversarial and based on conquest and power trips. 

The long game is about ten years from now.  It’s about building a brand.  It’s about making decisions on criteria other than immediate gratification.  It’s about sowing seeds instead of chopping down trees. 

Truth is, it seems to me a lot of people in real estate are addicted to the short game.  As I have written about extensively in previous posts, our current market is dominated by two emotions - fear and greed. 

Fear and greed are the essence of the short game.

When you focus on the short game, you focus on the deal. 

When you focus on the long game, you focus on your client. 

When you play the short game, the payoff is the equity of the paycheck.

When you play the long game, the payoff is the equity of the relationship.

I’m not here to tell other people how to run their business.  Truth is, their business is none of my business.  But way too many agents (and people) these days are operating from a position of scarcity, a belief that every dollar left on the table is somehow eternally snatched away, never to return or be multiplied in some other form. 

Abundance is the opposite of scarcity.  Abundance is based on the belief that there is plenty of business, plenty of opportunity and plenty of money to go around.  Those who believe in the theory of abundance know that the universe loves a cheerful giver, that collaboration beats conquest, and that brand equity is your most important asset.  

Scarcity-thinking is instinctual.  Abundance-thinking is a learned discipline. 

I often say that every transaction is really three transactions, if you play it right.  It’s the immediate sale, it’s a future referral and it’s the repeat business that happens ten years down the road. 

Don't get me wrong.  I'm not saying you should roll over and be a softie.  Skilled negotiation is one of the most important survival tools for a top-performing real estate broker.  Believe me, I will fight when it's time to fight.  But playing the long game means that the battles I fight will be for my clients, not for me.  

How many of your clients are raving fans?  How many of your clients will go out of their way to refer you to someone they care about?  How many of your clients feel a sense of connection that transcends real estate?

The answer to those questions will determine if your personal brand is an asset or a liability.

To those in this business stuck in the darkness of fear and scarcity, I offer this appeal… stop playing the short game.  If you don’t like your clients, fire them.  Clear space for new opportunities.  Surround yourself with people you like.  Quit being a desperate, greedy vampire. 

Harvesting is for a season.  Planting is for the generations. 

Decide today if you’re going to be doing this in ten years, and if you are, then start acting like it.  You don’t need "deals".  You need people who trust you.

Reviews matter.  Relationships matter.  Outcomes matter.  Happily-ever-after’s matter.

I’m sick of all these agents playing the short game.  One day, when this market changes, your reputation will be your currency.  Your value won’t be determined by whether the market is hot or cold, but rather by what people think of you.

APPRAISAL PLUS

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

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

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

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

Let me explain how this works.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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