LEARN YOUR CRAFT

“Learn your craft well enough to teach it.”  
                                     – Sun Tzu, “The Art of War”

One of the reasons I have written this blog for the past six years is that it forces me to really think about my craft.  There is a difference between “peripheral” knowledge and “actual” knowledge.

Peripheral knowledge is an awareness that the market has improved over the past 12 months.

Actual knowledge says listings are down 35% from one year ago, the ratio of “Active to Under Contract” home has fallen from 2.71 to 1.39 and the absorption rate for homes under $250,000 is just 1.76 months.

Many real estate agents try to skate through life working off peripheral knowledge.  My feeling is that if you are going to invest $200,000… $300,000… or $400,000 in a home, you might want to know what’s going on in a bit more detail.

One of my mentors, the late Jim Rohn, often taught in his seminars that if you were given the opportunity to teach a class, you should take it.  I have acted on that advice repeatedly through the years.  At my old brokerage in California, I taught classes regularly on lead generation, database management and technology skills. 

When I relocated to Colorado, I immediately put together a “Mastermind” group of fellow agents who met weekly to brainstorm and share ideas.  And for several years I’ve been consistently involved with many different networking groups, taking a leadership role and giving presentations wherever and whenever the opportunity arises.

If you’re going to get up before a group of people, whether it’s for 10 minutes, 45 minutes or 3 hours, you have to prepare.  And preparation means “knowing your stuff”.

It’s easier just to show up.  It’s easier simply to tell clients that the market is “better”, and hope that your simplistic answer will suffice. 

But I think excellence is found in the details, and that by taking time to force yourself into a place of actual knowledge and competence, you become far more worthy of trust and confidence.

UNDERSTANDING A CHANGED MARKET

I was going through some old files over Labor Day weekend when I found a copy of a letter I sent to many of my clients just about one year ago.

That letter, which was actually a three page discussion about the significant changes taking shape in the market last fall, was entitled "UNDERSTANDING A CHANGING MARKET."

Today, nearly 12 months later, I thought it would be worthwhile to revisit some of those comments I made last year and provide some updates with what is happening now, as the “Denver Recovery” remains the focus of much discussion around the country today.

First, let’s start with a look at where things stand in terms of inventory.  As of this writing, the overall number of homes for sale in the Denver MLS stands at 10,827, a 38% decline from the 17,583 homes on the market one year ago and a 54% decline from 2010, when we had nearly 24,000 homes for sale. 

Less housing inventory is almost always a stabilizing factor when it comes to prices, and when you have steady demand and falling inventory, prices almost always rise.

So what’s happening with demand?

Last month, there were 4,181 homes that went under contract, up 19% from the 3,386 that went under contract during the same period one year ago.  The number of contracts written last month increased at every price point, including a strong surge in the $250,000 to $400,000 price range, which is great news for a segment of the market that has really just been treading water for the past few years.

Below $250,000 (undeniably the hottest sector of the market), there are just 3,115 homes for sale, compared to 5,875 at this time last year.  That is a 47% drop in inventory in the most sought-after price range!  Contracts here are up 14% from a year ago, although I am confident that the increase would be even higher if there were simply more desirable homes on the market.

As I said last year, the decline in inventory is basically attributable to two factors.

First, foreclosures are down roughly 75% from Colorado’s worst year, 2007,  In the Denver metro area, we are on track for about 8,000 completed foreclosures this year, a huge decline from the 27,000 we had just five years ago.

Second, our economy is functional, but hardly robust.  Historically speaking, first-time buyers make up about 40% of the market.  So-called move up buyers make up the next 40%, with the remaining 20% consisting of downsizers and investors.

In analyzing the numbers, we have plenty of first-time buyers and lots of people trying to downsize, plus a large contingent of investors who are picking off rental properties with once-in-a-lifetime cash flow potential.  The missing link remains clear – the move-up market remains far, far below historical levels.

What does this mean?

In short, it means the homeowner in a $250,000 home who normally would sell to buy one for $375,000… isn’t selling.  He has neither the equity (yet) or the confidence in the economy to take on such a move, and so he stays where he is. 

That lack of entry-level inventory, coupled with the disappearance of foreclosures (80% of which affected homes priced below $250,000), explains why there is hardly anything for sale.

Short sales and foreclosures, which made up 45% of the inventory in the Denver MLS in January of 2011, are just 14% of our inventory today.  Distressed inventory, which undermined prices and destroyed neighborhoods, has pretty much vanished. 

That is great news for homeowners, neighborhoods and prices.

Absorption rate is a statistic real estate economists use to assess the overall health of a real estate market.  In general, six months of inventory is considered to be a “balanced” market.  Less than six months of inventory indicates a shortage of homes, and over six months represents a buyer’s market.

Look at this incredible change between August of 2011 and August of 2012, by price point:

PRICE                                  AUG 2011                            AUG 2012

0 - $250k                              3.64 months                       1.70 months

$250k - $400k                      6.11 months                       2.51 months

$400k - $600k                      8.60 months                       3.73 months

$600k - $1 million             15.84 months                      7.71 months

$1 million and up             37.60 months                     18.09 months

At every price point, absorption rates have fallen by more than 50%.  The Denver market is actually very healthy all the way up to about $600,000, although there is still much more demand for a $200,000 home than a $400,000 or $600,000 home. 

One last figure I track closely is what is known as the “Active to Under Contract” ratio.  In short, this ratio shows how many homes are on the market and still looking for a buyer compared to each one currently under contract.

Economists will tell you that a 2 to 1 ratio (2.00) is healthy.  This would mean there are approximately 2 homes for sale to each one under contract. 

At the start of 2009, this ratio (marketwide) was 4.75 to 1.  One year ago, it was 2.77.  Today, it is 1.39, meaning there are just 1.39 homes on the market for each one that has a contract on it.  That is much tighter than the 2 to 1 ratio economists describe as “balanced”. 

The one-year change in the ratios speaks for itself:

PRICE                              AUG 2011                     AUG 2012

0 - $250k                             1.58                                 0.73

$250k - $400k                      3.34                                 1.44

$400k - $600k                      4.87                                 2.24

$600k - $1 million               8.93                                 4.02

$1 million and up              16.59                                7.85

You can clearly see how tight the market is today below $400,000… how it softens up to $600,000… and then how it breaks down after that.  Still better than a year ago, but the obvious takeaway is the dramatic shortage of inventory below $400,000.

THE ZILLOW EFFECT

If you work in the trenches, know anyone looking to buy a house, or subscribe to a newspaper, you probably already know the market in Denver has turned.

Yet, almost every buyer I work with arrives with a residual psychological hangover, a fear-based caution caused by too many years of declining values, distressed inventory, broken promises and financial hardship.  

“How do we know values won’t plummet again?” they often ask.

It’s a good question, and one worth exploring in more detail.

There are actually several arguments you could make in support of future price stability, including strict new licensing requirements for mortgage lenders, an absence of new construction and demographic changes that cry out for more housing inventory.

But I want to focus on two big ones that are game changers.  One is at the government level, and the other is at the individual level.

At the government level, the fact is that the Federal government is up to its eyeballs in mortgages and loan guarantees.  Between Fannie Mae, Freddie Mac and FHA, the Federal government now has a financial stake in nearly 90% of all mortgages originated today.

When the banking industry imploded in 2008, largely under the weight of ridiculously loose mortgage lending practices, the government became the financier of last resort though its sponsorship of the two GSEs and FHA.  

Almost overnight, the role of the Federal government in housing exploded, creating massive liability for the taxpayer and leading to unprecedented overhauls in regulation and lending standards.

With Fannie and Freddie incurring nearly $200 billion in losses from bad loans made during the last boom, the lesson has been learned.  No more risky loans to marginally qualified buyers. 

Since bottoming out in 2008, Fannie and Freddie have radically revamped underwriting standards and as a result of making good loans to qualified borrowers, they two GSEs have already repaid over $46 billion back to the treasury. 

There is no way, however, that any single entity should be holding 90% of the nation’s mortgage loans.  A downturn in values would be utterly catastrophic to the already fragile economic condition of the US government, and it would likely plunge us into a full-blown Depression. 

This is reason number one why the market won’t tank again.

The second reason I can’t see values plummeting again is because of what I call “The Zillow Effect”.  Simply put, clients have access to infinitely more raw data about housing than they have ever had before.  For the first time ever, the housing market is almost fully transparent to the consumer.

Today, I would estimate that half of my clients have the Zillow app on their iPhones.  Using this app, clients can instantaneously pull sales history, assessment information, comparable sales data, and read MLS information directly from their phones. 

It’s incredibly empowering to clients, and frankly, this technology was almost non-existent during the boom years of 2000 – 2005.  Back then, buyers relied on real estate agents for data, and many agents were far more committed to paychecks than protecting their clients from making poor decisions.

You wonder why one-third of the agents in Colorado have quit since 2007?  There are several reasons, including a scarcity of transactions, downward pressure on commissions, and the brutal and often fruitless practice of trying to negotiate short sales.  But the biggest trigger for this exodus, in my opinion, is the pressure of being under an intense microscope with skeptical clients who (rightfully) won’t stand for anything less than full and complete disclosure.

If your business model has been based on anything less than character, competence, hard work and personal integrity, chances are your business is in shambles.

The reason my business has grown exponentially, the reason I have been named a Five Star Professional by 5280 Magazine each of the past three years, the reason I am closing more transactions than ever… is because I have always operated with transparency.  

Transparency will promote you, or transparency will expose you, based upon your ethics.

When a new market emerges, a transparent market where consumers have access to as much data as you do, you can’t fake your way to success.  You either know what you’re doing or you don’t.  You either have your clients’ back or you don’t.  You either tell the truth, or you are quickly exposed to be a fraud.

Truth be told, the real estate market of 2012 is far, far healthier today than most people are willing to acknowledge.  If you can trust the data, if you know the data, if you have a skilled negotiator on your side, and if you can get a mortgage at less than 4.0%, what is there to fear?  

MULTIPLE OFFERS

Amazing how much can change in 12 months.

One year ago, we were all sitting in classes discussing short sales and foreclosures.  Today, the hot new class is what to do when you have four offers on your brand new listing.

Legally, multiple offers can present some challenges to real estate brokers.

Does the seller need to be made aware of every offer that comes in, even after an offer has been accepted?  (Yes)

Are agents prohibited from telling other agents the price of competing offers?  (No, as long as the seller approves and everyone is notified)

Will some agents make “moonshot” offers to get a property under contract, knowing that the appraiser will likely rein the price back down to current market value?  (Yes, but there’s a poison pill good listing agents can drop into a counter offer to eliminate this practice)

In short, even though a hot market is obviously better than a cold market, every market has its challenges and good agents must adapt to whatever conditions are prevailing.

If you are working with buyers, there are things that can be done to improve the quality of your offer without necessarily raising the purchase price:

-  Eliminate or limit the appraisal contingency, with language such as “appraisal contingency only applies if property appraises $10,000 or more below contract price."

-  Take the entire down payment a buyer plans to make and convert it all into the earnest money deposit (a $12,000 deposit looks a lot more serious than a $2,000 deposit, and it’s all refundable if the buyer terminates based on a contract contingency).

-  Consider taking your home inspector to the initial showing so you can remove the inspection contingency from the contract at the time the offer is submitted (an “as-is" offer)

For sellers, the strategies are different.  For example:

-  Round-robin countering.  With multiple offers, choose the buyer you want to work with first and give them four hours to respond to your counter.  If they don’t respond, move on to #2.

-  Ask for as many contingencies as possible to be removed from the contract.

-  Make all or part of the earnest money non-refundable upon acceptance.

-  If buyers insist on leaving contingencies in, ask for a higher earnest money deposit or “tiered earnest money”, with additional amounts due at different checkpoints so that the buyer’s motivation can clearly by tracked.

In short, the rules of this market are very different from any we have seen in the past several years.  And while not every home draws multiple offers within hours, the ones that are priced right with a great location are almost always subject to competition very quickly.

If your agent is not actively adapting to the realities of our new market, one where inventory is down 40% and contracts are up 20%, one where the percentage of distressed homes (short sales and foreclosures) has fallen from 45% of the market in January of 2011 to just 14% of the market today, you might want to reconsider your relationship. 

With rates in the 3’s and bank-owned inventory (mostly) a thing of the past, it’s time to gear up for a new phase of the housing cycle.  The phase called “recovery”. 

CAPTURING LEADS VS CULTIVATING RELATIONSHIPS

Every week, I get three to five calls from telemarketers offering to “sell me leads”.  I also get calls from scores of web vendors promising to “capture” visitors who come to my site, while other sites encourage me to bid (a la Ebay) on existing “red hot” leads that they have generated.

I don’t know about you, but I am not looking to be sold leads, and I certainly don’t want to capture anyone.  I have never viewed prospective clients as commodities to be bought and sold. 

A successful, long-term business is built through relationships, not by capturing strangers.  The goal is to create value, not take hostages.

Part of what causes so many real estate agents (and brokerages) to have poor reputations is that too much attention is paid to the transaction and too little attention is paid to the people involved. 

When the clients you work with have been “sold” ,“captured”, or auctioned to the highest bidder… really, how much hope is there for the relationship?

I have built my business by referral, one satisfied client at a time.  That means my goal is to work with people who have been referred by people who know, like and trust me because they know I’m competent and they know I care about the well-being of my clients. 

I spend a lot of time talking with my clients about “exit strategy”… in other words, making sure you can get out of whatever you’ve gotten yourself in to if circumstances should change down the road.  Sometimes, if there’s not a viable exit strategy, then the deal never happens. 

But that’s for the best. 

The goal for anyone committed to long-term sales success should be to focus on the “happily ever after”, not merely the here and now.  I need clients who love me every bit as much 12 months from now as they did when we were together at the closing table.

And that rarely happens when you’re bought, sold or captured. 

REAL ESTATE ECONOMISTS DESCEND ON DENVER

The National Association of Real Estate Editors wrapped up its 46^th annual convention at The Brown Palace Hotel in Denver this weekend.  The convention, which featured hundreds of editors from newspapers, real estate magazines and industry websites, focuses on coming trends and technological innovation.

Lawrence Yun, head economist for the National Association of Realtors, said in a speech on Friday that demand is so strong for housing right now that many areas of the country could see 10% appreciation over the next 12 months.  He cautioned, however, that appreciation would probably be less than that if builders re-enter the market on a large scale.

New construction has essentially been grounded for the past five years.  Here in Colorado, nearly three-quarters of the builders who were building homes in 2007 have shut down, left the state or declared bankruptcy.  The process to jump start new home construction can take up to 24 months from the time financing is secured, as builders must clear zoning hurdles, build infrastructure and hire subcontractors before the first foundation is poured.

Stan Humphries, lead economist for Zillow, said that the recovery would look more like a “stair step” than a steady climb.  As demand pushes values higher, homeowners who have had little or no equity will jump into the market and list their homes, which will cause appreciation to stall.  Once those homes are sold, there will once again be a shortage, leading to more gradual appreciation. 

The one consistent theme among economists is that there is demand that is real and which figures to last for several years.  There are three main reasons for this, according to the economists:

-  Millions of adult children (ages 25-34) eager to buy a home after moving back in with their parents during the recession

-  A strong influx of first time buyers who are being encourage to take advantage of low rates and high affordability

-  The return of “first generation” foreclosure households coming back into the market after six or seven years on the sidelines

The one commonality with all three of these groups is that they figure to be far more interested in affordable entry-level housing than in luxury, high end homes. 

That suggests that appreciation gains will continue to be strongest below the median price, while the higher end of the market may take longer to recover.

PURPLE COW

People have far more choices, but less time than ever to figure them out.  

That's the opening premise of Seth Godin's book Purple Cow, which implores marketers and salespeople to stop offering ordinary products in ordinary packaging and, instead... be extraordinary!

We're living in the post-TV age, according to Godin, where mass marketing has been replaced by niche marketing, long cycles have been replaced by extremely short ones, and the fear of failure has been replaced by the fear of fear itself.

You must be remarkable, Godin says, or you might as well be invisible.

Because there are so many forms of media and communication available today - television, Internet, print, Facebook, Twitter, Instagram, texting, etc - niche marketers have more opportunities today than ever before to connect with their specific audiences.  

Therefore, it's time to ignore the masses and focus on the people you actually want to do business with.  Television is no longer an effective way of conveying your message to my 13 year old daughter.  But Instagram is.  Radio ads won't work in pulling customers into a new Yogurt place.  But building a Facebook Fan Page might grow your business exponentially.

Godin's Purple Cow is about teaching salespeople and marketers to lean into their niches, about building brand and product loyalty through finely targeted, specifically marketed messages and products.

One interesting example of a company building a Purple Cow brand is Jet Blue, which offers only limited service out of DIA (now) but is a major player on both coasts and one day will be more prominent in Colorado.  In addition to offering free bag service, free DirecTV and travel credit any time your flight is late, Jet Blue encourages people to dress up on their flights, often offering a free round trip ticket for the "best dressed passenger" on the plane.

It's innovation like that which causes people to talk, to become raving fans, and to develop fierce brand loyalty.

Godin's Purple Cow teaches us it's okay to take a risk.  In fact, it's pretty essential.  If what you're doing feels uncomfortable and no one has done it before, chances are you're on the right track. 

If that's you, keep going.

DENVER HAS LOWEST DELINQUENCY RATE OF ANY MAJOR CITY IN THE UNITED STATES

Real estate research firm CoreLogic has released its spring 2012 report on mortgage delinquencies, and its findings are great news for Colorado:  Denver has the lowest mortgage delinquency rate of any of the 25 largest cities surveyed for the report.

In both the Denver metro area and the entire state of Colorado, only 1.4 percent of all homes with mortgages were in foreclosure, which generally means that three or more consecutive payments have been missed.  Only four states reported lower delinquency rates – North Dakota, Nebraska, Alaska and New Jersey. 

Chicago had the highest foreclosure rate of the 25 cities surveyed, with 6.4% of all mortgages in foreclosure. 

The spring report is a far cry from just a few years ago, when Colorado actually led the nation in foreclosures per capita during 2005 and 2006.  It certainly appears that we have worked through the cycle, and as report after report declares the Denver metro area to be a seller’s market, there are expectations of much better days ahead.

MAY MARKET UPDATE - RECOVERY IS HERE

The tightest real estate market in at least a decade got tighter last month, as inventory continued to fall to unprecedented levels and buyers continued storming the market as Denver's powerful real estate recovery rolled forward.

At the end of April, there were just 10,254 homes for sale in the Denver MLS, a drop of 43% from one year earlier.  A total of 4,721 homes went under contract during April, up from 3,775 during the same period a year ago.

But it together and you have a 43% drop in listings with a 20% increase in the number of contracts, pressure which is driving prices higher below $400,000 and sparking bidding wars through much of the metro area.

Below $250,000, the change is even more remarkable.  The number of listings for sale - 2,818 - is down 65% from the 8,007 homes that were on the market in this price range one year ago.  A total of 4,675 homes are currently under contract in this price range, which basically means three out of every five homes listed for sale below $250,000 is currently under contract.

The overall absorption rate, which was 5.37 months one year ago, is at just 2.22 months today.  Below $250,000, the absorption rate is just 1.37 months, which means at the current pace of sales it would take less than six weeks to sell every single home on the market today, regardless of price or condition.  

Foreclosures are now back to 2002 levels in Colorado and the state currently ranks 44th in the country in terms of mortgage delinquencies... a far cry from when Colorado led the nation in foreclosures per capita during 2005 and 2006.

First-time buyers continue pouring into the market, driven by soaring rents and incredibly low interest rates that make owning significantly cheaper than renting in most parts of town.

A shaky economy has capped the so-called "move up" market, which means there are fewer privately owned homes coming on the market at the same time bank-owned inventory has dwindled.

And, in an interesting twist, many of the more than 40,000 households that were foreclosed on back during those dark days of 2005 and 2006 are cycling back into the market, eager to own once again but approaching things much more conservatively this time around.

Add it all up and you have the formula for an amazing inventory crunch, the likes of which we haven't seen in many years.  As long as rates stay low, rents keep rising and builders stay mostly on the sidelines, you can expect it to continue for some time to come.

LIFELINE ON THE WAY FOR CONDO MARKET?

Three years after the condo market brutally tanked, hope may be on the horizon.

FHA has announced that it plans to revisit the drastic steps it took in 2009 to effectively get out of the condo market, steps that killed the primary funding source for condo loan in the US and sent values plummeting as a result.

Due in large part to the high number of investors and speculators who used FHA financing to fuel a condo bubble in cities like Miami, Las Vegas and San Diego during the boom, FHA announced in 2009 a new set of rules that essentially disqualified 60% to 70% of the nation's condo developments from FHA financing.

These rules included:

· Not lending in developments where FHA insures more than 30% of the units

· Not lending in units where owner occupants occupy less than 50% of the units

· Not lending in developments where 15% or more of the owners are delinquent in their HOA payments

· Not lending in units where a single investor owns 10% or more of the units

· Not lending in units where the HOA isn’t withholding sufficient reserves

Because FHA makes 40% of the nation's mortgage loans, and over 60% of the loans below $200,000, the loss of FHA financing was a crippling blow to condo communities and condo owners alike.

In an ironic (but predictable) twist, FHA's attempt to shut down future condo lending also sent hundreds of thousands, if not millions, of existing FHA loans into foreclosure, further sinking the agency in red ink.

Regulators have now announced, however, that FHA plans to look at easing up on these rules as the housing market improves and the economy recovers.  That would be a huge lift for the millions of condo owners who have been holding on, waiting for some good news in the most distressed sector of the US housing market.

THE BIG FIVE

Home inspections can be highly stressful for all parties involved.  There is no such thing as a "perfect" home, and there never will be.  

Generally speaking, a thorough home inspection should last two to three hours, and it will address the key components of a home, including the roof, foundation, HVAC, plumbing and electrical components.

There may also be comments about the paint, siding or drainage, as well as comments about commonly ignored areas of deferred maintenance.

Most inspectors will tell you, however, that home inspections really boil down to five key things:  foundation, roof, HVAC, plumbing and sewer line.

The "Big Five", so to speak, are the items that can make or break a deal, because they affect the overall health of a home and repairs can cost thousands and thousands of dollars.

How buyers and sellers respond to inspections is subjective.  Some people take things with a grain of salt, while others have severe reactions when they are informed of flaws or potential flaws that exist with a home.

Inspections are a trying time, and this is really where a skilled agent is needed to hold a deal together.

Ignore or miss something big, and brace for an angry outburst (or potential litigation) from the buyer somewhere down the road.  Nitpick the seller to death on small things, and the entire deal may come unraveled when the seller decides to take a hard line.

The market plays a role in how this process plays out, as well.  In the market of 2008, 2009, 2010 and even the first half of 2011... sellers were often desperate to sell and they would accommodate some large quests.  Today, however, with buyers swarming the market and inventory at record-low levels, buyers must be much more realistic about what they ask for.  Many sellers do not fear going back on the market when homes are selling in days instead of months.  

How buyers, sellers and agents handle the inspection process is often the most critical component in holding a deal together once a home has gone under contract.  And it is one of the key reasons why experience is such an important factor when choosing representation.  Hire an agent who has seen it before, and chances are he or she will come up with solutions.  Hire someone who hasn't, and brace for a bumpy road.

The key is to assemble a competent team, giving unbiased assessments, with no agenda other than protecting the client's interest.  If you get that right, chances are excellent that you will survive the inspection process.

THE CHANGING FACE OF NEGOTIATIONS

Does the current red-hot nature of the Denver housing market affect negotiations?  Of course.

In a market where sellers are routinely seeing multiple offers, buyers need to bring their highest and best offer upfront.  No more lowballing, hoping to go back and forth for a few days before arriving at a middle ground.  That’s so 2011.

The new model works like this:  a home comes on the market, six buyers see it, three write offers.  One lowballs, one comes in near list price, and one comes in over list price.  Instead of negotiating with all three, the sellers quickly discuss qualifications with their agent.  Who’s got the largest downpayment?  Who has a reputable lender?  Does the agent on the other side actually close deals?  If it’s the buyer with the highest offer, the game is over right there.

Why not spark bidding wars?  Sometimes they happen.  But good agents know one of the primary challenges in this market is actually getting listings to appraise for what buyers are offering.  That’s because appraisals look backwards, and things are changing so rapidly in this market it’s hard for appraisers to keep up.  If the comparable sales are from November, January and March, chances are the older sales are going to be for less, because they were sold in a different type of market.

That’s not to say you can’t get a great deal.  It’s just going to take longer, and you’re going to need to be more patient.  Lots more patient. 

If you want to actually buy a house in a reasonable period of time, you’re going to have to change your thinking. 

That means you come in hard with your best offer quickly, and make it easy for the seller to say yes.  Does that sound different than what you’ve heard for the past five years?  Absolutely.  Because this

market is absolutely different from any we’ve seen in the past six or seven years. 

Today’s successful buyers are now playing to win, instead of playing not to lose.