YOU GET WHAT YOU DESERVE

Would I?  Could I?  Should I?

Conventional wisdom has it that you don’t talk about politics, religion or money in polite company.  But with tax day having come and gone exactly one month ago, I have to admit I have spent a lot of time over the past four weeks pondering the financial realities of trying to run a legitimate business in a cutthroat industry.

In a hot real estate market, bleacher bums think that making money must be easy.  “Everyone’s buying homes”, they say.  “Even my unemployed cousin just got his license!”

Great. 

There are some hard, cold realities in real estate.  I know this because I have lived it, but in my 19 years as a broker, I have also spent many years in senior management, studying the numbers, training new agents, and watching most of them vanish from sight over time as the novelty of working nights, weekends and 100% on commission wears off and the bills come due. 

Truth is, fifty percent of agents who take out a license will quit in the first year.  Three out of four first-time licensees will never renew their license after their first license cycle is up.

I apply the Pareto Principle (commonly known as the “80/20 rule”) to most things in life… but in real estate, it’s even more extreme.  According to NAR, 93% of all sales are closed by 10% of licensed agents. 

Yes, I am firmly in that 10%, and yes, it took a long time to get there. 

The sad reality is that most people derive their opinions about real estate based on their interactions with the 90% of agents who suck.  The odds are pretty high for consumers that, if they don’t know what they are doing, they are going to end up hitched to a substandard agent.  And it might happen a few times in a row. 

If you don’t know the difference between cost and value, you might spend your entire life eating Big Macs and shopping at Walmart.  And while an occasional Big Mac or trip to Walmart might not kill you (at least, immediately), when it comes to the biggest financial decisions of your life, you owe it to yourself to raise your own standards.

If I earn a $10,000 commission for selling a home, do you think I’m on easy street?  Do you think I’ve got it made?

What if I told you that federal payroll taxes last year (income, FICA, medicare) ate up 31 cents on every dollar I earned?  That insurance took up another 8.4%?  REMAX brokerage fees took 8.1%?  State taxes took 4.8%?  Marketing took up 4.3%?  Add it all up – taxes, insurance, brokerage fees, marketing costs, MLS dues, car expenses, cell phone bills… and the bottom line is that only about 32 cents of every dollar earned actually passed through to my bank account.

Those are a lot of hands planted deeply in my pockets.

Again, you’re never going to win talking about money.  It’s divisive, I get it.

But it takes an extremely skilled and hard-working individual to succeed in real estate when the overhead looks like that.  That’s why so many people get into trouble with the IRS, or put people in their cars without insurance.  Or tell white lies to try and get a sale closed.  Or work with clients they can't stand.  It’s hard to play by the rules and win.

The next time you think about buying or selling a house, I encourage you to do your homework before you enter into an agreement with anyone.  Are they in the top 10% of the industry?  Can they document a proven track record of superior results?  Are they ethical at all times?  Do they care about you?

It’s not that hard to find out.  Go to Zillow and pull up an agent’s profile.  Read their reviews.  Ask your friends who have recently bought or sold homes.  Search license history through the state real estate registry. 

Although it sometimes rubs people the wrong way, I believe most people get about what they deserve in life.  If you had a lousy experience with a real estate agent, maybe it’s because your own standards simply weren’t high enough. 

The good news is there’s time to change that, starting now.  

SELLER'S REMORSE

In a hot market where homes are selling for all-time high prices and buyers are being forced to make quick, emotional decisions in order to compete, you would think the issue of “buyer’s remorse” might be a real issue.

But it’s not. 

In fact, if the topic is “remorse”, I think you may find more sellers wrestling with this issue than buyers.

Fact is, anyone who has purchased a home over the past few years has seen sizable equity gains with the added benefit of incredibly low, fixed-rate payments thanks to our continuing low interest rate environment. 

While many buyers have felt anxiety about our market during their negotiations, I honestly cannot think of one client in recent memory who was anything but happy (and already firmly in the black) 60- 90 days after closing on their new home.

Earlier this week, however, I received an interesting email from a client who sold a home with me about 16 months ago.  It was a vintage farmhouse on an irregular, oversized rectangular lot in a mixed use area of Arvada, full of quirks and backing to an apartment building.  It had just two bedrooms and measured barely 1,000 square feet, with a mud room slapped on the back and a single tiny bathroom that had made every morning feel like rush hour on I-25 for my seller and her teenage daughter.  It was garageless, with only a broken down shed and a pasture of unkempt native grasses in the backyard which provided the infrastructure for someone’s small livestock operation many years ago. 

We listed the home for $204,000, and over 21 days we had about a dozen showings. 

“Too quirky.” 

“Don’t like the proximity to the apartments.”

“Needs another bath.”

“No garage.”

Finally, we received an offer.  Although it was only about three weeks, it felt a lot longer, in part because the feedback made it sound like this was the strangest house ever.  It really wasn’t, but in more cautious times, buyers weren’t afraid to nitpick.

We sold it, but only after some extended negotiation and a few additional concessions.  My client was relieved that it was finally sold, and I was happy to help her get on to the next chapter of her life.

Fast forward 16 months and the quirky farmhouse has been listed for sale in a zero inventory environment.  No improvements, other than taking down the shed in back and cutting down the tall native grasses behind the home.  The only real difference?  A supercharged market the likes of which we have never seen before. 

Listed for $250,000, the home received multiple offers in the first 48 hours and eventually sold… for $260,000.

“What just happened here?”, asked my seller in her email.

What just happened here is that between January of 2013 and May of 2014, an armada of buyers showed up in Denver.  Thousands of them were first generation foreclosure households (estimates are that somewhere between 30 and 40 first generation foreclosure households are hitting their eligibility point for getting back into the metro area market every day), thousands others were renters tired of rising rents and shrinking square footage, while thousands more had just settled in to town from California, Texas, Illinois and other large feeder states that are pumping up Colorado’s population like never before.

This massive demand surge has launched the greatest housing rush in memory, and it’s not going to settle down until more inventory shows up or buyers are altogether priced out of the market. 

Will it eventually slow down?  Of course – it has to. 

But has it happened yet?

Nope.  Buyers need to know that as long as inventory remains low and buyers outnumber sellers, prices will continue to go up.  But more and more, you’ve got sellers thinking about holding out a while longer, wanting to ride things all the way to the top.  Not wanting to feel seller’s remorse for selling too soon.

That reluctance to sell creates a self-fulfilling prophecy, where sellers don’t sell because prices are rising and prices rise because sellers aren’t selling. 

So when does the top arrive?  In my mind, you’ll see it first in the inventory, because when buyers finally grow weary and the market top arrives, sellers will sense it and begin throwing their homes on the market en masse.  Buyers will become skeptical and their skepticism will be met with even more homes for sale.  The market will eventually stall out, normalized conditions will return, and logic will once again have a place at the table. 

Until then, you need to pay attention to the inventory.  If you’re watching the numbers, you will see it beginning with a subtle shift, then a larger trend, and then, finally, after it is firmly in motion and/or already happened, the Denver Post will report on it. 

But right now, the story remains nothing for sale and a seemingly limitless pool of motivated, qualified buyers.  That tells me we’re not done yet, and that multiple offer mayhem will be the norm for at least a while longer.  

WEAPONS OF RISK AND EXPENSE

In a market where multiple offers are common and cash buyers are showing up in huge numbers, it is becoming increasingly difficult for buyers to get financed offers under contract. 

We are 125 days into 2014, and by my count, I have written 24 offers for financed buyers this year that have not been accepted.  Every one of those was a multiple offer situation.  

This is a stunning turn of events.  The Denver real estate market remains as hot as any in the country, and I am amazed every single weekend at the massive numbers of buyers out swarming the market as I am showing homes. 

Because the same question comes up week after week – “How do I make my financed offer more competitive?” – I am going to share a number of strategies that have been effective in 2014.  Keep in mind that many of these strategies involve risk, and they are not for everybody.  But if you find a property that is truly worth competing for, here are some winning negotiating tactics than can help you break free from the pack:

INCREASED EARNEST MONEY – The earnest money deposit is effectively a down payment on your down payment.  If you purchase a $300,000 home with a 10% down payment, your total down payment is $30,000.  If the seller is requesting a $5,000 earnest money deposit, that $5,000 is held upon contract acceptance by a neutral third-party title company and credited to your down payment at closing.  Earnest money is refundable under numerous scenarios, including a cancellation of the contract based on inspections, appraisal, title, HOA documents, or the inability to obtain financing. 

Increasing the earnest money deposit does not necessarily create more risk for a buyer, since that money is generally refundable (unless otherwise specified in the contract) based on the triggers outlined in the paragraph above. 

Increasing your up-front deposit, say from $5,000 to $10,000, can imply a seriousness to the seller which is helpful in your negotiations without greatly increasing your risk.  It’s still credited to your down payment, and it’s still refundable, but it implies a higher level of commitment. 

Some buyers are going as far as committing their entire down payment ($30,000, in this case) as earnest money.  That’s dangerous, because it’s a lot of money, but obviously effective in standing out from the crowd.

STAGGERED EARNEST MONEY RELEASE – Ready to step it up?  Offer to allow portions of your earnest money to go “hard” and become non-refundable early in the process.  For example, if you have a $5,000 earnest money deposit, propose that $1,000 of the earnest money go “hard” after inspections; $2,000 goes “hard” after the appraisal; and the balance goes “hard” upon loan approval. 

Yes, you are now committing real money that will be lost if the deal doesn’t close.  Can you lose money under this scenario?  Absolutely.  If you want to compete, however, you may need to accept this risk.

PAY TO PLAY – Ready for some real craziness?  Then how about letting a portion of your earnest money go “hard” and become non-refundable the minute the seller signs the contract? 

In the scenario above, with a $5,000 deposit… you could propose that $1,000 goes “hard” upon acceptance; $1,000 goes “hard” after inspections and the balance goes “hard” after the appraisal. 

This means before any inspection, before any appraisal, before you really have any detailed information about the property (other than what is available through public records and the MLS), you are committing non-refundable money (at least $1,000, in this case) to the transaction. 

If you choose to do this, you had better be confident about your financing, because you are putting your neck (or wallet) out from day one.  For serious buyers only.

THE “AS IS” SALE – This has become increasingly common in 2014, and I actually wrote about this back in February (when I listed and sold a home “As Is”, before it was trendy).  If you have a comfort level with the condition of the property, we include a clause in the contract that says “Inspections are for buyer’s information only.  Seller shall NOT be asked to make any repairs.” 

This takes pressure off the seller, but remember, the seller has virtually all of the leverage here.  An “average” offer isn’t likely to cut it, and if the home has serious defects, your only recourse is backing out of the contract altogether.

NO APPRAISAL CLAUSE – In a market with double digit appreciation, appraisals are an issue.  That’s because appraisers look backwards, at past sales, while buyers are looking at present demand (or even projected future value) when throwing themselves contractually at new listings. 

2014 will go down as the year of appraisal hell for real estate brokers.  Truth is, it’s really hard to get homes to appraise in this market, where values for lower end homes have been going up as much as 1% per month. 

The lender will only finance based on the lower of the contract price or appraised value.  So what does this mean in real life?

If you offer $300,000 for a home and propose a 5% down payment, your down payment is $15,000 and your projected loan amount is $285,000.  But if the property appraises for $290,000, the lender is only going to lend on 95% of the appraised value, or in this case, $275,500.  Since the contract purchase price is $300,000, your down payment requirement just went from $15,000 to $24,500.  If you don’t have the money to cover the difference, and the seller won’t lower the price (in a hot market, he won’t), you’re dead.

So buyers who have sufficient reserves for an increased down payment (or buyers who are on good terms with their parents, who may have the money) are increasingly waiving the appraisal contingency, which obviously is highly appealing to a seller who wants top dollar and minimal risk. 

And what seller doesn’t want top dollar?

THE ESCALATOR CLAUSE – Are you scared yet?  If the previous suggestions haven’t put a good shock into you, maybe this one will.  It is essentially the real estate equivalent of the “nuclear option”. 

An “Escalator Clause” written into an offer essentially says that the buyer agrees to beat any bona fide written offer submitted by a certain deadline by a fixed amount, say $1,000, all the way up to a certain capped limit.

What does that look like in real life?

If a property is listed for $250,000 and there are multiple offers, it is increasingly common to see clauses that say “Buyer agrees to beat any bona fide purchase offer submitting in writing by 12 p.m. tomorrow by $1,000, up to a maximum cap of $262,000 (or whatever number you are willing to go to).  Buyer agrees to waive appraisal objection rights and, in the event of a low appraisal, shall bring in any additional required down payment funds from a lender-verified source, with confirmation of such funding provided to seller and seller’s agent within 24 hours of receipt of appraisal.”

There are other variations of how that can be written, but you get the idea. 

This is serious stuff, and it’s not pleasant to talk about.  It is my sincere hope that you won’t have to break out these “weapons of risk and expense” in your negotiation… but it’s possible you may need to.

In 19 years as a broker, I have never seen more cutthroat competition among buyers than I have seen in 2014, and frankly, if you are working with buyers, it sucks. 

If you are looking to buy in 2014, you have to ask and answer two questions:

Where do I think prices will be a year?

Where do I think interest rates will be in a year?

If, based on your own study and research, you believe the answers to these two questions are “higher than today” and “higher than today”, you may need to break out and carefully incorporate these strategies in your next negotiation.

Because there’s a good chance the buyers you are competing with have already done so.

A PERMANENT LOW INVENTORY MARKET?

Much is being made of our current inventory drought here in Denver.  A severe shortage of homes for sale is inspiring multiple offers, bidding wars and near double-digit price appreciation (especially at the lower price brackets) once again in 2014.

So what's up?  Is this the new reality for home shoppers in Denver?

I believe it is.

And here's why.  As I have chronicled extensively on this blog, low inventory is the result of no more foreclosures, virtually no new construction under $350k, huge population growth, an improving economy and the "turnstile effect" of having more than 100,000 first generation foreclosure owners cycling back into the market.

Couple that with low rates, and you have a tsunami of demand sweeping over a tiny island of supply.  But here's the new twist...

When the Fed began systematically undercutting the mortgage market through Quantitative Easing (QE)  in 2009, ushering in an era of record low interest rates which extended into the second half of 2013, the goal was to breathe life into a lifeless housing market and put more disposable income into the pockets of refinancing homeowners.

All well and good, but now here comes the boomerang.  Fast forward a few years, and those homeowners who refi'd into rates in the 3's are suddenly pretty addicted to those low payments. 

When you pair that with the steep price increases across the board we have seen over the past two years, the cost of picking up an extra bedroom or a larger yard is inducing pretty severe sticker shock.

Follow this scenario:

- Homeowners Bob and Jane have two kids and own a three bedroom home at the start of 2012 that is worth $250,000.  Refinancing their loan at 3.25% at an 80% LTV gives them a monthly principal and interest payment of $870, an almost ridiculously low amount, which is fixed for the next 30 years.

- Two years later, Bob and Jane learn they are expecting child number three.  Thinking that a fourth bedroom would serve them well, they start exploring their options.

- Immediately, there are two problems.  While their existing home has increased in value and is now worth $300,000 (giving them more equity), the home they are hoping to buy has also gone up in value.  Available for $300,000 just two years ago, today those sellers are looking for something upwards of $350,000.

- The second shock is with interest rates.  That 3.25% mortgage of two years ago is gone.  The new number is 4.50%.  So even with a 20% down payment on their $350,000 replacement home, the new loan is $280,000.  And with rates at 4.50% instead of 3.25%, the reality is that their new payment will increase from $870 to $1,419, a 61% increase in housing payment.  

All for one extra bedroom.

And that's not the end of it.  Say what you will about "subprime financing", but ten years ago, if a homeowner wanted to move from their exiting home to a new home in one shot, they could do it by taking out a "bridge loan" that would allow them to purchase home number two before home number one even went on the market.

Buy home number two, move, and then go back and sell home number one.  That was easier, less disruptive to the kids and it allowed them to both buy from a position of strength (non-contingent) and sell from a position of strength (with a vacant or properly staged, turnkey ready home).

Those days are over.  Now, if a homeowner wants to sell and can't carry two mortgages, they must either sell home number one and attempt to purchase home number two "contingent" upon the successful sale of home number one (a heavy layer of risk in a hot market that greatly reduces the likelihood of any sane upleg seller agreeing to it)... or sell their home and ask the buyer for a rentback period (generally limited to 45 days in financed transactions) during which they hope to secure and close on a replacement home (again, darn near impossible in a zero-inventory market).

Neither of these options has a high probability for success. 

The third option is to sell home number one, sign a lease and move into an apartment for six months while your belongings sit in storage.  This is actually the preferred option, in my mind, because it provides the time and flexibility to be selective with your new home, and when the time comes to write an offer, you are non-contingent and ready to go. 

But who actually wants to do all that for one extra bedroom?

People are addicted to their low payments, and that's not a bad thing.  But it has the effect of freezing people in place, which means the upward mobility that was a hallmark of previous hot markets isn't showing up the same way here.

That means slim pickings, bidding wars and ongoing price aggression as a huge and growing pool of buyers compete in a continuing zero inventory environment.

For many sellers, the pain and discomfort of moving, both financially and emotionally, is greater that the pain of simply staying put.

THE BANK OF MOM AND DAD

In the past two weeks, I have written financed offers on properties that were $9k, $10k and $14k over list price.  Three incredible offers submitted, all rejected outright.

Why?  In each of these cases, it’s because the Bank of Mom and Dad beat us to the punch.

What is the Bank of Mom and Dad?  In a market where sellers love cash offers (as I documented here earlier in the week), the Bank of Mom and Dad comes into play when a buyer’s parents step up and purchase a home outright for their son or daughter, who then doubles back and refinances it after closing in order to put the cash (less their down payment) back into the pockets of Mom and Dad. 

Can everyone go the Bank of Mom and Dad?  Of course not.  In fact, only a small minority of buyers overall have the ability to play this card, because only a small number of parents are willing (or able) to serve up $200k, $300k or more on demand. 

But guess who probably just bought the home you had so fallen in love with?  Yep, BOMAD.

Is the Bank of Mom and Dad unfair?  Sure.  So is life. 

But the fact is in a market where multiple offers on everything is now pretty much the norm, those powered by the finances of Mom and Dad are winning.  And having the ability to buy a home in 15 days (or less), as is, with no appraisal and no underwriting, is going to win out every single time.

If you've been out writing offers and have found yourself inexplicably losing time after time, you might want to set aside a few minutes this weekend to call dear old Mom and Dad, wherever they may be, and reconnect.  Because cash is king right now in Denver real estate, and for many buyers, the Bank of Mom and Dad is the competitive advantage that is setting them apart from everyone else.

WHY DO SELLERS PREFER CASH OFFERS?

Sellers prefer cash offers for several reasons.  When you contrast how “easy” a cash purchase is compared to a financed offer, especially in a hot market, the bias towards cash is obvious.

CLOSING TIME FRAME – A cash buyer can, theoretically, close the next day.  Usually, the cash buyer will want 10 to 15 days to get the home inspected, review the title commitment and (if applicable) HOA docs, but after that… it’s straight to closing.

INSPECTIONS – Not all cash buyers will take a home “as is”, but many will.  Inspections are usually just to verify there are no major deficiencies, with no “nickel and diming” arguments over minor repairs.

APPRAISAL – Many cash buyers are confident and know what they are doing.  Therefore, they will often skip right over an appraisal, which is a huge issue in today’s rising-prices environment.  Because appraisals look backwards, at closed sales, and many homes are now going to the highest bidder, eliminating the risk of a low appraisal is another major incentive to take a cash offer.

What’s missing from this list of key components of a cash offer?  Uh huh, financing. 

When a seller chooses to work with a financed buyer, there’s a whole new set of risks that enter into the transaction.

First, the appraisal.  Any financed deal is going to require an appraisal, and the lender will only finance on the LOWER of the contract price or appraised value.  Let’s say you off $300,000 for a house with a 10% down payment.  That would be a $30,000 down payment

But in today’s super-heated, emotional world of bidding wars, the appraisal comes back at $285,000.  Now you have a problem, because instead of loaning 90% of $300,000 ($270,000), the lender is only going to lend 90% of $285,000 ($256,500).  That means if the seller won’t lower his price (he won’t), the buyer’s only recourse is to find another $13,500 to add to his down payment. 

Does the buyer have it?  Maybe, maybe not.  But if not, the deal is dead.

Now we have the biggest challenge of all, and that is getting a loan through underwriting.  Unlike 10 years ago, when lenders willingly gave money to anyone who could blink their eyes or touch their nose, it takes a real job (with a two-year employment history), real credit, and a real down payment to buy a house in 2014. 

Not everyone fits neatly into that box. 

With rates having gone up and buyers desperately trying to get into the market before rates rise further, some buyers are borderline in terms of qualifying.  (That’s why, as an agent, you absolutely MUST make sure your buyer is in competent hands with financing and that nothing is being left to chance here)

Let’s say a buyer with a 42% DTI ratio goes under contract today, but tomorrow, rates go up .25% and they haven’t yet locked in their loan.  Now their DTI is 46%, and suddenly their financing is dead. 

If you’re a seller, you would rather not deal with this.

But let’s go all the way now and talk about FHA and VA, because in addition to being the lowest possible down payment products on the market, FHA and VA have condition requirements for properties.  Fifteen of them, in fact. 

Things like cracked or broken panes of glass, missing handrails, exit doors that don’t open and close cleanly, trip hazards (think heaving sidewalks), roof issues, peeling paint… all of these are subject to review in an FHA or VA appraisal, and if issues exist, the deal dies unless the seller will fix them.

While most homes don’t have these types of issues, many do.  And especially in a hot market, sellers simply have no interest in creating transactional risk by opening the door to these kinds of reviews, many of which are subjective. 

This is not an all-inclusive list of why sellers prefer cash to financing, but it illustrates the point. 

Now I know what you're probably saying.  "Who's got $300,000 in cash sitting around to buy a house?"  Ready for a shocker?  Right now, nationally, 35% of all buyers are showing up to closing with cash.  

All things being equal, a cash buyer beats a financed buyer every time.  And if no solid cash buyer exists, a more qualified financed buyer beats an FHA or a VA buyer. 

It’s not fair, but it’s a fact.  Even if a lender says you’re qualified to buy a home, in 2014, the market may not agree.  

THE PERILS OF GOING OFF-MLS

Coming Soon.  For Sale by Owner.  Make Me Move. 

These are all potential “off-MLS” sales, meaning these are properties that never hit the Multiple Listing Service and, thus, are never seen by thousands of real estate brokers with active buyers looking to purchase a home.

When a market heats up, like this one has, you always see a rise in this type of activity.  But because of technology, we have never had the quantity of offline sales, nor the quantity of buyers looking to go offline to purchase a home.

Frankly, I don’t care if you go offline, online, or over the line.  I just want you to know what you’re getting into. 

The MLS has been around for decades, first in printed form, then in online form, and now fully digitized, with updates pounding our phones with emails, texts and instant alerts in real time.  It’s been the primary way homes have been sold for 60 years. 

As a real estate professional with 20 years of experience, I can summarize what the MLS stands for in two words:  fair trade.

It’s fair trade because it sets ground rules.  It provides full exposure and equal access.  And the agents who belong to the MLS agree to certain rules and regulations that promote ethics and integrity.

When you go “off-MLS”, these ground rules quickly disappear.

For example, agents who submit properties to the MLS agree to abide by mediation or arbitration (as opposed to a formal court proceeding) in case of a dispute.  No MLS, no mediation or arbitration, which means if there is a problem there is no set protocol short of going to court (which is the most expensive option) when it comes to seeking resolution.

For the majority of licensed agents who are also Realtors, there is an enforceable code of ethics that requires full disclosure of material facts about the property, no undisclosed or “secret” compensation, and disclosure of any potential conflicts of interest.  Go “off-MLS” and this code of ethics disappears.  It suddenly becomes a "one and done" world, with significantly higher potential for fraud or non-disclosure of pertinent information.

And for agents, going “off-MLS” is huge because when you leave the MLS system, there is no guarantee of compensation.  What is the commission if you bring a buyer to a Make Me Move seller?  Zero, unless you can get the seller to toss something in (but the vast majority of Make Me Move sellers are going this route because they have no intention of paying a commission in the first place).  

This means many agents flat out won’t engage with these types of sellers, because there is no guarantee of compensation.  That means not only is the seller unrepresented by a licensed agent, the buyer often ends up without representation, either.  That greatly increases the chances of a dispute, which greatly increases the chances of litigation.  So much for saving money.

Finally, no issue in Denver real estate has become a bigger flashpoint during 2014 than the “Coming Soon” sign.  You see these signs all over town, with agents or individual sellers marketing properties via a “Coming Soon” sign instead of through the MLS.

Why is this an issue? 

Sometimes, the “Coming Soon” sign is a legitimate marketing tool.  But in this market, it has become the epicenter of “off-MLS” sales.

How does it work?  An agent will list a home for a 6% commission.  However, as part of the listing agreement, the agent tells the seller that if he is allowed to “pre-market” the home for two weeks, and he is able to find a buyer, he will lower the total commission to 5% (representing both sides as a transaction broker, which means limited representation for both buyer and seller, which the buyer and seller may or may not even understand). 

The agent posts the “Coming Soon” sign, buyers line up to see the property, and the agent collects a commission on both sides of the deal.

Is this illegal?  No, if it is expressly agreed to by the seller in the listing agreement.

But is it best for all parties?  We know it’s best for the agent, because he just increased his commission by 60% or more. 

But for the seller, is it better to have one agent bringing buyers, or is it better to allow true market exposure by promoting the property to more than 14,000 dues-paying members of the Denver MLS?  What gives you the better chance for a highest and best final offer?

For the buyer, is it better to be represented by someone whose interests are aligned with the seller (or by collecting an oversized commission), or by having your own competent and experienced representation?  Again, I would argue that good representation is worth its weight in gold (see my Zillow Reviews), but because our industry has failed so badly in articulating its value proposition to consumers, buyers are often inclined to go it alone and hope that things work out. 

When a market is overheated and full of emotion, as this one is, decision making skills often break down.  There is an emotionalism to this market that is causing buyers to lunge at properties, and there is a profit opportunity for some listing agents that is too enticing to pass up, ethics be damned.

As someone who has always taken a big picture approach to this business, as someone who takes a real and vested interest in what's best for my clients, and as someone who focuses on long-term relationships instead of quick-buck transactions, this market sucks. 

It’s gone Wild West out there, and professional ethics are dying a slow and bloody death.  

PRICED OUT FOREVER?

In 1971, my parents bought the three bedroom house I grew up in in Southern California for $42,000.  Thirty years later, after my dad passed away, my mom sold if for $400,000.  

Was there a time when you could buy a great home in Orange County for $40,000?  Absolutely.

A few years later, it took $100,000 to buy a great home.  Then a few years after that, it was $200,000.  By the mid 1990s, it took $300,000.  By the late 1990s, it took $400,000.  Today, even after the Great Recession, the median price for a home in Orange County is $560,000.

While Denver and Southern California are not parallel markets, there's a lesson here nonetheless.  Eventually, housing prices in any landlocked, desirable metropolitan area rise and people get priced out of the market.

Watching what's happening in Denver right now, it's hard to not see the same trends taking shape.

Over the past eight years, I have had dozens of clients buy homes for under $200,000.  Within just a few years, many of those clients are now sitting on anywhere from $25,000 to $75,000 of equity.    

Today, like every other agent in Colorado, I have lots and lots of people talking to me about trying to buy a home for $200,000. The problem is, those types of houses/deals just don't exist anymore.  Time and market forces have changed the game.

If you talk to transplants from the Bay Area of California, as I often do, you'll repeatedly hear stories of families being totally priced out of the market.  In many areas of San Francisco and to the south in Silicon Valley, prices for average three bed, two bath homes now routinely top $1 million.

So what do the people who work in the Bay Area do when they can no longer afford to buy a home?  They drive.

They drive, from cities like Walnut Creek, Pleasanton, or even Central Valley towns like Modesto, Merced or Manteca.  Fifty, seventy, ninety miles.  Each way.  Five days a week.  It sucks.  (And by the way, many of these fed up people are now moving to Colorado and fueling our state's ongoing population surge)

In terms of housing prices, I worry that the same thing that happened in California is now happening in Denver.  I hate to say it, but if I was open to speculating a bit, I'd be very interested in markets like Firestone, Dacono and even Strasburg.  Markets 20 to 40 minutes from downtown where prices are 25% to 50% cheaper.

I have no shortage of clients looking for homes under $200,000.  And more and more often, I simply can't help them.  The market has changed, and they have been left behind.

This past Friday, I met with yet another prospective first-time buyer.  To prepare for that appointment, I pulled all single family homes in Broomfield, Westminster and Arvada priced below $200k.  

The final tally?  Eighty total homes listed, 76 of which are under contract.  Let that sink in for a moment.

When 95% of the inventory on the market is under contract, regardless of price, condition or location, change is no longer open to discussion.  It's here.

To say "Buy now, or be priced out forever"... sounds like the ultimate sleazy salesman's cliche.  But that's where we are.  

The era of sub $200k housing in the Denver metro area is coming to an end.  Get ready to start driving.

THE FRUSTRATED BUYERS CLUB

Search #1.  Wheat Ridge, Arvada.  Three or more beds, under $300k.  Fifteen homes on the market, 86 under contract.

Search #2.  Lakewood, Littleton.  Three or more beds, under $300k.  Twenty eight homes on the market, 95 under contract.

Are you kidding me?

Since buyers currently outnumber sellers by a ridiculous margin in the Denver market, many agents are enrolling an increasing number of their clients in what we affectionately call “The Frustrated Buyers Club.”

The FBC is a clearinghouse for all those innocent, well-meaning souls who thought it would be fun to buy a home in 2014, only to find that the experience quickly becomes a frustrating, time-consumptive, soul-crushing endeavor that leaves aspiring buyers in the throes of despair and agents on the verge of considering a Thelma and Louise style departure from the real estate business.

Consider the following… as of March 10, in the Denver metro area there are currently 1,225 homes for sale below $250,000… and 3,621 under contract.  That means 74.7% of entry-level homes listed for sale, regardless of price, condition or location, are under contract. 

Between $250,000 and $400,000… there are 1,568 homes for sale and 2,465 under contract.  That’s "only" 61% of the listed homes under contract, which would be fine, except that in a "normal" market that ratio would be more like 33%.

A "normal" market means five months of inventory with 2-3% appreciation. What we have right now has absolutely no connection to a "normal" market.  This is an overheating, inventory-starved market where Foreclosure 1.0 buyers, investors, relocating white-collar professionals, first-time buyers, oil and gas workers, marijuana growers and fed-up renters are storming the gates looking for inventory that simply isn't there.

Inventory remains within a few hundred homes of an all-time low, and by all-time low, I’m talking about records dating to 1985… when the population in Denver was about one-third of what it is today.

Since the end of December, absorption rates have plunged to unheard of lows as buyers have flooded the market, only to find absolutely no one wanting to sell.  In fact, about the only sources of inventory are builders, flippers and estates. 

Check out this transition at different price points in terms of absorption rates since the beginning of the year, keeping in mind that a “normal” market would have about five months of inventory:

0-$250k:  Absorption rate has fallen from 1.35 months to 0.61 months;

$250-$400k:  Absorption rate has fallen from 2.40 months to 1.01 months;

$400-$600k:  Absorption rate has fallen from 4.04 months to 2.45 months;

$600k-$1 million:  Absorption rate has fallen from 7.47 months to 4.27 months;

Above $1 million:  Absorption rate has fallen from 20.89 months to 7.62 months.

A falling absorption rate means more buyers than sellers entering the market, plain and simple.

If you are a buyer, here’s what you need to know if you plan to buy a home below $400,000 in 2014. 

* You need to do it now.  Waiting is costing you money as values continue to rise.

* You need to let go of your obsession about price.  With this imbalance between buyers and sellers, sellers control the market.  

* You need to do it before rates up further.  Again, higher rates are costing you money and will continue to cost you money on a monthly basis for the life of your loan.

Remember, the Frustrated Buyers Club is not a place you want to be.  It’s a place you end up.  And the only way to get out of it is to suck it up, get serious and commit to winning when you find a home that suits your needs.

HUD HOMES - YOU'VE BEEN WARNED

HUD Homes are the root canals of real estate.

Thank goodness they are on the decline.  I have probably sold 20 HUDs during the downturn, and I have one under contract now that is reminding me why I need to quickly make a U-turn and head the other way anytime I see a HUD sign planted in front of a vacant property.

A HUD home is a property owned by the Department of Housing and Urban Development.  This is the government agency that insures FHA loans, meaning that if banks will underwrite loans to guidelines established by FHA, the government will step in and make the lender “whole” if the buyer goes into foreclosure.

This means minimal risk to the banks, which meant that a whole bunch of FHA loans were done during the downturn that never would have been approved if there wasn’t the government’s “guarantee” of buyer performance.

So when a bank forecloses on an FHA buyer and submits and insurance claim to HUD, the government pays off the bank and takes the house in trade. 

This is where the fun begins.

I know my candor in this post will be upsetting to some people, but the first thing you need to know is that HUD does not hire based on merit. 

So when HUD sends in an “Asset Preservation Company” to drain the plumbing lines and secure the property, there’s no guarantee that this is being done correctly.  (And yes, just yesterday, I did an inspection on a HUD home where the contractor brought in to winterize the property failed to do so properly, resulting in a series of frozen pipes that caused a series of mini-floods throughout the house when the water was turned on… ah, but that’s a story for another day).

Once the property is “winterized”, HUD then puts it on the market. 

Here’s an overview of the rules:

- Home is placed on the market for 10 days;

- “Bids” are submitted online on behalf of owner-occupant buyers, but they must be working with a “HUD-certified” broker (which, fortunately or unfortunately, I am);

- Investors are not allowed to bid during this initial first-look period;

- Homes are sold strictly “AS IS”, with no repairs made by HUD, ever.

- High bidder wins, regardless of qualifications

If you’re lucky enough to win a HUD bid, now things get really exciting.

If you’re the broker, you have 48 hours to get a fully-executed contract package to HUD’s field office in Texas.  If the package doesn’t show up in 48 hours, delivered by overnight mail, your bid is tossed aside and they go to the next highest bidder.

What’s in that contract package?  Page after page of eight-point font legalese, which must be filled out in BLUE ink (no exceptions), with each and every signature and initial space fully executed (or see paragraph above).

HUD also views its transactions as so important that they require the signature of the owner of the real estate broker’s company.  So yes, the owner of my company is expected to sign a document (in BLUE ink) verifying that he knows this transaction is happening and that he personally vouches for the fact my client is an owner-occupant (although of course he has no idea who my owner-occupant buyer is).

It’s up to me to track down the owner of my company and get his signature (no matter where on the planet he may be), after I have presented the 49 pages of contract paperwork and addenda (signed in BLUE ink) to my buyer and picked up his cashier’s check for $1,000 (HUD’s standard earnest money deposit).

I then need to rush this package overnight (at my expense) to Texas, where it generally sits on someone’s desk for two or three days until it is opened and reviewed.  Eventually I get an email including a copy package of the contract, signed by an authorized desk jockey at HUD.

At this point, you have 15 days to get an inspection done.  If flaws are discovered with the home that were not disclosed by HUD (which is a pretty sure bet), you can cancel.  But your 15 day time limit is fixed and there are no extensions granted for any reason.

So the first thing you’ll want to do for your inspections is to get the water and utilities turned on. 

But… not so fast.  HUD wants a $150 cashiers’ check before they will fill out and sign a “Utility Activation Form”, which most water districts and utility companies require before temporarily restoring service to the house.

Once you have purchased this form (by sending another overnight package at the broker’s expense), you can call the water company and the gas/electric company.

Most water companies will not leave the water on for more than 72 hours, and they require that someone be at the property when the water is turned on at the street (to ensure the house doesn’t flood when the water is turned on).  Of course, they give you a nice four hour window with no advance notice, so plan on spending half a day at the house waiting for the water guy.

Working with the utility company can be even more fun.  Xcel will give you a day’s notice when they are coming to turn the gas on, but that’s it.  If you’re not there, no heat for you. 

So plan on spending up to a full day waiting for the gas service to be restored.

Once you’ve got water and power turned on, now you have a small window of time to get your inspection done.  This will be another $350 to $400, and as much as $500 if your client wants to test for radon. 

If your buyer is financing the property, chances are the appraiser will need to be squeezed in during this tight little window as well so he or she can verify that you have hot and cold running water.  Plan on writing another check for $400 for the appraisal. 

Let’s say, however, that the appraiser doesn’t show up during your 72 hour window of time with the utilities on. 

No problem, we just get another cashier’s check for $150 to HUD, get another Utility Activation Form, and we start the process over.  

Spend a half day waiting on the water.  Spend a full day waiting for the utilities.  And then hope that the appraiser shows up during your window of water/power time.

Let’s backtrack to yesterday for a moment.  Say, hypothetically, the Asset Preservation Company (Lowest Bidder Asset Preservation Company, LLC) botched the winterization and your plumbing is damaged. 

Let’s say your buyer spends $400 on inspections to learn that the plumbing is broken. 

That’s okay, you still might have 24 hours to get a plumber out (hypothetically), fix the plumbing (at the buyer’s expense) and get the home inspector back out to finish the inspection (with an additional trip charge). 

Even if that happens, though, we’ve run out of time for the appraiser before the utilities are turned off again.

Ok, freeze.  Go get another cashier’s check.  Send it to HUD.  Wait four days.  Get another Utility Activation Form.  Call for water and power.  Sit in the house for a day.  Get the appraiser out.  Hopefully no one has broken in and stolen the appliances or the copper pipes during this time.  Finally the appraiser signs off.

Now the lender can underwrite the file and (hopefully) approve the loan. 

If all of that happens, you’re almost there. 

Except now HUD requires that all closing figures and documents be sent to the title company eight full business days before closing.  No, I am not making that up. 

So your lender busts his or her tail, gets everything to the title company, and you wait.  And wait.  And wait. 

Finally, HUD looks at the paperwork and signs off.  You’re set to close!

You bring your funds to closing.  You sign you paperwork.  You finally own a HUD house!

You ask for the keys.  Um, you ask for the keys.  Keys? 

Oh yeah, HUD doesn’t allow me to give you the keys.  Per HUD’s policies and procedures, since the same key opens all 4,000 HUD homes in Colorado (that is some brilliance, right there), I am not allowed to give it to you. 

Instead, I am supposed to drive you to the house, open the front door, and wish you the best.  Then I am supposed to mail the key back to the listing agent.  Again, I am not making this up.

By this point, I think you can see the thread of insanity that runs through this process. 

It is my belief that at least half of the brokers in Colorado won’t even mess with HUD homes because of the absurdity of the process.  But, because HUD generally gives homes away for cheap (after all, the taxpayer foots the bill for losses), buyers go after them. 

The thing I want to do with this post is to use this as an educational tool for future buyers.  You need to know what this looks like up front, because by the time you figure out you’re in the middle of a three ring bureaucratic circus, you’ve already invested significant time, money and emotional energy.

I’m fine with HUD homes.  They are what they are.  They are often sold well below market value.  But if you find the process stressful, confusing and fraught with upfront costs and mind-numbing sideshows, don’t blame me.  You’ve been warned.

FULL SPEED AHEAD

Two months into 2014, and it's starting to feel a lot like 2013 all over again.

Record low inventory, multiple offer shootouts, an overall market absorption rate of 1.45 months.. yeah, this is the same song that just led to 10% appreciation in 2013.

The inventory of homes for sale in the metro area fell to 6,026 homes at the end of January, a new all-time low that was nearly 10% under last March's previous bottom.  From December 31 to January 31, a time when you might think more listings would come on the market, the active inventory actually plunged by 800 homes. 

Why did this happen?  In short, the number of buyers in January (about 4,200 homes went under contract) swamped the number of new sellers (about 3,400), which led to a net loss of 800 listings. 

If you're a buyer looking to "steal one", this is a little bit demoralizing. 

We've talked repeatedly here about why the inventory is low - no more foreclosures, large numbers of "boomerang buyers", no new construction under $325k, record in-state migration, an improving Denver economy, low rates, high rents.  Add it all up and the market remains just smoking hot.

We actually had an increase of more than 8% in the number of homes that went under contract in January of 2014 versus January of 2013, despite the fact that prices are up to 10% higher and rates are up a full percent over the past 12 months.

In Denver, higher prices and higher rates are not deterring anyone from buying a house.

With the Fed now backing off of Quantitative Easing (which has artificially held rates down since 2009), the near certainty of higher rates a year from today seems to be driving buyers to act while affordability is still reasonable. 

A year ago, however, affordability was unbelievable. 

I do believe that this year's market is going to be even more "tiered" than in past years, meaning that demand for homes under $300k is going to continue to sizzle while higher end homes are more vulnerable to value stagnation, especially as rates rise later in the year.

For 2014, the psychology on the street is that owning is better than renting, rates in the 4's today are better than rates in the 5's tomorrow, and migration and a dramatically improved economy have essentially driven all fear out of the market. 

If you aren't ready to get in, don't bother showing up.  The market in Denver below $300k remains swamped with buyers, and the only way to create balance between supply and demand is for prices to continue going up until buyers back off, which hasn't happened yet.