ODDS AND PERCENTAGES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

WHEN GREED RUNS A MARKET

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

HOT MARKET, OR OVERHEATED?

The headlines are all good. 

“Denver Leads the Nation in Rising Home Prices.”  

“Denver Housing Market Still White Hot”

“Denver’s River North in Feeding Frenzy”.  

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

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

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

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

So what is the reality of the Denver housing market? 

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

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

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

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

 

It’s all good, right? 

Maybe.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Big earnest money deposits are going to become riskier.

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

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

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

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

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

Because you, too, are now on the clock. 

THE DATA WARS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The stakes are high and the consequences are real. 

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

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

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

SMASH AND GRAB

For all the great news we keep hearing about the Denver real estate market – and the news IS great, if you already own something – there is obviously another side to things. 

For those on the outside looking in, affordability is getting further and further away, like a train pulling away from the station and slowly disappearing off into the distance. 

I ran some numbers this morning for a couple of my clients who remain on the outside looking in, buyers who haven’t yet been able to punch through and get something under contract in Denver's crazy-hot real estate market.

For them, affordability becomes more of an issue every day, as value becomes harder and harder to find.

While this not an exhaustive research piece, there are some similarities between the areas where they are looking, which are 80214 (Edgewater) and 80228 (Littleton).  Earlier today, I pulled all closed sales from the past 30 days in each of these ZIP codes, and then made a simple slashmark tally of homes which sold under list price, at list price, and over list price (with an extra “bonus category” for homes that sold $10k or more beyond their listed number).

Here's what I found:

80214 – Edgewater

31 Closed Sales

7 Below List Price (22%)

8 At List Price (26%)

16 Over List Price (52%)

10 More Than $10k Over List Price (32%)

80228 – Littleton

56 Closed Sales

16 Below List Price (28%)

9 At List Price (16%)

31 Over List Price (56%)

20 More Than $10k Over List Price (36%)

What you see in both of these ZIPs is about one-third of the listings are selling for $10k or more beyond list price.  Truth is, in this sampling there were many properties $20k over list, some $30k over list and one that was $47k over list price!

Of the 87 closed sales in this sampling, zero were bank owned or short sales.  That means all 87 were “retail” sales at retail prices.  And because sellers clearly see blood in the water, nobody is discounting anything. 

What can’t be known from this sampling is how many of these properties had appraisal issues.  Certainly, you could argue every offer that’s $10k or more beyond list price is at high risk for appraisal drama.  And with list prices pumped up to begin with, any property selling over its listed price has legitimate appraisal concerns.  

What buyers need to know is that one-third of all listings in this sample are selling $10k or more over listed price, and because we are now at all-time highs for values in the metro area, the people buying these homes are going to the top of the totem pole in terms of price.  And bringing extra cash to closing if the home doesn't appraise.

If you are scouring Zillow, Trulia and Realtor.com and basing your offers on past sales, you are likely to keep losing.  Right or wrong, many buyers today are factoring future appreciation into the equation, and betting that our market will remain strong.  

These are uncomfortable times for buyers, and even more so for those who are accountants, engineers and analyticals.  Sellers want the cash, and successful buyers are willing to give it to them.

WHY BUYER'S AGENTS ARE ON THE WAY OUT

We are living in an age of disruption.  I think about it every day, because recalibration, adjustment and course corrections are the fundamentals of survival. 

Huge changes are underway in the real estate world, but many of them are occurring below the surface, like a tide beneath the waves.  From the shore the water may look calm, but just below, the shifting currents are creating violent turbulence.

Technology is a primary disruptor, and it is touching every area of our lives.

We now live in an app-driven, on-demand world.  Millennials, in particular, have been raised in an era where technology equates to instant gratification.  Want a pizza?  Tap a button.  Need a ride?  Tap a button.

Want a house?  Soon, tap a button.

In the old days, like about 36 months ago, agents still had control over data.  If a property hit the MLS at 2:30 on a Thursday afternoon, the only ones who knew about it were the brokers.  We could make a mental note to call our client the next morning, suggest seeing it at 4:30 (or some other convenient time that fit our schedule), and still look like a great provider of service to the consumer.

Today, it doesn’t work like that.

Zillow’s $5.5 billion (current market cap) march into the real estate world has changed the game.  While Zillow’s data often remains inaccurate, inconsistent, and sometime downright wrong, the one thing you can say is that Zillow has applied crunching and disruptive pressure to traditional real estate models.

By adding data constantly, by increasing the value of their brand by relentlessly pursuing new ways to provide more information about housing, schools, crime data, assessments, zoning, rents, agents, and most recently “comparable homes”, Zillow has effectively forced the real estate world to change.

The response?  MLS systems have shifted by becoming more consumer-centric, more transparent, and less agent-focused. 

Zillow created alerts for site users, letting them know when new listings showed up on Zillow (even if those “alerts” were initially happening five, seven or ten days after a home was listed, based on Zillow’s spotty data feed).  As Zillow’s growing influence allowed it to strike (or buy) deals for real-time access for data with more MLS systems across the country, the value and accuracy of this service improved.

Eventually, MLS’s decided they needed to “go direct” to give consumers the same choices they were finding on Zillow.

That flipped the model, and put consumers (instead of agents) in charge of information.  And that’s okay… in fact that is progress.  But it is also disruption, and if your value proposition as an agent consisted solely of unique access to data, you value proposition has just been wiped from the face of the earth.  (And sadly, for a large number of agents, there is no value proposition beyond data!)

As I have written about before, the real estate pond is overstocked with agents.  We live in an 80/20 world where 20 percent of the agents dominate (those with real value propositions, not just access to data) and 80 percent fight for table scraps. 

If you aren’t in the top 20% (soon to be the top 10%), you will not survive the coming years.  

What can a buyer’s agent do to create value?  Ultimately, I think the buyer’s agent is going to go the way of the Dodo bird.  But to stave off extinction, there are some key survival traits that will allow some to outlast others.

For one, you need to be an educator, not just a door-opener.  You need to understand economics, not just aesthetics.  You need to be a negotiator, not just a contract writer. 

You need a strong network of professional service providers who will take great care of your clients at reasonable prices.  You need resources like insurance agents and mortgage lenders and accountants who can provide fast, accurate and money-saving information to your clients.

You need to be a marketer, not just a licensee.  You need to be an adapter, not a reactor.  You need to stick to your past clients like glue, providing value in unique and creative ways and always letting them know how much they are appreciated and how committed you remain to serving them, even after the sale. 

But even if you do all this, the current is still going against you. 

There’s a saying among experienced real estate agents:  Listers Last

Listers last because they are in control.  Listings are the equity of your real estate business.  And soon, I believe we are moving into a world where listers will increasingly control both sides of a real estate deal.

Within five years, I believe that many listings will be sold (or at least placed under contract) through an iPhone app.  A new listing appears, a pre-approved buyer sees it, and taps a button that says “submit contract now”. 

The listing agent offers a 1% commission rebate to the seller and a 1% commission rebate to the buyer (thereby cutting out negotiations), functions as a transaction broker for a 4% commission, and the buyer’s agents are left wondering what just happened.

Is this happening today?  Not yet.  Well, it is actually, sort of. 

The preponderance of “Coming Soon” signs (which I have written about previously) are the precursor of this type of system.  A significant number of deals are happening in Denver right now without ever seeing the MLS, and agents (ethically or not) are double-ending deals off the strength of the market and a little 1 x 3 sign rider hanging in the front yard.

Do buyers get the same level of representation working with the seller’s agent that they would get from their own dedicated buyer’s agent?  Absolutely not. 

In fact, I think there are huge ethical conflicts about trying to double-end deals that affect both buyers and sellers and I won’t do it unless I am specifically instructed by my seller to do so.

But my opinion is in the minority.

As more and more real estate data migrates online in the coming years, the perceived value of a buyer’s agent is going to erode.  Consumers, especially Millennials, will no longer value the buyer’s agent, even though they “don’t know what they don’t know” about the value of experience, negotiations and the overall complexity of a real estate transaction. 

Marginal agents will not survive, and even the good ones will have a very hard time competing with the currents of technology and consumer-empowerment.

Adapt or die.  That’s the way the world works, and it’s time for real estate agents to get a lot more strategic about what they are doing and why they are doing it. 

Otherwise, the fate of the Dodo bird awaits.

RACING THE CLOCK

Here's a snapshot of a conversation I am having about three times a week, courtesy of the red hot Denver housing market:

Client:  "Is this house really worth (pick your favorite number) $350,000?"

Me:  "I don't know, but someone is going to pay it." 

This is obviously a less comfortable position than in previous years, when the value of homes was easily measured by past comps instead of present demand. 

But right now, present demand is determining value, and with demand overwhelming supply, prices are going to continue going up.  Many buyers are even factoring in projected future appreciation when determining what to offer for a home.

When will it end?  The question of when it will end is a good one, and an important one.  Obviously, interest rates are a huge motivating factor right now, as rates in the low 4's remain highly attractive to buyers scrambling to lock in a 30-year mortgage payment before higher rates make homes less affordable.

So when and how will our market turn?  Of course, there's no way to know for sure, but I believe any slowdown will start with new construction, which is far more likely to freeze up when rates rise due to the chilling effect of payment shock.

Right now, virtually all new single family construction in the metro area starts at $350,000 and goes up.  Truth is, there are only a handful of new communities where buyers can purchase anything in the $300s. 

Let me show you why I think higher end new construction will be the first domino to fall when rates finally surge.  It's simple math, really.

-  $400,000 purchase with 20% down payment = $320,000 loan; At 4.25%, the P& I payment on a 30 year loan is $1,575.

Assuming 10% appreciation (which is not unrealistic for 2015), let's project forward 12 months.

-  $440,000 purchase price with 20% downpayment = $352,000 loan; At 5%, the P& I payment on a 30 year loan is $1,890.

That means 12 months from now, under this very realistic scenario, the payment for the same home is nearly 21% higher than it is today.

New construction is selling like crazy right now, and this is why. 

But a year or two from now, if payments really are 21% (or more) higher for the same home, it's going to have a chilling effect.  In fact, you could easily argue that builders are racing the clock to build and sell as many homes as possible based on low payments.  When payments go up as interest rates rise, and they will at some point, demand for new construction will slow appreciably. 

The most bulletproof sector of the market, in my opinion, remains the sub-$400k market.  That's because supply is finite, builders won't build them (because they can't do so profitably), and it's what the vast majority of buyers are looking for.  

When rates rise, I see continuing activity, but with buyers getting squeezed into smaller and smaller resale homes and condos as they literally are priced out of the new construction market. 

Risk in real estate is directly proportional to market positioning.  The entry-level and sub-$400k markets are darn near bulletproof in my opinion, based on an overwhelming demand-supply imbalance.  But when you start tapping into new construction, where supply is not fixed, rates will matter more. 

For builders, the race is on.  Sell 'em now, while rates are low.  Because when rates rise and the market slows, the first place to clear out will be the sales office of your favorite local new construction builder.

WE NEED YOUR HOUSE

I have seen variations of a real estate marketing campaign on social media channels several times lately.  It’s a picture of Uncle Sam, finger extended, somehow implying that the patriotic thing to do in a low inventory market is to sell your house.

Excuse me?

I have also seen several recent emails and Facebook posts from agents right here in Denver with headlines like “We Need Inventory” and “Realtors Need Houses to Sell”.

Say what?

A great cleansing is coming soon in the real estate world, and it will start with agents who don’t understand that none of this is about them.  Real estate is about the consumer… the first-time buyer, the downsizing retiree, the family selling an estate home after a loved one has passed.

Looking at this business from the Realtor’s perspective is like looking backwards through a pair of binoculars.  It distorts reality, and even worse, it makes the big things (your clients and their needs) seem small when they should be at the center of everything.

In the old days, like three years ago, much of the value Realtors brought to the process was simply through access to data.  Access to the MLS, access to past sales history, access to neighborhood comps. 

In the post-Zillow world, that advantage is gone.

If your value proposition consists of knowing what Mrs. Smith’s home sold for down the street, you’re done.  Today, everyone knows what Mrs. Smith’s home sold for.  What you had better  know, if you want to remain relevant, is what the finishes were like inside the home.  Why she chose to sell it.  How many offers she had.  Whether or not permits were pulled for the basement finish.  If there were structural issues. 

If you are going to bring value to this process, knowing the basics isn’t enough. 

I’ll say it again.  If MLS data is your value proposition, you are done.

Now, you need to know how to market (starting with yourself).  You had better be able to demonstrate how you are a skilled negotiator.  You need to know how to create value.  You must have a strong network of vendors who can help you solve problems.  You must connect people to others who can help them.

Clients expect you to sell their home for top dollar, or find value on the buy side.  You need to be able to demonstrate proven results.  You have to be able to show (not just tell) somehow what sets you apart.

15,000 agents in Denver have signs in the back of their cars.  Yet 1,500 do 90% of the business.  

Third party endorsements are huge.  Reviews matter.  A lot.  When someone Googles your name, you need to make sure they find you.  First. 

You need to save your clients time.  Millennials, in particular, value time.  They have grown up as digital natives in an “on-demand” world.  They embrace disruption.  They like efficiency.  They want results.  They don’t care about how things used to be done.

Adapt or die.  Especially today.  Especially in Denver, the hottest real estate market in the country.  Millennials are now the largest demographic group in Denver.  Many work in tech-based fields.  They make their living disrupting. 

How are you going to create value for them?  What makes you relevant?

If telling them that “Realtors need houses to sell” is your pitch, you might want to start by putting a sign in front of your own house.  Because that type of thinking will soon have you moving on to another line of work, much sooner than you may have planned. 

INVASION OF THE NEWBIES

It’s hard to tell what is going up faster… home prices in Denver, or the agent count in the Denver MLS.

As of this morning, there are 15,682 agents in the Denver MLS, up over 8% in the past year and more than 20% since the beginning of 2012.  In a strong market, newbies are attracted to real estate like moths to a flame.

I see this every day, as offers come pouring in on my listings.  One of the first things I do when evaluating any offer is that I figure who the players are inside the transaction. 

Who is the buyer’s agent, how long have they been selling, how many homes have they sold in the past five years?  Who is the lender, are they locally or Internet-based, is there any disciplinary history with them or their company that I should be aware of?  And, of course, who is the buyer?  How many offers have they written?  Why is this home or neighborhood important to them?  And how did they get connected with the agent and lender?

Increasingly, as the market has been overrun with buyers, I am seeing more and more buyer agents with 3 lifetime transactions, or 11 lifetime transactions, or quite often, zero lifetime transactions.

With sellers, my job is twofold.  Get the best price and terms possible, and mitigate risk. 

You can look at the other agent as the co-pilot in your transaction.  If that agent has landed 100 flights safely, I feel pretty good.  If they have skidded to a stop at the end of the runway twice (in who knows how many attempts?), then that is a factor worthy of consideration.

Yes, I am biased toward accomplished agents, because I know how difficult it is to hold transactions together in an emotionally-charged market.

One reason buyers under $300k are having such a difficult time is that “it’s hard to compete with crazy.”  Some of the offers I have seen on my listings are just ridiculous…

-  A $235,000 offer (FHA, asking for closing costs, with down payment assistance) for a home on which they second highest offer was $215,000.  Did you know you can find comps in the MLS?

-  An “uncapped” escalator clause that promised to beat any offer ($1 million? $20 million?) by $1,000 and “pay $10,000 if the property doesn’t appraise”.  Pay $10,000 to whom?  To me?  To the sellers?  To charity?  Sounds like a pretty good deal for somebody.

-  And, of course, amateur hour contracts that arrive with missing deadlines, no signatures and a promissory note for the earnest money. (“My buyer has NO money!”)

As a listing agent, I have the discipline to say “no” to crazy.  But many less experienced agents do not.

I’ve said it several times, and I’ll say it again here… often, the highest offer is not the best offer, unless it speaks directly to the appraisal and it’s got an acceptable buyer/agent/lender team.  (Although that “crazy offer” can often be used to jack up escalator clauses on better qualified buyers… thank you very much)

In multiple offer situations, I look at every offer, and then break them down into contenders and pretenders.  In a market where so many buyers are being nudged or pushed into taking homes “as is” or waiving appraisal clauses, you know that many of these buyers are going to get wobbly with the slightest bit of turbulence.  You have to account for this up front, and one way to mitigate the risk is to make sure you have a competent co-pilot working the other side of the deal.

To date, there have been 13,651 closings this year in the Denver MLS.  That equates to 27,302 transaction sides.  Spread among 15,682 agents, that equates to 1.74 sides per agent so far this year. 

But of course, we all know that the world doesn’t work that way.  If we simply apply the Pareto Principle, which says 20% of the people get 80% of the results, what we really have are 12,546 agents fighting over 5,460 transaction sides (0.43 sides per agent).  Feel your collar tightening at all?  That’s not how it looked on HGTV, is it?  Hard to pay the bills on half a sale every four months.

When it’s all said and done, there is going to be a lot of roadkill in the agent world over the next few years.  A lot of buyers will go down, too, working with agents who simply don’t have the skillset or experience to succeed in such a competitive market. 

I often say that most things in life come down to odds and percentages.  While no one can guarantee any one result, the fact is there are levels of probability.  Some agents give you a 90% chance at success, some give you a 70% chance, and some give you a 10% chance. 

In baseball, these are called batting averages.  A .350 hitter is much more coveted than a .180 hitter.  Yet, remarkably, way too many people think that everyone who owns a bat, or a real estate license, is a slugger.  Check the numbers.

Information is available to help consumers make better decisions.  Go to ZillowReviews.com.  Google someone’s name.  Ask a friend for a referral.  Whether buying or selling, it’s up to you to get the right people on your team.

In real estate, the barrier to entry is low.  But the barrier to success is high, and it requires a price most people won't pay.  Choose wisely, or live with the consequences of hiring a batboy to do a cleanup hitter's job.