Buying

Accurate Pricing

We meet with sellers all the time and make estimates on price. We really do our best to provide guidance on what a house is worth. It is a fascinating art.

But what we try to stress over and over is that pricing right is not about finding the estimate and trying to get 5% more, to provide wiggle room. It’s a natural reaction for a seller. If we ask 5% more, we can always come down. If we price low, we leave money on the table. While this may make sense, it is not accurate in reality.

I have a buyer client who is currently attempting to buy a home. This home is priced right. I would certainly not say I think it is priced too low. I don’t think it is priced too high. What I will say is that it is realistic. We made an offer, a very good offer I felt… but guess what… so did someone else. End Result, we just sent a second offer that upped our initial one by 4.5%… Meaning, the seller is going to land up selling their house for MORE than asking, and in less than a week on the market.

Isn’t this what sellers want? If the seller had asked 5% more than they did, I don’t know that my clients would have fallen in love. They fell in love at the asking price… they were willing to pay more, but they fell in love at asking. If the seller had asked more, and my client’s focus had been at the higher number, there would have been a higher comparison. Perhaps there would have not been an offer, or only one offer. No one to push the other up.

Houses priced fairly are moving very, very quickly in the city. Properties that are priced high, are getting very little attention. Why negotiate with someone who is being unrealistic, when you have options with fair sellers?

On the buyer side… be prepared for a battle. Be prepared to offer quickly and a fair number. Gone are the days of you being the only buyer on a property. Gone are the days of stealing a home. This doesn’t mean you need to offer 5% over asking everything, but it does mean that if you think you can slow play an offer and hope to dance to the middle ground, someone else will be willing to do better. If you really want a house, don’t risk dilly dallying. It’s not always worth walking away.

Decade of New Construction

Better to Buy or Build?

This question comes about in almost every new client conversation I have. There are those diehards that refuse to live in a new house, and there are those who want a maintenance free home from the start. (no such thing by the way – but new homes are certainly less). Personal tastes aside, there is always a financial question regarding which is better. It is the goal of every seller, whether builder or homeowner, to maximize their price at the sale of a home. There may be some other factors on the table regarding timing, but it all comes down to the final net price to seller. Always.

So, prices tend to go up and down in tandem for resale and new construction. Sometimes, one lags the other, but in general, when prices are rising, they are going up for both types of sellers. For that reason, the percentage of sales that are new construction tend to be pretty flat in good times and bad. I’m not saying that new homes keep selling, I’m saying that as a percentage of total sales, they remain fairly constant.

When we look at the last decade, this is certainly what we see. From 2003 to 2011, the percentage of total sales that were new construction (Albemarle and Charlottesville only) remained between 16.7% and 18.0%, and in 7 of those years, it was even tighter, between 16.6% and 17.1%. Not a lot of variance.

But in 2012, we saw a major shift. In Oct of 2011, builders began getting advance warning from their suppliers that prices were going up. Drywall, lumber, you name it… Prices went up. And we’re not talking 2% here. In 2012, prices on drywall went up roughly 30%. And in January of this year, prices went up another 20%+. 2012 saw lumber prices up 44%. And that drives new home prices up. Nationally, the average new home contains roughly 45% of it’s cost in materials. And when they go up as significantly as they have, there is little way to protect the profit without ratcheting prices up.

But good news may be on the horizon. Lumber commodity future point to as much as a 25% decline in prices from mills as China demand decreases and output from Canada increases.

So, here is the interesting thing. 2012, saw the first major drop in new construction. Builders may not have even noticed. The actual number of new homes sold in 2012 (266) was the highest in any year since 2007 (376 – so we are still a long way off the bubble path). But while there was a 4.7% increase in new construction sales in Charlottesville and Albemarle, that paled in comparison to the 15.7% increase in total sales. End result is that the percentage of homes sold in Charlottesville and Albemarle that were new construction went from 16.7% to 15.1%. (Explanation of the Graph: Blue and Green columns represent the total number of homes sold and total number of new construction homes each year. The yellow line is the ratio of new construction to total market.)

NewConstructionWhat brings this back? Two things are possible, likely a combination of the two will play out.

The first is that material prices come back down. As the lumber news points, there should be some relief from manufacturers as output increases. This won’t bring it back to par, but it will allow some relaxing of prices.

The second option is that resale homes will see a price increase. (It has been many years since I said that and it feels pretty good.) As long as resale prices remain depressed, the builder market will have a tough time competing. My bet is that 2013 sees better numbers than 2012 for new construction, but not back to the 2011 16.7%.

Title Companies v. Attorneys

Once a home is under contract, and sometimes even before, buyers will be asked if they have a settlement agent in mind to handle their closing. Some buyers opt for attorneys, others request a title company to handle the closing, primarily to avoid the attorney fees. After all, the insurance is the same after the closing, so why pay any more for the same service?title ins.jpg

Fair question.

I have in front of me a 56 page document that was just released by CRA International, a national research organization that studied the HUD-1 costs across the country and tried to determine how much extra buyers spend on attorneys instead of going straight to the title company and closing it with them.

The argument that settlement companies have made is that attorneys are expensive and unnecessary for these transactions. Without competition, attorneys would force the price of home loan settlement sky high and the consumer would be punished. The attorneys argue that in fact it is the title companies that keep prices high. They claim that title companies may charge less in the form of a “closing fee” but they more than make up for that discount in the price of the insurance policy that they offer consumers. Attorneys are able to price title policies from different companies and that brings price down.

The study looked at 839 financings that occurred in a single 12 month period, and included 366 new home purchases and 473 re-fi’s. In the case of re-fi’s, there are occasions when the lender actually performs the closing. So, in Virginia for instance, 50% of the cases studied were closed by settlement companies, ~30% by attorneys and ~20% by the lenders directly. Across the entire study 60% were closed by settlement companies, 17.4% by attorneys and 22.7% by lenders.

The empirical evidence is that the attorneys are correct that title companies charge more for their policies, but they are wrong that it always costs more overall. The study showed that in states where Attorneys handle all the closings by law and the states where settlement agents are dominant the charges are roughly equal. There does not appear to be any influence that regulations have on the costs of closing a loan. In states, such as Virginia, where consumers have a choice, the numbers that make up the total for closing costs may be different, in the end, the costs are roughly equal.

The CRA study found that “High or low closing costs appear to be at least equally – and frequently more strongly – associate with a wide range of other factors (such as details of the loan, the characteristics of the state or loan area, and the characteristics of the borrowers);” Translation: While different loans cost different amounts to close, it is based on size of loan, credit score, local taxes (GRANTOR TAX!!!) and other factors, not who the settlement agent was.

So, what does an ambiguous study tell us about how buyers should choose their settlement agent? Very little. Instead, it says that the price conscious buyer isn’t going to save money. So the question that a buyer needs to ask is, “How will I best be served?” Given that settlement companies are not allowed to act as attorneys or provide legal advice in the case of legal issues arising, my advice is to stay with a local attorney who can represent you if you need it. The cost of bringing a lawyer on board down the road is much higher than having them with you from the start.

Buyers Agents and Compensation

I received an e-mail yesterday announcing that a builder is offering 5% compensation to buyer’s agents who bring acceptable offers on their homes. The rationale behind such an offer is simple. If the builder agrees to pay 60% more than other builders, perhaps buyer’s agents will be willing to sell their homes harder. Another way to put it: It’s a bribe.

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Buyer’s agents are here to represent their clients. The problem is, some agents never discuss compensation with their clients. When an offer of 5% compensation arises, the agent may be able to then collect 5% on a sale. However, if the client and the agent hammer out a negotiated rate for services, when there is a 5% commission offered, the agent can show the property and let their client know that if they select one of these homes, that they can expect a rebate of any amount above the negotiated commission at closing.

Likewise, if a listing pops up in which the seller is offering a cooperating compensation lower than a negotiated rate, Buyers will know their agent will give fair representation to that property. Clients can know that their agent will want to show them all properties, regardless of what the seller is offering because there is no disincentive to show a specific home.

Negotiating a commission up front is in the best interest of the client, as it puts all listings (listings from the MLS and unrepresented sellers) on an even playing field. It aligns the efforts of the Agent with the best interest of their client, and it provides the basis for establishing expectations between the client and agent.

Top 5 City Deals of the Year

Originally Published February 17, 2009

Taking a quick break from my series on my principles of Nest Realty, I retreat back to some more info on the City Tax Assessments. I have been studying the city tax records and the implications to buyers for a few days now, and I have some fun findings to publish. My hat is off to five agents who negotiated the deals of the year. I have looked at the homes in my prior study, 284 in all, and compared 2008 tax assessments to sales price. While I don’t think this is always a perfect study of a “good buy”, I do think it’s the most objective way to create my top five deals. A quick read of my Parts 1 and 2 in Tax Assessment stories is also a good place to go along with these 5 Deals.

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#5) 1432 Rugby Road. Sold August 28, and on the market for 350 days, this 3,100 square foot home was assessed for $685,100 and sold for $465,000 or a 32.1% discount.
Original Listing Price: $635,000 (Sold for 73.2% of asking)
Buyer’s Agent: Murdoch Matheson

#4) 801 Watson Avenue. Sold January 14, and on the market for 189 days, this 1,440 square foot home was assessed for $260,300 and sold for $175,000, representing a 32.8% discount from tax assessment. Original Listing Price: $249,000 (Sold for 70.2% of asking)
Selling Agent: George Stone
(Note: George Stone was also the Listing Agent. There is no way to know {without asking directly} whether George acted as a Dual Agent or a non-agent to the Buyer. It was not in the agent notes.)
35 Days after closing, this house went back on the market for $249,000 and sold in two weeks for $239,900.

#3) 316 Meade Avenue. FORECLOSURE. Sold November 13, and on the market for 22 days, this 936 square foot home was assessed for $197,300 and sold for $132,000, representing a discount from tax assessment of 33.1%. Original Listing Price: $144,900. (Sold for 91% of asking)
Buyer’s Agent: Karen Ball

#2) 1216 Smith Street. SHORT SALE. Sold September 26, and on the market for 214 days, this 850 square foot home was assessed for $203,200 and sold for $125,000, representing a 38.5% discount from tax assessment. Original List Price: $203,000. (Sold for 61.6% of asking)
Buyer’s Agent: Michael Vest

and the #1 Top Deal of 2008 goes to 
1009 Rougemont Avenue. Sold May 23, and on the market for only 1 day, this 1,014 square foot home was assessed for $179,400 and sold for $110,000 representing a whopping 38.6% discount from tax assessment. Original List Price: $124,900. (Sold for 88% of asking)
Buyer’s Agent: Julie Gee

What have we learned? Well, a few things.
1) The market isn’t always about the calendar: These sales occurred in Jan, May, Aug, Sept, and Nov. So, it’s not a matter of the “market collapsing” late in the year.

2) It’s not about the size of the property: Two of these houses are under 1,000 s.f. Two between 1,000 and 2,000 s.f. And one property is over 3,000 s.f.

3) It’s not about time on market: These properties were on the market 1, 22, 189, 214, and 350 days. You can’t wait until the home has been vacant for 6 months to make your move. You are just as likely to find a deal on day 1 if you are vigilant.

So, how did these deals come about?
Well, I think it has to do with the buyers and their agents. None of these deals would have happened if the buyers hadn’t been willing to make an offer that might have seemed a tad ludicrous to others. They took the chance, and now they are happily owning property for a price that, at least on the surface, seems mighty impressive.
I have told more than one of my clients in the past: “If you don’t make the offer for 25% below asking price, I can guarantee you that you won’t get it for 25% below.”

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