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Finding and Setting the Right Price

You did all the right things.

Before the sign went up and your home hit the market, you pre-inspected and fixed every little defect. You uncluttered—including the garage and every closet; you painted; you cleaned all of the carpets; you landscaped and added a few plantings; and, lastly, you put away all of those ridiculous knick-knacks that your mother-in-law gives you each year (and expects to see every time she visits).

But 60 days later … no sale.

If you did everything else correctly, then chances are you read the comps incorrectly.

What are “comps?”

Comps (which is short for “comparables”) are past sales. They are not pending sales, as we don’t yet know their actual sales prices, nor current listings, because they haven’t shown that they can even pull in an offer—and, ideally, those that are closely comparable to your home in terms of size, area and overall features (thus the name). Chances are, no past listing is going to be exactly like your home, but we have methods for weighing and balancing out the differences to determine what those past sales may tell us about your home’s value. The key word here is: may. And for a few reasons.

First, it’s worth noting that comps only tell us where the market was at a given point in recent history, but not necessarily where it is currently, or where it’s heading. For this reason, comps only tell us about what a listing was actually worth when it went under contract. That’s something that could change as little as two weeks later. The real estate market has a mind of its own — one that’s driven by the behaviors of buyers and sellers, along with other factors. For this reason, in real estate, and especially when formulating price, the present is the only thing that really, truly matters. Along with some Realtor intuitiveness.

Subjectivity

For these reasons, comps are great as mere data points, but it’s important to know that they’re also subjective. Let’s face it, buyers’ decisions are not only based on the attributes and pricing of an individual home; they’re also based on things like other available listings, as well as personal reasons, like life changes and finances. For this reason, in order to get a good measure for value, the more data, the better. At the same time, it’s important to remember that in no way do comps serve as a crystal ball for what comes after them, so it’s important to regard them as one factor that can help us to determine value, but not the factor. The biggest factors should be current and expected market conditions, which are a little harder to determine.

One inevitable trend to bear in mind when selecting and weighing out comps includes buyer and seller subjectivities. In other words, whether they realize it or not, most sellers select the comps that give their home the best value. What’s worse? Once they lock in on that comp, they tend to use it as the only measuring stick. Meanwhile, buyers are doing exactly the same thing on the opposite side of the equation.

Both are wrong.

‘Tis all about the season

In order to generate an accurate estimate of current value, you’ve got to weigh market conditions. When there are more listings than there are buyers (which can be determined partly from things like average days on market), then you can bet that the lower priced comps are closer to accurate. When there are more buyers out there than there are listings? Well, then you can expect to be in steep competition, when homes will often fetch more than their asking prices as more people fight over them. The words “spring fever” mean everything in real estate, so you shouldn’t expect a comp that sold in the height of that fever to accurately reflect what a similar home is worth in fall or winter. These seasonal changes have anything and everything to do with value.

Reading Between the Lines

So back to your dilemma: 60 days on market and you don’t have a contract. At this point, change is inevitable. But, in addition to revisiting your comps and re-weighing how you’ve used them, a good agent can also read between the lines to see what all of the activities surrounding your listing tell us.

By looking at things like number of calls, number of showings, repeat showings and other inquiries, a good agent can get a feel for where the hang-up lies. For instance, if they’re getting a lot of showings, and even some repeat showings, but no offers? The issue may be price. Why? If they liked it enough to schedule the first showing, then liked it enough to see it again, but stopped short of making an offer, then there’s a good chance that they felt their idea of value was far enough apart from yours that they shouldn’t bother making an offer. Your agent also may be able to report on specific feedback provided by those buyers. Maybe there were specific elements that turned them off, like countertops or carpets—things you can change going forward.

Of course, the best agents also know how to dig deeper—like into available inventory and historical absorption rates for your specific area. By combining this information with the feedback mentioned above, you should begin to get a feel for why your home hasn’t elicited an offer.

There are no Shortcuts

As much as I’d like to tell you that you can just look at some recent comps, make a few adjustments and then slap a number on your home, it’s just not that easy. What buyers in a certain market are willing to pay for your home at any given time is a little more complicated than what someone else decided to pay for a similar home in recent history. If your home’s been on the market for 60 days, that doesn’t mean your agent isn’t doing a good job; it could be that the market is shifting. Maybe you’re out of sync with other current listings.

Filed Under: Blog, Capabilities, Selling

2016 – What to Expect

2016

2016At the beginning of each year, we try to write a piece offering our predictions for the coming season. 2015 was pretty interesting (to say the least) and we expect 2016 to be unique, too, albeit for some different reasons.

Without any further introduction, here are One South’s predictions and things to look out for in 2016.

‘So, How is the Market?’

We get some version of this question quite a bit. Here are some words to describe 2015:

  • intense
  • inconsistent
  • hyper-local
  • unique
  • seasonal
  • inventory-deprived

2015 went a lot like this – from February to June, we had bidding wars, escalation clauses, sales-in-a-day, full price, non-contingent, appraisals waived, cash offers … all of which indicate extremely frothy conditions. And then, from July to November, it was quiet as a church mouse. While the summer is typically slow, it isn’t usually that slow. For the most part, agents and sellers thought that the 2015 market was done until December showed up, and it has suddenly become surprisingly busy again.

Go figure.

So as we enter 2016, the conditions that drove 2015 all still exist in much the same form (low interest rates, improving economy, less negative equity, constrained inventory) and set the table similarly for the coming year. That said, we need to discuss a few additional factors that will come to the forefront and will have a pretty big impact on the next 12 months.

Pricing – Up or Down?

Lets start with pricing … take a look at the chart below:

Pricing is trending higher, as it has been doing for several years, and that is a good thing. When home prices fell by 30-40% during the crash, it trapped a lot of people in their homes as the debt and the values became inverted. As long as houses were worth less than what was owed on them, people were going to stay put. As the prices have risen, much of the negative equity has been recovered and people can sell and walk away with some cash to go buy the next one. The rise in prices has done wonders to make the market far more fluid.

But don’t be fooled and think that the primary reason that prices have moved upwards is entirely due to a phenomenal economy …  it isn’t. If you do a deep dive into the overall US economy, you will still see plenty of clouds on the horizon. More on this in a bit.

Just know that we are on far better ground than in 2012, but far from the go-go days of 2006.

So what to expect from pricing? Look for prices to move higher, but probably not at the same rate as 2014/15 … with some better increases if you are in a neighborhood that is walkable or in an inventory-constrained sub-market.

‘Tis the Season

An interesting trend has been developing in the past several years – stronger seasonality.

What do I mean by seasonality? Seasonality is really looking at when sales occur over the course of a year. The velocity of transactions peaks in the spring and begins a long slow decline from late summer on with a small secondary season in the September/October time frame, too … well at least until 2015.

Take a look at the chart below showing when homes go under contract:

Typically, sales peak in spring, slow in the summer and then experience a resurgence in the fall (you can see the smaller peaks in the September/October time frame in ’12, ’13 and ’14.)

But what happened to the secondary fall market in 2015? Dunno … it disappeared. Gone. Bu-bye. Adios. Au revioir. Aloha. I think many sellers made decisions based on the expectation of a fall market and consequently, were disappointed when it never materialized.

And with the election coming in the fall of 2016 plus the fact that I think we can all agree that this one will be a pretty contentious one, I would imagine that 2016 will look a like 2015.

So what does this mean? If you are a seller, make your best effort early in the year – I just don’t trust the second half of the year. But if your life dictates a fall sale, then be extremely careful about using spring comparable sales to set your price in the fall.

Mortgage Rates

December 2015 marked the first time the Federal Reserve raised the Federal Funds rate since 2006.  That is an entire decade, for those scoring at home. While the move was pretty much infinitesimal (they moved from 0% to .25% or one quarter of one percent,) it does in some small way indicate the Fed’s belief that the worst of the recession is behind us (at least for now.)

See below:

Federal Funds Rate vs. Inflation | Credio

Now, many assume that the Federal Reserve’s action impacts the mortgage rates … not really true. The Federal Funds rate is the rate at which banks borrow money, not consumers. By raising the rate, the Fed may actually have done more to keep long term rates low for mortgage borrowers well into the future. I know it sounds crazy, but it is true.

Without going into a detailed explanation on how interest rates are priced (you can find that post here), the Fed really didn’t do anything that could impact rates in the near future – so don’t worry that you are looking at 7% by year’s end … it is highly unlikely that the interest rate environment at the end of 2016 will be strikingly different than the environment at the beginning of the year.

But still, to see how stupid low rates still are, see below:

It is kind of amazing, really.

The .25% that the Fed raised its rates will have almost no impact – the rate increase is akin to bumping up your cruise control from 65 to 66 m.p.h. heading down I-64 to the beach. As long as the world economy plods along (and for the most part, the economies of Europe and Asia are pretty sluggish right now, as is Russia) and people view investment in America as the safest bet, we aren’t really in much danger of rates spiking. So remember, the Fed raising their rate is not the same as the mortgage company raising their rates. It is simply the Fed making it ever-so-slightly more expensive for banks to borrow money, not the consumer.

So what to expect? Rates will probably rise a bit in the spring as consumers demand mortgage money and then fall back when the market cools and demand for purchase money decreases. By and large, don’t expect transformative change in the mortgage markets in 2016 as they can’t go much lower and upwards pressure is still largely non-existent.

Inventory Levels

Ahhh … inventory.

Take a look at the following charts …

As you can see, we are not building new homes at the rate we once were … and it is not even close.

When the 2008 crash happened, we just stopped building (note the almost vertical line shooting straight down beginning in 2006/7) and have been largely undersupplying the market for what is approaching a decade. You can see the impact on overall inventory levels in this chart of available homes at any given point in Central Virginia:

From the height (2006/7) to now, we are still operating at levels roughly half of where they were. Where there used to be 10 houses to see, there are now 5 (and in some markets, the drop is even more pronounced.) That is a big difference.

So what does this mean? If you have a specific home in mind, then you best be aggressive when you find it. Don’t play around or someone else will buy it out from under you … at least in the spring. Be warned.

Demographics

Each and every study we see about demographics points to an aging populous looking for a first floor master bedroom in a walkable neighborhood. We constantly get requests for a ‘cool flat‘ or ‘industrial loft‘ in the city from the ’50 to 60 something’ crowd that is downsizing (or at least reallocating their living space) and wants to move from the cul-de-sacs of Suburban Richmond to a more dense and mixed-use environment.

Statistics seem to support this trend:

In the 4th Quarter of 2013, all of the inventory levels (Fan/Glen Allen/Midlothian) were strikingly similar … but that changed quickly. The lesson to draw is that as we recover from the crash and rebuild our market, it appears as if tastes have shifted and each micro-market is operating independently. Supply and demand differ greatly even within areas in somewhat close proximity and what we were used to in our past may look far different than the future.

So while it may be premature to predict the death of suburbia, demand for home in the fixed-inventory city/urban markets (Fan, Museum District, Near West End, Ginter Park) is increasing relative to the demand in suburban markets.

So what do you do if you are moving from ‘out’ to ‘in’? Do your homework and be prepared to make a quick decision. Fixed inventory means undersupply and demand will only increase for walkable neighborhoods for the foreseeable future.

TRID

The term TRID is not yet a widely known term but it soon will be.

Ok then, what is TRID? TRID is the manifestation of the Dodd-Frank Financial Reform legislation signed into law by Obama in 2010. Designed to protect the consumer from the unscrupulous and predatory lenders who largely created the crash of 2008, TRID places mandatory time-based review periods into the closing process. In November of 2015, TRID went into effect and officially changed the closing process. The result is that it is now far harder to make changes to the closing statement that we (agents, lenders, attorneys, title companies) have used for as long as I have been in real estate.

Now, the goal was to protect the consumer (honorable intent, I do believe) but in reality, it is going to hurt, and hurt some people badly. All laws have unintended consequences and TRID is no different. Gone are the days when a closing statement can be amended in real time to correct errors or to change credits and in its place is a mandatory 3 day review period … yep, 3 days.

So imagine – Moving trucks are in your driveway, attorney is expecting you at 10 am, the cable company is (allegedly) coming between 1 and 5 and Nana and Pop are set to take the kids for the duration of moving day … and then the phone rings. Your agent is calling to let you know that the people buying your home have an issue because the people buying theirs have an issue with their loan … BOOM … and we all have to wait at least another 3 days to close. ARE YOU KIDDING ME?!?!?!?

It is going to happen.

So what do we do about TRID? Read this and then read this for our recommendations on TRID.

The 2016 Election

This not political commentary so don’t read anything into it … it is simply commentary on the impact elections have on the market.

In election years, markets tend to slow down. Why? Because markets hate uncertainty and elections provide uncertainty in spades. Businesses cannot plan if they are unsure about the business climate. Tax rates, tariffs, environmental mandates, healthcare, incentives, regulation and any of millions of other factors are all in flux until we elect the President …  and Governors … and Senators … and Representatives … and thousands of other local officials. Until corporate America has a sense of what the future looks like, hiring decreases, capital expenditures slow, relocation ceases and new initiatives lag.

So what do we do about the election? Regardless of your political views, once we get within shouting distance of the 2016 election, we are going to slow down. Do your housing business in the spring if at all possible … then feel free to watch the debates and yell at the TV.

Summary

So 2016 is going to present some unique challenges, but guess what? So did 2015 … and 2014 … and 2013 … and so on. Every year is unique and yet we always seem to make it through (ok, so 2009-11 we will exempt from that statement.)

But here are the keys to take from this post:

  • Prices are likely to rise a bit more, but probably not at the same rate as before.
  • Beware the impact of TRID, especially early spring until everyone figures out how to deal with it.
  • Pay attention to the Fed’s next few moves as they will tell you what is going on in the world economy.
  • The 2016 election will slow us all down come the 2nd half of the year.

Good Luck in 2016!

Filed Under: Blog, Buying, Capabilities, Front Page, Lending, One South, Selling, Valuation

Coming Soon or Losing Soon?

Zillow’s Coming Soon Section … Good Idea or Bad?

I have seen several statistics that say that 9 of 10 real estate transactions involve at least one agent. I have also seen several statistics that indicate 9 of 10 real estate transactions actually involve both a buyer’s and seller’s agent.

And just so you realize, Zillow only carries about 10% of all of the real estate portal traffic (depending on which web survey you choose to believe.) Oh, and the traffic which flows through Zillow, along with legitimate home buyers, is that of researchers, ‘looky-loos’, serial shoppers and renters. The real buyer traffic Zillow drives on a daily basis is only a fraction of the real home-buying traffic Zillow would have you believe. It is unfortunate that Zillow constantly perpetrates the myth not only about how much traffic they carry, but its quality … but that is another post for another day.

Coming Soon

Zillow’s ‘Coming Soon’

So cue the nefarious ‘Coming Soon’ section of Zillow.

It another attempt to drive traffic, Zillow created a place on their site where sellers can announce they intend to sell their home.  Buyers can see these homes and attempt to buy it before it officially hits the market. The seller’s motivation is to save commissions and the buyer’s motivation is finding properties before they hit the market. In theory, it has great appeal.

But is it a good idea? Let’s ask it this way – Does any seller of any item get more or less when they only tell a handful of people? I think the answer is obvious.

Selling ‘softly’ or ‘quietly’ misses the single most important point about selling a home – competition for an asset increases its value.  This holds particularly true in areas lacking quality inventory. Proper exposure maximizes the number of buyers and forces them to compete. It is, without a doubt, the best way to get your strongest offer.

(it is interesting to note that Realtors check the ‘coming soon’ pages often in an attempt to find under-priced properties, but once again, another post for another day…)

Getting Your Best Offer

I once heard an auctioneer say that any time two people are in the same room at the same time trying to buy the same thing, the seller gets market value … and when three are chasing the same thing, the seller will get more than market. Having been to numerous auctions, I wholeheartedly agree. I have never been in an auction setting where I thought a buyer made a great deal for themselves. Knowing this, why would anyone want to decrease the competition for their property?

And most people tend to think exclusively in terms of price, but offers are made up of PRICE AND TERMS. Getting a great price is partially, if not completely, negated if the seller has to move twice or is forced to purchase the improper home due to time constraints.

Simply stated – the more competition is created, the better BOTH price and terms get. The ‘Coming Soon’ section of Zillow undermines seller leverage by allowing the property to slowly enter the market to a limited number of its potential buyers. What are the chances that everyone who is interested in your property will find it if it is listed on only one message board? Very small indeed …

But What About the Commissions?

Great point … what about those dreaded commissions?

We wrote a post which breaks down the commission savings here in more detail, but suffice it to say, they are not as great as most think. People tend to view commissions as expenses … which is not necessarily the case. A good Realtor is an investment and making a good hire will far offset the expense incurred. If you feel your agent is an expense, find a new one.

Good agents:

  • know how to create competition and competition drives prices up
  • negotiate and save you money
  • interpret market conditions and help your decision making
  • know how navigate lending, title, appraisal, inspection and closing issues which always arise
  • recommend good service providers which make the transaction smoother

Do you know where the most serious, qualified and motivated buyers are right now? Riding around in a car with their skilled buyer’s agent, that’s where. Shouldn’t you want someone to represent you when they show up?

And let’s not forget the one cost most often ignored or improperly valued – time. The time required to successfully manage a transaction is far more than any seller realizes and in many cases, the time savings alone can justify the commission expense.

Summary

Now – do not take this article as someone saying that if you do not use an agent, your home will not sell. Nor is it saying that ‘Coming Soon’ does not have its place. This article is simply stating that using an agent and correctly leveraging the most powerful network (MLS) will typically generate value in the transaction in excess of the commission rate. Using techniques like ‘Coming Soon’ may avoid commissions, but not without costing you on many other fronts. Make sure you are calculating the savings correctly.

If you are selling to a friend (or friend of a friend) or are not necessarily worried about getting every penny out of your property, then Coming Soon or other ‘word of mouth’ techniques might be the best way to sell your home. But if you are interested in selling at both maximum value and for the best terms, exposing it to the most qualified buyers in a finite time period with guidance from an experienced agent will always yield the best results.

Filed Under: Blog, Buying, Capabilities, Featured, Front Page, Selling

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