Comment

How To Spot A Bad Flip

Question: I don’t have the time to do a full-scale remodel on a fixer-upper so have found myself favoring renovated homes, many investor-owned. I’m afraid of buying a bad flip and wondering if you have any tips for spotting them during showings.

Answer: Whether or not a home has been recently renovated for sale by an investor or homeowner, it’s important for you to do as much digging and inspecting as possible to verify the quality of the work and materials. For starters, never assume that because a home has been professionally remodeled and looks new that you do not need to perform an inspection. In fact, I think a home inspection is most valuable when buying a flipped property because you’re paying a premium for it being/appearing new. However, inspections take place after entering into a purchase agreement and cost money, so I’ll highlight some things you can look for before making an offer that will give you an idea of the quality of the work.

 

Exterior

  • Driveway: Repaving a driveway is expensive and often ignored in cheap flips. Look for cracks or other damage in the driveway. If the driveway has been redone, that’s a good sign.
  • Roof: You don’t need to be a roofing expert to know whether a roof looks to be old and damaged or in new or good condition
  • Downspouts: You want to see water runoff extending away from the home by 8-10ft, not being dropped right next to it, which is often overlooked by inexperienced or cheap investors
  • Lawn: Grass takes time and money to look good so if the lawn is in good condition, that’s a great sign
  • ·Windows: Windows are very expensive and you can tell a lot about an investor by the windows they install. Are they good quality? Did they replace none, some, or all of them? Did they install new windows or refurbished windows?

 

Interior

  • Floorplan/Design: Did the investor make decisions that leave you scratching your head like a shortage of kitchen cabinets, awkward toilet placement, or tiny clothes closets? It’s not easy to redesign a floorplan and novice remodelers almost always make mistakes.
  • Dishwasher/Stove: Give them a pull and see if they’ve been secured. If they are, the investor likely paid attention to other more important details.
  • Water Heater: Is there a drip pan around the base and is it tied into a floor drain?
  • Electrical: Look at the inside of the panel door to see if it’s been labeled and if there is a signed/finalized permit sticker.
  • Furnace: Does the exhaust pipe have a constant positive pitch leaving the unit until it reaches the exterior (note: this should also be the case on a gas water heater)?
  • Door Frames/Shoe Molding: Are the frames around the doors and shoe molding along the floor new or painted over? New frames/molding looks clean and smooth while originals with paint over top look clumpy and damaged. If it’s original frames/molding, you might be looking at a quick, cheap flip.
     

Other

  • Permits: https://permits.arlingtonva.us/ allows you to search the full permit history of any home in Arlington so make sure you check 1) whether permits were issued and 2) whether permits were finalized
  • Receipts: Try to confirm who did the work. Are they licensed, bonded, and insured or were they a friend who loves DIY projects? Don’t be afraid to talk to the contractor(s) who did the work and see how much they’re willing to share about the materials and crew they used.
  • Days Since Last Sale: Look up how much time has lapsed between the investor’s purchase of the property and the completion of the remodel. The timing of the work should align with what the seller is claiming to have done. You can’t do a full remodel, with proper permitting, in a month.
  • Overall Care: Care and attention to detail outside of the walls tends to show up in the quality of work behind the walls (where you or your inspector can’t see), so if you notice mistakes you can see, be wary of what mistakes you can’t see.

Other common items to observe are the quality of cabinets, appliances, and fixtures but most of that is dependent on price point and expectations should be managed accordingly. Also, do not shy away from electrical, plumbing, HVAC, roof, and/or structural inspections if you have concerns over the quality of the work after doing your general inspection. They cost about $150-$300 each, but that’s a lot less expensive than buying a home with hidden issues, even if you end up spending the money just to realize you need to walk away from the deal.

The term “flip” carries a negative connotation, but regardless of what you call a house that has been remodeled/updated for purposes of resale, it can be a great opportunity to get many of the benefits of a new home, without the price tag of new construction or burden of doing the work yourself. However, you must approach the purchase with caution and a careful eye for quality of workmanship to avoid your dream home turning into a money pit.

 

 

Ask Eli Image_Facebook Image Size.jpg

Comment

Comment

What is the Average Length of Home Ownership

Arlington’s transient nature leads to a much shorter length of home ownership than the rest of the US. The average homeowner lives in his or her house/apartment for an average of 9.4 years (median 7.2 years) while the national long-run average is 13.3 years, according to this study from the National Association of Home Builders.

Comment

Comment

How Does Down Payment Amount Impact Negotiations?

In a multiple offer situation, the amount of your down payment may be the difference in whether or not your offer is accepted, but in non-competitive negotiations, the data shows that it only really matters if you’re putting 0% down or paying 100% cash. From 1% down to 99% down, there isn’t a strong correlation between the amount of a down payment and a buyer’s bargaining power.

Comment

Comment

Department of Veterans Affairs (VA) Loans

Loans guaranteed by the Department of Veterans Affairs are known as VA Loans and provide current and former Service members with an opportunity to purchase a home with as little as 0% down. In addition to the normal closing costs (title fees, transfer taxes, etc), a Funding Fee is charged at settlement, which is equal to anywhere from 1.25-3.3% of the loan amount, depending on size of down payment, type of service, and whether or not it’s the borrower’s first time using the VA loan program.

Comment

Comment

Who Pays Closing Costs When Selling a Home?

Certain fees and taxes vary by state and locality, but it is customary in Virginia, DC, and Maryland for each side to cover the taxes and fees associated with their portion of the transaction and the seller to pay the commission to both the broker/agent representing them and the broker/agent representing the buyer. Sellers pay about .25% of purchase price, plus whatever commission they’ve agreed to, in closing costs. Buyers pay about 2.5-3% of purchase price in closing costs.

Comment

Comment

What To Know Before Buying a House

Question: We are planning to buy a home in the DC area sometime in the next 12-24 months and want to make sure we take that time to prepare. What should we know before buying a house that we can get started with now?

Answer: Whether you’re a first-time buyer, experienced buyer relocating from out-of-state, or moving locally here’s a list of things I review and plan out with clients before getting into the full swing of house hunting:

Local Customs, Requirements, Timelines, and Contracts
The home-buying process varies greatly across and within states. I think the most important thing you can do as a buyer is take an hour at the beginning of your buying process to become educated on the process, timelines, and key contractual terms/obligations in the area(s) you plan to search. This is also a good way to meet and vet different real estate agents early on to get a feel for who is willing to spend time with you up-front on education and planning vs pushing immediately for a sale.

Choose the Right Financing, Get Pre-Approved
Not all lenders offer the same loan products so it’s important to identify a lender who not only provides high quality service, but also has access to loan products that fit your profile (down payment, credit score, job industry, etc). Real estate agents, friends, and co-workers are all great sources of recommendations.

You’ll also want to get a pre-approval from at least one lender, one that actually reviews and verifies your financial documents, income, and employment instead of just running credit and reviewing an information sheet. This will decrease the chances of you being rejected from a loan, allow the lender to provide the most accurate recommendation, increase your leverage in contract negotiations, and reduce the amount of work required of you once you’re under contract.

Don’t Forget A Monthly Budget
I find that most people qualify for more than they actually want to spend, especially dual-income buyers, so budgeting is important. The biggest mistake most buyers make is budgeting strictly around the sale price, which is often driven by the amount you have for a down payment. It’s just as important to set a monthly budget for total housing expenses including mortgage, taxes, insurance and if applicable Association fees and/or mortgage insurance. Your lender can help you project monthly expenses at different price points based on different down payment amounts.

Do You Want Representation?
Determine if you want to have a real estate agent representing you in the transaction (breaking news…I highly recommend it) and, if so, what level of service you’re looking for. In most cases, the seller pays commission to their representing broker and the buyer’s broker, so representation often comes at little or no cost to buyers.

Push Yourself on Your Criteria
It’s very easy to come up with your top 3-5 criteria for a home and rare for most couples to disagree on the short list, but push yourself/yourselves to rank your top 10-12 criteria. This list can and will change as you search for homes, but it pushes you to think about more than bedroom count, schools, commute, and an open kitchen. This is especially valuable for couples. Just because you have the same taste in music, food, and TV shows that brought you together, doesn’t mean you’re on the same page about housing criteria.

Cash Needs + Savings
You need cash savings to pay for your down payment + closing costs of 2.5-3% of the sale price (in the DMV). Within a few days of your offer being accepted, you’ll have to transfer 1-5% (negotiable) of the sale price into an escrow account as deposit to secure the sale. You’ll spend about $1,000 out-of-pocket between contract and closing on inspections and the appraisal. Don’t forget how expensive moving is either, so keep enough savings for incidental moving expenses, new furniture, painting, etc. You should aim to haver 3-6 months of emergency savings tucked away after everything is paid for.

Other Key Providers
Most buyers are familiar with the role real estate agents and lenders play in the transaction, but don’t forget about the importance of working with a quality title attorney and home inspector. Your agent should be able to make a great recommendation.

How Long Will You Live There?
This is probably the most underrated conversation for buyers to have when they’re setting a budget and determining criteria. Your home-buying strategy should look very different if you’re planning to own for 3-5 years vs 10-12 years so give it serious thought and be realistic.

Deadlines and Lease Terms
Figure out if you have any strict deadlines for the move and iuf there are direct or indirect costs of buying before or after that deadline. It can be difficult in a low-inventory market to time a purchase, so make sure you’re aware of the pros and cons of purchasing before or after your deadline. If you’re renting, make sure you find out the cost of early termination or if month-to-month leasing is an option.

Reason for Your Purchase
I still haven’t met somebody who asks for a bad investment when they buy a house, everybody wants their home purchase to be a great investment, but you have to define what a great investment means to you. Does it mean your home appreciates in value well above the market over a certain period of time? If so, you’ll likely be in under-developed areas or in a house nobody else wants. Does a great investment mean you wake up every morning so happy with your home and neighborhood that the money is a secondary concern? I often remind clients that sometimes the best investment is buying a house that allows you to live there longer and eliminates one or more real estate transactions in your lifetime. In other words, the value you get out of being in a home for 10 years vs 3 years far surpasses a small increase in your budget.

I hope this list is helpful not just for local DC Metro readers, but for anybody getting started with their home search and wondering what you should know before buying a house. These are the conversations and steps I take with my clients every day to make sure they’re prepared, educated, and have the right strategy in place before we even step foot in a house together. I’m sure I left a few things off this list, but this should get you 95% of the way there. Feel free to give me a call or send me an email at Eli@EliResidential.com for the 5% I missed.

Comment

Comment

How Long Does it Usually Take to Close on a Home Purchase/Sale?

Question: How long does it usually take to close on a home purchase/sale after an offer has been accepted?

Answer: If a loan is being used to purchase the home, expect the time from offer acceptance (ratification) to closing (purchase/sale) to take 30-45 days and a week or less if it is a cash purchase.

The average closing period in Arlington from 2010-2017 was 42 days and the median closing period was 36 days. Keep in mind that includes sales with a seller rent-back period which can extend closing for months.

As a general rule of thumb, a quick close is anything under 30 days, with some lenders able to close in as little as two weeks, and anything over 40 days is generally considered a delayed closing around here. With the majority of sellers preferring to sell as quickly as possible, quick closings are a great way to help your offer stand out.

Below are the three elements of most real estate transactions that determine how quickly a home can be sold after an offer is accepted:

Financing (14-45+ days)

One of the biggest differences between financing through large national banks and a local lender tends to be the speed they can close a deal.

Most of the big banks I’ve worked with struggle to close in less than 35-40 days, often asking for 45 days, which can really compromise a buyer’s negotiation leverage in a competitive market. On the other hand, many local lenders have no problem closing in 3-4 weeks, with some able to close in two weeks under the right circumstances.

Appraisal: All lenders require an appraisal, which usually takes 1-3 for the final appraisal report to be submitted.

Timelines vary based on how busy the market is (how booked up appraisers are), how quickly the request is made and whether it is requested as a rush order. With interest rates increasing over the last 12 months, refinancing has dropped significantly, thus freeing up appraisers’ schedules for purchases and allowing for faster turn-around times.

Underwriting: Underwriting is the lender’s review of the borrower’s financial information, property information, Association information (if applicable) and any other relevant facts they need to determine whether or not they will approve/fund the loan.

Buyers play a big role in how quickly this process moves by responding quickly to any lender requests for new or updated documents or explanations. Once a loan has been approved by underwriting, there is a mandatory three-day loan terms review period the buyer is required to have before the property is purchased.

Title Review (3-7+ days)

Before a property is sold, a Title Company or attorney specializing in the field will order a title search and (usually) a survey of the property to check is there are any outstanding claims against the ownership of the property (liens), no issues with property boundaries or other red flags that may impact the ability of the owner to transfer the property’s title free and clear.

This process generally takes anywhere from a few days to a week, as long as there aren’t any issues that need to be resolved.

HOA Resale Package (3-14+ days)

If the property is located in an Association (Condo or Homeowners), Virginia requires that the seller provide certain Association-related documents for the buyer to review, including a resale inspection of the property, by the Association, to make sure there aren’t any violations.

Associations have 14 days from the date they’re ordered to turn these documents and inspection around, but most Associations are able to fulfill the request within 7-10 days.

Ask Before Offering

If you are considering making an offer on a home, I recommend asking the seller/seller’s agent if they have any preferences for the closing period. While most sellers prefer to close as quickly as possible (especially if the home is already vacant), some need time to move out and offering a three-week closing may not have the right effect if the seller needs six weeks to move out.

Comment

Comment

Can a Seller Back Out?

Question: Can a seller back-out of a home purchase contract?

Answer: Sellers have practically no way out of a home sale contract in Northern Virginia (or DC), but buyers have multiple opportunities to void an agreement without risking their deposit. The most common ways for a seller to get out of a home sale contract are:

  • Kickout Clause: Kickout clauses allow the seller to give the buyer notice that they intend to void the agreement if the buyer does not perform a specific action. The most common example of this is when a purchase is contingent on the buyer selling their home. Sellers can give a buyer notice of their intention to void if the buyer does not provide a bona-fide contract on the sale of their home or remove the home sale contingency all together. If the buyer fulfills either requirements, the seller must remain under contract and cannot void.
  • Buyer Default: If a buyer falls into default of their contractual obligations such as not making their required deposit on time or not applying for their loan on time (7 days), the seller may void the contract.
  • Technicality: A seller who really wants to back-out of a contract may look through the agreement for a missing initial or some other contractual technicality in an attempt to claim the contract was never formally ratified. This isn’t very reliable and I would not recommend any seller rely on this method.

Buyers (Usually) Have Outs

On the other hand, most contracts afford buyers multiple opportunities to void a purchase contract without losing their deposit. This includes the home inspection, financing and appraisal contingencies found in many contracts.

Also, if the property is located in an Association (condo or HOA/POA), buyers have a non-negotiable right to void within three days of receiving the required resale/Association package (by-laws, budget, rules & regs, etc).

Voiding Without Cause

If a buyer voids a purchase agreement outside of the legal means (contingencies) of the contract, they risk losing up to 100% of their deposit, which is usually 1-3% of the sale price.

However, sellers are not required to make a similar type of deposit as security for performance under the terms of the contract. If a seller decides to back out of an agreement without cause, the buyer is faced with a decision to accept the seller’s decision and walk away, accept a buy-out/settlement from the seller (if offered), or take legal action and sue for specific performance (force the sale) or financial remedy.

As a buyer, you hold the cards and command the most leverage over the purchase agreement remaining in force or being voided.

Comment

Comment

Are Escalation Clauses a Trap?

Question: A few of our friends who bought homes recently told us that we should expect to use an Escalation Clause/Addendum when we make an offer, if we want our offer accepted. Is that your experience and is there a better way of making a competitive offer?

Answer: I thought this would be an appropriate follow-up column to last week’s columnon the dangerously under-supplied housing market and it’s also become a frequent topic of conversation with clients.

With so much competition for hard-to-find homes that have just come to market, it’s critical for buyers to understand the purpose and risk/reward of using Escalation Clauses/Addendums in their offer.

Please note that this column is specific to contracts in Northern VA; Maryland and DC contracts vary in language and use.

What Is An Escalation Clause/Addendum (EA)?

An EA allows you to make an offer at a starting price while agreeing to increase your offer to a higher price if another offer is higher than yours. It includes a ceiling/maximum escalation value and an escalation factor, the amount your offer will increase by, over the next highest offer.

The contract allows for the seller to execute a purchase contract (ratify) at an escalated value, without the buyer having to agree to the new price. However, to protect buyers, the seller is required to deliver the next highest contract that was used to escalate your offer.

That other offer must also be materially similar, meaning the other offer cannot include seller credits or a material difference in contingencies (e.g. the other buyer has to sell a home before buying this one).

When To Use an EA

EAs are best used when there are multiple confirmed or expected offers and the seller has set a deadline, asking for best-and-final. It is very common in our market for sellers to set an offer deadline after their first full weekend on market and often those deadlines are set with the expectation that all offers will be best-and-final and the seller will make a decision shortly after the deadline, without any back-and-forth with buyers.

Buyers are often skeptical of this practice and assume that sellers will come back for more negotiating anyway, but in my experience, most sellers stick with the plan and a buyer who leaves something on the table is often informed that another offer was selected.

Managing the Risk & Reward of an EA

Used correctly, EAs allow you to maximize the chances of your offer being selected, without grossly overpaying relative to the rest of the market. It allows you to offer as much as you’re willing to pay for a home, without actually committing to pay your maximum if nobody else in the market values the home as much as you do.

In my experience being on both sides of the transaction, and speaking with colleagues, the winning offer in a multiple offer bid almost always includes an EA, however, the winning offer escalates all the way to its ceiling only about half of the time.

The clear risk to you is that you’re exposing the highest price you’re willing to pay to a seller and if there aren’t other offers that justify automatically escalating your offer, the seller may attempt to simply counter your offer at a number equal to or close to your escalation ceiling.

There are things both the seller’s agent and buyer’s agent can/should do ahead of accepting/offering EAs to avoid a potential messy situation where this occurs.

As the buyer, you should think about how you will respond if the seller attempts this. I have had (buyer) clients walk away from a deal when this occurs, leaving the seller with nothing or a much worse offer, but have also had (buyer) clients thrilled to be countered at a price below their escalation ceiling, even if there weren’t other offers to support it.

Key Takeaways

  • EAs have become common-place in the market
  • EAs should be used when there are confirmed or expected multiple offers and a deadline has been set by the seller
  • EAs help the seller get the best price and allow buyers to maximize their chance of securing a home without grossly overpaying relative to the market
  • EAs carry a lot of risk and reward, so be sure to understand them before including one in your offer

If you are thinking about getting into the market for a home purchase and would like to discuss strategies that will help you maximize your chances of a successful home purchase, without exposing yourself to unnecessary risk, feel free to reach out to set-up a meeting with me. You can reach me any time at Eli@EliResidential.com.

Comment

Comment

Arlington Is Running Out Of Homes For Sale

Question: We have been searching for a home for over 6 months and have expanded both our criteria and budget, but still not finding something we like. We have heard that the housing supply is low, is that true for Arlington?

Answer: The housing supply shortage in Arlington is a big problem and it’s not just Arlington that is feeling the pain, it’s most of Northern VA and the greater DC Metro (nationwide as well).

You’re not alone in your experience either, we have a handful of clients who have been looking for the better part of a year while also expanding their search area and budget, but unhappy with what’s available.

So, is the housing shortage mostly anecdotal and buyers are just too picky or to cheap? Nope… here are some charts that highlight the alarmingly low housing inventory in Arlington:

Eight Consecutive Quarters of Fewer Homes For Sale, Year over Year (YoY)

After seven straight quarters of YoY decreases in the number of homes for sale, Q1 2018 brought us the largest drop in YoY homes for sale with 21.1% fewer homes for sale than Q1 2017, which was already 7.2% lower than the number of homes for sale in Q1 2016. The chart below represents all homes for sale in Arlington.

1111.jpg

 

Existing Housing Supply Would Only Last 1.5 Months

Months of supply measures how long the existing housing inventory would last given the last 6 months of demands (absorption). Most economists say that 4-6 months of supply represents a well balance housing market and Arlington has hovered around 1.5 months of supply for the last 6 months.

I broke out the chart below by housing type (detached, townhouse, and condo) to highlight the fact that the problem exists across all housing types, but town-homes have historically been the least supplied type of housing in Arlington.

2222.jpg

 

Good Homes Are Selling Much Faster

This chart shows the YoY change in the number of homes sold within the first 10 days on market, which has increased the last six quarters in a row. There was an impressive 53.4% YoY increase from Q1 2016 to Q1 2017, followed by yet another double digit increase in homes sold within the first 10 days from Q1 2017 to Q1 2018.

3333.jpg

 

The $1M+ Home Market Is Healthy

The only sub-market in Arlington with a healthy supply are homes listed for over $1M, with around four months of supply, while everything priced from $300k-$800k is under one month of supply.

However, the $1M+ sub-market is only “healthy” on paper, take a deeper look and you’ll see two major problems (cue comments that the problem with $1M+ homes is that they are $1M+). First, most of those homes are actually $1.5M-$2M and second, most of those homes are tear down/new construction with very similar size and design, leaving wealthy buyers who don’t like new construction with very few options.

4444.jpg

 

Tips For Buyers

Here are some tips for buyers searching for hard-to-find homes in a tough market:

  • There are few, if any, great deals in an under-supplied market. In this market, good value is finding a home that meets most of your criteria, that you’ll be happy in, that you can afford.
  • If you want to negotiate, your best bet is to find something that has been on market for at least 2-3 weeks otherwise you’ll accumulate more rejected offers than homes currently on the market
  • Put in the time early in your search to understand the market so you can recognize the right home when it comes on market
  • Base your offer on what the home is worth to you, not just the asking price
  • Understand how Escalation Clauses work and use them to your advantage
  • Find out if there are offer deadlines (usually the Monday or Tuesday following the first day on market)
  • Understand the cost-benefit of contingencies (inspection, financing, appraisal are the standard contingencies) and how you can maximize the strength of your offer with limited risk exposure
  • Consider doing a pre-inspection — a home inspection before you make your offer
  • Have a strong financing approval letter from a reputable lender

A lot of readers have reservations about the value real estate agents provide in buying or selling homes, but without coming off as too much of a salesman for my industry, difficult markets like this are where having a strong agent makes a big difference. Not just somebody to open doors for you and draft a contract, but somebody who understands your needs that you trust to advise you on making the right offer, at the right time.

If you have an agent you trust, rely on them. If you’re looking for somebody, I’m available every day of the week to talk or meet, just send me an email at Eli@EliResidential.com and I’ll be happy to help.

Comment