New Construction vs. Resale Price Comparison

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New Construction vs. Resale Price Comparison

Question: We are ready to move into a house we’ll raise our family in and are set on Arlington. We want a newer home, but are not sure if it’s better to buy new construction or resale; our decision will ultimately be a financial one.

Can you put together numbers that show how the sale prices of new construction compare to resale?

Answer: Of course I can! When weighing the financial decision of new construction vs. resale, you’ll also want to consider the replacement cost of major systems like HVAC, windows, roof, water heater, appliances, etc. that carry life cycles of 10-30 years (appliances being on the early side, roof/windows coming later) as well as higher efficiency factors of new homes that significantly reduce utility costs. Many new homes also come with extended “bumper-to-bumper” warranties that you won’t get in resale.

As expected, there’s a clear premium to be paid for new construction and buyers tend to negotiate a deeper discount from the original asking price on homes being resold. The dataset is based on sales since January 1, 2014 for detached homes built since 2000 with 4-6 bedrooms, 3-5 bathrooms, and 3-4 levels.

 

Are these numbers in-line with what you expect to see on the difference in sold price between new construction and resale? Are the prices about what you assumed for new/newish homes by zip code?

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Clarendon Neighborhood Spotlight

Where is it? Clarendon is probably the most recognizable, well-known neighborhood in Arlington. Those outside of Arlington often refer to the entire Rosslyn-Ballston corridor as Clarendon.

Technically it is bound by Wilson Blvd to the north, 10th St N. to the south, Washington Blvd to the west, and N. Danville Street to the east (eastern border is based on the boundaries of the Clarendon Sector Plan).

Clarendon is known for its lively dining and retail scene, along with being host to a popular chains like an Apple Store and Whole Foods, where the parking line regularly overflows into the street.

From rooftop bars, numerous restaurants and high-end retail, Clarendon attracts people of all ages to its massive condo and apartment complexes, as well as droves of patrons from outside the neighborhood. Depending on your preference for entertainment, it’s either the place to be or the place to avoid on Saturday nights. The neighborhood is built around the Clarendon Metro station, which is located on the Orange and Silver lines.

About the interviewee: Tim Donaldson moved to Clarendon in 2014 after spending eight years in Los Angeles, and chose the area because it provides the walkability of a city, but he can hop in his truck any time and quickly be on the highway, which he can’t do from D.C.

He started as a renter in The Phoenix, a popular condo building at 1020 N. Highland Street, and loved it enough to buy a two-bedroom condo after one year. He loves the amenities, and chose to buy because of how well run it is due to the long tenure of its staff.

What do you love about Clarendon?

I love the balance of being able to walk to everything, but not having to fight through city traffic to get to a highway, which I do often for work and to fish. It’s a big city lifestyle, but more laid back. You also have the convenience and familiarity of successful chains like Whole Foods, Starbucks, Cheesecake Factory and Lululemon, but also some great non-chain places for music and craft beer/wine. I’m sad the record store closed!

Where do you shop, eat, and hang out?

My wife and I have a long list of favorites all within a few blocks. Green Pig Bistro is our date night spot, we’re regulars at Lyon Hall, I go to Fireworks for their great beer menu, Galaxy Hut for awesome music, Ambar’s all-you-can-eat is the best deal around, Texas Jacks BBQ is second to none (I agree), love the classics like Liberty Tavern and Bonchon, and the new Spirit of 76 is a cool, cozy bar! We love being able to walk to Whole Foods or Trader Joes for groceries.

Do you take advantage of nearby parks and trails?

I take weekly walks at Potomac Overlook and Zachary Taylor parks and love biking the WO&D, Four Mile Run, and Mount Vernon trails. I know there are parks closer by, but I love hiking and biking those areas.

How has your overall experience been in Clarendon?

Very positive! I’d love to be able to buy a single-family home in Lyon Park (adjacent neighborhood) so I can stay close to Clarendon. People mostly associate Clarendon with weekend partying, but it’s an incredible community with an art show, crafts fair, and bike race during the year. Most of the businesses put out water bowls for dogs in the summer and there’s always families out pushing kids in strollers, which gives the whole neighborhood a feel of closeness that I love being part of.

Thank you so much for your interview Tim! I’m sure this will help people considering a move into or within Arlington who are looking for a vibrant, walkable community like you described.

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How Accurate Are Zillow Zestimates?

Question: How accurate and reliable are online home value estimates like Zestimates (Zillow) and Redfin Estimates? My neighbor used his Zestimate to determine the asking price of his home. Can I trust that number?

Answer: Online estimates, like Zestimates and Redfin Estimates, are similar to doing a Rough Order of Magnitude estimate on a project, meaning it’s a good way to quickly determine approximate value. I suggest that clients only trust Zestimates/Redfin Estimates within +/- 10 percent of the value it provides.

In fact, I think that it’s irresponsible for Zestimates and other online estimates to be listed so prominently on their respective sites without an obvious disclaimer (readers must click for a short disclaimer). The fact that it’s a single number, down to the dollar, not a range or rounded falsely suggests it is highly accurate.

Why It’s Wrong

Zestimates, Redfin Estimates and other online estimates rely on public information like square footage, lot size, number of bedrooms, year built, tax appraisal (inaccurate), etc. and past sales in the area, but have no way of knowing details that drive true market value like quality of lot, natural light exposure, curb appeal, and age of major systems like appliances, roof and windows.

These details are critical to determining the actual market value and cannot be priced in without a full inspection of the home and understanding of their influence on local sales. In fact, there’s currently a lawsuit filed against Zillow for inaccurate Zestimates.

Zillow Admits Inaccuracies, Worse In Arlington

Zillow itself acknowledges that its Zestimates are inaccurate, stating that it has a median error rate of 5 percent (I’m sure the average error rate is much higher), only 53.9 percent of estimates are within 5 percent of the sale price, and only 75.6 percent are within 10 percent of the sale price. These last two stats are probably median error rates, with even worse error rates if you look at averages.

Further, because they’re national stats, they benefit from the large number of communities around the country that are full of nearly identical homes. When housing inventory is homogenous and there’s little variation in pricing by neighborhood (common in much of the country, not in Arlington), it’s much easier for online estimates to be accurate. I’m sure that the margin of error in Arlington and Northern Virginia is worse than the national numbers.

Comparing Popular Online Estimates

Industry spends a lot of money developing these estimate tools, so let’s take a look at how some of the most popular sites for estimates compare to each other. I’ve chosen to compare estimates on a few randomly selected properties in different sub-markets from Zillow, Redfin, and REALTORS Property Resource (RPR, created by the National Association of REALTORS for agents).

Note: there’s less variation between estimates on properties recently sold (recent sale price factors heavily) and listed properties (asking price factors into estimate formulas). Estimates below are rounded to nearest $1,000.

Listed Properties:

  • Crystal City, condo: Zillow ($376,000), Redfin ($418,000), RPR ($395,000)
  • Fairlington/Shirlington, condo: Zillow ($384,000), Redfin ($429,000), RPR ($231,000)
  • Rosslyn-area, townhouse: Zillow ($957,000), Redfin ($818,000), RPR (unavailable)
  • Donaldson Run, single family home: Zillow ($1,063,000), Redfin ($1,175,000), RPR ($1,125,000)

Unlisted Property (no recent sale):

  • Lyon Village, single family home: Zillow ($3,465,000), Redfin ($1,821,000), RPR ($2,751,000)

How To Price Your Home

With unreliable estimates from online tools and limited or no access to data on sales from 12+ months, it’s difficult for homeowners or anybody without access to your home and historical data to accurately determine the market value of your home. I frequently start with sales dating back 5 years when I price a home in order to capture true market data and trends, as 6-12 months simply isn’t enough in most cases.

If you want historical data on comparable or neighborhood sales for your home or would like an opinion on the market value of your home, shoot me an email at Eli@EliResidential.com or give me a call at (703) 539-2529 and I’ll be happy to help.

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Arlington First-Half Real Estate Review

Question: How did Arlington real estate do in the first half of 2017?

Answer: Market indicators at the beginning of the year were very strong. Spring purchase activity picked up earlier than usual in 2017 and all services providers I spoke to (contractors, landscapers, lender, title companies, etc) all said business was thriving.

Now that we’ve made it through the first half of the year, let’s take a look at some key market indicators I like to use to determine how we’re doing relative to years past.

As usual, you’ll see some familiar customized stats from my previous posts:

  • Avg Net Close: This is sale price less any seller credits for the “true” sold price
  • Avg Discount from Org and Last List: One of my favorites — this is how much of a discount buyers negotiated from the original and last asking prices. A good indicator of who holds the most leverage in the market. 100% = buyer paid full price
  • Avg Days on Mrkt: How long it took for the seller to ratify a contract to sell, from the date they listed it for sale. A good indicator of the speed of the market and demand
  • Months of Supply (chart): Economists will say that a balanced market has six months of supply. Anything below favors sellers and anything above favors buyers

Highlights

  • Arlington real estate prices are noticeably higher in most market segments, except apartments/condos (and in zip codes dominated by condo sales) where prices continue to stagnate
  • Nearly all markets show signs of upward pressure on prices with lower days on market and smaller discounts from original and last asking price
  • Average net sold price of detached (single-family) homes is way up, which is influenced by more sales of expensive new construction and off-market sales of cheaper tear-downs not showing up in the stats. However, it’s primarily due the overall market for detached homes picking up, as seen by strong numbers in zip codes with few new construction sales

With that, I’ll let you smart folks dig into the two tables and one chart yourselves and draw your own conclusions. Feel free to reach out to discuss anything you’re seeing, ask for more granular data for your home/neighborhood, or for help interpreting the data.

Stats By Housing Type

 

Stats By Zip Code

 

Months Of Supply

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How Many Real Estate Agents Work In Arlington?

Question: I’m cheating a bit here and answering my own question this week. I come across so many agents representing buyers and sellers who I don’t recognize that I wanted to know just how many agents have handled a real estate transaction in Arlington over the last couple of years. So Eli, how many real estate agents are there operating in Arlington?

Answer: Like it or not, the residential real estate profession has one of the lowest barriers to entry of any industry. While there are a lot of great agents out there, dedicated to their profession and delivering real value to their clients, it’s easy for just about anybody with a couple of months to study and a few hundred dollars to represent you in a real estate transaction.

That’s why it’s important to ask your agent if they’re full-time or part-time, how much business they do, and about their professional background.

A Lot Of Agents

To answer my question, I pulled data on the last 5,000 transactions (totaling $3.2 billion in just under two years) in Arlington to find out how many agents were involved.

Remember that in each transaction there are usually two agents and for the sake of simplicity, if an agent represented both sides of a deal, they’re credited with two sales in these figures. Here’s a summary of what I found:

  • There were 3,139 total agents who worked on the last 5,000 transactions, with 2,287 different buyers agents and 1,904 different listing agents
  • 178, or 5.7 percent, of those agents closed ten or more of those deals
  • The 2,218 agents who closed one or two deals accounted for over $1.6 billion in sales or about 25 percent of sales volume (the $1.6B has to be divided by twice the $3.2 billion sales volume in Arlington to account for one agent on each side of the deal)
  • The top 1 percent of agents by total transactions accounted for just over $1 billion in sales or about 16 percent of sales volume
  • Only one agent represented over 100 buyers or 100 sellers (and you’ve probably seen her face on buses around the county)
  • Out of the agents who closed five or more deals, 46 of them averaged over $1 million per sale

Some Exceptions

Just because somebody has only done one or two deals in Arlington doesn’t mean they’re not a great agent, in fact, I see a number of solid agents on this list who I know from other markets in the D.C. metropolitan area. There’s also quite a few agents in the industry who transact simply for their own investments.

What Do You Think?

Given this information and the data points above, are you surprised at the number of agents operating in Arlington? Do you think having a low barrier to entry and minimal license maintenance requirements/costs is a good thing for the residential real estate industry or should it be more difficult and more expensive to operate as a licensed agent so that fewer agents are managing Arlington’s real estate market? Discuss!

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Cherrydale Neighborhood Spotlight

Where is it? Cherrydale is one of Arlington’s most sought-after neighborhoods, bounded by the intersection of Interstate 66 and Lee Highway to the east, N. Utah Street to the west, I-66 to the south, and Old Dominion Drive to the north, with an awkward configuration of boundaries just north of Old Dominion adding to it.

It is primarily served by Washington-Lee High School, with a small section north of Old Dominion districted to Yorktown High School. Cherrydale boasts a diverse housing selection, with a large number of single family homes dating back to the early 1900s mixed with homes from each decade, including new construction homes that have replaced smaller, aging homes.

In addition to single family homes, Cherrydale has some pockets of condos and townhomes. Most of Cherrydale is within a 15-minute walk of the Ballston or Virginia Square Metro stations.

About the interviewee: Jennifer Galloway and her husband moved to Cherrydale from a Ballston condo in 2016 to find community, more space and their target school district for their 10-month-old daughter. They moved into a beautifully renovated pop-up home that combined Jennifer’s love of older homes with her husband’s preference for new and were sold by the two beautiful magnolia trees in the backyard.

Hailing from Connecticut, Jennifer entered the D.C. scene working in politics and eventually leveraged her connections and fundraising experience to found the Wolcott Hill Group, a nonprofit consulting firm. Jennifer is a proud graduate of the 2016 Leadership Arlington cohort and 2016 “40 Under 40” winner.

What do you love about Cherrydale?

It’s such a close, supportive community. I think we’d met every one of our neighbors within the first month and everybody has been so helpful, which is invaluable for a young family like ours. We also love the generational mix in the community with everything from young families to retirees who have lived here for 40+ years.

My husband commutes into D.C. every day and I’m always going to appointments around the metropolitan area, so we both utilize the Metrobus system that runs through out the neighborhood and makes commuting easy.

Why did you move to Cherrydale?

We wanted to be in the Washington-Lee High School district and my husband needed a short commute into D.C., so we were focused on Cherrydale, Waverly Hills and Westover.

When we first started looking, we stopped by an open house in Cherrydale and ended up talking to the neighbor for a while. She told us they were considering a move, but loved the neighborhood so much that they invested in a major renovation/expansion of their home in order to stay in the neighborhood. That sold us.

What are some of your favorite places to go?

Our favorite restaurants are Cassats and Lebanese Taverna, which are both walkable. We spend a lot of time in nearby parks like Woodstock and Quincy Park and take walks along the Custis Trail. If you’ve never been to Arrow Wine, had pastries from Randolph’s, or empanadas from La Union Grocery, you have to go soon.

Are there any fun community events?

There’s a big July 4 block party every year at the top of N. Stafford Street with a George Washington impersonator who reads the Declaration of Independence. We also have an annual yard sale in the neighborhood that’s a lot of fun.

What do you think the next 10-15 years will bring for Cherrydale?

I’m sure we’ll continue seeing small, older homes replaced by larger new homes and a continuous flow of young families coming in. However, there are many families, like ours, who plan to raise their children in Cherrydale, so it will be exciting to see the community grow together over the years.

Thank you so much for your interview Jennifer! I’m sure this will help many families considering a move into or within Arlington who are looking for many of the same things your family wanted.

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How To Negotiate A Home Inspection

Question: I just finished the home inspection for a single-family home I’m purchasing in South Arlington and there are about 40 items on it. Should I be nervous and consider walking away from the deal? What’s reasonable to expect from the seller?

Answer: Before you freak out about the list of issues the inspector found, I will say that for an older single family home, the number of items the inspector listed in the report is within the normal range of what I see. Unless you’re buying a new home, you should expect the inspection to turn up at least a handful of items that you or the seller should address.

What Is A Home Inspection?

Shortly after ratifying (signed by both parties) a contract to purchase a home, most buyers will (read: should) hire a third party inspector to inspect the entire home and produce a report of any issues, from foundation cracks to missing door stops.

In most cases, the contract to purchase is contingent on the home inspection, meaning the buyer has the right to ask the seller to fix or replace anything and/or provide a cash credit to the buyer at closing. If the buyer and seller are unable to come to an agreement on these requests, the buyer has the right to void the deal.

What Should You Look For?

The goal of an inspection is to ensure that the seller is delivering the property in the condition both sides expected while negotiating the sale price. Generally, you can divide findings into big-ticket items that impact the value of the home and must be addressed and smaller punch-list items that shouldn’t cause much friction. The big-ticket items I look for during an inspection are:

  • Structural flaws
  • Water penetration
  • Safety hazards
  • Inoperability (e.g. air conditioning not working)

System Life Expectancy

You should also determine the age of major systems like the roof, windows, HVAC and water heater prior to making your offer, and verify these are accurate during the inspection. Make sure you’re clear on the expected life expectancy of these systems while you’re negotiating the sales price and factor this information into your offer.

You’ll have a tough time convincing most sellers they’re on the hook for crediting you the cost of a 17-year-old water heater if that information was made available prior to your offer, assuming the system is working.

What Should You Ask For?

As I mentioned earlier, you’ll generally be deciding between asking the seller to handle the fix or replacement of something or asking for them to provide a credit at closing. Often times an inspection agreement includes both – a credit for some items and a request to fix/replace others. Sellers must use licensed contractors and provide works receipts for any work they do.

In general, if something you’re asking for involves personal preference or you want to have control over the quality of the result, it’s best to ask for a credit and handle it yourself. For example, if the deck is falling apart and needs to be replaced, you don’t want the seller managing the design and construction of a new deck so ask for a credit for the replacement cost and make sure you’re getting the deck you want.

Additionally, if the A/C system needs to be replaced and the seller has a mid-grade system, but you’d like to install a top-of-the-line A/C system, it’s best to request a credit equal to the replacement cost for a comparable mid-grade system and invest in the extra cost of a nicer system yourself.

Inspections Don’t Need To Be Contentious

Inspections are one of the most common points of contention between buyers and sellers, but with the right preparation and expectations going in, it can be a smooth process that both sides are happy with.

Like the negotiations you had on the sale contract, the inspection period is also a negotiation. Buyers should expect sellers to address big-ticket items and smaller items that are not classified as improvements/updates.

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Buy An Old Home With Confidence

Question: I really like the architectural style of older homes and feel like I can get a better deal by focusing on homes built more than 30 years ago. Can you provide me some data showing the number of homes old by age and any suggestions you have for a buyer shopping for an older home?

Answer: I also have a personal preference for older homes and love working with clients who have a taste for unique architectural styles! With a bit of vision and a good checklist of things to watch out for, buying an older home can offer real value. To avoid having your dream home turn into a money pit or safety hazard, here are some things you can do prior to purchasing your home to protect yourself:

  • Double up your inspection: You should always have your home inspected by a reputable inspector, but nobody is perfect, so it’s a good investment to have two sets of professional eyes on the home to ensure maximum coverage.
  • Don’t forget your chimney: A general inspection doesn’t include a full chimney inspection and chimneys tend to be one of the least maintained parts of a home, especially if the previous owner didn’t use the fireplace. A damaged chimney can be unsafe and expensive to fix.
  • Check the structural integrity: Old homes have weathered many storms (literally) and the chances they’ve experienced water penetration at some point is high, especially if it sits in a low-lying area where the ground is likely to hold more water. Talk to your inspector about whether or not it makes sense to have a structural engineer do an in-depth study of the foundation and other structural elements of the home.
  • Electrical testing: There’s a good chance an older home has gone through multiple rounds of electrical updates through a few different owners. You never know if a previous owner was a self-proclaimed jack-of-all-trades who fancied themselves a public servant by day and electrician by night. For the sake of your family, make sure a professional gets behind the walls to make sure everything looks good (wiring is safe, home is properly grounded, etc).
  • Insulation: One of the biggest downsides to older homes is poor insulation, especially if they still have older windows and roofing. Check the home for cold/hot spots, proper insulation installation, and seals around doors and windows.
  • Termites or other wood-destroying insects: Termite/wood-destroying insect inspections are very cheap and worth every penny. In Northern Virginia, sellers are responsible for repairing any termite damage.
  • Lead testing: In addition to testing for lead paint, you may consider testing your water for elevated levels of lead due to leaching from lead pipes or lead soldering, which wasn’t banned in the US until 1986.

Let’s take a quick look at the age of single-family homes sold in Arlington, by decade, from 2012-2016:

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Yes, You Should Stage Your Home

Question: We are planning to sell our home and wondering if the cost of professional staging is worth it. What’s your opinion on staging and are there certain circumstances where you do or do not recommend it?

Answer: I recommend staging for almost every home I sell because it will increase your sale price by more than you spend and help your home sell faster. In fact, it makes such a difference that clients often joke after seeing their decluttered and staged home that they’re considering moving back in!

What Is Staging?

Professional staging is a service used to improve the marketability of a home by arranging rented furniture in certain rooms of a home to maximize the space and visual appeal. Most staging professionals have an interior design background and a large supply of furniture to work with.

Staging is mostly done when a home is vacant, but for sellers occupying the home they’re living in, stagers will also provide consultations on how to best utilize your existing furniture and make suggestions on small add-on items to enhance a space (area rugs, towels, flowers, wall art, etc).

How Much $$$?

Condos can usually be staged for $1,500-$2,500 and townhomes and single family homes generally cost $2,500-$4,000 depending on the number of rooms you stage and quality of furnishings. For high-end real estate, expect to spend $5,000-$10,000. You should plan on spending 0.5-1 percent of your asking price on staging a vacant home.

What Are The Advantages?

  • Better pictures = more interest online = more showing traffic
  • Significantly better showing experience for buyers
  • Empty space looks smaller, staging helps visually increase the size of a room
  • Buyers struggle to visualize how beds, couches, tables, etc will fit
  • Awkward spaces benefit from the design of a professional
  • Clean, organized look increases the sense of a well-maintained home
  • Play to the strengths of a room and distract from its flaws

When Should You Stage?

  • Move-in-ready condition (limited updates/investment required)
  • Vacant
  • Home has been thoroughly cleaned and freshened up as necessary (paint, replace damaged/ancient items, etc)
  • Using professional photography

Where’s The Proof?

You may see staging companies or agents make claims that staged properties return an “X” percent higher sale price or sell “X” days faster than unstaged properties, but the reality is these numbers are just convenient marketing figures with no real substance.

One of the challenges with statements like these in real estate is that you don’t have the ability to isolate something like staging and compare the success or failure of the same home sale with and without it. You have to rely on the experience of your agent to help with decisions like these.

My experience with staging comes from seeing the impact it has on homes I sell, but even more so, how buyers I work with react. There is a noticeable difference in how buyers react to staged homes versus empty or cluttered homes (lived in without regard for design) and this shows up in their preferences when they’re viewing properties online to decide what they want to see and then again when they’re actually in the property.

I generally take an opportunity to point this out to my clients so they understand how much of an impact staging has on their perception of a home, so they keep it in mind when it comes time for them to sell.

I’m Here To Help

If you’re considering selling and trying to decide which investments like staging, painting, and updated appliances will return more than they cost, feel free to reach out to set-up time for me to see your home and make some suggestions.

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Using Square Footage in Real Estate

Question: Square footage seems randomly reported on different websites. Why is that and what is it supposed to include? Is the math on $/sqft the same across all sizes or is there a diminishing return at a certain point where more square footage doesn’t translate into more value?

Answer: Total square footage, above grade square footage, and $/sqft are some of the most common criteria and valuation metrics used in real estate, but square footage is also one of the most inconsistent data points we have. For purposes of this column, I will talk in terms of finished square footage used in real estate sales. County appraisers include unfinished space (e.g. storage, garage, decks) at a discounted rated in their tax assessment calculations.

How Is Square Footage Calculated?

I haven’t come across a published definition of how Arlington calculates finished/livable square footage, but in speaking with county tax appraisers it’s considered interior space with finished flooring and walls, and part of the home’s heating and cooling systems. I believe ceiling height (minimum 7 feet) is a factor as well. It does not include garages, decks, attics, or raw storage. It does include closets and bathrooms that are part of finished areas of the home.

Square footage is measured from the framing or exterior walls, so often times the County’s square footage is higher than the usable square footage inside the finished walls of a home.

What Do Most Websites Use?

MRIS, which is the database of record used by REALTORS and where most consumer-facing websites pull data, contains a few fields for square footage.

Taxable Living Area: Pulled from the tax record for above-grade (above ground) finished square footage. It’s a bit of a misnomer because it does not include taxable living space in the lower level(s) of a home.

Above/Below Grade Finished: This is an optional field entered by the Agent to calculate total square footage

Above/Below Grade Unfinished: This is an option field entered by the Agent and does not impact total square footage

Total Finished: Sum of above and below grade finished square footage, if entered by Agent

In my experience, most consumer-facing websites will use the total finished square footage if it’s available and default to the above-grade square footage from the tax record if it is not. Zillow seems to do the best job of pulling from multiple public data sources to get total square footage, even if the Agent hasn’t entered it into MRIS. On the other hand, Zillow allows homeowners and Agents to edit this data. Most square footage readings entered into MRIS by Agents are based on measurements between finished walls, not from the framing.

Common Data Problems

Be careful using square footage to define search criteria or for home valuations because the data can be flawed. Here are some common issues I run into:

Total square footage not entered: If an Agent doesn’t enter data for above and/or below grade finished square footage, the total square footage field is a null value.

New homes: In most cases new construction has a taxable living area in MRIS (from tax record) of zero or if it was a tear-down, it likely has the square footage of the original home which is generally much smaller.

Split Levels/Foyers: Split Levels and Split Foyers were a common design in the 1960s-1980s and usually about half of the total square footage of the home is considered lower level or below grade. In most cases, the square footage number pulled by MRIS from the tax record is only the upper level and thus only about half of the total size is automatically listed.

Additions: If a home has an unpermitted addition or the tax record was never updated, the MRIS taxable square footage will be low and unless the total square footage was entered, the extra space won’t show up.

Condos and townhomes are generally much more reliable when using square footage as a criteria/valuation factor than single family homes.

Price per Square Foot To Compare Values

$/sqft can be an effective valuation tool when you’re assured that the square footage values you’re using in your calculations are accurate and when you’re comparing properties of similar size.  For example, a 600sqft condo selling for $350,000 is nearly $600/sqft while a $2 million single family home with 6,500sqft is just over $300/sqft. Most condos trade in the $400-$700/sqft range and most single family homes trade in the $200s.

I generally avoid using $/sqft when valuing single family homes because the prevalence of inconsistent data introduces too much risk. However, $/sqft can be an effective valuation tool for condos and townhomes, especially when comparing values within the same community where fees and square footage measurements are consistent across each unit.

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Do ‘Smart’ Homes Mean A Higher Sale Price?

Question: We want to upgrade our home with ‘smart’ technology but aren’t sure if it makes sense since we plan to sell our home in about a year. We’d feel better about doing so if it will increase the value of our home. Will these updates get us a higher price when it’s time to sell?

Answer: I see hundreds of homes each year and I’ve noticed only a slight increase in Arlington owners and renters using smart home devices. While supply is low for homes equipped with automated technology, evidence and buyer feedback points to increased interest in these homes and a slight bump in sale price, too.

What makes a home smart?

A smart home integrates three or more Internet of Things devices to solve daily tasks through automation, often working interdependently to complete them without human assistance. These devices are usually wirelessly connected to automate, control and monitor home functions like adjusting the temperature, grilling food, warming a mattress, dimming and turning off lights, checking on a video feed of your sleeping baby and feeding your pet.

Are buyers interested in smart technology in the home?

A recent Gartner survey of consumers in the U.S., the U.K. and Australia shows 10 percent of households take advantage of connected home solutions. Reasons for the lower adoption are varied: the perceived pain of the tech learning curve, the steady influx of new devices, and IoT privacy and security concerns.

In the US, adoption rates are higher:

By far the most popular devices are home security alarm systems, which have nearly double the adoption rates (18 percent) of newer connected home solutions, like home monitoring (11 percent), home automation or energy management (9 percent)… adoption rates were 5 to 6 percent higher in the U.S., where smart home devices were mostly first marketed.

You might think that smart homes are primarily valued by Millennials, but researchers are finding that home automation broadly appeals to Millennials, Gen-Xers and Baby Boomers, with Gen Xers spending the most money.

Will A Smart Home Technology Investment Pay Off When It’s Time to Sell?

I have a similar answer to this question as I do with a number of other home improvement projects. Yes, a smart home investment is likely to improve value, but it’s unlikely to return you 100 percent or more of your investment. Your decision to purchase smart home technology should factor both a bump in resale value and the personal value it brings to your family while you live there.

The type of smart home technology you choose will matter too. Selecting popular products like lights, thermostats, door lock, security systems, and cameras can be highlighted during showings and are generally pretty easy to control, which result in positive buyer reactions. However, I’ve visited a few homes with complex designs and unusual products, which ended up deterring my clients because of the presumed headache and cost of maintaining the system.

Thinking about renting out your property?

Renters are very interested in smart homes and I think this is one of the best ways for home-owners to compete for renters with higher end rental apartments. Millennial renters who live in multi-family dwellings were surveyed last fall about housing preferences. Eighty-six percent would pay more for a “smart” rental.  Sixty-five percent of Baby Boomers in the same survey indicated they would do the same. Furthermore, it was revealed that Millennial renters would pay about 20 percent more for smart home features; and 44 percent would trade a parking space to live in a “high-tech” apartment.

Has Smart Home Technology Influenced Your Purchase?

I’d like to hear from readers who have either been drawn to or turned away from a home with a smart technology package. If you’ve been a buyer in recent years and smart technology was a factor in your decision, I’d like to hear about it in the comments!

If you’re interested in seeing a smart home in action, I recently took a tour of the Alarm.com demonstration house in Falls Church, just off W. Broad Street. Send me an email if you’re interested in seeing the home and I can put you in touch with somebody from the team.

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Relationship Between Homes Price & Days On Market

Question: How does the price range of the home for sale affect the speed of the sale?

Answer: Last week I published statistics showing how quickly homes in Arlington sell(20 percent in the first five days, 50 percent in the first 30 days) and received a follow-up question in the comments asking how price impacts days on market. Here’s your response!

Data Description

The following data represents more than 15,000 sales in Arlington since January 1, 2012, broken out by sold price within the three primary housing types in Arlington – apartments/condos, townhomes and single-family/detached homes.

Key Findings

  • The middle price ranges sell fastest, with the cheapest and most expensive inventory in each housing type taking the longest to sell
  • Townhomes are in the most demand and sell two and a half weeks faster than other housing types
  • If you’re selling an apartment or single family over $1 million, be patient with your pricing and don’t worry if you don’t get your asking price immediately. It usually takes some time for those buyers to materialize.
  • Yes, there were actually nine single-family homes that sold for under $300,000 in Arlington (eight in 22204 and one in 22206)

 

I always appreciate hearing from readers in the comments section and via email. If you have any questions about the Arlington real estate market, please do not hesitate to post them in the comments or send me an email to Eli@RealtyDCMetro.com.

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Q1 2017 Arlington Real Estate Update

Question: How is the Arlington real estate market looking so far this year?

Answer: Through observations in my business, conversations with colleagues and conversations with providers like lenders, title companies, inspectors and contractors, almost everybody saw a spike in business this winter, a usually slow period. After a few years of relatively flat growth in Arlington residential real estate (most of the price growth we saw in the county from 2014-2016 was attributed to tear-downs and some localized development), I think we’re finally going to see some real market-wide appreciation in 2017.

Below, I’ve compiled a series of key metrics that all support this claim. The data is broken down by housing type – detached, townhouse, and condo – and is presented by Quarter (calendar), mostly in Year Over Year changes.

Increased YoY average sold price shows mostly consistent growth over the last few quarters and a clear increase over Q1 2016.

 

A large increase in new pending contract in Q1 proves a substantial increase in buyer activity. Increased demand means price appreciation.

 

Homes in Q1 sold for .5-1 percent more relative to their original asking price, another indicator of high demand.

 

Homes in Q1 2017 sold much faster than they did in Q1 2016, coming close to the expected market pace during spring markets (Q2).

 

The housing supply has decreased by about one-third over the last two years, meaning the market is shifting further in favor of sellers.

 

If you’re a homeowner interested in taking advantage of a favorable market or a buyer wondering how to succeed in a competitive market, don’t hesitate to reach out to set-up a meeting. You can reach me directly at Eli@RealtyDCMetro.com or (703) 539-2529.

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Impact of Rental Ratio on Condo Loans

Question: What is the likelihood that a lender will approve a loan for ~$500,000 for a first time buyer putting 10% down in a condo building that is approaching or over 50 percent units being rented out?

Answer: This question gives me another opportunity to bring in an industry expert: loan officer Jake Ryon of First Home Mortgage (NMLS #993471). Below, Jake debunks the common myth about rental ratios in condo buildings and introduces the factors that actually impact condo loans most frequently.

MYTH: Buyers Can’t Qualify For Condo Loans If More Than 50 percent of Units Are Rented

One of the most common myths that exists in the industry is that buyers cannot get a loan if more than 50 percent of units are being rented out in a condo building.

TRUTH: Most Homeowners Can Qualify For Condo Loans Regardless Of Rental Ratio

The percentage of units rented in a condo building (aka investor ratio or owner occupancy ratio) has no impact on loans for borrowers that are purchasing or refinancing their primary residence or second home.  If the borrow is an investor seeking a conventional loan, the building must have at least 50 percent of the units occupied by owners (not rented).  FHA’s requirement is the same but does not apply to second homes.  While condo associations may elect to self-impose a rental cap, as it stands now with Fannie Mae and Freddie Mac, it currently doesn’t impact borrowers who are purchasing or refinancing their primary residence or second home.

What Does Impact Loans On Condo Buildings?

  1. Commercial/Non-Residential Square Footage: Currently, Fannie and Freddie cap the total commercial/non-residential square footage in a building at 25 percent of the total space, up from 20 percent a few years ago.  Your lender may be able to obtain a project waiver directly from Fannie Mae if the commercial/non-residential square footage exceeds the 25 percent cap.  I was recently able to obtain a waiver for a five unit project that has 38 percent commercial space (in D.C.) because we were able to show it was common in the area, didn’t impact marketability and were able to provide several comps with similar square footage of commercial/non-residential space.
  2. Single Entity Ownership: The maximum number of units owned by one entity can’t exceed 10 percent of the units in the project per Fannie and Freddie guidelines.  If it is a 2-4 unit project (rare in Arlington, very common in DC), no entity can own more than one unit.  Both Fannie and Freddie do allow one entity to own two units in a project with 5-20 units.  A project waiver may be possible from Fannie Mae if a single entity owns greater than 10 percent.
  3. Delinquency: Fannie and Freddie do not allow more than 15 percent of the units in the Association to be > 60 days delinquent on the payment of their monthly assessments for the project to be warrantable (approved for loans).  A project waiver may be possible with Fannie Mae if the delinquency rate is slightly higher than 15 percent.
  4. Budget: Fannie and Freddie require the Association’s current year adopted budget to include a minimum of 10 percent of the annual monthly assessments to go towards the reserve fund.  If the budget does not document the required 10 percent, a current reserve study that supports the Association’s current level of contribution may be acceptable.

If you have any questions about condo warrantability or anything else loan-related, Jake Ryon can be reached at jryon@firsthome.com202-448-0873 or online. He is located at 1015 15th Street NW Suite #375 Washington DC 20005.

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Landscaping For Resale and Current Trends

Question: I’m planning to sell my single family home in North Arlington this year and it seems that in my neighborhood, homes with great landscaping sell for top dollar. Our sale price justifies an investment in our lot, so I’m curious what the Arlington home-buyer demand from landscaping and if there are certain types of landscaping that offer the best Return on Investment.

Answer: Every spring I get a lot of landscaping questions and like to bring in my friend Jeff Minnich of Jeff Minnich Garden Designs to update Arlingtonians on what homeowners are doing in their yards and provide cost-effective tips for investing in your exterior for resale. If you’d like to continue the conversation with Jeff, you can reach him at jeff@minnichgardendesign.com or 703-525-4540.

Enjoy Jeff’s expert response to this week’s question:

In Arlington, homeowners take great pride in their gardens. Our temperate climate is such that we can enjoy our gardens for the majority of the year. Over the last 15 years, there has been a trend toward extending the interior living space seamlessly into the outdoor living space–outdoor rooms, kitchens, fire pits, play areas, fencing, to name a few.  The desirability of a well-designed garden space is a solid investment, and attractive to potential Arlington homebuyers.

Most people involved in the landscape industry have seen a surge in business the last few years, as the economy recovers. This year is particularly busy.

There are really two kinds of investment in a home and garden: doing what will bring pleasure, enjoyment, and ease to day-to-day life in the home; and doing what might add value to the property, if resale is in the cards.

When preparing to sell a home in Arlington, it is important to remember that many buyers have the means and desire to put their own personal stamps on their new homes and gardens. Therefore, I always recommend concentrating on safety items, tidiness, and color.

Fix that uneven sidewalk or replace rotten wood on the deck. Fix gates. Replace the burnt out bulbs in your outdoor lighting system (lots of potential buyers drive by and have a look at night, too). Have the windows cleaned and check the exterior paint job, particularly the front door (yes, these items are part of the outdoor landscape, too). Power wash the house, sidewalks, patio, deck, driveway…make sure your hardscapes sparkle.

Weed, re-edge and mulch the planting beds. Remove old/dead shrubs and trim existing ones. Look up into your trees–does a tree or branch look dead or precarious? Have a tree professional look at it. Potential homebuyers do notice these things. Cut the grass and make sure your lawn is not full of blooming dandelions! This one item can be a big turn-off.

Finally, finish the job by adding some flowers to windowboxes, pots, and beds. Remember, you cannot take back that first impression–the outside of your home is the first thing potential buyers see before walking through the front door, and it can often make or break a sale.

 

Once new homeowners get settled on the inside, they start to ponder what to do in their new gardens.

The most common request from new homeowners is a master landscape plan, which is a great starting place so they can prioritize, then phase, the work they’d like to do, all within a broader vision.

Safety issues should be addressed quickly–items like unstable walks or decks, handrails; and the often boring, but absolutely necessary, issues like grading, drainage, and where to put trash cans.

Fencing is a relatively quick and easy project to prioritize early on, and fences can give instant privacy, keep children and pets in the yard, and define a space. Nice fencing is particularly attractive to potential buyers with these concerns.

Outdoor living spaces are the next most-desired items, and these often involve building. It’s always a good idea to start with hardscapes–patios, sidewalks, decks, porches, walls, outdoor kitchens, etc.–and end with softscapes–plants, lawns, lighting, irrigation–as construction is messy and, try as they might, workers can still damage plants and surrounding areas.

Privacy from fencing and thoughtful plantings can screen unsightly views and enclose outdoor spaces.

Those interested in safety might find low-voltage outdoor lighting desirable. Outdoor lighting opens up the garden for nighttime use, too, and can be used to highlight architecture, specimen plantings, or specific pieces within the landscape.

For those who often travel and have very busy schedules, an irrigation system is a must. It really takes the edge off watering duties, yet should never 100 percent replace a discriminating eye and hand-watering intervention when gardens get really hot and dry.

I often say my outdoor lighting gives me the nighttime and my irrigation system gives me freedom, so they are very valuable to me.

Beautiful plantings are the icing on the cake and tie everything together. Much of North Arlington is blessed with large shade trees — a big reason potential buyers consider North Arlington — and lush evergreen and deciduous underplantings help potential buyers imagine living in these outdoor spaces.

Without a doubt, garden projects that define and enclose personal outdoor spaces–things like fencing and nice gates, patios and seating areas, and beautiful plantings–are items that not only increase the day-to-day enjoyment of the homeowner, they greatly increase the value of the property, as well.

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Being Competitive In The Spring Real Estate Market

Question: The best time for me to purchase a home is over the next few months, but I’ve heard from friends that the spring is highly competitive. Do you have any tips for being more competitive in the spring market without overpaying?

Answer: In a couple of weeks I’ll publish a summary of real estate data for the first quarter of 2017 in Arlington, but I can tell you that this year is off to an explosive start and the “spring market” started early. Warmer weather brings more buyers to the market and more competition over our limited housing inventory. Here are some tips on how you can improve your chances submitting a winning offer without exposing yourself to unnecessary risk or overpaying:

Take Your Time, Do Your Homework

I always tell clients that a home has two values — market value and personal value. Personal value will drive how you structure your offer and what you’re willing to pay relative to market value. Hopefully you’ve spent time over the last couple of months sharpening your criteria and understanding how it fits within your budget. If you’ve put in the right prep work upfront, you’ll be able to recognize personal value quickly and make strong offers with confidence.

Settle Faster

One way to make your offer stand out is by settling in three weeks instead of the more common 30-40 days. The settlement period is the time between the contract being signed (ratification) and the home purchase. It’s dictated by the time your lender needs to prepare your loan, so talk to your lender early on about ways to reduce your settlement period. Most sellers want to close on a property as soon as possible.

Contingencies

Most offers in Arlington include contingencies (protective terms for a buyer) for financing, appraisal and a home inspection. The shorter you can make each contingency, the more attractive your offer will look to a seller. Talk to your lender about how long they need for the financing and appraisal contingencies and don’t add unnecessary time to them.  Home inspections are valuable steps in the buying process, but also carry significant risk to the seller.

There are a number of ways to improve the “normal” 7-10 home inspection contingency to make your offer more attractive such as reducing the length of the contingency to five days with a short negotiation period, using a Pass/Fail contingency by removing the right to negotiate, making the inspection for informational purposes by removing the contingency all together (do not make this decision without considerable discussion), or getting approval from the seller to conduct a pre-inspection before making your offer.

Seller Preferences

Before making your offer, find out if the seller has any preferred terms such as a post-settlement occupancy (aka rent-back), home purchase contingency, or timing of settlement (Virginia loans should close end of month).

Watch Days on Market

The number of days a property has been on the market will help you decide how to structure your offer. You should be prepared to make your strongest offer within the first week of a listing and adjust your terms with each week a property sits.

The spring market can be a great time for buyers who are prepared for the additional competition because you’ll see a significant increase in inventory, so that illusive two bedroom + den or half-acre yard with a deck is more likely to appear. If you’re not prepared to make a strong offer, the spring can be frustrating and defeating because you may watch your dream home(s) go to other buyers who have made smarter, but not necessarily higher, offers.

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Resale Value of New Construction

Question: I’m considering purchasing a new construction home in Arlington or a nearby neighborhood and have been meeting with a number of local builders to research my options. I’ve heard from quite a few that purchasing a new home often results in instant equity because they often get appraised for at least $100,000 more than the purchase price. Do you think that the higher appraisal value is an accurate reflection on the resale value of these homes?

Answer: Over the past decade, variations of large Craftsman and Arts & Crafts style homes have been replacing older homes across Arlington and Northern Virginia. Local builders have figured out a standard exterior aesthetic and interior design that buyers are willing to pay a premium for, so most new homes over the last ten years have a similar look and layout. Savvy buyers have started to question how these homes will do when they come back onto the market for resale.

Due to the fact that most buyers of $1M+ new homes plan to raise families in them for a long time, we won’t see a lot of these homes resold for a while. My guess is that we’re about 5-10 years away from really being able to answer this question, but by opening up the dataset to Arlington, McLean and Vienna, I was able to come up with enough data points to begin looking at the resale value of new homes in Northern Virginia.

The 106 data points I pulled together are for new homes built from 2007 on and resold once after the original purchase in Arlington, McLean and Vienna. I removed any foreclosures or short sales. For purposes of this analysis, I think it’s better to look at resale in all three markets combined rather than split them up and draw assumptions from minimal data.

  • On average, new homes resold for $45,585 more than what they were purchased for with an original average purchase price of $1.46M (~3 percent gain)
  • Of the 106 total data points 42 were sold within 3 years, 50 sold within 4-6 years, and 14 sold within 7-9 years
  • Homes that sold within 7-9 years of original purchase fared the worse with 57 percent (8 of 14) selling at a loss
  • Homes sold within 4-6 years have done the best, with 80 percent (40 of 50) selling for more than the purchase price
  • Two thirds of homes sold within 1-3 years sold for a gain
  • Of the 30 homes sold for a loss, the average loss was nearly $120,000
  • Of the 74 homes that sold for a gain, the average gain was nearly $114,000
  • Two homes resold for the same price they were purchased
  • 21 homes sold after three years of ownership and 18 sold after five years of ownership, these were the two most common times between sales
  • The biggest loss was nearly $665,000 and the biggest gain was nearly $400,000

It’s tough to draw any specific conclusions from this data because we’re still so early in the resale cycle for this type of new homes, but I thought it’d be fun to take a peak behind the current a bit early because it’s such a common question.

The important takeaway is that a good investment in a new home in Northern Virginia is more about making the right decision for you and your family than it is obsessing over the numbers. If you take your time, learn the market and understand the difference between builders you will put yourself in a much better position to end up on the “gains” side of the data when it’s time to resell.

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Will Rental Income Return To Rosslyn and Courthouse Owners?

Question: I’ve been renting my unit at the 1800 Wilson condos in the Rosslyn/Courthouse area for the last five years and am wondering why I used to get more rent five years ago than I do today, despite keeping the unit in great condition for each renter. Any ideas?

Answer: You may have heard that over the last five to six years, the rental market has hit all-time highs across the country, so it makes sense that you’d expect your rental income to increase. However, the increased rental demand and previously undersupplied luxury rental market in Rosslyn got the attention of some major developers, who recently built larger luxury rental buildings nearby.

Developer vs. Landlord

Landlords at 1800 Wilson and the neighboring Rosslyn/Courthouse condo buildings took a hit on rental income starting in 2013 as luxury apartment buildings Slate|Sedona19Nineteen Clarendon, and 2001 Clarendon added nearly 850 units to an undersupplied Rosslyn/Courthouse rental market, while offering deep discounts to new tenants in the range of one to two free months of rent (standard for new apartment buildings).

In the last year or two, each of the buildings have finished their initial leasing cycle and the incentives have expired at all three, so 1800 Wilson and other landlords in Rosslyn and Courthouse should see a small increase in rental rates.

Don’t expect a huge jump because rental supply is substantially higher now and Central Place, above the Rosslyn Metro station, just started leasing 377 luxury units. However, many of these apartments are in the ultra-luxury market and cater to a different renter than those looking at 1800 Wilson and similar buildings in the area.

Rental Trends

I built a table of rental trends in condo buildings in Rosslyn & Courthouse with comparable 1BR/1BA and 2BR/2BA units. I limited data to 1BR units w/ 650-850sqft and 2BR units w/ 900-1,350sqft to reflect the majority of 1BR and 2BR units at 1800 Wilson. “Avg Discount From Ask” is the average difference between final rental rate and original asking rental asking price.

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Multigenerational Housing in Arlington

Question: We’re a family of four, with two school age children, and considering having my parents move in with us soon. What sort of multigenerational options do you see in Arlington and how frequently do they come on the market?

Answer: The demand for multi-generational living has increased substantially nationwide over the last few years and most experts and builders expect that trend to continue. Multi-gen living is generally defined as parents living with their adult children, and their children (grandchildren). The most common multigenerational housing requests I get are for families seeking a full bedroom and bathroom on the main level and occasionally for a full second master bedroom with private bath, on any level.

Main-Level Bedrooms/Suites

Main-level bedrooms and/or master suites are increasing in popularity with homeowners and local builders because the rooms can be used for permanent multi-gen living or guests with physical limitations, but also convert easily to offices, playrooms, and libraries. The data below is current as of Friday, March 10, 2017 in Arlington, Virginia for detached homes sold with a full main-level bedroom and bathroom, not including one-level homes (e.g. ramblers and ranchers) or foreclosures/short-sales.

 

  • The average days on market is consistent with what you see for all detached homes in Arlington, but averaging about 1 percent more of a discount from the original asking price, suggesting sellers are either overvaluing a main-level BR/BA or there isn’t enough buyer demand
  • The average sale price reflects pricing in the most expensive Arlington zip codes for detached homes because about half of the 1,235 sold are from 22207 and 22205
  • In 2016, homes with a main-level full BR/BA made up nearly 14 percent of all detached home sales and 11.5 percent of new construction sales.

Second Master Suite

Here’s a look at the much less popular, much harder to find, second master suite in detached Arlington homes. Data is current as of Monday, March 13, 2017 and does not include foreclosures or short sales.

 

  • The demand for a second master bedroom is clearly low with average days on market and the percent discount from asking price well above the market average for detached home
  • Homes with a second master suite are much larger than homes with main level BR/BA, averaging about 1 more full bedroom and bathroom
  • Over half of the homes sold with a second master suite were in 22207 or 22205

Aging In Place Follow-up

In January I wrote about aging in place in Arlington and got some great responses from readers about the concept of Universal Design guidelines for updating/building a home to accommodate aging in place and programs like the Arlington Neighborhood Village. Thank you to the readers who provided that feedback!

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ROI On Remodeling Your Rental

Question: After reading your article two weeks ago about remodeling before selling a property, I was wondering what your thoughts are on remodeling our rental property. It’s a 1BR + den a couple blocks from the Virginia Square metro with a perfectly functional bathroom and kitchen, but about 15 years old.

Answer: A couple of weeks ago, I warned about spending money on major remodeling projects before selling your home and you should be equally cautious about making major updates to a rental property. In your case, it doesn’t sound like spending $15,000+ remodeling the bathroom and kitchen is a good investment at this time. Here are some of the questions/factors you should consider:

Payback Period

How long will it take to break-even on your remodeling expenses based on projected increase in rent? A moderate remodeling of your bathroom and kitchen is likely to increase the amount you can rent your unit by $150-$200/month (this is case-by-case), meaning your pay-back period is likely 10+ years. Keep in mind that the market value of your updates will depreciate annually and usually at a faster pace under the wear and tear of a rental unit.

Tenant Profile

The ROI of remodeling is heavily based on the type of tenant you’re most likely to have. Your tenants will most likely place more value in convenience, affordability, and functionality than they do aesthetics and upgraded finishes/appliances. As the tenant profile shifts towards families and higher-end properties, the ROI of upgrades increases.

Length of Stay

The less time a tenant plans to stay in a property, the less concerned they’ll be with updates, but tenants planning to stay for three or more years will consider their rental to be more of a home and place great value in an updated kitchen and bathrooms. As the tenant profile shifts to longer rental periods, the better the ROI on remodeling. In your case, the tenant profile is more likely to stay for 12-24 months, diminishing the value of remodeling.

Tax Write-Offs

According to Joseph Aiken, CPA with Aiken & Company, the current tax code considers any capital expenditures on remodeling to be depreciable assets, meaning you can’t write off the cost of your remodeling in the year you spent the money, rather deduct it over a 27.5 year depreciation schedule.

My advice for investing in a rental property is similar to investing in pre-sale improvements. Fresh paint, quality floors, lighting, and a deep clean go a long way on a rental property without breaking the bank and can usually be written off as maintenance expenses on your taxes. Check out IRS Publication 527 for tax details on rental properties.

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