Cost of New Construction Homes in Northern VA

Question: How has the cost of new construction single-family homes changed over the last few years?

Answer: First, thank you to everybody who voted in last week’s poll to decide how we would donate to locate charities. Arlington Food Assistance Center (AFAC) received almost 2/3 of the vote and thus a donation of nearly $1,000 to help feed our neighbors in need. Now on to this week’s real estate topic…

The cost of a single-family home has skyrocketed locally and nationwide, with the average cost of a single-family home in Northern VA increasing 31.6% from October 2019 to October 2021. This data includes resales of existing homes and new construction, with the majority of the sales being resales. Let’s take a specific look at how the cost of a new single-family home in Northern VA has changed over the last three years (hint: they also got much more expensive!).

A few quick notes about the data:
  • The data is limited to what has been entered into the MLS (Realtor database of record) and not all new construction makes it into the MLS, but the majority does and thus gives us an accurate reading of the market
  • Northern VA aggregate totals includes Arlington, Fairfax, Loudoun, and Prince William Counties plus the Alexandria, Falls Church, Fairfax, and Manassas Cities
  • In the table below Alexandria, Falls Church, Fairfax, and Manassas refer to the County, not City, portions
Here are some highlights from the data I reviewed:
  • The average cost of a new single-family home in Northern VA increased a staggering 25.9% to an average sold price over $1.6M from 2019 to 2021
  • The biggest increase from the localities I reviewed was in Aldie, which increased 37.5% to an average cost over $1.25M from 2019 to 2021
  • The most expensive County for a new single-family home is Arlington, coming in at an average sold price just over $2M in 2021, trailed only slightly by Fairfax County, with an average sold price about $100,000 less than Arlington
  • The best value, on a price per square foot basis, for new construction in 2021 is in Manassas ($173/SqFt) and Dumfries ($183/SqFt) and the least value, on price per square foot, is Mclean ($380/SqFt) and Arlington ($379/SqFt)

If you are interested in learning more about new construction options in Northern VA or the DC Metro, feel free to email me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Reader Vote for Thanksgiving Charity Donation

Happy Thanksgiving week everybody! The Eli Residential Group will be donating $1,500 towards three fantastic local food charities based on your votes. We will distribute the donations in proportion to the total votes received for each of the three charities below. Thank you for your participation and have a wonderful start to the holiday season!

Poll:

  1. Arlington Food Assistance Center (Arlington, VA)
  2. The Lamb Center (Fairfax, VA)
  3. SOME -So Others Might Eat (Washington DC)

Arlington Food Assistance Center

AFAC is rated 86.34/100 on Charity Navigator.

“Our mission is to feed our neighbors in need by providing dignified access to nutritious supplemental groceries.

Since 1988, the Arlington Food Assistance Center remains dedicated to its simple but critical mission of obtaining and distributing groceries, directly and free of charge, to people living in Arlington, VA, who cannot afford to purchase enough food to meet their basic needs.

While hunger might not seem to be an issue in a wealthy county like Arlington, the high cost of living here combined with the current economic situation causes many families struggle to make ends meet. Supplemental groceries from AFAC mean that families can remain in their homes, workers can stay on the job, children are ready to learn, and mothers and babies have the nutrition they need. We help relieve the food budgets of our clients, thereby allowing them to make other necessary purchases without sacrificing their health and nutrition needs.”

The Lamb Center

The Lamb Center is rated 97.12/100 on Charity Navigator.

“The Lamb Center is a daytime drop-in shelter for poor and individuals experiencing homelessness in Fairfax, Virginia. We provide a variety of services without cost to our guests, including breakfast, lunch, showers, laundry service, Bible studies, housing and job counseling, AA meetings, a nurse practitioner clinic, a dental clinic, and much more. We partner with local groups and organizations who have a passion for serving the homeless.”

SOME (So Others Might Eat)

SOME is rated 94.35/100 on Charity Navigator.

“SOME provides material aid and comfort to our vulnerable neighbors in the District, helping them break the cycle of poverty and homelessness through programs and services that save lives, improve lives, and help transform lives of individuals and families, their communities, and the systems and structures that affect them.

The cycle of poverty and homelessness can be broken. SOME’s (So Others Might Eat) comprehensive programs are designed to help our most vulnerable neighbors—people experiencing homelessness and extreme poverty—find pathways out of poverty and achieve long-term stability and success.

SOME is an interfaith, community-based service organization that exists to help and support residents of our nation’s capital experiencing homelessness and poverty. SOME offers a variety of services, including affordable housing, counseling, substance use disorder treatment, and job training. In addition, SOME helps meet immediate daily needs by providing food, clothing, and healthcare to those in need.”

How Much Are Condo Fees in Arlington?

Question: We are finalizing our condo budget for 2022 and wondering if you can share information on what condo fees are elsewhere in Arlington.

Answer: For those unfamiliar with how condo fees are set, they’re a calculation of the next years projected budget (operating costs, savings contributions, etc) divided by each unit based on a pre-determined ownership percentage (usually based on square footage or bedroom count). The budget is set by the Board, which is made up of condo owners, not by the property management company.

Many condo owners/potential owners have a hard time wrapping their head around paying condo fees and see it as a loss compared to other property types, but it’s important to understand some of the benefits of condo fees, which I wrote about here in 2018. With that said, condo fees that climb too high have a negative impact on property values, which I detailed here in 2017.

So let’s take a look at what average condo fees look like around Arlington! Please note the following about the data:

  • I don’t include amenities in these numbers because there isn’t a reliable source for amenities in each building and the data that’s in the MLS suffers from a lot of human error (missing or incorrect info)
  • The source for the condo fees is property sales data in the MLS so it is limited to what has been sold/offered for sale, not published condo fee data from each building (that doesn’t exist). While this isn’t a 100% accurate picture, it’s a big enough sample size that we can consider these numbers pretty close.
  • I limited the data set to one and two bedroom condos and also did not include cooperatives
  • My reference to “buildings” in the 2nd and 3rd cross-sections refers to condo buildings with 5+ floors and “low rise” refers to buildings with four or fewer floors
  • In some cases you will see a year-to-year decrease in condo fees. It’s unlikely that condo fees dropped in Arlington in those years, rather it’s a result of shifts within the data (more sales of condos with lower fees or fewer sales of condos with high fees)
  • Fee/SqFt refers to the average monthly condo fee divided by the finished square footage of the unit. It’s a good way to compare the relative value of a building’s fees.

Hopefully these numbers help Boards and condo owners understand where they fall relative to the rest of the market. Keep in mind that there are several factors that cause buildings to be above or below average including amenities, staffing, historical management of reserves, unit mix (buildings with larger units have fewer owners to spread costs across), and many more.

It’s important for each Board to understand how their fees compare to comparable buildings and take a good look at each budget line-item to ensure smart spending with proper savings (primarily driven by the Reserve Study). The budget drives fees, fees should not drive the budget.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Zillow Shutters Their Home Buying/Selling Business

Last week I wrote about breaking news in the real estate industry that Zillow was underwater on their home buying/selling business, Zillow Offers. Hours after I published my article, to the surprise of many, Zillow announced it was shutting down Zillow Offers and reducing their workforce by 25% as a result.

The purpose of last week’s article was to discuss what Zillow’s problems meant for the real estate market and Zillow. For those who didn’t read and don’t intend to, the bottom line was that Zillow’s issues are not an indicator of trouble in the broader real estate market or for Zillow’s business overall, they’re simply a bad bet by Zillow that will cost them about $1B since they started Zillow offers in 2018.

However, ARLnow Commenter “Arlington Robin” made a great point that while Zillow’s issues may not be indicative of trouble in the nationwide/DC area real estate market, it will likely create problems in local markets like Phoenix where Zillow will be selling a lot of homes, likely with a priority on selling quickly vs extracting top dollar.

Background

Zillow entered the iBuying business in April 2018 (launched in Phoenix) with a home buying program called Zillow Offers in which they’d quickly purchase homes using their internal pricing algorithm (built off the Zestimates algorithm) directly from homeowners for cash. The incentive structure is simple: fast, cash, reliable, no list prep. In 2019 I wrote a column on iBuying and discussed the approach, pros, and cons.

Since 2018, Zillow Offers expanded to over 20 markets around the country (mostly in the south and out west) and bought tens of thousands of homes. Three weeks ago, Zillow announced it was freezing home buying through 2021 to focus on selling ~7,000 homes they had accumulated and last week an analyst at KeyBanc found that 2/3 are selling for less than their purchase price at an average discount of 4.5%.

Soon after these reports surfaced and hours after I wrote my article about it, Zillow announced they were shutting down their iBuying program completely (although they still have thousands of homes to sell).

Zillow vs iBuying Competitors

Zillow wasn’t the only one in the business of large scale iBuying. Opendoor and Offerpad both operate in this space with better margins and, at least for now, do not seem to be heading for the same fate as Zillow. Although, based on my reading of their earnings statements, they’re both operating at a loss, like many tech start-ups.

Even though Zillow has access to more resources and data, there are a few good reasons why Zillow has tapped out.

Setting the right offer price (high enough to buy homes at scale, low enough to make money) and forecasting the market 3-6 months out are critical to the success of an iBuying business. Zestimates, Zillow’s market valuation tool that drives these buying/forecasting decisions, was designed to attract and engage consumers, not to drive a massive home buying and selling business. Companies built around iBuying designed their pricing algorithms specifically for the purpose of maximizing margins in buying/selling real estate at scale.

Furthermore, Zillow needs to protect its core business from the high volatility of iBuying at scale ($1B in losses in 3.5 years). Zillow investors likely have less of an appetite for the risks associated with large scale iBuying, but the investors in iBuying focused businesses like Opendoor and Offerpad know exactly what they’re signing up for and are likely more willing to accept early losses. As a large publicly traded company, Zillow couldn’t just ask itself whether they could make it in iBuying, but whether the payoff in making it in the iBuying business was worth the risk of compromising its core business and brand. Clearly, Zillow leadership decided that it was not worth it.

Opendoor and Offerpad both have earnings calls scheduled for this Wednesday Nov 10 so it’ll be very interesting to see how their numbers compare to Zillow’s and what they have to say about Zillow’s exit from their business.

My Thoughts

Zillow’s foray into iBuying via Zillow Offers feels more like a lab experiment with tight guardrails than a genuine attempt to stand-up a lasting business. They’re well aware of their high margin of error predicting home sale prices via Zestimates for off-market sales (in other words, when they don’t get to tune the Zestimate based on a list price), disruptive market events are the norm not the exception, and every market is tremendously risky when buying and selling into short windows. All of these, and more, make iBuying an inherently risky business.

I doubt Zillow went into iBuying simply hoping to get lucky with market timing or that they under valued the risk associated with the business. So now that we’ve seen Zillow exit the business in less than four years instead of pause, recalibrate, and continue, my theory is that a large part of their reasoning for starting Zillow Offers was for the data and lessons learned. If they timed it right and their tech worked as hoped, it could have transformed their business (they projected the market could be worth $20B annually to them), but if it didn’t they walked away with incredible data they will certainly leverage for future ventures.

Zillow has clear intentions of growing from a search and marketing platform to becoming more integrated in the transaction (including title and mortgage) so this may ultimately be a small price to pay (~$1B in losses) towards finding the most profitable and scalable way to reach their goals. Even if it takes a few more $1B mistakes to figure it out, there’s too much return in disrupting the business of buying and selling real estate for Zillow to not keep investing in potentially disruptive ventures.

The next step for Zillow in their quest to be more integrated into the transaction is likely Power Buying whereby Zillow will buy the house you want, allow you to move in, sell your previous home, and then sell your new home back to you. It’s essentially a more involved bridge loan for people who need to sell a current home in order to buy their next home. This model is less risky and allows Zillow to profit off the transaction in multiple ways.

I’d love to hear other thoughts and theories about Zillow Offers and Zillow’s next ventures in the comments!

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

Zillow’s Home Buying/Selling Issues

Question: Can you share your thoughts on the latest news about Zillow’s issues with their home buying program?

Answer: I don’t usually comment on real estate news, but the recent issues reported with Zillow’s home buying/selling program are interesting and worth discussing.

Catch Me Up

Zillow entered the i-Buying game in April 2018 (launched in Phoenix) with a home buying program called Zillow Offers in which they’d quickly purchase homes using their pricing algorithm (Zestimates) directly from homeowners for cash. The incentive structure is simple: fast, cash, reliable, no list prep. I wrote a column on this type of “i-Buying” in 2019 and discussed the approach, pros, and cons.

Since 2018, Zillow Offers has expanded to over 20 markets around the country (mostly in the south and out west) and bought thousands of homes (maybe tens of thousands, but I couldn’t find a good source). Two weeks ago, news broke that Zillow was freezing home buying through 2021 as they work to offload ~7,000 homes.

Yesterday, news broke that an analyst at KeyBanc, Edward Yruma, studied a sample of 650 homes Zillow is currently selling (about 20% of their total inventory) and found that 2/3 are selling for less than their purchase price at an average discount of 4.5%.

What Does it Mean for the Market?

Does this signal a falling/collapsing real estate market?

People, especially news outlets, love looking for signs of a market or business collapse and will certainly play-up this angle. However, I think it’s a lot of nothing at this point.

First, Zillow’s i-Buying program doesn’t represent the housing market, so I don’t buy that it’s an early indicator of a downturn. It’s a new technology-driven business model for buying and selling homes and even if you expect i-Buying to find long-term success, you expect bumps along the way as algorithms and processes evolve through different market cycles.

Zillow relies on its Zestimate home valuation algorithm to determine their offer price and they have a published median error rate of 6.9% for off-market sales, which is essentially what a Zillow Offers home purchase is. Zestimates is within 10% of the final sold price on an off-market deal just 63.8% of the time.

Their published, and more visible, 1.9% error rate for on-market sales is misleading because the Zestimate algorithm adjusts to asking prices and days on market data once a listing is posted, which brings Zestimate accuracy for on-market sales (majority of sales) much closer to the sold price.

Combine Zillow’s 6.9% error rate for off-market sales with the difficulty in tweaking their pricing algorithms in a rapidly appreciating market (they’ve had to adjust values higher on the fly for their offers to have a chance of being accepted) and it’s easy to understand how they ended up with too much inventory worth less than what they paid.

This isn’t a housing market issue, but growing pains of a new business model and technology.

What Does it Mean for Zillow?

Did Zillow reach too far from their core business and get itself in trouble?

Business Insider reported that if Zillow sold everything at the current list price in Phoenix (Zillow Offer’s second largest market), they’d lose about $6.3M. Let’s say they take even more losses on these homes and take similar losses in the rest of their markets, we’re probably looking at losses of ~$50M-$100M against a market cap of approximately $22B and ~$3.7B cash on hand as of today. Far from trouble and probably losses they’re willing to accept in return for the lessons learned/experience.

These losses are also offset by the financial gains Zillow gets in the other businesses they have that benefit from their home purchase/sale transactions. Zillow bought a mortgage company in 2018 and market their loans to buyers of their homes and likely convert quite a few home sellers via Zillow Offers into Zillow Home Loans borrowers on their next purchase. Zillow also has their own title and escrow business, Zillow Closings, a notably profitable business. The transaction activity also strengthens their very lucrative revenue stream from real estate agents who purchase leads from, and pay referral fees to, Zillow.

Not only is this news about underwater inventory unlikely to materially impact Zillow’s business, but it’s hard to even call it an embarrassing misstep at this point given the valuable information/lessons learned they likely picked up along the way.

Does Zillow Offers Operate Here?

Zillow Offers does not operate in the DC area, in fact, the closest market to us that they operate in is Raleigh NC. I believe we don’t see Zillow Offers here because our housing inventory is more diverse and older than most/all of their current markets.

A diverse housing supply makes it more difficult for algorithms to predict values compared to markets Zillow Offers operates in that have huge developments of homes with very similar inventory. An older housing supply is likely considered too risky for a hands-off buyer like Zillow making it hard for them to make competitive offers that account for the added risk factor.

Looking Forward

I’m very interested in when Zillow restarts their i-Buying program and if they make significant adjustments to the markets they operate in, their fee structure (fees are already high for homeowners), or process. There’s so much potential in i-Buying for a company like Zillow because of all the different ways they can create revenue/profits, even if they take some losses on the actual sale, that it’s hard to imagine they don’t come back better and stronger than before.

On the flip side, they could decide that i-Buying creates too much risk/distraction for their core business(es) and find revenue elsewhere, leaving i-Buying to companies that specialize in it like Opendoor.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

Starting Your 2022 Home Search

Question: We are looking forward to buying a home in 2022. Do you have any recommendations on how we should start the home buying process?

Answer: Google “home buyer tips” or “what to know before buying a home” and you’ll find plenty of advice on the topic, so I’ll include some suggestions I don’t see on most of those lists and also put my own spin on others that you have heard before.

Weighted Criteria

It’s easy to come up with 3-5 things that are most important to you, but challenge yourself early to come up with a list of 12-15 things. Then give yourself 100 points and allocate points to each based on how important each item is to you and you’ll end up with a weighted criteria list to help you focus your search and objectively compare properties.

If you want to take it to the next level, bring your weighted criteria list with you on showings and score each house out of the total points allocated to it so each home you see is scored on a 100-point scale.

Length of Ownership

How long you expect to be in your home is one of the most important considerations in defining what you prioritize and how you use your budget. You should focus on the following:

  1. Likely length of ownership
  2. Difference in criteria for a 3-5 year house vs a 10-12+ year house
  3. Difference in budget requirements for a 3-5 year house vs a 10-12+ year house

Appreciation is not guaranteed and difficult to predict, but the value of longer ownership periods is undisputed. One way longer ownership adds value is the potential for eliminating one or more real estate transactions, and the associated costs (fees, taxes, moving expenses, new furniture, etc) and stress that comes with moving, over the course of your lifetime.

If you have an opportunity to significantly increase your length of ownership by stretching your budget, it’s often justifiable. On the other hand, if your budget or future plans restrict you to housing that’s likely to be suitable for just 3-4 years (and buying now still makes sense), it’s generally better to stay under budget.

Influencers (not the Instagram ones)

Family, friends, colleagues…they’re all happy to offer opinions and contribute to your home buying process, but the input can be overwhelming and unproductive if you don’t set boundaries. Try to determine up-front who you want involved in the process and how you’d like them to be involved.

Think about how you’ve made other major decisions in life – what college to attend, what car to buy, where to get married, whether to change jobs – and if you’re the type of person who likes input from your friends and family, you’ll likely do the same when buying a house. Plan ahead with those influencers so their input is productive.

Does Your House Exist?

Before jumping too far into the search process, spend a little bit of time searching For Sale and Sold homes on your favorite real estate search website/app to see if the homes selling in the area you want and within 10% of your upper budget are at least close to what you’re looking for. If not, spend some time adjusting price, location, and non-critical criteria to figure out what high-level compromises you’ll need to make and then compare those compromises to your current living situation and/or continuing to rent.

Know Your Market

We’re in a strong seller’s market for single-family and townhouses right now with low supply, high demand, and increasing prices, but the condo market is more balanced.

Each sub-market behaves a bit differently and comes with its own unique set of challenges and opportunities, so take time early on to understand the sub-market(s) you’ll be involved in and what you’re likely to experience. This is something your agent should be able to assist with.

Pre-Approval & Budget

There is a lot of value in working with a lender early on in the search process. For starters, you’ll have somebody who can provide real rates and advice based on your specific financial situation/needs. A lender can only do this if they’ve reviewed your financial documents and credit. The more you put in, the more you get out.

You’ll need to have a lender pre-approval to submit an offer (seller has to know you qualify for the purchase you’re offering to make) so if you have to do it anyway, why not doing it early on so you get the most value out of your lender? It also means that you’ll be prepared to make an offer if you find the right home before you expect to be ready.

Given how competitive the Arlington/Northern VA/DMV real estate market is, the quality of your pre-approval can make a big difference when you make an offer. You should strongly consider partnering with a local lender with a great reputation to give yourself an advantage (or not put you at a disadvantage) when making an offer. Pre-approval letters from big banks and online lenders don’t go over as well in our market. If you’re looking for a recommendation, consider Jake Ryon of First Home Mortgage (JRyon@firsthome.com).

Find an Agent

The least surprising suggestion on this list! Agents come in many different forms and finding somebody who suits your personality and goals is important. Ask friends, colleagues, and family for referrals and meet with multiple people until you find the right fit.

The worst thing you can do is choose your agent based on whoever responds to an online showing request faster. A good agent can provide a ton of value being involved in your buying process 3-6+ months before you’re ready to buy. Be wary of anybody who wants you to “wait until you’re ready” before working with you.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

Avoid Gaps In Your Condo Insurance Policy

Question: My condo association carries an expensive Master Insurance policy, but my lender is requiring that I purchase my own individual policy. What coverage do I gain from the individual policy that the master policy doesn’t include?

Answer: Every condo association has its own (expensive) Master Insurance policy to cover the common elements, but there are substantial gaps between the association’s policy and what you’re personally liable for without an individual HO-6 policy. Most people shop for the cheapest, fastest individual insurance policy and apply just enough coverage to meet the lender’s requirements, but that may put you at risk.

To explain common gaps between master policies and HO-6 (individual condo) policies, I’d like to re-introduce Andrew Schlaffer, Owner and President of ACO Insurance Group. Andrew is an expert in Master Insurance policies and has helped multiple local condo association’s reduce their cost and improve their coverage since writing a column on the topic last year. If you’d like to contact Andrew directly to review your association’s master policy, you can reach him at (703) 719-8008 or andrew@acoinsgrp.com.

Take it away Andrew…

Increasing Claims, Increasing Coverage Gaps

The condominium insurance marketplace is facing challenges that will impact homeowners in 2021. Water damage is leading this list of challenges—according to the Insurance Information Institute, about one-third of homeowner insurance losses are caused by water damage and freezing. The DMV is home to many aging condo buildings that struggle with mitigating water damage losses and their impact on insurance.

As water damage claims continue to rise and property damage costs increase, many insurance carriers are beginning to make changes to their coverage offerings that may increase your risk exposure.

Master Insurance vs Individual Insurance Policy

Nearly all master insurance policies in this area are written on a Single Entity basis which means coverage extends to general and limited common elements but also extends within individual units to fixtures, appliances, walls, floor coverings, and cabinetry, but only for like, kind, and quality to that conveyed by the developer to the original owner.

Items not covered by the master insurance policy and are generally not the association’s responsibility include:

  • Personal Property (clothes, electronics, furniture, money, artwork, jewelry)
  • Betterments and Improvements (demonstrable upgrades completed after the initial conveyance)
  • Additional Living Expenses (the cost to live at a temporary location, storage fees, loss of rents)
  • Personal Liability (provides protection for bodily injury or property damage claims arising from your unit)
  • Loss Assessment (triggered only if there is a covered cause of loss and the master insurance policy limits are exhausted; this assessment would apply collectively to all unit owners)
  • Medical Payments (no fault coverage available for injured guests within your unit)

Condo owners should purchase an individual condo insurance policy (HO-6), which is also required by lenders. This policy can provide coverage for the items listed above.

Review Your Dwelling Coverage

Dwelling Coverage should be included in every HO-6 policy to avoid significant out-of-pocket expenses. Many condo associations can hold you responsible for expenses that fall under the master policy deductible that are caused by the owner’s act, neglect, misuse, or carelessness. Due to the rise in water damage losses, many insurance carriers are increasing their deductibles, which in turn spurs the need for homeowners to adjust their dwelling insurance limit.

In a recent instance, a condo suffering from significant water damage losses was required by its insurance carrier to increase the master insurance policy deductible from $10,000 to $25,000. In this community, each homeowner should have at least $25,000 of dwelling coverage to indemnify them for the deductible expense in the event a claim arises from their unit. If coverage is not available, the homeowner would either pay this expense personally or the association can put a lien on their unit.

Dwelling coverage should also include a homeowner’s betterments and improvements (improvements made above what the builder originally delivered), including those completed by prior owners. Most lenders will require at least 20% of the unit’s market value insured under this coverage as well. 

What Information to Share with Your Insurance Provider

You should always review the condo association’s governing documents and understand the applicable statutory requirements (i.e. Virginia Condominium Act) and lender requirements to verify their individual responsibilities, including maintenance/repair and insurance. Along with sharing the association documents, homeowners should also provide their personal insurance agent with the following:

  • What is the master policy deductible? ($5,000, $10,000, $25,000)
  • What approach is used for the condominium insurance coverage? (Single Entity)

My Recommendation for HO-6/Other Individual Policies

Thank you, Andrew, hopefully this helps at least a handful of readers better protect themselves.

I find that most buyers go straight for the path of least resistance and cheapest premiums for their insurance coverage. Adding coverage to your existing auto policy in 5-10 minutes probably means that nobody actually reviewed your association’s Master Insurance policy and thus you’re at risk of coverage gaps. Personally, I’d rather pay a bit more to know that my policies have been designed with some personal attention and reviewed annually for gaps. Andrew and his team can handle this for you as well.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Who Is Responsible for Main Supply Lines?

Question: We bought an older home with original water and sewer lines. Who is responsible for the maintenance and replacement of these lines and how do I know if there’s a problem?

Answer: You are responsible for the main plumbing lines for water and sewage running between your home and the public lines. In most cases, the gas company is responsible for everything to and including the meter (attached to your home) and you’re responsible for the lines after the meter.

The main lines are usually buried under your front yard and replacement costs (water and sewage) often start at a couple thousand dollars and can easily exceed $10,000. Costs vary based on some key factors including:

  • Distance from the public line to your home
  • Pipe material
  • Type of excavation/installation (difficulty in digging up old plumbing, # of turns in new pipe)
  • Cost to return landscaping to original state (this is on you, not the County)

In most cases, Washington Gas will return your property/landscaping to its original condition, including hardscape and your lawn (even your driveway), after excavating for repair or replacement. It’s not a bad idea to find out where your gas supply line is and plan landscaping with that in mind.

Identifying Problems

The life expectancy on many of the most common materials used for main plumbing lines range from 50-100 years, but tree root growth, unnatural disturbances like new landscaping, corrosion, and pressure build-ups can cause leaks, blockages, and other damage that you should monitor.

The most effective and most expensive way to look for problems is to hire a plumber to scope the lines with a camera to see if there are any issues. The cost of doing this often exceeds $500 per line, but can give you piece of mind or early warnings of a problem.

If you don’t want to pay a plumber to scope your lines, you can monitor for signs of a problem:

  • Water Line: higher water bills, lower water pressure, flooding in yard when there isn’t rain
  • Sewer Line: slow drainage/clogs in multiple areas of the house, foul smell inside or outside, odd behavior from plumbing like bubbling sounds
  • Gas Line: if you smell a gas/rotten egg odor, hissing sound from a gas line/meter, hazy/cloudy near gas line, plants dying, issues with gas-powered appliances

Good To Know

Here are some other helpful tips regarding the main lines for water, sewage, and gas:

  • HomeServce USA, through Dominion Energy, offers insurance protection for the water supply line, sewer line, and in-home gas lines
  • In most cases, you can expect the gas company to have a utility easement on your property which allows them the right to access your property for repairs or replacement as needed. Check your survey/plat to verify this right of access.
  • Polybutylene pipes (grey plastic) were used from the 70s-90s and prone to breakage. If your sewer lines is Polybutylene, consider replacing them now.
  • Lead pipes (dull grey) were used in the early 1900s for water supply lines and risk leaching lead into your drinking water and should be tested or replaced
  • CSST (Corrugated Stainless Steel Tubing) became popular for gas lines in the early 90s and is often not property bonded which means a lightning strike can blow a hole in your gas line. Bonding your gas line is simple enough that most home owners do it themselves, although I must recommend you use a qualified Electrician.
  • These days, PVC/CPVC are the most common piping for the main water and sewer lines instead of the heavier cast iron/galvanized steel options that used to be the standard. Copper is still a popular choice for water lines, but more expensive and more difficult to install.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

Renting Back Your Home After it Sells

Question: We’re preparing to sell our home and would like to stay in the house for a few weeks after it sells. Can you explain the rent-back concept?

Answer: A Seller’s Post-Settlement Occupancy, more commonly referred to as a rent-back, allows a homeowner to sell their home, collect the proceeds, and continue living in the home for a pre-determined period after closing.

Some common scenarios for a rent-back are:

  • You need the sale proceeds for the purchase of your next home
  • You want to ensure the sale closes before you move out
  • You want to wait-out the end of the school year or last day at a job

How Rent-Backs Are Structured

The Northern Virginia Association of Realtors contract (as well as other regional contracts) provides a standard form for a Seller’s Post-Settlement Occupancy Agreement so you don’t need to worry about hiring an attorney. It functions as a short-term lease including:

  • How much the seller will pay the buyer for the rent-back
  • How long the rent-back lasts
  • A security deposit
  • A penalty for staying past the rent-back period

Buyers will conduct a pre-closing walk-through before they purchase the home where they have all the rights provided to them in a normal sale. At the end of the rent-back, the new owners will conduct another walk-through once the previous owners move out, which is like that of a walk-through at the end of a normal rental period. If the previous owners caused damage during the move-out, leave junk behind, or fail other property delivery requirements, the new owners can make a claim against the security deposit, which is generally held by the Title Company who handled the sale.

Time Limitations

If the home is being purchased as a primary residence and the Buyers are taking out a mortgage, most loans (and all Fannie/Freddie loans) require that the Buyer intend to move into the property within 60 days of the closing and thus any rent-back is limited to 60 days (I usually recommend 59, just to avoid an issue with underwriting).

If a home is being purchased with cash or as a secondary home/investment property with a loan, the 60-day limit doesn’t apply. However, the contract form you’ll use explicitly states that it’s meant to give the seller the temporary right to use the property after closing and not subject to the Virginia Residential Landlord Tenant Act, so avoid using this form in place of a legitimate lease if the Buyer/Seller intend on a longer-term rent-back.

Not Without Risk

For the new owners, a rent-back carries with it some of the same risks as being a landlord. Disputes over security deposit, damage in excess of the security deposit, or trouble with the previous owners moving out on time are all realities that Buyers need to consider.

As with many decisions in a real estate transaction, a Buyer’s willingness to agree to a rent-back is a matter of risk and benefit. The risk being issues arising like those mentioned before and the benefit being that offering the seller a rent-back can be the difference between them accepting your offer or taking somebody else’s.

Free Rent-Backs?

In “normal” markets, the fee for a rent-back is usually calculated using the new owner’s carrying costs (mortgage + taxes + insurance), but in our hyper-competitive market, many Buyers offer Seller’s a free rent-back as a way to increase the competitiveness of their offer. A free rent-back isn’t worth much if the seller is asking for an extra week, but it certainly adds up if they’re asking to stay for 6-8 weeks past closing.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

Answering Your Appraisal Questions

Question: Can you explain the basics of the appraisal process?

Answer: I sat down with one of the best local lenders, Jake Ryon at First Home Mortgage (Jryon@firsthome.com), and came up with a list of some of the most common questions we hear about appraisals, which I’ll answer below:

What is an appraisal?

An appraisal is an objective assessment of a property’s value, conducted by an unbiased third party who does not have a stake in the sale of the property.

Below is an example of the core component of a recent appraisal in Arlington, the Comparable Sales Analysis. It compares objective features of the subject property (the home being assessed by the Appraiser) to the same features of similar/comparable homes that have sold nearby to reach a valuation of the subject home based on the Appraiser’s determination of how the difference in features change the value of the homes.

Why are appraisals done?

In most cases, the bank/lender is the primary investor in a home purchase. If you put 20% down, the bank is investing the other 80%. Appraisals are done to ensure that banks are making responsible investments in homes they otherwise know very little about and to make sure they do not lose substantially if you, the borrower, default on the loan and the bank is forced to take over (and sell it).

In short, the bank conducts an appraisal to make sure they agree with the value (aka the agreed upon sale price) you’ve placed on the home.

Who does the appraisal?

Anybody can hire a licensed appraisal to provide an opinion on a property’s value, but most appraisals are done through a bank/lender. Lenders have a pool of independent, licensed appraisers or appraisal companies that receive a notice when an appraisal is needed for a loan and an appraiser from the lender’s pool claims the job.

The selection of the appraiser is designed to be a blind selection process to maintain independence and objectivity so that lenders can’t handpick the appraiser they want and potentially influence the results.

Is an appraisal required? What is an “appraisal wavier”?

Most lenders require an appraisal to approve a loan, but in some cases an “appraisal waiver” is issued if Fannie Mae/Freddie Mac determine that that they do not need the additional assessment of an Appraiser because the sale price falls within an acceptable range based on sales history and reliability of comparable sales.

Waivers may also be given if the borrower has a high enough down payment that enough of the risk of overpaying for a property is being absorbed by the buyer.

How long does an appraisal usually take?

When Appraisers are not overwhelmed with orders and a lender submits a rush order right away, I’ve seen appraisals completed in as little as a few days. However, in most cases, appraisal reports are usually completed within 1-2 weeks of the order being placed by the lender.

What effect does a low or high appraisal have on a property sale?

If the appraisal value comes in at or above the purchase price, the bank is happy and the loan proceeds along the approval process. If the appraisal value is below the sale price, the bank will require the sale price to be reduced to the appraisal value or that the buyer put more money down to satisfy the loan-to-value ratio.

In most cases, the amount of additional money a buyer needs to put down is equal to the percentage the bank is contributing to the purchase (e.g. 80% if you’re making a 20% down payment or 95% if you’re making a 5% down payment) multiplied by the difference between the contract’s sale price and the appraisal value. However, this additional contribution can vary or may not be needed depending on your down payment amount, type of loan, and other details of your loan arrangement.

What happens if we disagree with the value or it comes in low?

The borrower/buyer is the only party who can challenge an appraisal and they must provide other (better) comparable sales, facts, or justifications to support an adjusted valuation.

I have dealt with some frustrating scenarios as a listing/seller’s agent when an appraisal came in low based on factually incorrect information on the appraisal report (incorrect bedroom count, square footage, etc) and there is nothing that can be done unless the borrower/buyer requests a revision.

What is an appraisal contingency?

An appraisal contingency is one of the three “standard” contingencies in the residential real estate contract (inspection, financing, and appraisal are the “big three”). It protects the buyer in the event a property appraises for less than the sale price by giving the buyer the ability to renegotiate the sale price or void the contract without losing their deposit.

Who pays for the appraisal and how much does it cost?

Buyers pay for the appraisal as a pre-closing expense and the cost usually ranges from $500-$1,000 depending on the type of loan and value/complexity of the property.

Does appraisal value equal market value?

I would argue that the answer is no. Market value is the price a buyer and seller are willing to exchange a property for and often incorporates forward-looking expectations (future construction, development pipeline, market trends, etc).

The appraisal value is generally backward-looking given that Appraisers are tasked with determining a home’s value based on similar properties that have sold/closed nearby (generally within 6-12 months). There is subjectivity in which comparable sales an Appraiser chooses for the report and how they value different features, like a pool, view, or extra garage space.

Oftentimes I find that things the market values like beautiful finishes/design, a quiet neighborhood street lined with mature trees, or lot quality (privacy, flat yard, etc) are not valued by Appraisers to the same extend as they are buyers. Appraisers are generally focused on objective, measurable criteria like bedrooms/bathroom count, square footage, parking, lot size, etc.

It is worth noting here that Appraisers do know the contract sale price of the property they’re appraising in real-world appraisals for lenders (as opposed to my hypothetical scenario above).

Does appraisal value impact my property tax assessment?

No, the appraisal value has no impact on anything outside of the loan. The County will not receive the appraisal value to include in their assessment for tax purposes.

Can I switch lenders and use the same appraisal?

For Conventional loans (the majority of loans in Arlington), most lenders will not accept an appraisal done through another lender, but VA and FHA appraisals do have reciprocity on appraisals between lenders.

If you have additional questions about appraisals, you can email me at Eli@EliResidential.com or a great local lender, Jake Ryon of First Home Mortgage at Jryon@firsthome.com.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.