Find Savings in Your Condo/HOA Budget

Question: We are finalizing our 2023 condo budget. Do you have any advice for ways to save money?

Answer: As a former Condo Board Treasurer, I feel the pain that this time of year brings, so I’m happy to offer some advice that helped me finding savings while I oversaw the budget and has helped other Associations do the same…review your Master Insurance Policy. I know, it’s not the most exciting answer, but your insurance policy is likely a top three expense on every year and if you haven’t reviewed it lately, there’s a good chance you can cut the cost by 5% or more and probably improve your coverage at the same time.

I’m not an expert in insurance so, I asked Andrew Schlaffer, President of ACO Insurance to provide some details on what Boards should look for when they do a review of their Master Policy. If you’d like to discuss a review with Andrew directly, you can reach him at 703.595.9760 or andrew@acoinsgrp.com. Take it away Andrew…

Hardening Markets, Increasing Premiums, Decreases in Coverage

The condominium insurance marketplace is facing challenges that will impact homeowners in 2022 and beyond. Water damage claims are still among the loss leaders impacting Unit Owners, along with fire damage and wind/hail claims. The DMV is home to many aging condo buildings that continue to struggle with mitigating water damage losses and their impact on insurance premiums.

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. A few examples of these coverage changes include Increased deductibles, per unit water damage deductibles, removing coverage for Sewer or Drain Backup and Wind-Driven Rain. 

In general, condominium property rate increases in the DMV have been significant and unpredictable. Much of the pricing impact can depend heavily upon carrier underwriting discretion which highlights the importance of your insurance professional specializing in this space. It has not been unheard of for Master Insurance policies to receive between a 7% to 15% property rate increase in 2022. For struggling communities, these rates are much higher. 

The umbrella/excess liability carrier marketplace has also faced tremendous disruptions. There are several factors driving these rate increases including but not limited to: COVID-19 impacts, years of underpricing, reinsurance rate increases, and the rise of nuclear verdicts (claims over $10MM). Additionally, there have been several specialty real estate programs who no longer offer umbrella/excess liability options for the habitational industry which has put a lot of strain on remaining carrier markets to fulfill the increase in demand. Many communities can expect umbrella/excess liability rates to increase between 10% to 25% this year. 

Pillars Of Insurance Reviews

Condo insurance reviews require a holistic approach, so it’s important to break the cost into a few distinct categories: insurance premium, deductible expense, and out-of-pocket costs. To effectively accomplish long-term savings, all three of these categories need to be considered and addressed with a qualified insurance professional.

Adjust Coverage Responsibly To Save On Premium

Premium is certainly a factor to consider during the insurance selection process; however, available insurance products differ significantly. Coverages and services should be very carefully analyzed and compared. While omitting various coverages will save premium dollars, it might also result in substantially increased costs to the Association for out-of-pocket expenses related to uncovered claims. It is critical to work with a professional who understands local insurance needs and can adjust your insurance program in a way that maximizes premium savings while maintaining adequate insurance coverage. Some coverages may be required by statute and/or Association documents, so cutting required coverage exposes the Board to unwanted risk.

Deductibles Based On Loss History

Associations with strong financials often choose to increase their property deductibles which can provide immediate savings of 2-5%. Deductibles range from $2,500 to $25,000+. When considering deductibles, it is important for the Association to review their loss history and the loss history of comparable buildings in an effort to obtain an accurate estimate for deductible expenses.

Rate Shopping

The most common strategy employed by Associations seeking lower insurance costs is to shop their carrier. An Association can accomplish this in several ways but generally their appointed broker can offer alternative carriers in an effort to obtain the most competitive rates possible. Make sure your broker has access to all of the competitive markets in order to maximize the likelihood of finding savings.

Secondly, and more importantly, if savings is found, your broker should verify that all required coverages are included to secure the Association’s long-term financial security and lender approval. Additional savings can be realized by a thorough coverage analysis to verify the Association is not being over-insured by paying for coverage it won’t use.

To insure cost savings and long-term health of your property, make sure your insurance broker specializes in Condominium or Homeowners Associations. To maximize your savings, the Association, insurance broker, and insurance carrier need to work in harmony to identify and reduce threats to the financial health of the community.

Help Reducing Claims

One of the best ways to keep insurance costs down is to avoid claims altogether.  Some examples of how insurance brokers can help reduce claims and the impact claims have on your future premium costs include coverage reviews/benchmarking, claims management services, site inspections, building upgrade recommendations, life safety planning, vendor contract reviews, discrimination/harassment training, and hiring/firing best practices. 

Thank You

Andrew, thank you very much for providing your insight. I know from experience how much of an impact an insurance review can have on a condo budget, but also how important the right coverage can be when there’s an unexpected claim.

One thing Boards often overlook when they’re solely focused on price is the quality and speed of service when a claim in filed. For example, if a pipe bursts and floods the gym and lobby, a Board should be confident that the work orders will be executed quickly so the building can be back on its feet without delay or headache. Unfortunately, most Boards don’t think about this until they’re dealing with it, and it’s too late.

I encourage any Board/Treasurer to reach out to Andrew to review their policy. His contact info is:

Andrew Schlaffer, President

ACO Insurance

www.acoinsgrp.com

Direct: 703.595.9760

Email: andrew@acoinsgrp.com

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.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Improved Study on Off-Market Sales

Question: Should I consider selling my home off-market?

Answer: The correct question is not whether you can buy/sell a home yourself (yes, you definitely can), rather what are the chances that you net a better result doing so. Last year, Bright MLS released a significant study comparing the results of on and off market sales and found homes sold “on-market” through the Bright MLS platform (link to article explaining what Bright MLS is) sold for 16.98% more than those sold off-market. It was an excellent first attempt at objectively comparing sales data between the two approaches, but there were some flaws in the methodology that received pushback.

2022 Study is Much Improved

In August, Bright MLS released a new, much improved study on the same topic with significantly more data and better methodology. They expanded the data set from 443,000 sales from 2019-2020 to 840,000 sales from 2019-Q1 2022, which means we added data from the peak real estate market of 2021-early 2022. They improved the methodology in several ways such as controlling for flips, new construction, sales between family members, and distressed sales and also significantly improved how they compared prices by analyzing property and neighborhood characteristics, not just by median prices.

On-Market Sales Sold for 13% More, Even more in DC Area

The study found that from 2019-Q1 2022, homes sold through the Bright MLS platform in the Mid-Atlantic sold for 13% more than those sold off-market and the returns were even greater when the market peaked in 2021 (14.8%) and Q1 2022 (19.7%). The DC area market saw even higher returns for on-market sales than the Mid-Atlantic (see chart below).

I think that one of the most important takeaways from this study is how significant the increase in returns were for on-market vs off-market sales when the market was at its peak from 2021-Q1 2022. There’s a clear trend that as the market became more favorable for sellers, and it became easier to sell a home than ever before, the difference in returns between on-market sales and do-it-yourself sales became significantly greater.

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Are you Informed about Real Estate (Reader Poll)?

I would love to hear more from you in comments or by email (Eli@EliResidential.com) about your opinions on the availability of good real estate content – national or local market information, investing, best practices/how-to, etc. Whether it’s content you’d like to see here in my column or content you wish you could access from other sources, I’d love to hear!

Question #1: Are you informed on the real estate market?

A1: Yes, I seek out information and data regularly
A2: Somewhat, the news I follow includes enough to keep me informed
A3: Not really, I occasionally hear/read the headlines
A4: No, I don’t get any exposure to real estate news or information

Question #2: Are you happy with the real estate information/news you receive?

A1: Yes, I get exposure to the type and amount of real estate information I want
A2: No, I get real estate information but it’s not what I want
A3: No, it’s hard to find real estate information

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.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Algorithm-based Real Estate Losing Millions in Northern VA

Question: I have recently seen two properties from Open Door listed for less than what they paid for it. Is that common for them or are these outliers?

Answer:

What is Algorithm-based Real Estate?

Algorithm-based buying and selling, also known as iBuying (2019 article here for more details), is when large companies/investors use algorithms (e.g. Zestimates) to assess a home’s value, purchase it (cash), and then resell it for a (hopeful) profit. These are arms-length transactions using corporate-level strategies rather than local ones.

The idea is that there are enough homeowners who value the ease and flexibility offered by iBuyers (cash, quick closings, no showings, etc) over getting a higher price that there’s billions in business for these companies (Open Door is currently valued over $3B). The acquisition and resale values of homes are determined by algorithms that these companies believe give them a clear picture of local markets across the country and competitive advantage at scale.

Zillow lost about $1B over 3.5 years using their pricing algorithms and shut down their iBuying business last year (article here for more details). After Zillow shuttered their iBuying business, it left Open Door as the biggest player in the industry. What makes them different than Zillow is that iBuying is their core business; for Zillow it was a supplemental revenue stream that risked hurting their core business.

I think the business in fundamentally flawed for many reasons, one of them being the massive disadvantages iBuyers are at during shifting market conditions. In strong markets, sellers can achieve the same or similar terms from everyday buyers and iBuyers are competing with everyday buyers on a house they haven’t seen, in a market they don’t know. In a weakening market (like we’re in now), properties they bought months earlier may be worth the same or less than they are when they’re being resold, so profits are smaller and losses much more common. 

The greater DC Metro area is a relatively small, unattractive market for iBuying for multiple reasons, one being our diverse housing stock makes it difficult to value/project using algorithms; areas with large scale tract housing tend to much more popular with iBuyers (and corporate buy and hold investors) because it’s much easier to calculate market values.

How It’s Going…

As noted earlier, Zillow exited the iBuying business after ~$1B in losses over 3.5 years, leaving Open Door (market cap $3B+) as the main players in this category. I was curious how Open Door’s business is performing in Northern VA so I dug into their data from this year.

I looked at all of Open Door’s currently active (88), currently under contract (29), and sold (35) properties in 2022 and found 152 properties. I was able to find Open Door’s purchase price on 112 of those properties via public records.

Of the 112 homes I found Open Door’s purchase price on, the total acquisition price for these properties was $63,464,400, for an average of $566,646 per property, ranging from $207,100 to $1,031,800. If we assume their average purchase price held for the 40 properties I couldn’t find an acquisition price for, we can estimate their total acquisition price for all 152 properties in this data set (Northern VA sold in 2022 or currently under contract or listed for sale) to be $86,130,257.

Based on the analysis below, I think they may end up losing $5M-$6M+ on these investments.

Known Losses on Closed, Under Contract, and Listed Homes

First, let’s take a look at the gains/losses I can calculate (Known Gains/Losses) based on the known data which is:

  • How much Open Door paid for 112 properties
  • How much settled properties sold for (including closing cost credits to the buyer)
  • How much under contract and active properties are listed for
  • That Open Door pays 2% of the sale price to buyer agents (note: in 2021 over 96% of sellers offered at least 2.5% to buyer agents, see analysis here).

I do not know what their other direct costs are including closing costs (on purchase and resale), carrying costs (taxes, HOA fees, utilities), improvements/repairs, marketing, etc but I will address those later in this article.

Here are some highlights on the Known Gains/Losses:

  • Known Gains on sold properties are just over $390,000
  • Known Losses on properties under contract or actively for sale are over -$1,458,000 if you assume the property sells for what it is currently listed at (unlikely, more on this later)
  • For the 40 properties I do not have the Open Door acquisition price for, I can confirm that they sold five properties for $479,413 less than they originally listed them for (including the 2% commission) and for the 35 homes currently for sale or under contract that I don’t have the Open Door acquisition price for, they’re listed for $1,727,003 less than the original asking prices
  • Of the 35 homes sold, they spent an average of 53 days on market and accepted a price on average 3.8% below the asking price. Only three sold over ask and another three sold for asking. These metrics fall well short of what sellers experienced earlier this year (the average home sold much faster and for at or above the list price).
  • The average property tax liability on these 152 homes is estimated to be roughly $71,000 per month
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Projected Losses on Under Contract and Listed Homes

In the section above, I calculated “Known Losses” on properties currently under contract and currently listed for sale by using the most recent list price as the projected sale price, but the reality is that most, if not all, will sell for less.

Of the 35 properties sold in 2022, Open Door accepted an average of 3.8% below their most recent list price with only three selling for over ask and just three more selling for asking price. This was during one of the hottest real estate markets ever, when the large majority of homes were selling for at or above the asking price.

If we assume that all properties currently under contract or for sale will sell for an average of 3.8% below the current list price (that’s probably too optimistic for Open Door), the projected Known Losses on the remaining homes is nearly $3,252,000!

Furthermore, this only accounts for losses on the 82 homes under contract or for sale that I know the Open Door acquisition price of, there are an additional 35 homes that are under contract or for sale that I do not have the acquisition price on so those homes could easily account for another $1M-$1.5M in projected Known Losses.

Additional Unknown Costs

There are plenty of additional direct and indirect costs that we know exist, but would be difficult or impossible for me to calculate including direct costs like their closing costs (e.g. transfer taxes) on the acquisition and resale, months of carrying costs like property taxes, Condo/HOA fees, and utilities, and any improvements/repairs prior to resale (it doesn’t appear they do much). There are also plenty of indirect costs of the operation including salaries of staff working on the deals, marketing each property, and more.

It’s likely that Open Door is taking on roughly $1M-$1.5M in additional direct unknown costs for these 152 transactions.

What Can We Conclude?

I think that we can safely assume that Open Door will be taking $5M-$6M+ in direct losses from the 152 homes they currently have for sale, under contract, or sold in 2022 in Northern VA.

For a company currently valued over $3B, these losses are meaningless; and Open Door reported nearly $1.5B in gross profit over the past 12 months (but losses on Operating Income), so clearly they’re winning big in other markets, but what conclusions can we draw from Open Door’s experience?

In my opinion, the most concerning data from Open Door’s Northern VA activity is not the millions in losses it’ll take on currently for sale and under contract properties, but the poor performance of their closed sales from earlier this year in a historically strong market. When you account for the unknown additional direct costs on those sales, Open Door is likely coming in at roughly break even. Additionally, the days on market and sold price to ask price ratio data (two key measures of resale success) is much worse than the rest of the market.

We can reasonably conclude that they overpaid for their acquisitions because they generated little-to-no profit, despite a rapidly appreciating market and we can conclude that their resale process/strategy (pricing, prep, listing management, negotiations, etc) performs significantly worse than market average.

As I mentioned above, they clearly are not having these problems in all markets because they’ve generated significant gross profits from their transactions (although they’re taking losses in Operating Income). Many markets are much easier to operate in with an arms-length, hands-off approach. Our market is not. I’ll leave you with some thoughts:

  • Local markets behave very differently and present vastly different nuances that make a national approach to local real estate difficult to execute
  • The greater DC Metro area market is a difficult one for algorithms to figure out because of the diversity in housing stock and nuances of price shifts over small geographic areas
  • The greater DC Metro area market will be a difficult market for high volume corporate buyers to profit from without taking a localized approach, which is expensive and complex
  • Our market is overwhelmingly full of smart, educated, and savvy home sellers and buyers relative to other markets which means that we are more likely to exploit flaws in corporate-level buying/selling strategies that are not specifically tuned to our market or markets like ours
  • There are plenty of examples where algorithms and/or arms-length, uninvolved are successful, there’s excessive risk of that approach in our market and it is unlikely to be more profitable than time-tested, human expertise in the long-run or at scale

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.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Expect Listing Activity to Spike, Fade Quickly

Question: I’ve noticed a lot less homes being listed lately, will that continue for the rest of the year?

Answer: I hope everybody had a great holiday weekend! For those in the market to purchase, you’ll want to quickly shift out of vacation-mode and into house-hunting mode this week because you’ll see a lot more homes being listed for sale in the coming week(s) than you have over the last couple of months.

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Historically, September comes in just behind March and June for new listing activity, with much of that front-loaded in the week or two following Labor Day weekend. This follows a similar trend on the demand side where we see peak demand from roughly mid-March to early June, with a slowdown during the summer vacation months, followed by a brief spike in buying activity following Labor Day weekend with dwindling buyer interest through the remainder of the year.

However, the seasonal increase in September demand generally lags the pace of new inventory and thus results in the most average available listings for sale in September and October, before falling rapidly in November and December because the volume of new inventory drops by over 50%. For buyers, that means that the next 4-8 weeks will be your last chance at a wide variety of homes for sale until March.

Projected Surge in Available Inventory

As of 10AM Monday September 5, there are 369 homes listed for sales in Arlington and a whopping 42 homes in Coming Soon status, 34 of which are scheduled to hit the market within the next week. The homes in Coming Soon status will boost total inventory by nearly 10% and there are sure to be plenty of homes listed for sale over the next week that are not showing in Coming Soon.

Given the decreasing absorption rates (demand) we’re seeing in the market, I would expect that by next week we will see an increase in available inventory of well over 10% when you take the net of homes listed for sales and homes that go under contract during the same one-week period.

Effect on the Market

I expect historical trends for monthly listing activity to play out along similar patterns as those charted above. With demand steadily decreasing from earlier this year because of normal seasonal trends and massive shifts in demand due to interest rates and other factors, the next 4-8 weeks will be an interesting period to observe our market.

How much of the new inventory will be absorbed? The absorption rate (ratio of homes going under contract to homes for sale) in Arlington fell 61% from 1.17 (more homes going under contract than coming to market) in February to .46 in July (and will certainly drop further when August data is released).

How will sellers with sitting inventory react? The average days on market for the 369 homes currently for sale in Arlington is 86 days and the median is 53 days. In the last 7 days, sellers have reduced their asking price on 31 homes.

I’m looking forward to providing insights to you over the coming months on how everything plays out!

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.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Pay Closer Attention to Your Condo Homeowners Insurance (HO-6)

Question: What is the difference between my individual condo insurance and the Association’s master insurance policy and do I need my own insurance?

Answer: Every condo association has its own (expensive) Master Insurance policy to cover the common elements and limited 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 financial 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) 595-9760 or andrew@acoinsgrp.com.

Take it away Andrew…

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 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.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Most Common Contract Contingencies Explained

Questions: We’re making an offer on a home that has been on the market for a few weeks and want to include contingencies, what is normal?

Answer: Contingencies can be used by buyers to reduce their risk in a real estate transaction by allowing them, in specifically defined scenarios, to renegotiate contract terms or cancel a contract without losing their Earnest Money Deposit. The three most common contingencies are the home inspection contingency, financing contingency, and appraisal contingency.

The shift in market conditions over the last 3-4 months has meant adjusting from a market where most winning offers did not include any contingencies to a market where many buyers are able to include at least one or two contingencies, often all three. This week I thought it would be helpful to refresh everybody’s understanding of the three most common contingencies and what protections they provide to buyers.

Home Inspection Contingency

  • Purpose: Allows buyers to hire a licensed home inspector who will provide a detailed assessment of a home’s condition and recommendations for repair, replacement, and maintenance.
  • Structure: The inspection contingency offers two options. One being the ability to void the contract after the inspection and the second being the option to void and the option to negotiate for repairs or credits based on the results of the inspection. 
  • Timeline: In most cases, I see inspection contingencies last 3-10 days and if there is a negotiation period, those often last 2- 5 days.

Financing Contingency

  • Purpose: Protects buyers if they do not get approved for their loan and allows them to void the contract or delay closing without losing their Earnest Money Deposit.
  • Structure: The financing contingency can either automatically expire at the end of the contingency period or extend to the closing date, unless the seller takes formal action to remove it after the contingency period ends.
  • Timeline: In most cases, I see financing contingencies last 10-24 days. It is a good idea to consult your lender on this timeline.

Appraisal Contingency

  • Purpose: Protects buyers in the event the property appraises for less than the contract purchase price. It allows a buyer the option to void, renegotiate, or proceed.
  • Structure: In some cases, through a separate addendum, buyers may agree to waive a specified difference between the appraised value and purchase price and make the appraisal contingency only if the appraisal value is below a certain number.
  • Timeline: In most cases, I see appraisal contingencies last 10-24 days. It is a good idea to consult your lender on this timeline.

As a buyer, it is important to understand that the use of, structure, and timeline of contingencies in your offer play a significant role in how a seller responds to your offer. In some cases, contingencies (or lack of) may have a greater influence on negotiations and a seller’s response than price, so it is important to approach contingencies thoughtfully and strategically based on your interest in a home, days on market, and an assortment of other factors.

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.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Housing Slowdown More Extreme in Outer Suburbs

Question: Are you seeing different patterns in the housing market slowdown in different parts of the region?

Answer: In September 2020, I wrote an article highlighting how extreme the differences were between the demand shift in Arlington compared to outer suburbs like Fairfax and Loudoun Co. In short, Arlington was competitive before the COVID surge and the outer suburbs lagged far behind it, but once the COVID surge began, Arlington became moderately more competitive while the outer suburbs experienced an extreme shift in market conditions, becoming more competitive than Arlington in just a few months.

Fast-forward two years and we are seeing something of a rubberband-effect as the entire housing market slows down, with noticeable shifts in all markets, but more extreme shifts in the outer suburbs. Not that we are witnessing anything close to a crash, the market is still good for sellers, but very different than what we’ve seen the last two years.

Note: this analysis focused on the single-family/detached housing market, not condos or townhouses

Outer Suburbs Slowing Faster, Arlington King of Stability

Months of Supply (MoS), a measure of supply and demand that calculates how long existing inventory levels will last based on the current pace of demand (lower levels favor sellers), tells the story better than any other metric.

In the charts below, you can see our regional story of the pre-COVID, COVID, and current real estate market play out:

  • Competition in the outer suburbs generally trailed the DC and Arlington markets, offering buyers more time and leverage in their purchase decisions
  • After Amazon announced HQ2 in November 2018, MoS in Arlington dropped sharply as demand picked up and supply dropped, with a more modest, lagging effect on the surrounding markets
  • The COVID market from roughly summer 2020-spring 2022 sent MoS lower (favorable to sellers) in all markets, but the drop in MoS in outer suburbs was more extreme, pushing those markets well below Arlington and DC, making them extraordinarily competitive
  • As of July 2022, MoS in the outer suburbs was still lower than Arlington and DC, but rapidly increasing. The year-over-year increase in MoS in Loudoun County was 94.4%, nearly double what it was in July 2021. The increases in MoS were 67.4% (DC), 41.6% (Fairfax Co), and 27.8% (Arlington).
  • You can see the steadiness and strength of the Arlington housing market playout over the past five years in these two charts
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Market Shift is Demand-Driven

You can blame the sudden market shift almost entirely on a drop in demand, not more listing volume. Absorption Rate (AR) measures the percentage of homes going under contract compared to the number of homes for sale and is a good way of measuring demand.

In the charts below, check out the massive spikes in demand for Loudoun County during the market peaks and the rapid fall over the last few months. You’ll notice in the five-year history that the AR for all four markets shown was pretty similar pre-COVID, increased far rapidly in the outer suburbs during the COVID market, but in just the last couple of months, all four markets have come together to their “natural” pre-COVID levels.

The AR in Loudoun Co dropped 60.1% year-over-year in July and Arlington had the lowest year-over-year drop in AR of the four markets, at 35.7%. DC dropped by 48.9% and Fairfax Co by 40.6%. Loudoun Co capped out at an astonishing 3.1 AR in February, fell to 1.49 by April, and came in at .57 in July. Loudoun and Fairfax Cos remain slightly ahead of Arlington and DC, but I suspect those rankings will reverse in the August/September readings.

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Want another sign of lower demand? The average sold price as a percentage of the asking price has dropped from 105.1%-106.7% in April to 100.7%-101.4% in July. Keep in mind that these are trailing metrics because they are based on sales (usually 3-6 weeks after going under contract), so these are reading from contracts in Feb/Mar and May/June, respectively. I think we will see the average sold price to ask price drop below 100% in most or all four of these markets by the time September data is published, which will reflect contracts from July/Aug.

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Listing Activity Remains Stable

As noted above, the market shift can be attributed almost completely to lower demand because listing activity remains similar to historical volumes, even down a bit, which is an opposing force on lower demand and helping to maintain a more favorable market for sellers.

The charts below show new listings of single-family homes in Arlington, Fairfax, and Loudoun Counties, and DC, following by the same chart for the DC Metro and Northern VA region, and finally a chart just for Arlington since Arlington is a bit hard to see on the first chart. The main takeaway is that across all regional markets, the number of single-family homes being listed for sale has remained steady over the past five years and the fluctuations in market conditions are almost completely driven by changes in demand.

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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.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Influence of New Construction on Arlington Prices

Question: How much of an effect do expensive new construction homes have on the average prices in Arlington?

Answer: A couple of weeks ago I offered a mid-year review of the single-family housing (SFH) market in Arlington and average prices were a focal point. This week, we’ll look at some pricing data with and without new construction included to understand how much new builds influence our average prices. Please note that the data used below is based on new construction sales entered into the MLS and accounts for most, not all new construction sales.

New Construction Prices High, Effect Limited

So far in 2022, a new SFH home has sold for an average of nearly $1,000,000 more than resales. Sales of new SFHs have accounted for 9% of total sales but only account for a 6.8% increase in Arlington’s average home value. The numbers were similar last year.

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22207 Dominates New Construction Sales

Since 2018, the 22207 zip code has accounted for 54% of all new SFH sales in Arlington and so far in 2022, 22207 has accounted for 60.3% of new SFH sales. In 2022, new home sales have accounted for 14% of all sales in 22207 and are responsible for increasing the average home price in 22207 by $120,000.

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Average New SFH Nearly $2.2M

In 2021, the average new SFH crossed over $2M for the first time and after a 7% increase in average prices so far in 2022, the average new SFH is nearly $2.2M. There are still some markets where you might find a new house under $2M including 22205 where lots, and thus homes, tend to be smaller than neighboring North Arlington zip codes.

The 22204 zip code far out-paced other zip codes in average price appreciation for new SFH, increasing by 15% from 2021 to 2022. I expect similar double-digit growth in new construction prices in 22204 for another year or two until the gap between 22204 and other Arlington neighborhoods gets tighter. So far in 2022, new SFH outside of 22204 is selling for an average of over $2,273,000, which is 45.1% higher than new homes in 22204. The percentage gap of average prices of resale homes in 22204 versus other Arlington zip codes is similar, at 48%.

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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.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Did Interest Rates Increase .75% Last Week?

Question: Have you already seen interest rates increase since last week’s announcement that the Federal Reserve is increasing rates by .75%?

Answer: Contrary to popular belief, the news you read about the Federal Reserve increasing interest rates does not directly result in changes to the interest rates you get on your mortgage. The Federal Funds Rate is the rate that large banks charge each other for short-term, overnight loans and is one of the many market factors that influence the interest rate you get on a mortgage.

Fed Rate Up, Mortgage Rates Down

Last week, on Wednesday July 27, the Federal Reserve announced they were increasing the Federal Funds Rate by .75%. Many people I spoke with thought this meant that mortgage rates would immediately or quickly increase by a similar amount, however, the reality was that the average 30yr fixed mortgage rate, per Mortgage News Daily, decreased from 5.54% on Wednesday July 27 to 5.22% on Thursday July 28, one day after the announcement. As of yesterday, MND’s research showed that the average 30yr fixed rate had dropped even more to 5.05%.

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Mortgage Rates Are Market-Driven, Like Stocks

Mortgage rates operate like stocks in that they are constantly (daily) moving up and down as they react to changes in the domestic and global markets. In theory, mortgage rates, like stocks, are supposed to reflect the valuation of all current and future market information to determine the cost of borrowing money each day.

What the Fed Rate Means for Your Mortgage Rate

What does that mean in relation to your mortgage rate and the highly publicized Fed Funds Rate?

The Federal Reserve meets eight times per year to set monetary policy, including making any changes to their target Fed Funds Rate. Prior to those meetings, financial experts are constantly adjusting their expectations of the Federal Reserve’s rate announcements and those expectations are embedded on a daily basis into mortgage borrowing rates, so the most significant rate changes occur when expectations aren’t met or surprising guidance is issued by the Fed during these meetings (keep in mind, this isn’t the only information banks use to determine mortgage rates).

Heading into last week’s announcement, I read that mortgage rates, stocks, and other market instruments were priced with a roughly 80% expectation of a .75% increase in the Fed Funds Rates and a roughly 20% expectation of a 1% increase, so when the announcement was made confirming a .75% increase and guidance was given suggesting the Fed will soon be able to slow their rate increases, market instruments reacted in a mostly positive way, which resulted in mortgage rates decreasing because the outcome was weighted towards expectations for lower future rate increases (.75% instead of 1% and slowing future increases).

The next scheduled Federal Reserve announcement on the Federal Funds Rate is scheduled for September 21, you’ll see mortgage rates react daily based on new economic data on inflation, growth, unemployment, global threats, etc that will all influence how the Federal Reserve responds during their next meeting.

Mortgage Rate Forecasts

There’s one thing I’ve learned over the years about mortgage rate forecasts…they’re always wrong. You can see how much of a difference there is in forecasts from the experts in this recent Forbes article, with expectations for 2022 rates ranging from ~5-7% to a technical version of a shoulder shrug.

With that said, if you’re seeing news about inflation coming under control and we avoid new major global supply chain disruptions, odds are that mortgage rates will gradually come down through the end of the year. However, none of that is guaranteed as we find ourselves in a constant state of global and economic volatility and disruption, factors that generally cause instability and increases in mortgage rates. 

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.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.