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.

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.

Is it a Good Time to Sell?

Question: I have seen and heard that homes are sitting on the market and reducing prices lately, is it still a good time to sell?

Answer: I’ve noted in some recent articles (example) that we’ve seen a shift in market conditions; beginning around late April/early May when rates started hitting 5%+, the stock market struggles became more serious, and more banks and economists indicated higher risks of a recession. If you’ve followed national news, you’ve also likely read about cooling across the country, including some of the markets that led the market boom over the last ~18-22 months.

For the first time in a long time, homeowners are asking if now is a good or bad time to sell. There’s no one answer for everybody, but here are some things that everybody should consider.

It’s a Seller Market, Concerns are (Mostly) Relative

We are still very much in a seller’s market, but it seems worrisome because we are transitioning out of a historically insane seller’s market that we may not see again for a long time. So, the perception that the market is struggling is relative to what we’ve seen in the last ~18-22 months, but still looks quite favorable relative to a longer-term view.

The chart below shows Months of Supply (the lower it is, the stronger the market is for sellers) in Northern VA for detached (single-family) and attached (townhouse/condo) homes. MoS is increasing (and I expect to see a sharper increase in the chart in future months) but still very low relative to historical standards with quite a ways to go before it even reaches 5-10 year averages.

But what about the price reductions? It is accurate that more properties (including single-family homes in good condition) are going through price reductions to attract buyers, but that can be expected during a transition period as sellers and buyers adjust to new market conditions. A lot of the price reductions I’m seeing are to properties that overshot their asking price because they likely expected momentum to continue from earlier this year.

Interest Rate Problem

Interest rates are the biggest problem and biggest unknown in predicting how the market will hold up through the remainder of the year. Most experts expect rates to end the year at around 5%, but it’s very difficult to say what the path there will look like. For rates to finish the year around 5%, we will have to get inflation numbers under control and that has proven more difficult and less predictable than expected.

If rates continue to rise and reach the 6.5%-7% range, I think that we will see a very negative reaction in demand and motivated sellers will end up taking sizeable discounts to push a sale through. However, it seems more plausible that rates have peaked, will level off, and hopefully, begin to fall slowly as inflation comes under control.

Stability in the rate market is critical to maintaining demand at this point and if we move into an environment with gradually falling rates, we should see demand tick up.

Keep Seasonality in Mind

If you plan to sell in the second half of the year, make sure to account for seasonality in setting proper expectations. Historically, we experience a slower, less active market (on both the supply and demand side) in the second half of the year. Couple that with the macroeconomics that have created headwinds over the past two months, and you’ll need to calibrate expectations accordingly. The chart below shows historical monthly activity for supply and contracts during a normal year in Arlington.

July, August, November, and December tend to bring notably less demand (holidays slower than summer) with a moderate bump in activity after Labor Day, through October/early November.

Finally, Homes to Move Into

This may seem counterintuitive, but for a lot of (potential) sellers, a slower market may be a good thing if you are also looking to buy. Depending on your situation, you could benefit more from a slower market as a buyer than you suffer from it as a seller. This will depend on what you’re selling, what you’re buying, where you’re buying, your financing, and more.

Seller concerns over becoming buyers in a market that was producing double-digit offers and contracts within days were keeping many homeowners from moving and thus furthering the supply/demand gap we’re dealing with.

Statistics vs Real-Life

The question of when to buy and sell is a popular question and there are several ways to make an informed decision using historical data, but when you look at that data, the success metrics are not vastly different between the best and worst times of the year. Plus, timing markets is nearly impossible. Your personal situation(s) and preference(s) should be the most important factors in deciding when the right time is to sell (or buy).

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 Real Estate | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Are Condos a Good Investment?

Question: How have rental rates on condos compared to appreciation in resale market value?

Answer: Last week, I compared the historical appreciation rate of different property types (tl;dr…single-family > townhouse > condo) so this week, I thought it would be interesting to drill into what a condo investment looks like in Arlington by comparing historical market value appreciation against historical rental rate appreciation.

1BR vs 2BR Condos, North vs South Arlington

Last week we learned that, since 2012, condos in South Arlington have appreciated faster than similar condos in North Arlington, and in both areas, a two-bedroom condo has performed better than a one-bedroom condo.

North Arlington Rental Rates Frozen, Moderately Higher in South Arlington

Incredibly, the average rent for a one- or two-bedroom condo in North Arlington has barely changed since 2012, while increasing about 18% and 15%, respectively, in South Arlington. I believe that is due to the high volume of new apartment buildings delivered over the last 10+ years, significantly increasing the supply of rents and delivering more modern finishes and amenities than most condo buildings offer, causing condo buildings, mostly built 15+ years ago, to become less desirable for renters.

It’s important to note that the rental data below is limited to what is in the MLS, which is mostly condo rentals and does not reflect the commercial rental market, which has seen average rental prices increase since 2012.

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*Calculated using that year’s average 30yr fixed interest rate (5.5% for 2022), 20% down, and $50 per month on homeowner’s insurance

**Approximate first-year return on an all-cash purchase

Expect Low Return, Potentially Negative Cashflow

In most cases, real estate investments follow similar principles as other investments – more risk for higher returns and lower expected returns for more stable investments. Arlington is one of the most stable, lowest-risk real estate markets in the country/world and condos tend to have the lowest risk of all property types because they’re generally easy to rent with less exposure to costly repairs and maintenance oversights. Thus, you can expect shockingly (for some) low returns on a condo investment in Arlington.

If you’re putting close to 20% down, expect to be cash-flow negative for a while. If you’re paying cash, expect a low single-digit cash-on-cash return. It’s important to note that the calculations above do NOT include vacancy periods (expect some between tenants), property management (usually ~6-10% of gross rent), maintenance/repair, and other expenses you may incur.

Where is the Payoff?

Investment properties come with significant tax benefits from depreciation and some other expenses (not mortgage interest) so for high-earning individuals with few write-offs, the payoff for large tax deductions is substantial and can offset monthly cash flow losses. If you are financing the investment, you must consider the unrealized gain of principle buydown (unrealized until you sell) and incorporate that into your return-on-investment calculations.

Also, keep in mind that these are blended averages of one- and two-bedroom condos. If you are exclusively seeking an investment property, you will find some properties with moderately better-projected returns by focusing less on what you want to live in and more on value.

Many people end up with a condo investment property because they’ve bought it for their primary residence and then convert it into a rental property when they move out. This can be an excellent way to build your investment/real estate portfolio because you get a lower interest rate on a primary residence, with the ability to put less than 20% down, and generate value just by living there and not paying rent yourself.

Condos are, of course, not the only option when it comes to real estate investing but they tend to be the most accessible, and thus, the most popular. Investing in real estate can be a great way to build wealth, but you must first understand the risk-return profile you want and be realistic about costs, returns, and the time you’ll spend managing the investment. 

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 Real Estate | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Which Property Types Appreciate Faster?

Question: What type of property appreciates faster – condo, townhouse, or single-family?

Answer: Since 2012, the data is clear – single-family homes appreciate the fastest, followed by townhouses/duplexes, and then condos. Since 2012, the average single-family home has appreciated 69% compared to 27% for condos.

This pattern was true before the pandemic market sent single-family home prices through the roof
(see 2016/2018 numbers below), but was amplified over the last two years as demand intensified for
single-family homes.

South Arlington Appreciating Faster Than North Arlington

Based on appreciation since 2012, South Arlington has been a better investment than North Arlington for all three property types. I expect that trend to continue as new construction picks up steam in South Arlington, Columbia Pike development continues to thrive, and Amazon HQ2 expands hiring.

Two-Bedroom Condos Appreciate Faster Than One-Bedroom

Two-bedroom condos consistently offer a higher return than comparable one-bedroom units. South Arlington condos have appreciated so much since 2012 that even a one-bedroom condo in South Arlington has produced a higher percentage return than a two-bedroom condo in North Arlington since 2012.

Of course, return on investment isn’t the only consideration when buying a home and you certainly need a lot more money to afford a single-family home (avg over $1.3M in 2022) than a condo (avg $533k in 2022) and a 2BR condo (avg $633k in 2022) over a 1BR (avg $377k in 2022), but for most buyers, having a good understanding of how historical returns compare by property type and size should influence decision-making. But please don’t forget that most single-family homes will also require a much higher maintenance, repair, and replacement budget than townhouses and condos (even accounting for condo fees) in order to access those higher long term returns.

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 Real Estate | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Demand and Showing Activity Slowing Down

Question: Have you seen a drop in demand and buyer activity recently?

Answer: There has been a modest, but noticeable drop in the intensity of demand and buyer activity over the last 3-4 weeks. I’m seeing fewer showings/offers and more price reductions and cases of homes lasting through the first week on market. I saw signs of it in the second half of April, but it became most noticeable in May.

But let me be clear, we are still very much in a seller’s market. I expect prices to hold in many cases and continue increasing in some, but the frequency and number of escalations should start to ease (already has) and buyers may find themselves able to secure some contract protections (contingencies) they couldn’t before.

DC Area Demand Index Tapers, Arlington Remains Strongest Market

Below you will see the Bright MLS Home Demand Index for the DC area. From July 2021 through February 2022, demand trailed its year-over-year (YoY) counterpart and even came close to matching the YoY demand reading in February 2022. However, you’ll see a noticeable separation in YoY demand taking place in March and especially April. I expect these lines to separate even further in May.

It’s worth noting that, with a demand reading of 227, Arlington has the highest demand reading in this index amongst the nine jurisdictions included in the Washington DC area index, followed by Alexandria at 190 and Fairfax at 151.

Arlington Showing Activity Drops

I pulled data on total showings and showings per listing for Feb 1-May 23 2021 and 2022 on homes priced from $500k to $1.7M, with combined data for all price points at the top of each table. For those not interested in examining the data in detail, here are the highlights:

  • Activity surged in the beginning of the year and shifted in April/May (I think this started in mid/late April)
    • Showings per listing increased 20-26% YoY from February-April 2022, but decreased 12% YoY in May 2022
    • Total showings were up a more modest 9% and 3% YoY in February and March 2022, respectively, but dropped by 11% and 25% YoY in April and May 2022, respectively
  • Historically, we have seen showings slowdown from April to May, but the rate of the slowdown in 2022 compared to 2021 is significant
    • From April 2021 to May 2021, showings per listing dropped 21%, but from April 2022 to May 2022, showings per listing dropped 43%
    • From April 2021 to May 2021, total showings dropped 31%, but from April 2022 to May 2022, total showings dropped 42%
  • In February and March, nearly every price range experienced a YoY increase in showings per listing and most experienced an increase in total showings as well. By April, the changes were split evenly between increased and decreased activity, but in May nearly every price range experienced a YoY decrease. 

I will continue to track market data for you and in a couple months, once most of the spring contracts have closed, we will be able to measure how some of these early indicators of weaker demand effect price metrics.

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 Real Estate | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Caveat Emptor – Let The Buyer Beware!

Question: What responsibility does a seller have to disclosure problems with their home?

Answer: Sellers cannot lie about or conceal material defects of their home, but in Virginia, property owners are under no responsibility to disclose them to a buyer. That’s because Virginia is one of the few states in the US still operating under the common law concept of Caveat Emptor, meaning “Let The Buyer Beware.” This places the duty of discovery (of defects) on the homebuyer. Per Bankrate.com, the other states include Alabama, Arkansas, Georgia, North Dakota, and Wyoming.

Residential Property Disclosure

The Residential Property Disclosure is required in most transactions except for sales between relatives, foreclosures, builders, and a handful of other scenarios. The Disclosure, signed by the seller and buyer, states that the homeowner(s) makes no representations or warranties with respect to things like:

  • Property Condition
  • Sexual Offenders
  • Adjacent Parcels
  • Wastewater Systems
  • Historic Districts

Alternatively, jurisdictions like Washington DC and Maryland require extensive disclosures by homeowners. The DC Disclosure runs 4+ pages long and requires owners to make representations on every material aspect of the property and community including roof, insulation, heating/cooling, appliances, drainage, zoning, and more.

Realtors Held To A Higher Standard

While Virginia homeowners aren’t required to disclose defects, the Realtor Code of Ethics holds us to a higher standard. A listing agent who is a Realtor “shall disclose to prospective buyers/tenants (customers) all material adverse facts pertaining to the physical condition of the property which are actually known by the licensee.”

While listing agents don’t have a duty to discover latent defects, they are required to communicate anything they’re made aware of through the standard course of the transaction be it discussions with the seller, inspection of the property, or otherwise.

Should Virginia Change?

Personally, I’d like to see Virginia make changes to the seller disclosure laws to balance the scales a bit. One could make a case that increasing disclosure requirements would reduce buyer risk, thereby making Virginia homes more valuable and pushing home values up across the board (sellers would still have the ability to offer “As-Is”). It would be particularly valuable in a market like we’ve had the last few years where due diligence periods are shortened or waived completely.

As a counterpoint, buyers in jurisdictions with heavy disclosure requirements can rely too much on what the seller says/does not say and fall victim to a seller simply not being aware of a defect that a buyer could have discovered through due diligence.

What do you think? Are you happy with the current system or would you like to see Virginia get rid of Caveat Emptor and place more duty on the seller to disclose material defects? 

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 Real Estate | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.