The Missing Ultra High-End in Arlington

Question: I recently saw a home listed in Arlington for almost $30M. Are there neighborhoods in Arlington with ultra-expensive homes like this?

Answer: We hear a lot about the “missing middle” in Arlington housing, but there’s another market that Arlington struggles to support that nobody is talking about…the super-rich. Sure we have plenty of homes that sell for $1M-$2.5M (457 sold in 2019) but in 2019 there were only seven sales over $2.5M and just one over $3M (and that was a sub-dividable lot). So what gives with everybody calling Arlington “expensive” if we can’t support the super-rich? Where do they live? (I hope my sarcasm is coming across…)

405 Chain Bridge Rd Arlington VA 22207. Listed by Mark Lowham, TTR Sotheby’s.

Arlington’s Most Expensive Homes

The recently listed $28.5M home, by Mark Lowham of TTR Sotheby’s, on the Potomac River side of Chain Bridge Rd is an anomaly in Arlington. Outside of the prestigious Country Club Hills neighborhood and Turnberry Tower penthouse-level condos, sale prices in Arlington rarely eclipse the $3M mark and even in those communities the handful of $3M+ sales historically top out at $4M. And then you have a very small pocket of ultra-luxury homes at $5M+ along the Potomac, off Chain Bridge Rd, which fall within Arlington County, but actually have a Mclean mailing address and zip code (22101).

Note: There are dozens more homes in Arlington worth $3M-$5M that just haven’t been sold. Many are custom built in the last 10-15 years with the original owners still occupying them. There are also a handful of private sales that aren’t entered into the MLS because they were sold off-market.

Why Doesn’t Arlington Have Ultra-Expensive Homes?

So with so much wealth and close proximity to DC, why doesn’t Arlington have more ultra-expensive homes? The answer is lot size.

For anybody that has looked for a home with a little elbow room/privacy in Arlington, you’ve reached the unfortunate conclusion that it’s very difficult to find anything with more than ¾ acres (even ½ acre is highly coveted) and there are just a small handful of properties with more than 1.5 acres. Smaller lots make it difficult to build enough house to justify a $5M+ price tag.

Where To Spend $5M+?

So where do people with $5M+ to spend on a home live? In Northern VA, most of those homes are in Mclean or Great Falls, as well as further west in Loudon County’s horse/wine country. DC’s most popular ultra-expensive neighborhoods are Georgetown and Kalorama, with a spattering of other neighborhoods west of Rock Creek Park. In Maryland you’ll find the most expensive homes in Potomac along River Rd, as well as Chevy Chase and Bethesda.

Enjoy Some Photos

For those of you who are here just for the pictures, here you go! I’ve linked to $5M homes either for sale or sold in the last few years in the area:

Northern Virginia

Washington DC

Maryland (Montgomery County and Eastern Shore)

How Agents and Agent Teams Are Structured

Question: I’m in the process of searching for a real estate agent and having trouble understanding the different organizational structures. Can you explain how it works?

Answer: Most real estate agents operate as independent contractors within their brokerage (office), thus have autonomy to operate their business/service model as they choose. With over 12,000 Realtors in the Northern Virginia Association of Realtors alone, the organizational structures and business models vary widely to suit an agent’s style of business and/or target clientele.

I think it’s almost as important for home buyers and sellers to learn about their prospective agent’s operating model as it is to make sure they know your market. An agent’s operating model will impact your experience and you need to make sure it aligns with your expectations.

I’ll break down some of the organizational structures that are most common today so you have an idea of what to look for.

Brokerage

At the top of the organizational structure is the brokerage, which is best described as the office your agent works for. The brokerage is the legal entity involved in the transaction and when you sign a Buyer Representation or Listing Agreement, it’s actually with the brokerage, with your agent as the assigned representative of the brokerage.

Currently in the DC Metro, most brokerages are made up of multiple agents, often dozens to hundreds, and function like a shared office. An agent cannot operate independently outside of a brokerage, but an individual agent can have their own broker’s license and operate an independent brokerage.

Most agents operate as independent contractors within their brokerage, but there are some models, Redfin being the most popular, where agents are employees.

Agent Models

In most cases agents operate individually or within a team, structured in a some common ways:

  1. Individual Agent, No Support: Many agents work independently without any sort of support staff. The advantage for clients is that you always know who you’ll be working with and who is handling every detail of your transaction. The main disadvantage is that there is a single point of failure if that person is unavailable.
  2. Individual Agent With Administrative Support: Some independent agents hire one or more people to support administrative tasks like scheduling and marketing. Some brokerages also offer this type of administrative support to their agents. This should be an advantage over #1 because the agent has more time for high-value tasks, but it also requires the administrative support to be on top of things and strong communication between agent and admin.
  3. Team Partnership: Two or more experienced agents with strong individual businesses may partner to share some administrative support costs and build a stronger brand together. For the client, it has many of the same qualities as #2, but there’s usually an added benefit of knowing that there’s at least one other experienced agent available as back-up in case your agent in unavailable.
  4. Team Lead With Coordinators: An individual agent or partnership with a large book of business that uses specialized buyer and seller coordinators to support client activities. An advantage to clients is that the transaction is generally led/directed by an experienced agent and that there is no single point of failure, you’re working with a support team. A disadvantage is that some or many high-value pieces of the transaction are handled by coordinators, not the lead (experienced) agent.
  5. Team “CEO” With Junior Agents: An experienced agent who acts more as a CEO, overseeing the operations of a large team of agents, and personally handling very few transactions, if any. Clients should benefit from systems and processes the “CEO” agent used to become successful, imparted on the junior agents. A disadvantage is that these teams often have dozens or more agents and the experience of those agents varies widely and don’t necessarily reflect the talent of the “CEO” agent.
What Should You Ask?

It’s important for you to understand how your real estate agent operates and it shouldn’t be hard to find out by asking some simple questions.

  • Will I work with anybody else during the transaction?
  • Will anybody else work on my transaction?
  • What happens if I need something when you’re unavailable or out-of-town?

I hope this has been helpful for anybody starting out their search for an agent or just generally confused by how the industry is structured. As always, if you would like to meet with me about buying, selling, or renting in Arlington or the surrounding DC Metro communities, feel free to email me at Eli@EliResidential.com.

Expect A Slower Market Until February

Question: Does the Arlington market change in the winter?

Answer: November marks the start of the traditional “winter market” in Arlington that is defined by fewer homes being put up for sale and homes sitting on the market just a bit longer than they did earlier in the year. The decrease in new inventory will be obvious to anybody who has been searching for a home in 2019, but you’ll barely notice the increase in how long homes are taking to sell because the market is moving so quickly that even a slowdown will mimic spring markets in previous years.

Sharp Decrease In New Inventory

Historically, the fewest homes hit the market in Arlington from November-January, with the pace of new listings in December coming in at nearly 1/3 the rate of new listings from March-May. With inventory levels in 2019 already at historical lows, this winter will feel especially short on housing supply.

Month Contribution to Total New Listings
Buyer Demand Cools Off

Historically, the percentage of homes that go under contract within the first ten days decreases from November-January, with November and December (holiday season) having the most noticeable reduction in quick sales. However, with the pace of the Arlington market at all-time highs in 2019, you can expect the drop in demand in November and December to feel like peak spring demand in previous years.

Percentage of Homes Under Contract in First 1-10 Days
Is The Winter The Right Time For You?

The winter can be a great time to buy if you’re more focused on value because demand decreases so you may pick up some negotiation leverage.  However, if you’re searching for something unique and struggling to find properties that fit your criteria, the odds of the perfect place hitting the market in the winter decreases.

Given how low inventory is heading into this winter, I’m not sure buyers will find as many deals as they have in previous years. Demand is still strong from buyers who haven’t found a home yet in 2019 and low supply makes it a strong market for sellers, even during the holidays.

If you’re considering buying or selling in Arlington or the surrounding DC Metro communities and would like to learn more about the impact seasonality will have on your process, feel free to reach out to me at Eli@EliResidential.com.

Making Up For A Questionable Housing Report

Question: I recently read an article by the Sun Gazette that median price per square foot was down since last year in Arlington and the rest of Northern VA. Is that what you’re seeing in the market, despite reports of prices going up?

Answer: I read that article as well and was equally confused by the statistic that $/sqft was down 6.8% in Arlington in the first nine months of 2019 compared to the first nine months of 2018. While this data point may be technically correct, it doesn’t accurately represent what’s happening in the Arlington/Northern VA marketplace. Even without having access to the data behind it, does anybody believe that with all the news about the Amazon-effect on Arlington’s real estate market, that people are paying less per square foot in 2019?

Price-per-square-foot Is Actually Up (obviously)

The truth is that while the median $/sqft did drop year-over-year in the first nine months of 2019, it was actually due to a shift in the type of inventory that sold, not because buyers are getting more for their money. As I pointed out earlier this year in an article about a national news story on Arlington’s real estate market, it’s easy to find market data that sounds interesting (aka generates reader clicks) but doesn’t tell an accurate story.

When I drilled into the 2018 vs 2019 data on median and average $/sqft, I found that within comparable sub-markets (e.g. 2BR condos, 4BR single-family, etc) median and average $/sqft increased year-over-year. In fact, if you use average $/sqft instead of median, like the article references, there was a 9.5% increase across Arlington. In this case average is a better statistical measure than median, but of course the median $/sqft made for a better story.

Accurate Headlines From The First Nine Months

While I have the data together comparing the first nine months of 2019 to the first nine months of 2018, I’ll go ahead and offer up five headlines that accurately represent the Arlington real estate market through September 2019:

  1. The market is up, but not by as much as you might thing based on some new stories. The average purchase price in Arlington jumped 5.8% to just over $722,000.
  2. A lack of inventory drove total sales down by 8%, with the biggest drop-off showing up in the condo market which suffered from a 12.3% drop in sales, led by a 13.6% drop in two-bedroom condo sales.
  3. The price range of the middle 50% of homes jumped from $380,000-$864,300 in 2018 to $415,000-$916,000 in 2019, a 9.2% increase in the lower limit and a 6% increase in the upper limit. This indicates that the Amazon-effect is impacting lower price points faster than upper price points which makes sense because investors and other speculators are more likely to purchase at lower prices.
  4. Good properties sold much faster in 2019 with 62.7% of homes selling in the first 10 days, compared to 46.4% in 2018. The craziest stat? 85.5% of 2BR townhomes/duplexes sold within the first 10 days.
  5. Price growth in the 22202 zip code, the area surrounding Pentagon City and Crystal City aka National Landing aka Bezosville, led all Arlington zip codes with a 13.7% jump in average sold price.

If you ever run across market data you’re not sure about or would like a customized data analysis, please reach out to me at Eli@EliResidential.com.

Arlington’s Next Luxury Condo Building

Question: Do you think Pierce condos in Rosslyn will be able to sell for the prices they’re advertising?

Answer: A few months ago, local developer Penzance released details on their upcoming Highlands development that includes three luxury residential buildings, one of which will be a 27-story condo building called Pierce.  Here’s a summary of what we know:

  • Large Floor Plans: 104 units ranging from a 1,270sqft 1BR+Den to a 3BR with over 2,400sqft
  • Larger Prices: Starting at $900k and increasing to over $3M
  • Luxury Finishes: Thermador appliances, hardwood throughout, Snaidero cabinets, floor-to-ceiling windows, some direct-access elevators and other luxury touches
  • Top Amenities: 24hr staff, rooftop pool, two-story gym, club room, to name a few

Courtesy of Mayhood at PierceVA.com

Is There Anything Else Like It?

It seems that Penzance is modeling its approach after Turnberry Tower, the iconic all-glass blue building a block from the Rosslyn Metro. Both buildings’ smallest units are 1BR+Den with about 1,300sqft, they have similar high-end finishes, many units with direct-access elevators, and both have luxury amenities.

Demand and prices at Turnberry have increased significantly over the last 18-24 months, which is a good sign for Penzance.

Meeting New Demand

There is a significant, relatively new, demand in Arlington for large condos to satisfy Baby Boomers downsizing from big suburban homes around the DC Metro. Over the last 20 years of condo development in Arlington, most floor plans have been 1BR-2BR, ranging from 700-1,000sqft. To find larger floor plans, buyers are mostly left with buildings constructed in the 70s and 80s, so there is currently an underserved market for newer condos with large floor plans.

For example, 2000 Clarendon, a condo building in Courthouse set to deliver next year, originally planned six 2BR+Den units of ~1,400 and ~1,700sqft. They had so much interest that they added two more. Their current waitlist for the 2BR+Den units has over 20 people on it. However, the price of 2000 Clarendon units are about half what similar units at Pierce will cost.

Will People Pay These Prices?

  • 1BR+Den with 1,270+sqft start at $900k (4 units)
  • 2BR with 1,320+sqft start at $1.1M (44 units)
  • 2BR+Den with 1,953+sqft start at $2M (46 units)
  • 3BR with 2,411sqft start at $2.6M (10 units)
  • More than half of the units will be $2M+
  • More than half of the units will be over $1,000/sqft. Over the last five years, seven Turnberry condos and two Waterview condos have cross the $1,000/sqft mark. DC hits this mark in its premier buildings.

Rosslyn has only begun its transition into a luxury market and Pierce will be a great indicator of where Rosslyn is in the eyes of the market. The sales won’t come overnight, or be without challenges, but the developer can afford to be patient for:

  • The down-sizing Baby Boomers that Pierce is suited for can afford to pay a significant premium for the right floor plan and building
  • Amazon, Nestle, consulting/law firms, Defense contractors, and tech start-ups are supplying more and more highly-paid Executives to the Arlington housing market
  • International money will be drawn to its proximity to DC and Amazon
  • Trophy units with direct views of DC and the Potomac River should be in high demand because it’s unlikely that future developments will block those views, something that has had a major impact on many Turnberry owners in the last five years (I wouldn’t be surprised to see some of them move a couple of blocks up the street to reclaim their views)

There are some challenges that will likely slow the pace of sales and maybe even cause them to bring prices down on some units:

  • At these prices, buyers will also be looking at similar units in DC’s top addresses in neighborhoods like Georgetown, West End, and The Wharf
  • There will be a 7-11, fire station (quiet-exits will help, but won’t convince everybody), and a school (a negative for most, despite the beautiful design) within one block
  • Being up the (steep) hill from many of the neighborhood’s top draws including Rosslyn Metro, Key Bridge, Mt Vernon Trail, and new dining options
  • Rosslyn still has many elements from its sleepy government office district days and probably 5-10 years from shedding that completely via redevelopment that’s in the pipeline

Pre-sales are scheduled to begin in early 2020, but the building probably won’t be finished and ready for move-in until well into 2021. I don’t think the current market, or even the 2020 market, will be ready to pay these prices for most of the 104 units, but I think by 2021 we’ll see Rosslyn far enough along and Arlington’s market driving forward enough to generate some eye-popping sales for Penzance’s Pierce condos.

Is iBuying the Next Trend in Real Estate?

Question: What do you think about the iBuying trend in real estate? Have you seen an impact in Arlington?

Answer: iBuying offers homeowners a way to sell their home quickly without going to market, using a price generated by an Automated Valuation Model (AVM) like Zillow’s Zestimates. The big players are Opendoor, Offerpad, and Zillow but recently some well-known brokerages have joined the party including Redfin and Keller Williams.

At this time, none of the main players are offering iBuying in Arlington or the DC Metro. Currently, the largest iBuying market in the country is Phoenix with about 6% of transactions going through an iBuyer (half of those are with Opendoor).

How It Works

The process of iBuying is similar for each company and looks something like this:

  1. Homeowner submits a request for an offer and provides some basic information about their home (bedrooms, square footage, etc)
  2. iBuyer makes an initial offer on the home based on their AVM pricing algorithm
  3. If the owner likes the price, the iBuyer conducts a property inspection to determine condition and cost of repairs
  4. iBuyer makes a final offer given the property condition
  5. Owner can accept and close usually within 10-14 days

Advantages

  • Sell quickly
  • Sell as-is
  • No showings
  • No repairs or improvements
  • No contingencies that cause contract to void
  • No cost to get an offer

Disadvantages

  • Sale price likely below market value
  • “Service fees” usually range from 7-10% of the sale price, well above most commissions when using an agent
  • Still pay your normal closing costs (taxes, title fees, etc)
  • iBuyers not operating in most metro areas

When Does An iBuyer Make Sense?

There are all sorts of reasons a homeowner may value speed and convenience over price so iBuying exists for that market, but it should remain only a small percentage of the overall real estate transaction market. iBuying won’t always be the best option for somebody looking for speed and convenience, but with no cost and little effort to get an offer, it makes sense to at least see what an iBuyer is willing to pay.

If you’re in a market where iBuying exists (or when it eventually comes to Arlington), why wouldn’t you request an instant offer from an iBuyer and compare it to what your real estate agent thinks you can get on market? I know a broker in Texas who got more for his house from an iBuyer than he could get on the market because the AVM pricing algorithm over-valued his house.

Will iBuying Last?

I’m not sure how iBuyers will survive an economic downturn when they’re sitting on a huge amount of inventory that’s worth less than they paid for it. It’s a great business model in a hot market, but potentially devastating when the market turns.

Another flaw I see in the current model is that homeowners (like the broker in Texas I mentioned earlier) can take advantage of the process. An owner who does their homework, meeting with agents and getting iBuyer offers, will most likely only choose the iBuyer if they’re over-paying. That’s great for owners who can take advantage of it, but I’m not sure how that can be a sustainable business model.

An additional drawback is that iBuyers generally charge a fee of 7-10% of the purchase price, which is mostly attributed to the risks associated with buying based on an algorithm and a basic property inspection. If iBuyers can figure out how to reduce risk enough to cut this fee in half and sustain themselves through downturns, things will get interesting for the real estate industry. There have always been brokers and investors who specialize in “buy now” or instant offer programs, but what makes iBuying unique is the implementation of technology to determine pricing and to make the process more convenient, as well as the scale of operations. I think the longer-term solution is something that blends the convenience and scale of a well-funded tech company with the market knowledge of a local agent.

How Much Are Condo Fees In Arlington?

Question: Our Board of Directors is planning for the 2020 budget and we’d like to get a sense of the market rates in Arlington, particularly in the Rosslyn-Ballston Corridor. What are the average condo fees in the Arlington area on a cost per square foot basis?

Answer: It’s that time of year for most Condo Associations – budget planning time! As a former Condo Board Treasurer, I understand the pressure you’re under to balance responsible spending and reserve contributions with resident expectations of low, stable fees. Let’s take a look at what condo fees are across Arlington…

Arlington Condo Fee Rates

Fees are generally set on an annual basis by dividing up the Association’s total budget, including reserve contributions, by the ownership percentage assigned to each unit. Ownership percentage is determined by the builder and can be found in the legal documents you received prior to purchase. In most cases, it’s determined either by the number of bedrooms or square feet.

On a square foot basis, the average condo fee in Arlington is $0.54/sqft with a median fee of $0.53/sqft. Along the Rosslyn-Ballston Corridor the average jumps a bit to $0.57/sqft and the median remains the same.

On a per bedroom basis:
Bedrooms Average Fee Median Fee Average R-B Corridor
0 $319 $380 $306
1 $436 $470 $443
2 $575 $471 $631
3 $976 $505 $1,093

Not All Fees Created Equal

Before you jump to any conclusions about the relative value of your condo fee, you need to consider what’s included.

Amenities that require staffing and/or expensive maintenance like an attended front-desk, on-site management, and pools add significantly to the budget. The value for those amenities is subjective. Amenities that take up a significant amount of space within a building like large lobbies, party rooms, or rooftop gyms take away from the total unit count, thus increasing the ownership percentage of each unit.

There’s also a wide range of utilities included, or not, in a condo fee. Some fees include all utilities (water, sewer, trash, gas, and electricity) while others may only include trash with the rest paid directly by each owner. Some fees even include internet and cable! These differences can change your monthly bottom-line between two condos by hundreds of dollars.

Another important consideration when analyzing condo fees is how well they’re being used to fund the reserves (the Association’s savings account for major repair or replacement work) and whether future planned/unplanned building expenses will require a fee increase or special assessment. A well-funded reserve account usually means long-term fee stability and decreased chances of a special assessment. Associations should complete a new Reserve Study every five years to maintain a sufficient reserve balance and healthy building maintenance.

Other Thoughts On Condo Fees

Over the past couple of years I’ve written other condo fee related columns you might find helpful including A Case For Condo Fees, How Fees Impact Resale Value, and Finding Savings In Your Condo Budget.

While I have the attention of condo owners/Boards, I’ll also remind everybody that I’m organizing an info session on smoking bans in condos and to email me at Eli@EliResidential.com if you’re interested in joining.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What Is An Escalation Clause/Addendum (EA)?

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

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

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

When To Use an EA

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

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

Managing the Risk & Reward of an EA

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

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

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

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

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

Key Takeaways

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

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

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

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

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

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

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

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

 

Existing Housing Supply Would Only Last 1.5 Months

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

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

 

Good Homes Are Selling Much Faster

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

 

The $1M+ Home Market Is Healthy

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

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

 

Tips For Buyers

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

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

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

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