Home Buyers

Demand and Showing Activity Slowing Down

reallivingathomeblog Arlington, Buyer, Seller , , , , , 0 Comment
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.

Are Buyers Really Waiving Inspections? The Many Approaches to Home Inspections

elieliresidentialcom Arlington, Buyer , , , 1 Comment
Are Buyers Really Waiving Inspections? The Many Approaches to Home Inspections

Question: What are the different ways of structuring a Home Inspection Contingency and how do they affect the odds of my offer being accepted?

Answer:

Last Week’s $1,000 Donation Poll

Before I jump into today’s column, I want to announce that based on last week’s vote, our team donated $1,000 to the Fisher House Foundation on behalf of the ARLnow community in honor of Memorial Day. Fisher House Foundation builds comfort homes where military & veteran families can stay free of charge, while a loved one is in the hospital. Thank you to everybody who voted and commented with feedback about the various charities.

Home Inspection Contingency Overview

Not only is this market pushing Buyers to offer well over asking price, it’s also pushing them to take on a lot of risk by reducing or eliminating the protections offered by standard contingencies: Inspection, Financing, and Appraisal Contingencies are the “Big Three.”

Of the “Big Three” contingencies, the Home Inspection Contingency represents the most risk to a Seller because it gives the buyer a nearly unilateral option of voiding and/or the ability to request Seller repairs or Seller credits based on the findings of the inspection. Thus, Buyers who reduce or eliminate the risk of a Home Inspection Contingency to a Seller are viewed much more favorably than Buyers who do not.

A home inspection is when a Buyer hires a licensed Home Inspector to provide a report on the condition of a home. They examine and test things like appliances, the roof, water drainage, and the electrical system to help Buyers understand what they’re buying. Depending on the size and age of a property, inspections generally cost anywhere from ~$300-$800+ before common add-ons like radon tests and chimney inspections.

If you’re buying a home, there are a few different ways of approaching the home inspection.

Home Inspection with Right to Void or Negotiate Repairs and/or Credits

This option is most favorable for Buyers and least favorable to Sellers because it allows the Buyer to void the contract (and get their Earnest Money Deposit back) if they don’t like the results of the inspection (or even if they just get cold feet) and also allows Buyers to make any requests they want for Seller repairs or Seller credits.

If a Buyer decides to void, there’s nothing the Seller can do, as long as the Notice to Void is issued within the proper window of time. Buyers can make any requests they want of the Seller for repairs and credits, but the Seller can also negotiate or reject whatever requests they want. If the Buyer and Seller are unable to reach an agreement on repairs and/or credits within a specified number of days, the Buyer has the option of accepting the Seller’s latest offer for repairs and/or credits or voiding the contract.

Most people would consider this the standard/default type of inspection, but in hot markets like we’re experiencing now, this structure is much less common.

Home Inspection with Right to Void Only

Also known as a Pass/Fail inspection. This option is less favorable to Buyers and thus, better for Sellers. In this scenario, Buyers retain their ability to void the contract after doing the home inspection, but give up the negotiation period to request repairs or credits from the Seller.

The idea behind this inspection structure is to communicate to the Seller that the Buyer just wants to ensure there are no major issues, but is willing to take on the cost/burden of smaller issues. Of course, there’s nothing stopping the Buyer and Seller from agreeing to repairs or credits within this structure, and it happens more often than you might think. This is especially true if a larger issue is discovered that is a surprise to both parties such as water penetration or a cracked foundation.

In many cases, the timeline that Buyers have to complete their inspection and make a decision to void or not is much faster than a “full” inspection, which is another benefit to the Seller. If the contract is going to be canceled, Sellers want that to happen sooner than later.

Pre-Inspection

In this scenario, the Buyer does their home inspection before making an offer. It allows the Buyer to make a significantly more appealing offer to the Seller because it does not include a Home Inspection Contingency (no right to void based on the inspection), while giving the Buyer all the benefits of being informed by a complete home inspection.

The biggest downside to this approach is that Buyers are paying for a home inspection before they know whether or not their offer will be accepted so Buyers can pay hundreds of dollars and spend 2-3+ hours at an inspection for a house that they get significantly outbid on. In many cases I’ve experienced with hot homes, multiple buyers are doing pre-inspections. I recall a house in Arlington in early 2020 that had something like 20 pre-inspection done!

This approach is not always an option because there may not be enough time to schedule a pre-inspection before the Seller is reviewing offers or the Seller may not allow pre-inspections because they take up large chunks of time and get in the way of other Buyers seeing the property.

No Inspection or Info-Only Inspection

Unfortunately, the market has gotten so competitive that many Buyers are purchasing homes without doing a home inspection or doing one for informational purposes only, whereby the inspection is done after an offer is accepted without any contractual ability to void, thus risking the (likely high) Earnest Money Deposit if the results of the inspection are bad enough to warrant terminating the deal.

This is a particularly unhealthy place for the market to be because it transfers a massive amount of risk onto Buyers who choose to commit their deposit without any due diligence or makes it very difficult for Buyers who refuse to take on that type of risk to actually buy a home.

What Should We Do?

While I doubt it will ever happen, I’d like to see the state or our Realtor Associations introduce a basic/minimum inspection requirement for homes being sold to non-builders/contractors/investors (like the “accredited investor” threshold that the SEC has for certain investments).

This would mean that in a hot market where Buyers are being pressured not to do a home inspection, Sellers would pay a relatively small amount ($200-$300) for an inspection report on the core systems of the home to be conducted by a licensed Inspector, with that report available prior to offers being made or after accepting an offer, but with a short review period that includes a right to void (like the required HOA/Condo document review period).

The best advice I can give is that it’s important to understand the risk-reward balance of any decision you make in real estate, especially as it relates to structuring or removing the Home Inspection Contingency.

Why Can’t I Find A House!?

elieliresidentialcom Arlington, Buyer , , , , , , , , 0 Comment
Why Can’t I Find A House!?

Question: I’m prepared to make a strong offer in Arlington’s hyper-competitive market, but I can’t even find a house to make an offer on! Why is every home on the market either old and too small or new and too big??

Answer: While debates about Missing Middle and tear-downs continue, I thought it would be helpful to look at why Arlington is such a difficult place for most families to find good housing options. Most of Arlington’s single-family housing problems stem from when the majority of homes were built – before 1960 and within the last decade. Only 17.8 % of single-family homes sold since 2016 were built between 1960 and 2009!

Too Old, Too New

According to Arlington’s 2019 Profile, there were 28,500 single family detached homes in the County and according to public records, ~80% of those homes were built prior to 1960 or since 2010. Why is that a problem?

Many homes built prior to 1960 are functionally obsolete for most families (“the reduction of an object’s usefulness or desirability because of an outdated design feature that cannot be easily changed”) and homes built since 2010 have an average price of nearly $1.8M over the last 18 months.

Most homes built in Arlington in the 1940s and 1950s (with the original footprint) are plagued by 2-3 small bedrooms with small reach-in closets sharing one small bathroom, small enclosed kitchens, and small basements with low ceilings. They also lack the openness desired by most families in today’s market. Unfortunately, there’s very little one can do to bring these older homes up to today’s standards without extensive/expensive remodeling and/or expansion.

The economics of building a new home in the last decade doesn’t support the construction of a more modest homes (3,000-4,500sqft) so most new homes are built with 5,000-6,000+ square feet and are priced well above most budgets.

Just Right

It wasn’t until the 1980s and 1990s that Arlington homes were consistently built with designs more suited to today’s buyer including things like attached garages, master suites, and combination kitchen/dining spaces. While these 1980s-1990s designs may not be perfect, it makes for more reasonable compromises at prices many more Arlington families can afford.

Unfortunately, over the last four years, there have been fewer single-family homes for sale that were built during the 1980s and 1990s (4.3% combined) than any other decade until the 1910s.

Housing Changes Over Time

I put together some charts to highlight how home sizes have changed through each decade as well as how the average cost of a home changes by the decade it was built. These charts are based on Arlington single-family detached sales since 2016.

Note: Older homes that have been remodeled/expanded and sold are included in this data so the average size, bedroom, and bathroom count for older homes is higher than what you would expect from the original designs. Most pre-1960 homes were built with three bedrooms, one bathroom, and under 2,000sqft.

Note: Total finished square footage includes any finished basement space.

Here’s the data table for each of the charts:

Decade Built# SoldAvg PriceAvg BRsAvg Full BAsAvg Finished Sqft
<1930355$945,3453.62.42,302
1930s562$899,8673.52.42,315
1940s987$827,1973.52.32,121
1950s961$870,4533.72.52,413
1960s232$915,8184.22.92,760
1970s104$944,5764.02.82,919
1980s86$1,006,0184.23.03,193
1990s96$1,184,4094.63.23,641
2000s229$1,430,9054.94.04,697
2010s584$1,638,6965.24.65,004
Total4,196$1,022,3724.02.92,965
Using This Information

For those of you currently searching for a home or planning to start your home search, hopefully this information can be used to help you understand how likely/unlikely it will be to find the type of home you’re looking for and be more prepared to act decisively when the right home hits the market.

For those of you who own a home that falls within the middle-ground many buyers are seeking, you should have an even more favorable position within an already favorable market for sellers.

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

Arlington’s Next Luxury Condo Building

judson726 Arlington, Buyer , , , , 1 Comment
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?

elieliresidentialcom Arlington, Buyer, Seller , , , 5 Comments
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.

Data Suggests You’re Searching For a House Today

judson726 Buyer , , , , , , 0 Comment
Data Suggests You’re Searching For a House Today

Question: I partied too hard last night and am nursing my hangover searching for homes online. Am I alone in my misery?

Answer: Congratulations, you are among the millions of Americans who choose to nurse their New Years Eve hangover by searching for homes online. In fact, New Years Day ranks among the top three most active days for people to search for a home online, along with July 6 and the weekend after Thanksgiving. Conversely, these tend to be some of the slowest days/weeks for showings and offers.

 

If you’re searching for homes today, chances are you’re using one of the Big Three – Zillow, Trulia, or Realtor (Yahoo Homes is ranked as third most traffic, but I’ve never heard of somebody using it and couldn’t find it online).

For years I told clients that these third-party sites were their best bet for search because our MLS failed to deliver a good client-side search experience compared to what was being offered by other sites. However, earlier this year MRIS went through a merger and rebranded to BRIGHT MLS and finally created a respectable client-side search portal that gives buyers access to more search fields, a much better user interface, and better collaboration tools with their Agent. A major advantage of searching through the MLS is you have real-time, accurate new listing alerts, status changes, and price reductions. 

Check out the short YouTube video (LINK) highlighting some of the new features and tools of the client portal.

I hope everybody had a great 2018 and wishing you all an even better 2019. Happy (online) house hunting to many of you today. If you’d like me to get you set-up with a BRIGHT MLS search portal send me an email to Eli@EliResidential.com and I’ll be happy to add you.

Three Biggest Home Buyer Mistakes

judson726 Buyer , , , 0 Comment
Three Biggest Home Buyer Mistakes

Question: What are some of the most common mistakes people make when buying a home?

Answer: Merry Christmas! I’m assuming very few people will read my column this week so I figured it was a good time to sneak in some click-bait so I can pick-up some future readers. Please don’t throw tomatoes or broken Christmas tree ornaments, I’ll get back to my normal columns on January 8 with a deep dive into how the market performed in 2018. Without further ado, here are the three biggest mistakes I see people make when buying a home:

 

Mistake #1: Meet Me At [Insert Address] in 60 Minutes

Buying a house should not be like ordering an Uber across town. Just because you can “order” a real estate agent online to meet you at a house in 60 minutes doesn’t mean you should…and you really shouldn’t. If you want to set yourself up for the best results, you should expect the process to start like any professional relationship; with an introductory meeting to discuss your needs, review the process, establish a strategy, and vet the professional you’re working with.

 

Mistake #2: A Good Deal Isn’t Just About Negotiations

People are programed to think that by negotiating a seller down from their asking price they’ve secured a good deal. Good deals come in all shapes and sizes and shouldn’t be defined by the seller’s asking price, but by whether or not you are getting value relative to the market and your needs. 

I come across plenty of properties that are underpriced or fairly priced and buyers who are solely focused on negotiating a discount often lose out on what would be a great deal without negotiating. Similarly, I’ve seen plenty of sellers overprice homes by so much that buyers negotiate 5% off and still over pay, but they walk away feeling like a winner. Don’t let a seller’s price dictate what is or is not a good value. Put yourself in a position to recognize value and move with confidence when you find it.

 

Mistake #3: Duped by Lenders

It’s easy to shop for interest rates online, but what you see online is often very far from what you get. Here are a few tips when shopping lender rates:

  • Go through their pre-qualification process first

  • Compare rates for a specific property (rates may change based on loan amount, property type, and location)

  • Compare rates on the same day

  • Compare the Annual Percentage Rate (APR) not the interest rate. A lender may artificially reduce an interest rate by tacking on up-front costs and these costs will be captured by a higher APR even though the interest rate is lower.

 

Merry Christmas and Happy New Year to everybody. I’ll see ya in 2019!

What To Know Before Buying a House

judson726 Arlington, Buyer , , , , , , , , , , 0 Comment

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.

Are Escalation Clauses a Trap?

judson726 Arlington, Buyer , , , 0 Comment

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.