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.

Most Common Contract Contingencies Explained

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

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

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

Home Inspection Contingency

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

Financing Contingency

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

Appraisal Contingency

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

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

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

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

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Housing Slowdown More Extreme in Outer Suburbs

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

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

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

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

Outer Suburbs Slowing Faster, Arlington King of Stability

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

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

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

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

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

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

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

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Listing Activity Remains Stable

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

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

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

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

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.
Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Influence of New Construction on Arlington Prices

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

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

New Construction Prices High, Effect Limited

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

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22207 Dominates New Construction Sales

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

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Average New SFH Nearly $2.2M

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

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

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

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

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

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

2022 Arlington Mid-Year Condo Review

Question: How did the Arlington condo market perform in the first half of 2022?

Answer: It has been quite a ride for the Arlington condo market over the past four years!
After a long stretch of relatively little appreciation from ~2013-2018, the condo market surged on the November 2018 news of Amazon HQ2 and then flatlined when COVID lockdowns began in the spring of 2020. Beginning in the summer of 2020, condo inventory flooded the market in record volume, causing the market to soften and prices to drop.

Conditions were improving by the summer of 2021 as demand picked up. By early 2022, competition return to the market with more multiple offers and escalations. The competition didn’t last long, as the entire housing market began to slow due to high interest rates and worsening economic conditions. After much volatility in the condo market since late 2018, I think we are finally seeing signs of the market finding its natural balance — moderately favorable for sellers, while providing buyers with a range of options and the occasional opportunity for a discount.

Let’s look at the stats behind the first half of the 2022 Arlington condo market…

Pace of New Inventory Evens Out

From 2013-2018, the Arlington condo market averaged ~500 and ~700 new listing in the first and second quarter, respectively. Those numbers dropped off a cliff in 2019 and 2020 because people chose to hold properties because of Amazon’s announcement (Q1 2019-Q1 2020) and then held in Q2 2020 because nobody knew what to do when COVID hit. Then the pace of inventory surged at a record-shattering pace from the summer of 2020 through the end of 2021.

Inventory levels finally came down to earth, closer to their 2013-2018 averages, with 576 and 651 new condo listings in the first and second quarters of 2022, respectively.

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Supply/Demand Levels Back to Normal-ish

With the easing of new inventory volume and demand coming back to level, Months of Supply (a measure that combines supply levels with the pace of demand) has returned to levels more in-line with pre-Amazon years and what I would consider to be the Arlington condo market’s natural balance.

Housing economists consider six months of supply to be a truly balanced market for buyers and sellers, but we rarely see a sub-market around here that gets close to six months. 1.5-2 months of supply is a favorable market for sellers, but it usually takes less than one month of supply for multiple offers and escalations to become a common occurrence. 

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Demand Metrics Tell Similar Story

The return to balance is showing up on the supply and demand sides of the equation, although demand seems to be marginally stronger that it was pre-Amazon announcement, which I’d attribute to how expensive townhouse/single-family properties have gotten lately, driving more demand towards less expensive condos.

What we can see from the chart below is that the speed of the market, measured by the percentage of properties going under contract within the first ten days, has improved over last year but has fallen well below 2019/2020 levels. The same goes for the percentage of properties selling for at or above the asking price.

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Good Half-Year for Two-Bedroom Condos

All pricing data points to the first half of 2022 being a great year for two-bedroom condos and an okay year for one-bedroom units. Here are some key pricing data points:

  • The median price of a two-bedroom condo increased 11.7% to $550,000 in the first half of 2022 compared to the first half of 2021
  • The median price of a one-bedroom increased 3% to $380,000
  • The average price of a two-bedroom increased 15.7% to $620,616 compared to 3% to $381,220 for a one-bedroom condo
  • On a $/SqFt basis, two-bedroom condos increased 7.4% to $517/SqFt compared to 2.8% to $497/SqFt for one-bedrooms

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

Should Your Condo Building Have a Rental Cap?

Question: Do you think it is a good idea for our condo board to consider setting a cap on the number of units that can be rented at a given time?

Answer: One of the most common debates within condo buildings is whether an Association should limit the number of condo units that can be rented concurrently. There are some benefits of limiting the number of owners who can rent out their unit(s), but I think it’s the wrong decision for most buildings because it can hurt property values and is unnecessary, in most cases.

For the sake of clarity, when I refer to rental/investor units in a building, I am referring to individual unit owners renting their unit(s) out to tenants instead of occupying it themselves (they are considered investors).

Lending Misinformation

There is a lot of misinformation out there about how the number of rental units in a building effect the warrantability of a building (ability of future buyers to secure a mortgage). Here are the limits you need to be aware of:

  • Fannie/Freddie Loans: Conventional loans backed by Fannie Mae/Freddie Mac do not have any rental limits for primary and secondary home loans. They limited the number of rentals in a building to 50% for investor loans only.
  • VA (Veterans) Loans: No rental limits. The VA does not like seeing rental caps and may not approve a building for VA loans if they do have rental limits in place.
  • FHA Loans: FHA loans are restricted in buildings with more than 50% of units rented. FHA loans represent a small percentage of the loans written in this area.
  • Jumbo/Private Loans: High balance loans (over $970,800 loan amount), not insured by Fannie/Freddie, have a wide range of guidelines. Some have rental restrictions and others don’t, but in general jumbo/private loans tend to have more conservative lending guidelines and a higher chance of restricting a loan due to the number of units being rented. However, many banks will make exceptions, especially with higher (30%+) down payments and there are many alternative lending options in the jumbo/private arena a buyer can choose from.

Pro: Better Quality of Living

Owner-occupants generally invest more in their home, take better care of common areas, and take more pride in developing a strong social community. In small associations or those intent on maintaining a certain standard of living, quality of living may prevail over property value.

Cons: Buyer Turn-Off, Forced Sales

Many buyers want to keep their options open to renting a unit out after they are done using it as their primary residence and are turned off by the idea of a rental cap and plenty will not buy in a building if there is a cap, even if it’s unlikely to be reached. By turning otherwise motivated and qualified buyers away, you’re bound to hurt the market value of units in your building.

If a rental cap is reached and enforced, it can hurt market values even more because homeowners are forced to sell if they move out and a forced sale may result in a homeowner agreeing to take a worse deal when they would have otherwise chosen to rent the unit until they can sell into a strong market.

Track Rental Activity in Your Building

Even if you do not have a rental cap, it’s still important to track which units are being rented out. At a minimum, your Board/Management should receive a copy of each lease and keep a basic spreadsheet to be able to report on which units are being rented. In my experience, I have found that most buildings in Arlington settle into a rental percentage of 20-35%. For some buildings, like those in the heart of Clarendon, I see higher rental percentages, sometimes exceeding 50%.

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.

Are You Considering Operating a DC-area Airbnb

Question: What are the local laws governing short-term rentals in the DC area?

Answer: I hope you had a great Fourth of July holiday weekend! Some of you may have stayed at an Airbnb this weekend and come back with grand plans of buying your own investment property to rent out.

If you’re considering purchasing an investment property for short-term rentals (STR), like Airbnb, one of the most important things to research early on are the local laws governing them. With all the tourism to the DC area, a short-term rental property can be quite lucrative, but most local governments in this region have laws in place to prevent properties from being used exclusively for short-term rentals and thus limit your expected returns.

It’s also important to know that short-term rental restrictions from Homeowner, Condo, or Cooperative Associations take precedent over any local laws and it is extremely rare to find an Association that allows for any rental period less than 6 or 12 months.

Short-term rentals are defined as properties rented out for less than 30 consecutive nights to the same renter.

I compiled a list of the local STR laws in the greater DC area and summarized them below with links to the government websites where the information is detailed:

  • Arlington County: Allowed in units used by the owner as his/her primary residence (the owner occupies the unit at least 185 days of the year). Cannot use detached accessory dwellings for short-term rentals.
  • Washington DC: Unlimited rentals if the property is owner-occupied during the rental (rental is for partial use of the home), limited to 90 nights of rentals per calendar year for properties that are not owner-occupied during the rental (renter has full access to the entire property). DC also requires an assortment of licenses, certifications, and fees.
  • City of Alexandria: Unlimited rentals during a calendar year and no restrictions on owner occupancy. Properties can be owned and used solely for short-term rentals. City of Alexandria charges an additional 8.5% Transient Lodging Tax for properties that sleep 4+.
  • City of Falls Church: I could not find any official guidance from the City of Falls Church on short-term rentals and am led to believe there are not currently any restrictions or additional taxes
  • Fairfax County: Limited to 60 nights of rental bookings per calendar year, with no reference to owner occupied vs unoccupied. Detached accessory dwellings cannot be used as STRs. No more than six adults can stay in a single property. Additional Transient Tax charges apply.
  • Loudoun County: It seems that Loudoun County is still drafting their short-term rental policies, with the last official write-up I found referencing a February 2022 public hearing and draft amendment. The County’s zoning currently does not allow short-term rentals, but a hold has been put on enforcement until a policy can be finalized.
  • Montgomery County: Limited to 120 nights of rentals if the home is not occupied by the owner during the rental and unlimited rentals if the home is owner-occupied during the rental. No more than six adults can stay in a single property.
  • Prince Georges County: Limited to 90 rental nights per calendar year if the property is not owner-occupied during the rental and limited to 180 rental nights per calendar year if the property is owner-occupied during the rental.

Owning and operating a short-term rental can be very lucrative, but it’s important to understand that residents and local governments are still in the early stages of defining how their communities want to support or restrict STRs. Before making a significant investment in a property for STR income, get fully informed on current laws/taxes, research the mood of residents and politicians on STRs, and incorporate the risk of law/tax changes into your investment decision.

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.

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.

Ideas for Reducing Your Interest Rate

Question: Are there any good ways to lower my interest rate?

Answer: I probably don’t need to spend time educating you on how high interest rates have gotten
over the last 6 months (they’ve more than doubled in most cases), but we’re now seeing rates in the
upper 5% to mid-6% range on most loans. Unfortunately, the current economic environment makes it
more likely that rates continue to climb and most lenders I speak to tell me they’re expecting rates in
the 7-8% range later this year.

While there isn’t much you can do to change your rate in a significant way, just like you can’t do much
about the price of gas, there are some strategies you can use to help. I spoke with Jake Ryon
(jryon@firsthome.com) of First Home Mortgage about things he recommends to help bring down your
rate.

Consider ARMs (Adjustable Rate Mortgage)
ARMs got a terrible reputation during the housing crisis because many borrowers didn’t understand
the terms of their loan. Some of these options allowed for negative amortization so borrowers opting
for the lowest rate ended up owing more on their loan than when they started. Many of these options,
and the sometimes predatory approach to lending, have been outlawed so the ARMs you see today
are a distant relative of the ARMs of the housing crisis.

What is an ARM?
Simply put, an ARM is a loan with an interest rate that is locked for a set period of time (usually 5, 7,
or 10 years) that can adjust (up or down) after that set period, based on market rates. The rate will
continue to adjust up or down based on market rates with limits on how much a rate can change each
year and throughout the life of the loan.

Why should you consider it?
In the current interest rate environment, you’ll usually see lower interest rates on an ARM than on a
standard 30-year fixed mortgage. The difference can be roughly .5-1%, which is a significant savings
on interest payments.

What about the risk?
The risk of an ARM is that if rates remain high or end up higher at the end of your lock period, your
rate will adjust upwards. The gamble you’re taking (based on historical rate trends, it’s a good bet) is
that rates will drop enough to justify refinancing into a lower 30yr fixed rate before your ARM lock
period expires.

Over the last few years when rates were so low, ARMs didn’t make sense because they were so
close to a 30yr fixed rate (sometimes higher), so you haven’t heard people talk much about their
benefit until more recently when the spread between the two has increased.

Buy Origination Points
In most cases, you can buy “points” on your loan to decrease the interest rate. One point equals 1%
of your loan amount and for a while, you were seeing a reduction of around .25% in rate for a point. In
the current interest rate environment, buying a point may lower your rate by as much as .5-.75%.
Discuss this with your lender up-front so you’ll know if you should budget additional cash to lower
your interest rate. Your lender can also calculate the break-even point on this investment, which is essentially calculating how long you need to be in the loan (own the property) for the money saved in
interest payments to exceed the amount you paid for the point.


Increase Down Payment
Sorry if this seems obvious, but for years when rates were so low, many buyers were choosing to put
less money down, even if they had more funds available, because the cost of borrowing was so low,
they felt they could use the extra cash more effectively in other savings/investment vehicles.

That financial strategy is no longer as attractive and using as much down payment as you can muster
is gaining favor in financial advisory circles. In general, you achieve the best interest rates with a 20-
25% down payment, with little improvement beyond that. However, putting more money down can still
make a lot of financial sense even if it doesn’t lower your rate because the interest payments on
borrowed money are so high now.

There are still plenty of loan options for buyers with less (3-5%) to put down, but those rates have
shot up and carry higher mortgage insurance premiums.

It’s now even more important to get pre-approved and open discussions with a trusted lender at the
beginning of your home search (here’s a link to an article I wrote about picking a good lender). If you
have any questions about finding a lender or want recommendations, don’t hesitate to email me.

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, 4040 N
Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.