Question: Do I have to use my Property Manager if I sell my house?
Answer: This is more of a PSA post than anything else. If you’re a landlord or tenant, it’s crucial to pay attention to the fine print in agreements, especially regarding a future property sale. It’s common for Property Managers or Agents to include language that gives them the right to list your property if you choose to sell it or gives them a right to a commission in the event it sells during the rental period, to the tenant or somebody else.
Property Managers With Exclusive Right to Sell
Watch out for language granting property managers or agents exclusive rights to list your property if you decide to sell. This exclusivity restricts your options and flexibility, limiting your ability to explore alternative selling methods or use the agent of your choosing.
Required Commission Payments
Be aware of language stipulating a commission to property managers or agents if you sell your property to the tenant or another buyer during the rental period. Landlords might be obligated to pay a commission, even if they find an alternative buyer or wish to handle the sale independently. This financial burden can significantly impact both parties.
What If an Exclusivity or Commission Clause Exists?
Like most things in a contract, these clauses are negotiable. If you see something that you believe binds you to certain actions or payments in the event of a sale, ask about it and work to ensure you have the most flexibility if a sale does take place. You may not plan to sell when you sign the paperwork, but life happens and priorities change.
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.
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.
Question: Is it more effective to save for my kids’ college through a rental property investment or a more typical college savings plan like a 529?
Answer: I often hear from parents who purchase a small investment property around the birth of their child as the primary savings vehicle for college. Some people swear by it. I did it when my son was born (and will report back with results in 13 years!).
I reached out to my financial advisor, Erik Fischer CFP, RICP of Taylor Financial (erik@taylorfinancial.com, (727) 417-3400), about the topic and he offered a very detailed, thoughtful comparative breakdown of using a real estate investment as a college savings tool vs a more traditional 529. Erik is an excellent resource if you have additional questions about this topic or other financial savings topics.
With frequency, this question arises from parents who gravitate towards real estate investing. And, there is not a definitive answer. Ok – column over. Just kidding. While it’s true that there is not a definitive answer, depending on your situation the answer may be definitive for you.
Identifying the parameters:
First, establish a target – how much wealth do you want to save to pay for college?
Then, consider the following key areas when comparing the two investment vehicles
Savings strategy –how will you fund your savings vehicle
Flexibility
Level of involvement
Associated risks
Expected growth rate
Tax implications
Establish your target:
The good news here is that your target will likely be the same regardless of which approach you choose. So here is an easy-to-follow framework of how to establish your target.
Identify the amount you would like to have accumulated for each child when they reach college. You can research the “Cost of Attendance” (*important* this is your all-in cost, not just tuition) at http://www.collegeboard.org.
Use the current cost of attendance for a school and inflate that amount to future dollars using an inflation rate of 5%. Inflate this number out until your child is likely to graduate college.
Why 5%? This is somewhat arbitrary, but over the last 20 years college costs have been doubling or more the long-term average inflation rate of 2-3%. I encourage you to use a number somewhere from 5-8%.
Take the last 4 years of inflation adjusted costs and add them up. These numbers represent a ballpark of what you could expect to pay for this child. Is it perfect? Of course not, but it will give you a greater level of visibility into what you will need.
Establish your target (example):
Let’s say your child was just born, plans are to attend college in 18 years, graduate in 4 years. At UVA, in-state cost of attendance for families making over $110,000 per year is $29,877 (tuition represents roughly half of this number). If you adjust for inflation and add up 4 years of all-in cost, you arrive at an aggregate number that includes the annual timeline of cashflows. See table below:
These calculations will vary whether you plan for in-state vs out-of-state, public or private, and how much of the cost you are willing to fund. Regardless, the framework will remain the same or very similar to arrive at some accumulation target.
You have your target, now what’s the best way to get there:
Let’s compare a 529 based approach to a rental property-based approach. Of course, these are not the only two ways to save for college, but we’re focusing on these two today.
Let’s first look at the rental property approach: the high-level idea is buying a rental property when a child is born and selling it to fund college when the child is college-ready.
Because of the increased complexity of rental real estate (which is not inherently good or bad, it just is), let’s identify some of the important considerations first:
Down payment will be required
Management / execution risk
cash flow planning
property management
tenant management
increased tax planning
increased insurance planning
financing considerations (if you will require a mortgage)
a plan to sell the property (to fund college)
So, you may have picked up here another hint at what the answer might be for you depending on your situation. That is, if you do not have the cash on hand to make a reasonable down payment for the type of property you desire, the rental property might be off table for you, at which point you might lean on an annual savings approach of a 529.
Rental property example:
Rental strategies come in all shapes and sizes, but let’s say that we have $50,000 available to fund this strategy and we use that to purchase a property with the following facts:
20% down payment, leaving $10,000 left over as a sinking fund to close the deal and maintain the property.
Purchase price $200,000
Mortgage rate of 6%
Cash flow neutral over the course of the 10 years (perhaps negative in the first few years, and positive in the last few years due to rent inflation and fixed mortgage), with annual profits years 11-18 of $5,000 that you let accumulate in a bank account that generates some interest
Property appreciates at 3% annually
Sell the property in your child’s senior year of high school and pay off the remaining mortgage.
Keep the rest in cash to pay for school, or in a high yields savings or CD ladder to time payments over 4 years. The point is, you’ll have all your cash going into freshman year and you’ll keep it invested safely while they are in college.
Here is the formula with accompanying visuals below: determine growth of underlying asset, then sell after 18 years, subtract 5.5% of sale price (commissions, closing costs, etc.), eliminate the debt, add back in the cash from your rental property bank account. Once you have done all this, you are left with unencumbered cash that you can use to pay for college (pay it all to a college…lovely, right?)
$340,487 x 94.5% = $321,760
$321,760 of take-home transaction, minus the outstanding debt of $94,493 = $227,267
Plus $45,000 in cash that has accumulated in your rental property bank account = $272,267*
*The final available balance will likely be lower due to a capital gains tax, but the tax charge is highly variable based on factors like future tax code, final cost basis, tax management during property ownership, and other personal financial considerations at the time of sale.
We are now very close to our target. Also, it’s very important to identify the many factors that can be quantified with deeper analysis, but by nature are less tangible. Let’s list them:
Advantages
Tax advantages along the way with depreciation, deductible expenses, and favorable tax rates (capital gains rates) on sale
Opportunity to develop skills and expertise in real estate
Flexibility that you are not required to use the asset for college if you are able to pay for or end up choosing to pay for college in some other way – this is a big one.
Potential for upside return
Potential to be integrated with planning for your own retirement
Disadvantages
Level of management extremely cumbersome compared to a 529
Execution / management risk can significantly impact total returns.
Increased liability
Market risk
Typically, you will need a significant amount of cash upfront to make the down payment
Carefully examine these attributes, because one or some of them might be deal-makers or deal-breakers for you.
Now, let’s compare the rental property strategy to the typical/default college savings account, a 529. This is simple, add an initial lump sum, or deposit annually.
529 – Annual Deposits equaling $500 per month for 18 years
529 – Lump Sum with the same $50,000 that was used for the rental property
The tables above represent the hard numbers that move you much closer to your ideal target. Helpful. Now, there are also many factors that can be quantified with deeper analysis, but by nature are less tangible. Let’s identify them:
Advantages
Tax-free growth, and tax-free distributions if used for qualifying educational expenses.
This is the big one, it’s the main differentiator of the 529 from any other account type.
Automatic – set it and forget it
Can be transferred to other qualifying relatives if needed for their education
Potential for stock-market returns
Based on the new Secure Act 2.0 law, part of the plan may be eligible to convert to a Roth IRA for the beneficiary if certain criteria are met
Disadvantages
Tax benefits are lost if not used for qualifying educational expenses
10% penalty on earnings if not used for qualifying educational expenses
Market risk
Lack of flexibility to use the money for any other reason, due to a & b above
Lack of liquidity, use and control for any reason other than college
Cannot be integrated with planning for your own retirement
Carefully examine these attributes, because one or some of them might be deal-makers or deal-breakers for your own situation.
Comparing the two:
How do we put this all together? From a wealth accumulation perspective, in these examples, the rental property strategy wins, and it beats the lump sum deposit into a 529 by a significant amount.
However, this is only one example. If we ran 100 examples for each, we would get 100 different results for each. Yes? You could get a 10% return in the 529, or a 6% return. Your rental property could cash flow negatively in all years, or positive in all years. You could get a great deal, or a bad deal. You could refinance if interest rates lower and capture significant savings. You could have an extended vacancy. Maybe the asset only grows by 2% instead of 3%. There will be a ton of variability.
Distill the factors that will influence the results for you:
Rental strategy
Purchase price of the home
The plan to sell the home
Ability to manage the cash flow of a property, maintain it, and sell it properly / advantageously
Ability to execute proper tax planning along the way
Ability to manage tenants
529
If you deposit a lump sum, at what point in the market cycle did you get started – during a bull market? During a bear market? Unfortunately, this is somewhat out of your control, but it makes a big difference in final results
Investment selection – did you create an appropriate portfolio within the account
Behavioral finance – did you try to time the market, chase a rate of return, or avoid a market drawdown? As you can tell by the wording, none of those tend to be in your financial interests.
What’s the bottom-line(s):
Don’t just focus on the surface-level math, but dig deep into the variables that impact your personal strategy (including non-financial)
While real estate in this example, and many others, may produce a higher college savings balance, it comes with a lot more work and requires a large lump sum payment up-front
Research and seek out the expertise you need to execute both options efficiently
Thank you very much for your detailed analysis, Erik. I have benefitted from Erik’s financial guidance for many years and would encourage anybody with questions about college savings or other financial planning decisions to reach out to him at erik@taylorfinancial.com.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to Eli@EliResidential.com. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
Video summaries of some articles can be found on YouTube on the Eli Residential channel. 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.
Question: I’m planning to sell my home to a builder to be torn down, do you have any advice?
Answer: For many homeowners with older, smaller homes in expensive markets, selling to a builder is the easy and most profitable option when you’re ready to move. If you live in a home like this, you probably get hundreds of calls and letter from builders, investors, and real estate agents offering to buy your home as-is.
Here are six tips and ideas if you’re considering this option…
Don’t Overvalue Cash
The idea of somebody paying cash for your home sounds exciting and more reliable than somebody getting funds from a bank. “They pay cash” is one of the most common reasons I hear from homeowners explaining why they prefer selling to a builder.
The truth is that many builders don’t buy homes with a mountain of cash they have sitting around; they rely on strong banking relationships to finance their purchase with cash-like deals (the money is available quickly and easily).
The real value of cash is that a buyer can close quickly and does not require any bank approval, but a cash-like deal from a well-qualified buyer working with a great bank can often mirror this by removing any finance or appraisal contingency and closing as fast as the bank will allow (many can close in 2-3 weeks).
The contingency (or study period) structure and Earnest Money Deposit terms are more important than the funding source being a buyer’s private cash balance vs a trusted bank/lender. I would also argue that it’s more likely that an individual or builder cash-buyer will run into a cash crunch prior to closing than an established bank/lender.
Your Home May be Worth More to a Homeowner
It’s no secret how hard it is to find entry level homes these days. You may think that your current home with a small kitchen, old roof, and unfinished basement is only worth the land it sits on, but buyers are hurting for inexpensive homes, even if they need loads of improvements. Don’t assume that just because your home is small and dated that a builder is your only option.
Make sure you’re comparing builder offers to what you can get on the open market, taking into consideration other financial (e.g. differences in commission) and non-financial (e.g. timeline and showings) differences between the two routes. There may be little downside to testing the open market before committing to a builder, depending on your situation.
Your community will also appreciate your contribution to preserving the local tree canopy!
Builders Can Offer Attractive Rent-Backs
A rent-back means that you can live in your home after closing (aka after getting paid) for a specified period, usually for little or no cost, for months after a sale. For many sellers, this extra time is perfect for searching for your next home or apartment, with cash in-hand, or taking time to clear out decades of personal belongings.
A normal buyer can also offer a rent-back, and are often happy to, but if a home is being purchased using a mortgage for a primary residence, the buyer cannot offer a rent-back over two months. A builder, even if the funding comes from a bank, or cash buyer has no restriction on the length of rent-back. It’s well within reason to negotiate 3-4+ months of free or low-cost rent-back from a builder after closing.
Share in the Builder’s Profits
Jealous of the profit a builder will generate from building a new home on your lot? Rather than selling your home to a builder, consider negotiating an equity stake in the project and getting paid based on the sale of the new home. It’ll take 10-12+ months longer to be paid and there’s more risk, but you can make a lot more than you would selling your existing home.
Use Missing Middle to Upgrade, Stay Home
The new Missing Middle zoning code may be a great solution for many Arlington homeowners by allowing you to partner with a builder to build a Missing Middle product (duplex, townhouse, or small condo building), live in one, designed to your specifications, and leverage profit sharing on the others to significantly reduce the cost of your new home.
The cherry-on-top is getting to stay in the same place you have lived in for years/decades!
Realtor Representation Can Be a Net Benefit
A direct sale without agents/commissions is one of the primary selling points builders offer and it’s certainly a good one, but representation and commissions come in many shapes and sizes that sellers can benefit from when selling to a builder. Benefits range from understanding how to measure the value/risk of contract terms like a study period or deposit, knowing what to negotiate for based on your needs/preferences, or effectively soliciting more bids to ensure you’re getting the best price.
Even though working directly with a builder can be simple, it’s important to remember that a builder’s core business is acquiring lots with favorable terms/prices, which runs counter to your best interests.
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 Eli Residential channel. 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.
Question: What design trends are you seeing in homes these days?
Answer: Every year we cycle through new color, material, and design trends but it’s also rarely anything actually new just recycled trends from past generations (e.g. wallpaper is making a big comeback). Design isn’t exactly a strength of mine, so I defer to the experts for my annual design trends column. This year I pulled from Apartment Therapy, Architectural Digest, Forbes, National Association of Realtors, The Spruce, Veranda, Wall Street Journal for their expertise and selected trends that I’ve been seeing more of.
Moody Space: A return to rich, dramatic color palettes (purple, sand, maroon, cream, chocolate brown) swathing an entire room. These spaces will maintain their minimalistic integrity, with a focus on intimate and moody forms and textures. Painted or wallpapered walls in the same color as the ceiling, trim, shades, furnishings, and/or fabrics can be modern and cool. Moody tones make spaces feel intentional.
Organic Materials and Earth Tones: In today’s chaotic world, nature has a calming effect, because of this, organic materials and earth tones are timeless and unlikely to look dated any time soon. Expect lots of wood and colors inspired by nature such as peaceful blues and mossy greens. Nature-inspired art and live edge tables are other ways to incorporate the elements in our homes.
Art Deco: Bold patterned fabrics, rounded shapes and profiles (think round kitchen islands), and “lavishly unnecessary” nostalgic trinkets. Exploded in the United States in 1920’s and represented luxury, glamour, and exuberance.
Plush, Luxe Textiles: Expect to see more overstuffed sofas and armchairs; thick, plush area rugs; and ultra cozy bedding and bath accessories. Luxury textiles such as velvet are in high demand. Fabrics in jewel tones for an upscale look and high contrast colors in your fabrics and throws.
Accents with Personality
Wallpapered Power Rooms: This trend is going to get bigger in the new year. We can experiment in powder rooms with pattern play and colors that we may be cautious to put in our larger rooms. Lauren Robbins Interiors calls the powder room the “jewel box of the home” as they can add an element of surprise when you open the door.
The Slab Backsplash: April Gandy at Alluring Designs Chicago calls this one of her favorite design trends for 2023. “Slabs of quartz or marble are perfect for any design aesthetic and help to create a clean, seamless look in any kitchen,” Gandy says. “The lack of grout lines makes this backsplash super low maintenance and so easy to keep clean.”
Dark & Textured Countertops: With a focus on nature, leathered granite and soapstone countertops have an earthy, approachable quality and will start to appear in more new kitchens. Darker countertops will often be paired with lighter stained cabinets.
Lighting As a Mood: People are recognizing the importance of ambient lighting and the role it plays in giving a space a feeling. There is a growing interest in task lighting and layered lighting and creating different moods for different activities.
To see how these trends have shifted over the years, you can reference my 2022, 2021, 2020, 2019, and 2018 design trend articles.
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.
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.
Question: How did the Arlington single-family housing market perform in 2022?
Answer: The 2022 housing market came in like a lion and left like a lamb. The way things were reported in the news, one may be led to believe the 2nd half of the year was a disaster, with home values crashing because of higher interest rates, falling stock portfolios, the Ukrainian war, and buyer fatigue.
The truth, at least locally, is that the aggregate of the first half/second half, yin and yang housing market was still marked by strong price growth across all single-family sub-markets (I’ll analyze the condo market next week).
Strong, Stable Growth Continues for Arlington Single-Family Homes (SFH)
Like a blue-chip stock, the Arlington housing market is reliably strong and stable. We didn’t experience the double-digit annual appreciation of other national housing markets from ’20-’22 but we also benefitted by excellent growth prior to the pandemic buying craze (Amazon HQ2 and overall strong local market conditions). You can also count on the likelihood of stable growth to continue even if other markets struggle as they transition out of their reliance on pandemic-buying and ultra-low interest rates.
The average and median price of a SFH in Arlington increase 4.4% and 7%, respectively
Over the last five years, the average and median price of a SFH in Arlington increased by 25.3% and 29.1%, respectively
The average buyer paid 1.9% over asking to purchase a home in 2022
Homes that sold within ten days of being listed sold for an average 5% over asking and 57% of homes sold in 2022 were sold within ten days
Low supply was a big driver in keeping prices elevated despite difficult second half market conditions. There were 30% fewer SFHs sold in 2022 than in 2021.
22205, 22201 Zip Codes Lead Growth
If we drill down into performance by zip code (note: 22206 and 22209 don’t have enough SFH sales to be included), we find some really good insights:
22204 is the only remaining zip code with an average price below $1M. It was only 2017 that the entire County’s average price was below $1M.
22201 extended its lead as the most expensive zip code to purchase a SFH, costing an average of over $100k more than the next most expensive zip code, 22213, and finishing the year with an average price of nearly $1.6M
22201 and 22205 experienced the most appreciation, with YoY increases of 9.3% and 8.2%, respecively. The next highest zip code, 22203, grew by 4.9%.
22205 was the most competitive/frustrating for buyers, with the average home selling for 4% over ask
Over the last five years, the 22202 zip code (area surrounding HQ2) has, unsurprisingly, benefited from the highest appreciation at 33.8% growth since 2018 due to the Amazon HQ2 boost followed by the pandemic buying craze
New Construction: Bigger Homes, Bigger Prices
New builds have outpaced the appreciation of the rest of Arlington over the past two years, gaining 21% since 2020. New homes are also bigger than they’ve ever been with the average home claiming over 5,100 SqFt of finished living space, nearly six bedrooms, and more than five full bathrooms. Buyers are now paying almost $400,000 per bedrooms to own a new home.
You may notice the sharp drop-off in the number of new homes sold in 2022. This drop does not align with County data for new construction starts/completions and I think is more representative of the number of homeowners building outside of what’s being offered on the market – demolishing a home they already live in, acquiring their own lot and hiring a builder, or securing a lot/build with a preferred builder prior to it being marketed for sale.
Price and Bedroom/Bathroom Distribution (for my Missing Middle friends!)
The biggest change in price distribution in Arlington has been at the ends of the spectrum, with the percentage of homes seller for under $800k dropping from 35% in 2018 to 11% in 2022. On the other end of the spectrum, the percentage of homes selling for $2M+ has increased from 3% in 2018 to 11% in 2022.
Most sales in Arlington fell between $800k and $1.2M. The median household income in Arlington is about $128,000 which at current interest rates, limited personal debt, and a 20% down payment qualifies for a roughly $900k purchase. If rates drop to 5%, the median income qualifies for roughly $1M.
Nearly 2/3 of SFHs sold in 2022 had three or four bedrooms, most of which had at least two full bathrooms, and the price of those homes averaged $940,500 and $1,155,000, respectively.
If we add townhomes and duplexes to this data, we’ll see an even higher concentration in the 3-4BR range and lower average prices, so we see here that the term “Missing Middle” is a bit of a misnomer…it’s not missing and the average costs generally align with median household income, but the supply simply of “middle” housing isn’t as high as County leadership and MM proponents would like it to be. I also expect that most Missing Middle housing built would be more expensive than the current average prices for 3-4BR homes, certainly when comparing existing “middle” housing and new Missing Middle housing in the same location.
*Note: this table displays the most common BR/BA combinations, but does not show all sales
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 Eli Residential channel. 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.
Question: What are current forecasts for mortgage rates in 2023 and beyond?
Answer: Happy New Year everybody!
A few weeks ago, I posted a “Beyond the Headlines” deep dive with James Baublitz, VP of Capital Markets at First Home Mortgage, into why interest rates have increased so much.
As the calendar turns, many of you will be kicking off your home search and asking about current and forecasted interest rates, so I’ll cover that today, plus a quick note on recent loan limit increases for down payments as low as 3%.
What is a “Normal” Mortgage Rate?
The first thing to understand about mortgage interest rates is that they are market-driven and forecasting comes with the same amount of unpredictability as any other economic/market-based forecasting (GDP, Unemployment, Stocks, etc). Take predictions/forecasts with a grain of salt.
The other truth that is best illustrated by the chart below, which shows the average 30yr fixed mortgage rate since 1971, is that there really is no established “normal” interest rate that we can point to and say “this is what you can expect when markets stabilize.” So, use caution when relying on assumptions about future rates (e.g. for a refi).
Forecasting Future Rates
Most major forecasting organizations including Mortgage Bankers Association, Freddie Mac, and National Association of Realtors (NAR) believe rates will steadily decrease through 2023 and that trend will continue into 2024.
Mortgage Bankers Association expects rates to fall faster than Freddie Mac and NAR, with average 30yr fixed rates hitting mid 5s by the 2nd quarter and low 5s by the end of 2023. They forecast that rates will be in the 4s by Q1/Q2 2024 and believe the long-term stable rate to average 4.4%.
Freddie Mac sees rates remaining in the mid 6s for most of 2023 and closing out the year at an average of 6.2%.
NAR expects the average 30yr fixed rate will hover just above 6% in the first half of 2023 and then settle into the upper 5s in the second half of the year:
Higher Loan Limits for Lower Down Payments
The Federal Housing Finance Agency (FHFA) just released new conforming loan limits for 2023, with significant increases to reflect recent price growth. The jurisdictions in the greater DC Metro area were given the maximum loan ceiling of $1,089,300.
Beginning this year, Fannie/Freddie will insure loans up to $1,089,300 with as little as 5% down, or the equivalent of a purchase price just under $1,115,000 with 5% down. The new conforming limits increase the maximum loan amount with 3% down to $726,200, or the equivalent of a purchase price just under $749,000 with 3% down.
For any conforming loan (or any loan for that matter), borrowers must also qualify on several factors including credit score, debt-to-income ratio, first-time buyer status, and more. Feel free to reach out to me for lender recommendations if you’d like to explore your mortgage options.
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.
Question: We are looking forward to buying a home next year. Do you have any recommendations on how we should start the home buying process?
Answer: If you Google “home buyer tips” or “what to know before buying a home” and you’ll find plenty of advice on the topic, so I’ll include some suggestions I don’t usually see online and put my own spin on some of the more common advice.
Weighted Criteria
It’s easy to come up with 3-5 things that are most important to you, so challenge yourself early to come up with a list of 10-15 must-haves and wants. Then, starting with 100 points, allocate points to each criteria based on how important it is to you and you’ll end up with a weighted criteria list to help you focus your search and objectively compare properties.
I encourage couples to complete this exercise individually first, then work together on a combined list. This will put even the best relationships to the test!
If you want to take it to the next level, bring your weighted criteria list with you on showings and score each house based on the points you allocated to it and score each home on a 100-point scale. I often find that buyers who have taken this exercise seriously and are working within a budget are hitting scores in the 70s-80s on their top choice homes.
Length of Ownership
How long you expect to live in your home is one of the most important factors in defining what you prioritize and how you use your budget. You should focus on the following:
Likely length of ownership
Difference in criteria for a 3-5 year house vs a 10-12+ year house
Difference in budget requirements for a 3-5 year house vs a 10-12+ year house
Appreciation is not guaranteed and difficult to predict, but the value of longer ownership periods is undisputed. One way longer ownership adds value is the potential for eliminating one or more real estate transactions over your lifetime, thus the associated costs (fees, taxes, moving expenses, new furniture, etc) and stress that comes with moving.
If you have an opportunity to significantly increase your length of ownership by stretching your budget, you generally should. On the other hand, if your budget or future (e.g. job will move you in a few years) restrict you to housing that’s likely to be suitable for just 3-4 years, it’s generally better to stay under budget.
Influencers (not the Instagram ones)
Family, friends, colleagues…they’re all happy to offer opinions and contribute to your home buying process, but the input can be overwhelming and unproductive if you don’t set boundaries. Try to determine up-front who you want involved in the process and how you’d like them to be involved.
Think about how you’ve made other major decisions in life – what college to attend, what car to buy, where to get married, whether to change jobs – and if you’re the type of person who likes input from your friends and family, you’ll likely do the same when buying a house. Plan ahead with those influencers so their input is productive and comes at the right time (e.g. not when you’re already two weeks into a contract).
Does Your House Exist?
Before jumping too far into the search process, spend a little bit of time searching For Sale and Sold homes on your favorite real estate search website/app to see if the homes selling in the area(s) you want to live in and that are within 10% of your budget are at least close to what you’re looking for. If not, spend some time adjusting price, location, and non-critical criteria to figure out what compromises you’ll need to make and then compare those compromises to your current living situation and/or alternatives like renting.
Know Your Market
We’re transitioning from the most intense housing market ever into a much more moderate environment, but what you see and read about the housing market may not be accurate in the sub-market you’re looking in.
Each sub-market behaves a bit differently and comes with its own unique set of challenges and opportunities, so take time early on to understand the sub-market(s) you’ll be involved in and what you’re likely to experience. This is something your agent should be able to assist with.
Pre-Approval & Budget
There is a lot of value in working with a lender early in the search process. For starters, you’ll have somebody who can provide real rates and advice based on your specific financial situation/needs. A lender can only do this if they’ve reviewed your financial documents and credit. The more you put in, the more you get out.
You’ll need to have a lender pre-approval to submit an offer (the seller has to know you qualify for the purchase you’re offering to make) so if you have to do it anyway, do it early on so you get the most value out of your lender. It also means that you’ll be prepared to make an offer if you find the right home earlier than you expect.
Despite the market slowing down, the quality of your pre-approval can make a big difference when you make an offer. Quality means a lender who has taken the time to fully review your documents and credit, will speak on your behalf to the listing agent, and is a bank/mortgage broker with a good local reputation.
You should strongly consider having a pre-approval from a reputable local lender to give yourself an advantage when making an offer. Pre-approval letters from big banks and online lenders don’t go over as well in our market. If you’re looking for a recommendation, consider Jake Ryon of First Home Mortgage (JRyon@firsthome.com).
Find an Agent
Agents come in many different forms and finding somebody who suits your personality and goals is important. Ask friends, colleagues, and family for referrals or spend time talking with different agents at Open Houses until you find somebody you like.
The worst thing you can do is choose your agent based on whoever responds to an online showing request faster. A good agent can provide a lot of value getting involved in your buying process 2-4+ months before you’re ready to 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 @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
Question: How has Arlington’s condo market reacted to higher interest rates?
Answer: In last week’s column, I looked at performance metrics for detached homes in Arlington, shared my thoughts on local pricing behavior, and discussed news about the national vs local real estate market. This week we will look at the underlying performance metrics in Arlington’s robust condo market.
Underlying Arlington Market Performance Data for Condos
Here’s how I approached the data used in this week’s analysis:
Low-, mid-, and high-rise condos only
Resale data only, no new construction
All data is presented by the month a home was listed in so we can measure how home sales performed based on the month they came to market
Net Sold = Sold Price less Seller Credits
I used data from 2017, 2019, 2021, and 2022 because I think it offers a helpful snapshot of recent Arlington markets to compare 2022 to. 2017 was our last “normal” market because Amazon HQ2 was announced Nov 2018 and that kicked off a condo craze. 2019 was the first full year with the Amazon bump, but pre-COVID market, and 2021 was a full year of the COVID-driven shift in condo demand.
I either did not use or must caution your interpretation of this year’s August-November data because it is incomplete for purposes of this analysis. There are 13, 26, 39, and 42 condos actively for sale that were listed in August, September, October, and November, respectively, which will influence the performance metrics for those months when they do contract/close and most likely will result in worse performance metrics than those months currently show.
There are only 10 condos still for sale listed January-July that will likely pull down the performance metrics for those months once they contract/close, but not enough for me to be concerned about the resulting data being presented in this analysis.
Business as Usual for Condos
While the detached market was on fire in 2021 and early 2022, the condo market performed mostly along the lines of historical metrics, except for one month, February 2022, when average sold prices climbed slightly above the original asking price. As a result, high interest rates have led to a more modest reversal in pricing behavior over the last six months, compared to the detached market.
The only time in the last 15 years that we’ve seen a real acceleration in condo prices was during 2019 (and pre-COVID 2020) as a result of Amazon’s HQ2 announcement.
Pace of the Condo Market Slightly Below Normal
We had a few months during the peak of the 2022 market where the pace of sales came close to the craziness we experienced in 2019, after Amazon announced HQ2, but average days on market has returned to its normal seasonal trends. As more data rolls in for closings in August-December, I expect the average days on market for the last 3-4 months of 2022 to exceed historical averages, but not by much.
One of my favorite performance metrics is the percentage of homes that sell within 10/30 days. I think it beats average and median days on market for a true understanding of the pace of a market.
As opposed to average days on market, these charts indicate that high interest rates have slowed the pace of the condo market beyond the usual seasonal slowdown, with a notably slow October where just 38% of condos listed sold within 30 days. Expect to see these metrics fall even further as more condos listed after July contract and close.
Looking Forward
Condo pricing tends to be pretty stable and movements up or down are relatively small, with the exception of major events like Amazon HQ2 (rapid appreciation) and COVID (rapid, temporary depreciation), so expect a return to stable and predictable pricing in our condo market where we’re used to seeing 0-2% appreciation year-over-year.
The effect of high interest rates will likely be felt most in the slow pace of the market. The pace will almost certainly increase in Q1 2023, which means we can expect about 1/3 of condos to sell within the first 10 days and about 2/3 to sell within the first 30 days during the spring selling season.
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.
Question: How have you seen the Arlington housing market react to higher interest rates?
Answer: I hope everybody had a fantastic Thanksgiving. The results of last week’s Dark Meat vs White Meat poll were impressive. With 559 votes in as of this morning, only three votes separated white meat as the preferred part of the turkey over dark meat! We may have found the only vote closer than a Georgia Senate Race!
National vs Local Market Expectations
With daily news about the nationwide (and global) housing collapse resulting from parabolic price appreciation followed by parabolic interest rates, I want to use this week’s column to check-in on what we’re seeing locally and remind everybody that what you read in the news is generally going to be the most attention-grabbing data points and that our market is likely to experience a much more modest correction than many other markets nationwide, as we saw during the Great Recession.
My Take on Local Pricing Behavior
I shared some detailed thoughts and observations last month in a column addressing price drops in Arlington and the TL;DR version is that 1) yes prices have dropped relative to their peak this spring, 2) there’s not nearly enough data available locally to say with any statistical confidence how much that drop has been, and 3) my observation was/is that market-wide in Arlington we’ve lost most/all of the appreciation we saw in the first 4-5 months of 2022 ,but 2021 prices are still mostly holding up. Keep in mind that in a volatile, low inventory market (current state) pricing is more randomized and case-by-case than it usually is, so you’ll see plenty of individual examples that buck the aggregated trends/assumptions.
Underlying Arlington Market Performance Data for Detached Homes
This week, I thought I’d share some charts of underlying market performance metrics to help illustrate what our market is experiencing. Here’s how I approached the data this week:
Detached (single-family) homes only. I’ll probably look at condos next week.
Resale data only aka no new construction because performance metrics used in this column for new construction aren’t usually representative of the market
I used data from 2017, 2019, 2021, and 2022 because I think it offers a helpful snapshot of recent Arlington markets to compare 2022 to. 2017 was our last “normal” market because Amazon HQ2 was announced Nov 2018 and that sent data in unusual directions. 2019 was the first full year with the Amazon bump, but pre-COVID market, and 2021 was a full year of COVID frenzy buying with normal seasonal behavior (2020 was totally out of whack on seasonality).
All data is presented by the month a home was listed in so we can measure how home sales performed based on the month they came to market instead of the month they closed (closed data is a lagging performance indicator)
Net Sold = Sold Price less Seller Credits
**An important caveat to this data is that I either did not use or must caution your interpretation of this year’s September, October, and November data because it is incomplete for purposes of this analysis. There are 15, 22, and 19 homes actively for sale that were listed in September, October, and November, respectively, which will have a significant influence on the performance metrics for those months when they do contract/close and most likely will result in worse performance metrics than those months currently show.
Note there are 2 homes for sale listed in each month May-July and 7 for sale from August that will likely pull down the performance metrics for those months once they contract/close, but not enough for me to be concerned about the resulting data being presented for those months
Net Sold Price to Original Ask down 9.3% in 6 Months
The average net sold to original ask dropped from a March peak of 105.9% to 96.6% in August. I suspect that once September-November listings close and we can start filling in those fields, we’ll see that number fall further but maybe not significantly because asking prices have started to react to weaker market conditions and many sellers are coming off their expectations for spring 2022 prices.
Of note, this performance metric is coming more in-line with 2017 metrics. I’ll be interested to see if performance metrics stabilize around 2017 numbers, pre-Amazon HQ2, or if they worsen. My guess is that they’ll worsen slightly compared to 2017 through the end of the year and come more into balance in 2023 (pending interest rate movements).
Average Days on Market 4.8x Higher in August than February ‘22
Unsurprisingly, the average days on market has skyrocketed relative to earlier this year from 9 days in February to 43 days in August. August ’22 is still lower than August ’17, but the August average will increase once the 7 properties still for sale from August contract/close.
Homes Selling Within 10/30 Days Go from Record High to Low
One of my favorite performance metrics is the percentage of homes that sell within 10/30 days. I think it beats average and median days on market for a true understanding of the pace of a market. As opposed to average days on market, these charts indicate that our market pace is slower than 2017, on a seasonal basis.
We’ve gone from 82% of homes listed in March selling within 10 days to just 27% in October. Similarly, at least 90% of homes listed February-April sold within 30 days compared to 45% and 44% selling within 30 days in August and October, respectively. That is a massive change in market pace within 4 months!
Looking Ahead
I expect the performance metrics of August-October to worsen as more of those listings contract/close and November-December to come in below 2017 numbers. It’ll be a bit difficult to truly understand the aggregate effect on pricing because Arlington is a relatively small housing market, but I’ll do my best to come up with some accurate measures once we’re far enough into 2023 and enough 2022 listings have sold. Ultimately, the tale of local home values will be told in how long it takes interest rates to settle back down into the expected 4.5-5.5% range (don’t hold out for sub-4% rates again).
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.
Question: Is it possible to take over a seller’s existing loan if they have a low interest rate?
Answer: Thank you to our Veterans and Active-Duty military for your service.
In keeping up with the theme of last week’s column, addressing popular mortgage product/strategies, and in honor of Veterans Day, this week I’ll cover assumable VA loans.
An assumable loan is a loan that can be transferred from a seller to a buyer, allowing the buyer to maintain the interest rate of the seller’s existing loan rather than accept a market-rate interest rate. This can be valuable in a high-interest rate environment like we’re in now when most homeowners have an interest rate well below current market rates.
To help me provide the best information about assumable VA loans, I reached out to Skip Clasper of Sandy Spring Bank (sclasper@sandyspringbank.com), who I highly recommend for a range of loan products including VA loans, construction/rehab loans, and jumbo loans.
Only Some Loans Are Assumable
VA loans (available to Veterans, service members and surviving spouses), FHA loans, and USDA loans are the only traditional loan products that are assumable. They make up a relatively small percentage of existing home loans in Arlington (likely single-digit percentage of total loans). I’m not aware of any conventional loans that can be assumed.
Key Details about Assuming a VA Loan
There are some important details and caveats to assuming a VA loan that both buyers and sellers need to understand prior to transferring a loan:
Buyers do NOT have to be a Veteran or otherwise qualify for a VA loan to assume a VA Loan
Sellers can NOT obtain a new VA loan until the previously assumed loan is paid off (or refinanced out of) unless the new buyer is a Veteran and uses their eligibility on the assumed loan
It is less expensive (closing costs) to assume a loan than to originate a new loan. The VA Funding fee is only 0.5% for assumable VA loans.
You need a down payment that covers the gap between the assumable loan balance and the purchase price. For example, if the seller’s loan balance is $200,000 and the purchase price is $500,000, the buyer is assuming $200,000 is debt and will have to cover the remaining $300,000 via down payment or alternative debt such as a second trust.
Buyers need to qualify for the loan using normal income, debt, and credit guidelines
As you can probably determine from the above details, there are only a limited number of scenarios where assuming a VA loan makes sense for both parties. The biggest hurdle to VA loan assumption is that the VA loan eligibility stays with the loan so if the buyer does not have their own VA loan eligibility, the seller must be sure they are okay giving up this very valuable benefit until the new buyer pays it off or refinances.
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.
