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
Table

Description automatically generated

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.

Pay Closer Attention to Your Condo Homeowners Insurance (HO-6)

Question: What is the difference between my individual condo insurance and the Association’s master insurance policy and do I need my own insurance?

Answer: Every condo association has its own (expensive) Master Insurance policy to cover the common elements and limited common elements, but there are substantial gaps between the association’s policy and what you’re personally liable for without an individual HO-6 policy. Most people shop for the cheapest, fastest individual insurance policy and apply just enough coverage to meet the lender’s requirements, but that may put you at financial risk.

To explain common gaps between master policies and HO-6 (individual condo) policies, I’d like to re-introduce Andrew Schlaffer, Owner and President of ACO Insurance Group. Andrew is an expert in Master Insurance policies and has helped multiple local condo association’s reduce their cost and improve their coverage since writing a column on the topic last year. If you’d like to contact Andrew directly to review your association’s master policy, you can reach him at (703) 595-9760 or andrew@acoinsgrp.com.

Take it away Andrew…

Master Insurance vs Individual Insurance Policy

Nearly all master insurance policies in this area are written on a Single Entity basis which means coverage extends to general and limited common elements but also extends within individual units to fixtures, appliances, walls, floor coverings, and cabinetry, but only for like kind and quality to that conveyed by the developer to the original owner.

Items not covered by the master insurance policy and are generally not the association’s responsibility include:

  • Personal Property (clothes, electronics, furniture, money, artwork, jewelry)
  • Betterments and Improvements (demonstrable upgrades completed after the initial conveyance)
  • Additional Living Expenses (the cost to live at a temporary location, storage fees, loss of rents)
  • Personal Liability (provides protection for bodily injury or property damage claims arising from your unit)
  • Loss Assessment (triggered only if there is a covered cause of loss and the master insurance policy limits are exhausted; this assessment would apply collectively to all unit owners)
  • Medical Payments (no fault coverage available for injured guests within your unit)

Condo owners should purchase an individual condo insurance policy (HO-6), which is also required by lenders. This policy can provide coverage for the items listed above.

Review Your Dwelling Coverage

Dwelling Coverage should be included in every HO-6 policy to avoid significant out-of-pocket expenses. Many condo associations can hold you responsible for expenses that fall under the master policy deductible that are caused by the owner’s act, neglect, misuse, or carelessness. Due to the rise in water damage losses, many insurance carriers are increasing their deductibles, which in turn spurs the need for homeowners to adjust their dwelling insurance limit.

In a recent instance, a condo suffering from significant water damage losses was required by its insurance carrier to increase the master insurance policy deductible from $10,000 to $25,000. In this community, each homeowner should have at least $25,000 of dwelling coverage to indemnify them for the deductible expense in the event a claim arises from their unit. If coverage is not available, the homeowner would either pay this expense personally or the association can put a lien on their unit.

Dwelling coverage should also include a homeowner’s betterments and improvements (improvements made above what the builder originally delivered), including those completed by prior owners. Most lenders will require at least 20% of the unit’s market value insured under this coverage as well. 

What Information to Share with Your Insurance Provider

You should always review the condo association’s governing documents and understand the applicable statutory requirements (i.e. Virginia Condominium Act) and lender requirements to verify their individual responsibilities, including maintenance/repair and insurance. Along with sharing the association documents, homeowners should also provide their personal insurance agent with the following:

  • What is the master policy deductible? ($5,000, $10,000, $25,000)
  • What approach is used for the condominium insurance coverage? (Single Entity)

My Recommendation for HO-6/Other Individual Policies

Thank you, Andrew, hopefully this helps at least a handful of readers better protect themselves.

I find that most buyers go straight for the path of least resistance and cheapest premiums for their insurance coverage. Adding coverage to your existing auto policy in 5-10 minutes probably means that nobody reviewed your association’s Master Insurance policy and thus you’re at risk of coverage gaps. Personally, I’d rather pay a bit more to know that my policies have been designed with some personal attention and reviewed annually for gaps. Andrew and his team can handle this for you as well.

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.

Did Interest Rates Increase .75% Last Week?

Question: Have you already seen interest rates increase since last week’s announcement that the Federal Reserve is increasing rates by .75%?

Answer: Contrary to popular belief, the news you read about the Federal Reserve increasing interest rates does not directly result in changes to the interest rates you get on your mortgage. The Federal Funds Rate is the rate that large banks charge each other for short-term, overnight loans and is one of the many market factors that influence the interest rate you get on a mortgage.

Fed Rate Up, Mortgage Rates Down

Last week, on Wednesday July 27, the Federal Reserve announced they were increasing the Federal Funds Rate by .75%. Many people I spoke with thought this meant that mortgage rates would immediately or quickly increase by a similar amount, however, the reality was that the average 30yr fixed mortgage rate, per Mortgage News Daily, decreased from 5.54% on Wednesday July 27 to 5.22% on Thursday July 28, one day after the announcement. As of yesterday, MND’s research showed that the average 30yr fixed rate had dropped even more to 5.05%.

Chart, line chart

Description automatically generated

Mortgage Rates Are Market-Driven, Like Stocks

Mortgage rates operate like stocks in that they are constantly (daily) moving up and down as they react to changes in the domestic and global markets. In theory, mortgage rates, like stocks, are supposed to reflect the valuation of all current and future market information to determine the cost of borrowing money each day.

What the Fed Rate Means for Your Mortgage Rate

What does that mean in relation to your mortgage rate and the highly publicized Fed Funds Rate?

The Federal Reserve meets eight times per year to set monetary policy, including making any changes to their target Fed Funds Rate. Prior to those meetings, financial experts are constantly adjusting their expectations of the Federal Reserve’s rate announcements and those expectations are embedded on a daily basis into mortgage borrowing rates, so the most significant rate changes occur when expectations aren’t met or surprising guidance is issued by the Fed during these meetings (keep in mind, this isn’t the only information banks use to determine mortgage rates).

Heading into last week’s announcement, I read that mortgage rates, stocks, and other market instruments were priced with a roughly 80% expectation of a .75% increase in the Fed Funds Rates and a roughly 20% expectation of a 1% increase, so when the announcement was made confirming a .75% increase and guidance was given suggesting the Fed will soon be able to slow their rate increases, market instruments reacted in a mostly positive way, which resulted in mortgage rates decreasing because the outcome was weighted towards expectations for lower future rate increases (.75% instead of 1% and slowing future increases).

The next scheduled Federal Reserve announcement on the Federal Funds Rate is scheduled for September 21, you’ll see mortgage rates react daily based on new economic data on inflation, growth, unemployment, global threats, etc that will all influence how the Federal Reserve responds during their next meeting.

Mortgage Rate Forecasts

There’s one thing I’ve learned over the years about mortgage rate forecasts…they’re always wrong. You can see how much of a difference there is in forecasts from the experts in this recent Forbes article, with expectations for 2022 rates ranging from ~5-7% to a technical version of a shoulder shrug.

With that said, if you’re seeing news about inflation coming under control and we avoid new major global supply chain disruptions, odds are that mortgage rates will gradually come down through the end of the year. However, none of that is guaranteed as we find ourselves in a constant state of global and economic volatility and disruption, factors that generally cause instability and increases in mortgage rates. 

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 Single-Family Home Review

Question: How did the Arlington single-family home market perform in the first half of 2022?

Answer: We have reached two years of the average single-family home (SFH) in Arlington selling for
over the asking price, but like the rest of the economy, things are finally cooling down. However, the
“cool-down” data won’t start showing up for another month or two and the data you’ll see here, a
review of the first half of 2022, reflects what was mostly a red-hot market.

More Competitive, Less Price Growth?
By nearly all measures, the first half of 2022 was more competitive than the first half of 2021, yet we
got lower average and median price growth in ’22 than in ’21, compared to the first half of the year
prior.

The competition in the first half of 2022 was unlike anything we’ve seen in Arlington before with the
average SFH selling for 4.2% more than the asking price, compared to an average of 1.8% over ask
in the first half of 2021. In 2022, an insane 79% of homes sold within the first 10 days on market,
compared to 70% in 2021 and 73% of homes sold at or above asking price in 2022, compared to 66%
in 2021.

With such intense demand, one would expect to see higher price growth in 2022 than in 2021, but
that’s not the case. The average and median price change in the first half of 2022 was 7.1% and
5.6%, respectively, compared to the first half of 2021. From 2020 to 2021, the average and median
price change was 9.6% and 16.6%, respectively.

I think the reason for conflicting demand and appreciation data is two-fold. First, the 2021
appreciation is based on the first half of 2020, which included the first few months of COVID
lockdowns when the market basically froze, so those prices may have been somewhat artificially
deflated. However, the counter argument to that is comparing the first half 2020 prices to 2019 prices,
we got a healthy 5% appreciation in average price.

The second reason, and this is just a theory, is that by 2022 the market (sellers and listing agents)
knew that buyers were accustomed to paying significantly over the asking price and thus set more
conservative (lower) asking prices to ensure competition instead of setting prices that were more
reflective of actual/likely market values. Doing so would artificially inflate some demand measures
without causing a coinciding explosion in prices.
Since the beginning of the pandemic in the first half of 2020, the market has experienced the
following:

  • Median price increased by $225,000 or 23%
  • Average price increased $197,000 or 17.5%
  • Average seller credit (towards buyer closing costs) decreased by 75%
  • The number of homes sold for $2M+ increased from 5% to 11% of total sales
  • The number of homes sold for under $1M decreased from 53% to 31% of total sales


22205 Leads Growth, 22201 Still Most Expensive
The 22201 and 22207 zip codes remain significantly more expensive than other Arlington zip codes
as the only two with an average price higher than the county-wide average. The 22205 zip code has
benefitted from tremendous growth over the past five years and led the way in the first half of 2022
price growth, adding 12.7% to its 2021 first half average.

After gaining 19.8% in 2021, 22204 settled back down to a 5.1% increase on average price in 2022
and remains the only zip code with an average price below $1M, but with more new construction
popping up throughout the 22204 neighborhoods, I don’t expect the sub-$1M average price to last
much longer.

Market Conditions Are Demand-Driven
We hear a lot about under-supply being the main cause of extreme competition and significant price
appreciation. While that is true — we have been running low over the last few years on homes actively
listed for sale — the reason for the low supply is almost exclusively demand-driven (high absorption
rates) not because the number of homes being listed for sale has collapsed. As you can see from the
chart below, illustrating the number of SFH listed for sale in each quarter over the last decade, the
amount of inventory coming to market has remained relatively consistent.

What has changed is how quickly those homes are being purchased and that has caused the
average number of SFH actively for sale to drop significantly, per the chart below. One thing that is
particularly well illustrated is how much more of an effect the Amazon HQ2 announcement
(November 2018) had on demand, and thus active supply, compared to the COVID market that had
such a dramatic effect on other regional and national markets.

Looking Ahead
We have absolutely seen a shift in market conditions over the last couple of months. Good homes are
sitting on the market through the first week(s), more sellers are reducing their asking price, and
buyers are negotiating more contingencies.

This is all, in my opinion, a very good thing. This is not the bottom falling out in Arlington, rather just
regaining some much-needed balance.

Will softer market conditions lead to a drop in prices? Maybe a little. There will certainly be some
sales from the first half of this year that seem extraordinarily high versus comparable sales in the
second half of the year, but I think on aggregate we won’t see much of a dip in pricing, mostly just a
leveling off.

The best support for that theory comes from the fact that we didn’t experience the same extreme shift
in demand/pricing during the COVID market that other regional and national markets did. We were
already experiencing a competitive, moderately high-growth market prior to COVID due to natural
market forces created by increased demand on the news of a massive new employer, Amazon, so I
expect our market to be able to hold most, if not all, of its value through the cool-down. I also expect
things to pick right back up in 2023 if interest rates come down a bit by the end of the year, like
they’re expected to.

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.

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.

Chart, bar chart

Description automatically generated

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. 

Chart, bar chart, histogram

Description automatically generated

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.

Chart, bar chart

Description automatically generated

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

Table

Description automatically generated

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.

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.

Are Condos a Good Investment?

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

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

1BR vs 2BR Condos, North vs South Arlington

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

North Arlington Rental Rates Frozen, Moderately Higher in South Arlington

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

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

Table

Description automatically generated

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

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

Expect Low Return, Potentially Negative Cashflow

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

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

Where is the Payoff?

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

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

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

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

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

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

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

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