Elementary

Kris Berg, from http://sandiegohomeblog.com/

Her most recent post, here, talks about a listing that she competed for which is being inadequately marketed — or at least didn’t feature a photo in the MLS.  She goes on to describe some of her marketing plan for her listings, which are basic steps for any good agent – but I would guess that most people don’t take the time to do these things, even in this market.  Good reading.

I especially like this line:

“The fact that we were not selected is not the point. We can’t win ‘em all; we never have, and we never will. Hire me; don’t hire me. But, if you don’t hire me, please hire someone as good or better. Hire someone worthy of your business.”

Kris’ is a good blog to add to your RSS reader if you’re a real estate agent — it’s lots of real estate 101, from her San Diego perspective, and there’s a lot to learn (or maybe just be reminded of).

The Man Show

Years ago my brother-in-law introduced me to his favorite cable show — a complete chauvinistic, in-your-face, weekly dialogue between Adam Carolla and some other guy, who has his own show now; I can’t remember his name.  But I do remember that it came complete with a “Girls on Trampoline” feature…

Well, Carolla has redeemed himself.  I read a review and Netflix’ed The Hammer last week, and my wife and I both got some good belly laughs out of it…worth a slot in your queue.

Guy Kawasaki’s advice to entrepreneurs

I somehow stumbled onto this on Mindsite.com’s blog – Dave Eraker’s (founder of Redfin) new startup. 

Here’s a direct link to this video of Guy Kawasaki, formerly of Apple and now a venture capitalist, speaking at TieCon 2006.  It’s worth seeing here.  You have to love the wisdom, but also the fact that Guy can’t stop smiling.  An worthwhile 40 minutes…

Good news out of SoCal

Low Low Prices!  Shop now!

Sounds like sales are picking up in Los Angeles.

Discount Broker goes Broke

Help-U-Sell, a big franchiser of a discount brokerage model, has filed for bankruptcy protection.  Inman reports on it here.

It really doesn’t surprise me that a discounter is having troubles at this time…in a tougher market for sellers, which we’re experiencing here in Seattle for the first time in nearly 15 years, a seller wants to be sure they’re doing all they can to move their homes.  Help-U is a specific, very low priced option.  I wouldn’t put Redfin, for example, or Sutton Real Estate, which offers a similar lower priced option to its sellers, in that same basket.  I think they provide a service that’s somewhere between nothing and “full,” and their pricing is in that range as well.

A counter argument for a discounter’s success might be that in tough times, with declining prices,  a seller needs to preserve as much equity as possible.  I don’t buy that.  I think the demise of Help-U-Sell, and I’m sure soon-to-be other similar models, shows that most sellers recognize or at lease perceive that they’re getting what they pay for when they enlist an experienced, conventional (for lack of a better word) broker.  That way, even if the house doesn’t sell, they won’t feel like they didn’t do everything they could to fully market their property.

Like it or not, the current brokerage system works pretty well to sell property for its market value, with relative transparency to all parties.

Seattle’s Market Bounces Back!

Okay, this may be a stretch, or a bit polyanna of me, but I think the “Fall bounce” which we typically see heading into the post-Labor Day market, will be bouncier than normal.   This means that we’ll see more sales, firmer pricing, and generally much more “velocity” in our local Seattle real estate market.

Why do I think this — other than as a broker and developer I’d REALLY REALLY like to see it happen? 

A few reasons:

• The RPX Monthly Housing Market Report — May 2008 – was just released.  Seattle ranks fourth in 23 listed MSA’s (metro areas) in price decline, with 4.7% year over year.  This follows a 12.1% increase between May ‘06 and May’07.  The interesting thing is that between April and May 2008, there was a 3.7% uptick in value.  No one should be deluded into thinking their house is worth anywhere near its peak price, but a 5-10% decline from that 2007 pricing still builds in a lot of equity/appreciation for anyone who bought before 2007.  For five year annualized change, Seattle ranks at the top of the list, with 9.5% annual appreciation.
• Transaction counts were down 24% between May of ‘06 and ‘07, and down another 46% between May ‘07 and ‘08.  A 30% increase in sales for September and October would bring a lot of strength into the market, while not coming anywhere near where our sales numbers (in terms of transaction volume) have been the last few years.  It’s like having a car that can do 150 mpg — we were driving that fast in 2006, we slowed to 114 mph last year, and to 61 mpg this year.  I just want do be doing 80 again.  I think this old rig has it in her.
• The housing bill.  Some summary info here.  I don’t like all of this, but there are some great elements here to spur the market.  Our car isn’t out of gas like it is in lots of markets, so a little nitro in our tank should help us get things moving again quite nicely.  More stable mortgage markets and the first time buyer credit, while not solving all of our issues, sure won’t hurt things.  The rates seem like they’re staying low and will for at least the near future.
• Rents vs. Prices.  This has long been stated (Seattlebubble post on the topic) as a reason for the decline of civilization (or “too expensive housing”) – Housing prices get out of whack relative to market rents for those houses.  That’s really turned around.  Rents here are WAY up.  RPA manages over 1000 rental units — most of them for individual owners for whom we manage single family homes, condos, or small multifamily buildings.  Our portfolio’s rents are up, on average, over 8% for each of the last three years — 24% in total.  This makes up for seven years of virtually no increases, of course.  But to rent a $350,000 townhome for $1800, or an $800,000 house for $3500 — these are mortgage payment sized rents.  Even the higher end homes ($1m-2m) are renting well, and for big numbers that we haven’t seen.  I think people NOT buying has significantly increased demand for the rental product, which bails out lots of homeowners who don’t HAVE to sell right now.  But it won’t take long for these renters to recognize that owning, at close to the same monthly payment, is an attractive option.
• The market right now, as it sits, just ain’t that bad.  We’re moving product if it’s well-positioned and well-priced.   That means priced a few points BELOW recent sales.  In those hot markets, the mantra was “well, it’s been six months.  We need to be priced 10% above that sale.”  No more — trends work both ways.  It’s a tough pill to swallow but for most owners that paid $200,000 for their homes in 1993, and could have sold for $900,000 at one point?  $775,000 is still a healthy gain.   I know that’s small consolation to those owners that actually paid $900,000, but that part of the market is a small minority.  Hopefully they don’t have to sell this year.  I say this because even if we just have stability, it’s just the “normal” market we had in the early 90’s.
• Year over Year statistics.  Things started slowing dramatically last September, after August’s financial crisis began in earnest.  So when we start reviewing year over year numbers, instead of seeing big declines, we’ll see flat or improving numbers for volume, and maybe for pricing.  This sort of news seems to create more good news.
• And one last thing:  For new construction, including townhomes, most builders are selling now at prices that give them little or no profit margin.  Sometimes this is at the demand of their lenders, sometimes just to clear the deck for the builder and to get out from under the debt service.  This can’t continue, and I don’t think the underlying land prices can fall enough to restore that margin in upcoming years.  As a result, very little new product will come onto the market until prices come back to a point where it makes sense for a builder to build it. 

We’ll see what the season brings, but with a good 1/3rd of the year to go, I’m more optimistic than I’ve been since I got back from Inman last July and quickly started battening down the hatches.

Reshuffling the deck — a 1031 case study

Lots of our clients hold rental properties they obtained decades ago — either their first homes, or a house they inherited from their parents.  And through pure inertia, or apathy, they just continue to rent them out without a real strategy for the investment aspect. 

Sometimes this emotional need to hold the property makes a lot of sense.  When my grandmother died in 1991, she left her home in Maple Leaf to my father and aunt.  My dad bought my aunt out, and he just couldn’t bring himself to sell the house in which my grandmother had spent 40 years tending her gardens and reading books on a chaise lounge that had this great view of the Cascades.  We were all glad he kept it, if for no better reason than it somehow soothed the pain we felt at losing her, to at least still have her house in the family.  After 10 years, six years ago, the pain had eased a bit – he sold it.  It had turned out to be a good investment move as well, as the house had gone up significantly in value during that holding period.

But here’s my case study:

In a similar situation to my father — we were contacted by a friend whose mother had inherited not only her family home, where she had grown up, but her husband’s family home as well.  Both houses were near Greenlake, both homes were more or less in “original” condition.  For nearly 30 years she tended both houses, not so much for an emotional need after that much time, but as investment properties.  She would turn over the tenants, paint the walls, re-rent the mother-in-law unit in the basement, cut the grass, etc.  It was all getting to be a bit much for this woman who really didn’t NEED to be personally handling these rental homes.  So she could have turned them over to our property managers and gotten out of the loop a bit, but owning two highly appreciated houses, one of which had a legal building lot used as a “backyard” and detached garage, wasn’t the highest return she could get for all of that equity.

I estimated that the total value of the three parcels (assuming the yard would be sold separately to a builder) was around $1,125,000.  Houses at $450k and $425k, and the lot at $250k.  Her net income on these houses, after taxes/insurance, was around $30,000 — a dismal 2.6% return on her equity.

My proposal for her was to take that $1,125,000, or around $1,025,000 after sales costs (commission, excise, some preparations for sale on the homes), and roll these properties into a single apartment building using the IRS Section 1031 tax deferred exchange.  By doing this, she would pay no capital gains tax on these sales, saving her over $150,000 in taxes.  The more important issue is that we aimed to double her net cashflow, getting her ROI up to 5-6%, and in doing so, provide professional management and eliminate her need to micromanage these rental homes. 

So all we had to do was sell these three parcels, and find an appropriate “target” or “replacement” property for the exchange properties.  And do it within a few months of each other. 

Here are the properties we sold (this was about three years ago, so the values are different now):

 Cute little bungalow — original sale estimate $450k; final closing price $405k.

Terrific craftsman, a little further away from Greenlake and not in the “prime zone.”
Original sale estimate $425k; final closing price $485k. 

Side lot next to the above.
Original sale estimate $250k; final closing price $272k.

Once we had these in escrow (total sales price of $1,162,000, a little more than I had initially estimated), we went shopping.  I was targeting an apartment building in North Seattle, so it would be in a neighborhood with which the client was familiar and comfortable.  And it didn’t need to be a trophy building — we wanted cashflow, in a solid location.  We ended up in Lake City, bidding against another buyer for this bulletproof 12 unit apartment building:
 

Purchase price was $1,120,000, and the net income in the first year:  Over $63,000, net of costs including property management fees, or 5.6%. 

Our original goal:  Preserve equity by avoiding cap gains tax (check); get the client out of the property management business (check — except she still is involved just to the extent she cares to be); increase net cashflow with a conservative investment property that has good potential for continued appreciation and rent increases (check). 

This went smoothly in large part because the market was so strong to sell out of for our rollover properties – although that hurt us a little on the buy side, too, having to bid for the target site.  But it also helped that the client trusted our recommendations, and that she was savvy enough to understand what we were looking at — she had lots of experience with real estate, not just these houses but other commercial properties as well.  This experience and trust helped us to be able to focus on making the transactions happen.

A short sale tale

I’ve been privvy to lots of talk about this new distressed homeowner law in Washington and how it affects our work as real estate agents.   We’ve had a half dozen deals in our office in the past month that are either properties in foreclosure or properties that are being sold as short sales — where the lender is taking a big discount off what they’re owed (”owed” meaning all sums including principal, accrued interest, foreclosure costs to the trustee, etc) in exchange for getting cash now out of a presumably arms’s length sale. 

As agonizing as it is for the sellers, and sometimes for buyers, these situations are always a lot more effort for the agents.  And ironically it’s more effort with less pay — the lender often dictates that the commissions should be “X” which is sometimes far less that what has been contracted for in our listings.  Instead of just communicating with the seller and the buyer’s agent, suddenly we’re in touch with the lender’s “loss mitigation” folks, escrow, maybe a bankruptcy trustee.  You hear no whining here — we can choose not to take this work, as it’s a free market.  But if our seller needs our help, it’s hard to say no. 

And I wonder, from the bank’s position, how bad these “losses” really are?  Sterling Savings, a local bank out of Spokane with which we do a lot of business, has a $2,000,000,000 construction loan portfolio.  They’ve set aside about $150m in “loss reserves,” anticipating that when the dust all clears on this, that they’ll be out that much money in principal.  And their stock has been POUNDED, to just a few dollars a share, with a market cap of $131m, down from $30/share last summer.  They had income of $272m in 2007.  It just doesn’t make sense to me that they’ll be hurt that badly, given their non-exposure to subprime and Alt-A loans, and this construction book — a large percentage of which is in the not-so-sick Puget Sound region. 

As a real life example of a short sale:  We’re working on a deal now where the bank is close to foreclosure, and we’re close to a closing.  Sales price is around $400k (I’m changing the numbers a bit to obfuscate the deal).  Lender’s principal balance is $365,000, but with interest and fees, the “payoff” would normally be $410,000.  In last year’s market, this house sells for $465,000, bank gets all they’re owed, agents get paid, and seller gets a bit of cash at closing.  But at today’s value, and a distressed sale at $400k, and after commissions/excise/escrow/title, there’s only $365,000 left over.  So the bank agrees to a “short” which gets them 100% of their principal back.

I’ll bet they’ve written that loan down by 30%, or taken a loan loss reserve for $90,000 as they are so close to foreclosure on a loan that’s been non-performing for a year.  That’s $90,000 against their current earnings.  So at this closing, they get $365,000, their WHOLE PRINCIPAL.  Do they book the $90k they’ve now “not lost” as income?  I don’t know, but I would think so.

As the market unfreezes, and in one-two-three years, this logjam breaks up, it will be interesting to see if these banks’ loan loss reserves have been wildly conservative, resulting in huge windfalls on the balance sheets…or if they’ve been incredibly underestimated. 

It depends on the bank, of course.  But I think lots of smaller commercial banks, like Sterling, have been the baby thrown out with the bathwater. 

To be continued…

The Rental Boom

While we hear much about the size of the just-started-to-retire 77.2 million Baby Boomers (1946-1964), the generation beyond mine (I’m an X-er, but barely, born in 1966) is bigger.  The Gen Y cohort (b. 1977-1996) is 84 million strong.  Behind that, the Millennials, are 48 million+ in number.  (All data from U.S. Census Bureau).

While 69% (and dropping) of the US population are homeowners, and 85% of those over 65 own homes, listen to this:  ONLY 49% of those ages 25-34 own homes.  They are renters. 

Eventually, do you think those kids are going to become homeowners?  As much as is said about the value of renting — and to be sure, it makes great sense in many many cases — it would be a scary thing if my 75 year old father was still managing a $2000/month rental payment rather than sitting in his free and clear home.  At some point the mortgage gets paid off; the rental payment never goes away.  I think homeownership makes sense for a huge variety of reasons, even if the house is never worth a penny more than what you pay for it.  But for now, the Y’s and Millennials are renters and will be for quite a while.

Which begs a question in this web 2.0 world — who is providing a Zillow-like experience to all of these renters?   Craigslist, sure…our property managers use this constantly.  But what a terrible user experience…hard to find, hard to sort, you have to re-post regularly to keep up exposure, limited pictures, no mapping.  Sure it’s free…but I’d happily PAY as a rental property owner to have a service that actually maps, shows pictures, and be easily reactivated when vacant.  I’ll bet tenants would pay to use it.  Rent.com is another provider of rental listings, but they mainly service the large, corporately owned apartment complexes.

Where is the national database of rental listings, providing a great consumer experience for both landlord and prospective tenant? 

 

Square Footages — Do the Right Thing

It’s not too difficult to interpret our MLS’ guidelines for showing Square Footage in our listings.  And for the new townhomes we list and build, it’s especially simple since we have building plans to work with.  I’ve talked about this before, most recently on Rain City Guide.

The way to do it “right” is pretty logical.  List your Finished Square Footage “SFF” (nearly all townhomes are 100% finished), take that total to your Total Square Footage “ASF” field (approximate square footage), and you’re done.  The ASF is the critical field as this is what gets put into the Square Footage line in all listings as they get fed into the online database, and it’s the denominator in the price/psf calculation that all buyers see in the MLS listing. 

The temptation that many agents (and I assume, their builder clients) fall prey to is including the garage square footage in the ASF total as a way to appear larger.  As an example, I have a listing here that is a 2 bedroom townhome, with 1010′.  At our list price of $325,000 that works out to be $321/psf.  If I add in my 215′ garage, that figure drops to $265/psf.  What a better deal!  Except my garage shouldn’t be counted as finished or unfinished “living” space.

Here’s the skinny from the MLS on the topic:

NWMLS Legal Bulletin 15:   

SFF - Finished: Does not include attics and basements unless they are finished living space. For instance, if there is a furnace in the middle of the room or it is suitable only for storage, do not treat the room as finished living space. Let your common sense guide you.

SFU - Unfinished: Unfinished, but potentially livable rooms should be in the “SFU - Unfinished” category. If the attic or basement has a ceiling which is too low for anyone but kids to walk around without bending over, do not include it in the unfinished or any other category. The test is whether it is potentially livable space. Such praises as “nice large storage attic” are common and should not result in any problem. Again, let your common sense guide your conclusions.

Garages: DO NOT INCLUDE THE GARAGE in the total square footage, even if it is in the basement. The same is true of carports. The listing will show whether or not there is a garage. If you feel compelled to say more than “two car garage,” do so in the “Remarks” section.

ASF - Total: Add together the finished and unfinished space to get the “ASF - Total.”

There are about 160 townhome listings in North Seattle right now — about 16% of the residential market.  In reviewing EACH of these, one by one, I’ve found that about 60% of the agents do it the right way.  Here are the five star agents (and the builders they represent) who are giving the public what they want:  Accurate information!

Doug Holman, RPA – Real Property Development Company (this is us…)

Steve Kennedy, Re/Max  – Howland Homes 

Gabe Rosenshine, Alchemy Real Estate — Great Northern Land Co., Creative Builders, Howland Homes (and others).  Greg says he’s a huge proponent of accurately showing the true square footage and not including garages. 

Greg Stamolis — DPA Construction, Noland Homes, and others.  In speaking with Greg he was also vehement about doing it right. 

Michael Chou, Re/Max — Ashworth Homes, RPDC, others

Mike Peters, Re/Max — Ashworth Homes, others

Stuart Vincent, Windermere — Seaquest Homes, Seattle Signature Homes

Bob Bennion, Windermere — Farrow Homes

I’m sure there are other agents that are doing it as prescribed, but these guys jumped out while I was doing the search and talking to them about their processes.

At the other end of the spectrum there are a few agents who should know better, showing garage square footage as part of the total square footage.  And worse, they’re doing it without even disclosing that fact.  Maybe my next post will be to point out these offenders and the builders who are either telling them to do it that way, or not telling them not to. 

A few builders that I spoke with said “I’d do it right if everyone else did, but I don’t want to be at a competitive disadvantage because my square footage looks less than the guy who is including his garage.” 

If everyone did it the same, this wouldn’t be an issue.  I think that consumers are more and more demanding accurate, precise information.  Before they ever visit a townhome they’ve seen it online, and they are entitled to get good, unqualified information that can be relied upon from all sources.