The #1 thing to do when picking a house

Don’t settle. There, I said it.

As the market becomes somewhat more balanced, buyers now have choices. A year ago, the choice was to buy any house available or not buy a house at all. Buyers said things like “I don’t really love it but I don’t want to loose it. How much over asking price should we go to get it?” Today’s buyer has the choice between several houses in their price range.

There was a lot of settling going on during the past year or two. I get it. You wanted to move and on Friday there were 15 new listings to be greeted by 75 buyers who were just like you.

During this time, I would always tell my clients what I thought of each house. Most of the time I would say something like “In a softer market, this house will be hard to sell. I would wait for a better one if I were you.” Most of them did.

Here are some big things to not settle on when picking a house:

  1. The location. As more houses come on the market, the houses in the preferred neighborhoods will not only sell faster, they will always hold their value better. It’s worth waiting for a preferred neighborhood, part of town, school district, etc because one day YOU will be the seller and you want to make that as profitable and easy on yourself as you can.
  2. The lot. It is easier to sell a terrible house on an amazing lot than it is to sell an amazing house on a terrible lot…..in a balanced market. In a true Buyer’s Market this is even a bigger deal. That amazing house on a terrible lot will one day be outdated and be a subpar house on a subpar lot. A good lot never goes out of style and never needs updating.
  3. Floor plan. If there is something odd about a house, chances are any buyer is going to notice it too. Don’t buy the “If Only” house. That is what I call a house where you really like it but there are one or more major flaws and you walk out the door saying “If only that 3rd bedroom was larger” or “If only that kitchen wasn’t so tiny.”

Why 6-7% interest rates won’t crash our market

If you’re like me, all you are reading in the news is how the skyrocketing interest rates are affecting the real estate market. Headlines say stuff like how the rate has nearly doubled, how sales have decreased, some even are saying the market is going to crash.

Wrong. Wrong. Wrong.

Youtubers and journalists need something exciting to get your attention. If you saw a headline or video that pretty much said everything is going to be okay, would you be interested?

I think part of this drama is also that you have people whose data is correct but how they use it is wrong, or their data doesn’t give much of a historic comparison.

Affordability seems to be the main topic today. These people are talking about how much more a mortgage payment would be today compared to the all time low we saw last year……DUH! Short term thinking I say.

Here is why I don’t think a 6 or even 7% interest rate is going to do much more than curb unsustainable appreciation and slow down people moving just because they feel like moving. To begin with, people will always have changing needs for housing. Families will grow, there will be divorces, marriages, job transfers, job losses and all the other lifestlye/life cycle changes.

But here are the main reasons I am not worried: The Debt-to-Income ratio and longer term history.

Let me take you back to the early 2000s. The real estate market was crazy. Houses were selling fast in multiple offers. Prices were going up like crazy. Know what the interest rate was back then? Barely under 6%. And back in the late 90s when the market was also booming, it was about 7.5%.

A house in the Bluegrass that was worth about $250k back in 2004ish would be worth about $425k today. The principal and interest portion of your loan at 6% on a conventional loan with 5% down would have been $1423 back then and $2420 today. Yeah, that sounds like a lot more. It is, but let’s keep going here.

So the real difference between then and now with property taxes and insurance included would be about $1200 a month. To qualify for the mortgage on that $250k house back then would require an annual income of about $73k. Today that house would be worth about $425k and would need about $126k in income. The median household income has gone up 80% over that time according to the census. The value of that same house has not gone up quite as much.

So there you have it. I think if the market has historically been very good in the past during times when rates were higher than they are today, and since household income has pretty much grown congruent to home values in the Bluegrass, we will weather this period very well.

Then why is the market so slow right now? Simple. People are in shock and upset that rates went up so fast. Once they realize they can’t go back in time, they will move forward with their plans. I predict that (short of a major economic crisis that pulls down EVERYTHING) buyers will be out in force next spring. Prices will remain stable. It will be a good market. It won’t be a market that you’ll read headlines about because remember, you only see real estate in the headlines when things are exceptionally good or exceptionally bad.

How every Buyer picks their house

I often get a Buyer who gives me a very long detailed list of all the features they want in a house. It’s usually things like how many bedrooms, bathrooms, what type of floor plan, what type of kitchen cabinets or flooring they must have.

Then they buy something totally different from what they described?

Why is that?

It is because people pick the home they ultimately purchase based on how they feel while inside a house. It’s the vibe the house gives them. It is an emotional decision.

When I work with a Buyer, I try to notice how they respond to a house. Did they tell me it was too dark inside? Did they think the yard was too bare and needed more trees? Was the backyard not private enough? Did they not like the floor plan and why? Or did they even care about any of this?

These are the type of things people use when making their decision. If a Buyer feels groovy inside the house, they can overlook items such as not having a pantry, not having the flooring they prefer, or if it is missing one of those specific features they said they could not live without. In houses they feel good about, they say things like “We could always change the counter tops later.”

All of which is why I try to create that vibe when I list a house. Buyers also respond to colors, decor, cleanliness and clutter. You can have the most amazing house but if you have wild paint choices, it is going to be harder to sell. Why is that? Truth be told, few of us have vision. We ALL think we do but trust me, there have been so many times where I have told a Buyer that all a house needs is a fresh coat of their choice of paint and they don’t see it. Or I’ll say imagine this house with the flooring you want and they can’t see it. Or maybe I’ll say “Those cabinets could be painted and that mauve counter top could easily be replaced.” And even worse is a cluttered or dirty house. Nobody can imagine what it would look like in better shape.

So the lesson here for Sellers is that you need to make your house feel a certain way for a Buyer to fall in love with it. Another important thing to keep in mind is that people who totally fall in love with your house will pay the most since it is an emotional response and not a logical one.

How can a Seller do this?

The most crucial and obvious ones are to declutter and clean. Not to your standards but to the Buyer’s standards. Then think about how your house looks. Think about how Buyers will tour your house. Ever been in a Builder’s model home? Next time you go in one, notice that there is just enough furniture to make the space feel good. You want your furnishings to compliment the space, not fill it. You will notice that the furniture often has narrow legs and you can see more of the floor. Seeing more of the floor always makes a space feel larger. There is thought about how people will walk around a space. You don’t want to block parts of the room off with furniture nor do you want to make pathways seem narrow. Those things create the vibe that the house is small. Buyers get that same vibe from this as you do when you’re stuck in a traffic jam.

Something else you do NOT want to do is have Buyers leaving the showing with a To-Do list of repairs. If you have unfinished projects, finish them. If you have a stain on your ceiling from a repaired leak, paint it. Buyers will respond to those things logically instead of emotionally. They begin to think about what it would cost to repair it, and they usually estimate high. You want your buyer to leave your house thinking only about how wonderful their lives will be in your house and how they need to rush home and sign an offer.

Good time to buy rental property?

I get asked this quite a bit. Some people want a long term rental and some are interested in airbnb-ing a property.

Here is the one single thing to know when considering any type of rental: There is no good or bad time. The numbers work or they don’t. If the numbers don’t work it, they don’t work even if it is a Buyer’s Market. If the numbers work, then you buy regardless of what the market is like.

What do I mean by this? Long story short, the house has to support itself without you having to throw in your own money every month. That is called cash flow. Positive cash flow means the house supports itself. It covers your mortgage, taxes, property insurance, maintenance and has at least a little left over for a profit. Negative cash flow is when the expenses exceed the rent.

Now, what about Long Term Rental verses Short Term Rental? I personally think Short Term Rentals are risky right now. I know, I know…..Many of you have made good money with your Airbnbs the past couple of years. I do not dispute that. My concern is that this trendy investment option will get oversaturated AND slow down drastically during tougher economic times. It is much more volatile than long term rentals. If you want a shot at huge returns and can stomach volatility, it’s easier to invest in stocks. So what I tell people when they ask me if they should get an Airbnb is to do it only IF they want to invest in real estate in general. If you do, then you can switch between short and long term rental as demand swings. Move your furniture out and you’ve got a long term rental. Best of both worlds for you.

Negotiating 101

“You can lead a horse to water, but you can’t make him drink.”

I think this is good quote for explaining how negotiating works. Some people think negotiating is about getting the other party to do exactly what you want. It isn’t. It would be nice if it worked that way but it doesn’t. The goal of negotiating is to get the other party to bend as much towards your ideal situation as they are willing to go.

In real estate sales, the biggest single item to negotiate is the sale price.

Often a buyer will base their offer amount on the seller’s list price. MISTAKE!

Before you make an offer, you need to first know what the house is worth. That’s where your realtor comes in. Once you know what the house is worth, you make an offer based on its value rather than the seller’s list price. Why? Because if the house was overpriced, you might make an acceptable offer that is still more than what the house is worth.

Here’s a few observations based on my 17 years of experience in every market type ranging from the worst in history to the best in history and everything else in between:

  1. Sellers in our area usually don’t come down a considerable amount from their list price. You are not going to get your offer for 80% of the list price accepted. Even in the worst market ever, this was very rare. Usually if a seller is that motivated, they reflect their motivation in their list price.
  2. If you make a very low offer, most sellers either reject the offer or barely budge from their list price because you have given them a sign that you are going to be difficult to deal with so they leave plenty of room for more negotiating. This basically put you back in the same place you started so it is counter productive.
  3. The most common method of negotiating is the old “Meet you in the middle” routine. I often see a buyer make an offer for say $10k less than list price hoping to get the house for $5k less than the list price. Common also is when you come down to the last round of negotiating and somebody says “Let’s split the difference.” While this is common, it is very uncreative.
  4. You can lose a house while waiting for a seller to respond. I have seen this numerous times where a buyer will make a low offer, drag out negotiating over multiple days, then all the sudden another buyer makes a much better offer and your next communication from the seller’s realtor is that the house is no longer available. You typically want to make an offer that will either be accepted immediately or maybe where the seller counters once and you accept it. If the house is nice enough for you to have picked it among all the competing listings, then odds are another buyer has come to the same conclusion that it is currently the best house on the market in that price range.

So, here is my advise on getting your house and getting it at a favorable price:

  1. Realize that the person who wins the last battle usually thinks they won the whole war. I usually try to reverse engineer a counter offer so the other party can come back with exactly the number I was hoping they would. When they do, they feel like they won the war of negotiating, but I really just let them win the last battle.
  2. Know what it is worth and make an offer either for that amount or slightly less. Remember the goal is get the seller to tell you the least they will take for the house. Before the market got so crazy the past few years, the average list to sale price was about 97-98%. I might make an offer 1-3% less that the house is worth. If they counter for anything less than the full price, guess what, you’re getting the house for less than it is worth. Sometimes the seller just accepts it. If that happens, great, you STILL got the house for less than it is worth.
  3. And speaking of winning, don’t get too caught up in the game. Save that for a trip to Vegas at at blackjack table. Your goal here is to get the one house that you felt was superior to any other house you have seen. If you get it and get it at a fair price, quit trying to make that horse drink more water.