lexington kentucky blog

August 17th the Y2K for Real Estate?

by John Rice

Here we are just a few days from the date that the media thinks is going to change the entire real estate market.

Leading up to this reminds me of most of the year 1999. Back then, the media took the opportunity to let us know that most computers were never prepared for the year 2000. Doomsday was scheduled to begin January 1st 2000 since the computers would think the year was 1900 instead of 2000. This was called Y2K. People stocked up on cash, water and food in case the world froze up.

Of course, what happened on 1/1/2000 was that everybody woke up to find nothing had changed. Whenever I see a pantry stuffed full of a lifetime supply of canned goods, I wonder if that is somebody’s leftover Y2K stash.

All of us will wake up on 8/17/2024 and find that the real estate market kept going, just as it always has since the first person hired somebody to be their real estate agent whenever that was.

There are a few changes, and they are not at all like the so called journalists predict. Housing prices will not go down. No real money will be saved by anybody. Commissions in my area have dropped a little. I used to see mostly 3% offered to Buyer’s Realtors with an occasional 2.5%. I am now seeing a lot of 2.5% commissions. The change is really more of a technical inconvenience than anything mind blowing.

What will change is basically the equation to get to the same solution that has always existed.

In the “Old days” of right now, the Seller’s Realtor had a certain commission they wanted to make for selling the house. They would add an amount to that for the Buyer’s Realtor. The sum of those two numbers were what the total commission was going to be. By the way, commissions have always been negotiable.

The new model pretty much does the same thing…..at least in my market. A seller will have 3 options when signing a listing agreement with their Realtor: 1) The Seller’s Realtor is paid a larger commission and will offer to give part of it to the Buyer’s Realtor. This is the old fashion way. YES, it still will exist! 2) The Seller’s Realtor will charge their own commission PLUS the Seller will offer an amount to the Buyer’s Realtor to be paid directly by the Seller. 3) The Seller may choose at that time to not offer any commission to the Buyer’s Agent. Option 3 is the one everybody is assuming will change the industry. Well, time will tell if I am wrong, but I don’t really see Option 3 being viable in anything less than the absolute hottest real estate market ever. Why? Because history has proven that Buyer’s want their own Realtor involved. That is why most For sale By Owner listings fail to sell. Almost all Buyers prefer to have their own Realtor involved.

On the Buyer side of all this there are a few things I want to point out: The National Assoication of Realtors (NAR) is wanting it’s members to have Buyers sign an agreement which details how their Realtor will get paid. There has been no change in Kentucky’s state law at all. Why? Because commissions have always been negotiable. The NAR is a professional organization whose membership is voluntary. You can be a real estate agent without being a member of NAR, you just can’t call yourself a Realtor because they own that word. You would have to call yourself a real estate agent. This new NAR rule is really like being a member at a country club and having to wear a tie to dinner because it is a rule.

So back to how things change for Buyers. Well, for those real estate agents that use the NAR form, there will be a place to put what commission is to be paid by either the Buyer or Seller for the Buyer’s Realtor. This has always been on existing Buyer Representation Agreements, so the concept is nothing new. This is the part the media is in a frenzy over……but hold on, there is more to this. Our new offer to purchase contracts have a paragraph now for Buyer’s Realtor commission. Yep. You can write on the offer that you want the commission for your own Buyer’s Realtor to be paid for by the Seller. Aaaaaand this is something I think most all Buyers will want to do since few have the cash to pay for their representation.

There will be Sellers who try not to pay, either directly or indirectly, for a Buyer’s Realtor. They will probably find that not many Buyers look at their home. This is effectively like a For Sale By Owner situation, something most Sellers fail when attempting, largely because most Buyers want their own Realtor involved.

So in the end, what we have is a lot of hoopla with little real change. Most all Sellers will either directly or indirectly pay for the Buyer’s Agent commission one way or another. The Seller now just has a choice of how to do it. The Buyer now has to write in their offer how much, if anything, their Realtor is to be paid by the seller.

3+3=6

3.5+2.5=6

6-3+3=6

6+0=6

Yay, you get to pick your own equation now. Any numbers you want which will total somewhere between 5-6% commission when selling your house, just as it always has. Keep in mind too that a Seller’s Realtor is not going to do 100% of the work for both a Buyer and Seller for the same price. Also, just like any market, there is a point where it just isn’t profitable to do the work. Commissions can only go so low before Realtors just say no.

Minimize negatives >accentuate positives

by John Rice

I woke up at 3:44 this morning thinking about the differences between how a buyer and a seller view a house, and what a seller needs to know.

A buyer is going to come in a house, stay for 20-30 minutes if they like it, and wander around all the rooms.  They view the house as a whole at this point.  They are trying to decide if they like the whole thing since they can’t cut and paste features.  This is the main difference.  When a buyer goes from room to room and all colors are different, that just seems random to them.  A seller sits in each room for longer periods of time and tends to view the house as different individual spaces.  Same thing for finishes.  When a buyer sees nickel door knobs, a gold light fixture, and maybe black cabinet hardware, it throws them off.  It has a confusing vibe for them, just as it would for you if I spent the next few paragraphs talking about the Olympics and how much more I like coffee from South America than I do from Kenya.

If you are a seller, the best thing you can do is to give your house that cohesive vibe.  Paint all the walls the same color.  Makes things match.  It sounds silly, but those things have a calming effect on people.  People want to feel calm/relaxed in their home and this is one way to make  a buyer feel that way.  If two houses are side by side and identical, the one with the cohesive vibe is going to sell before the one with every room a different color.

Now I don’t want to make this about updates.  I think HGTV and Tik Tok have us convinced that   white shaker cabinets and shiplap are all it takes to make ANY house sell.  I’ve been in  houses that are totally random, but have these upgrades.  You know what happens if the house has the random vibe?  All a buyer does is want to cut and paste those features to another house.  They say they really like this or that feature, but they don’t buy it. 

Often, real estate is more about minimizing negatives than accentuating positives.

How much do updates really add in value?

by John Rice

I often run across articles in the news about what specific updates give the most return for the money spent.

While I appreciate that somebody took the time to research this, I sort of roll my eyes as I read them.

For example, if your house is a hot mess but you put a brand new garage door on, trust me, your house didn’t grow in value by 87% of the cost of that new garage door.

Why doesn’t it work that way? Well, because the buyer is looking at the whole house, not each individual feature.

A few weeks ago I showed a house that looked absolutely fabulous online. The kitchen and flooring were brand new. It was a total WOW house…..online.

When I pulled in the driveway, I wasn’t sure I was at the same house. I had to check the address!

The exterior of the place was very rough. The original windows had peeling paint and cracked window glazing. The driveway was cracked up and probably hadn’t been recoated since the 80s.

It didn’t get better once I got inside. The lockbox was on the backdoor. The addition on the back that I had to walk through had 1970s paneling that clearly had water damage under that fresh coat of paint. The basement was pretty much lipstick on the world’s ugliest pig.

But oh that kitchen!!!!

Here is the thing. The buyer who sees that kitchen and is willing to pay the seller back for their investment is expecting the rest of the house to be equally as nice. The buyer who doesn’t mind the condition of the rest of the house isn’t going to want to reimburse the seller for that gorgeous kitchen.

I see that all the time having shown houses like this for the past 19 years.

For this house, the seller didn’t really get much of a return. I think they might have sold for almost as much had they not done the kitchen at all. It would have been wiser to have taken the money spent on the kitchen and spread it evenly across the whole house, rather than put all their eggs in that one basket.

When a nice house is a bad choice

by John Rice

Some houses are just a bad choice.

I was out with a buyer this past week. We looked at several new/newer homes in neighborhoods all over town. All within a similar size and price range too.

One house in particular was on my buyer’s radar. It had a 3 car garage. He liked that. Being a car guy, so did I!

Before going to see the house, I looked at the recent sales in the neighborhood. I found that most of the houses were 1400-1600 square feet and were selling for $270-290k. While there were several lots left to build upon, my realtor red flag was raised and frantically swinging when I saw the house we were going to see was also about the size and was priced at $340k. I am probably somebody who personally would pay a premium for that third garage spot, but even I wouldn’t pay $50k more for it.

I thought perhaps the house had some other features that would make it stand out from the significantly cheaper ones that made most of the neighborhood?

Once we got there, it was clear that the third car garage was about the only difference. Upon viewing the house, I noticed that the primary bedroom was sort of small compared to other new homes in the same price range. Also, all the backyards were really small in the whole neighborhood. The location of this neighborhood was also what I would call less than Grade A.

So, what did I do? I told my buyer that I just did not see this house being worth $50k more just for the garage. I also told him that when he goes to sell it, buyers with good realtors will tell their clients the same as well as how the backyard and primary bedroom were small. Long story short, I think this particular house is always going to be harder to sell and likely won’t appreciate as much. I think this neighborhood is a fine pick though for any buyer wanting a new/newer home whose budget tops out at under $300k.

My buyer saw what I was saying and while he would love to have had that huge garage, he chose another house.

Why buying now always beats waiting

by John Rice

I reckon this is sort of like a market update type of post.

I showed a very affordable house in Berea last weekend. It was very nice. Good sized. More than one bathroom. In good condition with a couple of nice features. The list price was $229k.

The house sold 15 months ago for $205k. From the pictures of when it sold back then, about all that is different is that it was vacant.

15 months ago was a little different of a market. We had just seen rates rapidly rise to about where they are today. Buyers were still in a little bit of shock. Back then I predicted that the market would pick back up as people acclimated to current rates and the period of super low rates disappeared in the rearview mirror. Guess I was correct although that was a pretty safe prediction to have made.

The house sat on the market for a few months back then. It being vacant didn’t help. If at all possible, you always want to sell your house with some furniture in it to warm it up a bit. Most buyers have a hard time envisioning what a house would be like when it is empty.

Back to today. We were one of four offers. We went $5k over the list price and waived the home inspection. Know what? We still didn’t get it.

That means this house sold for at least 14% more in those 15 months. That’s a really good return for not having done any updates and in a small town that isn’t really considered a hotbed for growth.

I am totally sure that the seller of this house was anxious about their purchase 15 months ago. They probably felt like they paid top dollar for it and were anxious about their interest rate. Want to be this person? All you have to do is think about where you’ll be a year, five years, ten years down the road and not focus on today’s fear. Other than the Great Recession, it’s hard to go wrong with homeownership.