I sell houses just like I drive

I drove up to Pittsburg this past week with a couple of friends to go to a track event. My first time. It was a lot of fun. Only hit 110 MPH on the straights since it was raining during our track sessions. We took mostly state highways up and due to rain, mostly interstate back.

As soon as I got back, I put a house on the market for some great people who used me to buy the house several years ago.

Having just spent 5-6 hours on the road, selling their house made me think about what it is like driving through traffic. Not that it was at all frustrating or any of the negatives you typically associate with traffic. I mean the whole watching all the cars around you, seeing when you can get around somebody, knowing which lane is moving better…..that type of thing.

Real estate is a lot like that these days where you can expect multiple offers. You’ve got all these moving parts around you and you have to make quick decisions and take advantage of every opportunity. It is always changing, just like all the cars around you on the road as every other driver is doing the same thing.

We put the house on the market for TOP dollar. Neither the sellers nor I really expected to get half a million dollars for the house, but like moving through traffic, we took advantage of the openings we had to get where we wanted to be.

We immediately got 3 showings. One agent never gave feedback and didn’t say his buyer’s had any interest. Lots of times getting no feedback is the feedback. They were the stopped car on the shoulder of the road. They were out.

We had another agent who had an out of town buyer. This agent called me and said her people wanted to write an offer sight unseen. Now, I really had no intention of negotiating this offer unless it was going to be the only one we got. A buyer making an offer sight unseen is like passing a semi truck right before a blind turn. Too much could go wrong. My goal was just to get it and use it to motivate other buyer’s to act quick and bid high.

Then about an hour later I got a call from another agent who asked if we had any offers. I was more than happy to tell her that another agent had just told me she was going to make an offer. That put this agent in high gear as she wanted to zoom around the other buyer and get the house for her clients. Normally when there are two offers, the default is to get in the fast lane with at least a full price offer.

We sold it for full price. I never got the other offer. That buyer ended up being like that car in your rear view mirror that slowly fades away in the distance never to be seen again. Without that buyer though, I doubt we would have gotten such a great offer…..so thank you to that agent who cruised with us for a little bit.

Worried about the real estate market crashing? This will help

We are living in the first tough economy since the Great Recession. Naturally there are people that worry about the real estate market crashing again. The memory of half the houses on any street being for sale and owing more on your house than it is worth is all too fresh.

While I don’t see any need to be concerned about that happening again, I got to thinking about what that would look like if it were to happen.

Let’s look at a huge difference between 2005 and today. Both are times when the real estate market was on fire.

Back in 2005, the interest rates I was seeing were around 5.5%. The market was good. Values were high. Then when the 2006 season kicked off, it wasn’t as good. The following years until 2012 got worse and worse. Fewer buyers. More sellers. More foreclosures. Unlike stocks, real estate values usually rise gradually and fall even more gradually. Short of a landfill being built behind your house, you are not going to wake up one day and find your house is worth 20% less than it was the day prior. Remember this because I will bring it up later.

That person who paid $300k for a house in 2005. Let’s say they did a 30 year mortgage at 5.5%. One year into their mortgage, they owed about $296k still. After five years, they still owed about $277,500. This is why many of them had to BRING money to a closing when they needed to move in 2010. Back then, one of the first things you would ask a potential seller was “How much do you owe on it?” Many were upside down on their houses, which is why many chose to walk away and let the house get foreclosed.

Today, a buyer can get a 2.875% interest rate for the same $300k house. That is just over half what it was 15 years ago. After one year, they owe about $293,500. After five years, they owe around $266k.

Okay, now it’s time to remember I said real estate values, when they drop, don’t drop fast. It took about 5 years for values in the Lexington area to drop about 15% from the 2005 peak values. Some houses didn’t even loose that much. Picking a good house with a good floor plan, on a good lot, in a desirable neighborhood for the price range and with average or better performing schools is the best way to protect yourself from a bad market. If you look at the math on today’s buyer getting a super low interest rate, you will see that in five years, they have paid off about 12% of their balance. If they get a couple years of appreciation before a decline, the numbers are even better!

I know I got a little nerdy there with the math. Sorry. In the end, my point is that should the market crash again, today’s buyer is going to be in much much much better shape due to low interest rates. If the value of your house drops at the same rate that you are paying down your mortgage, then the worst thing that can happen is you just aren’t building equity in the house. It’s effectively like you’ve been renting where you pay to live there and walk away with nothing when you sell…..and this is the worst case scenario. The best case scenario is that the market stays good and you build a ton of equity. I just don’t see much risk in buying a house right now thanks to low rates.

Low interest rates could be the WORST thing to happen to the market

Yep. I know. It doesn’t make sense at first. How could these incredibly low interest rates possibly be a bad thing? They are a very good thing right now for people buying or refinancing their existing house. The problem is in the future.

Let’s take the average person who has probably refinanced their old mortgage recently. Let’s say they paid $160k for their 1700 square foot home in Masterson Station in 2013. They put 5% down on a conventional loan. Their interest rate was 3.875%, which seemed stupid low at the time since rates had been about 5% just a few years earlier. Their payment, excluding taxes, insurance and PMI, would have been about $714 a month. They decide they want to refi. Their house is now worth about $210k. They owe about $126k on their old mortgage. They get a 3% interest rate and now their payment is about $531. They are saving around $180 per month. They are happy.

Now lets look 5 years out from now. They want to move up to a $300k house. (Let’s keep the value of their current house and the one they want to buy based on today’s values since both should appreciate about the same….it just makes it easier for me to do the math!) They have close to $100k in equity, so they are effectively only going to finance an amount that is about equal to the value of their current house. This is really sounding good. But wait, maybe the interest rates are 5%? If so, their payment will more than double. That’s right. They have close to $100k down and are borrowing an amount equal to the current value of their existing home. Their new payment for principal and interest would be just over $1100 a month. People who need mortgages shop by their mortgage payment. They find out what they can afford per month and then figure out how much house it buys. These people won’t move. They will upgrade their existing house instead.

The same holds true for the people buying a house today. They won’t want to see their mortgage payment double if interest rates go up, so they will stay as long as they can stand it.

This is why, unless interest rates stay very low for a very long time, eventually there will be even fewer houses for sale. This will of course keep prices high since there will be less of a supply and demand will not decrease. We are not building enough new houses and the next generation of buyers will be bigger than previous generations.

So, what’s the take away here? If you can see yourself staying in your current house for 7-10 years, refi now. If you are a buyer, buy a house big enough to stay in for a long time. The last thing you want to do is outgrow your current house in 3-5 years and possibly not be able to afford a larger one.

How do houses go up in value?

Ever wonder HOW prices rise for houses?

Before I got into real estate, I didn’t really think about it. You’d read stuff like the average price went up something like 4.6% last year…I assumed it was like a rising tide and affected every house the same way at the same time.

But it doesn’t work like that. It works more like traffic taking off after a stop light. The first car goes, then the second car see the first car moving and goes, then the third car sees the second car moving and goes, and so on. As much as I wished they would all move at the exact same time, they don’t. And that is exactly how prices go up in real estate.

There are lots of factors impacting value: Supply/demand, location, price range, condition, etc. No surprise here, but when prices are going up, the neighborhoods that are the most desirable and have the least supply go up first. Once there is enough of a price gap between those neighborhoods and the next best neighborhood, the prices of the second best neighborhood start to rise as buyers see a bargain and move in that direction. Then when the prices are up on the second best neighborhood, that does two things: It makes the prices go up on the first choice neighborhood since it is better, and it also drives bargain shoppers to the third best neighborhood. This process ends up going through ALL the neighborhoods in town as long as the market remains hot.

I sold two houses in one particular neighborhood several years ago to some friends wanting to rent them out. I was telling my friends that I thought the prices in the neighborhood were about to go up since there was a big gap between what an identical house was selling for in other neighborhoods. Since I tend to Geek out on this type of stuff, I don’t think they were as into it as I was…..but now their houses are each worth $35-45k more in just a few short years.

So, next time you are stuck in traffic, forgive me if it makes you think of real estate.

When people pick the wrong house for the right reasons

It happens.  More than you’d think.

I showed a house about a month ago to a client.  There was a line to see it.  It got multiple offers that same day.

My client didn’t like it.  I didn’t like it.

Why?  The floor plan sucked.  It had a big two story foyer as soon as you walked in.  The living/dining/kitchen area was open.  All this sounds great, but the issue was that this was a 1733 square feet home that had no more usable space than a 1300 square foot home.  The upstairs hall was wide.  The hall from the front door to the living room was wide.  The dining area was small but nobody could tell since it was vacant.  All the rest of the rooms were equal to what you’d find in a 1300 square foot house.

It made a good first impression though.  You walk in that foyer and see space.  You walk down that wide hall and see the open living/dining/kitchen.  You go upstairs and see that wide hall.  The house felt bigger than it was just because when you are viewing a house, you are going through every room in about 15 minutes.

It sold for over $6k more than the list price.

It closed today.  The new owners are probably moving in and glad it quit raining.  Once they live there for a while, they will probably realize that much of their square footage isn’t usable.  They will realize that what they have is a 1300 square foot home with 400 extra square feet of hallways and foyer.