What’s that gonna do to my property value?

It’s a questions I get asked often, so I thought I would share some examples about what affects property value and what doesn’t….most of these have been asked by friends and clients, for which I am thankful they deemed me to be enough of an expert to ask!

“The golf course behind my house went bankrupt and I’m worried about it getting developed”

I got this one a lot since I lived in such a neighborhood where this happened. People that lived on the course were worried that their values would drop if there wasn’t a golf course behind them. If the land got developed to be single family homes that were priced about the same as the rest of the neighborhood, it would not impact value. Sure, if it was your house you would know the view you used to have, but to the person buying your house, all they know is that there are houses behind your house just like most of the rest of the neighborhood. (BTW, when this happened in my former neighborhood, there was no value difference for the lot. Houses of similar size and similar condition were selling for the same regardless of whether the house sat on the course or backed to other houses in the neighborhood.)

“The city is taking part of my lot for storm sewer runoff.”

This friend of mine lives in a historic neighborhood where all the houses on his street have large, deep lots. He showed me where the city was going to install underground drains and described what it would look like. It wasn’t going to be ugly. Fortunately his lot was big enough that his backyard was still huge by today’s standards. I said it wouldn’t impact value at all since there was still plenty enough backyard for future buyers to have room for kids to play, a pool, etc. It was functionally the same before and after.

“My neighborhood got redistricted to another school”

This one happens a lot. If the school you are losing performs equal to the new one you are getting, then it won’t impact value. If you are going from one of the highest performing schools to a lower performing school, well, that isn’t so good. If you are going from a poorly performing school to a better one, your values could go up!

“They are going to build apartments in my neighborhood.”

This seems to be happening a lot. Density in Lexington is only going to get worse as we attempt to fill every square foot inside the urban service area before entertaining the idea of expanding it. People in Lexington are used to this. While the increase in traffic in your neighborhood will be annoying compared to what it used to be, future buyers won’t know how good you used to have it. Plus, people in Lexington are used to traffic. Unless your house backs up directly to the new apartments or you are on the road that everybody living in the apartments will use, it won’t impact value.

I think when it is YOUR house, it is easy to think any change will be negative. You will remember backing to the golf course, when you used to have a bigger backyard, the school your kids went to and what that vacant field looked like before it became apartments. The thing to remember is that when you go to sell your house, the buyer has no idea how things were. They only know how things are now. A prime example of this in my own house is noise. When I moved here, there was a lot of undeveloped land around me. It was very quiet. With all the new development around me came things like hearing fire trucks or ambulances, dogs barking in the distance, the sound of kids playing. I miss the peace and quiet but you know what? All the changes are things most people see as being normal in any neighborhood, so it doesn’t hurt my value one 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.

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.

“You should have bought my house”

I just sold a house to a past client that reminded me of something that happened almost 20 years ago.

The house this client bought was a good solid house. The current owner built the house and took good care of it. It really just needs some updating, fresh paint and new flooring. The seller sold the house for less than they could have gotten had they done these improvements. They passed on the savings they had to the buyer who was happy to get a good deal on a good house and use the savings to update to his own taste. This really worked out well for both of them.

There was a little gap between what the seller wanted and what the buyer wanted to pay. Not a huge gap. I told the buyer that I knew he would end up renovating any house he bought. He enjoys working on houses and has improved every house he has owned. I told him the story of two houses right across the street from each other that were essentially the same house.

Back in the early 2000s, there were two houses for sale on the same street. Both were split levels of similar size and floor plan. One was pretty nice and was $150k…..which would be like $250k today. The house across the street was $118k and needed everything.

I bought the $118k house because that was all I could afford at the time, but I secretly wished I could have bought the one across the street for $150k because I liked the yard better.

I bought my house for $118k and over the course of several years, ripped out all the old, tired, worn out finishes and replaced them with new materials.

The house across the street that sold for $150k closed shortly after I closed my house. I met the new owners. Great people. Over the course of the next couple years, I saw them rip out and haul off everything that made that house worth $32k more than my house. They ripped up perfectly good carpet because they wanted hardwood. Understandable. They didn’t like the looks of the kitchen counter top even though it was in excellent shape. This continued for quite a while.

One day I was talking to the husband and I finally said what had been on my mind for quite some time. I said “You should have bought my house instead. You have thrown away everything that made your house worth $32k more than my house.” He paused for a second and had a deep thought look on his face. Then he said he had never thought of it that way. He saw materials he didn’t like and was excited about fixing up his house. I saw $32k going in a dumpster.

He probably walked in to my house when both were for sale and was turned off by everything being worn out. That is understandable too. But if you know you are going to renovate a house to your taste, it is better to start with one where you are paying less and ripping out worn out materials.

I can’t wait to see what this buyer does with his new house. And I would have never guessed something I learned that long ago would still be benefiting my clients today!

The one thing this agent did that got his buyer my listing

He called me.

That’s all it took.

I put a listing on the market yesterday that I knew would get a ton of showings. It was priced at $155k and there just isn’t much for sale in that price range.

The agent called me before his showing and asked what type of terms my seller was looking to have. He also told me that his buyer had tried unsuccessfully two times to buy a house in this particular neighborhood. He has friends/family in the neighborhood and really wants to be there. I really wanted to hear that because I knew that his buyer would not walk away after a home inspection since he not only needs a house in a tight market but really wants to be in that neighborhood. His only option would be to wait for the next house to come up in that neighborhood. This buyer was committed. I asked who the buyer was using for his mortgage. It was a local company that is well respected. Icing on the cake to me.

Some of you might wonder why an agent would tell me this? Isn’t it compromising his buyer’s position? In today’s market, everybody assumes they will have to pay full price. Everybody is electing to do the inspection type where you will have an inspection but not ask for any repairs. Since everybody is doing pretty much the same thing, the decision on who gets the house often comes down to minor things such as what type of financing the buyer is doing, if they are using a local lender who can be trusted to get the loan to a closing…..and even to little things like letting the listing agent know the buyer really wants to be in the neighborhood.

Being a buyer’s agent today is not about negotiating since buyer’s have no power right now. It is about advocating for your clients. It is about finding out what is appealing to a seller and what will make them pick your client. That is exactly what this agent did. In an era where you get a random text from an agent that they are sending you an offer, making a quick phone call can really make a buyer stand out. The actions of this agent is what got his client the house.