Just How Local Is The Real Estate Market?

Real estate is local.  That’s what they say anyway… usually it’s the final tag line in an article or interview discussing real estate values and market conditions.  Kind of an afterthought really, yet factually just relevant enough that it needs mention.  The funny thing is, real estate is so local that any broad analysis can easily be useless.  Let me explain.

In our area along and near the Los Angeles/Ventura County line, we have half a dozen towns and a population under 200,000.  To our east lies the San Fernando Valley which if a city unto itself would be a top 10 largest city in the country; to the south, Malibu.  We’re in the weird part of California where the Pacific Ocean is both south and west of us.  We’re just a mere 35 minutes to downtown Los Angeles… at 4 am, same for Beverly Hills.  Yet those are markets included when analysts speak about L.A.  The statistics include real estate in and around the greater Los Angeles metropolis.  If you live here, you know just how stupid that sounds but that’s how analysts look at trends in the L.A. market.  Fact is, Beverly Hills real estate has almost nothing to do with Westlake Village.  The only connection is that they’re both real estate an located in Southern California.  If you were looking to buy smaller in Beverly Hills and for the same money you can buy bigger in Westlake or Calabasas, then there might be a distant relationship, but it’s just not close enough geographically nor in lifestyle to really be a consideration.

Is there a connection between the value of property in one place and to another close but still far away?  Sometimes.  I remember back in 1994 when the market was at or near the bottom of that early ‘90’s collapse.  There was a total fixer in the flats of Beverly Hills listed in the mid $900,000’s.  I said to an associate, “If you can buy in Beverly Hills for the $900’s, then you better be able to buy in Studio City/Sherman Oaks in the $800’s; and if you can buy there in the $800’s, Tarzana best be in the $700’s, Woodland Hills in the $600’s etc.”  So there is a relative connection in their pricing, but it’s pretty thin.

My brother in law, David Bader, sells with the John Aaroe Group in Beverly Hills.  He has a client who builds spec homes.  Sometimes those homes are in L.A., maybe the Hollywood Hills and sometimes in the south east Valley, like Studio City.  David tells me people are paying $1.3M for a teardown in Studio City and building a $3M home on it. He says that there’ll be multiple offers on both the teardown buy and the estate home sale.  Same is true in West Hollywood, Bel Air, Brentwood, Santa Monica, Venice, all over the Westside.   The market is so hot it can burn you to touch it.  Is there a correlation with what is happening in Santa Monica or even Studio City to what is happening in Westlake?  Not really.  They are on fire while we are just smoldering.  It’s a different buyer with different priorities and very different money.  And with very few exceptions the person that wants the Westside is probably not even considering the Valley and almost certainly not Calabasas and definitely not Westlake or Thousand Oaks.  But that’s OK, because the person looking to buy in Thousand Oaks is not considering to buy in West LA either.  Here they would be buying fabulous public schools and an easy suburban family lifestyle, whereas the Westside is the City, celebrity glamour, nightlife and private school.

It’s interesting, just 15 years ago there used to be subdivisions and model homes sprinkled all over the Conejo.  Today, barely a one.  Yet just 10 miles away in nearby Moorpark, another small Ventura County hamlet, there are some new homes being built.  That’s not very far away, 18 miles, but the impact of those homes on our affordability and housing market is nil.  So 18 miles isn’t local enough.  How about comparing the east part of our Valley in Agoura Hills, a small city next to Calabasas to Thousand Oaks just 7 miles away.  Is there a relationship between Agoura and T.O.?  Yes, but someone who’s looking Agoura is probably not willing to drive the extra 10 minutes to buy in Thousand Oaks or Newbury Park.  Sure, there’s some exceptions, after all it’s just 7 miles, but sometimes your buyers would have you think it were a thousand.

Amgen, Thousand Oaks’ largest employer, recently announced a sizable layoff.  This has cast a bit of a pall, over the west end of our valley.  It’s felt strongest in Newbury Park and Thousand Oaks where many employees live.  So now we are talking about 5-7 miles, that’s pretty local.  Break that down even further and look to certain newer subdivisions where the concentration of Amgen employees is greatest and there’s an even stronger effect of the Amgen Pall.  We are now talking about a square mile here and a square mile there.  We are talking really local, Hyper Local.  But that’s the nature of real estate.  You’ve heard the old adage that the three most important words in real estate are location, location, location.  I like to think of this as: the town, the neighborhood, the street and lot.  Does one sale in a neighboring subdivision have an impact on another similar home in a different subdivision?  Maybe, maybe not – not if the buyer only wants the one subdivision, then the value of a sale just a couple streets over is of little consequence.  You can’t get much more local than the street and lot.  So if you ask me, is real estate local?  I say, you better believe it.

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Trulia Acquired By Zillow

The cost of doing real estate just got a whole lot more expensive.  You know there’s an old joke: What’s the difference between and California real estate license and a California driver’s license?  Not everyone in California has a driver’s license. 

The real estate industry in California has long been plagued by easy licensing and the cheap cost to start a real estate business.  It’s a little like the idea that the American Dream is that everyone should own a home.  As we saw with the real estate meltdown of 2007, clearly not everyone should own a home.  The same is true for the practice of real estate; not everyone should be allowed a license.  There is a reason that when asked about their experience during a real estate transaction, most real estate professionals are held in esteem only slightly better than used car salesmen.  The reason is simple, too many people that have no business doing real estate are doing real estate.  Ever looked into becoming an attorney or getting a license to sell insurance?  How about securities like stocks and bonds?  Getting your Series 6 or Series 7 is tough.  Even to become a sheet metal worker requires an apprenticeship.  Real estate?  Pay for an online class, take a bunch of practice exams and sit for the state exam and voila, you can sell real estate!  Yeah, you need to find a broker to hang your license with but that’s about as tough as standing in the street and yelling, “Free money” and having people put their hand out.  It’s easy.  And the fees?  Not that much.  For about $1000 you can get out there and sell real estate.  However, that’s about to change.

With Zillow’s purchase of Trulia announced today, we may actually see the cost of doing real estate go up.  It’s always been the case that the best real estate agents are spending money to advertise their clients’ properties.  They spend money on prospecting and marketing for the clients and themselves.  The consolidation of the advertising arena means that there is less competition for ad dollars and that means higher costs to the consumer who in this case is all the real estate agents.  If suddenly to be competitive you have to spend real money marketing properties online, agents without the benefit of deep pockets are going to find it more difficult to compete.  This is welcome news for seasoned real estate agents.  It means fewer newbies can offer the level of marketing because it is going to cost more.  It also benefits the traditional brokerages who are constantly fighting over the same licensees.  A broker that pays for services from Zillow, is going to have a better draw than one that does not.

Zillow and Trulia have said they anticipate keeping both brands alive.  We know this will not be the case.  Score Seattle, sorry San Francisco, you lose this one.  It is only a matter of time before the bean counters and Wall Street demand the elimination of duplicate and overlapping costs.  No need to have two CEO’s, same for HR, admin and eventually sales and marketing.  I can hear Carl Icahn and Bill Ackerman now…

So the real estate marketing world is going to change.   Fine with me.  It will cost me more and to that I say, “Great!” because eventually I’ll probably benefit. 

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Pushing A Buyer To Lift Contingencies, What Options Are There?

Most sellers begin the process of selling their home with a few common misconceptions.  The usual ones revolve around condition and price; “someone will pay my asking price because they’ll fall in love with the home just as I did.”   Or the, “I lived with it all these years (some problem discovered on the inspection), my buyer can too.”   One of my favorites is the, “I need to get “X” amount out of my home, so we should price it with that in mind.”  These are all typical seller positons that generally soften up when confronted with the reality of home selling.  The one that is trickiest however, is the one after you’ve gone under contract, where the seller expects the buyer to perform and do the things the buyer is supposed to do, like get a loan approval and lift loan, appraisal and investigation contingencies.

Now I’m not talking about someone deliberately committing fraud, that’s a whole other can of worms, no I’m speaking to the process in California whereby the buyer has definitive timelines that they are contractually bound to adhere to.  These timelines include, apply for a loan, do investigations and include lift any and all contingencies. 

What does this mean lift contingencies anyway?  The California Association of Realtors Residential Purchase Agreement (RPA) defaults to a 17 day time allowance for a buyer to do their due diligence, their investigations, which would typically include a physical inspection (which could also mean inspecting for mold, geological conditions, Radon testing, structural, roof etc.)  It also includes things like verifying the insurability of the property, examination of HOA docs, and ensuring clear title to the property.  Sometimes a buyer might even have a contingency on selling their current home, but this is a little different so I won’t be addressing this specifically today.  The most critical contingency is on the buyer obtaining financing which includes having an appraisal done to validate the sales price.  At the end of the buyer’s due diligence, the buyer is supposed to sign off on contingencies or cancel the transaction; Paragraph 14 b (3)At the end of the time specified (or otherwise specified in this agreement) Buyer shall, Deliver to the Seller a removal of applicable contingency or cancelation of this agreement.”  In other words, at the end of the default of 17 days (unless otherwise agreed to) the buyer either lifts or cancels.  It is not until the buyer lifts all their contingencies that their deposit can be forfeited.  A buyer has no money at risk until they lift all contingencies.  In other words, the buyer can cancel escrow and get all their deposit back.  Does the buyer need a valid reason to cancel?  Technically, yes, but how can you ever prove otherwise?  It’s really pretty impossible for a seller to try and prove the buyer isn’t cancelling for one of the allowable reasons as say opposed to, they just changed their mind.

So what happens when day 17 comes and goes and then day 18 and 19, and the buyer still has not lifted their contingencies as required under the terms of the agreement?  What happens really depends on how strong the seller’s position is.  Do they have a backup offer in place or is this the only buyer?  Does the Realtor sense the buyer is stalling for reasons other than the loan or appraisal ie: they are still trying to assemble all the down payment monies?  Are the buyer and their lender really moving forward or are they playing games, maybe hoping rates are going to drop?  Is it even reasonable to expect a buyer and their lender can actually get financing in 17 days?  You end up asking yourself, do I have a deal or don’t I?  The answer to these questions will dictate the response from the seller. 

Let’s say you have a back-up buyer.  In that scenario, on day 15 the seller’s Realtor might send out a “Notice of Buyer to Perform,” NBP.  This is required for a seller to cancel.  Under the terms of the agreement, a seller cannot cancel until the allotted time frames have expired and a notice to perform was delivered to the buyer 48 hours prior to the unilateral cancellation by the seller.  Huh…?   A seller has to give 48 hour notice (unless otherwise previously agreed to) before they are allowed to cancel the transaction.  If a seller decides they want to cancel but haven’t yet delivered the notice, a seller must add on the 48 hours before cancelation is possible.  The buyer has to be given the opportunity to lift contingencies prior to cancellation.  But what if you don’t have another buyer and you are reluctant to cancel your one and only buyer just because they are a little slow in getting loan approval?

This is the most common snag in the sale process; the buyer’s lender is late and without a back-up offer, you’re not going to blow out your buyer just because off a few days, but do you really have a deal?  The reality is, many homes sale contingencies are not lifted on time.  But what happens when a couple days turns into several, then into weeks, then what?  This is when the remedy is the lesser of two evils.   If I start to sense a real problem, I usually encourage the seller to send the Notice to Perform even if they do not intend on exercising the option to cancel right away.  That’s correct, the seller can send the Notice to Perform without actually cancelling the transaction.  This is a little like an old western movie where the sheriff pulls out his revolver and sets it on the bar.  He’s letting everyone in the room know that if things get out of hand, he’s ready to shoot.  But that doesn’t mean he has to shoot, only that he now is ready to should the need arise.  Because the Notice to Perform must be delivered for the seller to cancel, it can be delivered at any time and so the 48 hour clock is ticking.  It is in this situation that the seller’s has discretion to cancel.

Can’t a seller just cancel anytime?  No, a seller can only cancel for buyer’s failure to perform, ie: lift contingencies.  Yet the buyer can cancel at any time, even at the last minute.  California courts have ruled that you can’t force a buyer to buy, but your can compel a seller to sell.   Ya ‘Gotta love California.  The lifting of contingencies is important because up until they are lifted, the buyer can cancel without any forfeiture of deposit.  Once the contingencies are lifted however, their deposit is susceptible to forfeiture and the seller can cancel the buyer and keep the deposit.* 

*Keeping a deposit is never as easy as it sounds.  Why?  Because a seller who has an open escrow, is still in escrow until it’s closed by mutual agreement (with the buyer) or the court of law or through arbitration.  That means that the deposit can only be handed to the seller, and escrow closed, when the buyer agrees to allow this. “Wait a minute,” you say, “The buyer has to agree to let me keep their deposit and to cancel escrow, even after they wasted my time and defaulted?”  Yes.  So when they don’t agree what happens?  A couple of things can happen, first you can negotiate to give them some of the deposit back while keeping the balance.  More often than not this is the outcome.  Second, you can continue to sell your home, but you’ll have to disclose to the new buyer there is an open escrow elsewhere and then when you accept an offer, open the new escrow with a new escrow company.  Then eventually after mediation and arbitration with the original buyer, you win, and the arbiter awards you damages, you keep the deposit money and have closed escrow with the new buyer.  So it’s not exactly as simple as cancelling your buyer for failure to perform and then just keep their deposit.  By the way, the maximum allowable forfeiture?  3% of the purchase price, which is why almost every deposit in a California home purchase is 3%; that’s the maximum a seller could retain under the liquidated damages clause in the event of buyer default.

Knowing all this about default and attempts to keep deposit, what’s a seller to do when a buyer won’t lift their contingencies when they’re supposed to?  Here is where it really comes down to your agent, their status in the real estate community and their interpretation of the situation.  Emotional sellers at this point really need an agent who’s knowledgeable, one whom they trust and one who is hopefully familiar with the other agent.  The agent is going to have to speak with the buyer’s agent and really assess this: Do you have a deal or not?  For me, I am the hammer.  I make the other agent stay on their client.  I hammer them over and over and over, to get those contingencies lifted.  I’ll send the notice to perform, even when we really don’t want to cancel.  I’ve had agents yell at me because I’ve done this and I’ve told them, “We aren’t cancelling this minute but if your client doesn’t get their act together and release contingencies, we will.”  It doesn’t always work and sometimes the delays are totally legitimate.  Sometimes they are due to honest mistakes but sometimes they really are deals going off the tracks and it takes a hammer to get them to either “Putt or get off the green…” 

It’s never easy when a deal starts falling apart, but more often than not a good set of agents can keep a deal moving forward and get you to the finish line, close the escrow, so that everyone can live happily ever after.

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Market Forces At Work

It’s a funny thing this economy of ours; this system of capitalism where the free market drives the movement, prices and value of goods and services.  With real estate, too many homes means prices drop; not enough, prices rise.  The same is true for the labor market.  As the U.S. economy continues its slog forward, adding jobs at retail stores and restaurants, the unemployment rate keeps dropping; 6.1% as of last week.  Yet very few would say they are making what they were before The Great Recession.  The reason?  The vast majority of the jobs being created are in the service industry and therefore not the high paying jobs we need to make life a little easier and allow us to spend a little more freely.  Sure it is better that we work than not, no question, but the value of the American worker has never been lower and when you’re at the bottom, there’s only one way to go and that is up.  How one wonders, is an American worker supposed to compete with a Southeast Asian country paying a dollar a day or an engineer or physician from India earning a fraction of an American engineer or doctor?  Not since the era of the monopoly, when child labor was common and worker safety and a fair working wage, the rallying cry of organized labor, has the American worker been valued less than they are today.  But that I believe, is about to change. 

In the early part of the 20th century, American business saw more than enough workers to do the jobs required, especially by using women and children who earned much less than men.  But labor law was a new concept.  Once it took hold and sweatshops became factories, suddenly the American workforce gained the upper hand, able to demand a better standard of living, a higher scale of pay. 

The root concept for this shift in the working man’s ability to command better wages, was the shortage of available labor, supply and demand.  Take away the kids and now you have to pay someone who won’t work for pennies a day.  It is this concept that we hopefully are finding ourselves on the precipice of once again: as the unemployment rate drops, competition for skilled labor increases.  More companies are bringing jobs back from overseas because the quality is better here and the cost to move product from foreign lands is only going up.  Making stuff here is proving more economical.  This means an increase in demand for workers and increased demand for workers leads to better pay.  As employers have to lure workers from one job to fill another, our salaries increase.  A simple case of supply and demand.  And as wages improve and income rises, so does everything else, including real estate.

I go into this rather extended history lesson to make the point that once the labor market breaks through the malaise of stagnant wages, our whole economy is going to get markedly better and owners of real estate will be one of the chief beneficiaries.  A little wage inflation is a good thing and not the enemy of real estate.

I’ve heard many argue that the rocket ship rise in property values last year was an artificial boom; that it was fueled by investor cash and not an improvement in the real value of real estate or the economy.  Even more argue that as inflation kicks in and interest rates rise, the cost to purchase real estate will rise as well and thus prices will have to go down in response to lower affordability.  Further eroding property values, some even say, will be the alternative investments fixed income instruments like bonds will offer.  Investors will divest their real estate holdings in exchange for the greater, more liquid returns that higher interest rates offer via U.S. Treasuries and corporate bonds.  So the argument goes any way.  It’s an interesting argument, particularly in the short term, but it ignores the fact that we all need a roof over our head; that the population is not getting any smaller and that as our wages increase, so does our ability to afford a little more mortgage, a little more house.  Our ability to earn more has a direct impact on the value of real estate.

This leads me to the following suggestion: Go buy a house, especially one needing work.  If you own one and would like a larger one, price your home to sell and upgrade.  Now is the time.  In fact now is an outstanding time because as inventory rises, (which is what has been going on for the past 12 months) there are more homes to choose from.  More homes means greater competition and like the worker competing with other workers for one job, too many homes means prices for some homes will come down.  Right now we are seeing that many of the homes coming on the market are coming on priced too high for their condition.  Where upgraded and turnkey homes are still selling with multiple offers, homes needing a little work are not.  They are priced too high and thus, sitting.  The sellers of those homes believed that their homes went up equally with turnkey homes and this is simply not the case.  Just as the demand for a computer scientist may be high, the demand for a field worker may not be.  So while there is a shortage of upgraded, move-in ready homes, there is no shortage of homes needing work.  These sellers are finding themselves competing for the same buyer.  This means for these homes you’ve an opportunity to negotiate a better price.  Once wages start to increase however, the demand for housing is going to increase and that darn supply and demand thing is going to lead to higher prices across the board.  Right now, there is an opportunity to buy a home with a little sweat equity built in.  You’ll have to negotiate of course, but with rates still ridiculously low, it’s an opportunity you won’t want to miss.

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Thoughts On Seeing The Inventory And Why It Matters

One of the best aspects of being a real estate broker, is that I get to go into a lot of homes.  Every Wednesday, Thursday and Friday, depending on the specific area, as an agent, I’m afforded the opportunity to go out on “Caravan” or “On Tour” and see the new listings without having a client in tow or having to have an appointment.  It’s an important part of the process for an agent to understand the market; what’s for sale, what’s a good deal and what’s not, and what people are doing to improve their homes.  Knowing the inventory is one of the key elements to being a successful Realtor.

Since the advent of the internet based Multiple Listing Service, home buyers and sellers and even just the curious, have the ability to view properties without ever stepping foot inside.  30, 40, even 50 or more photographs representing a property, are now commonplace.  Back in the day, all a would-be buyer would have is the view from the curb (think ‘curb appeal’) since there were no pictures available except maybe in the store front of the listing office.  The only way to  see what it looked like, was to get inside with a real estate agent or at an open house.  This was just as true for agents as the general public.  Thus to help sell a listing, the home had to be made available to other Realtors and this was accomplished by having Caravan.  What is interesting is that with all the changes to the way properties are marketed today, getting inside is still just as important for agents as ever.  Knowing the inventory is essential.

It’s a funny thing going into other people’s homes for a living.  Like the public, I see the photos online and base an opinion on that representation.  But relying on a picture alone can be a big mistake.  I can’t tell you how many times I’ll go into a home that looked amazing on paper, only to be disappointed at the actual property.  Those tricky Realtors with their wide angle lenses…  I know one agent who uses a photographer that will blend three different flash exposures to create a look for a room that is physically impossible to replicate in real life.  Some Realtors will digitally enhance the color of the grass or even put grass where there is now only dirt with a little caveat, “grass is an artist representation.”  I one time had to have an algae green swimming pool Photoshopped because the owner was in the process of cleaning up the pool but hadn’t finished when we finally had a good sunny winter’s day to shoot our pics.  Or another time when the owner forgot to change a light bulb the day of the shoot and the photographer said, “Don’t worry, I’ll Photoshop it in.”  And how about those amazing twilight shots where the house is illuminated just after sundown?  Did you know that the sky always comes out white with the twilight exposure and the photographer has to add the sky?  And then there’s the whole room size thing…  A wide angle lens always makes a room look a little larger.  It’s amazing how many times a home that looked completely redone turns out to be pretty tired too.  Knowing the inventory is a pretty important part of my job.

The other thing about getting out and seeing the homes is that I get to see some amazing properties.  A few weeks back I went on Caravan to a home in Old Agoura that on paper looked overpriced.  How could a home in an area that typically sells for +/- $1m have a listing for nearly $3m?  So I went to see it; it with its knotty pine cabinets, commercial French 60” oven range accompanied by a pot bellow stove for wood cooking in the kitchen.  It had not one but two guest houses and a 7 car garage, was on horse property that backed up to protected parkland littered with horse trails… wow.  Or the time I went into a home that had a spectacular garden, totally manicured and private; made me feel like I was in England.  So much care and so much attention to detail, yet the pictures just didn’t do it justice.  It had to be seen.

Yesterday I went into a home in a neighborhood where homes typically sell for $700-900K.  I was speaking with the owner about how much her home might be worth, and I said, “Well without seeing it probably $900K-ish.”  When she asked me to come in and look I felt pretty comfortable with my “pencil sketch” assessment; that is until I got to the kitchen.  She hadn’t mentioned that she’d remodeled with traditional “Small Bone-like” white soft-close cabinets and glass inserts, “Brush finish” absolute black granite counters with a white Carrera marble island, subway back splash and commercial stainless steel appliances.  My estimate immediately went out the window and I’m whispering to myself, a million… this home is worth a million bucks maybe more.  Too bad she’s not selling…

Not long ago a home came on the market, in the “Salt Box” style; very unusual in Southern California.  This is where the front of the home is straight across, no indentations, like a salt box – think Virginia.   It was white clapboard siding with black shutters.  Inside the owners had used recycled farm boards from somewhere back East for the flooring.  Super cool.  Based on the pictures it looked nice, but once inside… incredible.  I sent it to every client I had, but alas it sold immediately.

I saw another home a couple days ago, a flip, that had the most interesting matte finish dark oak floors, almost walnut in color, but not at all glossy.  If I hadn’t gone into this home, I’d of had no idea because it wasn’t specifically called out in the listing description and the photos didn’t do it justice.  ‘Just looked like a dark wood floor, but it was way cooler than that.  Knowing inventory, this is what a Realtor does.  But it’s not only important for my buyers, it is equally important for my sellers.

When a seller starts telling me about all of the things they’ve done to their home, I use my knowledge of the inventory (the competition) to very often, boost the estimated selling price as my earlier example demonstrated or to bring that seller back to reality.  That decorative backsplash from the builder may have cost a lot when you bought it 20 years ago but that doesn’t mean much anymore.  Or your custom paint including the red dining room that was popular around 2000, isn’t going to get you more money today; or those multicolor balloon valances that make me want to sing, “The Heat Is On” and roll up my coat sleeves a la Miami Vice, may have cost a bundle back when, but you’d better take them down because they aren’t going to help you today.  I joke, but for every amazing home I see, I see ten others that will need my help to get my seller a fair selling price.  This isn’t the knowledge you can glean from pictures alone.  You have to get out there and see the inventory.  This is why being a Realtor is a full not a part time job, and why Realtor gets paid what they get paid: market knowledge, product knowledge, analysis and advice.  It can be a fun job, but like any job, it’s a lot of work and to be good at it, a whole lot of work and a whole lot of time.  Now if you’ll excuse me, I have a seller I have to help to declutter.  I just hope I can get them to pack away the Elvis ashtray collection, remove and replace their purple carpet and wash their dogs before I open it up to Caravan.

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What’s My Home Worth?  A Sensible Guide To Pricing A Home For Sale

When I am asked to meet with a potential seller to discuss listing their home for sale, the first thing I need to understand is their motivation.  Why are they selling?  Could it be there have been changes in the family or changes in employment? Perhaps it’s as simple as the desire for a different location, amenity or maybe it’s health related.  The second thing have to do is to research the property because I am going to have to give an opinion of value.  Keep in mind that an opinion of value for selling is not the same as appraised value.  My opinion is designed to get the home sold for the highest price, in the shortest amount of time, for the least amount of hassle.  An appraisal is designed to give the bank a general sense as to the value of the security (the home) for their investment (your loan.)  So how do I approach this process?

The obvious starting point is to look at the structure size and the property size and to find homes that are similar in nature.  This is called finding comparables or finding “Comps,” as you will often hear them referred to.  Comps are tricky business because no two homes are ever the same.  Still, it’s all we have to go on. Thus recently sold homes form the backbone of our property value assessment.  Closed sales however, only tell part of the story.

Circling back, we need to consider the motivation.  Why?  A seller’s motivation has a direct impact on the value of their home.  Huh?  Let me explain… If a seller is not in any kind of hurry, our approach to pricing is going to be different from a seller who needs to sell quickly.  Naturally I will argue that every seller needs to sell quickly since the faster sale invariably achieves the highest sales price.  That said however, a seller that is willing to wait indefinitely for that “Buyer that just loves my home,” may find that in fact if they wait long enough, “The One” will come along and pay the asking price.  Most sellers don’t have the benefit of time, or at least don’t have the desire to see the process extend over months or possibly years.  So motivation does have a direct impact of the value in the context of selling.

The next thing we have to consider are the pending sales.  These are the properties in escrow.  These are the sales that have taken place in the past 45 – 60 days.  They are important for the obvious reason that they are the most recent sales.  The problem here is that we don’t know how much they were negotiated for, rather only the asking price.  The number of days on the market will help us to guesstimate the sales price.  If a home is in escrow and sold in 5 days, we can assume fairly safely that the agreed price was at or possibly even above ask.  If that home on the other hand sat on the market for 120 days or longer and has already had several price reductions, it is fair to assume it did not go out at asking.

Next I will consider the competition.  How many homes might be an alternative to the one I am selling?  This is significant because the more choices a buyer has, the more compelling my pricing has to be.  Remember in the context of selling, competition (or absence thereof) will influence our pricing approach.

Once we have analyzed closed and pending sales and evaluated our competition, it’s time at look at absorption rate.  Absorption rate is found by taking the average time on market divided into the number of homes available; ie: 12 homes sold in 3 months, 12/3 = 4 are selling per month.  In other words, how quickly the homes for sale are being absorbed by the buyers gives us vital insight into how we will price ours.  For example if the avg. number of homes selling per month is 2 and there are 18 homes available, there are 9 months’ worth of inventory (18/2 = 9).  If like the earlier example the avg. per month is 4 then with 18 homes on the market the absorption rate is 4.5 (18/4 = 4.5).  It will take 4.5 months to sell all the homes on the market.  If our goal is to be sold in less than 60 days and the average is 135 days, we need to be priced lower or offer more than our competition.  By the way, the National Association of Realtors deems a balanced market, one not favoring buyers nor sellers, to be 6 months’ worth of inventory.  In our area I believe that magic number closer to 3 months.  California must always me in a state of perpetual shortage or else the value of Malibu wouldn’t be any higher than that of Dallas.  Notice that nowhere do I consider the “I need to get this much out of my home to sell,” in this discussion.  The “Need” discussion rarely has any relationship to the market value of a home, nor what it will eventually sell for.  That’s not to say it’s not an important consideration, it is, but it is not connected to my opinion of value.

By now I imagine by you’re about ready to stop reading and hire a Realtor, which is exactly what you should do.  As a Realtor I do all this analysis for you and more. Because it’s not just comps and absorption rate that determines how to price a home for sale, but also understanding the overall market, buyer demands and amenity/condition evaluation.  Putting all these elements into a blender is basically how you figure out a sensible, approximate price, but putting that approximate pricing estimate together with a marketing strategy is exactly why you hire a professional.

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Steve Ballmer, The LA Clippers And The Conejo Valley Housing Market

Twice a day the father of two middle schoolers, checks his favorite MLS site to see if anything new has come on the market.  He’s looking for the perfect place to call their next home.  It has to be on a good lot, preferably with a view and a great location.  It needs the right number of bathrooms and bedrooms and the kitchen has to be really upgraded since his wife loves to cook.  A pool would be nice but it has to have a three car garage and of course it has to be in the right school district.  They’re a busy family so remodeling is out of the question.  In fact, their current home was an older home when they bought it 15 years ago and they did all the work to fix it up, but that was life BC (Before Children) and they certainly aren’t going to do that again at this point in their lives.  This is pretty much the description of the move up buyer in our Idyllic community of the Conejo Valley.

Across town another couple, slightly younger, is searching for their first home.  They’re in their late 30’s, both working professionals and they have two small children approaching elementary age.  Since they aren’t selling a home with equity to roll into a new place, all the money has come through hard work, saving, a few stock options from his company and a couple of lucky investments.  They’ve saved 20% for a down payment and have finally paid off their student loans.  As professionals they work long hours, come home to spend a little family time and put the kids to bed.  Lucky for them, her mom is able to help with the kids.  They need a house large enough to accommodate everyone but they have no extra money to remodel after the 20% down nor do they have the time or acumen to do it themselves.  This is our typical first time buyer.  The traditional late 20’s/early 30’s first time buyer couple doesn’t buy in the Conejo Valley anymore.  It’s too expensive and their first job out of college simply doesn’t pay enough for them to qualify under the tight lending standards today, plus they have some pretty big student loans they need to pay off first.

Meanwhile, the homes in the Conejo Valley aren’t getting any younger.  In fact, there hasn’t been a sizable new home subdivision in more than a decade and there won’t be any either, the community is built out.  There’s simply no land left to build new homes.  Over the past several years, buyers looking for a new home had to settle for something totally remodeled or something “newish.”  The need for the desired “turnkey” home has been largely satisfied with an abundance of investor “flips.”  These were homes purchased at steep discounts at the foreclosure auction during the down turn of the economy.  These investors would take a blighted property, fix it up, putting in all the newest niceties and turn a handsome profit.  There were no shortage of flips from 2009-2013 but those days are over what with distressed properties (foreclosures and short sales) declining as percentage of the market every month.  So given this reality, what are our first time and move up buyers to do?  Simple, they fight with others just like them, over the scant number of updated, upgraded homes.  So while inventory is rising and sales are declining, buyers complain that there isn’t anything on the market and if it’s nice, they end up in a bidding war with someone equally qualified as they.  And this brings me to the Los Angeles Clippers potential sale to Microsoft Billionaire Steve Ballmer.

Prior to putting the club up for sale, Forbes had valued the LA team somewhere well under a $1 billion.  After all, the lowly Milwaukee Bucks just sold for the highest price ever for an NBA team at $558 million and in the Clippers, we are talking about a playoff team located in the 2nd largest media market in the country.  Not only have the Clippers been a playoff team for 3 years in a row, they have the core of their roster signed for the next 4-5 years and have a fantastic coach.  They play in a great arena, have a new state of the art practice facility and oh by the way, the new television contract is coming up for negotiation in 2015 and that is going to be a windfall for ownership with the NBA being the fastest rising sport in America.  So what has this all to do with our two couples and their struggle to find a home?

Imagine that after many months of home hunting, the dream house comes on the market for our move up couple with middle school aged kids.  It’s got most everything they are looking for; the schools, the square footage; the Viking kitchen; the cul de sac, pool, yard and oh yeah, an amazing view.  Along with their evidence of down payment and prequalification letter, our family of four write a full price offer even though the home is priced significantly higher than the comparable sales in the area suggest it is worth.  Since our couple have been looking and looking, they are not going to miss out on this place, it’s nearly perfect!  Then the unimaginable happens: 4 more offers come in, with some even over asking price.  What??  How can this be?  The ensuing bidding war is crushing for four of the five bidders since only one will win.  And that winning price?  Significantly over ask and eons from the last neighborhood sale.

You see like the LA Clippers, this home had location, desirable amenities and was up for sale in a market where there isn’t another comparable property available and it is unknown when the next might come on the market.  To this end, the home went to the person most willing to step up and pay way over what common thinking would suggest it is worth.  And like Steve Ballmer, the couple that won the bid, knew they were probably over paying for the home, but they didn’t care because value is in the eye of the beholder and they recognized that another opportunity like this was unlikely to come along any time soon.  They wanted it, had the where with all to pull it off and darn it, they weren’t going to miss this chance over a little bit of money.

Now what do you suppose the owners of a losing team like the Orlando Magic or even a big market club like the Philadelphia 76er’s are thinking?  They are figuring that if the Clippers are worth $2B, even though their arena isn’t as nice as the Staples Center and even though their roster isn’t stacked with young allstars under contract, rather it’s filled with maybe-one-day rookies and a bunch of bloated contracts of hasbeen players and even though they aren’t in LA, they are thinking their ball club is worth similar money.  Not as much of course, but maybe 10% less, say $1.8B.  And if one of those clubs comes were to come on the market, what do you think would happen?   How about nothing?  In fact maybe they don’t even get an offer since they are so overpriced no billionaire Wall Street hedge fund manager is going to touch them and the club just sits on the market for sale.  This is exactly what is happening in our housing market.  Homes that are not fixed up are coming on the market in droves so our inventory is swelling, but they are not what the buyers want nor are they priced to reflect the improvements required and thus they are not selling.  “I’m not going to give my home away,” they say.  Or “Look at the home up the street.  It sold for ’X’ and my home just isn’t as updated so it should be worth ‘X’ minus the upgrades.”  Of course they completely under value the upgrades and under estimate the cost to put them in having never done them themselves.  Coupled with the fact that no buyer is going to pay a price for a home that after the home has been upgraded by them, is only worth acquisition cost plus upgrade cost.  No.  They are going to want to pay below that because why would they do all the work and not have some sweat equity upside?  They won’t and rather will just wait for the upgraded one to come on and buy that instead.  So what is going to happen?  Sellers of non-updated homes will have to lower their price until it gets to a point where a buyer has enough upside potential to purchase and fix it themselves.  Until then, our inventory is going to continue to grow and prices of remodeled homes, continue to rise.

So did Steve Ballmer over pay for the Clippers at $2B, I think he would say no.  Did our move up couple over pay for the dream home?  They too would say no, because market value is after all defined as “What a willing buyer and a willing seller agree to without the presence of duress.”

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