Full Service for 1% March 22, 2006
I came home today and as usual, looked through the mail. There was the ordinary bills (yuck!), magazines, no fan mail (rats!) and the assorted direct mail pieces (which I normally drop in the round file). One piece stood out because it was a picture of a house with the words “How much is your home worth? Interested, I turned the postcard over and it went on to say “Full Service and Marketing for 1% commission fee” So what, there are all sorts of discounters out there looking for business. Not so fast. The discounter on this direct mail piece was a ReMax agent. Don’t know about you but this is the first outright solicitation that I have seen from one of the ”big brands” brazenly advertising a discount commission. Anyone else seeing stuff like this?
Why Google Base Matters
If you are building a real estate search site and you didn’t hear the warning shot fired by Google today, then you don’t really deserve to be in business much longer. While just about anyone building a real estate search tool should be concerned, I’m going to focus this article on my friends over at Zillow…
Zillow: be worried… Be very worried.
Here’s some background… Yesterday I was playing around with some google searches when I noticed a new box that shows up when you do a real estate search… as in [Seattle+real+estate]:
This takes you to a simple (and kind of ugly) results page:
Where you can also go to a simple (and not very user-friendly) map of listings:
My impression of Google’s latest features is that the data is VERY incomplete and the interface is ugly.
So, why should the people behind Zillow be worried?
Three reasons:
- You are not sticky. I’m a hard-core real estate user and after satisfying my Day 1 voyeurism, I’ve never had a good reason to visit your site again. I’ve talked with your staff about this and I know that you are not geared toward a user like me, but I recommend you find a way to create stickiness if you really are planning to be an ad-based media company. Why? See reason #2…
- A super-sticky site only has to be half as good at proving a home valuation to decimate your business. People who start their home search on-line do not start a home search by typing in [www.zillow.com] or even [www.realtor.com]. People start a home search (and especially people moving to a new city) by typing a query into a google search box. From now on, those people are ALL going to see Google’s offerings, and should Google decide to add a valuation tool, the tool will likely be “good enough” so that they never even both going to Zillow. Google only has to be good enough at providing a valuation in order to capture most of your market. Why? See reason #3…
- People are lazy. People don’t use your site to get the “exact” price of their home since you don’t even try to provide it. If you asked 10 appraisers to value a typical Seattle home, you would get 10 different answers and at least a 5% standard deviation in their answers. Even if you can improve your answers by 2% more to match the variability inherent in the emotional decisions associated with buying a home, that is still not good enough. Don’t waste much more time trying to improve your appraisal methods. You’re good enough and soon others (like Google?!?) will have a service that is good enough as well. Instead, find something sticky. You have a very talented team, so I doubt you’re suffering from lack of ideas. Nonetheless, it is clearly time to develop something that will bring me back to your site on a regular basis.
To everyone else creating real estate search tools, I’m not convinced that a vertical real estate search will ever beat Google’s offerings UNLESS they have a much better database of homes than Google. Right now, Google is seriously lacking in quality inventory. However, if the consumers go there (and they will), then you can expect brokers (and someday brokerages!) to follow with their listings.
I didn’t get the house…WHY?
When there are multiple bids, and the price of the property is bidding up over the asking price, the amount of downpayment is sometimes the reason why your offer is not accepted.
Let’s say a property is put on the market at $275,000 and the highest offer is $315,000. There is an offer of $310,000 with 50% down and an offer of $315,000 with zero down. Usually the seller’s agent will advise the seller not to take the $315,000 offer, because she does not expect the property to appraise. While one can buy a house with zero down, that does not mean that the seller is willing to take the risks associated with a zero down buyer.
It is the seller’s agent’s job to know not only what they can get in the open market for a property, but also what obstacles might get in the way of the sale closing. These days, when an agent lists a property at $275,000, it is likely a price higher than the last few sales in the area and a price that will appraise, with some effort. When it bids up over that amount, the seller’s agent must be ready for what will happen if and when it does not appraise. Often that means that zero down buyers will not get the house, if there are other offers with larger downpayments, even if the other offers are for less money. A common result will be that the seller will counter the 20% down buyer with the highest price offered, regardless of escalator clause considerations.
This points back to my post noting that the appraisal is done for the lender. If the property appraises at $300,000 and the sale price is $315,000, the lender does not participate in the shortage. If it is a zero down loan and the buyer has no cash, the buyer will need the seller to reduce the price down to $300,000 for the transaction to close. The lender will only give the buyer 100% of the appraised value, without regard to the agreed upon sale price. If the buyer is a cash buyer, often there is no appraisal at all, since the appraisal is ordered by the lender.
This issue has come up in the last two offers I have presented. In fact, I lost a client who did not get the property because another offer at 20% down trumped her zero down offer. When she asked me to be more aggressive in getting her offer accepted, I explained that the seller’s agent made it clear that the 20% down buyer was going to get the property because they had 20% down and the agent knew the property would not appraise. There was just no way to get the seller to accept a zero down offer, with the costs included in the price, no matter what I did.
Buying your first property with zero down and the seller paying the closings costs is clearly possible, and is done every day. But often the zero down buyer, with no cash to pay their own closing costs, is excluded from purchasing the most popular house in the most popular neighborhood that has multiple offers.
Offering the highest price is of no consequence to the seller, if you can’t close.
Appraisal Question March 21, 2006
While the buyer is paying for the appraisal, they are paying for it as part of their loan costs. The appraiser is hired by the lender and works for the lender and his/her purpose is to inform the lender. I just saw an appraisal of a property I know would sell at about $950,000, come in at $750,000. The appraisal was for divorce purposes and it was a unique, difficult to value property. Appraising is an artform, not a science. There is no one absolute number pointing to what a home is “worth”.
The reason there is an appraisal is in case you do not make your payments and the bank has to foreclose. If you are buying a house for $500,000 and you are putting $200,000 down, frankly, the appraiser doesn’t have to agonize over the process. The bank is clearly going to be able to sell it for the $300,000 they lent you to buy it. Now if you are putting zero down, the appraiser is on the line in the event you foreclose and the bank can only sell it for $450,000.
You need to determine what the home is worth. It’s great when it appraises and everyone loves those few times when it appraises for more than the sale price (except the seller). But if it appraises “right on”, don’t take that as some great feat. Different appraisers will get different answers. Appraising for different purposes, like to value for an estate or divorce when the house is not being SOLD, will often produce different results than when the appraisal is for a home purchase.
Clooneygate and Real Estate Blogs March 20, 2006
I just read a fascinating story in the the NY Times (subscription required) about a “post” by George Clooney on a liberal Blog, The Huffington Post. Seems that the Blogger, Ms. Huffington, cobbled together some responses that Clooney had made in news interviews and created the post. She then ran the content by Mr. Clooney’s PR folks for approval and was given the right to publish the post (as written by her) but attributed to George. When it was discovered that George did not really pen the message, all hell broke loose in the Blogosphere. According to the story, even confirmed loyalists to The Huffington Post were upset. Seems that the medium carries a significant representation of authenticity to it and despite the content of the message, the authenticity that the thoughts were the writer’s thoughts carries more weight.
So, you ask, what do we learn from Clooneygate as it relates to real estate bloggers? Be real. People reading your Blog are interested in the context of your thoughts as they relate to information. It is not the information so much as what you think about the information. Your spin. Your opinion.
All too much, real estate brokers and agents all want to look and act the same. Differentiation has, many times, been frowned upon. Just look at most agent web sites. Take the name and picture off and most of them look the same. Blogging is different because of the medium. Resist the urge to do things like everyone else, especially if it means copying information written by others. That is not interesting. You are!
Russ
Spring has sprung!!
It is the first day of Spring! Also my first born’s 22nd Birthday! Does it get any better than this! The attached photo is the view from my window today.
I would love some digital view photo tips from our in-house photo expert contributor. I can never get a photo of a view that matches the breathtaking reality.
Happy first day of Spring everyone!
East Lake Sammamish Trail to open tomorrow
I’m excited to see this latest addition to our regional trails system. We will now have trails that extend from Ballard to Issaquah. For anyone who’s run or biked on East Lake Sammamish, this will be a welcome relief from contenting with the very fast and very heavy auto traffic on that road.
This is also a good example about understanding Title Reports when you purchase real estate — particularly when it comes to existing easements. For those of you not familiar with the history, the Seattle Times has a good story about the events leading up to the opening. The abridged version is:
- Lakeside homeowners purchased property with existing Burlington Northern Sante Fe railroad easement – even though it was no longer active the easement remained
- Under the federal Rails to Trails act, King County purchased the easement for purposes of a recreational trial
- Homeowners sue to try and block the trail
- A federal judge rules that the former rail bed is appropriate for trail use
So ask yourself — should you ignore that easement that shows up in title just because it’s not in active use?
The property rights issue aside, I’m looking forward to trying out the trail tomorrow. One cocession they did provide for the homeowners was to add heavy fencing along the path. For others using the trails, I plead for you to remember that the adjoining homes are private property so please respect thier rights and stay on the trail. Happy trails to all.
The Living Barge Project March 18, 2006
Barge? Life? Art?
Enter the Living Barge Project.
The Living Barge Project is a large-scale, temporary public art installation by Sarah Kavage and Nicole Kistler that will be moored on Seattle’s Duwamish River for the month of April 2006. Native plants will be installed on an industrial barge, creating a temporary floating island full of ferns, shrubs and tree seedlings.
We want to use this project to create a lasting, positive dialog about the history and future of the Duwamish and the neighbors and businesses that surround it. We also want to raise citywide awareness of the Duwamish and invite people to participate in its restoration.
For years, I’ve been working with Sarah Kavage in a completely different context, so it is a lot of fun to see what she is up to in her “art” life.
Considering the opening day tour to the barge scheduled for April 1st is already sold out, this looks to be an extremely popular (yet temporary) art project. Check out the schedule of events to find out how you can experience the Living Barge.
Fremont: the Center of the Universe!
While it has nothing to do with the MIT Forum, I thought it would be fun to present and comment on the TurnHere video of the Republic of Fremont along the lines of Dustin’s post on Ballard.
The video is a lot of fun and gives a great perspective on the funky, hip side of Fremont, while also acknowledging Fremont’s changing demographics.
The Russian in me can’t help but comment on the statue of Lenin that sits in a parking lot of a local Taco Del Mar. Roger Wheeler gives a brief history of the statue on the Fremont Chamber of Commerce website:
Poprad, Slovakia is the place, 1978 the year our story begins. Emil Venkov won a commission to sculpt and cast a bronze statue of Vladimir Ilyich Lenin, Russian revolutionary leader. He worked for ten years, finishing in 1988 - just in time for the regime to collapse. Demand for Lenin bronzes was nil, with the exception of visiting American teacher Lewis Carpenter. He was intrigued by the bold and unusual design, Lenin striding out of - what - rifles, flames, wheat? Carpenter decided to take the statue home with him, a decoration for a Slovakian restaurant maybe. He decided big time. He mortgaged his house, bought the statue for $13,000, then paid $28,000 to truck it to Scandinavia and ship it via the Panama Canal to Washington state. Carpenter was killed in a car accident in 1994 and his mother, Lydia, was left with a seven-ton Lenin in her Issaquah back pasture. Lydia called Carpenter’s Fremont sculptor-friend, Peter Bevis. Bevis and the Fremont Artwalk Committee were looking for something big to kick off their event. Lenin was just certainly that. After much welding and grinding and banging at Bevis’ Fine Arts Foundry Lenin was ready to thrust his way into Fremont history, being unveiled at Artwalk amid much carping, griping, and fist banging from critics and former countrymen who remembered Lenin as something other than heavy-duty art. Lenin is for sale. For a mere $250,000 (obo), you too can join Lenin’s well-traveled history.
Fremont attracts many local artists there are quite a few galleries. One of my favorites is Frank and Dunya, which features art and collectibles from artists from all over the world.
Some other things mentioned in the video include:
- The weekly Fremont Sunday Market is an outdoor European-style Market has something for everyone!
- With the charm of an old home setting, the Fremont Coffee Company is one of the best coffee shops in Fremont (but definitely not the only great one!).
- The Fremont Troll that sits under the Aurora Bridge is definitely a fun attraction. Interestingly, a street that leads into the troll was recently named Troll Avenue.
- Sonic Boom Record is a great local record store.
If you must flip, flip responsibly!
(Editor’s Note: I’m extremely excited to announce a new contributor to Rain City Guide. Eileen Tefft is a Managing Partner with Ltd Real Estate and has over two decades of experience in the real estate industry.)
Hello Rain City Guide community,
This is a first for me. First post, first time ‘published’. I’m excited and feel it’s about time I got into blogging as a way to share information to readers interested in real estate. As a kid, my parents bought and held real estate as an investment. My uncle was a contractor, my grandfather a carpenter… In fact, my dear 82 year-old mother was still hanging off rafters, pounding in 2X4’s in her 60’s (she still would be if someone needed a rafter built! Today she’s cutting down trees with her new chainsaw!). I bought my first property when I was 22 and subdivided it at 32. It was fun and it felt natural.
I got 3 calls this week from past clients wanting to begin buying real estate as an investment. After several hours of discussions, I decided to write about the nuts and bolts of my experiences, the mistakes I’ve made and where I found the most success.
There seem to be two types of investment buyers. One that wants to ‘flip’ real estate (turn a quick profit by buying low and selling high) and one that wants to purchase and hold for the long term. I will address the first question here and save the second for another post which will include buying for cash accumulation vs. buying for a positive cash flow, buying using 1031’s and buying using Self-Directed IRA’s.
So, let me start first with the question I get asked most… “How can I buy a house, fix it up, make a profit, quit my job and live off the real estate returns like I’ve seen on T.V.?” (As seen in Will and Grace, The Flippers that Care and those alluring infomercials that promise making thousands a month by following their methods for real estate investing).
So, at the risk of being seriously discounted by those that have made a business of ‘flipping’, I’d like to share my thoughts with you. I encourage those of you that made a profit to share your systems with all of us, too. I have to abbreviate here so I don’t get boring, so consider this a starting point.
The Flippers
Here there are three obvious parts… Obvious, but not so easy to carry out.
- Buy at the right price
- Put in just the right improvements to maximize the cost-spent to the market value added.
- Sell at the right price.
Buying at the right price. Tricky tricky!
- Foreclosures
- Buying in a buyer’s market
- Buying property privately from a distressed buyer
- Buying property in dire need of an upgrade.
- Buying property that has some upside other than remodeling
Which of these methods work best could be a book all in itself! At the risk of being too abbreviated, however, let me tell you my thoughts on each of these purchases.
1. Foreclosures: There are real estate offices that specialize in assisting buyers to buy on the courthouse steps.
- You must pay cash
- The foreclosed homes are often in tough market areas
- The foreclosed homes are often completely trashed, i.e. one owner being foreclosed on took out all the rocks in the rockery, not to mention all the fixtures and cabinets prior to the sale
- You could have to wait one year before you know the title is clear. Investors I know that have purchased at foreclosure have shared horror stories with me about investing cash and then losing the home.
- And most of all, remember, if a home makes it all the way to the court house steps, it means that no one wanted to buy it conventionally, since most lenders will work with sellers if they’ll list properties. This could be a “short-sale” - when there isn’t enough money in equity to pay off all the debts against the house. Short sales could be the subject of another post, but I’ll just say that I’ve convinced lenders to discount their mortgages from $10-$100,000 just to avoid foreclosure, since lenders really don’t want the hassle of being property owners.
- Spending about 3 days each week just driving to all the properties being sold at that Friday’s sale. Remember, you can’t gain entrance to these homes as they are not listed.
- Lastly, because some real estate offices specialize in foreclosures, there are now too many investor buyers, and properties are getting bid up way over a profitable value.
2. Buying in a buyers market: Kitsap County and parts of Pierce County are some of the best places to look for buyer’s markets although they’ve both had price increases in the last two years. Check the statistics to see in which areas listing inventory is going up and sales are going down. That certainly isn’t King County at the present, nor any time in the foreseeable future… At least, that’s my opinion!
3. Buying property privately: Buy from family, friends or anywhere you know of someone willing to sell for less than market value. Remember, sellers want to keep their equity as much as you want to have it.
4. Buying a property that’s listed showing “needs a little work”: This option is finally one that you might be able to make some money on if you do it right. These are generally properties that have sat on the market because buyers couldn’t get emotionally attached to the house, whether it was poor curb appeal, roof leaking, 1910 kitchen, etc… Most buyers don’t want to do much more than change paint color, if that. Here, you’re buying with the intention of remodeling, which can be complicated. Be careful that the remodeling you do will pay for itself. Changing counters leads to changing fixtures which leads to matching those fixtures with the rest of the house, etc, etc. Then you have to sell. Even if you use our Fee-for-Service model for listing a house, you still will pay at least 7% in selling costs. so you have to improve the property 7% over whatever you need/want to earn.
5. Buying with additional upside: Here are some ways of doing that:
- Buying a home with unfinished square footage. Daylight basements and unfinished attics can be perfect for this kind of purchase.
- Buying in a location where the home is worth way less than others in the neighborhood. Possibly add new square footage, like a full master bath or larger kitchen.
- Buying in an area where you can split off a lot, rezone, short plat or somehow have a way to make a profit in addition to any that might be made by remodeling.
- Buying new construction at today’s prices with delayed closings.
My experience has taught me that a great purchases a buyer can make, with the most upside (if the asking price reflects the current market and not the future market), and the least investment and work (still keep your day job!), is new construction. Although this is not for the feint of heart, buying a home or condominium “under construction” that is three months-to-two years from completion has put a lot of money into the pockets of many investors. One would have to be able to put down the required non-refundable earnest money (which in today’s market might be 3-5%), and then sit and wait until the unit(s) are completed. The risk is that you are not contingent on so losing a job or moving from the area would not be a reason to get your earnest money back. The benefits? No payments until after closing, no after-hours labor or weekend working just to make a small profit. As long as you think your ability to get a mortgage will be there at closing and that the market is going to continue moving upward this should be a good investment for you.
Let me give you an example. A client bought a parcel with two houses on one lot. We “condo’d” it into two houses on two lots. We remodeled each home and sold just one for the purchase price of both. The client made around $50,000 with a small investment and a line of credit on their home over a one year period. At the same time, another client bought a presale condo six months from completion. This client also made $50,000 over a 6 month period and the client only had to put down $15,000 for this six month period
Of course, this requires the right new construction, and perfect timing… But I have found that, more often than not, there is money to be made in buying at pre-completion prices.
* A little FYI - Agents don’t like this form because they make far less in commissions and have to wait until closing to get paid.
I hope this post was valuable. Each of these issues could expand to a book! Making profitable upgrades is a science all it’s own as is finding the pre-construction projects that will make the most money.
Look for more posts from me in the future…
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