At the start of every year, Matt Hodges with Presidential Mortgage and I join Rick Moore for a quick hour talking about the Charlottesville real estate market. We’ve followed Rick to I think three different radio stations, and it’s always too short of a program to cover the content that Matt and I prep for.
Listen to the show, skim, ask questions. Matt is here. I’m here.
We covered a lot of ground from the market to building or buying, rising interest rates, escalation clauses, and a whole lot more.
Download the Podcast here.
Transcription Below
Rick:
Hey, good morning everyone. Thank you so much for being in here with us again this week, Sunday Morning Wake-up Call as we talk about real estate, focus on the local central Virginia real estate. Our guests today, Matt Hodges, Presidential Bank Mortgage, and Jim Duncan, a realtor with Nest Realty. Gentlemen, thank you for being here.
Matt:
Thank you Rick-
Jim:
Morning, Rick.
Matt:
Good morning.
The Market
Rick:
So just dive straight into it. Who wants to talk about projecting the 2022 market? Jim, you’re the realtor, let’s hear it from your side of things first.
Jim:
It’d be an interesting market as I said for the last many years of my career. This one’s interesting in different ways. It’s a really challenging market for buyers right now. Sellers are in a great position, if they can find somewhere to go to. A lot of local sellers are moving out of the area and taking advantage of the market. But from a buyer’s perspective, it’s a really challenging market. I think ’22 is going to continue to be so for a little bit. To give you some quick context, Rick, in January, 102 resale homes were listed in Charlottesville and Albemarle, excluding new construction. 69 of those went under contract in January and 90 are under contract or sold as of today. The average days of market was four and the median was four.
Jim:
That’s a hard market for buyers who are in a position of making super fast decisions about how they’re going to spend in many cases, the rest of their lives. We don’t have enough inventory in the market, we’ve been saying that for years, we still don’t. And we have a lot of buyers who love living in the central Virginia area and they continue to buy homes here and the prices are continuing to accelerate. So it’s going to be an interesting ’22. And sellers, I think that they’re in a great spot if they have somewhere to go on the other side.
Rick:
And Matt Hodges from the mortgage side of things, is there a different viewpoint?
Matt:
Well, I’ve got very similar thoughts, but I’ll expand a little bit on what I see in my market. I probably have right now two to three times as many buyers as I would traditionally have this time of year, in the beginning of what we call the spring market. And many of those are holdovers from last year, sometimes even from two years ago. So throughout this whole COVID phase, buyers have been out there trying to find their house and they haven’t been able to. They’re somewhat discouraged, some are not going to end up buying, but I do regular check-ins with them and they’re still active. So the demand is certainly there, but we’re losing a little bit of the supply. And then on that supply side, many of my buyers have a house to sell, but they’re frankly afraid to list the house for sale because they believe it’s going to sell so quickly and they won’t be able to find their next home. So they’re using mechanics to get into the next house, own two houses at the same time. And that’s perpetuating part of the issue with the supply.
Jim:
Yeah. To add a little bit of color to that also from my perspective. I’m working with quite a few buyers right now. And I think last weekend I was out with some buyers with whom we’ve been working together for about a year. And last weekend was the first time in a year that we showed three houses in a weekend, where every other time I’ve seen them, we’d looked at one and say goodbye. So I think that seeing two or three in a weekend is really good. I was with another set of buyers the other day and we were talking about how more inventory is starting to come to the market. And I said, “I’ve seen y’all twice in 10 days. Whereas previously it was once every three, four or five months.”
Jim:
And they’re looking in the City of Charlottesville as were the other ones. So it’s a challenging environment for buyers right now. But I think that as we near spring, I think that we’re going to see, I won’t say a lot more, but we’re still going to see more homes coming in the market for buyers to be able to choose from. And I think that’s going to be a good and healthy thing overall from the market perspective. But I don’t see the multiple offer scenario diminishing that much, unless interest rates really start to go higher than they are now.
Rick:
Sunday Morning Wake-up Call. Again, we are talking about the real estate market with the focus on the local real estate. Jim Duncan, Nest Realty, and Matt Hodges from Presidential Bank Mortgage are here with us. Matt, you made mention of sellers afraid to put their house on the market because it was going to sell so quickly that they might not be ready to actually sell it because they didn’t have a place to go to yet. Does this sort of inability slash disinterest to own two homes lead to more commercial buyers?
Commercial and investor buyers?
Matt:
Commercial, meaning cash offers, institutional buyers for investment property? Is that what you’re…
Rick:
Well, yes. Well, whether it’s cash, you’d have to explain that part to me, but for somebody who’s going to buy it and then rent it or do something else to it. Flip it and then sell it again, sort of thing.
Matt:
That is a huge issue. And that’s not an issue necessarily that’s specific to our area. It’s a nationwide problem where our asset managers are looking at real estate as an attractive source of return. And then just even individuals here in Charlottesville area who are looking for rental properties because they kick off good income flow versus the cost of the house. Now, if we look at the offers and some of the things that we hear about offers and acceptances, there’s often a cash buyer who wins a bid because it’s cash.
Competitive Real Estate Environment
Matt:
And if you come from the seller’s perspective, you don’t have any contingencies where a homeowner that’s coming forward has an appraisal, they want to do a home inspection, they’ve got financing that they need to get cleared. And all those things are contingencies to selling the house. A cash buyer at, or even below the sales price that a homeowner would come forward with is more attractive because there’s no contingencies, the deal is done. They’ve shown that they have the money to buy it outright, even if they end up financing. And what we understand is that roughly half of those cash buyers end up getting financing anyway.
Jim:
Yeah. So, hey Rick, let me add one thing to that. I think that one of the things that I try to hammer home to my clients, buyers or sellers is what Matt said is that, yes, it’s a cash offer, but you have to be mindful of the fact that just because they have the funds doesn’t mean that they’re going to allocate those funds to the house. A lot of them are going to get [inaudible 00:08:19], about half of them on average. So it’s hard for a buyer to compete against that. I’m going to completely fabricate numbers right here. But if there’s a house for 500 and a person with a loan offers 560, they’re mindful of all the stuff that Matt’s talking about. But somebody with cash can come in and offer 580 or even 550 or 540.
Jim:
And the seller would look at the offers and say, “Well, I like this loan, this package, but cash gives me a much fuzzier feeling.” So yeah, I think that that’s something that we need to be mindful of. But also from a seller’s perspective, protect the fact that it’s cash. Because even if the buyer goes to get a loan, makes sure that that cash transaction is not going to be side swiped by somebody getting a loan and delaying closing. Because a lot of this stuff happens after… when that seller that they’re counting on happening based on that timeline. So again, it’s a interesting and fascinating time to see what’s happening in our market.
Rick:
Jim Duncan, you mentioned that you believe the spring would bring a little more inventory in the housing market to our central Virginia area. What makes you say that? And is it going to be anything significant? Let me rephrase that. Is it going to be anything to take us back to relief on the stress that’s currently on the buyers? Or is it just going to be, “Oh, instead of seeing one house on the weekend, maybe you can see five?”
More Inventory Coming to the Market?
Jim:
I think it’s going to be the latter. I think that we’re not going to see… and frankly, we don’t want to see so many homes come to the market that the buyer has 15 or 20 or 30 to choose from on the weekend. Because that means that the market’s going to be flooded and it’s going to make prices stagnate and decline most likely. And that would mean something catastrophic had happened that cause inventory to go that high so fast. But candidly, part of it is hope because my buyers are exhausted and I think that we’re ready for more stuff to come on. But also we’re starting to see more stock coming on the market. Every single day, we’re seeing more coming scenes and more active listings, they’re hitting the market that my buyer clients are interested in. So I think that’s certainly a good thing. We’re not going to see a massive increase, but seasonally our market… every February, March, April, things pick up, more houses come on the market and it’s a good thing. But something substantive, I don’t think we’re going to see it.
Matt:
Yeah. Rick, just anecdotally with my business, I’m seeing contracts earlier January. I received one just recently that was a bit unexpected. So I’m seeing that there’s new inventory coming on and I’m seeing the social media posts that firms are putting on, not necessarily an individual realtor, but the firm’s listings, and I’m seeing some momentum there. I’m seeing listings that I know my clients are going to go out and see. So I’m hopeful as well, but all it is is anecdotal data at this point.
Jim:
Rick, I’ve written this real estate blog for, I think 17 years now. And I’m looking at a post from August 2011, talking about inventory finally dropping. So I think it’s something that… In 2012. Low housing inventory stinks in Charlottesville and Albemarle. So I think it’s something that we’ve been in this area of low inventory for a long, long time. And the only solution to that is going to be building more housing. And it’s very difficult to build new homes, not just in Charlottesville and Albemarle, but anywhere at a place where it’s going to be affordable, depending their various definitions of affordable. This can be affordable for many buyers. There’s no good or easy answer to solving the housing crisis that we’re faced with.
Rising Interest Rates
Rick:
By the way, if you want to read Jim Duncan’s blog and some of the articles there, you can go to realcentralva.com. Matt, I believe you’re the one who mentioned the possibility of rising interest rates. If we have such short buying dates, I don’t know that that’s a proper phrase, but if something goes on the market and within four days, it’s coming off the market through sale, what is expected to be a rising interest rate that actually brings trepidation to the buyers?
Matt:
It’s an excellent question. And I think we’re going to find out some of those answers. In the last two years, we had artificially low interest rates that was Fed driven. The Federal Reserve through their policies decided that they were going to be a huge buyer of mortgage backed securities. And that’s just a fancy way of saying, bundle a whole bunch of loans together and sell it on the open market. Well, if that open market is Wall Street, and it is some massive company that wants to own these mortgage backed securities and the Fed comes in and is even a bigger player, it pushes down the interest rates. While the Fed’s escaping that market by March, they’re also increasing the short term lending rates. So not the mortgage side, but on the home equity line of credit, credit cards, car loans, things like that.
Matt:
And they’re also going to let roll off of their balance sheet, older mortgage backed securities. And when I say roll off, that means that a loan gets paid off because the house sells. A loan gets paid off because they’re refinanced to a lower rate. Or the loan just hits maturity and there’s no more mortgage on that house. In the past, the Fed would buy a like security to replace the one that rolled off of their balance sheet. They’re not doing that anymore. They’re looking to treasuries.
Matt:
All of these things have a negative effect on interest rates. The interest rates have already pushed up since mid-December, when they were in the low threes, and now there’re four or on either side of four. My clients tend to be risk averse and conservative when they buy. They’re not pushing the debts income ratios that Fannie Mae and Fred Mac would allow. So they’ve got some room to absorb higher interest rates. But at some point it’s going to feel pretty uncomfortable to have a rate that is much higher than you could have gotten two years ago. You also have an issue with people who refinanced and now aren’t going to think so much about selling their house because they’ve got a great rate in the house that they’re in and they might renovate it instead of moving.
Rick:
Jim, I was going to ask the term velocity that I’ve run across when looking into current market issues, what does velocity mean in the real estate world?
Jim:
How fast the house comes in the market and goes under contract. And our market is a fast moving market. A lot of times the house will come on the market on Thursday or Friday, and it’s under contract within 24, 48 hours. Which is an extraordinarily fast time again, to decide whether you’re going to move your family to a place to be for 7, 10, 15 years. But I think that what Matt was talking about earlier that there’s so many buyers who are holdovers from ’21, ’20, ’19, that they’ve been targeting one or two neighborhoods. And so when that one comes on that fits, those buyers are going to move extremely first, something that it’s just how fast the house moves. And it’s one that Matt and I have talked before about just the fact that we’re talking about velocity in the housing market is hard because it’s not a commodity. Housing is not a commodity, it’s a place where people make lives and spend the bulk of their lives. So it’s a hard thing. But the short answer is, it’s how fast the house moves.
Rick:
Do you believe that raising the interest rate a half a percent or a full percent is going to produce velocity in noticeable amount?
Jim:
I think so. I think that it’s important to look at it in the context of… I always tell people, my wife and I bought our first house 20 something years ago, it’s rate was 8.8 and we were very, very happy. When my mom was selling real estate in the early ’80s, it was 18%. So historically four and five and six are still really low. But I think that we’ve been in this two and a half to three and a half interest rate environment for what, about 10, 12 years?
Matt:
[crosstalk 00:18:29] very long time.
Jim:
Yeah. So a long time. So today’s buyers, they don’t have that historical knowledge because they’re looking at what it is right now. I showed a house the other day that was, I think a 15 year old house, 10 year old house. And my buyer client said, “Huh, I couldn’t even vote when this house was built.” So the perspective is fairly narrow. But I think two or three years ago, rates spiked about a point, because if I recall Matt, you and I talked then. The rates spiked in part because the volume was so high of mortgages that they had to slow it down. And that costs things to really slow down for about a month or two. So I think that the short answer is yeah, I think that as rates rise, I think we’re going to see things slow down a little bit.
Rick:
Sunday Morning Wake-up Call here. We’re talking with Jim Duncan from Nest Realty and Matt Hodges from Presidential Bank Mortgage, to get insight and learn some tips coming up on the real estate market. Hang tight everyone, we’ll be right back.
Buyer Fatigue and Timelines?
Rick:
And thank you everybody for being here with us today. So, gentlemen, Matt, you mentioned earlier in the program about having some buyers still with you who had been around since last year and even some from two years ago. So I’ll let you start, and then I want Jim to step in. Have you had buyers who started out looking and then sort of faded away because they became disinterested or disheartened?
Matt:
Oh absolutely. The buyers that are out there tend to want to find their next property within a defined period of time. Sometimes it’s tied to when a lease ends, for example. That’s not as big a deal today. But it’s that constant emotional challenge where you’re going out there and thinking, “Wow, this would be perfect for myself, for us as a couple, for us as a family,” whatever the unit is, and it doesn’t happen and there’s discouraged buyer. And then it happens again two weeks later, and then they put it off for a while. What I’ve tried to do and what most good realtors are doing, as well as keeping the client engaged. It doesn’t mean pushing them towards a house that isn’t right for them, but understanding, empathizing with them throughout the process.
Matt:
So I just had touch points with all of my clients to check in with them, to see how they’re doing, to see where their mind is, to see what timeframe that they’re working under. I’ve been doing this for 23 years. Love what I do. And a client may not be a client next week, they might be a client next month, next year. And that’s perfectly fine. Let’s just make sure that their needs are met and that they don’t get so discouraged about the marketplace that they divorce themselves completely from finding their next home.
Rick:
And Jim, how about on your end? Because Matt makes mention about somebody wanting to… or one scenario is, a couple possibly wanting to find a home before the lease ends and that maybe not being an issue now, if the velocity is rather high and home selling within four days on the market. But my image in my head is, “Well, gosh, aren’t you taking a house that has things you don’t want because you need a house because your lease is about to end or you extend your lease.” So what’s what you are seeing on your end versus Matt’s version?
Jim:
Very similar. I had one buyer years ago I think of frequently at this time of year. He would come out of the woodwork every year, his lease would come up for renewal in March or April. And we’d talk in January, February, we’d look, we wouldn’t find anything. And he’d renew his lease. And took I think three or four years to find the right place. And he’s happy there. But I think it’s… one of the things that we’ve seen in the pandemic is that there’s been a flattening of the market, if you will, where it’s still very seasonal. But I’ve talked to a lot of realtors and November, December were some of the busiest, November, Decembers we’ve ever seen. There’s people who just, they had to buy something. But I think it’s also something that I’ve said to my buyers for years, that every buyer makes compromises, but it takes time to figure out what the compromises are that you’re willing to accept.
Jim:
I don’t want anybody in a perfect world to call me up in February and say, “I need to buy a house by April 1st because my job starting.” That’s not a good scenario. The ideal is that someone will move here, rent for six or nine months and use that time to find the right place. Because there is a much greater chance of the right house coming in the market in six or 12 months than in six or 15 days. So again, I think it is something that it requires a deliberate and diligent practice to find the right place. But yeah, I think that there’s a lot of buyers out there who are frustrated because they’ve been looking for 3, 6, 9, 20 months for the right place.
Increasing Prices, and Real Estate Assessments
Jim:
And prices have been increasing… every month prices go up, so it gets harder and harder for some people to buy. But the market is doing what the market’s doing. So I think what I advise my buyers is… and it’s hard for everybody, frankly, is to be as patient as they possibly can be, make the best offer you feel comfortable winning or losing on that house. And if it works, awesome. And if it doesn’t work, that wasn’t the right house. And sometimes you make the offer you’re comfortable winning or losing. And if you lose, you move on to the next one, when the next one comes.
Rick:
Quick, follow up to that. And I realized that real estate sales and purchases are the specialty for both of you, but Albemarle County real estate assessments came out recently, correct?
Jim:
Yep.
Rick:
So I’m curious what effect that would have on sales and purchases and rentals.
Jim:
I don’t know. It’s hard. For me, I think the assessments one, they are by code, they’re supposed to be 100% of market value. But I think from a rental perspective, if the property owner’s mortgage goes up because the taxes go up, there’s a reasonable expectation that the rent will go up as well. So again, I think that as things get more expensive, that they’re going to pass it on to people who are paying the rent.
Rick:
Does that drive more people who’ve been renting out to seeking to buy instead? And I’m not talking about students or grad students.
Jim:
Does higher rent drive them to buy?
Rick:
Yeah.
Jim:
I think that for those who have the life stability to know they’re going to be somewhere for four to seven years, I think that buying a house could be the right decision for them. They should at least have the conversation with a good realtor and with a great lender like Matt, to figure out whether that scenario would work for them. But yeah, rents are… I looked at one rental for a client the other day who’s going to rent, and then is going to buy. And I was looking on Zillow at their rent and it went up like 43% in three years, which is stifling. So I think that assessments are really going to affect people on all areas.
Matt:
I’m seeing quite a few renters who are buying their own property. One of my clients went under contract and she was paying, let’s say roughly 1000 in rent, and she’s going to be paying 1250 in a mortgage. And that’s perfectly comfortable for her. And she’ll have equity, and she’ll have building equity over time. She’s comfortable in that property. And the seller was ready to cash out at that point. I’m seeing that where there’s a direct contract between the two and sometimes it never even hits the MLS marketplace.
Rick:
Interesting.
Jim:
Which frankly is a great solution for the landlord because they get to sell the property to somebody that they know is good from a buying perspective. And the landlord does not have to make needed repairs and the tenant knows all the things that need to be fixed and they’re good with it. I’ve represented a buyer many times in that scenario, it can be a win-win for everybody.
Staying Unemotional During the Buying and Selling Process
Rick:
Jim Duncan, realtor at Nest Realty and Matt Hodges with Presidential Bank Mortgage here with us today, as we talk about the real estate market. So Jim, I’m going to start with you, here on this question. For a buyer in any market, but especially in today’s market with these rapid purchases, how does somebody stay unemotional in making this decision that both of you have already identified as being challenging to do on a quick basis for something, a home that these folks will probably live in for eight to 15 years or longer?
Jim:
There’s no easy answer or method to it. My role is to be the unemotional detach advisor and council in that instance and to empathize and be mindful, but not share the emotions [inaudible 00:29:46]. It is hard. I think it’s hard, whether you’re a buyer or a seller. A lot of the sellers are having multiple offers and they… if you’ve got 8, 10, 12 offers, that can be an emotional process. Because you want to sell the house to 10 people and then you know that you’re disappointing nine. And if you’re a buyer, I think it’s a very difficult situation because this is the place where you want your… if you have kids, it’s where you want your kids to go to school. And if you don’t have kids, this is where you want to walk downtown or farm or whatever, live your life.
Jim:
And I try to help people as much as possible detach. I tend to say just deliberately flippantly, “It’s just a bunch of sticks and bricks. We’ll find another one.” It fits all the needs. And then once you get it under contract, then we can sort of let some of the emotions in. But it’s also, as Matt well knows, things happen between contract and closing that I try to stay as unemotional as possible and reflect that upon my clients until closing, because I’ve seen… Any number of things can happen that can throw something side ways. But yeah, it’s an inherently emotional and disruptive process on many, many levels.
Rick:
Matt?
Matt:
Yeah. So I tried at this point to do an intake interview, if you will, via a Zoom, so I can put a face to a name, to a voice. And I try to find out what their wants and needs are and to empathize and to hear the emotion at that point. And then I very much try to keep the project of them buying their home on a track that does not involve emotion. I don’t want them over paying for a house. I don’t want them to get overly in love with a property that they may or may not win under contract. I will put together a worksheet of where the top of the range is of what they’ve told me, either payment on a monthly basis or purchase price, knowing that anything below that is going to be comfortable for them. And we talk about that.
Matt:
I say, “I’m not giving you this number so that you go to this point. I give you this number so that everything below it is going to feel comfortable,” and try to do it in a very unemotional way. I do recite back what they’ve talked to me about, what their goals are, so that I can get those things accurate and try to remove some of the emotion, we’re talking numbers here. So I agree with Jim. I think that the less emotion we can put into the process, the better our clients are served.
Agent Fatigue
Rick:
Jim, we were talking about Matt experiencing buyers coming and going over this two year time period, some of them sticking around, some of them stepping away and then coming back. What about buyer agents? Because I would think that it’s just as difficult to in this market of looking to find something, showing properties, being one of, I think you said 10 offers with nine who are being turned away. What is that like? If you don’t know, then you must know a colleague.
Jim:
Yeah. I think that any active agent in this market is writing offers that are not going to win. And it’s exhausting to write 4, 5, 6, 7 offers for buyers that don’t win. But that’s what we do. I think it is just… Yes, it’s exhausting. But to the previous point, I’m not being emotional. My emotion or exhaustion is irrelevant. Each time I need to do the absolute best for my client and present the best possible offer to the seller. But yeah, there’s no way to spin in a great way. But the best way I look at it is, every offer that I write for my buyers that doesn’t get accepted, they are better at writing offers. And so they take the feedback…
Jim:
I try to get feedback from every agent whenever I write an offer that doesn’t get accepted. Was it price, was it cash? Did the other buyer waive home inspection? Whatever. I try to talk to the agents to see how I can strengthen the offer for this buyer and for the next one. But yeah, there are… I haven’t looked at the numbers in [inaudible 00:34:42] in a little while, but I saw a headline the other day that said there are more realtors than there are listings in the country. So you have a lot of agents who are new, who don’t have experience writing offers. And so that’s going to certainly increase the number of people writing offers right now.
Rick:
Well, let me ask you real quick, because we have a break coming up in 60 seconds. I would’ve thought that the exhaustion would weed out some of the part-time agents, but you said that there are a lot of real estate agents. Does this exhaustion not weed out agents?
Jim:
I don’t know. Objectively, I think it should, because you need to be doing a certain number of transactions a year to be competent. But I think that if you are doing it as a hobby and you need one or two transactions a year to pay your side expenses, your fun expenses, then it doesn’t matter if you’re writing off or not winning because it’s not a living, it’s not a practice. It’s the hobby that you do on the side of your real job. So I don’t know. I think it depends on what the buyer’s motivation is.
Rick:
Sunday Morning Wake-up Call here. Our guest today, Matt Hodges, Jim Duncan. You can also go to Jim’s blog at realcentralva.com for more information on our topic of the day, which is real estate, a little focus on local real estate in central Virginia. Hang tight everybody, we’ll be back for another 20 minutes. Be right back.
Rick:
All right, everybody. Thank you once again. Keeping up your interest on local real estate with Jim Duncan and Matt Hodges. Gentlemen, there was something I didn’t know anything about until the both of you mentioned this as we were preparing for today’s show. Buyers writing love letters to the home sellers. I’d like to get both perspectives. And so I’m going to start with Jim.
Buyer Love Letters
Jim:
So buyer love letters. I think that many… I’d say most buyers who have been active in the market for the last two to four years are familiar with the concept of writing a letter to the seller, identifying why you are the best buyer for their home. Whether it’s, you saw that they went to UVA and you went to UVA school also. And so they should sell you their house because of that. Or if they have two kids and you have two kids or whatever those commonalities are that you want to convey as the buyer. I think last year, the National Association of Realtors put up some guidance saying, “Don’t do these” because it opens a pretty broad door to potential for unfair housing violations, where a seller chooses one offer over the other one based on something other than the merits of the offer, whether it’s sex or race or whatever that opens up the potential for that happening and for the perception of that happening.
Jim:
So as of this year, I’m requesting all of my sellers to allow me to put in the agent modes in the MLS, no buyer love letters. It clutters up the offer process to be blunt. If you’re looking at eight or nine or 10 offers or even one, and you’re also dealing with emotional offer letters that’s saying, “I’m the best buyer and this is why,” it makes it a much more difficult process.
Jim:
Last year, before I started into this policy of no buyer love letters, we had five or six letters on one. It was harder for my sellers to look at the merits when they’re considering the emotional component of each buyer in each letter. And I had one last year also, a listing that the buyers wrote a letter to my sellers, which I don’t remember what the letter said. But the buyers cat also wrote a letter to the seller cat. [crosstalk 00:39:18] cats should have their owners let them buy the house. It’s laughable, but I think it’s… well, just full stop. It’s laughable. But I think it just makes it a more difficult process for everybody because the perception is the reality. And if you chose an offer because of you like this person better, objectively you might be choosing for the wrong reason.
Rick:
I laugh because my wife is a member of one of those… and I don’t know the proper term of it, but one of those free, F-R-E-E, free items in your local neighborhood thing. “Oh, I don’t use this anymore. Would anybody like it?” And somebody else can say, “Oh, I’m in need of that.” Or, “Oh, mine broke. I’d love to have that.” And you put it out on your doorstep and somebody comes and claims it. And the rules of that are, you can either put your name in and the seller or giver, I guess, in this case, draws numbers because you’re not supposed to decide, or you can decide by saying people saying what their reason is for wanting it. And you can do it that way, which is what the whole love letter thing is making me think of. “Oh, I love pink. I wear pink everywhere. I’d love your unused package of pink socks.” I get a laugh at it every time. So Matt, back to love letters, what have you seen in the mortgage aspect of love letters?
Matt:
So, unfortunately I saw a love letter last week on a ratified contract that my client won. I was not aware of the love letter in advance and I cringed when I saw it attached to the contract. I very much agree with Jim that it’s really a fair housing issue. You do not want to come across to say to a seller, “I’m just like you, I would fit in really well into this neighborhood.” You can read a lot into those comments and none of them are really good. You should be evaluating the merits of the contract placed in front of you. And frankly, sellers have the ability to Google, to go into social media and do research if they wish, lots of things are out there in the public domain about buyers and sellers. If I were talking to a buyer and they brought this up, I would absolutely discourage them from putting any type of love letter attached to a contract.
Jim:
Beyond that… Sorry to interrupt. But everybody Googles everybody.
Matt:
Yeah, exactly.
Jim:
Whether there’s a letter or not, everybody Googles everybody in a transaction.
Matt:
There was a cat that I saw on social media this morning. The sellers could not take their cats to their next home, I think it may have been a condo or something like that. So the cat conveyed with the house.
Rick:
Oh my.
Jim:
That’s amazing.
Matt:
The buyers took the cat. They love the cat. Anyway, just thought it was an interesting point.
Timing for Buying and Selling Homes
Rick:
All right. Local real estate tips and oddities with Jim Duncan and Matt Hodges. We were talking earlier, Matt, you mentioned, I believe you were the first to mention about some sellers sort of withholding or going slowly about selling a home because of the difficulty or concerns in buying a new one because the homes were selling so quickly. But if someone does want to sell their current home before finding a new one, how do you make this work? There’s got to be ways.
Matt:
There are lots of ways, not all of them work for all buyers, but I try to explore with the clients that want to do something like this. What are legitimate ways that Fannie Mae or Freddie Mack or Ginnie Mae, one of the people that provide the rules for us, they say is an allowable mechanism? So for example, you can’t take a credit card advance and use that as your down payment because it’s not secured to anything. So we discuss things like putting a home equity line of credit against the house that they own. Let’s pull the equity out of the house in advance of selling it, to use that as a down payment. Let’s talk about the bank of mom and dad as a gift from a parent to a child, you can use that as a down payment, perfectly acceptable.
Matt:
There are ways to access, not liquidate… and by the way, I’m not a financial advisor so when I throw these options out there, I always include, you should really talk to your financial advisor about these things. But you can extract money in the form of a loan from your 401k. Notice I didn’t say liquidate it because I’m not a fan of liquidating stocks or mutual funds for someone’s retirement to buy a house. But if there’s a mechanism to borrow against it, which will then get repaid when they sell the house, that’s a legitimate source for a down payment. So we try to explore with a client who does want to buy that next house first, and they don’t have the net proceeds from the sale of the current house, how do you do that? How do you extract money out of the equity or talk to a family member or use your employer’s 401k? There’s quite a number of options that we can look at.
Valuing Homes
Rick:
Question that I always wanted to have answered. And we’ll start with Jim and then let Matt step in. So Jim, I believe you used the number 500,000 earlier, we’ll go back to that. I buy a house for $500,000. What is the value of the house a week later after I own it? Does it go up? Does it go down? Does it stay the same? Is it like a car where the car depreciates?
Jim:
I don’t know. I think it depends. I think that it’s something that if you buy the house for 500 today, it could be worth 480 tomorrow, or it could be 515 or 520. It really, really depends. But I think it’s something that, again, I’d look at it through the lens of, if you pay 500 for that house and you are happy there and your family are happy there, then it was worth it. So I think it really depends on what your intentions are. But yeah, I think on the flip side when a house comes to the market that first couple days, if the house comes on at 500, there’s no way to tell what that value is, because there are so many buyers out there that if it goes on the contract in the first week, it’s probably going to be valued, market value at 500 or 520 or 530 or 540, whatever that buyer number nine is willing to pay.
Rick:
But what if it stays on the market for longer than a week? What if I’m the seller and I put it out there and it’s on the market for two weeks in today’s market?
Jim:
I won’t put a number on it, but I think that the buyers will see that that house has been on the market for two and a half or three weeks, and they’re asking $500K and the buyer’s going to perceive that it’s overpriced. Because I think that in this market right now, most houses… will say most, will go into contract in under 15 days, which is extraordinary from an historical perspective.
Matt:
Hey, Rick, there’s three answers to your question. Let’s just pretend I’m an economist and I can give as many answers as I want. [crosstalk 00:47:48] looking back to around 1920, every 10 year increment, you see house appreciation. So the house that you buy today at 500,000, 10 years from now is going to be worth more. Obviously you got to put an asterisk next to that because you truly don’t know. But if history is any guide, it will be worth more. The second answer is during this velocity timeframe that we’ve talked about of COVID last two years, houses have gone up higher than list price and ratified, and then sold again later or refinanced again later at a higher value.
Matt:
So how long does a temporary measure like COVID occur? Well, we think it’s at its end. We don’t think that there’s going to be as much of a pandemic, we think it’s going to be more of an endemic at this point. And then the third answer is, well, we’ve already had the appreciation. So what you’re buying at right now, figured that if you try to sell in the next two or three years, you’re going to take a loss, especially since you need to think about the closing costs, the commissions, et cetera. So those are the three answers. But if you’re holding it long term, I think that house at 500,000 is worth more in 10 years.
Escalation Clauses
Rick:
If I’m buying a home… and Matt, I think I already know the answer to this from you because you touched on it a bit earlier. But if I’m buying a home or trying to buy a home, tell me about an escalation clause, because I want to know if I’m… because there are many people, if you go to an auction, people buy on eBay all the time now and you put your eyes on something and I’m going to it for $100, and then somebody comes in and buys it for $102.50 and you’re like, “Damn it.” And suddenly you’re buying it for $105 and then somebody buys it at… and suddenly you bought it for $145.95. And you’re like, “Oh, damn. I really only wanted to pay $100 for that.”
Matt:
I’ll give you the layman’s understanding and then defer it to Jim, because Jim actually writes these contracts. So a listing comes on, my buyer says, “I am willing to bid over it as my starting price, but I know that’s only the starting price.” I’m also going to write a clause into the contract that says, “I’m going to go up by 1000, 2000, 5000, whatever the increment is. I’m going to take steps up, comparing myself to other offers that come in. So my offer is at 500, there’s a 505. Well, I’ve got an escalation that goes over 505. So I’ve now beaten that potential buyer, unless they’ve got an escalation clause.” And it plays against one another until the highest and best offer wins the day because the realtor working with their buyers have both a starting point and an escalation clause where they cap out at, that math should produce the winner. And you should have realtors who are honest, and there are, that do this process appropriately so that the proper person wins the bid at the end of the day.
Rick:
Well, Jim, do you know any honest realtors, let’s start there? And then you can get in into the escalation clause part.
Jim:
Ha ha. Matt actually answered it really, really well. And I’m going to echo that and then add some different color to it. So yes, you can ask for 500, one offer goes to 540 and you have another one with the escalation clause and they’ll go to 545. The one for 545 could be the highest and best offer. But I’ve got this reasonably complex spreadsheet that I’ve put together over the years, that looks at the other variables in the offer. So if we’re looking at 500 starting, 550 is the highest price, has their loan that they’re putting 5% down. And then I’ve got another one for 540 that is a loan with 20% down. And I might have another one for 537 that has no home inspection. So there are so many variables in there that yes, the highest price in might be the one.
Jim:
But I think that, one, I’ll say this, the active realtors that I work with every day and Matt works with them also, for the most part, they’re awesome and honest people and their role is just to put out the best offer for their buyers and their seller that they can do. That said-
Matt:
Yep. I agree.
Jim:
… trust and verify the clause that many of us use says that not only will… 500, 545 and 550, if that offer goes into 550, per contract, the ratified price will be 550 so long as the seller produces… I always redact them when I’m a seller, but produces the other offer that forced it up to 550. So it’s yes, we trust that it actually went to 550. And we also look at the other offer to verify that it did in fact have a bonafide offer. But there are so many variables, Rick, to go into it that, again, someone could offer 580 with a 5% loan and someone could offer 540 cash, I might be inclined to advise my seller to go with that 540 cash, because we know that it’ll never appraise for anything north of 550 or 530. So the escalation clauses are about one piece of making that competitive offer.
Rick:
And just to follow up, I would think that… well, certainly I’ll say Jim Duncan is an honest realtor. And I would think that in today’s social media world, there aren’t very many sleazy realtors on the market because word gets around pretty quickly on almost every person who is not very honest with their trade, whether that’s real estate or contractors or people on the corner selling girl scout cookies. So just a few minutes left.
Good Agents
Jim:
One of the privileges that we have in Charlottesville is that we’re a frighteningly small town and that the realtors, the good ones, we’re going to work with each other many, many times over the years, which I think is a real asset and privilege to how I practice. Other markets… like we have an office in Fredericksburg, Nest does, and some of our larger markets, agents might work an entire career and never do a transaction with the same realtor twice, which is an astonishingly foreign concept to me, who has now been doing this for 21 years. And I’ve worked with the same realtor sometime 10, 12, 15 times over the years.
Jim:
So for people coming into Charlottesville, I think that one of the assets that we have is that the good ones know the other good ones. And we can practice on a more human level and work things out that I would perceive and assume often wrongly, but assume that other markets are more pure transactional, and you don’t have the opportunity to work things out. So it’s something that for me, is kind of comforting and nice to have a small town like we do. It’s really kind of nice.
Build?
Rick:
About 60 seconds left gentlemen. If I can’t find a home, should I go looking for land and build a home?
Matt:
I’m seeing a lot of clients who are renovating their existing house. I’m seeing clients who are looking at building new. Trying to find contractors to start in a reasonable timeframe is very difficult right now. It is a process you can go down, but realize you need to invest time.
Jim:
Really fast, if you contract on a piece of land today and [inaudible 00:55:58] custom build, you might be looking at an 18 month process from contract to close. And at that time, interest rates are likely to go up, construction costs, labor, everything is going to go up. So you could be contracted for 700 today, and it could be eight or 850 in 18 months. So one, it might be the right thing for the right person, the right solution. But I think it takes the right time and diligence and patience, and gut and money.
Rick:
Wow. Sunday Morning Wake-up Call. Jim Duncan, realtor at Nest Realty. Well recommended and Matt Hodges, Presidential Bank Mortgage. Gentlemen, thank you both for being here very much. Appreciate your time, your efforts and your work in the community.
Matt:
Pleasure always.
Jim:
Thanks Rick. Thanks Matt.