Wednesday, February 25, 2015

This Week in Boulder Real Estate [Tales from the Trenches]

by Osman Parvez

A few quick updates for you. 

1. No Meetup
The Boulder Real Estate Meetup scheduled for tomorrow is cancelled. Unfortunately, I've got a cold. The topic was an in depth review of the bidding wars which have occurred so far this year (all of them). The analysis I prepared for the meetup will go out in next month's research report instead. If you aren't subscribed, sign up here

2. Bidding War Tactics
Sellers - when a listing agent presents you with the Colorado Commission approved Exclusive Right to Sell Contract, read §5.8 carefully.   

It states the following:

"When asked, Broker Will / Will Not disclose to prospective buyers and cooperating brokers the existence of offers on the Property and whether the offers were obtained by Broker, a broker within Brokerage Firm or by another broker."

In a bidding war, there are only a few legitimate reasons you'd not want your listing agent to disclose the presence and details of other offers. If you check the "will not disclose" box, you're forcing potential bidders of your house to negotiate blind folded and you're leaving money on the table.    

At a minimum, have a candid discussion with your agent about strategy. What's their approach for disclosing the presence and terms of other offers? Why? To what degree shall they share or not share information to help you obtain the strongest possible offer?   

If your listing agent claims that offers are always confidential, pretend you're from Missouri and ask them to show you. Here's the truth. Confidentiality is only mentioned under the mediation section of the Colorado Contract to Buy and Sell Real Estate. It's not even binding language, it's only a desired outcome if the you know what hits the fan.  

There is massive value in disclosing the high water mark in a bidding war. Buyers who have confidence that other legitimate offers are coming in will pay a higher premium for the property or remove contingencies to strengthen their offer. Buyers who feel they aren't getting the facts or are bidding against phantom offers will be less likely to offer their true "highest and best."   

Remember, trust is essential to maximizing value and is the single most important ingredient to successful negotiations. Read, Six Ways to Build Trust. p.s. For those agents playing games with non-disclosure and a lack of transparency to put money in your own pocket, remember your reputation is on the line. The chickens come home to roost when you represent future clients in future negotiations. The majority of transactions in Boulder are done by a minority of full time, professional agents. Treat your negotiation counter parties fairly and with respect. 

3. Looking to Buy or Sell?
I'm representing buyers at all price ranges at the moment in Boulder, Louisville, and Longmont - from affordable housing to +$3MM. Most of my buyers are flexible on terms, including the closing date and they're willing to pay a premium for desirable homes. Call me if you're thinking of selling. 
ph: 303.746.6896.   

I also have knowledge of several Boulder properties that will go on sale this year. If you're shopping for a home, feel free to call me as well. I may have a match for you. 

4. Private Sales, Transaction Brokerage and Integrity 
Private sales have a nasty habit of leaving money on the table but for personal reasons (divorce, job changes, death in the family, etc) an owner may want to quietly market and sell their property.   

If the property is a good fit for a buyer, I'll work with them to finalize the deal with the seller but keep in mind that if I have a existing relationship, I won't work as a Transaction Broker. I take exception to the Real Estate Commission allowing the TB status because there is no such thing as a neutral Realtor. It's an impossible burden and unrealistic of how human relationships work. With rare exception, I'm either representing the buyer or I'm representing the seller, exclusively. It's the only way to manage conflicts of interest and remain in integrity. I care about the deal at hand but I also care about the next hundred negotiations. Integrity and reputation matter, especially in a small real estate market like Boulder.

From HBR's Six Ways to Build Trust


In negotiation, as in all aspects of life, your reputation precedes you. A bad reputation can be a deal killer from the start, while a great one can help transcend an impasse. Effective negotiators realize that their reputation is not just a backdrop, but a tool.

5.  Team Building
Speaking of reputation, last year, we were approached by several agents interested in switching to Realty Unique.  

As you might imagine, we're a little selective. If you're an experienced agent looking to join a great team, have significant professional experience, and feel that your values align with ours, please contact us. We'd love to talk to you. 



----
Like this analysis?    Subscribe to our client research report.     
Want to get blog updates via email?  Click HERE.       
Ready to buy or sell?  Schedule an appointment or call 303.746.6896. 
You can also like our Facebook page or follow us on Twitter.

Your referrals are deeply appreciated.  

--
The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

image:  David Runer

Tuesday, February 24, 2015

Best Practices for Negotiation

by Osman Parvez
----
After yesterday's post on bad faith negotiation, here's one to point you in a better direction. Remember that sophisticated negotiations are not a yelling match, they're a chess game. 

Best Negotiation Practices for Listing Agents

Step 1: Analysis. This includes a deep review of the most recent and relevant comparable sales. It's not complete without an analysis of appreciation trends for specific property type, price range, and location. There is no short-cut, it requires analytic skills and market knowledge. 

Step 2: Strategy selection. Lay out recommended strategic options for the seller and the most likely results of each approach. There are risks and rewards to several common techniques.  

Step 3: Professional marketing. A sophisticated approach is to target all potential buyers; the internal sphere and external buyers. Professional photography, a well advertised open house, a private and public marketing period are essential components. Agents should personally invite high volume brokers and their clients to see the property. Make sure the property is listed on as available on the MLS for a reasonable period of time.  

Step 4: Communicate key information to interested parties about incoming offers. Provide supporting information (evidence) of the caliber of competitive offers. This dramatically increases buyer confidence and drives the purchase price upward while simultaneously reducing buyer contingencies and increasing the probability of a successful closing. Anything less is short-changing the seller and leaving money on the table.    

The use of selective transparency to increase trust is one essential component of Negotiauctions. Virtually every sophisticated high-end asset transaction is a negotiauction. Shut-down moves, which limits same side competitors to 3-5 parties, is another essential component. There is no benefit to more than 5 offers; it's a smoke screen. 

Step 5: If bidding is particularly active, we strongly advise our sellers to allow us to negotiate a gazumping provision into the contract. This levels the playing field. Otherwise, once sellers have signed the deal, they lose virtually all leverage over the process. If the buyer flakes, the seller eats the cost in the form of lost time on market and a tainted listing.

Step 6: Don't forget the 80/20 rule. A minority of agents in Boulder do the vast majority of transactions. We find ourselves negotiating with the same counter-parties again and again. That's why we provide all bidders with key information, including the high water mark.   This cements our reputation as a negotiator with integrity, not a self interested used car salesman. 

---


Note: We had a detailed discussion of buying and selling best practices at the last Boulder Real Estate Meetup. Missed it? Don't miss the next one. Learn more and RSVP.



----

Like this analysis?    Subscribe to our client research report.     
Want to get blog updates via email?  Click HERE.       
Ready to buy or sell?  Schedule an appointment or call 303.746.6896. 
You can also like our Facebook page or follow us on Twitter.

As always, your referrals are deeply appreciated.  

--
The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

image credit:  Elias Levy

Monday, February 23, 2015

How to Negotiate in Bad Faith [Tales from the Trenches]

by Osman Parvez


Bad Faith Negotiation 101

Step 1: Set an asking price well below market value in order to lure 100+ people to your open house. Don't put it on the MLS. 

Step 2: At the open house, brag about how the inventory shortage is allowing you to double-end million dollar plus deals. 

Step 3: When asked how your sellers feel knowing they left money on the table by not allowing an open market sale, say "well, that's their choice."

Step 4: Refuse to disclose terms of any offers to agents who submit, including the current high water mark or whether intended offers are competitive. Receive over a dozen blind offers, most of which are not competitive.  

Step 5: Advise your seller that they should choose the offer from your buyer - since you know this buyer the best and you're most confident it will close. Not knowing any better, the seller takes your advice. Neither buyer or seller understand what a Transaction Broker means.

Step 6: Refuse to tell the other agents who submitted offers anything about the winning bid. Hope they forget about it and move on. They won't. 

Step 7: Pocket the double-end. Continue to brag about how many offers you received and your sales commission. Hope nobody files a complaint with the Real Estate Commission.


True story. 


----

Like this analysis?    Subscribe to our client research report.     
Want to get blog updates via email?  Click HERE.       
Ready to buy or sell?  Schedule an appointment or call 303.746.6896. 
You can also like our Facebook page or follow us on Twitter.

As always, your referrals are deeply appreciated.  

--
The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

image:  Fabio Di Lupo

Friday, February 20, 2015

What Snow Storm? Go See the Fresh Listings [Get 'Em Hot]

by Osman Parvez


A storm is bearing down on Boulder this weekend, but if you're seriously shopping for real estate - put on your boots. You need to see listings when they're fresh.     

This week, 26 new property listings hit the Boulder real estate market. We culled the bad locations, refreshed listings, and other undesirables. Here are 12 worth seeing.  


Call me to schedule a private showing.  303.746.6896.



Attached Dwellings 




1301 Canyon Blvd 408 | $1,249,000 More Details 

If you're looking for a turn-key, luxury condo, this is a good option. The location doesn't get any closer to downtown. 1500 SF, two garage spaces, lock and leave.






900 Pearl St 207 & 209 | $2,750,000 More Details 

You won't often see a fire sale at the high end, not in this market anyway. The asking price was nearly $4MM last year and the owner paid $2.76MM in 2005. 4 bedrooms, 4 baths, nearly 4,000 SF and nearly 850 SF of rooftop terrace? Jump on it, now. Call me for a private showing at 303.746.6896.



3000 Broadway St 10 & 11| $698,888 More details 



Two units, one great location but probably most appropriate for an investor. Live in the top, rent the bottom or vice-versa. The location offers easy downtown access, the finishes... well, not so fantastic.








2850 E College Ave 309 | $424,900 More Details 


A solid choice for a CU student. Landmark Lofts are adjacent to campus and modern, which means Junior can focus on school instead of maintenance. Student density is very high in this location, but it's not the party side of town. Probably not the right choice for anyone else. 






Single Family Homes 




3674 Chase Ct | $559,000 More Details 

The large lot and updates are great. The basement bedrooms, not so much but it's liveable. You're on a street with little traffic and the house faces north/south, the outdoor spaces look pretty good. Martin Acres has seen a lot of activity this spring. Prepare for a bidding war. 




2485 Dartmouth Ave | $715,000 More Details 

This one is on the less busy, upper part of Dartmouth Ave or it wouldn't have made the cut. Interior isn't entirely dated, but it could use a refresh. The value is in the open space access, views, and schools. 









2715 Iliff St | $839,900 More Details 

We don't know about "coveted" but this is a solid location on Table Mesa. If you have need for 6 bedrooms, this could work for you. Interior is dated. 







4455 Chippewa Dr | $850,000 More Details 


A large ranch without a basement in Frasier meadows. Four bedrooms, three baths, and no stairs. With respect to valuation, we recommend carefully reviewing the comps and past history on the MLS before writing that offer. 





865 13th St | $850,000 More Details 

This was already under contract once and now it's back. The split layout and non conforming bedrooms aren't great, but the location is very desirable. Check for red cups in adjacent recycle bins, this location tends to have a lot of students. Lots of comments in the SPD, read carefully. 



3975 Newport Ln | $925,000 More Details 

Very quiet location in Wonderland Lake. Finishes could use an update. Easy access to open space and west of Broadway. We're not huge fans of a split layouts, most buyers prefer all bedrooms on the main or upper levels but this factor is largely offset by the location.







300 Evergreen Ave | $2,385,000 More Details 


A trophy in one of the best locations in town. Nicely updated and buttoned up. Comparable to Trailhead without the construction risk. We're taking clients to see it this afternoon, so will have more details shortly. Call with questions or to arrange a private showing. 

ph: 303.746.6896





----

Like this analysis?    Subscribe to our client research report.     
Want to get blog updates via email?  Click HERE.       
Ready to buy or sell?  Schedule an appointment or call 303.746.6896. 
You can also like our Facebook page or follow us on Twitter.

As always, your referrals are deeply appreciated.  

--
The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

image: Dave S.

Thursday, February 19, 2015

The End of Free Money [Make A Smarter Decision]

by Osman Parvez

After nearly a decade, the Fed has announced the end of its bond buying program and a return to normal activity. In other words, expect rising rates in 2015... eventually.    

When?  It's everyone's obsession and anyone's guess.   


The latest Federal Reserve meeting minutes have a fascinating discussion over the timing of tightening rates and signaling to markets. My suggestion is to watch for signs of a healthy labor market and for inflation indicators. Given the Fed's indecision, I expect rates will rise too slowly, not too fast. 

What's the Impact?
The answer depends on how the economy continues to grow in our region, when and how quickly rates begin to rise, and many other factors. 

Here's what rising rates looked like the last time around.

The Past
During the last real estate cycle, the Boulder market was impacted from top down. Higher end homes (at the time $1MM+) saw inventory rise and prices fall first. Eventually it trickled down to the middle of the market. At the very tail end of the cycle, the entry level saw a brief and shallow decline. 

When the top end of the market stagnated, some developers capitulated and liquidated new inventory at 40% off the original asking. The high-end slump lasted years and primarily affected properties without high quality views, proximity to downtown, or adjacent open space. These factors are anchor to long term value. Entry level houses saw prices fall around 5% and the drop only lasted a few months. 

Will history repeat itself? There is no clear answer.   

The Future
In the long run, Boulder real estate has performed very well compared to other real estate markets. I'm a believer. Not only am I focused on advising investment oriented buyers, I'm seeking investments for myself and my client-partners.    

While my "rating" on Boulder real estate is "strong buy," there is no certainty. No investment short of U.S. government securities are risk free but holding cash is a losing strategy.

Make a Smarter Real Estate Decision
If you're thinking about deploying capital in the Boulder real estate market, here's how you can best insulate yourself from the end of free money and rising uncertainty.    

1. Increase your margin of safety. Only acquire assets that are in solid, time tested locations. Do not take location risk. In other words, don't buy a high value asset in a location that has no track record. 

2. Buy mainstream properties with conventional layouts which will appeal to a majority of potential buyers. Two bedroom houses and one bedroom condos are risky when it comes to resale, unless there are offsetting factors such as protected view corridors or open space/downtown proximity. In general, buyers should choose two or more bedrooms for condos and at least three bedrooms for houses. Don't forget about storage. Almost everyone who lives here has three or more bicycles, camping gear, and skis/snowboards.   

3. Be ready to pay a premium for properties that meet the above criteria.   The inventory shortage is driving bidding wars for desirable assets. You need to know what's worth a premium and what isn't. Choose your Realtor carefully.

4. Don't skimp on due diligence for view corridors, easements, and regulations restricting expansion/remodeling. In Boulder, it goes way beyond zoning. This particularly applies to historic properties and houses on small lots.   Don't assume you can expand it or add a carriage house until you check current regulations. Longmont, Louisville, Lafayette, and unincorporated Boulder County are less restrictive.   

You should also get a sense of the trend for regulatory changes in Boulder. Talk to your Realtor, talk to developers, talk to the city planners, and talk to the neighbors. Whatever you do, don't tear down a historic coal shack and put up a basketball court.   

5. Understand Boulder real estate value indicators. Value investing is about knowing the real, or intrinsic value of an asset. There are clear north/south and east/west real estate value delineations in Boulder. For example; if you're buying to rent to students, proximity to CU is your biggest factor. If you're buying to rent to future Google Employees, you want to think about access to 30th and Pearl. If you're looking at the luxury market, aim for neighborhoods and locations that have a history of supporting those valuations. 

In my opinion, much of South Boulder - particularly Table Mesa - is undervalued. It has easy access to open space and great schools. The revitalization of Table Mesa plaza is something to keep a close eye on. Certain trophy homes in north central Boulder are trading for far more than they should and will see a substantial haircut to value when the market turns. 

Once clients know my background, they almost always ask for my "rating" on a property. Back when I was an analyst, the managing director of research insisted on strong buy ratings for what were obviously crappy stocks. Today, I don't have a boss breathing down my neck and no investment banking relationships to protect. Here's the truth: very few properties in Boulder are A+ investments. Most are B's and C's. There are many D's and F's, the dregs of the market that you should avoid at any price.   

6. Real estate is the only investment class that you live inside. The best investment doesn't always make the best living situation. This primarily applies if you intend to occupy the property as your personal residence. Most of the condos in Boulder have poor sound insulation. You'll likely hear your neighbors from time to time. If they are students, you'll know. Buy something that you won't outgrow in 5-7 years. 

7. Think about regulatory risk. Investors have been repeatedly burned by assuming that their project is "by right." Guess again. Whether you're building large or small, you're taking serious amounts of risk. Boulder has some of the most restrictive codes in the country and an intelligent, vocal, activist community. Talk to the investors who bought the old Robb's Music building next to Liquor Mart. Talk to the developers of Baseline Zero who are currently facing stiff community opposition (rightfully so, in my opinion). Note City Council's attempt to pass an emergency development moratorium (a favorite tactic) and the likelihood of a comprehensive development plan being pushed forward this year. 

8. Be patientIf you're buying, remember that selection will grow between now and early summer. Inventory is at record lows but it will rise seasonally.   Currently, too much money is chasing too little inventory. Some buyers are clearly paying a premium for sub par assets. In a bidding war, don't get caught up in the frenzy. Only engage when the asset is truly desirable.  

To help prepare for bidding wars, I show my clients the following: How many similar properties sold during the past twelve months? How many closed for cash? How many went above asking and by how much? This information gives a sense of what to expect in the coming year and increased confidence to walk away when things get too bubbly in a bidding war. Not getting that from your Realtor? Get a better adviser.

Sellers, remember that you don't want the highest offer, you want the highest price that will close. Be cautious with variable commissions to your listing agent. The real estate commission has recognized this as a potential conflict of interest, especially if the property was not offered on the open market (i.e. a "private sale."). See Commission Position #44. Ask for verification of funds. Consider negotiating a gazumping provision. Force your Realtor to use selective transparency to cull the herd of offers to no more than 3 to 5. If he shows up with more than 5 contracts, he's not doing his job. 

9. Watch for game changers. Like it or not, Boulder is experiencing rapid change. The Boulder Transit Village Area Plan has jump started development around 30th and Pearl. Google has announced a 3-4x increase in its workforce and a local campus right across the street from Whole Foods. Everyone is talking about the impact on real estate.   

Game changers are happening in other markets too. Note Longmont's redevelopment of the Butterball Turkey plant. It's a game changer in a market that's only a twenty minute drive from Boulder where home prices are often half the price.  

10. Choose your adviser carefully. Because barriers to entry are low, the real estate industry attracts a huge amount of rookies with little professional experience. Most last a year to two. The largest real estate brokerages prefer it this way because they churn and burn new agents for fees.   

Do your research on agents but don't put much credence on easily manipulated reviews on websites like Zillow or Trulia. The vast majority of my transactions, for example, are not on Zillow.   

Interview at least two or three agents. Talk to them about strategy, negotiation tactics, and market conditions. Make an intelligent decision.   
---


Meetup logo
The next Boulder Real Estate Meetup is February 26th. We'll be discussing market conditions, strategies, and much more. Join us! RSVP and learn more HERE.




---
Like this analysis?    Subscribe to my research.          Ready to buy or sell?  Click HERE to schedule an appointment or call 303.746.6896.

As always, your referrals are deeply appreciated.  


The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

image:  Pawel Loj

Wednesday, February 18, 2015

The Impact of the Expanded Smoking Ban in Boulder

by Osman Parvez

City Council passed an expanded smoking ban last night. Effective March 19, smoking will be banned at all Parks and Recreation and Open Space & Mountain Parks lands, all multi-use paths and 25 feet on each side of the paths, 25 feet from all transit stops and building doorways, outdoor seating areas at restaurants or taverns, the downtown Boulder Business Improvement District, the Boulder Civic Area, and the area surrounding Boulder High School. 

A map of the entire downtown Boulder smoke-free area is below.



The ordinance prohibits smoking and using e-cigarettes or electronic smoking devices. Violators will be subject to a maximum fine of $1,000 and/or a maximum of ninety days jail.

Community Impact

1. Over time, expect fewer panhandlers at downtown street corners and fewer groups of homeless people hanging out in parks or along the Boulder Creek path.  Downtown crime rates, particularly around the Boulder Creek path and the library will fall.  The downtown area will be a more pleasant and safer place to visit

2. Expect to see more transients hanging out in surrounding neighborhoods, particularly where significant pedestrian and vehicle traffic occur.   An increase in panhandling and petty crime will occur in East Pearl, Goss Grove, University Hill, Newlands, the area around Whole Foods, the 29th Street Mall, and the Table Mesa shopping plaza.     You'll also see more homeless hanging out in parks where a law enforcement presence is minimal such as Martin Park, North Boulder Park, and Scott Carpenter Park.

3. In coming years, the ban will be expanded.  

----
Like this analysis?    Subscribe to our client research report.     
Want to get blog updates via email?  Click HERE.       
Ready to buy or sell?  Schedule an appointment or call 303.746.6896. 
You can also like our Facebook page or follow us on Twitter.

As always, your referrals are deeply appreciated.  

--
The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

Tuesday, February 17, 2015

Boulder's Strong Demand and Record Low Inventory [Analyze This]

by Osman Parvez
----
Writing offers and getting nowhere? You're not alone. Record low inventory and strong demand is what you're up against.  

No happy talk and hand waving. We advise our clients with the facts about market conditions. It's the only way to help you make a smarter real estate decision. 

Let's look at the numbers.  

Boulder House Inventory



The chart above shows inventory of detached, single family houses in Boulder over the last twelve years. That bright green line on top? That was record high inventory five years ago. The dark blue line at the bottom? Last year.   

See that red dot? That's where inventory is starting out in 2015. It's the 2nd lowest point in more than a decade. The lowest point was the previous month. Look at 2012, 2013, and 2014's pattern. Note the trend. 

Here's another (cleaner) view of the same data. 



The grey shaded area is the average long term inventory for single family houses, by month. The green line represents last year's inventory. The pink line is 2015.

Last month there were only 94 homes on the market, compared to a long term average of 298. January's inventory was a shocking 68.4% below average.    

Inventory has started to rise seasonally but it's still far lower than last year. As of this writing, there are only 116 homes in inventory. That's 24.6% below what it was last February. 52% of inventory is available, the rest is under contract.  

Now, let's look at the demand side.

Boulder Sales Volume



The chart above shows sales volume. The green shaded area is the long term average sales volume, by month. The green line is last year's sales volume. The little pink dot represents this year.  

Sales volume during the whole of 2014 followed the typical seasonal pattern and wasn't far off the long term average. 708 houses closed, compared to a long term average of 778. That's a 9% decrease from the long term average. Given the ultra low inventory, we're surprised sales volume wasn't much much lower.  

Our Advice

-The median sale price for houses in Boulder last year was $685,000. These are not trivial assets. Intelligent real estate decisions are based on a deep understanding of market conditions and professional advice.

-Choose your adviser carefully. We've seen recent advertising by listing agents who claim that their professional marketing is the reason for the bidding war, even as they mismanage the negotiation process and leave money on the table. Don't be fooled. It's Mr. Market. The best negotiation in a bidding war is a semi-transparent technique HBR calls negotiauction. Call us for details. 

-The relevant market analysis for your needs is based on your unique real estate objective. Market conditions vary by price range, property type, and location in Boulder. Whether your goal is maximize the sale price or you're the purchasing power of your equity, choose your Realtor carefully.   


Any questions? Call us - but only if you haven't signed a buyer agency agreement with our competitors. We've recently had several buyers reach out to us who were unhappy with their agents but locked into iron-clad agreements with rookie agents. Read the holdover provision section of the buyer agency agreement carefully before signing.   303.746.6896. 


Notes: 

  • BARA's historical data doesn't track pending sales. We do that separately in another analysis. Contact us for details.
  • The analysis above is for the City of Boulder, single family houses only. Condos and town homes are not included.    

Meetup logo
The next Boulder Real Estate Meetup is February 26th. We'll be discussing market conditions, strategies, and much more. Join us! RSVP and learn more HERE.



----
Like this analysis?    Subscribe to our client research report.     
Want to get blog updates via email?  Click HERE.       
Ready to buy or sell?  Schedule an appointment or call 303.746.6896. 
You can also like our Facebook page or follow us on Twitter.

As always, your referrals are deeply appreciated.  

--
The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

Monday, February 16, 2015

Turkey Plant Re-Development [Pics]

by Osman Parvez
----
Demolition at the former Butterball/ConAgra plant in downtown Longmont continues.  As discussed previously, this 27.5 acre development is a massive indicator that Longmont is set for significant and rapid change. 

The mixed use development will feature 250-300 residential units, commercial, and industrial spaces.    Wibby brewing space for an 8,300 SF brewery next door which will include a substantial taproom and outdoor patio.    Plans are not yet final but the litigation cloud that slowed the process has been lifted. 

Here's a few pics from our photo set.   Here's our development map.






Other indicators of growth for Longmont include Whole Foods, Lucky's, municipal utilities including fiber, and rapidly rising home prices in certain neighborhoods.    For now, Longmont remains an affordable alternative to Boulder. 


----
Like this analysis?    Subscribe to our client research report.     
Want to get blog updates via email?  Click HERE.       
Ready to buy or sell?  Schedule an appointment or call 303.746.6896. 
You can also like our Facebook page or follow us on Twitter.

As always, your referrals are deeply appreciated.  

--
The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate. 

Sunday, February 15, 2015

Non MLS Sales, Asymmetric Risk and Misaligned Incentives

by Osman Parvez
----
Private transactions remain a small fraction of the overall market, but last week I met a broker who bragged about how often he's closing them.   


I asked him how the sellers felt about the money they were leaving on the table. His response? "It's always their choice." 

In my opinion, it's not much of a choice if you don't understand the risks and the benefits. You're more likely to go with whatever your Realtor tells you is best.  Private transactions are fraught with risks to the seller.  Not coincidentally, they're also filled with financial reward for the listing agent.  

Let's quantify the asymmetrical risk and return for the seller and their listing agent. 

Let's Get the Facts Straight
Background Fact #1: It's a common practice for a listing agent to offer sellers a discount for selling the property to an unrepresented buyer. This is known as a variable commission. Realtors like to call it "double ending" the deal. Variable commissions usually have the seller pay 4% instead of a 6% commission.  Note:  these are the most common numbers for local real estate transactions, but not set in stone. 

Background Fact #2: In the current market, listings are often selling for far more than asking.   As of mid February,  nearly thirty Boulder sales have already exceeded the asking price. The median premium was 4.1%. One went for 8.5% more than asking.   

Background Fact #3The median sold house price in Boulder last year was $685,000. I'm using this value for all three scenarios below. 




Please look at the table and follow along.   

Scenario A: Private sale.  The listing agent sells the property to his "sphere" before it hits the MLS. The seller accepts the risk of limited exposure because the listing agent reduced the commission of 4% instead of his usual 6%. Surprise, surprise... the listing agent procures an offer from an unrepresented buyer for full asking. The listing agent collects his 4% or $27,400, doesn't have to pay a buyer's agent, and the seller nets $657,600 before title insurance and other closing costs

Scenario B:  MLS sale.  After a reasonable period on the MLS, several buyers throw their hat into the ring.   The winning buyer pays 2.13% more than asking. 

Why 2.13%?  To illustrate the break even point for the seller for accepting the risk of limited exposure. If the listing sells for exactly 2.13% more than list, the net proceeds for the seller are exactly the same as Scenario A.   The overall risks aren't the same, but we'll get to that below. Just remember 2.13%. 

Scenario C: Another MLS sale.   This time, professionally managed marketing program and bidding war drives the sale price to 4.1% more than asking or $713,085.  Why 4.1%? Because that's the median premium for houses that exceeded the asking price thus far in 2015. In this case, the listing agent makes $22,819 because they have to pay the buyer's agent $19,966. So even though the total commission is 6%, the seller nets $670,300 or $12,700 more than the "double ended" private sale. The listing agent makes $4,581 less.   

Do you see the asymmetrical risk and return for the seller in the scenarios above?  The seller bears almost 3x the financial risk as the listing agent for a double ended deal.  If professional marketing and well run bidding war obtains just 2.13% more than list, the net proceeds break even.   If the bidding war hits the median premium, the seller nets substantially more.  

A Few Factors to Consider
Pricing and Negotiation - If an experienced Realtor is marketing your home for sale, the asking price should be based on the best comparable sales and an analysis of the trend for appreciation/depreciation of similar properties. If your agent is truly working in your best interest, they should price slightly ahead of the trend and leave a little cushion for inspection.  

In a private sale, the listing agent has a powerful financial incentive to selectively present the comps and price your home low. It's a proven fact that when listing agents are selling their own homes, they price higher and negotiate harder.    In this inventory deprived market, sellers are throwing cash at even marginal properties.  Why not let Mr. Market decide the real value?

Waved Contingencies - In the open market, inspections are often curtailed to increase the attractiveness of offers. Smart buyer's agents are also adding appraisal cushions and other techniques to sweeten the deal. In a private sale, where the buyer is unrepresented, the listing agent faces a lot of risk in advising the buyer to wave any contingencies. Most private, non MLS sales will keep contingencies that would have been eliminated in a bidding war because they protect the listing agent. With such little inventory and low transactions, deals are often facing low appraisals. An open market transaction gives the seller tremendous leverage to reduce buyer contingencies before the contract is signed.    

Liability: If a listing agent is double ending a deal, they don't represent the buyer and have very little responsibility towards the buyer's interests. In many cases, the listing agreement automatically switches the agent's status to "Transaction Broker." This takes them off the hook for most of the seller's interests too.  In my opinion, a broker with little liability is far more likely to not disclose material facts that can adversely affect the sale. They've got a powerful financial incentive to forget about certain details that were say, spoken but not documented. 

In Colorado, your Realtor has insurance coverage for errors and omissions. As a seller, how are you covered?

My Advice  
Make sure your listing agreement addresses asymmetry in risk and reward.  If your Realtor denies it, find a better Realtor.  The contract should always align seller and listing agent incentives.  Variable commissions are fine if they allow a reasonable period for open market exposure on the MLS and directly address the added liability. If not, the seller is not only leaving money on the table but encouraging the listing agent to stuff it into their own pocket. 


Additional Reading:   Colorado Real Estate Commission Position 44


----
Like this analysis?    Subscribe to our client research report.     
Want to get blog updates via email?  Click HERE.       
Ready to buy or sell?  Schedule an appointment or call 303.746.6896. 
You can also like our Facebook page or follow us on Twitter.

As always, your referrals are deeply appreciated.  

--
The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties.   We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate.