Hey, how are you today? I am going to go over septic systems In today's example, we’re going to go over the most common type of system that we see in residential real estate in this area. It's all governed by Title V law, and you haven't already seen it, I do have a video on Title V where I sort of breakdown the report and talk about the kinds of things that we're looking for, in the report when we go through, the kind of types of things that you should probably be thinking about..
If you want to know how a septic system works really, I don't have a good way to show you when I'm at the properties. I did this quick little video so that you can sort of see what's going on. And again, this is the most common setup. It's a good setup. It's a good overview, but there are lots of differences between the various setups and there's a lot in the more modern systems, anything in the last 20 years, generally has significantly sophisticated engineered components that are worth talking about.
If you're already in a house and you just want to learn a little bit about septic systems, have a conversation with the guy that's pumping your tank. And if you say, well, “I don't have anyone pump my tank”, go find someone and get your tank pumped. It's been too long. Okay, even modern day systems are not designed to run indefinitely without pumping there. We'll go over a little bit why, but generally, there's three components to a system, a tank, a D box and a leach field. The size of those components depends on the size of the system and it's generally rated by bedroom. Soa two-bedroom system is going to have a smaller tank, smaller D box, and smaller leach field. A five-bedroom system is going to have a big tank, a big bigger d-box in a much bigger leach field. The reason is because for every bedroom that a, and they're rated and bedrooms for some reason, But, I mean make sense because they're trying to take a guess at how many people are living in the house to figure out how much water you're going to use.
But they're rated by bedrooms and basically a bedroom equates to 110 gallons of water a day per bedroom. So a four-bedroom system is 440 gallons of water per day. That is a ton of water. I know that sometimes I get questions, they say, what if I use a lot of water! If you're using 440 gallons of water a day, you are using too much! You're being very wasteful. Come on. Let's have some respect for the environment here. The systems are really not designed for that. You know, you shouldn't be doing that. Okay, but most people, you know, my family, a family of five, very typical family, but I think we use 140 gallons a day on average, you know, that's all laundry, all showering. You know, it's just really, really hard to get into, you know, 400 a day. And so, and you really shouldn't be. So again, these systems tend to be over engineered for daily household use, which is good, make means that they're less likely to fail, but they do get really big as the number of bedrooms goes on. But generally everything goes into the tank. The tank is primarily for solid waste collection. What they're trying to do is separate everything that's in there so that it doesn't get into the leach field. You don't want solids in the leach field, which we'll get to in a minute. But basically what you're hoping is that nothing but liquids gets into that d-box. Okay? And liquids, ultimately that can be broken down, obviously water doesn't need to be broken down and go right back in and system but there's lots of other stuff that the solid waste in here, which is designed through the helpful, use of bacteria to break down into a liquid, which ultimately then goes into the D- box as effluent and then out to leach field.
Okay, once it gets into the leach field, again bacteria does its work returns, everything, 100% of everything, back to Mother Nature. It's good for your lawn too. I mean, you can't beat it. So, if you're not sure where your tank is, I'll tell you the end of February or early, March is a great place to figure it out. All you've got to do is look to where's and see where the snow melts first! Okay, your tank, because of the bacteria in there, that's breaking down those solids is generating enough heat where it's going to melt the snow on top of the septic tank. And so, you know, I get a nice clear outline. My tank must not be very far below the surface, but I get a very clear outline every time the snow starts melting, on exactly where it is. I don't really have to guess I know exactly where it is. So your leech filled with not produce that kind of heat D box, doesn't produce that kind of heat. Those are harder components to find, But they are in your title 5 and it should be noted that even though the tank is relatively easy to find, because it's close to the house, the D-box, and the leach field can be really far away, and some of these systems have pump up chambers because gravity for whatever reason, the lot isn’t helping you with gravity. And so, you know, you can move this stuff wherever, and sometimes they do that in order to find a place where the drainage is good enough where they can put a system in, but most of these systems are gravity based, 90 to 95%, I would say use nothing but gravity and mother nature. This is a brief overview. I hope you found it helpful and, but go over the title 5 thing if you're in the market for buying a house, and we probably are because that's why you're on my site. But if you did just come here to learn a little bit more about your system, and you like the video, let me know!
Okay. So in this video we're going to help out buyers and a lot of sellers in understanding what counts for square footage. That's the question I usually get asked, “what counts”. The answer is it all counts, but it doesn't count the same. On the buyer end, which is where we have most of these conversations, buyers are worried that they are paying too much for a particular property because the dollar per square foot is high. Well, there are reasons why the dollars per square foot can be high relative to other properties, because buyers don't just look at whatever the number is in either public record or on the MLS sheet and then make a decision that the price should be, you know based on the dollar average dollars per square foot of the town's, that’s not how they make the decision.
They make the decision based on how useful house A is versus house B and if house B got this price and House A is more useful, they pay more. If it's less useful, they pay less. And square footage plays into those kinds of things. I say this all the time, buyers are pretty smart. They pay for utility. They don't pay for the raw square footage number, they pay for utility. Some of them do pay for the square footage number, and a lot of times when they do that, they're making a mistake, but with a little bit of practice, you can make much better decisions about this in understanding how square footage can be different. Most people do understand that square footage is correlated with price, but it's understanding that the square footage is different. So in going to the public record to figure out the square footage to see “what counts” isn't going to help you because as the decades have gone on towns have tried to capture square footage, which they try to do accurately for tax purposes, but they capture it differently.
And on top of that, a lot of homeowners haven’t exactly helped out the town, because they have finished a basement or they finished the third floor and they won't tell the town. They don't want to get taxed on it. So they try to keep that secret. Now, that's not a good idea. But we're not going to cover that in this video. We're going to leave that alone. Eventually the town is going to figure it out, but even when the town does,they are taking a very rough assessment and what the square footage might be worth at best. And so as a buyer you have to be far more aware of the differences.
The main thing that you need to recognize is that houses that have a lot of square footage, but are less useful are going to get lower dollars per square foot than houses that are highly useful with a really high utility. I'll walk you through some examples here. Most people would not pay the same price for basement square footage that they would for above grade square footage. And the reason is very simple. They're not going to be in the basement very much. We're going to be on the first floor, the second floor every single day. The basement? Maybe on weekends to watch a football game, right? You're not using it the same amount so it's not worth the same amount. Really, this is pretty obvious stuff and buyers sort of intuit that they shouldn't pay the same for finished basement space. So same thing with space that's on the third floor. You have space to get an attic, you know, it's got a roof lines interfering and it's kind of just a funky space, and the stairway comes right up the middle, I mean it's useful. It's nice to have! Nobody's going to say, “well, I don't want the house because the attic is finished. But they're not going to pay the same amount of money that they are for the first and second floor. They're just not! You know, it's bonus space. And bonus space is worth something but it's not worth the same as the space you use everyday.
An outbuilding is another example of that, an outbuilding is a building that's not attached to the house. We don't see this a ton, but when we do, see if they have a nice finished space in an outbuilding, It's not they don't pay the same for because they know. In January and snow storms that are going through, they're not going to use it X number of months a year and because it's not attached to the house it is more difficult to access. You got to go outside and get there. So it's worth us. Tandem rooms which we occasionally find in older houses are when someone is added on a bedroom behind another bedroom. And so the only way to get to the new bedroom is by going through the old bedroom. Well, it's really inconvenient for the person using the front bedroom and because of that, most people don't really like tandem bedrooms, they don't pay the same amount for him. So again, that's going to impact the difference between where the house sells based on the public record square footage, and what the buyer really thinks the square footage is. Some houses have Dead Spaces. A lot of houses that have been added onto without a really good plan, and they have dead spaces and just the rooms that nobody can really figure out what it is that they might use it for. And typically, when those houses sell, buyers don't pay for those rooms because they can't figure out what they're gonna use it for. But some dead space is very useful and the example I have here is mudrooms. I mean, you can't really, you know, spend time in a mudroom, but, in New England, it's a super useful part of the house. So if you have a big expanded mud room in New England, most of the time buyers are more than happy to pay full freight for that room because it's got high utility. This is New England! We wear winter jackets in June and occasionally we wear light jackets in December and the weather is funky here, and having an easily accessible closet with boots and umbrellas and snow gear for everybody in the family, you know, it's useful. It’s a useful thing to have and it keeps you from having to store stuff and it just saves you a lot of Time, and Time Savers worth money. People recognize that. A good mudroom is worth its weight in gold and usually gets top dollar, even though you look at it on a floorplan might be considered a dead space, right ? But there's other spaces in houses that do not have obvious uses to them, and if and if they do have uses, it’s on a much less useful time frame, and they don’t pay the same for them.
It takes a little practice. It's an art, not a science to really figure out what the useful square footage is for a house, but it's not usually the number that if it's a super efficient house, it's going to look expensive but it isn't if it's a really inefficient house. It's going to look cheap, but it may not be.
So the key here for any buyer is you don’t want to over pay, and on the sell side, you want to know which parts of your house are useful or not useful. And that's really what you've got to keep in mind.
That's the overview for today. Hope everyone got something out of that. Remember if you really want to understand what's useful square footage, or not. We're here to help, especially on the buy side. Don't overpay just because you're trying to use a simple metric which is actually quite complicated underneath covers. All right. Have a good one.
I hope you enjoyed this post! Want to see more? Let me know!
Below is a quick video from our expanding video library. If you're a first time buyer, (or even a second time), see how comfortable you are with these common issues that we're often helping buyers with. We discuss:
1) Mortgage costs
2) Betterments
3) Easements
4) Radon
5) Lead Paint
6) Housing renovation estimates
Be informed! A house isn't a toaster, you can't return it!
Sincerely, Matt Heisler
Transcript:
Hey Everybody!
I know a lot of you out there that sign up on my website are looking for your first home. Very exciting! So a lot of people decide early on that the first thing they're going to do is look around on the web and then they migrate to looking at open houses, And by the way, I have a secondary video that kind of goes along with this one about open houses. You may want to check that one out. But a lot of times they're leery of getting an agent early on in the process. This is a quick quiz to sort of determine whether or not you should probably engage a buyer agent earlier in the process. We're going to jump right in and see whether or not it's a good idea for you to get an agent. I have a series of questions here. If you get them all right, then, you’re probably pretty prepared to go out and start the process on your own. If you get most of them wrong, you probably should align yourself with a buyer agent sooner, rather than later. Good news! We're available. So you can give us a call and reach out to us and we'll help get you straightened away.
The first one is very simple. It has to do with getting a mortgage, everybody almost, everybody's got to get a mortgage. Okay, so how much does a mortgage cost? And usually, when I ask buyers this question, they don't know, they will turn around and tell me what they got for an interest rate. An interest rate is not what a mortgage costs. When you get a mortgage, ultimately the bank or mortgage provider charges you a certain amount of money in order to do all the paperwork to get you qualified. It is not easy to figure this thing out. It's not like going in and Target and buying a shirt with the prices on the tag. You actually have to go through what's called the closing disclosure or CD for short, and you've got to strip out what the actual bank charges are. And Banks aren't really all that interested in making this a clear process because a lot of times they want to put higher fees into the mortgage in order to help their loan rates be more competitive and ultimately make more money. So they aren't all that interested in being transparent about what their loan costs are. Which is why if you ask a loan guy, how much does this loan cost? And you're not going to get a straight answer. I mean, I'd be really surprised if you find someone who gives you a straight answer,, call me, let me know who they are because I want to work with that person. But most of the time you're not going to get it. So the real question here is, how much are you going to pay in Bank fees? One-time charges to the bank?
Hopefully, you've already got that number in your head. The mortgage has three types of fees, prepays, which is money that you're going to use to pay for your bills. A lot of times taxes are collected up front, but you're going to use them to pay taxes on the new house. We don't consider that a bank charge. Okay? Even though the bank is collecting that money, they're going to use it to pay your bills. That's not really money the bank gets, that's money the bank holds but they hold it on behalf of your bills. There's also title insurance. I'm not going to spend a lot of time talking about Title Insurance here. It's usually 20 to 30 percent of all your closing costs. If I'm telling you that title insurance is 20-30% of all closing costs, and your first question was, “What is title insurance?” That's your first clue that, maybe you should probably work with a buyer agent who can answer that question. Title insurance is not home insurance. Title insurance will not protect your house from a fire. It protects your house from other things and it works like an insurance product but it's very different than most of the insurance products we pay for. You should probably find out what it is because it's expensive, and you're going to have to pay for it. And then the last thing, the last big group is the loan cost, the bank fees and they should be between 2500 and 3500 and they do move around a lot. They've been going up recently because it's been harder to get Loans done, and they've been doing lots of re-fis and generally, when they get busy, they charge more because they can. But normally 2500 to 3500. I will tell you that 2,500, I do not see that a lot. It's very difficult to get that but it's on the lower end of what people get - maybe twenty percent of the loans. I see people are getting 3000 is a lot more common and 3500 is, is on the higher end of what should you be paying. How much do I see people pay? Five, six. Seven thousand dollars is not uncommon. If people aren't careful, and they're not looking through it. A lot of times they come to me and they're very loyal to the bank that they want to use. They don't shop around and by the time I see the CD, it's too late because they tell me they're not going to switch Banks. And then I look at the CD when they closed and they just three thousand dollars right out the door. Really, you want this as a thing that you want to check out first. If you're going to pay for points, points lowers the rate, and sometimes it's a good thing to do. I'm not going to tell you its a bad thing to do, but it will add substantially to the one-time cost that is a one-time fee. But you get something for it, which is a lower rate and certain other types of loan structures like being able to carry a house for a certain amount of time. They also cost more money. They have additional charges in there to that aren't going to make the little more expensive as they should because you're getting something for it. But the answer, the question, is this twenty-five to thirty-five hundred.
All right, question number two. To if a house has radon. Should I find another house? So radon is an odorless, colorless gas. That's been shown to cause lung cancer. So what do you think? Huge problem?
Okay. Yes/No, should I find another house? All right, generally, no, you should not find another house. You talk to me, you talk to any real estate agent, you talk to most home inspectors. They will tell you: That's not really a great reason to find a different house. Radon, first of all, is incredibly Fixable, you know, and the fixes are cheap. They're reliable. They often last for 20 to 25 years before they need repair work. And then there are even cheaper fix generally costing for $500 to get another 20 to 25 years out of them.
Radon is easily testable with a cost that often costs less than 30-$40 and they're long lasting. So, there are very few fixes in real estate about anything that are as cheap, as easy to fix as radon in a house. So, I mean, there are exceptions, right? You know, but I mean if you're a heavy smoker, I’d probably be a lot more sensitive about moving into a house that had radon even if it was protected, but generally most houses have radon levels that are just over the line and exposure to those low levels of radon even when the systems aren't in are usually measured in decades, before it causes a lot of risk. You don't get lung cancer from radon in a couple of days, usually takes 20 years. Most people don't even stay in the house that long. It's just, it's not really this giant serious immediate health hazard. Most of the time you got plenty of time to test, and make sure its (the mitigation systems) working. Generally people move into houses with lead paint with far less discussion than they do about radon. Lead paint I would consider a much more serious health issue. So, you know Lead paint can be a problem relatively very quickly in a matter of months or years. And on top of that the cost for mitigating a house with LED is, is often very, very high. So, fortunately today, a lot of houses have already been at least partially mitigated. You know, they have new windows and stuff, old windows are huge source of lead paint. Newer, vinyl windows, they don't have any lead paint at all. Obviously, there's still lots of houses with lead paint still, lots of lead paint considerations in older houses. And that's a more serious problem. Something that you should probably talk more about. And yet people tend not to worry about it as much, which I'm not really sure that that makes a lot of sense.
If you were thinking that Radon is definitely a “no” for you. Again, maybe It means that maybe you're not as up to date on some of these issues and how they get fixed, and you should probably have those conversations.
I just bought a home - this is question 3 - I just bought a home and it has betterment. What do I do? Usually when I have a conversation about a betterment with most first-time home buyers, they have no idea what a betterment is. Is that you? Lots of houses have betterments. A surprising number of them. A good listing. Agent will have the betterment information available before you write an offer. But even if it's in there, even if it's in the listing sheet, most buyers - they don't know what it means. They don't understand what it means. You should have this conversation with your buyer agent. What is the betterment for? How much is it going to cost me? And how long is it going to cost me this money? A lot of various betterments can have 10 years left or more! If you're going to be in the house for 10 years, you’re having to pay the whole thing. Especially if the seller is asking you to assume it. On the other side if the betterment wasn't properly disclosed, you should know that many times we encourage the seller to pay for the whole thing. A lot of times that happens if it wasn't properly disclosed. If you're in a direct deal with the seller, there's going to be a lot of pressure on the buyer to sort of eat the betterment. To kinda say, “ Hey, you didn't know”. If you don't have an offer that's been written to put pressure on the seller to eat the betterment for non-disclosure. Then you could get stuck paying it! That's not really what you want to do. You know, you want to make sure it's basically going to assume every house has a betterment whether it's disclosed or not in, right? Your offers are a way to protect yourself so that if a betterment suddenly shows up and they usually show up pretty late in the process, if they are going to show up. Usually you've already called movers, you're planning on closing, you know, it's a bad time. You want to make sure that you don’t get stuck paying it.
Along with betterments, which is basically a kind of easement. There are regular old easements. Okay, buyers today don't know a lot about easements, and they're definitely not aware that some easements don't have a lot of price impacts and some easements have a tremendous number of price impacts. I'll take the example of a common driveway. So usually if I take a buyer down a common driveway, they either say I'm not buying this house because they hate it, or they say the common driveway doesn't bother me, which is great. But then they're ready to pay pretty close to the price for the house. As if there was no easement there at all. That's not what you should do. So most people, in fact, nine out of every ten people, maybe even 18 out of 20. They don't they don't want an easement, a serious easement, on their property that involves sharing the property with someone else at some level and that drives the price, the retail price, down of the house for a common driveway. It's not uncommon for the price to be 10% lower. Now, in a market that's really hot, we see that gap close. But if the market slows down, the gap comes right back, so, you know, you're going to get stuck, paying that premium if you're not careful, and if your not sure how much easements should cost.
I’m talking about common driveways here, but there's dozens of different types of easements and they all, you know, have a certain value that generally depreciates the lot. Sometimes the values is very small. Sometimes the value is very large. But either way, you should definitely make sure that you understand the easements that are on the lot. Most buyers don't know how to research easements. They don't know how they affect the lot (price). They don’t have any idea what they cost. So if you want to take a really good, look at the property that you're going to be buying for the next six or seven years, and to minimize the risk, you need to be having these conversations and working with someone who's going to do this research for you.
Okay question number four, so probably the number one thing I get asked about all the time is repairs. How much does it cost to repair this? And generally buyers are either super optimistic - They think that they can get work done, very cheaply or they're terrified. And then they overestimate they take whatever number I give them and double it. That's very common. It's like hard for me to say, “You don't really need to double it. You can bring it down a little”. It's very difficult, I find for buyers to estimate the cost of these things only takes a little bit of research to figure out what it's going to cost. So, here, I have a couple of common examples and I have a typical roof replacement of assuming that this is a 1600 square foot ranch or 1,600 square foot Colonial.
Okay, and so you see the prices there and then a full kitchen remodel again, modest sized house 1,600 square feet right over 1,600 square foot condo that has the original kitchen and you know, you're going to be doing it. How much should it cost? Okay, now it matters how much it costs because if you can buy a property where this work is done, then you should be willing to pay more. You shouldn't be paying the same amount of money for a property that needs one of these two things. These are serious things, they have to be done. It de-values the property. So you should be making sure that you're getting that discount. We'll move on here.
For the roof, typical price would be nine thousand dollars. A couple years ago was eight thousand dollars, probably nine thousand dollars today. And that's should be a roof with, you know, ice and water shield at code. A 30 year plus shingle, with some copper in it, you know, really high quality roof. Okay, and so it doesn't cost 16 thousand dollars to do a regular simple roof. Okay, sixteen thousand dollars is for 3,000 square foot Colonial that has a lot of pitched roofs and it's very steep slope. That would be the more expensive install because there's just, there's more involved, there's more labor involved.
Okay, kitchen remodels, however, now they vary a whole lot. Okay, so I'm going to give you a number here, but if you really want an accurate estimate, you've got to have a conversation with your buyer agent. About what exactly it is that you intend to do. So, for most homes, under 500,000 in this market, a redo should be less than 40 K. Okay? Cabinets are only going to be five or six thousand dollars. And countertops should only be three or four thousand dollars. Okay. So those are the two biggest expense items and basically you can double the labor. But if you're doing, you know, flooring, so where does it get more expensive? Well, if you're going to rewire the whole thing, right? If you're going to move all the lights around and start moving walls around, you know, the walls will add five to ten thousand dollars to a project depending on the wall. So, you know people always say “well, I just want to open this up.” ‘Just’ and ‘open up’ is not, those 2 words don’t go together. It's an expensive project to do. You can do it. Generally, you can almost always do it, but it's expensive and it may not be worth it based on the kind of house that you have in the kind of extra space you intend to gather. But having said that most of the time doing cabinets, floors, backsplash new appliances, you know in a smaller kitchen should be under 40 K. Still a ton of money, right? Got to be really careful with it. You want to be talking with someone. I do help my customers when they're planning and remodeling and help them figure out what they want it to look like. And then show them different ways where they can get similar looks, but spend less money, right? But if you have an expensive house, your house is 800 thousand dollars, you're going to spend at least a hundred, you know, eighty thousand two hundred dollars. Hundred thousand is not an unreasonable budget for a house like that. Especially if the kitchen needs a ton of work. So again, if you're moving stuff around, or expanding it. And If you're going to make your house bigger in order to get that kitchen in there, these numbers are going to look silly low. Okay, I've seen customers, they just had four feet off to the back of the house that adds like seventy five thousand dollars. It's probably not something I would do, I would move because I think it's cheaper to move than it is to add four feet to the back of the kitchen. But you know, I see it all the time. You just need to know that any time you're moving an exterior wall. It's it's gonna make moving an interior wall look cheap. The key here is that you want to have some kind of budget. Some kind of accurate budget for almost any house. Most houses need something. They're in the middle of their life cycle and they need burners and roofs and floors, and bathrooms and kitchens, and windows, and hot water tanks, heating changeovers, all sorts of stuff. And you really want to be armed with those numbers so that you don't get into a house where you're paying decent money for (the house) and then it's just one bill after another. So. You don’t want to get into a money pit.
So those are the four questions if you felt like those. So those were the four questions. Hopefully you feel like you either are all set ready to go on your own because you know so much about housing but if a lot of these questions made you say hey, maybe this is complicated. There are people who do this every day, who have prices from past clients and can really guide you and get you the information that you need. So that you're making an informed decision about the House you're buying, which ultimately my perspective is what it's all about. There aren’t good houses and bad houses. There are just, you know, houses that are going to be more expensive to get back to where they need to be or houses that just don't they don't, they're not going to ever sell as much as high as they should for various reasons.
Here is the pod cast of my latest forecast for the year! Great tips here for sellers and buyers. For more information for your specific situation, give us a shout!
Why Has Zillow Decided to End the House Flipping Business Program?
This post will at times get a little technical about the "insides" of what's it's like to be working with sellers *before* they list their houses, and it should be noted, that it's an opinion piece. (Although I did read the full Zillow statement yesterday and there are numerous supporting statements in it.) I think, though, they also left a lot of stuff out (that they'd rather not talk about), and I'm speculating here as to what that is.
On the surface - to wall street types and others - it was a marriage made in heaven. Zillow, creator of the "Z-estimate", and owner of one of the biggest advertising platforms for houses, would use their estimate power to buy houses direct, fix them (or not) and then flip them for a profit, largely by their own expertise and - importantly - cutting out the real estate agent, to make the process more easy for home owners. Genius, right? I had to answer a lot of questions about "was Zillow going to put me out of business" and the like. And every time I was asked, I laughed, and usually answered, "Let's see if they make money at it first".
The issue, you see, cut right to the heart of Zillow's z-estimate. I know (most professional real estate agents as well!) that Zillow's estimate of a homes value has a LOT of blind spots (especially in places like Massachusetts, but I'm sure it doesn't work as well as they need it to everywhere). If you're going to be buying (and flipping houses), you need to know what they are worth. That is a huge starting point. Here's what else you need:
1) You need to know what it's going to be worth when you sell it
2) You need to know how much you're going to spend in fixes and carry costs
3) You have to do all that stuff while doing for less than half the average broker commissions in the area
4) You have to make *enough* money to make it worthwhile.
Guess what? Each of those is HARD. It is easy to say - from Wall Street, or Seattle - that home buying and selling with the traditional real estate agent model is inefficient. And expensive. And unnecessary. But now with Zillow's announcement - a company that has spent hundreds of millions trying to prove this - we can definitively say it's not nearly as inefficient as Zillow (and others!) think. Let's talk about why.
Three's a Crowd
When you buy and sell a house, there are two primary cost sharing parties involved. Buyer and seller. The real estate agents protect and aid both parties for a fee. Most agents work alone, under a brokerage, and have (relative to a large corporation) minimal costs. They use personal cars, personal phones, and tend to stick to their local area, reducing travel time and other overhead.
How does adding a company (will all the overhead and bureaucracy of a corporation) make this process more efficient? You wouldn't expect it to. Generally, larger companies need to benefit from economies of scale to offset the additional expenses of "being big", which is why manufacturing is hard for start ups and good for corporations. But what economies of scale are to be gained in buying houses? Can you save money on recording fees and title companies? Carrying Costs? Reduce fix or update costs? In most cases, the answer is no - these are fixed transactional costs, and there's no large company on the other then to leverage for "bulk pricing" - just independent contractors and governments that are working on fees that most feel are too low already.
Here's another way to look at it. When a seller sells a house, they pay their end of the recording fees, the full carrying costs (usually because they are living there), and the listing agent fees. The buyer takes on the buyer's fees, and the buyer agent fees (yes, I know the fee comes out of the seller's net, but a more accurate accounting is the buyer is paying for the buyer agent fee*). This is all straightforward stuff. So how does it look when Zillow (or Open Door, or anyone else) does it?
Well, then you have the seller to Zillow transaction, and then the Zillow to Buyer transaction. You now have 3 parties, and two transactions, instead of 2 parties and one transaction. Is this easier for the seller? I guess so, you don't really have to worry about the buyer not getting financing. But is this more efficient on paper? It doesn't look so, and it's hard to figure out where any savings are coming from. Oh, there's no agent! Well, sort of.
Where did the Real Estate Agent Go?
We'll talk about the "ideal" situation first, and then the "less ideal but closer to actual".
Ideally, for Zillow, the goal was to buy the house direct from the seller based on their pricing model (no agent) and then sell it direct (no agent) on their website. Selling direct is also called For Sale By Owner, or FSBO, and historically FSBO's tend to sell about 5% less than they should. Let's say Zillow was able to cut that in half - 2.5% - they still have to do an extra transaction for 2.5%. And that is to break even. Ultimately, they probably need to come up with profits (which was the goal) and that's after they pay all the expenses. (Zillow regrettably axed 2000+ employees who were working on the flipping of homes). 2.5% on a 400,000 house is 10,000. Let's say a goal of profit being 10,000, (frighteningly small) and internal expenses of 10,000, and transaction costs of 10,000. That's $30,000 of costs that need to be covered, and only $10,000 of room to do it with. This is starting to not look like a good business, where you lose about $20,000 on each "flip."
The less ideal situation is that Zillow was still paying buyer agents to sell the homes they bought. So much for the 2.5% saved! AND, they were also paying agents to come in and tell them what to pay for the house (they didn't trust their computers, and wisely). These things just make the "theoretical" margins smaller and smaller, and increase the chance you'll never make any money. And the agents? They haven't gone anywhere. They are on both sides of the deal, as before.
What was the plan to make money?
Most of the talk about getting rid of agents was just that - talk. It played good on Wall Street, sounded good in the media, and resonated with folks. But it wasn't the plan. The plan was to screw sellers. We've already done the numbers. Zillow (or any other home buyer), needs at least 20,000 to cover expenses and profits (it's probably more like 30,000), and no buyer is going to pay "extra" for a house. Buyers pay market. So where was the money coming from?
Sellers. You have to get the purchase price down by your profits and expenses. Just like professional flippers, the money is made at purchase - not at the sale. That means you have to get the sellers down to a profitable price. There are many agents (and others!) who have always offered you cash for your home. But there's a catch - you get convenience, but you don't get market value for your home. Zillow offered nothing different, except in situations where they overpaid - and took the loss at sale (65% of all their sales were underwater according to various media outlets). Here's how the conversation goes:
Seller: What will you pay me for my house?
Flipper/Zillow: $420,000.
Seller: But my house is worth $450,000!
Flipper/Zillow: Maybe, but we will take all the risk, let you close when you want, and pay cash.
Seller: That's great, but 30,000 is a lot of money. No thanks, I'll take the 30,000.
I mean DUH! Almost everyone wants the money!! It's a lot of money!! In fact, Zillow stated that 90% of all "serious" home sellers weren't interested in Zillow's cash offer. I bet the numbers were even more brutal when you start counting the "non-serious" sellers. I bet for every 200 inquires, they probably got one house to buy. Which house? The house where they mis-calcuated what it was worth, and paid the seller too much.
Home Sellers Aren't Stupid
Do I really need to point this out? Home sellers have generally good ideas about what their house is worth. They pay attention. Most are close. On average, they tend to overvalue their house a bit, because most of them love their house, but they generally don't grossly undervalue it. And they get second (and third) opinions often, and they generally demand information to help them piece out the puzzle and make sure they have it right. Sellers can do math. And if you have an inefficient model that is going to take money out of a seller's pocket, they are going to figure that out, and not do business with you.
Ultimately, that is what today's announcement says. Despite all the criticism that Real Estate Agents often get, the fact is we are pretty efficient at what we do, and we deliver more value than most other models (currently all other models!). Is there a faster, better, cheaper way to sell a house? I'm not sure there is, but I spend a lot of time thinking about it. Zillow did too - and spent hundreds of millions of dollars hiring very smart people and putting a plan into execution. They failed spectacularly. My clients are very happy with the value they get on the purchase side and the sale side. I help them make and save money, with the largest single investment most of them will ever have. The advice I give is hard to standardize, because people and houses are all custom, and the deals we do are custom. People value real estate agents because the advice we give isn't generalize, it's specific to their purchase, and their sale. As long as that remains the case, computers are going to have a hard time catching up.
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*Really, the buyer pays the fee. If the buyer doesn't buy the house, no fee is generated. It's the buyer's money that allows a fee to be collected, as such he is equally responsible for payment.
Normally, I'd be writing this in January, cause normally the we already would have a good indicator of what the match between buyers and sellers will be. Not the case this year! I expect there to be some big changes as we go through the months. Let's look at some of the major factors that will likely affect the housing market this year.
COVID
I mean, duh, right? Honestly, it's the elephant in the room, and all the items that follow are one way or another CCOVID related so let's break them down. It's just too big an element to talk about effectively in one fell swoop, you've got to break it out.
Vaccination Progress of COVID
As of this writing, over 10% of Massachusetts has had one shot, about about 3.5% have been fully vaccinated. We're up to about 40,000 shots a week, and figuring they will be split 50/50 for the next month or so, that means about 600,000 additional people will be fully vaccinated in the next four weeks. That means we'll be over 13% vaccinated, which isn't super impressive except that teachers, healthcare workers, and the most vulnerable will be by and large fully vaccinated. If J & J gets there one shot dose out then those numbers move up even quicker - more supply, and just the one shot means we could be looking at doubling the current rate of vaccination by late April. But even without the J & J kicker, hospitals will be safer, schools could be back to in person learning - things that start to pave the way to feel safer. And the bigger kick of all will be that the mortality rate will drop very quickly. Roughly 60% of all deaths are those who will be vaccinated by the first or second week of March, and if we have the same success rate as Israel, virtually none of them will die. That probably sounds too good to be true, but I think news like this is going to break through at some point, as it becomes obvious just how effective the vaccines are.
Seasonal Decline of COVID
If you haven't noticed, cases are dropping dramatically across the country. It's official - the dreaded second wave has passed, although so far the media coverage has not been particularly robust. At their peak, we were seeing 250,000 cases a day in this country, but now we are down to 100,000. Still a lot, but down a massive 60% in just over a month. That means hospitalizations and deaths should fall too, but a similar 60% we hope, which would be around 1200 a day, or around where they were in August. Hospitalizations are down in every single state in the country, which I find quite remarkable. That's without vaccines- it should be noted that cases have been falling far faster than any effect from the vaccines. Why is a rather big mystery (nobody is out there in the media/medical community explaining the sudden drop in cases that I can find). There is a little talk (in the NY times, but not a lot of details) saying that the drop means we might be approaching herd immunity (again, not well explained), but if that is the case then we will likely see continued improvement in the numbers especially as the vaccination rates climb. If you look at some states that peaked early (Illinois), the rates are down about 80 percent, and if the rest of the country follows suit, that would be great. Really, this is all good news, and if the best case presents itself, March could be a month where sentiment turns.
Kids Return to School
Hey, this is a big one. Don't dismiss the size of the impact that this will have on EVERYTHING, housing included. First, it will feel a lot more normal, but second - and most importantly - the number of parents who will suddenly have extra time to either look for a house or plan to sell one will go up sharply. I know in the fall I was spending at least 18 hours a week on the kids and school (on top of my job), and I'm still around 6-7. That is a huge amount of time. This will also help if sports pick back up. When will this happen? Unsure. March, maybe. April maybe. But if there are problems, they'll go right back to remote or hybrid for the rest of the spring. So it is a huge thing to watch, but very uncertain at this time.
Overall Market Factors
Interest Rates
On the flip side, if the COVID numbers improve, I expect interest rates to move higher. How much is the big question, but I think they will quickly get to 3.5% on a 30 year - perhaps higher. Those are still great rates - but they will diminish quite a bit of buying ammunition for buyers and that will put a hard cap on prices. Buyers are completely stretched at this point, and any movement in interest rates will change what they can afford.
What Will Happen To the Springtime Housing Market?
I think it is a given that all of these factors are going to happen. The question is when, and do they all happen at the same time, or do they space themselves out. Ultimately, it will probably change the timing of how things play out, but probably not the magnitude.
The most likely case is we start to see some houses come on in mid-March, or late March, and catch up a little bit with the delayed inventory cycle we are seeing. There is so much pent up demand, however, that these homes will be very tough for buyers to get. They will sell quickly, and many buyers are not looking at the value they are getting, and the unwary will probably overpay for this bunch. Things hopefully will smooth out by April, and I'm hopeful by May a lot of the steam will come out and we can have a productive late spring. It is certainly possible it all happens a month later, or even two months later, but I'm pretty sure May will be quite busy. Sellers would be wise to target earlier - not later - and buyers should be patient in the early go. Which will be really hard! But they should.
An Educated Home Buyer is a Happy Home Owner. Read On!
Matt Heisler is a real-estate professional and owner of this website. He has been selling homes in MA for buyers and sellers for over 20 years. He is an expert in foreclosure purchases, short-sale purchases, short-sale sales, buy and hold investing, fix and flip investing, and of course traditional residential home sales. He is happy to take questions as they pertain to real estate on Title V, Radon, Termites, Sump Pumps, Roofs, Foundations, Wells, Septic Systems, Cash-Flow, Staging, and a host of other housing issues. As a Vanderbilt University alumnus, he is proud to serve his local community.
*All information is posted in good faith and is assumed to be reliable, but may rely on third party information sources.
What is more American than home ownership? Not much, maybe apple pie and hot dogs, but home ownership consistently is a big part of what most people think of as the American dream.
Since it's something almost everybody wants, it can be hard to get. But is it any harder - or more expensive - that it was 10 years ago? 25 years ago? 50 years ago? Longer? Let's discuss.
There's a few things that we need to get straight, off the bat. It's basic economics stuff, but you can't really have a discussion about pricing without looking at the economics of the housing market. Even though it's basic, some of the discussion is going to, uh, go against the grain of the popular rhetoric of affordable housing. We'll get into why also, but first - the economics.
Sometimes, when my customers complain about the cost of housing (hey, I do it too!), they'll ask me: Why is it so expensive? If I've learned anything, it's that the mystery of house prices isn't much of a mystery. It's supply and demand. Many of the towns inside 128 are built up - the supply grows, but not very fast, as there aren't "easy" places to build - and with limited supply - and population growth - you have a recipe for upward prices. That's how it works in Eastern Massachusetts, and the proof is in the prices. In places where you don't have population growth or plenty of supply you generally have very cheap houses! In Springfield, MA, you can get an young home, about 1800 sq feet, for about 200,000. The mortgage on that is about $1300/month or so, meaning you'll need to make about $4000/month to buy it - or about $50,000 a year. That certainly seems affordable. The same house - in Wellesley for example, but there are certainly other places - is probably about $1 Million, and the mortgage on that is probably going to be about $4000/month (depending on what you put down), meaning you'll need to make about 14,000 a month or close to 150,000 a year. The hard part is getting the deposit too - about $200,000 or (more likely) $300,000 or more.
Once you understand that it is supply and demand, you're forced to answer a basic question. Who is buying these expensive houses? Answer: Someone. And, far more often then not, they live there. Single Family house prices are high enough in almost all places that they don't make a lot of sense to rent out - and make even less sense to be vacant. So what you have is homes that have been bought, by people who live there, who in all likelihood have a mortgage, and whose income and debt levels have been validated by a third party. What that means - is they can afford it. And that leaves us with the final, inexorable economic conclusion: Housing is affordable.
Housing is Affordable? What?
Yes. I'll say it again: It's affordable. I know this sounds like lunacy, but if housing wasn't affordable, the houses wouldn't (in fact couldn't!!) be bought. But they are being bought, and banks are loaning people money to buy them. This isn't like 2005 where a substantial portion of the buyers couldn't afford the homes - it is no mean feat to get a loan today, and the era of easy money hasn't returned. Banks are picky - super picky- and the owners can afford what they are borrowing. And don't try to sell me that a very few super rich people own all the housing and the rest of us just rent! The graphic at the top shows that home ownership is about 70%, which is higher than it has been historically.
Let's look at this another way. If the houses weren't affordable, who could buy them? Well, they wouldn't be bought. And then we would have lots of houses on the market. And prices would fall - until they were affordable again, and then prices would stop falling or go back up. I know what you are thinking. Matt, do you have any evidence to back this up?
Yes.
What is this chart? Well, this chart uses data reflecting household income, interest rates, and historical housing costs to determine how expensive a house was - or is - looking at the mortgage payments they were making relative to their household income. (Most of this data comes from the St. Louis Fed, and is easily searchable on line). Note on the data at the bottom!
That was a mouthful - so what does the chart say? Well, in 1990, household income was about 69,000 on average in Massachusetts, and the average house price was about 305,000. Since interest rates were 10%, we can guess most homeowners mortgage payments, which in this case were 26,100 per year (not per month!!). From there, we take what was going to the bank and divide it by total income and we get the House Payment Ratio - or how much of your income was dedicated to a house. In 1990, it was 38%. Which, historically, was about average! (Banks typically target 40% as the upper limit, so these numbers make total sense in that context). Things got really bad in 2005, as home prices exploded due to the "easy credit" I've already talked about. No surprise, that ended in disaster. Today, with the record low interest rates, home ownership has still continued its fall from the 2005 peak, and while while more expensive than the 1990's, isn't really that much more. It is up quite a bit from the go-go 80's - clearly a time of transition from saving to investing in housing, and a marker of another way the consumption economy changed during that time period.
Note, particularly, that when housing got historically expensive - 2005 - we had a housing crash, lots of availability in housing, and prices pulled back. So yes, I have the evidence to prove that housing is affordable - more affordable than anytime in the last 15 years in fact.
It Might be Affordable, but It's Still Expensive
What most people mean when we say housing isn't affordable is that it seems to be expensive. And there are several reasons for that. Again, all based on economics.
In general, interest rates have only gone down from the peak in the late 1970's. This has resulted in prices moving much faster than inflation. Mortgage payments haven't changed nearly as much (adjusted for inflation), as noted in the chart above.
Banks has increased, on average, the term of most loans to the full 30 years. Longer terms means that buyers can afford more house. It is "cheaper" in terms of monthly payment, to buy a house with a 30 year mortgage than a 20 year mortgage or a 15 year mortgage.
Banks have increased the amount of DTI (debt to income) that homeowners are allowed to carry over the decades.
Add it all up and the average homeowner is usually paying more of his/her paycheck as a percentage to housing costs than ever before. With healthcare, student debt, and daycare also reaching higher and higher levels, there just isn't as much left over as there might have been years ago. Basically, you can afford it, but it ain't easy.
What Can Everyone Do to Make Housing more Affordable?
In general, if you want housing to be the best investment you can for yourself, buy a little less house. This is SO HARD to do - but most financial advice website will support this notion. Of course, it only works if you reduce the term of your loan (or increase your payments) to really knock down the interest. That advice applies to normal times - not now - as rates are so low that it may not make sense to go smaller.
What Can Governments Do to Make Housing more Affordable?
Ah yes! Our elected officials! What can they do? Believe it or not, there is very little they can do. And the things they can do - they probably won't - because they are hard to sell (they are easy to do, however).
Much of the discussion of governments and affordable housing has to do with increasing supply. Changing town zoning, incentives for builders, and building more apartment buildings and condos. Folks, look at the chart. It doesn't work. They've been doing this for 30 years - and it doesn't work. Housing prices will follow household income and mortgage rates. Simple as that. (And don't get me started on 40B, which is majorly problematic)
But Governments CAN do certain things. Things that banks won't like - but might improve people's wealth in the longer-term. What are those things? Glad you asked.
Eliminate the 30 year-fixed reverse amortized loan.
Why eliminate the mainstay of American Household financing? Because this was a loan designed for people that didn't move - ever. That isn't the modern day world!! In today's world, people move - often every 5-12 years - making a 30 year product that pays 2/3 interest in the first 5 years a raw deal. These products are great for banks - but bad for homeowners. If loans were shorter - 20/25 years or simple interest - it would be more reflective of what today's home owners need. You don't get something without nothing though - either of these would make loans MORE expensive. By a lot. And that would be deeply unpopular, because people are bad at finance. But eventually (in fact quite quickly*) housing prices would come down to adjust, and everyone would win. The benefit here is that people would build equity in their house much more quickly, which would allow them to maintain the house, and use the equity for when times are tough. Most homeowners who have been in a house five years or less don't have enough equity to do either of those things.
Household income and home prices are for Massachusetts only - not the entire US.
I had to estimate Massachusetts Household income for 1980 and 1975 based on trends in the US Household income. That data was really hard to find.
*Ideally, you could just knock a year off of the mortgages every two years. 29 year loan, 28, 27... In 10 years you're at 25 term loans, without much market wrecking. Similarly, you could create hybrid 30 year products that covert to simple interest in 8 years, then 6 years, then 4, until they were entirely simple interest.
An Educated Home Buyer is a Happy Home Owner. Read On!
Matt Heisler is a real-estate professional and owner of this website. He has been selling homes in MA for buyers and sellers for over 20 years. He is an expert in foreclosure purchases, short-sale purchases, short-sale sales, buy and hold investing, fix and flip investing, and of course traditional residential home sales. He is happy to take questions as they pertain to real estate on Title V, Radon, Termites, Sump Pumps, Roofs, Foundations, Wells, Septic Systems, Cash-Flow, Staging, and a host of other housing issues. As a Vanderbilt University alumnus, he is proud to serve his local community.
*All information is posted in good faith and is assumed to be reliable, but may rely on third party information sources.
In most years, there are super hot spots where getting a property is a challenge. This year however, those hot spots have basically been everywhere - coast to coast. While eventually much of this will moderate through price increases, in the short-term it makes sense to discuss escalation clauses: What are they, How do they Work, and Should I Use an Escalation Clause in a home purchase contract.
What Are Escalation Clauses
Many of my clients have heard the term Escalation Clauses, but they aren't sure how they work. The easiest way to explain them is in the context of what a traditional offer might look like. In a standard or traditional offer, the contract simply says the buyer offers to pay the seller a fixed number - let's say 400,000 for instance. That is pretty simple and clear to understand. An escalation clause, however, assumes that there are going to be multiple offers, and then the purchase price is written as: Buyer offers to pay the seller (X) over the highest offer. On a home of $400,000, X would typically be a number between 2 and 5K. (It's not usually $1! It's not the 'Price is Right' people.) This means, in practice, that as a buyer you don't really know what you are offering on the house. Ultimately, what you are saying is no matter what someone else offers, I'm willing to pay more. Even so, this won't guarantee that you'll get the house. I've had listings that have received multiple escalation clauses - and only one person can get it. (Usually the offers have different escalation bump amounts (So bigger is better!) or have other factors that allow a seller to choose the best offer).
On the surface, escalation clauses sound like an aggressive buyer strategy to put them in a great position to buy a home. In practice, however, there are often issues with these strategies.
How Escalation Clauses Do and Don't Work
Most buyers assume that when there are multiple offers, most of the offers look "like theirs". If a listing does get 4-10 offers, many of them do tend to look similar. But there are always offers that have major differences, and those differences are often crucially important and can affect how "reasonable" your escalation clause looks in hindsight. OK, that was really vague, lets see if I can make it more concrete. Some buyers are competing in a market with a lower LTV (Loan to Value) which means as a percentage they are borrowing more. This is very common in the starter market, where we see a large number of buyers with 3.5 or 5% down. Very often, these buyers will lose repeatedly in a super hot market to buyers with a more significant down payment (as they should), and quickly they develop a new strategy to win the listing - overpay. In this market, I have seen buyers with low LTV offer 15% higher than the listing price in an attempt to win the bidding war. Some sellers and seller agents will look favorably on these offers, but these offers always come with mortgage contingencies, and the plan here (on the buyer's end) is to let the bank's appraisal play referee and come in and knock the price down. It's a high stakes game of poker for these buyers, hoping that a month into the transaction the seller will be willing to reduce the price significantly in order to keep the deal together, otherwise the seller will blow up the whole transaction and start with someone else.
Another way offers can differ is with by reducing the number of contingencies. Typically, there are three main ones, the home inspection, the appraisal, and the mortgage contingency. Offers that look similar in price can often be separated by certain buyers that have waived some - or all - of these contingencies.
The bottom line is, when you have a pile of offers, they don't all look the same, and some are going to have higher prices to cover up other weaknesses. When you put in an escalation clause, however, you are often giving the seller the best of both worlds - a higher price, and a stronger offer. You should know going in that you are probably "over offering" what you need to in order to win.
And, as noted above, an escalation clause isn't a guarantee. If there are multiple escalators, you could lose. In addition, the complexity (and risk) of a buyer getting buyer's remorse is significantly higher, and long-time listing agents know this. So jaded they are about escalators, that some listings agents will advertise that they will discourage their seller from taking any offer with a escalation clause in it. This means as a buyer, you should remember to ask the listing agent about their feelings on escalation clauses - otherwise you could be taking yourself out of consideration.
Should I Use an Escalation Clause in A Home Purchase Contract?
I generally advise my buyers not to use escalation clauses. Not knowing what you are going to end up paying is a sure way to start heading down the buyers remorse pathway. Even so, there are exceptions. Here are the reasons you may want to think about using an escalator.
A) You know it's going to be competitive or hyper competitive
B) You need a house soon, or you're going to be homeless
C) You recognize you won't be able to get a similar house; it's perfect for you
D) You have the financial flexibility to put more down if the house doesn't appraise at the final purchase price (and it may not).
You'd want at least 2, and probably 3 of these conditions in place. Most of the time, it makes much more sense to have a productive discussion about what the value of the house is to you, and to offer that price - without an escalator- as a number you have confidence around. In addition, making your offer stronger in other ways - fewer contingencies, aggressive dates, more money down - is often a key deciding factor for quality offers. Although some sellers will only focus on price, most listing agents know that an offer strength is much broader than just the top line number.
An Educated Home Buyer is a Happy Home Owner. Read On!
If you're being sent to this page, it's because you asked me when you can expect to get paid. I get it - it's been two months and you've waited long enough. However, I don't usually know "exactly" when you'll get paid, because there are multiple scenarios and I simply don't have the funds yet.
Below, I cover the three most common scenarios - but there are others! - and I'll write about them in a little detail here.
First things first, things don't get going until there's a closing. In Massachusetts (and probably most states) it is technically illegal for the funds to be paid until the closing is on record. Usually, agents are paid out of the escrow funds held at the listing agency. Those are kept in a separate account (again, by law), so the first step is they need to move post closing to a commission account. This is easy if it's the first scenario, where the buyer has all the commission funds in escrow, which is the first path in the image below.
The listing agency transfers the money, and writes the check to the listing agent, and then writes the check to the buyer agent's Brokerage (not the buyer agent!). The buyer agent's brokerage has to wait for the (usually) postal mail to arrive (2-5 days), and then they deposit that check, which needs to clear (0-8 business days, depending on the bank). Then the buyer brokerage can write the check to the buyer agent. That means it can often take 10 days from closing to get paid - and sometimes longer. Some listing agencies (often the really big ones) have to send checks to central clearing houses which can REALLY slow things down.
That is the easy scenario of course. The hard one is when the listing agency has some funds, but the rest of the funds are at the closing table. This is the middle scenario in the image below. Usually what happens is the closing funds are sent to the listing agency and deposited. Just as the scenario above, this can take about 5-10 days. At that point, the top scenario is followed, resulting in another 5-10 day delay. Here's a situation spelled out that could take 20 days.
Closing attorney sends funds to listing brokerage (5 days- no mail on Sunday)
Listing brokerage deposits check (1 day to deposit, 5 days to clear)
Listing brokerage sends funds to buyer brokerage (3 days)
Buyer Brokerage deposits check (1 day to deposit, 5 days to clear )
And that's when everything goes right, and no one is missing any paperwork (I am often chasing other brokerages for commission statements and W-9's)
The clearing of checks really slows things down, and when someone uses overnight mail it speeds things up, but it is not uncommon for closings on a Friday not to have anything mailed until the following Monday or Tuesday.
Having said that, you should know that as an agent myself, I know the waiting can be hard. At Heisler & Mattson Properties, we clear checks immediate and often write commission same day we have funds. This includes when we send checks to buyer brokerages. Although many agencies may give you the run around, that doesn't happen here.
The last situation is becoming more common, but it still isn't common. The closing attorney, occasionally, will write separate checks to both agencies if they are owed funds. This is significantly a faster way to do things than path #2! But in Massachusetts, technically it is not the way it is "supposed" to be done.
I hope this newsletter finds everyone safe and well. It certainly has been an interesting spring to say the least, so far, and I'm getting a lot of questions about what is going on in the market, so I thought I would take a moment to discuss the current trends that we are seeing, so people can assess what makes sense for them.
Interest Rate Impacts
Normally, interest rates drive a big chunk of purchase behavior in Real Estate. I'm going to start with this part as it affects all the other sections. People keep an eye on rates and often make decisions around the rates that are available. Rates have gotten very low, touching or even exceeding the rates available during the financial crisis. They weren't very high to begin with, but it's hard to argue with these rates. I have - on occasion - seen 30 year mortgages with a 3.0% rate for purchases on conforming mortgages, and some 10 year ARM's have dropped below 3.0. With many economists predicting a rise in inflation, locking in these rates for a longer term is an insanely good idea. I do not know if inflation will pick up, but I do think that it will pick up when people least expect it, as that is the way of things. There are a number of arguments for and against the rise of inflation, but the bulk of inflation arguments is around the influx of money into the world financial system. The arguments against inflation are the past 20 years, and the low inflation rates that have persisted despite several periods of significant monetary injections.
Links: I linked an article from Barrons about potential inflationary environments. But there are lots of others.
Current Real Estate Market for Home Sellers and Home Buyers
When the stock market crashed, I got a number of calls from buyers and sellers that were in process. They all wanted to know, how will this affect the market? I suspected that there would be fewer buyers, but also there would be fewer sellers, and only if there was a big imbalance between the two would there be a big change in market prices. So far, that suspicion has been largely held up. We have seen the sub 500 market stay quite brisk, as more sellers and fewer buyers have stayed away from that market. Although things are moving slower (home selling in a weekend now take 8 days or so), there is good traffic and quick transaction for many homes in this price range. This makes sense, many people in this price point "have to" move. The higher levels of the market, mostly with people who "want to" move, has seen fewer buyers, but there are still more buyers than there are sellers. Overall, I'm not seeing a lot of different price action. I see most homes selling where prices were 3-5 months ago, and no real change, but there is still a lot of pressure on prices on the lower end. To see examples, you can check my recent reports in Milford, and here in Natick. It is worth noting, however, that the prices in the most expensive towns were under pressure before the pandemic, so it is hard to see if this is a continuation of the trend or a true pandemic impact. Maybe a bit of both.
There have been some changes, to be sure. If you'd like to talk about what we can do for your situation, please call, but note generally in this market we are doing the following types of changes.
Open Houses: No longer a group activity, OH are being broken into individual appointments, usually about 15 minutes or so. Handwashing before and after is also a common approach, and of course the state's Mask order remains in effect. Basically, most showings are now private showings, and seeing a home is more complicated, but by and large folks are having success with this.
Depending on each home, certain additional precautions can be made, whether you are showing to sell or purchasing. It's the new normal! Overall though, I think agents and agencies are doing an excellent job coming up with new parameters for keeping things going. Everyone's risk level is different, so these solutions won't work for everyone, but for a lot of people, they can keep things moving.
If home purchasing is driven by interest rates, real estate investing is even more so. Right now the inventories for investment property are extremely low until you get far out into the suburbs of Worcester and prices for investment property are at huge jumps over last year (in Worcester county) and remain at very optimistic levels for for counties to the East. When I say optimistic, I mean at the prices they sell, it is hard to generate meaningful cash flow for the risk incurred, and that landlords are betting on rents rising at a good clip over the next 2-3 years. With rising unemployment, and a large rental base that was getting priced out of the market inside and around 128, I think that there could be a significant migration out of these areas impacting rents - as is typical in economic downturns. If your income isn't going up, then you move, and try to control your expenses. While this is probably a positive for properties 50 miles or more away from Boston, the impact inside that radius is unclear. It is certainly possible, if the economic impacts of the pandemic continue, that over-leveraged investors may have to sell some inventory. Right now, that inventory would likely be gobbled up, but a sustained increase in selling would impact prices in this part of the market. Any obvious drop in rents would do it also, but either of those are likely months away at this point. In the meantime, with the drop in interest rates, I expect to see continued pressure on this segment.
Think about Remodeling
If there are DIY (do-it-yourself) projects you've been putting off, now is a great time to do them. Painting rooms, changing knobs or fixtures to give places a fresh look can all be done. It isn't clear when the economy will open up, but if you have a vacant house to fix, this is a great time to hire contractors. Generally, their business has been hit hard, and although I don't see prices for work dropping yet, you should be able to find generally responsive contractors while business is off. If you have a tenant move out, it is a good time to consider renovating your apartment for this reason. If you have questions about how to get creative here, contact me and we'll see what we can come up with.
Just for Fun!
I am usually taking my own advice, and I just recently finished a trim up grade in my dinning room. I added Board and Batten - a type of wainscoting - and it came out pretty good! Here is a link to the whole project, with before and after pictures, tools needed, and cost information. This is a style that has been getting more popular, and you'll probably see it when you're out and about!
simply says the buyer offers to pay the seller a fixed number - let's say 400,000 for instance. That is pretty simple and clear to understand. An escalation clause, however, assumes that there are going to be multiple offers, and then the purchase price is written as: Buyer offers to pay the seller (X) over the highest offer. On a home of $400,000, X would typically be a number between 2 and 5K. (It's not usually $1! It's not the 'Price is Right' people.) This means, in practice, that as a buyer you don't really know what you are offering on the house. Ultimately, what you are saying is no matter what someone else offers, I'm willing to pay more. Even so, this won't guarantee that you'll get the house. I've had listings that have received multiple escalation clauses - and only one person can get it. (Usually the offers have different escalation bump amounts (So bigger is better!) or have other factors that allow a seller to choose the best offer). 
weren't very high to begin with, but it's hard to argue with these rates. I have - on occasion - seen 30 year mortgages with a 3.0% rate for purchases on conforming mortgages, and some 10 year ARM's have dropped below 3.0. With many 
unemployment, and a large rental base that was getting priced out of the market inside and around 128, I think that there could be a significant migration out of these areas impacting rents - as is typical in economic downturns. If your income isn't going up, then you move, and try to control your expenses. While this is probably a positive for properties 50 miles or more away from Boston, the impact inside that radius is unclear. It is certainly possible, if the economic impacts of the pandemic continue, that over-leveraged investors may have to sell some inventory. Right now, that inventory would likely be gobbled up, but a sustained increase in selling would impact prices in this part of the market. Any obvious drop in rents would do it also, but either of those are likely months away at this point. In the meantime, with the drop in interest rates, I expect to see continued pressure on this segment.