Cash is King, but Maybe It Shouldn’t Be

cash-offerWith the recent, and drastic, heating up of the real estate market in the Boston area, buyers in multiple bid situations are again making “cash” offers. Just recently, I had a couple make a very strong offer on a fantastic single family home in Lexington. Like most nice homes in good suburbs, it had just gone on the market and there were multiple offers. My buyers ultimately lost out to other buyers who submitted a “cash” offer. In practical terms, the winning bidders made an offer with no mortgage contingency. It doesn’t necessarily mean that those buyers had ready access to all the funds necessary to close on the property without a mortgage. It only means that they were willing to risk their deposit if they couldn’t come up with the funds at closing. My experience is that even buyers who forgo mortgage contingencies still plan to get a mortgage. Rates are at historic lows and the interest, up to a mortgage of $1.1M, is tax-deductible. In addition, I believe that most buyers who have easy access to that much cash are probably buying more expensive property. So where does this leave responsible buyers (and their agents) who don’t want to take the risk of losing a significant deposit?

I think the phenomenon is simply an expression of buyer desperation. Buyers that waive the mortgage contingency may have lost several bidding wars, and are looking for an advantage. I assert, however, that an offer from a pre-qualified buyer who is also “well-qualified” is not significantly better than a “cash” offer.  Sellers should only prefer the cash offer if the price and other terms are also better than an offer from a strong buyer with a mortgage contingency. Cash offers are genuinely stronger in transactions where getting financing is actually difficult, like commercial properties and multi-unit investment properties. Standard single family homes and condos are simply not that hard to finance.* Buyers with good credit, nothing to sell, and a job are going to get financing. The seller should focus more on the offering price and possible inspection issues. Deals fall apart over inspection issues when buyers are not properly prepared for an inspection and then get scared off by something major that they weren’t aware of before they bid on the property. Deals rarely fall apart after a purchase and sale agreement is signed and the buyers then fail to get financing.

Buyer should never waive a mortgage contingency unless they are really prepared to pay cash. It is simply too big a price to pay even for a small risk. At the same time, I would recommend that sellers only place a very small value on the lack of a mortgage contingency. At the closing, the money is green no matter where it comes from and the goal is to sell the property, not keep the deposit.

Next Up: what buyers can do with regards to the other terms to make an offer as attractive as possible.

*It may be important to inquire as to a buyer’s ability and willingness to put down more money in the event the property does not appraise at the selling price.  This is a real risk in the current market of quickly increasing prices.

Don’t Renovate and Sell!

home renovationsHomeowners often consider making renovations before selling. They believe the increased value of their home will exceed the cost of renovation. Unfortunately, this is often not the case. For every dollar you spend on renovations, you generally recoup less than a dollar back.  See the annual report in Remodeling magazine, which compiles statistics on the cost recouped of most remodeling projects.

Based on surveys of thousands of real estate professionals, Remodeling magazine concludes that the highest return projects are around 70%, while the lowest are in the neighborhood of 40%. The magazine sends out surveys to thousands of real estate professionals across the country essentially asking for their experience and opinions. The conclusions can’t be scientifically proven, but as the costs of construction are fairly easy to determine there is no reason to doubt the survey’s construction figures. However, I wouldn’t rely too heavily on the specifics of cost recoupment figures. I have seen the surveys they send out and there is simply no way to compile figures in any truly scientific way. Who really knows how much a particular home would have sold for if the kitchen hadn’t been renovated?? Rather, the opinions of thousands of real estate agents, appraisers and other real estate professionals are probably fairly accurate in a general sense. They should be used as a general guide as to which projects result in higher or lower cost recoupment, and very approximately what to expect.

Interestingly, according to the study, renovated kitchens and baths recoup somewhere around 55-65% versus other projects that return more. Common real estate wisdom says that kitchens and bathrooms sell homes. So what’s going on? The answer to this conundrum is that nice kitchens and baths make homes appeal to more people and easier to sell, but are just not valuable enough to recoup the initial investment.

The value proposition of renovating your kitchen and baths looks much better when you do the renovations a few years before you sell your home. You also get the chance to actually enjoy the renovations. Most real estate agents consider kitchens and baths fairly new up to around 3 years after renovation. For example, you spend $50,000 on a new kitchen and enjoy it for 3 years. You then recoup 65% of the cost at sale, so the renovations cost you about $17,500 and help sell your home.

In real life, it may be difficult to plan ahead. However, if you are considering making improvements to your home, considering recoupment values may help you determine what renovations make the most sense in the long term. After making improvements, I often hear sellers say, “Wow, I should have done this earlier.”

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5 Stats that Determine the Real Estate Market

housingPeople often ask me, “How’s the market?” The answer is clearly subjective, but careful analysis of the following statistics leads to at least an educated subjective judgment:

1.Value

Values or prices are usually expressed in terms of how the median price of closed sales compare year-to-year or month-to-month. Because the seasons strongly affect home sales, I recommend considering the median prices for any given month compared to the same month a year ago:

  • In April 2012, the median selling price of single family homes in the greater Boston area fell 2.5%, and condominium prices were up 6%, compared to April  2011.

 2. Volume

The most relevant statistic for sales volume (the number of homes sold) is the number of homes sold compared to the same month a year ago.

  •  The number of single family homes sold in the greater Boston area was up 11%, while condos were up 18.5%.

 3. Inventory

Take a look at how many homes are on the market compared to a year ago.

  •  The inventory of single family homes was down 10% in April, and for condos the inventory was down a whopping 30%.

 4. Days on Market

Still relevant but not quite as important, are the figures for “days on market and “supply.” This is the average time it takes a home to go under contract.

  •  The average days on market for real estate in the greater Boston area stayed relatively stable, declining two days from 122 to 120 days for April 2012 compared to April 2011. For condos, the time fell 19 days from 117 days to 98 days.

 5. Supply

The “supply” is the number of homes on the market divided by the monthly rate that they are selling. For example, if there are 50 homes on the market and 120 homes sold over the past 12 months (an average of 10 per month), there is a 5 month supply. Most experts consider somewhere between 7.5 and 8.5 months supply of homes a fairly balanced market.

  •  The supply of single family homes was down about 10% from 7.9 months in April 2011 to just 6.4 months of supply in April 2012. There was a 4.8 month supply of condominiums available in April, down sharply from April of one year ago when there was an 8.2 month supply.

 If you can get the answer to these statistical questions for the geographic area (neighborhood, town, city, state, or country) that you are interested in, you should have a pretty clear picture of what the real estate market is doing. So how’s the greater Boston area market doing? My analysis is that the greater Boston area is experiencing a transition to more of a seller’s market. The supply is shrinking and demand appears to be growing, pushing prices up and making it easier for sellers to sell. What’s your analysis?

The figures for this post can be found here on the Great Boston Association of Realtors site.

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Has your home’s value decreased? Buy a more expensive one!

trading-upIf your home has decreased in value and you are thinking about selling it, it’s hard to see any silver lining. However, if you have other resources and have been thinking about buying a larger home, this is, surprisingly, the best time to “trade up.”

Here’s why…

I recommend that homeowners consider home ownership a long term investment in the residential real estate market. Most people plan to “stay invested,” buying and selling several homes in their lifetimes, or stay in the same home for decades. Most people enter the residential market when they first buy a home. They leave the market when they sell their last home or leave their last residence to heirs. People might trade up into a more expensive home or make a lateral move or two to something of similar value before downsizing in retirement as “empty nesters.” If you don’t sell your home and completely step out of the housing market by renting for a long time or traveling the world for few years, you stay invested. Similarly, you are no longer invested if sell your home and move to a completely different market, like moving from Boston to Florida. In these cases, you might want to carefully consider your relative position in each market.

Here is an example of how trading up could look when the value of your home is down:

2006: The value of your home (either just purchased or not) – Home A: $500,000

2012: Your home has decreased in value 15%. Current value Home A: $425,000

2012: You purchase your dream home – Home B: $750,000

2027: 15 years later the market has recovered and gone up a total of 30% since 2012

The value of your home – Home B: $975,000

The value of your old home – Home A: $552,500

You benefit in the long run, because you purchased the more expensive home in a lower market. Your home is down today, but the more expensive home is down more!

The point is that it doesn’t make sense to put off selling your home, because you can’t get what you want for it. Sell when it makes sense in your life to be in a different home. Your investment in the residential real estate market will take care of itself in the long term.

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Converting to Investment Property

Sell or Rent HouseRenting Your Home vs. Selling Your Home

Many of the sales I handle are in urban neighborhoods where people consider keeping their condominium as an investment property instead of selling it. This is more common lately as many homeowners become painfully aware that they cannot sell their home for the price they want. They naturally consider holding and renting the property until the value of their home recovers. However, if a home’s value is much higher than what was paid for it, this strategy has serious tax implications.

Capital Gains Tax Rules  – The Basics

According to Federal and State (Massachusetts) tax rules, gains in value are tax free up to certain limits for people who lived in the home as a primary residence for two out of the last five years. A gain of up to $500,000 for a couple or $250,000 for an individual is tax free when you sell the home. Basically, if you rent your home instead of selling it right away, you have a three year window to sell and avoid paying capital gains tax. Gains on homes not sold in the three year window are taxed at 15% Federal and 5% State. Another option is to keep the property for life and pass it on to your heirs. A discussion of this option is complicated and beyond the scope of this post.

The Three Year Plan

If you hold onto a property and rent it, you will have to deal with one unpredictable variable – tenants. In my experience, the presence of tenants usually compromises your ability to get the highest possible price for the property. Tenants are not usually the best decorators and may not have the highest standards of cleanliness. Plus, it is extremely difficult to make improvements with tenants in the unit. To get the highest possible price, you may have to wait for the tenants to leave, make improvements, and then thoroughly stage the unit starting from scratch. With tenants in your unit, you could get anywhere from 3 to 5% off the highest possible price. The discount may be even greater if the home shows badly, or the tenants make showings difficult or are problematic. Being a landlord carries significant risk.

These costs and headaches must be considered against any expected future increase in the value of your condominium. If you decide to sell immediately, many of these costs can be avoided. There is no danger of a tenant causing wear and tear or making showings difficult. If your home is in good condition and well-decorated, you can probably prepare it for sale without making costly cosmetic improvements and can stage it using many of your own furnishings. Ultimately, you may decide to rent your condominium, but it’s important to be aware of what you’re getting into.

Feng Shui – One Agent’s Perspective

A few weeks ago I was walking along Osborne Street near my home in Brookline. I looked up and noticed this large house facing me from the end of Osborne Street.

While the house itself looks great, I particularly noticed how amazing it felt to look down Osborne and see this magnificent house sitting handsomely at the end. It occurred to me that having one’s entrance looking down the street would be considered excellent Feng Shui. I remembered that the developers of the Mandarin Hotel and Residences in the Back Bay had, at great expense and at the last minute, situated the Hotel entrance to look down Fairfield Street in order to improve its Feng Shui.  They even had to move the street lights to make it all work. See this Boston.com article to read the full story.

Feng Shui, literally translated as “wind-water” is an ancient Chinese system of aesthetics  that uses various principles of energy, design, architecture, and other disciplines that work together to improve life. In the context of residential real estate, it is mostly an art related to improving design and function. It is not really about aesthetics (although aesthetics still play a role), but rather about energy and balance so that one’s life works better. In my experience selling homes, I have had clients with varying degrees of concern for and knowledge about how a potential home measures up according to Feng Shui principles. I have also had a couple of clients hire Feng Shui consultants to evaluate their potential home, and I hired one myself to suggest improvements to my last home. I have learned a few things in this process. These are NOT in any way any kind of basic principles but rather just some interesting odds and ends I have picked up.

  1. Real estate agents are generally not that happy when their clients want to evaluate a home’s Feng Shui. They often see it as just another obstacle that may have to be overcome. Fortunately, this is not my perspective.
  2. Rectangular construction is good.  Corners are good. Anything curvy can be problematic. The reasons for this are somewhat complicated and are related to energy and balance.
  3. When you are considering a condo or apartment on more than one floor you should be concerned if your upper floor is not situated entirely over your lower floor. A floor plan that falls into this category is known as the “Philly Duplex.”  These homes occupy half of one floor and then all of an adjacent floor.  The reason for this concern relates again to balance and also to healthy boundaries between your home and your neighbor’s.
  4. Bed placement is crucial. Make sure you place the bed so that you can see the entrance to the bedroom from the bed, but it is not directly in front of you. I did not adhere to this principle at one point and my bedroom always felt wrong – now I know why.
  5. Many, if not most, “problems” can be mitigated enough to alleviate major concerns without reconstruction or spending a great deal of money. You can vastly improve the Feng Shui of your home working with the right colors, proper furniture placement, plants, screens and mirrors, as well as just de-cluttering. There is also a huge amount of information out there and it is fairly easy to find and understand.

Do you have any good Feng Shui stories or principles you would like to share?
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Tub/Shower Combo vs. the Walk-in Shower

As with my last post, this question may not be of immediate concern to you, but it is likely to come up sometime in the future if you are a homeowner.

If your bathroom needs remodeling or you are putting in an entirely new bathroom where there wasn’t one before, should you go with a walk-in shower or the tub/shower combination? I think the answer is clear: get rid of the existing tub (in the case of a remodel) and go for the walk-in shower. If you already have a tub somewhere else in your home, this decision is a ‘slam-dunk’. Why would you ever need more than one tub in your home?  In my experience of over 16 years in residential real estate (I actually do talk to people about these things), adults don’t take that many baths. Unless you have several very young children in your home who all need baths at the same time, don’t hesitate to convert one tub/shower combo to a walk-in shower.

The tougher question is what to do if you are renovating the only bathroom in your home and there is not enough space for both a walk-in shower and a tub. Here again, I think the walk-in shower is the answer.  Many people’s biggest concern is about resale. “If I don’t have a tub, won’t that hurt resale?” The answer is ‘no, you will lose some buyers, but you will gain more.’ Those people who just have to have a bathtub won’t buy your place, but the “wow factor” that your walk-in shower creates will substantially help your resale. Even those who thought they had to have a bathtub, may easily change their minds when they see your beautiful walk-in shower.

Why a walk-in shower is just better:

  1. More room in the shower generally.  The sloped walls and thick sides of most tubs make the actual floor space of a tub relatively small compared with a walk-in shower that occupies the same floor space.  With more floor space in the shower it is easier to make room for two!
  2. Tiled walk-ins can be fit into oddly shaped areas or areas too small for a tub.  If you take out your tub, you might be able to make room for a small walk-in shower and a new linen closet.
  3. They are easier and safer to get in and out of – no side wall to step over.
  4. Not as dangerous.  Cast iron, porcelain, and fiberglass tubs are slippery. Most walk-ins have tiled floors which are generally less slippery.  Look for tiles made out of materials that are known to be less slippery.
  5. They can easily be made to look great with glass doors and good tile work.  You can put glass doors on a tub, and nice tile as your tub surround, but it never looks as good as it does without the tub.
  6. Less expensive and a wider choice of great looking fixtures than the tub/shower combination fixtures.  As I noted in my last post, there is a wider choice of fixtures when the fixture doesn’t have to divert the water between the tub and the shower (tub/shower diverters).
  7. No shower curtain.  I know they make pretty ones but there is a big downside.  They are highly susceptible to mold, they don’t stay in place easily, and they just always seem to be in the way.

Tell me what you think!
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How Small Is Too Small?

After writing about enormous over-the-top penthouse condos in the city, I thought it might be nice to mention the other side of living in the city.

“Micro Condos”

I have sold some pretty small (but still nice) homes in my time.  My personal record is a 330 square foot studio apartment at 56 Commonwealth Ave. in the heart of the Back Bay that I sold 3 times as follows!

October, 2002         $229,000
July,  2004               $214,000
August, 2006           $245,000

A 340 square foot renovated studio on the third floor of 56 Comm. Ave. just sold for $281,000 in case you wondering how much it might cost you to own one of these babies today.

The most amazing micro-condo that I could find is in Hong Kong.  It is 344 square feet of hip environmentally friendly space that transforms through the use of sliding walls and slide-out furniture:

“Tiny Houses”

While I have never sold one of these, I recently learned that there is a new movement dedicated to living in exceptionally small houses.  These are not mobile homes but real houses that are typically between 100 and 130 square feet in size and are very often illegal because they are not even large enough to meet local building codes.  In Massachusetts, for example, a home that houses one person must have at least 150 square feet of habitable space.

For a fascinating and detailed discussion of tiny houses, check out this article from a recent New Yorker.

And if you still want more, go to Tinyhouseblog.com

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A Peek at the Ultra High-End

Hi. Welcome to my new blog. If you are reading this you are also reading the very first entry.

Did you happen to read the Boston Globe on Friday July 8th? You might have caught the front page article entitled “What price luxury.” See the Boston.com article here. In a nut shell, the 6,829 square foot Penthouse at the Mandarin on Boylston Street in the Back Bay just sold for $13.2M (Hey you do get 4 parking spaces for your $10,000+ per month condo fee, and 3000 sqft of deck space). The sellers paid about $13.1M about 3 years ago, and never even moved in. secure server . Interestingly, these same sellers put it on the market for $16.99M and it took 32 months for it to sell.

This appears to me to be the most expensive condominium ever sold in the city of Boston. Second Place goes to another Mandarin unit that recently sold for $12.2M and 3rd place to a Penthouse Unit at 51 Comm. Ave. that sold last year for $10.8M. That unit took 4 years to sell. Currently there two other off-the-charts Penthouses available. One at the new Clarendon for $6.75M and the other at the Four Seasons for $8M. If you’re really interested in the Clarendon unit, ask me about as I saw it a couple of weeks ago.

New York has had $10M+ apartments for a long time so why not Boston? I don’t think it says too much about the real estate market in general. One, it means that Boston is attracting some of the super rich. That is good as it helps maintain Boston’s reputation as a world class city. And two, no matter what the price range, overpricing your property is still a bad strategy.

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