Signs of a slowing market

Here are the latest listing inventory stats (per Red Oak Realty):

  • Active inventory is declining, but at an uneven and slow pace. We have been at a 6-year record high for the past 8 weeks.

  • A wave of new listings hit the market last week, particularly in the $750K-$1M price range, keeping seller competition stiff.

  • The number of pending properties has declined for the past two weeks, reflecting in lower buyer demand.

Additionally, average days on market for active inventory is at a 6-year year high: this week it is 37 days (it was at a record low the same time last year at 32 days). 

If these trends continue, sellers are going to have a harder time getting properties into contract and may need to take price reductions.

Buyers may want to consider getting aggressive on their offers for those not-so-perfect homes. There may be a "bargain" waiting to be discovered.

Data from the MLS for the following cities: Albany, Berkeley, El Cerrito, Kensington, Oakland and Piedmont. These charts are for Red Oak Realty and clients.

Data from the MLS for the following cities: Albany, Berkeley, El Cerrito, Kensington, Oakland and Piedmont. These charts are for Red Oak Realty and clients.

What Buyers Need to Know When Viewing Open Houses

If you are shopping for a house you may feel like you are overwhelmed with questions or uncertainty and have anxiety over the unknown. It is helpful to work with an experienced buyer's agent. If you attend open houses without your agent, here are a few tips to keep in mind:

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  • Any agent hosting an open house, whether they are the listing agent or not, should be helpful and honest with you; however, their fiduciary duty is to get the highest and best for the seller. Don't ask a listing agent what they think the house will sell for. Frankly, they likely do not know and they do not want to scare away any buyer by saying, "I hope we make a record-breaking sale for the neighborhood and it goes hundreds of thousands over the asking price".
  • If you do talk with the open house host, other potential buyers are listening and are "sizing up" their competition. It is like poker, do not show your hand. One time I had a buyer tell a listing agent what their budget was and asked the listing agent if they thought they could win the property in competition. Don't do this! You just showed your hand.
  • If you ask the hosting agent question after question, you may be conveying the wrong message. Yes, buyers deserve answers to their questions, but let your agent do the research and ask on your behalf. You could be inadvertently sending vibes to the hosting agent that you are uncertain about the house, have grave concerns about the property condition or that you may not be a deal closer.  For example, I had a buyer client ask a listing agent about plumbing and water pressure. My client noted that she loved her showers in the morning. My clients called me that night to tell me that they found an old farmhouse that they loved. I immediately called the listing agent to ask for the disclosures/reports on the property. The listing agent immediately remembered my clients and said, "I do not think this is the right house for your clients." I asked, how so? The agent replied that it was a 100-year old home with old pipes and she could not guarantee that the water pressure would be sufficient. Pipes can get replaced and no home is perfect. I was able to discuss at length the property condition with my buyers and inform them about what is typical when reading the disclosures. Buyers may not be aware that certain comments to the listing/hosting agent will convey details that could be possible deal-killers.
  • Many Realtors host open houses actively and legitimately to seek out buyers. They may ask guests to "sign in".  You don't want to do this if you are already working with an agent. This is a way the host can contact you and solicit your business. Kindly tell them you are working with an agent and give your agent's name. You can always say "I will take your card and ask my Realtor to contact you if we are interested". Some may think there is an advantage to working with the listing agent as their buying agent. But ask yourself, if a conflict arises, would you be comfortable with the same agent representing both sides?
  • Don't ask the listing/hosting agent for a showing. Call your agent to set up a private showing. Likewise, when perusing homes online, don't request a showing via online real estate websites. Realtors pay to be sponsor-agents on various websites. If they show you a property that you later purchase with your agent, they can claim they are entitled to the commission; this is called procuring cause.
  • While viewing open homes, social courtesies apply. I have seen open house visitors act in way that appears defensive or even hostile. You don't need to engage in long conversations with the host or disclose a lot of information about yourself. Listing agents do remember the visitors and will convey to their seller what their impression is of the buyer.

Bottom line, choose your buyer's agent early in your house hunting process. If you are working with a stellar agent they will do research, talk with you about comparable sold data and pricing, review and discuss property condition, and provide you with answers to your questions. They should be putting your needs above all else and be transparent. Bring all of your questions, concerns and fears to them with full confidence in their advice.

Words for Buyers

With all of the online tools available today, many new buyers feel that they have a grasp of the market and don’t need the help of an experienced Realtor to assist in navigating the market. 

The other night  I was talking with a client who was seriously considering submitting an offer on a property in North Oakland. The home checked off nearly all of the boxes on her needs list and we were knee-deep in analyzing the property disclosures. As her advisor, I pointed out the flaws while also sharing with her the reasons I liked the place.

The house had an open floor plan and some thoughtful improvements, while maintaining the essence of its 1908 construction. The downside was that some of the finishes were inexpensive and already showing deterioration; additionally, it could use a bit more storage. We both commented on how we couldn't believe that the sellers didn't deep clean or paint the property in preparation of the sale. (Sellers, yes it is just paint and carpet cleaning but this conveys a lack of care and pride to buyers).

Just three weeks prior, this client wrote an offer on a home that she adored and made her giddy with excitement. She had put in a killer offer on the place but didn't prevail. The heartbreak of not winning was real and the disappointment was tangible.

As we were talking last night, my client spoke about the house she didn’t win in comparison to the house that she was potentially writing on today. I explained that the property that she lost on had sold for more than $100,000 over her budget and was potentially worth $400,000 more than the current house in question. It was indeed a dreamy property that received more than 20 offers. I gently said that although we still covet the house lost (I covet it too) it was not attainable. I suggest that we focus on properties that are attainable. 

Think of it like this, there is a handsome man, who is smart and funny. He is flirting with you and gets your heart racing. The only catch is, he is married. He is a big tease and you can't have him. Let's put him back on the shelf and look at real candidates; ones who are genuine, may not be as sexy at first glance, but with a wardrobe makeover could be even better.

Losing out on properties can be an emotional roller coaster. It taps into emotions that often surprise us. It can be a combination of real disappointment coupled with anger. Anger that you work very hard to be able to buy a home and how dare this real estate marketplace be so expensive!  Don’t get caught up in the tease. Focus on real candidates that are fulfilling, attainable and will give you true joy. Let the flirts be a fantasy and inspiration on your Pinterest board. Buying a home is a process requiring true focus.

My job and experience is to help you streamline your search. I help organize (and re-organize) your shopping list, explain the nuances of the market and provide inspiration on how you can make your ordinary home magical for you. I know that house hunting requires real support, if you are house hunting right now, hang in there. 


Why Timing the Market Rarely Works

I have several clients who are genuinely concerned about over-paying in this market. I completely understand this concern and in no way disregard it. Frankly, the money is not mine, so the purchase needs to make sense for the buyer. The problem is that Oakland and Berkeley have very limited inventory. In Rockridge, only 56 homes sold through the local Multiple Listing Service for the entire year of 2016. If you purchased in this market, you likely paid what you felt was a premium to get into the neighborhood. Maybe you waived your contingencies and paid more than the appraised value. You may be sitting here thinking, "Who does Deidre think she is to encourage this type of offer?" Well, the fact is that the market has not slowed down in 2017 and prices thus far have surpassed what folks paid in 2016. Essentially, if you bought last year, you are ahead of the game. 

But let's be honest: The market can soften and values can decline. This is real estate, a commodity that fluctuates just like other investments. If you are buying in this market and are only considering certain areas, you will likely need to pay a premium, but the key is to do so wisely. Purchase a property that will fit your needs for the next 7 to 10 years or more. That way, you won't have to worry about the market going up or down because you won't be selling. Furthermore, the market may soften, but interest rates will likely go up.

This morning I was talking with Vanessa Bergmark, the owner of Red Oak, about our market's similarities with the stock market. Let's say you invest in a retirement account with a goal of retiring in 2030. You may work with an advisor or select mutual funds based upon moderate growth. You may see retirement rise and fall, but you do not panic because you're not retiring anytime soon. You would not do a panic sale at the threat of further decline; you would wait it out. You should have the same outlook when buying a home: Buy a place you can afford that fits your needs and is in a neighborhood that works for you. Enjoy life and hold on to your property.

I have heard many buyers say they would never pay that much for that house and, just like that, values increase even more. Earlier this year, I had clients who were trying to buy a home in South Berkeley but did not want to spend more than $950,000. They wrote a $950k offer and were verbally countered to $990,000. They decided to liquidate some assets and stretch to the $990,000 price in order to buy the home. Fast forward 6 weeks later, a home within 1 block closed escrow at $1,200,000. By stretching in that moment, those buyers scored a home that they love and have stopped chasing the market. If you're currently looking to buy and are not offering enough money, you are chasing the market with your next offer.   

Five years ago, I helped someone buy a fixer in the Rose Garden area of Oakland. At the time, I worried that they overpaid. (Yes, I worry all of the time for my clients!) For that year, they paid top dollar for a home in that condition, yet one year later a home half the size on the same block sold for $100,000 more than what they paid. Fast forward, 3 more years and they are ahead by $250,000.

This is not to say that you should buy a lemon or buy beyond your means; rather, focus on what you can afford. Buy smart and for the long haul. 


Home Buyer Q & A

Q: What are some common costs home buyers overlook when purchasing a house? 

A: One of the first things I talk to clients about is expectations.  Often buyers look at homes that are freshly painted and appear updated and the assumption is that everything is done or is turn-key.  In our marketplace I tell clients to expect about $30,000 in repair recommendations.  It could be a sewer line that needs to be replaced, an old roof, a bad electrical panel or foundation work.  A huge portion of my clients last year needed to replace Federal Pacific electrical panels; a very common panel in homes built in the mid-century.  Often electrical work is a recommended “do now” repair.  Another common misconception is that a buyer will pay property taxes based upon the current owners tax basis.  Yes, as part of the buyer’s closing costs, they will be billed at the current owner’s property tax, however within 6-10 months buyers will receive a supplemental tax bill that is a retroactive bill from the date of closing, which is the difference between the previous owner’s tax bill and the current tax bill.  Therefore if the seller paid $5,000 per year in property taxes and the current tax bill is $10,000 a buyer will owe the difference.  Property taxes are based upon your purchase price; 1% of the purchase price, plus another fraction of a percentage (that varies city to city), which is derived from bonds and assessments.

Another surprise to some buyers is that seismic retrofitting is currently considered an upgrade. The bolting, shear wall support and bracing to help protect a home in an earthquake is an upgrade, meaning a buyer will likely want to budget for this work and not expect it.  Let's say a home is built in the 1940s and there are bolts in place, those bolts are very likely not up to today's standards and are considered undersized.  Year by year we know much more about earthquake safety, as well as more about where fault lines are.

Q: Are any costs associated with buying a house negotiable?  How can you go about negotiating those or secure lower costs? 

A: Everything in a real estate transaction is negotiable, however, in the robust Oakland-Berkeley marketplace, the vast majority of closing cost fees are customary "pre-assigned".  I have seen heavy cash down or all cash buyers pay seller closing costs in an effort to reduce the purchase price. By doing this they hope to have a slightly lower property tax basis.  The one thing that should be known is the city may call and ask questions about the transaction and I have heard that there is no guarantee that the city may not adjust the value up.

Q: What are some more common costs associated with owning a home that you wouldn't experience through renting?

A: You will need to fix all repairs, there is no landlord to call when the hot water heater breaks or the roof leaks.

Q: What are some of the best ways to financially prepare for buying a house? 

A: Do not spend all of your liquid assets getting into a home nor use them as your down payment.  Make sure you work with a mortgage lender who provides spreadsheets of all of the out-of-pocket expenses, monthly payments, property taxes, etc.  Plug those numbers into your budget.  See if you have money to eat a meal out, fix an unexpected repair or make the improvements that you desire.  The best strategy would be to have a house savings fund for future repairs and maintenance, almost like an HOA reserve fund.  I have done a home improvement project almost every year that I have owned my house. 

Answering buyer questions regarding mortgage financing

A first-time buyer reached out to me with some great questions.  They are looking to buy a house in Berkeley or Oakland within the next year and had already pursued mortgage financing with a “big bank” as well as a local mortgage lender for a loan pre-approval.  With their price point being $700k-$800k and a 20% down payment, they received rates for a 30-year fixed loan that varied from 3.875% from a “big bank” to 4.7% from a local lender.  They also had an option utilizing cash through a source that would take some time to acquire.

They wanted to know my thoughts on, 1) buying a loan vs. buying cash, and 2) working with a local lender versus a “big bank.”  My response to them was:

One of the drivers of our market in the last 4 years has been low inventory, which has created multiple offers.  I track approximately 200+ transactions in the Oakland and Berkeley area annually and, what is important to note, approximately 80% of winning offers are written with the buyers waiving all of their contingencies (online tools do not reveal type of financing or terms of the winning offers).  If the property is popular, it can be a battleground situation.  One of the implications to this type of offer is that your initial down payment (typically 3% of the offer price) is at risk if you do not close escrow for any reason.

As far as big bank versus local lender, in the 12 years of selling hundreds of homes the majority of my transactions are with local mortgage brokers doing the financing (with a handful of exceptions), but never with the big bank financial institution that this particular buyer solicited Typically in this multiple offer market, a seller will go with the known quantity, meaning the local Realtor and local mortgage lender whose reputations for closing deals precede them.

An example being, this year my client purchased a 2 bedroom, 2 bathroom penthouse in the Adams Point neighborhood of Oakland. On this property there were 12 offers received and there was a full day of negotiating.  There were 4 offers that received a multiple counter offer from the seller.  In the end my client had to increase her price to win the deal, but I found out afterwards that there was another offer identical to ours.  The listing agent mentioned to me that the sellers picked my client’s offer because she conveyed to her seller that I was a local agent with a vast amount of experience in our market and the lender was a local Oakland mortgage provider.  The terms and price were the same.  In no way do I want my clients paying a higher interest rate by selecting a local lender over a big financial institution but we are in a market that is currently beyond competitive.

In regards to cash versus loan, cash can beat out other offers as long as it is about the same offer price as the loan offers.  Meaning if there is a choice of a strong offer with a loan that is more money than a cash offer, I have seen sellers take the loan offer to yield more money.  Cash is king only to a certain point.  I see cash deals about 25% of the time; however, what is even more important is the reputation of your agent and lender.

I hope this potential buyer Q&A helps you as you decide your mortgage financing.

To Buy or Not to Buy

Yesterday I received an email from a buyer who expressed that they were discouraged by the market and were considering taking a year-long break from the house hunt.  They thought the time off would be good to reassess things and watch what happens in the next year with the housing market.  I completely understand their feelings.  In my experience, one of the biggest causes of frustration for buyers is the list price to sold price ratios.  When you see that a home sold for 30% to 40% over the asking price it is sure to be a huge wet blanket.  Often times in those vast scenarios, the house was dreadfully underpriced.  It would be less discouraging if you saw something priced at $1.250 million and then see it close at $1.4 million as opposed to (this real life example of a recent sale in Montclair) a list price of $928K and selling over $1.4 million.

In regards to my buyer taking a break for a year, I support whatever decision is best for my clients.  I am a big believer in buying smart and only when a house really fits your needs.  My best advice would be to line up your financing and be open to what the market may bring, but not feel pressed to buy for the sake of buying.  Next year may bring us a different market and we will not know until we are actively in it.  Perhaps set a pause button but stay open to the possibilities that may come.

Waiving an Appraisal Contingency

If you are active in the Oakland, Berkeley real estate market then you are aware we are in a seller's market and you have likely heard about all of the non-contingent offers. In a seller’s market there are typically multiple bids on a property.  When a buyer writes a competitive offer in an attempt to win the bidding war there are three main contingencies to consider; the inspection contingency, loan contingency, and appraisal contingency.  These contingencies are in place to protect the buyer, however, a buyer can choose to waive any or all in an effort to strengthen their offer and make it more appealing to the seller. I write many non-contingent offers for clients but I only do this when my clients have a thorough understanding of the risks and implications involved with writing and submitting a non-contingent offer. 

When writing an offer with no contingencies, you are telling the seller that should you cancel, for any reason, you are aware that you are at risk of losing your earnest/initial deposit money.

Because the appraisal is an aspect of the escrow that is determined by a third party, I'd like to further address the appraisal contingency in more detail. Every house purchased with a loan has an appraisal performed.  The hope is that the property appraises at the offer price.  Sometimes, in a seller’s market, bidding wars can cause appraisals to come in lower than the purchase price.  When an appraisal contingency is in place, an appraisal that comes in lower than the contracted purchase price allows the buyer the opportunity to potentially renegotiate the offer price with the seller. In contrast, if a buyer decides to waive the appraisal contingency, they have to be prepared to increase their down payment to cover the difference in the appraised value and their offer price.  

Real World Example: 

You are offering $900,000 on a home and it is your goal to buy a home with a 20% down-payment ($180,000 cash/$720,000 loan).  

The appraiser comes out and appraises the home at $880,000. You have waived your appraisal contingency, so you will need to have funds to cover the 20% down-payment, of the appraisal price ($176,000) plus an additional $20,000. See below:

$176,000 adjusted down-payment based upon 20% of the appraisal value +

$20,000 additional down-payment +

$704,000 adjusted loan amount = $900,000

Why do the numbers change?  A 20% down-payment loan program is based upon the appraised value, not the offer price. The seller accepted your offer at $900,000 and you wrote your offer saying you would pay $900,000, even if it does not appraise at this price.

What is at stake if you take a risk and do not have the funds to cover the difference?  Your earnest money, also known as a good faith deposit.  Typically, in our niche market, buyers are placing 3% of their offer price in a neutral escrow account. This money is held there until the escrow officer has mutual instructions from both the buyer's agent and seller's agent. This 3% is applied to the buyer's down-payment, unless the buyer breaches their contract. "Breach" means backing out for a reason outside of your contingencies or reasons not permissible per the contract. So, if you write an offer with no contingencies, which many buyers are now doing, and you back out because an appraiser values your potential future home for less than you offer, this is considered a breach of contract.

I hope this explanation helps you better understand the risks and implications of offers written without contingencies - specifically, an appraisal contingency.