The Relative Frequency of Real Estate on Google Trends
Check this link out. I find it fascinating to see how chatter - for the purposes of this graph, search - changed as the market did. A score of 1 is average.
The Relative Frequency of Real Estate on Google Trends
Check this link out. I find it fascinating to see how chatter - for the purposes of this graph, search - changed as the market did. A score of 1 is average.
Web Search and Real Estate
I am in the process of re-activating my Pennsylvania real estate license, as well as getting my NJ one.
While I am and will remain primarily a developer, there is a good deal of value for me personally, and, I think, for clients in working with someone like me on various transactions. Investors and other developers may top this list, as I am in-tune with a large number of potential project properties everywhere from Philadelphia to Long Beach Island, and points in between. I also have the real-world experience to help clients understand potential pitfalls, costs, and real market value that other agents may, but may not, have. For some clients, there will be the opportunity for me / us to offer a truly integrated real estate experience, as I’ll be able to assist them in everything from acquisition and analysis to design + build and, eventually, their sale. Sort of like the Property Brothers TV show, without the brother.
This post isn’t really about all that, though. It is about real estate search, technology, and how people find real estate and the professionals they work with. Traditionally, a broker had agents. They ran ads in the local paper, held open houses, and the agents sat in the office, waiting for a potential client to come in, looking for a property. While all of that still happens, more-or-less, I believe it is a far smaller and less significant aspect of the real estate search process than it once was.
The change is obvious, yet elusive. People clearly go online now to search for real estate, even when (perhaps especially when?) they have a Realtor. Where do they go? How do they choose a property they want to see? Who do they call to actually see it?
There was a time not very long ago that Realtors controlled what a client saw. They had access to the MLS, and before that to the paper listings in the office. This meant that they controlled the information. The client had little control of what they saw or knew about a home or the market in general. All of that has changed.
With Trulia, Zillow, Realtor.com, Loopnet, etc., almost all information is more transparent than its ever been; and that trend is only going to grow. Realtors no longer control information. In fact, clients don’t only need them less for ever for information but, in many cases, are better able to search out and research what they want than a Realtor. With their control of information gone, the only thing that Realtors control is access. Without them, it is very hard or impossible to see a home listed on the MLS. To gain access - to actually see the home - you need a Realtor. Naturally Realtors will continue to protect this moat, without it their existence would be in question moving forward. This is a statement of reality, not criticism. Good Realtors offer a good deal to their clients that online search does not. Everything from contracts to negotiations, to local market knowledge and due diligence are immensely important to a successful transaction, and the Realtor’s role in all of this should not be diminished.
Yet, it is still true that one of the agents’ prior roles has diminished quite a bit. As I entertain various marketing options myself - everything from Trulia and / or Zillow ads to Google AdWords - I am thinking more about how people actually search, and who they choose. As a Realtor, both Trulia and Zillow allow you to pay for placement next to listings. So, if a person searches for homes in Chicago under $400,000, a Realtor can pay to highlighted next to the listing. That does not mean they are the listing agent - far from it, to the chagrin of many listing agents, too. I have no objection to this process, and think it’s interesting and potentially useful.
I wonder (and need to research) what the click-through rate is, and, more importantly to gain a sense for how many of these agents actually end up working with the client. As Chris Dixon has pointed out (about search in general, not real estate in particular), Google has been so successful because people tend to search Google with the intent to purchase. Unlike ads on Facebook, for instance, where people see ads when they are not necessarily looking to buy anything, if someone searches for “baby cribs” on Google, there is a fairly good chance that they actually want to buy a crib. This is valuable to advertisers, and one of the reasons that Google mints money.
At any rate, I think the same logic applies to Trulia and Zillow. If someone is on the site there is a pretty good chance they are interested in real estate. Of course, since both sites are well done, there is certainly a level of window-shopping from people who just like looking at real estate, and are not necessarily interested in buying or selling. The actual percentage, I am not sure. Regardless, the question becomes where a Realtor should spend their marketing budget and what value-added services they can add to their client’s process to make up for reality that most clients are going to search on their own anyway. Most people do not trust Realtors to find them what they want. They are going to go online and find what they want, and email their Realtor those addresses.
Where are they going? Logic (interested in comments and insite from others here) would dictate to me that a specific search site (again, Trulia, Zillow, Realtor.Com) is probably many people’s choice over Google or other search engines. In fact, this brings into question Google’s overall dominance in search, as specific portals chip away at their long-time dominance.
If we assume that a person heads online to look for homes, where do they find the Realtor they actually work with? That is my question. I have some thoughts, but I hope to find some Twitter replies, comments, and to do some of my own research to better understand this process and the thinking behind it. I will post again on this general topic, as it is one I am thinking more-and-more about.
Have a great weekend.
Stocktwits, Trulia, and Search and Results
Over the past few weeks I’ve become fairly obsessed with Stocktwits. It’s not that I am a big trader, and I am very far from an expert. However, I find the social aspect of the site - and the concept that you can sort through lots and lots of noise to find a few people to align your thoughts with and flush out investment ideas - brilliant and inspiring. It is the single best real use of Twitter that I have discovered.
Their founder, @howardlinzon, is a great twitter follow even if you’re not a big investor. Anyway, they recently came out with a heatmap that allows you to graphically see what people are tweeting and talking about. The basic idea of this is that if people are talking about it, that volume of conversation may lead to something. In their case it is a change in stock price, but this idea is brilliant. I don’t know that this is an entirely new concept, apparently the basic idea that “noise” leads to trends has been kicked around by social psychologists for decades. But, I think Stocktwits hits just the right tone of serious and irreverent, and that heatmaps is a very interesting thing. What it means I don’t know yet. I’d be very interested (as I am sure lots of people would) to discover the results of stocks that have had elevated chatter. That could be very interesting, and perhaps profitable, too.
I have also been thinking more about this type of thinking as it could be layered on other topics - notably real estate. I dug around a bit, and it seems like Trulia is poking around at this: http://www.trulia.com/explore/ - but, in my limited search, it seems like searchpath isn’t available yet and hindsight seems to have very limited data (I tried a few zip codes and got no results). Anyone know of any other companies with accessible tools like this for real estate - something that displays that number of searches being done in a given area? Or do you know about any interesting studies about the affects of search to results? I’d love to hear what you think or know about this.
The Start Of a Rehab Project
Several years ago a guy and his wife walked through an open house I held for a property we’d developed and were working on selling. The house was an open loft-like home with a green roof. It was really cool, and they liked it. At the time it wasn’t right for them, but we exchanged numbers and stayed in touch.
About a year after that Franco asked me to work with one of his classes at Drexel, where he teaches. I was happy to do so, and enjoyed the process very much. In the class, we worked with students to identify various “green” measures (everything from insulation to flooring) and evaluate and model what mattered. It was a daunting task in many ways - most of the experts in the field aren’t really very good at this yet.
During that class, where I probably learned more than anyone, Franco and I started thinking and talking more-and-more about doing a house for he and his wife Sharon and their two kids. I had never worked with a client before, having done more speculative development projects where I called all the shots (for better and, at times, way worse). The idea of a design-build project appealed to me, especially for clients as cool and receptive to sustainable design ideas as Franco and Sharon. The timing wasn’t quite right, but we both agreed that when the time was appropriate, we would work on this together.
Fast-forward to about 6 months ago, and we re-initiated the talks again, but this time more seriously. We discussed everything from new construction to “container houses” to rehabs. We discussed areas of the city, costs, how to get construction financing, contractors, real estate agents … you-name-it, we discussed it. And all for good reason. Though not doing it speculatively, we were undertaking a development project. To do a project right, there are many, many variables that have to be considered. We considered them.
After a false start or two (an initial offer on a rehab house fell through), they made an offer on a home on S. 13th street, in Philadelphia, near Passyunk. It’s a great, tree-lined street with lots of parks nearby, close to the subway on Broad Street, and with lots of hip new restaurants opening up in the area.
The house is a 3-story home in need of fairly serious rehab. Over the course of the past 60 days or so, I have worked with Franco and Sharon to first imagine the completed home, and then price its development (both labor and specs), and then re-imagine and re-price it a time or four as we worked through a very laborious construction loan process, called a 203k loan. The 203k aspect of this project probably requires a post or 7 all to itself, but let’s just say that it was a challenge for all involved. Ultimately though, they closed on the home yesterday.
The design plan isn’t quite as grand as once imagined and our nerves are a bit more frayed than we’d like, but I just received a text message from our contractor that he has a demo permit in hand. Work will, at last, begin in the morning to first deconstruct, and then reconstruct, this home from its current state into something we all can be proud of.
For the next several months I will continue working with Franco and Sharon and Paul (the contractor) to manage this project and various design elements (with significant assistance from an architect). Developing a property is a constant juggling act of finances, design, sustainability, timelines, and other restraints. The end product must touch on each of these (and several other things, too) to be successful. A great-looking house that is too expensive: failure. A bad looking house that is affordable: failure. For it to work, all of these various parts must be the best they can be within the context of the overall limitations (budget, scale, etc.). That’s not easy to do, but getting the most you can out of whatever limitations you face is the challenge, whether a project be a rehab of a home or a new office building.
Here are two recent slides from the FHFA real estate index recently published. If you care to see the whole report and/or specific areas, check out their site.
This is a classic glass half full or half empty discussion. On one hand the market is clearly sputtering and struggling. On the other it has improved quarter to quarter fairly significantly from the 3rd quarter of 2008. We’re a long way from having to worry about it, but, historically, when improvement is up 10% or more, watch out … a significant fall off isn’t far behind. Ah, that would be a nice thing to have to worry about.
Part of what I do is look closely at sales in a given area to better understand value and what is really selling, and at what price. The other day I did just that for Beach Haven, NJ, and thought I would share the findings. Here are the sales of single family homes in Beach Haven over the past 6 months.
One of the things that stands out to me is the same thing that jumped out last time I did this, back in March. While it seems that everything on the Island is big or bigger, a high percentage of homes sold are smaller - 1,500 ft or less. For sure this is at least partially due to lower price points, but I think it also suggests that a good number of buyers want smaller homes.
It isn’t a coincidence that our smallest home is 1,250 sq. ft., nor is it shocking that more people call on it than our larger home. There is a market for smaller homes. The tricky part for us right now is that existing smaller homes have come way down in cost as compared to a few years ago.
This is a difficult truth to consider as a developer. Given the cost of land (at least $450,000) you are lucky - very lucky - to be able to sell the smaller home (including land) in Beach Haven for less than $750,000 and make money. People can purchase similarly sized homes for less, as you can see. Does this mean we can’t develop the smaller home? I don’t think it does, but it does give pause. What do you think? People complain all the time about how every home is too big. Yet when you look at it closely the reasons become obvious why builders and developers build larger homes.
Would you buy our home for $750,000 if you could buy an older one, in need of significant work, for, say $550,000 - $600,000? Would you rather pay $900,000 for a larger home?
The Third Wheel
Last week I posted on two of three critical players in real estate development: buyers and sellers. The third wheel, if you will, are the banks. Most developers and investors use leverage, loans, to acquire and then develop whatever it is they’re working on. Some use less than others, some do all cash deals, but at the end of the day development deals typically have some level of leverage involved. For all the reasons that don’t need repeating here banks continue to be very reluctant to lend in general, and even more so on development deals.
Generally speaking, when a developer acquires a piece of land or other development parcel and looks to finance it through a lender, the “deal” if it’s available, is/was something like this:
- 25-30% of acquisition cost in equity (cash)
- The bank finances the remaining 70-75% of the initial acquisition
- The lender also offers construction financing of 100% of the construction cost, assuming that the expected finished value (as determined by an appraiser) is at least 20% more than the total costs.
There are other variables, and of course all banks have their own guidelines, but the structure laid out above was not uncommon. In terms of real numbers, here is a rough example:
- Buy a piece of land for $400,000 - put $120,000 down in cash, with the bank financing the remaining $280,000
- Spend $250,000 on construction, with the bank financing it
- Total debt upon completion is +/- $530,000 and total cash invested is $120,000 + soft costs (debt service, fees, etc.) of perhaps $30,000 - $150,000 total
- Total investment is $150,000 debt + $530,000 debt = $680,000
- To support this structure the value would need to be around $816,000 or more (20% more than total costs).
- If this all happened as planned, and the property is sold, the seller makes $136,000 on a cash investment of $150,000 - a 90% return thanks to leverage (it would likely be less in actuality due to realtor fees and taxes, etc.)
That is how it used to work. It is clear that this was probably too attractive and too easy. Too much was built by too many people who were just trying to cash in on the boom - many investors bid up the prices of just about everything develop-able and the resulting end prices were too high - and the supply too large - to be sustainable.
Yet now, with market prices down say 20% from highs (much more in some markets), the banks are generally unwilling to lend, and it doesn’t make sense to me for a few reasons. First, banks don’t want to own property. I get that. They don’t want to foreclose, selling property or finishing partially complete projects is not their business. Yet if you think back to the example above - and you change the numbers a bit to be less favorable for the developer, you can easily create a scenario where it is hard to imagine a bank losing in nearly any situation. The bank could require more down and/or more of an equity cushion on the back end. Let’s say their requirement changes so that you put 40% down and need 30% equity on the back end. In the example given above that would mean putting $160,000 down and having to have total costs not exceed about $571,000 (on finished value of $816,000). Would this eliminate many investors and developers from the market? Sure it would. Would it also almost eliminate all risk for the bank? It really would.
Assuming the lender were comfortable in the ability of the developer to complete the project so the bank wouldn’t get stuck with it, there is very little financial risk. For the bank to get hurt the property would need to sell for $245,000 less than expected, and it would need to do so in markets that are already down 15-20%. Could the developer lose money - you bet. Could the bank? Nothing is impossible, but if you’re not comfortable with that little risk as a lender I’m not really convinced you’re a lender.
Unfortunately many lenders won’t make these types of loans under any scenario. That type of close-minded and formulaic approach to lending is exactly what got us in this mess in the first place (check this box, now that, ok, approved!). I continue to believe that there are many deals that can and should be financed by lenders right now, and that their risk, because of market forces, would be far less than they used to be. To be fair I know that many of their hands are tied by regulatory agencies, etc., but at the end of the day, lenders lend. It’s what they do, or should.
Buyers - Don’t hide behind your number
Yesterday I posted on many sellers’ unrealistic expectations of value for their property. Today it’s the buyers turn.
The real trouble with buyers and sellers alike is communication. With both typically insulated by a layer of Realtor, the ability to actually understand the others’ stance is muted. Realtors should be helping guide the evaluation of value and communicating a logic. This logic may or may not work or even be right, but without it there is no real conversation and no movement towards a deal. There are just random numbers jumping back and forth. People hide behind these numbers, and I never understand it.
Most buyers right now are looking for a deal. They believe they should get a discount because of the market conditions. That’s fine and in many cases true. With so many properties under distress of some level, there are typically some deals available and they are worth seeking out.
The question becomes, a discount from what? If you start with the presumption that most properties are marketed at too high of a price, first you need to adjust your thinking for what the real value should be, and next you need to figure in the discount you believe is fair. Deals happen when the buyer and seller are both motivated. It has to be a two-way street.
Most buyers look at a property that costs, say, $300,000 and instantly chop perhaps 15% off (it may be 5% or 25% - the point is there is no real logic behind it other than hope). Maybe they get lucky. Perhaps $255,000 is what the seller actually had in mind anyway. In most cases they won’t though. They’re horse trading - not evaluating the actual value. Horse trading can work and for many people it is the only way they know how. If the sale price was $10 they would offer $6 and be happy at $7.
I’ve fallen into this trap before too, but now I won’t. While there is never an absolutely obvious actual value to property there is an intellectual process that can be followed to get to a fair value. Very occassionaly you can get there when one party is horse trading and the other is thinking, but it is rare. My thinking may or may not be correct - that is another issue entirely - but I when I make an offer it is based on my perception of value. When I sense that the seller is horse trading back with me, my instinct is not to. I simply explain my logic, offer what I think is appropriate given what I want to do with the property, and hope that they’ll see things as I do. Generally speaking my approach to buying doesn’t work.
The good news is, it shouldn’t. If you are an investor/developer making offers and a high percentage of them are accepted you are probably going to regret it eventually. To be sure there is a difference in my perception of this process compared to a typical home buyer. There is also a difference in how I can value something compared to them. In almost all cases it can make sense for a home buyer to pay more than someone in my shoes, but I digress.
Placing fair value on something isn’t easy. Yet there is so much information readily available - from tax records to real estate sites showing comps to Realtors and appraisers - that not trying to get it right is just lazy. When buyers horse trade rather than evaluate they are unlikely to make a deal and even more unlikely to have it work out for them financially if they do happen to get it done.
There are many variables to consider when making an offer: why is the seller selling, what are other comps, what are your own expectations for costs to get it to be what you want, what is your exit strategy - these are just a few of the things to consider. That said, the best way to evaluate this is to talk. Most buyers and sellers alike are entirely unwilling to do so though. The act of discussing the property can and should help inform the overall process; yet people tend to hide behind their offers and Realtors.
I am in favor of more transparency, more communication, more openness. I believe this for deals but really just about everything else to, for what it’s worth. I am not suggesting that there isn’t a little games-men-ship that should be played in an offer, clearly that is commonly part of it. However, as a buyer I prefer to fairly evaluate the value and make my offer and ask questions. If my offer is way less than asking, I prefer to be upfront about the reason, and explain my logic. Some people won’t engage in this, and I feel it’s a mistake. Hiding behind your number won’t help you understand the other person’s perspective. To get a deal done you need to remove barriers, not add them. This means using a Realtor that is willing to actually communicate, and hoping the other party does to. It also means being wiling to talk truthfully about your thinking. You won’t lose anything by doing this. Really, you won’t. At least some of the time you won’t gain anything either. You’ll run up against a seller or agent that just won’t communicate truthfully. Chances are there is not strategy other than overpaying that would have worked with these types anyway. Since you don’t want to overpay, you want to deal with people who are willing to think and communicate. This may or may lead to a deal getting done, but it will inform the process for all and ultimately save time. Hiding behind your number - just throwing something out there and hoping - leads to wasted time and energy. If nothing else you lose an opportunity learn more about the market and the thinking of other people in it. When reasonable people get together and discuss things, deals that make sense happen.
The Trouble With Sellers
Man, this is frustrating. With the very positive exception of a likely client (more info to follow soon I hope), getting deals done right now is tough. The trouble continues to be three-fold. First are the sellers. Second are lenders (still). Third are buyers, including me. This post is about the sellers, I’ll post on the other two this week.
Most sellers continue to have unrealistically high ideas of the value of their land / home. Recently I made an offer on a lot on the Island and inquired on another. In both cases the property has been available off-and-on for several years. Both are very challenging properties that offer limited appeal to buyers. Realistically both properties are very unlikely to be purchased by anyone but an investor / developer. For similar dollars there are plenty of other options on the market that have greater appeal to your typical vacation home buyer. Most sellers fail to recognize this reality and price their investment home / land as if it is likely to be purchased for move-in value. If they discount it at all, it’s $50,000 or so. They are missing the boat.
For an investor or developer to want to do a project and take on the risk (especially in this market), there has to be upside. Take a lot where you hope to sell a finished home, upon completion, for $850,000. Less the cost of sales of 6% your net sale is instantly $800,000. Subtract $300,000 for construction costs (these are humble) and you’re at $500,000. To a developer or investor, paying more than $350,000 on the initial acquisition gets risky. Paying close to or more than $400,000 just doesn’t make sense. Is this greedy? I don’t think it is.
In the scenario I just laid out the developer (buying for say $375,000) would be all in for $675,000 or so - add soft costs and you’re realistically going to have an investment of $700,000 or so on a home you hope to sell for $850,000 and make $100,000 on (don’t forget about the $50k cost of sales mentioned above).
In this scenario if everything goes well you’ve made about 15% on your investment ($100k / $700k). The truth is, for the level of risk involved in real estate right now, that’s not great. It is at the low end of what a developer is willing to consider, and it makes you think two or three times more than you’d like to. Sure, $100k is no small amount of money, but is it possible you end up selling for $775,000 - you bet it is. Adios profit.
I don’t expect any seller to care. I really don’t. If they can get $550,000 for their knock-down home or lot, good for them. Really. But the thing is, they can’t. When a property has been on the market for years with $5,000 price reductions and it hasn’t sold, it is time to re-evaluate things. If the seller actually wants to sell the property, they need to realize who the buyers are (in this case, investors / developers) and how they value things. Without motivation there are no deals made. Right now, with some limited exceptions, it seems that many sellers, and the Realtors that represent them, still aren’t seeing the actual value in their development-type properties.
If you’re a seller of a development type property (undesirable house or vacant land) and you actually want to sell your property, you need to understand the way people like me evaluate these things. If, after doing that, the real value of the land isn’t enough to motivate you to sell, then don’t. Take it off the market. Wait it out. If, on the other hand, the real value of the property is enough to motivate you, then market it at the price and get it done.
