Sylvia returned from a Realtor Risk Management Course yesterday with all sorts of frightening and scary news. This was an MCE course (Mandatory Continuing Education) required to maintain her Broker’s License and the instructor was an attorney. After Sylvia rattled off the list of things we do that the attorney says we shouldn’t be doing, I couldn’t help but wonder what sort of industry this has become. This basic message from the attorney? – don’t be too helpful to clients or it can get you sued. I wonder how many Realtors actually follow this sort of advice and thereby provide less service to their clients because they are more concerned about being sued than they are helping people. I don’t buy it. We are Service Industry Professionals and should be, at all times, providing the best service we can to our real estate clients – even if doing so exposes us to a little more risk.
So what were some of the specific things the attorney said agents should NOT be doing?
The attorney at this Risk Management course says, as agents, we should stay completely out of the inspection process and leave it all between the Inspector and our Buyers. We should never refer the Buyer to just one inspector (even if we have a really good one we’ve always used), but should instead provide a list of at least three. Same with any other Vendor we refer – always give a list and never recommend just a single vendor. Under no circumstance, he says, should we do a walkthrough or even be present at the inspection. He says doing so opens us up to liability in case the Buyer later discovers defects that she thinks we should have noticed or “should have known about”, or thinks we referred a bad inspector, and then decides to sue us.
The attorney says our answer should always be “I don’t know” to questions such as “what sort of appreciation can we expect in this neighborhood” or “what has the appreciation been in this area the past year?” We should refer those questions to a third party source, according to the Risk Management Course, because if we offer an opinion that the Buyer relies on, and it turns out to be wrong, the Buyer might later sue us.
The attorney says we should always encourage Buyers to get a Home Warranty so that if an appliance breaks down shortly after closing, the Buyer will be covered and won’t be mad at us and therefore will be less likely to sue us.
Remember, this is an attorney teaching a Risk Management course, but my God!. Notice that, in an education course like this, it’s all about helping the agent avoid being sued. That’s fine, but the risk avoidance methods suggested are at the expense of the level and quality of service provided to the client. I know attorneys are paid to be cautious, but I have to disagree with this entirely.
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I’m not sure what to think about East Austin. I still don’t recommend it to investors, though I know many investors have done well and are doing well there (selling mostly to other investors and brave young buyers), and I have friends who’ve invested there. One friend of mine purchased a 2 bedroom home a year ago for around $120K. He put $25K into it right away, fixing up the kitchen and bathroom and other cosmetic issues, and then rented it for only $650/mo to a couple of waitresses chasing cheap rent. Those numbers don’t work for me, but the tiny place is probably worth close to $200K now, so he’s thinking long term appreciation.
I myself have made at least a half dozen serious trips into East Austin the past year, previewing homes and making sure I’m not missing out on deals I should be recommending to my investors. Each time I do this, I see nothing that comes close to making sense for the type of investors we typically work with. Our typical Austin investor wants a clean newer home located in a popular, reasonably close-in suburban area with good schools that will attract quality renters. Basically, family neighborhoods with good schools where you see Moms pushing jogging strollers, kids riding bikes and Dad jogging with the dog. Think Circle C and Steiner Ranch for example.
The average price of a single family home sold through the Austin MLS is up 10% from October of last year, and we’re up 9% year to date. I created a graph below to illustrate what real estate appreciation in Austin has looked like over the past 7 years. As you can see, we enjoyed a 17% appreciation rate from 1999 to 2000, which was the tail end of our last real estate boom in Austin, then the market hit the skids in 2000 with 3% appreciation (stock market started to crater about March of 2000) and then we were flat as a pancake from 2001 through 2004, with falling prices in both 2002 and 2003. From 2001 to 2004, our net appreciation over those years combined was an unremarkable 0.7%.
I threw in Condos and Townhomes on this graph, but as usual include only single family homes in the overall stats on the other charts below. The Austin MLS includes all residential sales in the stats they report, but I like to keep single family homes separate since that’s what most people own and buy.
I remember in 2001 and 2002 when I started receiving a lot of calls from investors looking to “park some money” anywhere other than the stock market, which was in freefall and investors were watching the wealth shrink. At that time, I would ask “why do you want to invest in Austin? Our market is dead and rent values are plunging?” Those who did invest in 2001/2002, purchased a home that did not increase in value over the next several years and that was very difficult to rent and even saw rents fall each year.
I’ve overlayed the rent values over this time period (times 100 for easier viewing) onto the graph below and you can see what a slow sales market did to our rental market. Sellers who couldn’t sell were forced to rent, which flooded the rental market with excess inventory. Builders, who had no buyers left to sell to due to job losses, started agressively going after renters. So we had a simultaneous increase in rental inventory and a decrease in renters. You can see the result below.
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(Dallas Morning News) – All of the Texas cities tracked in a recent survey by the National Association of Realtors had increases in home prices in third quarter 2006. Statewide prices were up 8.6 percent, one of the largest such increases in the country.
The biggest jump was in El Paso, which was up 14.3 percent. Meanwhile, Austin had the highest median price in the state at $175,500.
The rest of the United States saw a 1.2 percent drop in median home prices, with home prices falling in 45 of the almost 150 markets tracked in the survey.
Below is a link to a news segment from News 42 Austin profiling the Austin real estate market for homes that cost 1 million dollars or more. The news story plays up the $1M+ market, indicating a swell of demand for homes in that range. It’s an interesting story not only about the Austin real estate market but about the amount of wealth coming into Austin and the wealth that already resides here. But are Million Dollar Homes in Austin really selling “faster than they can be built”, as the story states?
Here are some stats not provided in the story:
• As of today (11/15/2006) there are 7641 single family homes listed for sale in the Austin MLS. Of those, 395 are listed for $1M or more – about 5% or 1 out of 20 homes.
• This year, as of today, 22,757 homes have sold in Austin. Of those, 277 sold for more than $1M – about 1.2% or about 1 out of every 100 homes sold.
• This year, as of today, 325 listings of $1M or more have Expired or been Withdrawn without selling, compared to the 277 that have actually sold. For roughly every eleven $1M homes that sell, there are thirteen listed for more than $1M that don’t sell.
The news story says $1M homes in Austin are selling faster than they can be built, and that may be true in a few select subdivisions with a few builders, but the MLS stats don’t support that assesment for the market overall. 1 out of 20 listings in the Austin MLS is priced at $1M or more, but only about 1 out of every 100 actual sales are for $1M or more. There are more Million Dollar homes on the market than current demand can absorb, and more of those listings eventually fail to sell than do sell.
It’s still a good story in other respects, but it always interests me which stats and numbers news reporters choose to offer in their stories and how news stories can leave a reader or viewer with an impression that is not 100% accurate. In this case, the story might lead a viewer to think $1M+ homes are selling like hotcakes when in fact it’s still a Buyer’s Market in the million dollar range in Austin if looking at the metrics we use to determine such things.
Austin’s rental market for single family homes looks like it might finish the year with a slight upturn from last year. This would break a four year downward slide in Austin rental rates that started in 2002 after the tech bust and 9/11. We still have November and December to factor in, but we’re a bit ahead of the year-to-date rates for this time last year.
The problem continues to be ample supply being provided by new investors. As you can see on the chart below, 26% more homes were leased through the Austin MLS this October over October a year ago. That’s 610 leased homes Oct 2006 compared to 485 leased homes Oct 2005. So the demand is there, but supply is keeping up. Year to date, we’ve leased 38% more homes this year than last year. That’s a lot of new renters being absorbed by the rental market.
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