Understanding a dynamic market one property at at time

What mystifies me is how prices are being set for fixer-uppers in the Boston area. Seems to me, you should do a CMA of properties that are similar, but renovated. Subtract the cost of renovating the fixer to that level. That should leave you with a fair price.

I understand that during the bubble, buyers were bedazzled by the house-flipping shows on TV, and often overpaid for fixers. Many of those properties still sit mostly unrenovated, as the cost and effort required to restore them proved too much for all but well-heeled buyers.

But today, asking prices for fixers still seem ridiculously high. I noticed a $400k house that may need between $300-$350K in renovations. No house of that size in that area has ever sold for anything like $700-$750K. But the listing language makes clear the seller still expects multiple offers.

Listing language is funny, too. I always get a chuckle when the listing says, "ALl offers to be submitted monday at 7pm" as if people will be lining up, clamoring to get a spot on the front doorstep, waving signed P&S's in hand.

I strongly agree with Marcus' comment: sellers seem to factor the value of their property "post-renovation" in calculating some of these asking prices. My wife and I would scour Arlington and Watertown for houses we liked in 2005/2006 looking for decent one or two family homes that were either nicely appointed, or, if they looked like a hurricane hit them from the inside (which many did) and they needed plenty of work, that they would be priced appropriately. Sadly, they almost universally were still asking ridiculous prices.

That said, someone was buying these places at their hyper-inflated post-renovation costs depsite their pre-renovation conditions because I saw them all get snapped up eventually. I think this market correction will force a lot of sellers to re-examine their pricing structure and either fix their places up, or price them accordingly.

We walked into some places that were truly disgusting - I mean, dirty and unkempt - and I'd ask myself who even allows someone into their home if it looks like this -- and further -- wouldn't you be able to at least clean your dirty floors and patch the holes in your walls if you're asking the astronomical prices you want for these houses? Just funny. But that's what you can get away with in a runaway market. I doubt you'll be seeing that kind of thing going on now.

Rona and other agents,

If you know where prices are going up, would you please list them? Be as specific as you can as to area and type of home. Then we can go look up in the public records and see those particular classes of homes have had rising prices on resales over the last couple of years.

It would be so helpful in ending the constant bickering around the edges on this blog, on subjects like median prices by town and multiple bid situations. Let's get right to the heart of the matter.

It should be just an easy matter for agents to know where these situations exist. Not only do they work them every day, but price change information is an essential component to preparing a CMA, which I imagine most agents do regularly.

And if there are no places where prices have been rising, let's here that too.

The author of this post makes a critical error in attempting to ascertain the direction of a market (or do a CMA) by looking at prices per sq foot that, in the scheme of things, are too close to one another to be instructive. A 2%, 5%, or even 10% difference between two individual properties in price per sq foot is not meaningful! There are so many differences between individual properties, such as the size of its yard (in the burbs) or whether the condo has parking (in the city).

It's a sure sign of laziness when people in real estate become wedded to price per sq foot without taking into account the features of each property. For example, a 1000 sq ft South End condo might sell for $600k without parking, but for $660k if it has parking (10% more per sq ft). Similarly, a 2500 sq ft Newton home will be worth waaay more than 10% more if it's on 3/4 of an acre instead of 1/4 of an acre.

oh, just a guy! I make this argument day in and day out with a few of my clients. I wish all my buyers knew this too. I think, because it is an easy number to acertain, buyers cling to it. I find my clients who work in finance, tax or MBA's cling to it even further.

The author, I think, was leaving off the 000s...Not quoting $/sq ft.

I agree with Marcus - overpriced fixer-uppers was one of the signs of the real estate apocalypse - not just that they existed, but that people were buying them, showed that the market had come unhinged. Its odd that their prices haven't dropped yet, and that's a strong sign the market is still overpriced.

And also agree on the square footage metric, though I don't think Rona was referring to that. Its useful in a broad sense, but I'm amazed how many people get overly focused on it. I prefer my own "number of real rooms" metric - within reason a square foot here and there in the living room doesn't mean nearly as much as the fireplace, or design.

LL
the all offers submitted by X thing is the semi reverse of the exploding offer gambit, where your offer expires at midnight or whatever. it is mainly a thing to use when you're trying to lend a sense of urgency to folks who have a strong desire to buy, just like when you give an exploding offer, to get people to take it or counter offer so that you can make the purchase quickly.

The offers submitted by X thing worked in the bubble run-up - the hilarious thing is seeing them still be used. Makes you wonder if the real estate agent involved has the slightest clue.

"The offers submitted by X thing worked in the bubble run-up"

Charles, this technique of selling a home has little to do with market direction. Offer deadlines suggest that the seller believes the property to be desirable and will likely receive several offers. In a market trending downward, this desirability may be based on the seller wisely pricing his property below market competition. The seller is communicating with informed buyers that he knows that the low pricing strategy will generate a quick sale and that they must act quickly. However, If the property is not aggressively priced, the misguided seller is left with no offers and egg on his face. Worst, he has squandered the critical first week of the listing.

The offer deadline works in this market when a seller prices his property below all comps and other listed properties. I should think that some on this blog would be delighted by such desperate acts of capitulation.

I've watched a great lack of success with that tactic lately. I suppose it might work in theory, if priced correctly, but I've yet to see that correct pricing - or I'd bid myself. I'd love to hear of a few examples.

It does require that buyers be in the mood to move quickly, and frankly I don't think there are many of those out there.

Capitulation and deadlines are more than a bit contradictory, btw. A deadline is an attempt to exercise seller power, capitulation is an admission of lack of seller power.

Deadlines express sellers' arrogance, a conviction that their property is "hot." They'd better be right. The humiliation of a failed deadline hangs around a property longer than the smell of cat pee in carpeting.

I'm especially stumped by deadlines on serious fixers. Are developers still scooping up SFHs to rehab? If not, I can't see how a regular buyer could put together financing to buy a condemned $400K house, plus the extra bags of cash required to make it habitable--and be confident enough of the deal to race their offer in before the closing bell.

I'm with charles. Deadlines are not a sign of capitulation. They're a warning to buyers of a mini-bubble waiting to entrap them.

One application of the CMA process I've observed over the years is that list prices adjust at lightening speed in an upwards market. In a declining market the adjustment process is slow, slower and slowest. Sellers catch the wave during a boom with little prodding from their agent or neighbors. Making that phone call from a seller agent's perspective to request yet another price reduction is not a moment you live for. Charles employs a strong choice of words when he says, "capitulation is an admission of lack of seller power." On the other hand, if you've priced out 95% of the folks who might elect to buy your house, you had better have battery backup for your power supply.

"Are developers still scooping up SFHs to rehab?"

Marcus,

The answer is no at least in the burbs, My brother in-law is a tear down Builder in Needham and Wellesley and hasn't bought anything since 2005. He's sold a couple of his properties (after severe discounting) but is saddled with two town houses he has been unable to move...

I can't see how a regular buyer could put together financing to buy a condemned $400K house"

Marcus, so I assume this statement means you saw the same property I did in Arlington a few months back? :)
For those not looking in the area, there actually *was* a 400K condemned house in Arlington. Well, actually, I don't think it was technically *condemned* but it was shut down by the Board of Health for about 30 health code violations. Despite its laundry list of flaws, all the basics for 'attractive property' were there - 1/3 of an acre in ARLINGTON? Check. Large, spacious colonial style? Check.
Soeone was able to look past the dead squirrels in the bathtub (not kidding) and see it for what it was - (I'm not sure still what THAT 'is'.... just valuable land with a tear-down occupying half of it? Or an old home that still had good bones?

And, for the record, it sold right away for full asking price. (the whole 'sealed bids' deal.)

There's another Arlington condemned property on the market right now:
#70781952 $399,900.

Needs total restoration. On a small corner lot. It's in the Bracket school district so it will probably sell pretty soon.

Dear Just a guy,
Dina is right, I left out the $xxx,000 for ease of reading. If you have been reading me, you should know better than to assume that level of naivete.

Gus,
I am trying to get you hard info. Some addresses were named in the survey. It is hard to ID property that goes to bidding war unless I actually saw it in the short market window. If you write me privately, I can search your search criteria to see what examples show themselves.
The survey implies, but does not prove, that the pressure is strongly in entry level homes with three bedrooms. Those, priced right, will sell.

Anything, priced right, will sell. The question is what the market price is, and whether or not most sellers are trying to sell at market.

A $10 condo in the south end will sell no problem. Same with a 10,000 condo. But a million dollar condo might have an issue.

How that price is arrived at doesn't matter hugely - if a bidding war ends up with a price down 20% from last year, which is a more important indicator - the bidding war, or the price?

There's another Arlington condemned property on the market right now:
#70781952 $399,900.
Needs total restoration. On a small corner lot. It's in the Bracket school district so it will probably sell pretty soon.

That house is condemned by the board of health. It will require between $300K-$350K to bring to modern standards.

Obviously, there's no CMA to support a $750K investment on that part of the street, for a house that size. So, you're saying that someone will shortly be misled by a realtor to make a financially catastrophic decision? You must be, if you're confident that such an objectively bad buy will "sell pretty soon."

Rona,

I probably wasn't clear. I'm not asking you to collect information, but just to share information you already have.

When you prepare a CMA, are there certain types of homes (by area, price range, size, or any other factors), where you adjust the price upwards from the comps because prices in that segment are rising?

Are there market segments where you see current prices higher than for the same home or comparable homes than they were, let's say, two years ago?
In what segments are prices stable from two years ago? If you don't know of any, it would be helpful to know that too.

Gus,

Good question, now that I get it...;)
I am adjusting downward along with town average, if I believe the property is not in a "strong demand" segment. I am making no adjustment when I am in a strong demand segment. I am financially conservative and keep the goal of protecting my client's funds at top priority. So I am not comfortable asuming that anything is actually rising. When the spring sales come through escrow and close, we will have better data about how much buyers are paying in these bidding wars. Right now, we have spotty information from a variety of people who were in the fray.
Thank you for hanging in with me. I am trying to get you better info.

Marcus,

you said:
"So, you're saying that someone will shortly be misled by a realtor to make a financially catastrophic decision? "

Not at all.
How do you arrive at your figures of $300K-$350K to bring this place to modern standards? Experience? Show me the facts to back this up.
Another condemned property in Arlington went under agreement in 12 days and sold over asking for $400,000 with similar sq footage. This was in Feb 2008.

The current property in Arlington that is condemned is in the most desirable school district in a town often chosen for it's schools. Arlington buyers will be considering this property seriously.

As gas prices continue to rise, home buyers will be buying in the towns close to Boston and to public transportation more and more. Prices for these homes will be at a premium.

Where is the train/ subway in arlington?

I've no idea about the property in question, but Marcus seems to know what he's talking about construction-wise. 300-350 is not a huge budget by any means for a renovation these days. It all depends on what is needed.

The fact that something similar sold in Feb does not necessarily undermine Marcus point - it may in fact reinforce it.

A quick Google search for the address of the condemned Arlington home should tell you a bit more about the property....

Caveat emptor.

Sally, thanks so much for proving my point.

Similar (but habitable!) 1920s-era homes nearby have sold for, at most, in the low 5's. So renovation costs would have to come in around $100-150K to justify a $400K price. Anything more than that, you might as well buy the similar but already-nicely renovated house right on Park Street for $570.

I don't know how much experience you have with contractors, but if you can fix up a house that needs "complete refurbishment" for 100K, please share some names. The house needs a new kitchen (looks like a grenade went off), 2 new baths (no shower!), plus new wiring (doubt anything in this bad shape ever had the knob and tube replaced), and everything else that goes into a complete rehab. It has aluminum siding, which is much like wrapping a house in a ticking time bomb. And, just for fun, the house seems to be listing sideways a bit.

But you don't address any of that. Your argument is the epitome of the real estate agent's sales pitch--other houses have sold for that much (proving, well, nothing), and that the location is hot hot hot.

This is not the proper use of CMAs for a fixer upper.

Charles,

I mentioned public transportation in Arlington, not the train/subway. Arlington has a number of MBTA bus routes running through it for people to go easily to Alewife, Davis or Harvard Squares and to Lechmere Station. The Minuteman Bikeway runs through the town, straight to Alewife or Davis.

The current condemned house will need a lot of restoration, no doubt about it. I have seen it. It will cost money to restore it. I just don't know what that amount is as I don't have the experience.
I still would like to see some facts to back up any claims made on amounts it will cost, otherwise it's all just guessing.

Marcus,

There is no house for sale on Park Street in Arlington for $570,000. Do you mean Park Ave? I would welcome a discussion on this blog sometime about the cost of renovations in the metro Boston area. I have no idea what a basic restoration of a condemned house would cost.

And I have no sales pitch as it's not my listing and nor do I have a buyer for that property. And I do not know or can even guess how much it will sell for. All I said is that I think it will go under agreement fairly soon.

I also disagree very strongly that buyers are as gullible and easily led as you are suggesting, that agents lead them down the primrose path making them buy something that they don't want or is not good for them. Baloney!

Hot, hot, hot!

Well, I don't know if the Arlington market is such but I do know that in the Brackett school neighborhood, houses that are under agreement or sold in the last 3 months, were on the market an average of 12 days. The 2 houses of similar age square footage of the condemned house, sold for $529,000 and $584,500.

I feel it is my obligation to educate my buyers about the market they are shopping in. I do not see my efforts as a misleading sales pitch.

I talked to a couple of contractors when I purchased my gut renovation. These were 'friends of friends' that I talked to for their opinions, I had actually already chosen my contractor. I was told the average price per square foot for a renovation (not new construction) in boston started at $150/square foot. Of course, the higher end products you choose, the higher that number will go. The price I got from my contractor ended up around $150/sq foot, or a little less. I am redoing everything - all systems, all framing, adding a dormer.

I have no idea if this is a good price or not. I have zero experience in renovating, so I was happy to go with this contractor and pay those rates as he had excellent references, and I am very happy with (project almost complete). I just wanted someone who would do the job, and do it well.

so, maybe you could use that general figure for clients looking at properties in need of renovation.

Thanks for picking up the typo, Sally. Yes, Park Ave.

A common rule of thumb: You need $100K to redo 2 baths and one kitchen. Light cosmetic changes can be cheaper, but a kitchen alone can also easily exceed $100K if you go all out.

I also disagree very strongly that buyers are as gullible and easily led as you are suggesting, that agents lead them down the primrose path making them buy something that they don't want or is not good for them. Baloney!

Really? Perhaps you should read today's story on yet another record number of foreclosures in Massachusetts.

buyerandseller, your cost per square foot rubric is not out of line. And that price gets you to a $300K renovation on the property we were discussing--putting the final cost at $700K when the best comp Sally found was $584K.

To my mind good transportation would involve a train or subway - a bus gets stuck in the same traffic my pickup does. Albeit with much less comfort.

As someone who renovates and builds, I've no need to guess at building costs. Marcus strike me as in line, so I'd guess he knows what he's talking about - I haven't seen the property, so I've no idea.

Though at 300k, I'd think hard of scraping and building new.

charles, I've taken the 77 bus many times, which connects Harvard Square to Arlington Heights through Arlington Center. If it's this slow and unreliable in Cambridge, I can only imagine what it's like at the outer limits of its run, especially for commuters. IIRC, when the Red Line was expanded in the 1980s, the original plan was to put a stop in Arlington Center. But the city elders were shocked at the very idea, outsiders and strangers and ruffians in Arlington Center, and so Davis Square ended up with the $900K houses.

Just to be clear, I haven't done a walkthrough of this particular property, and don't plan to. Lousy location and an ugly part of the street. However, it makes sense to approach a reno with the ability to fund a worse-case scenario, and position yourself for pleasant budget surprises instead of the other kind. I've seen similar renos cost about $250K. Sally's upper-limit comp of $584 leaves a reno budget of only $180K. I think any buyer would be crazy to leave themselves such a tight reno budget for a house that needs total rehab, or to spend more than the comps are worth.

Given the numbers, no sensible buyer should pay more than the high 2's or low 3's for that house.

There aren't any in Arlington but there are Xbuses in parts of Watertown and Newton that are fantastic. They have maybe two or three stops, then get on the pike and stop at South Station and the Financial district. I know local buses can be slower, but I've commuted by both for several years and would not hesitate to do so again. Sure, they're subject to traffic issues that everyone else faces but I bet you'd be surprised to hear that that's a rare exception and not the rule.

I had a good experience with both types of buses and it sure as hell beats sitting in my car and paying for gas, then worrying about parking once i get there.