Author Archives: jstewart

Winds of Change in the Market By Jeff Stewart, CCIM

The indicators are subtle: Balloons swaying from mailboxes on a steamy Sunday afternoon, bandit signs in the neighborhood right-of-way, and a small, but growing, cluster of real estate signs at the subdivision entrance. All would be perfectly normal except that all of those things were a rare sight during the hottest part of the housing boom of the last year. Our housing market has finally begun to soften as the Federal Reserve (FED) has increased mortgage rates in attempt to rein in inflation.

While most Americans are painfully aware of the rising inflation and have heard about the FED’s decision to hike interest rates, many are not aware of exactly what that means for homebuyers . . . and consequently the resulting effects on sellers. Let’s look at an example.

The MLS reports the median sales price for the Austin – Round Rock area was a whopping $550,000.  Until the last few months mortgage rates had held relatively steady around 3.5%. So if a buyer for a $550,000 home puts down $110,000 (20%) at 3.5%, their monthly principle and interest payment (PI) would be $1,975.  However, rates at the time of this writing are bouncing around 5.75%. If we bump the rates up in our example to 5.75%, we have a PI of $2,568 . . . an increase of $593. Most homebuyers are not in a financial position to absorb such an increase. Assuming our median buyer still has $110,000 for a down payment, they would now be looking at a $450,000 home in order to maintain their housing budget.  As a result, one article I read estimated that the rate increases have eliminated the bottom 15% of prospective homebuyers . . . and the FED has signaled that at least two more rate hikes are expected by the end of the year.

The FED’s stated goal is to slow the economy and lower inflation without pushing us into recession. It is too soon to know how successful those efforts will be, but there is no doubt that it has begun to slow our residential market. To be sure, it is still a sellers’ market.  We still have less than two months of housing inventory, but inventory is growing significantly, and we have seen numerous “price improvements” (the new lingo for price cuts). This has happened so quickly that it may take a few months to be able to understand if this is a small correction or something more serious.

The good news is the job market remains extremely strong.  This month several national news outlets reported that on average two jobs exist for every job seeker.  I would think that employment numbers in Austin will continue to lead the nation.

As always, I like to point out the opportunities.  In this case, interest rates are finally high enough that I think it makes sense for some sellers to consider providing owner financing. For many years now, interest rates were so low that it made little sense to provide seller financing. Now, with the stock market in a major correction and rising interest rates, owner financing should have some appeal to certain sellers. Sellers may want to consider several factors.

First, most owners selling any non-homestead property are probably facing some substantial capital gains taxes. These taxes can be deferred by an IRS 1031 like-kind exchange for other property.  Also, they can be completely avoided by dying. None of my clients have voluntarily chosen that last option, however. One other strategy to lessen the tax load is owner financing. The IRS collects the tax as the seller receives the proceeds, hence why many sellers have historically preferred installment sales. I like to say that it enables sellers to earn interest on their AND the IRS’s money.  At this moment, I would expect that interest rates for owner financing might be 7% or more. Additionally, the seller is intimately familiar with the property and should feel comfortable with having it as collateral . . .especially with a significant down payment. Again, this is not for everyone, but it is a growing opportunity that we have not seen in years.

As always, I am here to help you or those you care about. Please do not hesitate to call.

PREVENTING SLAB PROBLEMS By Jeff Stewart, CCIM

 

Last month set a record for the hottest June in recorded history. It sets the stage for a similar summer as we had in the drought of 2011. This means homeowners need to be proactive in safeguarding their foundations. This is especially true for owners with properties east of I-35 in the black clay.

Slab foundations are engineered with beams, rebar and post tension cables to perform under great stress, but in the final analysis, they are still ground supported.  While engineered slabs seldom fail, they certainly can settle enough to bind doors and cause unsightly cracks in brick and drywall.  The key to preventing this is to maintain consistent moisture in the soil supporting the exterior beams of the foundation. As a former general contractor and officer of a builder warranty company, I have seen scores of houses with all degrees of settling. Many of the problems could have been largely avoided with some simple maintenance.

First, the area most prone to settling is generally where the foundation gets direct afternoon sunlight, usually on the southwest area of the home.  If the soil has become so dry that it has pulled away from the slab by a half inch or more, this is a concern. If the gap is significantly wider, air is likely reaching the soil under the perimeter beam.  As the air dries out the ground supporting the slab, settling is likely to occur.  This is especially true in areas with expansive, clay soil.

The preventative solution is fairly simple.  In extremely dry periods, such as now, place a high-quality soaker hose parallel to the slab, approximately 20-24 inches away from the concrete.  The key is to have the hose barely emit drops of water.  It is imperative not to make the soil a muddy mess.  The goal is to SLOWLY add moisture to the soil.  Do not saturate it.  This may take several days or a week. Absolutely do not put water directly into any gap next to the slab.  Water saturated soil becomes liquid-like and provides no support. This will only worsen the situation.

After a few days of adding moisture, it is not surprising to see cracks in brick or drywall close shrink and doors begin to swing freely again. It just requires awareness and a tiny bit of effort.

New Record Prices…Again. By Jeff Stewart, CCIM

A few months ago, I watched a panel of economists and stock experts give their various opinions on what we might see the Federal Reserve do about interest rates considering our current inflation.  One expert was adamant that the rates would remain low for one basic reason.  Higher rates would also drive up what the U.S. government must pay to finance its deficit spending. I had heard this argument before, and it does have some validity . . . however, inflation now demands action from the Fed.  How high will rates go?  The word in the news is to expect at least two, possibly three more rate increases by the end of this year. Thirty-year mortgages were at 5.25% last time I checked.

REALTOR.com reports that in May the median listing home price for Austin / Round Rock was $627,000. That is up 25% from the previous May.  The April median sales price was $550,000, but those were mostly listed in late February or March.  With prices like these and climbing interest rates, first-time homebuyers barely have a chance.  In fact, I feel certain that many of the homeowners in our area would be unable to afford their current home if they were to be in the market today.  Great news for sellers, but a painful reality for buyers.

As expected, the property tax appraisals have been mailed out and the reaction has been intense – and interesting.  More than in any time I can remember, people have been excited to see how their properties have appreciated and what they are now roughly worth. On the other hand, they are in total shock at the prospect of the amount of taxes they may be forced to pay.  So far, most of the appraisals I have seen are arguably close to market value or below.  The actual tax rates will be set in late September or early October and the tax statements will go out at that time.  At that point, I predict a fair number of properties will hit the market due to the extra expense of the soaring taxes.  I am working on two such listings right. It makes total sense for these sellers. Unused properties are currently bringing record prices . . . and record property taxes.  It may be the perfect time to cash-out.

As always, I am available to help you with any real estate needs or questions you might have.  I look forward to hearing from you.

Homestead Capital Gains Tax By Jeff Stewart, CCIM

CAPITAL GAINS TAX ON HOMESTEADS

During an income tax revision in 2003, the IRS published a change to the tax code for homeowners. Known as the Section 121 Exclusion, it outlines the rules in which homeowners can limit the capital gains tax on the sale of their primary residence.

Section 121 excludes taxes on the first $250,000 of capital gains for individuals and $500,000 for married couples filing jointly when selling their home . . . with a critical limitation.  In the immediate five years prior to the sale of the residence, the sellers must have occupied the home an aggregate of at least two years.  They must also provide documentation of capital improvements when establishing the tax basis, much like rent property. Last year, I had several clients who had gains well above the exclusion.

I bring this to your attention because very few homeowners keep adequate records of their capital improvements on their homes. Most homeowners never dream that they will live anywhere long enough to have a $500,000 capital gain on the sale of their residence, but in this market it can happen. It is critical to keep good records to prove capital improvements or risk paying too much to the IRS.

The Austin Affordability Problem By Jeff Stewart, CCIM, SRES

 

THE SEARCH FOR AFFORDABILITY

Affordability. We need to find some solutions to the housing affordability problem if we want our children and their children to remain in Austin. The Texas A & M Real Estate Research Center’s chart shown here illustrates Austin’s growing affordability problem compared to other major Texas cities.

At the time of this writing, I searched the MLS for single family homes (not condos or manufactured) with an Austin mailing address, and in the the price range of $10,000-$375,000. I found 14 homes actively for sale. Only 7 of those homes were inside the city limits and only one looked like a house I would want to see clients buy.

The Research Center is constantly monitoring the affordability problem.  In the recent edition of their Tierra Grande Magazine (provided to all agents), they made cost projections for potential increases in interest rates and property taxes.  While interest rate hikes are pretty obvious, their property tax projection should alarm every Texas homeowner.

The current median priced home for the Austin / Round Rock area is just under $476,700.  For this purpose, we are going to round up and use $500,000 for our example. The Research Center chose to assume annual property taxes would stay at a 3% average tax rate, which places the tax burden on our example at $15,000 the first year. They also estimated that

 

values could increase an average of 10% per year.  Using these assumptions, the Research Center projects that in five years the taxes would climb to $24,158, $38,906 in ten years, and if all assumptions held true, taxes would be a crushing $62,659 in fifteen years!   This appears unsustainable to me.

It is important to note that the 2017 Tax Cuts and Jobs Act placed a $10,000 cap (for married couples) on the itemized deduction for state and local taxes, including property taxes.  In light of the rapidly growing tax burden in our earlier scenario, this was a significant tax increase  . . . that also affects the cost of homeownership.

Still on affordability, an interesting construction possibility that still has much to prove is the 3-D printed wall system.  The January 2022 edition of the Texas Coop Power magazine has an informative article about the 3-D construction process.  It has examples of recently built homes in East Austin and Army barracks at Camp Swift.  One home was featured in SxSW, as well.

The 3-D builder, ICON, is an Austin based company.  According to the article, their first  project was a welcome center and six tiny houses at Community First! Village. ICON and Lennar Homes have announced they plan to build 100 homes in the Austin area using the “printing” process. No word on where yet, but Lennar did say the homes would be similarly priced to those built with traditional construction. While not more affordable than conventional houses at this point, the goal is to be able to substantially increase supply. Ideally, a significant increase in inventory would eventually aid the affordability factor. For more information, go to ICONbuild.com.

Another alternative construction process is taking place in my neighborhood. A house was recently leveled, but instead of a new traditional slab, the builder used piers of galvanized steel which were screwed into the ground.  You can imagine the surprise of the neighbors when a gigantic crane appeared and began to assemble manufactured home components that were built at a local mobile home plant.  The structure was largely assembled in two days.

The builder told me that he chose this method because the inspections were mostly done in the factory and not by City inspectors. Also, he believes he can complete the home in a fraction of the time a site-built home would require due to city inspections and shortages of materials and labor. I will keep you posted on the ultimate sales price and well this manufactured home is received in the marketplace.

Accessory Dwelling Units (ADUs) By Jeff Stewart, CCIM

Accessory Dwelling Units

Looking for an Austin real estate investment with solid returns? What about something that has the capability to generate enough cash flow that it might be possible to recoup the initial investment in less than ten years?  Perhaps less?  This opportunity might be as close as your back yard . . . literally.

ADUs, or Accessory Dwelling Units, have become the rage during the COVID pandemic.  Formerly known by the less than flattering handle of a “Granny Flat,” ADUs are now designed more for the Airbnb crowd.  Short-term rentals are regulated differently in almost every community, but where allowed, they provide a real opportunity to generate a surprising amount of revenue. Not long ago, I sold a home for friends and clients that had a great secondary unit in the back.  The rental unit was a well-furnished, attractive, single bedroom with a small bath. Patrons had easy access down a sidewalk beside the main house.  I was stunned to learn that they had been earning $20,000 or more each year.

Mindful of permits and city regulations, a number of firms specialize in everything from site-built units to prefab structures. Some look like they jumped off the page of Architectural Digest, yet are actually quite practical in their simplicity ands design.

In the past, this type of set up was usually most common as a garage apartment near campus and occupied by college students.  The advent of social media and an abundance of short-term rental websites has changed all that.  As Austin continues to grow as a vacation destination with SXSW, UT games, ACL & F1, the demand for short-term rentals has soared.

Again, most communities have strict policies regarding ADUs and most homes are not a fit; but for the right situation, this might be an opportunity for a small but rewarding investment.

 

JEFF STEWART, CCIM

Stanberry REALTORS

jstewart@stanberry.com

Decisions with the Golden Question By Jeff Stewart, CCIM, SRES

For the past six months or so, I have struggled with how to help prospective buyers decide what to offer.  This is new territory for me. With decades of experience as a landlord, homebuilder, developer, and real estate broker, I feel qualified to answer most any questions about a property . . . until recently. More now than probably ever before, my buyers are asking a question that I am unsure how to answer.  The question?  “How much over asking should I offer?” The problem is that I have no way of knowing what the winning bid will be when sales prices often far exceed other comparable sales.

So what is paying too much in an extremely competitive market? I am not sure, but I have heard of numerous cases of buyers’ remorse lately.  Where is that intangible line between the satisfaction of a winning bidding war and a sense that one paid too much?  It is a line that varies with each individual buyer.

In short, I have been struggling with the whole concept of representing a buyer who decides to offer $100,000 over asking.  Obviously, many other agents have no such reluctance – in fact I have dealt with several who regularly urge their clients to make such offers in order to win the sale.  Since March, I have had at least eight to ten offers on my listings that exceeded $100,000 over the asking price.

Justin Bariso has written an excellent common-sense article published by INC.com that I believe will help my buyer clients with this very real dilemma.  Justin refers to it as the “Golden Question.” He suggests that the golden question will help anyone make better decisions with fewer regrets.  It is simply one question that is really the same question in five different contexts. It is so simple and so obvious, yet it pertains to every individual making a difficult decision.

Justin offers this simple “decision tree,” if you will.  When my next client is struggling with a stressful decision, I plan to urge them to contemplate Justin’s simple questions:

How will I feel about this in:

  • a day?
  • a week?
  • a month?
  • a year?
  • five years?

So simple, but so logical . . . especially when dealing with the largest purchase most people will ever make.  If we are honest with ourselves, the answers to the questions can guide us to minimize our emotions and make better decisions with fewer regrets.

When preparing an income proforma for a commercial property, CCIMs are taught to make educated predictions about the future . . . inflation, market demand, interest rates, etc.  We do so, knowing full well that the future will certainly be a little different than we have imagined it, but acknowledging that we are making the most common-sense, long-term decision possible based the best information we have in the present.  The concept of asking the golden question is very much the same and I think it has the potential to give buyers a little more confidence in their decision-making.

 

Jeff Stewart, CCIM

Broker Associate / Stanberry REALTORS

jstewart@stanberry.com

 

PLEASE READ: Texas law requires all real estate licensees provide the Information About Brokerage Services (IABS) 

to prospective buyers, tenants, sellers and landlords. Please see the link above.

Consumer Protection Notice

Buyers’ New Strange Psychology By Jeff Stewart, CCIM, SRES

MAKING SENSE OF AUSTIN HOUSING PRICES

 

Today the Austin American Statesman had a front-page article describing our red-hot housing market.  Quoting research from Redfin, the piece detailed how more than 1,500 homes in the Austin area sold for more than $100,000 over list during the period of January 1 to May 23.  By comparison, there were only 22 such sales over the same time in 2020.

This begs the question, “Does that mean that these 1,500 plus homes were underpriced considering the market?”  I do not have an answer for that, but it would seem so.  However, let me tell you about a recent listing I had. Several weeks ago, I had a client list a rent house.  Based on recent experience selling similar rent houses, we priced this home higher than we would have just two months ago.  It immediately had quite a few showings. Unfortunately, even though the house was in a very popular neighborhood, the house had a few problems, and we received no offers . . . low or otherwise. In this market, it only takes a few days to realize the listing price is too high.  We substantially reduced the price and immediately began to receive offers . . . ALL well over the list price. I find this very interesting from the perspective of trying to understand the mindset of today’s buyers.

Considering all this, it demonstrates at least two critical points. First, for whatever reason, the listings probably must be somewhat underpriced in order to create the feeding frenzy we so often hear about.  This is difficult for sellers to swallow. If they are hoping for an ultimate price of $700,000, why would they willingly list it at $595,000?  Well, they would not in a normal market, but this is anything but normal.

The second point this brings up is that buyers are just not in the frame of mind to offer below list.  I am at a loss to explain why, but this has been my experience and others’ as well.  All told, for the first time in my long real estate career, pricing a listing is less about carefully analyzed sales comps and more about some strange, new buyer psychology.  We are in uncharted waters here.

 

Jeff Stewart, CCIM

5 Things Every Seller Needs To Know By Jeff Stewart, CCIM

5 Things Every Austin Seller Should Know

By Jeff Stewart, CCIM

We are living in crazy times.  The median days on market for new listings has been down to four days. It would seem that the only things needed to sell a house in Austin is a sign and a post on FaceBook.  Actually, that might be partially true.  A sign and a post on FaceBook are all it takes to get offers.  To get from verbal offers to closing can be a convoluted path in this market. So, lets take a closer look at five very important things every seller needs to know.

First is the strategy of pricing.  A risky tactic we occasionally see is to under price a property and create a feeding frenzy. While that might be an ego boost for the sellers, this just encourages low-ball offers from the bottom feeders.  On the other hand, an unrealistically high price risks losing the momentum of that first burst of buyer enthusiasm.  In a hot market such as ours, it is obvious within mere days if a property is over-priced.

The second important point is the need to establish a process for dealing with multiple offers.  Multiple offers are now the rule rather than the exception, and while nothing is set in stone, most listing agents have slowly adopted a process that garners the seller their best deal while treating all interested parties in a reasonable and honest manner.  No one likes to lose, but there is much less animus when all parties feel they had a fair shake.  If the number of offers becomes unmanageable, it becomes very difficult to communicate with all the buyer agents.  Currently, a common strategy for multiple offers is: 1) put the home in the MLS on Thursday night or Friday morning.  Once it becomes clear that several offers are on the way, suggest to the sellers that they consider all the offers on Monday morning and require all offers to be delivered by Sunday evening.  Many agents change the remarks in the MLS to reflect this.

Many buyers are surprised to learn that sellers are not required to respond to offers in a timely manner . . . or at all, for that matter. Someday, when the pendulum swings back to a buyers’ market, it will be very interesting to see if sellers dare to sit on offers for several days as they do now.

Third, I want sellers to know is that the offer with the highest price might ultimately be the wrong choice. Many factors should be considered in addition to price. Yes, the net proceeds are of primary importance, but it is pointless if the transaction does not close and fund.  The financial strength of the buyer, the expertise of the buyer’s agent, and the motivation of the buyer should all come into play.  It is not uncommon for the most inexperienced buyers and their newly minted agent to submit the highest offer, only to fail to get to the finish line when complicated issues come up.

The fourth thing on my list is awareness.  Sellers get dollar signs in their eyes when the contracts get bid up to incredible amounts.  I always warn my sellers of two things: 1) when people pay exorbitant prices, they expect the product to be flawless. Those expectations may be unrealistic.  Buyers may either be very disappointed with the inspection results or may expect the sellers to provide repairs and improvements that seem excessive. 2) Some buyers’ agents are well-known for their approach of having their clients offer outrageous prices to win in the bidding wars, with the promise that they will claw a large portion of that back in demanding repair dollars from an excessively harsh inspection. One excellent idea in combatting this strategy is to have a “pre-inspection.” Pre-inspections are becoming more common since they help sellers affordably address problems ahead of time. Plus, if the inspection is made available with the sellers’ disclosure, it is much more difficult for buyers to claim they were unaware of these items when they made their offer.

Finally, every seller needs to know the contract is just the beginning. Getting to the closing table is the goal, but challenges may arise, and it is best to expect a few.  Appraisers are not meeting their promised deadlines and lenders have been swamped with both sales and refinance deals. Also, due to the severe shortage of homes, buyers are rushed into impulse buying.  When three other groups are waiting outside on the sidewalk of the home you are viewing, it is extremely difficult to give your purchase the careful consideration it deserves.  No wonder so many transactions are falling to the wayside.  Enough sales fail at the last minute that I have changed my philosophy.  I was always against seller leasebacks.  It is unquestionably the best practice if the closing is the time of physical transfer.  I get that, but sellers might want to think about a two-week leaseback just so they do not move out for a cancelled closing.  I had a lender back out the day before closing once.

Different times call for different strategies, but we adapt. My best advice?  Remain calm and carry on.  I think I heard that somewhere.

PLEASE READ: Texas law requires all real estate licensees provide the Information About Brokerage Services (IABS)  to prospective buyers, tenants, sellers and landlords. Please see the link above. Consumer Protection Notice

Jeff Stewart, CCIM   Broker Associate

Stanberry REALTORS   jstewart@stanberry.com

FIRPTA- The Foreign Investment in Real Estate Tax Act By Jeff Stewart, CCIM, SRES

FIRPTA – One of the last paragraphs of the residential listing specifically asks if the seller is a ‘foreign person.” It fails to fully explain why.  The Foreign Investment in Real Property Tax Act (FIRPTA) is one of the more onerous and misunderstood federal tax laws when it comes to real estate. The concept is simple: Foreign sellers of real estate must pay a 10% or 15% tax upon the sale of U.S. real estate. It sounds like a reasonably straight forward tax until one discovers, often to great financial distress, that the buyer is ultimately responsible. How is that? The buyer is legally tasked with acting as the withholding agent and for making certain that the IRS is paid the correct amount of tax. In other woods, the buyer is on the hook. As unreasonable as this might seem, one can see why the IRS might pose this burden on the buyer since the seller is likely out of the country. Also, any money sent past the U.S. border is almost certainly beyond the reach of the IRS . . . so it is easier to hold the buyer responsible. . . fair or not.

I can gratefully say that I have not knowingly had to deal with this complicated process.  The key point is that it is imperative to positively know if the seller is a foreign person, hence the question on the listing contract. Unfortunately, one can see why a seller might be a little less than forthright in answering. The FIRPTA withholding process is not for amateurs. A knowledgeable title company is extremely important in such a transaction.  However most importantly, It is critical to engage attorneys and CPAs with the required expertise when conducting a transaction that falls under FIRTPA.

PLEASE READ: Texas law requires all real estate licensees provide the Information About Brokerage Services (IABS)  to prospective buyers, tenants, sellers and landlords. Please see the link above. Consumer Protection Notice

Jeff Stewart, CCIM   Broker Associate

Stanberry REALTORS   jstewart@stanberry.com