All the news that fits, we print...

We've got more news than time to tell it, but the is news great!

We've got a brand new Residential Purchase Contract coming on line in May that will bring sanity to the lives of Sellers, Buyers, Lenders and Title Companies. Realtors may have to work a little harder, but that's hardly a bad thing.

Our frenzied Seller's market races on unabated. This is fantastic news for Sellers, of course. And even though Buyers are having to run faster than a speeding train to latch onto a house, as soon as they take possession, the engine of vast appreciation starts chugging along for them, as well.

We have a practical example of the kind of extreme appreciation we're seeing in this market, along with some ideas about how to put it to work for you.

And finally we'll show off a little of our marketing finesse with a new market tool and the marketing tool we've built to support it.

The Purchase Contract in 2005...

After years of debate, bickering, dickering and gnashing of teeth, the Arizona Association of Realtors is about to bring forth a brand new version of the Purchase Contract, plus support documents. You can read all about it here. You can find examples of the new documents, plus all the other forms that are used in a typical home purchase, on our contracts page. The new contract is being released to lachrymose lamentations from the Realtor community, but in fact this instrument is much better than the one it replaces. It retains all the buyer protections that made the previous contract so good, but it adds significant new safeguards for sellers. Even better, it imposes stringent obligations on lenders, so that the never-ending-closing should be a thing of the past. Notably, most of the defects in the old contract that we at Bloodhound have routinely amended around have been addressed. And it's still only nine pages long...

Brother, can you spare a house?

It's a seller's market and it's hot. No, it's sizzling. No--blistering! The local newspapers can't write enough about our scorching market, and they're running out of intemperate adjectives to describe it. In fact it is a seller's market such as we've never seen before, but we're not quite to the point of going door-to-door to beg for shelter. All products at the low end of the pricing scale--single family homes, town/patio homes, condos--are in huge demand, with multiple above-full-price offers coming in on the first day of the listing. But as soon as you climb a rung or two on the price ladder, things are more manageable. And, paradoxically, homes that are priced improperly on the initial listing can languish for weeks even after the price is reduced.

Even so, buying a home in this market takes preparation and a willingness to give. Where a year ago we were underbidding and taking closing costs from the seller as a matter of course, now we devote a lot of thought to giving the seller everything he might want in the original offer. So, for example, if you are not already pre-qualified by an Arizona lender (like our favorite, Logan Hall of SallieMae Home Loans), your offer will almost certainly be rejected. Sellers have no reason to take a chance on an out-of-state lender, not with all those other offers to consider. This will become even more important under the new contract. Likewise, we will call to get the listing agent's preference in title companies before we write a contract. This choice rightfully belongs to the buyer, but right now we can't afford even the smallest sticking point. In highly competitive situations, it may be necessary to waive repairs or the appraisal contingency, and we have even written contracts with escalator clauses--we will beat the next best offer by $1,000.

All of these recourses presume that the market will stay this hot. How long will it last? No one can predict the future, but our bet is that we have around two years left of extreme appreciation, even if the current shortage of inventory is eventually relieved. The forces driving this market are not hugely interest-rate or price sensitive. In addition to our normal baseline demand of people relocating from other, usually much colder, states, we have new demand coming from investors, second-home buyers and retirement-home buyers. The investors will start to move on when median home prices have doubled--when a newer three-bedroom, two-bath home in Goodyear or Gilbert is going for $350,000 or so--which will take a while even at this 'blistering' pace. But the second-home and retirement-home buyers are probably with us for quite a while. There is a tremendous amount of real estate equity in California, particularly, and it comes into Arizona with immense buying power.

This is all fantastic news for people who already own Phoenix-area homes. We have clients who have added over $100,000 to their net worth over the last year, all in the form of appreciation on their homes. Some of our investors are up $60,000 or more--per rental home. But at the same time, it can seem like very bad news for buyers. Truly, you're going to pay a lot more for a home now than you would have a year ago. But as soon as you close on your new home, that sizzling, scorching inferno of blistering hot appreciation should kick in for you, too.

A tale of two houses...

Here's a way of understanding just how hot this market is. We do a significant amount of work with investors, and this story concerns investment homes, but the principles hold true as well for owner-occupied homes.

If you look here, you will see MLS listings for two homes. (The Adobe Acrobat Reader is required to view these files.) We sold both of these houses. We served as the Buyer's Agent for the house on Sage last June, and we actually bought it for $129,000 with $1,000 coming back in seller-paid costs, so the net purchase price was $128,000. We are the Listing Agents on the Olive house, an identical floorplan one block south of Sage. The purchase price will be $190,000 with the appraisal contingency waived and with the buyer paying all their own costs (and kicking in an extra $500 to the sellers at Close of Escrow).

That's a 67% gain in value for our investor on Sage in about 10 months. He put only 5% down, plus his share of the closing costs, so it's well over 600% cash-on-cash return. He should be up about $75,000 on this one house at the end of his first year of ownership, more than 750% return on his actual cash investment.

This is anomalous appreciation--normal is around 6% a year. But even at that lower rate, allowing for rental income, tax savings and appreciation on resale, Phoenix-area single-family homes can yield from 15% to 50% net-after-tax annual cash-on-cash return over a 7 or 8 year holding period. Rental or residence, there is simply no other investment that can produce those kinds of returns.

The proof is in the numbers--and that means now, not a year ago--so we're going to buy the Olive house for a lot more than it would have cost us a year ago and hold it as a rental property for 8 years. We've calculated appreciation at 6% even though you may do a whole lot better than that, especially over the next two years. We've held rents low and vacancy high, even though both should trend the other way as homes get pricier.

This spreadsheet has us buying the house with 5% down. Please understand that, as a rental home, this house will produce a negative cash flow--it will lose money until it is sold. It loses a lot of money month by month and continues to lose money at the end of the tax year. But on resale, it could return 21% or more per year, net yield after taxes. In other words, you're going to trade present income for a lot of future wealth. Obviously this will only work if you can spare the present income.

But we can do better than this. This spreadsheet is the same scenario except we're putting 20% down. We still are out of pocket quite a bit month-by-month, but at the end of the tax year we essentially break even. And at the end of 8 years we're showing a net after-tax yield of 11% or more.

And, of course, the news is that much better if appreciation exceeds 6% a year, if vacancy is less than 10% per year, and if rents go up--all of which seem very likely right now. Can you really make 750% or more, cash-on-cash return, like the investor on Sage? Maybe. Or maybe not. But you won't make anything on your investment in real estate, either as a rental or a residence, until you take the plunge.

We got caught being heroes...

We're listing a lot of homes lately, which is good. What this market needs more than anything is inventory, and we're eager to do what we can to bring new inventory on line. But the challenge for listing agents, right now, is helping sellers make sense of the immense number of very different offers they're likely to get. In a more sedate market, having even one offer to present is a gift from the gods. But in the Phoenix-area right now, sellers can get five, ten, even twenty offers on the first day the home is listed. Distiguishing the best from the rest can be a problem.

So Cathleen was a hero and wrote software that will summarize multiple offers on a single piece of paper. By going through the offers page-by-page and calculating gross proceeds minus the seller's loan and closing costs, all pro-rated to the date escrow will close for that offer, her software calculates the seller's net return for each offer. It even discounts late-closing offers for their added cost in time-value-of-money terms. Offers are weighted by tell-tales that reveal weak borrowers, and this feature will be even more robust using tools to be deployed with the new contract. The end product is a very clear analysis of which offer is actually best in terms of its net yield to the seller, its closing date and its likelihood of closing successfully. A dizzying array of paper is reduced to one sheet, from which an easy selection can be made.

This is exactly the kind of benefit you get from Bloodhound and nobody else. So Greg was a hero and wrote an ad about it. What good is it to be a hero if nobody knows about it? We do everything we can for our buyers, but there are limits to how much can be done, the way things are right now. But when we list, we get to howl. If you're ready to sell or you know someone who is--and it could not be a better time to sell--put Bloodhound on the trail. We'll bring you more offers--and better offers--than you ever dreamed of, and we'll show you how to sniff out the best.

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