All Forum Posts by: Jeremy Schappert

Quote from @Jeremy H.:

Very cool experiment you ran!

I think for one real estate is completely location dependent. On top of that, a new home is generally going to have a lot more demand due to size, finishes, amenities etc. The demand is going to mean you pay a premium for it, and a lot less likely to get a discount. 

For me an older home can more often be purchased under market value, especially one that needs work. Fewer "normal" people want an older home, again, especially if it needs work. What does this mean? As long as you have a good layout, I feel there is more opportunity in the older home space, IF bought at the right price. You can force equity and appreciation. So you can buy cheaper AND force equity - you can add the finishes, upgrades to lighting/AC etc. I actually prefer an older home I can get at a good price. 

I would LOVE to see an analysis based on price. Low end - mid range - and upper end. The low end houses here do not appreciate. That part of town has been ghetto forever and always will be. You need a big investment to change this - a college, medical center etc. Something to drive demand and money to the location

Hey Jeremy, first great name.  I totally agree with you that the older ones often have the profit potential in the ways you described.  Makes sense that you have to add value to significantly change the total value, and to change the value more than all the other homes are naturally changing value.   I also agree with your assessment of low-end homes, if you're going low-end they better cash flow well because I wouldn't bank on appreciation.  Thanks for reading!

Quote from @Allan Smith:

Real estate generally appreciates based on location. If it is in a desirable area, it will appreciate. The age of the home does not matter.

Interesting thought, I do agree mostly.  However, if I'm just looking at the structure/improvement I believe that a home would depreciate following a curve in the same way that most physical goods depreciate on a curve (in terms of real dollars, adjusted for inflation).  Faster at the beginning and the leveling off to some extent.  Boats, cars, RVs.  Basically, any good that doesn't get additional value from the fact that it is old like a collector's watch or some wines for example.

Quote from @Mike Dymski:

It's the land/location that appreciates rather than the home.

I can agree with that.  Maybe a better way for me to have put it would have been... A new construction improvement depreciates more during the first five years than an existing improvement.  If you think of depreciation as a negative appreciation I think you get to the same place.  I do agree that generally appreciation has more to do with the land/location as you point out.  In the two counties I looked at there weren't big differences in land appreciation between the areas that the samples were selected.

Thanks for the nice words, Chris.  It's funny I'm not a top agent (yet) in my area but I don't think many agents do many deep dives for their clients.   It honestly feels like the agents with the silver sales tongues get the most business not necessarily the ones that help you buy the best property. 

I'll have to strive to do both.

Analysis of 136 homes in two DC Metro counties held for 5 years.

Genesis of my curiosity

As a Realtor and investor for 10 years I often create my own theories of various market trends based on my own observations, experiences and listening to the anecdotes of others. I have formed opinions on questions like:

• Do new construction homes or older/existing homes appreciate more?
• Do fee simple homes tend to appreciate at a faster or slower rate than condominiums? Why?
• Do new units nearby increase your property value and/or rent?
• Which amenities included in a Home Owners Association or Condo Owners Association provide a good value to the owners because of economies of scale? And which increase the probably that your fee paid will be squandered.

When clients have these sorts of questions I of course share my opinion and state them as opinions. When an interesting questions recurs often enough, I research, but when I can’t find existing research I do my own analysis. This post addresses the first question above through my own research: appreciation of new construction versus older/existing homes.

Scope & methodology

Out of Scope: I have found lots of articles on the pros and cons of buying a new vs existing home. The properties themselves are often different, maintenance costs are different, purchase prices are different, utility costs are different, etc. Comparing the pros and cons of purchasing the 2 home types is not my aim here.

In Scope: The change in the sales price of new construction homes from when they were first sold after construction to when they were sold subsequently versus the change in sales price for existing homes over the same period. In the interest of time I limited my search to Montgomery County MD and Loudoun County VA homes that were sold in 2017 and sold again in 2022.

Methodology: I pulled all the homes that fell into the scope defined above from Bright MLS. I realize that many new construction homes and some existing home listings are never entered into the MLS, but I don't see that affecting the high level results I'm shooting for. In total I sampled 152 homes that met the criteria. I manually looked at all of the listings in order to find and exclude homes with significant improvements. Significant improvements excluded were homes that after the 2017 sale were torn down and built new, large renovations, additions added, extensive deferred maintenance addressed. 16 of the 152 homes were excluded leaving 136 to further analyze.

Obviously there is some subjectivity in determining which homes had ‘significant improvements’. Generally by looking at the listing pictures and reading the remarks I wanted to weed out properties that you could say had $5k-$10k of capital improvements invested into them between when they were sold in 2017 and then sold again in 2022. It occurred to me that the reason I have not been able to find any research on this topic is probably because of this subjective nature and time consuming attribute of this weed out process.

Without further ado, my findings

New construction homes that were bought in 2017 increased in price by 28.3% when they were resold in 2022. Stated another way, on average those properties increased 5.7% annually (using simple interest). Existing/older homes increased by 37.6% over the same period, or 7.5% annually. New construction homes missed out on 9.3% of home appreciation. In my sample the average sales price for the new construction homes when sold in 2017 was $699.3k. Consequently, on average the new construction homebuyers’ equity balance was $65.0k less than if their home would have appreciated like an existing home.

As detailed in the chart above the difference in the appreciation rates was much more exaggerated in Montgomery Co. than in Loudoun Co.

Making sense of the results

The results weren’t shocking to me. It makes sense that the purchase price of something brand new will demand a premium. No matter how well maintained, the quality of being brand new no longer exists once it has been lived in. It’s not uncommon for a buyer client ‘X’ to only be considering new construction homes. I’ve yet to have a client that is categorically excluding new construction so let’s say that client ‘Y’ is considering both types of homes. New construction homes have demand from ‘X’ and ‘Y’ and existing homes only from ‘Y’. Greater demand drives a greater price, Econ101 right?

As noted above there are many other considerations in deciding between a home that is new or existing. Whether or not the other benefits of new construction outweigh this diminishment of potential appreciation could be the topic of another post.

Deeper dive and feedback

I’d be super interested to hear from folks on this topic. Are the results about what you expected? Have you read anything else that supports my small sample findings or to the contrary? What was your experience buying new construction, how did it appreciate or depreciate? What other related topics have you wondered about?

At some point I'd like to dive deeper into this same question. Analyze a bigger geographic area over a broader time period. Also it would be interesting to control for attributes such as 1) condo vs. fee simple and 2) modest vs. midrange vs. high priced homes. The limiting factor was that each listing needs to be manually considered and that Bright MLS limits me to exports of 5,000 lines at a time. In total I downloaded about 80,000 lines of data just to do this small sample analysis.

I hope you found reading this as interesting as I did creating it.

- Jeremy

An original thought, so far as I know

As you probably know, in 2021 & the first half of 2022 it was a seller’s market. This was as true in the DC Metro as almost anywhere else in the country. Winning offers had no contingencies, this was the norm. In this seller-sided environment, at least in the DMV, it became a common practice for buyers to perform pre-offer home inspections. As the name suggests, a pre-offer inspection is a home inspection performed before the prospective buyer submits their offer. They did this so they could have the benefit of knowing the defects of a property and still achieve the strength of an offer that omits an inspection contingency. When sellers review offers, they’d prefer one without an inspection contingency over one with. However, just because their offer was inspection contingency free didn’t mean they necessarily won the contract, perhaps five to fifteen other prospective buyers did the same thing. It follows that a buyer could pay for any number of these pre-offer inspections before they finally got a home under contract.

In the words of Bob Dylan, times they are a-changing. Our market has become much more even. Low inventory and a low number of buyers has limited the number of transactions occurring but neither the buyer or seller has a clear advantage over the other. Pre-offer inspections occasionally still occur but they are the exception not the rule. In 2022 I started the process of selling my modest rental portfolio of eight houses. I was a bit envious of those earlier sellers that had received offers without inspection contingencies. I was jealous enough that I thought, I’d gladly pay for an inspection out of pocket in order to get a pre-offer inspection. Followed by my eureka moment, maybe I can?

Thinking through the details

My plan needed to accomplish my goal of getting an offer that didn’t have an inspection contingency and address the following realities:

• If I didn’t intend to alienate a huge swath of buyers I needed to grant the buyer the opportunity to have a licensed home inspector of their choice inspect the home.
• When I’m on the sell side I always convey to the buy side that a pre-offer inspection would be welcomed and favorable. Even though the suggestion is out there the reality is that I shouldn’t expect folks to do this all on their own dime in this market.
• I didn’t want to pay for all or even part of numerous inspections, that could add up. I know the close prices of my rentals will all be between $100k-$200k. Paying too much out of pocket would eat into profit.
• I wanted to keep the buyer to some extent invested, pot committed. I needed them to to have some money on the line should they decide to walk away.

What I did

So far, I have listed three of my rentals, two have now sold and the third is under contract. All three had no inspection contingencies in the offer I accepted. Initially I received no offer that waived the inspection contingency. I took the best offer a verbally countered with the following:

• Do a pre-offer inspection then strike the inspection contingency if you choose to move forward.
• I’m willing to pay for half of a pre-offer inspection directly to the inspector.
• I’ll agree not to accept any other offer until after they get the chance to review their inspection (that date was specified).
• If a better offer does come in prior to them completing their inspection I would share a copy of that offer with them and give them the opportunity to match that offer.
• I’m willing to put this in writing.
• In exchange, the inspection report would be made available to me upon request, but not provided to me without request.

The biggest talking point of my pitch is that I’m willing to pay for half of the inspection and the buyer is still free to walk away if they don’t like the results of the inspection, and actually for any or no reason at all. The reason for the caveat about providing or not providing the report is that I may not want to know about defects that were previously unknown to me. Knowing about material defects would require me to disclose this information to other prospective buyers.

I’ll go into more detail below as to why a no inspection contingency offer is so important to me. For now suffice it to say that given my circumstances it wasn’t a close contest between paying the cost of half an inspection ($100-$237 in my case) and the cost of accepting an offer with the contingency.

Honestly I had no idea how my plan would go but there really wasn’t much to lose. The worst they could do is tell me no. That would be fine, I’d be in the same position I already was in.

I was quite pleased with the outcome, I received virtually no push back on any of those three deals. It did require some explaining on how the mechanics would work. One buyer agent even put me on a three way call with their buyer client to explain which is pretty unconventional. It was interesting to me that none of the three buyers had me put the terms of our verbal agreement in writing. I think because I was offering to pay for half of their inspection up front it showed that I was acting in good faith and that my goal was to get them under contract, albeit without that contingency. It should go without saying that once the buyer side provided me with the inspector’s payment instructions I paid my half immediately, within minutes!

Why I care so much about removing this contingency

The truth is I don’t always. For the three sales above I did. Like I mentioned these were rentals. I had done various degrees of renovation to prepare them to be listed. By no means had a thorough evaluation of all the systems been conducted. I didn’t have any knowledge of anything big but it was certainly a possibility that something significant could come up. Other times where I have bought houses to flip and did full, to the studs, gut-job renovations I wouldn’t deploy this tactic. I would be confident that anything found I could easily have corrected and likely at no cost because the work would be under warranty.

The biggest reason I care about removing the contingency in these instances is the timing of negotiation. Before the contract is ratified I still have tons of leverage as the Seller. I can continue to negotiate with the Seller, I can try to find another buyer, I can fix deficiencies myself if that’s most cost effective and I could even decide not to sell it, continue to rent it out. Before ratification the buyer will likely still want to negotiate on items discovered in an inspection however they will be more inclined to be very reasonable with what they are asking for because they don’t have it locked up yet. They might look past some items.

Once a contract is ratified with an inspection contingency, my leverage is just about zero. If the buyer asks for a ridiculous amount of money off of the sales price I’m in a tough spot. If I say ‘no’ and the deal falls through I have wasted time and I’m back on the market but this time looking weak. This perceived weakness can cost thousands or even tens of thousands (depending on the price point). Future prospective buyers will all want to know why the deal fell through. They may assume the property isn’t worth my list price, even if my initial contract was above the list price. Later buyers may want to do an extra thorough inspection and even contract additional system specific inspectors. Also if I was made aware of material defects in the process I’d need to disclose those which could bring less foot traffic to my listing and reduce incoming offers.

Additional nuance

I don't think the above is always the right strategy. For instance in cases where the best or only offer you have has numerous other contingencies I think it's unlikely worth the extra cost and effort to remove this one. Specifically when there are other contingencies in place that will give the buyer an opportunity to negotiate down from the initially contracted sales price. Or contingencies that allow the buyer to unilaterally terminate the contract. For example in MD, DC & VA buyers purchasing homes that are part of an association (i.e. COA or HOA) statutorily are afforded a review period of the association documents. During that period the buyer can walk with basically no consequence for any or no reason. I'd be much less inclined to deploy this strategy when selling a home that's part of an association or when there are numerous other ways for the seller to terminate or negotiate further.

Other contingencies that are mainly outside of the Buyers control don’t steer me away from this strategy so much. I’d generally still use this strategy when the buyer has a financing contingency. Interviewing their loan officer regarding what diligence has already been done prior to accepting their offer should mitigate the chance of having an unpleasant surprise later. So long as the buyer is acting in good faith they are trying to successfully get their financing. My incentive is aligned with the sellers. The same concept is true for an appraisal contingency, I’d still use this strategy.

Why not just get your own inspection prior to listing?

I’ve seen instances where sellers will have their place inspected by a licensed home inspector prior to listing. They might fix some or all of the punch list items uncovered and then have the report updated to reflect those repairs. Or perhaps not, they deem the condition as reflected on the report to be ‘good enough’. Regardless the idea is to share the report with prospective buyers prior to receiving offers. Hoping that the buyer will forgo their own inspection. Or possibly hoping to strengthen their negotiating position should a buyer perform their own inspection and find the same deficiencies. After all, if a buyer was told up front about a needed correction it would be hard for them to successfully negotiate on an item that wasn’t newly discovered.

While I don’t hate this strategy I don’t think it’s as good. I think the buyer perception is that the seller is trying to bully them into a no-contingency offer based on one home inspector’s opinion, a home inspector that they didn’t select and that they might not trust. That inspector was hired by the Seller, was it his buddy? Did the seller convince him to omit some items or put them in a more favorable light?

If the buyer with the best offer still insists on their own home inspection I think a seller is setting themselves up for unnecessary conflict. What if the two home inspectors have differing opinions on something? Additionally there are now two inspections being performed, you would think two inspections would uncover more defects than one.

Further implementation

When selling for myself, no question, I’ll continue to use this strategy when the circumstances are right. However, there’s a big difference between doing something unconventional for yourself as the owner/investor and recommending it to a client as their agent. Sellers are incurring a lot of expenses when selling their property. Costs to prepare their home for sale, staging, commissions, transfer taxes, closing costs, moving expenses, let alone all the costs that come with the purchase of their next place. Geez, hopefully they are selling for a big gain, right? To recommend that they pay for one more thing sounds like a painful ask. One more thing that they haven’t heard of other sellers paying for.

The selling costs listed above total thousands or tens of thousands (depending on price point), this one costs $100-$250 and could save them thousands or tens of thousands. What do you think? How would you feel if you real estate agent suggested this? Would you prefer your agent to think of creative solutions like this or would you rather them go by the playbook? I’d love to hear your opinion.

Hi Michael, glad you found it useful.  It's been a while since I've been on BiggerPockets, I think this article needs some updates.  Maybe I'll do that at some point soon.  I'm posting some new articles that I think will be even more interesting. 

Originally posted by @Russell Brazil:

Originally posted by @Jamie Bradley:

This was great information. Thank you. I'm interested in your LO top pick for the washington DC / D/M/V area?

Best,

JB

 Consider @Upen Patel. Top notch.

 I have been using this LO:

Andrew Stewart | McLean Mortgage Corporation

You’ll have to google search him as it doesn’t apper the BP allows me to share his contact info.

Originally posted by @Jamie Bradley:

This was great information. Thank you. I'm interested in your LO top pick for the washington DC / D/M/V area?

Best,

JB

I have been using this LO:

Andrew Stewart | McLean Mortgage Corporation

You’ll have to google search him as it doesn’t apper the BP allows me to share his contact info.

Selecting a loan officer in brief…

For experienced home buyers, I want to quickly lay out my strategy for picking a loan officer. Subsequently I’ll go into the detail for those interested or less experienced with the process. In a nutshell, pick a loan officer who is good with the administrative work and is responsive. Use that loan officer for your pre-approval letters. Once under contract, immediately shop around for the best deal with other lenders. When you find the best deal give the loan officer you have been working with the opportunity to beat or match what you found elsewhere; they likely can match what you have found. If they can’t match what you have found, then move on to the loan officer with the better deal. Don’t feel guilty if you have to switch loan officers - it’s their job to be competitive. You’ll have the mortgage for up to 30 years, but the loan officer will be working on your loan for a few hours.

Selecting a loan officer for your pre-approval letter

With dream homes at your fingertips, thanks to Redfin, Zillow and other sites, it’s easy to fantasize about buying a home. It’s also easy to wade into the process and not take practical first steps to set yourself up for a smooth transaction. This is my advice for homebuyers, and I hope it’s practical information you can use.

If you are considering buying a home, especially if it’s your first time doing so, the most practical place to start is with an institution who will lend you the money. (If you’re buying your home in cash, congratulations! This article is not for you.) A note: choosing between a mortgage broker or a direct mortgage lender is not the point of this article and here I’m calling them both Lenders. I recommend shopping in two stages: first, shopping for a loan officer, or LO, when you first consider buying a home and using this LO for your pre-approval letters, and secondly, shopping for the best terms once you are under contract. Your LO should be able to tell you what they have to offer, help you apply for a loan, and after you’ve qualified, they can give you a pre-approval letter. Just like real estate agents, LOs are a dime a dozen, and similarly they may not all serve you equally.

For the vast majority of buyers, the lenders will provide extremely similar loan products and terms. The LO is a sales position, so look for the attributes of a good salesperson. The best LO will be able to explain your options, respond to your questions quickly, update your pre-approval letter for the second time on a Saturday evening, and perform all the administrative portions of their role quickly and correctly. Additionally, you will need to decide if you seek a Conventional, FHA, VA or other loan product, because it will be specified in your pre-approval letter and offer. Do your research and leverage your LO to explain your product options and of course make sure that the LO can provide the product you decide is best for you. If you personally know an LO, they could be the best place to start! Someone who knows you personally will likely go above and beyond to check all those boxes. At this stage in the process, don't agonize over the interest rate and fees as long as it's within 1/8% and a few hundred dollars of the next guy (we'll deal with that later). If you don't know someone personally that fits the mold, ask friends who they have used and how their experience was, but stay focused on the good salesperson criteria when making your selection. If you're still coming up blank, reach out to me and I can give you my top picks (I have no financial lender/broker affiliations). If you don't personally know anyone, have no friends to refer you, and don't like me enough to reach out, pick a big operation. They will likely have a wide variety of loan products and well-groomed process controls to help ensure you don't fall through the cracks.

Once you have selected an LO and applied for the loan, request a Loan Estimate disclosure from the LO. The ‘Loan Estimate’ disclosure is the document that replaced the ‘Truth-in-Lending’ disclosure in most cases. The Loan Estimate will provide you with all the relevant information you need regarding the loan as well as information extraneous to the loan. Lenders are required to provide you with their Loan Estimate disclosure within 3 days of applying.

Below I’ll walk you through next steps finalize a lender and to make sure you’re making the right comparisons so you get to keep more of your own $$ and spend less on fees.

Selecting a Lender for the Loan and Minimize your $$ out the Door

As soon as you have that dream home under contract (or even when you’re pretty sure you have the winning offer extended), you need to act quickly to shop and select the best loan deal possible. Up until this point the focus was on the LO selection, but now your focus shifts to the loan terms. Time is of the essence at this point, since your financing contingency days will be ticking by. You may be saying, “Hey, if it’s so urgent why didn’t you say something earlier?” That’s because interest rates and potentially fees change, and you can’t shop properly until you’re ready to pull the trigger.

Start with the LO you received the pre-approval letter from, and make sure you have all their terms noted, but don’t try negotiate yet. The biggest two loan terms you will be assessing are the interest rate and lender fees. The lender fees can be named many different things, and you’ll want to add up all the fees associated with that lender. The common names of these fees are listed in the table below “Fees to Include in Comparison.” Be aware, though - lenders may still have their own creative names for some of these fees! The Loan Estimate disclosure will make this process a breeze. The bank fees will be listed on Page 2 of the loan estimate in section A ‘Origination Charges’ and section B ‘Services You Cannot Shop For’. A note: Lender Credits would reduce the fees the lender is charging you, Lender Credits may appear in section A ‘Origination Charges’ or in Section J ‘Total Closing Costs’.

When looking at the Fees tables above, remember that the goal is to pick the best loan, not to determine the total closing costs! By stripping out all the items which aren’t the direct consequence of a particular loan product with a particular lender, you can compare the loans fairly and make the best decision. A simple example to demonstrate my point - let’s pretend you are buying a new car. Things have been going amazing for you so you’re going to buy a 2018 Aston Martin Vanquish (it’s just an example so might as well have some fun). You locate two dealers who have the car, dealership A & B. You ask the salesperson at dealership A how much the car will cost and they tell you in total the car will cost you $300k, that cost includes what they expect the sales taxes to be in addition to a new car cover that you think you’ll need but dealership A doesn’t sell. You have a similar conversation with the salesperson at dealership B, they quote you $340k, that price doesn’t include sales tax but it does include what they expect it will cost you to add a climate-controlled garage at your home, they say a car cover just won’t do for such a nice car. So, who should you buy the car from, who knows, right? That’s why we need the price for just the loan.

Another difference between lenders to consider is whether or not the lender offers an interest rate lock and if so, what the terms around that lock are. An interest rate lock is just the lender guaranteeing a certain interest rate as long as you close within a specified number of days (typically 30-60 days). If you believe rates may rise before you close, a rate lock protects you. Some lenders allow for a re-lock, so in cases where the interest rate drops, you can re-lock at the new rate. I’m a fan of interest rate locks. Without a lock, you may be able to negotiate the rate back down to what your original quote was but there is no guarantee, and if the rate changes at the last minute there may not be time to do anything about it. Keep in mind that an interest rate lock may cost you a fee or may be standard with some lenders.

What lenders call “points” are fees paid at closing to lower the interest rate, or conversely, some banks may give you money at closing and increase the interest rates. The price of buying or selling points should be very similar between lenders, so how many points lenders will allow you to buy or sell is the question to ask in addition to the price. The longer you plan to hold the loan, the better buying points is. If you expect to sell the property, or pay off/refi out of the loan sooner rather than later, buying points would not be desirable.

Lastly, a loan may require mortgage insurance which can add a layer of complexity when choosing between loans. If you are applying for an FHA loan it will have a Mortgage Insurance Premium (MIP). The premium is currently 1.7% of the base loan amount at closing, and then payments are due annually for the life of the loan. MIP will be the same between all lenders, so there is no need to consider it in your lender comparison. If the loan requires Private Mortgage Insurance (PMI) then that insurance can be paid either upfront at closing or annually, making it difficult to compare between PMIs with different payment structures.

Now that we fully understand the loan the original LO is offering, we can shop for a better deal. I recommend contacting as many lenders as you can. If you can get a Loan Estimate disclosure from them quickly then that’s great, but they aren’t required to give it to you for up to three days. This is not a problem for you since you know which fees to ask about. Some lenders may require you to apply before they quote you a rate; some may give you an idea of the rate without applying, indicating if it’s worth your while to apply. Regardless they should give you a quote for the rate and fees you want without sending in all the paperwork that will eventually be required to close the loan. If you find a better deal than what the original LO who gave you the preapproval offered, and assuming the original LO has provided you with quality service to this point, then go back to the original LO and tell them you have found a better deal elsewhere but you would like to give him the opportunity to beat it. Likely they will only match it. If you like your original LO and they have matched the best offer you can find elsewhere then stick with them - they likely are farther along with the paperwork and they have put in the work extending you pre-approval letters. If your original LO can’t match what you find elsewhere and you feel good about the new lender then it’s time to switch lenders. Don’t feel like you wasted the first LO’s time - the fact is they weren’t competitive enough to earn your business. When possible, you want to make your final decision on a lender before they order an appraisal, since you will pay for the appraisal and it may not be transferrable to a different lender.

I have had great success following this outline and I believe you will also. By putting in the work, you can feel good knowing you got the best deal possible. When buying real estate, a strong team of professionals is valuable but nobody will care as much about your deal as you. The real estate agent, loan officer and title company all work for you - you can negotiate their fee and you can go elsewhere if they aren’t meeting your standards. Being an active real estate investor, I look for strategies to save money and make great deals. When I’m working for a home buyer as their real estate agent I enjoy sharing the strategies I have learned to help them think like an investor and get a great deal.