What's Selling: Cedar Lake

Acing the "Ooh!" and "Aaah!" Factor

Where: 2700 Chowen Ave. South in Minneapolis' Sunset Gables subdivision (just south of Cedar Lake)

What: Moderne-style Art Deco with 5 Bedrooms and 5 Baths, and 3,800 finished square feet

How much: listed for $875,000; sold for $823,050 (94% of asking price, and more than $35,000 over the tax assessed value).

When: less than 3 months on the market; closed Friday (Oct. 22).

Who: listed by Ross Kaplan, Edina Realty City Lakes; selling agent Paul Larson, Coldwell Banker Burnet

What's selling in a tough market, especially for upper bracket homes?

Trophy properties like 2700 Chowen Ave. South, just south of Cedar Lake in Minneapolis.

This historically designated home probably generated more "ooh's" and "aaah's" than any other home I've listed, for good reason: prospective Buyers salivated over the original fresco above the Fireplace, the custom millwork and period Art Deco light fixtures, and all the space and light.

The clincher?

A $200k-plus first-floor addition (2004) complete with its own washer dryer and private, courtyard entrance.

Pre-Approval Letters & Written Statements

What Are They Really Worth?

Put it this way: the picture of toilet paper should give you a hint.

First, some background.

In Minnesota, the first things that typically lead off any offer to purchase residential real estate are the Buyer's earnest money check, and a pre-approval letter from a lender (unless the Buyer is paying cash).

The standard pre-approval letter recites that the lender has initially screened the Buyer's finances and credit scores, and, based on that quick review, says that the Buyer can afford the home.

In practice, a pre-approval letter almost always means . . . nothing.

Most lenders will issue them in less than 10 minutes on the phone with a prospective borrower, after collecting the most basic information.

Meanwhile, their express language explicitly states that nothing in the pre-approval letter obligates the lender issuing it to actually fund the loan.

The Written Statement

Which is where the Written Statement supposedly comes in (think of it as "the Final Approval" Letter).

Once the Buyer and Seller reach agreement on terms, the Purchase Agreement typically includes a Financing Addendum that calls for the Buyer to deliver a Written Statement within 2-3 weeks.

The standard Written Statement recites that an appraisal satisfactory to the lender has been completed; presumes that the lender has finished vetting the Buyer's W-2's, recent tax returns, and any other Buyer financial "bona fides"; and lists any outstanding conditions remaining -- usually pro forma ones, like the Buyer not blowing up their credit or losing their job.

Once the Buyer delivers the Written Statement to the Seller, the Buyer's loan is supposed to be finally underwritten -- and the Buyer's earnest money becomes non-refundable.

O-for-2

Except that in practice, that's not how it works today.

Now, skittish lenders can and do reserve the right to revisit the loan at any time up until closing.

They may request additional Comp's to substantiate the value of the collateral (the home being purchased); ask the Buyer for (still) more financial documentation; or tweak (tighten) their underwriting standards.

Or all of the above.

The result?

What was supposed to be a finally underwritten loan suddenly . . . isn't.

All of the foregoing means two things:

One. Buyers and Sellers today, especially when upper bracket properties are involved, should consider drafting custom language to address the Buyer's financial qualifications, and defining when their earnest money becomes non-refundable; and

Two. Sellers shouldn't load up the moving van until they know, for sure, that the Buyer's financing is good.

Appraisal Air Pocket

Housing Market Circular Reasoning

The reason more upper bracket homes aren't selling . . . is because more upper bracket homes aren't selling.

Huh?

Once a deal is struck, the lender's appraiser seeks to substantiate the value of the collateral -- the home being sold -- by looking to other, similar homes that have sold recently.

The preferred number is three, within the last six months (more recently, if possible).

But what if there aren't three good comp's?

Increasingly, lenders in CYA mode appear to be filling that vacuum with the most conservative assumptions possible -- scuttling more than a few local deals.

The result is . . . . even fewer upper bracket deals.

That's certainly not the whole story with respect to upper bracket housing -- the tiny little recession we're experiencing, elevated unemployment, a weak stock market, etc. are all contributing factors, too.

However, "appraisal issues" are increasingly exacerbating the problem.

Appraisals & Upper Bracket Homes

Risk of Not Appraising Borne by Buyer

The very rich are different from you and me.

--F. Scott Fitzgerald

Fitzgerald might have added, "and so are their home transactions."

One of the features of truly upper bracket homes is that the individuals who buy them -- by definition -- are people of substantial means.

If they need a mortgage at all, it's often for a relatively small percentage of the purchase price (in lender parlance, their "loan-to-value" ratio is low).

So far, so good.

The downside of pouring so much equity into a home is that the Buyer may not have an out if the home doesn't appraise.

Primer on Financing Contingencies

That's because a bank that has a $3 million dollar home as collateral securing a $1.5 million loan (loan-to-value = 50%) doesn't really care if the home actually appraises for $2.9M; they're still amply secured.

But the Buyer may care a lot!

Normally, when an appraisal comes in low, the bank won't make the loan, and the Buyer's Financing Contingency fails.

Voila! The Buyer can get out of the deal.

Now go back to the hypothetical above.

The loan appraisal comes in low . . . but the bank doesn't care.

So, the Buyer in such a circumstance loses their "out."

To protect themselves, more upper bracket Buyers are inserting language into the Purchase Agreement specifying that the deal is "contingent on the home appraising" for the negotiated sale price.

Shelter From the (Stock Market) Storm?

Real Estate as a Haven

Conventional wisdom to date has been that a rocky stock market bodes poorly for upper bracket housing.

That's because, compared to other Buyers, upper bracket Buyers presumably have more exposure to stocks.

When stocks take a hit, so does their purchasing power.

Witnessing the latest stock market gyrations, I'm wondering whether at least some drained investors have decided that they want off the roller coaster.

Smart investors heed one maxim: 'buy low, sell high.'

Nothing is a better value in today's housing market than upper bracket homes (it doesn't hurt that mortgage rates are at record lows -- another side effect of stock and financial market turbulence).

P.S.: a half dozen or so sales do not a trend make, but in just the last two weeks, 7 homes on or near Cedar Lake, Lake Calhoun, and Lake of the Isles -- ranging in price from $900k to $3.3M -- have gone pending.

Downsizing Developers: 'Stayin' Alive'

Dave Alan Homes in Minneapolis'

Bryn Mawr Neighborhood

Feel the city breakin'
And ev'rybody shakin'
And we're stayin' alive, stayin' alive.
Ah, ha, ha, ha,
Stayin' alive.
Stayin' alive.
Ah, ha, ha, ha,
Stayin' alive.

--lyrics, "Staying Alive" (The Bee Gees)

How does a local home builder weather an epic downturn in new construction amid a glut of upper bracket homes?

By going down-market (relatively speaking, at least).

New Math

In this case, Dave Alan Homes appears to focusing more on mid-tier neighborhoods like Byrn Mawr in Minneapolis, rather than upper bracket spots closer to the lakes or in Edina.

So, instead of buying tear-down homes for $300k-$350k and putting up $1.2M new construction in their place, builders are plunking down $150k or so and building $500k-$600k homes.

In fact, $150k is exactly what the buyer paid for 4xx Thomas Ave. South in February (market time: 1 day).

Judging by the state of construction I saw when I drove by this morning, the home is still about 3 months away from completion (note: the home pictured above is another, similar-looking Dave Alan home, not the one on Thomas).

P.S.: Since it's not on MLS, it's possible that this home is being built for a client (rather than as a "spec home").

BIG Edina Discount

Great Value Overlooking Lake Edina

Where: 4904 Poppy Lane in Edina

What: 4 BR/3BA walkout rambler with 4,200 FSF and pool overlooking Lake Edina

How (much): $699k

Who: listed by Steve Stewart; broker is Edina Realty

Historically, homes in Edina enjoyed some of the best appreciation in the Twin Cities -- and weathered economic downturns much better.

Not this recession -- especially for upper bracket Edina homes (and true of upper bracket homes throughout the area).

Exhibit A would be this sprawling rambler overlooking Lake Edina.

Originally listed at $1.1 million a year ago, the price was just reduced Monday from $825k to $699k -- now a whopping $180k below the tax assessed value ($880k).

I saw the home earlier this Spring, and thought it was a value $100k higher!

Big Weekend for Country Club Open Houses

Country Club Extravaganza

Country Club is one of the premiere neighborhoods in Edina -- indeed, in the entire Twin Cities.

Mostly built in the '20's and '30's, Country Club homes are historically registered, and include some of the most impressive Tudors and Colonials around.

There are currently 44 Country Club homes on the market ranging in price from around $600k (smaller homes needing lots of work) to more than $4 million; more than half will be open this Sunday (that's quite unusual for upper bracket homes).

One example: 4620 Drexel Avenue South (pictured above).

Built in 1928, this Tudor has been completely renovated, and has five Bedrooms and Baths, and 5,600 FSF. List price is $1.75M.

If you are looking for a great home in a fabulous neighborhood, but didn't think you could afford Country Club, come take a look.

You might just be surprised!

Do You Really Want That $2M Listing??

Homes That Don't Measure Up
to Their Asking Price

The quick Realtor answer to the question posed above?

"No, not if the home's worth closer to $1.3M."

That's especially true if the owner with the unrealistic price expectations also expects a drumbeat of expensive marketing over the course of a year (or longer) -- the average market time now for a Twin Cities home carrying that price tag.

To bridge those expectations, more Realtors who specialize in upper bracket homes are presenting such clients with a proposition: 'I'll run as much advertising as you want, but you pay for it.

When (and if) the home sells, the Realtor then credits back the client's marketing outlay at closing.

It's Listed for HOW MUCH??

Now THAT's Curb Appeal

Pop quiz: guess the listing price of this estate-like property (with a setting to go with) in Hopkins' Knollwood neighborhood (just northwest of highways 169 and 7) :

A. $1.29M
B. $2.45M
C. $949k
D. $1.89M

Answer: C

What's the explanation?

A rough market for upper bracket homes in the Twin Cities; and the fact that the home needs some cosmetic updating (some, not a ton).

Bonus question: what's missing in the shot above?

No garage.

It's actually on right side of the home, but what you see from the street is the back of the garage, not the front.

Nice.

Making Use of "Agent Remarks"

Marketing Opportunities -- Taken & Missed

The MLS database has two places -- "Public Remarks" and "Agent Remarks" -- where listing agents (representing the Seller) can describe the property.

Good agents use the Agent Remarks field to supplement and punctuate the home's key selling points, as described in the Public Remarks. That's especially the case for larger, upper bracket homes, where there's more to say (or should be!).

Lacklustre agents leave the Agent Remarks field blank, or simply copy and paste the Public Remarks into it.

Guess which category the following falls into?

Agent Remarks: See agent or the City of Edina on pending assessments. Agents to verify all measurements.

Note: now that the road construction in Edina in winding down, the other shoe is dropping -- pending assessments that in some cases are tripping $20k. Ouch!

When the Comp's Are "Thin" -- Or Non-Existent

"Active's" Loom Larger in Pricing Decisions

Realtors and Appraisers alike rely on "Comp's" -- comparable sold properties -- to estimate fair market value for any given home.

By definition, a Comp is similar in style, condition, and size as the "subject property" (the one you're trying to price); is physically nearby; and has sold in the same market.

Given that interest rates, economic conditions, listing inventory, etc. are constantly in flux, the "same market" typically means going back no further than six months -- and sometimes three, depending on the lender and price point.

"One of a Kind"

So what happens if there aren't any homes that meet those criteria?

That's especially the case for "upper, upper" bracket homes in the Twin Cities (and elsewhere) right now, which: a) are moving very slowly in today's market; and b) by virtue of their price, size, and finishes, tend to be more unique, anyways. (To be fair, the expected market time for expensive homes is always significantly longer than for more modestly-priced homes.)

By necessity, you then have to rely more on what you're competing against.

Typically, that means scrutinizing the dozen or so "Active" listings that prospective Buyers are most likely to consider along with the to-be-priced home -- then picking a price that beats all of them!

The virtue of that approach is that it (also) satisfies prospective Buyers' insistence on getting what they perceive to be a great value -- a requirement at the top of most Buyers' lists today.

Twin Cities Market Snapshot -- March, 2010

Today's Buyers: Looking for (Affordable) Cream Puffs

My quick "snapshot" on the Twin Cities housing market as of St. Patrick's Day, 2010?

It continues to be a schizophrenic market, in which the lower end -- defined as under $200k for single family detached -- is selling (too?) briskly, and values are hard to find.

I attribute that to: 1) tax incentives (due to expire April 30) that loom larger for entry-level homes; 2) a preponderance of first-time Buyers unencumbered by existing homes they have to sell; and 3) a pronounced drop in bank foreclosures (down more than 50% locally the last six months).

Meanwhile, upper bracket homes (say, $800k and above) continue to languish, and are being aggressively discounted to move.

Two Contests: Pricing & Beauty

Another phenomenon of this market: Buyers are looking for "cream puff's"; that is, homes in mint -- or at least move-in -- condition that show great . . . and are priced great.

Or as Edina agent Jonathan Spar puts it, would-be Sellers in today's market have to win two contests: a pricing contest, and a beauty contest.

Perhaps that's why I'm seeing more listings that have been sitting, unsold, "re-debut" on the market touting the fact that they are "newly staged" (often with a price reduction, for added "oomph").

That's a tacit acknowledgement that they weren't so beautiful before -- but now they are!

P.S.: sometimes I wonder whether Buyers who fall in love with a home realize that they're buying the home, not the staging!

Market Activity By Price Point

If a picture is worth a thousand words, take a look at the third slide in the presentation below:

Twin Cities Housing Market: Big Picture and Little Details

View more presentations from JeffAllen.

The takeaway? Twin Cities housing sales over the last 12 months are correlated almost 100% with price point.

In other words, the lower the better -- and "upper, upper bracket" is the worst .. .

Golden State (CA) Buyers in MN

Not So Golden -- Or Plentiful

Once upon a time -- like three years ago -- having an out-of-town Buyer, especially from an expensive market like California, could be like winning the lottery for Minnesota Sellers.

After all, it's just human nature for Buyers to bid more freely in a market where everything seems cheap by comparison.

Not surprisingly, the converse is also true: it can be tough for local Sellers when the Buyer is coming in from a less expensive market.

Often times, such Buyers need to lose out on a few, coveted properties before they reconcile themselves to paying (higher) local market prices.

CA Downturn Contagious

While the housing downturn and recession have certainly knocked the Twin Cities, they've absolutely clobbered formerly white-hot (and ridiculously overpriced) markets like Southern California.

The result is a one-two punch locally: not only are there fewer, incoming transfers from more expensive housing markets, but the ones who are coming are not nearly as flush as they were just a few years ago.

Just one more reason why it's been an especially challenging market for Sellers of upper bracket homes in the Twin Cities . . .