Zillow Talk

The New Rules of Real Estate

By Spencer Rascoff and Stan Humphries

Are you missing an opportunity to make, or save a small fortune, when you buy or sell property?

Possibly. Because, hidden in plain sight, there’s a powerful weapon most of us overlook when we’re in the midst of making a deal.

If you don’t have this weapon, or, more importantly, don’t know how to use it, it could cost you thousands.

Spencer Rascoff and Stan Humphries know this because they have the weapon, and their expertise in its use is unsurpassed.

They’re the founders of Zillow, the biggest and fastest growing online real estate and rental marketplace.

Their weapon is data - terabytes of information on more than 110 million homes - and the computer wizardry that can interpret it.

In fact, their site, zillow.com, gets around 90 million

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unique visitors every month, but chances are high that most of the users are just browsing, without the knowledge and insight to turn their visit into a handsome profit.

In this book, the pair set out to rectify this by showing how you can find and use the data you need to make buying and selling not only more profitable but also less demanding and stressful.

Their credentials for doing so are impeccable. Before Zillow, Rascoff was the co-founder of the hugely successful travel website Hotwire, and Humphries was a data expert at another travel giant, Expedia, which subsequently acquired Hotwire.

The authors recognized that, in the age of Internet empowerment, real estate was the one major American industry that was still waiting to be transformed by easy access to information.

“Shopping for a home was like being in a dark

room where only the agent was holding a flashlight,” they write. That’s why they created Zillow - the name is a blend of zillions (as in “zillions of data points”) and pillow (a reference to home – where you rest your head). Analysis of the data they’ve amassed represents their determination to turn on the lights for everyone.

Buying InsightsDespite the market turbulence of recent years, buying a home is still a really smart investment.

As witness, the authors reference financial guru Warren Buffett, who’s recently on record as saying: “If I had a way of buying a couple of hundred thousand single-family homes … I would load up on them.”

Instead, Buffett’s Berkshire Hathaway conglomerate recently bought more than a dozen real estate brokerages, including some of the best known names in the business, to capitalize

on what he sees as the real estate market growth potential.

Buffett probably did his own calculations but, analyzing their Zillow data, Rascoff and Humphries suggest that residential real estate provides an average annual return of 11.6 percent, compared with 10.4 percent for the S&P 500 Index.

Furthermore, regardless of the 2008 bubble, real estate is always less volatile than the stock market.

But that doesn’t make it a cinch…

Buy Or Rent?For a start, there are times when it makes more sense to rent a home rather than buy one.

The most important factor here is not the price vs. rent cost ratio but how long you plan to live in a particular home.

There’s clearly a critical dividing point when one

makes more sense than the other - what the authors call the breakeven horizon. But who knows what it is?

To calculate it, you need to take account of all the net costs of both buying and renting, including down payments, closing costs, mortgage payments, property taxes, utility costs, maintenance, tax benefits and even home value.

Zillow data shows us that the breakeven horizon varies vastly between locations - from less than a year (before buying makes sense) in Riverside, California, to more than 4 years in Washington DC.

The US average is 2.3 years and, in 80 percent of US metro regions, the horizon is less than 3 years.

Hot Spot SpottingBut where to buy? The answer isn’t in the current property hot spot but in the next one that’s going to show up.

By analyzing data, the authors say they can pinpoint patterns that show whether, and how quickly, a neighborhood’s homes are likely to increase in value.

The easiest way to spot a hot spot is to identify neighborhoods that have already taken off. Surrounding areas will develop much more quickly than elsewhere - a feature they refer to as the halo effect.

Another driver of value growth is gentrification - the gradual takeover of formerly depressed areas by professionals and other upper middle class residents.

“In general, neighborhoods are most likely to gentrify if they have older homes, low homeownership rates, and some access to more popular neighborhoods,” Rascoff and Humphries say. “Factors like the local population’s median income and education level are correlated as well.”

A surprising influence that has recently gained quite a lot of publicity is the Starbucks Effect - the appearance of the ubiquitous coffee shops in up-and-coming areas.

Contrary to intuitive expectations, this tends to happen BEFORE a neighborhood starts to warm up and may in fact be a driver of beneficial value change.

The authors actually spoke to Starbuck’s location maestro who confirmed the chain did its own research and that site selection was as much an art as a science.

The Worst Of The Best?Another surprising factor behind home values demolishes the widely-held notion that buying the worst house in the best neighborhood is a smart move.

Zillow data shows that only rarely does the bottom 10 percent of houses in any postal code area

sell for a proportionately greater profit than the remaining 90 percent.

In fact, say the authors, “the nicer the neighborhood, the bigger the myth” - possibly because there’s less demand for lower-price homes in nicer neighborhoods.

Schools And PricesMost everyone knows that school districts are crucial in many home-buying decisions - and the data confirms its impact on house values. High quality schools go hand-in-hand with high property values.

Working with another data-mining service, GreatSchools, Rascoff and Humphries drilled down into the numbers based on a 1-through-10 scoring system for performance, with 10 being the best and most sought-after school.

They found that moving from a midpoint 5-scoring district to a 6 produced an increase of 15.4 percent

in home values, but moving from an 8 to a 9 invoked a 60 percent increase in values.

To find high-quality public education in a more affordable neighborhood, look at those areas surrounding the highly rated ones. Property in adjacent neighborhoods may be cheaper, but these areas will often also have good schools.

The Adjustable/Fixed Rate Mortgage Debate

When it comes to raising a loan for home purchase, few standards are more universally accepted than the belief you should obtain a 30-year, fixed-rate mortgage (FRM), Rascoff and Humphries note.

Yet an FRM is not always the best deal and, under certain circumstances an adjustable rate mortgage (ARM) can save you thousands. Yet most of the time they are completely overlooked.

ARMs have lower interest rates in the early

stages, meaning fewer financing costs buyers eventually have to pay over the life of the loan.

In one example, the authors show how a $160,000 FRM taken out in 1986 cost the borrowers $256,793 over 15 years, while an adjustable rate loan for the same amount at the same time cost only $224,599 - a savings of more than $32,000.

Furthermore, the extended period over which a fixed rate can be maintained relies on the government underwriting the loan.

“This system must and will change,” the authors write. “Some folks are working to reform it…. (S)hifting more responsibility and risk onto private lenders will result in somewhat higher rates on thirty-year fixed-rate mortgages.”

However, ARMs do represent quite a gamble, depending on the direction that future interest rates take, but it’s wrong to assume that a fixed rate loan is best just because conventional wisdom

says so.

“Determining your home loan is one of the most important financial decisions you’ll every make,” they warn, “and you owe it to yourself to do a little homework before buying a home.”

Buying ForeclosuresRascoff and Humphries demolish or at least diminish another myth about buying foreclosed properties. They’re not always the outstanding deal you might think.

For a start, these homes are generally in poorer condition than those not in foreclosure, and banks aren’t required to disclose the same information that a private seller is. So they’re likely to cost a fair amount to put right.

“The difference between the list price of the average foreclosure and non-foreclosure might be eye-popping, but it’s also irrelevant…” they argue. “(W)e need to compare the average foreclosed

home to similar properties that haven’t been foreclosed.”

Examining September 2012 figures, comparing estimated home values with prices achieved on foreclosures, showed that the actual amount a buyer saved averaged only 7.7 percent - a far cry from the 25 to 30 percent often cited.

And, as a general rule, areas with the lowest demand see the highest foreclosure discounts.

Finding A Home InspectorAlthough data can tell us a lot about the value potential of a home, there’s no substitute for a close-up visual inspection that only a qualified home inspector can give.

But, say the authors, for all the attention and effort buyers put into research, too many of them neglect this critical final step.

They offer these simple guidelines to help you find

the right expert:

Do your homework - check experience, qualifications, license and insurance of your candidates.

• Ask for client testimonials and study online ratings and reviews.

• Ask to see sample reports of other properties they have inspected.

• Be guided by your own first impressions - considering how they present themselves physically and online.

• Finally, during the inspection, follow your inspector wherever they go, asking questions and noting any concerns.

Selling InsightsThe spotlight moves to the art of successful selling in the second part of the book, although many of the authors’ insights are also highly pertinent to

buyers.

Home ImprovementsIt’s commonsense that a well-presented home will likely sell faster and for more than one that is not. But there are misconceptions about the specific improvements you should make to boost its value.

Not all home improvement projects are created equal and some will actually cost you more than you’ll get back.

For instance, spending $3,000 on a mid-range bathroom remodel, like replacing a toilet and light fixtures and adding a double sink - is one of the best investments, returning $1.71 for every dollar spent.

On the other hand, plunking down $12,000 on a full upscale remodel will return only 87 cents on the dollar.

“Kitchen renovations, at any level, offer among

the lowest return on investment of the home improvements we studied,” the authors reveal. They recover only about half the cost invested.

Note also that every year, you lose about $2,600 of the incremental resale potential that might be attributable to a remodel.

Words And MeaningsWhether it’s down to you or your agent, choosing the words that describe your home in a listing can have a measurable impact on the outcome of the sale.

Digging into their data across 24,000 home sales, the authors conclude: “Picking the wrong adjective could cost you time, money and, in some cases, lots of both.”

For example, a house described as “unique” can sell for as much as 30 to 50 percent less than expected because the word tends to imply the home needs work or some kind of rehab to make it

livable.

There’s a similar buyer wariness about “modern,” which usually indicates the home was built in the 50s; and homes described as “cozy” “charming,” “cute” and “quaint” generally equate to “small.”

And there’s more: “In eight thousand top-tier listings, we compared final sale prices of homes to their estimated values. And we saw a clear price drop in the final sale price - as much as almost 7 percent - just when the listing used ‘investment,’ ‘potential,’ or ‘TLC’,” the authors write.

So, are there any good words? Yes. Homes described as “luxurious” can earn 8.2 percent more than expected - provided they really are luxurious! - “captivating” can get you 6.5 percent more, and “fantastic” is worth another 2.8 percent.

Rascoff and Humphries also found that the longer the listing, the bigger the selling price - but only up to a maximum of 250 words.

Best Time To ListDepending on whether you’re a buyer or seller, certain times of the year yield better outcomes than others.

For sellers, the timing is especially critical. An analysis of 4 million homes on Zillow showed that, on average, homes listed in the last weeks of March sold the fastest and for the most money.

To pinpoint the precise, best time to list in your neighborhood, monitor the level of new listings in the area, noting when it starts to accelerate and then slow down.

There’s usually a spike in new listings between the third week in February and the beginning of March, meaning there are a lot of options for buyers at that point. But buyers themselves haven’t yet begun the peak of their search activity.

A few weeks later, they’re ramping up their search

and homes newly listed in this later period tend to show higher in online searches.

So, as soon as the number of houses being listed in your neighborhood slows during this period, that’s statistically the most favorable time to list.

Listing before or after that tipping point, even by a couple of weeks, results in more overall time on the market and a lower sale price.

One last point about timing, homes listed in December sell for much less than other months.

Get Your Asking Price RightMore counter-intuitive facts: If you set your asking price too high and then reduce it, you’ll likely sell for less than if you set it too low.

Lower asking prices can generate a lot of interest and start a bidding war, whereas high asking prices can prolong a home’s time on the market and make it seem like a “stale listing” which means

potential buyers could expect price reductions.

On average, a house that undergoes a 10 percent price cut ends up selling for 2 percent less than its estimated value.

These homes also take longer to sell. While correctly priced homes spend an average 107 days on the market, listings that eventually have a 10 percent price cut spend 220 days on the market.

Despite this, on average, sellers overprice their homes by about 6.9 percent.

Rascoff and Humphries do have one important piece of confirmatory data for something we instinctively know - asking prices that end in a number 9 produce better outcomes than those ending with a zero.

They recall how researchers in a different field - women’s apparel – found that 8 percent more products sold when the price ended in .99 instead

of .00.

“On average, a home will sell for more - and often, sell faster - it its original price ends in a ‘9’ instead of a ‘0’,” they say.

Do You Still Need An Agent?Despite the wider availability of data and the benefits that flow from it, the authors don’t suggest this means buyers and sellers can do without the services of a real estate professional.

“Real estate agents are still incredibly important, and they’re not going anywhere,” they write. “In fact, real estate professionals are working more than ever today.”

Partly that’s because agents have remained relevant by embracing technology, because of the complexity of the marketplace and because of the real risk of devastating consequences when home buying goes wrong.

“Agents have evolved from the days when a large part of their job was being an information gatekeeper; today, theirs is more of a service industry, where they bring their minds and muscles to negotiating and pricing.”

This makes it crucial to find the agent who can best service your needs.

You may think that experience is an important factor but this is not really so. The most successful agents usually have more listings on their books and may not be able to devote as much time to you as a newer agent can.

The data tells us that agents with 30 to 40 years’ experience take an average two weeks longer to sell a home than a newbie with less than five years’ experience! And the statistics say they don’t achieve a higher sale price.

“If the thing you’re looking for is a higher sale price, the data says it doesn’t matter how long

your agent has been on the job,” say Rascoff and Humphries.

In fact, a more salient factor might be the choice of gender. Although the difference is very small, women agents sell homes for higher prices and they sell them faster!

To find the best agent, study online reviews. Although we may be skeptical about some reviews, Zillow’s review of 600,000 commentaries on its own website, which include 1 - 5 scores for various factors, suggest ratings are a pretty accurate way to predict how an agent will perform.

Agents who score well for “responsiveness” sell 27 percent faster than low-scorers.

And those with a perfect local knowledge rating sell 57 percent more than those who only scored a 1 on local knowledge.

Agents who are actively involved with other agents and consumers also tend to be better at their job.

For example, agents who often take part in Zillow’s online forums sell 33 percent more homes than non-participants.

TrendsThe final two parts of the book take a closer look at data trends, providing a tentative outlook for the future direction of the market.

For example, there’s the Gayborhood Phenomenon. The expansion of rights for the lesbian, gay, bisexual and transgender community has been a positive price factor. Home prices in historically gay neighborhoods have steadily delivered above average value growth.

Another price-impacting factor is the street name. Homes in a street called “Lake,” “Court,” “Boulevard,” “Way,” and “Place,” are generally higher priced than those using “Street.” And, when it comes to value, streets with a name rather than a number enjoy higher prices.

Rascoff and Humphries also explore how public attitudes like optimism and stress correlate with the real estate market.

For instance, there’s a strong relationship between market performance and the level of optimism about the economy - though there’s no way of knowing which causes the other.

There’s even a strong association between how the housing market is performing and blood pressure and cholesterol levels. As the economy tanked in 2008 the number of survey respondents reporting high cholesterol and blood pressure increased measurably.

The trends reversed as the economy recovered.

Other factors they discuss include:

• Walkability - the trend towards buyers preferring neighborhoods within walking distance of key facilities like restaurants and grocery stores. This is most noticeable among

millennials - people born after 1980 - who drive an average 20 percent less than older age groups. Home prices in more walkable areas offer higher returns and recover faster from market downturns.

• Waterfront property. Despite hurricanes, coastal homes continue to command a significant price premium. “People simply want to live on or near the water - no matter what,” the authors write. Although coastal living seems to be becoming riskier than ever, with increased flood risks, so far that risk just isn’t reflected in prices. For example, buyers in Florida will pay 58 percent more to live on the waterfront, a trend that remains unchanged in the aftermath of major storms.

• Near-term price trends. For the remainder of this decade and probably into the next, the authors see continuing price turbulence, with

another price correction in markets that have become overheated like parts of America’s West coast. Negative equity is constraining the housing supply. People whose mortgages exceed their home values simply can’t afford to sell. Fewer homes on the market generally means higher prices. At the same time, low mortgage rates are driving up demand, pushing up prices even further. Higher interest rates though, could reduce the threat of another bubble emerging.

ConclusionIt’s important to note that throughout this book, the authors stress that many of the numbers they present reflect national averages and that there’s a huge divergence between individual local marketplaces.

So, although they provide very clear and specific guidance, it’s absolutely critical to do your own

research.

Some of the data you need may be available on Zillow but you might also have to call on your real estate agent or use other sources to track down certain key local information.

“Now that we can all access the data, we don’t need to feel lost, or helpless, or hopeless,” Rascoff and Humphries write. “Which brings us to the most important new rule of real estate among them all: Get your hands on as much information as you can. Recognize that you’re buying and selling in a local market, not a national one, and learn as much as you can about it.”