Melissa Savenko's Richmond Real Estate Review

Real Estate Investment in the City of Richmond - The Too Typical Story These Days

Back in May 2011 I reported on news from Inman News that real estate investors would be major drivers in the real estate market for the foreseeable future, particularly in the foreclosure and short sale worlds.

That has certainly proved to be true. Experienced investors have been in the buying mode for the last several years, even if their personal investment models have radically altered. For example, I have several investor clients who went from flipping houses into "buy and hold" rental property. My condominium developers stopped doing condos and started doing apartments. The driver for all these changes: available financing for flipping and condominium development went "poof!" overnight. But money for income-producing investment properties, or developing apartments, was and is still available and even cheap.

The very interesting phenomenon that I observed beginning mid- to late last year, which seems to be gaining traction: people who have never held investment real estate are trying to get into the game. It makes perfect sense, when you realize over a ten (10) year time horizon real estate has outperformed the major stock and bond indices by substantial amounts - 40%+ return on investment compared to 15% or even negative returns. [NOTE: These statistics are according to the annual update program I saw at the Greater Richmond Association of Commercial Real Estate ("GRACRE") on Tuesday.] There are also special tax advantages to real estate, versus other types of capital investments.

Here is the typical "new investor" call I am getting more and more:

BUYER: "I'd like to start buying some investment real estate."

ME: "Great! What are you looking for, and what are your financing sources? What type of return on investment are you expecting?"

BUYER: "I want to buy a duplex or triplex in the Fan. I've talked to my banker, and (s)he says I'm qualified to buy. It needs to make money right away."

ME (Thinking, not saying): "Get in line. Everybody and their brother is looking for investment real estate in the Fan. If you don't have cash and you can't move quickly, your chances are somewhere between slim and none. And, P.S., by the way, Fan duplexes are almost NEVER going to cash flow. They are too expensive. They are great investments if you fit one of three (3) scenarios: (1) you have a ton of money you need and/or want to put down; (2) you are buying it as an owner-occupant, with the rental on one unit to offset your own mortgage expense; or (3) if you want to convert the property back to a single family residence."

ME (Saying): "Well, I think you are going to face a lot of competition from some really well-financed players in that submarket. Also, any investment real estate in the Fan is going to cost you well upwards of $300,000. That's a lot of money at risk for your first investment property. Why don't we consider single-family homes in [BLANK] neighborhoods, which I really think are going to have a continued upward trajectory in value and marketability."

BUYER (Oftentimes now huffy): Well, no, that's not what I want. I want a Fan multifamily property. My brother's sister's aunt's father-in-law bought a Fan duplex in pristine condition for only $150,000 just two weeks ago. And my lender says I will qualify for 80% financing up on properties up to $400,000.

Sigh. What's a girl to do? I've got colleagues who say it is not our job to protect people from themselves. If people want to make a stupid investment, you let 'em. Sell them the property, take your commission, and don't look back. The problem is, I feel like in many ways protecting people from themselves is exactly my job, and if I don't advise a client that I think is contemplating an....let's say "imprudent" investment....I am shirking my fiduciary duty.

What's the right answer?

Here's where I am right now: For any of you folks who want to start slow and small building an investment portfolio in the City of Richmond, give me a call. I'd love to help. For anyone who has buckets of cash and needs somewhere to put it, and likes City investment real estate, call me too. And for those people who fit into Categories 1, 2 and 3 for Fan or Area 10 multifamily properties, I'd love to help you also. New investors who sound like my fake Buyer above, I'm not sure I can help you buy, but I sure as heck have a bunch of properties I'd love to sell you. [:)]

The Real Estate News in Today's Richmond Times-Dispatch

I've read today's Business section of the Richmond Times-Dispatch, and there are several interesting articles about real estate. In no particular order of importance:

1. According to a report released by HOME, Housing Opportunities Made Equal, foreclosures in Virginia slowed considerably in 2011, but foreclosures + underwater houses, houses worth less than the total amount owed, will continue to be a drag on the housing market specifically, particularly on prices, and the economic recovery generally.

2. A Hanover couple will have their "For Sale" property featured on the Today show this upcoming Friday, February 24, 2012, at 9 a.m.

3. An Associated Press story on the National Association of Realtors' report on January 2012 home sales nationwide also supports the proposition that the housing market recovery isn't a Central Virginia phenomenon, but is occurring broadly across the U.S.

What are some of the takeaways, in my mind, from these stories?

• There is room for cautious optimism about the housing market, both nationally and locally.
• However, we still have long way to go.
• There will continue to be downward pressure on prices until the foreclosed and "shadow" inventory have worked their ways through the housing market.
• It continues to be a buyer's market, requiring sellers to take some extraordinary actions. Case in point, the Hanover couple, who not only have their home featured on a national show, but have moved out of the home and into a two bedroom apartment with three small children, perhaps to make their home easier to show and therefore sell.

An observation of my own: Certain areas of the City are already showing strong signs of recovery, with quick sales and multiple offers. Haven't seen those in a while! So be aware of that, buyers. Listen to your real estate agent if they advise you that you're trying to buy into one of those areas. Right now, for the areas I specialize in, that looks like parts of Area 10 (Fan, Museum District particularly) and almost all of Area 20 (West End of the City of Richmond).

Stay tuned, and keep your fingers crossed. A stronger housing market is good for everybody.

Richmond Public Schools Rezoning - What Do the Closures Mean?

Well, the City of Richmond is proposing to close three (3) elementary schools, and the proposals are generating all kinds of wailing and gnashing of teeth.  The three schools are Summer Hill, J.B. Fisher, and John B. Cary.  The only one I am going to talk about is Cary, because it is really the only one with which I am familiar.  And just to be clear, I have no dog in this fight, other than wanting all of the City elementary schools to be shining examples of excellence.  My daughter went to William E. Fox Elementary from Pre-K through Grade 5, and we had an AMAZING experience.  I can't say enough good things about that school.  In fact, Fox was one of the main reasons we moved to the Fan when we bought our first house in 1999.

John B. Cary ("JBC" or "Cary") serves the Byrd Park, Carillon, Carytown, and Museum District neighborhoods.  Apparently it is WAY under capacity, with only 210 students.  The more concerning statistic is that only 39% of the kids in the JBC zone actually attend JBC.  That means a lot of parents are either sending their children to out-of-zone schools with capacity - perhaps Mary Munford? - or sending their children to private school.

Michael Paul Williams wrote a column about Cary and its glory days as a magnet school.  I'm dating myself, but I remember how disappointed I was that I didn't get into Cary and my best friend, Kara, did.  My neighborhood school was Ginter Park, and that's where I went.

Cary is fairly close to both William Fox and Mary Munford.  I don't know much about Munford's enrollment levels, but it was my understanding that William Fox was at physical capacity.   So I'm not sure how Fox could absorb the JBC students.  Also, if given the option to attend William Fox, which consistently wins awards for excellence, you have to presume that more than the 39% of eligible neighborhood kids would sign up.  How would that be managed?

[NOTE:  According to the draft Study, Fox isn't anywhere near capacity.  That's odd.  I remember it being a big deal when my daughter was there, so much so that out-of-zone kids from the Museum District, who had regularly attended Fox rather than Cary, were no longer accepted unless they had an older sibling already at Fox.  It caused all kinds of hoo-ha.  I also thought there was some prohibition on Fox having trailers to house overflow students, maybe some sort of deal with the Fan District Association?  In any event, I really hope this doesn't mean that Richmond Public Schools doesn't consider Fox at capacity because they are advocating a substantially higher class size than what Fox's normal, uber-successful operations look like.  Does anyone know the answer to that?  Or is it just that attendance has dropped off significantly in the three (3) years since my daughter graduated?]

From a purely real estate perspective, Cary occupies a prime piece of real estate between Sheppard and the Downtown Expressway, adjacent to the City tennis courts.  Not only could the City save money from closing an unnecessary physical plant, but that property would be perfect for private redevelopment.  Could the City sell it?  For that matter, why don't they sell Maymont Elementary too? 

I agree with the commenters that object to fewer, bigger schools.   From a facilities standpoint, I am sure that makes more sense for the Richmond Public Schools system.  Fewer facilities = fewer costs.  But I do not think mega-schools are a good pedagogical approach.  Neighborhood schools should be the objective.   Oh, and P.S., by the way?  Those plans to put Grades K-2 at one school and Grades 3-5 at another, splitting current Fox kids by grade between Fox and Carver, that's  TERRIBLE idea.  Sucky-McSuckster.  Awful.  Kill it.  Immediately.

So...what happens when next to no one in the neighborhood is attending the neighborhood school?  I guess we will find out.  I predict they will split the Cary kids between Fox and Munford, although I have no idea how that will work from a pure physical capacity standpoint.  Stay tuned....

Ginter Place Condominiums and Other Similar Projects - How Do You Solve the Problem If You Have "Live," But Not "Work, Play?"

There was an article in the Richmond Times-Dispatch the other day about things looking up on the sales front at Ginter Place Condominiums.  For those of you not familiar with the project, it was a historic tax credit conversion - state credits only - of the old Richmond Memorial Hospital into sixty nine (69) luxury condominiums, marketed towards downsizing Baby Boomers who loved the Ginter Park and Bellevue neighborhoods but didn't want the huge house any more.

Well, for reasons that are not the developers' fault at all, the Ginter Place project has been languishing.  Only fifteen (15) units have been sold to date.  Reasons for that:

1.  It hit the market in October 2008.  The housing market was in the process of meltdown.  It was a scary, scary time.  No one was moving anywhere.

2.  Meanwhile, credit markets contracted, if not completely froze.  AND, in an almost death-blow to larger condominium projects, the FHA changed its financing rules for condominiums and would no longer provide FHA financing unless and until 51% of the units in a project had been sold.  So, if you've got 69 units to sell, you have to sell 35 units to buyers with cash or conventional financing (20% down or more) before later purchasers in the project are eligible for the most favorable financing product out there.  Well, most folks were conserving all the cash they could, because the general economic situation was so daggone scary.  And many folks didn't want to put 20% down for the exact same reason.

[BRIEF ASIDE ON WHY FHA FINANCING IS SO GOOD:  First, it has the lowest down payment requirement, only 3.5% of the purchase price of the property.  Second, it accepts the lowest credit score, 580-620 scores are eligible.  Lastly, it provides close to market rate interest rates for these buyers, almost as good conventional buyers with the best credit scores.  On the down side, you do have to pay for private mortgage insurance ("PMI") for five (5) years.]

3.  Even if you could find a cash or conventional buyer, a lot of them had a house to sell.  And they couldn't sell their house.

4.  Lots of people are reluctant to be the earliest adopters in a large-scale condominium project.  What happens if the other units don't sell?  This concern is magnified in a down market.

5.  With respect to Ginter Place, the neighborhood association had extracted a DEED RESTRICTION from the developers, prohibiting the use of the units as apartments.  That really tied the developers' hands when the market went south.  In the normal world, the developers would have rented out the unsold units to keep the project afloat, then sold the units when the market turned.  I find it pretty incredible that they didn't just let the bank take the entire thing back. 

So there are the market-based and project-based reasons Ginter Place has suffered in a completely awful real estate market.  But IMHO there has always been another issue with this project and several others - Monument Square at Willow Lawn Drive, Rockett's Landing right across the City line in Henrico on the river - that has made the sales even slower going in this market.  Here's my theory:  Baby Boomers buy condominiums for the "urban" experience.  They want to be able to walk places.  Or they at least don't want to have to get into a car for everything.  They want proximate access to products and services that take care of most, if not all, of their needs.

So I actually have a proposed solution.  Maybe folks will think it's goofy as all get out.  But this is my proposal for Ginter Place.  You aren't quite close enough to shops and restaurants and activities to achieve that walkability that makes the Fan/Museum District/Carytown so desirable.  Yes, you could walk to MacArthur and even Bellevue and the few shops and restaurants there, although it's not a short walk.  And you can hop across that wacky intersection of Hermitage and Westwood to make it to Kitchen 64.  But a walk to the Boulevard corridor isn't easy to do because there aren't any sidewalks, and you have to get past the No Mans Land under the interstate overpass on Boulevard. 

So.....how about running a trolley service for your residents?  It could run up and down the Boulevard corridor, from Ginter Place south to the Byrd Park tennis courts, with stops all along the Boulevard.  It would run north all the way down Lakeside, to the Lewis Ginter Botanical Garden.  People could hop off to go to a ball game, or to go to the Virginia Museum, or to walk through Carytown and shop and have dinner.  They could go to the Lakeside Farmers Market or have tea at Feathernesters.  Start slow, and run it at set times on the weekends.  See how it goes.  Maybe the City of Richmond could help subsidize it, if it's successful, and it could be opened up to anyone.  And you don't even have to rely on the City to make it happen.  Just call Buck Ward at Richmond Trolley Company.  Maybe two private enterprises could make this a win-win for both sides.

Maybe this is the worst idea in the world.  But as I look at the condominium projects over the last several years that have succeeded, and those that have had a difficult time, the idea of flipping the model comes back to me over and over.  If you don't have the work and play right there, figure out a way to make it there.  In other words, if it won't come to you, bring your people to it.   The idea was "if we build it, they will come," even without an additional retail and commercial component.  In a booming economy, with the hyperinflated buyers' market, maybe that made sense.  But in this world, it has turned out the buyers come if the promised new urbanist ideal - the "work, play" of the "live, work, play" mantra - exists in some form or can be seen coming in the not-too-distant future.  Cf. West Broad Village as a good example of that.

So, if you don't have "work, play" as part of your project, and it's not realistically close, make it realistically close.  Just a theory.  Thoughts and discussion would be greatly appreciated.

Real Estate Development - Interesting Happenings in Richmond a/k/a RVA

There is SO much going on in Richmond, it's hard to figure out where I want to start.  Here are just the biggies:

1.  INTERBAKE FOODS:  The Interbake Foods building has transferred to Rebkee Company.  Yet another state and federal historic tax credit conversion in the making.  Word on the street is it will be apartments - shocker - with a hoped-for retail component. I'm curious to see whether the apartments are VCU-focused, or marketed instead to young urban professionals.

2.  TAX CHANNEL BUILDING:  The Tax Channel building on Broad Street near DMV is under contract.  I'm not sure if that transaction has closed.  I haven't heard anything about what the plans are for the building, but underneath that hideous facade and minus the ugly rear addition, it's supposed to be pretty spectacular inside.  AND the refacing, etc. that was done back when, apparently with the intention of making it God-awful ugly, was specifically done in such a way as to make it easy to convert the building back to its original glory.

3.  BOULEVARD:  The City of Richmond Fleet Maintenance facility is moving.  Check out the recent Richmond Times-Dispatch article about it here.  Only five (5) years after Umesh Dalal, the City auditor, recommended it do so.  Oh, well, that $2.4M annual savings over five (5) years, that $12M, we don't really need that....But that the City of Richmond is slow-moving and borderline incompetent isn't really news.  The more significant implication of the Fleet Maintenance Facility move is it opens up almost that entire Boulevard parcel for redevelopment, including, one would hope, a new ball park for the Flying Squirrels.  Now, if we can just get the City School Board to blow up the monstrosity that is the Arthur Ashe Center, we'd have the final piece of the puzzle.  Plus the porn store is becoming a Mexican restaurant!  Yea!

4. CITY STADIUM:   Still no word on that "highest and best" use study that was supposed to be done for the City Stadium property.  Shocker.  My personal opinion is the site is perfect for mixed use development.  However, I also strongly believe the City owes it to us, the citizens, to do a competitive bid/request for proposals on that parcel.  In fact, weren't there supposed to be TWO (2) studies done on that parcel?  One was to explore "highest and best" use, one was to explore ways to maximize the property if it stayed a sports stadium.

5.  VCU/VUU APARTMENTS:  More apartments are planned for the Virginia Union area at Brook and Lombardy.  The Gilbane project in Carver has been approved with less density and less height.  [ASIDE TO GILBANE:  Please, please, PLEASE don't value engineer that building into some hideous nod to the industrial and Victorian architecture of the era. The renderings look OK.  But 8 1/2 Canal is AWFUL.  Don't do it again.  I'm begging.]  The apartments in the VCU/VUU area make sense, but apartments continue to go up all over Downtown and Shockoe Bottom.  In one of the next few posts, I'm going to try to count up the apartment units added east of Belvidere  in the last year or so, just for fun.

6.  FAN BUS BARN:  No word on plans for the Bus Barn located at Robinson and Cary in the Fan.  6+ acres of prime real estate in one of the most expensive areas of the City.  Why the radio silence?  Why isn't the City talking about potential plans for that parcel?  At least why aren't they throwing one of their "highest and best use" studies at the thing?

7.  3600 BROAD:  The big grey whale of a building on Broad at Hamilton, the former Chesapeake & Southern Railroad headquarters, is being converted to apartments.  This is also a historic tax credit renovation, using state and federal credits.  [ASIDE:  Is this tax credit thing becoming a sort of refrain?].  Apparently the building is considered a "contributing structure" in the Scotts Addition Historic District.  Hmmm......interesting. 

8.  CONDO INVENTORY:  The number of available condominiums in the City of Richmond is rapidly approaching undersupply.  The reason:  There have been NO condominiums developed since 2008.  Projects funded and in progress when the market crashed were completed, like Windsor Court.  But there was no financing for new projects, and therefore no new inventory in the pipeline - until now.  A high-end "luxury" condominium development called The Tiber is going up on Libbie Avenue near Grove.  I'm keeping my eye on it to see how it goes.  It's been my position for a long time that there is an under-supply of "luxury" condominiums available, even before the market crash, for the wave of down-sizing Baby Boomers.  And in my opinion, there is also a pretty specific formula for floor plan, size, amenities you must have to develop successful high-end condominium units.  Let's see if these folks first-to-market get it right.

This is only scratching the surface on what's going on in the real estate world here in Richmond. There are so many interesting things, such as the increasing number of out-of-town developers entering the market.  Some of those developers are entering the Richmond market with (IMO) really great plans, some with not just head-scratching plans, but "what the H-E-double hockey sticks are you THINKING?" plans.  I'm happy to name names, and we can all sit back and watch whether my predictions are correct or not.  But for now, it is back to the salt mines.  As always, I welcome your comments and/or suggestions for topics or otherwise.  Hasta la vista, baby.

Zillow Zucks AGAIN! - They Win, Consumers and Agents Lose

OK, this post will probably be of interest only to agents, and maybe I'll get feedback that I'm way off base, but I've got to vent.  AND I am really curious as to the opinion of other real estate professionals, and consumers too, for that matter.

Since 2010, I have been paying for Zillow's "Premier Agent" program.  What it means is I pay for the privilege of having my mug pop up on the right hand side of the screen when a consumer is looking at a property in the particular zip code I "own."  I pay for X% of ____ zip code, which means my contact information will be included one of the three agents in that list X% of the time. 

When I first purchased the Premier Agent program in 2010, it was a big deal for me, because the market was still slow and money, especially money spent on anything not absolutely required, was extremely tight.  But I know how many consumers start their home search on the Internet - over 85%, last statistics I heard - so I bit the bullet and paid some amount for 25% of 23220.  I think it was about $115/month, but I got a decent discount if I paid for a full year.  I told myself if I got ONE sale out of it, the Premiere Agent program would pay for itself.

The program has been extremely successful for me.  It has recently become MORE successful, because Zillow has added a Customer Review section, which allows clients to review you and hopefully say very nice things about you.  Presumably a consumer will chose to contact the agent with the highest rating to get additional information about the listing.  The benefit to the Premiere Agent:  You get the opportunity to capture that customer and hopefully convert them into a buyer client.  Because I have had success with Zillow's program, because it has been a good investment with positive return, I have purchased more coverage for the zip codes where I practice.  So I have coverage in 23220 (Area 10 - City), 23221 (Museum District, Near West End), 23223 (Church Hill, Montrose), and 23227 (Northside, mainly Bellevue). 

Here's the problem, in my opinion:  ANY AGENT can purchase ANY Zip Code.  So the agent the consumer sees in the right hand column, the agent the consumer contacts, might have absolutely zero experience in the geographic area where the property of interest is.  So what does that do for Zillow?  As agents figure out the power of Zillow's program to generate buyer leads, agents buy profitable zip codes.  Demand for profitable zip codes - areas where the real estate is expensive - increases.  The PRICE of those zip codes increases exponentially. 

I just got a call from my Zillow representative letting me know my 50% share of 23220 and 50% share of 23227  is "out of contract," meaning I am paying on month-to-month basis my "legacy pricing rate," which was $137/month.  Because of the "high demand" for this zip code and the LENGTHY waiting list of agents frothing at the mouth to buy it, my monthly payment will now be $576/month.  And, oh yes, by the way, we will no longer do one year contracts, only six (6) month contracts.  So of course they can jack up the rate yet again in six (6) months.

Needless to say, I'm p*ssed.  I've been a good customer, was one of the first to buy into the program when it was brand new, and I feel like I should be able to keep my legacy pricing, or at least get some sort of more graduated increase.  It's like now that the investment is FINALLY paying off, they increase the price 400%.  I'm stamping my foot and hollerin' "It's not FAIR!"  [To which my Dad would reply, "Who ever told you life was fair?"  But I digress.]

So I'm getting screwed, but you probably don't care about that.  But here's how this program screws consumers, which you should care about.  Agents with no experience in an area, but with deep pockets, will get in line for zip codes with the priciest real estate.  In Richmond, Virginia, 23220 is one of those zip codes, because of the Historic Fan District.  Rather than the about $170,000 median home price for a home in the Greater Richmond area, the median price for a home in the Fan is in the neighborhood of $625,000.  [NOTE:  That figure comes from an article in Style Weekly about the battle over the Fan House's downstairs bar].  It's a lot easier to make a living selling $600,000+ homes than it is selling $170,000+ homes.  Agents line up for that zip code, increasing the demand, increasing the price.  Very good for Zillow.

But how about the consumer who clicks on the agent who pops up 100% of the time when that consumer is reviewing  Fan listings?  Isn't it reasonable for that guy or gal potential buyer to expect the agent is an expert in that area in which the property of interest is located?  What if they are a suburban agent in Chesterfield County who doesn't know the first thing about historic property?  Or better yet, what if they are an agent in WILLIAMSBURG,  that doesn't even belong to the local MLS?  Both things have happened with me and my listings, and are going to happen more and more, as agents catch on to the power of the Premier Agent program.

So, what's the ultimate effect?

• Zillow gets richer;
• Agents pay more for access to zip codes and those buyer leads;
• Agents without any experience in a particular area, but with deep pockets, can and will buy the priciest zip codes; and
• Consumers end up with agents that have little to no experience in a particular area.

[NOTE:  Consumers should be doing their own due diligence on the agents they choose to work with, particularly when looking at an area or property type that requires specialized knowledge, like historic property, resort property, farms, to name a few.  But I am constantly surprised at how little research people do on the agents they choose.  Consumers should be asking how many listings in the area that agent has had, how many sales, how long they have worked there, etc.  But that is a topic for another day]. 

What do I think is the solution to the problem?  Well, it's not one Zillow will adopt, I will tell you that.  I think there should be some nexxus between the agent purchasing a zip code and the zip code.  What do I mean by that?  The agent should have sold a property there, listed a property there, have his or her office there, live there...I am sure there are other means to establish nexxus.  My poor account rep, Gus, who has graciously and patiently listened to me vent about how much Zillow SUCKS, said this would be "way too difficult" for Zillow to do.  Horse hockey.  They are running so many algorhithms with all the Zillow data they collect now, I am sure the agent zip code nexxus would be a piece o'cake.

What would the result be, in my opinion?

• Consumers would be better served by Zillow, which already has a host of data accuracy issues, by getting appropriately experienced agents;
• The artificially high demand for pricey zip codes would drop; and
• Agents in an area wouldn't have to pay such exorbitant pricing for the privilege of getting buyer leads off what was originally our own d*mn data [NOTE:  Again, topic for another day].

Yes, I know this is somewhat self-serving.  I want my zip codes, and I don't want to have to pay $576/month to have them!  But this goes to a more core issue for me.  I am continually frustrated with agents practicing in areas they have no d*mn business practicing.   I know what I know, and I know what I don't.  In the 6+ years I have been in real estate I have learned the hard way to stick to my knitting, to practice in the areas where I am knowledgeable and value-added, and to refer any other business outside of my comfort zone.  There are not many people, except possibly my broker and some other of his contemporaries, who can really truly claim to have expertise in ALL of the Greater Richmond metropolitan area these days.   But agents will tell you all day long they can sell anywhere.

Zillow is selling its data to the highest bidder, without regard to any link between that zip code, that agent and that agent's experience.  I'm sure my complaints aren't going to change that.   Free market, right?  But to sell a Richmond zip code to an agent that is not even in the same MLS is, I think, outrageous.  If Zillow really is a product for the consumer, don't they want the consumer to get the best possible service from a true local expert? 

All this and $0.25 still won't get you a cup of coffee.