Real Estate Live: The Condo Market with Tom Murphy of Pardoe Real Estate Friday, September 1, 1 p.m. EDT On WashingtonPost.com Welcome to Real Estate Live. I am your host Sandy Fleishman, real estate reporter for The Washington Post. Submit questions early. While the market for houses in the Washington area may be slowing a tad, the competition for condos is still strong, according to those in the industry. The July data on the District shows sales of condos and co-ops only 2 percent behind last year's record-setting pace. Northern Virginia also is hot. Nationally sales slowed during the second quarter but remain above the numbers for the same time last year. My guest this week is Tom Murphy of Pardoe Real Estate, often referred to as the "condo king" because of his top sales record over the past 18 years. Murphy specializes in condominiums, cooperatives and town houses throughout Washington and is licensed to sell in Maryland and the District. Sandy Fleishman: Hi, Tom Murphy is ready to answer your questions about the condo market and general trends in the real estate market in the Washington area. Remember, though, that we can't answer specific questions about which mortgage company to use, which neighborhood to live in or the like. And keep in mind that Tom's responses are just his opinion, though they represent an expert's opinion. So here we go! Tom Murphy: I appreciate the opportunity to be here. Real estate is a very interesting field, especially at this time. As everyone knows, this year has been phenomenal real estate year, following an amazing 1999. The basic trends are that the inventory keeps dropping, and therefore the prices keep rising. The number of sales this year is not up that much over '99, primarily because of the lack of inventory. Annandale VA: Hi Tom, please define what the difference is between a condo, co-op, and townhouse. And how about these new townhome- style condos? It is quite confusing. Are the covenants & restrictions on each similar or are condo restrictions on average the worst/most restrictive? I have read that you own the townhouse and land it sits on, but for a condo, you only own the walls inside your unit, not the land? Are condo fees usually a lot more expensive than townhome fees? Sorry but I had so many questions and need to know all my options before deciding what to buy, thanks for your time. Tom Murphy: Townhouses historically have been what we call "fee simple" properties. This meant that the owner owned the building & also the land beneath it. This is still the predominant type of townhouse. However, in recent years, a hybrid form has developed which is a condominium, but with townhouses instead of apartments as the components of the condo. Any condo set up means that the individual owns that particular unit, but jointly owns with the other members a lot of common areas, including the land. As for apartments, they are divided into condominiums & co-ops. In the case of a condo, the owner has an ownership in real property & gets a deed to prove it, just as if they owned a house. In the case of the co-ops, the operational features are identical to the condos. That is, if you stood outside the building & couldn't read the sign, you wouldn't know which it was; when you went in the lobby, you still wouldn't know. Their fees are generally similar because a desk clerk is paid a going rate in that area; the desk clerk doesn't care if it's a condo or a co-op. Likewise, the utility bills for the condo & the co-op are provided by the same suppliers at similar rates. The real difference is that the co-op apartment is personal property, as opposed to real property. As I said earlier, operationally you would not know the difference. In many co-ops, the ownership is represented by a stock certificate & a proprietary lease, which says that the owner may use Apt. 500. In addition, if the building contains 100 apartments, each owner owns 1 percent of the total building (assuming apartment sizes are the same). The co-op, for tax purposes, therefore gets its own tax bill because the individual units do not get direct tax bills (they aren't on the property rolls.) A co-op owner, therefore, pays a proportionate share of the total tax bill received by the co-op association. The covenants and restrictions tend to be quite similar. Some co-ops and condos permit pets; some don't. The reality is co-ops have more control over more items if they choose to exercise it. In general the buyer of a co-op must be "admitted" to the co-op through an approval process. Upper Marlboro, Maryland: I was thinking about buying the one- bedroom condo I am currently renting, but everyone tells me that is terribly difficult to sell a condo and it would be even worse for a one- bedroom. Is it really a lot more difficult to sell a condo than it is to sell a house? Sandy Fleishman: One-bedroom units are typically harder to sell, right, Tom? But in the hot close-in markets things seem to be changing, don't they? Tom Murphy: The factors that determine the difficulty of selling are interest rates, supply, and demand. This is just basic economics. At the present time, I am working with 15 to 20 buyers who would love to buy a one-bedroom condo, if there were any to sell them. This is the reason prices are going up & inventory is going down. In Washington especially, selling condos & co-ops is not difficult because there is a continual influx of young professionals making their first real estate purchase. S.W.-D.C.: Tom- Is there a lot of competitive bidding on condos like there is on houses lately? How much are people offering over the asking price on condos in such close-in locations as Bethesda, North Arlington, and N.W. District that are in a reasonable walking distance of a Metrorail station? Tom Murphy: There has been a steady increase in the number of competitive offers on condos. This is again a function of the low supply. It has made it crucial for a buyer to be represented by an agent who knows how to handle competitive situations. If the agent is operating as a buyer agent there are some flexibilities available that permit the agent to take a reading on whether there is or is not competition & on how stiff it might be. Acting as a buyer agent, I frequently go to the presentation with several offers from the same buyer. If we are all alone at the presentation, I can submit the lower prices. If we have a lot of company, & my buyer really wants the property, I have the option of submitting the higher offer. The obvious value of this is that you can avoid offering too much if there is no reason to do so. If I'm not operating as a buyer agent, I could not use this procedure. Operating as a sub-agent of the seller's agent (which used to be standard), my obligation is to tell the seller how high the buyer is willing to go. As far as how much higher than asking price selling prices are these days: There is no magic bullet. If the property is underpriced, then you should go over the price. If the property is already overpriced, my advice to a buyer is to make an offer as close to reality as possible & if someone else chooses to overshoot a rational value, I say let them have it. Gaithersburg MD: Is it true that if I had a condo and wanted to try to sell, I'd have to get written approval by all my adjacent neighbors? That sounds a bit ridiculous. Sandy Fleishman: Fill us in on this one, Tom, and a bit on the difference between condos and co-ops. Tom Murphy: The answer to that question depends upon the rules & covenants of the particular condo. If any condos have such a rule, they are in a very small minority. Dupont: I have a one bedroom on Willard street NW north of Dupont going up for sale soon, as I can find my new house. Tom Murphy: Congratulations--you should get busy looking for that house because you will need a place to live when your condo turns up sold 48 hours after you put it on the market. Oakland, CA: What are the specific design features most requested by condo buyers? And what are the primary age groups requesting such features? Tom Murphy: First, most condos are resales, not new construction, and so the question really amounts to what has the seller done to upgrade the kitchen & the bathroom. In new construction, this is a serious question. The developer has to look at the market carefully. Who is the buyer likely to be? Items such as fireplaces and balconies are more important to some buyers than to others. Older buyers tend to go for these items because they are generally coming from a house & downsizing & want a lot more than 4 walls. They are also in a better position financially to afford these extras. Kitchens in new construction almost invariably now involve a choice of granite or Corian or other materials. A major item in all new construction is that the property be wired for computers & Internet activity. Even the existing condos have to find some way to meet this requirement or suffer competitively. Bethesda Md.: Could you comment on the changes you have seen over time on the type of buyers that are buying property in and moving into DC? Tom Murphy: First-time buyers have always been important in DC, but they are even more important now because of all the incentives being provided by the federal government (the $5,000 tax credit) and the city. There has been a major increase in the number of empty nest buyers. The retiring professional from Bethesda, Potomac, or McLean is not going to be satisfied with even a standard DC 2-bedroom. They can afford more & they demand it. The developers are scrambling to provide it. Washington, DC: Since this market is so hot, I am thinking about buying a condo for investment purposes. How hard is it to buy a condo or single family home with little or no money down, and where is the best place to get information on this type of strategy? Sandy Fleishman: There's a lot of information out there in cyberspace for first-time homebuyers from groups like Fannie Mae, Freddie Mac, the National Association of Realtors and local housing authorities often steer potential homebuyers to housing counselors. Investors are a very different can of worms, though, aren't they Tom? Most of the national real estate companies offer their take of the subject, as would financial advisors you can consult with. Tom Murphy: There's a lot of malarkey on no-money-down investing. I wouldn't spend a lot of time looking for it. In my experience, most lenders want 20 or 25 percent down from an investor. Recently, there have been some 10 percent down programs. Historically, of course, investors try to minimize their down payment by securing owner financing. Information is hard to come by. The investors were basically out of the market for 6 or 7 years; they have now come back with a vengeance, but the lenders have to take a hard view of down payments to protect their investment. In addition, there is so much flexible financing available that the number of owner-financing deals has almost dropped off the table. Alexandria VA: I just moved back home from Los Angeles, and was shocked by the popularity of the Metro DC area's high apartment and condo rentals. What the hell....? Anyway, after being greeted at least four different times by a line of applicants trying to snag a one bedroom apartments for under $1200, I was wondering if there are any safe and affordable neighborhoods in DC that have one bedroom apartments for under a grand? (I now know that Logan Circle may be permanently off that list - what a nightmare). Sandy Fleishman: We have a story this week about "sticker shock" here, so you're not alone. Rents are definitely up. You might have to widen your search. Any suggestions, Tom? Tom Murphy: Rents are not up by accident. The supply of rental units has been reduced substantially in the last few years. Much of the supply fueling the sales increases has been condos whose owners could not previously afford to sell, since they may have had to bring cash to the table to cover their mortgages. Now that prices have been going up for 3 years, those sellers have poured on the market. The effect, however, is that many of these sellers were renting out their places; now those aren't available for rent since the new buyer will be a resident. If you can find a way to change your requirements with regard to proximity to Metro, you will improve your chances. There are still lots of apartments in the city in attractive areas with rents around $1,000 for a one-bedroom. No promises, but you might want to try Clover Park and Adams-Morgan (away from Metro). Fairfax, VA: I have made three offers on different condo units at a popular complex in Arlington. I just lost the third one, when the seller requested that I drop the assessment contingency. I refused to drop the assessment contingency. Is this request common among sellers? And isn't this practice a little shady? Tom Murphy: In the contracting process the parties are free to request whatever provisions make them comfortable. I don't know what you mean by the "assessment contingency." If you mean the inspection contingency, lots of buyers are dropping this so that in a competition the owner will pick their offer over yours. There's nothing wrong with this, but a buyer could be making a mistake in giving up the inspection opportunity. This is obviously less significant a danger in a condo than in a house. One thing to remember is that most of our contracts have boiler plate provisions providing the buyer with what is called a walk- through inspection before settlement to check that the plumbing, electric & appliances are in working order. You will find that 90 percent of the items identified by inspectors fall into these categories. The good news is that the seller is bound to fix these problems whether or not there has been an engineering inspection. If you are worried that you will not be able to identify these problems, please remember you are free to bring that same engineering inspector that you would have used on the contingency to help you during the walk-through. Wash, DC: Don't really have a question, but a comment. I was recently forced on to the market when my landlord suddenly decided to sell the condo unit I've rented for a long time. I quickly realized there are almost no vacant apts in DC, so I seriously thought about buying a condo. But I wasn't prepared for a market in which tiny 1-bedroom condos sell after only 2 days on the market - often at a price higher than what was asked. I just couldn't believe this! I'd always heard that one should avoid buying condos, because they do not make for good investments. But apparently a lot of people ignore that advice when it comes to DC. Finally, I leaped on an apartment rental that appeared in the Post one Sat. morning. By 11:30 a.m. I was the first to get my application in of the 50 or so people who had already called to inquire. Things are absolutely nuts. I hope I never go through this again. Thanks for letting me vent! Tom Murphy: This is a common story & the alternative would be that the investor who owned your apartment would raise the rent 20 percent to get the same return he could get by selling it. Make him an offer! VA: Mr. Murphy, what about condos in VA and MD? I realized the topic is condo in DC and sorry if I'm off of the way. Tom Murphy: The suburban condo market has many similarities. There is now more competition there as well. Some of the differences are that suburban condos have a higher potential of being newer & may have lower condo fees because they don't provide the same services. There is no place to put a front desk in a garden condo complex with 20 buildings. The big-city model is more likely to involve a high-rise building with a front desk. As far as sales, the fact is the market is hot throughout the area for each category of housing. Woodley Park, DC: Hi Tom, I have a question, but it's more of a complaint. How come all the new construction taking place in DC is either for super-luxury apartments, or outrageously high-priced condominiums? On the other hand, there are new public housing units being built in place of the old high-rises, but nothing for us plain old middle class folks. I find the new $3k+ condos on U Street particularly galling, but even more so the $300s-$800s(!) restored old apartment building on Columbia Road. What's going on? Doesn't the District have some sort of zoning laws to encourage semi- affordable housing in the $100-200k range? Thank you. Tom Murphy: What is going on is very clear. The developers are responding to the market. One reality is that in a time of scarcity, land becomes even more scarce & so the prices paid by the developer are higher & can be recovered only by selling high-priced properties. As for the older buildings, where prices have also taken off, some of them have very special locations & neighborhood amenities. We're dealing here with a market economy & there are people who do have the funds to buy these properties. What would you do as a developer? The question then is, could the city have a program to encourage the building of middle- income properties? The normal answer is that the folks at the lower end of the economic ladder are the ones who need the help & we're doing a poor job of that. If there are any extra funds available, it would look like they should be targeting the lower end of the market first. The other thing pushing the high-priced market are the suburban refugees I referred to earlier. If you sell a $600,000 house in the suburbs, it is no great trick to buy a $500,000 deluxe condo. Sandy Fleishman: We're running out of time, so here's the last question. Burke, VA: When will the insanity stop? A house across the street that 2 years ago was worth $175K tops just sold for $219K. Sandy Fleishman: Nothing like a hot economy and no inventory to drive prices up. Though interest rates have gone up, inventory's still key, right, Tom? Tom Murphy: We need to put this whole thing in focus. The prices have not just skyrocketed. The reality is, if we look at the last 10 years, we have been dealing with a value roller coaster. Since we hit the peak in about 1990, prices went down every year until 1997. Even after 3 years of increases, we are now just about getting back to the values of 1990. This is certainly a dynamic subject & it appears to me there is room for more growth until we top out. Sandy Fleishman: Well, that's all the time we have today. I want to thank Tom for his thorough answers and great advice. I hope you've enjoyed talking to him. I'm sorry we couldn't get to all your questions. Please join us again in two weeks. Bye!