By Susana Field -
I believe there is a saying: “Desperate times call for desperate measures.” And “Necessity is the mother of invention.”
Two days ago an interesting email notification came across my desk. It was from a local developer/real estate agent, presenting quite the creative sales offer.
To put it in perspective, let’s just take a quick look at last year’s numbers:
· The total amount of Steamboat Springs’ 2008’s real estate transactions was down 52% of the average number of transactions over the previous five years (727 transactions in 2008 vs. an average of 1430).
· Meanwhile, the number of properties for sale at the close of 2008 was up 176% (1,992 vs. an average of 1,132 over the past five years).
So, basically the amount of real estate transactions in 2008 were half of what had occurred for the previous five years average (2007 was an exception). The number of properties for sale at the close of 2008 was on the closer side of having doubled, from the previous five year average. Demand was cut in half, while supply almost doubled.
Following the old supply and demand model, you would think that Steamboat Springs’ property prices would have had to go down. Maybe even way down. But let’s look at the average price of properties for the same time period: Steamboat’s prices increased half again (148%) of the average, from $417,062 to $617,631!
You could argue that people not wanting to pay the increased average property price of Steamboat’s real estate is what’s keeping so many properties still on the market, and likewise, why the number of transactions is so low. In fact, Telluride’s numbers show this; they posted both the least price increase and the most real estate transactions, for the Rocky Mountain Region’s ski resort towns.
It makes sense: We buy properties not only to live in, but with the hope of the property appreciating over time. An automatic piggybank, so to speak, that we can enjoy, and even use the mortgage interest as a tax write off, while the piggybank’s wealth grows. We don’t want to buy something that is possibly going to go down in value when and if the majority of those 1,992 listing’s owners really start to squirm and slash their prices. If prices dropped across the board, there would be less appreciation to be made down the line because you would have to wait for the market to go back up to the price you paid, before appreciation can even begin.
Thus, enters the creative offer that came across my desk two days ago. The developer of some new townhomes near the ski area is offering a 20% price guarantee! The terms, quoted verbatim, are these:
· Developer will escrow 20% of purchase price for 5 years
· Upon five year anniversary, property will be appraised by neutral 3rd party
· If property appraises for less than the original purchase price we will refund the difference up to 20%
· Re-purchase Addendum will be attached to developer contract
The townhomes range in price from $2,250,000 to $2,455,000, and in size from 3465 to 3779 square feet, with 4 BR/ 3 BA and a two-car garage.
So let’s say you purchase one for $2,300,000. 20% is $460,000, so this is the amount held in escrow. If in five years your townhome’s value has dropped by up to $460,000 (to a value of $1,840,000), you’ll get that $460,000 back. If it has dropped less than 20% of your purchase price, you get less back. If it’s dropped more, oh well. And if it hadn’t dropped at all, the developers pocket the escrowed funds.
Rather than offering a 20% price reduction now, which would bring the value of other properties down, the developers are essentially promising you a 20% price reduction in the future, should the value of the property dictate as such. It’s a risk reduction for both sides, and an attempt to increase the number of transactions (at least theirs), and listing numbers down (again, theirs), while keeping Steamboat’s prices high.
Interesting. I’d love to hear what you think.
