What’s Nu, The Friction in Home Sales

Back in the day at Centennial High School, my physics teacher often asked the class, “What’s Nu?” The answer was and still is friction! That is, the Greek symbol (µ) Nu in the mathematical formula for friction (it’s pronounced nu). I keep going back to that thought in my head when trying to explain the idea to home buyers and sellers and colleagues alike, when we discuss why it is so hard to get a real estate transaction to happen.

Consider that interest rates to finance homes are at an all time historic low and there is huge inventory of homes available. Also, there will always be buyers and sellers needing to sell homes so long as life happens. Life goes on and so does the market, but getting a deal to happen these days is growing with continuing complexity, it’s like trying to drive a car with an anchor dragging behind it. In today’s real estate market there are a growing number of hurdles that need to be cleared each and every day. Let’s look back in the not so distant history, the concept of getting two parties (a buyer and a seller) to agree upon the price and terms was mostly what you needed to make a deal happen. The sales contact was at one time just a single page, the lender had a few pages to sign, even the appraisal was on all of two pages, add in a few more for title work and deeds and one could sell a home with only killing one tree or less. The number of people directly involved with the sale was often about six including the parties of the sale.

Today, I believe it takes at least two trees to die and be turned into paper for each and every real estate transaction to happen, the number of pages of paper is easily in the triple digits! The number of people involved has soared into the double digits. In our new modern age of efficiency of cell phones, email and multiple media, are we are really getting any more efficient at this, maybe not? In a recent FHA sale I brokered, it took two real estate agents, two different inspectors, an insurance agent and his inspector, a septic tank inspector, an electrician and a plumber, the lender and their appraiser who had to make two trips to the property, and the title company just to name the people who came in direct contact with the property and/or the buyers and sellers. I consider this deal just an average transaction and not a particularly complicated one; we even did it in less than 30 days. Negotiating the deal was about the easiest part of it.

Now enter the wonderful world of “Distressed Sales”. These are commonly known as a “Foreclosure Sale” when it is the lender or a “Short Sale” when it’s the private home owner, that is selling a home and they are not typically motivated. This is because either the lender or the individual selling the home knows they will have to sell the home for less that the mortgage that was attached to the home and either the lender or the individual or both will take a beating financially for the difference. It’s hard to get motivated for that. These types of sales can easily double the amount of paper work needed and often double or even triple the amount of time need to complete one of these transactions. 

So a term is needed for all this added activity and administrivia to sell a home. So I’m calling it FRICTION. It is a force that requires additional work or effort to get a real estate sales transaction to happen. Buyers , sellers and real estate professionals across the country are struggling with all of this newly added “Friction”. I believe it is one of the major forces that is retarding the number of sales happening everywhere.

The more friction a sale has the more likely the buyers and their agents will look elsewhere for lower hanging fruit. This causes homes with high sales friction to stay on the market longer and ultimately sale for less money. In fact, home sales today are parting into two distinct markets, those with low friction and those of considerably higher friction, most notably the distressed sales are in the latter camp. The two buy types for each of these are the typical owner occupied buyer and the investor buyer. The owner occupying buyer may be ready and willing to buy but often is just barely able to qualify to buy a home. They can ill afford to deal with all of the added friction of a distressed sale. On the other hand the investor buyer is more sophisticated and has the time to deal with distressed sales and all the friction associated with distressed sales, so they can demand a better deal or discount when buying real estate. The investor then makes a profit from not only from rehabbing the property but by reducing the friction to an acceptable level for the owner occupying buyer. This is a successful Fix and Flip scenario.

As both a real estate broker and an appraiser in the local Pueblo, Colorado market, I keep sampling the market coming up with a number for this discount of around 15 to 20% of lesser value for distressed sales. I’m also predicting this number will grow larger over the next year or so. Why? Because there seems to be a major shift going on, buyers a year ago were asking agents to just to find them a good deal and today those buyers are asking for a good deal but without all the friction. They don’t often know the term, but they know they want to avoid it as much as possible. I may not be the first to coin the term “Friction in Real Estate Sales”, but I thought we all need to know what to call it. So now you know “What’s Nu in Real Estate”…

Kent Shelman is an Associate Broker with RE/MAX Pueblo West and a Licensed Real Estate Appraiser and Owner of Colorado Realty Reports.