LIVE BOZEMAN STYLE

Pricing is a Really Tough Conversation

We operate in a capitalist-driven market; by definition, the free market is our market value determiner. The free market defines a home's value via two simple factors: a willing Seller and a willing Buyer. With a large flow of cash Buyers, the free market functions without many outside influences here. 

The Bozeman market regularly operates without intervention or third-party opinions that could otherwise wrangle in values (such as banks and appraisers.) Due to the limitation of buildable land, the influx of qualified buyers, and the demand of existing residents, our community suffers from limited financially accessible inventory for our laborers (teachers, servers, retail workers), restricting their financial opportunity to enter our market. 

Is There a Pricing Solution?

Bozeman City Planners have worked for years to develop an “Affordable Housing Plan” As you can imagine, the solutions aren’t straightforward. Affordable Housing, by definition, seems to expect that every owner should be able to purchase a single-family, three-bedroom, two-bathroom home. While that style of property is the quintessential American Dream, that housing expectation doesn’t account for alternative housing opportunities. Even 10 years ago, when prices were lower, a starter home for most of my buyers was a condo or townhome. Those properties offer lower property taxes, lower ownership costs, and a lower financial barrier to entry for a first-time buyer. 

For developers to offer single-family houses priced affordably (as the City defines it), Developers can not afford to build houses that meet the city's minimum requirements and offset the burden of development costs. 

Did you know the City requires minimum lot sizes, minimum setbacks, and minimum footprints for homes? And requires developers to plan for parks and open spaces, funding them either through a financial contribution to the City or with actual realized park development. 

For Developers to offer Affordable Single-Family Housing, the City has to offset those hearty development costs, therefore allowing Developers to offer properties to the end user for a lower purchase price. Instead, the City passes most infrastructure costs to developers to expand our City services. Whether a Developer is considering infill or outlying construction, they will be subject to regulatory requirements, engineering review, planning review, and costs associated with the improvement of existing infrastructure. 

A real-life example of Commercial Development infrastructure costs:

My Seller faced a major hurdle when selling the old JB’s lot on West Babcock. The property is served by the City of Bozeman's water and sewer service and is subject to the City’s available line capacity. When the Seller elected to remove the failing building from the property, he inadvertently removed his allocation for the City water and sewer services. He accidentally opened up his allocated capacity for other developers to consume, meaning new developers were able to use that freed-up capacity to permit their projects, leaving my Seller’s property without adequate capacity to rebuild a new structure. 

In order to make his property saleable, he had to prove historical use to the City to facilitate water and sewer capacity. We were able to take old water bills to the City to show that the property had water and sewer capacity and get the property’s use of City services “Grandfathered” in. 

However, the Buyer who purchased the property wanted to use it for “heavy demand” use on the water and sewer line. Therefore, this new Buyer had to assume the cost of expanding the existing city infrastructure to facilitate their new end-use. This required the buyer to dig up West Babcock Street, expand the pipe and re-lay the asphalt. Do you want to guess the cost? 

The cost of that commercial infill development is now increased by the cost of improving the City infrastructure, a significant cost borne by a single end-user.

The City Strikes a Deal:

In an effort to facilitate Affordable Housing, the City has struck a deal with a local Developer to offset the Developers infrastructure costs by employing COVID relief dollars ($5.2 Million) to fund a lift station, allowing the developer to connect to the existing uphill City services at no additional financial cost to the Developer. According to the Bozeman Daily Chronicle’s reporting on this agreement, in exchange for the City bearing the cost of this lift station, the Developer will donate 5 acres of land, or 4% of the overall 115-acre project, to the City to be utilized for affordable housing. The City considers this agreement a win-win as the City is utilizing COVID relief funds, dollars they otherwise wouldn’t have had, to offer the infrastructure to this development and create capacity for future development. The exchange requires the builder to donate land for affordable housing development. 

The City is not in a position to develop the property. 

For the affordable housing opportunity to be realized on the 5 acres, the City needs to transfer ownership of the property to an entity with the skills and resources to realize the development potential. 

Once ownership is transferred, the new entity will be subject to the same development rules and costs as the original developer would have been subject to, except they wouldn’t have to pay to purchase the land, and the lift station is now in place.

When evaluating a property, bankers use the formula that the land should be no more than 30% of the value of the property. With that in mind, if the new developer doesn’t have to pay for the land, theoretically, those homes should be able to be 30% less expensive than the neighboring properties where the developer had to purchase the property. Also, a non-profit isn’t anticipating a gain to develop the property so they can reduce the property asking price by the profit margin, probably about 10% today. Do those two reductions produce a product that meets the City’s expectation of affordable? 

How do you ensure that Affordable Housing is available in perpetuity? 

Many Affordable Housing projects have a back-end caveat that could inadvertently burn the purchaser: they have a cap on the gain they can realize when they go to sell, ensuring that the properties never realize market value. 

Suppose a purchaser keeps a property for a number of years; usually, a subsidized (or affordable) purchase requires the owner to hold it for a minimum of 10 years before they can sell the property without paying recapture to the original developer or non-profit. 

With that in mind, Affordable Housing projects may not allow the owner to realize the full potential of market gain while responding to the changing needs of their life. Suppose they sell before the ten years as suggested in the above example. In that case, as Sellers, they won’t be able to transact at market value but instead, be limited to an annual cap of perhaps 10% gain with any additional gain either returning to the non-profit to fund future development or to a new Buyer as they’d be required to sell for a depressed amount.

• Have we helped a purchaser if they can’t utilize this initial purchase to launch into the fair market? 
• Would that purchaser have been better served to purchase a different property, such as a condo or townhouse, without a cap on gain, allowing them to realize the future potential of their investment? 

Why Consider a Condo Instead of a Single-Family Home?

Condos can be more affordable than traditional houses. 

Because condos share ownership of the land under their property and all units share one meter for the water and sewer service, and the Condo Owners Association “COA” pays to insure the exterior of the property, a condo owner can anticipate a fixed monthly cost of ownership.  

The condo owner’s association pools those dues payments to pay the general bills; it pays the water, sewer, and insurance bill for the whole project, which covers your personal use as well as the cost of the water utilized to maintain the lawns, parks, and any other area under ownership by the HOA. Depending on the project, the condo association may even pay for the garbage and internet for the neighborhood users! 

 To many buyers’ surprise, Condos don’t have to look any particular way. They can share walls like side-by-side units, be detached (free-standing), look like traditional houses, or be stacked like apartments. Because condos don’t have to be built in any particular style, they can meet the demands of many end users. Whether you are a first-time buyer or a snowbird wanting a lock-and-leave property, a condo could be a great choice! 

Townhouses are another fantastic option for a budget or low-maintenance-seeking Buyer!

Townhouses can look exactly like condos in that they are side-by-side units and may have no shared interior walls. Townhouses are different from condos in that they own the land under their unit, are separately metered, and pay for their own water and sewer. Also, each unit pays for its own exterior insurance and maintenance, making it really live (and finance) like a single-family home. 

The biggest difference between a condo and a townhome comes to financing. When purchasing a condo, if bank financing is utilized, the bank will review the financial health of the condo association and verify the percentage of owner-occupied units, in addition to analyzing the individual borrowers' financial health. It is the position of financial institutions that owner-occupied units have a higher likelihood of being well cared for, are more likely to pay their ownership bills first, and are, therefore, lower risk to the bank of non-payment. There are no similar loan limitations, due to the property type,  on townhouses.