July 2009 Archives

July 30th, 2009

The guidelines for this carnival.

As always, I arranged the entries that met guidelines into three levels, based upon originality, usefulness to the consumer, and how much thought and effort and research went into an entry.

STRONGLY RECOMMENDED

There were no strongly recommended articles this time

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RECOMMENDED

Reba Haas submitted How to protect yourself from someone else's unpaid water bill when buying a home. It applies to Washington state directly, but California and many other states have similar (although not identical) rules.

Bigger Pockets submits 7 Beginner Real Estate Investing Mistakes to Avoid

Military Finance Network submits an excellent article Homeowners Assistance Program Helps Military Members Who Lost Money Due to PCS. Basically, if you had to sell your primary residence at a loss while the market was down due to military orders, this is something you need to check out.

Your host presents How To Keep Listing Agents From Filtering Out Offers. If you're a property owner looking to sell, you want to read this article before you start looking for an agent.

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MET GUIDELINES

Home Inspections Can Save You From Future Headaches Yes, but some specifics and concrete examples might make it better.

What Do You Do When You Face Possible Foreclosure? features three other financial bloggers who don't know about real estate or loans answering this question. There isn't one right answer - it's dependent upon a lot of situational items neither mentioned nor asked for. One of them finally did mention the single most likely answer (try a mortgage modification, which they are already trying) but I can't recommend the post even though it does meet guidelines.

Does Size Matter: How Small A House Are You Willing To Live In?

Periodic tenancy vs fixed term contract - which is best for tenants? How about "It depends upon your situation?"

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SPAM AND OTHER RIDICULOUS SUBMISSIONS

Some stockpicker named Barel Karsan submitted a post called "Identifying Cheap" thinking it would be acceptable because the company they're pitching is a land company. Put him into the comprehensionally challenged group - certainly not a recommendation for his services.

A complete bozo of a site named ETF Database submitted "25 People Who Revolutionized the ETF Industry". Well, no matter your position on ETFs, they have nothing to do with real estate. Of course, I'm not surprised that people who want you to waste brokerage commissions day trading mutual funds (and crummy mutual funds at that) are unable to comprehend that they have nothing to do with real estate. Bad dog! No link! Put them in the doghouse forever.

A site named the Biz-learner submitted "25 Social Media Sites for Financial Professionals". She may call herself the learner, but she failed this course. Can't comprehend guidelines that says this carnival is for consumers, can't comprehend that its about real estate, not social media.

Some idiot named Dan Miller submitted an article about "Celebrity Pictures" and then a second one on "Student Consolidation" that appeared like it might have been about student loans, but was really prurient video. Into the Internet's most famous black hole is where he should go.

A site named "Free Credit Tips Info" submitted a post called "Chase Credit Cards" hyping precisely that. I would say that taking this kind of free advice is likely to cost you dozens of times as much as if you paid somebody. So it's not really free, is it?

Then the same bozo submitted another post on "Prepaid Credit Cards" Here's a clue by four: If it's prepaid, it's not a credit card, numbskull. Avoid this clown. They have no idea what they're talking about, or if they do, they're willing to write anything regardless of how horribly inaccurate it is. I deleted several more of his spam-wannabes unread.

For those who might object to the treatment their submission received, the relevant information has been in the guidelines since before submissions were being accepted for this carnival. Having been told to read the guidelines, you willingly submitted these posts. Live with it.


Consumer Focused Carnival of Real Estate will return in one month on August 30, 2009, here at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be Midnight August 28th.


I recently received an email asking about a Good Faith Estimate on a $200k loan. The person asking my opinion attached the actual "estimate" to the email. In addition to a point of origination and a point of discount and $3000 in other closing costs plus $2500 in alleged government charges separate from the $3500 in FHA's initial mortgage insurance premium, it just assumed a 6% seller credit of $12,000 which made it look like the loan wasn't going to need much more than the down payment money to close the loan. They just automatically assumed that the seller would offer that much or be willing to pay that much, because the FHA says they will permit the seller to do so.

Ladies and gentlemen, the FHA limit on seller-paid closing costs may be 6%, but that doesn't mean every transaction has 6% concessions - or any at all, for that matter. I don't think I've heard about any where the seller concession was maxed out - and I have heard of a couple FHA loans recently where they was no seller concession. Keep in mind that on FHA loans there is no mandatory concession, unlike VA Loans which prohibit the veteran from paying some very real and necessary transaction costs that buyers and borrowers traditionally pay. Nor does it change the fact of how expensive the loan is. If you had a less expensive loan, it would be even less net money out of the seller's pocket.

It also makes it appear as if their loan was less costly because of lowered requirements for cash to close. People are often stupid about cash, because they understand that this is real money which they accumulated in their bank account little by little. Loan amounts, not so much - at least not until they've been paying on them for a while. This has the effect of lowballing the cash necessary to close, and the buyer possibly ending up shy on cash to close.

The loan referenced was a damned expensive loan, but by playing "let's pretend someone else is going to pay this" with the consumer and pretending that consumer weren't going to have to pay these costs, they hope to assuage consumer skepticism. But you always pay these costs. If there's a $10,000 seller concession for whatever in the cost, any well-advised seller would also take $10,000 less with no concession, as they will end up with more money in their pocket. This loan officer was pretending to give with the right hand while taking with the left - the standard lender game of making it appear as if their loan is lest costly than it is so you sign up with them and not the competition. By subtracting that 6% of the sales price off the loan cost, they are making their loan look more attractive than it really is.

Except for VA loans, I would advise people to never accept estimates or figures that assume a seller concession. Even with VA loans, you're paying for it one way or another, so I would want to know the real cost of the loan without seller concessions. After all, if the seller is going to pay $5000 more of the proceeds if he accepts my offer than if he accepts someone else's offer, he's going to want at least $5000 more in sales price in order to accept my offer over the other guy's. Assuming his agent has anything like a clue - and I never assume the other side is stupid or clueless until they prove it. Even if there are no competing offers, they should accept an offer of $5000 less without the $5000 in costs you're asking them to pay. I get the same amount of money to start, but then I don't have to pay for higher commissions, higher title and escrow fees, or anything else. Subtracting the amount of the needed concessions from your offer and submitting it without a demand for such is always superior to an offer that may be for the higher amount, but has more givebacks to compensate. Seller concessions cost the buyer/borrower money - it just might not leap off the page in black and white.

Finally, unless you have a fully negotiated purchase contract, you have no idea whether a given seller will actually be willing and able to give those concessions. Many times, the lenders in short sales will disallow them even if the purchase contract price reflects those concessions. Asking for closing costs says two things to those in the know - you don't have a lot of cash and there is a high risk the transaction won't actually close. Neither one of those is a signal you want to send to sellers or listing if you can help it. On lender owned properties, it can cause the lender to bypass your offer in favor of a lower offer without that request, because the one thing that costs them even more money than accepting a lower offer is accepting an offer that doesn't close. Even on "regular" sales, which seem to have shot up to about forty percent of our local market in the past couple of months, a competently advised seller is going to know they're risking a lot of money because of the likelihood of you not having enough cash to close.

Caveat Emptor

Article UPDATED here

Carnival Link

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The phrasing in parallel with Animal Farm is intentional. Sellers need to understand this, and so do buyers, especially in a hot real estate market like San Diego has currently become. Some offers are more equal than others, and knowing how to choose between competing offers on the selling side is critical. On the buyer's side, understanding this and anticipating it so as to make your offer attractive to a seller with a good agent is critical to success in making offers.

Even if they are for the same number of dollars or even for larger amounts, some offers are much less likely to actually consummate than others. If they don't consummate, all that happens for sellers is that they wasted their time, their money, and came up with nothing. Furthermore, once you have a fully negotiated purchase contract, the chances of renegotiating it so the seller gets more money are nil. Most purchase contracts, the seller needs to make concessions due to things discovered to be suboptimal with the property. Sad to say, there are even some very shark-like real estate types that go around making offers with the intention of using every little thing to renegotiate the contract in their favor. They make their offer look superficially attractive and then once they have a purchase contract start demanding concessions right and left.

There are currently three major things likely to prevent a transaction from actually going through. The first is the Home Valuation Code of Conduct sticking the transaction with an appraisal that's lower than the purchase price. Last month I had an appraiser choose two completely trashed lender owned beaters down the hill as comps for my client's beautifully maintained property in a more desirable location, and there wasn't a thing I could do about it even though there were better comps. When this happens, all the issues in When The Appraisal Is Below The Purchase Price for Real Estate come into play. If the loan standards are eighty percent Loan to Value Ratio and the buyer only has 20% to put down, when the appraisal comes in low, the cash isn't there to make it happen and the transaction will fail. In some cases, private mortgage insurance can maybe extend it to ninety percent currently, possibly 95% in a few cases, but 100% financing is out of the question for anyone but veterans, and adding private mortgage insurance often means the buyers don't qualify on the issue of debt to income ratio. Most often, if the appraisal comes in low it means that either the transaction is going to fall apart, or there is going to be a mixture of the buyer adding more cash to the deal and the seller lowering the price. If the buyer doesn't have more cash to add to the deal, it doesn't take much predictive ability to see that things are going to boil down to the seller deciding whether they'd rather find another buyer or take less money.

The second thing likely to prevent a transaction going through is issues with the property. Something is discovered during the buyer's due diligence period that causes them not to want the property, or to want . It could be anything. These issues are always with us. The only way not to be surprised by them is for the seller to be honest with themselves and do their own due diligence beforehand.

The third major deal-killer is buyer inability to qualify for the loan. Either they represented themselves as having more cash than they do, they really don't qualify for this loan on this property, or some miscellaneous loanbuster issue pops up. This is why I insist that every qualification letter I write and every letter I'll counsel my clients to accept be a pre-qualification written for that specific property and that specific offer. A generic "They qualify for $300,000" letter is wasted paper. The person writing that letter must also make specific representations as to why the buyer qualifies on the basis of debt to income ratio, loan to value ratio, credit score, and Cash to Close. For my listing clients, it the offer doesn't do this, I send the buyer back to try again. I tell them what the letter must cover, and I will counsel my clients never to accept an offer that doesn't include this information.

Running an automated underwriting program is easy and popular, but never acceptable for this purpose. Automated underwriting results are only valid if they don't change anything from how it was submitted. Let me tell you something that happened to me not long ago: I got an automated underwriting accept and priced and locked the loan and sent the file through on that basis. My processor, for reasons beknownst only to them, took it into their head to run automated underwriting through again on precisely the same file and got a lesser acceptance that raised the cost of the loan and cost me most of the money I would have made on that loan, and it could easily have changed to an outright rejection of the loan. This was for a refinance where nothing of consequence changed except for a precise appraisal amount that was still well within guidelines. What do you think is likely to happen when the purchase price changes or the the precise loan amount or any of dozens of other factors changes by a little bit? I never accept automated underwriting results for a purchase offer. Manual underwriting rules, however, are universally good, particularly in the A paper world. If something happens at one lender that causes it to have trouble, somebody else will take it if the manual underwriting standards are met.

I should also stress that sellers live in a world where net proceeds are what is important. If the transaction doesn't close at all, the net proceeds to the seller are negative regardless of what was offered. Even if the transaction closes, an offer for $200,000 requiring them to pay $5000 for seller paid closing costs is in actuality $5000 and some change less net money to them than an offer with no such requirements. A good buyer's agent is going to make careful consideration of this.

So keeping these in mind, which offer is the most attractive to a seller, assuming the same number of dollars and desirability of the offer?

All cash offers are always going to top this list. If the buyers don't care what lenders think, if they don't need a loan or a loan contingency, don't have to be concerned with loan standards, that eliminates an entire layer of complexity that includes most of the likely reasons why things fall apart. An all cash offer without an appraisal contingency is the Gold Standard. They are saying "The property is worth $X to me - I don't care what an appraiser thinks" They can still be intending to over-negotiate every little thing revealed by the inspection, but there is less to go wrong from a "nothing you can do in the initial contract" standpoint.

The next category on the list is offers where there buyer has significantly more cash than lender standards require for the contemplated loan type, particularly if they're planning to use it for the down payment anyway. This means that the buyer has the option of continuing the transaction even if the appraisal comes in low. Since all the incentives right now are for appraisers to come in low on the appraisal, this is happening a lot right now and there is nothing anyone can do about it except repeal those ridiculous new appraisal standards. If the buyer has more cash, when the appraisal comes in lower than the purchase price the viability of the transaction doesn't depend upon the seller deciding whether to take less money or put the property back on the market. If the buyer has more cash than absolutely necessary, the parties can meet in the middle rather than the seller being the only one with room to give. Conventional financing purchase offers of thirty percent cash or more and VA loans where the buyer is putting down cash even though they don't have to fall into this category, and even FHA loans where there is a cash cushion. I always want to address the question of "How low would the appraisal have to come in before this transaction has difficulty because of it?" Offers where the buyer has this cash cushion means that if the appraisal comes in slightly low, it isn't just the seller deciding whether to take less or put it back on the market.

I would rather have conventional financing than government. Government involvement puts a bottleneck, or single point of failure on the transaction - if the government won't put their seal of approval on it, we're done. It also takes longer. That said, I need to say that both VA and FHA are unfairly tarred in many agent minds because until a few years ago they were costly bureaucratic nightmares for the seller. The bureaucratic issue has largely changed, but it is still an issue even if it is a much smaller one, and a VA loan in particular does not permit a buyer to pay a lot of very real and necessary costs, so the VA loan needs to be for a higher number of dollars to break even on this point with conventional ones.

If a buyer wants a government loan but can go conventional, that will delay the transaction if they start out government but need to change to conventional, but it should still close. There is a fallback position. This is a critical difference and makes such an offer superior to one where they have no choice but a government loan, particularly some special or limited funding government program like the mortgage credit certificate or locally administered first time buyer programs

Both when writing an offer and evaluating one, I always want to address the question of what circumstances or combination of circumstances could cause this to fall apart. As a buyer's agent, I want to show the listing agent that my client wants the property and I have considered how to get around potential failure points. As a listing agent, I have a fiduciary responsibility to help my clients evaluate offers and make an informed choice on which offer to accept based in part upon likely failure points. Comparatively few agents meet that responsibility (one reason we've got such extreme transaction fall out now) but the good ones are all among them. A good listing agent is always looking for evidence in an offer that the buyer's agents have considered possible failure points and how to get past them.

Waiving the appraisal contingency is always an argument in favor of an offer. It can be symbolic, but it says "The property is worth $X to me, and I'm willing to pay that whether or not the appraiser agrees". Nonetheless, if there is a loan contingency attached to such an offer it's not an unlimited blank check. If the appraisal comes in lower than the difference the buyer can cover, the transaction is still going to fall apart. If the buyer has no extra cash, waiving the appraisal contingency accomplishes nothing. But a prospective buyer having $10,000 extra cash and no appraisal contingency should be something that is very valuable to well informed listing agents and their clients.

What if your offer is less desirable in these terms, quite likely because you have no choice? Well then you need to offer more money to sweeten the deal and give the sellers a reason to choose your offer over any others. When I'm acting as a buyer's agent, I always discuss how much competition we're likely to see from other offers if my buyers like a property. It's not a perfect science, and I never trust a listing agent telling me how many other offers they have (Unless the answer is "none") or for what dollar amount, but it's like gravity: if you don't take it into account, you're certainly not going to get where you want to go.

Caveat Emptor

Article UPDATED here

IMPORTANT NEWS

Fannie Mae and Freddie Mac are so pleased with their 105% refinancing program that they have announced they will be expanding the eligibility to 125% in about a month. This will help a lot of people who were left out in the cold by the 105% program

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Carnival of Real Estate

Carnival of Personal Finance

The Loan Shopping Koan

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It's very easy for loan providers to talk about a much better loan when you're shopping than they have any intention of delivering. Then you give them thirty days after you sign up, and you're put into a situation where the loan isn't what you were promised to get you to sign up with that loan provider, but you have a choice of signing now and getting it over with, or going all the way back to the beginning with a new loan provider. If it was intended as a purchase money loan, you may not even have the time to start all over again. This creates powerful incentives for loan officers to paint their loan as being better than it is, and there's no practical legal downside for them doing so.

It's very much like a zen koan: Consumers want the best possible loan, but the better the promised loan, the more likely it is that it won't actually be delivered. It is very difficult for consumers to tell if what's being promised will actually be delivered. This has only become more of a problem recently with HVCC on the one hand and lenders charging for failed loan locks. Both of these have bad effects which loan officers have no choice but to pass on to consumers in one way or another. I would like to go back to locking every single loan and guaranteeing total cost and rate as soon as I have an application, but doing so would inevitably mean that all of my clients would pay higher costs for the same rates in the end.

Despite Washington's high minded words of the last few months, the changes in the loan industry have universally hurt both the consumer and the ethical loan officer, while helping lenders and to a lesser extent, unnecessary bureaucracies like Appraisal Management Companies. Nor will the new rules for the HUD-1 and Good Faith Estimate make any difference except around the edges when they take effect. They do a few things very right, but loan providers can still lie with malice aforethought to get you to sign up with them, and as long as they give you the notice of what they're really going to deliver seven days before the end of a thirty day (or more) process, they are still golden. If rates have gone up in the meantime, it's quite likely that the rational thing to do is stay with the liars, even though they can change their minds again as long as it's another 7 days to closing. If you think this is a recipe for jerking consumers around, you're right. Loan officers can tell you they've got 5%, then 5.125, then 5 again, then 5.375, all before finally delivering the 5.75% they intended to deliver all along, and similar games with cost apply. Remember, it's always a tradeoff between rate and cost.

What is an informed consumer to do?

Well, if you're an adult about costs, you can ask loan providers to guarantee their total compensation at loan sign up - the Upfront Mortgage Broker Guarantee. I would still prefer to do loan quote guarantees because they put the risk for misquoting squarely on the loan officer. However much I'd like to do them, though, the costs to me and all of my future customers of failing to deliver on Mortgage Loan Rate Locks is just too high for me to lock the loan before I have a reasonable assurance of the loan actually closing. In some cases this means once I have a full loan package, in others it means I need to wait until I have a loan commitment from the underwriter. Until then, in order to protect my ability to actually deliver low cost loans, I've got to let the rate and cost float. That's what is real, and it's easy for liars to say a loan is locked when it isn't. Loan quote guarantees would take all the uncertainty out of it for the consumer, but I can't do them at sign up any more except in a very few cases.

The "We'll do the loan for $X total compensation" removes a lot of the incentive for loan officers to actually find the best rates as opposed to the loan quote guarantee, which quotes an aggregate figure for costs and rates that includes everything, including what the loan officer makes. It focuses upon the mouse of loan officer compensation, not the elephant of what the loan is actually going to cost you, but it's better than nothing. This is an intentional choice of words - think of the standard cartoon "elephant scared of mouse" schtick and you've captured the ridiculous nature completely. You really should focus on the total bottom line to you, but since we can't lock the loan under current market conditions until we are pretty certain the loan will close, we can't guarantee those terms at sign up, no matter how much we want to. One hopes if you're looking for a mortgage loan you're enough of an adult to realize nobody does loans for free. Nor are loans what most people think of as "cheap". It can be hidden in many ways (yield spread must be disclosed, but SRP and secondary market premium do not), but nobody really does loans for free. No matter which way they hide it or don't, you're still paying for it.

Ask your loan officer the hard questions. Every single one of them. Nail them down as to exactly what they are offering, when they can lock it, what the closing costs will be, and how long it should take. The total closing costs shouldn't change even if the loan is allowed to float rather than locking. If you discover they have lied, well the best thing to do for the long term health of the loan market is to walk away, but most people won't do that.

Things have gotten a lot more difficult for loan consumers wanting to actually get the best possible deal, rather than merely signing up with the loan officer who talks the best game. I would really like to go back to the way I used to be able to do things - Quote a loan I know I can deliver, lock it immediately, get the application done and work it so as to fund within the lock period. Unfortunately, if I tried it my future clients would all be paying higher costs when my closing ratio dipped lower than the lenders require it to be, and therefore they started charging me higher costs for the same rate, costs that my future customers would end up paying because there is no other way any more than there is for any other business. That's a good way to not only hose my future clients, but be forced out of business completely. One more koan to the loan shopping experience - this one from the loan officer side.

Caveat Emptor

Article UPDATED here


This is a real, major and pervasive problem in the industry. For a while, it mostly went away as listing agents were desperate for any offer, but it has come back in recent months. At least two properties my buyer clients have made offers on in the last few months have sold for substantially less than my clients offered and were both willing and able to pay for the property. I can tell you this because I have copies of the offer paperwork and have since obtained the final sales price from public records.

This happens for two reasons: The listing agent wants both halves of the commission, and control issues having to do with kickbacks of one sort or another from other sources.

The first is by far the worse. Even if the property sells for ten percent off the price it could have gotten (which may be most or all of your possible equity), your listing agent gets paid eighty percent more than if the property sold for the highest possible price to an offer represented by someone else. There are many agencies and brokerages out there that do one thing very well: Getting signatures on listing agreements. Everything else, not so much, but they really are great at getting access to property owners. No matter what city you live in, you've seen the advertising of this type of brokerage. They claim they're great so you should do business with them. However, anyone can claim they are great, especially in non-specific ways.

The goal of all of this is to get you to take the easy way and come to them first, because if they're that successful to afford all that advertising they must be doing a pretty good job for their clients, right? As a result, they can get listing agreements out of property owners who don't understand what's really going on. I hope regular readers know better, because I've gone over why you don't want a top producer listing your property before. However, because that signature on the listing agreement gives them control over the property, control over access to the owner of the property, control over what information the owners have access to, and control over who can so much as see the property, there isn't much anyone except the owner can do about it. Indeed, once they sign the listing agreement, there's not much even the owner can do about it.

There are also control issues with kickbacks. Illegal though it may be, many brokerages mandate that all of their transactions go to a certain title company, a certain escrow provider, etcetera, because they somehow make more money (either through kickbacks, common ownership, special services, or reciprocal referrals). However, if the listing agent controls both sides of the transaction, who's going to tell the principals involved that the agent is breaking the law?

Quite often, they even restrict showings of other people's clients, because one of their agenda items is using the property to get buyer clients. Rather than actually working to sell that property (which is what they are obligated to do), they dangle it out there as bait so they can make contact with the foolish sort of buyer who calls the listing agent to see the property and force them into a buyer's agency contract. I was out of town for the Friday and Saturday of Memorial Day Weekend, and one set of my clients called a listing agent about seeing a property. First, the listing agent told them that "Sure, no problem to see it today!" even though the MLS listing which all other agents see said "48 hour advance notice - by appointment only" There might have been a special circumstance of which the listing agent was aware, but I kind of doubt it because they also wanted my clients to sign an Exclusive Buyer's Agency Agreement in order to see that property. Since I make it a point to educate my clients on this point, they knew to refuse.

Here's the real sticking point: When that agent signed the listing agreement, they accepted a fiduciary responsibility to that seller. It is their responsibility to get it sold for the highest possible price in the quickest time with the fewest problems. It is a violation of that fiduciary duty to their listing client to act as that agent did towards my clients. Their duty is to get that house sold. If someone doesn't see it, they're certainly not going to make a good purchase offer. Anything unnecessary that causes or might cause a buyer to balk about making an offer on that property is a violation of their contractual and legal fiduciary duties. By conditioning prospective buyers seeing the property upon anything other than being there at the first mutually reasonable time, they are in violation of that fiduciary duty to their listing client. However, I must once again ask: If they control all access to that owner, who's going to point this out to the owner?

Here's one person who definitely can't: Any prospective buyer's agent. Both agency law and MLS rules everywhere that I am aware of make it an punishable offense for buyer's agents to contact that owner directly. A buyer's agent could lose their license, MLS access, or both for doing so. It doesn't matter if I "only" lose one - I can't stay in business without both. In other words, the one group of people who have the professional knowledge and interest to possibly inform that property owner that they are being hosed is legally and professionally constrained from doing so. Yes, Virginia, real estate law is structured to protect the major chains and brokerages that advertise constantly (and control the National Association of Realtors and state associations, so they control the vast majority of real estate lobbying).

Nonetheless, if you want to sell your property quickly for the best possible price and without it coming back to bite you, you really do want an agent. The pitfalls and ways that the real estate sharks trap you into their own private feeding frenzy really are enough to make you want an agent even if you couldn't do anything to protect yourself from the bad ones.

So what is a self-interested consumer to do to protect themselves?

Two things: Eliminate the motivation to do this, and eliminate their control over access to you, the property owner.

Both are easy if you know how before you sign the listing contract. Afterwards, they are considerably more difficult if not impossible. Since most consumers don't know enough or don't care enough to do the research beforehand, this is why the vast majority of people who want to sell their property aren't protected. Some listing agents do a very creditable job even though you're not legally protected, but many others don't. Nor is there any real way of gauging their personality for certain ahead of time. It's easy to say the right things before that listing agreement is signed, then go off and do something completely different. Do you want to bet the return on a half million dollar investment on how they will really handle it?

The easy one first: eliminating control of listing agents. There is one exception to the rule about other agents having no permission to contact you: If they are instructed to. Most of the time, you don't want to talk to other agents. But there are two exceptions: If they're having difficulty seeing the property, and if they're making an actual offer. If the listing contract is silent about these two issues, then the listing agent controls these absolutely. Actually, it's their broker, which amounts to the same thing at best, and could be much worse. So if you don't negotiate this in advance, know that you're committing complete control over these two issues to that agent or their brokerage, and there literally is no way for you to find out about any difficulties they don't want you to know about.

What you, as a consumer want, is to get at least duplicates of any offers sent to you directly, and you want to be the one people come to with access issues. You want there to be explicit instructions in MLS to call you directly with any access issues, and to send at least copies of all offers to some facsimile number or email address that you control - not the agent. Put this right into the listing contract. You are entitled to check this on the listing at any time, and you should wander into your listing office at least once during the first week the property is on the market (without telling them you're coming) and demand a copy of your property's full MLS printout - the one that other agents see. You are permitted this on your property and your property only, so be prepared to prove you are who you say you are (Photo ID and copy of listing contract). You should also do this every couple of weeks the property is on the market. Check that the instructions stay what you want them to say in this regard.

Note that even if prospective buyers and their agents don't comply with this instruction, the listing agent has no real way of knowing they didn't. Especially if you wait for that agent to contact you instead of calling them the second you get the fax or email. If they don't contact you within 24 hours, that's everything you need to know about that agent and brokerage. As a buyer's agent, I would be happy to send such duplicates - it means I have some real assurance my client's offer doesn't disappear into the trash can, as I'm pretty certain the ones at the start of the article did. As a listing agent, even if I'm working with the buyers to get me more information (like whether they are qualified) before presenting the offer, I'm going to make sure my seller client knows we've got an offer right away. For me, this happens whether there are instructions to send offer duplicates directly to you or not, but if it didn't, how would you know? I won't get offended by such requests. No good agent who will work for their clients best interests should get offended. It's a legitimate control you are exercising upon the situation, just like any other contractor-contractee relationship. The old maxim about "trust but verify" applies. The agents who get offended or don't want to do this are the ones you should avoid at all costs.

Eliminating the monetary motivation for agents to filter out offers submitted by other agents is harder, but even more important. You as the seller do not want your agent also representing the buyer. Whose side would they really be on? In most cases, all but the worst crooks will be on the side of the seller, but there isn't any way to be certain you aren't one of the exceptions. There are tricks and things that one agent can do that you really can't guard against in general, but it is much less likely that two agents each representing different parties will collude upon. Anything shady, no matter what that might be, and at least one of them can be held legally responsible in a court of law! Nobody wants to be representing the mark in a con when the mark can come after them with an attack lawyer and expect to win a major damage award plus court costs and in many cases jail time.

The way to do this is actually pretty simple: Write it into the listing contract that you will not accept Dual Agency. Period. You don't really care if the buyer is represented or not - if they choose not to be, that's their problem - but you won't permit your agent to represent them. That agent needs to pick a side of the transaction - yours - and stay on it, or they're not getting the listing. If they show the property to some prospective buyer or some buyer wants them to submit an offer, there is a standard form - the Non-Agency Agreement, that explicitly states that both the buyer and that agent agree that there is no agency relationship being created, and the agent is doing whatever they are doing because their contractual relationship with you, the owner of the property, requires that they do it. Tell that agent you won't even consider offers made without another agent until they show you the Non-Agency Agreement. If they can't give you their absolute and sole loyalty for the sale, do you really want them to have the listing?

Furthermore, write it into the listing agreement that if there isn't another agent involved, your agent won't get to keep the buyer's agency share of the commission. A small amount of additional compensation is in order - there really is extra work and extra costs involved, so I ask for an extra half a percent if the buyer is unrepresented, which might just about pay for the extra my transaction coordinator charges plus the gas for meeting the appraiser, inspector, etcetera. You don't want your agent shooing away unrepresented fools offers, either, as they might do if they had to do extra work for no extra pay. You want to put the listing agent's financial motivation squarely where it belongs - they get paid the most money by getting you the highest price on the quickest sale with the fewest problems, not by getting both halves of the commission and the maximum in referral kickbacks.

I'm not real hot on Designated Agency, either, where two different agents working for the same brokerage are buyers and seller's agent. It can work, but the controls necessary to safeguard consumers on both sides are both complex and opaque to that consumer - not to mention that most brokerages don't have them. As a rule of thumb for buyers, if you're working with a good buyer's agent, had been for a while, and it just happens you like a property one of the other agents that works with them is listing, chances are decent that might be okay (about 8 in 10). If you contact the brokerage because they're the ones listing the property, and they refer you to their in-house buyer's agent, chances are 999 out of 1000 that you should run, not walk, in the other direction. For sellers, it's worse. Unless your listing agent is unavailable for some reason, or that other agent from the brokerage can show a pre-existing buyer's representation agreement, I wouldn't want that offer. There are too many games that can be played, and it makes collusion to someone's detriment much more likely, as these agents work together constantly and might well have the level of mutual trust and teamwork (and possibly direction from the broker) to make a scam work and get away with it. In the majority of cases, this collusion more likely favors the seller than the buyer, but there just isn't a good way for anyone to be certain. As always, if there's a game being played and you can't prove who the mark is, you should assume it's you. Real estate attracts a lot of sharks because of the potential for high profits, and even the cheapest properties have enough profit potential to attract those sharks and all of the con games they play.

The difficult part about this is that the vast majority of agents, even those who aren't necessarily among the worst, will strenuously object to these provisions. Most agents really want to "double end" their deals - represent both the buyer and seller - simply because they do get paid more. Most have never taken the time to understand all of the ethical and legal issues with "double ending" a transaction. But these provisions against getting both halves of the commission really are necessary to remove the motivation that causes bad agents to throw up barriers to offers not represented by them. You don't want them to even be tempted to filter out offers, restrict or refuse showings, or require that prospective buyers do business with their business associates, all of which are bad for you, but result in that agent eventually receiving more money either directly or indirectly.

One more thing is beneficial: Require a notation in MLS that says you welcome
buyer's agents presenting offers in person. Your agent should also want to present counter-offers in person. This not only gives you another opportunity for outside contact uncontrolled by your listing agent, it humanizes that transaction. It turns a faceless fax machine spewing paper into real live human beings. You'd be amazed how much it helps the probability of the transaction actually closing.

The issue of listing agents acting for their own benefit to the detriment of the clients is real, is common, and is once more increasing in magnitude. If you're a property owner who wants to sell on the best terms possible, you need to protect yourself from the problem before you sign that listing contract.

Caveat Emptor

Offer UPDATED here


Sorry I'm too busy to write these but have to link this week's carnivals before any more time goes by

Carnival of Real Estate

Carnival of Personal Finance

I am seeing a very disturbing trend these past few months. Rather than do the work they should be doing, listing agents are treating the entire short sale process as a kind of "Black Box", delegating the negotiations with the lender to a negotiations firm, treating the negotiation firm's advice as if it were handed down from on high, and expecting buyers (and their agents) to blindly follow along in profound indifference to the buyer's interest. Sadly, they're getting a lot of cooperation from buyer's agents who should know better but are acting more like sperm donor agents than real agents.

I have seen the following demands from these knuckleheads in the past couple of months:

  • trying to require buyers to pay repairs, termite etc before they own a property, when in fact the transaction may never come off
  • requiring buyers to pay the negotiation firms that they had no role in hiring, because the lenders allegedly won't allow it to come out of sale proceeds. Maybe you should take the hint the lenders are giving you - these negotiators and their recommendations do not serve the interests of any of the three principals to a short sale transaction. The interests they serve are those of a lazy (and horrible) listing agent
  • Agreeing to keep the offer open at least sixty days without an accepted purchase contract

The answer to any of these demands is short, simple, and to the point: No.

You want my client to pay for repairs to a property they don't own (and most often the sellers don't want to take it off the market)? How can agreeing to this not be a violation of buyer fiduciary interest?

You want my buyer to give keep an offer open two months without a valid purchase contract?

You want my buyer to pay a firm that they have no role in hiring and does nothing to represent their best interests?

First off, ladies and gentlemen, if you don't have a valid purchase contract, the thing to do is walk away. There is a world of difference between "offer accepted pending lender approval of short sale" and "we have submitted your offer to the lender" In the first case, you have a contract with one contingency - kind of like a loan or inspection contingency on the buyer's side, only from the seller's side instead. Nothing wrong with that. Transactions with seller contingencies happen every day. But it also means you have an accepted offer. There can be only one accepted offer, and once there is an accepted offer, the property needs to be removed from the market and no other offers may be considered until this one falls apart. In other words, the seller is stuck with the buyer every bit as much as the buyer is stuck with the seller.

But if you don't have an accepted offer, what you have is "Hope I get it". Kind of like the Little Engine That Could, except there is no defined end to the process and it's not under your control. It's just repeat the mantra of "Hope I get it' until you get told that you didn't. That choice of phrasing was very considered, by the way. Under this scenario, listing agents submit multiple offers to the bank - a recipe for disaster if ever there was one from both the perspective of the buyer and the seller. If the bank keeps getting offers, what are they going to do? That's right, keep the property on the market hoping for a better offer. Whereas if you show them some hard back and forth negotiation and one or more prospective buyers dropping out of the process until only one is left, that's good evidence that that is all the property is worth.

Understand this in your bones: That short sale lender wants one thing above all else: Their money. As much of their money as they can possibly arrange to get back. The owner's job transfer, illness, etcetera, are not their problem. That lender needs to see conclusive evidence that there is no way they are getting any more money out of this property and this owner before they will approve the short sale. They need to understand that this is all the market will support, and that the current owner cannot pay them any additional money, and that if they don't get off their fat backsides and approve this pronto, not only are they going to end up with less money when this buyer walks, but they're going to have to pay the expenses of getting it sold as well as the penalties for having a nonperforming asset on their books.

The way to approach that is to negotiate hard with prospective buyers, as if the lender weren't part of the picture. The best evidence that this is what the property is worth is that you tried to convince multiple people to offer more, and this one you picked is the one that's the best for the lender. Submitting more than one offer to the lender is a recipe for Delay and two different forms of Denial from that lender. They are going to want to wait until they get still more offers.

The lenders do have a secondary concern to getting their money, and that is time. It may be difficult to believe for agents and buyers and sellers who wait three months waiting for the bank to make up their mind, but the bank really would rather move quickly. Time costs them more money. It's just that most listing agents do not and will not do the work of actually getting the offer approved by the short sale lender - which they accepted responsibility for when they took that listing. "Short sale specialist" means a lot more than hiring a negotiating firm!

This nonsense about asking buyers to fork over cash for repairs before closing, asking them to keep offers open without an acceptance of that offer, and asking them to agree to pay the negotiating firm are all things that an appropriately represented buyer is going to ask for concessions for. Concessions on price, concessions on indemnification, concessions just for putting up with the ridiculous nonsense on stilts. This all translates to the buyers who are well-qualified and have plenty of resources walking away, while the ones who are marginal or even below qualification level are perfectly willing to hang around in the hope that a miracle will happen. What else this means is that the property sells for a lower price. But the Broker's Price Opinion has no way to reflect these unattractive things making the property worth less to the buyers. It is therefore going to come in higher than the sales price. So we have two additional ways that the transaction falls apart because the listing agent couldn't do the correct thing in the first place. With stuff like this happening, is it any mystery why four out of five short sales fail? Is it any wonder that the better buyer's agents advise their clients to avoid short sales?

Short sales done correctly are really pretty much like regular sales, albeit with one long, difficult and thoroughly unpleasant step added. But what happens before that step shouldn't be any different for a short sale than any other property. Nor should what comes after be any different, except that the seller cannot get any cash out of the deal. The one extra step that is actually necessary does impact buyer desirability, but not nearly so much as all of the unnecessary nonsense (euphemism alert!) that some listing agents insist upon adding.

All of this is, incidentally, one more piece of evidence that most major real estate brokerages are built around the seller and listing property for sale for minimum effort on their part, especially of any actual licensed agent involved. The buyer can go hang. In some cases, literally. No buyer's agent worth what comes out of the south side of a northbound cow is going to counsel their buyers to put up with this stuff, at least not without a lot of concessions including a major downwards adjustment on price (and as I covered above, the lenders will deny such sales when the broker's price opinion comes in too high). But people still keep calling listing agents about their property without having a buyer's agent to advise them. Given that, the agents think they'll find some clueless victim to sell it to. All too often, someone proves them right. In the meantime, like Tina Teaser, the worthless listing agent who is really impeding the sale of the property uses the listing to make contact with as many buyers as possible.

Buyers can't force sellers to sell, much less to sell to them in particular. But sellers and listing agents shouldn't be blind to things that cause buyers to walk away or to be willing to pay less simply because the sellers are not getting cash out of the deal. Especially in a short sale situation. They may not get cash, but soon enough they will be back to getting 1099s for forgiveness of debt, a taxable event. Every dollar they can prevent the lender from losing is going to help them.

The general statistic is that one short sale in five actually comes off. Given the nonsense listing agents expect buyers to put up with, it's no wonder that buyers getting disgusted and walking away is right at the top of the list of reasons for fall out. Sellers need that buyer - without a buyer, they don't have a sale, and nobody sells their property on a short sale without a need. Nor does this nonsense on stilts motivate the bank to get off their backside and approve the short sale. Quite the opposite, actually.

Caveat Emptor (and Vendor)

Article updated here

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