State of The San Diego Real Estate Market August 2009

Or, games listing agents play that hurt everyone, including their seller clients, but allow them to make more money.

Things have been crazy these last few months. Crazy frustrating for both buyers and sellers, for different reasons. Mostly, it is because of the rise of the corporate listing agent, whose name is on everything but whose involvement is as minimal as he (or she) can make it.

Here's the set up: A year ago we had depressed prices and nobody was buying because everyone was waiting for "the market to bottom out." It had bottomed out, but the major media hadn't picked up on the fact yet. Some of this was because they typically talk national where San Diego was significantly ahead of the national curve through this entire boom and bust cycle. We started going up earlier than just about everyone else and we had the bubble pop about a full year before the rest of the nation. Furthermore, major media tends to look backwards economically and extrapolate what the national trend during that period forward. Doing that has a certain applicability, but not to specific real estate markets because there is no such thing as a national real estate market, and anybody who talks about a national real estate market as if such a thing really existed has just labeled themselves a clueless bozo. Except for the effect of changed policies and rates on real estate loans, every local commuting area is different.

The second thing to be aware of is that for the last several years, the way to survive and prosper as an agent was by listing lender owned property. The margins on lender owned property are thin, but if you do enough of them, you can make good money. First off by doing practically nothing to sell the property - sign in the yard, entry in MLS - but a wasteland buried in excrement will sell if the price is low enough. Matter of fact, there's a certain brand of investor who does very well out of those and looks for them, so the agent doesn't have to do any marketing. They also make money by using their listings to make contact with buyers who don't know any better.

For short sales, the other major component during the downturn, given that sellers weren't getting anything out of the sale anyway, they didn't do much in the way of diligence about the agent that was going to be listing the property. There's a certain brand of agent who may be good at nothing else, but they're good at being sympathetic to the people who didn't do any due diligence before they bought, and didn't do any before they signed a listing agreement, either. Net result: signature on a listing agreement. But if you pretend you can adequately represent both parties, there's good money in being an agent for short sales. Throw enough mud at the wall and keep throwing it long enough, eventually enough of it sticks.

Into this environment came the strongest turnaround I can remember. We've always had cycles in southern California real estate - it comes with the territory. But this one was extraordinary both for its strength and for the suddenness of onset. Why this happened is pretty easy to figure out: The stock market was tanking and people who are focused on what's happening to their money right now pulled it out and went looking for something else to invest it in. A couple trillion dollars nationally realized that real estate was already about as hard hit as it was possible to get, so they pulled all that cash out of the stock market and decided to invest in real estate. The result is a sudden influx of all cash offers and offers with major amounts of cash down as all that money that was in the stock market seeks a safer haven. This led to a major demand spike, easily comparable to the 2003 spike that occurred because we had a drop in the number of people that wanted to sell.

Finally, we've had some changes in the loan market. Tightening of loan standards, anti fraud standards. The government and lenders always bolt and weld the barn door after the horses escape, but here the lenders were colluding in the equine escape. Finally, Home Valuation Code of Conduct came along and threw a humongous monkey wrench into the ability of people to purchase the home they're under contract for.

The net result has been pure chaos. Frustrating chaos for both sides, even though it didn't need to be, but the minimally involved corporate agents with all of the listing contracts have no idea whatsoever how to design a transaction that actually works, and they have no capability or intention of dealing with the volume of offers they suddenly got. I haven't listed any in the last few months, but it's a golden opportunity to do very well for seller clients by doing it right when everybody else isn't. Of the sixty-odd offers I've made on behalf of prospective buyers, I got an acknowledgement that they had received the offer out of seven. They can't so much as acknowledge that they have received an offer, and they're wondering why everything they're doing is falling apart in this lending environment? And falling apart it is. Something like sixty percent of accepted purchase contracts are falling out of escrow because the listing agents are bozos, plain and simple.

Furthermore, these listing agents (particularly on short sales) have gotten used to setting "teaser prices" on real estate. Say they really expect that they can get $400,000 for a property. They'll talk the owner into listing for $350,000 because "It's not like you're going to get any money out of the sale anyway". They then use this to make contact with the sort of buyer who assumes that because the asking price is $350,000, someone who can afford $350,000 might well be able to afford it. Not really - but the agents are using it as "bait" to make contact with buyers. Even after the lender has rejected offers of $350,000. These people are weak on the concept that the listing price is "a written representation of an offer the seller would be willing to accept". They tell the buyers who contact them that "this property just got an offer accepted, but I'll be happy to find you something else." Basically, they're liars from the start - but many people don't know any better than to call the listing agent.

Other games are going on also. Despite the addition of "Contingent" status into our local MLS for properties with an accepted offer that need external release in order to happen (primarily short sales), many agents are doing their best to pretend the property is still available. I am really tired of being "the bad guy" who has to tell my clients that the listing agents are playing games and that property is not really available - particularly those clients who are looking for hard to find things like 2 living units on a lot.

I am also disgusted by the lack of response to offers from listing offices. I understand that every property that's not hideously overpriced is seeing multiple offers. That's no excuse not to respond to offers that are made. If you're too busy to respond properly (an immediate acknowledgment followed within a couple days by a counter-offer), that's a pretty good sign you shouldn't be taking any more listings until you hire more agents. But agents, unlike minimum wage office staff, take a percentage of the profit on the deals they work, so you can guess at what really happens. As I said above, I've made sixty-odd offers this summer on behalf of my clients - and have gotten some kind of voluntary response (an acknowledgment of the offer) seven times. No counters, which every reasonable offer should get.

All of this leads to an environment that is extremely frustrating to buyers. I would advise buyers to just move to the sidelines for a while if I thought it was going to get any better. If I didn't think prices were going to be headed up as quickly as the appraisals can be found to justify them.

It's also frustrating to sellers, as their agents haven't done a very good job choosing offers that are resilient - able to consummate despite the obstacles that exist in pretty much every transaction. The big one has been HVCC, which has caused appraisals to go from an occasional problem that can be avoided to something that's an issue on every transaction. If I were listing a property with multiple offers, the questions I would be asking are "If the appraisal comes in low, how able are these buyers to consummate?" and "How much do these people really want the property?" There is way too much fallout of transactions these days - and it's mostly the listing agent's fault. The good news is that this enables the frustrated buyers to have a second, third, fourth, chance. The bad news is that tt's even more frustrating, however, because even more prospective buyers dogpile into it on subsequent attempts, and the listing agents aren't doing anything better on those go-arounds, either.

If I were advising prospective sellers in another market with comparable conditions, I'd say be careful to do your due diligence on the listing agent before you sign that listing agreement. Not "how much real estate do they sell?" because the agents that are causing the problems sell an awful lot of real estate - eventually, and for far less than they could get, but it does eventually sell, which is all "top producer" tracks. But are they set up to give your property the time and effort and attention it needs? A good first test is to pretend you're a buyers agent - respond to their phone tree as if you are a buyer's agent, leave a message as if you are a buyer's agent - at least until you get an actual agent on the phone. If that proves to be difficult, well, you know how they'll treat your property. As a seller, you don't want your listing agent representing both you and the buyer any more than the buyer wants their agent to be the listing agent, so agents that aim to make dual agency the order of the day are not ones you want listing your property. If you're in San Diego, of course, the solution is easy.

Caveat Emptor