Is Your Agent A Cheerleader Or An Analyst?

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It's not difficult to see how some of the weakest agents and loan officers I know make lots of money. They work for an office of a well advertised chain, and when they get the walk-in traffic, no matter what happens, it's "A great property," or "a great loan." Nice place, priced a hundred thousand above where it should be? "Great property!" Attractive on the surface, but has a cracked foundation that's going to cost a hundred thousand to replace? "Great Property!" A 2/28 a full percent above what you could have had with a thirty year fixed, and with a couple thousand dollars in extra closing costs? "Great Loan!"

It's like working with a cheerleader.

A lot of ex-cheerleaders make a very good living as real estate agents and loan officers. The personality types are a good fit for sales, whether it be real estate or loans. Enthusiastic about everything, no matter how messed up it is. Their answer is always, "We can do it!". The people who don't understand what's really going on, and don't compare it seriously; they hear a putative expert going on like this, and all their warning reflexes get defused. It's human psychology, that when all the barriers should be going up in such situations, they go down instead.

Here's a cold hard fact: There's no such thing as a perfect situation in real estate. No matter what you're doing, buying, selling, or getting a loan, there are always trade-offs. Sometimes the trade-offs are obvious, as with loans, where there is an explicit tradeoff between rate and cost. Sometimes, they're not so obvious or direct, as when comparing between properties for sale. You can understand those trade-offs, and choose the one most advantageous to you, or you can choose in ignorance, metaphorically stamping "sucker!" on your forehead.

A stronger agent or loan officer will explain those choices, and put the consequences of each in context. "This one is $50,000 more, but has another bedroom, another bathroom, and is 300 square feet larger. This one is $40,000 less, but it's going to cost you $80,000 to fix the foundation. This one is $30,000 less, but it's going to cost you about $10,000 for carpet and paint." On the loan side, "You can have a thirty year fixed rate loan at 6.5% for a total cost of $1500, as yield spread will pay the rest, or you can have 6% for a total cost of $8000, or you can have a 5/1 ARM at 6% for $3000, or a true zero cost 5/1 ARM at 6.375%" . An informed choice requires knowledge of both reasons for and against a given option. I don't try and tell them which property to make an offer on or which loan to like more. I can present one in a better light than another, but making the choice is not my job. My job is explaining the consequences of the choices the clients make before they're stuck with them, because in real estate, like everywhere else in real life, there are no "do overs".

People like to be told that everything is going to be easy. But that's not the way to get a good bargain in real estate. You shop for the best loan, force loan officers to compete, compare properties, force your agents to come up with bad things to say about every property, fire any listing agent who won't tell you hard truths from the first time they open their mouth. Real success in real estate is never easy.

Real estate transaction can be made easy - at the price of giving the other side what may be the best deal since the Dutch bought Manhattan. Real estate, particularly in high cost areas where the largest proportion of the population live, is valuable enough that just a few percent of the purchase price can be more than most people make in a year, and if you're not on your guard, you may never know you've been had. I talked with a guy recently who had no clue that there was an identical property four doors down being offered for $140,000 less than he paid, at the time he paid it (I didn't tell him. Not my client, and done is done. No use stirring up trouble or getting him aggravated over something that could no longer be remedied). Really pay attention to the things people will do to save much smaller amounts of money for a few weeks, and it will remove all doubt in your mind as to whether scams happen. To use another gratuitous example, the vast majority of all the negative amortization loans out there. What percentage of people do you think are going to sign off on, "pay interest two percent higher than you could get, compounding against you in the lender's favor, end up owing more than the property is worth and being unable to refinance, and won't be able to afford the payments in three to five years, thereby ruining your credit for life and losing the property as well," if everything is laid out with full disclosure? But millions of people did, and I'm still getting email most weeks from people who were lied to by their loan officers and agents and only figured it out at signing! Bobby McFerrin wrote a great song, but "Don't worry, be happy!" is not the key to a successful real estate transaction. In fact, it's the direct opposite. If you're not willing to be a diligent guardian on your own behalf, I'm willing to bet money that nobody else involved will, either.

Around here, even an average "small" transaction puts $300,000 or so onto the table. Ask yourself, "What would I do with $300,000 at stake?" Then ask yourself what the worst scoundrel you know would do with $300,000 at stake. I assure you that the world of real estate has people out there worse than any fictional villain - I've dealt with some of them. The fictional villain has to be believable; the real person only has to exist. Finally, ask yourself what somebody who's almost - but not quite - a saint might be willing to do with $300,000 on the table. The variations should give you a good idea as to the gamut of possibilities, but people are ingenious when it comes to ways to squeeze extra money out of someone else.

Now ask yourself: Do you really want to hire a cheerleader as the expert on your side in light of this? Or do you want a cold-hearted analyst who really understands everything that can go wrong, and is going to tell you the downsides as well as the upsides of everything? It may not be as complex as the game of celestial billiards NASA plays with probes like Voyager, Galileo, and Cassini-Huygens, but a constant between the two is that, like celestial mechanics, real estate transactions have critical moments where if you are just a little bit wrong in what you do, you end up heading in completely the wrong direction, if not splatted into the side of the waypoint at several miles per second. Nor can you usually fix it later if you get it wrong at the critical moment. If you doubt this, spend a little time on any of dozens of real estate forums, reading the stories of the people who got it wrong, and are now trying to fix it.

Buying real estate, or financing it, is a huge decision. So big that the emotional hind brain with all the "flight or flight" stuff over-rides our rational decision-making process, which was layered on in our complex operating system we call a brain much later, and loses out any time there is a conflict between the two. Fear and suspicion are hardwired into the hind brain. If anything about the situation is uncomfortable, the primary reaction of the hind brain is to get out of that situation. In fact, in many cases, the only way some sales folk can move a lot of people off their hunkered down position in mental concrete is by pretending that there is no possible downside to the transaction. Not only is this cheerleading behavior a calculated lie (unless the sales person really is that clueless themselves), but it destroys any element there may be of the healthy response of evaluating the situation completely, from a rational viewpoint. There is no such thing as a real estate transaction without potential downsides, and the ones you don't know about or don't understand are generally much worse than the ones you do.

I don't know how many times I've heard people say things that reduced to "I can't be rational! This is far too important for that!" A good professional's most important job function boils down to keeping intellect in the process. I can't make Mrs. Lee (and women make the decisions when picking out the cave!) decide she emotionally likes the property enough to buy it (Even if I could, I wouldn't - that way lies professional disaster). That's Mrs. Lee's part of the process, and Mr. Lee will help. I can give them enough concrete reasons why or why not to get past that reptilian hind brain's emotional over-ride of the thought process.

I've got to admit that the thought of being able to buy real estate and get loans stress free appeals to me, too. Being a carefree adolescent or child is appealing on a certain emotional level. But it's also profoundly dangerous. One of the wisest and most profound things I've ever read, despite the mixed metaphors, was the following:

"'Let George do it ' is not just the lazy man's motto. It is also the credo of the slave. If you want to be taken care of and not have to worry, that's fine; you can join the rest of the cattle. Cattle are comfortable - that's how you recognize them. Just don't complain when they ship you off to the packing plant. They've bought and paid for the privilege, and YOU SOLD IT TO THEM"

So how about it? Do you want to be comfortable, or do you want to be involved and understand everything going on? Do you want to have it all easy, or would you prefer to plan it through? Do you want to work with a cheerleader, or with an analyst? Maybe you've been reading the news these past couple years. Millions of people are in the process of losing their homes, having their credit ruined for years, and having the rest of their lives ruined, financially. Millions more have already been through it. I've yet to hear of one who was the client of an analyst-type agent or loan officer who disclosed everything the client needed to know at the appropriate time.

There's always going to be a leap of faith somewhere in a transaction. Short of learning the jobs of three or four professionals on the same level of knowledge and practice as they possess, there is no way around this. But by going in with your eyes open, doing your own due diligence, and cross checking what you are told, you can make that leap into a short step, and give yourself confidence that your trust is not misplaced by verifying it isn't misplaced where you can check. Because most of the crooks out there are fundamentally lazy, and can not or will not do the work and preparation that will enable their little drama to withstand even small amounts of real scrutiny. Most of those desperate people I read or get email from, trying to recover from being royally taken advantage of, could have been saved by very small amounts of skepticism and research.

Caveat Emptor

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About this Entry

This page contains a single entry by Dan Melson published on February 3, 2014 7:00 AM.

The Loan Shopping Koan was the previous entry in this blog.

The Lender's Rule of Mortgage Payments is the next entry in this blog.

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