Buying and Selling: March 2008 Archives

Don Henley has a fun song off his second solo album called "Driving With Your Eyes Closed". I can't find a video performance, but here's an MP3. It's got a chorus that ends with the line, "You're gonna hit something /but that's the way it goes."

A lot of what I read about the real estate markets reminds me of that song. Mostly, people are looking in a rear view mirror myopically, and think that's going to tell them where the market is going. Not so.

Let me tell you the most important "secret" about the real estate market - or any other market. Short term results are mostly about mass psychology. People are so into what is happening right now that they will react to it the same way as everyone else without thinking, whether it's fear and greed driving the market up or fear and greed driving it down. The short term, in real estate, is this year, next year, and maybe the year after. But the actual real estate transaction is expensive. It can cost you a couple percent just for the transaction to buy real estate, seven to ten percent to sell, so you've got to clear ten to fifteen percent higher price just to break even on the costs. Those costs will more than pay for themselves, but they are there. An average year in my market is about 5% up, and 20% up in one year is one of the best years local real estate has ever had. Short term flippers work by different parameters than most consumers, but these are the market factors most people have to deal with. It takes about three average years to break even on the costs you have to pay for the transaction.

This is enough to take the majority real estate investing out of the frame of the short term market, controlled by mass psychology, and into the realm of the medium to long term market, where psychology is a factor, but as time goes on, more and more of your investment results are controlled by pure economics. Supply versus demand. What people who want housing make. What the interest rate environment is like. Oh, and don't forget the effects of government and public policy. When somebody says, "The market has dropped in the last three months, therefore it's going lower" that is no more correct than the opposite which we had four or five years ago: "The market has been going up - five percent in the last three months alone! Therefore it's going to keep going up!" In either case, making this sort of claim is functionally equivalent to blacking out your windshield and driving by the rear view mirror. "You're gonna hit something, but that's the way it goes!"

Furthermore, there is no such thing as a national market for real estate. It does not exist, and anybody who claims it does is either so clueless as to the nature of real estate markets that you should pat them on the head and say, "That's nice dear. Now run along and play with your Duplos&trade," or they are actively lying. There are factors such as the interest rate environment that influence real estate markets nationally, but there is no national real estate market. In order for a given area to be considered one market, the properties within them must be functionally equivalent for the residents as to location. Let's look at the City of San Diego: No way is San Ysidro, right by the Mexican border, functionally equivalent to Del Mar Heights, thirty-five miles away along the coast on Interstate 5 just north of all the corporate buildings in the Golden Triangle, and neither is equivalent to Rancho Bernardo, which is about that same distance north inland along I-15. All three are part of the City of San Diego, and we haven't even gotten to the suburbs yet, they are three very different markets, with different demographics, different lifestyles, different building styles and all that that implies. For my real estate work, I specialize in and around the City of La Mesa, which borders San Diego on the east, and is different from all three previously described areas, and there are areas of La Mesa which are decidedly different from other areas of La Mesa. These markets are close enough physically to have market interactions, but different enough to constitute different markets - never mind Idaho, Georgia, or Vermont, which are not part of the local commuting area. Talking about a unified countywide market is occasionally a useful fiction, as there are interactions. People are able to commute from home to work and back again, no matter their respective locations within the county. Talking of a national real estate market is blatant nonsense. At most you can talk about a national amalgamation of local markets - a statistical hash of what is going on in all of the individual markets. Even right now with real estate markets in the tank in all the headlines, though, there are local real estate markets that are doing very well, and others that are poised to do so.

You can talk about national factors influencing all of the local real estate environments. Interest rates, lender requirements, legislation in Congress, federal rule-making in general, all of these have a national influence. The markets themselves remain local.

For longer term analysis, you've got to talk about the economics of an area. Current supply versus demand, and where that ratio is going. What do people in the area make? What is the regulatory environment? How difficult is it to build more housing? What are the population trends? What is the economy of the area doing? What are the factors influencing rental price and availability? How likely is any of this to change in the future? It doesn't matter whether people are getting "priced out" or even how many people are getting "priced out." People have been priced out of Manhattan for decades; it hasn't stopped Manhattan real estate from rising in value. What does matter is whether enough people with the economic ability to pay the current prices are available to buy up the new inventory that hits the market. It doesn't matter that people who bought twenty years ago could not afford to buy their properties at current prices. What does matter is that enough people who can afford it will buy to more than balance out the people who want to sell at current prices.

So while you can talk about national trends, any given property sits in a particular local market, and any discussion of whether to buy a given property has to be rooted in the local market situation. National trends may have an influence upon its value. If interest rates go to eight percent, people can only afford about seventy percent of the loan they can afford if interest rates go to five percent, so falling interest rates are a time of rising prices, other things being equal. Of course, we've had falling interest rates the first three months of 2008, and that's not the case. The explanation is that there are stronger factors at work.

Nonetheless, if a million people want to own property in an area (say, La Jolla) and only 40,000 people can, then the price will be determined by the 40,000 people willing and able to pay the most. If twenty million people want to live in San Diego County and only three million can, the prices will be determined by the three million people willing and to pay the highest prices. End of discussion. Not all properties in all locations are equally valuable of course, but the mix will be determined by what prospective buyers are willing to pay the most for. Note that not all costs are in dollars. Sometimes it's opportunity cost, sometimes it's any number of other costs, such as the risk of earthquake, the heat when the Santa Anas roll in, etcetera. Some people absolutely require living in a six bedroom 3000 square foot house, and if they can't afford the prices those command here, they'll go elsewhere despite the fact that they could easily afford something less expensive. Others will put up with living in a broom closet so long as they can go surfing every day.

Analysis focusing on a market's short term results are largely a study in mob psychology. Three years ago when property was overpriced locally, I couldn't slow people eager to follow the other lemmings with a locomotive. The last year or so, with available property prices well below historical trendlines locally, it's taken entire battalions of wild horses to pull people off the sidelines due to media coverage. But mob psychology is a changeable thing. A co-worker and I were talking about modifying an old T shirt the other day. The original version has two vultures sitting on a tree limb, discussing the negative utility of patience: "Patience MY ASS! I'm going to KILL something!" (pardon the vulgarity.) We're going to change the second line to "I'm going to BUY SOMETHING!" That's the mood of the market we're encountering now. The people who have been holding off seem to have realized that this is about as good as things are going to get for them. Maybe they're tired of waiting. Maybe they've realized things are more affordable for them now than they were in 2000, let alone 2004. Maybe they got "priced out" during the bubble and want to move before it happens again. Once you buy, it's not like the seller can come back and ask you for more money later because it turned out to be such a wonderful bargain - you're locking in your cost of housing. Putting it under your own control forever. The vultures are starting to swoop.

Analysis on a local market's longer term prognosis have to ignore mob psychology. It's unpredictable on that scale, and nobody ever knows just when it will turn, or how. But there's only so long mob psychology can trump practical economics, which is the norm that any particular market will follow ever more closely the longer you run the experiment. With the recent decline in values, San Diego has dropped significantly below long term value trends. This means that considering current supply and regulatory barriers to increasing it, demand of people who want to live here, the values that those people can afford to pay, and increasing demand for housing in San Diego, not to mention the changing dynamics of the rental situation (be prepared for rapid increases in rental rates), right now is an excellent time to buy, as prices are below where you would expect, given the longer term factors influencing the San Diego regional housing market.

Articles which consider only short term price fluctuations are looking backwards as we go into the future. They're looking at where we've been, not where we're going. And as always when you're effectively driving with your eyes closed: "You're gonna hit something, but that's the way it goes..."

Caveat Emptor

Article UPDATED here

First off, let me make something very plain. All a CBB can do is give good agent an incentive or disincentive to look at the property. A high one will not, by itself, sell the property. A low one will not prevent it being sold. Buyers, being interested in their own bottom line, will persist in choosing the property that offers them the best property for their purposes at the lowest price, and agents with about an hour in the business should understand this. I not only cannot sell a buyer on a property that isn't at least as good a bargain for them as the competing properties, I won't try. It's contrary not only to my client's interest, which should be the ultimate consideration of any agent, but it's not in my interest either.

Now with that said, you really don't want to do is give agents a reason to sell the other property instead of yours. A cheap CBB does not motivate the agents to work. Suppose a boss told their workers "You will be paid $10 for every green widget you sell. You will be paid $15 for every purple widget you sell." Assume the widgets are identical in every way except color. How many green widgets do you think would get sold versus purple? Sure, they'll sell green if the customer wants it, but that's not going to be what they suggest first. If a customer came in the door wanting a green widget, they'd get a green widget. But if they walk in the door and aren't sure they want a green widget, the sales staff will quite predictably see if they can sell them the purple widget first. If they can, the green widget sits unseen, untried, and unsold.

In real estate, the person who sets that compensation is the owner of the property. There are lots of properties out there, even in a seller's market. Do you want your property to be treated like a green widget, or a purple one?

This isn't evil. Agents have to eat, pay the mortgage, pay expenses, etcetera, and we don't make as much money as people think. Even less so than most people, agents don't get to keep every dollar their company gets paid for their services, and they don't get paid instantly for waving a magic wand. It takes time, work, and expertise - I've spent six months, hundreds of hours, and over a thousand dollars just in expenses working with clients to close a deal. If the company gets paid $10,000 and the agent has an 80% split (better than most), they get $8000 gross. Less monthly desk fees, less per transaction fees, and less fixed expenses of staying in business, that's maybe $6500, and social security eats twice as much of that as normal, leaving about $5400 - and we haven't even considered income taxes or advertising yet. For a solid month of work, and who knows how much time looking before the clients made the offer that was accepted. With practically unlimited liability, and requiring continuous training and work to keep their edge. If it takes 3 months in all, that's barely minimum wage, and most agents work sixty hours per week at a minimum. Quite often, we've got to reduce our commission to put some money back into the transaction so it can close. Sound like a cushy sinecure to you?

Of course, most agents are working with more than one set of clients at a time, but as you can see, a $10,000 commission doesn't translate into a huge windfall for the agent. If the company only gets paid $8000, that translates into maybe $4100 that the agent can use to pay their family's living expenses and taxes. Which do you think they'd rather have, the bigger check or the smaller? Ask yourself what you'd do in their place. If it's a question of the smaller check or nothing at all, there's no question, but there are a lot of properties competing with yours for the available buyers, and more coming onto the market all the time. Do you want to give agents a reason to try and sell your property, or a reason why they'd prefer to sell someone else's property?

With all of this in mind, a screaming deal will sell. You don't have to worry about whether or not the agent is going to be on your side. Buyers will beat a path to your door, with or without an agent. However, pricing your property as a screaming deal is not something most rational owners want to do. They want to get top dollar for that property, and it takes at least ten percent below the rest of the market - more likely fifteen - to get attention as a screaming deal. I've said this before, most notably in How to Sell Your Home Quickly and For The Best Possible Price, but this is fifteen percent off the correct asking price, not the owner's fevered dreams of greed. The average CBB around here is three percent. So, save three percent to lose fifteen? Not something I'd do. Furthermore, you're not going to put up a CBB of zero, no matter how low it's priced. I've explained before why the seller pays the buyer's agent. Finally, if you end up needing to give the buyer an allowance for closing costs to get the property sold, you're quite likely giving out with the other hand the same money you withheld in the first place, as buyers paying their agent is a closing cost. Why not put it out there in the first place, where it is likely to do you some good?

The differences a higher CBB makes for the seller are three: You don't have to worry that buyers needing to come up with cash to close for their agent will impact buyer cash to close, you get more attention for your property more quickly and more consistently, and you don't have to worry about buyer's agents creating reasons not to buy your property. Put yourself in this situation: Most buyers are reluctant to pull the trigger on a half million dollars. They need some good hand-holding and reasons to buy, and instead, their agent is looking for a reasons to help convince them why they want to buy some other property instead. Do you think it might take longer for the property to sell? With carrying costs of somewhere around two-thirds of a percent per month for most properties, if a CBB a half percent higher gets the property sold three weeks faster, you are ahead of the game. The time difference will almost certainly be more than that, and - statistical fact - the longer your property sits unsold, the lower the price it will sell for.

If you want to offer a low CBB, that's your prerogative. The property had better sell itself enough better than anything comparable to still the doubters - and practically every buyer is a doubter. The lower it is, the worse it will be, the longer you'll have to pay carrying costs, and the lower your final sales price. A low CBB, especially in conjunction with other factors about the listing can advertise to buyer's agents that you aren't ready to sell yet, warning them of a difficult transaction. If I can find a model match with an obviously motivated seller around the corner, why should I take my buyer to yours? We're going to get a better price on the same thing with the property around the corner, there will be fewer issues with the transaction, and the fact that I'll make more money even though my client got a lower price is pure bonus for being a good agent. Call it karma.

On the other hand, offering a significantly higher than average CBB doesn't work as well as some people seem to think it does. It definitely won't sell the property for more than it's really worth. Furthermore, it raises all kinds of red flags in my mind, and, I imagine, in the eyes of most agents. "Why do they think they need to offer five percent when the average is three?" springs to mind pretty much unbidden. Most often, the property is overpriced. Almost as often, there's something wrong with it that only an experienced investor is going to be able to deal with - and experienced investors don't pay top dollar for a property. Ever. Quite often, there's something unrepairable detracting from the value of the property. It might get the property sold much more quickly - most agents have some investors I can call if we have reason to, and if you get our attention with a high CBB, both we and our clients are happy. So if you're stuck with a property that has something seriously wrong with it, a high CBB and a low price will cause it to see a lot more action. But they have to be coupled together. High CBB won't do it on its own. On its own, high CBB is pointlessly wasted money.

An average CBB or maybe slightly higher will quite likely accomplish what you want; a quicker sale and therefore a higher sales price. If you're a half percent above average, that's not enough to raise red flags, and it will get you attention. Good buyer's agents will still require that it be an above average value for the client, but they will look, where they might not otherwise. It also stands a good chance of motivating them to really take a good long look at the property.

Short Sales are worse than everything else, as far as CBB goes. Short sales usually take much longer, are more often than not overpriced, and there's a much higher chance of transaction falling apart and the agent losing the client as a result. In my area, over eighty percent of all short sales fall apart, and there's not much the buyer's agent can do to alter the odds - it's in the hands of the listing agent. The lender is going to require the agents involved to reduce their commissions. Agents know this, and they can't really fight it. If you're out there on the cheap end of CBB before the lender wants to grab money we've earned away from us, and four out of five self-destruct and lose the client without closing, what reason is there to show your property, as opposed to the one down the street that's not a short sale? Cost my client money and time to no good purpose, when I can usually find them something just as good at a better price that closes faster and without the eighty percent chance of fallout. But there's always a reason for a short sale. I've never seen one yet where the owner didn't need to sell for some reason or another. Why doesn't matter; If a short sale is the least bad thing that can possibly happen to you, the one thing you don't want is for the property to fail to sell, and a below average CBB on a short sale will practically insure that the property won't sell.

If I had my druthers as a buyer's agent, I'd rather buyer's agency commission be set as a flat amount, regardless of the actual sales price, so that the agent isn't shooting themselves in the foot if they can negotiate a better price. On the other hand, it's not a crime for the seller to structure it in a way that produces dissonance between the interests of the buyer and the interests of that buyer's agent. I may not like it, but I take shameless advantage of it when I'm listing property - I advise owners to make CBB a percentage. Just because I understand a happier client is likelier to bring me more business doesn't mean every agent does. Maybe it's because I read Sun Tzu and von Clausewitz at an early age, and military history has always been an avocation with me. Maybe it's because I took almost enough probability and statistics courses in college for it to count as a major. Maybe I'm just competitive by nature. Whichever it is, I believe in taking every opportunity to load the dice in my client's favor before they get tossed. Anytime there are large amounts of money at stake, you're either in it to win or you are a sucker. There's a lot more money involved in real estate than almost anything else.

At higher valuations, reasonable agents expect CBBs to go down. There's not much difference in the actual work between a half million dollar property and a full million dollar one. Higher liability exposure and a little more hand holding and a little more service. Furthermore, the kind of people who buy million dollar properties tend to be better qualified to do so, leading to fewer escrows failing due to buyers failure to qualify.

One of the things I don't understand is that many agents are the worst about CBB. They should know the power, and yet when it comes to their own money they disregard the facts and try and to do it on the cheap. I make a special note when I notice those listings, because it's like they're shouting, "I'm just out for a quick buck! I don't really know what I'm doing!" to those with the ability to hear it. With that information, I keep a special eye on their listings for other clients. Just part of my desire to look for opportunities to depth charge fish in a barrel. When I find one, it always results in a happier client.

Caveat Emptor

Article UPDATED here

I just picked a random ZIP code in my local MLS, and out of the first twenty listings I came to, ten had explicit violations of one or more of the sections of RESPA regarding steering right there in the listing. This did not include lender-owned real estate, which has its own set of issues in this regard. All I did was count two common violations.

The first was "Buyer must be prequalified by X", where X was some loan originator. In a way, I understand this. Forty percent plus of all escrows locally are falling out, and the vast majority of them because of unqualified buyers who cannot qualify for the loan. This wastes a minimum of about a month, plus when it goes Active again, it looks like it's been on the market for longer than it really has. Bad thing all around for the seller. The justification used is that for some reason, the agent trusts that particular loan officer to render a real opinion. Perhaps occasionally, a lender owned property will even try to require prospective buyers to prequalify through them. While it might seem reasonable, here's some relevant law from RESPA

Business referrals

No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

They mean that "any thing of value" bit, if you peruse down the the definitions. It's defined very literally by about a paragraph of text that boils down to four words: ANY thing of value. You refer business to them, they give you approvals you can count on. It doesn't matter if you require "only" a prequalification - they now have the prospective borrowers information, including credit information and home telephone number. This means that even if there's no application fee, no deposit, not even a credit report fee, you have still given that loan originator a "business relationship" with the borrower. That makes for legal consideration on both sides of the equation, and both the originator and agent are guilty. This is just as hard a violation of RESPA as a fraudulent HUD 1 form. It hasn't been enforced much of late, but I believe that the State of California could probably put over half the brokerages and lenders in the state out of business over loan steering. I only counted four out of twenty actual explicit requirements to pre-qualify with a specific lender this time, while the last time I conducted the exercise it was eight. Maybe it's getting better, maybe it's not, but twenty percent of a representative sample of listings having an explicit violation of the law right there for everyone to see is not something agents should be proud of. When it comes to holding someone responsible for their representations, pre-approval doesn't mean anything. If you're a real estate agent who doesn't do loans, talk to a lender you trust about necessary information to determine whether a loan is doable. I've created a special form that I send to agents making offers on my listings. Nothing in the way of personally identifiable information except the borrower's name - no social, no contact information - but it does have credit score, late payment history, income information, etcetera, to the point where I can tell whether or not I could do the loan on the terms necessary to make the transaction fly. Furthermore, it does require the loan officer to sign a representation that they aware that a decision as to whether or not to grant credit - in the form of agreeing to enter escrow - will be made based upon this information. They don't need to make representations of opinion - all I'm asking for is verified facts. Armed with those facts, I have a pretty darned good idea if this borrower is capable of consummating the transaction. Doesn't tell me whether they will or not, but that's not what wanting a prequalification or preapproval is about.

But when I'm a buyer's agent, which is most often, I simply ignore these requests that violate the law. Furthermore, this puts me in rather a strong negotiating position if the listing agent repeats the request or brings it to my attention. Now they've compromised their client's interests, by giving the other side (me) a concrete legal issue to aim at them. Game, set, match. As I said, four out of the first twenty listings in a random ZIP code explicitly violated RESPA right in the listing, without counting the ones that say "Contact us prior to making an offer," where that's usually what they want. Four out of twenty where there is precisely zero doubt that they're violating the law.

Actually, that wasn't the most common violation, either. That goes to "Seller to select all services," at six out of twenty - thirty percent. Also from RESPA:

Sec. 2608. Title companies; liability of seller

(a) No seller of property that will be purchased with the assistance of a federally related mortgage loan shall require directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company.

(b) Any seller who violates the provisions of subsection (a) of this section shall be liable to the buyer in an amount equal to three times all charges made for such title insurance.

Even though in California the seller usually buys the title insurance for the buyer, I've had more than one lawyer tell me that failure to negotiate is construed as a violation of RESPA by the courts. It works like this: In the case of simultaneous owner's and lender's policies from the same company, there's a discount for the lender's policy, essentially requiring the lender's title insurer to be the same as the owner's title insurer. Since this happens on every purchase transaction where there's a loan, you have the requirement to negotiate. Seller and buyer negotiate until they come to a mutually acceptable compromise. Neither one of them gets to dictate to the other. Furthermore, failure to consider the best bargain for the client is a violation of fiduciary duty for the agent. It's not the sellers who want to choose services. Other than corporate owned property - lender owned and corporate relocation properties - there just isn't a reason for many sellers to care. The only reason is if they're employed by a title or escrow company, and their fringe benefits include free title or a free escrow. I've seen that once in the last four years.

What's really going on here is title insurance companies providing free farms, or subsidized mailings, or any number of other freebies they use to attract real estate agent business. Or the brokerage has a captive escrow company they're required by the broker to use, despite the fact that failing to negotiate this point is a violation of the law. I've had agents or their idiot assistants tell me that they get "discounted service" even when I've got a lower quote from the competition. Furthermore, the interplay of title company and escrow company is important. If there's no common ownership between the two, the title company will charge a "subescrow fee" that I've seen be anywhere from $100 to $450 (usually about $350) because they're the ones who are actually set up to accomplish some things that are legally the escrow company's responsibility. For instance, recording. What this means is that even if the actual quote is lower from unaffiliated companies, the clients are quite likely better off choosing escrow and title companies where there is common ownership, even if the quote is a little higher - because there won't be subescrow fees, and quite likely not messenger fees between title and escrow. To paraphrase an common saying, $350 is $350, even when there's a half million dollar deal happening. Make certain you get a guaranteed total fee for services quote based upon the actual escrow and title relationship to each other. I'm quite sorry for independent escrow companies - I have no reason to believe they're any less competent or charge anything more than title company affiliated ones - but they're competing at a disadvantage because the title company wants to charge more to work with them, and this is quite reasonable given that they will be performing services that are the escrow company's responsibility. They waive subescrow for their own affiliated companies simply because, one way or another, they're responsible for the work.

I've also heard all sorts of nonsense about competence of title and escrow officers. The fact is that most of them are perfectly up to your transaction. Even corporate owned relocation properties, where there may be some complex tax issues, aren't significantly more complex than your garden variety individual buyer - individual seller, and don't get me started about 1031 exchanges. Any good agent's agenda is very simple - competent service providers for the lowest total price. The vast majority of the time, this means a title and escrow company with common ownership. Note that I don't care which title company and affiliated escrow company. I'll do business with anyone that hasn't hosed a client, and even if they have, I'll simply require a different title or escrow officer - just because John has a recto-cranial inversion doesn't mean Jane, another officer at the same company, does. Even lender-owned property will negotiate service providers if you approach it right - which is how it should be. Oh, you'll end up with their choice of providers most of the time, but you can get them to pay for subescrow and messenger fees, and quite likely an allowance to meet your lowest quote elsewhere - meaning your client doesn't really have a reason to care. Essentially the same product at the same price to them. Why would most clients raise a fuss about that? Indeed, the only thing worthy of most clients raising a fuss would be if you didn't negotiate for that. Indeed, explaining the whys and wherefores of the whole service provider quandry has gotten me a seller or two working at cross-purposes to their listing agent, who had someone all picked out without informing their seller. When this happens, my buyer wins. How could I not use every weapon at my disposal?

The intent of Congress on steering is quite clearly spelled out:

TITLE 12--BANKS AND BANKING
CHAPTER 27--REAL ESTATE SETTLEMENT PROCEDURES
Sec. 2601. Congressional findings and purpose
(a) The Congress finds that significant reforms in the real estate settlement process are needed to insure that consumers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country. The Congress also finds that it has been over two years since the Secretary of Housing and Urban Development and the Administrator of Veterans' Affairs submitted their joint report to the Congress on ``Mortgage Settlement Costs'' and that the time has come for the recommendations for Federal legislative action made in that report to be implemented.
(b) It is the purpose of this chapter to effect certain changes in the settlement process for residential real estate that will result--
(1) in more effective advance disclosure to home buyers and sellers of settlement costs;
(2) in the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services...

Whatever forms those kickbacks and referral fees may take, if your agent is violating this, do you really want to do business with them?

Caveat Emptor

Article updated here

There are two sorts of buyer's agency contracts, exclusive and non-exclusive. Note that this has nothing to do with Exclusive Buyer's Agents, who do not accept property for listing. I disagree with their reasoning on the virtues of doing so, but I can see a reasonable person making the arguments that they do. Despite the fact that ninety percent of my business is as a buyer's agent, I have no plans to become an Exclusive Buyer's Agent. The line their organization takes is that agents tend to work on behalf of their listing clients, neglecting buyers even when they're representing them as well. To be fair, I do see that happening in the industry. The solution is quite simply to refuse Dual Agency. I get referral business by making each individual client as happy as I possibly can, not by hosing one class of clients so that I can make another that little bit happier. I'm only on one side of a given transaction, and my clients will tell you I'm not in the least hesitant to advise them if something isn't quite like I would like it to be. Furthermore, I learn things by listing properties - things that I can turn around and use to help my buyer clients - just as I learn things by representing buyers that I can turn around and use to help my next set of listing clients. Without that feedback between the two very different tasks of representing buyers and representing sellers, I'd be a much weaker agent, whichever side of the transaction I was on.

Now some states permit agents to call themselves "exclusive buyer's agents" if they work with exclusive buyers agency contracts. An exclusive buyer's agency contract, however, does not mean that all of that agent's business comes from representing buyers. It means that they require buyers to sign a contract that essentially prevents those buyers from working with another agent. An exclusive buyer's agency contract says that no matter which property these buyers buy during the period it runs, that agent will get paid. End of discussion. Since the buyers accept responsibility to pay the agent if the seller or someone else doesn't, which isn't a problem if there's only one buyer's agent, because it is in the seller's interest to pay the buyer's agent. However, what the seller pays only covers one agent, so if there's a second agent involved, the buyer has to pay that second agent out of their own pocket. This essentially constrains them to work with the agent they've given that exclusive contract to. Many very weak agents require exclusive buyer's agency contracts because they're scared of the competition - they know they don't measure up, so they cut the competition out by binding them with an exclusive agency contract. They've got good advertising campaigns in effect, good networks of people, whatever - the essential element in their strategy is that the prospective buyers talk to them first, before those buyers understand what's really going on. Not to mention that this does, in some states, allow them to designate themselves as "Exclusive Buyer's Agents." This is confusing nonsense, and not beneficial for consumers.

There is, however, an alternative. This is the Non-Exclusive Buyer's Agency Contract. This is a standard contract, available in all fifty states through the work of the Association of Realtors (self-interested dinosaur controlled by major chains though the organization is, it does do some beneficial work). In California, it's put out as a part of the WinForms program of standard forms, and I suspect the same is true elsewhere. When you strip it of all the legalese, what it says is that If you buy a property that agent introduces you to, then that agent will be entitled to a buyer's agency commission. Notice that construction, straight out of you high school geometry or logic course? If A then B. If not A, then nothing. In other words, if some other agent introduces you to the property you buy, you owe this agent nothing.

Consumers can be working with literally any number of prospective buyer's agents through non-exclusive contracts, and be perfectly safe. There's only going to be one commission due - to the agent who actually gets the job done. Because of this, consumers can sign one of these and start working with any agent, safe in the knowledge they're not stuck with that agent if they find out they're not doing the job they should. The only thing consumers are giving up is the ability to cut out the agent who actually finds the property they want to buy at a price they're willing to pay. Since this is the hardest, most difficult, most time consuming and most liability ridden part of a buyer's agency job, this is only reasonable. You don't go down to the premium mechanic, have them fix your car, and get out of the bill by paying the cheap shop on the corner. That is the real work for a buyer's agent, not the paperwork of the offer and escrow period, or the gladhanding, or even the showing. The ability to recognize and negotiate a bargain are closely related, however, so even if you get a lower buyer's agency commission by cutting out the agent who finds the bargain, or a cash rebate, you're likely to end up paying more overall for the property. How is saving one or two percent and missing out on five percent, ten percent, or more a good investment? The lowest difference I've made in the last year was over fifteen percent, by CMA of properties sold. That's what a buyer's market will do for you. But you're unlikely to find the agent who makes that kind of difference in your area first time out of the box. The non-exclusive buyer's agency contract lets you give every agent you meet the same chance to earn your business - which means consumers get to force the agents to compete on the basis of who actually does the job!

This makes signing such an agreement a bet the consumer literally cannot lose. In fact, the more such bets the consumer makes, the better it's likely to turn out for them. The weaker agents will self-select out of the process in most cases. What this means in plain every day talk is they won't exert themselves because they know they're not likely to end up with the business. The consumer who signs ten non-exclusive buyer's agency contracts might have, at most, two or three agents who actually work for the business. The others simply won't. They know they can't compete, and simply won't bother. Actually, most of them won't sign the non-exclusive agreement. They'll try to talk you into an exclusive agreement, but don't let them. For the consumer's part, they can simply keep looking for agents until they find the ones that will compete.

Indeed, it's only when signing an exclusive contract that consumers are making a bet they can lose. Not only can they, they are extremely likely to. Remember the ten non-exclusive contracts you signed in the last paragraph, out of which you got two agents who were willing to actually do the work? Look at that the other way around. Eight out of ten didn't, and the real proportion is probably higher than that. So if you sign an exclusive buyer's agency contract, those are the kind of odds you're facing. Eighty percent or more chance you're locking your business up with an agent who won't really do the most important parts of the job. I get calls from these people's victims all the time, asking me to work for them without any chance of getting paid. My answer is no. I'm perfectly willing to compete for the business, but I'm not willing to work without pay so that someone else can get paid. I'm eager to make the bet that I can out-compete other buyer's agents, but if someone else has already been awarded the gold medal, I'm not going to so much as head for the stadium. How hard do you think the person who has been pre-emptively awarded that gold medal is likely to really work for you? If the answer you got is, "not very" then you understand why you shouldn't sign an exclusive agency agreement. But buyer's agency is one competition where "time in the competition" doesn't control who wins. If you don't award that gold medal before the competition is held, good agents will compete, and they'll work all the harder because if they don't measure up, you can always find some more agents who will. Isn't that what you really want as a consumer?

Caveat Emptor

Article UPDATED here

The answer depends upon what they're doing for you.

If you contact them because they're the listing agent for a property, they shouldn't ask you to sign an agreement at all. They have a fiduciary duty to that seller to get the property sold. If the act of asking to sign the agreement causes you not to buy, or not to view the property - something that cannot be known in advance - they have violated fiduciary duty. They've just caused potential buyers to be discouraged. That's as hard a violation as it gets. It doesn't stop a lot of agents, as I've written before about Tina Teaser and Sherrie Shark, but it is a straightforward, no nonsense, no kidding violation of fiduciary duty. You don't want to do Dual Agency anyway, as I've written on many occasions. There are many reasons why you want a buyer's agent representing your interests, especially if it's a new development. There are all sorts of issues that will bite people without buyer's agents ten to a hundred times or more frequently. Issues that arise directly because of Buyer's who don't want buyer's agents are about nine of the top ten reasons why buyers get burned, including the top three or four.

If all an agent is doing is setting up an internet gateway, or search, that's no big deal either. MLS will allow me to have something like 120 client gateways at a time. I've never had half that at any one time. I can't serve that many people. I can only work with an absolute maximum of about six sets of full service buyers at a time - and that's if I don't have any listings. A smart agent will quite happily set up and internet gateway on the speculation of getting a transaction out of it. I'll call or email these folks periodically to see if they want to look at anything, or anything has caught their fancy. I'm not investing any significant time with them; they don't count against my (self-imposed) limit of six clients at a time. In fact, I make a lot more per hour with these clients than any others. Indeed, those of these folk who only want me for the paperwork will ask me for a contract that says I will rebate part of any buyer's agency commission at that point in time. If my liability is less and I'm not putting in anything like the time I need to for a full service client, I'm perfectly willing to work for a lot less money.

If you come to me to put an offer in, I don't need a contract there, either. The purchase contract specifies that I'm the buyer's agent - I don't need another one. Some agents use this moment as an opportunity to "lock up the business" by insisting people who want to make an offer through them sign an exclusive buyer's agency contract, but there is precisely zero need for any kind of agency contract at that point in time. The agency is created for this offer by the purchase contract itself, either explicitly (as in the California standard contract) or implicitly, by agency law. There's absolutely nothing wrong, ever, with an agent who asks you to sign a non-exclusive buyer's agency contract. You can walk away from a non-exclusive agency agreement at any time, but an exclusive agency contract requires that you stick with them even if this one falls apart. Suppose they do something to sabotage the transaction? It happens.

It's a rare client who requires something I have to pay for, but It does happen. Mostly, it's fresh foreclosure lists when it does happen. I haven't been subscribing consistently, as right now the well-aged ones are mostly better, but I know the ones that work for when I do have clients that want them. I can get them starting that day, and going back. I don't charge for this - but that's the only time I ask for an exclusive buyer's agency contract. Not only am I putting out a significant stream of money for their benefit, these people do count against the limit of six clients at a time I can work with - they count double! Working the fresh foreclosure lists is a lot more demanding than anything else I do, because it's all time critical. I can't put it off a day, and often not even an hour, even if there's something else going on with another client - it's got to be done NOW, and there are a lot of misses for every hit. It's kind of like been married to the ultimate high maintenance spouse. If that spouse is not willing to give just as much, nobody rational wants any part of that relationship. If you want an agent to put in that kind of work, you're going to have to commit to that agency relationship.

But the one common time a good agent will ask for a buyer's agency contract is when someone wants a real full service package. Property scouting is far too time intensive to do on speculation that you might want to do the transaction with me after I invest the time to find a real bargain. The agent has to invest usually weeks of time up front, culling out the bad prospects in favor of the better ones. This is, by the way, far and away the hardest work of the transaction, and the work that gets done has most of the liability of the process. A good agent - one who knows how good he or she is - will still only ask for a non-exclusive contract here. I'm perfectly willing to bet that I'm going to find you something you want to buy, and if I don't, then you owe me nothing. I'm eager to make that bet, as a matter of fact. I am not frightened of people who want to work with multiple agents. I know that the vast majority of them won't get out of their offices to go look. But if I do find something you want to buy - I take the time and do the work, and my experience and training spots a superior value - then I'm not going to countenance you then taking the transaction to some other agent. Kind of like a mechanic who gets the problem fixed - and then you decide to take the car to another mechanic. You're still going to have to pay the mechanic who actually solved your problem, and you're still going to have to pay the agent who finds the bargain. You don't think the agent did anything to deserve getting paid? Then don't buy that bargain property they found for you! But if you want to buy the property they found, then there is, by obvious fact, something particularly valuable, both about their property and about their work in finding it! If that were not the case, you wouldn't want to buy it.

So it's reasonable to be asked to sign a non-exclusive buyer's agency contract. As a matter of fact, agents that actually do this work have learned that if they don't get you to sign it, a very large percentage of people will then go to a discounter or rebate house, or even just buy the property without an agent, thinking they'll get a better bargain that way. Not only will you get a better bargain through the agent who understands the property and the market, that agent can then stay in business for the next time you, your friends, or your family wants to buy real estate. That's a win-win. But trying to cut out the agent who found the bargain is a lose-lose. You'll get a cookie cutter transaction from someone who doesn't understand the market and can't bargain as well - you'll end up paying more, and if there comes a point where you should walk away, they won't know it and won't tell you if they do.

Caveat Emptor

Article UPDATED here

I know I've been predicting this for eighteen months, first from a trendline and later from watching the local market in action. I was hoping to see the recovery start last summer but that was when the national media finally picked up on how bad things had gotten. When masses of people are hearing gloom and doom daily, they're not likely to take out mortgages to buy real estate.

But in the last month, things have turned around so much it's actually a little scary.

The last three properties I've been involved in negotiations for all had bidding wars going on. Right now, I'm waiting to hear back from a house my clients have put in an offer on. I said an offer, but it's really more like a bid, because I know of thirteen competing offers on the property. It has been on the market for precisely six days as of right now, and today was the deadline for a "best and highest" from everybody. My clients offered almost ten percent over the asking price. At that price, I'm still seeing excellent value and if we get it, everybody will be happy. If we don't, there are still other properties they'll be quite happy with. But previous to that, I helped other agents with four and five offers competing against their client, and that was only in the last two weeks.

Even the kind of buyer we're getting has changed. I don't know where they all came from, but offers with twenty and thirty percent down payment are coming out of the woodwork. Maybe they're all investors that sold at the top of the market and think the time is right to jump back in. Maybe they're representing foreign investors looking to buy at a favorable time. Suddenly, I've got a couple sets of clients with more of a down payment, on average, than I've seen since I've been in the business.

Now, before all of the desperate overpriced sellers and their listing agents start singing "Hallelujah!", these properties are special cases. They're in desirable locales, mostly with good schools, they're attractive properties, and they've been priced correctly from day one. Actually, the one that saw the best bidding action was somewhat under-priced to start with. Indeed, there's a property on the same block going through what has been the story for the past two years: Start overpriced, come down slowly bit by bit, until nine months or a year later someone like me notices there's value there and they've been on the market long enough that they're likely desperate enough to deal, and my clients come in and get it for twenty percent below what they might have gotten if they priced it correctly in the first place. It's a story that's been played out thousands of times here locally. I can sing this hymn verbatim with my eyes closed and no accompaniment.

But what happened is that these owners and their agents came out and listed the properties for just noticeably less than market on the first day. Exactly like I keep telling people, it generated enough traffic to more than bid the price back up and make up for whatever underpricing they had done. Furthermore, the properties are coming off the market and going into escrow within a very short time - a week or two, instead of several months. No carrying costs of thousands of dollars per month, or only very small ones. No trying to find the money for multiple mortgages, or rent plus the mortgage on the property they're selling. No stress of wondering when it's going to sell. Multiple offers came in from quality buyers with significant down payments and plenty of income to justify the loan. No stated income 100 percent financing, 2/28s, or negative amortization here. Sustainable, longer term loans are the order of the day - and A paper, too.

So far, this is a limited phenomenon, even if it is expanding. The sellers and their agents are still having to make the correct moves to get this to happen. Omit one of the critical items (correct price and attractiveness), and the property will still sit on the market. Mind you, bargain properties have always been able to move, even at the nadir of the market, but now more properties are moving more quickly, and the ones that stand out for value are seeing multiple highly competitive offers very quickly, something we weren't seeing the last couple of years.

So even though the headlines today are screaming that housing prices fell 13.5% from February 2007 to February 2008, those are sales which started six weeks or so earlier than that, due to the refinance mini-boom we had. The actual experience I and other agents are having out in the market these last couple of weeks has been painting a very different picture. Yes, it's all anecdotal, but if you put enough anecdotes together, you get a trend - and it seems like every agent I'm talking to is reporting the same thing.

There's a huge amount of pent-up demand for housing locally. I've been noticing people talking about holding off for better than two years now. Waiting for the market to show signs of bottoming out. Well, it's showing signs of the bottom having been sometime in the past now. I did call market top almost a year before the local Association of Realtors admitted it, and the current consensus by local economists has that I only missed it by a month. I just made appointments to see some properties with some clients on Saturday, and three out of three agents where the property wasn't vacant told me they're in counteroffers right now, and they may be in escrow by then. I told them to call my cell if that was the case, and we'd pass the property by.

For those who have been holding off, we have hit bottom. I've been saying all along the economic support was there for $350,000 to $400,000 starter level single family residences, and it now appears that has been borne out. If there are still a few thousand sellers whose property is sitting on the market because they're in denial of the decline, that's their problem. The people who are serious about selling, properties are not only selling, but they're seeing bidding wars like I haven't seen in five years. From this point on, the longer you wait, the higher the price you're likely to pay. When the word gets around, and the kind of pent-up demand that has been keeping the market depressed these last two years plus gets ready to strike, expect to see a significant recovery in prices before the media starts reporting a trend.

Caveat Emptor

Several times a month I get calls and emails. Sometimes, it's even people stopping in. "I've heard you're good at finding bargains." Well, yes I am. "Please tell me the addresses of some bargains so I can drive by."

Well, facts are cheap in the age of transparency. I will quite joyously look at stuff on the internet, even set up an MLS Gateway or feed for someone on the speculation that they'll come back to me later for a showing or to make an offer. Setting up such a feed takes very little time, and about the expertise of an eleven year old that has learned to fill out internet forms. Oh, and MLS access. Can't forget MLS access. We've got a brand new system that lets me custom define the search area now - I can click the corners of a search area I want on a map, and it will return only the results within that area. It's a really neat feature, and using it takes about ten seconds of training, and maybe ten minutes to do the whole thing. I'll happily do it as the possible prelude to a limited service commission, and even if the prospects end up using another agent, I've risked and lost nothing significant. No agency contract required, or even asked. I've even done it for folks who didn't want to give me their phone numbers so I could follow up. If they come back to make an offer, my compensation will be set in the offer paperwork.

But good analysis, experience, and expertise are not free - or even cheap. Furthermore, my time is valuable - and you're asking for a lot of it. I might find three or even four real potential bargains when I spend a full day searching - and that's in a target rich environment. Furthermore, I've got a lot of experience and a lot of knowledge to draw upon that many agents don't, and I look at a lot of properties. I can winnow 100 listings on the internet to twenty possibles in about an hour, go through them in about five hours, of which I might show a client who has made the commitment to work with me six, with usually one or two standouts among those. The rest will have something that to experienced, knowledgeable eyes, will have reasons why it is not a viable choice for these particular clients. Maybe it's overpriced and I have reason to believe the owner won't negotiate. Maybe the location or surroundings have an unsolvable issue - one reason you can only tell a bargain by getting out of the office and looking at property. Given the area I work, most often there's something going on with the property itself that's not worth what it's going to cost to fix. I love the older East County suburbs of San Diego - they are good places to live, and when you consider what you get for what you spend, they blow the rest of the county away as far as value. Furthermore, I think the conditions are getting right for the housing buzz to rediscover them. But anytime you consider structures that mostly vary from thirty to eighty years old, you have to watch for maintenance and repair issues, and it really helps to know what you're looking for. Furthermore, it is always necessary to understand the market the property is being listed in. The only way you can do that is by having been in the properties that have sold recently, and the only way you can do that is to go out and look at them while they are still "for sale" because it's not likely the new owners will let you in after it sells.

What I'm trying to say is that the fact of the existence of a listing on MLS is cheap - basically free. You want me to send you addresses of properties for sale meeting certain criteria, that's easy and I'm happy to do it, no strings attached. Anything like that, that can be done by automated computer search, is not a part of what I'm really offering for sale, and I'll give it away on the speculation that sometimes, I'll make something when that person comes back to me to write an offer.

But the ability to recognize a bargain and equally important, what is not - that's the largest part of what I'm really selling as a buyer's agent. Winnowing those 100 listings to a few standout values is a valuable skill. If you don't agree with this, you shouldn't need or want that skill, and you shouldn't be talking to an agent about finding bargains. For people that want me to use that skill, there is a fee. This is precisely equivalent to the difference between a computer programmer giving away some old boilerplate code for free - but they want to be paid for a brand new custom program. This requires all of the same things: Expertise, analysis, experience, knowledge of the area and the current market, the time it takes me to build, run, and debug the bargain-finding program in consultation with the client, and everything else that's involved. The mental ability to do those things did not suddenly appear one morning and it does not maintain itself. Furthermore, the liability for doing this if I make a mistake is huge. Agent mistakes cannot be undone by simply re-writing a few lines of code to work correctly, and having the ability to sue me and my insurance company if I do make that mistake is a huge benefit to the client in and of itself. If they make the mistake, they're stuck - and to be blunt, the probability of a non-professional making that mistake is both much larger than most home buyers believe and many times the probability that I will make that mistake - while if I make that mistake, they can get a lawyer and sue me for everything they might have lost, plus court costs, plus other damages ad nauseum. The idea isn't to sue, but rather not to make that costly mistake in the first place. An amazingly large percentage of buyers make mistakes of a magnitude that I find incomprehensible, all in the name of saving a fraction of what the mistake costs.

The ability to recognize a bargain property is a valuable skill. If you disagree with this, what reason do you have for looking at properties before you buy them? Why don't you simply pick out the cheapest property that meets your specifications on MLS, make an offer, come to an agreement, and pay the price, all sight unseen? Remember, you're claiming that the ability to recognize a bargain does not have value. Why would you want to take the time to look if there's no value in it? When there are ten thousand identical items in a warehouse or on the grocery store shelves, you grab one and get on with your life. You might look at the label to make certain it was manufactured to fill the need you have. You don't bother opening the box - if it's defective, you can just exchange it for another. They're all interchangeable.

But that isn't the case even on everything in the grocery stone. There's a reason they wrap meat in transparent plastic - so you can see the piece of meat you're buying. To view the cut, how much fat is on it, how large a piece of meat it really is, how fresh it is - in short, the value of the meat. If you know what good meat looks like, you've seen people that have no clue as to what to look for choosing crummy meat that you've just rejected. It happens most of the times when I'm at the meat counter, as a matter of fact. It's why the grocery stores keep putting out bad cuts of bad meat. Somebody who doesn't know any better will buy it.

The same thing happens in real estate. I have dealt with people who bought into just about every bad situation imaginable - and now they're trying to unload the results of that onto someone else at a premium price. When I list a property, it's even my job to help them do so. But a significant percentage wouldn't even be selling if they had made the right choice in the first place!

The point I'm trying to make is this: Because the ability to find and recognize a bargain is a valuable skill, if you want it, you're going to pay for it. You can either pay me consultant rates by the hour, or you can pay me by doing the transaction with me. In either case, you're going to sign a contract that spells out exactly what that pay is. If you want bargains I've already found, those are valuable also. I can use the basic information as a lure to attract other people willing to work with me. If you buy it and you are not my client, the simple physical reality is that it's not available for people who are my clients. You got the benefit of my expertise without paying for it - and those who are willing to pay for it didn't. Contrary to something I read by a listing agent the other day, I have no responsibility to market the property - I haven't accepted agency, sub-agency, or anything else. When I'm acting as a buyer's agent, I have no obligation to any owner to sell their property. And until some prospective buyers sign my agency contract, I have no responsibility to them as far as locating and evaluating property. So if they're not going to sign my contract - and a non-exclusive agreement is all either one of us needs - I have no responsibility to give them the benefits of my expertise for free, any more than a lawyer or a computer programmer does. As a matter of fact, that non-exclusive contract is me betting that I will find something sufficiently above and beyond the market that they want to buy it - because if they don't buy it, the contract says I don't make anything. It's me betting that my expertise will cause them to want to stick with me - because if it doesn't or they don't want to, there's no reason they have to. If that bargain I find isn't a bargain, they can walk away with no obligations. But if it is a bargain, they use me as buyer's agent. The only reason to refuse to sign a non-exclusive agency contract is if you're not willing to work with the agent who brings you the bargain.

And that describes most of those who call or email. When asked to sign my contract, they'll say, "I'm working with someone." To which the answer is, "No, you're not. They're not doing the job. If they were, you wouldn't have come to me. What you are asking for is no different than asking one lawyer to do for free what you're paying another lawyer to do, or asking one computer programmer to do for free what you're paying someone else for. If you didn't think that what I do was somehow valuable to you, you wouldn't have contacted me and we'd both be doing something else right now. So your choice is this: Do you want to stick with someone who isn't doing the job, or do you want to work with someone who will get the job done, and will give you permission to fire him if he doesn't?"

Loyalty has a place. It's perfectly fine to give your Uncle Harry a chance to earn your business. But if Uncle Harry gives you his business card and tells you to call him when you've found the property you want to buy (or a property you may want to buy), he hasn't earned your business. In fact, he's told you he's unworthy of it. That's not an agent. That's a transaction coordinator, which most agents will charge you extra for so that they can go out prospecting and gladhanding for other business while the transaction coordinator does paperwork - the only real work their office does. But full service should be a lot more than a transaction coordinator doing paperwork in the office - and the office should pay for that coordinator out of what they make, not charge you extra for it. In this scenario, what expertise are you really getting? The ability to fill out all the paperwork on a checklist? It is important - but is it worth the thousands of dollars to you? Or is the ability to find you a bargain while discarding properties that aren't bargains what's really worth what a buyer's agent makes?

If you want a bargain on real estate, work with the buyer's agent who finds bargains you want to buy. The principle is the same one that says if you want the ditch Charlie digs, you pay Charlie to dig a ditch, not George. If you want the haircut Jane gives, you go to Jane's shop for her haircut - not down the street to Mary. And if John the mechanic isn't fixing your car correctly, you don't pay John and then ask Dave to do the work for free. You take your car away from John and take it down to Dave, and pay him for the work he does. It doesn't matter that John's mechanic shop has nifty uniforms, a funny advertising campaign, or anything else other than the mechanic who fixes your car so it runs right, which they don't. Dave fixes your car so that it runs right, you pay Dave, and you go back to Dave the next time it breaks down. If the funny advertising campaign is worth giving John some money, that's fine. But you're still going to have to pay Dave to fix your car, and he's going to want you to sign his service contract before he does any real work. The same thing applies to when you want to buy real estate. If Uncle Harry isn't doing the job you need him to do, you fire Uncle Harry and start working with someone else. Don't tell me you want me to find bargains for you but you're working with Uncle Harry. Get Uncle Harry to find you the bargains. If he's not doing that, your choice is really very simple: Suffer with Uncle Harry, or start working with someone who will do the job that he isn't.

When I'm looking to buy professional services, I don't look for the office with the lawyer with the neat ad campaign, computer programmers who act friendliest, or the doctor who talks about how to draw customers into their office. I look for the office who will demonstrate their expertise, keep me there by demonstrating their knowledge of the expertise I need, explain everything I need to know (preferably before I need to know it), advise me as to what my best choices are and the consequences of those choices. I want the office that finds other, better alternatives and offers them to me. That's sanity. That's what's valuable to me.

The same principle applies to real estate. If you want to do the searching yourself, that's fine. Here's your MLS gateway, call me when something pops up that you want me to get involved in. But if you want real expertise on the buyer's side of the transaction, that gateway is not what you want and you're going to have to agree to pay the agent who gives it to you. Because it is valuable, and if you didn't think it was valuable, you wouldn't be asking for it. I am not cheap - no good agent is. But I'm a lot less expensive than using a cheap agent.

Caveat Emptor

Article UPDATED here

People who talk about learning skills tend to discuss a model for learning called the conscious competence learning model.

It starts with unconscious incompetence. You not only don't know how to do something, you don't realize that it is a skill that requires learning. "Anyone can do that", people at this stage of learning will think, despite the fact that they never have. They have, in fact, no basis for comparison. Some things are as simple as tripping over your own feet, but most aren't.

The next stage is the conscious incompetent. You still don't know how to do whatever it is, but at least you know that you don't know how. Maybe you've tried and fallen flat upon your face, maybe it's something that you instinctively know is beyond your training or ability. Back when I worked for the FAA and people would find out what I did for a living, it's was amusing to see how many people would immediately volunteer that they couldn't have done my job. For some reason, I don't get that now, despite the fact that the skills of being a good real estate agent are at least as difficult to acquire.

The next stage up the ladder is the conscious competent. Some preparation, supervision, a few botched tries, and then you do it right without anyone having to step in. But you've got to think - really pay attention, take your time and be careful about what you're doing.

The final stage is unconscious competence, where the skill becomes second nature. You're good at whatever it is. Most people over the age of two are at this stage as far as the skill of walking is concerned. They do it without considering how to move the muscles that make the legs and hips move. They walk whatever distance they need to without even paying attention. And here's an important point: Sometimes by not paying attention, people step on something or trip over something and get seriously hurt. They walk in front of a semi, or trip over the coffee table and fall through a window or just step on an oily patch that causes their feet to go out from under them and hit the back of their skull on the pavement.

It is my contention that nobody is up to unconscious competence when it comes to real estate.

In fact, if you think you've achieved unconscious competence at most of the core skills of real estate, you're almost certainly stuck on the first level.

First off, real estate isn't one skill. It's at least half a dozen. The average client doesn't care about how good we are at attracting other clients. They care if we interact with them incorrectly, but I have yet to hear of a prospective client saying, "I want to sign up with someone who's great at prospecting for leads." They'll say highly correlated things like "I want to work with a top producer," or "I want to work with (insert heavily advertised brand here)" but they really don't care about lead prospecting competence per se. Yet this is probably the most discussed skill set on real estate websites. I don't understand why other agents think this is fascinating to clients, but by how often they talk about it, they evidently do. Maybe because it's one of the big focal points for every office - if you don't attract enough business, you're not going to be in the business. Nonetheless, clients don't really care about this one. You could be the worst prospector in the business, but somehow get enough clients to stay in business, and as long as you're good at everything else, the clients are going to be happy.

Then there are the interpersonal skills that most people have in fact developed by the time they're adults. Hello, how are you? Nice day, and so on from there until we get to the pinnacle of those skills, handling people so well that they never realize they've been handled. People care about this, and they know they care. Don't believe me? Whatever you do for a living, try calling your next prospect something nasty. You can't do real estate without these skills, but not only are they not the central job function for real estate licensees, but clients actually do not want somebody who is obviously too good at this. Why? They like the basic skills, but they don't like being played by sales persons, something that's happened to basically everyone by the time they're ready to buy real estate or get a loan. Nonetheless, many people choose agents and loan officers based upon feeling "a connection." *Buzz*. Thank you for playing. If a prospective agent isn't competent at the interpersonal dance, that's one thing. But 95% of all agents are quite good at it, and it doesn't mean a darned thing about their competence at real estate. Anybody with any competence at interpersonal skills can talk a good game in the office. They could be ready to crack that license prep course any day - not actually know a thing about real estate yet - and still manage to generate "a connection."

Then there's the paperwork and legal CYA stuff. I could name names of nationwide real estate firms that take months to cover these skills with new licensees, and brag about their training based upon that. The obvious snark that occurs to me every time I see one of their advertisements is, "How is being able to avoid legal judgments when you've hosed your client a virtue in the client's eyes?" In other words, it blows my mind that they actually brag about it to clients. To be fair, this skill set is a real part of the career, but I'd like to see more emphasis upon actually doing a good job for the client, not disclosing everything in small print, hidden among 500 other sheets of paper at final document signing. There is stuff here that you're going to see on every transaction, or almost every transaction, but pretty much every real estate transaction is going to have something going on that is different from some hypothetical "typical" transaction, and if you aren't thinking about what you're doing, it's very likely you'll miss something important. Even if you are thinking carefully, you might miss something. People successfully sue agents every day, and the defendants are not all incompetent. This isn't a skill that gets clients a better bargain very often, and perfect paperwork doesn't mean the client didn't buy a vampire property, that they got a good bargain even if they didn't buy a vampire, that they sold for a good price in a timely fashion, or anything else except that the paperwork is perfect. The paperwork will usually tell them if they are careful enough, but "careful enough" can be "reading documents for forty-six hours straight at final signing," and even then, it's pointless unless they've got the willpower to say no to the transaction at the last moment like that. Nonetheless, bad paperwork is what the attorneys of former clients find easiest to pin on real estate agents, and almost every judgment against an agent has "bad paperwork" behind it as the evidence. Paperwork is a necessary skill for agents, but it it's only evidence of a good or bad job - it isn't the good job or bad job itself.

Negotiation is a critical skill for agents, and many do actually study it. But for every agent I encounter who understands principles of negotiation, another is completely clueless and a third thinks negotiation is where you tell the other side everything about how the transaction is going to be. You should see some of the contracts my buyer clients have been told to sign - take it or leave it - in the middle of the strongest buyer's market of the last fifteen years. And these folks wonder why the property didn't sell. Actually, I'll bet that if you work with buyers, you wouldn't be surprised. I just randomly pulled up twenty listings in the zip code my office is in - and all but two had violations of RESPA right in the listing. Bare, baldfaced violations of RESPA - steering is illegal, no matter the form it takes. It's not only setting you up for a lawsuit, it's setting your client up for a lawsuit. If DRE wanted to put at least half the agents and brokerages in California out of business over this one point, I think it would be pretty trivial. But I digress - this paragraph is about negotiation. Everything about the transaction is negotiable, and refusing to negotiate anything can be grounds for losing an excellent offer. Price is not an independent variable, and it's not the most important of a series of completely independent points. It may be the central issue of a negotiation, but it influences everything else about the negotiation, and is in turn influenced by all those other factors. What does each side need, what do they want, what would they settle for, and what are they willing to give up in order to get it? If the answer to this question is "nothing," then they must not want it very badly! There are many factors other than money, but they all inter-relate, and the person who can figure out something the other side wants that isn't money can use that to make both sides happier. Negotiation isn't just faxing offers back and forth, and in the context of real estate, it's a skill that takes a significant amount of practice as well as study to maintain. Furthermore, more than any other skill involved in real estate, negotiation never gets to be so strong a skill that you can do a good job without thinking about it. For one thing, on the other side of that negotiation is another agent who does the same thing. I always presume the other side is better at it than I am to start with. Evidence quite often proves this presumption to be nonsense, but you don't hose your client in negotiations by paying attention and being careful. Nor is there any metric for negotiation skills except how good the deal you get one particular client is, and since every property is unique, often the client has no real idea whether you should be nominated for negotiator of the year or pilloried for incompetence. I haven't heard of anybody being sued for poor or non-existent negotiation skills. I have heard of buyer's agents getting beat up by their brokers for doing too good of a job - lowering the commission.

The next skill is property evaluation. This is more important to buyer's agents than listing agents, but listing agents can benefit by knowing it as well. It breaks into several skill facets, each of which is a skill that requires instruction and practice. The most important facet of this is the ability to spot defects that are going to cost the client money - actual structural problems. Ask yourself: Is the fact that the agent tells you they're not an inspector going to make you feel better about buying a property where the roof caves in three weeks later? Is that going to absolve the agent of blame in your mind? Don't expect your agent to note everything that a contractor or inspector or engineer will - but they should tell you about everything they see, and they should see most of it, and it should come as part of a full service package, so you don't have to spend $300 getting an inspector out, or $600 for an engineer, not to mention put a deposit into escrow where you may not get it back for quite some time if the seller wants to be obstinate. Furthermore, without a good agent who will tell you this stuff, you might have to do this multiple times. Instead, with a good agent you know about the problem before you consider putting an offer in - and instead of a costly drama that eats your life, you walk away unscathed and find another property that actually suits you. I just helped a client cross four properties off their list today, all of which would have sent him through that cycle. Decorator's eye is another facet of this - helping the client stage a property - or helping them see the potential of a property despite poor staging. Rehabber's eye is related, yet a distinct sub-skill - helping the client see the property with a few changes, usually not very expensive ones. Location evaluation: How does the location of the property fit with the client's agenda? Schools, traffic, shopping, environmental noise and other factors. Sometimes, the client doesn't know themselves, as I have discovered upon many occasions. All of these are part of the core job function, all are skills that must be developed and practiced if you want them. They are also critical to how happy a client is going to be with an agent's work - particularly if you're working as a buyer's agent, as I usually am. But it seems that this whole group of critical skills gets neglected in favor of "Which property has one feature that makes Mrs. Client swoon with delight?" This approach is conceptually similar to "throw enough mud at the wall and eventually some will stick." Out of sheer frustration if nothing else. But I have yet to see a single brokerage train their clients for any of this entire group of skills. Indeed, most of the major chains seem to be doing their best to pretend these are not part of an agent's function. Here's the thing: I can get people to buy and sell properties without these skills, and never get sued successfully over them. But then it's completely hit or miss as to whether the client will really be happy with the property - and who do you think is going to get the blame if they're not? I had some clients insist upon buying property on the corner of two moderately busy streets last year - and I made certain to remind them of the traffic and noise throughout the transaction - giving them encouragement to change their mind if they weren't certain they were going to be happy with it. But I'll bet you a nickel they call me when it's time to sell it because these opportunities to change their mind also generated a real buy-in to the situation for them.

Marketing skill is more critical for listing agents, but buyer's agents need to know marketing as well. How do you get the attention of someone who will want to buy this property? How do you persuade them it's worth making an offer on? What are the available venues, and what actually works? Theory says that there is one buyer out there who will pay more for the property than anyone else - how do you get their attention or that of someone close to them? Get them to come look, get them to see value, get them to make an offer you're happy to accept, get them to carry through on the purchase? On the buyer's side, you've got to be able to counter the fecal matter - and I can count on the fingers of one hand all the properties I've been in the last year where I didn't find some obvious fecal matter in the way it was represented, or the things that the listing agent said in order to get it sold. (FYI: This fecal matter has an ugly habit of biting the disseminators later on.)

Did you think I was leaving market knowledge out? Here it is. How does the property compare to everything else around it? What's the general market for real estate like in the area? What else has sold lately, for how much, and what was it really like? It's too late now to get a viewing of all the comparables that sold within the last few months - the lock box is gone, the new owners have moved in, they're done with all that transactional nonsense, and the vast majority sure as heck aren't going to let random strangers poke around their new house. How many agents get off their backside, get into their car, go out and look, take notes, and remember? Most of the agents I've done business with never leave the office except for an actual showing generated by clients driving around, or surfing the internet, or even reading the "for sale" ads. That is so backwards I have difficulty articulating precisely how messed up it is. A good agent knows the market, knows the comparables for sale, and knows how a given property compares. They might not have been in every single one, but they've been in enough for a good comparison. Patronizing an agent who hasn't done this, who doesn't make a habit of this, is like having half an agent - at most. How in the nine billion names of god are you going to help a client price a listing properly if you haven't looked at the competition? How in the name of ultimate evil are you going to know a property is or isn't worth making an offer on, and for how much? Yet people will do put up with this nonsense because they don't know any better. This is probably the agent skill that needs the most practice of all, and decays the most quickly if not practiced. There's this one neighborhood about three miles from my office that I haven't been into for almost three months, and I'm terrified I'm going to get a call for it before I can remedy the situation. There's nothing wrong with clients suggesting properties, and I firmly believe that no matter how messed up the property is, they should be given the opportunity to see any property that catches their eye - but doing that and only that takes zero advantage of the one thing good agents have that bad ones (and 99.999% of the general public) don't - precisely this expertise. It is this expertise that makes more difference than any other skill set in results for clients - whether selling or buying. You can't recognize either a bargain or the opposite without the context to put it in. You can't price a property right without knowing the competing properties and their relative strengths and weaknesses. But all too many people, both agents and general public, discount this difficult to acquire skill, thinking, "Anybody can do that!" Question: Which learning category does this place them into?

I don't know how many people I've met that seem proud to be stuck in unconscious incompetence. But just because you don't recognize the skill doesn't mean it doesn't exist, it doesn't mean that its lack won't bite you, and it most assuredly does not mean that its presence in others won't hurt you. For real estate transactions, to the tune of thousands of dollars at a minimum. Knowledge springs, not from the mental impenetrability of "Anyone can do that!", but rather from the admission that perhaps you might have something to learn.

Caveat Emptor

Article UPDATED here

One of the things I keep telling folks about the real estate market, whatever area you live in, is that it is controlled by the loan market. If you want to understand where real estate in general is headed, look at the loan market and the financial markets that generate them.

Right now, the loan markets are in full panic mode. In the last week or so, all non-governmentally guaranteed loans for more than 95% of value have disappeared. This means that VA and FHA are all that is left above 95% loan to value ratio, and you've pretty much got to be A paper full documentation to get 95%. Since 100% Loan to Value ratio financing has been the universal financing vehicle for borrowers for the past several years, this constricts their choices. Comparatively few people have money they could use for a down payment if they wanted to. Not everybody qualifies VA or FHA. VA requires military service, and FHA has loan limits that aren't going away. As I'm writing this, we're still waiting for hard numbers on what increased loan limits will be, but I strongly doubt that they are going to be raised as high as most people seem to be assuming that they will.

Furthermore, all of the other loan programs to get 100% loan financing have gone away, and all of the supplemental programs to extend buyers' ability to qualify have rather sharp income limits, and those income limits are not going up at all. They actually effect San Diego less than most areas, but even here, they constrict the ability of buyers to qualify. Both the mortgage credit certificateand all of the municipal first time buyers programs have income limits that mean people can't make over a certain amount of income - and even if they have no other bills they can't qualify for the loan on property over a certain loan amount, because even if they have no other bills, their debt to income ratio will be too high. You can't cheat on this - all of these programs require full documentation of income. Above about $420,000, even if they conforming limit goes up, even if the prospective buyers make the maximum amount per year for the program and have no other bills, they won't qualify based upon debt to income ratio.

The moral of this story is simple: If you want to sell your property above a given price, you're not competing for first time buyers. You are competing for people who have sold (or are about to sell) their property for a profit and are now ready to move up. No matter what the conforming loan limit is or becomes in your area, if the prospective buyers don't qualify for the necessary loan based upon debt to income ratio, they can't buy.

Any time you raise the price you want to sell by a certain amount, there are people that no longer qualify to buy your property. You have priced them out, and no matter how much they might want to buy your property, the fact remains that they cannot.

As for buyers making the median family income in San Diego of $72,100, their limit on 100% financing is about $270,000. So unless they have a significant down payment, a family making $6000 per month is looking at a condominium. Just a cold hard fact.

There will always be buyers around the edges who are exceptions. People who have saved or inherited a substantial down payment in defiance of demographic trends. But those are the exceptions, and for every one of them, you have a dozen of more unqualified buyers engaged in wishful thinking. I just spent the most of the morning unsuccessfully looking for a stated income loan to save the home of a guy who called me out of the blue this morning. At this point, I'm 99% certain there's nothing I can do, because the loan program to help him doesn't exist today. Six months ago it would have been a slam-dunk - there's plenty of equity. Before you ask me what relevance this has to buying and selling, I'm going to answer: Every time a lending program goes away, there go some buyers who otherwise could have qualified. Right now, there is no stated income. Doesn't bother me much, as 95% or more of my clients have always been full doc, but for those who are used to the opposite ratio, it's the apocalypse. Ditto for sellers and listing agents who don't understand what it takes to qualify, and who price their properties as if the loan market for two years ago was still going gangbusters. When the property sits for months because the people who might buy can't qualify for that big of a loan, that's a problem.

With all this said, the people who do have the cash or the ability to qualify for a loan are in the driver's seat now. You may be getting tired of hearing this from me, but veterans can qualify for about 20% more loan than someone without military service for the same income. People with 5% or more down are in an even stronger situation, and people who have both things going for them have an incredible amount of negotiating leverage. When the loan market will approve anyone who can fog a mirror, your competition is everyone who can fog a mirror. When the loan market wants to see guarantees and cold hard cash going into the property in the form of a down payment, your competition is, by comparison, non-existent.

Caveat Emptor

Article UPDATED here