Buying and Selling: June 2008 Archives

My general rule of thumb is "Remodel for your own enjoyment. If you're lucky, you'll get some of your money back when you sell." The remodeling industry has made a very large amount of money seducing people into believing they will recoup their investment, or more than their investment. But as you can see here, it's a rare remodeling project that returns more than the cost. Therefore, don't remodel with the idea of making a profit, because you won't. Not a single one of those multipliers is greater than 1.

But there are times when remodeling to sell makes dollars and sense.

Mostly, it's when the existing stuff is so outdated that Ms. Newlywed takes one look and flees in terror from the Uranium Yellow or Art Deco Pink and Blue that's been out of favor since before her mother was born. Maybe it was fine thirty years ago when you bought it, and you've gotten used to it, but now it's fifty years old and you've just never motivated yourself to do anything about it. If the kitchen is straight out of 1955, and the bathrooms look like they were last decorated when Hawaiian kitsch was the hot new fad (memo to the young: Eisenhower was President), it's probably a good idea to do something about that before you try to sell - "Try" being the important word. Because people looking for their dream home aren't interested, and these properties sit on the market. If they eventually sell, they will sell for way below everything else on the market, first because of the visible age, second because it sat on the market and you had to reduce the price further and further while paying carrying costs for months. These are the sorts of homes rehabbers and flippers look for, because they can make a profit on them. If you have the money, why wouldn't you want that profit for yourself?

For buyers, if you're willing to buy something that's solid but older, you can get one heck of a deal as well as being able to remodel at whatever pace you're comfortable with. Truthfully, most folks I talk to have at least some plans for as soon as they buy, anyway. If you're planning to install new kitchen cabinets and granite counters anyway, what does it matter if what's there is ancient or poorly laid out?

The first level of remodeling is to clean, shine, and repair any surfaces that need it. This is a straightforward extension of the "carpet and paint" principle. New paint and carpet are cheap, and have a great return on investment. If the formica is burned or chipped, if the tile is broken, if it's dull and dingy, make it shine. It always amazes me that people with hardwood floors will leave them looking like they haven't been polished since they were laid down in 1932. Strip them, sand them, polish them - before you put the property on the market. It's a lot cheaper than replacing or laying new carpet. They will look beautiful. They will make people want your house. Not everyone, of course, but how many buyers do you need? If you've got something lots of people see as desirable, flaunt it.

Sometimes, there just isn't any choice but to take it to the next level. Stoves built in to the countertop and cooking ovens in the cabinets are so 1958. If there aren't any good matches for marred, gouged, or broken surfaces, you probably want to re-do the whole surface. Keep in mind that labor costs are pretty much a constant, and the largest expense of most jobs. You want to spend $4500 resurfacing the bathroom in plastic and linoleum, or $5800 resurfacing it in Travertine and nice tile? Add a moderately upscale toilet for a couple hundred bucks, and you've got a bathroom that looks like it comes out of Sunset magazine rather than an episode of the Flintstones. Somebody who flees in terror from the latter is likely to be attracted to the former. Even if they don't flee in terror from the Flintstones bathroom, most folks are going to be much more attracted to the Sunset magazine bathroom.

Keep in mind, also, that the new stuff you put in has to go with whatever you're keeping. If you've got a Mediterranean paint scheme, Art Deco counters are not going to work for most prospective buyers, and they're the ones you're trying to please at this point. Just sayin'. The more vanilla you keep it, the fewer prospective buyers you will alienate.

Don't go overboard. It can be a real temptation to spend $25,000 or more on new kitchen appliances, but you're not going to get your money back. Keep in mind that most appliances are personal property, so (in the absence of the contract specifying otherwise) you can take them with you when you go. However, in cases like that it's more common than not that those appliances remaining will be written into any purchase offer, and if you agree to leave them, you have to. If you don't want to leave them, away goes the purchase offer to no beneficial effect. If two-thirds of the gourmet kitchen that attracted a buyer is going away when you move out, it's not likely to do you much good in selling your property. I always ask my buyers why they're willing to pay more for the kitchen when most of it is going away. There are idiots who insist they don't want a buyer's agent, but betting on that is a bet you don't need to make - and quite often lose.

Poor lighting can kill a sale without the buyers ever realizing why. It's dark, it's cavelike, it feels old - they don't want it. Just leaving the drapes open makes a huge difference. Replacing the lighting - particularly if you use CFL so you don't have to necessarily have to rewire for a bigger load - can be very cost effective.

If you're going to remodel anyway, clean up your lines of sight and floor plan if you can. The longer the uninterrupted lines of sight, the bigger the property "feels". The less complex the floor plan, the more open and larger it will feel. If you have to go through three switchbacks to get through the kitchen, that's a bad thing. Separate but connected "areas" are better than room dividers which are in turn better than walls, at least in the public areas of your property. If you're remodeling anyway, fix it.

One of the overlooked and relatively cheap remodels is the closet. Basic closets from fifty years ago are tiny by modern standards. People today have more stuff, and they want places to put it. People who get very interested in modern new kitchens and beautiful new bathrooms can just as easily get turned off by small closets. If they see a standard post-war closet arrangement (a three foot space between walls of two bedrooms, with half going to one bedroom and half to the other), they'll quite likely think that isn't enough closet space. "Next property! These closets are too small." Put a modern closet design in, with shoe holders drawers and cabinets and half size hanging spaces that efficiently use the space, and for most people, that's a horse of a different color. Closets are a bigger concern with more people than most folks give credence to, and they're way cheaper than most other remodels.

In some cases, remodeling may not get your money back, but it may be the difference between selling quickly and not selling for months, if at all. It's very hard to track this sort of information, and harder still to assign a dollar value to it. Keep in mind that a $200,000 mortgage at 6% costs $1000 per month, and property taxes and homeowner's insurance add to that. Not to mention that the longer it's on the market, the more you have to mark the property down in order to sell. At these prices, four months make a difference of about $6000 in carrying costs alone, never mind what you have to mark the property down to interest people in it with over a hundred days on the market!

Remodeling isn't the license to print money it's been portrayed as - except for the remodeling industry. Small budgets are more likely to recover large fractions of what you spend than larger ones. Unless the property is significantly behind the times, remodel for your own enjoyment, because you won't get as much back as you spend.

Caveat Emptor

Article UPDATED here

About a month ago, I wrote Top Ten Reasons Your Home Isn't Selling. It was well received so I thought I'd take it from the buyer's perspective. Once again, I'll try to inject as much humor as I can.

Number 10: The Commute: It never ceases to amaze me the number of people who will commit themselves to living in a neighborhood they've never lived in before without a real evaluation of how to get from there to everywhere else they need to be. Don't just drive from the house to work once when there's no traffic. Try to drive back and forth at the times you'll be driving it every day. Or if you're a public transportation person, figure out what that's going to be like before you're stuck doing it. Take into consideration that the commute is going to get less and less enjoyable as time goes on. Be certain in your own mind that you're going to be okay doing this as often as you have to. If the commute is intolerable, then as certain as gravity you're not going to be living there or not going to be working there. For genius IQ points (or at least subgenius), try the paths you're going to have to take to your other common destinations. Grocery stores, the mall, your Tuesday night class in whatever, the kids' scout meetings. If you have to travel or work in different locations, do those trips also. An good agent should ask about all this, and be aware of the effects. An Evil Agent, will, of course, induce you to buy property where you'll have to sell it - generating more commissions.

Number 9 Beautiful Surfaces: They've just put Travertine and Italian Marble all through the room you want for the nursery! Too bad about that six inch wide crack in the foundation they covered up! Still, it's obviously the house you've got to have! At least until the first time your toddler breaks multiple bones falling on those tiles. Unfortunately, by then it's too late. And just wait until the old cast iron plumbing fully closes up or springs a leak, but at least it puts out the fire caused by plugging too much into eighty year old wiring! Yes, beautiful surfaces are nice - and one of the best ways to get novice buyers to pay too much.

Number 8 Insufficient shopping: You looked at one house and fell in love. Unfortunately, it was the crummiest most overpriced house in the neighborhood. Other people trying to get out before the new needle exchange program opens down the street are going to be praising you for paying so much that their house will appraise for whatever value they need it to! Seriously, if you don't look at ten to fifteen properties, you're definitely short of market information, even with the best agent in the world ;-). I have seen people shop more for $20 toaster ovens than half-million dollar real estate. Scary.

Number 7: Skimping on Services: Trying to do without title insurance or inspection is a recipe for disaster. I've said this before, but title issues really do happen, and it's not always with the person who may appear to be the current owner. Ditto the inspection. I don't think I've ever had a property where the inspection didn't reveal anything I didn't know about the property. I've had the stuff the inspector found be trivial, but never non-existent. Here's one thing that seems to be a rule: if you're getting a good bargain, there will be something you want an inspector's opinion on before the sale is final. People understand cash, and many don't understand the concept of insurable risk. By the time you join the ranks of those folks out half a million dollars worth of property and still on the hook for the loan, you may have a different opinion.

Number 6: Location: Backing out of your driveway onto the high-speed expressway, your spouse's vehicle is flattened by the bus returning this week's escapees to the maximum security prison a quarter mile down the road - past the explosives factory, the toxic waste dump, and the chemical plant. She's taken to the emergency room at the hospital for the violently insane across the street, and neither you nor your lawyer ever do come up with conclusive proof of what happened after that when the airliner landed short of the runway. Seriously, there are many things that can rule out a location, from the above through several milder forms of ambient environmental issues, down to misplaced improvements. You might be able to move a building. Nobody has ever figured out how to move the land it came on.

Number 5 The Loan: The only way to qualify for the dollar amount you need is to take an unsustainable loan or a loan that is guaranteed to self-destruct. I'd like to be humorous here, but this is somewhat less funny than the most politically incorrect joke I've ever heard, let alone what I'm willing to print here. Betting on rising values and falling rates to enable you to refinance more favorably is literally putting your home and your future on a craps table. This leads into-

Number 4 Didn't Adhere To Budget, and not having a known budget in the first place is the ultimate case of this. I've written at least one two three articles directly upon the point of figuring how much you can afford. Figure out your budgetary limit first, and shop by purchase price, not payment. This isn't to say you have to spend the maximum, but the worst ways people shoot themselves in the head (not the foot) is by falling in love with the property that's too expensive for what they can really afford. In How to Effectively Shop for a Buyer's Agent, I tell you to immediately fire any agent who wants you to look at a property that cannot be obtained within the budget you tell them about. The asking price can be a little higher than your limit, with the understanding that if you can't get the price down that far via negotiation, you're not interested.

Number 3 Assuming Something That Isn't True: Josh Billings was correct. It's not what you don't know that gets you - it's what you know that ain't so. I've been the unwitting victim to this, and I've seen enough other transactions to have come to the conclusion that people who deal in real estate without an expert fall into two categories: Those who know they got taken, and those who don't realize it yet. There are so many tricks and traps that get played upon the unwary that there is literally no way to write about all of them because new ones are invented continuously. You have to be someone who deals with these issues every day to have a prayer of realizing the pitfalls of some of them. Consider that if some trick motivates a buyer to pay 10% extra for a $500,000 property, that's $50,000 extra in the seller's pocket and out of yours. I've learned to question everything, and to ask, "What are the possible explanations for this?" Unless you're an agent yourself, you probably wouldn't believe the grief this saves my clients.

Number 2 Failure to Plan: A good agent has contingency planning in effect for everything, and those plans don't include permanent vacations in countries without extradition. If you're seeing all this stuff for the first time, how likely is that to happen? Even the second or the third? The reason I do so well for my clients is that I've got a solid plan from the time they contact me for the first time, and I have plans to deal with everything I don't control. This includes everything from if they get their hearts set on exactly the wrong property to negotiations before and after the contract to what happens if the inspection reveals something major, and how to lay the groundwork in case stubborn negotiating partners don't see it may way, or the universe decides to jump in with an unpleasant surprise . If you don't have this sort of plan, may I suggest you hire someone who does. Because failure to have a plan in place will cost you large amounts of money.

Number 1 Not Having a Strong Buyer's Agent. This is the first thing you need to shop for, before you so much as look at online listings. Have at least one in place before you look at any property, even new development. You want one who's going to go digging for both good and bad. There is no such thing as a perfect property, because if everything else is perfect, the price certainly won't be, and if you're only willing to settle for the perfect deal, you're either wasting your time or asking someone to take advantage of your ignorance. If you use the seller's agent, they have a fiduciary duty to present that property in the most favorable light. Given the choice between an agent pretending problems don't exist until the small print disclosures and an agent who fails to do their legal and contractual duty, which would you choose? If you don't like this choice, then you want to apply the information in How to Effectively Shop for a Buyer's Agent. Having a good buyer's agent will make more difference than anything else in your real estate experience.

Caveat Emptor

Article UPDATED here

Over five hundred years ago in Europe, there was a con game that was more practiced than any other con game in the history of the world. It was simply the thing to try on the new rube in town. Someone would claim to be selling a suckling pig in a sack ("poche", from which we get "pocket" as the diminutive, as well as "pouch"). You have to understand the situation back then to appreciate what was going on. Suckling pig was tender, delicious meat, the sort that the average person of the time might only eat a few times in their life. Perhaps never, if they were poorer than average. It was highly sought after, and commanded quite a price, in terms of the average person's wages.

In reality, of course, what was in the pouch wasn't a pig at all, but rather a cat. Most modern Americans don't realize this, but "roof rabbit" was eaten back then, because the alternative was often starvation. Before potatoes were brought back from the New World, Europe did not find it easy to feed its population. Nonetheless, I'm given to understand cat meat is nasty disgusting stuff, a food of last resort, because cats are almost 100% carnivores. However, the victim of this scam didn't usually get to eat the cat, either, because they were expecting a pig, which was not nearly so nimble. As a result of this, when they opened the sack, the cat would escape. This con gave us three phrases that are very popular today: "Let the cat out of the bag," and "left holding the sack," as well as "Buy a pig in a poke."

So what if prospective buyers have a hard time viewing a property?

This isn't 500 years ago. People that have the financial resources to buy real estate in the United States today aren't likely to be that trusting. If they were, some alleged Nigerian millionaire would have relieved them of those resources. In fact, in advice given since at least 1530, people have been advised ""When ye proffer the pigge open the poke."

Why? Because if you don't, people are going to presume it's a cat (at best), and they're only going to offer what cat meat would be worth to them, which may not be anything. But if you show them that there really is a delicious suckling pig in the sack, they may be willing to pay the premium prices that suckling pig - or beautiful turnkey property - commands.

I don't know how many times I've gone over this with clients. People aren't looking for reasons to buy your property, they're looking for reasons not to buy your property, and, "They don't want to let me look at it," is more than sufficient reason to lose interest.

Does that have anything in common with the educated pig buyer? You bet it does. They wanted to see the pig, otherwise it was only worth the cat price (i.e. nothing unless they were starving, and then not much).

The entire process of real estate has evolved with inspections, appraisals, etcetera is precisely because the information possessed by the parties at the time of the contract is asymmetrical. That's fancy talk for the seller knows more than the buyer. The entire viewing and inspection idea has evolved from this basic fact, and the need to remedy most of the imbalance of information.

But if prospective buyers have a hard time being allowed to see the property, they are not going to make good offers. The idea is that there's probably a reason that seller won't let them look at the property, and they're most often right in that presumption.

Every time I start looking through MLS for property that might suit my buyer clients, I run across several of the stupidest ideas in real estate. I can handle one and usually two hour notices, but when someone asks for four, they're not likely to get it. I've got someone who wants to go look at property now, or wants me to go look at property now and get back to them on it, and I'm usually trying to shoehorn a few extras in while I'm in the neighborhood. If I can see your property, I might think it's worth my clients attention. If I can't, I definitely won't.

But four hour notices aren't anywhere near the worst: 24 hour notices are at least as common. In a way, I understand. Tenants can legally require 24 hour notice, but it's to my listing clients advantage to come up with some reason to cut that as far as possible. What are the tenants paying, $2000 per month or so? Offer to rent a storage locker for them and rebate some rent money, and your average tenant is going to agree so fast your head will spin. This kills the "I'm worried about them stealing my stuff!" angle as well. Always be ready and willing to show, and since every day the property doesn't sell not only adds carrying costs but means a (statistically) lower sales price, the money you spend generating cooperative tenants is a fantastic short term investment, better than anything short of a jackpot lottery win, and a lot more dependable.

That's not the worst, though. That dishonor goes to "property shown with accepted offer." Here we go with the cat thing again. The question that goes through my mind when one of my buyers asks about one of those is, "How bad could it be?" Why that question? Because the worst case scenario is precisely what the property is worth until the seller opens the "poke" and shows us the "pigge" instead of the cat or worse. Contingencies aren't going to cut it. Contingencies are for when you know a little bit and want to know more. In this instance, the buyer doesn't know anything, because they haven't seen it. The fact is that in the absence of any observational evidence, I figure there's a reason why the seller doesn't want us to know, and negotiate accordingly. Mind you, if you're willing to take a blind risk this can generate a fantastic bargain at the right time, with a seller who's ready to listen to reason about the effects of this upon value. But most aren't.

I can't blame the seller who doesn't understand this. The fact that they're clueless on this point is evidence of agent failure. This is one more way that agents "buy" listings and hurt their clients. Failing to make the client understand that showing restrictions lower perceptions of value as well as sales price is a major agent failure. Because the agent does not make certain the client understands the way that buyers approach properties, that agent is failing in their fiduciary duty, and their client will end up paying more money in carrying costs as well as getting a lower sales price because of it.

A while ago, I wrote an article on Top Ten Reasons Your Home Isn't Selling. It's no coincidence that talking about real estate in this context explicitly hits the three biggest reasons why real estate doesn't sell. Not only is it a direct instance of problem number three ("Showing Restrictions"), but by restricting showings the property becomes less valuable ("Price") and highlights a major shortcoming of the listing agent. And since these folks have won gold, silver and bronze medals in the "shooting yourself in the foot" event, may I suggest that after some appropriate time has passed, this may become a very lucrative desperation mine?

Caveat Emptor

Article UPDATED here

Quite a lot of the time when I view a property, I get requests for feedback.

Usually it's an automated email. Other times, it's some office assistant who wants to fax me a form which will "only take a few minutes of your time".

The point of these, and the various other methods that get used, is to shift the burden of the work they should be doing from the listing agent, which is where it needs to be, to other people. Basically, my competition is asking me to do their job for them. The only time I will respond to requests for feedback is if the agent involved will spend at least as much of their own personal time as it takes for me to provide the feedback. In other words, the agent - not their flunky - has got to listen to me talk, and then write it down themselves. If they start arguing with me, it's no longer a request for feedback, it's a sales call. But in any other circumstances, they're telling me this feedback is not important enough to justify their time, so why should it justify mine? I don't have any responsibility to their client; they do.

The point of both of these, and three or four other methods that get used, is to pressure their listing clients to drop the price. Many offices have multiple employees gathering this information, the idea of which is to get the client to lower the price because the agent didn't do it in the first place. They get the listing by promising a price they know they can't get, and then use the feedback information to hammer the client into reducing the price. This is actually two cardinal sins in one action, and I'll be damned if I'm going to help these slimeballs not only hose their clients, but also take listings away from good agents doing their fiduciary duty by failing to do that duty. This should also tell you how good an agent who uses their great feedback system as a major selling point is likely to be. Agents who know the market don't need a feedback system.

This whole rigamarole is easily avoidable by the agent doing the job they agreed to by accepting the listing.

Here's the way it should work: Agent knows the market. Agent persuades listing client to put an appropriate asking price on the property before it hits the market. Listing gathers lots of traffic, who like what they see. Appropriate offers come in, negotiations ensue, a contract is agreed upon, escrow is opened, and the transaction is consummated. Everybody emerges happy. Time elapsed: under thirty days from listing to contract, under sixty to completion. The only hard part is the pricing and staging discussions with the client, at least a week before it hits MLS. By accepting the conflict then and doing their job in the first place, the agent avoids a lot of problems that will happen later if they do not. Furthermore, the client emerges from the successful transaction not only happier, but objectively better off in that they get more money from a quicker transaction.

Here's the way these problems start: Instead of the above situation, an agent doesn't know the market the property sits in. Maybe they work across town in a different suburb. People decide to list with an agent whose office is near their office for convenience. Unfortunately, that's twenty or thirty miles away from the neighborhood they live in, and the agent might be vaguely aware that the area the property is in actually exists. They have no clue what the market in that neighborhood is like. An agent from twenty miles away is one of the best predictors I know of a mis-priced property. They have no idea of the market in the immediate area. I was just in a very nice property today priced $110,000 more than a very comparable property two blocks away. It's got an extra 3/4 bath, the comparable has a nice California room. The comparable has been on the market for months, and it's only $30,000 overpriced. This should give you an idea how badly overpriced the newer listing is. The listing office is way up in Carlsbad. Big Mistake on the part of the homeowner, and it's going to cost them.

More importantly than market knowledge, the agent didn't do the most important part of their job.

Here's what happens: Homeowners are usually quite proud of their property, and they understandably want the highest possible price for it. They see high asking prices, and they think they should be able to get them. Few members of the general public understand the relationship between the market, asking price, and sales price, not to mention how long it takes to sell. So when they interview agents, they're looking for the agent that will promise the highest sales price.

Here's the issue behind that: How does the client know if the price an agent says they can get is real and deliverable? The answer is that they don't. Ladies and gentlemen, I get paid on commission. I'd like to be able to get $2 million for a tiny condo in The 'Hood. The fact is that buyers choose to make offers upon the property that appears to be the best bargain for their needs and desires. The entire idea of listing and marketing the property is to attract the attention of the buyer whose needs and desires that property meets better than any of the available competing properties. Yeah, there's an element of seducing the buyer into liking the property more so they will pay a higher price. But like a lover, an agent can never seduce two people at once, so if they're seducing the seller they're not seducing the buyer. Not successfully, anyway.

So what a bad agent does is promise whatever sales price they think will get the owner to sign that listing contract. As soon as they've got the contract, they start planning ways to get the owner to decrease the asking price.

What's the harm in that, you ask? Those buyers they are trying to appeal to look at the property online. They see that too high price, and decide they're not interested. The buyers who do come by see that they can get something better for the same price so they make offers on the other property. Thirty days out, pretty much everyone on the market has decided they're not interested, and new buyers coming onto the market see that it's been on the market for over a month and their first question is, "What's wrong with it?" They don't want to go look at it. A good buyer's agent like me might be able to talk them into seeing it if the agent sees a bargain, but they don't see a bargain because it's overpriced. In order to lure the buyers back, you've got to cut the asking price to below what you could have gotten if you had priced it correctly in the first place. Otherwise, you're waiting for months until people like me think you might be willing to negotiate to something advantageous for my clients, and that's going to end up even worse for you. Meanwhile, whatever reason you wanted to sell the property is on hold. Being hammered by your agent to lower the price, you get so desperate that you'll take offers you would have trashed when the property first hit the market.

Here's the cute part, if you're one of these agents: Because these properties eventually do sell, and lots of people fall for this trick, that sleazeball looks like a "top producer." They've always got a large number of listings in the pipeline, Waiting for Godot. When one of them finally has the price dropped far enough, it sells. Since in the production metric used by the real estate industry, they are getting their 3% of lots of different properties, they're doing great for themselves and it appears that they're successful - precisely the sort of agent many people look for. In reality, their clients end up hurting. A freshly minted licensee who approaches the listing correctly will reliably achieve results superior to this.

Unless you're basically an agent yourself, the pricing discussion should be difficult. There is a fundamental tension between the desire to get the highest possible price for a property and the need to price it competitively with other properties. If a prospective listing agent does not understand this, ditch them. If this tension is resolved easily, there are two possibilities. Far more common of the two is that the agent isn't doing their job. They could be ignorant of the market, or they could be seducing you into a listing contract by talking a Bigger Better Deal that they cannot deliver upon. There really isn't much difference. The other possibility is very rare around here, although it was more common when prices were going up like crazy: The homeowner doesn't try to overprice the property.

How can a homeowner deal with this issue? The only foolproof way is to really understand your competition - the other comparable properties for sale in your area. You also need to know about the properties that have actually sold, because it's not uncommon that some idea of inflated value creeps into a neighborhood, and all of the properties sit on the market unsold until they figure it out, while the next tract over is selling a little bit better. Since it's unlikely that the new owners are going to allow you to view their recent purchase, you're pretty certain to be at an information disadvantage.

Keep in mind, however, that the pricing discussion should be difficult. If it's not, there's probably something wrong. Furthermore, unless you're Martha Stewart, the "what to do so it shows well" discussion is likely going to be uncomfortable as well. Remember that it's for your advantage. I'm trying to make you more money, faster, by making your property more appealing to buyers. If the agent doesn't tell you how to clean it up and get rid of the clutter and make certain it stays presentable, that tells you that everything is either already perfect (unlikely) or that they're shying away from telling uncomfortable truths you need to hear. This is never a good sign in an agent.

Avoid listing agents who don't work your area consistently. If their office is more than ten miles away from your property, they're not likely to be a good agent for you. I am willing to list properties outside my area, but I am very upfront that it's going to take me a few days to size up the competition and the recent sales before I'm ready for the pricing discussion. An agent from further away who doesn't make a point of telling you this is dangerous to your pocketbook. My website tells people where I make a habit of working, and by extension, where I do not. Theirs should do the same thing. My website also talks about bargain properties in La Mesa and the nearby communities where I work. This is further evidence that I really do work that market.

The pricing discussion is important, and getting it right in the first place will reliably put more money in your pocket sooner than overpricing it. The agents who won't face the uncomfortable task of persuading you to price the property properly in the first place are not agents you will be happy with later. Keep searching until you find an agent who will work your best interests, even if it risks irritating you.

Caveat Emptor

Article UPDATED here

There have always been real estate transactions that fall apart. The reasons why they fall apart are as varied as the people who enter into the transaction in the first place. Let's get back to the very basics for a moment. An offer to purchase is a representation that a given prospective buyer would be at least willing to purchase the property on the terms you are offering. Accepting that offer to purchase means that the seller is at least willing to sell it on the same terms that the buyer is offering to buy upon. If one or the other of these parties is not willing to consummate the deal on those terms, why was there both offer and acceptance? There was offer and acceptance, or there isn't anything more than negotiations to fall apart. People fail to reach agreement all the time. That's not what this article is about. It's about what happens to prevent the transaction from being completed after you have a valid contract.

The last credible figure I heard was that 50 percent of all escrows in San Diego County are falling apart. This means that one out of every two contracts don't happen. A few years ago, the proportion was a small fraction of that - I can't find it online, but I seem to remember 11%. This increase is both outrageous and preventable.

The first reason transactions fail is new information. It isn't cost effective or a good negotiations tool for a buyer to spend money on inspection and appraisal before there is an acceptable contract. When this information comes in, you can expect there to be a reassessment of the transaction, because you can expect there to be something about the property that does not conform to reasonable expectations. I certainly can't remember any transactions I've had where the inspections didn't reveal anything new. I've had them where what was revealed was trivial enough to ignore, but never a one where there was nothing. Transfer disclosures from the current owner to the prospective buyer are another of the possibilities for new information to crop up.

All of this new information can indicate a need to subsequent negotiations when it comes to light. If the buyer thinks it's small enough that they are willing to accept the transaction "as is", they can choose to let the transaction continue on the track it's on. If it's big enough that they're unwilling to deal with the situation, they can also choose to walk away. The vast majority of the time, the sanest response is some new negotiations based upon the new information. This isn't normally about things like overall sales price, it's about getting the property into the condition and functionality that the buyer thought they were getting in the first place. Either party can be obstreperous and unreasonable at this point, effectively killing the transaction.

There's also the issue of cold feet, and the related issue of "grass is greener" syndrome. Either one can apply to either party in the transaction. In the first, the buyer decides they don't want to buy or the seller doesn't want to sell after all. In either case, they weren't really "sold" on the benefits of the transaction to them. "Grass is greener" is where they still want a deal, just not this deal. Those happen when markets are asymmetric in power. A few years ago, it was sellers who wanted to bail out of contracts they had duly negotiated because someone offered them a higher price. More recently, it's been buyers trying to pull out because they think they've found a better deal somewhere else. Both are vile. It's not a sin to want the best possible deal, but once you enter into a legal contract you should be prepared to honor your representation that you want that deal. Both of these phenomena are the fault of poor agents, and both are a good way to waste a lot of money in legal expenses when their clients are sued for specific performance. I don't want any part of agents that don't take appropriate steps to prevent either one of these in their clients, and I take note when I hear about them. It's also a reason not to take an attitude of "no quarter!" in negotiations. My client signed that offer or contract because those terms will make them happy. If the other side decides they need to bail out because the terms are odious, my client isn't happy.

Closer to the point is ability to perform. This can be a seller who can't or won't or doesn't meet their obligations in a timely fashion. Delivering good title to the buyer is kind of important to the transaction, and it does occasionally happen that the seller can't do this. Or they don't have the money to make needed repairs, or just won't get off their backside to actually do it.

But far more commonly, it's the ability of the buyer to perform their obligations under the contract that kills the transaction. I have heard about occasional buyers who couldn't or wouldn't or didn't perform on other scores, but the most central of these in the current market, and the reason for at least 90% of the rise in failed transactions, is that the buyer cannot qualify for the necessary loan.

The Era of Make-Believe Loans is over, but judging by the evidence, there's an awful lot of people who haven't figured this out yet. That's the first thing I want to find out when I get a new buyer into my office: What's the evidence of their ability to qualify for the necessary loan? How much do they make, what are their other payments, what is their credit score, how much do they have for a down payment, and is there anything about their situation which might be a cause for concern during the loan process? I don't want to give them the third degree, but I want to be confident I'm not wasting their time or mine, and that I'm not setting them up for a failed transaction. Failed transactions don't make clients happy, they waste the client's money, and they aren't any good for my business, either.

A year or so ago, if somebody came into my office with a 580 to 600 credit score and two years in the same line of work, chances were excellent that a loan could be done - even 100% financing. That is not the case currently, and the time to plan the loan is before the clients fall in love with the property they can't afford.

Lest I be unclear, 100% financing isn't completely gone, but you have to plan more carefully now, and often the purchase contract must be written in certain ways to make it acceptable to everyone who needs to be involved. Write the purchase contract wrong, and you might have killed the deal before it begins because there's something there that's not going to be acceptable to the lender, and sometimes it can prevent other folks from signing off on the deal as well. Furthermore, if the required steps in the contract are going to cause the seller to balk, you're better off finding out before you've got a contract.

The loan environment, especially for loans above 80% loan to value ratio, has changed drastically in the last year, and all of the changes thus far have been in the nature of making qualification more difficult. In my area, appraisal values are arbitrarily reduced by all lenders I'm aware of currently, and if you're not careful, you can find yourself in a situation where 85% loan to value is the maximum that can be done (This just changed - see below). Since the proportion of buyers that have that kind of down payment is rather small, and the proportion of those who want to invest it in the property if they do have it is even smaller, that can be a problem.

Even the government programs like VA and FHA with their low down payment requirements have their stumbling blocks. Not only do they require a buyer to qualify via full documentation of income (as do ALL government-based loan programs), but there are subsidiary requirements as well. Some properties are not eligible, period. Some people (and some companies) can't be involved, period. Investment property and second homes are iffy to doubtful with the VA and practically non-existent for FHA. It's a real good idea to know if you're going to hit one of these roadblocks before you are sixty days into a transaction that's not going to happen, and now we're all going to pay lawyers to fight over the deposit.

When I list a property, I want real information that tells me a loan is doable for this borrower before I advise my client to accept a given offer. Pre-qualification is a joke and even pre-approvals aren't anything to put stock in. The only examples of either that I trust are ones that I wrote, because I know what went into them. However, Steering is illegal. I can't require the buyer to get their loan through me or even to talk to me (or anyone else of my choosing). What I can do is require their loan officer fill out my form and provide documentation that enables me to determine whether a loan is doable or not. If I can't find a lender that can fund that loan, we've got a problem. It's kind of important to know this before we counter.

Unfortunately, we've had ten years where loan money was easy to get, no matter how ridiculous the transaction, and it's left a very strong imprint on many agents. Many have literally know no other environment, and they're finding it hard to make the necessary mental changes. I haven't been in the business ten years, either, but I do understand how the loan environment has tightened up and its effects upon my clients. Even the agents who have been in the business much longer may have no real grasp of the loan environment and often they're just checking off the box that says, "pre-qualification" on the checklist because that shows they did their due diligence. That isn't going to fly anymore. It may or may not help them when they're defending against a lawsuit, but it certainly isn't going to make their future ex-client happy about the thousands of dollars they lost, either because they couldn't qualify or because their prospective buyer couldn't.

When will we see a loosening of lending standards? I don't know but I wouldn't be surprised if it happened today (Okay, I was a little bit surprised when the email that was the first official notice from any lender came in as I was typing this paragraph! This will make it easier for properties that don't qualify FHA or VA to sell). It isn't important, because we're not going back to Make-Believe loans any time soon. Be careful before the contract, and you'll have a lot less chance of getting bitten by the obstacle of a loan that cannot be done.

Caveat Emptor

Article UPDATED here

My advice to sellers is very simple: Hold off if you can. Things have already improved, but better times are coming once more inventory clears. The prognosis for this is very good. I'm seeing fewer short sales, at least in my area, which means that there are fewer people who need to sell.

For buyers, it's not going to get any better than this. Stop worrying about whether the market has hit absolute bottom. Trying to time the market is worse than useless, and as I said in When You Should Not Buy Real Estate, the math works against buying for less than about three years duration. Look at the likely situation at least three years out in determining whether it's a good time to buy a place to live (if you can't last three years, stay a renter). That likely situation for property owners three years from now by comparison with now is so much better that I'm worried about diabetes every time I consider it. The local economy is doing well - enough people can afford higher prices than current to make this a strictly temporary depression in real estate prices. Growth policy is getting more restrictive all the time, and it's not like there's a whole lot of places left to build anyway. Increasing the density of existing housing doesn't seem likely in the short term, and the one municipal government that had a little bit of sanity on the manner has changed its tune for the worse. Against all these constraints on supply, demand keeps growing. The only thing working against price recovery longer term is the interest rate outlook, and I don't think those are going above the mid sevens, if that high - which would make a difference of about 10% to prices by equivalent payments - and the other factors more than compensate. Increased demand and economic ability to pay each account for more than that. Don't forget the effects of high gas prices, either, raising the value of the older suburbs that are closer in relative to that of the exurbs.

This buyer's market is not going to last three more years. I can't tell you exactly when it's going to become a seller's market again, but it isn't going to be three years. The ratio of sellers to buyers has dropped twenty percent in the last year, from 32.6 to 26.7, and absolute inventory is starting to drop - it's off over 2000 units in the last three months, when you'd expect more new inventory to be coming onto the market given the time of year.

Furthermore, those ratios are misleading because a large proportion of property for sale is still overpriced in terms of asking price when you judge by the prices things actually sell for. In my primary area, it appears that about sixty percent of what's on the market is overpriced given actual sales in the neighborhood. Some of these are Short sales where the lender just isn't going to deal due to mortgage insurance, and buyers would be wasting their time to make an offer. Others are represented by agents "buying" a listing, although that's pretty much a constant of any market. When you get down to sellers willing to allow their agent to market the property correctly and talk a reasonable price, the ratio is probably about ten sellers per buyer. Given that, Sellers don't have to compete nearly so strongly as they did even a few months ago.

Indeed, right now there is a severe constraint upon buyers that's likely to get loosened a bit in the near future: Available loans. The loan market always controls the real estate market. With San Diego designated a declining market by every lender I'm aware of, the buyers with small down payments have been locked out of the market. Currently, the only way to get high loan to value ratio loans is loans with a federal government guarantee attached: either FHA (decent) or VA (better). For conventional loans, the appraisal is automatically reduced 5% and the lenders are capping out at 90 to 95% of the lower of cost or market, which is to say, the lower of purchase price or appraisal. But Fannie Mae and Freddie Mac are still willing to buy 100% loans, at least up to the conforming limit (currently $417,000). It's just that the lenders they're buying the loans from who aren't. I'm not having issues with appraised value constraining the loan, but folks with less careful buyer's agents are, and they're needing a minimum 10 percent, and maybe 15% down payment just to get financing at all. But that "declining market" label came to us relatively recently, long after values had registered the lion's share of the drop we've had. It's going to warrant removal sometime in the not too distant future. Indeed, it seems to me that the numbers probably are there to support removal, but it's going to be a while longer before this fact is apparent, thanks to the boards of realtors who manipulated statistics to make the drop in property values appear as small as possible for as long as possible.

So what happens when the restrictions are loosened a little bit? Instead of ten to fifteen percent down payment, people need just 5% - and maybe none. Right now, people with 5% down payment just aren't a factor in the market for the most part. What happens to the seller to buyer ratio when they are? It drops. What happens when it does? Even more of the power swings from buyers to sellers. What happens to prices then? They shift upwards.

As a special note: The prices of Condos and Townhomes and even PUDs has been hit particularly hard - much harder than that of detached housing. I'm seeing nearly 200 current listings just in La Mesa, El Cajon, Santee, and Lemon Grove where the asking price is less than $150,000, and fifty have already sold. With an FHA loan, you can buy into those for 3% down, or roughly $5000. Payment on $150,000 at 6.5% (including FHA insurance) works out to $948. Add $200 HOA dues and $150 per month in taxes, and in many cases you're coming out about even on the rent - and that's without a significant down payment. Furthermore, less than $3000 per month of income can qualify you, when it might have taken twice that a few years ago and it still takes $5000 per month income for even the cheapest "fixer" detached home. With the Era of Make Believe Loans departed for now, Condos and Townhomes and maybe PUDs are going to be what first time buyers can afford in the future, and the price of gas is going to constrain people as to where they live. I expect those prices to recover more value, more quickly, than detached housing. These might not be what people want, but they are what people are going to be able to afford. Once prices start upwards again (and they will, soon), many people who won't consider them now will stop being in denial about economic reality. The choice for most folks is going to be "buy a condo or rent forever". Expect the demand and the prices to go up significantly.

Caveat Emptor

As I wrote a few days ago, the buyer's deposit is always at risk. This is just a fact of real estate transactions. I could pretend it's not so, but that wouldn't keep the deposit from being at risk - it would just make me a liar. Nonetheless, because it's cash that the buyer had to forego spending that money in order to painstakingly set it aside a few dollars at a time, they understand that the deposit is real money in no uncertain terms, where most don't have that same understanding about a loan that's probably fifty times bigger and just as real. It may be comparatively rare that the buyer's deposit is actually forfeit (As of yet, I haven't lost one), but by recognizing this fact and planning for it, I can protect a client's deposit far more effectively than anyone who pretends otherwise.

The first rule is to be careful writing the offer. I want to make certain that all offers (and counteroffers) consist of something my client qualifies for and that I can make happen. This is one of the best reasons why real estate agents want to know enough that they could do loans, even if they don't. If I wasn't a loan officer, I'd consult a loan officer before writing an offer. Review client qualifications and necessary loan guidelines before the offer is written. If the issues of whether the client can qualify and what needs to happen so they do qualify have already been solved, you start the transaction with the largest part of the road to successful completion already paved.

Related to this is the issue of a client getting cold feet, which is one of the most common ways to lose a deposit. The best way to solve this is by showing them enough properties that they really understand the value offered by this one. Some agents believe in pressure sales and glossing over problems with the property. I believe in meeting these issues head on. The first thing I tell folks at our first meeting is that there is no such thing as a perfect property. They need to decide what they're willing to live with and what they aren't, and how much they're willing to pay for not doing so. It's my job to make certain they understand what the issues are with a given property, and that they'd be happy paying the necessary price to live there. All of an agent's nightmare scenarios start with talking someone into buying a property they don't like, so I'm not going there ever. This also solves the "cold feet" before we make an offer, where someone who doesn't understand these issues is going to be in danger of cold feet at every bump in the road.

The main issue with all of the buyer contingencies is time. You have a certain number of days to deal with those contingencies. When I get them done well before the time limit, the time limit isn't a problem.

For the loan contingency, I want an automated underwriting decision ASAP. Usually, there are reasons not to do this before we've got that fully executed purchase contract, but once we have that contract, there's no reason whatsoever not to do it that day.

I also want to order inspection and appraisal immediately, to meet those contingencies. I've got seventeen days for those. If I've got the appraiser and inspector out there the next day, I should have their report within two to three business days after that. Any subsequent negotiations needed due to those reports, I can start on right away. If the seller isn't going to be reasonable (or reasonable enough), we can find out about it right away and if the buyer decides to walk away based upon these reports or subsequent negotiations, we're in a much better position to argue that they should retain the deposit than if it were twenty-five days into the transaction and now the deposit is in jeopardy regardless of whether the contingencies have been released in writing or not. All parties agreed the contingencies ran for seventeen days in the purchase contract, and if that period is up, there's an argument to be made that the deposit is forfeit. I'm not a lawyer, so I don't know if it's a good, valid, legal argument, but if the whole issue is moot because we're done on day ten, the argument never gets started.

While this is all going on, I'm getting any final loan stuff together. This includes Preliminary Title Report and Escrow information. That complete loan package should be submitted before I go home on the day I get the appraisal. If it's not done by then, something major is wrong. I can submit loan packages with the appraisal "to follow", but it's better to submit them complete in the first place, even if it does mean I've got to pay for color copies. Every time an underwriter touches a file, they can add conditions. Those conditions can effectively make a loan impossible, and far more loans are approved with impossible conditions than flatly rejected. Also, submitting a loan with minimal information is itself one of the best ways to raise red flags in an underwriter's mind, or would be if raising red flags in the underwriter's mind was a good thing. It isn't. Once red flags get raised, expect them to throw as many roadblocks at you as they can. Better to submit a clean, complete loan package as soon as possible. Doing the extra work right off the bat really does save you a lot of future work.

Even when refinances are running several weeks, purchases are usually no more than two days for underwriting. If you submitted a clean complete file, any prior to documents conditions you do get will minimal and trivial, and the funding conditions should be just the absolutely standard cookie cutter stuff. I don't like getting anything other than the routine funding conditions that happen on every transaction, because it means I have to get those conditions and wait a couple of days for the underwriter to get back to the file. This waste of time is my fault if it happens, but with the best will in the world, it will happen to you a pretty significant percentage of the time. It's not a disgrace, it's just something to avoid if you can get ahead of how underwriters think. You can always mark time if you have to, but you can't get it back once it's gone.

I believe in giving the seller and their agent a reasonable amount of time to hang themselves, but once the loan is submitted, I'm going to be asking about their responsibilities if I haven't gotten evidence they're done yet. Allowing them to hang themselves doesn't mean letting them hang my client. I want to see that termite inspection in particular before the end of seventeen days. The standard contract has the buyer responsible for section 2 work. It's never happened to me, but it's very possible that there's enough section 2 work needed to call the transaction into question. After seventeen days, this becomes more difficult for the buyer.

As soon as possible, I order the closing documents and get them signed. Even if you're not ready and able to close the transaction as a whole, this is a good idea. Something that's already done correctly isn't going to be an issue if my client gets called away on business - particularly out of the country as does happen. Notary work becomes a real issue outside the United States - it must be done at a US Consulate or Embassy. There is no exception for "Buyer had to leave the country" (or even just "go out of town") written into the time frames and contingencies on that purchase contract. I suppose you could ask for one, but it will make most sellers more than a little nervous, for tolerably obvious reasons. Better to know and plan in advance, but life happens. Better not to be bit if it does.

If I can get all the ducks in a row before the contingency period expires, not only does this preserve my buyers rights and give us an advantage in subsequent negotiations, but preserves as much as possible of my client's options to exit the transaction while preserving their right to recover the deposit. If I can close the entire transaction before the end of the contingency period, that makes me very very happy, and not just because I get paid sooner. It means that the issue of my client losing the deposit for walking away never comes up..

By finishing everything before the end of the contingency period, I've also preserved as much as possible of the right of specific performance in case the seller gets cold feet. It happens. Not so much right now, but a few years ago in the crazy seller's market, it happened because sellers thought they could get a higher price. If my buyer client is happy with the state of the contract as it sits, their lawyer can quite likely argue specific performance of the contract, and maybe recover legal costs too. Not my place to say whether or not, as I'm not a lawyer. I only know that lawyers seem to be much happier with agents that keep this information in mind.

If I can't close it before the end of contingency period (and I recently had signed loan documents sitting at escrow for two weeks while we waiting for the sellers to finish termite work), I still want to get together with my clients before the contingency period expires, put the evidence in front of them, and have them make a choice to continue or abort the transaction. Just because the contingencies haven't been released in writing is no reason that a seller's lawyer can't argue that they were released anyway. Much better if the argument never comes up because it's a moot point.

There is nothing I can do that generates an ironclad, foolproof guarantee that my client won't lose their deposit. But doing things the right way, quickly, can certainly make it a lot less likely than pretending that tje deposit isn't at risk. Lawyers and judges are the only ones who can answer the question of whether it has been forfeited, but it the issue is resolved without them getting involved, everybody is going to be happier. Neither party should have signed the purchase offer if they didn't want the transaction to happen on those terms set forth in the contract. Therefore, making it happen quickly, reliably, cleanly, and before the deadlines have passed is the best way to prevent making anyone unhappy.

Caveat Emptor

Article UPDATED here