Buying and Selling: December 2008 Archives

Every purchase contract I write includes an addendum for Wood Destroying Pests. In California, this is accomplished via form WPA, a one page addendum that requires an inspection and details responsibility for who makes repairs. The work needed is separated into two sections. To quote from the actual standard report, Section I work "CONTAINS ITEMS WHERE THERE IS EVIDENCE OF ACTIVE INFESTATION, INFECTION OR CONDITIONS THAT HAVE RESULTED IN OR FROM INFESTATION OR INFECTION," while Section II is "CONDITIONS DEEMED LIKELY TO LEAD TO INFESTATION OR INFECTION BUT WHERE NO VISIBLE EVIDENCE OF SUCH WAS FOUND."

The standard around here is that the seller pays for Section 1 items, the buyer for Section 2. The reasoning for this is quite solid: The lender isn't going to fund loans for properties where they know about termites in the process of eating the property that they're taking as security for the loan. They could very well end up foreclosing upon a property that cannot be sold, or cannot be sold for the amount of their loan. Federal Reserve Regulations frown on that, so say the least.

So when I got this from an agent on an REO, I was skeptical

Hi Dan,
The bank will not pay the termite - Section 1. They said we must get bids and the buyer will need to pay for it. This is not allowable with VA. I already know how much it is - $1550 - I ordered the report. The property needs tenting.

I forwarded that to my clients, who responded:

Thanks for the update. As usual I have some questions.

1. (irrelevant to this article)

2. We are definitely eager to see the termite report. Are they likely to give it to us, and if it does show serious structural damage, can we back out?

3. Is the VA loan going to hinder this or is it a simple matter of writing another check?

4. Would they have told us about this if we were going the conventional loan route?

My answers?

2) They have to give us the information if they have it. Not only is it in the contract and the law, disclosure laws require it. The only legal way not to disclose it is if they honestly do not know. That isn't the case - they're telling us there is known Section 1 work needed.

3) Section 1 work eliminate the VA loan as well as any others unless it's done. It's a condition of the contract. The lender is going to want to see the report. When they see the report, they're going to say no. Section 1 work is a loan killer, no matter the loan type. The only ways to get around it are an all cash offer, or agreeing to eliminate the termite clearance from the contract.

4) They would have had to. See answers to 2 and 3

However, this work is the owner's responsibility - in this case, of the lender who owns the property. Section 1 termite work impacts safety and habitability; not to mention that no agent who doesn't hose his clients is going to agree to clients paying section 1 work before escrow is completed (in other words, before you even take title). Since transactions fail to close for other reasons at the last minute, this means you could end up paying for the work and not taking title. The property and our offer were predicated upon the property being in a certain condition, but now we know it is not in that condition. Work is needed to bring it up to that condition. Therefore, the property is worth less without that work being done. The owners can do this work, or they can give an allowance in the price, and since this work is necessary to get a loan, not doing it makes a major difference in the price.

You can decide what you want to do. This may be just a testing tactic. If we respond strongly, they may give on the issue. If they don't, I would very strongly advise you to reconsider the property - it's very possible that you would end up spending the money to tent the property and still not getting the property. But that isn't my decision to make.

I am certainly going to advise against deleting the wood destroying pest addendum from the contract offer, which would enable us to pretend to our lender that no such damage exists. Not only is it fraud (and they would come after all of us), but what happens if it were to turn out that damage was greater than represented by the sellers?

If they are going to stand upon what the agent is representing here, the property is worth considerably less than the asking price, and they are trolling for an agent who will allow their clients to be hosed in the interests of getting a commission check, or willing to commit loan fraud.


We went back and forth a bit, and this was what I ended up sending back to the listing agent:

My clients are indicating that their offer was predicated upon the Wood Destroying Pests Addendum.

Section 1 Work is required to be done by every lender and every loan type I am aware of. Failure to disclose it (when known to exist) to the lender is fraud. Therefore, it needs to be done prior to loan funding, and therefore prior to transfer of title. Since the only non-fraudulent way to get a lender to fund such a loan is to do the work, it is the responsibility of the current owner to obtain a termite clearance.

Furthermore, since required Section 1 work impacts both safety and habitability of a property, an "as is" transaction does not shield the current owner from the need to repair this fault.

So the current owner is advised that they are required by the terms of our offer and the need for most potential purchasers for financing to do the work.

Otherwise, may I suggest you solicit "all cash" offers?

Here is the situation: The current owner and listing agent know that there is Section 1 work that needs to be done. Knowing this, if we were to conspire with them to eliminate that particular phrase from the contract, we would be guilty of fraud, in that we would be asking the new lender to fund a loan where we know there is a disqualifying condition of the property, but failing to advise them of it. This would be particularly pointed in the case of an agent who also does the loan (and therefore has a fiduciary duty to the new lender), but it doesn't let everyone or even anyone else off the hook: That listing agent is conspiring with malice aforethought to keep relevant information secret from the new lender, as are the current owners, who happen to be a bank, and therefore should be fully apprised of what usual lending standards are. Fraud, fraud, and fraud.

They ended up rejecting our counteroffer. Chances are they'll find someone who doesn't mind committing fraud. Lots of agents do this, as evidenced by the fact that she barefacedly proposed this fraud in written communication (email). That doesn't change the fact that she is proposing an intentional concealment of known information that a party to the transaction (the new lender) has a legitimate interest in knowing, and that is just as much fraud as appraisal fraud, concealing cash back from the seller to the buyer, or any of a large number of other ways to commit fraud in consummating real estate sales. Remember that agents owe a duty of fair and honest dealing to everyone, not only contracted clients. That includes the buyer's lender, whomever it may be. Just because you may not deal with them directly doesn't make them any less of a party to the transaction. Lots of escrow officers and agents are discovering this now in regards to concealing sellers giving buyers cash back, because the property is therefore worth less than presented. The exact same principal applies to the termite report.

Caveat Emptor

Article UPDATED here


The completely frenzied micro-market currently manifesting in the Eastlake area of San Diego is a wonderful illustration of several pieces of advice I consistently give. First, What Happens When You Over-Price Real Estate?: properties priced correctly are getting multiple offers, properties priced a little under are seeing bidding wars, and properties overpriced just a tad are sitting for months until the price gets reduced low enough to counter the very high "days on market" counter. Second, all of the subsidiary ideas in How to Sell Your Home Quickly and For The Best Possible Price also get illustrated: Properties that are clean, uncluttered, and easy for buyers to get in to see (as well as priced correctly) are seeing multiple offers within a week, while corresponding properties without those virtues are sitting with no offers. Buyers and their agents are even learning to avoid short sales, other things being equal.

But the most important thing is something that you kind of have to be a buyer or a buyer's agent to appreciate, and that is to be very careful you don't list your property with someone who doesn't have the time to dedicate to selling your property quickly and for the best possible price.

Here's the situation: You've got this one agent or brokerage. Their signs are all over on listings. "Must be pretty good," people think, and they call that agent, who comes out, schmoozes them, may even talk them into pricing the property correctly, and gets a signed listing agreement.

This agent then promptly disappears to schmooze more prospective listings. When previewing or showing properties where the owner is home, I've made a habit of asking a question of them that really asks about talking to their agent. It's damningly consistent how often these people tell me they can't so much as talk to their actual agent. Even talking to the agent's office staff is dubious. The agent themselves? No way.

I managed to talk to one such agent last week. She told me "I have no idea how many offers I've got on the property. My office staff is handling that. I'm too busy because my transaction coordinator isn't doing their job."

Say WHAT? Whose job do you think all of that is? That transaction coordinator doesn't have their name and signature on the listing agreement. They didn't sign it, representing that they would diligently work to sell the property on the best possible terms. The office staff, including the transaction coordinator, is there to dot the is and cross the ts to enable the agent to handle more "big stuff". They are not there so that the agent can disengage themselves from the listing, or go heap more work onto the pile that the poor office staff has to deal with. Yet when I managed to indirectly suggest she should perhaps not accept any more listings until she had a handle on the ones she already had, she acted like I was some kind of alien monster, here on planet Earth to consume the poor hardworking agents such as herself, and usurp their Rolls-Royces. She's making money hand over fist - but her clients are getting hosed.

When I make offers - offers with reasonable deadlines to respond - they are sitting there, without response, for the week I give them, and usually several weeks beyond. It took one company six weeks to respond to a one week deadline offer, and I've got others where if they do eventually respond, the clock is sitting at nine weeks or more. Some of them are plying the time-honored (and horribly weak) technique of the "best and highest" offer - but even they're not picking one for weeks. This is pathetic. And then they have the gall to complain when they eventually do call back that my client has moved on and is no longer interested in their property. Just because it's like I'm talking to a black hole is no excuse to terminate the conversation, eh?

Not that the response to the "normal" listings and lender owned listings is great, but the response to short sales are far and away the worst. It seems that many agents are just having their back offices send all of the offers directly to the lender. No response to the offer, no negotiation and consultation with the actual owner of the property, no fully negotiated purchase contract, and definitely no fighting to get any particular offer accepted. Then they get upset when, after two months of this nonsense, most of the offers have moved on, including the highest, and none of the remaining offers are willing to match that highest offer that the lender just approved. Never mind that the lender might well have approved any of the offers if the agent had dug in and negotiated it correctly and fought for that offer. Never mind that the agent could certainly have gotten more money out of most - if not all - of the offers simply by coming up with reasons why it was in the prospective buyer's best interest to do so.

These poor people in the back office have no clue which offers are strong and backed up by a buyer's actual ability to perform, either. For that matter, neither do most listing agents. Letter from some lender asserting without evidence that the buyer is supposedly able to qualify for a loan in the amount of whatever loan amount is required? Worthless.
What was the qualifying rate used to justify that conclusion and is it still available? What's their debt to income ratio and is there any wiggle room if the rates are a little bit higher, if there is some unreported debt, or if there's some kind of special tax assessment? Is the allowable loan to value ratio going to work for this property? Do these buyers have the cash to close? Nor is pre-qualifying with their favorite lender any better - not to mention that requiring a buyer to do anything with any particular third party - even simply requring prequalification with a given lender is illegal under RESPA.

To make up for the back office and agent's incompetence at deciding whether a given offer is backed by an ability to perform, listing agents are attempting to impose onerous and abusive requirements for buyers in order to make that agent's life easy - not to get the most money from the quickest sale and the fewest problems. I just read a listing that said no offers will be submitted without seven different illegal requirements, and a host of others that certainly act to discourage buyers with even halfway competent agents. Starting the "due diligence" period as soon as the offer goes in, before there is a fully negotiated contract, so the buyer has to spend money when they might not even get a contract, and when they technically do not have the right to have inspectors at the property? Requiring buyers to qualify with or even to use particular lenders? Requiring the contact information for the buyers themselves, allowing them to bypass the buyer's agent and contact the buyer directly? All of those are violations of major legal principles involved in real estate - and I've seen them on many listings within the past few weeks. Nor are they in the nature of "fiduciary duty" because they enable both the agent and their principle to be hauled into court for violations of the law, costing far more than the principal could possibly make even if they buyers didn't understand their legal rights. Quite frankly, what these requests most often do is scare away qualified buyers who are competently advised, as well as causing the property to be worth less to the ones that do stick around.

The way to get good responses is first, to not put onerous conditions upon the property in the first place, and second, to respond in a timely fashion to every offer. Whether you counter-offer or explain that there are better offers on the table is determined by circumstances. But by responding to prospective buyers, engaging them in the process, and letting them know you take them seriously, the listing agent and their client are building psychological buy in for the buyers. They are giving the buyers a reason to believe that there is a real possibility of getting this property, and given such, they will focus upon this property. Until there's a fully negotiated purchase contract, those buyers are free to wander off in search of other properties, and if not responded to in a timely fashion, pretty much all of them will. Why not, when there is no response? Even "Talk to the hand!" is more response than I'm getting out of most listing agents these days.

Any time you have multiple offers, that is a golden opportunity to play them off against each other, netting more for the clients. These "top producers" are completely blowing these opportunities, which incidentally would net them more money in commissions, as well, but they're too busy signing new listing contracts to properly service the ones they've got. I'd be too ashamed of myself to associate myself with these listings. I'd certainly never brag about it in the vein of "I sold all these properties!" Have they no professional pride whatsoever? Kind of like someone who's supposed to be a maker of fine cabinetry bragging about creating steaming piles of excrement.

Let's examine the economics of the situation. Say that an agent can have thirty listings, of which three or four will close in any given month and a couple more agreements will expire. Suppose they are getting 90% of the sales price a dedicated agent with two active listings who sells them all quickly will get. Let's say the "top producer" averages 3.5 sales per month, while the not so top producer who actually serves their client interests averages 1.8. Let's do the math.

First off, that "top producer" has thirty signs on thirty properties out there advertising them and their services. The agent who serves client interest has two at any given time - and not the same two for very long. It's repetition and consistency that sell services to more members of the public who don't understand how these things work. Most yard signs (not my occasional listings - thanks to an idea I got from Greg Swann) advertise the agent, not the listing. But people driving by the same sign every day for six months are a lot more likely to call the agent to sell their property than the ones who drive by the same sign for only four to six weeks. Benefit: "top producing" bozo, not consumer. This turkey is selling about 12% of their listings per month, as opposed to the other agent we're considering, who sells 90% of their listings per month.

Let's examine who makes how much, as far as the agents go: "top producer" gets 3.5 commission checks per month for 90% of the commission, because they found a buyer that produced 90% of the sales price. Let's say the median price in the area is $400,000, and commissions are 3%. 90% of $400k is $360,000 times 3 percent times 3.5 checks per month means they average $37,800 per month in revenue to their brokerage, of which some goes to the brokerage and some to them. The agent who really gets the property sold gets $400,000 times 3% times 1.8 checks per month, which means they average revenue to their brokerage is $21,600 per month. Which agent do you think the brokerage values more?

Now let's look at individual consumers. Let's assume 8% overall cost of selling the property, and a loan for 70% of the value of the property, in this case, $280,000. The person who chooses the "top producer" walks away with $51,200. The person who chooses the agent who actually makes the effort to sell their property walks away with $88,000 - more than sixty percent more money in their pocket. If the loan is for 90% of value, or $360,000, the "top producer" client is going to be short $28,800, while the real agent's client is still going to walk away with $8000 in their pocket. Not to mention that the property sells quickly, so you don't have all the monthly expenses of maintaining it even though it may be vacant. If you bought for $300,000 and have a $280,000 loan at 6% here in San Diego, that's about $1800 per month that the consumer saves, considering insurance, for every month the property didn't sit on the market unsold. All of this is real money! Not to mention the clients of the agent who limits how many clients they work with have a 90% per month probability of ending up happy, while the "top producer's" clients only have a 12% chance of ending up with a sold property, and they are not going to end up nearly so happy.

So if you still want a "top producer" after reading all of this, be my guest. They're easy to find. Just look for all the yard signs sitting in the yard for months - if the listing didn't fail completely. Look for corporate advertising blanketing a particular market channel. But if you look a little bit harder, you can find a competent agent who has the time and will actually work hard to sell your property, properly manage the offers they do get, and sell the property for a better price much more quickly, ending up in much more money in your pocket.

Caveat Emptor

Article UPDATED here


RESPA

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.

Let me repeat the important part: no person shall give and no person shall accept any fee, kickback, or thing of value

Is a "business relationship" a thing of value? It seems straightforward enough - I can't find anybody who says "no" - until we're talking about prequalifying my clients with their favorite lender. Then I get all kinds of hemming and hawing about there being "no money involved," as if the relationship itself were not valuable. Look up the legal definitions of consideration and value: I assure you that those definitions are not restricted to transactions where money is involved.

This pretends, of course, that there might exist such a referral relationship where there's absolutely no element of "You scratch my back - I'll scratch yours" involved. I have yet to find such a relationship. I suspect that even if I were to pull a Diogenes looking for such, I would die unsuccessful. Even when I am referring folks to real estate agents elsewhere, despite the fact that I accept no referral fees, there is some possibility they will eventually refer me some business back. Even if they don't, I still get the knowledge that these folks I dealt with in some way were satisfactorily served by a competent, conscientious provider. All of these things are of value to me, and if you're a professional agent or loan officer, they should be to you, also. And the business relationship is certainly valuable to the receiver. Therefore, all of these things involve both the giving of and the receipt of value.

REALTOR Magazine

Generally, to operate an affiliated business arrangement legally, you need to:

* Disclose to consumers your interest in the affiliated company
* Tell consumers the cost of the service
* Explain there's no required use, i.e., consumers are free to go elsewhere for the service without penalty

And there's the rub. When you require that consumers use a particular service, they are not free to go elsewhere. It doesn't matter if you don't have a financial interest. The only difference if you have no financial interest is that you don't have to disclose that interest.

It is one thing if the consumer asks for a referral. Then you can tell them about any companies, any providers of services you like, so long as you disclose any financial interests you and your company may have. It is a completely different matter to require them to use your favorite loan provider - and illegal.

Now if you want to argue about "How do I fulfill fiduciary duty to my client by filtering out unqualified buyers rather than wasting months on transactions that will never fly," you simply need a very few pieces of information: Debt to Income Ratio, Loan to Value Ratio (which you should know yourself from the contract) Credit Score, and Cash to Close. I guarantee you this is more information than 99.9 percent of all loan officers investigate when writing a qualification testimonial. Your client is entitled to this information - they are involved in a decision as to whether to grant credit by agreeing to the purchase contract, which will cost them thousands of dollars if unsuccessful. Then take this information to anyone you choose and ask them if they could get a loan done for this borrower. You have absolutely no reason to require any potential buyer patronize any particular loan provider in order to get this information.

(Here's a letter with an example of the information required)

And here's my public service for the day, to inconvenience those ethically challenged individuals that persist in this illegal practice of requiring buyers to pre-qualify with a given lender:

report RESPA violations

You should send a written complaint describing the practice that you believe violates RESPA. The complaint should include the names, addresses and phone numbers of the alleged violators. It is preferred that you include your name and phone number in case an investigator wishes to ask further questions. You may request confidentiality. Send the complaint to:


U.S. Department of HUD
Office of RESPA and Interstate Land Sales
451 7th Street, SW, Room 9154
Washington, DC 20410


Caveat Emptor

Article UPDATED here

(I published this originally June 18, 2006. Anyone want to tell me I didn't hit this nail on the head?)

The housing bubble is not the primary focus of this website, but to pretend it does not exist is plainly wishful thinking. One of the ongoing phenomenon that have been driving the bubble is the "Stated Income"loan, where the lender does not verify that the prospective borrower actually makes enough money to qualify for the loan, only that they have a source of income that could generate enough income. If you're working the night shift at 7/11, they're not going to believe you make $90,000 per year, but if you're a in a profession where some folks do make $90,000, you may be able to qualify "stated income" regardless of whether you actually make it or not.

Lest I be unclear on this subject, despite being known as "liar's loans" because people use them to lie about their income in order to qualify, it is not what they are intended for. Nor is "stated income" intended to help shifty or incompetent loan officers shaft lazy borrowers by not bothering to document income. They are intended for those who really do make the money, but because of the way that the income tax laws work and the way that lenders qualify people for loans based upon income, do not appear to. Business owners and the self-employed and people on commission get to legitimately write off a lot of expenses that the hourly or salaried employees do not. For instance, I write off a large percentage of my vehicle miles, office expenses, etcetera. I'm paying for business related expenses with pretax dollars, where most folks generally do not get to take this deduction. Being self-employed, if I was silly enough to want the home office deduction it would be easy enough to justify. Not to mention asset depreciation. All of these don't have much effect upon the money I have to spend, but they do have an effect on my tax forms, where it looks like I make a lot less than I effectively do. So instead of using my tax forms to qualify for a loan, sometimes I need to do a stated income loan in order to qualify for the loan, because the tax forms show a lower number than people making comparable amounts who are salaried. This is what stated income is for.

On the other hand, I'm sure that most of the adults reading this have seen the potential for abuse. When I can just tell the lender how much I make and they agree not to verify it, a certain number of people are going to say they make more than they do, and indeed, both stated income and NINA loans are often informally known as "liar's loans". Furthermore, since if the person getting the loan does not qualify, there is no loan and the loan officer does not get paid, there's a certain amount of pressure on the loan officer to get the loan done even if the prospective borrower does not qualify. Let's say they don't qualify, but the loan officer wants to get paid. So the loan officer puts them in for a stated income loan, says the clients make more than they do, and voila! funded loan. Clients get the loan where they would not have qualified by documenting their income, loan officer gets paid, bank gets a loan, and if it was a purchase, real estate agents get paid for their transaction and the seller goes happily on their way because they got their money.

A few years ago this kind of practice was an occasional thing. Of late, however, it has become endemic. And although if the clients really do make the money there is nothing wrong with it, if they don't make the money to qualify but they get the loan they are still going to have to make the payments. This reflects the reason for the rise of the negative amortization loan, where the minimum payment does not cover the interest charges. Either one of these is something a good loan officer does with a trembling hand and a lot of care. I always make certain that these folks really can make the payment they're going to have to make, but the vast majority out there do no such thing.

Well, it looks like everyone is going to have to, because of IRS Form 4506. Form 4506 is an item the clients sign, usually at the end of the loan process, that gives the lender and anyone they may sell the loan to access to your tax returns. IRS form 4506-T is basically the same thing, except that it gives access to a transcript (the numbers) rather than an actual copy. Signing form 4506 is mandatory. No signature, no loan. It's that simple.

Now it take the IRS about sixty days to respond to this request, so this has zero effect upon funding your loan. If your loan isn't funded withing thirty days of you signing the loan application, there's something wrong with that loan unless something external to the loan is holding them back and you should go apply for a back up loan. But for later on, it can have an effect.

One of the ways it can have an effect is on the loan provider's subsequent business. Traditionally, as long as the borrower made the first three payments on time, a loan broker was off the hook as far as borrower default. Lenders who have recently become much more nervous about their loan portfolios have recently started to change this, whereby a broker who put through a stated income loan (or any loan, for that matter) which is not subsequently borne out by the evidence of form 4506 is liable for the loan for the loan's full duration. Since form 4506 is never borne out by any stated income loan, else the client should be getting the better rates for full documentation, this means that every time any broker puts through a stated income loan, they are liable for the consequences to the lender.

Well, it shouldn't take much of an imagination to figure out the effects this is having upon the loan market. With the shifting of the consequences to the broker, the brokers are having second thoughts about doing stated income loans. Make no mistake, stated income was way out of control over the last couple of years. I've always been religiously careful about them, but that made me a member of a tiny minority of loan officers. Most of the loan officers out there have no clue as to what is an appropriate stated income loan, which has to a large extent put the brakes on stated income here locally. I'm not certain what effect this is having upon loan officers at direct lending houses, and there are a certain percentage of broker loan officers that are too clueless to understand what this means to them so they are going to keep right on doing them until the lawsuits pile up, but it's really starting to put the brakes on stated income loans here locally.

Now stated income loans have been a large proportion of what drove home prices upwards. It was an easy way for loan officers and real estate agents to get people into loans, and therefore properties, that they really could not afford and did not qualify for. Both easier sales and bigger commissions, as people want the better house with the higher price and tend to reward the agent and loan officer who can get them in, regardless of whether they can really afford it or not. People who did not really qualify, but this gets them the loan, and therefore that beautiful McMansion they've got their heart set on, despite the fact that they cannot really afford it. It really is easy to sell people on too much house, and very few of them really understand the implications. I've sat people down, taken them through the math, and they still signed up with the agent who promised to get them into the McMansion because they wanted it so much.

Well, with the lenders getting aggressive about enforcing financial consequences, every loan officer with the brains to understand that heavy objects fall is suddenly taking a hard look at their business practices. Now it's not just a question of "Get paid or don't get paid," it's a matter of whether the money they get paid right now is enough to balance out the money they are going to have to pay later to buy the loan back, and the answer is largely coming back "No!" Furthermore, there could be actions taken against licenses by lenders and not just by clients. That brings a completely different trade-off into the picture, and a lot of loan officers aren't liking what it says.

Now because the prevalence and easy availability of "stated income" loans has been one of the things driving the increase in the price of housing, essentially killing the stated income loan is not going to have a beneficial effect as far as sellers are concerned. It decreases, by some amount, the potential market of people who can afford to buy your property. Where before, the bottom line with most agents and loan officers was that anyone who wanted the property could probably be qualified for the necessary loan and was therefore a legitimate potential buyer, that is now changed. Since anytime you constrict your market of potential buyers, the equilibrium price of the market is going to fall, expect this to have a further deflationary effect upon property values. Indeed, there are a lot of factors that are conspiring against highly appreciated property values right now, but this one small item could well be what starts housing prices more notably downwards. Because it attacks a way of doing business that was at the heart of the large run up in prices, this relatively small measure may be the pin that pops the housing bubble.

Caveat Emptor

Original here

Listing Agents say they hate it when prospective buyers (of their listings) make offers on multiple properties, but they keep doing things to encourage it.

It is both legal and simple for buyers to make multiple offers. All I have to do is include some phraseology about this offer will be withdrawn in the event of the acceptance of another offer. Listing agents do the equivalent thing every time they negotiate multiple offers. At least they do it if they are hardworking and smart, rather than asking everyone for their "best and highest offer," a lame, weak technique that has precisely one advantage - minimal labor for the listing agent. But it should not surprise anyone that if listing agents can do one thing, buyer's agents can respond by executing multiple offers, especially where sellers and listing agents miss deadlines to counter, take weeks to make up their mind, don't respond to requests for information, and have to be goaded into responding at all.

A single offer is stronger for both buyers and sellers. For buyers, it says that you have singled out this one property to make an offer on. You want this one, at least if the seller can be dealt with on a reasonable basis. It says you aren't going to flake out or abandon them mid-negotiation because you have found something you like better, and if you come to an agreement, you're not going to abandon that agreement without reason. Someone making multiple offers cannot claim any of this. For sellers, all of these are valuable features of an offer - perhaps more valuable than an extra $10,000 on the offer. If your agent doesn't understand this, that's a problem.

Furthermore, encouraging multiple offers encourages both lowballing and uncommitted buyers who don't care whether they buy your property or not. There's not much emotional buy-in, but many buyers will throw out a low-ball for marginal properties just to see if they get a response. But even if you do respond to such offers, they're not going to turn into the kind of offer that makes sellers happy.

For all the complaints about multiple offers I hear, though, listing agents seem to keep doing things to encourage them. Sitting on offers for weeks is a bad idea because buyers will move on. I just got a response December 1st for an offer some clients put in back in mid-October. They were already in escrow on something else. About a month ago, I got a response three weeks after the offer, two weeks after deadline to respond, during which time the clients decided they wouldn't be happy in the property after all. Agents who delegate unlicensed assistants to check boxes on offers are a definite turn off, as well - those assistants have no idea what is a good offer and what is not. They have never seen the property, they have no idea of the market it sits in, no real clue as to general market activity - and if the agent doesn't have their hands on the situation pretty constantly themselves, neither does the agent. When I call an agent phone number in the listing, and there is literally no way of talking to the agent, or for that matter, any actual living person, that's a situation for a throwaway multiple offer, if anything at all. They're not taking prospective buyers seriously. Put in a lowball multiple offer, if they respond in a timely fashion, great. Otherwise, let's move on with our lives.

If you want buyers to make single offers, you need to respond to them promptly and individually. You need to take the time to understand the offer and the strong and weak points, and you have to understand how it matches up with your clients needs. This takes time, and it takes an agent who knows what they are doing - not a clueless unlicensed part time receptionist who is filling in boxes. This means that in order to get the most mileage out of the offers you get, you have to have a listing agent who has the time to spare for this particular listing. The corporate transaction mills are not the way to get that. There are many reasons I advise people against "top producers," and that is only one of them. If you want the best possible price, you need an agent with the ability to invest enough time in your property to make a difference. Yes, I use loan processors and transaction coordinators. They're not allowed to interact with my clients, and they don't even enter into the picture until and unless we've got a locked loan ready for submission or a fully negotiated purchase contract. They're there to dot the i's and cross the t's - taking care of the fine detail work - not so I can disengage myself from the transaction.

If the agency real estate office is doing everything they can to take as many listings as they can, to the point where the agents cannot properly service those listings, that's a situation where you're begging for multiple, weak offers. I put deadlines to respond on every offer I type. Reasonable deadlines, minimum of three business days, perhaps five, to give the other side plenty of time to respond. Most of my buyer clients have time pressures. They don't have three weeks to wait and see if one offer responds, after which they wait three more weeks to see if another offer responds, when they're operating under any kind of a deadline. I'm working with a client who's being posted here from elsewhere a couple months from now. When we started looking , even a short sale was a legitimate possibility, which should surprise you given my general opinion that buyers should avoid short sales. Inconsiderate listing agents trying to service too many listings have eaten most of the time we had to play with, causing us to now be in the situation of needing to make multiple offers on multiple properties. Buyer degree of attachment to any given property: small. Buyer willingness to negotiate on any given offer: small. Buyer willingness to offer an attractive price in such circumstances: small. And these "top producer" megaoffices listing these properties are wondering why, despite the incredible numbers of offers being made, they're not getting the kind of increases in value we saw a few years ago? Why the offers are all petering out at a low level? Why prospective buyers who do get accepted offers are so likely to bail out on the deal? Why actual sales prices aren't increasing?

Many listings want to accumulate offers for weeks. I've read several listings that say things like "no offers will be evaluated until (two weeks from now)." Okay, if we like the property, and nothing else catches our eye, we'll consider making an offer just before then. Keep in mind, it'll be ten days between when my client saw the property and when they make their offer, it won't be a hot "right now" offer or even a lukewarm "next day" offer. It'll be a multiple offer - only fair, since that's what the seller is asking for. And if my buyers they find something else in the meantime, well, there won't be any offer made at all.

Let me ask: what happens when your best offer - most often the first, almost always one of your early ones - has moved on with their life? For that matter, what happens when all the good offers have moved on with their life? You're stuck with the low-ball offer from a flipper, that's what. I'd hate to be in a situation where I told my listing client there were 8 offers - but only the lowballs were still interested. But that's what these agents are setting themselves up for.

If there are competing offers and one of them isn't nearly as attractive as another, there is no harm in saying so, and saying so quickly. Either they will drop out of contention or they will increase the attractiveness of their offer. If they increase their offer, my client is happy. If they drop out, my work with them is done, and they're now out there looking at other properties. The quicker I answer, the more likely it is that this prospective buyer will respond with a better offer. I'm perfectly willing to fax over (slightly redacted) first pages of competing offers in such situations where the offer isn't even close.

Every offer needs to get a timely response, whether it's a rejection, a counter, or an acceptance. This is not only common courtesy, but good business, and the best way to end up with a good price on the final contract, one that the buyer is both willing to and capable of meeting promptly.

Negotiate with each offer individually. Asking everyone for a "Best and Highest" offer is very weak. Any buyer's agents that are worth a damn know how to respond to that one. Individual negotiations (if you happen to actually have multiple offers) works wonders. Put the multiple offer disclaimer on it if it's appropriate, and slap it back to them same day if you can. Keep the negotiations hot. Keep the buyer's memory fresh. Increase the buyer's mental buy-in if you can. This is labor intensive, but it leads to happy clients, bigger paychecks, and more clients. I don't see how anything else can be more important than those three things for an agent. I don't see how anything can be more important than just creating happy clients.

Encouraging multiple offers by acting like you don't care about prospective buyers is a good way to be forced to settle for less money than you could have gotten. I don't encourage it, I don't recommend it, and I very definitely do not practice it. I don't understand those agents and sellers who do. You get the buyers you deserve - the buyers you earn by treating them correctly. Give them respect, give them attention, negotiate with them as individuals, and one good, seriously interested buyer is all that you need to get a good price for the property.

Caveat Emptor

Article UPDATED here

This is a right given to buyers agents by my local MLS, and it's a good one, that I like to take advantage of whenever it is practical. The actual property owner - not the listing agent - does have the right to refuse in writing, a copy of which must be provided to that buyer's agent.

This presentation is not intended to be an argument, and the buyer's agent is not permitted to stay for discussion of the offer between the owner and their agent. Think of it as a prepared speech. What I make is very akin to a corporate Power-Point presentation - in fact, it is a Power Point presentation on my laptop when I have the opportunity to put one together. Chances are good that you have seen dozens or hundreds of presentations basically like mine, except that I can guarantee to get done in fifteen minutes or less, providing nobody interrupts and starts arguing. The presentation is not intended to be an argument. It's a sales pitch. It's intended to make a calm, rational case why this offer that my client is making is one that should be accepted. I make my case, thank them for listening, and leave. I am not allowed to be present for the discussion of the offer, so it wouldn't be very smart of me to design my presentation as an argument. Also, it would be pretty silly of me to expect an immediate response. It would be stupid to demand one.

Many people seem to feel threatened by such presentations. My best understanding is that most of these are afraid of conflict. As I said before, however, it's not an occasion for an argument. I am not allowed to hang around for the discussion, and my presentation is geared towards being perceived as the rational thing to do when the discussion starts without me there to defend it. I don't like it when presentations turn into an argument. A presentation is an opportunity for me to speak my piece directly to the seller, unfiltered by any outside influences, so that both parties have an opportunity to gauge the mental state of each other. If the listing agent has done their job correctly, we're going to be saying the same things, albeit from a different perspective. On the other hand, if the listing agent is a problem personality who "bought" the listing, wants both halves of the commission, has their hand out behind their client's back, or any number of other unsavory problems, then a seller should be grateful to that buyer's agent for providing them with evidence to suspect such. Not to mention that presenting an offer in person is the only way I know of to guarantee that it doesn't go straight from the fax machine to the trash can without intersecting the seller in-between. Yes, I do know agents that I suspect of this. I could name agents I more than suspect of this - and the only way I can ensure it doesn't happen is request to present offers in person. I'm calm, I'm professional, and if I get a signed note saying the client doesn't want me to present in person, they at least know about the offer. And even if you've known your agent your entire life, "trust but verify" is never bad advice.

This isn't to say bad conduct on the part of a buyer's agent during presentations should be tolerated. If the presentation is made at the listing office or at the owner's home, they have a right to insist that I leave. If we're out in public somewhere, they have the ability to pick up and leave at any moment. It is incumbent upon me to give them reasons to keep listening.

Many listing agents feel threatened by this request. If they have done their job correctly, there is no reason for them to be, because what I'm going to say is going to reinforce the critical parts of what they should have said, thereby bringing them additional credibility in the eyes of their client. If it doesn't, well then the client has to judge the situation on its merits. That listing agent has unlimited access to the client. I have this short prepared presentation limited to one subject - my client's offer and why they should accept it. If the listing agent can't make a better case that their interpretation is better than mine, something is wrong. I'm not trying to steal their client - I want to make certain we're all on the same page. And if the listing agent has done their job correctly and I'm a bozo, well, the comparison isn't going to flatter me. So I'm motivated to get it right.

I do not agree to disclose the presentation or the offer beforehand, however. I am responsible to my client to make the presentation as strong as possible, and tipping my hand short-circuits the entire purpose of the presentation. It isn't like the seller has to come up with an immediate verbal response, as if we were in court. When I'm done, I thank them for listening and walk out. They have until offer expiration to respond - so it's in their best interest to schedule me as soon as possible. I just had a request where the listing agent refused unless I faxed over the offer first - which defeats the entire purpose of making the presentation. No. There is no reason you need to see it beforehand - unless you're trying to cover for your own lack of competence. You've got the same data I do. You can figure out precisely which comparable properties I'm going to use, and propose your own. I similarly, have to anticipate this and tell why the comparables I pick are the correct ones, and make the comparisons make sense in the real world. I have a short presentation time to make my case. You have unlimited time to disagree with me, in free format. I'm not allowed to be present for discussions unless you intentionally start those discussions with me present. If I do say something you disagree with and you can't out-argue me before your own client with all of those advantages, something is rotten in your state of Denmark. Not that the presentation is intended to be an argument - but if the listing agent insists on making it one, all of the advantages are in their corner. I can't fight either a listing agent or an owner who doesn't want to be reasonable. I can't force anyone to agree with me, to sign a contract they don't want to sign, or anything else. Actually, if someone on the other side is not going to be reasonable, both me and my client are better off finding out right away. What I can do is build a coherent rational case why it is in the seller's interest to accept our offer.

Nor will I agree to limit the subject of my presentation, at least not any further than presenting the case I need to make. I'm not going to talk politics, I'm not going to display any of the internet's famous prurient material, and I'm not going to do anything else that's irrelevant. I will cover the state of the market, I will cover which properties are and are not comparables, and I will cover why this is a good offer that should rationally be accepted. I recently had a listing agent tell me that they would only agree to let me make a presentation if I limited myself to one section of the presentation I usually give - the "my clients are good people" spiel. I could have lied and told them I'd do it. Instead I told them that their condition was not acceptable. This right was intentionally granted to buyer's agents precisely because there should be checks upon the agent on both sides, and in many cases, clients trust agents in defiance of all reason because they don't understand that the agent is telling them garbage because nobody else gets to talk to them. Whether a buyer's agent makes an in person presentation isn't the listing agent's call. They can certainly counsel the client on the subject, but the decision as to whether to accept the presentation is the client's - precisely because the agents we're all trying to get rid of are going to be the ones trying to prevent anyone else from talking to their client.

I haven't really done all that many of these yet. But the format of the presentation is pretty simple: Show them I'm a good guy, show them my clients are good people, talk about their situation. Then I segue into what the market conditions are, and the property and its position in the market. I show why the property is a good match for the client and why the client is a good match for the property by market position. I show why this offer makes sense in light of market and market position. I talk about the benefits of accepting the offer. Then I close by talking about how my client really wants this property, how well my clients qualify and evidence that they will be able to consummate the transaction - why it's a good fit all around. Finally, I thank them for listening and, assuming there are no questions, leave.

If nobody starts interrupting and arguing, it all takes ten to fifteen minutes. As I said, I'm not looking to attack anybody. Attacking doesn't get me a fully negotiated purchase contract, so it doesn't make my clients happy. What I am looking for is the opportunity to make my case in person, and present all of the evidence I want presented. The reasons it's advantageous to do so are obvious, but let me add one more: You would not believe all how often listing agents (or their clueless assistants!) do not read material that is in the offer, do not understand it, or don't understand even the most obvious implications of what is there. Some fraction of this is intentional filtering - not wanting their client to see information that client is entitled to see because it is part of the offer (this is called "intentional breach of duty" in court filings) - while some is unintentional negligence, in that they're going through motions and making checks in boxes, and they don't pull their noses off the grindstone long enough to realize what's there in the offer and why it is important. But it is in the interest of both principals that this evidence be presented, and if the listing agent is too busy to take the time to understand the offer, they've got too many listings to properly discharge their fiduciary responsibilities to them. This is what is called prima facie evidence - "on the face of it", it is obvious that they're not properly discharging those duties. By allowing a buyer's agent to make a presentation, they are relieving themselves of a lot of potential for legal difficulty down the line, because the buyer's agent should talk about all of this stuff. That's the whole point of the presentation.

It's also an opportunity that everyone should welcome: to put human faces on the transaction, instead of just these mysteriously appearing pieces of paper and voices on the phone. It gets the buyer and seller thinking of each other in terms of being real people. It very much tends to lessen the tendency of people to draw lines in the sand and issue ultimatums, it increases the probability that this will become a fully negotiated purchase contract, and it becomes very helpful later on if we need subsequent negotiations because something new happens or is discovered about the property.

Here's one final benefit of the presentation: the listing agent has this same right to present counter-offers. I have to admit to encouraging tit-for-tat in my clients for this - if the listing agent allowed me to present, I think it's a good idea to reciprocate. If they didn't, that's not a good sign for the counter presentation or the transaction for that matter, and maybe we need to find another property not represented by such an problem personality. Whatever my attitude, it's my client's call. In the final analysis, you can't win a fight with a listing agent who is determined to be a problem personality. All you can do is avoid the fight by going elsewhere. To be fair, the same applies on the other side as well.

Caveat Emptor

Article UPDATED here

Fake Agent Scams

| | Comments (0)
I am selling my home to this couple and from day one I wanted this to be strictly a buy-owner sale and they knew this but they brought in a Realtor and wanted me to give her 1% for paperwork all because they have been friends with this Realtor for 20 years. But when I met with their so-called Realtor she didn't seem to be a REAL legit Realtor. On her business card is only a cell number, no web site, only an AOL email address, and fax. On her business card it states Broker but after further research she is listed as an agent if this is even the same person, because I didn't pull the search by license number only by the Real estate company name. Today the purchase agreement was signed but I noticed that her license number WAS NOT disclosed no where on the home sale contract, just her name and title. Is this legal for a Realtor to fill out a sales purchase agreement without disclosing her license number. I really do not think that she's even a Realtor, just the Buyer's best friend.

First off, even if this person is a licensed agent (as opposed to Realtor®, which is roughly equivalent to an agent who is also a member of the marketing union) Dual Agency is setting yourself up to get taken advantage of in major ways. Nobody can effectively serve two masters with such wildly divergent interests. Buyers want the lowest possible price; the sellers want the highest. Buyers want everything fixed; the sellers don't want to spend any money they don't absolutely have to. If the transaction falls apart, buyers want their deposit back while the sellers want to retain it. I could go on and on. Exactly how is someone supposed to work for the best interest of two clients with such directly opposing interests? Never use the listing agent as your buyer's agent, or vice versa.

Now as to the question you asked: You don't say what state you're in, but every state that I know of has an online licensee database (the fact that you have a real estate license is public record).

The business card stuff, I can ignore. There are still agents effectively working in 19th century conditions. And unless you're a supervisory broker, lots of firms will simply list you as an agent on the roster, even if you have your broker's license.

The failure to disclose license number is more serious. State laws vary, but here in California it's required to go on basically every major document, including the purchase contract.

Who's handling escrow? Ask them what the agent's license number is. If they don't have a license for this person, you've been scammed, and you should contact your state's department of real estate immediately, as well as a real estate attorney to see if you have a valid lawsuit. Actually, if the license number really isn't on the purchase contract, there is material there for a lawsuit, at least in California. If they don't have a license, they are probably practicing law without a license, as a real estate license allows an agent to fulfill a very limited set of functions that would otherwise require a law license. Even if it isn't automatically practicing law without a license, chances are that someone who doesn't have a real estate license has gone over the line into things that require an actual attorney. Going over the line into practicing law without a license is probably the second most common way that actual licensed agents get successfully sued and criminally prosecuted - right behind record-keeping failures in the brokerage escrow account.

I don't know why people think real estate agency is no big deal and that anyone can do it effectively. Actually, scratch that; I do know. People don't like spending large amounts of money needlessly, and there's a whole bunch of businesses trying to sell things where their sales depend upon people believing that they can do just as well without an agent. It's not true, but there's no law against trying to convince people of something that isn't true. To be fair, good agents who know what they're doing do cost what appears to be a large number of dollars, but that is nowhere near as expensive as buying without an agent, or selling without one. People don't know how much they don't know. Go and find yourself a good listing agent (Just as if you were buying, I'd tell you to find youself a good buyer's agent), and you won't have to worry about whether the other party's agent is licensed - if they're not, it's not your problem, and won't be your disadvantage.

Caveat Emptor

Article UPDATED here

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About this Archive

This page is a archive of entries in the Buying and Selling category from December 2008.

Buying and Selling: November 2008 is the previous archive.

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