Buying and Selling: February 2009 Archives

On a forum I frequent, someone posted this advice for prospective property purchasers: At closing, at the title office or bank, when signing the title, contract for sale or any transfer instrument (use a single obliterating line) mark out the word "tenant" and write above it "landlord" or "buyer".

Better yet, require a free simple title to transfer ownership without the buyer identified as a "tenant".

I do not understand this "advice" and am turning to you for clarification. Thanks!

I only work in California, but the only times the word "tenant" should appear on a title transfer deed is if it's a leasehold, or to describe the manner in which two or more grantees hold title amongst themselves.

It is possible that someone might contend that a title granted as "tenant" was a leasehold or rental interest of some nature. I can't see it working in the face of a purchase contract, though, unless there's a whole lot of scamming going on, and everybody involved would basically lose their license and their livelihood, and be liable to the purchaser for what they should have gotten, and didn't. Be advised, however, that I'm not a lawyer, so consult one. With that said, however, such words shouldn't appear unless there's a reason for it.

Here in California, the deeds typically read "(A) grants (B) (type of title or interest) in (legal description of property). It doesn't say seller, buyer, or anything else. It simply transfers title from one group of holders holder to another. There can be commonality between the first group and the second - say a parent granting the property from themselves to themselves and their child. Spouses usually automatically join title by action of law, but it can be beneficial to have them officially on title of record in some cases. They can also be used to remove a particular party to the deed, by omitting them from the list of parties the property is being granted to, as in from A, B, C and D to A, B and D.

There are two kinds of transfer deeds most people will see: A Grant Deed conveys any interest in the property, including interests that may accrue due to operation of law at a later time. A Quitclaim Deed conveys only what interests you many currently have. An actual purchase should use a Grant Deed, transfers within a given family most often use Quitclaims. There are others: Warranty Deeds and Special Warranty Deeds, the latter being mostly used in lender owned property. Both are insurable, marketable title, but there are differences and if you need to know, consult a licensed attorney. Sometimes people acquire title through court judgment, and the title being granted is as strong as anything else, if subject to appeal.

The holder or holders can be lots of different things. It can be a corporation, husband and wife, a single individual, a trust, an estate, a partnership, etcetera, or even a combination.

It also includes how the grantees are going to hold title: joint tenants, tenants in common, common property, etcetera. Each of these has legal implications, and those implications change from state to state. Consult a lawyer in your state for more. Joint tenants, also known as joint tenants with rights of survivorship (i.e. survivor gets the entire share of title), is the most common way for married couples to hold property, but there are many others. There can be layers of this - say a husband and wife hold their share of title as joint tenants, but they are only part owners in a tenancy in common. Any time there are two or more owners, the title deed has to say how they are going to hold title between them. Each of the possibilities has legal meanings and consequences. Single property owners can be and usually are described as "a single man/woman", "an unmarried man/woman" (not the same thing as single!), "a married man/woman as his/her sole and separate property" and many other things, but the word "tenant" does not appear in any of the possibilities I am aware of. Each of these implies things about the state of title as they hold it, but a full description is beyond the scope of this article and changes from state to state. Consult your attorney for details.

The interest being granted can be one of several things or a combination of interests. A "fee" is a piece of actual land. An "easement" is the right to use a particular piece of land in a particular way, but without the rights of ownership. The most common easement is access. The owner of parcel A gives the owner of parcel B the right to travel over a specified part of parcel A in order to get to their own parcel, or for other purposes. Utility easements are part and parcel of this, and the parcel owner granting an easement is giving up rights to do things with their property that conflict with that easement - for instance, building a garage or granny flat over the gas line. If conflict happens, the property owner is required to do what is necessary to give the easement owner their rights. Quite often, easements run with the ownership of a given property, in which case the title being granted is a fee and one or more easements. A leasehold is a time interest - for a specified period of time. Think of it as a rental interest to get the idea. Finally, there is a condominium interest, in which someone holds title to a share of an underlying property, which interest cannot be partitioned off, and usually comes with some rights of exclusive use to a portion of that property. In plain English, you own a defined share of the entire thing, and exclusive rights to your condominium unit, your assigned parking space, and anything else that may have gone with a particular unit under the Condominium Plan, but you have no rights to split yourself off from the common ownership interest. Just because you live in detached housing does not mean you don't live in property that is legally a Condominium. It irritates me no end to read "title being conveyed" in MLS being "fee simple" and then find below read that are homeowners association dues on the property. These two things never go together. If there are association dues on the property, it isn't a fee simple.

Whether the person signing a title transfer deed had a right to grant the ownership interest conveyed (or all of the ownership interest conveyed) is a different story. I can grant my interest in a property on the moon to anyone else, but if I don't have any interest in the property granted it is meaningless - a wasted piece of paper. This is the strongest of many reasons for title insurance. People granting interests that they may not own or control happens all the time. Usually, it is to clear up a cloud on title, but fraud is a real and significant factor, and sometimes people legitimately may believe that they are (or were) the owner, but it turns out they weren't due to some unforseeable factor. If someone sells you a property they don't own, and you don't have title insurance, you are out the money, still owe the money on any mortgage you may have taken out, and you don't own the property. Here is a not too untypical example: Owner A dies, and sibling apparently inherits. Sibling sells property to someone, who eventually sells it to you. But Owner A had a long forgotten marriage that was never dissolved, and that spouse had a child. Child discovers undissolved marriage, checks to see what property may have been left by Owner A, finds your property. Child sues for title and wins, as they've got the law on their side. It can happen to you, no matter your current situation. Fifteen or so years ago, an heir of Alonzo Horton (who laid out what is now downtown San Diego well over a century ago) got several million dollars out of an interest in land it turned out he had inherited but lots of people had been using the entire intervening time.

Words in title grants can be important. Unless I was buying a leasehold, I probably wouldn't accept a title deed granted to a "tenant" (unless it was "joint tenants" or "tenants in common" with any co-purchasers in the property), and I'd decline to pay the money until the seller furnished a correct deed. Why should I, when they haven't lived up to their end of the bargain? Why allow them to create a potential can of worms when you don't have to? Lenders, for their part, have also wisely instituted requirements to make the title deeds they are lending money upon conform to certain requirements before they will consummate the loan. They are in the business of making loans that are going to be repaid, not of repossessing property where the owners didn't, but they're not going to tolerate needless clouds on their title if they do need to take over the property. Bottom line: Be careful about wording on the title deed. Word order and even the presence or absence of commas can be important. If at all in doubt, consult your own lawyer.

Caveat Emptor

Article UPDATED here

The most common mistake in real estate (and every other aspect of financial planning, for that matter) is to assume the situation now is going to continue indefinitely. In the stock market, people chase last year's returns. They "wait for the market to bottom out". When things are going well, they assume that real estate is going to continue to gain twenty percent per year every year.

This is pernicious. Otherwise rational people just assume that whatever is going on right now is going to continue, and it can be extremely difficult to talk them out of it, as I can tell you from personal experience, having lost an awful lot of income trying unsuccessfully to persuade people to limit themselves to what they could actually afford, and missed out on just as much by trying to move people off the sidelines now that we're ready for a recovery in San Diego. But "Past Performance Does Not Guarantee Future Results" is not just a legal disclaimer. It amounts to natural law, just as strong as gravity or the Second Law of Thermodynamics.

People get caught up in mass psychology, doing things because everybody else is doing them. Mass psychology can move the market. In fact, the history of real estate is mass psychology moving the market. Masses of people believing that a property is worth $600,000, and therefore it is. They believe it's worth $600,000 today in part because they think it's going to be worth $650,000 tomorrow. Or $700,000, $800,000 do I hear $1,000,000? You get the idea.

This works even more strongly on the downslide. People are afraid that if they invest $400,000 in the property today, it'll only be worth $350,000 tomorrow. They don't want to lose money, even if it's only a temporary theoretical loss on paper. They want to wait until the market "bottoms out". Newsflash: Real Estate isn't liquid like stocks and bonds, and should not be purchased (or sold) as if it were, with all of the false conclusions that one assumption leads you to.

I'm now going to invoke one of the great and dirty non-secrets of investing: There is no predicting the top or the bottom. Why? Because it turns so strongly on mass psychology. Nobody can tell when mass psychology is going to change. Nobody can tell what it's going to grab onto, or completely ignore. Not Hollywood, not Madison Avenue, and certainly not your friendly neighborhood agent or loan officer. Mass psychology is the "noise" that disguises the true economic signal.

There is a real economic signal. Most things really do have some kind of intrinsic value to them. This value is determined by function, by supply and demand, and by ability to pay, as well as lesser factors. Real estate is no different than most other stuff in this regard. Shares of corporations have a value strictly determined by the value of future earnings per share. $1 per year of future earnings may be more valuable in a low inflation environment than it is in a high inflation environment. Longer potential earnings streams are more valuable than short term ones - $1 per year per share from a well-run insurance company is more valuable than the same earnings from a company with one technological trick that currently leads the market.

The noise often obscures the signal. A little history that leads to some useful concepts: Back in the first half of the second millennium, the assumption was that Earth was the center of the universe, and that planets (and the sun) traveled in circular orbits about Earth. This didn't fit the observed data (planets sometimes moved backwards against the celestial background), so astronomers postulated that planets moved in "epicycles", smaller circles about what was presumed to be the center path of their orbits, called the deferent. Before Copernicus and Keplerfinally brought the whole house of cards down, astronomers were postulating epicycles within epicycles within epicycles in an attempt to fit the observed data.

Unlike planets, economic variables are moved by more than just one force. The fact that planets and artificial satellites are moved by precisely one known force is why we can plot their orbits so precisely. But economics is a lot more complicated, and so the astronomical concepts of epicycles and deferents have some value in understanding them. Let's even use those terms. It's far more complicated than this, but if you think of mass psychology as the epicycle moving about the deferent of the underlying value, you may begin to get a useful picture of what's going on. The epicycles can be very large and last for years, but markets always move about the deferent in the end. That's where the restorative economic forces trend - and the further away from the deferent things get carried by epicycles, the stronger those restorative economic forces are. Right near the deferent they're not very strong, but the further from the deferent that mass psychology and other epicycle creators move perception of value, the stronger the restorative forces get. Think of a a large ball the size of the US economy rolling down a broad shallow valley where the sides get progressively steeper. Things can happen to the ball to move it out of the exact bottom of the valley quite easily, but at the moment it moves off the deferent, forces start acting upon it to move it back to the deferent. Small, almost unnoticed forces that build up, and build up more the further you get from the deferent.

Now what does all of this have to do with the price of tea in China, or more precisely, the price of real estate in your area? Everything. For over a decade, we had been pushing that ball up one side of the curve, as I detailed in Fear and Greed, or How Did The Housing Bubble Get So Big? (first published February 2006). We had mass psychology and political direction and the lenders competing for market share and profit with ever more aggressive loan products, and they all pushed the ball about as far off the deferent as it was possible to go. We had hundreds of millions of people pushing that ball just a little more uphill, assisted and wedged and leveraged and braced by all the machinery we could bring to bring to bear. We had it firmly in our minds that this was the "good" side of the valley, where we wanted the ball to be, and we wanted it as far up the "good" side of the valley as possible. We even started thinking of this so-called "good" side of the valley as the deferent, but the deferent pays no attention to what we think.

Now let me ask you: when that 14 trillion dollars per year ball finally breaks loose and starts rolling down the hillside, building up momentum all the while as the restorative forces add more and more to that momentum all the way down, and keep adding more and more momentum (although the amounts being added get smaller) all the way to the center, do you think it's going to suddenly and magically stop right on the deferent?

Not in this world or any other. It's got all the momentum that a 14 trillion dollar ball can build up, and guess what? It crosses right over that deferent like it wasn't even there and keeps on going. By this time it's got mass psychology behind it just as much as it ever did on the way up, pushing it ever harder as well. In an economic analog to the gravity assist (aka slingshot effect), it is very easy to push it much further to the "bad" side of the deferent than ever we had it to the "good" side, particularly as the government meddling intending to slow the ball's rolling is in fact making it worse and worse and worse and worse and worse, because the government is not paying attention to the Law of Unintended Consequences.

What's the practical upshot? Well, other than the fact that any disturbance from the deferent distorts the markets and makes for future oscillations, and that anything we can do to the market generates just as many losers as winners, what is the practical upshot for individuals? Nobody can directly control the market actions of others, so how can we as individuals best deal with all of this?

The way we deal with all of this is quite simple. First we have to get as true a picture of where the deferent really is as we possibly can, or at least where we are in relation to the deferent. What is the supply of housing like in your market, and how easy is it to add more? What is the demand for housing like in your market? Do people want to live there? Are we talking San Diego and Honolulu, or are we talking Detroit and Cleveland? Next, we have to ask "what is the ability to pay?" How much do people make relative to the basic necessities of living? How strong and how varied is the area economy? Is it a hub for multiple industries like San Diego and Boston, where if one industry tanks the market is likely to be supported by others, or is it a one industry (like Silicon Valley was twenty years ago) or one company town (like Seattle used to be)?

At any one point in time, the value of a particular property is a function of the value of comparable properties around it. If model matches are selling for $300,000 right now, the property is likely to be worth about $300,000 right now. The only way to tell for sure, of course, is to put it on the market and see if anyone buys it for that. The trend is a function of supply and demand - how many properties are for sale right now and how many people want to buy them - as well as mass psychology. Finding the deferent precisely is incredibly tough, but finding which side of it we're on is usually much easier, if you will ignore mass psychology and what is happening right now and look at the underlying economic factors of a particular housing market.

I performed such a study about six months ago; a study I stand by the results of (if anything, more strongly today than then). The study assumed an underlying interest rate of six and a half percent as that was what was available for about one point then; rates are much lower than that today. Mass psychology - a temporary phenomenon of millions of Chicken Littles screaming that the sky is falling - is obscuring the underlying basics as much as it ever did on the way up.

Obviously, the way to profit is different now than it was back when the market was going full gangbusters the other direction. Then, you could buy any damned property you like, pretend to fix it up a bit, and the rising tidal bore of the market would ensure you could make a profit. But the economics of relying upon flipping a property for quick profit are chancy; market sentiment can turn any time.

Longer term investing gives less spectacular results but more certain ones. The deferent for real estate values does rise over time, with population and economic prosperity and the fact that the amount of land available in an area is fixed, and the trend seems to be tying up more and more of that land in reserves of one sort or another: Open space, limited development zones, historical landmarks, etcetera, not to mention legal terrorism relating to property that may not be within a given reserve but that someone wants to prevent the development of. All of this makes property more valuable as time goes by, population rises, and that same population becomes more affluent. If there are 100,000 properties in your area and 150,000 families, the price will be whatever the top 100,000 bidders are willing and able to pay. If the 100,000th buyer is willing and able to pay $200,000 for a property, that becomes the price. Now suppose there are suddenly twice as many prospective buyers. Does the price go up or down? For the mentally challenged, the answer is "up". It's still the top 100,000 bidders who get the properties - but there are now 300,000 competitors. Bidders are going to have to do more in order to be successful buyers - and the ones who aren't willing or able to do more will go without, just like any other good. But housing isn't like concierge service or spa visits - The alternative is not to do without, but rather to do with a lesser substitute for what we really want. Even if it's underneath a bridge or in their car, people have got to have a place to live. This tends to make for more inelasticity rather than less in the demand curve, or to put it in everyday English, if the price of housing goes up, people tend more strongly to do without other things instead of cutting back on housing. Most people don't have a need for a six bedroom 3000 square foot home no matter how badly they want it - but most people would agree that the minimum acceptable substitute for a family is somewhere between a 2 bedroom rented apartment and a three bedroom1200 square foot PUD, rather than the inside of a drainage culvert. The strongly supported conclusion of all of this is that there is a level that housing values will trend back towards, and that deferent (at least in San Diego) is well above current values.

(Note to renters: The demand for rentals is increasing even more because of all the people who lost property and can't get a loan right now. The vacancy factor in San Diego is already a microscopic 2%. Nor can landlords skate on make-believe loans like so many of them were doing, planning to make money off a rising market. What do you think this is going to do to the rental price, particularly of non-apartment units? If you haven't shopped for a new rental lately, be prepared for a some sticker shock when you or your landlord terminate your current tenancy, and in the meantime be prepared for significantly increased rents as landlords discover they can get more)

So how to you make a profit in this sort of situation? First, put any thought of a quick flip out of your mind. The odds against it are so long as to equate to "Not gonna happen", at least not profitably. This is an investor's market. You buy with the idea that you're going to hold the property a minimum number of years. I would advise three at a minimum, and plan for at least five. Make sure you've got a loan that you're going to be happy with that entire time. It's a lot more expensive to refinance investment property than it is your primary residence, and the constraints on doing so are far more telling. If you're putting enough down, a commercial loan becomes a real possibility, simply because the qualifications are easier right now and the rates are competitive. You need a positive cash flow out of the property - which means most likely you're looking a larger down payment rather than a smaller.

Planning to rent the property out is always a winner. If you can get a positive cash flow out of renting it, the only viable economic model of ownership does not depend upon the location of your job in relation to the property. If you need to move hundreds of miles away and renting it out is not an option, you are at the mercy of the current market and whatever phase the mass psychology epicycle may be in. This is one thing that bit an awful lot of people in the last couple years. Just because renting it out is economically viable doesn't mean you can't choose to live in it yourself, but life throws curves. Having the ability to make your property into a viable rental is a pretty effective trump card for most risks of housing. Even if you can't live there because your new job is on the other side of the continent, someone will want to. Especially in San Diego.

Make it habitable, bring the maintenance up to date and keep it that way, but with that said, I would hesitate about upgrading a rental before the actual time comes to sell it. Renters can't ruin your new remodel if you haven't done it yet. Granite countertops, maple cabinets and travertine floors still need to be taken care of. Furthermore, they do got old and less attractive looking. When you go to sell, you want them to be brand spanking new to sucker in buyers without a good agent, one of those bits of detail that sells a property that has already appreciated for a noteworthy premium. Upgrading isn't what makes the property more valuable; the market has already done that. Just like most long term investors, you really made your money when you bought - you're just waiting for the market to formalize what you know is going to happen. You've already made a profit by buying when prices were cheap - you're just not sure when the check for the profit is going to get here. Warren Buffett (among many others) has made pretty much every one of his billions of dollars the same way.

There are precisely two times in the history of holding a property when the price counts: When you buy it and when you sell it. In between, the market value can be thirty-nine cents for all you care. If you don't sell it then, it's not important. If you know that market is going to revert to something higher in a few years, you know you've already made a profit, you're just waiting for the check to roll in. In the meantime, you're living in it (gaining the valuable benefit of shelter) or making a little money every month from the rental.

People think they're going to outsmart all of this by waiting for the market to "bottom out" or turn around, just like they think buying property when the market is rising is a "can't miss" proposition, and for precisely the same same fallacious reason. First, nobody can predict exactly when the market will turn. Second, when it does turn, it takes a while for it sink in to the public consciousness. Mass psychology, remember - it takes a lot for things to penetrate. Third, when it does manage to get people's attention, it's because you've already missed the best window. The way you figure out that the market is going up is by missing the first ten or twenty or fifty percent of increase, if not more. Fourth, mass psychology is fickle. It's difficult turn the market back around short of what I've been calling the deferent point, but it can happen, has happened, and will happen again. Fifth, as I have said previously, what I've been calling the deferent can be very hard to discern exactly. Suppose the market is already past that by the time you wake up and smell the coffee? That's how bubbles happen, and how people get caught up in them and metaphorically lose their shirts. How many bubbles of one sort or another have we had in the last ten years? Betting on making money because of another bubble like the one we just had anytime soon strikes me as a bad bet such that everybody that makes it is likely to lose. So don't make it. But the psychology of "waiting for the bottom" encourages precisely this kind of thinking.

You can always find a good investment if you've got the patience. But right now, properties that are going to make someone an awful lot of money when the market normalizes are so thick on the ground that you can't hardly avoid tripping on them. Furthermore, mortgage rates are near all time lows. The interest cost if you need a loan, or want one so that you can put leverage on your side, is even lower than the base cost in dollars. The time to make a bet that you're likely to win is when the odds are on your side - while the market is below long term trends. You know it's going to come back eventually, and as long as you can afford the property, you're just waiting for the check to arrive.

Caveat Emptor

Article UPDATED here

Lots of properties have some kind of problem with them. Maybe you bought in full recognizance because of something else about the property, but probably not. Mostly it's directly a result of not spending the effort to find a good buyer's agent. But whatever the cause, you're stuck with the property, and you've decided to sell it, but just like everyone else you want to get the best possible price.

Welcome to Bigger Fool Real Estate. That property is your problem. You want it to become someone else's problem. I'm speaking now as a listing agent, responsible to get the best bargain for the sellers. Getting a good bargain for the buyers is not the listing agent's responsibility. I have to tell the truth, but my responsibility is to get the property sold on the best possible terms. If I was your buyer's agent, things would be different, but right now I am postulating that I am not. (I don't do dual agency. Ever.)

I'm going to write about property with problems, but this is equally true of the property that doesn't have upgrades that competing properties do. People don't understand that upgrades get old, the same as the rest of the house, and they are attracted to them and will often pay outrageous prices for them. You need to discuss ways to effectively compete for buyers with your listing agent. A good agent is the difference between making it happen for you on favorable terms and not at all, but you've got to be willing and able to help with the necessary steps.

The first thing is to know is that you're definitely going to have to disclose the issue, and where and when you have to disclose it. Plan for it. It's amazing how often handling the disclosure right can gloss right over what might otherwise be a deal killer. People won't spend the utterly trivial amount of effort to find the good buyer's agent who will save them because they don't understand it's important. This can work to your advantage. This is one of several reasons you need a sharp listing agent.

If you've got an issue that might drive off buyers, you need more prospective buyers than otherwise, because you're going to lose a larger than normal percentage of them. As any buyer's agent knows, people aren't looking for a reason to buy your property, they are looking for a reason not to buy your property. Every property loses a percentage of prospective buyers, and even if they can't put their finger on why, properties with issues lose more prospective buyers. The way to even this out is an asking price just enough lower to draw extra interest. Most buyers are silly about low asking prices, and the more people who view your property, the more chances you have to get a buyer who doesn't care, or who thinks the lower asking price is enough compensation. If you don't price the property thusly, it'll sit on the market and you'll end up getting even less for it, if it sells at all. If you do price appropriately lower, a good percentage of the time you're even going to get two or more prospective buyers bidding the price back up. A good agent can advise you on this - what is enough to work and what's too much. It is not a matter of cut and try - you've got to get it right in the first place if want optimum results. In the situation we're talking about, you want and need lots of people looking at your property.

Clean and declutter the property. Make it shine as much as you can otherwise. Visual appeal $ell$. The situation you're looking for is a buyer who doesn't realize the problem exists, and good visual appeal can distract them from reasons not to buy your property. Avoid turning them off when you don't have to. Equally important, make seeing the property as easy as you possibly can. This is always important, but in a situation like this, it's critical. Moving out is an especially good idea in this case, if you can afford to do so, particularly if you've got children or pets.

Take good pictures for MLS and the advertising. People, particularly ones with weak or no buyer's agent, are silly about attractive pictures. Even otherwise perfectly rational ones who are aware of trick photography and Photoshop. Sometimes, they'll make up their mind they want the property before they actually see it, just from the pictures. They'll still want to look, but they're not careful. Lots of turkeys get sold this way. I don't advise trick photography or Photoshop, by the way - people will realize you were attempting to play them. But picking your shots and vantage points carefully can show even awful properties to good advantage.

De-emphazine anything that may point out your undesirable features or call attention to them. Don't try to hide it, but you don't want to call attention to it, either. Most people have holes in their perceptive ability big enough to sail multiple ocean liners abreast, particularly when it comes to looking at property. If one buyer spots it, the next one or the one after won't. This is why you want more people looking at your property than the absolutely perfect property next door.

Make sure the property is advertised where it will draw attention. You need a quick sale. You don't want people wondering why it's got a large number of days on the market - then they go looking for reasons why nobody else bought. Lots of people aren't interested in anything that's been on the market over thirty days, as in they won't even look at the listing online. If you fool yourself about property value for even a short period of time, or aren't willing to do what is necessary to begin with, you can cost yourself literally thousands of dollars for every dollar you think you're saving.

Know what kind of buyer are you looking for - unrepresented ones without agents, or ones where their agent is just trying to crank a transaction. Make certain they're able to qualify for any necessary loan before accepting their offer, however, because a large percentage of these can't, meaning you are wasting your time. The competently advised buyer who is ready to deal with your issue is a distinct second choice, because they're not going to offer as much, and they're going to walk away if you try to insist they pay what the property isn't worth.

The worst of all possible worlds is someone who insists upon perfection who suddenly realizes the property isn't perfect partway through the transaction - because they're going to bail out, and you may not get any compensation for them wasting your time.

To the maximum extent possible, just ignore whatever problem issues your property may have. Don't lie, and if someone directly asks, don't pretend it isn't there, but don't bring anybody's attention to it, and don't act like it's important, and you'd be amazed how often prospective buyers will pay attention to your attitude rather than anything else. You would be amazed how often unrepresented buyers, and buyers whose agents are trying to crank a transaction, never notice something that should be a deal killer, or don't pay proper attention to it.

If you're in the position of needing to sell to a Bigger Fool, it's not an impossible task, but it is one where you've got to get it right the first time, and you need a sharp agent who knows what they're doing. A discounter or someone who just hangs out a sign in the yard is going to cost you more than you could possibly save over the more expensive agent who actually makes it happen on good terms.

If you're a buyer, none of these techniques are in any way a secret. They are in widespread use. If this bothers you, the best way to prevent it from happening to you is get someone who is going to point these issues out and compare them to other properties. In other words, Get yourself a good buyer's agent before you start looking. And if they won't point out these sort of issues, they're not a good buyer's agent and you should stop working with them and find another agent who will. These folks are trying to unload their problems, and you don't want to be their Bigger Fool.

Caveat Emptor

Article UPDATED here

I hear people complain that they've never had a good buyer's agent, that they can't find one, or that they one they had hosed them (Sometimes, they're wrong about that, by the way). I also regularly get email from people claiming they did fine without one, often despite evidence in their own email that says they didn't.

Finding a good buyer's agent is trivial. Literally as easy as moving your eyes and turning your head to look around. Open your phone book. Run a search engine. If you're in San Diego County, contact me. You get the idea. At last resort, stick your head out the window and yell. Seems you can't swing a dead cat without hitting a real estate agent.

The one thing to understand, and you need to understand it before you start looking, is that for every good buyer's agent out there, there's at least one not so good one. The best way to handle this is by giving every agent who wants one a chance to work with you. You have literally nothing to lose beyond a little bit of your time. But while you shouldn't give anyone an exclusive agreement, there is no reason whatsoever not to sign a non-exclusive representation agreement. A non-exclusive buyer's agency agreement is quite literally a bet that consumers cannot lose. And here's the rub: The agents who won't work without an exclusive contract are the ones that can't really compete. The agents who will work on a non-exclusive basis are the ones that know they're good. I don't care whether someone is working with just me, or has ten other agents on the line. I am willing to make the bet that in heads up competition, I can beat anyone else. If I'm wrong, then I get the important benefit of knowing I need to improve. And the agents who are not willing to make that bet are among the ones you should avoid at all costs. Nor does the mere fact you have an agreement mean you must continue to work with them. On the contrary, all of the good agents maintain something close to a "fire me at any time!" policy - it's implicitly part of the non-exclusive agreements I advocate.

There are only two reasons why you didn't get a good buyer's agent: ignorance and not trying. Ignorance as in you don't know that a listing agent is working to get the best deal for the seller. That is their contractual and fiduciary duty. A seller wants the highest price, quickest sale, with the fewest problems possible, and it is the listing agent's responsibility to see that they get it. If you bought when there was a better property cheaper, if the seller would have negotiated a better deal, if you don't understand that the disclosure they bury in the middle of 425 other pieces of paper is really important, that's not the listing agent's problem. Ignorance as in you don't know how critically important it is to get expert help in the biggest transaction of your life. Ignorance as in you didn't do the tiny bit of research that lets you know not to sign an exclusive agency agreement. Ignorance as in you don't know how much you don't know about putting all of the information in the proper context, whether something is trivial or whether it really is a deal killer - information you have no hope of knowing unless you make a habit of buying and selling real estate in this area. Ignorance as in you don't know that the number one set up for buyers who spend too much to buy properties they should not have considered purchasing at all is that they don't have an expert on their side.

Not trying explains itself. You just didn't try, whether because you thought it wasn't important (there's that ignorance factor again), or because you thought you could save yourself money by not having one (ignorance yet again). Go ahead and tell that to a roomful of agents sometime. Buyer's agents or listing agents or both, it makes no difference. The good ones will all laugh because no matter how often they hear it, they've learned enough that it's still funny, and we're always encountering examples. If it isn't the funniest thing I've ever heard, it's a real contender. When I try to explain what they did wrong to people who ask, they say something like, "You're blowing the tiny details way out of proportion!", usually in quite a defensive manner. Ladies and Gentlemen, real estate is all about the details - lots and lots of details. Details ad nauseum, and even small details can make a difference of tens of thousands of dollars in the value of a property. Furthermore, it is precisely those details upon which your agent will be judged. It doesn't do yourself any favors to pretend you didn't cost yourself four or five times or more what you saved. If your agent was yourself, look in the mirror for the person to blame. There is no one else. If the ego thing is more important to you than the money, that's fine, but you need to admit it to yourself at least. Otherwise, get a buyer's agent before you start looking. A good buyer's agent is far more important than a listing agent. There is no other factor that even compares for predicting how well you will do in real estate. Get more than one if you like. As long as you don't sign any exclusive agreements, you can always hire more and fire the bad ones you already have.

The big thing to evaluate agents on is not experience, but attitude. Not have they been doing transactions for eighty-three years, but are they going to tell you about the problems and issues they see with this property? I would work with a brand new agent with the ink still wet on their license who will bring your attention to issues over the most experienced agent in the world who won't. Heck, I'd advise still working with the newbie even if the more experienced agent also will. For that matter, in my personal experience, an agent who says "I've been doing real estate for (some number of) years!" is most likely about to tell you what they've been doing wrong for all those years. Experience doesn't make it right, particularly in the face of the complexity of real estate and the fact that most state regulators don't know any more than beginning consumers, and it can be almost impossible to prosecute for some of the worst abuses there are (e.g. buying listings)

It may take some cut and try for find a good agent, but firing a bad one takes no effort and shouldn't require a confrontation - if you signed the right agreement in the first place. If you sign an exclusive buyer's agency agreement, firing a bad one takes a formal release, and you can't force them to do it. It's bad business, but probably the majority of brokerages won't sign such a release. What they'll do is talk like they will to get you into the office, but if they can't get you calmed down or substitute another agent, they refuse to actually sign. If you sign a non-exclusive agency agreement, on the other hand, you just stop working with them. If there was something they showed you that you liked enough to buy, you would have already made an offer. Furthermore, you probably wouldn't want to fire them. Therefore, you just leave that agreement in place and stop working with them, and your problem is solved. Pretty neat, huh?

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The last few years, real estate agents and brokerages have begun charging a transaction coordination fee in addition to whatever their share of the sales commission was. The purpose of this is to pay a transaction coordinator, so your agent doesn't have to do work you've already paid them to do, and can go earn more in commissions.

Is this a racket or what? Imagine if you paid an appliance repair service, and they did part of the job, then hired someone to come and do the rest. Someone who isn't a qualified appliance repair person, who doesn't necessarily understand the repairs that went into the job. Suppose the repair service billed you a "service fee" on top of their ordinary rates to pay for this other worker. Would that make you all warm and fuzzy inside? But real estate agents and brokerages get away with it because they bury it inside the accounting of one of the most complicated transactions most people will ever do.

The work that a transaction coordinator does is all included in the work required by a standard listing contract or buyer's agency agreement. That work doesn't get done, the agency or brokerage hasn't really earned that commission check. So they peel off the agent and substitute the transaction coordinator. So far, all is well and good - assuming the transaction coordinator knows at least as much as they need to. But if the agent wants you to pay for the transaction coordinator on top of their fee, which includes agreeing to do the work the transaction coordinator does, I think you should refuse.

In my opinion, it's better to find an agency where the agent doesn't vanish as soon as there is a purchase contract (and in some cases, before). The company may required me to use a transaction coordinator to ensure compliance, but I make it plain that coordinator is not permitted to contact my clients. They need something from my clients, they ask me. This (among other steps) keeps me involved in the full transaction, whether I'm doing the loan or not. It also encourages repeat and referral business. The clients keep talking to me, not some office worker they don't know or call center employee three states away who may be completely clueless about California. There is no doubt in the client's mind that I'm still in control of the transaction. There is no specter of doubt that maybe the transaction isn't important, that maybe I don't really care. And because it's all work that the contract requires me to do anyway, I never charge a client a transaction coordinator fee.

Agent disengagement is also another way in which perfectly good transactions get screwed up - because transaction coordinators who don't know any better do something that messes it up. I've worked with some transaction coordinators who were a lot sharper than the agents, and saved the theoretically more qualified agent from incredible screw-ups. But I've also worked with ones who were, to be charitable, completely adrift upon the sea of regulation and what obligations there were in the contract and the law for that agent and their principal. I don't mean missing a required signature on a document - that happens to everyone, is easily fixable, and is no big deal in most cases unless clueless people make it into one. Stuff like that is something transaction coordinators are good for. I mean basic obligations, like safety and habitability and things that were agreed to in the contract, and little details like whether the laws are adhered to.

Transaction coordinators are to relieve the agent of some of the routine work of the transaction - so that agent can go out and make more money. How is it not a violation of good business ethics to charge a consumer again for what we've already agreed to do, so that we can go out and earn more commission money and charge another transaction coordinator fee? The only justification I can see for charging a transaction coordinator fee is pure unbridled greed, and a client who doesn't know any better. Except that's not a justification - it's a rationalization. An "I can get away with it!", not "It's the right thing to do." It isn't the right thing to do.

Transaction coordinator fees are relatively small on the scale of agent commissions - $450 is about the cheapest I've seen recently, and I've seen them as high as $750 of late, but that's a fraction of the agency commission on even a cheap condo around here. Sometimes it's used it to give a nice bonus to someone who works for the brokerage, sometimes to pay a third party fee for the service, and sometimes they just use it to pay the transaction coordinator's regular hourly wages. Whichever it is, I have no objection to that person earning that money. But it shouldn't be a separate charge to the consumer - it needs to be paid out of what the agents and brokerages make. It's work we're required to do, that we have agreed to do in the contract, be it listing or buyer's agency. How is it good business to make clients pay again for the same work we've already agreed to do, for the money they've agreed to pay us?

For consumers, a transaction coordination fee is probably not the difference between being able to afford the property and not. If you end up paying it, however, you are effectively paying twice for the same service, and generally less competently performed and with more chances of a screw up, either because of communication issues or because the transaction coordinator may not understand everything the agent did. Most so-called "junk" fees aren't, but paying for a transaction coordinator is a junk fee. There isn't a good reason why consumers should pay for the same thing twice. So ask prospective agents right up front whether they charge a separate transaction coordination fee or not. A good agent who doesn't won't have any problems saying that they don't, and even putting it in writing that their agency commission is the gross amount their company makes, and any fees to a transaction coordinator come out of what they're already being paid. And ask, also, if the agent is always going to be involved in the transaction or not, and what steps to insure their involvement they take. If they're planning to disappear as soon as there's a fully negotiated purchase contract, they're not really going to be involved in the whole transaction, are they? And you'd be amazed how often things go preventably wrong in the later stages of a sale or purchase, because the agent who should understand the entire contract from start to finish doesn't, or they disappeared with the work they agreed to do unfinished, leaving it to a transaction coordinator who has no choice but to do exactly the same thing every time, because that's what they've been instructed to do.

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There's an awful lot of nonsense out there that advises people to do without an agent. Quite often, first time buyers of real estate get seduced into not having an agent by this stuff before they get into the market, let along before they understand what's really going on. After all, it's pretty easy to get seduced by an advertising come on that says, "Save money!" when there's an explicit cash reason to do so, and there is no corresponding line on a HUD 1 that details everything it cost you. I get emails and even occasional comments from people who are convinced they did "just fine" without an agent, often despite evidence right in their own email that they did not.

By the time of their second real estate transaction, most people have figured out that while an agent is an expense, they are a financial lifesaver as well. For most people, however, the second transaction is a sale as opposed to a purchase, and a buyer's agent makes a lot more difference to your result than a listing agent

The first thing you have to understand is that just because you don't have an agent does not mean there isn't an agent involved. Furthermore, the agent that isn't yours is working for the person on the other side of the transaction, not for you. If you think of agents as some sort of tollbooth, it makes sense to try to bypass them. It's very possible to do so. In no state that I am aware of is there any requirement whatsoever to have an agent. However, agency is not a tollbooth, no matter how many "do it yourself!" hucksters and crummy real estate agents make it out to be. There are real opportunities to make a positive difference at every stage of the transaction, and if these is no agent, chances are that not only will things not be made better, but that the other side will make them worse.

For buyers, the very first thing to understand about a listing agent is that they have a contractual and fiduciary responsibility to get the best terms possible for the seller. Highest price, quickest sale, fewest problems. When I take a listing, I am trying to sell that property. When a prospective buyer calls me wanting me to show my listing, and I am going to do my best to sell you that property. Nothing so crass as a high pressure sales pitch, but I'm going to get the job done a lot more often than you'd think. Whereas I might look at 100 houses or more for my buyer clients and show them only the ones where I see some value, my sales ratio is a lot higher than 1 in 100 or even 1 in 10 when I've got one listing I'm trying to sell to people who call me out of the blue to see one of my listings. The specific numbers might change, but you'll find that's pretty much the way of things with listing agents. Not the best property for the buyer? Better properties available more cheaply in the same neighborhood? You could get a lower price for the same property if you had a better negotiator? None of these is a problem from the listing agent's point of view. The listing agent's job is to get the best possible terms for the seller, and every one of these situations is indicative of a listing agent who has done their job.

Now if I'm the buyer's agent, my responsibilities are entirely different. The vast majority of the time, that listing agent doesn't so much as get to talk to my clients. That agent has my contact information, not my client's, and I may not care which property my clients buy, I'm not going to let them get pressured to buy something that doesn't suit them, and even if the listing agent does (due to showing restrictions) get to talk to my client, I'm going to keep the conversation where I think it belongs. I've put listing agent's noses out of joint quite effectively by bringing client attention to defects or any number of other tactics, including the old "talk to the hand" standby where necessary. These people have designated me their agent, therefore, you talk to me, Mr. Listing Agent. It's my responsibility to pass it to the clients - along with anything I believe is getting left out. A good buyer's agent is not looking to sell you this property, they are looking to find the best bargain for your needs and make that happen. A buyer's agent has no responsibility to the owner of the property - our responsibility is to our clients, the prospective buyer.

Any time you are looking to buy real estate, you are in a situation of asymmetric information. The seller knows more about the property than you do. A good buyer's agent is going to remove most of that gap in information. I know the area, or I wouldn't agree to work there. Simply by practice, I've become much better at spotting issues that buyers need to become aware of before they make an offer. Quite often, the buyer was aware of something I point out, but hadn't considered it in this particular context. It's a rare property where I don't get a look from my client that all buyer's agents should recognize, because it means the clients hadn't thought of that. Often, it's something that means I've just talked them out of a property they would have been miserable in.

It's not just in spotting defects, either. A lot of what I bring up has to do with long term livability of the property or relative value. I've saved clients from so many misplaced improvements that you probably wouldn't believe me if I gave you a number. Saving people from spending money they don't have to (along with the interest on the bigger loan that goes with it) happens multiple times with most clients. Beautiful is nice - but it's also seductive and usually over-priced.

Then there are negotiations. A buyer's agent has seen what's sold in the area recently. Unless you've had a long and unfruitful search, chances are that you have not - and they're not going to let you in now. A buyer's agent knows how this property compares to what has sold lately in the area. It's disgusting how often I find listings where the agent literally has no clue about the antecedents or the current competition. Often it's because that agent bought a listing - promised to get an unrealistic price in order to secure the listing contract. They're not going to get that price - except from people who think they're being "smart" by not having a buyer's agent. Far and away the largest reason for overpriced sales is people trying to "save" a little money by not having a buyer's agent.

Furthermore, quite often once you do get into negotiations, you discover that the other side has decided not to be reasonable, and there is a tension between whether it's a good enough bargain to stay in the transaction, or whether the attitude of the seller and their agent has crossed over a line into territory where you are better off bailing out. Just because you have started negotiations doesn't mean you are under any obligation to continue. Sometimes, even if you have a purchase contract, the best way to respond to a given situation is to decide you don't want the property that badly. If the owner is not going to fix problems they should, the purchase contract needs to be re-evaluated in terms of the rest of the market. This property might not be the bargain you thought it was. Better to discover that before there is an offer, of course, but before the transaction is consummated is better than afterward. That owner is stuck with that problem. Whatever it is, you don't want to take it off their hands unless you're getting something out of the situation that compensates you in your own mind. Then there are costs associated with the transaction, and who pays for them. Your agent should know what is and is not customary in your area, and why, not to mention the basic law behind everything.

Everywhere in the United States that I am aware of, the listing contract calls for the listing agent to get a set percentage of the sales price, and split that percentage in some wise with the buyer's agent, if there is one. If there isn't, the listing agent gets to keep the difference. There are reasons why the seller effectively pays the buyer's agent, despite the questionable nature of it - and consider too, that the only one bringing any actual money to the table is the buyer. Without the buyer's money, nobody gets anything, so everybody is being paid by the buyer. Nonetheless, trying to save money by doing without a buyer's agent won't get you any actual money, and you will end up paying all sorts of extras that don't show up on any official paperwork but are no less real, because you didn't know what a good buyer's agent knows, and therefore bought the wrong property for too much money and spent extra for stuff that really should have been the seller's expenses.

Caveat Emptor

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