Buying and Selling: April 2009 Archives

We were ready for a strong turn in the market, but the strength of what we've gotten in the last six weeks is amazing. It has been, if anything, worse that a few years ago.

What caused it? People with money are scared to leave it anywhere else. The expectation is that inflation will become a large factor in the next several years, so you don't want dollar denominated investments such as bank accounts and bonds just sitting there. With real estate, you have a tangible asset where they can't just go out and print more, diluting your value. The stock market has seen major declines and most people don't think they're over - especially once the inflationary spending of the new administration gets into the system. People are looking for a safe place to put the money where it won't be worth less (or worthless) tomorrow. Even if real estate declines a bit more, there's the limited supply that exists to redeem basic value.

As I said when explaining how the bubble got so big, when you suddenly dump a lot of cash into a market, prices shoot up. And boy how prices have shot up. I was in a model match for a house I was buyer's agent for at just over $330k 12 months ago. There's a bidding war that's gone over $500,000 for the one that just went Pending. Another property, larger and with a view that goes all the way to Mt. Soledad, got an all cash offer for $50,000 over asking price - no bidding war, just jump straight to the nukes. And these are just the East County properties - sedate, older east county, which has always had good value compared to everything else. I closed on two properties in Chula Vista earlier in the year, and there's practically a bidding orgy going on there now. Model matches are going for almost twenty percent higher than those two properties - and that's with a two month difference. I haven't been working north of Clairemont, but what I've heard says that coastal North County is hotter than anything else.

I think we've graduated to a full-on seller's market, so much so that I'd be telling tell people to hold off on buying if I thought it was going to be any better later on. I am telling people that you really need a sharp agent in this kind of market to prevent overpaying. If you have any kind of a decent situation and desire to sell, it may be time to seriously consider it. For the last three years, I've been telling people "Hold off on selling if you can. There are too many distress sales, and not enough buyers" That has emphatically changed. I still think that, considered in isolation, you'll get more for your property if you hold off a while, but no longer so much so as formerly. If you have other considerations, like needing to leave town for a job, selling so you can buy something elsewhere is likely to be better than alternatives.

Six weeks ago we had just over 12000 active listings in San Diego MLS. Today we've dropped to 11,400, with 866 having gone pending in the last 7 days. That's basically a 13 week supply, but 1840 of the actives list are short sales with an accepted offers denoted properly - and I've talked before about how many short sales aren't denoted properly. Assuming short sales take ten weeks on average, that's a nine week supply. Perhaps about where we were last time I wrote one of these articles, but with a difference: Anything priced even vaguely in the right neighborhood is seeing multiple offers if not bidding wars. The attractive properties, priced correctly, that everyone wants are all going "Pending" within about a week, having seen multiple strong offers. They don't have to be beautiful modern properties, either - so long as they are basically okay, they're seeing action and lots of it. If you're not seeing multiple offers, the only real explanation is that your listing agent didn't do his job - he let you price it waaayyy too high. If you're in that situation, fire your agent today and find someone competent.

If you're a buyer, there are alternative strategies to pursue if you don't want to overpay. The easiest is to have a good buyer's agent to help you - but no buyer has the kind of leverage we had just a few short months ago. Making up your mind that you're going to start with a old and unattractive but basically solid property and be the one to upgrade it. Kind of like the flippers (or actually, fixers) we had five or six years ago, except you're buying it for yourself rather than with intent to sell. I'm not certain the current market is ready to support pure flippers yet, but it is getting close.

The one note of caution I must sound is that you've got to pay particularly close attention to the current paranoid lending standards and new appraisal standards. Not all offers are created equal. Lenders loan on the lesser of purchase price or appraised value. This means that, for instance, a VA loan based offer with $50,000 in down payment has the option of making it happen when the appraisal comes in $40k below the purchase price. A 20% down payment conventional loan does not - unless they have even more cash available to them. An all cash offer beats everything, of course.

If you're a seller, having an agent who doesn't understand current lending standards and negotiate in full cognizance of their limitations is a recipe for having the transaction fall through, and having to start over again trying to get people interested even though your property may have sixty days or more on the market. If you're a buyer, it means placing your Good Faith Deposit at risk (or more precisely, at more of a risk than it needs to be). I'm seeing properties sit in escrow with agents who should know better, in denial over the fact that this transaction is not going to happen because the necessary loan isn't going to fund. The time is long past when agents - whether they're on the listing side or buyer's side - need to know loans every bit as well as loan officers, to avoid wasting client money and client time. There may be no way to tell ahead of time that the loan definitely will fund, but there are all kinds of red flags that tell you it won't if you pay attention.

In short, this market has suddenly become very lucrative for sellers, but everyone - buyer or seller - needs to be extremely careful about negotiating contracts that have some room to continue if something happens to the appraisal, because there's no longer the ability to get around an appraisal that comes in low. Either you're going to renegotiate that contract, the buyers are going to come up with more cash, or you're spinning your wheels because the loan isn't happening, and the transaction isn't happening without that loan.

To close this article, if you'd like to discuss your particular situation with an top of the line agent who knows the San Diego market, contact me.

Caveat Emptor

I've been answering this question for a long time. Whose interests do we need to be concerned about, in a "If they are harmed, we've got a problem" sort of way? Who has a primary stake in a real estate transaction, and who does not? Whose interests must be served by said transaction? Whose interests are critical, and whose are not. I never really went into an explicit answer. But some nasty emails and deleted comments of late have made an explicit answer important.

For as long as I've been thinking about the question, I've been answering it the same way. Depending upon the transaction, there are two or three parties with a primary stake: The buyer, the seller, and the lender if there is one.

The buyers interests are the most important and the most critical. They are giving up a very large sum of money in order to purchase real estate. Money is liquid; real estate is not. You can do anything with money; real estate, not so much. Therefore, there must be a compelling arguments made why it is in that buyer's interest to part with that much cash in order to buy that property. I've made a fair number of said compelling arguments, but you always have to be able to make it. Every time. If they're getting a loan, you also have to build an argument why it is worth them taking out a loan, which forces them to pay out a given amount of money every month for the next thirty years in most cases. Money that the buyer hasn't earned yet, and in most cases couldn't pay back right now if they had to. You've got to build a compelling argument for why that buyer giving that seller however many thousands of dollars in order to buy that property is in that buyer's best interest. If you're a real estate agent and you can't do this from the ground up, you're in the wrong business.

The seller's interests are also critical. There's got to be a compelling argument made as to why it's a good idea for that seller to agree to sell their property for that price. If not, we should be looking at buying some other property. Real estate may be illiquid, but nobody is creating any more of it. Not the Dutch, not the UAE, not anybody, not really. So why, to paraphrase the immortal words of Roald Dahl, would someone willingly exchange something of which nobody is making more of for something which they're printing more of every day? Again, if you're an agent and you can't do this, you're in the wrong line of work.

The seller's interests and the buyer's interests are different, of course. Without those differences, nobody would ever trade anything to anyone else ever again, and that includes trading for money, or sales as it is usually called. But you've got to be able to make compelling arguments for both sides, and you've got to be right, as real estate transactions are not readily reversible in the general case. There are some exceptions, but you can't usually go back afterwards and say, "Let's call the whole thing off!".

The lender, if there is one, also has a compelling primary interest in a real estate transaction. They are putting up many thousands of dollars of money they have already earned or gotten in some fashion in order so that the seller gets cash from the buyer rather than having to wait thirty years for the last bit to trickle in. In most cases, the lack of a lender will prevent the transaction from happening at all because that seller needs cash in order to pay off their own lender, or cash for the property in order to accomplish their reasons for selling it, not monthly payments trickling it over the next thirty years. Therefore, without the lender, the seller's interests could not be met, and therefore the buyer's interests would not be met. But the lender doesn't have a direct interest in the property investment, only that it can be sold to pay off the debt if the borrower defaults. What they do have an interest in is whether the buyer can pay them back, and, failing that, if they can get their money out of selling the property if the buyer does not.

The seller is usually paying almost everyone who works on the transaction, the buyer's money is the reason why the seller is able to pay everyone, and the lender's money is what is used so the seller can pay everyone. These three parties have legitimate, primary interests in the transaction. If their needs and criteria are not being met, they can call the entire transaction off. As strange as it may be to see a real estate agent writing this, they should call the transaction off if their interests are not being met.

Everyone else is working for a paycheck: Agents, loan officers, escrow, title, appraiser, inspector, notary, ad nauseam. We make our money by being able to help one of the above three "people" consummate the transaction. We are worthy of our pay to the extent we help one or more of those people serve their interests, or serve those interests better. If we can't do that, we shouldn't be part of the transaction. We only make money by serving the interests of the primary stakeholders, and if we're not doing that, we shouldn't make money.

If you cannot agree with this, you and I have nothing further to talk about. I make my money by putting my clients into a situation that's better than it would have been without me. If that's not the way you make money in real estate or any other business you might be in, then you are trying to be a tollbooth, and the dynamics of the market are going to do their best to route around you. In other words, if you cannot show a value to those you serve that is at least as great as the money you make from providing those services, the market evolution is going to put you out of business as soon as it can. This knowledge goes back at least to Frédéric Bastiat, but it's nothing that despots the world over haven't known for millennia, who have been getting increasingly sophisticated about not getting put out of business as the markets have gotten more sophisticated about what adds value and what does not. I have absolutely no sympathy for any argument that concludes you must pay someone because the law says you must. The law, to the extent it relies upon "because I said so!" is an ass.

That doesn't mean there aren't legitimate economic reasons to choose to use a real estate agent, a lender, a notary or whomever. But to the extent the law forces you to use one, the law is a tyrant, engaging in rent-seeking behavior. Healthy economic organisms interpret rent seeking behavior as damage, and seek to route around it. Eventually, they will succeed. It may take a while, but they will succeed.

So now you know why I am always looking at "What is the consumer's interest?" and "How can the consumer benefit?" and "Does this benefit the consumer?" It isn't altruism. It's enlightened self-interest. By providing value for the consumer, even if in the context of specialized knowledge or judgment that consumer may not have, I am showing an economic reason why it is in that consumer's best interest to put money in my pocket. If $1 in my pocket means more than $1 in theirs (and it does), consumers will freely choose to line up at my door for the privilege of paying me. Some consumers may not agree, and that's fine. There's plenty who agree do to keep someone who is so oriented hopping for as long as I am willing and able to work. That's the best income insurance there is or ever will be.

But if you are not so oriented - and I am looking here at any alleged professionals who think in terms of their own benefit, rather than the benefit of consumers - then it's only a matter of time before the market figures out a way to route itself around you. I and others like me are going to be working forever. Those who take the tack that "you pay me because you have to!" are going to find yourselves in declining industries, and no amount of regulation (e.g. this) is going to do anything other than delay the tide until someone figures out how. And acting self-righteously as if you have some kind of "right" to that money as you lobby the government for them to force people to do it your way will only make you more and more contemptible, more and more an object of ridicule.

Caveat Emptor (and especially Caveat Vendor)

Article UPDATED here

It really helps my perspective in a lot of ways to be both a Realtor and a loan officer. Just the other day, I had a loan only client where they were already under contract to buy a property when they contacted me. The basics of the situation was that the property was in a very urban area, built up about the time of World War I, that has seen considerable renewal in the last decade or so. I work there as an agent sometimes, but don't keep constantly informed on all the market activity in the area, so when I do get a buyer or seller client in that area, it does take me a bit of effort to get back up to speed on that micro-market.

Silly me, I trusted that the buyer's agent had done their job, and when I got the loan application, I sent the appraiser out. Yes, a stupid mistake, I know. The buyer's agent was raving about what a fantastic deal it was the whole time the appraiser was working. Then the appraiser e-mails me and said, "Value isn't there. Do you want to proceed?"

Well, beat me like a red-headed step child. I ran the comps, and there just wasn't any doubt. The property was at least 25% over-priced, at least as compared to what the appraisal will support. Keep in mind that lenders will only lend based upon the lower of purchase price or appraisal. This is good basic accounting practice going all the way back to Luca Pacioli, and those who would change this do not understand the underpinnings of our financial system nor do they understand loan underwriting.

So what do I do? First, I apologize to the client for not having run the comps in the first place. Then I explain the situation to him. Having the value fail to come in isn't the end of the world. He has a loan contingency in effect, so he has options.

First, he can just walk away. The loan can't be done on the terms of the purchase contract, giving him grounds to exit the contract without penalty. No harm, no foul. This is a good option to consider.

Second, he can come up with the difference in cash or the equivalent, increasing his down payment so that all the lender has at stake is the same percentage of the appraisal amount. If it was an eighty percent loan on (for example) $200,000 (or $160,000), coming up with more cash can make it a eighty percent loan on $160,000 ($128,000), or higher percentage value loan on the same amount. This usually isn't a good option, but if the property really is worth that much to you, it might possibly be worth considering if you can. Most residential buyers don't have this much extra cash lying around, but if you really would get something out of the deal that really is worth the money you are paying, it is an option worth considering.

The third and usually the best option is to renegotiate the deal. The seller can't make the buyer stay in the contract if there's a loan contingency in effect. In fact, if the appraisal is done correctly, there just isn't a lot of wiggle room for the sellers. Another appraiser is going to come up with a very similar value. Therefore, the seller is not going to get more money out of the deal. They can decide they want to do what is necessary for this deal, or they can flail about for months hoping for another buyer who doesn't need a loan. If the appraisal is done correctly, it is in the seller's interest to renegotiate. Some won't, sitting in Denial, but it's not the constructive alternative. If the appraisal is only going to come in for $160,000, pretending it's a $200,000 property doesn't help the seller any more than over-pricing the property in any other context. Remember, lower of purchase price or appraised value. If the appraisal is only for $160,000, the loan can't be based on an amount higher than $160,000. Whether the listing agent bought the listing or whether there really are aspects of the property unquantifiable in the appraisal, the fact of the matter is that most potential buyers need a loan and are therefore going to be stuck with that appraised value, and can't pay more than it indicates. Even the ones who can usually don't want to.

This isn't to say that appraisers are infallible, don't make mistakes, don't collude with buyers upon occasion, etcetera. Sellers and their agents need to do their own due diligence to find out if that appraisal is accurate or not. But if it is, sitting there in denial of the facts isn't going to help.

What is not a constructive option is to beat up the appraiser or get another one. Assuming the appraisal is well done, the value is going to be close to what any other honest appraisal will come up with. The sales in the neighborhood are what they are. If there are better and higher comps, by all means ask the appraiser to take them into account. But if there aren't better and higher comps, it is neither in the buyer's interest nor the lender's to over-pay for the property. Buyer's agents and loan officers who pressure an appraiser for higher values than are justified, and appraisers who cooperate, are committing FRAUD. I have nothing but contempt for any of them. Especially the buyer's agents, who are violating fiduciary duty on the most basic level.

The appropriate response, on an buyer's agent part, is to renegotiate or advise a client to walk away if the seller won't renegotiate. That's doing your job, serving your client, etcetera. If I can't find comps that persuade the appraiser to change the appraisal upwards, that appraiser has just saved my client a large amount of money they shouldn't have been spending. The appropriate reaction is gratitude, not anger that my deal is falling apart and I'm not going to get a commission check yet. Unfortunately, this is often not the reaction that appraisers and loan officers get in that situation. The most common reaction is trying to find a more compliant appraiser, one who is willing to stretch the truth. Exactly how is that fiduciary duty to pursue a path which results in my client over-paying for the property?

If the property really is worth paying that much money, I shouldn't have any problem explaining to my client why it is worth that much money, appraisal or no. Yes, they've got to come up with more cash, but if the property isn't worth the purchase price, I shouldn't be pursuing a course that results in my client paying that price. Agents who do should be fired. Actually, I think they should lose their license, but consumers firing them is an acceptable minimum.

It is only the loan which enables anyone to pretend otherwise. But a dollar my client pays for via a loan is every bit as much real money as a dollar out of their checking account. Neither a client or an agent should treat $1 in purchase price any different in an "all cash" purchase than they should if the property is bought with a 100% loan, and no money out of the client's pocket. For an agent to do otherwise is a sign of the worst kind of crook in the business. If a property is worth $X, it's worth every penny of it whether or not lenders will lend based upon the full purchase price. It may not be a property which this client can purchase, but it is still worth that money. The appropriate response for a buyer's agent is to attempt to renegotiate, and advise walking away if that is unsuccessful. It is not to violate their fiduciary duty as well as committing FRAUD by getting a bogus appraisal. If the buyer's agent is really determined to do their job correctly, they've just got a little bit more to do than they previously thought.

Unfortunately, it's been a really long time since any of the main institutions of real estate were serious about the client interest part of professional standards. Neither the various Associations of Realtors nor anyone else really gives a rat's. What most of them teach is getting a transaction done, and treating the loan and the appraisal as obstacles to that, rather than protections for clients. There is an enormous inertia of lazy thinking in the real estate profession, and it's been hosing clients for decades. But just because you can manipulate the system to persuade a lender to believe that a property is worth lending $X on doesn't mean the property is worth that purchase price, and lenders are starting to defend their interests, something I'm very happy to see.

It isn't pleasant for a buyer's agent to re-open negotiations. It's still my job when this happens, and if the listing agent is any kind of professional, they're going to respect me for it. Nor is getting angry a constructive response from a listing agent. As a listing agent, I can try and find better comps, I can persuade the buyer why the property really is worth that much money despite the appraisal, or I can do what I almost certainly should have done in the first place: Go back to my selling client and explain why the property is over-priced and why I should sell it for less. A listing agent who can't or won't act appropriately in this situation isn't worth the dog feces stuck to the bottom of their shoe, much less a fat commission check. They are sabotaging their client, and should be treated accordingly.

Do you see what the common element is here, and the common problem? It's agents who didn't do their job right, whether they "bought" the listing by indicating an unrealistic price, or said it was a good bargain when it isn't. Not only did they commit one of those two egregious violations of client interest, when it is rubbed in their face, they are compounding that mistake by refusing to own up to it and deal with the consequences. It's difficult to own up to mistakes, but it's also something a professional has to do. Agents who refuse to do so should find themselves unemployed and penniless. It's too bad that by the time a consumer has discovered this issue, they are already damaged by these malfeasant twits. Unfortunately, it's very hard to get rid of these sort of agents and the inducements really aren't there for other agents who do serve their clients best interest to make the complaints that would, in a perfect world, result in the incompetent ones losing their license. All the more reason why consumers need to do due diligence in the first place and ask the agent the hard questions before they sign on the dotted line.

The guy I talked about at the start of the article? Despite the evidence I furnished of the comparable sales, his agent is either sitting in Denial or FRAUD. There isn't a lot of wiggle room here. They dropped the application with me when I took the position that the appraiser was correct. They couldn't dispute the reasoning, so they went in search of someone who will agree with them despite the evidence. The property still shows as being in escrow. The only way that value is going to come in for a value that allows that transaction to close as written is via a fraudulent appraisal that's going to result in the client paying too much for the property. But evidently, this agent has decided that's where his interests lie. So it does happen. It will happen to you if you're not careful about your choice of agent. The good news is that with lenders defending their interests more strongly now, this kind of agent is going to find themselves increasingly out in the cold when it comes to actually getting the transaction done. And one of the very few good things about the new appraisal standards is that they're going to make that kind of "appraisal shopping" a lot more difficult.

Caveat Emptor

Article UPDATED here