Buying and Selling: June 2009 Archives

I just got off the phone with an agent who claims to have three offers on the property, but he doesn't want to counter the offer. He just wants my client to voluntarily throw more money (or more something) onto the table.

We're going to decline to do that.

The offer we made was good. The other agent, if they knew what they were doing, would just be fishing - or rather, hoping to get us to go fishing voluntarily, adding more and more bait until they finally decide they had better hit it. Not really a horrible strategy, but wickedly vulnerable to agents who understand negotiation. The only reasonable way to respond is to ask the other side to take it, leave it, or tell you what they really want. Someone who understands negotiation is going to tell them exactly what I did - which is "You can take it, leave it, or counter. But we're not going to go on a fishing expedition. Tell us what you want and we'll talk about it."

However this particular agent either didn't know what they were doing or were pretending not to know. As a rationalization for his actions, he said, "I've had multiple offers and lost them all when I countered."

So?

Every listing agent gets desperation checks. Sometimes they're flippers looking to turn a quick buck. Sometimes they're serious investors. Sometimes they are even people who intend to live there forever and ever. What all three of these (and many other situations) have in common is that they say to themselves, "Let's see if we can get it for that."

The intelligent way to respond is usually to counter offer. Below a certain point, of course, you want to respond with, "Offer rejected - do better!". But if they're in the right general ballpark, the way to get what you want is to tell them what you want. You won't get everything. That's what negotiation is all about. But you would be amazed at how often terms that are quite important to one party are something the other party can meet without any downside.

Furthermore, you don't want to sell to a "Let's see if we can get it for that" offer. Yeah, some folks will walk away if you counter. Those are the folks that you don't want to sell to anyway. Even if every single one of ten offers walks away, you haven't lost anything - because those people weren't willing to offer a reasonable price. If you price the property correctly, it will get offers, and you will be able to sell to one of them for right around the market price. If you over-priced your property, desperation checks are all that you're likely to get. If you underprice the property, you will get hordes of offers, but it's unlikely to be bid up as far as where it should have been in the first place.

(How can a consumer tell if their property is over-priced or under-priced or priced just right? By the offers you get and their timing, of course! It's one of those zen things like the chicken and the egg. It's also why the discussion of list price should not be easy for anyone - because by the time it becomes apparent you went with the wrong answer, fixing it will only repair some of the damage)

You never know which offer is and isn't going to come back with something better. So you give them a reason to offer you something better by telling them what you really want. Yeah, number one on the list is usually money. But sometimes it isn't. And sometimes subsidiary concerns can make all the difference, even getting the property for fewer dollars than another offer.

Being unwilling or unable to counter without losing good offers is the mark of a very weak agent. Unfortunately, by the time you find out they're a weak agent in this fashion, it's probably too late. When I'm the buyer's agent, I don't really want the first offer accepted, and those few of my clients who've had it happen can testify that I really am mortified when it happens. I want to talk about what my client wants, and how we can go from the first offer to something both sides are happy with. Whatever happened to "never take the first offer"? Don't they teach that anymore? The first offer is just an opening, like opening a conversation with a member of the opposite sex you're interested in.

One legitimate fear is that an unqualified buyer may sign a counter exactly as it is, creating a purchase contract that ties the property up for months while you find out they can't really qualify. That is the only situation where I delay the actual counter until I am certain the buyer can qualify. But I do call the offering agent and ask for more evidence the buyer will be able to qualify. This is in line with the precept of "ask for what you want, and explain why they should give it to you" precept. After they provide information that persuades me these folks will qualify for the necessary loan, they'll get a counter.

If a qualified buyer signs one of several counters I make, that's not a disaster. That's exactly what I want. Every counter I put out there is something that would make my client happy. Do I care which offer gets signed? Well, sometimes when something about their situation (like having a known problem agent representing them) makes me hope it isn't them. But that doesn't stop me from putting the offer back out there. It's my clients needs that are important, and if my client needs me to deal with these issues, that's part of why I'm getting paid.

Not being willing to counter is like hoping the fish is going to jump right into the boat. Yes, you know they're out there in the lake, but you haven't hooked them and you definitely haven't landed them yet. The counter is the hook - it lets them know exactly what you want, and why they should give it to you. You're more likely to get what you want by telling a buyer what that is.

Caveat Emptor

Article UPDATED here

The stock market has a phenomenon where a company's stock is "Priced for perfection." It may sound nice, but "priced for perfection" is emphatically not a good thing. It's where the stock price of a company has been bid up so much that only if absolutely everything goes the company's way is it going to be a good investment. If anything doesn't fall the company's way, their stock will prove to have been overpriced because the income stream will then not support the stock price at current market levels. In a nutshell, an analyst who tells you a stock is "priced for perfection" is telling you that it's very likely you'll lose money in the short term, and even if it's a good solid company the time to buy is not now.

Real estate has a similar phenomenon. Real estate agents aren't stock analysts, so I've never heard someone else use the phrase in this context, but it's very similar to the stock market phenomenon of the same name. I saw a property a few days ago that brought the concept to mind more strongly than any other I've seen recently.

The first thing that leaped out at you was that this property was a work of art. Someone had put a huge amount of money and labor into this property. The kitchen was almost brand new, well laid out, and had pretty much every amenity or convenience I can think of. The floors were all beautiful. The back yard pool needed to be resurfaced, but the entire thing was laid out beautifully for entertaining. The front bedroom had been converted to a very functional and attractive office. Both bathrooms were gorgeous and modern. The electrical was wonderful. Even the garage had been done up with a dozen or so tall cedar(!) storage cabinets.

But the more I thought about it, the less I liked the property. First off, it was a tiny house with tiny rooms on a tiny lot - it was only the fact it was vacant that prevented it from driving this point home on the level of a ball-peen hammer between the eyes. My clients were talking about moving walls to make it more livable, and with everything they thought of, I immediately had a reason why they didn't want to do that, relating to either eventual sale value or severely impacted livability in the meantime. You literally could not do anything to improve the house without adversely impacting something else. My clients were hung up on how gorgeous the whole thing was "But this room is small and we want it bigger" and I had to explain that you could get the room by taking it from the kitchen or garage. If you take it from the kitchen, there goes that beautiful kitchen you love and the family area goes away. If you take it from the garage, you lost half those storage cabinets you love. Want to expand the master? Same trouble. The Second bedroom? There goes a third of that yard you love, and all that's left is a small ring around the pool. There simply was no room. The current owners had done literally everything that could be done.

Then there was the matter that the neighborhood was in such a condition as led me to believe it had seen better days, and this was the smallest house on the smallest lot. The investment potential in such circumstances is limited, to say the least. The house was priced with a premium for how beautiful it was now - but new appliances get old, beautiful surfaces do age, and entropy will take its toll. The more I thought about it, the more strongly I was against my clients buying it. The only thing in favor of buying it is the same thing in favor of buying any residential property right now - the generally low price condition of the market in general.

The entire effect was a property that just oozed the "I'm beautiful! Buy me!" vibe that works so very well on the majority of middle class buyers. And if it was a "forever and ever" house where you just wanted to live there exactly as it was, and didn't care about how much your heirs get after you die, there would be no reason not to buy it. But such buyers are exceedingly rare. I can think of one such set I've had in the last three years, and the people I was with weren't them, so as I explained the property's shortcomings to them, I kept going back to what their Plan was, which included likely moving again in a few years.

Lest you misunderstand, it was neither a Misplaced Improvement nor a Vampire Property. It was in excellent shape; the only repair bill I could see coming was resurfacing the pool. And the neighborhood supported its value just fine, thank you. No, the neighborhood wasn't beautiful, but it was decent, and everywhere you looked were bigger properties on bigger lots. If they weren't so exquisitely cared for, they still supported the value of this property just fine. The problem with this property was precisely how beautiful it was, which made it attractive to Mr. and Ms. Middle class, and therefore quite likely to bid the sales price up and considerably over the real value of the property. Future value appreciation would be limited to general market increases, less the effects of time on all of the beautiful surfaces that are freshly installed now, less the effects of what looks like a neighborhood that is on a gradual downslope relative to the general market.

Would I have pointed any of this out if I were the listing agent? Are you out of your mind? When listing, my responsibility is to get the highest price for the quickest sale and the fewest issues. If I were the listing agent, I would have pointed out all of the beautiful areas and exquisite craftsmanship, and kept my mouth shut about how small it was and how their plans to move this wall or that would adversely impact everything else. That's the listing agent's legal duty, it's good business and it's even fair, honest and ethical dealing.

In this case however, I was acting on behalf of the buyers, so I had an obligation to talk to my clients and save them from being seduced by the property, or at least enter into the relationship with their eyes open. If on sober reflection they had wanted to make an offer anyway, I certainly would have done so, but it's the buyer's agent's legal duty to point out and explain any downsides they see to a property. That many alleged buyer's agents fail in this is not an excuse for me to do so. It's also a crucial difference between a discount agent who rebates a percentage of their commission and a real buyer's agent. I saved my clients a lot more than the entire agency commission by talking them out of this property; something a discounter would never do. Not to mention that they would have been miserable the entire time they were in the property. Which means I may not get paid for my work that day, but when I do get paid, I will have earned every penny before they even see the property they eventually do buy, by keeping them out of this financial disaster waiting to happen. It will happen to someone - but not my clients.

This is one more illustration of why you want a good buyer's agent, and why you want to sign a non-exclusive buyer's agency agreement. A bad or discount agent will never spot this problem, and if you don't give them the security of knowing you're willing to keep working with them as long as they do a good job, there's no incentive for even the good agent to mention it. I would have told them anyhow - what's right for my clients is right for me, period. But it shouldn't be news to anyone that there are agents who will keep quiet about such things if you're only asking them to show you one property. Find a Good Buyer's Agent and be willing to sign the standard non-exclusive agency contract. It really does protect you.

Caveat Emptor

Article UPDATED here

Some fathers, sad to say, are not involved in their children's life beyond conception. Maybe it was just a one night stand and they have no idea they even have a child, maybe they were involved with the mother on some longer term basis and left, never to return. I've seen the term "sperm donor" applied to such fathers many times. I think it's equally applicable to the common concept of the buyer's agent.

The real estate business is set up around the listing of property for sale. NAR and all of its subsidiary associations are built upon the listing agent and being responsible to sellers, if that. One of the big reasons why most agents center all of their efforts upon listings is because they will pick up buyers who don't know any better simply by virtue of listing property. Many of the best listing agents I know think of the buyer's agent as an afterthought. The usual come-on is to rebate part of the "Cooperating Buyer's Broker" percentage to the buyer client in order to drum up business, with predictable results. The "Cooperating Buyer's Broker" percentage set up in MLS was an afterthought to encourage listing agents who picked up the confidence of one set of buyers during an open house to show their property, and for many years (until the courts started hammering on it) a buyer's agent was required to accept subagency for the seller, giving the seller their primary allegiance. Even today, that's the way a lot of agents think because they (or their trainer) learned the business when that was the case, and they think that buyer's agency is just a little bit of paperwork. But that is not the case; indeed representing a buyer's agent's job thusly is a recipe for disaster. There's a lot more to being a good buyer's agent than filling out a little bit of paperwork.

The fact is that choosing someone who's trying to sell you one particular house is a rotten way to pick a buyer's agent, almost guaranteed to get you someone who's just trying to turn a transaction. Fact is, they should be focusing all of their effort on getting you to buy the house they showed you, that they have a listing agreement for, that they have agreed to carry a fiduciary responsibilty towards the owner of. This means trying to sell that property, not trying to pick up buyer clients by dangling your listed property out there as a lure for buyers to make contact. Tina Teaser is a horrible listing agent, and probably a worse buyer's agent.

I do not know how the urban legend about an agent being a disinterested party got started. It serves the interest of the huge chains that control the National Association of Realtors (and subsidiary associations) or it would have been firmly squashed by now, but it is completely false. An listing agent owes a fiduciary duty to the seller, a relationship which legally requires them to place that seller's interests above their own. They theoretically owe a duty of fair and honest dealing to all, but that is much harder to enforce legally, and not nearly so honored. As evidence, all of the listing agents who say they've got multiple offers when that is not the case.

A buyer's agent is precisely the opposite, owing a fiduciary duty to the buyer, but "only" fair and honest dealing to a seller. As for dual agency (representing both), would anyone like to tell me how anyone is supposed to serve two masters with diametrically opposed interests while preserving fiduciary duty to both? It'd be like trying to serve in the Union and Confederate armies simultaneously, shooting bullets back and forth with the aim of hitting targets that include yourself. It can't be done. Every agent needs to pick a side and stay on it for at least the duration of the transaction.

Too many people only pick their buyer's agent after they've already settled on a property, with the result being that said buyer's agent is all too often the listing agent, or someone with an economic motivation NOT to speak up and tell you you shouldn't buy that property, or that you should buy it only under such terms as require major negotiation and a significant probability of a seller who is unwilling to be rational. "Sperm donor" agents is a charitable description of such activity. Yeah, you can probably get the property by giving the seller everything they want, but do you want the property that badly that you're willing to potentially deal with years of problems costing thousands to tens of thousands of dollars, until you find out that you can't sell it because of something your buyer's agent should have told you before you bought?

The fact is that a buyer's agent is more important than a listing agent. You're going to be living with the results of what the buyer's agent does for as long as you own the property at an absolute minimum. Most likely for the rest of your life. It isn't just a matter of "you paid too much" or "You paid more than you needed to," although those are huge factors. All of the negative issues that should have been brought up before you made an offer? Blame your buyer's agent. Crummy resale value due to floorplan, location, etcetera? Blame your buyer's agent. Nobody wants it due to some unfixable negative factor? Blame your buyer's agent. Houses with large and recurring repair bills? Blame your buyer's agent. Possibly in conjunction with other professionals such as inspectors and engineers, but your buyer's agent should get a share of any blame. At minimum, for not pursuing the issue if an inspector, etcetera raised a red flag. The Buyer's Agent is far more important than a listing agent to your future happiness. Do you want to trust someone with a fiduciary duty to the seller to point this all out? Especially given that if they do point it out, they are violating that fiduciary duty? "Known violator of fiduciary duty" seems like it would be a slam-dunk reason not to use them for your agent to me. This isn't a court of law and you don't need the verdict of a jury - you were a witness to the violation. You're not trying to send them to jail - only to determine whether or not they're a worthy guardian of your hard earned (or yet to be earned) money.

Many buyer's agents don't want to say negative things about the property they show. That's like a pilot who doesn't want to take off or fly the airplane; they only want to land. It's part of the job they take on with buyer's agency. I know how much harder it makes it to sell property, believe me. It's still part of the job. If they're not doing it, they're not buyer's agent's no matter what they call themselves. They're the agency equivalent of sperm donors.

It is dead simple to find a good buyer's agent. You (the consumer) only have to know one thing in advance: Sign only nonexclusive agency agreements. This lets you work with all the agents you want to until you find one that really does the job. You can have dozens of non-exclusive agreements in effect, allowing you to shop effectively for a buyer's agent by giving them all a chance - you simply stop working with the ones that don't measure up.

You should have at least one buyer's agent before you look at property. One of your buyer's agents should accompany you every time you visit a property you might like to buy, especially developer new construction. If you visit a property without your agent, you may be waiving your right to have a buyer's agent. I've heard from a couple dozen people in the last few months that were completely hosed by developers, but there's nothing I or any other agent can do after the transaction has already closed.

There are major rewards for sellers who make a property appear just a little bit better than it is. On a $500,000 property, it's pretty easy to make it look like it's worth another $50,000. Misplaced Improvements, Vampire Properties, unpermitted additions, just plain old money pits and properties with less obvious defects are out there. Just last week I had someone tell me via email "I just realized what a snakepit the property market is!" like it was some kind of revelation he'd just had. Once you buy, you are on the hook and it is very difficult (if not impossible) to undo the transaction. You might get lucky on your own, or with a "sperm donor" buyer's agent, but is that something you're willing to bet hundreds of thousands of dollars upon? Remember, it is very possible to lose this bet - people find out they lost it after the fact every day. Admittedly, you can still lose the bet with the best buyer's agent in the world - but it's a lot less common.

A good buyer's agent does a lot of work. This work saves their client a lot of money hassle and work way more often than not and people who don't want a buyer's agent find out why they really needed one after the fact.

Find a buyer's agent first, before you start looking at property. Get comfortable with them, expect them to say things that shoot holes in most property. That's their job, and there really is no such thing as a perfect property. It may be harder to persuade yourself to put in an offer on a property with known defects, but would you rather know ahead of time or not know? The defects are still there, either way. A good buyer's agent will tell you about them. A sperm donor agent will not. Avoid the sperm donor agents, and fire them as soon as you identify them. Knowing enough to only sign non-exclusive agency agreements allows you to fire them pretty much at will, by just not working with them any more.

Caveat Emptor

Article UPDATED here

I've been saying that the San Diego area real estate market has suddenly gone white hot. Multiple offers are the order of the day with most properties. I really need to make a distinction here: That's not the way the whole market is. In fact, there is a huge amount of market segmentation going on.

Market segmentation is what happens when certain things are much more in demand than others. Right now, the central area of San Diego is in high demand, simply because it's so close to everything. That's where the jobs are, all the cool nightclubs and restaurants, places to go and things to do. The Eastlake area is in very high demand, because you can get an almost new highly upgraded 3000 square foot house for half what the developers were selling them for five years ago. The North County Coastal region is probably hotter than anything else, because of the common belief of being where all of the really wealthy people live - the strip between Del Mar and Carlsbad has long been some of the most desired real estate in the world, and Rancho Santa Fe is the most expensive Zip Code in the country.

Once you get away from those areas, however, things are a lot more friendly to buyers. Some clients put in an offer on a property in Escondido, and some others on a property in Ramona, and instead of competing against a dozen or more offers, I'm pretty sure we're the only offer despite what one of the agents is telling me. La Mesa is seeing movement, but it's not anything like what's happening in North Park despite being maybe 6 miles further east and usually being able to get to Mission Valley and points north quicker from my house than from most of North Park, simply because it's such a pain to get out of North Park. Downtown might be five minutes longer from La Mesa. South Bay is usually quicker from La Mesa. The houses are similar construction built at comparable times, and on average the La Mesa houses are larger and situated on bigger lots. Yes, gas is headed back to $5 per gallon because our current government isn't going to follow up on what President Bush did last summer to drive the price down, but don't confuse "lesser distance" with "use less gas getting where you need to go." North Park is a horrible place to drive.

Pretty much every area is seeing more movement in the market than just a few months ago, but some areas are seeing a normal market with give and take, while others are seeing a white hot seller's market with ten or more offers on everything. Those extremely hot markets are seeing a lot of movement and if it weren't for HVCC preventing honest evaluations, we would have seen an even stronger recovery.

Some offers are more equal than others, and the new appraisal standards make them even more so. An "all cash" offer beats everything else for the same number of dollars. Offers under 70% loan to value offers beat everything except "all cash". Offers with twenty to thirty percent cash down come next in line. Exactly what beats what gets complicated and varies from property to property, but absolute bottom of the barrel is minimum down payment FHA loans. If you've got something near the top of this ladder, competing in the white hot areas may be something you can profitably do, particularly if you're willing and able to waive the appraisal contingency. Those areas are going to see rapid price appreciation in this environment, particularly if the industry forces lined up against it (NAR and NAMB, among others) manage to get those new appraisal standards repealed.

If, on the other hand, you're one of those trying to buy with minimum down FHA loan (or something else way down the preference ladder), you're not going to be able to compete with the offers at the top of the ladder. It's not really completely reasonable, because FHA standards aren't nearly so obnoxious as they to be, but they still take longer, have more opportunity to fall apart, and require more from sellers, even if you're not asking for seller paid closing costs. If you are asking for a seller paid contribution, then the sellers are understandably going to want an even higher offer from you to offset those costs, as well as a premium to convince them to sell to you rather than the people coming in with a conventional loan with 25% down. This raises the specter of whether or not the property will appraise for the necessary value to consummate the transaction, with it being increasingly unlikely. Lenders in particular are unwilling to consider these sorts of offers for lender owned property because they often require the lender to spend money fixing up the property and can then fall apart anyway, the ultimate bad trip for them.

So what buyers in this situation need to do is zig when everybody is zagging. Look in the less trendy areas where the competition isn't so severe. Consider properties that are solid, but not necessarily so visually appealing. In such a situation as yours and a market such as this, you want to offer on properties where you may be the only offer, or only need to compete against people in similar situations. It isn't forever and you don't have to stay there the rest of your life. It may take longer for property appreciation to hit these sorts of properties, but it will hit when people start to realize that San Diego is never going to be this affordable again. Remember 2002 and 2003, when people were glad to get a rotten little tiny property in bad shape (and way out in the boonies) even though there was no way their family was going to fit into it? Those days are coming again. Proportionally, those properties will see even more appreciation from this point than those that are already highly sought after. I'm advising people with lots of ready cash to buy as many condos as they can, as condos have been hit especially hard in the downturn. And as I've said a time or two, buying such a property makes it likely you'll get what you really want sooner. The ability to harness leverage in your favor is more powerful than any other investment you can make, if it succeeds. The current environment makes carefully structured plays on leverage very likely to succeed. Not guaranteed, as
There is No Such Thing as a Risk Free Investment, but very likely to succeed. .

There is always some segmentation in the real estate market, but we're seeing a higher level of segmentation now than I have ever seen in the past. Some types of property are more attractive to the aggregate market than others, and command a higher price as well as higher demand for them, and people are fighting like
gingham dog and calico cat over them right now. But those properties few people are considering now because people are still used to the buyer's market we had can be obtained more easily and for a bigger discount now simply because everybody is competing for the big beautiful properties in trendy areas will show a larger percentage gain later, when the big beautiful properties in trendy areas are completely out of reach, and large amounts of people start looking for substitutes because that's all they can have. The big beautiful properties in trendy areas are doing very well right now, thank you. They are quickly returning to nearly their peak price levels and the time to get a real bargain on them was a year or so ago. But the substitute properties, while severely lagging now, will catch most of the way up later, meaning that money invested in them will earn a higher return and quite likely enable those who do so invest to afford the big beautiful property in a trendy area once it does.

Caveat Emptor

Article UPDATED here