Buying and Selling: November 2009 Archives

One of the things that sticks out about buyer's markets is that there are two sorts of listings: Those who are willing to do whatever it takes, anything it takes, to get the property sold, and the other who apparently just likes having the property in MLS.

Many listing agents have made a habit of telling people that they can get more for the property than the next person over. Well, some can. But there really is no secret as to how they do it. They have the discussion to price the property correctly in the first place, and if the listing price isn't appropriate, they will not take the listing. I don't list many, but if someone is insistent upon a listing price that is too high for the market, I am better off not being part of that listing. Even if it does sell after two major price reductions for less than I likely would have gotten straight off, that client is going to be angry, not happy, and tell everyone it's my fault.

Indeed, if there ever is a market where listing agents can reliably get more than the value of the property, something I am pretty sure doesn't exist, the buyer's market is the furthest thing from it. What a good listing agent can get you is the full value of the property, but that's a very different value, and a very different mindset, in a buyer's market than it is in the seller's market San Diego had for most of the last decade.

Now, you need to ask yourself, "Why is this a buyer's market?" The answer is as simple as supply and demand. High supply and Low demand. Many people who want to sell, not very many at all who want to buy. Result: Those few buyers who are willing to be out there have all of the power. If this particular seller won't take the offer they make, the next one over, or the one after that, will.

Most sellers would agree that this is a challenge. Buyers think it's great. When I originally wrote this, sellers outnumbered buyers 44 to one. It's a real challenge to have a successful sale in such an environment.

What's a seller to do about this? Quite simply, ask yourself if you have to sell or if you have other options. If you have to sell, make up your mind that you are going to do whatever is required to make a transaction happen. This can be a lot: cleaning your house up, making it attractive, pricing it better than the competition, and not kidding yourself. The offer you are going to get still won't be anything like what you might have gotten when the market was hot, but that was when the ratio of sellers to buyers was about three to one, often less. You will be much more likely to get an offer, and remember, you decided that you need to sell.

Lest you think you aren't competing with other sellers, go find a real expert in your area to help you right now. In the entire history of United States real estate, no buyer ever bought a property because it was that seller's "turn." You are always competing against other sellers, but a buyer's market makes it far more obvious. Buyers make offers on your property because something is attractive to them where other properties are not. This can be features, this can be location, this can be willingness to do what other sellers are not, or this can be price. Usually it's a mixture. In the sort of market like when I originally wrote this - remember that 44 to 1 ratio of sellers to buyers - it's likely to be all four in great heaping gobs.

If you don't need to sell in a buyer's market, get it off the market! If you are not going to accept a much lower price than it might have gotten when the market was hot, you are wasting your time. Those few buyers who are willing to get off the sidelines are bottom feeding and bargain hunting. If you have a better choice than feeding the bargain hunting and bottom feeding buyers, take it. If your property sits on the market, then when the market does turn back, the fact it sat on the market is going to count heavily against you. The agents in the area know that it sat, believe me. I was in a half day class the day I originally wrote with several hundred other agents. Everybody I talked to agreed that the only transactions that were happening in that market were all happening completely on the buyer's terms. If you are not willing to meet those terms, you are not merely wasting your time, but actually sabotaging your future prospects of selling for a price that you would like.

If you are not willing to do what it takes to sell, get it off the market. Not only are you sabotaging your own future plans, you are adding to all of the excess inventory that's out there as a glut on the market. Indeed, for every additional property for sale in the neighborhood, people who are willing to do what it takes to sell the property are going to have to do a little bit more. Most often, this means "settle for a lower price than they might have gotten otherwise." Just the fact that there are 238 three bedroom houses listed in the same zip code gives buyers substantially more leverage than if there were fifty, or twenty. This drops the market that you are hoping you can use to sell the property two or five years from now, and gives it further to come back, which means that the pricing level will be lower when you go to sell your property for real. Individually, extra properties on the market may not make much of a difference, but collectively, they certainly do.

If you do need to sell in a buyer's market, get all traces of the "they'll do what I want" mindset out of your head. This isn't about pride, this isn't about profit, this isn't even about breaking even. This is about getting out with the least practical amount of damage. We have established that if you do not need to sell, you shouldn't have your property on the market in this environment. But you do need to sell, which makes the alternative of taking less than you think the property might be worth better than the alternative of losing it completely. And make no mistake, for as long as buyer's markets last, that is the attitude I (or any good buyer's agent) am cultivating in my buyer clients. If you won't sell, I'll talk to your lender after the foreclosure - if someone else has not already sold to me by then. When I wrote this, in San Diego, the only power sellers really had was the power to say, "no," and if your alternative is losing the property to foreclosure, a rational, informed person will pay thousands of dollars out of their own pocket instead, accepting offers way below what they owe on the property. And if that or something similar is not your alternative, then why is your property on the market at all? Why are you contributing to the apparent glut of supply to no good purpose?

(The market is much better now. Properties where all the ducks are in a row from day one - price, condition, staging etcetera - are not merely selling, they are seeing heavy action and multiple offers. Last summer things got really ridiculous again for a while, but that has largely gone away now and we're back in a more balanced market again)

Caveat Emptor

Original here

I went out previewing properties a couple days ago. That particular client's situation being what it is, I was concentrating on vacant properties. But over half the vacant properties in that area had restricted showing instructions. "Call agent first," or "call for appointment to see."

When the property is vacant, there just aren't any common reasons to restrict showing. It's not like the buyer's agent is going to surprise grandma in the shower or even could make off with the big screen TV. If you're really trying to sell it, if it's vacant, it's empty, at least of your stuff, and the stager's (if there is one) had better be insured. If there really is some reason to restrict showings, it should be somewhere on that listing report. But I'm seeing this schlock on lender-owned properties, where there is exactly zero reason for it, at least as far as the owner is concerned.

What the listing agent is trying to do is control access, so that people like my clients have a gatekeeper. Why? So that they are more likely to be the selling agent also, and keep both halves of the commission. If the offer they bring in isn't as good, or isn't as quick (thereby costing the owner money), they still made twice as much or more in commission if they represent the buyer as well.

I strongly suspect that many agents - and yes, I'm keeping track of who, even though I'll never share it - play gatekeeper with offers as well. I send over an offer, and I never hear back. I call the agent, and am informed my offer was rejected, but I never see anything with the client's signature or even initials. I don't list many, but when I do, every single offer gets a written response, even if it's just "Offer rejected!" signed by the owner. It's illegal for me (as a prospective Buyer's Agent) to contact the owner directly to confirm that they know about an offer, or I would. I could really get behind a law that said I could send a postcard to the owner that says: "Dear Mr./Mrs. X. My client made an offer on your property recently at 1234 Name Street. If you are already aware of this, please disregard this notice. If you are not, please contact your listing agent about the details. If they cannot satisfy you as to whether you previously saw it, please direct all complaints to the California Department of Real Estate at XXX-XXX-XXXX." Boy would that be a good use for postage. Agents who did their job would have nothing to fear; agents who failed would be out of the business fast.

The motivations of the seller are to show that property as often as possible, to as many people as possible. No showing means no offer. No offer means no sale. Therefore, anything which is a nonessential impediment to showing that property should be dealt with, and agent restrictions are one of these. Believe me, I understand about not wanting client phone numbers in MLS databases, because the last time I had a listing decide they wanted to postpone the listing (therefore withdrawing it from MLS), they told me they got over a hundred solicitations from agents who ignored both the "do not call" list and the fact that I still had a valid listing contract at the time, which they didn't bother to ask about. It's illegal to solicit another agent's listing in California. If it wasn't, people who list their properties would be getting phone solicitations from 8 AM until 9 PM every day, and the junk mail would kill entire forests.

But the seller, whether they realize it or not, wants their property shown as often as possible, to as many people as possible. That's how you get get good offers, or even better, multiple offers that you can play off one another. Anytime you make it more difficult for anyone to view your property, you make it less likely they will view it, less likely they will make an offer, and less likely that it will be a good offer. The sharks out there don't care about viewing restrictions. They're willing to make their low-ball offers sight unseen, albeit with inspection contingencies. And even a shark's offer is better than no offer if you need to sell.

So how does a Buyer's Agent deal with problem personality listing agents? About the only thing I can do is not waste my time and most especially that of my clients on their nonsense. The only one with the power to deal with such antics is owner of the property. Just insisting that you want to see all offers isn't enough. How are you going to know? You can ask that instructions go into MLS for making certain that you get duplicates of all offers. E-mail, fax number, address, or even a PO Box if you have one. Buyer's Agents can't bypass the Listing Agent, but they can send duplicates if the MLS instructs them to.

Even better is to insist that the Listing Agent forswear the possibility of Dual Agency, or they don't get the listing. In other words, no matter what, they will not get the Buyer's Agent's part of the commission. As I have said many times, make them pick a side of the transaction - yours - and stick to it. The listing agent can refer buyers to another agent, or the buyers can go without representation - it's not your problem. Actually, as a seller, you would prefer that the buyer go unrepresented. Not only will you get a better price from the poor fool, you get to keep the Buyer's Agent Commission. But this way, the listing agent has no motivation not to present offers from other agents, and you can give them a flat $1000 to handle the paperwork so they won't shoo suckers away. You are perfectly within your rights, by the way, to make whether you are going to pay a buyer's agent commission part of your decision making process on offers, but it isn't a good idea to make too big a deal out of it. Most of the reasonable offers you get will be represented by a Buyer's Agent of some stripe.

Nor does it demotivate them from open houses and all that. It is more likely that the people I meet at open houses will want to buy something else anyway. Oh, I do sell listings through open houses - but the one who actually buys that house is usually a contact of the neighbor who comes in with no possibility of buying themselves. Curious neighbors at open houses may be the most likely source of the kind of sale price that makes clients happy - if you treat them correctly. Internet marketing is cheap and easy and effective enough that it's worth doing just to get the listing commission. And when the property goes into escrow and people call about the ad in the monthly magazine I put an ad in, well I just find something similar if not better to sell them. Remember that I'm always looking for bargains, and I've usually got several properties in mind where the sellers are more desperate than I ever allow my listings to get.

This isn't all of the games that listing agents play to try and get themselves a larger commission. Many try to require a pre-qualification letter from a particular lender, which is over the border into illegality, or even that you use their loan brokerage, which a dead center violation of RESPA - no borderline about it. I ignore either of these requests, and I'm not above bringing the latter to the attention of the Department of Real Estate. The vast majority of all pre-qualifications are worthless. Nonetheless, the tactics I've suggested cover you against them pretty thoroughly. One more worthwhile tactic if you don't follow my advice about disallowing Dual Agency is to walk into their office at random intervals, and insist that they pull an agent report - as opposed to client report that is all the general public is usually allowed to see - for your property in your presence and give it to you. You are allowed to see agent reports on your own property (and only on your own property), as the privacy reasons that restrict agents from showing agent reports to the general public do not apply. Look at the showing instructions. Does it say what you want it to? Are the requests for making offers restrictive? If not, you may have legal grounds to terminate the listing, and you should want to, because the reason MLS evolved the way it has is to encourage the widest possible interest in your property. A listing agent who wants to restrict that so that they can receive both parts of the commission is moving you back into the days of the single listing half a century ago, and that is not in your best interest, not for price, not for timeliness of sale, and not for the ability of prospective buyers to actually qualify.

Caveat Emptor

Original here

Here's the real issue about commissions: They need to be structured to incentivize good results - rewarding those agents who do good work, penalizing those who don't. The current structure, where the brokerage gets a flat percentage of official sales price - doesn't really motivate agents to perform. It really doesn't make a huge difference to the brokerage whether a property sells for $500,000 or $400,000. Assuming a 3% commission, they get $15,000 in the first case, while getting $12,000 in the second, despite that any monkey should be able to sell a $500k property for $400k. Basically, they get 80% of the reward for doing nothing, but that failure makes a huge difference for the property owners. If they owe $400,000, that's the difference between going on to their next property with about $60,000 in their pocket or coming up short about $30,000 and having to do a Short Payoff, with all of the resultant consequences to that family's future. Nonetheless, at 3% commission, all this means is the difference between $12,000 to the brokerage and $15,000. There is a dissonance between the interests of the owner, who this makes a $90,000 plus difference to, versus the agent who will still get 80% of the same paycheck if they do nothing but persuade the owner to accept the first lowball offer that comes along.

This dichotomy of interests encourages all sorts of games, from "buying a listing" (leading a homeowner to believe the property will sell for more than it will in order to secure the listing) to failing to negotiate hard to accepting too many listings to be properly serviced. If I can really service six listings, and I take ten, the individual selling prices will suffer while I make more money - ten times $12,000 is more than six times $15,000. Most agents - just like most people - will do what aligns with their personal interests.

The major alternatives - "net listing", where the consumer "nets" a certain amount and money over that goes to the brokerage, and "Flat fee listing" don't really float my boat either. The first has the advantage of pay for performance and severely discourages agents from over-promising on price; nonetheless the homeowner isn't motivated to maintain the property, and the agent is a little too motivated to wait for a better offer that isn't likely to come. As for the "flat fee listing", all that motivates the listing agent to do is get it sold - never mind the price. Whether the owner makes $60,000 by selling for a great price, or loses $30,000 by not getting so great of a price, that's all the same to the agent with a "flat fee" contract. But the owner wants it to make a difference to the agent, because they want that agent to get the best possible price, not just the first offer. As for the "flat fee in advance" listing, why should that brokerage want the property to sell at all? They've made their money already! If the property sells, now they have to do all that work and assume all that additional liability!

What we really want is a fee structure where the agent is motivated to get the highest possible price as soon as possible, the latter being more important than is generally recognized, as carrying costs eat profits very quickly, especially if the family vacates so as to show the property to best advantage and get the best price, or if they've already moved to their new home for whatever reason.

There should be several terms in this equation. It should take the form a+b+c+... For every factor the owner and the agent can agree upon having an effect upon consumer benefit, there should be a term in the compensation equation. Note that if the agent doesn't measure up in some way, any of these terms (except the one for doing the base paperwork) should be able to go negative. It's likely that good agents should be making more for listings than they are, while ineffective bozos quickly go bankrupt.

I'm not concerned with getting paid for a listing that fails to sell. In fact, I consider the concept anathema to a good agent - or any other business. If I do not get the job done, I do not deserve to be paid. Nor does any other agent or any other business. The world doesn't pay off on a good try (let alone a bad one), and my experience is that listings that don't sell aren't likely to have been a good try. I just visited a listing yesterday, a preview for a prospective client. Showing instructions said "vacant -go" Got there, it's a combo lockbox, but no combo anywhere. Spend half an hour in the front yard on the cellphone trying to get a combo from agent, listing office, number listing office referred me to, the number I was referred to from that, and so on. Finally gave up. How many others like me have there done that? Sounds like an agent who wants both halves of the commission to me, discouraging prospective buyers represented by other agents. Sound like someone you want to work with? Sound like someone you want to reward if you do inadvertently sign up with them?

This doesn't change the fact that if it does sell, there's a given amount of work no matter what the price is, and a given amount of liability. That's just part of being in this business. No matter how careful you are, no matter how good you are, eventually something is going to bite you. It's just a fact of life, and is the reason for E&O insurance. Just because I haven't been bitten yet doesn't mean it won't ever happen. The commission structure needs to recognize this fact of life, or it will fail. But this is not how agents should earn most of their money, and most agents don't do this paperwork themselves, but have assistants paid as little as they can get away with to do it. A flat fee of $1000 is probably about right in California. Enough to pay the rent, the utilities, and the receptionist who actually generates the paperwork off WinForms.

Performance pay is a separate issue, and should be a separate term in the equation. I'll happily pay $20 to make $100 ("here's another $20 if you bring me another $100!"). The most central idea of engaging an agent is to get a better price for the property. My client shouldn't be expected to pay me if I'm not performing services of value - enabling them to get higher price for a quicker sale and less. Any twit should be able to get $300,000 for a property that's worth $400,000. That's not a valuable service, and that's not something an agent should get paid for. If the agent can't get a good enough sale price to meet even a minimum test of benefit for the client, they should lose money. If the sale price is low enough, it should eat up even the base transaction fee, or even send the commission negative - the agent pays the consumer for so badly bungling the transaction. This is nothing unusual in other businesses. Even doing mortgages, I'm perfectly prepared to pay money out of my own pocket if I can't deliver a loan on the terms I quote (for reasons other than client not telling me the whole truth, that is!). The goal is complete consumer satisfaction, and taking money when my client doesn't benefit doesn't help my business in the long term either.

This performance pay should be steeper than current standards. Between ten and twenty percent is about what I think will do the most good. Give the agent a good solid incentive to want a higher price if they think its coming, while still reserving the lion's share of the benefit to the client. If I get Joe a price $20,000 higher than he would have gotten without me, Joe should be quite happy paying me a portion of that money by prior negotiated agreement. I would be ecstatically happy to do so in the reverse situation. And if you wouldn't happily pay it, I suggest you need a financial guardian because you're not economically sane. You want the agent to have a personal incentive to make that money for you. But it should be 10-20% of the excess or shortage relative to a base amount - whatever the seller and their listing agent think it could be sold without the agent benefit. It should also be based upon the sale price net of all negotiated "seller givebacks" not related to specific later discoveries (i.e. inspections and requests for repairs based upon them). It an inspection shows unsuspected repairs costing $20,000 are needed, the seller would have to pay that anyway, and it's not the agent's fault that need exists. But the idea is that client benefit should translate into agent commission, and client detriment should translate into money out of that agent's pocket.

There should also be a healthy term built into the equation to reward or penalize the agent for a quicker sale or a slower one. This can be based upon a flat duration, or upon average days on market for properties in the same class. More expensive properties take longer to move - that's just a fact. But this component term should be based upon date of sale, and should be based upon a very high percentage of carrying costs for the property - about thirty to fifty percent, maybe even sixty. I'll happily pay fifty bucks if it means I don't have to pay a hundred - that is real savings! Say average days on market in a given market are roughly 120 from listing to close of escrow, and it costs $4000 per month to carry the property. So for every month above or below four months, at fifty percent carrying costs, the agent gets $2000 more or pays $2000. If it's a six month listing with no offers, the agent pays $4000 at the conclusion. This would force agents to learn what are and are not qualified offers, and force agents to live with the same kinds of tradeoffs that our clients do. No more, "Sorry that escrow didn't close. It happens," when it should be part of our business to know that that offer was pie in the sky in the first place. When it's their own pay being docked, agents will learn to do real investigation.

So far, the structure the ideal listing commission formula looks like this. $X basic commission, plus or minus $Y price performance (based upon 10-20% commission for over- or under-performing a certain price mark, plus or minus $Z time performance. Note that all of these are based upon demonstrable good for the client, and the client ends up with more money in their pocket as a result of every penny that agent is paid in incentive.

There should be one more flat component built in, contingent upon events. You don't want agents discouraging other offers, but you don't want them turning away foolish buyers who don't want a buyer's agent either. If someone is foolish enough to come in unrepresented by an agent, you don't want to shoo them away. So a fee for handling the buyer's end of the transaction is in order if there's no buyer's agent is a good idea - roughly half a percent of the sales price seems about right. Not enough that your agent is turning away offers made through other agents or pretending they don't exist, but enough so that they won't shoo any unrepresented buyers away, either.

None of this has any bearing upon the buyer's agency commission. That's a completely separate issue, and a separate article. But there are two issues you don't want happening to you. You don't want the listing agent discouraging buyer's agents so they can get both halves of the commission, and you don't want them shooing away an unrepresented sucker because it's extra work and liability that they won't get paid for.

Here's the really fun part: all of these terms need to get negotiated with every listing. Furthermore, it would tell a consumer quite a bit about whether they can really expect to get that listing price. I certainly wouldn't take a listing on terms which I wouldn't expect to get paid for, and neither would most agents (unless it's a "Hail Mary" to save their business).

As I've said, good agents would probably make more on this scheme, while poor ones will make considerably less, if they don't end up actually paying the client. You'd have agents advertising their average commission - paying a higher commission would do clients demonstrable good, rather than the standard "statistical studies show" argument NAR wants us to make. "Yes, I happily paid Joe $16,000 because because we agreed anyone could sell it for $250,000 in six months, and he closed a sale for $300,000 in thirty-two days." That's an five percent plus listing commission if the agent can pull it off - far more than any percentage I've ever heard of - that the seller was happy to pay because they demonstrably made more money and spent about $10,000 less in carrying costs! If an agent is that good, they can make that kind of money on every listing, and the clients won't be asking "What do you do to earn that money?" They'll be lining up to pay it! But to earn it, the has to deliver something good for the client, and if he can't help the client, he's going to end up owing the client money. Performance becomes the reason why agents are paid, individual performance for individual clients. It completely kills "buying listings", it completely kills "do nothing" agents as well as clueless ones, it discourages accepting more listings than you can service, it discourages working with more clients than you can handle, and it rewards agents who can actually get the job done better by the only universal measures - more money actually in the client's pockets sooner, with fewer carrying costs. The client benefit always leads to the agent reward - and client detriment always leads to agent penalty.

(the obstacles to it becoming standard practice are immense, because it would completely kill the idea and utility of National Brand Real Estate, or any branding above the individual agent level, and it's the big chains control the industry and lobbying - but that doesn't stop you from negotiating it for your own sale with an individual agent)

This does appear to be legal in California at least. It doesn't require any systemic changes - it all can be written into the listing contract, and it has no effect upon anyone other than seller and listing agent, meaning that if it's legal, there are no other interested parties, and a rational consumer would be as happy as a good agent to sign that listing contract, and happy to pay that commission, because it means they made even more money!

Isn't that what clients want? Isn't that what agents should get paid for? Don't you want an agent that's motivated for your benefit?

Caveat Emptor

Original article here