Buying and Selling: September 2013 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 W, X, Y and Z to W, X and Z.

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

Original article 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 sidelinesonce things are primed for a recovery. 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 massive 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 powered by 300 million people 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. However, none of this changes the fact that the restorative forces pushing the market back towards equilibrium are always in effect, and never quit.

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 in the neighborhood 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 a while 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. Add in that the party in power in the government is doing its dead level best to kill the loan market and the economy, and things get depressing. But governments change and mass psychology does too.

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 and mass psychology 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

Original article here

The vast majority of the population out there wants single family detached housing. The virtues and benefits of the single family residence have been extolled ad nauseum, and the drawbacks of the alternatives are the stuff of urban legend.

Unfortunately, in San Diego and many of the other densely populated urban areas of the country, the price of single family detached housing has gone beyond what the average person can easily afford. Even if they fall further from this point, in many areas, San Diego among them, the price of a single family residence isn't going to fall to what the average single worker can afford. The supply is too low, and the demand is too high. When you consider economic reality, the evidence is overwhelming that the real estate market in San Diego at least was beginning a very turnaround before the government spooked everyone, and even in other areas where prices still have further to fall, there's a limit to how far they're going to go.

So for people earning average wages, the choice becomes purchasing one of those alternative forms of housing, saving until they can afford it, or being a renter for the rest of their life. I went over how little saving for a down payment helps most folks, and how a strategy of buying what you can afford now helps more and faster than saving for a down payment. One further option exists, of course: Move to a less expensive market, but that requires finding a job there. There's a reason that all of the highly demanded urban markets are in high demand: That's where the jobs are!

Still, people will tell me they don't want to buy until and unless they can afford a single family detached house, with no association. That's fine if they're going about the process of saving. Most of them would be better off buying the lesser property and using the appreciation to leverage their savings, but it's okay to decide to take an alternative route to getting what you want. It's a free country.

However, in my experience, it's really rather rare to find people who are actually putting the money aside. It's great if you want a house and are putting the money aside to make it happen. I just helped a couple that could afford a beautiful house in a great area because they both worked hard and saved something like five years of their combined earnings for a down payment, but they're the rare exception. I know a lot more people that have been planning to buy a house for twenty years and have nothing saved at all, than I do people like that couple.

The cold hard fact of the matter is that if you're making fifteen or twenty dollars per hour, you can't afford the payments on such a single family detached house unless you've got a huge down payment. That's not likely to change unless we start being a whole lot friendlier to development, and in places like San Diego, there isn't room to do so even if we wanted to. There's too many people who want that sort of housing, and not enough land and not enough houses to go around. High demand, limited supply. Remember your first economics class. What does that do to price?

People will tell me in one breath that they don't want to deal with home owner's associations, then turn around and tell me they'd rather continue dealing with landlords. Landlords have more power than HOAs, and are less subject to moderating influence. If you're an owner, you have a vote and a voice in the HOA, and you can even run for the board yourself. If you're renting and don't want to follow the rules, the landlord will evict you and find someone who will. They have all the power they need in a vacancy under 3%!

There is always going to be a wider market further down the socio-economic pyramid. There are more folks making fifteen or twenty dollars per hour than forty. Even those making more have the option of buying cheaper housing, and there are those who do so, while those who attempt tricks to afford more house than they can afford regret it pretty much universally. If you buy the property, you owe the money and are paying the interest. Tricks like negative amortization, that make it look like you can afford more property than you really can, will come back around to bite you, with so few exceptions as to be statistically a non-event.

In California, townhomes and PUD developments are most often legally condominiums as far as title goes. It's just the physical set up that differs. Condominiums are multiply layered, stacked one on top of another all in the same building. Townhomes are typically only one unit high. They may be multiple floors and have shared walls, but no upstairs or downstairs neighbors. This improves the privacy situation, but it also increases the price, because land is what costs the most money, and there's only one unit on any given piece of land. PUDs are one further step up the line: They may be individual completely detached structures, but they share a common lot, so maintenance and such is usually shared, and you usually have to match the neighbor's decor. There may not be much space between units in a PUD, as I've said before, but there is usually some. All three usually have some sort of shared recreational facilities, as well, but not necessarily. This can be a very good thing. Lots of people who want a pool can't really afford the cost and the maintenance on their own, but spread it out between twenty or fifty or a hundred owners, and it becomes an entirely different issue. Lots of folks get really like the community facilities offered by an HOA that they couldn't afford on their own.

There are ways to do each sort right and wrong. The sin most developers commit with PUDs and townhomes is trying so hard to cram as many as possible onto a given piece of land, that each unit has effectively no privacy. With pure straight condominiums, the main sin committed is failing to insulate each unit sufficiently from noise in the neighboring units. Doing it right isn't cheap, and cuts into the profit margin. This also happens with townhomes and some PUDs, but to a far lesser extent. A complex where the developer did it right will be a little more expensive per square foot, but will be a much better investment. Granite counters and travertine floors get old, get dirty, and eventually do need to be replaced. The fact that you and your significant other aren't entertaining the neighbors every time you get intimate, that you can have friends over without disturbing the neighbors, or even that you have a private little back yard to barbecue in, won't.

If you're careful in your initial purchase, you can be happy and private in a condo, townhome, or PUD for many years. If you fall for a bad unit with nice surfaces now, you're going to suffer. If you pick a good unit, the way that leverage works will quite likely leave you very happy with your investment. If you pick a bad one, not so much. If you pick a good one and decide to stay, you'll likely find that your cost of housing becomes a low fraction of what rent would cost before too many years have passed.

If you can't afford the payments on a more expensive property, it's not a good idea to buy it. But if you don't buy anything at all, the economic prognosis for lifelong renters isn't good. This means that if you can't afford the property you really want, it's still a good idea to buy something your family can live in. Condos, townhomes, and PUDs may not be as great as single family detached housing, but they're a long way better than renting, and you can use the leverage inherent in the way property values has worked for the last century or so to help you get where you really want to be more quickly and more easily. Even if you never move up, you have placed your costs of housing permanently under your own control, given yourself a voice and a vote in how things are run, and the odds are overwhelming that you'll end up in a much stronger economic position.

Caveat Emptor

Original article 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 small amount. 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 people 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. Actually you shouldn't - because that's probably what happened to you.

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

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. You just stop working with them. Whereas 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, in order 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?

Caveat Emptor

Original article here

When I'm doing my initial automated search for properties for my buyer clients, I always pay close attention to listings represented by agents out of the immediate area. Why? Because an agent from fifteen or twenty miles away probably has no understanding of that neighborhood, and it's rare that they have done the necessary research of viewing the competing properties.

There are exceptions, of course. Agents who habitually work Santee despite the fact that their office is in downtown or La Jolla. Agents who habitually work La Jolla despite the fact their office is in Penasquitos. And there are always agents, who have a prospect that motivates them to do the necessary work outside of their usual area. I just finished one set of clients I was looking for in Clairemont, and I'm working with another set even further away. I've been out working for these people most of the last month, getting an understanding of what their market is really like in their price range, and I'm not showing them any property until next week.

Even a lot of agents don't understand how local markets really are. I just helped some folks buy a property right in the middle of my usual area. But they're looking to turn around and sell a property they have a partial interest twenty miles outside my usual area. I told them I would be happy to help them, of course, but that I'll need some time to do my research as to how to price the property, and while I'm doing that, I'll also have to figure out what the effective advertising venues are in the area. One of their siblings talked to an agent at the other end of San Diego County, and this clown told them, "no problem," and gave them a price - sight unseen - that was appropriate for the high cost area where that agent works, a place where everything is basically completely different. Lifestyle, demographics, commute. I couldn't say for certain yet, but the preliminary work I did indicates that this agent missed an appropriate price by at least ten percent - probably more like twenty-five.

Missing an appropriate price is a recipe for problems, whether it's over or under. If you're over-pricing the property, it's not going to sell - and you will almost certainly end up selling for less money than you could have gotten if you priced it correctly in the first place. If you're under-pricing it, you're getting less money than you could have gotten. If you offer too much, not only are you making the seller extra money but it is very likely the appraisal won't come in, making the whole thing a waste of everyone's time. If you offer too little, the seller is unlikely to accept your offer or even counter.

It took some time to sink through my head when I started acting as an agent, myself. But unlike mortgage information, where the information is good for the entire state of California with only minor changes from some lenders for differing counties, and I can stay abreast of the entire state's lender market for about the same effort it takes to stay current anywhere, real estate is hyper-local. If an agent wants to work outside of their usual area, they're going to have to do some serious extra work. Even within my usual stomping grounds, La Mesa is different from El Cajon is different from Santee is different from the adjacent areas of the City of San Diego. Each of them has neighborhoods and developments of different design and character and things going on, and there are only so many you can keep track of, because there are only so many hours in the day.

It is to be admitted that a lot of agents don't understand this. I've met a lot of them who won't do the work to stay current in their specialty areas, let alone outside. Prices move, neighborhoods become hot and cool off, and time of year is a variable as well. Major projects happen. The market you knew cold six months ago has changed, and you don't know it at all today unless you have kept up or caught up.

My point is this: When you choose an agent who doesn't make a habit or working the neighborhood, if they're being honest with you, they'll tell you it's going to take some time for them to learn enough of the market. If you're a buyer, chances are that you've got plenty of time, but if you're a seller with a deadline, the time it takes that agent to figure out the market can take a large bite out of your sale time. The alternative is to take a chance on pricing from an agent who really doesn't know your market, and marketing from an agent who may not know how to get your property sold effectively here and now. Far better to insist on evidence that the agent knows your particular market today

Caveat Emptor

Original article here

One of the best ways I have of telling how good a listing agent is is whether they get the counter to me before the offer has expired. Not that someone who gets the counter back to me quickly is necessarily wonder-agent, but that someone who doesn't is definitely among the dregs.

The whole idea of the purchase contract is that it becomes a legally enforceable contract when accepted. But if you're missing the "little detail" of timeliness, the contract hasn't been accepted, indeed it becomes impossible for it to be accepted unless someone is capable of time travel.

Missing offer deadlines has become common of late, with sellers hoping for better offers, so they sit on this one until too much time has passed, thus hurting their case further.

The other side missing the detail of timeliness gives my clients power. Now my clients can choose to accept what has become a counter-offer rather than an acceptance, because even if the other side intended to give a full acceptance, they haven't. There's this not so little niggling detail of the fact that the original offer has expired. It's dead. It's an ex-offer.

The other side missing deadline gives me information. When they respond after the deadline, I'm pretty certain there aren't any other offers going on, no matter what the other agent says. If there are other offers, they're not good offers. If there were other good offers, better than mine, why are they countering me so late? When I have multiple offers on one of my listings, I get each counter out there as quick as I can, and the proviso that another offer is not previously accepted is on every single one of them.

This means that my client is in a stronger position than they were in initially. Not infinitely stronger, but noticeably stronger. Particularly in the buyer's market we have locally and in most of the rest of the country. Even in a seller's market, it tells me that no one else wants this property at that price. It may be grounds to counter even lower.

This means that an agent who sits on an offer (or counter-offer) is weakening their clients bargaining position, i.e. violation of fiduciary duty. Unless it's the client who just can't respond, that agent has now incurred the possibility of action. Even if the client has been told of the offer, I always need to tell them that most offers have expirations, and the sooner they counter, the stronger their perceived bargaining position.

It's no better for a prospective buyer to miss a counter than it is for a prospective seller. There must have been something about that property that was attractive to you. Properties for sale never last longer than the first person who does what is necessary to get the seller to agree to terms. Once it's in escrow with someone else, it's too late to decide you want it. Unless it falls out of escrow - something not under your control - you are out of luck. Being a back up offer is basically a sucker's proposition.

This doesn't mean I make a habit of demanding responses within 24 hours. That's overplaying your hand in most situations. But a deadline of three to four business days is quite reasonable, and situations where it may be to your advantage to delay are rare. If you can't respond to an offer or counter-offer in that amount of time, something is wrong.

Caveat Emptor

Original article here

Not too long ago on a property I was selling I called an agent up on the day a transaction was supposed to close. He asked me the question, "Well who says it has to close today?"

"The contract that both of our clients agreed to," I told him, "I'll be bringing over a notice to perform later today."

He got all huffy and defensive and tried to talk me out of it, of course. His client was having difficulty finalizing the loan. He offered to fax me over a loan commitment, and it wasn't even in compliance with the purchase contract. The other agent didn't have a clue, being unwilling to take the few minutes to figure out what it said. Buyer's market or no buyer's market, he got the notice to perform as fast as I could take it to him. I didn't fax it; that could have been claimed to go astray. I hand carried it over. My client kept the deposit.

Now had the loan commitment been in compliance with the contract, I would have been considerably more forgiving, and counseled my client to be the same - but that doesn't mean I would have ignored the fact they had blown the time issue. Sometimes things go over for no fault of the loan officer or buyer's agent. When I originally wrote this, I had just finished a transaction where escrow took over three weeks of a thirty day contract to get me escrow information I had to have for the loan (I want a minimum 60 day escrow now due to loans taking longer). Add that to the logjam for loan underwriting we had, and thirty-nine days was what it took. Had the seller been hardcore about it, not only would they have lost the transaction, but it would have taken an absolute minimum of four or five weeks longer to get the property sold. The seller was quite properly due some consideration for the extension, but it is in their interest to stay in the transaction.

The issue at stake, most critical to sellers, but important for buyers also as well as costly to borrowers, is time. That seller can only have one escrow transaction on their property in the works at one time. If this buyer cannot perform in a timely fashion, they are spending money they would not otherwise have spent because of it. In most cases they are paying for an extra place to live while this joker of a buyer, or more precisely their agent or loan officer, bumbles about and wastes time. Around here, that's usually thousands of dollars per month. It has gotten to the point where one of the options I always consider is asking for an explicit "per day" escrow extension penalty for my client right in the purchase contract. That way, the buyer had better know right up front there is a deadline and will not treat it in some lackadaisical fashion, and if their agent does, well that's between them. Of course, in a buyer's market like this one, it scares a lot of buyers away, so discretion is advised.

Another way to cut unnecessary expense to my listing clients is a leaseback clause. What this means is that they can stay in the property, paying only appropriate daily rental on an equivalent property, for 30 to 60 days after the transaction records. That way, they don't have to arrange for new housing ahead of time; they can wait until the transaction is actually finalized, and then make arrangements. Of course, this means the buyer doesn't get possession right away, which many of them don't like, to say the least. They've gone to all this trouble to qualify for the property, scrimped and saved and now they're paying a mortgage and don't have the property. Nonetheless, it's a viable alternative to penalty clauses and sits a lot better at the beginning of the process when many of them are nervous about qualifying. As one final note to this idea, in order to get "owner occupied" loan rates as opposed to higher "investment property" rates, most lenders have a requirement to move in within 30 days, and this can, theoretically, create a conflict for the buyer.

On the flip side, suppose the seller is unable to perform? Cannot deliver good title, cannot get the clearances and inspections done, cannot get their lender to approve a Short Payoff, any one of a number of issues? Now the buyer is sitting here with an approved loan, and the clock is ticking on their rate lock. The days of always having a rate lock that will cover the entire contracted escrow period are gone, but it doesn't mean the seller can dawdle, and once the rate is locked extensions cost money. So now the contracted escrow period is up and my client's loan is ready to go and the documents have been signed and it's ready to fund and for the entire transaction to record, but the seller is sitting over there with their thumb metaphorically you-know-where and the rate extensions are costing my client a tenth of a point for five days or a quarter point for fifteen (depending upon the lender), always charged in full on the first day of the extension. On a $500,000 loan, a tenth of a point is about $500, and a quarter is about $1250. In a buyer's market, like this one, it may be a good idea to pre-negotiate a "seller unable to perform" penalty.

Of course, in most transactions, it's not the buyer and seller who are really at fault. It's the agent or the loan officer. They are getting paid for getting it done on time, among other things, and they are dropping the ball, either due to a "manana mindset" or because they are responsible for too many transactions or because they don't want to tell their client they have to spend some money, or because they're just an incompetent flake.

For loan officers, add "they promised a loan they couldn't deliver" to the list. It happens disturbingly often, as the incentives are in place to promise the moon in order to get potential borrowers to sign up, then play the "wait and hope" game of waiting and hoping the market drops far enough that they can deliver something that at least looks similar to what they promised. There are no loan extension fees in this case, or at least there shouldn't be, because to lock your loan would defeat the entire purpose of "wait and hope." On the other hand, in those situations the market has a distinct tendency to rise, and when it does, you pay the new rates that are even higher than what was really available at the time and that you could have had if you has listened to the guy who told you that rate really wasn't available at that cost. If the rate is locked and the rates go up, I don't care and neither does my client. If the rate is locked and the rates go down, renegotiation isn't a given but it is certainly possible. If the rate isn't locked, you are stuck with whatever happens in the market. Period.

The point of this article is that it is likely to save you money to get everything done right away, and even if the other side in the transaction doesn't, it puts you in a much stronger position from the point of view of negotiating, or from the a legal perspective if the whole transaction goes down in flames. Yes, an appraisal is somewhere between $350 and $500. Yes, a building inspection is about the same. Yes, the other reports run into some significant money, as well. But delaying will cost you more, which may be measured in terms of small percentages of the overall transaction, but when you do the math, it works out to thousands of dollars, not mere hundreds.

Don't wait for the deadlines. Definitely don't wait until after the deadlines. Deadlines are there for a reason, and missing them will cost you money. Get it done right now, and if your agent or loan provider will not or can not, document it. Loan providers you can drop any time until you sign the documents and often afterward, but you typically are stuck with agents once the transaction begins, at least until it finishes. Nonetheless, wouldn't you really rather that agent (or their insurance) was liable to cover your losses plus the cost of recovery? Document their failures to indemnify yourself.

Caveat Emptor

Original here


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.

Properly used, a transaction coordinator is of some benefit to the consumer. Another set of eyes watching the paperwork. Many agents do not use them correctly. They essentially hand the keys of the transaction to that coordinator, and expect the coordinator to bring them a paycheck without the agent being involved any longer. Sometimes, it's as soon as they've got a listing contract, as if that listing contract is what the agent is being paid for! I've also seen Transaction Coordinators quite commonly used to facilitate steering and other violations of the law by the simple expedient of saying "I am not allowed to contact the agent and their instructions are to do this" The simple way to frustrate that is to point out that RESPA prohibits steering, so there will be a complaint against their license if they persist. They're also likely to lose the transaction if they won't negotiate even the items that aren't actual legal violations, because the reason my clients asked for whatever they asked for is because it's important to them.

Many agencies and brokerages treat the agent job as pure sales, so once the listing contract or purchase contract is in place, the agent vanishes to be replaced by the transaction coordinator. This is the sign of a bad agent and a crappy broker allegedly supervising them. When a good agent signs a contract, listing or buyer's agency, they provide the service and work that the contract calls for. If they don't, any claim to be a good agent who can do the job faster, better or anything else is so much advertising hype, and if they were honest they would replace their name on all that advertising with the transaction coordinator's name. Before you sign a contract (listing or buyer's agency) ask to talk to an existing or former client. Ask that client how involved the agent stayed throughout the transaction. Did they talk to the agent about issues that popped up, or to someone else? If the answer is "someone else" that's a red flag to take your business elsewhere.

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 require 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.

Caveat Emptor

Original article here

Every so often I get e-mail asking why real estate transactions are so complex. Matter of fact, I have this discussion with most clients at some point. The answer is, "Because real estate transactions for a lot of money, and because there's a lot of money involved, con artists and other people will make a lot of money if they successfully con you out of even small proportions of it. Therefore, real estate acts as a magnet for the less than scrupulous."

Nor is outright fraud the only issue. If Sellers can persuade potential buyers that their property is 2% more valuable, that's $10,000 on a half million dollar property. If buyers can persuade sellers to sell that half million dollar property for 2% less, that's the same $10,000. Offer ordinary Americans - wealthy by the standards of the vast majority of the world - a chance to make $10,000, and they'll do anything from eating live worms to months of primitive living and Macchiavellian scheming to be the last one voted off the island.

Greed is a very powerful motivator. The lure of "easy" money has a very strong appeal. The lure of extra money has a very strong appeal. Because of that, there are a large number of scams and games out there. If you've been in either real estate or mortgage very long, chances are that you've had more than one tried on you or your clients. Perhaps one has even succeeded. Sometimes people get taken and don't realize it for years, if ever. Not too far from me, a couple months ago somebody got nearly $600,000 for a property that was really worth $480,000 to $490,000. The buyers are happy, too, according to the listing agent, never mind the fact that they paid $100,000 too much for the property. They'll eventually realize that their property isn't worth that much more than the neighbors', but they'll probably never make the connection back to "We paid too much". Unless the condition was completely misrepresented or something about what the seller says just isn't true, there's a good possibility of getting away with it. Even the sharp buyer's agents who spot the issue just want to keep their own clients out of trouble. There's no advantage to me or my clients in publicizing other people's lies for the benefit of third parties. Even on the listing side, the agent either thinks an offer is good or they don't, and the seller ends up accepting or sending the prospective buyer on their way. There's no advantage in warning others about one particular person trying to pull one particular scam.

With the amount of money to be made quickly, a lot of transactions have something fishy about them. I've seen figures and estimates varying all the way from two percent to nearly fifty percent of all real estate and mortgage transactions have something untoward happening. The percentages depend mostly upon where they set the threshold.

Against this backdrop, security measures have been instituted. Appraisal, inspection, disclosures, title insurance, escrow, notaries, etcetera, etcetera, etcetera. Every single one of them has reasons why they are advantageous and why they are required. Every time you do without one of the security measures that the industry has implemented which is applicable to your situation, you leave yourself open for the other side to do things which vary from minor games to completely illegal, from selling you a property that's worth less than the purchase price to selling you a property that is worthless for the purpose you intend. Yes, the security measures cost money - a lot of money in the aggregate. However, when the alternative is leaving the door open to transactions that are one hundred percent fraud, they have gotten incredibly cheap. Every time you try to cut out the professional who is supposed to protect you or work on your behalf, you leave the door open for losing more than that professional might possibly cost.

Take out the security measures, and not only do you open the door wider, but the people who are mildly concerned that they might end up imprisoned now will have no real downside to the activity. If there's no real chance of being caught and punished, what rational incentive is there not to do it? Do it, and make an extra $50,000. Don't do it, and the only difference is that you won't make that extra $50k. What's the incentive not to? There just aren't a lot of saints out there. Look at the way people behave in traffic, for a lot less gain, and pretty much every day I see someone getting a ticket that's going to cost them more than getting away with the offense 100 times would save. For this reason, all sorts of folks hope that you can somehow be persuaded not to take advantage of all available protective measures. It means they stand a better chance of getting away with whatever they're trying to pull.

In fact, the level of complexity and detail assists in finding and convicting malefactors. The more information you have, the better you can pin down exactly who did what. By breaking up the charges and the payments to track exactly what went where and for what purpose, a paper trail is created detailing what happened. If the only record made is that A paid B $X for some land somewhere, that says nothing about whether B owned it in the first place, what B told A in order to sell it, what A thought the condition was, or even what exact land was sold. I can go on for quite a while, but the point is that every little finger in the pie should have a good reason why it's there. If you're not trying to pull anything, they're there to protect you. Even if you are trying to pull something, they're there to protect you from the other side of the transaction cheating better than you. Especially if you're honest in the first place, it's a better situation for everyone, because now the other side (and any lender involved!) has assurance you're not trying to pull an entire range of unscrupulous activities, meaning the end outcome for you does not suffer from these apprehensions on the other side, and is therefore likely to be better for you. In short, for buyers, sellers, and lenders, all of these protections increase the value of the property.

Like employment and tort law, real estate law and practice has evolved the way it has as a protection against unscrupulous practices, and short-circuiting any part of it increases the odds that you will find yourself very unhappy indeed.

Caveat Emptor

Original article here

Before you even make an offer, you should be aware that you're going to spend a significant amount of money in the process of buying a property before the transaction is consummated. This will largely be money that you will not get back if something goes wrong with the purchase. There are methods of avoiding some of these, but they're a good way to get yourself in serious trouble by short-circuiting safeguards built into the system. You're talking about spending hundreds of thousands of dollars, either cash or in being responsible for a loan. The money I am talking about in this article is meant to prevent you from wasting a six figure number of dollars.

This doesn't include the "earnest money" or good faith deposit. The deposit is not, strictly speaking, money you are spending unless you do something that causes its forfeiture. It's relatively rare for someone who has an on-the-ball agent and who isn't trying to play games to forfeit their deposit. In the normal course of things, it will end up being used at the point of consummation rather than before, in order to pay loan costs, transaction costs, and possibly for some down payment money. It's mostly money you're putting up as evidence of your ability to consummate the transaction. The larger your deposit, of course, the more you have potentially at risk, but also the more serious you are showing the seller you are about the transaction. If I'm putting up a $10,000 deposit on a $250,000 condo, that's 4 percent of the purchase price. A buyer who's that serious will likely be able to get an offer with a lower purchase price accepted than someone without much of a deposit. Once upon a time, the default was 2%, but that's comparatively rare these days, as most deposits are smaller. No seller and no listing agent who are not completely insane will agree to a transaction without a good faith deposit.

The first thing you're really spending money on is the inspection. The lowest one I've ever seen was over $250, and they go up from there, with the average being about $350. The basic inspection is your best protection against undisclosed major or expensive faults in the property. I've heard of people using the seller's inspection or the previous buyer's inspection. This is a good way to save a few hundred while being out tens of thousands. The previous inspector could well have been instructed to ignore defects, and because you are not the one paying them, they have no responsibility to you. If you engage them and you pay them, you can sue them if they don't exercise all due diligence. It's okay to have your buyer's agent provide a recommendation or even select them - your agent is also responsible to you. But be careful about this if you're using a dual agent or going unrepresented. I would also never use an inspector recommended by the seller. They could have chosen their friend with malice aforethought. In any case, if you're not writing the check that pays them, they don't have responsibility to you. If they don't have any responsibility to you, what's their motivation to do a full inspection and report everything? Finally, you do want to pay them at time of inspection. Some inspectors will work through escrow, waiting until escrow closes to get paid, but they charge a lot more - and you're going to pay these higher fees whether or not the transaction actually closes. Better to just write the smaller check up front. You get what you pay for, but there's no reason to pay for all the inspector's deadbeat clients.

The second major thing you'll actually spend the money on is the appraisal. Like the inspector, an honest appraisal protects you. Around here, they start at about $350, and go up from there. Investment property appraisals are more expensive because there's extra work to be done, and so are higher dollar value properties. Never use someone else's appraisal or appraiser. I've written briefly on appraisal fraud before. The games that the unscrupulous can play are legion. Once again, it's okay to trust a buyer's agent or an independent loan officer you select to find an appraiser, but not a dual agent, and not a loan affiliate of the listing agent. The buyer's agent has an unalloyed responsibility to you, and the loan provider has one to the lender, who also doesn't want the appraisal to be for more than the property is really worth. These days, with lenders complying with Home Valuation Code of Conduct, it's rare that anyone beside the lender (or their designated AMC) will have an opportunity to select an appraiser, however it's very possible that HVCC may go away. However, Once again, if you're not paying the appraiser, they have no responsibility to you, so you want to be the one writing that check. Furthermore, many loan providers are willing to pay that appraiser, but you may take it for a law of nature that you're not going to save money that way - these loan providers will charge enough more to more than cover the cost of the appraisal, and they'll get it from you whether or not the transaction closes. Better to just plan to pay it yourself via a check in the first place.

One of the things a good buyer's agent learns are suspect are seller's appraisals. That seller wants to get the highest price possible, and the appraiser they pay has a responsibility to them. Furthermore, in such circumstances, some appraisers don't have any compunctions as to how high they'll go. Not too long ago, I visited an empty mosquito infested armpit of a property that hadn't been updated in sixty years. Okay, it did front one of our coastal lagoons, but even so my best estimate of the current value was about $640,000 (lower at the update)- and somebody had managed to borrow about twice that according to public records. Stuff like that doesn't happen without appraiser complicity. So unless you want to take a risk of trusting someone like that, don't trust a seller's appraisal.

None of this includes specialist inspections that are real smart to get if your initial inspection finds something of concern. Of course, if the initial inspection finds something of concern, the smartest thing may be to walk away from the property. It depends upon too many factors to write about with any coherence, and there are no guaranteed answers. Pretty much every real estate transaction is an exercise in controlled risks for the buyer, which is one more reason you want to have a good agent on your side.

Around here, the seller most often pays for the termite clearance, because that termite inspector is making a general warranty to all concerned that the property is in the condition they say it's in, but that's subject to specific negotiation.

So before you make an offer, be aware that you are committing the costs of inspection and appraisal to this property should that offer be accepted. There are ways to avoid paying them, but it's not smart to do so, as it's likely to cost you a lot more than you could possibly save. Before you make that offer, ask yourself if you're willing to put up this money as insurance against all sorts of common issues that properties really do have. If not, perhaps you need to consider a different property. It is worse than useless - actually counterproductive - to try and get out of spending this money. Yes, if something goes wrong with the transaction, it's money down the drain, but better several hundred dollars for the inspection and appraisal than half a million dollars or more for a property that isn't worth what you paid for it.

Caveat Emptor

Original article here

An email:


I purchased a house in DELETED with two friends. Unbeknownst to us, one of them was in a legal domestic partnership relationship that she withheld from us (we knew about the relationship, just not about the legal part). We each had to sign these Domestic Partnership Addendums to our loan application. She did not indicate she had a domestic partnership relationship through that form. She and her partner split. The partner filed for dissolution in November and in her paperwork has named our property as joint property. Our "friend" has denied that her partner has any legal right to the property.

Apart from this mess, this house partner ...DELETED... has been a terror since we got the house. I have offered to buy her out three times since DELETED. THEN I found out she lied about her Domestic Partner situation.

Can I force her off the deed for fraud (since she clearly lied about the DP situation?) OR, can I force her to either get her partner to sign a Quitclaim Deed (or something like that) and, if she can't, then she has to remove herself from the Deed of Trust?

My feeling is that she intentionally committed fraud and therefore the Deed of Trust is either invalid or her part of it is. AND I dont feel like I should have to "buy" her out since she lied.

Please tell me you have an answer!!!

The best answer I can give is that this looks like a matter for an attorney. There's a lot of complexity to your situation, and my knowledge is limited. I'm not a lawyer and you need to talk to one licensed in your state. That said, I'll be glad to share my understanding of the issues.

You have run straight into an issue that bites folks all of the time. My understanding of the domestic partnership arrangement is that it is legally the equivalent of marriage with the exception of a couple of issues of which real estate title is not one. This makes your situation basically the same one as has been biting victims of gold-digging spouses for as long as their has been marriage and law and ownership.

You talk about the Trust Deed and Domestic Partner Addendums. However, those are between the lender and each of you individually, not between your group of partners. The main questions are, "In what manner do you hold title?" together with, "What sort of a business partnership do you have?"

In most states, the default title arrangement is "Joint Tenants with Rights of Survivorship." What this means is that you're all equal, undivided partners. If one of you gets married or domestically partnered, that new member becomes an equal partner. Nice for them. Not so nice for you.

This is a situation where "tenants in common" would likely serve the interests of business partners better. Tenants in common can hold other shares of ownership besides precisely equal. So if they put up only ten percent of the money, they can own ten percent, whereas if they put up ninety percent of the money, they can be ninety percent partners - or whatever arrangement you all agree to. If they get married or become domestically partnered, the spouse or partner only gets a portion of their share under the tenants in common arrangement.

In the case of a trust, it's whatever the trust agreement says. If you have a partnership agreement amongst yourselves, even better, because it can give explicit recourse for situations like this. Corporate ownership has its advantages as well. There are situations where each of these is appropriate. It all depends upon what's important to each of the partners and appropriate to the situation.

That said, whatever you've got is what you're stuck with. You can't go back to the beginning and change the situation now. You've found out first-hand about why the various forms of ownership came into being. If everyone was always a reasonable responsible adult, there would be no need for the alternative forms of ownership to have evolved. Even if you've got nothing written, though, dueling attorneys is a horrible way to settle the matter. It's likely to be a lot more efficient to sit down with a mediator and see if you can come to an agreement everyone can agree upon. When everyone's paying a couple hundred dollars per hour for an attorney, any advantage they might have gotten gets eroded quickly, and it's not very long before everyone emerges poorer for the experience.

At last resort, you do appear to be effectively the victim of fraud and should be able to use that as some leverage, although my understanding is that the law would mostly treat it as an additional side issue rather than the central fact of the matter. But when attorneys and the courts get involved, there aren't any easy answers, and the whole thing leaves your control when you submit it to the law. The plain fact of the matter is that it might be smart or fair to do a lot of things, yet it's unlikely you're going to be able to force anyone to do anything, let alone smart or fair. Even if your partners from the nether regions are completely insane, you're likely to come out better overall if you can come to some sort of mutual agreement you can all live with, rather than paying attorneys and missing work for court. However, it's smart to pay an attorney to get advice and/or assistance in avoiding pitfalls of negotiation in this situation. One more example of why, in real estate, an ounce of prevention is usually worth a lot more than a pound of cure.

Caveat Emptor

Original article here

Most people don't stay in their first house their whole life. At some point, they want to move to a different home.

There are several ways to approach the transaction, but you have to decide which way fits you. You can approach it with an idea to maximizing profit, maximizing cash flow, maximizing speed, minimizing stress, or minimizing inconvenience. You really only get to choose one, but it's a good idea to rank them from most important to least important so that both you and your agent know where your priorities lie, and perhaps you can do some things from your lesser priorities.

Now, if this was a commercial site, looking to seduce you into listing with me, I'd probably have some corporate salespeak flack telling me to say you can have it all, but instead I'm going to tell you the blunt truth: You can't, not reliably, and any representation to the contrary is a lie, the words of a fool, or both. You can certainly do things in each of the categories (and others) but if you don't go into the transaction with a clear view of what is most important to you, chances are you won't get whatever it is that is important to you. Some people do luck out, especially in hot markets, but when the market is cooler, the fact is that you take what you can get, and the probability is better that you will get what is most important if you decide what is most important and stick to it.

Whether you are moving up market or down market, whatever factors there are that help you on one end of the transaction will hurt you on the other. If there are more buyers than sellers, it's going to be hard to compete against the other buyers, but easier to sell your current property, and vice versa. Generally speaking, Buyer's Markets Are A Great Time For Moving Up, while seller's markets are superior for moving down.

If you choose to maximize profit, move out of the old property and into a rental unit, and make whatever cosmetic alterations you're planning before the property hits the market. Newly renovated vacant units show better, and therefore sell better, than anything else. Your time of highest interest is typically for the time period immediately after it hits the multiple listing service. Particularly if you have pets or children, who are both highly efficient entropy generators, you want to move out if you can afford to. Since this is very costly in terms of cash flow, many cannot afford it. Nonetheless, in most markets under most conditions, the return you will get will repay your investment, as there are few obstacles and conditions to your prospective buyer moving in as soon as they can consummate the sale. Furthermore, because the property is vacant, they can more easily picture themselves living in it. Ask any artist which is easier to work with - a blank canvas, or one that already has a painting on it? Then consider that the average buyer has the imagination of a rock, which is why properties with just a little more oomph are much easier to sell. The less of your family there is in the property, the more potential buyers can picture theirs in it. The nicer it is already, the less trouble they have picturing their family in it nicely fixed up.

Staying in the property causes not only stress from whether the property is clean enough to show every day, but also from prospective buyers and their agents having both a window of observation on your life and the potential opportunity to debark with some material piece. I imagine it happens, but not nearly so much as to warrant the stress sellers put themselves through on this point. As an agent, I'm always aware that my good name is on the line as well, and I'm always watching prospective buyers, even though I've never had anyone attempt to remove anything (that I'm aware of). Nonetheless, many sellers insist upon being physically present, which often has the effect of chasing people away that I, as the agent, could have sold the property to given a freer hand. Given real estate practicalities, your concern over a couple of $15 CDs that might have potentially wandered off could have just cost you tens of thousands. So if you're concerned, move anything valuable or irreplaceable like jewelry and heirlooms out, and resign yourself to replacing anything that someone does take. You will come out ahead in the end.

If you're looking to maximize speed, moving out is a good idea also, but you're also going to want to price your property significantly lower. The higher the price, the harder it is to sell the property, the fewer people that can be expected to look at it, and the harder it will be for them to qualify. If you're priced 5 percent above anything comparable, the appraisal probably going to come in lower than the sale price, and not many people want to pay a premium for a property. It's going to take longer to sell, and you're almost certainly going to end up cutting your price below what you could have gotten in the first place. If you're priced a tad below the comparables, however, well everyone wants to buy homes with some built in equity, and the bank sees their loan as being less risky, so it's a little easier to qualify (They're still going to stick with the LCM principle, but from experience, they're less sticky about the little stuff if the appraisal is a little above the price). However, you walk away with less money than you could have gotten, a less than optimal circumstance.

If you're concerned about cash flow, on the other hand, moving out is not the way to go about things. For one thing, you don't have the money, or if you do, you're going into stress mode about whether some short deadline is going to be met, which can cause you to be forced to accept an awful deal that you would not otherwise have considered because you're running out of money to pay for all the extra stuff you weren't paying for before. If you think ahead, and make your agent aware of your concerns, you've got a better chance to come out ahead in the end.

Suppose your priority is to minimize stress? Then you typically stay put while researching other properties, and ask for a contingent sale, possibly with a leaseback that gives you a certain amount of time to find alternative lodgings. Alternatively, if cash flow isn't an issue, you might start looking right away, either with or without a "bridge loan" (cash out against your current property, as a down payment on the new one). Bridge loans are great, they are wonderful, they can do all sorts of things for you, but they are aren't cheap. Before you do one, consider whether there is a real need. If you have some cash and are a good credit risk, the better option may be to borrow more against the new property. Perhaps the better option is to split finance the new property and pay off the second loan on the new property when the current property sells. Because "bridge loans" are cash out refinances, then all things being equal, it's probably a better idea to get the money through a purchase money loan. It's even possible (albeit rare) that despite paying for two loans, the math may favor getting some money via a bridge loan, and borrowing the rest through the purchase loan on the new property. But if your debt to income ratio is tight, none of this may work.

If you want to minimize inconvenience, you probably want to stay in the property until it sells, and quite probably for a while thereafter, so you're going to want a short term leaseback as a condition of the sale. Many people do this to avoid moving the kids out of school in the middle of an academic year. If they're staying, it also gives them some time to find another property in the same district, or even that attends the same school. But here again, remember that you're limiting your buyer's options, which has the likely effect of scaring off the ones who would otherwise have offered you the best price, or causing them to not be willing to pay so much for it ("Darn it, my kids are in the middle of a school year, too!") If it's a buyer's market, you're likely to pay a certain price - or rather, your buyers are likely to be willing to pay less - but if it's worth it to you, you also get what you pay for.

There are other potential factors, certainly, and other strategies to maximize the blend of "goods" that's best for you. But these are the ones that most people need to think about ahead of time, and these are the ones where failing to consider them ahead of time will reliably cost you the most.

Caveat Emptor

Original here

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.

The fact is that with a routine transaction, if nothing goes too horribly wrong there are no red flags or screaming flares that rub a layperson's nose in how badly they are missing a buyer's agent. You make an offer, it gets accepted, the loan gets approved, you move in. There's nothing to tell you you're going to spend tens of thousands in repairs, you spent tens of thousands too much on the purchase price, the seller and listing agent kited by on their legal requirements (reasons on top of the double commission why bad listing agents and brokerages love buyers without an agent or their own), or any one of dozens of other problems that really do crop up. But the person who said "ignorance is bliss" made one glaring omission that changes everything (unless you're a politician). Ignorance is only temporary bliss.

By the time of their second real estate transaction, most people have figured out that while an agent is an expense, a good one is 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 don't have a financial incentive to sell them any given property. I'm not going to let my clients 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 their clients this property, they are looking to find the best bargain for the client's needs and make that happen. A buyer's agent has no responsibility to the owner of the property beyond "fair and honest dealing" - 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 brokerage 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

Original article here

During the initial interview with prospects, I like to cover the division of the labor that goes into a purchase that makes the buyers happy.

I have to know what's important to the buyers, how important it is, and what the budget I have to work with is. My goal is to get my clients some combination of better property and a lower price that's at least ten percent better than they would have had otherwise. That's a realistic, achievable goal. But in order to deliver that bargain in such a way as will make them happy, I have to know what's most important to them, what's not so important, and what's not important at all. That way I can ignore the property where the owner is so proud of some modification my client doesn't care about that they're not prepared to be reasonable.

Once I know what they want and what their budget is, I can tell them how realistic they are being. A good buyer's agent can hit a goal of making a ten percent difference with pretty much every property purchased. I can't guarantee it, but I'm pretty certain all of my clients would agree I made at least that much difference. In some situations recently, it's been thirty percent. But I can't find three bedroom houses in good shape on the top of Mt. Soledad for $250,000. It's not going to happen, and it's no service to anyone to pretend that it's likely to. If your budget and your desires are mismatched, it is my responsibility to inform you of that fact right at the beginning.

Once we have a meeting of the minds on what is possible and achievable, and what may be necessary to do it, the job that comes next is finding "possibles". I define a "possible" as any property which meets the client's essential requirements and might be obtainable within their budget. Budgets should be expressed to agents in terms of purchase price, not monthly payment. Expressing it in terms of payment leaves you open to being sold a property with a negative amortization or some other unsustainable loan with an initially low payment that becomes unmanageable later. You get a higher priced and therefore more attractive property for a payment that's within the payment you told them, and by the time you figure out the gotcha!, they've already been paid, and now they're going to want you to sell the property through them so they get paid again!

Back to the "possibles." The primary responsibility for finding them is mine, but if the client wants to suggest possibles, that's great also. Once possibles are identified, I've got to do a little records research and go look at them. It doesn't take long - fifteen minutes inside each one is more than enough to tell me if this one makes the cut, as far as amenities and value and condition go. Because I'm looking constantly, I've got a pretty solid sense of where the market in my usual areas is. In most cases, I've been inside several that were initially built to the same floor plan that have already sold recently. I've got a laundry list of common problems I specifically look for and evaluate how bad they are if they are present. I've also got to see if I can find a reason why it's obtainable within the budget I've agreed to work with. The obvious case is that if the asking price is less than the client's budget, that's pretty good evidence. That's not the only possible evidence by any means, but it's a pretty solid indication. Where the cut is varies. The easier it is to find what my clients want within their budget, the pickier I can afford to be. The one thing I don't want to do is waste my client's time with below average properties there's no reason for them to be considering.

If a "possible" makes the cut for value, amenities, and especially condition, while being obtainable within my client's budget, it then becomes a "likely". This is when I bring it to my client's attention, we go take a look at it together, and I tell them what I see that's right and wrong with the property. Most of my clients aren't real estate experts. On the other hand, they know what they like and are willing to pay for better than I ever can. If the only way you'll ever take action is if your agent tells you it's perfect and doesn't have any flaws, please get real. No matter how great it is, there's at least a dark lining to every property. If it's huge and beautiful, maintaining it is going to be expensive or you're going to be losing some of your return to deterioration. Fact of life. There is no such thing as the perfect property unless you've got an unlimited budget. Seeing as not even the richest man in the world has an unlimited budget, one hopes that you get the idea.

Agents should tell you about the pluses and minuses of every property they show you. I want to make certain they understand the implications of things they may not have thought about. I looked at six properties with a client the other day, and on every single one, there were things I pointed out that changed the picture in her mind dramatically. Agents shouldn't be shy about making recommendations as to which one they like or has the best apparent value. With that said, however, it's not the agent's job to tell the client which one the client should like. You're the one that needs to be happy at the end of things. No matter how much I like a property, if the client doesn't like it, that property profile goes into the wastebasket. Similarly, if the client likes one that I don't, it's my job to report the facts, not to talk them out of it. I can tell them why they shouldn't like it, but if I explain why they shouldn't like it and they still do, well, it's their money and their life. I'm the consultant, not the boss. I'm the hired expert who knows more about the market than they likely ever will, but the most important thing is that they're the one that knows their own mind best. It's darned few who are silly enough to disregard my advice, but they must be able to do so. I'm permitted to try to talk them out of making an offer, but not to prompt an offer, and whatever the clients want to do, they have to be the final authority.

Once they've decided to make an offer, it's my job to figure out how to conduct negotiations such that the clients get the best possible price. To this end, I'm always looking for things that aren't money to offer. For instance, with sellers nervous about committing to move out before close of escrow, a short term leaseback can make an offer more attractive. It amazing the difference that can make to the price the seller may be willing to accept.

Finally, the due diligence period is mostly on my head. Getting the inspections and appraisal done promptly is important. It's great if the client is there for the inspection, but despite lawyers who advise agents not to be there, it really is a responsibility that can't be ducked. I can't see how it can not be gross negligence to be not be present at the inspection. Make certain the client knows and understands what is going on. If I have to call the inspector back to explain something, I have to call the inspector back. Make certain the client understands the title report, the hazard report, etcetera.

A good agent provides lots of professional advice and input. More than some clients want, as a matter of fact. But real estate is enormously complex and if there were easy answers, everyone could do it. It's my responsibility to help you understand the issues, to make certain that you've got the best possible set of choices to choose between, and to make certain you understand the advantages and disadvantages of those choices (There will always be disadvantages, and if you don't understand this, you shouldn't be buying real estate). The decisions themselves, however, must be yours.

Caveat Emptor

Original article here

During the Era of Make Believe Loans, a lot of folks got used to zero real scrutiny of transactions. With values increasing rapidly, it was hard to lose money on real estate, whether you were purchaser or lender. One of the most common abuses has been Straw Buyer Fraud. Well, with local prices having receded roughly 30% and no rapid increases on the horizon right at this instant, a lot of lenders are getting burned on loans, losing money, and going back after those who aided and abetted and made those transactions appear more solid than they were.

Against that backdrop I got this email, with the subject, "I am a straw buyer":


I thought I was helping out a friend and HONESTLY did not think and/or realize I was doing anything wrong.

The friend has been making the payments for 10 months and is due to buy the property back from me at the 1 year anniversary (DELETED).

If he can't buy the property back (which I don't think he can), I want to approach the Lender. I can't afford the payments of DELETED and I don't want the property which is worth DELETED.

What kind of trouble could I be in?

Also there is an agent, a broker and an attorney involved in this scenario as well.

Well, California is an escrow state, so this isn't anywhere I can get involved, and the rules are different in every single state. As I've said before, the best thing to do if you find you may have violated the law is consult a licensed attorney in your area, and if it relates to real estate, make it an attorney who's a real estate specialist.

There are some generally applicable principles, but keep in mind that I'm not an attorney, so if there's any conflict between this and what your attorney says, believe your attorney.

The situation is this: You signed a Note, and in most cases, a Trust Deed or the equivalent. The Note says you owe the money. The Trust Deed pledges the property as security for that money.

In many states, California among them, purchase money loans are not generally subject to recourse. Unfortunately, you have committed fraud, which is one of the exceptions and therefore subject to full recourse in every state I'm aware of. Furthermore, loan fraud itself is usually a matter that causes the federal government to get involved, as most lenders are federally chartered. So you have a criminal fraud case, most likely at the federal level, quite likely conspiracy added to that charge, and on the civil side, you are going to be at least one target of a civil suit if the lender loses any money. You can also expect to hold a share of liability for the lender's attorney fees. That's the bad news.

The good news is there's quite likely evidence that you were led down the primrose path by those alleged professionals who should have kept you from breaking the law. This won't get you released from your basic responsibility for what you did, but if the feds and the lender bother with you, you're not likely to be their primary focus, and on the civil side, you're not likely to be the deep pockets they are really interested in. While neither the feds nor the lender is going to want to let you off the hook, you shouldn't be their primary target if you can show that you were advised to do this. Ignorance of the law is no excuse, but when comparing the level and degree of culpability, I'd expect that a non-professional led afoul of the law by allegedly professional advice you should have been able to trust is a fraction the culpability of those professionals who willfully advised you to commit an illegal action.

Now before you breathe a sigh of relief, let's consider the following: What if those alleged professionals aren't there any more? What if they're already out of business, broke, and in jail? Now you're the only target left. Ouch. Now you know how the last of Custer's men felt at Little Bighorn.

Here's another not so comforting thought: What if that property wasn't really worth what was paid for it? From what I understand, a large proportion of felons like to combine their scams. For instance, adding appraisal fraud usually doesn't add appreciably to the risk, while adding greatly to the reward. They pay an appraiser to come up with an inflated value, get someone to pay it, and voila! Extra profit! The games that can be played are legion. Usually, the sucker or mark is just so pleased to be getting "such a great property" that they don't really examine what's going on. Sometimes, they're so happy to be qualifying for anything at all that they won't examine the situation at all, for fear that they will won't qualify and it will all somehow melt away. It's been said before, but you're never so vulnerable as when you're trying to get away with something. If something seems to good to be true, it probably is, especially where hundreds of thousands of dollars are involved. In real estate, you always look the metaphorical gift horse in the mouth. If it's real, it will stand up to the examination. If it's not, you might just avoid paying three times what the property is worth, not to mention criminal prosecution.

Read those contracts. Really read them. Pay attention to paragraphs that say stuff like, "It is a felony to misrepresent information on this application." With hundreds of thousands of dollars on the line, they mean it.

If anybody claims to be helping you break the law or circumvent safeguards, run away! If they're willing to break one law, or one of their ethical responsibilities, ask yourself what reason there is to believe they won't break others? To be precise, their duties to you? If you're trusting them for advice, it seems likely they know the system a lot better than you ever will. There is a reason for every single law and procedure in real estate. The vast majority of the time, it's to protect consumers. If an alleged professional is willing to admit to doing one thing illegal or unethical, what evidence do you have that you're not going to end up one of the victims?

If there are legal ways around legal requirements and procedures that have been put in place, they almost always involves full disclosure to all parties. There some stuff that's none of the business of some parties, but that's because they have no reason to be interested. For instance, the listing agent in a recent transaction asked me for some financial history on the buyers that they had no need to know - they were just trolling for data which might lead to future clients, i.e. trying to get my clients future business. For that sort of stuff, it's good to tell them something vulgar and report them to the state. But if you know or have been led to believe that the other side of the transaction is being deceived or intentionally kept in the dark, you should be hearing more warning sirens than a ten alarm fire during an air raid. Do all the agents know everything they need to? Does Escrow know? Does Title know? Does the other side of the buyer/seller transaction know? Most importantly, does the lender know? Are you sure? Did you tell them? If not, what evidence do you have that they know?

Nobody should ever rush you into signing anything. Take your time. If you're not certain you understand it, don't sign, no matter who's hopping with impatience. Even me, although I don't recall ever committing that particular sin. Taking your time and consulting disinterested parties may cost you some money, although your agent or loan officer is doing their job if they inform you of what consequences there may be. Not doing so can cost you a lot more money, plus your freedom for years and your credit rating for the rest of your life. Worst comes to absolute worst and you lose the transaction and your deposit, that's better than getting convicted of fraud and owing half a million dollars that the property isn't worth.

Caveat Emptor

Original article here

What can a seller do to get the deposit when the buyer backed out after the time limit and just won't sign off on the money? My real estate agent is not helping at all. The real estate office was representing both the seller and buyer and I believe they don't want to upset the buyer and that is why they aren't pushing her to do the right thing. Thanks for any help.

This agent is not representing your interests in a fiduciary manner as demanded by the listing contract.

Real Estate is not sugar and spice and everything nice. Sometimes - quite often, actually - doing your job as an agent means that you have to do something unpleasant by taking your client's side. If your agent isn't willing to be a complete jerk on your behalf if they have to, they're not worth a talking to, much less signing a contract with.

This is another reason why Dual Agency is a bad idea from the consumer's point of view. Most of the reasons are from the buyer's side, but here's a concrete example why you do not want to permit your listing agent to also represent the buyer. Since when I originally wrote this, about thirty percent of all purchase contracts fall out of escrow for some reason or another - and that number has since exploded to over fifty percent, ask yourself how you'd feel about your listing agent trying to preserve the buyer's deposit even though you, the seller, may be entitled to it. You gave them sixty days or more exclusive shot at that property, paid the mortgage and all the other bills for that time period, and could not sell it to anyone else while they were wasting all of that time and money of yours. This is a very common phenomenon when one agent tries to represent the interests of both sides. But your interests call for the buyer to forfeit the deposit, and if they want to continue to represent you, they need to act in your best interests. In this case, your agent hasn't done that.

This isn't to say they have to start with scorched earth. A simple request to sign the cancellation and release of deposit is very reasonable - and precisely what they agreed to when they wanted to represent both sides, if the transaction fell apart. When there's no other agent, there isn't anyone else to do the job. They're it, because they tagged themselves by requesting dual agency.

Agents, however, are not lawyers, arbitrators, legal mediators, or judges. They have zero authority to force their other client to sign the cancellation and release of deposit. Some people won't do the reasonable and intelligent thing, whether it's because they're hoping to get away with it, or because they don't think it's the reasonable and intelligent thing, or for some other reason. But a failure to even ask is gross dereliction of duty, and a failure to do their utmost in persuading the other side to release you the money is a failure of their contracted fiduciary duty to you.

This means that you quite likely have a valid reason to cancel your listing. Consult with an attorney, but from the information presented, they have clearly failed to represent your best interests in accordance with that listing contract. As far as calls upon agent loyalty go, listing contracts conquer everything but the law, or at least they should. That's why I give each and every one of my buyer clients an explicit written release of any obligation if they should choose buy a property I'm listing. They can always find another buyer's agent to represent them, but the sellers are contractually committed to staying with me for the contracted period. I also tend not to show my few listings to my contracted buyer clients, for reasons I've gone into elsewhere.

One hopes you see why I make such a big deal about putting in the work to find a good agent. Here you are with months and multiple thousands of dollars gone, and you have absolutely nothing to show for it because your agent is a self-serving bozo. You don't need to fret about finding absolutely the best agent there is, but you do need to find one who knows what they're doing and will do what is necessary to represent your interests. I wrote a two part article How to Effectively Shop For A Listing Agent (Part I) and How to Effectively Shop For A Listing Agent (Part II) on this very subject. Chances are, there is more than one good agent in your area, but the good ones are usually outnumbered by the bozos, so just using your relative or friend is like playing Financial Russian Roulette with four of six chambers loaded. Nor is "top producer" any kind of sobriquet I'd want for my listing agent, because they're talking about overall volume of sales, and that's not likely to be present in the agent who can actually get top dollar for your property. All of the agency mechanics that favor mass production of sales work against them getting the best price possible for any particular property. To be fair, this works in the other direction as well, but it's not your problem. You want someone who's going to get the best possible price for your property, not someone who mass produces transactions. If they've chosen the other path, you don't need to feel guilty about passing them up in favor of the boutique agency that busts their backside to satisfy you. That high producing chain is making plenty of money off the suckers who don't know any better.

Caveat Emptor

Original Article here

Copyright 2005-2015 Dan Melson All Rights Reserved

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This page is a archive of entries in the Buying and Selling category from September 2013.

Buying and Selling: August 2013 is the previous archive.

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