Buying and Selling: February 2014 Archives

How do you transfer house ownership after someone dies and leaves you the house in a will?

The will must be probated. Once all debts of the estate are paid and the court agrees to a final disposition of assets, the executor will then create a deed giving whoever the heir is title to the property. It may or may not be part of the executor's job to record the deed with the county - so make certain it gets done yourself if you are the inheritor. It may cost some money, but it prevents huge problems down the road.

Note that if there's a loan or other liens in effect against the property, the mere fact that your predecessor died does not render them in any way invalid. Most specifically, Trust Deeds still have the power to foreclose if the payments are not made in a timely manner. Sometimes the estate has the money to pay them off; more often it does not and somebody better keep making those payments during probate, which lasts a legal minimum of 9 months, or the issue will be academic before probate is resolved. Nor can estates, in general, secure financing, so refinancing the loan can be difficult. Relatively few dead people earn significant amounts of money.

On the other hand, if your property is in a Trust, then there is no probate on that part of the estate. Title to the property remains in the trust, which didn't die. Control passes basically immediately to the successor trustee, who must comply with whatever instructions are made in the trust with regard to the property, but is otherwise free to do with it as they will within the limitations of the law. Among other issues encountered in probate but not here, this permits refinancing in whatever name happens to have the income to keep making the payments.

Caveat Emptor

Original here

I bought a condo in DELETED, CA. Zero down. For 7 months I paid every bill on time - mortgages, HOA and taxes until... The Homeowner's Association told us that we MUST pay a $20,500 special assessment.

My realtor had told me nothing about possible coming special assessment. I lived from paycheck to paycheck and had to leave the property.

I didn't pay ANY bills until my property was foreclosed. Today, AFTER ONE YEAR it was foreclosed, I received a letter. They say that I owe "prior the date when the property was foreclosed... delinquent in payment of the assessments, late charges..." $24.773.08

I can agree that I owe HOA monthly payments until the property was foreclosed but special assessment?

With a delay of seven months, I consider it unlikely (although possible) that the assessment was proposed prior to your purchase. It's usually no more than three months from proposal to assessment.

Usually, special assessments of that magnitude are not required to be paid immediately in one lump sum, but rather eligible for payments of so much per month over so many months. However the condo association has the right to levy assessments for repairs and required maintenance. This is part of owning communal or common interest property. Your assessment was larger than most, but the Association does have that right to make those assessments. It's in the CC&Rs, which you had to accept in buying the property - the former owner did not have the right of severing the unit from the association, and neither does the current owner. Usually assessments are recommended to the board by the management company, approved by the board (itself elected by the owners) and confirmed by vote of the owners. You most likely got a ballot in the mail. Whatever you did with yours, a majority of a quorum of owners in your complex voted in favor of the assessment. They need to keep records of all of this - board minutes, ballots mailed, ballots returned and how they voted. My guess is there were pretty good reasons the other homeowners voted for such a large assessment, and unless there's something wrong with how it was conducted, it's a valid lien on your property, and against you personally if you were owner of record on the date of assessment. If something was concealed from you regarding the assessment, it would be in the records of the association.

I doubt you were bamboozled by an already approved assessment. In California, you're required to receive what's called a "condo certification," from the HOA within seven days of the accepted offer. Among other things, that condo certification will show special assessments, whether under consideration or already approved. Furthermore, every single regulated lender in the known world is going to require that condo cert in order to fund the loan, and if there are special assessments known, they will require that you qualify at the increased rate of payment. So I'm betting you got full disclosure at the time.

This was a buried problem, and the only way to ferret it out for certain is asking members of the board point blank at purchase time about any deferred maintenance issues, but sometimes things like this can take an association by surprise. For example: fires, burst pipes, etcetera. A condo inspection only looks at your unit, not all of the others. Alternatively, you've got to walk the entire property looking for problems, and hope it's not hidden inside something where there's no way to know it's there. One final way that might spot problems is in looking at the level of association reserves in the condo cert. it takes a good buyer's agent to ferret it out before a sale, and an even better one to tell you about it. Most of this stuff isn't part of basic due diligence, and telling you about it is a noteworthy example of "no good deed goes unpunished," because it's going to mess up the transaction, and most clients will kill the messenger by not working with that agent on their next offer. If you didn't have a buyer's agent, you were all on your own, because that listing agent certainly isn't going to investigate in the first place and get their client angry. There's a reason why Dual Agency is a sucker's game from the buyer's perspective. Well, actually there are hundreds of reasons why dual agency is a sucker's game, but this is one of them.

It appears that you were the owner of record at the time the assessment was made. It may be payable in payments, but the full amount is due from the owner of record as of the day of the assessment. It's an all or nothing thing. It wouldn't matter if you were two days from buying it - the seller would have to pay it in order to deliver clear title, while you would not be obligated, although if the owner didn't pay it and clear the title, it's unlikely the transaction would proceed. If you were two days from selling it, same story. You would have to pay in order to deliver clear title, as required by the purchase contract, and the buyer would have the right to expect that you would do so, and the title company would refuse to insure the property until you did so, so the transaction would not happen without that assessment being paid. If you had bought it the day before the assessment became effective, well, you would have been informed by the condo certification, but it would be attached to you. You owe this money. The fact that you are no longer the owner as of this moment is irrelevant. Nor does default wipe it out, in general.

The homeowner's association has the right to assess the individual owners for needed repairs and maintenance. Indeed, they have a duty to do so in order to preserve the value and marketability of the property. What this person did was pretty darned silly, but done is done and there are no do-overs in real life. The board and owners don't make assessments gratuitously, because they're also assessing themselves, and every last one of them had to pay that $20,500, the same money this guy would have paid. Twice that, if they own two units. I may wonder what caused a large assessment unforseeably, and consider it likely that a good buyer's agent would have caught some deferred maintenance issues, but the cold hard fact is that he owned the property on the date of the assessment, and he therefore owes the association that money. He needs to talk to a lawyer if he wants to get out of it, but I don't know anything except bankruptcy that might do the trick, and that's only likely to reduce the damage, not wipe it out, and bankruptcy on top of a foreclosure is very bad juju for your credit rating and your financial future for several years. It could cost him five times as much as the actual money he'd save by not having to pay off the debt in full.

Caveat Emptor

Original article here

I was looking through some real estate listings and saw one property described as: "Contractor's special, first time buyers and investors. House needs TLC." Does contractor's special mean u better be a contractor if you wanna buy this place?

It means it needs some serious rehab work, but it's priced too high for you to make a profit paying to have it done, so the people they're trying to attract are people who are inexperienced home repair folk who don't realize what their time is worth, and won't realize how much time and money and dirt and sweat and just plain hassle that living with the problem and getting it fixed is going to entail.

In point of fact, it's an uncommon "contractor's special" that isn't overpriced. We're not talking about just carpet and paint here. We're talking some major league repairs. Foundation breaks. Significant settling damage. Plumbing that's broken and leaking water. Mold in the framing (which will usually spread). Wiring that's a fire hazard. The list goes on, but they've all got one thing in common: You're dealing with stuff that adversely influences the habitability of the property. Without those repairs, you're not going to get reasonable enjoyment out of the property. It fails the most essential test of inhabitability for a property: The ability to live the same kind of lifestyle in that property, as the rest of the country does in theirs, and to do so for the foreseeable future.

Martha Stewart notwithstanding, you can live with stained carpet. Whatever you read in Better Homes and Gardens, you can live with spots on your walls, or even holes in the drywall. It's possible to live with both old and ugly, if you get get electricity and hot and cold running water when you need them, and the house isn't falling to pieces around you. You can't really live if every time you plug something in or turn something on, there's a significant chance your property will burn down around your family's ears. You can't live if hot water is leaking out and eroding your foundation support, as well as keeping you from taking hot showers. You're not going to live indefinitely with a foundation break - sooner or later, it'll either rip the house apart or tear it apart.

Many such properties aren't a residence at all, when you really think about it. I'd sooner put your average family of four into a one bedroom apartment than a "contractor's special." Sure you got a low price - on a property you can't use. Kind of like getting a deal on dog vomit. It begs the question not only of why you'd pay for it, but why you'd want dog vomit at all. Me, on those rare occasions when one or another of my four-legged best friends has lost their dinner, I'd willingly pay someone who offered to a small amount of money to get rid of it for me.

This kind of property can be an opportunity, IF you really know what you're doing, and IF it's priced correctly so that you can do the work and make a profit, and that includes some significant cash for being the one to deal with it. But it's no coincidence that the serial decorators who line up to replace bad carpet and paint ugly walls give "contractor's specials" a wide berth. The work that needs doing is far too expensive to be "worth it" - at least at the levels "contractor's specials" are usually priced. The most recent one I was in, a four bedroom place not very far from my office, was priced about $20,000 below what would have been appropriate for a turn-key property in the area - and it needed roughly $60,000 worth of work that I saw. For a forty year old 1600 square foot house, with position issues, floor plan issues, and not a single surface in the entire property that presents well. A more appropriate price would have been land less demolition and haul away. Which is about what it's going to go for - once the owners price it somewhere in the appropriate ballpark. Oh, I can fight the battle and often even win a signed purchase contract for the correct amount - but it's a lot more effort than finding someone who at least is willing to admit the realities of the situation up front, and the owner who hasn't faced reality is very likely to find an excuse not to consummate the sale. Sometimes, I'll see if I can get a client the property is appropriate for to make a test offer, just to see if the sellers and their agents are willing to admit the obvious truth. If not, we move on.

What the owners are really hoping for, of course, is someone who only sees only the relatively cheap price, but not the cost, in all senses of the word, of the work that's necessary to have a useful property once they own it. But this kind of cheap is no bargain. I've said it in the past, but Know What Can Be Fixed and What Can't, What's Profitable and What Isn't, which is only one of hundreds of reasons why You need a buyer's agent, whose job is to bring up all of these not so minor concerns that owners and listing agents would rather buyers didn't understand, because it means they get more of that buyer's money.

Caveat Emptor

Original article here

I get occasional questions about the difference between these three kinds of activity. Well, there are subjective parts to the answer, but here are some general guidelines:

A true flipper is looking for a quick turn on the property, usually without much work done to really improve the property. They don't typically keep the property and rent it; they're not willing to accept the work of being a landlord. They make their money off of desperate sellers and getting a very low price for a property. Typically, their profit comes from how far down they can drive a desperate seller.

A fixer is someone who is looking to make a profit by making the property more attractive. By making it more attractive, they are able to sell for more money. There is both an art and a science to fixing, so that you don't spend more than you make. Fixers typically sell when the renovations are done, although many will wait for a full year to gain better tax treatment. They do not typically rent the property out, although they may live in it while it's being renovated.

An investor has the idea of buying and holding for a certain period of time, usually leveraging rent to make the payments, sometimes breaking even, preferably with positive cash flow, usually while eventually hoping to cash in on capital appreciation, but always holding for periods that start at two years and go up from there.

Now I've heard a lot of folks who are really fixers call themselves flippers, but I've never heard a flipper call themselves a fixer. Why? Because the general perception admires flippers more, because they theoretically make money by their wits instead of by the sweat of their brows. It's more status to call yourself a flipper, although why people think it's better to tell people they make their living by shorting people who really have no choice, instead of by actually creating value by improving the properties they purchase, is beyond me. But due to the huge long swell of the last seller's market, many people got addicted to the fact that it enabled people who didn't really know what they were doing to buy properties for too much money, and six months later sell for a profit despite not having done anything to improve the property.

Right now, the local market is starting to support flipping again, due to the fact that prices have stabilized, at least in the areas I work the most. However, more than one flipper lost their shirt in the downturn. Indeed, I know of a couple of properties out there on the market that went through more than one sale from desperate flipper to optimistic flipper, and then the optimistic flipper gets desperate and sells to another optimist. With those values having stabilized, fixers who know what they're doing are doing well again, although the market has changed how best to make a profit. It's no longer a gamble as to whether fixing will yield a profit after expenses in the usual fixer's time frame, but the margins are both thinner and lower. There are quite a few out there that are suitable, and many more that are not.

Investors pretty much always do well, mostly because they're not subject to time limitations. If market conditions aren't right to sell, they keep the property until market conditions are right. Until recently, there were a lot of desperate sellers out there, and so long as investors have got positive cash flow in a sustainable situation, all they've got to do is wait for the market to move in their favor. Until then, they are making money every month. Real investors never turn into desperate sellers, because they always have the option of hanging on to it. It might not be their most preferred option, but it is there.

I love working with fixers. It's a lot more work to find suitable properties right now, but that's fine. And, of course, families who buy for a personal residence in the current market (despite the very frustrating frenzy) will do very well in the longer term.

Caveat Emptor

Original here

I got an ill-mannered complaint email about how an evil loan officer from another company ordered the appraisal without waiting for the inspection to be done, and it turned out there was a minor problem that the seller likely could have had repaired, but this clown chose to walk away, and as a result is griping about having to pay for the appraisal.

First, that appraiser did the work based upon your representation you wanted the property. You signed a purchase contract saying that you were intending to purchase the property. You submitted a mortgage loan application, and as a result of that someone acting on your behalf ordered the appraisal, which has to be done if you're going to get a loan. That appraiser did the work. They are entitled to be paid.

Second, scheduling an appraisal promptly protects you. The longer the entire process takes, the worse the loan you are going to get. If they didn't order the appraisal right away, the loan officer is gambling with your money. But rate locks aren't free, and they are for definite periods of time. The longer a rate lock is, the more you will pay for it. Furthermore, if you go beyond them you're either going to pay a tenth of a point for five days, or a quarter for fifteen (both assessed in full on the first day of extension) or pay worst case rates. The person who ordered the appraisal was acting in good faith to protect your interests based upon the representation that you wanted the property. If you didn't, why did you make an offer and sign the purchase contract and submit a loan application? Speed is important in getting a loan done, and even if in some instances people like you end up paying for an appraisal when they cancel escrow, the people who actually want the property benefit by having everything done right away. Appraisals are around $350. A tenth of a point of $400,000 is $400. A quarter of a point is $1000. Or you can pay a quarter of a point more - $1000 - for a longer rate lock in the first place.

The assumption when you sign that purchase contract and loan application is that you want the property and loan, which means the appraisal has to get done, and you want the lowest rate, which means the shortest practical lock time. People get sued - successfully - for not ordering the appraisal right away. This person was doing exactly their job, and in the best possible way for a buyer who really wants the property.

I have stated before that I will bet money, based upon no additional information, that a loan done in thirty days or less will be a better loan than one that takes sixty or more. Due to all the new regulations and procedures delaying the loan, add thirty days to those numbers but the principle is still valid. Ordering all of the services: inspections, appraisal, disclosures, zone report, etcetera, right away is part of how a good loan officer - and good agents - get a transaction to close fast, on time, and to the loan quoted. For the buyers who carry through on their intention, as evidenced by that signed contract, doing this is the only correct way to do business. Delaying the appraisal until after the inspection adds to the time it takes to get the loan done. In the vast majority of cases, the inspection is going to reveal something you didn't know. Sometimes it's trivial, and sometimes it's major, and all gradations in between. Most people manage to deal with it like mature adults and negotiate something reasonable. I recently negotiated some sellers to pay $20,000 plus to hook up a sewer connection when the septic was shown to be failing, something I had no way to know when I checked out the property. The repairs were made, the deal closed, my clients are in the property and very happy. But this person who wrote me to complain canceled and walked away from something far more minor. How do you think the seller feels about everything they had to pay for, now that this person who said they wanted to buy the property flaked out?

A purchase contract should not be something you enter into lightly, thinking you can get out of it easily if the slightest thing goes wrong. This is part of the reason for buyers agents. They should explain to you that this is a binding contract, and you are agreeing to purchase that property, and in many cases the seller can sue to make you buy the property. A buyer's agent will also spot a lot of problems before you make the offer. Don't think of them as building inspectors; few agents have that license (and I'm not one of them). But there is nothing that says that I can't spot potential issues and bring them up. In the particular case of the person who emailed me this question, it was a trivial issue that I spot and tell my clients about on a regular basis before they make an offer, and as a result, we have dealt with the issue before the contract is agreed to.

Caveat Emptor

Original here

Why doesn't real estate just sell for the asking price instead of having to go thru all the paper work...? Wouldn't it be easier to just put a price on it and sell it for that price? We don't go thru all of that when purchasing cars or anything else. Where did this practice start?

This practice started millennia ago. The practice of buying stuff off the shelf at the marked price is the recent practice. Only when stores started selling so much they couldn't haggle over price was that practice invented. It's easy, but it's not suitable for transactions larger than the utterly routine. If Supermarket A has better prices than Supermarket B, people will tend to drift there over time - unless B has different merchandise A doesn't carry. This is the model for a couple of major chains. But every parcel of real estate is different from every other.

Land is important, it is immovable, they are not making any more, and it is uniquely identifiable by location. It is used as a basis for taxation, and social status. Not too long ago, the vast majority of the population worked by farming land. It's big enough, and expensive enough, to be worth extended negotiations, as even small percentage differences will be a large amount of money by the standards of any other transaction.

Precisely how much land goes with a parcel, and precisely what the boundaries and limitations are, is critically important. Taking just a few square feet away can mean that it cannot be used for a given purpose. Rights of easement are important to everybody served by that easement. Wars have been fought over simply the right to pass over a piece of land. Zoning disclosures are a real issue with at least twenty percent of all properties, as well as any number of other issues about the condition, permitted uses, boundaries, and appurtenances.

Because of its importance, its permanence, and its value, there has been a lot of fraud committed over land, therefore the systems of title and escrow. Misrepresentations and just keeping silent about very salient defects can be worth tens of thousands of dollars, so people do that (or try it) regularly. Add that to the fact that land is taxed by most governments, and you have all the reason needed for public records systems.

Because of its permanent and immovable nature, lenders will loan money secured by land on better terms than anything else. But since a fair number of people over the years have gotten money for land they don't own, or gotten more money for land than it is worth, the lenders have instituted safeguards such as the appraisal, inspection, and lenders title insurance. It still happens, by the way. Just before I wrote this, I looked a a property in a fantastic location, but really old and badly run down. By the market, I'd say it was maybe worth $600,000 - but the owners convinced someone to loan them $1.8 million dollars on it.

Every part of the process has a reason it is there. There is no need for anyone who is not a professional to learn them, but the reason those professionals exist is so that you don't have to know what they know - and that runs true for everyone from the escrow officer to the title officer to the agent, and trying to shortcut the process is a recipe for disaster. Nor is it pure information, in a lot of those cases, but experience and knowledge and judgment acquired over time, and the one that most people misss: how to put it in context. Just ask the people who got burned, and whose cases are the reasons for all that paperwork and hassle you have to go through to buy or sell a property. And people still get burned today. Most often, it's the people who try to shortcut the process to save a few dollars. "You don't need that appraisal! You're paying cash!" "You don't need that inspection! Solid as a rock!" "You don't need an agent! Trust me!"

There are good solid reasons why you don't want to cut any corners, and why you want a professional working for you every step of the way. Proper disclosure will save you from lawsuits most people wouldn't believe. Proper investigation will stop you from walking in to the problem in the first place, or at least get you some serious concessions if you have a good buyer's agent on your side. And if they fail to do their job properly, it gives you the right to go after their insurance and their broker's bond. This is all critically important. Professions such as real estate and all the allied professions exist for your protection, If they fail to protect you from the things they are supposed to guard against, then it is only moral that you be indemnified for that failure.

Caveat Emptor

Original here

One of the things I've heard and read other agents complaining about is that they can't find qualified buyers to represent.

Welcome to Unintended Consequences 101.

The way that the market had been working is this: Young, often unmarried, buyers buy a starter place, usually a condominium of some description. A few years later, once they're married and have a couple kids, they trade up, using their equity for the down payment and (usually) increased income in order to make the payments. They may do this a second time when the kids are teenagers, or when they get another rise in income. This is all simple demographics.

However, we all know that most buyers want to stretch to their maximum, and even a bit beyond, not understanding that there is no magic wand to make borrowing money more affordable. The absolute hardest thing for a buyer's agent who's trying to do their job correctly, is persuading buyers with property lust in their hearts to limit themselves to properties they really can afford. Traditionally, the penalty for failing to do this was a failed transaction, and a ticked off client who had already spent hundreds of dollars on appraisal, inspection etcetera, and quite often, multiple trips to the decorating store planning and a month or more fantasizing about the decorating they're going to do. When that all comes crashing down, it's kind of difficult to hold onto the client.

During the Era of Make Believe Loans, however, the immediate downside disappeared, and by the time people figured out that they couldn't really afford the property, those agents were long gone, with their commissions, leaving those buyers high and dry. With easy loan qualification, and initial payments way below a sustainable level, there was no immediate need to restrict themselves to selling what a client could afford. Since given one client or set of clients, most agents would rather make more money than less, they sold higher end properties than clients could really afford. The clients, for their part, were happy that there was no apparent need to spend years living in the lesser property, building equity.

However, by skipping over those starter properties, those agents greatly exacerbated their future problems. When the condominiums and other starter properties don't sell, the owners are stuck with them, and they cannot afford a larger, more expensive property until those properties do sell. These folks are the largest single source for buyers of archetypal three and four bedroom detached housing. If you bought a condo for $90,000 and sold it for $200,000, you have roughly $100,000 down payment for a $500,000 home. This lowers the payments from about $3415 (assuming PMI) to $2398, total cost of housing from roughly $4045 per month to $3030, and the income to qualify from $9000 per month to about $6730, a full 25% less, assuming no other debts. Considering the median family income is approximately $5500 per month in San Diego, this makes a major difference to how many people can qualify - far more than a proportional difference. Assuming a standard normal distribution, you're going from about 3.5 standard deviations over area median income to about one and a quarter. This increases the number of people who qualify from 233 in a million to 110,000 in a million (via Hyperstat). Now, you have 470 times as many people in your target group! But in order for this to happen, the condominiums and other starters have to sell.

The temptation is always there for agents want to hunt the big game, but now that the make-believe loans that enabled it are gone, we've got a situation. We've conditioned the public to believe that everyone can afford the property of their dreams, right off, and that's just not the case. This makes it much harder to sell them starter properties that fit within their budget. Their friend John or Jen was able to get that dream property, why can't they? The fact that John and Jen are fighting a losing battle against foreclosure doesn't enter their thought process. The people that already own the starter properties, having bought five or ten years before and gotten to a position where they're ready to move up, can't. Not until the starter sells. This made the crimp in the market far worse.

If condos and other starter properties don't sell, you don't have the usual influx of buyers with a down payment that enables them to afford more expensive properties. When you're essentially putting contact superglue on the bottom-most rung off the property ladder, you can't be too surprised when the higher rungs are vacant. So if you want buyers for higher end properties, and you want your higher end properties to sell, we've got to start going through the demographic "property ladder" of previous years.

Caveat Emptor

Original article here

Whenever I go scouting in public forums, somebody is always asking, "What's the secret? How do you get rich in real estate?" The alternate to this question is "What do you know that I don't?"

These people are sure there's some magic formula for getting rich quick in real estate, but nobody is willing to share. They're a good person, they're a smart person, and in their mind, they deserve to make money as much as the next person. Why won't anyone tell them? No con artists need apply, of course.

The reason nobody except con artists will tell them is that there is no such secret. There are no mystical secrets of the universe that make you an overnight success in real estate or any other field. Like any other investment, it takes money to make money in real estate, and the more money you have and are willing to risk, the more money you can make. Leverage in real estate is a fantastic instrument, but in order to get the lender to loan you money, you have to be able to convince them you can repay it. This takes money, and it takes income. It can also be overdone, as many people have. Even if you win the bet about your property increasing in value, if you cannot make the payments you can bet on losing the whole thing.

Other people are skeptical of the value of real estate agents at all. "What do they know that I don't know?" is the question that I see asked the most, when they don't proceed directly to an assumption that the answer to this question is "Nothing," and from there the bashing begins.

Until somebody hits a real world snag, of course. "My house isn't selling. What do I do?" "A buyer offered me $X. Should I accept?" or "This happened. What do I do now?"

The issues are mostly preventable, and had even a brand new agent with the ink on their license still wet written the contract, chances are good that the potential problem would have been foreseen, and safeguards against it devised. This is, after all, what we're trained for and what we do. If people could learn your job by reading a couple books, nobody would need to pay you for whatever you do - real estate is no different. Well, I know enough about many subjects to know that I can't learn everything I need to know by reading books, and that any pretense otherwise on my part would be foolish pretension. It might be one thing for me to pull my little girl out of a 5 foot deep swimming pool when she gets in over her head. It would be something else again to try an open ocean rescue of a 200 pound adult.

And a financial lifeguard is an entirely apt analogy. It's not that you don't know how to swim, for crying out loud. It's that you got in to a situation beyond your capabilities, beyond your experience, and now that you're there, you can't get yourself out. Unfortunately for those who ignore "no lifeguard" signs in real estate, it's very difficult to go find that lifeguard while the trouble is going on. It's not like you can get a time out, and many times the fact that you are drowning may not be apparent until you breathe in water, months or years later. If there is a agent present the whole time, you can sue their insurance carrier for your losses, but most often, they will prevent the deadly misstep in the first place. Any agent with a lick of sense won't get involved when there's already an existing problem. That's where attorneys come in, and attorneys get much more expensive than the agent in a hurry.

It's not what good agents know, but what they know. Anybody can read the financial press, and it's not too difficult to understand what they're saying. But knowing it and understanding what it really means are two entirely different things. Being able to formulate a plan of action to come out as well as possible is a whole other level beyond that. What good agents understand down deep at a level of calm certainty that nobody with an expertise less than theirs stands a cell phone's chance in an IED of talking them out of, and that is a system of approaching the transaction that debunks the hype, the nonsense, and makes certain that the numbers all work and the traps are all evaded. If you're not willing to pay the agent what it takes, spend a couple of years of your life familiarizing yourself with all of the issues, and you'll still likely fall short, because it's not just book learning, but experience, and even a new agent has a supervisor with a wealth of experience to draw upon. Nor is it just "sticks". There are an awful lot of carrots out there that are very valuable if know when and how to use them, and will cost a lot of money if you do not know when and how not to.

Here is a fact: The vast majority of people who claim they did fine doing a transaction without an agent say things that inform me and everyone else who understands the way things really work that they got taken for tens of thousands of dollars. Most often they say them while attempting to brag about how well they did, when they're really saying something like, "I threw the seller (or buyer) thirty thousand dollars extra because I don't really understand what's going on!" The number of dollars wasted can quite easily amount to a third of the property's actual value - well in excess of $100,000 for middle class homes here in the San Diego area.

There aren't any huge and critical secrets. But there is a wealth of experience and understanding and little tricks that make big differences. People who do not deal with the real estate and mortgage markets every day are unlikely to have this knowledge. Whether you're a computer programmer or any of a thousand other occupations, ask yourself if someone fresh out of college could do your job correctly on the first attempt, even if that's what they spent four years studying it (which you almost certainly have not done for real estate). You know the answer. It doesn't change because you're the one who wants to do someone else's job.

Caveat Emptor

Original here

The phrasing in parallel with Animal Farm is intentional. Sellers need to understand this, and so do buyers, especially in a hot real estate market. Some offers are more equal than others, and knowing how to choose between competing offers on the selling side is critical. On the buyer's side, understanding this and anticipating it so as to make your offer attractive to a seller with a good agent is critical to success in making offers.

Even if they are for the same number of dollars or even for larger amounts, some offers are much less likely to actually consummate than others. If they don't consummate, all that happens for sellers is that they wasted their time, their money, and came up with nothing. Furthermore, once you have a fully negotiated purchase contract, the chances of renegotiating it so the seller gets more money are nil. Most purchase contracts, the seller needs to make concessions due to things discovered to be suboptimal with the property. Sad to say, there are even some very shark-like real estate types that go around making offers with the intention of using every little thing to renegotiate the contract in their favor. They make their offer look superficially attractive and then once they have a purchase contract start demanding concessions right and left.

There are currently three major things likely to prevent a transaction from actually going through. The first is the Home Valuation Code of Conduct sticking the transaction with an appraisal that's lower than the purchase price. I had an appraiser choose two completely trashed lender owned beaters down the hill as comparables ("comps") for my client's beautifully maintained property in a more desirable location, and there wasn't a thing I could do about it even though there were more comparable comps. When this happens, all the issues in When The Appraisal Is Below The Purchase Price for Real Estate come into play. If the loan standards are eighty percent Loan to Value Ratio and the buyer only has 20% to put down, when the appraisal comes in low, the cash isn't there to make it happen and the transaction will fail. In some cases, private mortgage insurance can maybe extend it to ninety percent currently, possibly 95% in some cases, but 100% financing is out of the question for anyone but veterans, and adding private mortgage insurance often means the buyers don't qualify on the issue of debt to income ratio. Most often, if the appraisal comes in low it means that either the transaction is going to fall apart, or there is going to be a mixture of the buyer adding more cash to the deal and the seller lowering the price. If the buyer doesn't have more cash to add to the deal, it doesn't take much predictive ability to see that things are going to boil down to the seller deciding whether they'd rather find another buyer or take less money, and it doesn't take much insight to see that a very limited amount is likely to mean you're better off taking an offer where this isn't an issue.

The second thing likely to prevent a transaction going through is issues with the property. Something is discovered during the buyer's due diligence period that causes them not to want the property, or to not want to pay the originally negotiated price. It could be anything. These issues are always with us. The only way not to be surprised by them is for the seller to be honest with themselves and do their own due diligence beforehand.

The third major deal-killer is buyer inability to qualify for the loan. Either they represented themselves as having more cash than they do, they really don't qualify for this loan on this property, or some miscellaneous loanbuster issue pops up. This is why I insist that every qualification letter I write and every letter I'll counsel my clients to accept be a pre-qualification written for that specific property and that specific offer. A generic "They qualify for $300,000" letter is wasted paper. The person writing that letter must also make specific representations as to why the buyer qualifies on the basis of debt to income ratio, loan to value ratio, credit score, and Cash to Close. For my listing clients, it the offer doesn't do this, I send the buyer back to try again. I tell them what the letter must cover, and I will counsel my clients never to accept an offer that doesn't include this information.

Running an automated underwriting program is easy and popular, but never acceptable for this purpose. Automated underwriting results are only valid if they don't change anything from how it was submitted. Let me tell you something that happened to me not that long ago: I got an automated underwriting accept and priced and locked the loan and sent the file through on that basis. My processor, for reasons beknownst only to them, took it into their head to run automated underwriting through again on precisely the same file and got a lesser acceptance that raised the cost of the loan and cost me most of the money I would have made on that loan, and it could easily have changed to an outright rejection of the loan. This was for a refinance where nothing of consequence changed except for a precise appraisal amount that was still well within guidelines. What do you think is likely to happen when the purchase price changes or the the precise loan amount or any of dozens of other factors changes by a little bit? I never accept automated underwriting results for a purchase offer. Manual underwriting rules, however, are universally good, particularly in the A paper world. If something happens at one lender that causes it to have trouble, somebody else will probably take it if the manual underwriting standards are met.

I should also stress that sellers live in a world where net proceeds are what is important. If the transaction doesn't close at all, the net proceeds to the seller are negative regardless of what was offered. Even if the transaction closes, an offer for $200,000 requiring them to pay $5000 for seller paid closing costs is in actuality $5300-$5500 less net money to them than an offer with no such requirements. A good buyer's agent is going to make careful consideration of this.

So keeping these in mind, which offer is the most attractive to a seller, assuming the same number of dollars and desirability of the offer?

All cash offers are always going to top this list. If the buyers don't care what lenders think, if they don't need a loan or a loan contingency, don't have to be concerned with loan standards, that eliminates an entire layer of complexity that includes most of the likely reasons why things fall apart. An all cash offer without an appraisal contingency is the Gold Standard. They are saying "The property is worth $X to me - I don't care what an appraiser thinks" They can still be intending to over-negotiate every little thing revealed by the inspection, but there is less to go wrong from a "nothing you can do in the initial contract" standpoint.

The next category on the list is offers where there buyer has significantly more cash than lender standards require for the contemplated loan type, particularly if they're planning to use it for the down payment anyway. This means that the buyer has the option of continuing the transaction even if the appraisal comes in low. Since all the incentives right now are for appraisers to come in low on the appraisal, this is happening a lot right now and there is nothing anyone can do about it except repeal those ridiculous appraisal standards. If the buyer has more cash, when the appraisal comes in lower than the purchase price the viability of the transaction doesn't depend upon the seller deciding whether to take less money or put the property back on the market. If the buyer has more cash than absolutely necessary, the parties can meet in the middle rather than the seller being the only one with room to give. Conventional financing purchase offers of thirty percent cash or more and VA loans where the buyer is putting down cash even though they don't have to fall into this category, and even FHA loans where there is a cash cushion. I always want to address the question of "How low would the appraisal have to come in before this transaction has difficulty because of it?" Offers where the buyer has this cash cushion means that if the appraisal comes in slightly low, it isn't just the seller deciding whether to take less or put it back on the market.

I would rather have conventional financing than government. Government involvement puts a bottleneck, or single point of failure on the transaction - if the government won't put their seal of approval on it, we're done. It also takes longer. That said, I need to say that both VA and FHA are unfairly tarred in many agent minds because until a few years ago they were costly bureaucratic nightmares for the seller. The bureaucratic issue has largely changed, but it is still an issue even if it is a much smaller one, and a VA loan in particular does not permit a buyer to pay a lot of very real and necessary costs, so the VA loan needs to be for a higher number of dollars to break even on this point with conventional ones.

If a buyer wants a government loan but can go conventional, that will delay the transaction if they start out government but need to change to conventional, but it should still close. There is a fallback position. This is a critical difference and makes such an offer superior to one where they have no choice but a government loan, particularly some special or limited funding government program like the mortgage credit certificate or locally administered first time buyer programs

Both when writing an offer and evaluating one, I always want to address the question of what circumstances or combination of circumstances could cause this to fall apart. As a buyer's agent, I want to show the listing agent that my client wants the property and I have considered how to get around potential failure points. As a listing agent, I have a fiduciary responsibility to help my clients evaluate offers and make an informed choice on which offer to accept based in part upon likely failure points. Comparatively few agents meet that responsibility (one reason we've got such extreme transaction fall out now) but the good ones are all among them. A good listing agent is always looking for evidence in an offer that the buyer's agents have considered possible failure points and how to get past them.

Waiving the appraisal contingency is always an argument in favor of an offer. It can be symbolic, but it says "The property is worth $X to me, and I'm willing to pay that whether or not the appraiser agrees". Nonetheless, if there is a loan contingency attached to such an offer it's not an unlimited blank check. If the appraisal comes in lower than the difference the buyer can cover, the transaction is still going to fall apart. If the buyer has no extra cash, waiving the appraisal contingency accomplishes nothing. But a prospective buyer having $10,000 extra cash and no appraisal contingency should be something that is very valuable to well informed listing agents and their clients.

What if your offer is less desirable in these terms, quite likely because you have no choice? Well then you need to offer more money to sweeten the deal and give the sellers a reason to choose your offer over any others. When I'm acting as a buyer's agent, I always discuss how much competition we're likely to see from other offers if my buyers like a property. It's not a perfect science, and I never trust a listing agent telling me how many other offers they have (Unless the answer is "none") or for what dollar amount, but it's like gravity: if you don't take it into account, you're certainly not going to get where you want to go - a successful purchase.

Caveat Emptor

Original article here

If you have three real estate companies sending you emails with multi-listings, if you want to see one of the properties, who gets the commission? There five properties that I want to see the inside of the houses. Company A, B, C, etc. One house is listed by one of the three people that have been sending me emails.Am I obligated to sign up with an agent if I want to see the inside of a house? Do I tell the other agents not to send me anymore multiple listings?

That depends upon you and upon the agent and upon what sort of agreement, if any, you have signed.

If you haven't signed any representation agreements, nobody has grounds to complain. I don't ask for any agreement just to have listings automatically e-mailed to a prospect (within limits), or even an automated site for them to manage those listings. I have to have MLS access anyway, and that comes as part of the package. I look at it as an opportunity: for a few minutes work, I'm likely to end up with a prospective buyer. If one in a hundred of these converts to a transaction, I'm ahead of the game. The ratio is much higher than that. I could use it as an opportunity to set up my toll booth, and many agents do, but although they may be "top producers" because they cut out other agents with an exclusive representation agreement for having their receptionist take five minutes out of their day once to set this up, they're not the sort of agent someone who compares agents in action will likely choose.

If you've signed a non-exclusive representation agreement, the one who is the primary motivating factor behind the sale should be the one paid. This may be the agent who introduces you to the property, or it can be the agent who answers all of your questions well enough that you're willing to make an offer, or (best of all) the agent who opens your eyes to the possibilities of the property after six other agents have shown it to you. It can also be the one who fast talks or pressures you into making the offer, but that's the beauty of non-exclusive agreements. You can fire such agents by just not working with them any more, and they're out of your life and out of the transaction.

If you've signed an exclusive representation agreement, then the person you signed the exclusive agreement with is legally entitled to be paid. This is a problem if someone else really sold the property to you, or if you've signed two or more such agreements. Furthermore, you can't fire bad agents with an exclusive agreement except by waiting for it to expire. You sign a six month exclusive agreement in April, they're going to get paid for any transaction you start through October (and possibly longer) - even if you told them you never want to see their face again before April was over.

Many agents will ask you to sign an exclusive representation agreement before they do anything. You shouldn't sign one at all. Non-exclusive is plenty good to protect the agent while preserving your protections against a bad one. And there is no reason not to sign the standard non-exclusive agreement.

I have heard every rationalization under the sun as to why exclusive agreements are desirable. The only person they're desirable to is insecure or incompetent agents. There is no advantage for the consumer to sign one. Exclusivity prohibits real competition, where the consumer can observe your skills and your attitude in action. Anybody can look good in the office before you've seen a single property together. That's just sales patter. The proof is watching them in action when you're evaluating property together. That's where you can tell the best agents from the friendly idiots, the high pressure commission grabber, and all the other problem personalities around. And sometimes, that's where you find out that they're not so friendly after all. Unless it's showing one of my listings, I won't go out with someone who's signed an exclusive with someone else, and neither will any other agent I know of. I'm not going to show someone the bargain I spent twenty or thirty hours finding so that an agent who couldn't be bothered to get out of their swivel chair can get paid for the work I did, but you'd be disgusted at how often I get the request.

If all you're getting is a sit on their hands agent who never leaves their office to scout property for you, whether they're an explicit discounter or someone pretending to be full service, then the purchase contract itself has confirmation of the relationship and there is no need to sign an agreement in advance of this at all. The same is true anytime you approach an agent with a property you have already determined to make an offer on. The agency relationship is confirmed in the purchase contract, indeed, in the initial offer. There's absolutely no need to sign any kind of representation agreement with them outside of that. It's simply one more method by which rotten agents lock up business, because if you sign that exclusive agreement they ask for, they've got you for however long it lasts. I've been told - by clients - about listing agents who wouldn't communicate an offer until they had signed a buyer's representation agreement - a clear violation of fiduciary responsibility to that owner. I've heard every rationalization under the sun here, as well. "I'm putting my time into this! I deserve to get paid if it falls apart!" is the most common one. My response is to such agents is, "Not yet you don't, and if you're concerned, make sure it doesn't fall apart" The reason agents get paid as much as they do is because their pay is contingent upon a successful, fully consummated transaction. It's right there in all of the standard WinForms contracts. If an agent can't make this transaction go, if this transaction falls apart, they haven't earned any kind of right to mess up another one also. If you, the client, want to stick around once you've seen them in action, that's great! If not, that should also be within your range of choices. An exclusive agreement removes that option.

Caveat Emptor

Original article here

I am an adamant believer in the Non-exclusive Buyer's Agency Agreement. In practical terms, as opposed to the Exclusive Buyer's Agency Agreement, it is so much to the advantage of the consumer that it isn't funny, and it doesn't usually hurt good agents. On the other hand, the proponents have one argument going for them that I do respect, having experienced it more than once. I start a client on the searching process. I explain it's going to take looking at a minimum of 12 to 15 properties before they know what the market is really like in their area in their price range. I find a whole bunch of properties, and start taking them to a few. I offer rational, real world comparisons of their comparative virtues. Ask about what they liked versus what they didn't, what they could live with and what they couldn't. And then, in between, one or both partners gets a wild hair about going to view another property. I've explained what their price range is, but they either don't realize it's out of their range or don't care. They just want to see what it's like. And because the property is out of their price range, it's going to be a more desirable property - that's why the owners think they can get more money for it!

So they go out, and after my careful work of making sure to stay within their budget, on a sustainable loan they can afford, this other agent shows them what, by comparison, is the property of their dreams and says they can buy it!, and he knows where they can get the loan! If this sounds familiar, it happens a lot. "Dan was showing us such ratty properties by comparison! This guy is showing us beautiful stuff we love! Let's buy one!" and the first I find out about it is they tell me they're in escrow on someone else's property.

Most people buy based upon emotion. If you want to make one change in the value of your financial future, learn how to take emotion out of your decision-making process, especially on anything big enough to require payments. Once people have emotionally convinced themselves that they deserve this property, my rational analysis of the situation doesn't have a snowball's chance in July of talking them out of it. I know this very well. I could stamp out buyer's transactions at the rate of three or four per week by showing clients two or three ratty fixers within their budget and then moving in for the kill by showing one immaculate property in ready to move in condition for thirty percent more. But this is hosing people with malice aforethought, and no matter how many others do it, I'd have problems shaving without looking in the mirror, and I need to shave every day that I work. The reason that wasn't within their budget is that they cannot afford the payments, or they cannot afford the real payments. I've said this before, but there are no tricks to make the real cost of the loan cheaper. There are ways to lower the payments for a while, but they always come back to bite you in a few years, and the situation will be worse than if you had taken the sustainable loan in the first place. Buying a more expensive property than you can afford is a way to put yourself on a course for disaster. Kind of like Comet Shoemaker-Levy 9

And that's why there is money in fixers. It's all very well for people to say they are interested in the $400,000 fixer that fits within their budget and that they can fix it up and sell. Particularly first time homeowners, particularly young married couples, and especially if they have children, show them the $600,000 move-in ready property and they will bite almost every time, budget buster or not. Put all three factors together and not all of the wisest people in history together could talk them out of it.

So the smart operator offers $350,000 for the fixer that's been on the market for four months, spends $40,000 on upgrades like carpet and modernizing the kitchen or adding one more bedroom and bathroom, and turns around and sells for $620,000, of which she keeps approximately $186,000 in profit. If the buyer needs them to pay some closing cost in order to make the transaction happen, she still makes $175,000 for a few months work. Not bad, eh?

The average couple won't have $40,000 to upgrade the property immediately. I consider myself very lucky to have worked with two such couples in the last year. Most potential buyers try to minimize the down payment as much as possible. But if they buy that livable fixer, they have a lot more room on their monthly budget and as much time as they want. At 6% interest rate and California standard property tax rates, the $620,000 loan has a payment of $3717, plus $646 in property taxes. The fixer property, even if they buy for $400,000, the payment is $2398 and the taxes are $417. I know that it's smarter to split the loan into two if you can, but work with me for the sake of simplification. So the already fixed property costs $4363 per month, while the fix it themselves costs $2815. That's over $1500 per month difference they have to put towards fixing it up, or anything else they want to. In two years, they've got the $40,000 from that $1500 per month payment difference alone. This is leaving aside the issue that the rate on the bigger loan isn't going to be as low. The new owners can concentrate on the most important updates. Sure, it's a pain. That's why buyers are willing to pay $620,000 for the ready to move in property. Actually, they'll line up to pay $620,000 for the more attractive property. It's just the way things are. And they get done with their two year project, and now it's worth every bit as much as the property that was worth $620,000 to start with. At 5% annual for two years, that's $683,000, and it's getting to the point where I expect our local market to grow faster than that. If they sell, that's approximately $235,000 in their pockets (tax exempt in most cases) instead of in the professional fixer's. If they bought the move-in ready property and then sold, they'd net about $15,000 by the same calculations.

Now most properties, even fixers, won't generate quite this kind of quick windfall. But that is a real example I encountered not long before I originally wrote this. Moral of the story: fix it yourself if you can. By isolating off the emotional appeal, you've made yourself - or saved yourself - a lot of money. And the reason there is money in fixers is because most people won't do this, instead convincing themselves that they're good people and they deserve this beautiful property. And you know, most folks are pretty good people, and they do deserve a beautiful property. But if you deserve the property that's beautiful now, you also deserve the huge cost, and the huge loan with the huge payments to maintain it, and you definitely don't deserve all the profit that the folks who buy the first kind of property make from the sale.

Caveat Emptor

Original here

It's not difficult to see how some of the weakest agents and loan officers I know make lots of money. They work for an office of a well advertised chain, and when they get the walk-in traffic, no matter what happens, it's "A great property," or "a great loan." Nice place, priced a hundred thousand above where it should be? "Great property!" Attractive on the surface, but has a cracked foundation that's going to cost a hundred thousand to replace? "Great Property!" A 2/28 a full percent above what you could have had with a thirty year fixed, and with a couple thousand dollars in extra closing costs? "Great Loan!"

It's like working with a cheerleader.

A lot of ex-cheerleaders make a very good living as real estate agents and loan officers. The personality types are a good fit for sales, whether it be real estate or loans. Enthusiastic about everything, no matter how messed up it is. Their answer is always, "We can do it!". The people who don't understand what's really going on, and don't compare it seriously; they hear a putative expert going on like this, and all their warning reflexes get defused. It's human psychology, that when all the barriers should be going up in such situations, they go down instead.

Here's a cold hard fact: There's no such thing as a perfect situation in real estate. No matter what you're doing, buying, selling, or getting a loan, there are always trade-offs. Sometimes the trade-offs are obvious, as with loans, where there is an explicit tradeoff between rate and cost. Sometimes, they're not so obvious or direct, as when comparing between properties for sale. You can understand those trade-offs, and choose the one most advantageous to you, or you can choose in ignorance, metaphorically stamping "sucker!" on your forehead.

A stronger agent or loan officer will explain those choices, and put the consequences of each in context. "This one is $50,000 more, but has another bedroom, another bathroom, and is 300 square feet larger. This one is $40,000 less, but it's going to cost you $80,000 to fix the foundation. This one is $30,000 less, but it's going to cost you about $10,000 for carpet and paint." On the loan side, "You can have a thirty year fixed rate loan at 6.5% for a total cost of $1500, as yield spread will pay the rest, or you can have 6% for a total cost of $8000, or you can have a 5/1 ARM at 6% for $3000, or a true zero cost 5/1 ARM at 6.375%" . An informed choice requires knowledge of both reasons for and against a given option. I don't try and tell them which property to make an offer on or which loan to like more. I can present one in a better light than another, but making the choice is not my job. My job is explaining the consequences of the choices the clients make before they're stuck with them, because in real estate, like everywhere else in real life, there are no "do overs".

People like to be told that everything is going to be easy. But that's not the way to get a good bargain in real estate. You shop for the best loan, force loan officers to compete, compare properties, force your agents to come up with bad things to say about every property, fire any listing agent who won't tell you hard truths from the first time they open their mouth. Real success in real estate is never easy.

Real estate transaction can be made easy - at the price of giving the other side what may be the best deal since the Dutch bought Manhattan. Real estate, particularly in high cost areas where the largest proportion of the population live, is valuable enough that just a few percent of the purchase price can be more than most people make in a year, and if you're not on your guard, you may never know you've been had. I talked with a guy recently who had no clue that there was an identical property four doors down being offered for $140,000 less than he paid, at the time he paid it (I didn't tell him. Not my client, and done is done. No use stirring up trouble or getting him aggravated over something that could no longer be remedied). Really pay attention to the things people will do to save much smaller amounts of money for a few weeks, and it will remove all doubt in your mind as to whether scams happen. To use another gratuitous example, the vast majority of all the negative amortization loans out there. What percentage of people do you think are going to sign off on, "pay interest two percent higher than you could get, compounding against you in the lender's favor, end up owing more than the property is worth and being unable to refinance, and won't be able to afford the payments in three to five years, thereby ruining your credit for life and losing the property as well," if everything is laid out with full disclosure? But millions of people did, and I'm still getting email most weeks from people who were lied to by their loan officers and agents and only figured it out at signing! Bobby McFerrin wrote a great song, but "Don't worry, be happy!" is not the key to a successful real estate transaction. In fact, it's the direct opposite. If you're not willing to be a diligent guardian on your own behalf, I'm willing to bet money that nobody else involved will, either.

Around here, even an average "small" transaction puts $300,000 or so onto the table. Ask yourself, "What would I do with $300,000 at stake?" Then ask yourself what the worst scoundrel you know would do with $300,000 at stake. I assure you that the world of real estate has people out there worse than any fictional villain - I've dealt with some of them. The fictional villain has to be believable; the real person only has to exist. Finally, ask yourself what somebody who's almost - but not quite - a saint might be willing to do with $300,000 on the table. The variations should give you a good idea as to the gamut of possibilities, but people are ingenious when it comes to ways to squeeze extra money out of someone else.

Now ask yourself: Do you really want to hire a cheerleader as the expert on your side in light of this? Or do you want a cold-hearted analyst who really understands everything that can go wrong, and is going to tell you the downsides as well as the upsides of everything? It may not be as complex as the game of celestial billiards NASA plays with probes like Voyager, Galileo, and Cassini-Huygens, but a constant between the two is that, like celestial mechanics, real estate transactions have critical moments where if you are just a little bit wrong in what you do, you end up heading in completely the wrong direction, if not splatted into the side of the waypoint at several miles per second. Nor can you usually fix it later if you get it wrong at the critical moment. If you doubt this, spend a little time on any of dozens of real estate forums, reading the stories of the people who got it wrong, and are now trying to fix it.

Buying real estate, or financing it, is a huge decision. So big that the emotional hind brain with all the "flight or flight" stuff over-rides our rational decision-making process, which was layered on in our complex operating system we call a brain much later, and loses out any time there is a conflict between the two. Fear and suspicion are hardwired into the hind brain. If anything about the situation is uncomfortable, the primary reaction of the hind brain is to get out of that situation. In fact, in many cases, the only way some sales folk can move a lot of people off their hunkered down position in mental concrete is by pretending that there is no possible downside to the transaction. Not only is this cheerleading behavior a calculated lie (unless the sales person really is that clueless themselves), but it destroys any element there may be of the healthy response of evaluating the situation completely, from a rational viewpoint. There is no such thing as a real estate transaction without potential downsides, and the ones you don't know about or don't understand are generally much worse than the ones you do.

I don't know how many times I've heard people say things that reduced to "I can't be rational! This is far too important for that!" A good professional's most important job function boils down to keeping intellect in the process. I can't make Mrs. Lee (and women make the decisions when picking out the cave!) decide she emotionally likes the property enough to buy it (Even if I could, I wouldn't - that way lies professional disaster). That's Mrs. Lee's part of the process, and Mr. Lee will help. I can give them enough concrete reasons why or why not to get past that reptilian hind brain's emotional over-ride of the thought process.

I've got to admit that the thought of being able to buy real estate and get loans stress free appeals to me, too. Being a carefree adolescent or child is appealing on a certain emotional level. But it's also profoundly dangerous. One of the wisest and most profound things I've ever read, despite the mixed metaphors, was the following:

"'Let George do it ' is not just the lazy man's motto. It is also the credo of the slave. If you want to be taken care of and not have to worry, that's fine; you can join the rest of the cattle. Cattle are comfortable - that's how you recognize them. Just don't complain when they ship you off to the packing plant. They've bought and paid for the privilege, and YOU SOLD IT TO THEM"

So how about it? Do you want to be comfortable, or do you want to be involved and understand everything going on? Do you want to have it all easy, or would you prefer to plan it through? Do you want to work with a cheerleader, or with an analyst? Maybe you've been reading the news these past couple years. Millions of people are in the process of losing their homes, having their credit ruined for years, and having the rest of their lives ruined, financially. Millions more have already been through it. I've yet to hear of one who was the client of an analyst-type agent or loan officer who disclosed everything the client needed to know at the appropriate time.

There's always going to be a leap of faith somewhere in a transaction. Short of learning the jobs of three or four professionals on the same level of knowledge and practice as they possess, there is no way around this. But by going in with your eyes open, doing your own due diligence, and cross checking what you are told, you can make that leap into a short step, and give yourself confidence that your trust is not misplaced by verifying it isn't misplaced where you can check. Because most of the crooks out there are fundamentally lazy, and can not or will not do the work and preparation that will enable their little drama to withstand even small amounts of real scrutiny. Most of those desperate people I read or get email from, trying to recover from being royally taken advantage of, could have been saved by very small amounts of skepticism and research.

Caveat Emptor

Original article here

This is a real, major and pervasive problem in the industry. For a while, it mostly went away as listing agents were desperate for any offer, but it has come back. At least two properties my buyer clients have made offers on in the last few months have sold for substantially less than my clients offered and were both willing and able to pay for the property. I can tell you this because I have copies of the offer paperwork and have since obtained the final sales price from public records.

This happens for two reasons: The listing agent wants both halves of the commission, and control issues having to do with kickbacks of one sort or another from other sources.

The first is by far the worse. Even if the property sells for ten percent off the price it could have gotten (which may be most or all of your possible equity), your listing agent representing both sides gets paid eighty percent more than if the property sold for the highest possible price to an offer represented by someone else. There are many agencies and brokerages out there that do one thing very well: Getting signatures on listing agreements. Everything else, not so much, but they really are great at getting access to property owners. No matter what city you live in, you've seen the advertising of this type of brokerage. They claim they're great so you should do business with them. However, anyone can claim they are great, especially in non-specific ways.

The goal of all of this is to get you to take the easy way and come to them first, because if they're that successful to afford all that advertising they must be doing a pretty good job for their clients, right? As a result, they can get listing agreements out of property owners who don't understand what's really going on. I hope regular readers know better, because I've gone over why you don't want a "top producer" listing your property before. However, because that signature on the listing agreement gives them control over the property, control over access to the owner of the property, control over what information the owners have access to, and control over who can so much as see the property, there isn't much anyone except the owner can do about it. Indeed, once they sign the listing agreement, there's not much even the owner can do about it.

There are also control issues with kickbacks. Illegal though it may be, many brokerages mandate that all of their transactions go to a certain title company, a certain escrow provider, etcetera, because they somehow make more money (either through kickbacks, common ownership, special services, or reciprocal referrals). However, if the listing agent controls both sides of the transaction, who's going to tell the principals involved that the agent is breaking the law?

Quite often, they even restrict showings of other people's clients, because one of their agenda items is using the property to get buyer clients. Rather than actually working to sell that property (which is what they are obligated to do), they dangle it out there as bait so they can make contact with the foolish sort of buyer who calls the listing agent to see the property and force them into a buyer's agency contract. I was out of town for two days one weekend, and one set of my clients called a listing agent about seeing a property. First, the listing agent told them that "Sure, no problem to see it today!" even though the MLS listing which all other agents see said "48 hour advance notice - by appointment only" There might have been a special circumstance of which the listing agent was aware, but I kind of doubt it because they also wanted my clients to sign an Exclusive Buyer's Agency Agreement in order to see that property. Since I make it a point to educate my clients on this point, they knew to refuse.

Here's the real sticking point: When that agent signed the listing agreement, they accepted a fiduciary responsibility to that seller. It is their responsibility to get it sold for the highest possible price in the quickest time with the fewest problems. It is a violation of that fiduciary duty to their listing client to act as that agent did towards my clients. Their duty is to get that house sold. If someone doesn't see it, they're certainly not going to make a good purchase offer. Anything unnecessary that causes or might cause a buyer to balk about making an offer on that property is a violation of their contractual and legal fiduciary duties. By conditioning prospective buyers seeing the property upon anything other than being there at the first mutually reasonable time, they are in violation of that fiduciary duty to their listing client. However, I must once again ask: If they control all access to that owner, who's going to point this out to the owner?

Here's one person who definitely can't: Any prospective buyer's agent. Both agency law and MLS rules everywhere that I am aware of make it an punishable offense for buyer's agents to contact that owner directly. A buyer's agent could lose their license, MLS access, or both for doing so. It doesn't matter if I "only" lose one - I can't stay in business without both. In other words, the one group of people who have the professional knowledge and interest to possibly inform that property owner that they are being hosed is legally and professionally constrained from doing so. Yes, Virginia, real estate law is structured to protect the major chains and brokerages that advertise constantly (and control the National Association of Realtors and state associations, so they control the vast majority of real estate lobbying).

Nonetheless, if you want to sell your property quickly for the best possible price and without it coming back to bite you, you really do want an agent. The pitfalls and ways that the real estate sharks trap you into their own private feeding frenzy really are enough to make you want an agent even if you couldn't do anything to protect yourself from the bad ones.

So what is a self-interested consumer to do to protect themselves?

Two things: Eliminate the motivation to do this, and eliminate their control over access to you, the property owner.

Both are easy if you know how before you sign the listing contract. Afterwards, they are considerably more difficult if not impossible. Since most consumers don't know enough or don't care enough to do the research beforehand, this is why the vast majority of people who want to sell their property aren't protected. Some listing agents do a very creditable job even though you're not legally protected, but many others don't. Nor is there any real way of gauging their personality for certain ahead of time. It's easy to say the right things before that listing agreement is signed, then go off and do something completely different. Do you want to bet the return on a half million dollar investment on how they will really handle it?

The easy one first: eliminating control of listing agents. There is one exception to the rule about other agents having no permission to contact you: If they are instructed to. Most of the time, you (as the seller) don't want to talk to other agents. But there are two exceptions: If they're having difficulty seeing the property, and if they're making an actual offer. If the listing contract is silent about these two issues, then the listing agent controls these absolutely. Actually, it's their broker, which amounts to the same thing at best, and could be much worse. So if you don't negotiate this in advance, know that you're committing complete control over these two issues to that agent or their brokerage, and there literally is no way for you to find out about any difficulties they don't want you to know about.

What you, as a consumer want, is to get at least duplicates of any offers sent to you directly, and you want to be the one people come to with access issues. You want there to be explicit instructions in MLS to call you directly with any access issues, and to send at least copies of all offers to some facsimile number or email address that you control - not the agent. Put this right into the listing contract. You are entitled to check this on the listing at any time, and you should wander into your listing office at least once during the first week the property is on the market (without telling them you're coming) and demand a copy of your property's full MLS printout - the one that other agents see. You are permitted this on your property and your property only, so be prepared to prove you are who you say you are (Photo ID and copy of listing contract). You should also do this every couple of weeks the property is on the market. Check that the instructions stay what you want them to say in this regard.

Note that even if prospective buyers and their agents don't comply with this instruction, the listing agent has no real way of knowing they didn't. Especially if you wait for that agent to contact you instead of calling them the second you get the fax or email. If they don't contact you within 24 hours, that's everything you need to know about that agent and brokerage. As a buyer's agent, I would be happy to send such duplicates - it means I have some real assurance my client's offer doesn't disappear into the trash can, as I'm pretty certain the ones at the start of the article did. As a listing agent, even if I'm working with the buyers to get me more information (like whether they are qualified) before presenting the offer, I'm going to make sure my seller client knows we've got an offer right away. For me, this happens whether there are instructions to send offer duplicates directly to you or not, but if it didn't, how would you know? I won't get offended by such requests. No good agent who will work for their clients best interests should get offended. It's a legitimate control you are exercising upon the situation, just like any other contractor-contractee relationship. The old maxim about "trust but verify" applies. The agents who get offended or don't want to do this are the ones you should avoid at all costs.

Eliminating the monetary motivation for agents to filter out offers submitted by other agents is harder, but even more important. You as the seller do not want your agent also representing the buyer. Whose side would they really be on? In most cases, all but the worst crooks will be on the side of the seller, but there isn't any way to be certain you aren't one of the exceptions. There are tricks and things that one agent can do that you really can't guard against in general, but it is much less likely that two agents each representing different parties will collude upon. Anything shady, no matter what that might be, and at least one of them can be held legally responsible in a court of law! Nobody wants to be representing the mark in a con when the mark can come after them with an attack lawyer and expect to win a major damage award plus court costs and in many cases jail time.

The way to do this is actually pretty simple: Write it into the listing contract that you will not accept Dual Agency. Period. You don't really care if the buyer is represented or not - if they choose not to be, that's their problem - but you won't permit your agent to represent them. That agent needs to pick a side of the transaction - yours - and stay on it, or they're not getting the listing. If they show the property to some prospective buyer or some buyer wants them to submit an offer, there is a standard form - the Non-Agency Agreement, that explicitly states that both the buyer and that agent agree that there is no agency relationship being created, and the agent is doing whatever they are doing because their contractual relationship with you, the owner of the property, requires that they do it. Tell that agent you won't even consider offers made without another agent until they show you the Non-Agency Agreement. If they can't give you their absolute and sole loyalty for the sale, do you really want them to have the listing?

Furthermore, write it into the listing agreement that if there isn't another agent involved, your agent won't get to keep the buyer's agency share of the commission. A small amount of additional compensation is in order - there really is extra work and extra costs involved, so I ask for an extra half a percent if the buyer is unrepresented, which might just about pay for the extra my transaction coordinator charges plus the gas for meeting the appraiser, inspector, etcetera. You don't want your agent shooing away unrepresented fools offers, either, as they might do if they had to do extra work for no extra pay. You want to put the listing agent's financial motivation squarely where it belongs - they get paid the most money by getting you the highest price on the quickest sale with the fewest problems, not by getting both halves of the commission and the maximum in referral kickbacks.

I'm not real hot on Designated Agency, either, where two different agents working for the same brokerage are buyers and seller's agent. It can work, but the controls necessary to safeguard consumers on both sides are both complex and opaque to that consumer - not to mention that most brokerages don't have them. As a rule of thumb for buyers, if you're working with a good buyer's agent, had been for a while, and it just happens you like a property one of the other agents that works with them is listing, chances are decent that might be okay (about 8 in 10). If you contact the brokerage because they're the ones listing the property, and they refer you to their in-house buyer's agent, chances are 999+ out of 1000 that you should run, not walk, in the other direction. For sellers, it's worse. Unless your listing agent is unavailable for some reason, or that other agent from the brokerage can show a pre-existing buyer's representation agreement, I wouldn't want that offer. There are too many games that can be played, and it makes collusion to someone's detriment much more likely, as these agents work together constantly and might well have the level of mutual trust and teamwork (and possibly direction from the broker) to make a scam work and get away with it. In the majority of cases, this collusion more likely favors the seller than the buyer, but there just isn't a good way for anyone to be certain. As always, if there's a game being played and you can't prove who the mark is, you should assume it's you. Real estate attracts a lot of sharks because of the potential for high profits, and even the cheapest properties have enough profit potential to attract those sharks and all of the con games they play.

The difficult part about this is that the vast majority of agents, even those who aren't necessarily among the worst, will strenuously object to these provisions. Most agents really want to "double end" their deals - represent both the buyer and seller - simply because they do get paid more. Most have never taken the time to understand all of the ethical and legal issues with "double ending" a transaction. But these provisions against getting both halves of the commission really are necessary to remove the motivation that causes bad agents to throw up barriers to offers not represented by them. You don't want them to even be tempted to filter out offers, restrict or refuse showings, or require that prospective buyers do business with their business associates, all of which are bad for you, but result in that agent eventually receiving more money either directly or indirectly.

One more thing is beneficial: Require a notation in MLS that says you welcome
buyer's agents presenting offers in person. Your agent should also want to present counter-offers in person. This not only gives you another opportunity for outside contact uncontrolled by your listing agent, it humanizes that transaction. It turns a faceless fax machine spewing paper into real live human beings. You'd be amazed how much it helps the probability of the transaction actually closing.

The issue of listing agents acting for their own benefit to the detriment of the clients is real, is common, and is once more increasing in magnitude. If you're a property owner who wants to sell on the best terms possible, you need to protect yourself from the problem before you sign that listing contract.

Caveat Emptor

Original article here