Buying and Selling: November 2014 Archives

There are all sorts of reasons why escrow falls through, but they fall into three main categories. They can best be described as failures of qualification, failures of the property itself, and failures of execution.

Before I get into the main subject matter of the article, I need to define a contingency period. This is a period built into the beginning of the escrow process when one party or the other can walk away without consequences or penalty, usually for a specific reason. For instance, the default on the standard forms here in California is that all offers to purchase are contingent upon the loan for seventeen calendar days after acceptance. If the loan is turned down on the sixteenth day and the buyer notifies the seller that they want out immediately, the seller should allow the deposit to be returned by escrow. If it happened on the nineteenth day, the buyer should be aware that their deposit is likely forfeit. A contingency, just like anything else, is something negotiated as part of the purchase contract. If it's in the contract, you have one. If it's not, you don't, although some states may give buyers certain contingency rights as a matter of law.

Failure of the buyer to qualify for financing is by far the most common reason for escrow failure. This means that something goes astray with the buyer's quest to acquire necessary financing. They cannot qualify for the loan, they do not qualify within the escrow period under the contract, they allow their loan officer to spin all kinds of fairy tales about what the market is doing or likely to be doing when the plain fact of the matter is that the loan officer just can't do the loan on the terms they indicated when the poor unsuspecting consumer signed up. Maybe it existed at one time, or maybe they just hoped it would. In any case, it wasn't locked in and it certainly doesn't exist now, so rather than pay the difference out of their commission, the loan officer delays and hopes for the market or a miracle to save them. Or they told the consumer about a loan they thought they might be able to qualify them for, only to find out they don't, and they're stalling, hoping a better alternative will open up. Due to changes in lending law and practices, it's now taking a minimum of 45 days for loans, but when I originally wrote this, if a loan officer couldn't get the loan done in thirty days, I'd have bet money they couldn't do it on the terms stated in the initial documents.

Sometimes it does happen that consumers don't qualify for the loans due to real problems that just don't come up until the file is in underwriting. Since this can cause you to lose your deposit, it's a good idea to ask your loan officer about any potential problems before you make an offer. You know your personal financial situation but you probably don't know what all of the potential disqualifying issues for a lender. The loan officer should know what the issues are that may cause lenders to have difficulty approving your loan, but they don't know your history and situation unless you tell them. Many things that underwriting will catch do not necessarily show up on a loan application or credit report, so if you have an unpaid collection, monthly expenses that might not show up, a lien, a dispute in progress, any issues with your source of income, or anything else in your background that you have any questions about whether it could impact your loan, it's a good idea to ask right upfront, before you get into the process. Sometimes these issues mean that you flat out do not qualify, sometimes they mean that instead of 90 percent or more financing, you only qualify for 70 percent. Unless you have that extra 20 percent of the purchase price lying around somewhere, the transaction isn't going to fly, and the sooner you find out, the better. A loan officer who can't show you a loan commitment with conditions you can meet before the end of the contingency period is not your friend.

The second category of reasons escrow fails are failures of the property. Some defect is disclosed by the inspection process that the owner does not want to correct or is unable to correct, and the buyer decides that the property is not for them under the circumstances. Mold, termite damage, seepage, damage to the foundation, and all of the other usual suspects fall into this category. Title issues are here also, although they usually become unsolvable when they impact the loan. If the seller can't deliver clear title, the title company won't insure it, the lender won't lend the money, and any rational buyer should want to walk away. Why do you want to give someone money when they are likely not legally entitled to sell you the property?

For defects with the property, providing it was discovered within the contingency period, it's up to the seller to convince the buyer they should still be interested. After the contingency period is over, things are more complicated as there is the possible forfeiture of the deposit to weigh. Good agents that you want to recommend to your friends get out and get the inspections done right away to avoid this issue. Agents that are looking to line their own pocket wait until the contingency period is over before doing so, as this gives the buyer more incentive to stay in the transaction. Let's say you've got a $5000 deposit on the line and seventeen days to remove contingencies, as is the default here in California. Would you rather your agent got an inspector out within a couple of days, or waited three weeks? Keep in mind that you're going to pay the inspector, but that's money you're going to spend regardless. The first possibility means that you find out about potential defects while you can still recover your deposit, while the second possibility means the seller can likely keep that deposit. I know which situation I'd rather be in.

Failures of execution are likely to be because someone messed up. The seller didn't do this. The buyer didn't do that. One agent or the other dropped the ball. The escrow officer didn't do their job. Loan officer failures would be here if loans weren't a whole category on their own. This category covers all the little details in the purchase contract, each of which has to be met before the escrow officer can close the transaction. These failures may or may not be actionable, in the sense of you being able to hold them responsible for their failure. Many times, the escrow officer is used as a whipping post for the failures of other parties, but some escrow officers do screw up big time. Sometimes it takes an outside expert to dissect things dispassionately in order to figure out what went wrong where and whose fault it was, but outside experts cost money, so most of the time everybody just fades into the sunset pointing fingers at each other, unless there's some pretty significant cash involved. The transaction is dead and it's not coming back. Unless there's a good possibility of recovering enough money to make it worthwhile, let it go.

Caveat Emptor

Original article here

About once a week, I get an email from a client or prospect asking about a property they found on a site not sourced from MLS. These properties are pretty universally non-existent, at least as far as being for sale for the advertised price.

MLS listings have to pass some very important tests. Other agents, and for that matter, regular clients have got to be able to verify that they exist. What is it being offered for, what are the showing instructions. Agents who put properties in MLS without having listing agreements are subject to pretty severe sanctions when it is discovered. Fines, Loss of MLS access, possibly even regulatory action if it's severe enough.

That's not the case with the rest of the websites, the ones that get their listings from somewhere other than MLS. I'm not going to name names, but it's pretty easy to discover whether a site is sourced in MLS or not. I will say that client gateways and emails and IDX sites (such as agent websites that say "search MLS!" and realtor.com) are sourced on MLS. Sites sourced on MLS will still have puffery, but the property exists, is for sale for the listed asking price, and the hard numbers will be as correct as possible.

If the site does not source its listings from MLS, then agents can write up any property they want. In the past month or six weeks, I've had clients ask about

• properties that were already sold - escrow closed before the ad was written
• properties that aren't on the market and haven't been for years
• properties allegedly priced at sale prices from over ten years ago
• one property that doesn't exist anymore because it was torn down for new development

What is going on is that agents are writing up false listings for the express purpose of trolling for clients. Getting people to call so that they can maybe pick up a new client. This is very subject to the "talking a bigger better deal" phenomenon, because the person that talks the biggest best deals gets the most calls.

But here's the catch: These bigger better deals don't exist. What happens when you find out that deal doesn't exist? When you discover that an agent dishonestly claims to have a property for sale that they don't in order to get your business. Does that sound like the kind of agent you want? Of course, if you've already signed an exclusive agreement by then, you're stuck. Yet another reason to prefer the non-exclusive agency contract, where you can fire that agent by simply not working with them any more.

I have also seen the actual listing agent writing up ads on third party sites for far less than the list price of the property - a violation of fiduciary duty if ever there was one. This isn't a buyer's agent saying "I think I can get it for $X" This is a listing agent essentially repricing the property without consultation with the client. Nor can they have it both ways. If they believe that is a correct pricing of the property, why haven't they persuaded the owner of that, so the listing is priced correctly in MLS?

It is to be admitted that every once in a while - maybe one in a hundred - the property in question is a "For Sale By Owner" that hasn't figured out how to put their property on MLS through some discount service, or is too cheap to spend sixty or a hundred dollars to do so. Neither one of these is a recommendation for the property. If they're too greedy to spend that small an amount of money that will get the property sold better and faster than everything else, that doesn't bode well for their negotiating stance. On a $200,000 loan at six percent, $100 is three days interest, and that's a tiny loan around here. If the property gets sold three days faster by alerting the agents (and all of their clients with automatic feeds) to its existence, that owner is ahead. And if they can't figure this out, or don't care, how likely are they to negotiate in good faith?

On MLS, there are checks. The property is linked to public records. Other agents who know the area can challenge it. Not to mention the fact that the price listed must be the current asking price per the listing agreement. There are penalties for claiming something that is objectively untrue. There is a limit to the puffery due to these facts. Third party sites, not so much.

I suppose I should mention that it's not the MLS name that's important, nor ownership by Realtors. It's the fact that there are mechanisms for verification and challenge built into the website - mechanisms that are easily invoked, and once used, are actually followed up upon quickly with bogus entries being promptly removed or corrected and penalties applied for having put them there. I can send a complaint to my local MLS in about thirty seconds, the bogus information will be gone within 24 hours (usually within 30 minutes if it's during their business day), and the broker who put it there is likely to have some adverse consequences. Those are the important reasons MLS can be accorded some measure of respect.

All of this is quite aside from the fact that Dual Agency is a recipe for disaster, but at least a third of the buyers out there don't know this, because that's about the ratio of buyers that use the listing agent, according to Association of Realtor figures.

But the key feature of the third party sites for these ads is that they are not checked by anyone. The only way to find out if they're BS is by calling - and that's what the agent wants you to do. If they can convert one call in twenty to a client by writing an ad for a nonexistent listing on a third party site, they are way ahead of the game. The other nineteen weren't going to be their clients anyway, and one client with a $150,000 purchase - tiny around here - can put anywhere from $4500 to $9000 in their pocket. But do you really want to work with an agent who got your business by telling a lie?

I wouldn't.

Caveat Emptor

Original article here

We read Searchlight Crusade every day and consider your essays a priceless education in avoiding the major pitfalls in the home-buying process. On behalf of all of us consumers, thank you so much for your hard work!

Please comment on any pitfalls in selecting a property to purchase that is on a community water system. How do we find out how many homes share the resource, how often the water is tested and what the results mean, the GPM rate and whether it's sufficient for usage without any rationing, etc. We've had a long-time driller tell us NEVER to share a well, but this is a community system, not a single well. Unless the system uses only a single well...?

To be honest, there aren't a lot of properties around here still on a well. The water table has gotten too low in the populated areas to make it work. Most of the properties that are on wells are isolated and in rural or quasi-rural settings.

First a little background for folks who may not understand anything about wells. You have to be aware of the well parameters, of which there are three that are most important: "How deep has it been drilled?", "How big is the holding tank?" and "How fast does the pump replenish it?" These aren't the only issues to pay attention to, but they're the ones that are guaranteed to bite you if you don't pay attention. Wells do silt up over time and may need to be re-drilled. Pipes and pumping mechanisms corrode, get old and break down. And water quality is sometimes a very big issue - for instance if the tank at the town filling station springs a leak, and it may even be caused by something nobody knows about. I knew a gas station owner who got fingered by the EPA for a leak and spent 4 years and over $100,000 digging it out, diluting the underground flume he couldn't get to, and everything else anyone could think of before someone discovered an old forgotten military tank left over from WWII that was the real cause of the whole thing. (No, he didn't get any of his expenses back). Not to mention the water may just taste bad. It happens.

Finally, I should also mention that most of the properties I know of that are on wells use septic waste disposal systems. It may be revolting if you think about it, but in some areas you won't have any choice if you're going to live there. People have been doing fine with these systems for quite a while and it's quite safe - but you need to be careful that both systems are completely up to snuff and separated by the appropriate buffers. I'm no expert on what those are, but be certain to check with someone who is an expert before you buy. This can also make it very questionable as to whether you're going to be able to do any expansions you may desire in a legal and safe fashion. Septic systems are only rated for so much, and if you want to add additions, you may need to expand them - if the soil will absorb the extra, and if there's room. Sometimes the soil won't, and there may not be the necessary expansion room even if the soil will take it.

Now, getting to your specific question: Do you know how many wells we're talking about, and what the communal capacities are? Ask yourself how much water you're likely to use, and multiply that by the number of folks on the system. Ask if there are any agricultural or industrial users on the system, and how much water they use. Add in a finagle factor for bumps in demand - for instance, if a main pipe or holding tank springs a leak, one of your neighbors hosts a family reunion with a fleet of RVs, etcetera. If one of the users is agricultural and it's a dry growing season, they're going to put a lot of demand on the system. I haven't encountered it personally, but given that southern California used to be the citrus capital of the world, I've heard older relatives tell me about water wars between citrus growers and between citrus growers and everyone else. It still happens today, even though most agriculture has now left the area.

Now, let me ask what feeds your water supply? What's the source of the water? Is it just rainfall, or is there some permanent stream nearby that feeds it? How is the water table holding up under current and projected demand? Is it holding steady or dropping? Go ask some people that have lived there for a while about dry years and whether they have water worries. Ask about whether there has been more demand placed upon the water available in the past few years. Ladies and gentlemen, my father told me stories about the San Diego River filling Mission Valley from side to side, so there wasn't any way across that didn't involve boats. I remember floods that completely filled the underground garage at Mission Valley Center, right up to the ceiling. In the last thirty years, however, there has been too much demand placed upon the water table for it to flood like that.

My point is this: water tables don't replenish themselves. There has to be water coming in to replace what is used. If there isn't enough coming in to replace what's going out, there's going to be a problem. Eventually, everybody is going to be out of water if this is the case. The only question is when. Do you want to buy into a situation like that? They can drill deeper and all the other stuff; it only delays the day of reckoning and makes it worse. This was one of the root causes of the Dust Bowl back in the 1930s - everyone had kept putting increasing demand upon the aquifer that underlay an area basically several states in size, drilling ever more deeply to be able to water their crops one more year. A tragedy of the commons if ever there was one.

Which segues into another issue: All it takes is a small proportion of nitwits to exhaust the community water source. I've heard that your area is dry - perhaps not as dry as some of southern California, but that it doesn't get a lot of rain due to being in the rain shadow of some high mountains. If a few of your neighbors want to simulate a rain forest, it can leave everyone else without enough water. Exactly how many it takes depends upon the system and how much extra capacity it theoretically has. Even if everything is hunky dory now, all it takes is one water hog buying a property that's served by the system to possibly create problems. So let me ask you what the provisions are for limiting the water of abusers of the system? If you have to get law enforcement involved and go to court for years, where is the community going to get the money? Can you afford your share? Not to mention you would probably like to know where you're going to get water in the meantime. And what happens if the community water authority is run by control freaks? You don't necessarily have to do anything wrong to incur their wrath. Sometimes, all it takes is changing something they're used to, and even though it doesn't impact water use adversely, they'll try and use the water authority as a means of getting back at you (I suppose I should thank Larry Niven for introducing me to the concept of hydraulic despotism at a relatively early age). How big is the community water system? The bigger it is, the more nitwits it takes to drain the system, but the smaller it is, the more likely everybody is to make a good faith effort to get along and the less likely it is that some people see it as a lever for power over others. The issues aren't at all unlike those encountered by common interest developments in the cities, except that it's water rather than parking, recreational access, or loud parties that make it difficult for everyone else to live their lives, and a board that's more interested in its own power than in harmonious administration of common resources for the benefit of all. Unfortunately, these are all depressingly common occurrences.

Caveat Emptor

Original article here

There are actually several different kinds of listing agreements. They get their names from the rights conferred when you sign the contract. The vast majority of agreements concluded are either Exclusive Right to Sell or Exclusive Agency.

Exclusive Right To Sell means that no matter who buys the property, that agent will get the listing commission. There is an intelligent reason why most listings are Exclusive Right to Sell: If I can spend all that money and time doing the work to sell your property, and then you can not pay me for it even though I'm successful, well, let's just say I'm not going to be so enthusiastic about spending that money and that time if the prospective buyer can then go straight to the seller and I get nothing for my efforts. Some agents won't accept other kinds of listings. Other agents will only do so on a flat, up front fee basis, as opposed to deferring their fee unless and until the property actually sells. If you want a good agent to devote their full energy to selling your property, this is the kind of listing contract for you. If there is one particular person you think might buy direct from you, the owner, that can be handled via an Exclusive Right with Exception, which designates one of more persons who are exceptions to having to pay the agent, but even that is a marginal idea. Yes, it might save you a commission. But it will definitely create some doubt in the agent's mind, and less willingness to spend what they might really need to in order to get a sale made. Better to get a solid yes - or no - from that person who is an exception ahead of time. If they really want the property, they won't have any problem committing saying they want it when you ask them. And you can't sell to more than one person, right? So you shouldn't be wondering about somebody you found when you contact an agent. And before you condemn agents for acting like this, ask yourself how hard you would work at your job in order to maybe get paid, or maybe not, even if the job is successfully completed.

Exclusive Agency means that you won't pay agent commission if you sell it yourself, but you will pay if they, or some other agent, brings you the buyer. Any agent with a buyer is presumed to have been procured through the listing agent's marketing efforts. Nonetheless, this does allow for random people to knock on your door and buy the property direct from you - despite the fact that the listing agent's efforts were what alerted them to the existence of the property. Since most agents have been burned on this one or know someone who has, few agents want to accept this style of agency without requiring you to at least pay for their efforts, and they are mostly not the top-notch ones. But if you really want to exercise the escape clause in having to pay the agent, count on being on your own through the negotiations and escrow process. A very large proportion of prospective buyers who will go around your agent to negotiate with you directly are sharks, unqualified buyers unable to buy, or possess some other characteristic that's going to cost you a large amount of money, time and frustration. Real estate sharks like being able to cut an agent out of the transaction, because if you negotiate a direct sale, your agent is certainly going to pack up the tent and leave, which then leaves the shark a clear field with nobody who knows how to deal effectively with that shark.

Limited Service listings are popular with discounters, but they typically do not work on the basis of commission delayed and contingent upon a successful sale. They want their money up front. Cash, check, or, sometimes, charge. Furthermore, the reason they are called limited service listings is because they are not fulfilling all of the services that real estate agents are normally expected to fulfill, and their responsibility to you is also much lower. Might be a good thing to do if you're a former real estate agent who knows how to do it, but the average client doesn't know how much they don't know. The pitch is "save money!" but that's not how it usually works out. When the agent on the other side is a discounter, a good buyer's agent knows that their client is going to end up very happy - especially once it's been on the market a while. The same thing applies when a good listing agent gets someone represented by a commission rebate buyer's agent. In both cases, the difference in sales price is likely to be several times the commission difference. One more thing I should mention: A lot of both types make their living by shifting their work onto the full service agent that they presume is going to be on the other side of the transaction. What happens if there is no such full service agent - in other words, if the other side is using a limited service discounter also? The work needs to get done, and neither agent is going to do it. You're going to do it yourself or pay a lawyer - and paying a lawyer to avoid paying a real estate agent full commission is like spending a dollar to save a few pennies.

Open Listings are listings where there is no single agent that has a right to get paid. Of course, no one has the responsibility to act on the owner's behalf, either. Not to market the property, not to make certain you get the best deal possible, and not to represent your best interests in other ways. Therefore, most agents and discount listing services usually want a flat fee in advance for open listings. It may be small or relatively small, but it's cash upfront. There may or may not be a listed payment to buyer's agents in open listings, and therein lies the horns of a dilemma. You don't list a buyer's agent commission and buyer's agents avoid you because there is nothing in it for all of their hard work. You list a low one, and they're still going to take their buyer's elsewhere. You list a good one, and they'll bring their buyers all right - while working on their buyer's behalf to get them a better deal. Kind of like an arms race, except it's not life or freedom at stake, only money. Still, you just invited a bigger, better equipped army than yours into the fight, on the other side.

Probate is a special purpose listing when the property is being controlled by the estate of someone who died. Probate listings almost always go to full service agents because the probate judges are looking to get the best deal possible. Furthermore, the probate attorneys and executors aren't going to do the work, and the deceased definitely isn't going to do the work. There are often debts and there are almost always tax bills, and there are always heirs looking to get the most money possible. Probate is a real pain to deal with, and it takes forever, because the courts are involved. Nor are they necessarily great deals. For most local probates as of this writing, the court or the heirs have set a minimum bid that's more than the property is worth, because they evaluated the property on the basis of the prices when the owner shuffled off the mortal coil. However, with declining values, they're only hurting themselves. There's one not too far from my office where I had a client it would have been perfect for - except that the minimum bid is at least $40,000 more than the property was worth on the market back then. It had been on the market for a good long while before I found it, and it's still on the market today, more than six months later. If they'd priced it $20,000 lower, it probably would have sold within a month of going on the market. By the time I found it, prices were diverging by $40,000. Now, it's more than that.

I'm the sort of agent who believes in competition, and an exclusive right to sell kills competition once it has been signed. Nonetheless, there are enough countervailing reasons why it is in your interest to sign an exclusive right to sell. I may not like it, but you can have agents compete before you sign a listing agreement. Your house is a half million dollar investment around here. You probably want to interview at least as many agents as you would visit stores when you're looking for major appliances, before you trust anyone to handle that kind of investment. The difference in likely results is a lot more than the entire cost of a refrigerator.

Caveat Emptor

Original article here

I find it fascinating the number of people who will claim that because no college degree is required to become a real estate agent, that agents can't possibly be worth any significant amount of money.

The reason no college degree is required is because no college curriculum can teach what a good agent needs to know.

Oh, there are license preparatory schools in abundance. They'll teach you what you need to know to pass the licensing exam. You do need to know that stuff to practice real estate, but doing a good job on real estate is a lot harder than answering multiple choice questions on a government exam. You have to understand how it all fits together. No school in the world teaches that. Real estate law and practice is an extremely complex profession, and every situation, every real estate transaction, is different because no two properties are the same, no two sellers are the same and no two buyers are the same. There are common recurring elements, but there is not one line of the standard eight page purchase contract (in California) that there isn't occasional reason to change via negotiation, and there isn't a school going that teaches what those exceptions are.

Popular media loves to gloss over what agents do. People see the media depiction and think they can do it. Ladies and gentlemen, the reason the media glosses over it is because it's boring detail work, and most of the dramatic interactions take place between pieces of paper. When's the last time you saw a legal thriller that spent a proportional amount of time on all the boring background work that goes on? Same principle. I was an air traffic controller for twelve years and I have yet to see a single media program get that right, and ATC is considerably more interesting to the outsider. People are not on the edge of their seats to see if form WPA or the addendum controls in this instance, the way they are when there's two 747s on a collision course and Jack Bauer (24) has to save the day - but the real estate agent has to know, and if they don't know, they have to find out without anyone giving them the answer. It's not exciting to watch the agent visit the comparables to compare features and condition and figure out what a good offer or a good price is. It might be good drama to watch a good listing agent talk a potential client into listing for the right price as opposed to their fevered dreams of avarice, but few media writers are that good - and even fewer have a clue that this is a good thing to be doing. It's definitely not drama the way a good agent closes with prospective buyers, the best way being to show them they've already convinced themselves that they want it.

Most people also don't have the critical skill necessary for an agent - the skill of betting their paycheck on weeks or months of work that may or may not move to a successful conclusion. If the transaction doesn't close, we get nothing. How many doctors you know work on that basis? Lawyers? Even the ones that work on contingency want their expenses paid, and that includes office staff, and they're not likely to take contingency cases without a very large prospective payoff. Nobody but agents bets weeks to months of their time for such a small payoff. The whole mindset is completely foreign to educational faculty. Grant application papers, yes - but they're getting a regular salary while they write those. The fact that you've got to go out and get hired at least a couple times per month in order to survive is also completely outside their frame of reference, as well as most other members of modern society. For academics, even if they're turned down for a grant, they've still got money coming in. Even if they get refused tenure, they only need to get hired again once to have a new regular paycheck rolling in.

Most importantly, real estate markets are both hyperlocal and changeable. I've written a series that's eight or nine articles long about the neighborhoods of La Mesa, a city of about 60,000 people, and I have at least as many more to write. Those markets are different today than they were three months ago, and three months from now, they'll be different again. The only way you can keep track of what's going on in those markets out there is by being out there in those markets and living those changes. You can't do it from the inside of a college classroom, grading papers, and agents can't get this information from a college professor because that college professor doesn't know. That property that sold last week for $487,000 - what condition was it in? What amenities did it have? How big was it, really? Were those floors good hardwood or cheap pergo? This property right here that meets these client's criteria - What are the competing properties, and where does this one shine by comparison, and what are the problems with it? (There are always problems with every property). What were the recent sales really like? You don't know unless you were there. Old listings on MLS don't give you a good idea. It takes a good agent maybe two weeks to learn not to trust MLS claims, MLS pictures, or MLS video. A bad agent might learn, they just don't act like they've learned. It's a very rare consumer who doesn't take it as gospel.

This segues in to the war of information. Listing reports are, in a very real sense, a battlefield of information. You can only learn by experience what is and is not important, what had damned well better be correct versus what's in there for purposes of puffery, what's important and real, what's useless and unimportant, and what's in between. What, you didn't realize that sellers and listing agents want to present the property in the best possible light? Ladies and Gentlemen, they're practicing informational warfare with the goal of making this house seem like the bargain of the century. Lest you think I'm getting all holier than thou, I do this too, when I list a property. It's my contractual fiduciary duty to sell my listings for the highest possible price on the best possible terms in the least amount of time, and it is my job to tell the property's story in such a way as convinces someone to buy it on those terms. And roughly a third of all buyers use the listing agents as their buyer's agent. Scary, when you think about it. Do schools teach how to fight that informational war? Maybe the military educational establishment does, but nobody else, and they don't show how the principles apply to real estate, and even the marketers who've learned a good informational offense are sometimes stumped as to providing any defense whatsoever. Furthermore, an inappropriate or overly aggressive response to the situation can sink you worse than doing nothing at all. Did you learn all that in college? Me neither - and I took marketing. I had to learn how to handle the informational war by doing it.

Admittedly, a lot of agents don't know, either, and won't make the effort to learn, which is why I'll back a newbie with the right attitude and a brand new license over someone with thirty years experience and the wrong attitude any day of the week. Nothing says "bozo!" like the agent who brags about thirty-seven years of experience and acts like a deer in the headlights when he's presented with facts he'd rather pretend don't exist. But the point is this: the good agent didn't pick it up in school, and the rotten agent thinks they already know everything there is to know because they've got the license and one or two of those meaningless NAR designators designed to gull the public as you sit through 18 hours of class to put initials after their name. I just did six hours calling around and reading today and yesterday on a subject I researched and wrote about two years ago, and learned some things I didn't know. The final answer wasn't what my clients wanted, but I'd rather find out now, before we've made the offer than after we're in the middle of a transaction and my clients are out appraisal and inspection money and their deposit is at risk. I know for a fact that the answers to my research weren't in any NAR class, or anywhere else in any educational curriculum. Real estate is one of those fields where you've got to be prepared to learn as you go, but unless you've got the background of detailed knowledge of the field, quite often you run into a landmine you never knew was there, simply because you weren't looking for it. Someone a little more complacent than I am would never have questioned the obvious answer, which turned out to be wrong (It had to do with a municipal first time buyer program). My client is still questioning it, it's so counter-intuitive to a layperson, and I don't blame her. But there are huge and obvious traps that claim large numbers of victims. For example: the roughly one-third of all buyers who don't have a buyer's agent at all, using the listing agent to facilitate the transaction.

It's very hard to dodge landmines you're not looking for, and once the explosion happens, the damage is done. To be fair, even the best agent hits a landmine sometimes. But I'd rather be avoiding the mines in the first place than doing damage control afterward, and the odds of doing that are better if you've got someone on your side who knows what to look for, and is in the habit of questioning every irregular feature of the landscape they can before you drive over it, and who recognizes what an irregular feature is, because it's the hazard that you don't understand is a hazard that gets you. I say this regularly because it bears repeating at every opportunity: with the dollar amounts at stake in real estate, there are a large number of people out there who regularly and easily make multiple tens of thousands of dollars extra because the people on the other side of the transaction weren't careful enough.

Caveat Emptor

Original article here

Not too long ago, I started negotiating for a property. I did extensive research online, and and I and my clients visited several competing properties. We made an offer that was a little under 90% of the asking price, and I justified it in a cover letter with several direct comparisons. The property has potential - but my clients were going to have to really work at realizing any of that potential - and I don't mean just carpet and paint.

The owner's response? They did come down a little bit - about 2% of the asking price. But all they said was, "We want $X"

That's it. No, "But the kitchen is beautiful, it's 500 square feet more than those, the location prevents it from getting socked in by traffic noise." None of which was true, but are examples of the kinds of things they could have said.

Instead, just an ultimatum. I don't believe anyone can legitimately call that "negotiation", unless you want to include the sense that a flying creature with feathers that waddles on land, swims on water and goes "quack" can be labeled a Doberman Pinscher. It's still a duck, no matter what you call it, and that's still an ultimatum. If you look at diplomatic ultimatums, what spot do they occupy in the hierarchy? They're the last step before war. Similarly, in real estate, they're the last step before walking away. They should be a sign that negotiations have essentially failed. They're certainly not the way to start successful negotiations.

If you want more for the property, tell me why in the heck you think I should give it to you. What you want (more money) is irrelevant. It's counterbalanced by what I want - which is the exact opposite, to pay less money. Start a conversation for crying out loud - that's what I was trying to do. I didn't expect them to take my first offer, but my clients have the ability and interest to give them what they want - cash - for what they have: a property they don't want. Even if my clients are getting a loan, it still amounts to cash for the sellers. That's what any offer is really saying - "We're interested in buying this property, if we can reach an appropriate agreement." The initial offer is your bona fides as to what sort of agreement you're willing to reach. I don't make first offers I expect to have accepted, but neither do I make hopeless low-balls unless it is just a shot in the dark and I don't care if it "poisons the well" of possible rapport. I do want a reasonable response, and I do everything I can to encourage such a response rather than an ultimatum.

Duelling ultimatums is kind of like throwing matter and anti-matter at each other. Often, there's an explosion, and even when there isn't, nobody is happy because the radiation when they combine poisons everything. If you do end up with a purchase contract, there's still no rapport, so anything that comes along later is likely to cause the whole thing to fall apart. Why in the nine billion names of god would anyone want to do that? You don't get any empathy, you don't get any respect, and you're very likely not get a transaction, which means the buyer is unhappy, the seller is unhappy, and both agents are unhappy. Nobody is happy. It's nearly as certain as gravity. Why would you want to "negotiate" by dueling ultimatums when you know it's going to cause you and your client to end up unhappy?

I know how this happened. During the seller's markets, sellers had all the power. For a couple of years, there were dueling offers on almost every property on the market that was even vaguely reasonable in asking price. Listing agents got used to being able to dictate terms, and buyer's agents went along, in part because they could only hope to extract one or two things and going along with everything else was the only way to make it happen, and in part because the next time they made an offer to that listing agent, they didn't want it rejected out of hand. And it's taken three years of a buyer's market to start to get the message across that buyers are in command right now, buyers have needs of their own, and in the current environment if you don't give one buyer what they need in order to qualify or want in order to prefer your property to another, you may not get another buyer. You want to play hardball with this buyer, they're going to go down the street to the competing property, leaving you as the seller high and dry.

We're moving back to a more normal state of affairs now, but this doesn't mean sellers can play the autarch again. You have equity in a real estate property. You can't spend it at the grocery store, the gas station, or put it into your 401k. It's a real pain to swap it for another property, and if you're not willing to dive in and negotiate, you're not going to do well there either. You need the cash from a buyer - not necessarily this one, but how many do you think you're likely to get? There are almost always more properties for sale than there are people looking to buy them, and more coming onto the market every day. You can compete strongly enough to convince one buyer that they want your property instead of a competing one, or you are wasting your time. Effective negotiations are a large part of that competition.

A negotiation is first and foremost, a conversation. You ever had someone you got off on the wrong foot with, but then you had a conversation and found out they're a pretty swell person? Guess what? When you negotiate in good faith, both sides stop thinking of the other so much as "the enemy" and start to see each other in more human terms. This is good.

Negotiations are also an argument. A civilized refined argument. Many of us have forgotten how to have an argument that doesn't end up with lost tempers. You can find examples of this on both ends of the political spectrum - a sort of take-no-prisoners way of talking past each other - argument by slogan. Argument by putting the worst possible spin upon everything the opposition says or does (and conversely, the best on everything your side says or does) is worse than argument by slogan, as it shows actively bad intent, rather than just closed ears. Sometimes, one side is entirely in the right (or the wrong), but that's not the way it generally happens. Most times, there's evidence on both sides and some darker and lighter shades of gray involved, some justice and points on one side versus some justice and points on the other. In politics, the posturing is showmanship intended to woo third parties, but in real estate negotiations, the transaction is entirely dependent upon the two parties coming to an agreement both sides think makes them better off. Neither one can force the other to sign on the dotted line.

And what happens when you recognize the virtue of something the other side says? Yes, you give away something, but you get something as well. The other side takes a step back and says, "Wait a minute. This person is not just a member of the ravening horde, simply intent upon taking everything they can get." Yes, I'm trying to get everything for my client that I can, but if I try and get it by ultimatum, what happens when the other side is in a stronger position? If I try and get it at sword-point, what happens when the other side is better with sabers than I am? Even the very best lose at violence sometimes. This is why the idea of negotiations started - both sides end up better off and nobody ends up dead. The whole "defeat the vikings/huns/mongols" idea goes out the window when they start seeing you as human. Maybe when you say you see one of their points, maybe they come back and acknowledge some of your points as valid, and they give up something too. Guess what? The more both sides do this, the more likely the negotiation and transaction is to succeed.

Not everybody will negotiate in good faith. You always have the option of walking away from the negotiation table if they don't. I'm walking away less often these days than formerly, but it's still on the table. Knowing when is a matter of judgment and experience, and maybe training if you can find someone good enough, but you're not going to learn it all in one transaction. Sometimes walking away will knock some sense into the other side, most often when you've seen the virtue of some of what they're saying and they suddenly realize that in order to salvage this deal they want, they're going to have to get with the program. Sometimes, it doesn't. But in that case, there are other properties and other buyers out there that will be a better fit and give you a better bargain. If there isn't something better, then you shouldn't have walked away. It's as simple as that (Pssst: You can go back. Really. It's not easy, and you're likely to end up less well off than if you hadn't walked in the first place, but if it's still the best fit and the best bargain out there, you should).

So don't just trade ultimatums. Tell the other side why what you're asking for is necessary, reasonable, or both. Listen to what they say in response, acknowledge not only that you heard the response, but that you might even see the justice of some of it, if you can. They'll usually do the same. Give some ground where it is appropriate, and I am confident that your negotiations will come out better, as mine do, because we're not going back to a situation where one side dictates to the other any time soon. But you neither I nor anyone else can hold a conversation with the other side of a transaction if the other side is unwilling to hold it. If you are always willing, and always trying to start such a conversation, the odds of a successful negotiation increase dramatically.

My transaction? I think I've finally persuaded them to actually talk to me, rather than just trading ultimatums, both sides still have the ability to talk it over in private and think about it for a day or two. I was expecting an answer to my most recent proposal the day I originally wrote the article. We did eventually come to an agreement and consummate the transaction. Everybody ended up much happier than they would have had I not been able to talk them away from their ultimatum.

Caveat Emptor

Original article here

This is a question that gets asked a lot.

Escrow is nothing more or less than a neutral third party that stands in the middle of a real estate transaction and makes certain all of the i's are dotted and t's are crossed. They make certain that all of the terms of the contract have been met, and then they make certain that everyone who is a party to the transaction gets what is coming to them via the contract. Given the complexity of a real estate transaction, you want this. In California, that's an eight page basic contract. Do you want to go through and verify that it's all done? Suppose there wasn't an escrow? Given a half million dollar transaction, do you think it might be possible that some people would try to arrange to be paid without handing over a good Grant Deed or clear title, or that they might try to pay with nonexistent funds? Escrow puts a stop to someone not giving what they agreed and still getting what they want.

Many times folks complain about the escrow company or escrow officer, when it's not escrow's fault and the problem lies elsewhere. The escrow company is obligated to make certain all of the terms of the contract have been followed, not just most of them. I've talked before about how if the contract is not accepted exactly as proposed in the most recent modification, you don't have a deal. There cannot be any points of disagreement, or you don't have a purchase contract. Similarly for escrow. Usually problems that the client sees are not the escrow officer's doing, but rather someone else's. Quite often, the person complaining is the person who caused the problem. The escrow officer can't do anything without mutual agreement. If the loan officer doesn't get the loan in a timely fashion, it's not the escrow officer's fault. If the agent doesn't meet the inspector or appraiser so they can get their work done in a timely fashion, it's not the escrow officer's fault. If you can't qualify for the loan, if you have to come up with more money, if you don't get as much money as you thought, it's not the escrow officer's fault. But in many cases, the escrow officer makes a convenient whipping boy for the sins of others.

This is not to say that it's never the escrow officer's fault that something goes wrong, but if one party or the other is not in compliance with the terms of the agreement, the only options the escrow officer has are to get an amended agreement or get them into compliance. Nonetheless, I have seen many transactions fall apart because the escrow officer was a bozo. The really good escrow officers are like chess masters - several moves ahead of the whole game, and when I find one, I want to use them all of the time. Unfortunately for buyer's agents, the seller often has the real control over where the escrow transaction goes, and when the seller's agent decides they want to use some bozo, that's probably where it's going. I can do all kinds of things that should move them, but the bottom line is they want to use their broker's pet escrow (who is more likely to be staffed by bozos than any other escrow company, as they've got captive clients), I as the buyer's agent cannot force them to go elsewhere. It's a violation of fiduciary duty for them as well as a RESPA violation, but if I complain to the appropriate agencies, what are the chances of my client getting this property they've decided that they want?

As the escrow process moves forward, the escrow officer collects documentation that the various requirements of the contract have been fulfilled. When they have all been fulfilled, the transaction is ready to close and record.

The loan is usually the last thing left hanging after everything else is done. There are a variety of reasons for this, most obvious of which is that the loan's conditions are likely to include everything else being done before the loan funds. Appraisal, grant deed, inspection, etcetera and ad nauseum. When the borrower meets underwriter's guidelines, they go and sign loan documents. Signing loan documents does not mean the loan will fund, and it is a major misapprehension to believe so. It is legitimate to move conditions from prior to docs to prior to funding if doing so serves some interest of the client, such as funding the loan before the rate lock expires. If they go to documents before the client's income and occupational status have been verified, that's an unethical lender looking to lock the client into their loan or none at all. Always demand a copy of outstanding conditions to fund the loan before you sign loan documents.

Once the loan documents are signed is when the real fun begins, because that's when the underwriter takes a step back and the funder steps to the forefront. The loan funder is an employee of the lender who fulfills much the same function as the escrow officer - make sure all of the conditions have been met before they release the money. The loan funder has responsibility only to the lender, though, not the borrower, not the seller, not anyone else. It's their job to ask such questions as when the homeowner's insurance got paid (and where is the proof?), has the final Verification of employment been done (assuming they aren't required to do it themselves), or work out a procedure whereby they get proof that all of this stuff is satisfied before the funds get released. If the loan officer has done their job correctly, the funder is working primarily with the escrow company. If I have to talk to the funder as a loan officer, that's usually a sign I should have worked a little harder earlier on, because my part should be done before the funder gets involved.

Once all of the conditions to fund the loan and close the transaction have been met, the escrow officer records the transaction. In point of fact, it's the title company who usually is set up to record the documents, something they will charge for. Until the transaction is recorded, the lender can pull the funds back. It's not the escrow officer's fault (in most cases) if they do this. It's because something about the borrower's situation changed, and now the lender is unhappy and unsatisfied with the level of risk of losing some or all of their money. Only rarely is it caused by a bozo of an escrow officer who doesn't understand what's going on, and tells the funder something that causes the lender to get nervous. Remember, the lenders are loaning a lot of money, and the list of reasons why lenders justifiably get nervous is fairly long, especially as a certain percentage of all mortgage applications are fraudulent.

Once the loan is funded and the transaction recorded, the escrow officer has some final stuff to do. Send out the checks to everyone who's getting one, complete with an accounting of the money. Make certain all charges relating to the transaction are paid, for which they will usually keep a small "pad" for last minute expenses, so that the buyer and seller are likely to see a small check a few days later after the escrow officer has made certain everything is paid to the penny. And so ends the transaction, and this article.

Caveat Emptor

Original article here

I keep getting search result hits for the string "fsbo horror." It's an amalgamation because I haven't done any postings on this specific subject.

Both buyers and sellers have problems relating to For Sale By Owner issues.

For sellers, the largest issue seems to be properly disclosing all relevant items to satisfy the liability issue. There are resources available, but the question is whether the you took proper advantage of them and made all the legally required disclosures on any issue with the property there may be. If you have an agent that fails to do this, you can sue them. If you are doing it yourself, the only one responsible is you. You are claiming to be capable of doing just as good a job as the professional, and if you didn't do it right, the buyer is going to come after you. You have all the legal liability.

Now I'm going to leave the marketing and pricing negotiating questions out of the equation, because with a For Sale By Owner most folks should understand that in return for not paying a professional to help you, you've got to do it yourself. What many For Sale By Owner folks seem to fail to understand, however, is that if you haven't met legal requirements, the real nightmare may be just beginning when the property sells.

Let's say it was something fairly innocuous, like seeping water from a slow leak you didn't know about. A couple years pass, and now there's mold or settling. Perhaps the foundation cracks as a result of settling. Bills are thousands to hundreds of thousands of dollars. Your buyer goes back and finds that your water usage went up by fifteen percent in the six months before the sale. He sues, saying that even though you didn't know, you should have known based upon this evidence. Court cases are decided based upon evidence like this every day. A good lawyer paints you as maliciously selling the property as a result of this. Liability: Steep, to say the least.

Now, let's look at it from a buyer's prospective. You have a choice of two identical properties. In one, a seller is acting for themselves, in the other, they have an agent. The price may be a little cheaper on the for sale by owner one, or it may not - usually not. The most common reason people do for sale by owner is greed. But when I'm looking at a for sale by owner, the question that crosses my mind is "Are they rationally greedy, or are they just greedy?" Are they going to disclose everything wrong or that may be an issue with the property? At least here in California, the agent has pretty strong motivation to disclose if something is wrong that they know about. If they don't, they can lose their license, and even if they keep the license, they have potentially unlimited personal liability. If they did disclose, they're probably off the hook, and even if they aren't, their insurance will pay for the lawyers, the courts, and any liability. If there's one thing all long term agents get religion about, no matter their denomination, it's asking all of the disclosure questions.

This is not the case for many owners selling their own property. Some few are every bit as conscientious as any agent. A good proportion, however, are intentionally concealing something about the property. What's going to happen when it comes to light? If there's an agent, there's a license number, a brokerage who was responsible for them, and insurance. The latter two are deep pockets targets for your suit, and you can find them. Once that owner gets the check, you can find them unless they're dead, but they may not have any money. Even if they do have money, it may be locked up and inaccessible via Homestead or any number of other potential reasons.

One of the reasons that I, as a buyer's agent, am always leery of a for sale by owner property is that I have to figure that first off, there's a larger than normal chance that this property has something wrong that's not properly disclosed. When that happens, my client is going to be unhappy. When my client is unhappy, they are going to sue. The first target is the seller, but if they're gone or broke, who does my erstwhile client come after? Me. So I have to figure that not only is there a larger chance of there being something wrong, I have to figure there is a larger chance of me being held responsible for something I took every step I legally could to avoid. For Sale By Owner properties usually have to be priced significantly under the market in order to persuade me that not only am I doing the right thing by my clients by showing them them this property, where my clients have to pay my buyer's agent fee out of their pockets rather than out of the selling agent's commission, but also that the heightened risk of future problems is worth more than the price differential to my clients. Unless the answer is a strong solid "yes" that I can document in court if I have to, I'm going to pass it by in favor of the agent-listed property next door or down the street. That's just the way things are.

Caveat Emptor (and Vendor)

Original here

This has always been a portion of the market, but right now, more and more people are emphasizing it, or at least the ones who are able.

Actual Rent to Own is rare these days, a sign that the market is being driven by sellers, selling to poorly advised buyers. I can't remember the last time I heard of one happening, because there is an actual ownership interest right away, and the buyer is entitled to a share of the money put into rent, whether or not the deal is actually consummated. On the other hand, Lease Option seems to be a common Idea of the Moment, because the prospective buyer basically gets nothing if they don't want to buy, or if they cannot qualify for the loan.

Just like any other purchase contract, everything about these is negotiable, but the basics are thus: Buyer and seller reach a purchase agreement, with the date of actual purchase delayed by some amount of time. In the meantime, the agreement is for for the buyer to rent the property, usually for an above market rent. Part of each payment gets set aside for the buyer's down payment if and when the option is exercised. The difference between Rent to Own and Lease with Option to Buy is that in Rent to Own, a part of each payment is actually due back to the buyer if they decide not to buy, whereas in Lease with Option to buy, that money is just gone if the option to buy is not exercised.

Why do this?

For the prospective buyer, it's a way to engage in forced savings for a down payment. If rent is $2000 per month, with $1000 being credited to the buyer and $1000 in rent, over a period of two years, you've got a $24,000 down payment, and this is treated exactly like any other down payment, except that the seller already has it, so you only have to come up with the purchase price less this down payment money. This is useful for people with rotten credit and/or poor savings habits, especially if credit is expected to improve within the time frame of the agreement. It's horridly inefficient, and I've never seen a residential situation where it wasn't better to buy outright, but if you have a problem qualifying for a loan or saving for a down payment, this is one way to go about dealing with that problem. With 100% financing currently dead except for VA loans and a few Municipal first time buyer programs that run out of money at warp speed every time they get a fresh allocation, this is one way for people to get their foot in the door of property.

For the seller, it's a way to create a captive purchaser. These buyers have rotten credit and/or zero dollars for a down payment. Nobody else can do business with these buyers, because the buyers will not qualify for the necessary loan. They have Hobson's Choice: This one or none at all. This creates bargaining power for the seller even in the strongest of Buyer's Markets, because most sellers in such markets do not have the ability or willingness to offer a Lease with Option to Buy. They're not as powerful as offering a Seller Carryback, but they definitely give sellers pricing power they would not otherwise have. You can get an above market rent and an above market price, to boot, and the prospective buyers are more motivated than your average tenant to take good care of the property.

So why isn't everybody doing them?

First of all, the reason the seller has the property on the market is because they want or need to sell now, not two years from now. With either rent to own or Lease with Option to Buy ("Lease Option"), they aren't getting any equity out of the property now to enable them to buy their next property. Furthermore, they've still got all of the expenses of owning that property. Finally, the reason that buyer can't buy anything else is because the most generous assessment of their financial skills possible is "Needs improvement." Bad credit does not, generally speaking, happen like a lightning strike out of a clear blue sky. It happens because they don't pay their bills on time. There are some exceptions - mostly people who had major unexpected medical expenses, but there are limits to how badly one account can hurt your credit. Chances are high that they'll be late with the rent - which is money you're counting on to pay your mortgage, your property taxes, your insurance, etcetera. It takes a certain financial solvency to be able to offer these. Not to mention that until the tenants exercise the option to buy, you still own that property, which means you've got all of the headaches and obligations of being a landlord, or you're going to have to pay someone else to take care of them. Repairs, maintenance, etcetera.

For buyers, the prospective pitfalls are even worse. First, you're paying above market rent and agreeing to a price that is usually significantly above the current market. It might be below market when you actually exercise the option, but right now, it's almost certainly a goodly premium over the price that you can get similar properties for - because they're offering something extra that most sellers are not willing or able to offer, and if you didn't need it, you wouldn't be willing to pay for it, right? If you don't exercise the option to buy, the extra rent money you fork out is basically gone. There has to be equity in the agreed upon sales price, and there has to continue to be actual equity. No lender in the known universe is going to approve a short payoff for a Rent to Own or Lease Option, no matter how ironclad your contract. If the current owners lose the property to foreclosure, you're basically SOL. And it wouldn't be the first time sellers pocket the rent while not paying the mortgage, or even taking a cash out refinance. I'm not certain what the law is on this point, but I don't see a way to keep the current owners from doing any of this. It's a good idea to record the option, but that doesn't mean anything if the lender forecloses or is owed more money than the strike price. You can sue, but suing broke people is throwing more money down a black hole from which you're not going to recover it. Finally, and here's the rub that kills a very large proportion of the prospective buyers who enter into these agreements: You're still going to have to qualify for a loan for the rest of the agreed upon purchase price ("strike price") before the option period expires. Usually the market goes up, but sometimes it does go down, and the appraisal is less than the purchase price. If you can't make up the necessary difference between the biggest loan you can get and the strike price, you're not going to be able to buy. For that matter, if interest rates go up significantly, you could find yourself unable to afford the payments on that loan. In fact, these two phenomenon usually go together. Rates go up, therefore payments and cost of interest on the same number of dollars rises. People in the aggregate cannot afford to pay as much for real estate as they could formerly, and therefore, prices fall. Basic economics.

There usually is a significant deposit made, as well. Not as much as a regular purchase contract, but just because there's a time delay involved doesn't mean the seller isn't going to demand a deposit they can keep (maybe), or rent to a tenant without a deposit. The rules on whether they can keep a tenant's Rent To Own or Lease/Option deposit are also somewhat different and more advantageous to the current owner than California's renter-landlord law generally is (Don't ask me for details - I'm not a lawyer. I'm mostly parroting what I've been told on this point).

The prospective seller is entitled to do all the due diligence than any normal prospective seller or landlord is, and ditto the prospective buyers/tenants. Personally, I would want that inspection contingency period to run the full duration of the option period, and there really isn't an effective loan contingency period, as the owners already have the prospective buyer's money, and most Lease Option contracts are pretty solid upon the point of not getting it back. This point is negotiable, but usually that money has already gone to pay mortgage, property taxes, etcetera. What did I just say about suing broke people?

Rent to Own real estate and Lease with Option to Buy real estate are always a risk for both parties. The tricks are myriad, at the very least. This is not something to try without a very sharp agent representing your interests, and as for dual agency in this situation, I have it on excellent authority that slow roasting yourself while basting with acid is less painful for prospective buyers. With that said, if the situation is right and both parties act in good faith, it can be a way to make both sides of such an agreement very happy, when otherwise they would both have been very unhappy because neither could get what they want. The seller gets an above market price, albeit delayed, and a much improved cash flow in the meantime. The buyers can buy property, where otherwise they would not be able to.

Caveat Emptor

Original article here

Dan,

Okay, so now I'm in the process of just making an offer on a house and it's already getting confusing despite all my reading. It would have been worse has I not spent all this time reading but just when I think I have a solid grasp of this process something else springs up.

The agent is saying that with the offer we have to say who the lender is and if we change lenders we have to ask the seller for permission, basically, since it's a part of the offer. Is that normal?

It's a short sale (seems like everything we look at is!) and on the home there are two loans. This is what I heard from the sellers agent. The first lender signs off on just about any offer (and so far I'm told there are offers all the way to $189k) because for the most part they're going to get all their money back. The second lender has not signed off on any offer so far but the sellers agent says if you offer X (it's $199k in this case) they'll take it. First of all, how can the sellers agent even go into details like that? (And he told ME because I called him after I talked to our agent because I couldn't believe she knew all those details about first and second loans and what the second lender would settle with.) Second, how would he know how much they would settle for and third, why would that lender tell anyone what the lowest they would take is? Seems to me this is all speculation on what that second lender might do.

Okay, so the asking price is $199k and my agent knows we have about 3.5% saved, that's it! So we go and get pre-approvals from lenders for $200k. So far so good. Then we find a house we like and the asking price is $199k. And we lean that if we offer the asking price chances are it'll get accepted (usually we learn that there are 3 offers already and we need to offer more . . . yes, even in the down market!). Once I finally get over the fears and decide to do it the agent tells me we should offer $204,500 to cover closing costs. WHAT? I'm confused again.

Any light you can shed will be greatly appreciated.

I don't know much about your local market and its current state. Some things are appropriate in some buyer's markets, but will only get the door slammed in your face in seller's markets. On the other hand, some things are necessary in seller's markets, but are giving away far too much in buyer's markets, and there is an entire continuum between buyer's markets and seller's markets. Handling offers and negotiations in a manner inappropriate for the current market will pretty much guarantee failure, either by asking for something so outrageous that the door metaphorically gets slammed in your face, or by giving away all sorts of things including money that there is no need for. To know what is and is not appropriate, you need an agent who knows your local market, who's willing to really work on your behalf, not just fax offers back and forth.

As far as the lender goes, I have NEVER named a buyer's lender in a purchase offer, and I'm not about to start, for precisely that reason - and the fact that it's none of the seller's business. But it might conceivably be part of the standard contract in your state, for reasons I don't understand, being a California boy. Some state laws are a bit, shall we say, different? On the other hand, some lawyers I'm aware of could build a serious case that this particular item is a RESPA violation, which is federal law and applies everywhere in the US.

It's easy to figure out approximately how much they owe. The original dollar amount of existing liens is public record, everywhere in the US. From there, you can make a pretty good estimate of how much they owe. Not that it's generally a good idea to focus on what is owed. Whether it's free and clear, or upside down, the property is only as valuable to you as it is. You're not going to pay $400,000 for a property that's only worth $200,000 if they're upside down. Neither is there any reason to be willing to pay less if they own it free and clear. It's still worth what it's worth, and failing to understand that, by either the seller or the buyer, is a recipe for failure. Buyers do not care what a seller "would like to get," and sellers don't care about what a buyer can afford except as it applies to the question, "Can they afford this property?"

A short sale is a short sale is a short sale. Unless there are reasons like "pretty much everything is a short sale", buyers should avoid short sales. Even done right, it's a month and a half or more process of the lender trying to beat everyone up for more money by wielding a VETO. If you do decide that you want that particular property badly enough to fight through the short sale process, I wouldn't start by accommodating the lender. They're still going to try to beat you up, only they're starting from a better point for them and a worse one for you.

As far as over offer to cover seller paid closing costs: We do live in a net world. Are you asking for seller paid closing costs? You shouldn't if you don't need to, but if you are, it's kind of like an equation. If X, a price they will accept on an offer without seller paid closing costs, equals $200k, then X plus $5000 for closing costs is $205k. Actually, since they pay commissions on the higher amount, you should feel lucky if they agree to a price that doesn't add anything more than the closing costs cost them. Some markets, however, are priced to include a certain amount of sellers paying buyer costs, and if that's not needed in your case, you should be able to get an offer that's lower by about that number of dollars to be accepted.

The critical questions I usually ask are: Suppose you get it at that price. Happy or sad? Suppose you don't get it at that price, but someone overbids you marginally and does. Angry, or don't care? Finally, how many real competitors for your business are there? Is this property head and shoulders above everything else with a comparable asking price, or are there hundreds of other properties just as good, that you could just as easily make an offer on and be happy with? The answers to these questions will help a good agent determine what a good offer is, and what it isn't. A bad offer can poison the well, and a too good offer gives away too much. You want the property on the best terms possible, but you do want the property or you shouldn't make an offer. If you're a flipper looking to score on a low ball offer, you don't care if you poison the well (you're pretty going to walk away if they're not desperate enough to take the first offer or something close), but pretty much everyone else does.

From your email, I'm getting suspicious there's some tendency on behalf of that particular agent to inflate the price so they get paid more, and possibly even collusion. But there's no way to be certain, and no way to tell that it's even the way to bet without knowing more about your market. Only another agent in your market would know about that, which is one reason why any specific negotiating advice you're going to read in a forum with a national audience is so much wasted breath at best. There are possible exceptions to everything I've written in this article, and I know what they are and where they would be applicable, but it all has to do with a given local market at a given temporary time or specific situations where you're going to be getting something extra in exchange for giving up something that isn't normal. For anything beyond a particular local market under particular market conditions that apply in a very time limited fashion, detailing these would be so much wasted space on the page. All of this is one more reason you want a good buyer's agent on your side before you start looking at property. Dual Agency is a recipe for disaster for buyers (and for the sellers too!).

Caveat Emptor

Original article here

I had made a request to repair that included $3700 credit for closing costs. I wanted to get things done like safety issues and more critical maintenance issues done. Our estimate said that it would be about $4900 to do all the maintenance we were looking for. The seller was doing a bit, but not all.

The seller apparently balked at giving us any credit. He felt they conceded all they could. Anyway, my agent convinced them to at least counter. I was a bit angry at the initial balk. (the emotion part of the deal). After the initial anger, I went looking for problems and found one that frightened me. My agent had given me the inspection report from the seller's purchase of the home six years ago. There were things on there that were still a problem two years later. Primarily, high water pressure in the house (with the dire warnings of damage to pipes and fixtures as the potential side affect). Secondly, ants. The report six years ago had mentioned ants. Every time I looked at the house, (we visited it 5 times), I always saw ants not many usually only 1 sometimes 2. So, my residual anger ballooned these concerns way up. My ignorance was on the pipes. I have since talked to one plumber and an extended family member who is a retired contractor, home builder and home inspector. It was his comments that alleviated my fears about the pipes and allowed me to calm down a bit. He basically said, "Wow, six years of a pressure test - and it passed. Great! We usually only do two hours." He also said, get a regulator on it, but you shouldn't have a problem.

So, emotions, ignorance and too much time to think - nearly killed the deal.

On the other hand, sometimes people don't get worked up when they should. This person wasn't clear, but I'd get upset if my agent tried to placate me with a six year old inspection - as in "Fire him and sue him" upset. If it's just compare and contrast with a brand new inspection, fine. But if someone else paid that inspector, they may not have any responsibility to you, and you want them to be responsible to you. I wouldn't accept the inspection that the previous prospective buyer had done. Sometimes, agents trying to make sure a transaction goes through will try to give you an existing inspection, because they know what problems that will show. This is always the hallmark of a commission grabber, and you should fire them and file a lawsuit and a complaint with your state regulatory agency if they won't go quietly. Then start looking for something else.

An inspection around here will almost always reveal some defect which wasn't dealt with in the first round of negotiations that resulted in the purchase contract. Usually, they're dinky little stuff. Replace one light bulb, brace the water heater, maybe replace the garbage disposal. Sometimes, however, it is major work: rotting substructure to the roof, foundation damage, etcetera.

It does not matter if it is major or minor. It needs to be fixed. The way I usually explain minor stuff to sellers is, "You don't want to lose a $500,000 sale over $30 in repair work, do you?" It does sound rather silly, doesn't it?

If it's major, it still needs to be fixed. Here's a new defect in your property that causes it to be worth less than the agreed upon price. You can often get the buyer to accept the property for a lesser price - estimated cost of repairs plus an allowance for them being the person who has to deal with it. You're not getting out of major repairs on the cheap unless the buyer's agent hoses their clients. I want a reliable contractor out there to give my buyers an estimate for major repairs plus some money for all the ancillary expenses, and you'll find that's about par for the course. As the seller, you can have your choice between fixing it, giving them an allowance that makes your buyer happy, or losing the transaction.

Lest you think, "I'll just forget about that prospective buyer," even in seller's markets the next one that comes along is likely to find exactly the same set of defects and want exactly the same set of repairs, which is going to cost - you guessed it - pretty much the same amount of money. The only differences are one, in the meantime, you've spent some money on your mortgage, taxes, etcetera, and two, the earlier offer is usually the better one. In other words, same situation, but you're out more money.

Somebody's going to ask about "as is" sales. They really don't make much difference to this fact. I'm not going to let a buyer put in an offer on an "as is" property without an inspection contingency. The inspection shows something major that we didn't already know about, the choice is going to be give us an allowance, fix the problem, or lose the transaction. It's only an actual "as is" sale if the inspection doesn't reveal anything new and major. Matter of fact, selling "as is" is a red flag that tells me the seller probably knows about something major, unless it's a lender-owned property. If it is lender owned, "as is" and "without warranty" are the ways that business is done. Otherwise, it really doesn't mean a lot beyond that you are indicating that you would rather give an allowance at close of escrow than pay for repairs.

For buyers, you don't need to freak out about every last little thing. If you're getting a screaming deal, the fact that you need to put a handrail up in the stairway at a cost of a couple hundred bucks shouldn't cause you to pull out of the deal. If the owner doesn't want to make repairs, be willing to accept the cost plus something reasonable to represent your time and the decreased utility in the meantime. Don't demand triple the cost of major repairs unless you really are going to have to spend that much sitting in hotels and eating out until the work is done.

A reliable contractor is your best friend in subsequent negotiations. First off, it should tell you what it really is going to cost. If they've said that it's going to cost $7500 to fix, that's better information than any agent or inspector can give you. This does wonders for peace of mind, knowing that it's going to be $7500 to fix the problem after you're in title, not $75,000.

An allowance for construction work from the seller can be a great opportunity if you've got some cash left in your pocket after the sale. For example, if you're going to have to replace the green board in the bathroom anyway, it doesn't cost that much more to add some nice updates and upgrades. An extra $500 for better materials can really go a long way. When you go to sell, more money in your pocket. In the meantime, a much nicer bathroom. Even more to the point, one much more aligned with your personal tastes.

Every negotiation after the initial purchase contract is at least as dependent upon the good will of both parties as the initial purchase contract. If one party or the other thinks they got the worst of the initial negotiations, you can expect that to be reflected in how far they are willing to go for you when the inspection reveals defects. You want the person on the other side of the transaction to be thinking they get a decent bargain, one that they would make again. That way, they won't want to blow it off before it happens, by being unreasonable about the repair negotiations. Yes, this is one more reason that you want a buyer's agent to help with negotiations.

Caveat Emptor

Original article here

With the current popularity of pursuing a "green" lifestyle and some sustainability (garden plot, edible landscaping, micro-orchard, etc.) in one's yard area, I value your input about what to look for in an older subdivision with larger lots that aren't "vampire properties." And how do you factor in local ordinances? Thanks!

First off, I want to say that it's not my place to pass judgment on anyone's housing preferences. This person wants more green, so I'm going to help them with that. If someone else doesn't, I'll help them with that too.

If you're really looking to be green, there are a lot of reasons not to buy a single family detached home. In heating and cooling, materials, and most especially land use, single family detached homes are about as un-green as it comes. Talk to the sustained use experts, and they'll tell you that single family detached housing is horribly wasteful of everything involved. The "greenest" housing is high rise condominiums and apartment buildings. Not what everyone wants to hear, but nonetheless the truth.

With that said, there are degrees of "green". Small sized plots are not agriculturally efficient - that's one reason why Zimbabwe (to name the worst example) has gone from breadbasket to starving in a few years time - they broke the big farms up into little farms supporting one subsistence level family each. So you're not going to produce enough to offset what the land could do as part of a commercial farm or large public park, but you can do fairly well if you check with your local greenery experts. Locally, Kate Sessions (our most famous landscaper) was known for gardens that were both beautiful and water efficient - to the point where the City of San Diego doesn't water large portions of Balboa Park at all. Pretty much every greenhouse locally has someone whose advice to make the landscaping efficient is worthwhile. Even townhomes can be worthwhile - I know folks with dwarf fruit trees in the back yards of their townhomes, and if a homeowner's association was to make an effort, most of them would make far more more difference than a single plot owner - because while it is a common interest development, when you put them all together, you usually have several times the land available of most single family detached urban dwellings. Trees provide shade in summer and keep it cool - and they help break the wind and lower heating bills in winter. Obviously, check with someone local to you for specific recommendations because I'm pretty sure orange and lemon trees don't do so hot in Minnesota winters. Grass is nice, and good for resale, but it's a big user of water - a no-no for Green living in most of the west. It wouldn't be such a big deal to water grass with 'gray' (used water, no longer potable) if lawns weren't so notoriously un-"green".

For heating and cooling, double or triple paned windows and good, tight weatherstripping are pretty much mandatory for greens. Newer housing has this sort of thing already installed, and lots of older ones homes do, as well. Given the cost, it probably is not worth the cost on a purely monetary basis to replace existing windows with modern ones for that reason alone, but that doesn't stop a lot of people. I'd think wood floors - replaceable, polishable, durable - would be superior to anything else, but I can't cite chapter and verse. I know a lot of beautiful hardwood floors that are the better part of a century old - while even travertine starts looking dingy and ready for replacement in considerably less time than that. When wood starts looking old, it can be re-polished to its original shine more easily than anything else I'm aware of. Finally, wood is a much more renewable resource. Trees grow back. Quarries do not. Petrochemicals do not.

Good insulation is a feature of eco-friendly housing as well, but be careful: Too much can actually be a health hazard, as it can cause Radon gas to build up to levels that are illegal in uranium mines.

Modern air conditioning units work without CFCs. R410a ("Puron") is what home systems are in the process of converting to, as CFCs and HCFCs are being phased out. I don't have any first hand experience with this, but if you're replacing your system, it appears to be worthwhile to consider replacing with a high efficiency modern system. The difference in price is smallish, and the difference on your monthly bill significant. The upshot is that you'll pay for replacing your prior system with a high efficiency system a lot more quickly than a low. I'm also told that simply running the ductwork underground for a certain distance can negate the need for heating and air conditioning altogether - all you need is a good fan to pull the air through. Be careful that the static ground temperature in your area will support this first - check with a local expert. Needless to say, that last suggestion about burying roughly 100 feet of ductwork isn't really an option for the owners of anything but single family detached housing, even though it needn't be in a straight line..

The square-cube law is always in effect. Heat and cold leak in and out via surface area, while you're heating or cooling cubic volume. The smaller the surface area, as a proportion, the longer it takes for heat and cooling to leak out. A featureless cube (or better yet, sphere) is more efficient than a rambling single story ranch house. Nonetheless, it's more efficient to heat a small structure than a large one, and body heat from the inhabitants helps more in winter. A 1200 square foot dwelling is more "green" than a 3000 square foot dwelling for the same family. Is that going to stop me from showing 3000 square foot dwellings to those who want them? Absolutely not. Once again, this is "other factors being equal."

If you really want to go green, especially in the west, you're going to get into recycling the water you use. Laundry water can be used for a lot of plants, as can bath water. The ultimate instances of this are pretty disgusting if you think about them, but people do go a lot further than this, and every drop of water on this planet has gone through such a cycle multiple times. It's all pretty much dependent upon how far you want to go on your own hook. My main objection to the City of San Diego's water recycling plan was that it wasn't good enough to get out all contaminants, and people weren't going to get their own discharges back, so they could drop stuff into the drain like old engine oil, and be confident it wasn't coming back to their tap.

Green construction is no better and no worse, as far as intrinsic durability and aesthetics go, than non-green construction. It can be more expensive (How many hardwood floors have been laid down these last ten years?), but quite often, you can actually save yourself money in the end if you're willing to make the up-front investment. How far you want to go is a function of your preferences, pocketbook, and your area of the country.

Caveat Emptor

Original article here