Buying and Selling: May 2016 Archives

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

That's way up there on the list of complaints buyer's agents get. Probably number one, definitely no lower than number three, and it's only going to get worse when the markets recover. There's really only one honest response:

"Well, duh."

I'm talking about the one where the owner fixed it up and made it beautiful. Those properties are the equivalent of a hot chick in a singles bar. Their owner has gone to the trouble of making them visually attractive to the vast majority of potential buyers. People are visually oriented - as you should know if you've ever watched the crowd interact with said hot chick. She may be an abusive gold-digging stone cold female dog with enough external baggage to fill an freight train all by herself, but that's not visually obvious; people see the attractive surface and they want it. In case you're female, I'm informed by some people I know that this effect is even stronger with respect to "hot dudes". So feel free to mentally switch the sex when I talk about "hot chicks", it's just as applicable.

You are always competing with other buyers. If someone else is attracted to the property to the point of making an offer, the owner is going to choose the offer that's most attractive to them. Most of the time, this will be the one for highest number of dollars. There are ways to be the offer chosen without being the high bidder, but they do not work every time or even close to every time.

The "hot chick" property is not one where you get a bargain. If everyone finds it attractive, expect everyone to be making offers. The owner and their agent are going to do their dead level best to get prospective buyers to stumble over each other fighting to put in the offer for the highest price. The only way to win that game is not to play. If you must put an offer in on such a property, make it an attractive offer, but one that you would be happy to have accepted. Refuse to bid against everyone else - offer what the property is worth to you. Look for things other than cash that the seller may be interested in. I know I'm always looking for something about the seller's situation that tells me something else is important to them. A more certain transaction, a willingness to work with special seller requirements, whatever. There isn't always such a hook, but where it is present I want to offer it to them.

The property where you get a bargain - I mean the type of bargain where you're thinking "Score!" ten years later - is to look beneath the surface. Instead of looking for the property where everything is already perfect, look for the property where the underlying basics are there but the owner hasn't put the finishing touches on it that make it obviously attractive to everyone. The solid construction with good layout in a neighborhood where most properties are more visually attractive. You make a few improvements over time, and you have a huge profit in just a few years if you decide to sell, or are the envy of your friends who ask "How did you manage to afford such a wonderful property in this expensive neighborhood?" The answer is that you were looking for the right things, where the person looking for the property that everybody wants is mortgaged up to their eyeballs and not as happy with the results because it's got some problems he ignored because it was "just so beautiful!". He managed to pick up that hot chick with all her baggage, where you went after the quieter lady with her head on straight and a healthy sense of humor. It's amazing how often such a lady turns out to be a lot more beautiful than the "hot chick" once you understand what you're seeing. This works in real estate, too.

All of the best negotiating techniques work much better when you're the only offer than they do when there are a dozen. It's very hard to get someone to accept an offer for $20,000 or $50,000 less than another offer on the table. It doesn't work every time, or close to every time. Upon those occasions when I successfully did it, I can tell you it was by selling something else the seller was interested in.

You've got a lot more bargaining power when you're the only offer on the table. The property is on the market because the owner has decided they want to sell, that their best interest lies in selling. If the alternative is another offer that's for just as much money (or more) you're not in a strong bargaining position. If the alternative is maybe not selling, they're going to be a lot more willing to compromise with you.

The way to successful buying in real estate is to find a property you think would be good, and making an offer you would be happy to have accepted. Some sellers are not disposed to be rational. Some, like the owners of the metaphorical "hot chick" property, have a reasonable and rational expectation of better offers than other owners. If they won't take an offer you're happy to have accepted, the intelligent thing to do find another property. Getting emotionally attached and thinking you've got to have a particular property because "it's so beautiful" is a recipe for disaster - just like marrying the "hot chick" in order to secure a one night stand, and for essentially the same reason.

Caveat Emptor

Once we figure out when we are going to be ready to buy, how early is too soon to get a buyer's agent and start looking.

You are ready for a Buyer's Agent when you are ready to act on it if that agent finds you something that meets enough of your criteria. By act, I mean put in an offer and consummate the purchase. If you're not ready to act, you are just wasting everyone's time. If you are ready and willing to act, then there's no reason to wait.

If you are not willing to act, you're engaging in mental onanism. Kind of like fantasy stock market traders. Doesn't matter how well you do, it's not real. As Sir Sidney Poitier once observed, it produces nothing. If you don't understand the difference between playing with real money and playing with meaningless number scores, get a guardian.

Being unwilling to act frustrates the agent and wastes the time that they might spend prospecting for you, and productive agents have to be jealous of their time. If you waste their best efforts when you aren't ready to act, don't be surprised if you're not their top priority when you are. You avoid this trap by not approaching them until you are at least willing to act.

It does no good to store up "prospects for later." Good stuff doesn't last for months. It probably won't last for weeks. It may not last to the end of the day. It only lasts until one person who is willing to act discovers it. If you're not willing to act, you are wasting your time looking at property for sale. Six months from now, when you are ready to act, that property won't be there, the market will be totally different, and interest rates may well have moved to where you cannot afford what you could afford today.

Markets change over time. The market today where I am is a very different market than two months ago, which was different from two months before that, and also different from the market as it's going to be two months from now. This is one of the many reasons why attitude is worth more than experience in an agent, but it also means that market research you do now is worthless a few months from now. The markets vary not just with macroeconomic factors, but also with time of year. The upshot is that the market today is different than it will be in two months, different than it will be in late summer, and is already different than it was a few months ago. You try to look at your fifteen to twenty-five properties today with an eye towards buying in six months, you are doing worse than wasting your time. You are actually confusing yourself with data that is certain to be outdated by the time you go to apply it.

Furthermore, there's a well-known comedy schtick routine in the industry: Q: How often does the deal of the century happen in real estate? A: About once a week. The point of the matter is that if you are looking for a property that's a real bargain, they aren't that hard to find. The more difficult skill is recognizing them when you see them. The average buyer is looking for something that is both perfect and a bargain - and the intersection of those two sets is pretty universally null. The reason the current owners spent all that time, effort, and money fixing them up is because they expect that effort to be handsomely rewarded by buyers who don't understand or don't care about the economics involved.

You probably want to talk to someone who does loans before you talk to a buyer's agent. Find out from them what real rates are that can really be done for you. This, together with how much you make, gives you your budget. It may change, going down if rates rise or up if they fall, but this way you know how much you can afford to spend. I have said this many times, but it's a good idea to repeat it at every opportunity: Shop by purchase price, not by payment. If you shop by payment, you are laying yourself open to all kinds of games by unscrupulous lenders and agents looking for quick, easy sales. Of course, if you find somebody who does both loans and real estate, that's fine, as long as they pass the tests you'd administer to both. Among which, of course, are Questions You Should Ask Prospective Loan Providers and being willing to work on a non-exclusive buyer's agent basis.

Caveat Emptor

Original Article here

(This is a companion article to What Sellers Need: What Buyers Should Want to Supply)

Quite often, I hear people talking about the real estate market as if it's all some amorphous blob, and buyers and sellers are no more different than they are in the stock or bond market, or for that matter, people using the bank to make deposits or withdrawals.

I cannot agree with this concept. Real Estate is not liquid, and real estate is not commoditized, and in the absence of some future world government building precisely one identical housing unit with precisely the same environment for everybody, I daresay it never will be. Since the chance of the rulers of that government limiting themselves and their cronies to the same housing everyone else has are nil, you can take it from there.

What do buyers need? They have the cash the seller (that would be you) wants, or the ability to get it via a loan, which comes to the sellers as cash - providing they can actually qualify, hence the preceding paragraph. What they need in exchange for that cash is the the assurance they will be getting a clear title, unencumbered by outside interests who may come after them later. They also need an assurance that the building - which is what the vast majority of buyers are really interested in - is going to continue standing in good, inhabitable condition for the foreseeable future. If there is a loan involved, the lender will want reasonable assurance that they can recover their investment if something goes wrong with the loan, which also requires clear title among other things. Just as seller's issues become buyer's issues, so do buyer's issues become seller's issues.

This makes delivering clean insured title imperative. If there's a possibility buyers are going to put every penny they saved for three years into purchasing a property, together with putting themselves into debt for thirty years, and end up not owning that piece of property after all, it shouldn't be difficult to figure out that the property is worth much less to that buyer - or any other prospective buyer. There is a profitable niche in clearing title on real estate, but you've got to really know what you're doing, and you've got to be prepared to lose everything invested in a given property. There's a reason the standard California purchase contract requires the seller to purchase the buyer a specific very broad policy of title insurance, and why it allows and requires negotiation as to which title insurance company issues that policy. I want a good solid company that only insures good risks, because I want them to be around and able to pay the claim if one happens - even forty years down the line, as opposed to Fly Tonight Title that disappears as soon as it has the premium payment. If a good reputable company won't insure title, there is a reason, and title insurance that isn't there and solvent years later is useless. Actually, it's worse than useless because without that title policy that turned out to be useless, nobody in their right mind would have paid that anywhere near that price for that property. So yes, a good policy of title insurance costs money. However, without that title policy the property is worth a fraction of what you might get for it with that title policy - and this fraction is well under 50%. Paying for a title policy is part of the cost of getting as much cash as possible for the property. Examined in terms of return on investment, there's nothing that even vaguely approaches it.

As far as the building's structural integrity, inspections cost money: hundreds of dollars. It's not cost-effective for buyers to perform inspections on every property they want to make an offer on, and the owners - or their tenants - might have a little something to say about an inspector invading their personal spaces for three hours or so. But it is necessary that the inspector have legal responsibility to the buyer, and that's the reason why sellers are wasting their time getting an inspection. Yeah, it can help you fix problems before you put the property on the market. But no competently advised prospective buyer is going to accept such an inspection, because if there's something wrong or something missing, that buyer has no recourse to sue an inspector that was, after all, working for the seller. If you're planning to sell, and want an opinion as to what needs fixing, get a contractor out. But if the buyer's inspection reveals problems, the buyer is going to want the ability to negotiate repairs, compensation, or to get out of the contract entirely, hence, the inspection contingency. This is one reason why sellers misrepresenting the condition of their property are not only fooling themselves, but costing themselves money as well. Furthermore, the general inspector can recommend further inspections if there is something beyond their competence. Until somebody pays you the necessary cash to purchase the property and it is actually sold, the problems that may exist aren't buyer problems - they're seller problems. Buyers can always (at least until the inspection contingency expires) choose to instead walk away and make an offer on the identical floor plan down the street without these issues. It's up to the seller and their agent to motivate them not to do that. Consider that if this prospective buyer's inspector found the problem, it's likely that the next prospective buyer's inspector will, as well. Actually, a good buyer's agent will probably spot things before it gets to the point of an offer. Until you have that escrow check in your hand for the equity, these problems are the seller's problems. Remember, that prospective buyer can simply decide they don't want the property. Until the property is successfully exchanged for cash, all of those problems are part of owning that property, and you need to find a buyer who's willing to deal with these issues in order to sell. Delivering what buyers need, a solid property without objectionable issues, is a seller concern. Good agents will help, but bottom line, it's the seller's profit or loss.

With the exception of all cash sales, a very small proportion of real estate sales, there is going to be a lender involved, and when there's a lender, the issues that buyers have with lenders become seller issues as well. It may be precisely the opposite of the inspection situation: It's always the seller's choice as to whether to work with a given prospective buyer, and buyer issues in this regard are subject to finding a seller willing to deal with them. Nonetheless, the vast majority of all buyers don't have the cash to buy your property without a loan, and if you want to restrict yourself to prospective buyers willing and able to offer all cash for your property, that's your prerogative. Doing that, however, restricts your pool of potential buyers far more than anything else. Drastically lessened number of buyers who could choose to offer all cash drastically reduces the sales price. Even those buyers who have the ability to pay all cash often do not want to, for various reasons, and this unwillingness on your part means that they will be willing to offer much less for your property.

Every loan does have the real possibility of being turned down. I can do everything from verify all the buyer's information to checking the prospective loan against lender guidelines for issues, but if that underwriter turns down the loan, or (more commonly) puts conditions on an approval that the prospective borrower can't meet, that's pretty much the end of the loan. There is one vote that counts, and it belongs to that underwriter. The loan officer can reason, wheedle, and appeal, but the bottom line is that if the underwriter can't be swayed, the loan is dead. They don't reject loans very often when a loan officer has done the work beforehand, but it does happen, and is the reason that nobody except a loan underwriter for the lender you're submitting it to can guarantee the loan will be approved. Since no loan gets to the underwriter without a fully negotiated purchase contract and no borrower ever communicates with an underwriter directly, there is always a very real possibility that the loan the borrower is counting on will be turned down. For most loans, there's other places that will do the loan, albeit upon slightly different terms. Occasionally, though, there are loans where it's this lender or nobody, as nobody else has loan guidelines that will allow that loan to be funded. These two terms add up to the necessity for a loan contingency. If the buyer can't find someone to loan them money on terms that satisfy this purchase contract, they don't want to lose their deposit, and definitely don't want to be obligated to purchase the property. If you, as a seller, do not want to allow a loan contingency, that is certainly something you can choose to do - but it's going to cost you in terms of the proffered sales price, probably a lot more than the amount of any deposit. If a seller doesn't have good evidence prospective buyers can qualify for the necessary loan, I don't know any reason why they would agree to work with those buyers at all. If they do have such evidence, I don't know of any reason why they would want to focus on the deposit instead of the purchase price. The deposit is iffy at best and takes paying legal costs to get, not to mention it's usually not going to pay for the costs of the escrow period. The purchase price, once you get it, makes those costs stop, and it's a lot more probable than getting that deposit.

What the lender is looking for (absent evidence of impending fraud) is two things: Evidence of borrower ability to repay the loan, and evidence that they'll get their investment back if the borrower defaults. It is to this end that lenders require an appraisal from a licensed appraiser who has some demonstrated ability to (insurance or a bond) to repay them if the property does not, in fact, possess that value. Now, here's the kicker: If the appraisal is too low, you can pretty much bet that any lender on earth will reject that loan. There really isn't a need for a separate appraisal contingency, and if I and my buyer clients don't see the value in the property, we're not making an offer in the first place. Even in those rare instances of "all cash" purchases, that appraisal should be nothing more than a confirmation for the lender of something I and my buyer client already know. I'm willing to counsel my buyer client to offer that much because I believe that property is worth that much for their purposes. If they're intending to "flip" the property, we should both have looked at that situation and decided we're comfortable with it before making an offer. If my client intends to hold the property some number of years, that appraisal has absolutely zero bearing on what it will be worth at some indefinite date in the future. And even if they are that rare "all cash" buyer, if the value isn't there in front of your own eyes to justify that price, why did they and their agent make that offer? Therefore, there really isn't a good reason for a buyer or a competent agent who knows what they're doing to object to dropping the appraisal contingency. When I'm listing a property, I'm very cognizant of the fact that insisting upon an appraisal contingency is a sign of an uncommitted buyer, overly cautious or overly opportunistic, who's insisting on having everything exactly their way and is likely to chip and chisel at every opportunity. Such a buyer is also likely to bolt at the first chance of a better deal. It's also usually a sign of an agent who doesn't understand the process covering themselves in CYA to a pointless degree, because they should explain it to their client when the issue comes up if not before. This kind of agent is analogous to someone who calls themselves a paratrooper because they wear a parachute - even though they've never actually used it and have no intention of making a jump. Both such a buyer and such an agent are signs of a deal that's likely to not get consummated.

Just like sellers and everyone else involved, buyers would really like a nice smooth transaction that moves from fully negotiated purchase contract to complete consummation as quickly as possible without bumps, burps, or deal killers. There will be bumps in some transactions that can't really be avoided, but most bumps are caused by problem personalities on one side or the other of a transaction. Unfortunately for sellers, there's a lot more information on their attitudes (and those of the listing agent!) in a typical listing than there is information on the buyers and their agent in a typical offer. Don't raise the barriers to a successful transaction any higher than you need to - and don't let your listing agent do so, either. Quite a lot of them will insist upon useless pre-qualifications and pre-approvals from their favorite loan officer. Not only is requiring someone to patronize a particular third party in this manner steering, and therefore illegal under RESPA, but it doesn't do you any good on determining whether or not they actually will qualify for the loan, and this notation can warn potential buyers with competent agents off your property until that property has been on the market so long that you're desperate. Listing agents will often insist for no good reason "seller to select all services." What's going on is that they want to select all services so that certain specific title and escrow companies are happy with them. You didn't tell them you wanted to select the services, did you? Even if you did, the law is quite clear that it is subject to negotiation, not that this stops that sort of agent. Wander into their office at random intervals, demand a listing agent copy of your property listing (What an agent sees has significantly more information than what a potential buyer sees, but you are entitled to such on your own property) and if it has any of these notations, fire that agent and their brokerage immediately. You've got all the justification you need in the fact that they're not only violating the law, but your best interests as well.

Now that we've gone over what sellers need, let's look at what seller's want. As any good salesperson knows, wants are far more important to making a sale than needs. People are funny that way, and one of the harder parts of a good buyer's agent's job is keeping the actual needs front and center with the wants. Most people would not believe how many buyers will ignore faults that will cause them to hate this property in about two months in favor of really neat, but unnecessary amenities.

What buyers want is the perception of a bargain. Notice I didn't say they want the bargain - but they do want to believe that the property is the best bargain they could have bought for the price they could afford. Quite often, the appearance is more important than the actuality, and I've certainly experienced more than a few people who thought they got a deal and couldn't wait to brag to me - but here's the kicker: They never want to hear the evidence against the brag they're trying to make - and there's always evidence against as well as evidence for. Every last negotiating coup I've pulled off had evidence on the other side - that's what a good negotiator uses to convince the other side to deal. If they don't want to hear the evidence against, that's a pretty good indication it's stronger than the evidence for, and that they didn't get a very good bargain.

One of the ways in which this manifests is buyer behavior. If your property is more expensive than another one that's essentially similar, those buyers are not going to want your property. You have to convince those buyers that there is a rational reason why they should want to pay more for your property than for the competing properties. If you cannot do this, your property will sit unsold. This is the reason every competent agent in the known universe counsels against overpricing a property. It's not like all the sellers in your local MLS receive offers in turn, strictly in accordance with order of listing the property for sale. Quite predictably, buyers make offers upon the properties that are most attractive to them at a given price. If you cannot convince your own agent that the property is more valuable than the competing properties, that agent is doing you a favor by telling you to reduce the price. I guarantee that not only that your agent will be kinder than any prospective buyers will be, but that they're trying to save you money as well. It's always a balancing act between too expensive to interest anyone, and not expensive enough so that you lose money you could have gotten. But remember that it's the appearance of a deal than most buyers want, far more than the actuality. Most have no clue what stuff costs and how easy or difficult it is to accomplish a given upgrade. They only know that they didn't have to deal with accomplishing it, and for that, they're willing to pay quite a lot under the right circumstances. A good agent will help you with all of this.

Caveat Emptor

Original article here