Buying and Selling: February 2017 Archives

One of the things I'm seeing more of in MLS listings and developer advertising, among other places, is the phrase "$X in closing cost credit (or "$X in free builder upgrades") given for using preferred lender"

Sounds like a bargain, right? Just use their lender and you get this multi-thousand dollar credit. After all, "All Mortgage Money Comes From The Same Place!" Free money, right?

Well possibly, but not very likely. What most companies are looking to do with this advertising is give people a reason not to shop around. They hope that because most people think that "All Mortgage Money Comes From The Same Place", the average customer will just stay there to apply for a loan. Many builders and conversion companies will throw roadblocks in your way if you try to use another lender. They cannot legally require you to use their loan company (at least not in California), but they can make it exceedingly difficult to go elsewhere. I've been told by builder's representatives on two occasions that I was wasting my time with a loan, because "If they don't use our lender, they won't get the property!" despite already having a signed purchase agreement. Roadblocks take all sorts of turns. They won't let the appraiser in. They won't cooperate with requests for information, without which the other loan is going nowhere. And so on and so forth. By the way, this behavior is illegal under RESPA. They're just betting you won't do what it takes to complain, not to mention that even if you do complain you're still not likely to get the house you wanted - the genesis for all of this.

I should mention that the concept of giving you incentives (metaphorical carrots) instead of metaphorical sticks is legal, ethical, and highly desirable as opposed to the behavior in the previous paragraph. Just remember they've got to pay for those incentives somehow. Builders are not charities. You still want to shop your loan around based upon the bottom line to you.

The builders wouldn't give those incentives to use their lender, or throw roadblocks in your way when they're trying to sell you a property, if they weren't making more money with the loan. Quite often, they're making more money on the loan than they are from the sale. Put you into a loan half a percent or more above market, stick a three year prepayment penalty on it, and voila, anywhere from a 6 percent premium to perhaps 10 percent. To give you a comparison, around here an agent makes 2.5 to 3 percent from a transaction, and I do my loans on a margin that varies from under half a point to a point and a half, depending upon difficulty and size, and discounted from that if I'm also getting an agency commission on a purchase. But the average consumer is distracted by these "free" upgrades or closing costs that they don't realize how badly they've been raked over the coals. If I can get you that $400,000 loan half a percent cheaper and with no prepayment penalty, I'm saving you $2000 per year for certain, and very likely about $12,000 on the prepayment penalty.

Furthermore, on some of the builder's loans I've analyzed, they're getting you a rate that would carry a point and a half retail rebate or more, even without the prepayment penalty. This means on a $400,000 loan at that rate, the lender would be paying you a $6000 incentive to do that loan, more than covering normal closing costs. But this is comparatively rare. Usually, they're earning some or all of the secondary market premium directly. Have no fear, that builder is doing quite well for having loaned you that money.

What can an average person do about this sort of thing? As I've said before, builders often throw roadblocks in the way of outside lenders, and there's not a lot that you or anyone else can do about this fact.

There is a bill in the California legislature that wants to ban developers from being the lender also. This is a "quick fix" that won't fix anything; in fact, it will hurt. They can bring in outside lenders who agree to pay them under the table, or even on out in the open for certain services. Net benefit: Zero. However, this bill would also make it more difficult for buyers to order custom upgrades and finance them into the cost of the purchase, as often happens now and can be highly beneficial to the consumer who goes in with their eyes open. I wouldn't be surprised if it was the developers themselves pushing the ban.

Many people want brand new homes if they can get them. Given the realities about Mello-Roos and how prevalent homeowner's associations are in more recent developments, I'm not certain I understand this. It's one thing to deal with Mrs. Grundy when you're all cheek by jowl in a condominium high rise. It quite another thing to deal with her complaints because you left your garage door open ten minutes longer than the rules say, you want to paint your detached home a couple shades darker or lighter than everyone else, or whatever's got her dander up today.

I do have a trick or two up my sleeve for when I'm a buyer's agent in new developments. It's my job to outmaneuver the selling agents the builder has on staff (who tend to be heavy hitting salesfolk, which is not the same thing as the stronger agent). But they are dependent on some things that change from transaction to transaction, so I can't really describe them in any kind of universal terms. Writing an offer contingent upon an outside loan has its limits. Builders who throw roadblocks have that one wired; they wait for the contingency to expire at which point they've either got your deposit or your loan business as you are so desperate not to lose your deposit you'll do almost anything, particularly since most folks don't understand how much that loan is really likely to cost them.

Caveat Emptor

Original here

The answer is yes.

This situation is called a short sale. As with everything else pertaining to real estate, there are potential upsides and downsides. First of all, lenders in short sale situations often demand agents reduce their commission, so the agents are not likely to start from a discounted or low end commission. If it takes $12,000 to break even on a full service transaction, and you have to reduce your pay to make the sale happen, you're going to want more than $12,000 before the reduction. Discounters usually demand their money up front, but discounters aren't selling many properties in this sort of market. Along these same lines, it's a good idea to offer a larger than average commission to the buyer's agent. The average buyer's agent sees a short sale, and they say a transaction that takes twice as long as average, and that they have to accept reduced commission for while handling a whole lot of additional concerns. It makes the loan officer juggle rate locks and possibly submit multiple sets of paperwork. It makes the escrow officer juggle the entire transaction schedule, usually several times. Sometimes, the transaction approval with the seller's lender takes so long that an inspection or appraisal has to be re-done in order to satisfy the buyer's lender. It's tempting to just avoid your property entirely. With short sales, everybody marches to the beat of the seller's lender, which means I (as the buyer's agent or loan officer) have a whole slew of things that can go wrong beyond my ability to control, any of which results in my client ending up unhappy by costing them more money. Unhappy clients are poison to my business, no matter how great the deal they actually got was. Furthermore, I'm a lot more willing to not worry about my pocketbook than many other agents.

The person who drives this whole process, and makes it happen or fails to make it happen, is the listing agent. So if I see anything that tells me that listing agent is a bozo, or doesn't have their act together, I'm going to recommend that my buyer clients pass on the property, and I'm going to tell them precisely why. Pricing, staging, marketing, it's all got to have the fingerprints of a professional. If that listing agent has overpriced the property, if they have allowed the owner to leave excessive clutter, if they're saying things about the property that are not borne out when I go to view the property, I'm going to spell it out to my buyer clients why it's a bad idea to make an offer. I won't even look at "For Sale By Owner" properties trying to execute a short sale. I know, from experience, that I'm wasting my time, and my buyer client's as well. Lender approval of the short sale is not going to happen without an expert who is motivated to get the best possible price. You, as the owner, don't want to turn off either the buyers or their agents. So you want a listing agent that's demonstrably up to the task.

Now just because the lender accepts a short payoff in satisfaction of the debt, doesn't mean that all is forgiven. In some circumstances, they may go so far as to eat the loss entirely. I'm not certain I've ever seen such a case. They may report the loan as being paid satisfactorily to the credit bureaus, avoiding further hits to your credit, but they've just taken a loss. They want to deduct that loss from the earnings, as tax law permits them to do. But in order to do this with the IRS, they pretty much need to send the borrower they forgave a form 1099, reporting income from forgiveness of debt. Since this is taxable income under current law, expect to pay income taxes on the shortfall. The temporary moratorium on that ended at the beginning of 2017.

For those agents who promise that the lender will forgive your debt completely, it really isn't under their control. You're trying to get the lender to forgive many thousands of dollars in money you owe them, plus you want them not to hit you with a debt forgiveness 1099, so they end up paying the taxes as well? Remember that not going through the entire foreclosure process is a benefit to the current owner as well as the lender, and there may be the possibility of a deficiency judgment as well. I'd be extremely skeptical of any promise to get you out of two or all three. If someone comes to me for a short sale, I can promise to try and I might even be able to do it sometimes, but I can't promise to deliver. Nor can anyone else - it's not under our control. That's a cold hard fact.

So even though you're not really paying the listing or buyer's agent directly, as you would be in most normal transactions, you can expect to end up paying the tax upon whatever it is they end up making. After all, $10,000 paid to the listing agent and $10,000 paid the the buyer's agent means $20,000 that didn't go to your lender. As I've said before, that lender is going to want to see real evidence of poverty before they accept the short payoff. Getting short payoffs approved is not about "it's difficult!" or "I don't wanna!", it's about showing that there isn't any way that nets the lender more money. If it looks like they'll lose less if they foreclose, expect the lender to go the foreclosure route. They're not going to accept a short sale just because getting them their money would be uncomfortable for you, financially. You are (or actually, your listing agent is) going to have to persuade them that all of the other alternatives result in them losing more money than approving the short sale.

Agent commissions mean you'll owe more money in taxes, or deficiency judgment (if applicable) than without an agent, but that's only considered in isolation. If they convince a buyer's agent to show it to their client, if that results in a client being willing to make a larger offer, or an earlier one, if they negotiate the offering price upwards, and most especially if they get the lender to quickly approve a short payoff rather than dragging it out, or going through that whole dismal foreclosure process, all of these mean you ended up owing less money than you would have without that agent - precisely analogous to any number of research studies and studies that show that people who pay full service agents end up with more money in their pocket, even after paying the agent. It's very easy to look at the HUD-1 and ask yourself what an agent could possibly have done that's worth 3 percent of the sales price. There's no way to show or track, on an individual sale basis, the added value that the agent brought to the transaction. Those numbers just don't show up on the individual HUD-1, because there's nothing that documents them. On the other hand, they've been documented any number of times in the aggregate. The bottom line is that if the lender ends up losing less money, you end up with less in the way of potential tax liabilities, less in the way of judgments against you, and less damage to your long term financial picture, not to mention that the lender comes away better and the agent gets paid. If that's not the perfect picture of win-win-win, what is?

One last thing before I close: this presumes you have some reason why you need to sell the property. The loan market being what it is and my local market being what it is, I am straightforwardly advising people not to list their property for sale if they have a viable alternative. It may be a great time to buy, but it is a rotten time to sell. If you can afford the payments, if you don't need out from under the mortgage as quickly as possible - in short, if your situation is sustainable - there's no need to do anything, and you'll be able to sell on better terms when there aren't forty sellers per qualified buyer in the market. But sellers will still come out better if they can wait a while before selling. For buyers, property prices are not going to get any cheaper.

Caveat Emptor

Original article here

Every so often, I write about professional responsibility.

Every month I get a couple of magazines because I'm a Realtor. There was a letter from someone who was proud of the fact that he had never asked someone if they could afford the property, despite having been in the business for decades. Essentially, this reduces to, "I'm in this for the commission check, and what happens after that is none of my business."

Contrast this with investing in the stock and bond markets, where the SEC and NASD have mandated an entire slew of regulations and practices. Before any financial licensee accepts your money for investment, he or she is obligated to ask enough questions about your situation to have a reasonable basis to believe the investment they recommend is appropriate. A large proportion of financial licensees breach this, but the requirements are there, and upon those occasions where the investment turns out not to have been so well advised, they are both civilly and criminally liable. They are supposed to question you about reserves, and a will, and life insurance. Occupation, income, necessary expenses. They're supposed to encourage disability insurance and long term care insurance, where appropriate. The list of questions goes on and on, and if the questions don't get asked, those advisers who fail to ask are going to hear about it. The penalties start with fines that are larger than whatever loss the client may have taken, and include permanent loss of license, jail time, and being a convicted felon for the rest of your life. Among the regulations is a very stiff requirement that the money being invested cannot be borrowed except under strictly circumscribed situations (Margin accounts being the only example I'm aware of).

The idea that you can encourage someone to make a half million dollar investment with borrowed money, get paid thousands to tens of thousands of dollars for it, and have less responsibility than the guy who makes $1.25 signing someone up for mutual funds with $100 they saved out of their pay this month, is preposterous. It's wishful thinking, and lying to the The Guy In The Glass. It is completely unacceptable if those in my profession want to be treated as anything other than snake oil salespersons. Every time someone makes an easy property sale, or an easy loan sale, without ascertaining that they are, in fact, putting the person into a better situation, the fall-out down the line hurts every single one of us in the profession. In fact, the prevalence of discount solutions in real estate can largely be attributed to those unethical members of the profession who have failed to take the real interests of the consumer into account. When someone figures that they likely won't get the sort of real advantages that accrue from using someone knowledgeable and ethical anyway, they don't see themselves as having given up anything when they go the cheaper route.

The absolute worst case from someone investing $1000 in mutual funds is they lose that $1000, which hurts their ego and their pocketbook, but if they had to have that money to live on, they shouldn't have invested it, and the person who solicited that investment will need to answer to the SEC, the NASD, and the criminal prosecutors for their area. As many people found out the hard way in the last ten years, that isn't close to the worst case for someone put into a property they couldn't afford. Those people are finding themselves with their credit ruined, owing thousands of dollars in taxes, and in some cases homeless without anyone willing to rent to them. Life savings may have been completely depleted in a vain attempt to keep the property, and in many cases, there are deficiency judgments against them. In some cases, where a Realtor or loan officer had to exaggerate income in order to qualify them for the loan, they may even face criminal prosecution for fraud. It's like the difference between having your TV stolen, and having your life ruined.

Thirty years or so in the past, the listing services were reserved to Realtors, and so if you wanted access to MLS, you had to hire a Realtor. These days, due to restraint of trade suits, that's not the case. Not only are those days gone, they're not coming back (and that's a good thing, in my opinion). If all you are is MLS access and transaction facilitator, prospects are correct to pass you by in favor of the discount options that accomplish those same services far more cheaply. Every time some Realtor pleads that they're only a transaction coordinator, everyone who hears about that is driven straight into the office of the discount service providers. It's only by being more than that, and being willing to stand up in court and say that you're responsible for more than that, that you earn the full service commission. Most lawyers and all of the big chains tell their member agents not to be present for the inspection. My question is, "If you're claiming to provide knowledge or experience that the average person does not have, how can that possibly be anything other than gross and intentional negligence?" I'm there with a notepad, every time - lawyers be damned. As I have said, I'm perfectly willing to do discounter work for discounter pay - I make more money, more quickly, by limiting my responsibility and involvement to running the paperwork, even if I only make half or less of a full service commission. I never try to "upsell" those people who want discounter service on the full service package. Truth be told, it's easy for someone is used to providing full service to provide better discount service than the discounters. But if you want a client to happily pay a full service commission, you've got to convince them you've earned that money, by providing something real that they would not otherwise have.

One of the most basic of those services is as a check of their ability to afford the property. This is a major psychological stumbling block for a lot of property purchasers. Many very qualified buyers don't understand that they are qualified. Part of this is simple anxiety, part of it is so many loan officers telling people what difficult loans they are to discourage them shopping around to different providers. If you're willing to go over the numbers and tell them what kind of property they can and cannot afford, many people may buy who otherwise would not trust their ability to afford the property. If they tell me to butt out when I ask, that's their prerogative - I tried to do my duty and they absolved me of that portion of it. It's not acceptable if they want me to do the loan (a loan officer has to have the information to do the loan), but I can't force anyone to do their loan with me. Nonetheless, even the most jealous guardian of personal information will concede it was a professional necessity for me to ask. What actually reassures a lot of people, particularly in this market environment, about what they can afford is being told what they cannot afford - information I cover with everyone who'll let me. This information has lost me more than one prospect, but it reassures and solidifies the commitments of most.

If you cannot agree to find them something they want within a certain budget - purchase price budget, not monthly payment - you need to sit down and have a frank discussion about where the market is, and what their budget will actually buy. If their budget won't stretch to what they want, where they want to live, it's part of earning that full service commission to inform them of that fact. If they're going to have to settle for a fixer, a lesser property, or whatever in order to live within that budget, well, managing client expectations is part of every job that has clients. Unless you're personally going to extend them a loan they can really afford in order to buy the property, this means working within what they can afford with sustainable loans at current market rates that they can actually qualify for, and explaining what they can afford if their eyes are bigger than their wallet. If I ask and they tell me that they don't want to share the information with me, it's a free country and that is their right. It may be hurting themselves by dismantling one of the checkpoints which is there to keep them out of trouble, but it remains their right. I'm fine with them refusing because it means I don't have to do some of the work I have to do for other clients, and have less legal responsibility, to boot. It still doesn't completely absolve me - I've still got to pay attention to any other clues that may be present - but it greatly lessens what I'm responsible for. Failure to ask about their budget and financial situation is prima facie evidence of gross negligence.

Putting clients into property you know they cannot afford, or can afford only with the aid of temporary and unsustainable financing arrangements, is a violation of fiduciary duty, and willful ignorance is not an excuse. If you don't want to be responsible to a client's best interest, find another line of work, like cell phone sales, where you'll fit in just fine.

As far as being a loan officer goes, when I originally wrote this, the question was rarely "Can I get this loan through?" Much more often, it was "Should I? Am I really helping these people if I do this?" Not to mention whether or not I'm likely to end up buying the loan back from the lender. It doesn't benefit me to get a $1500 check if I were to end up paying out potentially $400,000 for a loan that went bad, any more than it benefits the client to be put into a loan where they can afford the payments now, but sure as gravity they won't be able to two or three years down the line. That has, obviously, changed somewhat, but less than you'd think.

You cannot provide service or expertise, and be compensated for it, without the associated liability. I'm not a lawyer, but that's my understanding of the law in a nutshell. Morally and ethically, there is no doubt whatsoever. Your choice as a realtor or loan officer is clear: You can try and duck out, sabotaging your business, your career, and your profession as a whole, or you can stand up and say in a loud clear voice that you are worthy of every penny of what you make, because you accept the challenge of that responsibility. Our profession is better off without the former sort, and they are unworthy of our protection. We should gladly cooperate in hounding those sorts out of the business. Not only is the profession better off without them, we'll be better off without them. On the other hand, there's room for as many of the latter sort as want to practice real estate.

Caveat Emptor

Original article here

My answer is yes.

National Association of Realtors is very proud of their sponsorship of legislation to keep lenders out of the business of real estate. They quote the legislation keeping banks out of the real estate business as being one of the reasons they're worthy of our dues money. They quote all kinds of justification, centering on the fact that they fear that the banks would "drive all the independents" out of business.

Folks, the vast majority of market share goes to a few big chains. You've heard the names. You know who they are. One belongs to one of the world's biggest financial corporations. Four of them, that most people think of as being competitors, are nothing more than different brands owned by the same company. On that scale, independents like the one I work for - thousands of brokerages nationwide, some of them in multiple locations - account for a grand total of about fifteen percent of market share, last I checked. The big national chains get the rest. They're just as corporate as the lenders, and they're anxious to protect their turf from the one group of potential competitors who have some kind of understanding of the business and otherwise low barriers to entry.

In fact, the lenders would compete primarily with the chains. Corporate marketing channels all look remarkably similar, and reach pretty much the same audience. Sure, lenders would probably take some transactions I'd otherwise get, but most of what they'd be getting would be feeding off fellow corporations. If you're the sort of idiot who believes that Major Chain Real Estate is better because you've had their television commercials tell you so, you're also part of the lender's target market.

Now, let me ask about the interests of the consumer, which are supposedly paramount. Our current system amounts to an oligopoly, controlled in fact by fewer than ten chains who can easily control the market (even if you buy the hokum that different brands owned by the same people make their own decisions, which I don't), and practices of everyone, based upon what is in the best interest of those chains. How many lenders are there? I know I've done business with dozens, and even if the current meltdown ends up shaking them out to the point that there are only a couple dozen holding corporations, that's still expanding the choices of this sort of consumer by a factor of three or more. Furthermore, because there are more corporations in the power circle, it becomes easier to get one (or a few) to break ranks, and harder to get all of them to agree to protect each other.

Let us ask about real estate which has become owned by the lender. Why should lenders lack an ability shared by every other citizen, resident, illegal alien, and even people who have never set foot in the country - the ability to sell their own property? There's no requirement for anyone else to use an agent. It may be smart to use an agent, but everyone else has the legal right to go it on their own. Why not lenders?

I'll tell you why. Because not only would lenders being able to get into the business threaten the interests of the major chains that control most real estate, but this requires lenders to pay those same firms money if they want to get the property from their bad loans sold - and they need to get the property sold.

I have to admit, I'm not exactly eager to compete with even more big corporations with huge advertising budgets. It remains the right thing to do. Right for the industry, and right for the consumers. As I've said many times before, rent-seeking is repugnant, and that's what NAR is doing - seeking rent from lenders who are not permitted to be in the business themselves.

Mortgage brokers have been competing successfully with lenders for decades, to the benefit of consumers. There's no reason real estate brokerages can't.

Caveat Emptor

Original article here

"overpriced house offer rejected what next"

(Before I get started, I want to make it clear that I am using the same definition of worth found in this article)

The first thing to consider is the seller obviously didn't feel that it was overpriced. But, just as many sellers will try to put a property on the market overpriced "just to see if we can get it", many buyers will low-ball a purchase price for the mirror image reason: "Just to see if we can get it for that." Nothing wrong with that, but it's a low percentage endeavor. Given that the sellers were unwilling to sell for that, consider the possibility that you didn't offer enough.

It's human nature to always want to blame the other side. Given the state of real estate prices here in San Diego when I originally wrote this, I have considerable sympathy for buyers. It seemed like ninety percent of those listing their property were in denial about where the market really was; that they hadn't checked out the actual sales being made. On the other hand, if you looked at the sales log, sales were still being made. This means willing buyers and willing sellers were coming to an agreement that both felt left them better off, and they were doing it (by definition!) at market prices.

The fact is, there are always at least two possibilities when an offer is rejected, and the truth may be a mixture of the two.

First, that the seller is being unreasonable. This happens a lot. Probably sixty percent of all properties initially enter the market overpriced. Somebody thinks their property is worth more than it's worth. When people can buy better properties for less, they're not going to be interested in yours. In this situation, you're not likely to get any good offers. You'll get people doing desperation checks - coming in with lowball offers to see how desperate you really are. A very large proportion of these are people in my profession looking for a quick flip and the profit that comes with it, or other investors. Anybody looking at properties priced where this one should be priced is likely not even going to come look. This activity is 100 percent predictable when you overprice property. Nobody will be interested at the list price, and when it's been on the market long enough, the sharks will start to swarm. Putting the property on the market overpriced will result in the seller making less money than they could have.

Second possibility, the buyer is the one being unreasonable. Properties like that one really are selling for the asking price, or at least substantially more than you offered, and you offered tens of thousands less. Some buyers do this because it's all they can afford. Some buyers do this because they want to get a "score". And some are just the standard "looking to flip for a profit" that I talked about in the previous paragraph. There is a point at which I tell all but the most desperate sellers that they're better off rejecting the offer completely than counter-offering. It saves time and effort, and the prospective buyer either comes back with a better offer, or they go away completely. Someone offering $250,000 for a $350,000 property is not likely to be the person you want to sell to. Even if you talk them up into a reasonable offer by lengthy negotiations, they're far more likely than not to try all sorts of games to get it back down as soon as you're in escrow. Better to serve notice right away that you won't play.

Now some bozo agents think that starting from an extreme position, whether high list price or lowball offer to purchase, gives them more leverage, or that somehow you're eventually likely to end up in the middle. This is bullsh*t. Concentrated, distilled bullsh*t. The whole concept of negotiating room is nonsense promulgated by weak negotiators. A transaction requires a willing buyer and a willing seller. Price the property to market if you want it to sell. Offer a market price if you want the property.

When I originally wrote this, the Quickflippers™ had a distorting effect on this, and disconcertingly many of the properties being offered for sale are owned by people who bought with the intention of the quick flip for profit, rather than buy and hold. Many of those looking to buy still fall into this same category, and I suspect this is much the same in other formerly hot housing markets as well. They had become addicted accustomed to the market of the previous few years, when a monkey could make a profit on a property six months after they paid too much money to purchase it. That is not the market we face today. This market favors the buy and hold investor. Actually, if you remember the spreadsheet I programmed a while back, I've pretty much confirmed that the market always favors the buy and hold investor, it's just been masked by the feeding frenzy of the few years, where John and Jane Hubris could come off looking like geniuses when it was just a quickly rising market and the effects of leverage making them look good. It's just that the support for the illusions of Mr. and Mrs. Hubris has now been removed.

Now, what to do when your offer has been rejected. There are two possibilities. The first is to walk away. If the home really is overpriced, and there are better properties to be had for less money, you made a reasonable offer and were rejected, you're better off walking away. I don't want to pay more for a property than it's comparable properties are selling for, and I especially don't want my clients to do so either. The sort of people who go around making desperation check offers walk away without a second thought with considerably less justification.

The second is to consider that the property might really be worth more than you offered. Okay, a 3 bedroom 1 bath home did sell for that price in that neighborhood, but when you check out the details, that was a 900 square foot home on a 5000 square foot lot and the one you made an offer on is a 1600 square foot home on a 9000 square foot lot, and in better condition with more amenities. It's a more valuable property, and you can refuse to see that from now until the end of the world and you're only fooling yourself. The reason you thought the property was attractive enough to make an offer was that it had something the others you looked at didn't, and most of these attractors add a certain amount of value to the property. The more value there is, the more folks are willing to pay for it. This is why one of the classical tricks of unethical agents is to show you a property that's out of your price range, then figure out a way to get a loan where you qualify for the payment. This property is priced higher because it has features that add more value and a reasonable person would therefore conclude that other reasonable persons would be willing to pay more for that property than others. Landscaping, location, condition, more room, amenities. There's something that the seller thinks reasonable people would be willing to pay more for. It's kind of like taking someone who can afford a $10,000 car and showing them a $25,000 one, then telling them they can get interest only or negative amortization payments to get them into it. You only thought you could afford the $400,000 home, but they've got a way that you can get into the $600,000 home, which obviously is going to have many things that the $400,000 home lacks. Consumer lust does the rest. Cha-ching! Easy sale, and the fact that they've hosed the client doesn't come out until long after those clients made a video for the agent on move-in day when they're so happy they've got this beautiful house that they didn't think they could afford (and really can't), and they gush gush gush about Mr. Unscrupulous Agent, who then uses this video to hook more unsuspecting clients - never mind that the original victims in the scam lost the house, declared bankruptcy, and got a divorce because of the position Mr. Unscrupulous Agent put them into. You want to impress me with an agent, don't show me happy clients on move-in day. Emotional high of being brand-new homeowners aside, there was a period of several years when any monkey of a loan officer could get anybody with quasi-reasonable credit into the property. What happens when they have to make the payments? More importantly, what happens when they have to make the real payments? Given the current environment, the question, as I keep saying here, is not "can I get this loan through?" but "Is it in the best interests of the client to put this loan through?" You want to impress me with an agent, show me a happy customer five years out "My agent found this property that fit within my budget, told me all about the potential problems he saw, got the inspections and loan done, and it's been five years now with no surprises, and the only problem I've had was one he told me about before I even made the offer."

Of course, the real value of the property may be beyond your range or reach. If your agent showed you something you could not reasonably acquire within your budget, you should fire them. I accept clients with a known budget, I'm saying I can find something they want within that range. If it becomes evident I was wrong (eyes bigger than wallet syndrome) the proper thing to do is inform the client that their budget will not stretch to the kind of property they want, and suggest some solutions, starting with "look at less expensive properties" and moving from there to "find a way to increase the budget" and finally to "creative financing options." That's a real agent, not "Start with creative financing options but somehow 'forget' to mention the issues down the road."

There is no universal "always works" strategy for rejected purchase offers. It's okay to do desperation checks, but be aware that most sellers aren't desperate and that it's likely to poison the environment if the seller isn't that desperate. Poisoning the environment is okay if you're a "check for desperation and then move on" Quickflipper™, but if you're looking for a property you want and have found something attractive, it's likely to be counterproductive so that you may end up paying thousands more that you maybe could have gotten the property for if you'd just offered something marginally reasonable in the first place. Make a reasonable offer in the first place, and you're likely to at least get a dialog. And if the seller rejected what really was a reasonable offer for an overpriced property, the only one to lose is them. If their property isn't worth what they want, nobody will pay it. Move on. Their loss is someone else's gain.

The only way to tell how much of the "blame" for a failed offer attaches to each property is to examine the market - what is selling for what price in that immediate neighborhood. Properties in the same condition, of about the same size, built at about the same time. Not across the highway in the brand new development with an extra bedroom and bathroom when this one is thirty years old. Not across the other highway in the eighty year old slums and half the size. You can't make the other side see reason. All you can do is examine whether you were reasonable or not.

Caveat Emptor (and Vendor)

Original here

Got this search:
"should I get a buyer's agent if I've already found a house"

The answer is almost certainly yes, but I am going to examine both the pros and cons. Full disclosure: This is what I do for a living.

The con is fairly simple. If the seller isn't paying a buyer's agent, they may be willing to sell more cheaply. Then again, they may not. One of the reasons people sell For Sale By Owner is that they're a little too greedy. Even if they have a seller's agent, their listing contract may call for them to keep the buyer's agent's commission if the selling agent sells the property without a buyer's agent involved, and this may cause them to be willing to sell more cheaply. They are under no obligation to do so, however.

Many think the buyer's agent's job is to say, "Here is the living room." That's like saying the president's job is to look impressive. Sure, most presidents do look impressive and I do say "here is the living room," where it's applicable and my buyer may not have figured it out for themselves. Nor is it about looking in the MLS and my connections to find my buyer a property they like. It's not even about making showing appointments with listing agents and occupants.

My real job as a buyer's agent is to find you the best property for your needs under your constraints and get you the best possible bargain on it while making certain that the seller and their agent aren't hiding anything.

Many folks call the seller's agents and use them as their agent. This is what is known as a mistake. That seller's agent has a listing agreement telling them and the seller what the responsibilities of the agent are to the seller. They may or may not sign a representation agreement with the buyer. If they don't sign one, all of their explicit legal responsibilities are to the seller. They are working for the seller, not for you, and they have a contractual obligation to sell that property at the highest possible price. The buyer's interests do not enter into it. Perhaps they do an excellent job of representing your interests anyway, but the odds are against it. Their legal responsibilities are essentially limited to "don't tell any lies and don't practice law without a license." While I was working for the FAA, we found out about an agent who had made a real good living for a while as a seller's agent and how he had done it: By telling everybody he showed a house in the area to that the airport was going to close. Ladies and Gentlemen of the jury, that airport land was dedicated solely to aviation usages by an Act of Congress, and if the county had wanted to close the airport (they didn't; they were making enough money to pay for every airport in the county there, and socking up a huge fund if they ever figured out something else aviation related to spend it on), they would have had to have paid back tens of billions of dollars to the federal government. We got a call from one of his victims one busy Saturday, who asked, "When is this airport scheduled to close?" We advised him that any proposed closure was news to us, and explained the preceding to the gentleman.

Even if the seller's agent does sign a representation agreement with you, in approximately thirty percent of transactions (from my experience) a situation other than price arises where the best interests of the buyer and the best interests of the seller collide. When this happens, no matter what they do, an agent representing both sides is stuck on the horns of a dilemma. If they do A for the seller, they are violating the best interests of the buyer. If they do B for the buyer, they are violating the best interests of the seller. Here's a hint as to which way they are going to jump in the event of conflicting interests: If they violate the seller's interests, they don't have a transaction at all. If you don't buy, they can always sell it to someone else, but if they lose the listing agreement, they are completely out in the cold.

Price conflicts of interest happen on every single transaction. The buyer's interests are to get the property as cheaply as possible. The seller's are to get as much money as practical. This is a fundamental conflict of interest, and the entire business model of real estate is set up to camouflage this conflict, especially from the buyer. It is quite likely not in the best interests of buyers to buy a particular property at all, but if you're contacting a listing agent to make an offer, you are asking the professional opinion of someone who has a legal and ethical obligation to not only sell it to you, but to get you to pay as much money as you possibly can.

Before I even point a property out to you, or if you find it surf the internet and ask, "What do you think?" I am evaluating the property for fitness, suitability, affordability, how it stacks up to other properties on offer, how many other properties are on offer, and what the details of the property likely mean in the way of potential problem issues. Just a for minor example, a property built in 1975 has to be concerned about both lead-based paint and asbestos; a property built in 1990 still has those worries but to a far lesser extent, as most building stocks with those concerns were long gone, and a property built in 2005 is more likely built over Jimmy Hoffa's final resting place than a repository for asbestos and lead based paint (it could happen, but the odds are long against it). I am not an inspector or a tester, but I can and do alert my clients to safety and environmental issues, potential repair bills, and all sorts of other items before we've made an initial offer. "Best thing you could do with this building is 'accidentally' run a bulldozer through it," is something I told a client in a few weeks ago, in the context of telling him the value, if any, was the land less the cost of demolition and haul-away. Initially built almost 100 years ago and haphazardly added to as well as obviously not in compliance with code, my client would have been facing the possibility of the county condemning the building as unsafe, and quite frankly, I didn't think anyone would insure it outside FAIR requirements. You're not likely to get that kind of talk from a seller's agent. If you do, they're working against the best interests of their clients. Do you really want an agent who will do that? Instead you get words like "charming," "funky!" and the ever popular phrase "needs a little TLC!"

When it comes to the offer, a seller's agent is looking to get the highest possible price. Period. They don't care if you could buy a better property for less elsewhere, their responsibility to the seller and desire for a larger paycheck are in perfect alignment. A buyer's agent is responsible to you, and whereas buyer's agents get paid based upon the sales price, same as the seller's agents, they at least have a legal responsibility to do their best for you. If there are any complaints, a seller's agent can take refuge in the fact that it is their primary duty to get the best possible terms (i.e. highest possible price) for the property. The buyer's agent has no such shelter. Which would you rather have as your representative?

Buyer's Agents do not usually cost you, the buyer, any extra money. Maybe there are exceptions, but I've never run into one. Both the Exclusive and Nonexclusive Buyer's Agent Agreements used by California Association of Realtors state (You want the non-exclusive agreement for a lot of reasons,), in the absence of additional agreement, that any commissions paid out of the "cooperating brokers" amount on the MLS count against the buyer's obligation to the representing agent. This is typically agreed to be two percent in California, and I don't know the last time I saw a residential MLS listing offering less than that to the buyer's agent. The way the transaction is structured is that the selling agent gets the entire commission, but agrees via the listing contract and MLS to share a certain portion with the buyer's agent, if the buyer has one. Good buyer's agents typically beat the price down significantly more than two percent, especially in the current market. I am equipped to do value battle with that seller's agent in ways that members of the general public are not, and whereas it's true they don't have to negotiate with my clients, they've got to sell the property to someone. It's not like the real estate fairy is magically going to convert this property to cash.

Alternatively, if they keep you out of an unproductive bidding war, isn't that also saving you money?

Finally, if there's something you should know about a property, the buyer's agent makes certain the question gets asked and the answer disclosed to you. This eliminates a lot of potential surprises down the road, and gives you the opportunity to have a reason to exercise your contingencies.

In short, buyer's agents are the professional on your side, they typically do not cost you any additional money, they can save you a significant chunk on negotiations, and you're more likely to find out about potential problems with the property if you engage a buyer's agent.

Caveat Emptor

Original here

Once upon a time, this was a good way to get more money for your listing. This led to a classic tragedy of the commons. Because it didn't take hardly any extra time, and there was no reason not to do so, listing agents will claim there are multiple offers with practically every property. It's not like they are expected to furnish any evidence.

Because of this, in the last few months, I've had listing agents try to tell me that there were suddenly multiple offers on property that has sat on the market for months. If I don't see any evidence that there's a reason for it to suddenly have multiple offers, such as a recent massive drop in the asking price, I find these claims dubious at best. It might be believable if the property has been on the market for three days, and has not recently been listed before that. If it's been on the market more than three weeks, such a claim is likely to be making things up. I recently talked a pair of clients into making an offer on a property that had expired twice and been re-listed for a third time. A week prior to that, a special incentive to buyer's agents had expired. In short, there was every reason to believe that that we had a clear field, with nobody else making offers. As I always do, I included information on comparable properties that had recently sold in the neighborhood, of which I had inspected two, and the issues that this property had. The listing agent claimed there were multiple offers and gave the kind of counter I hadn't seen since the height of the seller's market years ago, demanding a "best and highest" counter. I and my clients jointly countered back that we'd agree to their conditions if they'd agree to our price, and gave them 24 hours to take it or leave it.

Before you claim that there are multiple offers, you do need to have multiple counters in point of fact. Because the flinty-eyed buyer's specialists know better. Even if they do, in fact, believe that you've got multiple offers, we're going to tell our clients that it's best to counter back as if the seller is lying. Essentially, we call their bluff. If they do have multiple offers and someone is stupid enough to play ball with them, that's no skin off my client's nose. It's not that much of a seller's market, and it won't be again anytime soon. If this seller doesn't want to be realistic, we can keep looking until we find a seller that is realistic. This is why property sellers need to protect themselves from lazy agents.

For an intelligent buyer in this market, even if there are multiple offers upon a property, it doesn't make us willing to offer more for the property. It means we want to expedite our deadlines for the sellers to respond, and it means we're likely to make subsequent counters with a multiple offer contingency (in other words, we're making offers on multiple properties now. If another offer gets accepted before you accept ours, we're going with that one). Mostly though, it means that this seller, and their listing agent, have their heads stuck in the land of wishful thinking, and it's time to consider another property because we can't force the sellers to be reasonable. Nobody can make them sell against their will, but we can find another property where they seller isn't so far gone in denial, and where the agent has done a better job of explaining the realities of the current market. It's not like there's any shortage of choices.

Let's face it: Unless you fax over the competing offer, complete with all terms and the competing agent's name and their contact information so I can verify it, there is no reason for me to believe that you have a competing offer. If you do this, the offer is either better than my clients', or not as good. If it's not as good, the leverage is provides is minimal in any market. If it's better than my clients' offer, it's either something my clients are willing to beat or it isn't. If it isn't, your leverage is still negligible. It's only if the other offer is better, but my clients are willing to beat it, that this trick offers you any leverage whatsoever. In this market, it's more likely to make us act like I discussed in the last paragraph - because no property is worth getting attached to before you own it. Let me baldly state that I also understand the potential benefits of collusion with your friend the agent from another office. She colludes with you on your client's property, and you collude with her on hers, each stating that they do, in fact, have clients making thus and such offers on that property. Since once again, it's trivial to convince yourself that it's in your client's best interest, even verified offers aren't going to mean a whole lot to a smart buyer's agent. It may no longer be a buyer's market, but there are still no properties worth a buyer getting attached to them before closing. And for all the properties I've made offers on where the listing agent claimed there were multiple offers, I've never had one of them offer any real evidence.

People willing to price their properties to the market, and negotiate realistically, can sell properties very quickly due to the fact that comparatively few sellers are competing well for the buyers that are out there. In the last couple months, I've been involved in the sale of two beautiful properties - and two others that were plug-ugly, but sold quickly because the sellers and their agents had their heads in the right place. In one instance, I even had someone bidding against my clients, but we nonetheless consummated the sale quickly.

If you're trying to sell and you negotiate unrealistically, you are only hurting yourself. That buyer's agent can find them something better, cheaper, making the agent's client much happier. Even if you do have multiple offers, it might be a good idea not to particularly act like it. You can check the multiple offers box without being aggressive about it.

The property I mentioned earlier? Where the agent and seller acted like it was god's gift to prospective buyers? It's still for sale, and my clients have moved into another property. The relocation company that owns it is out roughly $6000 per month. Had they priced it to market, and negotiated reasonably, they likely would have sold. If they simply negotiated reasonably, they would have sold it to my clients. My clients have their new home - they're happy. The sellers? Not so much. They're paying about $6000 per month for an empty property. It's been on the market for a year now, and it's not like they have any real alternative to selling. That's $70,000 they've flushed down the drain to no good purpose, and it's not like there's any chance of them getting more than the property is really worth.

For listing agents who refuse to act like their clients are competing for buyer business, they are violating client interests no less than if they counseled the client to accept an offer from someone acting as a straw buyer for the agent, personally. In fact, I rather suspect this particular agent of being Sherrie Shark, but there's nothing I can do for the owners as a buyer's agent. It's not legal for me to so much as contact them without going through "Sherrie". Nor would it benefit my clients in any demonstrable way. It just gets me and potentially my clients caught up in a legal morass to no beneficial purpose. So the owners are high and dry on their own. It's our profession's problem, but there's nothing I can do about it as an individual. The only person who can do anything about it is the property owner; this is one of many reasons why it's important to be careful in your choice of listing agent. Unlike a buyer's agent, you need to commit to a listing agent for a given period of time, and if you commit to the wrong agent, you have wasted your time of highest interest, when you will get the best price for the property.

Caveat Emptor (and Vendor!)

Original article here

A few days ago, I had an agent get angry at me about an offer below a range asking price. I had submitted the offer with extensive justification as to why it was an appropriate offer. Basically, this clown had overpriced the property, and thought that because he had put a range on it, people were somehow not supposed to make offers outside the range.

Just because you put range pricing on a property, does not, by itself, mean anything. As I've said before, you can ask for any price you want for your property. It doesn't mean the asking price is realistic. It means that you own the property and have the ability to put a price on the property that you want. This doesn't do you any good if the price is above what similar properties are selling for. Having been told it's for sale, buyers have the same options the seller does - they can offer any price they would be happy paying. The seller doesn't have to accept. In fact, the seller probably won't accept. If the buyer offers less than the property is really worth, than the seller is correct to reject the offer. On the other hand, if the buyer is offering what the property is really worth and the seller doesn't accept the offer, they are hurting only themselves.

Many sellers and their agents are shooting themselves in both feet by overpricing the property. When I originally wrote this, there were some special circumstances in effect - the lending panic, to be precise. It's mostly psychological, as there are any number of very solvent lenders willing and able to fund loans, but hysterical reporting grabs attention (which is why reporters do it). The net effect is that many buyers who would otherwise be in the market were still sitting on the sidelines, and so the ratio of sellers to buyers locally had ballooned to 47 to 1. Imagine yourself in a situation where the ratio of men to women is 47 to 1. The social dynamics are going to favor the women. Even if she's a fat slovenly harridan at the tail end of middle age, she's going to have her pick of men. The men, for their part, are going to have be both good looking and well off to attract even the woman in the previous sentence, and keep working hard to keep the woman around. If you're not willing to do what it takes, and keep doing what it takes, you might as well not bother. Now imagine that people who want to sell are the men, and people who are willing to buy are the women. If you're not willing to out-compete the other 46 sellers, why is your property on the market? If you need to sell, then you need to do what is necessary to out-compete those other sellers. Make it pretty. Make it cheap. And you still better be willing to work when an offer comes calling. If you're not, get the property off the market until the climate changes. I told you when I originally wrote this that I didn't think it was going to be long.

It was longer than I thought, but my market at least has changed. We now have people looking for relatively safe places to stash their cash, places that look likely to return an eventual profit, and real estate heads the list.

Range pricing a property at a value you're not willing to accept is a waste of everybody's time. There was a property on the market variable priced over $125,000 range, and my client made a very strong offer about $15,000 over the minimum. Lots of cash, good deposit, short escrow, no contingencies, etcetera. Under the circumstances, a very good offer considering what the property was really worth. Yet despite all the information we put in front of them, this seller kept countering at the same number, which was more than my client was willing to pay for that property. Net result: the whole process was a waste from the time we started driving to the property. Yes, they got a lot of activity, but since they weren't willing to sell for the price that generated the activity - or anything like that price - the property didn't sell. Since if the property doesn't sell, every penny you put into trying to sell is wasted, as is every second of your time, plus all of the carrying costs that you may incur. So the listing agent told me they'd had a dozen showings in a week - but if they're looking at the property because it's variable priced $75,000 below any offer the seller is willing to consider, well, self-stimulation may feel good but it doesn't produce anything. This entire situation is a failing on behalf of the listing agent, who is theoretically earning money because of their knowledge of the market and should know precisely how likely it is that buyers will agree to pay more than the comparable properties are selling for, which is to say, Not. In a 47 to 1 buyer's market, if you need to sell, you're almost certainly going to have to settle for less than comparable properties are asking. If you don't need to sell, get your property off the market until it changes. The sooner excess inventory clears, the sooner the turn towards sellers is going to happen. Not to mention your days on market keep climbing, and there's nothing beneficial about having a failed listing in a property's immediate past. The longer it sits unsold now, the harder it's going to be to sell for a good price later. But in a seller's market, things are different. For one thing, buyer's don't have all that power - sellers do. That's why they call them "buyer's market" and "seller's market": Who has the power.

Properly used, variable or range pricing can increase the sales price of a property. But the catch is that it must still be priced correctly. Range pricing is not an excuse for a lazy or incompetent listing agent to build owner expectations above market level. The rule of thumb is that the bottom of the range should never be lower than a good "all cash, no contingencies" offer, and the top of the range should never be more than market plus a reasonable premium for dealing with the uncertainties of financing and contingencies. Both figures should be modified downwards if the seller is asking for something extra in the way of consideration from the buyer - for example, leasebacks of more than a week or two, seller contingencies, etcetera.

When I originally wrote this, the way the market was in most of the country, I was inclining against range pricing. If it's priced correctly, that range is information I can use as a buyer's agent. Why would I want to hand the other side information I could put to use were I on the other side, especially when they already have the whip hand in negotiations? Range pricing is something that's primarily useful for sellers when the sellers have the power, and back then, it was the buyers that have the power. If it's not useful for the seller, why in the world would you want to put range pricing on a property? With blortloads of highly upgraded properties for sale then, I had absolutely no hesitation in telling my buyer clients to offer what we think the property is worth to them under the circumstances, and let the sellers decide if they want to do what's necessary to get the property sold. If they don't want to play, somebody else will. Either way, the buyers are happy. This seller can either decide they'll be happy with an appropriate amount of money, or the property can sit unsold. Which is pretty much the situation as it always is. Since then, my local market has changed - particularly with regard to what Mr. and Mrs. Average First Time Homebuyer see as an attractive property.

Range pricing is not a panacea. Range pricing is not something lazy or fearful agents can use to "buy" a listing with impunity, confident it'll work out in the end (it won't). Range pricing is not an excuse not to price your property to market, or not to negotiate hard with all of the facts at your disposal (if you don't have enough favorable facts at your disposal as to what comparable properties are selling for, your negotiating position is not strong). Range pricing is a way to offer clues to buyers and get them to the table with an appropriate offer when sellers have significantly more negotiating power than buyers. Range pricing is something to use sparingly when sellers have no power. There's nothing that says buyers have to offer you what you want. Not now, not ever. The only leverage sellers have over buyers is the fact that if this buyer won't offer something that is appropriate, somebody else will. That's very weak leverage when there's 47 properties on the market for every buyer, but it's much stronger when properties are flying off the market as soon as they're listed.

Caveat Emptor

Original article here

About half the listings around here do not have a single number asking price, but rather a range in which "offers will be considered". Even many agents have trouble understanding range pricing. I've seen and heard more than one agent rail against it, saying that it is essentially "repricing the home".

Range pricing began in Australia and was brought to the United States by a certain major real estate chain. That chain is not one I particularly like doing business with, but that doesn't mean range pricing is a bad idea.

Range pricing is a way of starting people talking, and to begin the negotiating process; nothing more. If there's no offer made in the first place, I can guarantee there will be no transaction. The idea of range pricing is to jump start the negotiations.

Range pricing is not appropriate for all properties, nor in all markets. In a buyer's market such as we had when I originally wrote this, I'm certainly more hesitant to use it, as it offers more information as to the owner's state of mind. In a seller's market where prices are rising rapidly and sellers have all the power, it gives an indication as to what a serious offer is and what it is not. In a buyer's market it tells some buyers exactly how much leverage they may have. I'm also more leery of using it on commercial properties.

One thing many agents (and others) misinterpret range pricing to mean is that any old offer inside the range should be accepted. This is the mark of an inexperienced negotiator. If they say offers will be considered between $400,000 and $425,000, that is not the same thing as saying "I want $425,000, but I'll take $400,000." There are many other terms and conditions on a purchase contract besides just the price, and there is no mandate to agree with even a full asking price offer if those other terms are prohibitive. Indeed, an agent who knows how to figure out other terms to offer in place of higher price is likely to save you far more than any commission they earn. Even price is rarely just price. For instance, if I write an offer for $410,000 cash, no contingencies, with a $10,000 deposit, most sellers should rightly treat that as superior to an offer of $425,000 with the seller paying $10,000 of closing costs and only a $2000 deposit, contingent upon financing for sixty days. Note that the seller nets over $4000 more if the latter offer actually closes, but the former is a much stronger offer and if two such offers were to come in and other things were equal, I'd strongly counsel taking the cash offer, especially as the latter offer is indicative of a not very well qualified buyer without much commitment to the idea of purchasing the property, and there would be a high probability that the transaction will not actually close. There are all kinds of terms on purchase contracts, and having a discussion as to what's important to the other side can be a way of making your offer much more attractive without necessarily raising your price. For instance, owner occupants are often understandably nervous about whether the transaction is going to close, and committing large sums to alternative housing before it actually does close. If you can think of a way to address that concern, you're miles ahead of the negotiator who can't. Every situation is different, and what works one time may not be appropriate to even offer the next.

So if I see a property with range pricing of $400,000 to $425,000, I want to educate my buyer clients that an offer of $400,000 even with the seller paying up to $20,000 of closing costs is not within the range indicated. Indeed, as I've said elsewhere for such offers, a $380,000 sales price with the buyer paying their own way is a superior offer from the seller's point of view. If they insist, I must and will submit it, but even in a strong buyer's market I wouldn't be surprised to see it rejected outright with no counteroffer.

In a strong buyer's market, those few buyers willing to purchase properties have an enormous amount of power, and this will always continue when the seller to buyer ratio gets out of whack. So in a buyer's market, I might actually offer significantly less than the asking price range, secure in the knowledge that if this seller rejects it, I'll find something just as good tomorrow where the seller will accept. Some will. So if some won't, so what? You learn to spot the sellers that have the power to refuse, and the ones who have to take anything vaguely reasonable.

Now admittedly, I don't do a lot of listings, as most sellers don't like to listen when I tell them to price their property to the current market if they want to sell. (But if they don't want to sell, why are they talking to me?) But when I'm showing them what the market is like, and what reasonable prices for properties like theirs are right now, I'll ask a couple of questions once I'm convinced they understand. Everyone knows what they want to get for the property, and by the time I'm done, they better understand what a reasonable asking price is and why it's stupid to list for more. But after that, once I've explained that there are offers and then there are offers, and the price isn't the only thing worth paying attention to, I'll then ask them, "Now that you know what a realistic asking price is, what would be the lowest price you would consider selling for, if someone offered everything else you wanted? Great deposit, all cash, no contingencies for financing, etcetera?" Next I'll ask, "How far over the realistic asking price we've agreed on would you require going if the buyer came up with some odious terms: takes possession early, no deposit or not much of one, wants a long escrow, etcetera?" Rebates or seller paid closing costs always raise the necessary price at least dollar for dollar, by the way. A $380,000 offer with no rebate is superior to $400,000 with $20,000 rebate from both buyer's and seller's perspectives. Then, depending upon how much the seller needs to sell, I'll use that information to help me figure the endpoints of the asking range (assuming I'm not just going to use a single asking price). I won't just use either number, of course. But that, together with the state of the market and how much power buyers think they have in the market at the time, will give me a good feel for what the lower number of the range should be.

There is another, entirely different benefit to range pricing is that when the search is done on MLS or its substitutes, the lower number in the range is going to trigger your property coming up on more searches. If you're a listing agent, you know that MLS and MLS substitute buyers are more likely to be aggressive, and often unrealistic, bargain hunters, as opposed to people who really want to live in the neighborhood around this property. MLS inhabitants are not my favorite buyers when I'm listing a property, for that and other reasons. But if this property comes up on their search, they might look, and if they look, they might make an offer my client is happy to accept. If they don't even see it as they're searching, I guarantee no offer will come in from them. So range pricing helps me capture these people's attention. Whether interest, desire, and action follow is anybody's guess. But they might, where without range pricing they definitely wouldn't.

This doesn't mean I should put a lower end price on it that is lower than what the seller is likely to accept. That is just a waste of everyone's time. A buyer sees a property listed for $400,000, goes to look based upon that representation, and decides to make an offer - then it comes back that the seller isn't willing to really consider anything less than $430,000. Furthermore, the seller's time has also been wasted by encouraging that buyer to view the property. If the seller is not willing to consider an offer at that amount, it shouldn't be listed for that amount. If I get offers above minimum asking price that I'm reasonably certain can consummate, I'll even suggest raising the asking price while we consider them or negotiate. If I have an offer on the table for $450,000, it's not likely to be available to someone only willing to offer $420,000, and it is not reasonable or intelligent to have it listed for $420,000.

In short, range pricing, properly done, is not repricing the home, and it is a good way to get the buyer and seller to the table. It is not appropriate for every property in every market, but for those it is appropriate for, it's a useful tool. Properly used in a seller's market, it can even help your seller get a higher price for the property than any single number asking price you'd dare use.

Caveat Emptor

Original here

It has become very trendy to ask for pre-approvals on loans, because so many escrows are falling through. Unfortunately, as I have explained in the past, Loan Pre-Approval Means Nothing, and prequalification means even less. Both are literally wasted paper. As far as actually meaning anything you can hold someone to, they're useless. Worse than used toilet paper, which was actually put to some useful purpose once upon a time.

I never trust either a pre-qualification or pre-approval unless I did it. As I've said before, there is no accepted standard for either. Furthermore, I doubt there ever will be. Agents aren't asking for these pieces of waste paper because they're concerned about their listing clients. They're asking for them to cover their own backside so they don't get sued when the transaction falls apart.

There's no way on this earth that you can promise that owner that the transaction isn't going to fall apart. Accepting any offer always has some attached risk. If the buyer can't actually get the loan funded, the seller is out of luck as far as getting that purchase price for the property, and you'll have to go back to square one.

This isn't to say that the seller is out the whole amount. The buyer risked whatever good faith deposit, which should be at least enough to pay the costs of carrying the property for a month or two. This isn't to say that the seller is necessarily entitled to the deposit or that escrow will automatically remit it to them. There's rules about that. But the contract is very carefully written to limit the amount of time before the seller is entitled to the buyer's deposit. If you're concerned that the buyer may flake, or not be able to qualify, the correct thing to do is negotiate more of a deposit and more favorable terms for it to come to the seller in the purchase contract. If listing agents were really trying to protect their seller clients from failed transactions, they'd be focusing in on larger deposits and trying to get them paid to the seller while the property is still in escrow. That's real protection for the seller. Of course, many buyers will walk away from such terms, meaning that it goes from a possibility of that listing agent getting paid to no possibility of that listing agent getting paid.

Buyers understand the deposit in cash terms. They scraped and saved this money in real time, dollar by dollar. It's real to them, and they don't want to risk it. You've got a better chance of getting $10,000 more on the price with most buyers than of getting a $1000 higher deposit, or more favorable terms for forfeiture. Of course, a lot of buyers choose to go unrepresented or use the listing agent to represent them. Both are silly, when you understand what's really going on. But demanding a high deposit, or harsh terms of forfeiture, is a good way of scaring off potential buyers. Savvy agents understand that an increased deposit is a way to get a better price for their buyers. If you require a high deposit and harsh terms of forfeiture, you are discouraging certain buyers, shrinking the pool of potential purchasers, thereby lowering the likely eventual price.

Of course, being able to negotiate a good contract is a major part of what an agent's getting paid for. In some circumstances, high deposit will be appropriate. For instance, if the buyers are getting a really good price. If I'm getting a property $100,000 cheaper than comparables around it, I shouldn't mind putting up a bigger deposit, or agreeing to more stringent terms for forfeiture. On the other hand, if I'm paying top dollar for the property, I'm going to be a lot more guarded. Mind you, I don't make offers without evidence that my clients can qualify for the necessary loan, but I'm going to want that seller to assume more of the risk of the transaction falling through. If they're getting a good price, they should be willing to. If they're not so willing, they're basically saying that the transaction isn't worth the increased risk. Remarks about having your cake and eating it too apply. I'm certainly willing to persuade my clients to offer a better deposit to get a lower overall price. But I'm also perfectly willing to tell an overaggressive seller to go jump in the lake if they want harsh terms for the deposit without my client getting something tangible in return. The reverse of each applies when I'm listing a property. If the buyer is offering - or willing to offer - a large deposit or terms that are generous to my client, I may counsel acceptance of such an offer where I wouldn't of an otherwise identical offer with a smaller deposit or less generous terms for its forfeiture. It tells me that the buyer is willing to risk something real if they can't qualify after tying up the property.

There is another alternative, if you are or have a loan officer that you trust. Get their credit information. After all, a buyer is in a position where the sellers are in fact considering extending credit. Income, FICO, credit score, other debts. Ask your loan person if they could do a loan for this buyer. Of course, if your loan officer is a bozo, or if the buyer's is, all bets are off under this option. Under RESPA, you can't make them so much as put in an application with any loan provider not of their choosing.

If the sellers are not concerned enough about the buyers' ability to qualify to be willing to accept a lowered sales price for better terms on the deposit, I'd say it's not very important to them. If they're not willing to keep looking for another buyer, they want to do business with this one, and they must be getting something worth their risk out of the prospective transaction.

I recently had an agent tell me that requiring a pre-approval was part of their due diligence. Nonsense. I'll go so far as to say it's preposterous. The deposit is real. Information on creditworthiness is real, if subject to more interpretation. Pre-Approvals and Pre-Qualifications are a waste of space in the file, approximately equivalent in worth to an attestation that there is indeed a screen door in this submarine. There is no rational reason to choose one buyer over another, or accept one offer and refuse another, that has its roots in the pre-qualification or pre-approval. There's nothing there that you can hold anyone responsible or accountable for if the buyer does not actually get the loan funded, and if there's nothing there you can hold anyone accountable for, it's not anything real. Which makes it purely a CYA on the part of agents. Some of them may think it means something real, but it doesn't. Those agents need to be educated.

I'll admit I hate being asked for pre-approvals, even though I should probably love it as the sign of an agent that doesn't know what they're doing. But all too many times in the current market, a listing agent that doesn't know what they're doing is a sign of not being in touch with the current market, that I'm spinning my wheels in any negotiations, because the listing agent has no idea what properties like this one are actually selling for. It feels like you're trying to get useful work done on a computer that's frozen up and gone to blue screen of death. Not useful, and not helpful to either my client or theirs. You do have the option of behaving like a recalcitrant mule. Nobody can make you stop, but it's not likely to be beneficial to your bottom line.

Caveat Emptor

Original article here

I just came across your article on unpermitted additions. I am having a really difficult time. We own a home in DELETED that we bought in 2006. It was listed as a 3/2 1400 sqft. We are now trying to sell it, had many offers, however, we found out that it is on file with the county as a 2/1. The city came and sent an order to comply telling us that basically 1/2 the house needs to be demolished! That it was not permitted. What does one do if the seller never disclosed? Is it possible that he never knew? Then what? Shouldn't our agent when we bought it have alerted us to this? We hate to fork out more thousands of dollars into this money pit. We bought for 700k and were listing it for 540k - so we are already losing a ton...then this happened. These additions were done 21 years ago - 4 owners ago! I know this is asking a lot, we are so desperate to find a solution, and nobody seems to know. Any advice or

Unpermitted Additions are a rat's nest of problems, and you are never certain of how it is going to work out because so much of the response is within the realm of bureaucratic discretion. You can't control what individual human judgment is going to make of your situation and how it will respond. I have seen situations where I thought there was no reason for doubt refused, and situations where I would have bet serious money against acceptance approved. I don't like it, but there are unavoidable risks you take in dealing with unpermitted additions. There is money to be made in dealing with unpermitted additions and making them legal, but you have to have a very clear understanding that there is a risk of major loss involved.

Your Buyer's Agent failed of due diligence not to inform you of this and the possibility of what you have now encountered in writing in a timely fashion to enable you to make an informed decision as to whether or not to continue the transaction before adverse consequences ensued. 99%+ of the time, I spot additions while looking at the property and 90%+ of them I can tell whether they were permitted.

Had you known before the transaction happened, or even when it closed, there would have been many actions you could have taken to protect yourself. Now, your options are far more limited. The only advice I can legally give you at this point is to talk to a real estate attorney. Chances are good you can sue the brokerage who represented you. Even if they were representing the sellers as well. You may also be able to sue the sellers and their agents because they should have been aware of the issue and properly disclosed it to you.

Had you known of the additions at the time you purchased the property, California at least has an innocent purchaser law. It won't protect you from having to remove additions that are unsafe or cause unsafe conditions (e.g violating setback requirements) but it will prevent your property from being re-assessed upwards. You bought a 1400 square foot 3 bedroom 2 bath, and your purchase price was for a property of those characteristics, so you should only be billed for taxes based upon your purchase price, rather than an additional amount representing what would be in another property additional square footage. Furthermore, they tend to work with innocent purchasers who bring the situation to their attention to see what can be done to bring the property into compliance rather that requiring the removal of the addition. But my understanding of the innocent purchaser provisions is that it has to be done within 3 years at most of the date of purchase (and not being a lawyer, I could be mistaken, so talk to a lawyer).

Had you known before you made an offer and been properly advised, odds are that you would not have made the offer unless you were getting a price that was simply too good to pass up. I hate discussing the possible upsides and downsides of unpermitted additions with clients simply because even in the most routine cases there is so much uncertainty that I can't offer even probability estimates of what will end up happening. It is a consequence of that individual bureaucratic discretion I was writing about earlier. It's probably better than any of the politically possible alternatives, but it removes predictability from the equation and it certainly provides motivation and opportunity for corruption.

Furthermore, because it is a source of uncertainty and risk, dealing with that uncertainty and risk and turning it into a certainty - in other words, a property that is fully approved as it sits - is an undertaking worthy of compensation. Lots of compensation in some cases such as this one. A property that's only permitted as an 800 square foot 2/1 is worth considerably less than the fully permitted 1400 square foot 3/2 next door even if they are otherwise identical, precisely because of the risk of precisely what happened to this person. Until the relevant agencies have fully permitted the additions, there is always the possibility that you will be forced to remove them. In extreme cases, I have heard of them condemning not just the additions, but the entire structure. I should also mention that even if the addition was completely to code when it was built, what governs whether the permit is granted retroactively is the code now, and I shouldn't have to mention that those codes have become progressively more restrictive.

Some additions are old enough not to require permits. Until about 1972 around here, this was the vast majority of all additions that happened. Unfortunately, it can be difficult to prove that the work was done before that date. If you bring the discrepancy between records and actuality to the attention of the assessor, you are more likely go be believed than if the assessor finds out through other means, but "likely" is not a guarantee and most people choose to hope the situation goes away on its own.

This is one of many situations that buyers get into because of the "store" mentality. You want to buy a refrigerator, you go to the refrigerator store. You want to buy a sound system, you go to the electronics store. People think this carries over to "I want to buy the house, so I'll go to the agent who has the listing" (i.e. the real estate "store"), not realizing the pitfalls of such an approach in real estate. The fact is that the first thing you need to find when you decide to buy real estate is a good buyer's agent, who will prevent the vast majority of these problems from biting you. And these problems do happen, a lot more often than most people realize.

Caveat Emptor