Buying and Selling: April 2018 Archives

This was a comment on Real Estate Sellers Giving A Buyer Cash Back. The interesting thing is proposing hourly pay instead of commission for agents.

That makes a lot of sense. Disclosing (net) cash back to the lender changes the purchase price, which also changes the buyer's basis in the property - sorting out the tax situation nicely as well. And when a buyer is bringing a down payment to the table, they should be able to vary it as necessary to keep the LTV where they want it.

Speaking of choosing buyer's agents, though, I wonder what your opinion is of paying one by the hour (instead of via commission)? In the future day when I might be in a position to buy, there's a local buyer agency (who actually maintains a reasonably informative blog about the local market) that has the option to work that way and I'd welcome a third-party perspective on the pros and cons.

My view of them is -

Pro:
1. For buyers is willing to do their own research and self-direct their search, they can get the specific parts of the buyer's agent package they want a-la-carte, without having to buy the whole package.

2. Since the agent's compensation isn't driven by the price of the property selected (or the commission a seller is offering) there's significantly greater incentive alignment between a buyer and their agent.

Con:
1. If the buyer/agent relationship doesn't work out for whatever reason, a buyer still ends up spending cash for the hours used.

He's got some good points. Here are some more that I see:

First off, when do you fork over the money? Up front? Is the up-front money refundable? How easily? This could quite easily be a tool for locking up exclusive business. They do a rotten job, but you've already got $5000 on deposit with them, so you figure you might as well get what good you can out of what you've got spent. Commissions are contingent upon an actual finished transaction. In other words, I've got to get the job done in order to get paid a commission. I don't have to get it done to get paid an hourly rate.

Second, it occurs to me that this may be something aimed at getting more money: The hourly pay on top of the commission. It never ceases to amaze me the number of people who don't realize that buyer's agents get paid out of the listing agents commission. This is called a cooperating buyer's broker (CBB) fee, and it is paid to the broker, who then sends a part of it to the agent. What happens to the buyer's agent part of the commission? Is it used as an offset, is it refunded point-blank (running squarely into the issue of fraud if there's a loan), or what? The most reasonable way would be as an offset against outstanding hourly, and the remainder rebated for closing costs only. However, 2.5 to 3% of the purchase price can be an awful lot for a buyer to pay in closing costs, even with seeding an impound account in California. The buyer is likely to end up basically using the money to buy the rate down further than is really beneficial, simply because there's no other benefit they can legally get out of that money. So I tell you not to waste your money buying the rate down too far, then I give you the choice of that or forfeiting the rest of it to no good purpose. Does anyone else see the contradiction here?

Third, what is the basis for billable hours? Is it time actually spent with the client, or is it time spent working on the client's file? If the client isn't present, how does the client verify the figures?

The time I actually spend with clients is a fairly small proportion of all the work I spend on them. Maybe 20 percent, at the very most. Consider the parable of the iceberg: What you get is a lot more than what you see at first glance. Last week, I spent six hours looking for one set of clients, and another couple hours on-line winnowing before that. It took us less than two hours to view the properties I decided were worth showing them. Do I charge based upon my time spent, or based upon actual face time?

Now ask yourself, does the basis for billable hours constitute a hindrance to effective job performance? I have thought about it, and "face time" billing would cause most agents - and their supervising brokers - to be a lot less generous with their "file time". But "File time" is what makes a good agent. If I bill based upon "file time", I've got to be able to show what I did with that time, and I'm going to be running head on into clients who won't believe I spend the time I've spent, or at least say they don't, no matter how good the documentation. But does billing by "file time" give agents incentive to pad their time sheets? It seems likely to me that it would. Does billing by "face time" give agents an incentive to go as slowly as possible? Seems likely to me that it would, when the clients incentives are directly opposite. Not all agents would abuse either one of these, but enough would.

Here's another issue: Agents don't get all of what they "make". Brokerages have expenses, and they're entitled to make a profit on what they provide. Agents individually have expenses, some of which are fixed, and some of which are variable. If we work on an hourly basis, how much do we add for overhead? Are the clients going to be receptive to it? Even if I bill by "file time" there's a lot of stuff I couldn't bill for, but is nonetheless essential to the proficient practice of real estate. As any accountant or business school graduate will tell you, you have to recover the costs somehow in order to stay in business, and the way they generally do it is by building an overhead allowance into billing. I occasionally do consulting work at $150 per hour. Even with the more efficient, longer relationship of finding a client a property, I'd need to bill at least $70 per hour to end up with a middle class living at the end of the month. I strongly suspect most folks wouldn't be inclined to pay those kind of wages without evidence of value provided in advance. This would discourage clients from signing up with newer agents or brokerages who might very well do a better job than someone long established who has gotten lazy. Without a proven track record (as in "known to them"), how are you going to persuade the average schmoe who has only been told that, "Real Estate agents don't even need any college!" to fork over $70 per hour before they've seen the work? Commissioned salespersons have to get the job done before they get paid. Not so hourly workers. I realize business people do it all the time, as I've been on both ends of that, but most folks aren't business people, and even the ones who are tend to take a different approach to their personal affairs. Finally, can I really justify billing my consulting work $150/hour while only billing actual buyer clients at half that rate? I'm not going to reduce the consulting rate. If my time is worth $150 per hour (as my consulting clients have told me it is), it's worth $150 per hour. You willing to pay $150 per hour for my expertise, sight unseen? Other people have and will again, but that enlisted military man that walked into our office this afternoon might have some difficulty. I suspect most people would rather let me keep the buyer's agent commission. What if we're billing by "face time"? I'd have to charge a much higher number of dollars per hour to pay for my preparation time. Fact.

Let's ask if most people are likely to be adult enough to pay for something everyone else is offering "free", or at least where they don't have to write a check for money they have painstakingly saved? If the abomination that is Internet Explorer doesn't persuade you on that score, I've got my experience with Upfront Mortgage Brokers to fall back upon, and I can tell you that the answer is most emphatically no, at least in the aggregate. Every time I've had somebody ask about doing a loan on the UMB mandated basis of known fixed compensation, they've ended up canceling the loan. The UMB actually lets me offer cheaper loans than my normal "fixed loan type - known rate - guaranteed costs" because the client bears the risk of late loans, somehow mis-adding adjustments, etcetera. With UMB, I agree to get the loan done for a fixed amount of total compensation - but the clients know what that number is, and it isn't what most people think of as "cheap". With my normal guarantee, I assume the pricing risks, but I have to include the costs of those risks in my retail pricing. Upshot: The loans are slightly more expensive, but people like them much better. In fact, they can't sign up for them fast enough. The only possible reason I can find for this difference is that they don't have an explicit figure for how much I and my company are making (gross - the net is much lower).

Choosing or not choosing a loan based upon the fact that it seems the loan company is making a lot of money is a great way to shoot yourself in the wallet, but you'd probably be amazed at how many people do it. People tell themselves that the loan company is "making way too much money" off their loan and end up choosing the lender who offers something at a higher rate that costs thousands of dollars more - but doesn't have to disclose how much they make. I've not only seen it in action - it's been proven by government research. here is the research paper from the FTC. (Thanks to Russell Martin of http://www.smartmortgageadvice.com)

All of the preceding are not reasons to refuse to offer hourly compensation. They are simply reasons why I wouldn't expect a lot of it. The final consideration is this: Most agents are independent contractors, not hourly employees. Would hourly compensation create a situation where the Labor Board would rule that this hourly pay pushes agents over the line into an employer-employee relationship with their brokers? Given how most brokerages require their agents to do other things that are on the list of bullet points of statutory employees (regular required meetings, etcetera), it seems likely to me that it would be enough extra that FLRB might well rule that the agents involved are now statutory employees. This would change everything about the broker-agent relationship from its long-established norm (Brokerages would have to pay overtime, Social Security taxes, minimum wage. Holidays. Minimum time off. Etcetera. They might even have to deal with agent's unions). I don't say that agents couldn't work on an employee basis, but all of these added costs to the brokerage would certainly tend to make the wall of getting started higher for new agents, and harder to negotiate, thereby artificially restricting the number of agents. This would have the effect of limiting competition. I don't think that's a good idea for consumers, although the big chains would certainly love it, as it would make it harder for independents to compete.

If you think paying by the hour is a way to get superior real estate services cheaper, I have some land in Florida. Who's going to charge low hourly rates? Unprepared, less qualified agents. It might work out to be a little less, and people who have the intestinal fortitude to move quickly without being goosed on the biggest transaction of their lives might save a little bit in that the agent or brokerage's total compensation is a little less than it otherwise would have been, but where is the level of the value they provided in order to earn that money likely to be? I submit to you that I have reason to believe it would be considerably lower in the aggregate. More than enough lower to place their patrons in the unenviable position of buying the real estate equivalent of the Yugo.

In short, I see a whole lot of drawbacks, many of which are fairly well buried, while only a few advantages, which may be obvious but are outweighed for the vast majority of the population by the drawbacks. I might be willing to do it for the right client who asks, but I'm certainly not going to advertise it.

Caveat Emptor

Original article here

When we sold our home just over a year ago we were talked into selling for a bit more than the original offer so the person could get money back to do renovations... I objected based on percentages and stuff and my realtor and the other realtor agreed to commissions based only on the original agreed to asking price. Then I could not find any other reason to object, after all, if the loan officer was willing to loan that much money, what reason was it for me to say nay?

But now I hear it is illegal to do this? Yikes? Have you heard of this?

What should I do now?

The same thing anyone should do when they discover they may have inadvertently violated the law: Talk to a lawyer.

For all of this article, please keep in mind that I am not a lawyer. I don't even play one on TV. Not in California nor in any other state, and the laws and precedents can be different from place to place. So please double check everything with someone who is a lawyer, and if there is a conflict, follow their advice.

That said, my understanding is that it is not illegal per se for a seller to give a buyer cash back. If I hand you $500,000 cash - or something worth $500,000 to you - and you hand me back title to the property and $50,000 cash, or something worth $50,000 to me, there is absolutely nothing wrong with it. It's a free exchange, willingly agreed to by competent legal adults. No harm is done.

Where illegality does come into it is when there is another party to the transaction to whom it is not disclosed. In most real estate transactions, there is a lender involved. That lender is loaning what is usually a very large sum of money based upon the representations which were submitted to them. To intentionally and materially falsify those representations in order to persuade a lender to make a loan they would not otherwise make is a textbook case of FRAUD. Loan fraud is, literally, a federal offense. Go to jail for a while, and be a convicted felon for the rest of your life. Whether it's done by lying (stating something that isn't true) or by omission (failure to inform the lender of relevant facts) does not matter. Furthermore, due to the fact that fraud is a felony, there's a good likelihood of adding conspiracy in there - another federal felony offense.

The potential offense here is in failing to disclose the cash back to all parties in the transaction. If it is disclosed to the lender and issues the loan anyway, there is neither a criminal offense nor a civil tort, at least according to my best understanding.

The reason this fraud happens is because if the cash back is disclosed to the lender, then they will treat the purchase price as being the purchase price less the cash back amount. If the purchase contract says $400,000, but the seller is giving the buyer $20,000 back, it isn't really a $400,000 purchase price, is it? Net to the seller is only $380,000. Net cost to the buyer is only $380,000. That looks like a $380,000 piece of property to me, not a $400,000 one. The lender will take the same point of view, and base all of their calculations off of a $380,000 purchase price at most.

What that means is that if the buyers are not putting at least $20,000 down, they are over 100 percent of the value of the property. Which means the borrowers loan amount will be reduced accordingly. In fact, as I have said in Seller Paid Closing Costs (or, When Your Prospective Buyer Has No Money), it's better for both the buyer and the seller if they don't do this, because it is in both of their interests to use the lower purchase price that results from making the official price lower by the cash back amount.

In short, this whole charade is worse than self-defeating if it is disclosed to the lender, because if it is disclosed the lender will only lend based upon the net purchase price: "official" price less the cash back. If the cash back (or equivalent things such as paying buyer debts) are disclosed to the lender, I cannot think of a reason to do it, because whatever purpose you wanted to achieve with the cash back will be defeated. If the buyer wanted the cash to fix the property, they're either going to have to take it out of their down payment money or, dollar for dollar, out of the cash they got back, in order to have the same loan to value ratio that the loan was underwritten for. $400,000 official price minus $20,000 cash back is $380,000. So if the buyers put $20,000 down, the loan and the transaction would be doable only as 100% financing (not available as of this update except under a VA loan), and the net benefit the buyers got out of their down payment is zero. Alternatively, they can just take the $20,000 cash and apply it to the purchase price, over and above the $380,000 the lender will base their loan calculations on. Net benefit to doing all of this: Zero. Furthermore, there are drawbacks for both the seller and the buyer. It actually hurts them to do this if they disclose it to the lender.

What was the purpose of that $20,000 again? If it wasn't a down payment, the buyers will need to come up with $20,000 for a down payment from somewhere else. If it was a down payment, well, why not do the transaction "straight" in the first place? I assure you that a lender to whom this is disclosed will see it this way. Why not just reduce the official sales price by $20,000, pay less in commissions, lower fees, less capital gains, and have the buyer have a lower sales price, which translates into lower property taxes in a lot of places?

Which is precisely the reason this whole thing does not get disclosed to the lender. The buyers are trying to have their cake and eat it, too. They only want to pay $380,000 for the property, and have the lenders think that they paid $400,000, so they can borrow as if they paid $400,000. In other words, a material misrepresentation of the situation in order to induce the lender to make a loan they would not otherwise have made.

In short, FRAUD.

It is mostly the buyers, their agents, and loan officers who pull this kind of nonsense. Some of them are thoroughly blatant about soliciting this kind of crime. I don't know what they're thinking, but this is not harmless, this is not minor, and it has been explained to licensees. I can only presume a willful disregard of the rules. It can be difficult for sellers to even know who the buyer's lender is going to be, and it really isn't any of their business. Nonetheless, if the lender can show that sellers were a party to the deception (side agreements aside from the main contract are pretty much proof on the face of it), they can be dragged into the mess. Actually, sellers and their agents can be dragged in quite easily, side agreement or no, but side agreements are the equivalent of a smoking gun still in your hand while standing over a corpse. So if you're going to insist upon a side agreement, also insist that it be disclosed to the lender and proof that it was disclosed to the lender. Better still to make it all a part of the main contract. Optimum is not to give or ask for cash back in the first place. It sets you up for a criminal fraud investigation, and no matter how innocent you may be in fact, I have been told by someone who found out the hard way that they are no fun to endure. If you're a professional, it shows up in records as a complaint against your license, and I'm not even certain it comes off when you're found not culpable.

Caveat Emptor

Original article here

I keep running into people who paid money for a get rich quick seminar and are looking to buy property for zero down and immediately sell it for a $50,000 profit. Somebody With A Testimonial Told Them How It Could Be Done.

Sorry folks but the people with the real secrets to getting rich don't sell them for $199 at the Holiday Inn. They didn't do it during the stock market bubble, and they're not doing it now in real estate. As I told people back then regarding the stock market, don't confuse a rising frothy market with investment genius. And that rising frothy market has now changed. Deals like that do happen, but they're always less common than the People With Testimonials will admit, and they are snapped up quickly. Usually they never make it as far as the Multiple Listing Service. Before they're even entered into the database of available properties, they are sold, and they rarely fall out of escrow because the people who buy them know what they are doing.

Consider, for a moment, yourself on the opposite side of the transaction. You're not going to intentionally sell your valuable property for less than it is worth, are you? And if you're buying, you're certainly not going to pay more than market value, are you? Remember that Wile E. Coyote ended up at the bottom of the canyon under a rock for more reasons than that the Author was on The Other Side. "Super Genius!" Says so right there on the label. But betting large amounts of money on The Stupidity Of The Other Side is a mark's game.

About the only reliable source of "quick flips" for profit are distress sales. In no particular order, most of these are people in foreclosure, estate sales where neither the estate nor the heirs can keep the payments up long enough to sell normally, and where somebody's been transferred and has to sell now. The requirements are that they have large amounts of equity, not short sales or even lender-owned property, and the need for a quick sale.

These people get mobbed by prospective buyers, and by agents looking to represent them in the sale. Everybody wants something for nothing, and one of each group is going to get it. One agent is going to get a transaction where if it gets as far as the MLS, all he's got to do is type it in and bingo, the buyers will line up. One buyer is going to get to buy below market. Usually, they're the same person. The multimillionaire brokers all usually each have at least one going on.

The issue for these buyers in distress sales that is rarely addressed until it gets to actually making the deal is that they're going to need a certain amount of cash that they are prepared to lose. Putting myself in the position of the person who has to sell, I'm not going to give this person the sole shot at buying if I'm not pretty certain he can deliver. The only way to measure this is cash - how much they can put down on the property. How much of a deposit they can make that I can keep if they can't qualify. Remember that in this case the one thing a distress seller cannot afford is a buyer who can't consummate the deal quickly - unless the seller is going to get to keep something substantial for the experience. If you don't want to buy on those terms, than at that price someone else will. The multimillionaire real estate brokers, for instance. There are a lot of people who make a very good living at foreclosures because they go around from foreclosure to foreclosure offering cash for a below market price. Matter of fact, they pretty much saturate the foreclosure market. The chances of a seller in this position accepting an offer without a substantial cash forfeiture for nonperformance are basically identical to the chances of them having a listing agent that doesn't understand the situation. And quite often, that listing agent makes an offer themselves, in violation of all that is ethical.

Get religion about this point: There is ALWAYS a reason for a low asking price. Usually, a noticeably low asking price should be even lower than it is. Unless they're a philanthropist looking for some random person to donate money to, this seller wants to get as much for the property as they can. What they're hoping for is a buyer who doesn't know what a really bad situation they're getting into. "A cracked slab? How bad could it be?" is probably the classic example of this (The answer was about $300,000 in one case, but it could be as low as $20-25k). These sellers have been dealing with the situation. They've had a reason to become intimately familiar with the problems. They're hoping for an unsuspecting buyer whose agent wants an easy transaction and will not explain to them, or simply does not know, what those buyers are getting themselves into. I could certainly keep my mouth shut and do more transactions, easier, if I didn't take the time to tell my buyers everything I know about what they're getting into. I just had a buyer who loved the floor plan so much on a property with mold infestation right out in the open that he wanted to make an offer, even after I told him "Anywhere from ten to two hundred thousand to fix, maybe more, and probably at the upper end of that because you can see how it has spread". Luckily, his wife talked him out of it. The universe knows that most of these good deeds don't go unpunished. But that's what I'm theoretically getting paid for, and as often as I do my job and it causes them to get angry and I don't get paid, it's preferable to the eventual consequences of not doing the whole job and getting paid for it.

There's a newsletter I get from the State of California every three months. It's always got a long list of people who are losing their licenses. So if your agent tries to really explain something like this, listen to them. They're not trying to talk you out of the Deal Of The Century so that someone else can get it (the Deal of the Century in real estate comes around surprisingly often if you can afford it). They're trying to make certain you go in with your eyes open. It's likely to be a better agent than the guy who thinks "Okay, I've told you that the hill is known to be unstable, so I'm covered. It's not my fault that you didn't instantly understand all of the implications."

(On the Mold House: In the meantime, I called and left a message for the agent, and she returned my call and left a very accusatory, defensive message about "What is the documentation for your accusation of mold damage?" Opening my eyes, you silly ostrich. It's clearly visible - Eeewww! - right there, and there, and there, and there's moisture coming out at the bottom of the wall downstairs. My guess is that it's coming from the standpipe in the walls of the upstairs hall bath. I look forward to seeing her name on the List of Dishonor)

The typical property where there is real potential for quick profit is going to require work. Work as in physical labor that you're going to have to do, or pay someone else to do. Not to be sexist, but "The husband died (or became disabled) and the wife couldn't keep it up," is a cliché because it is so common. Sometimes the work is easy - carpet, new paint, clean up the yard and bingo! The property jumps in value! Sometimes the work is harder, and the profit is larger. And sometimes the buyer is basically going to have to tear the house down and start over. There is always a reason why the seller didn't do the work so they could make the profit themselves. Sometimes it's because they're lazy, sometimes it's because they can't. Sometimes it's because the work was risky, sometimes because it was expensive, and sometimes it's because the seller can get some poor fool to buy it who doesn't realize that they're going to have to make an investment that isn't worth the payoff.

Caveat Emptor

Original here

I have found your blog to be very informative. I was out riding my bike and rode past a house for sale. In a few minutes of Internet research I've found out a bit about it. The property is bank owned and it sounds like a property in need of repair. However the information I have found out doesn't add up.

From a real estate web site listing recent sales in the area, I found out that the property last sold for 5% less than the asking price. Apparently the sale happened in October.

The house is now listed in the local MLS service, and the text of the listing leads me to believe that the house was listed in December. It seems from what I have read on your site a foreclosure takes at least 3 months, and this house apparently was back in the hands of the bank and listed two months after it sold.

The house is priced well below the market and within my budget, but that the bank got it back that quickly raises a giant red flag for me. Also, given that the MLS listing says the sale is as-is and that there are no contingencies allowed raises another red flag.

How if they don't accept contingencies do you do a home owners inspection? Pay for one before making an offer, and risk you'll be throwing the money away if the seller doesn't take your offer? Or do a home inspection after they accept your offer, and forfeit your deposit if the inspection covers up a big problem.

Actually, foreclosures are perfectly fine for a first time buyer if you've got the wherewithal to work with them.

Lender owned, which means it didn't sell at auction, is an entirely different story than buying at the auction. You can make offers with contingencies for inspection, usually for seven or ten days, and providing it's an attractive offer otherwise, the lender may very well accept. You're always risking the inspection money on any property, because if it comes out that the house is messed up, you still have to pay the inspector. For lender owned (REO) properties, you don't need to forego an inspection contingency. Financing contingencies are also very doable - I've got one in escrow now with both, and I'm working on another. If it wasn't possible, they would reject the offer out of hand, and they haven't. Disallowing an inspection contingency makes the property worth a lot less, because a lot fewer people are willing or able to handle the risks involved. If your particular property is specifically disallowing inspection contingencies, it tells me they know about a problem, and it's almost certainly a big one. It can still be worked, but get yourself a really top-notch buyer's agent. It's worth paying them (or paying them extra) yourself if you need to, because you'll make more on this property, and they will earn it, because there's a lot more liability for them on this kind of property.

If you're looking at an REO, be aware before you even step onto the property that there are going to be maintenance issues. More often than not, there are even sabotage issues. Furthermore, because the lender doesn't live there and almost certainly knows less about the property than an inspection will reveal, they are exempt from transfer disclosures. They are not for Mr. and Ms. Upper Middle Class looking for the perfect house, they are not for Mr. and Ms. Just Barely Scraping Into The Property, and they are not for Mr. and Ms. Fumblefingers, Mr. and Ms. No Time, or even Mr. and Ms. Procrastinate. But if you've got the inclination and the skill or the cash to fix it, foreclosures can be quite lucrative. Foreclosures are always a risk - the more so because the current owner literally does not know and has no way of knowing what the condition of the property really is. That lender has never lived in it, so they cannot disclose things that most owners would know and be required to disclose. Furthermore, the lender usually requires some addenda of moderate obnoxiousness or worse, aimed at getting the deposit and limiting your opportunity to exit the contract - and making the property value even lower, as such addenda are a thing of negative value to most folks. But if you've got the resources to make that risk a manageable one, you can pick them up well below the price of properties with similar characteristics.

Lender sales are pretty much always "as is." However, I have successfully negotiated repairs and allowances for repairs upon multiple occasions. They are more limited in nature than most, due to the "as is" nature and most lender's unwillingness to put more money into the property, but it is very possible if you discover defects that make the property less than fully inhabitable within the definition of the law. Hot and cold running water, working electricity and heat (Not air conditioning, however), total enclosure of the dwelling area, and active fire hazards can all be negotiated even in "as is" properties. There really is no such thing as a pure "as is" sale.

You might also want to read my article, "Why There Is Money in Fixer Properties" if you haven't already.

Caveat Emptor

Original article here