Buying and Selling: March 2019 Archives

There are two sorts of buyer's agency contracts, exclusive and non-exclusive. Note that this has nothing to do with Exclusive Buyer's Agents, who do not accept property for listing. I disagree with their reasoning on the virtues of doing so, but I can see a reasonable person making the arguments that they do. Despite the fact that ninety percent of my business is as a buyer's agent, I have no plans to become an Exclusive Buyer's Agent. The line their organization takes is that agents tend to work on behalf of their listing clients, neglecting buyers even when they're representing them as well. To be fair, I do see that happening in the industry. The solution is quite simply to refuse Dual Agency. I get referral business by making each individual client as happy as I possibly can, not by hosing one class of clients so that I can make another that little bit happier. I'm only on one side of a given transaction, and my clients will tell you I'm not in the least hesitant to advise them if something isn't quite like I would like it to be. Furthermore, I learn things by listing properties - things that I can turn around and use to help my buyer clients - just as I learn things by representing buyers that I can turn around and use to help my next set of listing clients. Without that feedback between the two very different tasks of representing buyers and representing sellers, I'd be a much weaker agent, whichever side of the transaction I was on.

Some states permit agents to call themselves "exclusive buyer's agents" if they work with exclusive buyers agency contracts. An exclusive buyer's agency contract, however, does not mean that all of that agent's business comes from representing buyers. It means that they require buyers to sign a contract that essentially prevents those buyers from working with another agent. An exclusive buyer's agency contract says that no matter which property these buyers buy during the period it runs, that agent will get paid. End of discussion. Since the buyers accept responsibility to pay the agent if the seller or someone else doesn't, which isn't a problem if there's only one buyer's agent, because it is in the seller's interest to pay the buyer's agent. However, what the seller pays only covers one agent, so if there's a second agent involved, the buyer has to pay that second agent out of their own pocket. This essentially constrains them to work with the agent they've given that exclusive contract to. Many very weak agents require exclusive buyer's agency contracts because they're scared of the competition - they know they don't measure up, so they cut the competition out by binding them with an exclusive agency contract. They've got good advertising campaigns in effect, good networks of people, whatever - the essential element in their strategy is that the prospective buyers talk to them first, before those buyers understand what's really going on. Not to mention that this does, in some states, allow them to designate themselves as "Exclusive Buyer's Agents." This is confusing nonsense, and not beneficial for consumers.

There is, however, an alternative. This is the Non-Exclusive Buyer's Agency Contract. This is a standard contract, available in all fifty states through the work of the Association of Realtors (self-interested dinosaur controlled by major chains though the organization is, it does do some beneficial work). In California, it's put out as a part of the WinForms program of standard forms, and I suspect the same is true elsewhere. When you strip it of all the legalese, what it says is that If you buy a property that agent introduces you to, then that agent will be entitled to a buyer's agency commission. Notice that construction, straight out of you high school geometry or logic course? If A then B. If not A, then nothing. In other words, if some other agent introduces you to the property you buy, you owe this agent nothing.

Consumers can be working with literally any number of prospective buyer's agents through non-exclusive contracts, and be perfectly safe. There's only going to be one commission due - to the agent who actually gets the job done. Because of this, consumers can sign one of these and start working with any agent, safe in the knowledge they're not stuck with that agent if they find out they're not doing the job they should. The only thing consumers are giving up is the ability to cut out the agent who actually finds the property they want to buy at a price they're willing to pay. Since this is the hardest, most difficult, most time consuming and most liability ridden part of a buyer's agency job, this is only reasonable. You don't go down to the premium mechanic, have them fix your car, and get out of the bill by paying the cheap shop on the corner. That is the real work for a buyer's agent, not the paperwork of the offer and escrow period, or the gladhanding, or even the showing. The ability to recognize and negotiate a bargain are closely related, however, so even if you get a lower buyer's agency commission by cutting out the agent who finds the bargain, or a cash rebate, you're likely to end up paying more overall for the property. How is saving one or two percent and missing out on five percent, ten percent, or more a good investment? The lowest difference I've made in the last year was over fifteen percent, by CMA of properties sold. That's what a buyer's market will do for you. But you're unlikely to find the agent who makes that kind of difference in your area first time out of the box. The non-exclusive buyer's agency contract lets you give every agent you meet the same chance to earn your business - which means consumers get to force the agents to compete on the basis of who actually does the job!

This makes signing such an agreement a bet the consumer literally cannot lose. In fact, the more such bets the consumer makes, the better it's likely to turn out for them. The weaker agents will self-select out of the process in most cases. What this means in plain every day talk is they won't exert themselves because they know they're not likely to end up with the business. The consumer who signs ten non-exclusive buyer's agency contracts might have, at most, two or three agents who actually work for the business. The others simply won't. They know they can't compete, and simply won't bother. Actually, most of them won't sign the non-exclusive agreement. They'll try to talk you into an exclusive agreement, but don't let them. For the consumer's part, they can simply keep looking for agents until they find the ones that will compete.

Indeed, it's only when signing an exclusive contract that consumers are making a bet they can lose. Not only can they, they are extremely likely to. Remember the ten non-exclusive contracts you signed in the last paragraph, out of which you got two agents who were willing to actually do the work? Look at that the other way around. Eight out of ten didn't, and the real proportion is probably higher than that. So if you sign an exclusive buyer's agency contract, those are the kind of odds you're facing. Eighty percent or more chance you're locking your business up with an agent who won't really do the most important parts of the job. I get calls from these people's victims all the time, asking me to work for them without any chance of getting paid. My answer is no. I'm perfectly willing to compete for the business, but I'm not willing to work without pay so that someone else can get paid. I'm eager to make the bet that I can out-compete other buyer's agents, but if someone else has already been awarded the gold medal, I'm not going to so much as head for the stadium for that particular event - I'm looking for stadiums and events where the gold medal is available to me. How hard do you think the person who has been pre-emptively awarded that gold medal is likely to really work for you? If the answer you got is, "not very" then you understand why you shouldn't sign an exclusive agency agreement. But buyer's agency is one competition where "time in the competition" doesn't control who wins. If you don't award that gold medal before the competition is held, good agents will compete, and they'll work all the harder because if they don't measure up, you can always find some more agents who will. Isn't that what you really want as a consumer?

Caveat Emptor

Original article here

The answer depends upon what they're doing for you.

If you contact them because they're the listing agent for a property, they shouldn't ask you to sign an agreement at all. They have a fiduciary duty to that seller to get the property sold. If the act of asking to sign the agreement causes you not to buy, or not to view the property - something that cannot be known in advance - they have violated fiduciary duty. They've just caused potential buyers to be discouraged. That's as hard a violation as it gets. It doesn't stop a lot of agents, as I've written before about Tina Teaser and Sherrie Shark, but it is a straightforward, no nonsense, no kidding violation of fiduciary duty. It is also a marker for the informed buyer that this is a awful agent. You don't want to do Dual Agency, as I've written on many occasions. There are many reasons why you want a buyer's agent representing your interests, especially if it's a new development. There are all sorts of issues that will bite people without buyer's agents ten to a hundred times or more frequently. Issues that arise directly because of Buyer's who don't want buyer's agents are about nine of the top ten reasons why buyers get burned, including the top three or four.

If all an agent is doing is setting up an internet gateway, or search, that's no big deal either. MLS will allow me to have something like 120 client gateways at a time. I've never had half that at any one time. I can't serve that many people. I can only work with an absolute maximum of about six sets of full service buyers at a time - and that's if I don't have any listings. A smart agent will quite happily set up an internet gateway on the speculation of getting a transaction out of it. I'll call or email these folks periodically to see if they want to look at anything, or anything has caught their fancy. I'm not investing any significant time with them; they don't count against my (self-imposed) limit of six clients at a time. In fact, I make a lot more per hour with these clients than any others. Indeed, those of these folk who only want me for the paperwork will ask me for a contract that says I will rebate part of any buyer's agency commission at that point in time. If my liability is less and I'm not putting in anything like the time I need to for a full service client, I'm perfectly willing to work for a lot less money.

If you come to me to put an offer in, I don't need a contract there, either. The purchase contract specifies that I'm the buyer's agent - I don't need another one. Some agents use this moment as an opportunity to "lock up the business" by insisting people who want to make an offer through them sign an exclusive buyer's agency contract, but there is precisely zero need for any kind of agency contract at that point in time. The agency is created for this offer by the purchase contract itself, either explicitly (as in the California standard contract) or implicitly, by agency law. There's absolutely nothing wrong, ever, with an agent who asks you to sign a non-exclusive buyer's agency contract. You can walk away from a non-exclusive agency agreement at any time, but an exclusive agency contract requires that you stick with them even if this transaction falls apart. Suppose they do something to sabotage the transaction? It happens.

It's a rare client who requires something I have to pay for, but It does happen. Mostly, it's fresh foreclosure lists when it does happen. I haven't been subscribing consistently, as right now the well-aged ones (at least four months old) are mostly better, but I know the ones that work for when I do have clients that want them. I can get them starting that day, and going back. I don't charge for this - but that's the only time I ask for an exclusive buyer's agency contract. Not only am I putting out a significant stream of money for their benefit, these people do count against the limit of six clients at a time I can work with - they count double! Working the fresh foreclosure lists is a lot more demanding than anything else I do, because it's all time critical. I can't put it off a day, and often not even an hour, even if there's something else going on with another client - it's got to be done NOW, and there are a lot of misses for every hit. It's kind of like being married to the ultimate high maintenance spouse. If that spouse is not willing to give just as much, nobody rational wants any part of that relationship. If you want an agent to put in that kind of work, you're going to have to commit to that agency relationship.

But the one common time a good agent will ask for a buyer's agency contract is when someone wants a real full service package. Property scouting is far too time intensive to do on speculation that you might want to do the transaction with me after I invest the time to find a real bargain. The agent has to invest usually weeks of time up front, culling out the bad prospects in favor of the better ones. This is, by the way, far and away the hardest work of the transaction, and the work that gets done has most of the liability of the process. A good agent - one who knows how good he or she is - will still only ask for a non-exclusive contract here. I'm perfectly willing to bet that I'm going to find you something you want to buy, and if I don't, then you owe me nothing. I'm eager to make that bet, as a matter of fact. I am not frightened of people who want to work with multiple agents. I know that the vast majority of other agents won't get out of their offices to go look. But if I do find something you want to buy - I take the time and do the work, and my experience and training spots a superior value - then I'm not going to countenance you then taking the transaction to some other agent. Kind of like a mechanic who gets the problem fixed - and then you decide to take the car to another mechanic. You're still going to have to pay the mechanic who actually solved your problem, and you're still going to have to pay the agent who finds the bargain. You don't think the agent did anything to deserve getting paid? Then don't buy that bargain property they found for you! But if you want to buy the property they found, then there is, by obvious fact, something particularly valuable, both about their property and about their work in finding it! If that were not the case, you wouldn't want to buy it.

So it's reasonable to be asked to sign a non-exclusive buyer's agency contract. As a matter of fact, agents that actually do this work have learned that if they don't get you to sign it, a very large percentage of people will then go to a discounter or rebate house, or even just buy the property "without an agent", thinking they'll get a better bargain that way. Not only will you get a better bargain through the agent who understands the property and the market, that agent can then stay in business for the next time you, your friends, or your family wants to buy real estate. That's a win-win. But trying to cut out the agent who found the bargain is a lose-lose. You'll get a cookie cutter transaction from someone who doesn't understand the market and can't bargain as well - you'll end up paying more, and if there comes a point where you should walk away, they won't know it and won't tell you if they do.

Caveat Emptor

Original article here

Section 1031 of the IRS Code has to to with tax treatment on the exchange of one parcel of real estate for another. It's similar to Section 1035 which covers most non real estate exchanges. Car for a car. Boat for a boat. Business for a business. But section 1031 allows indirect exchanges so long as you follow certain guidelines. After all, how often do folks want to trade two parcels directly? It happens, but not very often. Usually, if A is buying B's parcel, then even if B wants to replace it with another piece of real estate, it probably isn't owned by A.

Why would you want to do this? Taxes. No other reason but taxes. If the taxpayer makes the exchange according to the provisions, they defer the gain. But we're talking capital gains, not ordinary income, so keep in mind it's not worth going gonzo over. The maximum long term capital gains tax rate for most folks is 15 percent. Getting to keep 100 percent of your gains instead of 85 is worthwhile, and when we're talking sometimes about multiple hundreds of thousands of dollars or even millions, that's quite a bit of motivation. It's nice to be able to invest and use those (potentially) tens of thousands of dollars, rather than basically forking them directly to the tax man, but there are additional costs to the 1031 exchange that you would not otherwise pay, costs that vary between a low of about $4000 per property involved in a straight exchange or $7000 per property in a 'reverse' exchange, and can be significantly higher. This erodes tax benefit in a hurry.

Your primary residence is not eligible for 1031 Exchange. Second homes are severely limited in eligibility (general rule: You can't occupy it more than 10 percent of total occupancy, although you get up to fourteen days per year. Check with your accountant for details. Matter of fact, check everything with your accountant. This is just a basic overview, and the devil is in the details). Section 1031 is for investment property, of whatever nature.

Section 1031 is not for "flipping". I am not aware of any explicit minimum holding time requirements for 1031 exchanges in general, but the IRS looks hard when the held period is less than a year. Questions arising from Section 1031 exchanges are good jumping off points for general audits - the IRS gets out the big magnifying glass to go over your taxes. Be careful. If the properties are being sold between related parties, there is a two year minimum holding rule, and nobody can end up with cash. For this reason, 1031s with a related party transaction are tough. If it's a property you bought as investment that you later made into a personal residence (or vice versa) the minimum holding time is five years.

There are some significant complexities in duplexes where one unit is for personal use, or personal use dwellings where there's a home office. I've gotten to the point where I don't understand the attractiveness or value of a home office deduction for many people, but people keep insisting upon trying for them.

There are three major requirements for a standard "forward" 1031 Exchange. You can not have constructive receipt of the funds. You must designate replacement properties within 45 calendar days of the sale of the relinquished property, and you must consummate the sale within 180 days or before you file your tax return, whichever comes first.

Constructive receipt is a fancy way the IRS has of saying control of the funds. If escrow sends you the check, or if the check is in your name, you have constructive receipt of the funds and the 1031 will be disallowed. So what happens is that you need to pay a 1031 accommodator (most title companies have one) to act as trustee for the money, and the actual transaction is done in the name of the accommodator. If you see something about cooperating with a 1031 exchange at no cost to you as part of a sale or purchase, this is what it's about. Makes no difference to the other party in the transaction, but the Grant Deed has to be made out to (or by) the accommodator entity, not the people who are actually taking part in the transaction.

There are three rules I'm aware of to use in identifying replacement property. The 3 property, the 200 percent, and the 95 percent. Keep in mind that this is investment property, often commercial in nature, and that even within major metropolitan areas it can be difficult to replace the property with something similar within the time frame. This is one case where the law is a lot more flexible than most of the people. As long as it's real estate within the United States not held for personal use, the law doesn't care what the use of the property you replace it with is, but lots of folks are trying to find something as specific to their purposes as possible. Also, in hot markets, there may be difficulties created with finding a property you can afford and that the seller will agree to sell to you in that time frame.

Keep in mind always that we're not necessarily talking a straight one property for one property exchange here. It can be multiple relinquished properties for one replacement (in which case the sale of the first relinquished property starts the clocks), it can be one relinquished for several replacement properties, or any mix of A properties now and B properties later, where A and B are nonzero, whole, and positive. Counting numbers, to use the technical mathematical name. For every additional property in the exchange, you can expect to spend more in fees to the accommodator, exclusive of all other costs to the transaction.

The first method of designating replacement properties is what's called the 3 property rule. You may designate up to three properties of any value, and as long as you actually acquire one or more that fits the parameters within 180 days, you've met this requirement. The second rule is any number of properties but no more than 200 percent of value. The final rule, 95 percent, is basically worthless and a good way to get in trouble, because unless you only designate one replacement property, you're not going to be able to acquire 95 percent of the total value of the designated properties. Identification of these properties must be precise and unambiguous. "Land at the corner of First and Main" won't work. You need something like a legal description or an Assessor's Parcel Number (APN).

Finally, you need to acquire the replacement property within 180 days of selling the property, and before filing your tax return for the year. This can and often does require the person undertaking the 1031 exchange to be forced to extend their taxes.

Where the person making the exchange wants to buy the replacement property before selling the relinquished property, that's called a "reverse" 1031 exchange. It's basically the same concept switched around. You have 45 days to designate which property will be sold (usually not difficult), and 180 days to actually sell it, which may be a problem in slow markets. Reverse exchanges are also more expensive, as they require accommodaters to take title to an actual piece of land, and they are not, in general, for the weak of wallet. Any financing must be non-recourse financing, because the accommodater is in title and they're not going to agree to be on the hook for the value of the loan if you can't sell the property. This can also cause a requirement for larger down payments.

There are also "partial" 1031 exchanges, where you end up not only with a replacement property, but also something else you didn't have before. For the exchange to qualify as for full deferral of the gain, the replacement property must cost at least as much as the relinquished was sold for, the equity in the replacement property must be at least as large as the equity in the relinquished was, and the loan must be at least as large as the previous loan. If any of these three conditions is not satisfied, you've probably ended up with what the IRS code calls "The part of a like-kind exchange transaction which is not like-kind exchange" but most accountants and other people in the real world call "boot," as in "you've got this, and that to boot." Boot is taxable, so if there's a lot of boot, it may defeat the purpose of a 1031 exchange.

One final thing I should mention is that a 1031 exchange can force you to delay filing your taxes. If you start the exchange in December, selling one property, and concluded it in June of the following year by buying the replacement but filed your taxes on April 15th, the IRA will disallow the deferral. The 1031 exchange must be absolutely complete before you file your taxes for the relevant year.

There are a lot of pitfalls to 1031 exchanges, and with typically large amounts under consideration, the IRS is notorious for being hard nosed about all the particulars of 1031 exchanges, whether they are forward or reverse. Don't try this without the aid of a tax professional, and for real estate purposes, an agent who has a good understanding can save your bacon. But if you do fulfill the requirements, it can be a good way of keeping money in your hands that you can continue to have invested in your new property, reducing your mortgage on that property, further saving you money, where otherwise nobody would be happy but the tax collectors.

Caveat Emptor

Original here

Several times a month I get calls and emails. Sometimes, it's even people stopping in. "I've heard you're good at finding bargains." Well, yes I am. "Please tell me the addresses of some bargains so I can drive by."

Well, facts are cheap in the age of transparency. I will quite joyously look at stuff on the internet, even set up an MLS Gateway or feed for someone on the speculation that they'll come back to me later for a showing or to make an offer. Setting up such a feed takes very little time, and about the expertise of an eleven year old that has learned to fill out internet forms. Oh, and MLS access. Can't forget MLS access. We've got a system that lets me custom define the search area now - I can click the corners of a search area I want on a map, and it will return only the results within that area. It's a really neat feature, and using it takes about ten seconds of training, and maybe ten minutes to do the whole thing. I'll happily do it as the possible prelude to a limited service commission, and even if the prospects end up using another agent, I've risked and lost nothing significant. No agency contract required, or even asked. I've even done it for folks who didn't want to give me their phone numbers so I could follow up. If they come back to make an offer, my compensation will be set in the offer paperwork.

But good analysis, experience, and expertise are not free - or even cheap. Furthermore, my time is valuable - and you're asking for a lot of it. I might find three or even four real potential bargains when I spend a full day searching - and that's in a target rich environment. Furthermore, I've got a lot of experience and a lot of knowledge to draw upon that many agents don't, and I look at a lot of properties. I can winnow 100 listings on the internet to twenty possibles in about an hour, go through them in about five hours, of which I might show a client who has made the commitment to work with me six, with usually one or two standouts among those. The rest will have something that to experienced, knowledgeable eyes, are reasons why it is not a viable choice for these particular clients. Maybe it's overpriced and I have reason to believe the owner won't negotiate. Maybe the location or surroundings have an unsolvable issue - one reason you can only tell a bargain by getting out of the office and looking at property. Given the area I work, most often there's something going on with the property itself that's not worth what it's going to cost to fix. I love the older East County suburbs of San Diego - they are good places to live, and when you consider what you get for what you spend, they blow the rest of the county away as far as value. Furthermore, I think the conditions are getting right for the housing buzz to rediscover them. But anytime you consider structures that mostly vary from thirty to eighty years old, you have to watch for maintenance and repair issues, and it really helps to know what you're looking for. Furthermore, it is always necessary to understand the market the property is being listed in. The only way you can do that is by having been in the properties that have sold recently, and the only way you can do that is to go out and look at them while they are still "for sale" because it's not likely the new owners will let you in after it sells.

What I'm trying to say is that the fact of the existence of a listing on MLS is cheap - basically free. You want me to send you addresses of properties for sale meeting certain criteria, that's easy and I'm happy to do it, no strings attached. Anything like that, that can be done by automated computer search, is not a part of what I'm really offering for sale, and I'll give it away on the speculation that sometimes, I'll make something when that person comes back to me to write an offer.

But the ability to recognize a bargain and equally important, what is not - that's the largest part of what I'm really selling as a buyer's agent. Winnowing those 100 listings to a few standout values is a valuable skill. If you don't agree with this, you shouldn't need or want that skill, and you shouldn't be talking to an agent about finding bargains. For people that want access to that skill, there is a fee - they must sign a standard non-exclusive buyers agency agreement. This is precisely equivalent to the difference between a computer programmer giving away some old boilerplate code for free - but they want to be paid for a brand new custom program. This requires all of the same things: Expertise, analysis, experience, knowledge of the area and the current market, the time it takes me to build, run, and debug the bargain-finding program in consultation with the client, and everything else that's involved. The mental ability to do those things did not suddenly appear one morning and it does not maintain itself. Furthermore, the liability for doing this if I make a mistake is huge. Agent mistakes cannot be undone by simply re-writing a few lines of code to work correctly, and having the ability to sue me and my insurance company if I do make that mistake is a huge benefit to the client in and of itself. If they make the mistake, they're stuck - and to be blunt, the probability of a non-professional making that mistake is both much larger than most home buyers believe and many times the probability that I will make that mistake - while if I make that mistake, they can get a lawyer and sue me for everything they might have lost, plus court costs, plus other damages ad nauseum. The idea isn't to sue, but rather not to make that costly mistake in the first place. An amazingly large percentage of buyers make mistakes of a magnitude that I find incomprehensible, all in the name of saving a fraction of what the mistake costs.

The ability to recognize a bargain property is a valuable skill. If you disagree with this, what reason do you have for looking at properties before you buy them? Why don't you simply pick out the cheapest property that meets your specifications on MLS, make an offer, come to an agreement, and pay the price, all sight unseen? Remember, you're claiming that the ability to recognize a bargain does not have value. Why would you want to take the time to look if there's no value in it? When there are ten thousand identical items in a warehouse or on the grocery store shelves, you grab one and get on with your life. You might look at the label to make certain it was manufactured to fill the need you have. You don't bother opening the box - if it's defective, you can just exchange it for another. They're all interchangeable.

But that isn't the case even on everything in the grocery store. There's a reason they wrap meat in transparent plastic - so you can see the piece of meat you're buying. To view the cut, how much fat is on it, how large a piece of meat it really is, how fresh it is - in short, the value of the meat. If you know what good meat looks like, you've seen people that have no clue as to what to look for choosing crummy meat that you've just rejected. It happens most of the times when I'm at the meat counter, as a matter of fact. It's why the grocery stores keep putting out bad cuts of bad meat. Somebody who doesn't know any better will buy it.

The same thing happens in real estate. I have dealt with people who bought into just about every bad situation imaginable - and now they're trying to unload the results of that onto someone else at a premium price. When I list a property, it's even my job to help them do so. But a significant percentage wouldn't even be selling if they had made the right choice in the first place!

The point I'm trying to make is this: Because the ability to find and recognize a bargain is a valuable skill, if you want it, you're going to pay for it. You can either pay me consultant rates by the hour, or you can pay me by doing the transaction with me. In either case, you're going to sign a contract that spells out exactly what that pay is. If you want bargains I've already found, those are valuable also. I can use the basic information as a lure to attract other people willing to work with me. If you buy it and you are not my client, the simple physical reality is that it's not available for people who are my clients. You got the benefit of my expertise without paying for it - and those who are willing to pay for it didn't. Contrary to something I read by a listing agent the other day, I have no responsibility to market the property - I haven't accepted agency, sub-agency, or anything else. When I'm acting as a buyer's agent, I have no obligation to any owner to sell their property. And until some prospective buyers sign my agency contract, I have no responsibility to them as far as locating and evaluating property. So if they're not going to sign my contract - and a non-exclusive agreement is all either one of us needs - I have no responsibility to give them the benefits of my expertise for free, any more than a lawyer or a computer programmer does.

As a matter of fact, that non-exclusive contract is me betting that I will find something sufficiently above and beyond the market that they want to buy it - because if they don't buy it, the contract says I don't make anything because they don't owe me anything. It's me betting that my expertise will cause them to want to stick with me - because if it doesn't or they don't want to, there's no reason they have to. If that bargain I find isn't a bargain, they can walk away with no obligations. But if it is a bargain, they use me as buyer's agent. The only reason to refuse to sign a non-exclusive agency contract is if you're not willing to work with the agent who brings you the bargain.

And that describes most of those who call or email. When asked to sign my non-exclusive contract, they'll say, "I'm working with someone." To which the answer is, "No, you're not. They're not doing the job. If they were, you wouldn't have come to me. What you are asking for is no different than asking one lawyer to do for free what you're paying another lawyer to do, or asking one computer programmer to do for free what you're paying someone else for. If you didn't think that what I do was somehow valuable to you, you wouldn't have contacted me and we'd both be doing something else right now. So your choice is this: Do you want to stick with someone who isn't doing the job, or do you want to work with someone who will get the job done, and will give you permission to fire him if he doesn't?"

Loyalty has a place. It's perfectly fine to give your Uncle Harry a chance to earn your business. But if Uncle Harry gives you his business card and tells you to call him when you've found the property you want to buy (or a property you may want to buy), he hasn't earned your business. In fact, he's told you he's unworthy of it. That's not an agent. That's a transaction coordinator, which many agents will charge you extra for so that they can go out prospecting and gladhanding for other business while the transaction coordinator does paperwork - the only real work their office does. But full service should be a lot more than a transaction coordinator doing paperwork in the office - and the office should pay for that coordinator out of what they make, not charge you extra for it. In this scenario, what expertise are you really getting? The ability to fill out all the paperwork on a checklist? It is important - but is it worth the thousands of dollars to you? Or is the ability to find you a bargain while discarding properties that aren't bargains what's really worth what a buyer's agent makes?

If you want a bargain on real estate, work with the buyer's agent who finds bargains you want to buy. The principle is the same one that says if you want the ditch Charlie digs, you pay Charlie to dig a ditch, not George. If you want the haircut Jane gives, you go to Jane's shop for her haircut - not down the street to Mary. And if John the mechanic isn't fixing your car correctly, you don't pay John and then ask Dave to do the work for free. You take your car away from John and take it down to Dave, and pay him for the work he does. It doesn't matter that John's mechanic shop has nifty uniforms, a funny advertising campaign, or anything else other than the mechanic who fixes your car so it runs right, which they don't. Dave fixes your car so that it runs right, you pay Dave, and you go back to Dave the next time it breaks down. If the funny advertising campaign is worth giving John some money, that's fine. But you're still going to have to pay Dave to fix your car, and he's going to want you to sign his service contract before he does any real work. The same thing applies to when you want to buy real estate. If Uncle Harry isn't doing the job you need him to do, you fire Uncle Harry and start working with someone else. Don't tell me you want me to find bargains for you but you're working with Uncle Harry. Get Uncle Harry to find you the bargains. If he's not doing that, your choice is really very simple: Suffer with Uncle Harry, or start working with someone who will do the job that he isn't.

When I'm looking to buy professional services, I don't look for the office with the lawyer with the neat ad campaign, computer programmers who act friendliest, or the doctor who talks about how to draw customers into their office. I look for the office who will demonstrate their expertise, keep me there by demonstrating their knowledge of the expertise I need, explain everything I need to know (preferably before I need to know it), advise me as to what my best choices are and the consequences of those choices. I want the office that finds other, better alternatives and offers them to me. That's sanity. That's what's valuable to me.

The same principle applies to real estate. If you want to do the searching yourself, that's fine. Here's your MLS gateway, call me if and when something pops up that you want me to get involved in. But if you want real expertise on the buyer's side of the transaction, that gateway is not what you want and you're going to have to agree to pay the agent who gives it to you. Because it is valuable, and if you didn't think it was valuable, you wouldn't be asking for it. I am not what most people think of as cheap - no good agent is. But I'm a lot less expensive than using a cheap agent. Or a bad one.

Caveat Emptor

Original article here

There is no such thing as the perfect time to buy. The perfect time to buy would mean that you have all kinds of leverage, and can make sellers give you pretty much the deal you want, but prices are nonetheless rising rapidly so that you will have a large amount of equity the first time you need or want to refinance, or if you need to relocate.

These two conditions never go together. If buyers have all the leverage, they are certainly not going to opt for increasing prices. Sellers can gripe and moan about it all they want, but when there is too much inventory prices are going to fall until that that excess is gone. Supply and Demand. In 2003 and 2004, there might have been 4000 residential properties on the market locally at any one time. When I originally wrote this, it was over 22,000 and I've seen it up to 25,000. That meant 18,000 additional sellers were competing for no more than the same number of buyers (fewer by my count). If they don't really want to sell, if they just want to sabotage other sellers by adding to apparent inventory, that's no skin off the buyers' noses. If sellers want to actually sell the property, they've got to compete in order to attract those potential buyers. It's not like buyers just go out there and buy the property whose owner's turn it is to sell. They buy the best property for them at the cheapest price. So sellers can either compete by having a cheaper price, or they can compete by having a better property. Most house bling does not recover the money you spend on it, even in a seller's market, but it might give you the wedge you need to attract a buyer in a buyer's market - provided that your property is no more expensive than the comparables. Most sellers are in denial about this. They've got something a little bit better than the comparables, they want to ask $50,000 more, and then they wonder why their property isn't selling.

If you're looking for a time when property prices are increasing by twenty percent per year, by all means wait. Those conditions are called "seller's markets," because people who are willing to sell can get buyers to do pretty much everything they want, including pay more than the last seller got. Most sellers want to hold when prices are going like that, and buyers are desperate to acquire. High demand, low supply.

Trying to time the market so that you buy at exactly the moment when it hits bottom is an exercise in futility. Trying to "Time the market," whether stocks, bonds, or real estate, is a recipe for disaster. It's great if it happens, but it's sheer luck, and anyone who tells you different is lying. By the time people realize that prices are really going up again, buyers will come out of the woodwork and we'll be in a seller's market again.

Buyer's markets, where sellers outnumber buyers, do not last long, in large part due to the fact that once everyone figures out that prices are no longer declining, now everybody suddenly wants to buy. Inventory has usually been shrinking for quite some time before that happens.

Buy while the ratio of sellers to buyers is in the thirties, while you can pick and choose your properties, and if one seller won't play ball, the one down the street who's a little more desperate will. If you need some special consideration, like a seller carryback of part of the purchase price, you can find sellers who will be willing to cooperate because that's the only way they will get the property sold. If you wait until the market heats up and there are only five sellers per buyer, they're a lot more likely to tell you to take a hike with special requests like that. If I want cash, why should I loan it to someone with poor credit money at a below market rate if it's likely that I'll find another buyer in a week?

The time of year may not be optimum. Other things being equal, Christmas season is always the best time of year to shop for a property, because nobody wants to move the Christmas tree. Most people have enough extra stuff going on at Christmas that they don't want to add another major item: buying or selling their home. Those sellers who have their property on the market need to sell. Spring is the best time for sellers, right when things start to warm up (so the very best seller season happens earlier in San Diego than I understand it does in Minneapolis)

Finally, there is one more factor: The Mortgage Loan Market Controls the Real Estate Market. When lenders are being picky about what circumstances they will loan money in, and incredibly picky about the loans they actually fund, the people who can actually qualify under those standards can drive a harder bargain than when the standards are 'fog a mirror slightly' and therefore everyone qualifies. This means that if you're one of those folks whom the lenders will fund, or who doesn't need a loan, you'll be able to pick up wonderful bargains when loan standards are tight.

Caveat Emptor

Original here

People who talk about learning skills tend to discuss a model for learning called the conscious competence learning model.

It starts with unconscious incompetence. You not only don't know how to do something, you don't realize that it is a skill that requires learning. "Anyone can do that", people at this stage of learning will think, despite the fact that they never have. They have, in fact, no basis for comparison. A very few things are as simple as tripping over your own feet, but most aren't.

The next stage is the conscious incompetent. You still don't know how to do whatever it is, but at least you know that you don't know how. Maybe you've tried and fallen flat upon your face, maybe it's something that you instinctively know is beyond your training or ability. Back when I worked for the FAA and people would find out what I did for a living, it's was amusing to see how many people would immediately volunteer that they couldn't have done my job. For some reason, I don't get that now, despite the fact that the skills of being a good real estate agent are at least as difficult to acquire.

The next stage up the ladder is the conscious competent. Some preparation, supervision, a few botched tries, and then you do it right without anyone having to step in. But you've got to think - really pay attention, take your time and be careful about what you're doing.

The final stage is unconscious competence, where the skill becomes second nature. You're good at whatever it is. Most people over the age of two are at this stage as far as the skill of walking is concerned. They do it without considering how to move the muscles that make the legs and hips move. They walk whatever distance they need to without even paying attention. And here's an important point: Sometimes by not paying attention, people step on something or trip over something and get seriously hurt. They walk in front of a semi, or trip over the coffee table and fall through a window or just step on an oily patch that causes their feet to go out from under them and hit the back of their skull on the pavement.

It is my contention that nobody is up to unconscious competence when it comes to real estate.

In fact, if you think you've achieved unconscious competence at most of the core skills of real estate, you're almost certainly stuck on the first level - somebody who doesn't know what they don't know.

First off, real estate isn't one skill. It's at least half a dozen. The average client doesn't care about how good we are at attracting other clients. They care if we interact with them incorrectly, but I have yet to hear of a prospective client saying, "I want to sign up with someone who's great at prospecting for leads." They'll say things that amount to the same thing, like "I want to work with a top producer," or "I want to work with (insert heavily advertised brand here)" but there's a real difference of intent on the part of the consumer. They really don't care about lead prospecting competence per se. Yet this is probably the most discussed skill set on real estate websites. I don't understand why other agents think this is fascinating to clients, but by how often they talk about it, they evidently do. Maybe because it's one of the big focal points for every office - if you don't attract enough business, you're not going to be in the business. Nonetheless, clients don't really care about this one. You could be the worst prospector in the business, but somehow get enough clients to stay in business, and as long as you're good at everything else, the clients are going to be happy.

Then there are the interpersonal skills that most people have in fact developed by the time they're adults. Hello, how are you? Nice day, and so on from there until we get to the pinnacle of those skills, handling people so well that they never realize they've been handled. People care about this, and they know they care. Don't believe me? Whatever you do for a living, try calling your next prospect something nasty. You can't do real estate without these skills, but not only are they not the central job function for real estate licensees, but clients actually do not want somebody who is obviously too good at this. Why? They like the basic skills, but they don't like being played by sales persons, something that's happened to basically everyone by the time they're ready to buy real estate or get a loan. Nonetheless, many people choose agents and loan officers based upon feeling "a connection." *Buzz*. Wrong answer, thank you for playing. If a prospective agent isn't competent at the interpersonal dance, that's one thing. But 95% of all agents are quite good at it, and it doesn't mean a darned thing about their competence at real estate. Anybody with any competence at interpersonal skills can talk a good game in the office. They could be ready to crack that license prep course any day - not actually know a thing about real estate yet - and still manage to generate "a connection."

Then there's the paperwork and legal CYA stuff. I could name names of nationwide real estate firms that take months to cover these skills with new licensees, and brag about their training based upon that. The obvious snark that occurs to me every time I see one of their advertisements is, "How is being able to avoid legal judgments when you've hosed your client a virtue in the client's eyes?" In other words, it blows my mind that they actually brag about it to clients - and it also blows my mind that some people will actually choose them based upon advertising that essentially says, "We're good at the paperwork that allows us to not get sued for hosing our clients".

To be fair, paperwork is a real and necessary part of the career skills, but I'd like to see more emphasis upon actually doing a good job for the client, not disclosing everything in small print, hidden among 500 other sheets of paper at final document signing. There is stuff here that you're going to see on every transaction, or almost every transaction, but pretty much every real estate transaction is going to have something going on that is different from some hypothetical "typical" transaction, and if you aren't thinking about what you're doing, it's very likely you'll miss something important. Even if you are thinking carefully, you might miss something. People successfully sue agents every day, and the defendants are not all incompetent. Paperwork isn't a skill that gets clients a better bargain very often, and perfect paperwork doesn't mean the client didn't buy a vampire property or money pit, that they got a good bargain even if they didn't buy a vampire, that they sold for a good price in a timely fashion, or anything else except that the paperwork is perfect. The paperwork will usually tell them if they are careful enough and understand enough to read between the lines, but "careful enough" can be "reading documents for forty-six hours straight at final signing," and even then, it's pointless unless they've got the willpower to say "no" to the transaction at the last moment like that. Nonetheless, bad paperwork is what the attorneys of former clients find easiest to pin on real estate agents, and almost every judgment against an agent has "bad paperwork" behind it as the evidence. Paperwork is a necessary skill for agents, but it it's only evidence of a good or bad job - it isn't the good job or bad job itself.

Negotiation is a critical skill for agents, and many do actually study it. But for every agent I encounter who understands principles of negotiation, another is completely clueless and a third thinks negotiation is where you tell the other side everything about how the transaction is going to be. You should see some of the contracts my buyer clients were told to sign - take it or leave it - in the middle of the strongest buyer's market of the last generation. And these folks wonder why the property didn't sell. Actually, I'll bet that if you work with buyers, you wouldn't be surprised. I just randomly pulled up twenty listings in the zip code my office is in - and all but two had violations of RESPA right in the listing. Bare, baldfaced violations of RESPA - steering is illegal, no matter the form it takes. It's not only setting you up for a lawsuit, it's setting your client up for a lawsuit. If DRE wanted to put at least half the agents and brokerages in California out of business over steering, I think it would be pretty trivial. But I digress - I'm trying to talk about negotiation.

Everything about the transaction is negotiable, and refusing to negotiate anything can be grounds for losing an excellent offer. Price is not an independent variable, and it's not the most important of a series of completely independent points. It may be the central issue of a negotiation, but it influences everything else about the negotiation, and is in turn influenced by all those other factors. What does each side need, what do they want, what would they settle for, and what are they willing to give up in order to get it? If the answer to this last question is "nothing," then they must not want it very badly! There are many factors other than money, but they all inter-relate, and the person who can figure out something the other side wants that isn't money can use that to make both sides happier. Negotiation isn't just faxing offers back and forth, and in the context of real estate, it's a skill that takes a significant amount of practice as well as study to maintain. Furthermore, more than any other skill involved in real estate, negotiation never gets to be so strong a skill that you can do a good job without thinking about it. For one thing, on the other side of that negotiation is another agent who does the same thing. I always presume the other side is better at it than I am to start with. Evidence quite often proves this presumption to be nonsense, but you don't hose your client in negotiations by paying attention and being careful. Nor is there any metric for negotiation skills except how good the deal you get one particular client is, and since every property is unique, often the client has no real idea whether you should be nominated for negotiator of the year or pilloried for incompetence. I haven't heard of anybody being sued for poor or non-existent negotiation skills. I have heard of buyer's agents getting beat up by their brokers for doing too good of a job - lowering the commission.

The next skill is property evaluation. This is more important to buyer's agents than listing agents, but listing agents can benefit by knowing it as well. It breaks into several skill facets, each of which is a skill that requires instruction and practice. The most important facet of this is the ability to spot defects that are going to cost the client money - actual structural problems. Ask yourself: Is the fact that the agent tells you they're not an inspector going to make you feel better about buying a property where the roof caves in three weeks later? Is that going to absolve the agent of blame in your mind? Don't expect your agent to note everything that a contractor or inspector or engineer will - but they should tell you about everything they see, and they should see most of it, and it should come as part of a full service package, so you don't have to spend $300 getting an inspector out, or $600 for an engineer, not to mention put a deposit into escrow where you may not get it back for quite some time if the seller wants to be obstinate. This is a critical job skill - but you would be amazed at the number of highly agents whose advertising tells the world about how much real estate they sell who might as well be wearing a blindfold. Telling clients about defects makes it harder to really churn those numbers!

Furthermore, without a good agent who will tell you this stuff, you might have to do this multiple times. Instead, with a good agent you know about the problem before you consider putting an offer in - and instead of a costly drama that eats your life, you walk away unscathed and find another property that actually suits you. On the day I originally wrote this, I had persuaded a client to cross four properties off their list, all of which would have sent him through that cycle. Decorator's eye is another facet of this - helping the client stage a property - or helping buyers see the potential of a property despite poor staging. Poor staging wouldn't make nearly the difference it does if most agents weren't lacking in this truly important skill.

Rehabber's eye is related, yet a distinct sub-skill - helping the client see the property with a few changes, usually not very expensive ones. Location evaluation: How does the location of the property fit with the client's agenda? Schools, traffic, shopping, environmental noise and other factors. Sometimes, the client doesn't know their own agenda, as I have discovered upon many occasions. All of these are part of the core job function, all are skills that must be developed and practiced if you want them. They are also critical to how happy a client is going to be with an agent's work - particularly if you're working as a buyer's agent, as I usually am. But it seems that this whole group of critical skills gets neglected in favor of "Which property has one feature that makes Mrs. Client swoon with delight?" This approach is conceptually similar to "throw enough mud at the wall and eventually some will stick." Out of sheer frustration if nothing else. But I have yet to see a single brokerage train their clients for any of this entire group of skills. Indeed, most of the major chains seem to be doing their best to pretend these are not part of an agent's function. Here's the thing: I can get people to buy and sell properties without these skills, and never get sued successfully over them. But then it's completely hit or miss as to whether the client will really be happy with the property - and who do you think is going to get the blame if they're not? I had some clients insist upon buying property on the corner of two moderately busy streets last year - and I made certain to remind them of the traffic and noise throughout the transaction - giving them encouragement to change their mind if they weren't certain they were going to be happy with it. But I'll bet you a nickel they call me when it's time to sell it because these opportunities to change their mind also generated a real buy-in to the situation for them.

Marketing skill is more critical for listing agents, but buyer's agents need to know marketing as well. How do you get the attention of someone who will want to buy this property? How do you persuade them it's worth making an offer on? What are the available venues, and what actually works? Theory says that there is one buyer out there who will pay more for the property than anyone else - how do you get their attention or that of someone close to them? Get them to come look, get them to see value, get them to make an offer you're happy to accept, get them to carry through on the purchase? On the buyer's side, you've got to be able to counter the fecal matter - and I can count on the fingers of one hand all the properties I've been in the last year where I didn't find some obvious fecal matter in the way it was represented, or the things that the listing agent said in order to get it sold. (FYI: This fecal matter has an ugly habit of biting the disseminators later on.)

Did you think I was leaving market knowledge out? Here it is. How does the property compare to everything else around it? What's the general market for real estate like in the area? What else has sold lately, for how much, and what was it really like? It's too late now to get a viewing of all the comparables that sold within the last few months - the lock box is gone, the new owners have moved in, they're done with all that transactional nonsense, and the vast majority sure as heck aren't going to let random strangers poke around their new house. How many agents get off their backside, get into their car, go out and look, take notes, and remember? Most of the agents I've done business with never leave the office except for an actual showing generated by clients driving around, or surfing the internet, or even reading the "for sale" ads.

Showing clients only those properties they have asked to see is so backwards I have difficulty articulating precisely how messed up it is. A good agent knows the market, knows the comparables for sale, and knows how a given property compares. They might not have been in every single one, but they've been in enough for a good comparison. Patronizing an agent who hasn't done this, who doesn't make a habit of this, is like having half an agent - at most. How in the nine billion names of god are you going to help a client price a listing properly if you haven't looked at the competition? How in the name of ultimate evil are you going to know a property is or isn't worth making an offer on, and for how much? Yet people will do put up with this nonsense because they don't know any better. This is probably the agent skill that needs the most practice of all, and decays the most quickly if not practiced. There's this one neighborhood about three miles from my office that I haven't been into for almost three months, and I'm terrified I'm going to get a call for it before I can remedy the situation. There's nothing wrong with clients suggesting properties, and I firmly believe that no matter how messed up the property is, they should be given the opportunity to see any property that catches their eye - but doing that and only that takes zero advantage of the one thing good agents have that bad agents and 99.999% of the general public don't - precisely this expertise. It is this expertise that makes more difference than any other skill set in results for clients - whether selling or buying. You can't recognize either a bargain or the opposite without the context to put it in. You can't price a property right without knowing the competing properties and their relative strengths and weaknesses. But all too many people, both agents and general public, discount this difficult to acquire skill, thinking, "Anybody can do that!" Question: Which of the learning categories above does this place them into?

I don't know how many people I've met that seem proud to be stuck in unconscious incompetence. But just because you don't recognize the skill doesn't mean it doesn't exist, it doesn't mean that its lack won't bite you, and it most assuredly does not mean that its presence in others won't hurt you. For real estate transactions, to the tune of thousands of dollars at a minimum. Knowledge springs, not from the mental impenetrability of "Anyone can do that!", but rather from the admission that perhaps you might have something to learn.

Caveat Emptor

Original article here

One of the things I keep telling folks about the real estate market, whatever area you live in, is that it is controlled by the loan market. If you want to understand where real estate in general is headed, look at the loan market and the financial markets that generate them.

When I wrote this, the loan markets were in terminal panic mode. The lenders were looking for any restrictions they could slap on around the edges to mollify investors, and investors were shying away from any loan that had any element of risk. All non-governmentally guaranteed loans for more than 95% of value had disappeared, and the ones above 90% of value were very difficult to find and even more difficult to fund. This meant that VA loans and FHA loans were all that was left above 95% loan to value ratio, and stated income loans were dead, no matter how much sense they made for your situation, as nobody would fund them. Fannie and Freddie drastically curtailed their A minus programs (all but the first level of their expanded approval eliminated, and they don't want to actually fund even those). Outside of government loans, you've pretty much got to be A paper full documentation to get a loan at all.

This eliminates pretty much every type of loan that was a major player in the market when things were hot. It also severely restricts the numbers of new buyer in a position to buy. Since 100% Loan to Value ratio financing had been the almost universal financing vehicle for borrowers for the previous several years, this constricts the ability of prospective buyers to get the loans they need. Comparatively few people have money they could use for a down payment if they wanted to. Not everybody qualifies VA or FHA. VA requires military service, and FHA has policy limits on what they will fund.

Furthermore, all of the other loan programs to get 100% loan financing have gone away, and all of the supplemental programs to extend buyers' ability to qualify have rather sharp income limits, and those income limits are not going up at all. They actually effect San Diego less than most areas, but even here, they constrict the ability of buyers to qualify. Both the mortgage credit certificateand all of the municipal first time buyers programs have income limits that mean people can't make over a certain amount of income - and even if they have no other bills they can't qualify for the loan on property over a certain loan amount, because even if they have no other bills, their debt to income ratio will be too high from just the payment and taxes and insurance on the property. You can't cheat on this - all of these programs require full documentation of income. Above about $420,000, even if they conforming limit goes up, even if the prospective buyers make the maximum amount per year for the program and have no other bills, the people these programs are aimed at won't qualify because the debt to income ratio will be too high.

The moral of this story is simple: If you want to sell your property above a given price, you're not competing for first time buyers. You are competing for people who have sold (or are about to sell) their property for a profit and are now ready to move up. If the prospective buyers don't qualify for the necessary loan based upon debt to income ratio, they can't buy.

Any time you raise the price you want to sell by a certain amount, there are people that no longer qualify to buy your property. You have priced them out, and no matter how much they might want to buy your property, the fact remains that they cannot.

As for buyers making the median family income in San Diego of $81,800, their limit on loans is about $290,000. So unless they have a significant down payment, a family making $6000 per month is looking at a condominium. Just a cold hard fact.

There will always be buyers around the edges who are exceptions. People who have saved or inherited a substantial down payment in defiance of demographic trends. But those are the exceptions, and for every one of them, you have a dozen of more unqualified buyers engaged in wishful thinking. In the last year or so, I have spend a lot of time looking for loans unsuccessfully trying to get people into sustainable situations and save their property from foreclosure. At this point, until the lenders and investors calm down from their institutionalized panic, those loan programs aren't going to exist. Even having lots of equity may not help you unless you can afford a hard money loan.

Before you ask me what relevance this has to buying and selling, I'm going to answer: Every time a lending program goes away, there go some buyers who otherwise could have qualified. Right now, there is no stated income. Doesn't bother me much, as 95% or more of my clients have always been full doc, but for those who are used to the opposite ratio, it's the apocalypse. Ditto for sellers and listing agents who don't understand what it takes to qualify, and who price their properties as if the loan market for several years ago was still going gangbusters. When the property sits for months because the people who might buy can't qualify for that big of a loan, that's a problem.

With all this said, the people who do have the cash or the ability to qualify for a loan are in the driver's seat now. You may be getting tired of hearing this from me, but veterans can qualify for more loan than someone without military service for the same income due to the lack of mortgage insurance requirements. People with a large down payment are in an even stronger situation, and people who have both things going for them have an incredible amount of negotiating leverage. When the loan market will approve anyone who can fog a mirror, your competition is everyone who can fog a mirror. When the loan market wants to see guarantees and cold hard cash going into the property in the form of a down payment, your pool of available buyers is much smaller - and prices are lower because of it.

Caveat Emptor

Original article here

You see it all the time at open houses and elsewhere. People who desperately need buyer's agents, but think of Buyer's Agents in the same way they think of automobile sales folk, and that's the complete opposite of the way it is.

They don't want to deal with an agent, because an agent will use high pressure tactics, convince them that this property is the one they want even if there's better stuff out there cheaper, and trick them into signing on the dotted line. Or so they think.

Actually, the person they fear is already part of the transaction. They're called the Listing Agent, and they're the one you're going to deal with regardless of whether you want an agent or not. It is their job to get that property sold. They have a fiduciary responsibility to the owner of that property to get it sold for the best possible price in the shortest amount of time. They only responsibility they have to the buyer is that they're not supposed to lie, mislead, or conceal the truth. Any of those are tough to prove even for egregious violations. If they can sell the property for $100,000 more than neighboring properties in better shape are selling for, they have done nothing else except their job. They have no responsibility to tell you there's a better deal around the corner. To a listing agent, the only importance of a better buy three blocks over is to hope you don't discover it. Despite all of this, many people will insist upon making their offers through the listing agent.

Lest you think I am kidding or in any way exaggerating, consider this: Within five miles of my office are at least 100 Planned Unit Developments (PUDs) built within the last three years. These are legally condominiums, but they have detached walls. Most often, the developer puts up a 1700 to 2000 square foot two story dwelling, separated by maybe six feet from the next dwelling over. In many of these, the first thing most of the inhabitants do every morning is greet their neighbors in the next unit over, then get out of bed. Not that I'm against condos - I'm not - but the townhome I bought in 1991 has more privacy than most of these, and it's got a shared wall. The inhabitants of PUDs usually - not always - have a small quasi-private back yard, and the units may or may not have shared walls. The garage is always within the walls of the unit, because they are packed so tight there is no room for a driveway or outside parking. The developer slapped on false granite counters and travertine floors at a cost of maybe $300 extra, and with their in-house agents who dealt swiftly and efficiently with those who come to look, sold them for $100,000 to $150,000 more than comparable dwellings sitting on 8000 square foot lots and without a homeowner's association (and association dues) to deal with. Those PUDs are not going to be new forever - and as a matter of fact there are a much larger than representative percentage of the new owners trying without much success to sell them. Whether they decided they didn't like their neighbors whom they practically share a master bedroom with, they want a place with a yard where they can build a pool or even just a horseshoe pit, or that they want to paint the place a slightly different shade of off-white (and can't), they are finding out the difficulties, and trying to sell. But they're asking the same kind of prices they bought them for, and without the massive marketing campaign the developer used, it's not working. When you're trying to sell 20 units on what used to be two lots totaling half an acre, you can afford the kind of marketing campaign that pulls in the suckers. At $520,000 each for twenty units that cost you $150,000 each to build, if you spend $100,000 on advertising, you'll make it back in spades. Not so much if you spent that $520,000 buying one of those units and now the market has declined and you need $570,000 to break even - and I'm finding my prospects single family homes on their own 8000 square foot lots for $420,000, where they can spend a lot less than $150,000 putting in travertine if they've got to have it.

A Buyer's Agent is not the person who's out to sell you their property no matter what. That's the Listing Agent's job. A Buyer's Agent is there to represent the buyer's interests, the same as the Listing Agent represents the seller's. Buyer's agents aren't car lot sales folk. They're like the folks who make a good living representing people who don't want to deal with car lot sales folk.

Buyer's Agents don't make their living selling one specific property. They make their living helping people to find and buy the property that is the best bargain for them. It is a Buyer's Agent's job to point out all of the little and not so little stuff I talked about two paragraphs ago, as well as a lot of other stuff I haven't talked about here. Buyer's Agents make their living getting buyers a better bargain - just like Listing Agents make their living getting sellers more money for their property. Real estate is a lot more costly than automobiles, and a lot more games get played. The Buyer's Agent is the one with the responsibility to say "Slow down, let's stop and check out everything else that's available, and consider the state that the market is really in - and where it's likely to go," not to capitalize upon the emotion of the moment and get the prospect sucker's signature upon dotted line before they walk off the lot. So long as they stick to a real budget, that Buyer's Agent gets paid about the same no matter what you buy - and the happier you are when it's all over, the more likely it is that they will get paid again when you send them your friends, or when you come back again when you're ready to move up or buy an investment property.

This is not to say that Buyer's Agent's won't play games; this is why I use and recommend non-exclusive buyer's agency agreements to stop most of them. These agreements give the buyer's agent everything they really need - assurance that if they find the property you want, they will be the one getting paid the buyer's agent commission - while not committing you to work only with them. If they waste your time, don't get the job done, if they act more like a Listing Agent, or if you just decide they're not putting your interests first, you stop working with them and that's the end of it. Unlike the exclusive agency agreement which locks you in to dealing with that agent, and four months after the last time you see them you might still be obligated to pay them a commission on a property somebody else showed you, the non-exclusive agreement lets you go your own way, and so you have nothing to lose by signing it, unless you're the sort who will stiff someone who's done work for you. Let's face it, the Buyer's Agent finds you a property you think is worthwhile, you are doing yourself no favors to ditch them in favor of your brother-in-law who didn't or couldn't do the same, or the discounter who doesn't do anything, but generously allows you to keep half the commission which they did precisely zero good for you to earn. Who do you think will get you the better deal: The agent who went around with you to ten or fifteen properties (and looked at forty others that weren't worth your time) and knows the market that property is competing against, or the agent who only leaves the office to cash commission checks? Who's going to negotiate harder? Who's going to have more negotiating power? Which agent is more likely to get your the better total bargain? There are exceptions, of course, and sometimes the long shot beats the triple crown winner, too. But that's not where smart money bets when the payoff is structured on strictly one to one odds, as it is here.

Now buyer's agents do get paid, but it's out of the commission that the seller has agreed to pay no matter who sells the property, or for what price. Buyer's Agents will make more difference to the sales price - not to mention the quality of the property you end up with - than any reduction in price you might get by agreeing not to use one. They're out there in the market all the time. They know the market you're in, and they know the tricks in ways that you, the buyer, are not going to equal, unless you spend the time it takes to learn everything they know. And unless you're a buyer's agent yourself, you pretty much can't. You've got your own living to make. What are the chances they could do better than you at your profession? The odds are not good; Even if they have the book learning, they don't have your experience. Why would you think the situation is any different when the roles get reversed?

Caveat Emptor

Original here

One of the things people keep asking about is first time buyer programs. They exist, but lenders are not the first place to ask. Why? Because many, if not most lenders, actually charge a quarter of a point or so for first time buyers, in addition to their regular rates. They do this because so many of them fall out, and they want some money for their trouble. Also, interfacing with local first time buyer programs is a bit of a hassle, and it often takes much longer to close the loan, if it does close. Yes, you need to tell them if you are using a first time buyer program, but if you start at the lender you may get hit with the charge for your loan, and then find out at the last minute that that particular lender does not participate on the first time buyer program for that city.

The place to ask about first time buyer programs is the government of the city that you intend to buy in, usually the housing department, but sometimes the planning department. If you intend to buy outside of city limits, call the county housing department. Yes, you do need to know ahead of time where you're intending to buy. I know how many people hate to plan, hate to "limit themselves" and hate to do preparatory work, especially multiple sets with multiple cities if they're not certain where they will buy, but it's necessary if you want their assistance money.

Most first time buyer programs are funded with money that the municipality gets from the federal government. You'd think they would be similar, that funding would be consistent, and that participating lender lists would be mostly compatible. You could not be more wrong.

Once each city gets the money, they are still subject to federal oversight, but that is broad and there's a lot of latitude. One of the things that all of them have in common is that they charge a fee for a lender to participate every year. Unless that lender gets a lot of business through that program, it's not cost effective to automatically renew every year. I only routinely pay the fees for the much broader Mortgage Credit Certificate program every year - I wait until someone wants a given city's program before I pay the fees associated with that program. So the list of approved lenders is going to concentrate heavily on major direct lenders with offices in that city. This has the effect of limiting the competition, although brokers who are willing to sign up still have all of the advantages of brokers, because for the vast majority of these programs, it only matters that the originating office participate, not that the funding office does. Once I'm signed up with most programs, it does not matter what funding lender I use because originating office is what's important, not the actual funders of the loan.

Each and every first time buyer program will be different. Any similarities between any two programs are basically coincidence. Income limits, qualifying properties, amount of funding, how long it lasts into the fiscal year (or quarter), how much money they get from the federal government relative to the population and cost of living, and most importantly, whether they have any funds at the time you want them and qualify.

Even the form that the first time buyer program takes is wildly variable. Most common is a second (or third) mortgage with nominal payments and a nominal rate. For instance, one east county city requires a 3% interest only payment. Also very popular is a "silent" second (or third) mortgage with no payments, but it needs to be paid back in full if you sell, and in many cases, if you refinance. Some first time buyer programs work off of a "shared equity" basis, with no payments and no interest charged, but they own a fixed share of the property and are entitled to payment in full at sale, and in many cases, of the base loan amount plus appreciation if you refinance. This lessens the financial benefits of home ownership, because normally the appreciation belongs entirely to the homeowner. Nonetheless, without the program, you wouldn't have had any of the benefits of ownership, economic or otherwise. Still other cities have programs geared towards maintaining a pool of limited income housing in that area, and the price you sell for when you sell will be restricted, negating most of the financial benefits of ownership. Some programs are even tiered based upon income, and those making a lower amount will get more favorable terms that those who still qualify, but make more than people in the first group, and there may be more funding available for the lower tiers.

It all depends upon the locality where you buy, and if you apply and qualify for a first time buyer program in City A but end up buying outside of that City limits, you are out of luck. For this reason, you need to work with a buyer's agent who knows the programs and their boundaries and is careful about them. Just because it has the appropriate ZIP Code or telephone prefix does not necessarily mean anything, and I find properties with the wrong ZIP Code in MLS quite often. For instance, properties that are actually in northern Pacific Beach here in San Diego will quite often have the more upscale La Jolla Zip in MLS. Before making an offer, you can always call to make certain the property is within the boundaries covered by the program, of course. You want to double check, because you will pay a fee, usually several hundred dollars, when you apply to the first time buyer program, and I don't know of any that refunds the money if you don't qualify, if you are outside the area, or if you just don't get the funds because they are out of money right then.

Please note that one other feature all first time buyer programs have in common is that they require owner occupancy of a single occupancy dwelling. These are not intended to help investors grow their real estate empire. These programs are intended for people who would not otherwise be able to afford the property and intend to live in it. In some cases, moving out triggers a requirement for immediate repayment in full (and just when it got more expensive to refinance because it's now investment property, too!). In others, so long as you live in it for a given number of years, you can keep it going providing you don't break other rules. Every program has it's own little twists on the owner occupancy requirement. None of them permit you to buy residences suitable for more than one family, either. Duplexes, apartment buildings, and other multi-unit housing are disallowed from every program I've worked with.

First time buyer programs are not grants. I've dealt with them all over southern California, and I don't know of any that are outright grants. In many cases, that would be more cost effective, not only to the buyer but to the city as well, than the hoops that have to get jumped through. So I suspect that outright grants are prohibited by the enabling federal legislation, although I've never read the regulations.

Some first time buyer programs do have mechanisms for forgiveness of the loans after a certain period of time. The requirements and length of time vary. I've seen those that have the forgiveness feature be as short as five years and as long as fifteen.

Prospects for subordination if you refinance are also variable depending upon where you buy. Some require payment in full if you refinance at all, while others will allow themselves to be subordinated to new First Trust Deeds providing certain requirements are met. Chief among these are usually requirements that essentially prohibit cash out refinancing unless you pay off the first time buyer program.

One final caveat to these programs is that most of them will not pre-approve you. In other words, they won't look at your application before you've got a fully negotiated purchase contract. I know of only one program that will pre-approve applicants, and none that will commit funds before you have a fully negotiated purchase contract. If they run out of money in the meantime, that's just too bad. - you're out the application fee. For this reason, you need to stay on top of not only the program requirements and boundaries, but also the funding status as well. If they don't have any money when you actually have a contract to buy, you are wasting the time and money to apply.

Now I don't mean to say these programs are not worthwhile. They can and do make the difference between being able to afford the property and being forced to continue to ride the rest escalator. I should also note that they are basically a band-aid to treat the gaping economic wound caused by artificial restrictions to the housing supply. But if the conditions are right for the band-aid to help you, it certainly is nice and there is no reason why you shouldn't take advantage of it.

Caveat Emptor

Original here

I'm clueless about how home loans work. Is there any way to figure out how much I can afford to spend per month on a home. If I were to get a home for $(figure) how much would that be per month? How do I know how much the interest will be? Any sites that explain it all in laymans terms? Thanks

It's actually pretty easy. You are allowed a certain percentage of your gross monthly salary for debt service and housing. According to Fannie Mae and Freddie Mac, who control A paper, it's essentially 45%. When I originally wrote this, some sub-prime lenders would go to 60 percent, but 1) that is essentially gone and 2) Don't you think it's a good idea to stay within the limits considered acceptable by the people with the best rates? This is called the debt to income ratio and is far and away the most important measure of qualification.

Lest it not be obvious to you, the less debt you have currently, the more you can afford to take on for a housing payment. One of the real problems, and reasons for abuse of a stated income loan, is couples who make $4000 per month each, but have $1200 or $1500 or $2100 in monthly payments for the two cars, credit cards, student loans, etcetera. Their coworkers all have $3000 mortgage payments, and $3000 buys a lot more house than the $1800 which is all they can afford. Actually, it's a pretty critical difference right now, since $1800 is the payment on about $275,000, while $3000 is the payment for about $450,000 or a little more. The reason why people pay more for property is always that the higher priced property is desirable enough to be worth the difference to them.

Take 45 percent of your gross monthly income, call it X. From X, subtract your current debt service. This is car payments, credit card payments, furniture payments, student loans, and any other actual debt you have. It does not include things like utility bills, however.

The number that is left over, call it Y, is what you can afford for housing by traditional measures. It needs to cover principal and interest of the loan, property taxes, home owner's insurance, and association dues (if any), PUD fees (if any), and Mello-Roos (if any).

Assuming that there are none of the last three, you're left with PITI, the acronym you're going to hear about what this covers: Principal and Interest (on the loan), Taxes (property taxes) and Insurance (home owner's insurance).

When I originally wrote this, there were A paper thirty year fixed rate loans in the low sixes with 1 total point or less. Rates are lower right now, but they vary over time. Any loan calculator (except auto loans) can handle that calculation.

There are complicating factors if you're not putting 20% down. If you're not putting twenty percent down payment, every lender out there will require Private mortgage insurance (PMI) in some form or another. Banking regulations require it. If it's something the loan market will support in your situation, splitting your loan into a first and a second is almost certainly superior to paying PMI. At this update, second mortgage lenders are requiring a minimum 10% down payment or 15% equity on a refinance. To do this, you're only going to put 80% of your loan on the first mortgage. Adding the remaining amount back in at 9.00% (doing this saves you about two and a quarter percent in charges on the whole amount), for which you're going to need to do a separate calculation. If you are in a situation where you're splitting your loans, put the two payments together and that's the principal and interest (PI) part of the PITI acronym. This assumes you've got decent credit, by the way.

I have no way of knowing your property taxes. Every state in the union has their own way of doing it. California's is actually one of the lower property tax rates, considered on an assessment per unit of value basis. There are also zones where bond issues have passed, Mello Roos assessment districts to pay for the costs of bringing utilities to the development, and so on and so forth. Your county assessor will have the details. One of the things a good agent can often do here in California is deduce the presence of assessment districts based upon the taxes paid by a particular property, but it's subject to error, and your county assessor's office will have the information, and it won't b subject to guesswork.

I have no real way of knowing what home owner's insurance might be. I usually estimate $100 to $110 per month for a good policy covering detached housing, but that's a guess, and it could be much more, or somewhat less, depending upon many factors. Most of the actual quotes and bills my clients get seem to be lower, but better to guess a little high when making a budget for a major purchase like that. The only way of moving from guess to certainty is to ask insurance agents how much to insure a specific property with a given level of coverage. Don't shop insurance based solely upon price - be careful about the level of coverage - I strongly urge the HO-3 standard policy for stand alone residences, and the HO-6 for condominiums and townhomes where the association has a master policy. The HO-15 Rider is also worth considering as a policy addition. These are actually nationally standardized policies, thanks to the NAIC. Lenders have requirements for what policies have to cover depending upon state, as well. Also consider level of coverage - a policy that isn't big enough won't pay the entire bill for repairs even if it is within coverage maximum. Finally, how solid is the company? Seems like every time there's an area disaster, you hear about insurance companies going bankrupt because they can't pay claims. This is not something you want happening to you. Make certain they've got a high rating from major rating services.

I should also mention that no basic policy includes flood or earthquake insurance. If you're in an earthquake area like most of California, get yourself an earthquake rider or separate policy, whatever is needed in your state. Flood insurance isn't something you worry about around here, but buy it if you're on a flood map.

Now, if the sum of these numbers (PITI) is less than $Y, that portion of your monthly income available for payments and left over after monthly debt service, you've got an excellent chance of qualifying for that loan. If not, you're going to have to go sub-prime, where the allowed debt to income ratio is higher, but the rates will also be higher and the terms less generous, for instance in the presence of a pre-payment penalty. It is actually likely that instead of playing games to stretch your ability to qualify, you would be better off shopping for a less expensive property in the first place. But that's a hard thing to get most buyers to accept. They've fallen in love with the brand new house and they don't want to hear that they can't really afford it. The universe knows that these good deeds do not go unpunished. But informing the client is still the right thing to do, as is deciding to find another property, one that you really can afford.

Caveat Emptor

Original here

The same as in every other area of life: Get out in front and stop it from becoming a problem.

I do not understand why many people approach real estate transactions like a casual outing. Go window shopping, decide on an impulse purchase, expect to sign a few papers and you're done. That might be appropriate for a toaster oven or microwave, possibly even for a refrigerator. In all of these cases, you're dealing with huge companies and products that are basically commodities. All the important stuff like price, size, and functionality is right out in the open, and you're spending $50 for the toaster oven, $100 for a microwave, maybe $2500 or so for a top of the line refrigerator with lots of bells and whistles. Furthermore, the huge companies that make and sell these need to sell millions of these to other people. It's not only not worth it, but actively counterproductive to their bottom line if they don't deal with complaints both quickly and generously.

Contrast this with the situation in real estate. First off, you're not dealing with a major company whose deep pockets are going to bail you out. You're dealing, at most, with a franchise operation that's paying big bucks to license a name, and consumers have no claim against the franchising organization. Here is a list of California license actions in the most recent month they have published right now. Not one heavily advertised household name among them, although every one of those household names was affiliated with someone on the list - usually each of them with several someones on the list. The big names might have some neat bells and whistles in the way of agent tools and client interface, but that's a distraction, especially in these days of expanding MLS capabilities, where any agent can set up a client gateway and get a link to the public portions of MLS on their website.

More importantly, the amounts at stake are, instead of fractions of someone's monthly salary, multiples of their yearly gross income. What this means is that the amounts at stake are many times larger, and therefore the potential reward. I don't know anyone who will cheat over a penny, and not many over a few dollars. But when the amounts at stake inflate to hundreds of thousands of dollars, that's a different level of temptation, and the list of people that can be trusted shrinks drastically. A smart agent working for you should be someone you can trust, if for no other reason than you can sue for breach of fiduciary duty and expect to win more than they could ever make for that breach. Unfortunately, as has been made clear to everyone who's paying attention, not all agents are smart.

Most important of all, a large fraction of the important issues aren't out in the open. Indeed, the amounts at stake are sufficient for the other side to do their best to bury them. Spotting these issues, particularly before a client has wasted time and money on the property, is one of the prime characteristics of good real estate agents. Whether or not you spot them is not the determining factor as to whether these issues are present, nor does keeping quiet make them go away. Even when called upon the facts, however, many sellers and their agents will still try to brazen it out in the best tradition of the communist party, by denying the issue. Several years ago, when buyers outnumbered sellers 4 to 1, many of them got away with it. Getting away with it is a lot less likely in a buyer's market. Furthermore, deceits of this nature are fertile ground for lawsuits, but despite the fact that it is far better - for both buyer and seller - to deal with all of the issues in a straightforward manner, there will always be those who think they can vanish with the money if only they can get that money wired into their account. They can't, but if they've already spent the money it's pretty hard to get it back. Better just to deal with the issue in the first place, even if it's by choosing not to pursue that property.

When a good agent takes a listing, they have all the issues from appropriate pricing on down the line dealt with before the property actually hits MLS. The seller has to have restrictive showings? Reflect it in the asking price and tell everybody when and why in the property profile. There's an issue with the property? Make it clear in the property profile - showings where the prospective buyer aren't willing to deal with the issue do nobody any good. Even if you can hide it temporarily, you can't hide it forever, and the effects when the deception are discovered are going to hurt more than if you were honest in the first place.

When a good agent considers a property for their client's purchase, they consider it complete with shortcomings. If there's an issue with traffic, noise, structure, schools, or anything else, I want my client to be aware of it, and I want to have a plan to deal with it in negotiations, before my client says they want to put an offer in. Yes, this makes it more difficult to persuade a client to put an offer in, but if your agent hasn't explained that there is no such thing as a perfect purchase situation long before you get to the stage of making offers, something is wrong. I haven't seen a property yet that was an exception to this. They've all got problems and issues. The question is whether these problems and issues are ones that the client is comfortable dealing with. Even if there are no other problems, the issue then becomes, "Is your client happy paying the extra money not to have them?"

Any time the problem gets in front of an agent, they are playing catch-up, much like a Cessna pilot trying to handle a high-performance military jet. It's controlling them more than they are controlling it, and the same applies to real estate. Pilots have a saying to the effect of "he got to the crash site fifteen minutes after the airplane." Real estate is no different, except the time lag is usually measured in months instead of minutes, and only gets caught up when a lawsuit is filed. I've seen agents - usually "team leaders" trying to pack in more business than they can really handle - so far behind the power curve on actually solving real problems for their clients that the client would have been better off with a fresh licensee on their first transaction, who at least aren't so busy delegating that they can keep track of what they need to know and what they need to deal with before it bites their client. Those subsidiary functions that busy high producing agents "delegate" to lower paid "team members" (which is 95% industry code for "poorly trained low-paid employees who have no idea how that piece of paper relates to everything else about the transaction but enable the agent they work for to rake in more commission checks")? You'd be surprised how often the details that bite agent and client both are buried in them, and any time an agent puts their focus on production, the quality is going to suffer. A better agent may not live so high on the hog, but their clients come out of the transaction much happier.

Caveat Emptor

Original article here

Liquidation auctions were a big thing for a while there. They were just advertising one on all the stations around here. The other agents in my office asked if I was going, and I told them, "There will be no bargains there." Two of them went anyway, one going so far as to take a client.

To be fair, this only applies 100% to one specific auction house, which I'm not going to name - but the tactics and terms are pretty standard. Here's the claims they make: "Huge selection" (which means, in this case, 222 properties of all sorts, 147 of them in the county, 75 out of the county, as opposed to 20,600 active residential properties in San Diego County MLS on the day in question), "Easy financing" (they rent some space to one specific lender). In fact, they do their best to restrict choice of lenders - giving some minor preferred terms if you do business with their tame lender, which isn't known in the business for being a good lender to do business with. This violates RESPA (federal law), by the way. "Perfect for families." If you believe this, I own not only beachfront property in Florida but also a bridge in Brooklyn and an albino pachyderm, and I want to sell them all to you for a low discount package price - contact me for private details. You've got to be some kind of idiot to believe that it's a good idea to bring kids - a genetic and conditioned emotional distraction - to a real estate auction. Their commercials have sound bite interviews with people right after they win an auction - excited that they "won" an emotional battle for a house! Of their very own! Not later, once they've discovered how rotten the situation is that they have gotten themselves into.

Reading the fine print, it didn't take much to figure out what's really going on here: They want to get buyers together in an emotional auction environment where it's psychologically very easy to overbid for a property, get them committed to buying the property, and cut them off from all of the due diligence they're allowed to do on every other property out there. Lock the buyers into what they do in the heat of the most emotional moment these artisans can create - while the sellers are free to reject the deal on a whim. They allow the prospective buyers no "cooling off" period at all. This is legal for purchases, but isn't a good situation to be getting yourself into as a buyer, particularly not in the current environment for most of the country.

Here's the skinny: First off, prospective buyers need a $5000 cashiers check made out to yourself, which you will endorse over to them, and the balance of 5% of the purchase price in the form of a personal check or something similar. What this means is that no matter what, the lender is getting $5000 of that buyer's money. Period, end of sentence. Furthermore, they have to put 5% of purchase price into escrow. This is way above the "traditional" 2% which is far too high for most transactions nowadays. Putting it into escrow means that, at a minimum, somebody else is holding onto it until and unless all parties agree to release it or a court tells them to. Given that you have to use their special "purchase contract" which wasn't available ahead of time, what do you expect that the terms of that contract are as regards to things like liquidated damages and money owed to the lenders for the "privilege" of sitting in escrow on a property where there's no real due diligence done? Their brochure said the purchase contract was available on their website, but I couldn't find it, and I not only checked their site map, but clicked on everything that I thought could conceivably be associated with it - which was basically everything. The contract itself wasn't there, but I don't have any reason to distrust their claim that it renders you liable for damages if you don't carry through on purchase. In other words, you find out a reason why you don't want the property, you still pay for the fact that you had the high bid. Not to mention their purchase contract is completely mandatory, and you can't negotiate anything about it, and you don't even find out what those terms are until after you've agreed to the price. Since contract terms can move the price by thousands or tens of thousands of dollars in regular negotiations, it shouldn't stretch your imagination to figure there's a reason they're waiting to spring all of this upon you - most likely a contract people wouldn't have signed at the peak of the seller's market in 2003. Furthermore, you're required to sign a "winning bidder confirmation" immediately upon making the high bid. What that says also wasn't subject to prior investigation - which is a polite way of saying they want it to be a deep dark secret until you "win" the auction for a given piece of property. Use your imagination for a moment, and ask yourself, "Why would they want to keep it secret until then? What might such a document say?" I'll bet you millions to milliamps the reality would be worse. These folks are professionals.

Did I mention that you're agreeing that you've already done your due diligence? Yes, but I didn't go into what it really means. They supposedly have three open houses for inspection, but how many people are really going to drag an inspector, an appraiser, a termite inspector, etcetera out to the property just because they might be thinking about bidding on the property? That's sinking anywhere from $800 on up into the property just on speculation of winning the bidding. If a prospective buyer does this due diligence ahead of time, it psychologically prepares them to be willing to go higher on the bid (they've already spent money). If they don't do this due diligence ahead of time, they're putting that 5% of the purchase price - however many thousands of dollars - at risk, and it's a very high probability risk at that. Suppose you bid $400,000 and it's accepted. You need to put $20,000 into escrow immediately! If a prospective buyer thinks they might bid on two properties, that's twice as much. Furthermore, although the purchase contract wasn't available, I'm quite willing to take the word of their brochure that there are no financing or appraisal contingencies allowed in that contract, even for their preferred lender. Their verbiage is adamant on the point of "as is, where is, including all faults." They're very explicit about no liability by sellers, which is basically standard for lender owned property, but they're not going to accept any requests for repairs either, which isn't. In fact, in some circumstances, it's illegal. Not to mention that you normally have seventeen calendar days to do your due diligence after there's a fully negotiated purchase contract, even with lender owned properties, before your deposit is likely to be in jeopardy.

They use a "property previously valued to" come-on, which is disclosed in the fine print to be the highest of 1) an appraisal 2) asking price, 3) assessed value or 4 ) broker's price opinion. You shouldn't need to be a Rhodes Scholar to figure out that this means the asking price - the exceptions just make for something even more cockeyed. It's been on the market for months, and it didn't sell for that price. If it had, they wouldn't be auctioning them off in these circumstances.

There's also an undisclosed reserve price. What this means is that if the auction doesn't get high enough to go over the reserve price, you don't get the property even if you have the high bid. Furthermore, reading through the fine print, you find that the auction has planted other bidders in the crowd, who can and will bid the price up. If claims they won't go over the reserve price, but since neither the identity of the plant nor the reserve price is disclosed, it's somewhat difficult to verify this. The job given these plants is plain and simple: Get the bidding going, and get it emotional, so people will keep bidding for a long time. Since the auctioneer knows both the plant and the reserve price, they can collude quite easily to a common purpose. As a matter of fact, the fine print says the owners don't even have to accept the reserve price. What does this mean? If, after all the psychological games they can play with you, you don't bid enough to make them happy, you still don't get the property! In fact, they've got 15 days to turn you down. You, on the other hand, are required to close escrow within thirty days, which means you had better get working immediately, even though they reserve the right to pull the rug out from under you.

If all of this isn't enough, they reserve the right to alter terms and conditions as they go, specifically including, "Advancing the bidding," which is a euphemism for jacking up the price for no apparent reason. In addition to that, there's a 5% surcharge on all winning bids in order to arrive at the final sales price. So someone knows their limit is $300,000 and advances the bidding to $297,000 before winning - only to discover that this translates to a "real" price of $312,000 - a price they already know they can't afford! Result? Minimum of $5000 in their pocket (your endorsed cashier's check), and they offer the property for sale again right away.

Have I mentioned the psychology of an auction yet? Particularly one with inexperienced bidders? Most of whom have no idea of the risks they are taking, let alone the fact that they should be compensated for them, or how much? I've heard too many inexperienced people saying that "Everybody knows" that foreclosures and auctions are great deals. I'd like to meet this Everybody, because he's spewing rank fertilizer in the form of unsubstantiated rumors that are far from universal even if they are sometimes valid when you've got a sharp agent on your side in a high transparency situation where both sides have to come to the table as equals. That's not the case here.

I looked through their book of available properties. There was precisely one that I had been in. It was a 3 bedroom 1.75 bath property on a lot that was mostly level because the developer had terraced it fifty years ago, with a deep crack in the foundation the entire width of the house - you could even see the evidence on the outside, for crying out loud. Nice paint, great view, some other nice touches - but flat roof I couldn't see, no yard, no close parks, no place for kids or pets, all the fixtures and surfaces other than the carpet were original, it sat on a busy connector street, and I couldn't tell you whether that house was going to be there tomorrow without a soil engineer's report on how well the leveling of the lot was standing up, how well the soil had been compacted, etcetera. I suspect problems, because the foundation wouldn't likely have cracked if there hadn't been soil compaction issues. I remember thinking, "Maybe $300,000, if the soil report comes back solid. Otherwise, you couldn't pay me to take this property." They were telling people it was valued at $429,000. Seriously, I would rather have a 1970s vintage townhome less than a mile away listing for $279,000 - and this includes HOA dues and dealing with a homeowner's association in the first place. More usable yard, a couple of small communal parks and a communal pool, and less environmental noise - not to mention that even if that condominium had structural issues I didn't spot, dealing with them would have been a communal issue as well. This seemed about average for what was being offered. The less desirable areas seemed to be heavily over-represented in their offerings. This is about as coincidental as falling down when you trip. All the usual war zones that people don't want, even when they think they're getting a deal.

The point of all of this is to get people foolish enough to bid on these properties locked into deals, where the sellers are not locked in at all. Get them emotional, so they bid up the price, and if they can't do that well enough, the seller has the option of taking their marbles and going back to what they were doing. So you can imagine that I wasn't very surprised when my two co-workers called me about halfway through the proceedings to say, "You were right. We're leaving. There are no bargains here."

Caveat Emptor

Original article here

Yes, I've always kind of liked Paul Simon. But this post was inspired by something I ran across from a title company. And just to make certain you realize what I'm saying, it's fifty ways to lose your money if you don't have title insurance.

You don't want problems from prior ownerships to interfere with your rights to your property. And you don't want to pay the potentially ruinous cost of defending your property rights in court.

A title insurance policy is your best protection against potential title defects, which can remain hidden despite the most thorough search of public records and the most careful escrow or closing.

For a one-time premium, a title company agrees to reimburse you for loss due to defects existing prior to the issue date of your policy, up to the policy amount. And, should it be needed, the policy also provides for the cost of legal defense of your title. The standard coverage policy protects you against such potential defects as:

I'm going to star (*) the ones I've got personal experience dealing with so you can tell how common some of these problems are.

*Forged deeds, mortgages, satisfactions or releases. *Deed by person who is insane or mentally incompetent.

Deed by minor (may be disavowed). (DM: I don't have after the fact experience with this only because the preventative systems on this are so strong)

*Deed from corporation, unauthorized under corporate bylaws or given under falsified corporate resolution.

*Deed from partnership, unauthorized under partnership agreement.

*Deed from purported trustee, unauthorized under trust agreement.

Deed to or from a "corporation" before incorporation, or after loss of corporate charter.

*Deed from a legal non-entity (styled, for example, as a church, charity or club).

*Deed by person in a foreign country, vulnerable to challenge as incompetent, unauthorized or defective under foreign laws.

*Claims resulting from use of "alias" or fictitious namestyle by a predecessor in title.

*Deed challenged as being given under fraud, undue influence or duress.

*Deed following non-judicial foreclosure, where required procedure was not followed.

*Deed affecting land in judicial proceedings (bankruptcy, receivership, probate, conservatorship, dissolution of marriage), unauthorized by court.

*Deed following judicial proceedings, subject to appeal or further court order.

Deed following judicial proceedings, where all necessary parties were not joined.

Lack of jurisdiction over persons or property in judicial proceedings.

*Deed signed by mistake (grantor did not know what was signed).

*Deed executed under falsified power of attorney.

*Deed executed under expired power or attorney (death, disability or insanity of principal).

Deed apparently valid, but actually delivered after death of grantor or grantee, or without consent of grantor.

*Deed affecting property purported to be separate property of grantor, which is in fact community or jointly-owned property.

Undisclosed divorce of one who conveys as sole heir of a deceased former spouse.

*Deed affecting property of deceased person, not joining all heirs.

Deed following administration of estate of missing person, who later re-appears.

Conveyance by heir or survivor of a joint estate, who murdered the decedent.

Conveyances and proceedings affecting rights of service-member protected by the Soldiers and Sailors Civil Relief Act.

Conveyance void as in violation of public policy (payment of gambling debt, payment for contract to commit crime, or conveyance made in restraint of trade).

*Deed to land including "wetlands" subject to public trust (vesting title in government to protect public interest in navigation, commerce, fishing and recreation).

Deed from government entity, vulnerable to challenge as unauthorized or unlawful.

*Ineffective release of prior satisfied mortgage due to acquisition of note by bona fide purchaser (without notice of satisfaction).

*Ineffective release of prior satisfied mortgage due to bankruptcy of creditor prior to recording of release (avoiding powers in bankruptcy).

*Ineffective release of prior mortgage of lien, as fraudulently obtained by predecessor in title.

*Disputed release of prior mortgage or lien, as given under mistake or misunderstanding.

Ineffective subordination agreement, causing junior interest to be reinstated to priority.

*Deed recorded, but not properly indexed so as to be locatable in the land records.

*Undisclosed but recorded federal or state tax lien.

*Undisclosed but recorded judgment or spousal/child support lien.

*Undisclosed but recorded prior mortgage.

*Undisclosed but recorded notice of pending lawsuit affecting land.

Undisclosed but recorded environmental lien.

*Undisclosed but recorded option, or right of first refusal, to purchase property.

*Undisclosed but recorded covenants or restrictions, with (or without) rights of reverter.

*Undisclosed but recorded easements (for access, utilities, drainage, airspace, views) benefiting neighboring land.

*Undisclosed but recorded boundary, party wall or setback agreements.

*Errors in tax records (mailing tax bill to wrong party resulting in tax sale, or crediting payment to wrong property).

Erroneous release of tax or assessment liens, which are later reinstated to the tax rolls.

*Erroneous reports furnished by tax officials (not binding local government).

Special assessments which become liens upon passage of a law or ordinance, but before recorded notice or commencement of improvements for which assessment is made.

Adverse claim of vendor's lien.

Adverse claim of equitable lien.

Ambiguous covenants or restrictions in ancient documents.

Misinterpretation of wills, deeds and other instruments.

Discovery of will of supposed intestate individual, after probate.

Discovery of later will after probate of first will.

*Erroneous or inadequate legal descriptions.

*Deed to land without a right of access to a public street or road.

Deed to land with legal access subject to undisclosed but recorded conditions or restrictions.

Right of access wiped out by foreclosure on neighboring land.

Patent defects in recorded instruments (for example, failure to attach notarial acknowledgment or a legal description).

Defective acknowledgment due to lack of authority of notary (acknowledgment taken before commission or after expiration of commission).

Forged notarization or witness acknowledgment.

*Deed not properly recorded (wrong county, missing pages or other contents, or without required payment).

Deed from grantor who is claimed to have acquired title through fraud upon creditors of a prior owner.

The ones below this require extended coverage from a title company

Deed to a purchaser from one who has previously sold or leased the same land to a third party under an unrecorded contract, where the third party is in possession of the premises.

Claimed prescriptive rights, not of record and not disclosed by survey.

*Physical location of easement (underground pipe or sewer line) which does not conform with easement of record.

*Deed to land with improvements encroaching upon land of another.

*Incorrect survey (misstating location, dimensions, area, easements or improvements upon land).

*"Mechanics' lien" claims (securing payment of contractors and material suppliers for improvements) which may attach without recorded notice.

Federal estate or state inheritance tax liens (may attach without recorded notice).

Pre-existing violation of subdivision mapping laws.

*Pre-existing violation of zoning ordinances.

*Pre-existing violation of conditions, covenants and restrictions affecting the land.

Post-policy forgery against the insured interest.

*Forced removal of residential improvements due to lack of an appropriate building permit (subject to deductible).

Post-policy construction of improvements by a neighbor onto insured land.

Damage to residential structures from use of the surface of insured land for extraction or development of minerals.

Many people talk themselves out of title insurance, claiming it won't happen to them. They think they've just saved hundreds to a couple of thousand dollars. And they have, if none of the above things (as well as others) happens. But the reason you carry insurance to insure yourself against losses that you cannot afford. If you lose that bet, you've potentially lost the entire property, and many times this is precisely what happens. Mr. Jones owned the property for many years before he died, and his estate sold to Mr. Smith who lived in it for fifteen years and then sold it to you. But Mr. Jones had a quickie marriage before he went off to World War II, forgotten but never legally dealt with. That woman's son finds the marriage certificate and checks to see if Mr. Jones left any property. Guess what he finds. Guess who may really own "your" property?

If I have a property, I'll pay a second time if I have to, in order to make certain there's a policy of title insurance covering me. This stuff happens.

Caveat Emptor

Original here