Buying and Selling: April 2019 Archives

Way back when I was just out of high school, I was doing a lot of things with my time. Working, dating, competing on the fencing team, gaming of various sorts. But every once in a while, I dropped in on one of those math courses I was registered for at UCSD. One of those courses was Math 110, "Introduction to Partial Differential Equations and Boundary Value Problems" Bozemoi. That was the course that convinced me that I was not, after all, cut out for a career as a mathematician. All the other undergraduate courses, I got a handle on fairly quickly, but the way my mind works made that one course something like having those alleged brains pounded out between two large gold bricks wrapped in lemon.

I eventually got through it. But one thing I took out of that class in no uncertain terms is the form a real solution to those equations took, and the fact that if you were missing terms ("parts of the answer" for those less mathematically inclined), your answer was wrong. Not incomplete. wrong.

One of the standard ideas of internet commerce is "cut out the middleman and their fees." You can find this in lots of fields. Some of them begin far earlier than the world wide web. "Discount" brokers have been going for decades, for both stocks and real estate. The internet certainly helped them, however. Loan quote services were probably one of the first ten business ideas on the world wide web. On-line this, on-line that. Do business with the faceless on-line corporation with cheaper fees (or none!) and you can't help but be better off, right? It's easy to illustrate that difference to just about anyone. There's money they're not spending, that anybody can point to as a savings earned by doing business in that fashion. But is that the whole story?

Indeed the whole discount proposition cannot succeed without an implicit or explicit assumption that the value you receive from having paid that fee is zero. But if that were the case, these professions would never have gotten going in the first place. Who wants to pay money you don't need to? Anybody want to raise your hand? I certainly don't. The world, humankind, and even our financial markets survived for millennia without stockbrokers, real estate agents, travel agents, or any other sort of business that is now being subjected to disintermediation. Why did these professions come about? It wasn't because our great grandparents were stupid, uninformed of the alternatives, or had no choice. They could and did buy and sell stock and real estate directly. The reason these professions, and others (such as journalism) arose is because they added value to the entire process. The people who made use of these professions profited by their choice. Not necessarily directly in dollars with every transaction, but statistically, the people who spent that money emerged notably better off in one or more important respects, and therefore, our predecessors made a choice to do so until essentially everyone did so.

There you have it: An explicit refutation of the assumption underlying the entire discounter promise. It neglects an essential term in the answer as to whether you end up better off. Was the money you didn't spend really the whole answer? What if by spending that money, you end up better off?

Suppose you save three percent by not having a real estate agent sell your property. Seems like a great idea on the surface, doesn't it? On a half million dollar property, $15,000 in your pocket for what you think is a few hours of work. I'll even start by granting you the same ability to market that an agent has, which isn't the case for the vast majority. But what happens if the price you pick isn't right for your market? I've gone over that. What happens if you don't disclose everything you need to? Then let's consider negotiations. Trying to match wits against a buyer's agent whose been in everything that sold in your neighborhood in the last six months is a guaranteed lose for a seller who hasn't seen any of it. That agent's got permission to visit other stuff in MLS. Owners trying to sell their own property don't. . Do you know what's appropriate for contingent sales? What about negotiating repairs disclosed by inspection? These and many other things need to be negotiated, and just telling the other side to do it your way will result in a failed transaction. Do you know how to find out if a buyer is qualified? The two months you spend waiting to find out that your prospective buyer can't qualify costs you roughly six thousand dollars all by itself. I could go on and on.

The same applies on the buyer's side. In the current environment, any decent buyer's agent who tries can make at least a ten percent difference by suggesting the correct property, negotiating to their clients' strengths, and using the seller's weaknesses against them. Usually it's more than that. My average was running about twenty percent when I originally wrote this. Even when the market turned crazy for about nine months it stayed about 10% - when everyone else was having appraisal problems due to Home Valuation Code of Conduct, I didn't have a single property that failed to appraise for value. Sound like a good bargain to you? Spend ten to twenty percent to save three? If so, come on into my office, and I'll give you $30 for $100 until you're broke. Or you can come into my office and agree to spend that $30 in order to have a very good chance of making well over $100.

The intelligent question is: Does spending that money save you more than it costs? Most people will spend $10 to save $100. That's rational. Most people will spend $90 to save $100. That's still rational. Some people will spend more than a hundred dollars to save $100, though, and that's not rational. Not spending the $10 or even $90 to save $100 isn't rational either. Nor are all of the costs in money. How do you quantify not making a mistake that most people don't know is there until and unless it bites them, after the purchase?

That's really the whole question, isn't it? Furthermore, it has to be answered individually, because few situations really subject themselves to this kind of analysis Admittedly, with the internet, it's gotten easier for consumers and more difficult for members of those professions. But the internet can only help you with questions you actually think to ask, and you still have to do the work to make certain you debunk wrong answers to find out where the truth really lies. It's not going to tell you any of dozens of reasons why this freshly remodeled home of your dreams is going to turn into a nightmare.

When I originally wrote this, I was closing on a property where the folks contacted me with information from a popular discount model brokerage in their hand, and those were the first properties they wanted me to look at (which I did). The difference in value they are receiving for their money is such that they never went back to that discounter, because I went out and looked at properties, I gave them reasons why this property was or was not one that they were going to be happy in, I gave them reasons why this property was a Vampire while that property was not. I explained to them how the surrounding environment was going to impact them in the property. I showed them what needed to be fixed, and gave them an idea what was involved. When I found an especially good value for their money, I got them out there and told them to act fast if they wanted it - if I hadn't, it would have been gone by the weekend. I'm not going to talk about why, but I can truthfully say that I wrote an offer that the seller chose to accept even though it wasn't the highest offer they had, and the difference was a lot more than my company's three percent commission. If those kinds of services aren't worth money to you, then you're not a good candidate for my services anyway. But all that discounter had to offer was how cheap they were, while I gave my clients more value than they would have saved before they put the offer that was accepted in, and they knew it. Once the clients started thinking in terms of what they were receiving by giving up that discounter's commission rebate, the discounter never had a chance. By CMA of all comparable properties in the area at that time, my buyers saved over thirty percent, and that's just by square footage - not including all of the amenities the property had that the competing ones don't.

I'm not going to pretend this one isn't an above average bargain, even for me. I'm not going to pretend that every full service agent can make that kind of difference on every transaction, because I know it isn't true. The best agent in the world strikes out occasionally - in which case you are still no worse off than without them. But making more of a difference to the client than the three percent a full service agent makes around here is an awfully easy mark to beat for the agent who tries.

Caveat Emptor

Original article here

It's a well known fact that not all factors in real estate are equally important, and not all property investments perform equally well. A critical part of successfully choosing the right property, whether it's for investment or personal use, lies in realizing that some things about a given property are completely under your control once you purchase, some things are only controllable by large groups of people acting in concert, and a few things can't be changed at all.

There are graduations among the three, in fact, it's more or less a continuous spectrum from picking up a piece of trash to weather and earth movement. Just because you can't control it doesn't mean you can't take it into account before you decide on where to spend your money. Once you've bought, of course, you're stuck with what events happen to have an effect upon that given location. Just because there hasn't been an earthquake there in 6000 years of recorded history doesn't mean it's impossible for there to be an earthquake. But if the area has a history of earthquakes, fires, landslides, you name it, or even just a known susceptibility, you're wise to take it into account. This extends into human controlled areas as well. Never been so much as loitering within ten miles? Nice, but that doesn't stop the head of the local mob from buying the house next door to yours later on, or the FBI from renting it for their Witness Protection Program (and no, that's one neither you nor I am likely to find out unless and until gunfire starts, but that doesn't stop the crooks looking for those witnesses!). One of the aspects of this being a free country is that bad people are also pretty much equally free to go where they want unless they're actually in confinement somewhere.

There are, however, all sorts of known factors about a property that you can consider, and a good agent can really hep you with. Sometimes it's a matter of capability (whether you can), sometimes of knowledge, sometimes of willingness, and sometimes, of visualization, whether you can really visualize the place with the changes made.

Knowing that difference is money.

Serious money, especially in a high cost area like mine. Knowing what you can change and what is beyond your control. Knowing what stuff costs, in general, is a really valuable piece of knowledge for an agent, and whether it's likely to be worth the money you spend.

Some stuff, like trash in the yard, paint on the walls, and carpet on the floors, is so easy to change it doesn't hardly register. Yes, good carpet costs thousands of dollars, but it's worth every penny at sale time. Paint is cheaper. Window coverings, All of this is superficial, and can be changed easily, but unless you're an experienced agent you would not believe how many times I've heard arguments against purchasing a property that amount to "I don't want to have to spend $4000 to save $40,000!" from buyers. Then they go out and buy another property for that $40,000 more, and stillspend that $4000 - or more - changing out the already good looking stuff that was already there for other good looking stuff, when they could have saved $40,000 off the purchase price by simply realizing they were going to replace it anyway, and buying the property with trashed carpet in the first place. I don't care how often I've seen it. It still blows my mind, every time. And if you're looking to sell, by all that's holy, you'll make a lot more dealing with it yourself than giving Martha Stewart Jr. a carpet allowance. The idea is that you want as much of Martha's money in your pocket as possible! By giving an allowance, sellers not only lose the money several times over in the sales price, they're also volunteering to pay some of the money they do get right out again!

Appliances. Why in the nine billion names of god are some buyers so particular about the appliances? The vast majority of appliances are personal property and are going to go away with the current owner. Who cares if the refrigerator is avocado green now? It's going away. If the owners do leave it, I know places that will pay you money for the privilege of hauling away functional appliances, and then you can put your burnt orange one in its place. Even if the appliances are attractive, unless they're built into the property, they're going away. It's not like it's going to be hard finding a stylish modern replacement. But when you're selling, it really is a good way to sucker more money out of people, and unless you build it in or agree to leave it in the sales contract - a concession the buyers will pay dearly for - you get to take them with you! How cool is that?

Surfaces are a little harder, but I do not understand why people are willing to reward current previous owners who built in things like granite counter tops or travertine floors. Actually, I do. It's all part and parcel of that same desire that Mr. and Ms. Middle Class want to have their home be beautiful, so they'll spend $50,000 more to buy the property that's beautiful now, and then they'll come along and replace all that beautiful stuff with equally beautiful stuff that's more in line with their taste. But granite counter tops, travertine floors, etcetera aren't all that expensive to put in (why do you think they're so popular with developers now?) and they do age. If you stay in the property twenty years, you're going to want to put in new ones before you sell. But guess what? You paid all of that opportunity cost, and interest on all of that cost, all of these years, and now you're having to install new ones just to come close to breaking even on what you've already spent. Smart Investors are looking for the properties where they can get those bumps up in value themselves by putting them in and flipping the property off to Mr. and Ms. Middle Class.

Similar to all the preceding examples, lighting is a relatively cheap investment that pays off. Lots of nice bright soft lumens. Some people will pay big bucks without realizing why, not to mention that light bulbs are both cheap and easy to change and the wiring lasts basically forever, so you can fix it up after you own it, enjoy it all those years you live in it, and still get the bump up in value when you go to sell. Providing, of course, you or your agent has the presence of mind to recognize the opportunity, and you don't insist on having it already in place.

Not quite so easy are windows for natural light. It's very hard to go wrong with too many windows, or too big. Just don't sabotage your structural support. And of course, you're cutting through walls. This isn't cheap; but it is often worth the money. Just like electrical lights. It'll make lots of folks willing to spend big bucks without understanding why.

This contrasts to bad or old wiring. It just won't hold the load modern dwellings need to, or doesn't have enough outlets. Back in the 1930s, one outlet per room was plenty. These days, code requires one per six linear feet of wall in new housing. The house I grew up in had a thirty five amp master fuse. That may not be enough for a linen closet, nowadays, but those houses are still out there. It isn't cheap to upgrade their wiring, but if you've got to do it, overkill isn't much more expensive. If you're running all new wiring and putting in new breakers and new outlets, the cost differential to make it way more robust than absolutely necessary is perhaps 1%. Instead of 500 amp service, consider at least doubling that. As long as you're putting in one outlet every six linear feet, make it a four or six plug outlet (with wiring robust enough to match). Point of fact, investors who flip rarely upgrade wiring - it doesn't pay off in sales price. But if you need to do it in order to make your family comfortable, overdo it. It doesn't cost any more per hour for an electrician to run bigger wires, install bigger breakers, or put in a bigger socket. So you spend $1 extra per outlet - if it keeps you from having to do it again, the money was well spent. There's been a steady increase in the amount of electrical load for the average house over the last eighty years or so. I wouldn't bet on that trend changing any time soon, and when you go to sell in five or twenty or thirty years, the electrical situation will still make buyers happy. Unless that house falls down around your ears in the meantime, you'll be glad you did. Here's another thing I don't understand: People will act like it's no big deal to upgrade the electrical service, even though it's much more costly than any of the stuff you've already read about. Maybe because they don't understand what's involved, or maybe because it's not obvious on the surface, but a house where the electrical grid will handle your requirements is easily worth $30,000 or more than one that won't - because if it won't, guess who's spending that money?

Towards the high end of the subspectrum involving personal control, you're pretty much stuck with the architecture. Put another room on that doesn't match, and people will start describing the house as "ramshackle". Houses where everything matches get more than houses where there are obvious mismatches. Short of hiring a bulldozer and starting over, your architecture is your architecture. Ditto basic construction. If it started with adobe, you'd do well to stay with adobe. If you don't like adobe, don't buy adobe.

Right at the extreme of possible personal control is the lot you're buying. Unless you can persuade one of your neighbors to sell, it is what it is. Don't count on that happening. If it's 4700 square feet, it's always going to be 4700 square feet. If it's next to a beach or next to a toxic waste dump, it's always going to be next to a beach or toxic waste dump.

Getting into things you can't control, but can influence, is the homeowner's association. If there's a homeowner's association, you can influence it by getting involved. You can't control it by yourself, and you can't make it go away, except by not buying where there's a HOA. Learn the rules, and learn the neighborhood, before you buy. If your rules aren't something you can abide by, be certain Mrs. Grundy is going to do her best to harass you into doing so. This starts at letters and goes through fines, and might even include foreclosure. If your neighbors are at war with each other before you buy, that's likely to continue indefinitely afterwards. Just because there's no war right now doesn't mean one won't start the instant you buy. The more recently it was built, and the higher end the property, the more likely it is there will be a HOA. If you buy where there's an HOA, it's more likely one of my grandfathers will give birth to triplets than that HOA will go away (FYI: if being old and male in a species where it's the female who gestates and rarely to more than one child at a time isn't enough for you, my grandfathers are dead). HOAs really are a good guardian of property values, but they sure can make an ordinary person who just wants to enjoy their property miserable.

You can't do a darned thing as an individual about the surrounding property, or the neighborhood. If all around you are 3 bedroom 1.75 bath properties that sell for $400,000, that's the mean your property will tend towards and be judged by. In some areas, $400,000 is a mansion. Around here, it's nothing nearly so grand. You may be able to get a little more if you've got a fourth bedroom, or an extra large lot, but a 6 bedroom 4 bath place will not be worth twice as much, simply because of the surroundings. In fact, it's unlikely you'll get more than 25% extra even if the property is a mansion, that being a relevant appraisal standard. Even if someone agrees to pay it (they won't), lenders won't lend based upon it. That property is a misplaced improvement. It's fine if you just happen to like the neighborhood, but don't expect that your house will sell for twice as much because it's twice as big or twice as nice. Three words: Not. Gonna. Happen. Keep this in mind when you're buying or upgrading your property, also. On the flip side, this can help properties that are below that neighborhood average. Everything around them pulls them up. But it also means that there's a sharp limit to the improvements that are worthwhile.

Traffic, whether you're on a busy street or a busy corner, parks, shopping and other neighborhood amenities, you can consider to be essentially fixed characteristics. No one individual controls them. Even if you get yourself elected mayor, you'll find yourself checked by the power of the rest of the government. There's nothing you can do to advantage yourself without disadvantaging someone else, and if you want the most primal scream of most suburban dwellers, talk to them about lowering property values. It sends people completely around the bend, mental health wise. Sometimes you get lucky and something good happens. Sometimes you get unlucky and the opposite occurs. But it's not under the control of any one person. Know this ahead of time. Acknowledge it to yourself, and worship at the altar of accepting these things as they are. By the way, if I were selling, I'd make certain your prospective buyer is aware of upcoming issues that may negatively influence the neighborhood. Even if you didn't know, if they can make a case that you should have, that may be good enough to win in the courts. It depends upon the jurisdiction. Talk to a lawyer in your area to be certain.

The geography of the land you can consider as fixed. Weather also. Even if you own a large enough parcel to move your house to a better location on the lot, or even to level that hill that's threatening to slide down on top of you every time it rains, your return on that investment is not going to repay the cash it costs you. Earthquakes, wildfires, tornadoes, hurricanes, floods. You might was well consider that the price tag includes a certain probability per year of each, be it large or extremely small.

Knowing, or learning, the difference between what you do and don't control, and what is and isn't profitable to upgrade, is a large part of the battle of finding a good property to invest in, whether you intend to flip in two months or whether you intend to live there for the rest of your life. A good agent, who's not dependent upon the tollbooth model of business, will be an immense help to the selection process or the sales process, and likely to make - or save - you enough money to pay their commission several times over, and more so if you include them in your planning process.

Caveat Emptor

Original article here

Here was an idea I had: Pack a list of the most important things consumers need to know about buying real estate, as packed into the words I can say in sixty seconds without sounding like an over-clocked squirrel. Here goes:

Figure out what you can really afford before you do anything else. Shop by purchase price, not payment, and refuse to look at properties which cannot believably be obtained within your budget.

Listing agents are contractually and legally obligated to sell the property as quickly as possible for the highest possible price. They represent sellers, not buyers. If the listing agent can sell you the property for $100,000 above comparable market price, they have done nothing except their job. Never allow the listing agent to represent you as a buyer.

Buyer's Agents represent buyers, not sellers, and having a good buyer's agent will make more difference than anything else to get you a better property value for less money. Get at least one buyer's agent before you start looking. Sign only non-exclusive buyer's agency contracts, insist they cover bad points as well as good on every property, and fire any agent that won't, or any agent that shows you a property that cannot be obtained within your budget.

There is no such thing as a perfect property, or the perfect time to buy real estate. Properties in immaculate condition command premium prices because the owners can get more money. If you want a bargain, be prepared to do some cosmetic work. A good buyer's agent will help you know what's cheap and easy to fix, versus what's difficult and expensive.

How was that?

Caveat Emptor

Original article here

One of the things that sticks out about buyer's markets is that there are two sorts of listings: Those who are willing to do whatever it takes, anything it takes, to get the property sold, and the other who apparently just likes having the property in MLS.

Many listing agents have made a habit of telling people that they can get more for the property than the next person over. Well, some can. But there really is no secret as to how they do it. They have the discussion to price the property correctly in the first place, and if the listing price isn't appropriate, they will not take the listing. I don't list many, but if someone is insistent upon a listing price that is too high for the market, I am better off not being part of that listing. Even if it does sell after two major price reductions for less than I likely would have gotten straight off, that client is going to be angry, not happy, and tell everyone it's my fault.

Indeed, if there ever is a market where listing agents can reliably get more than the value of the property, something I am pretty sure doesn't exist, the buyer's market is the furthest thing from it. What a good listing agent can get you is the full value of the property, but that's a very different value, and a very different mindset, in a buyer's market than it is in the seller's market San Diego had for most of the last decade.

Now, you need to ask yourself, "Why is this a buyer's market?" The answer is as simple as supply and demand. High supply and Low demand. Many people who want to sell, not very many at all who want to buy. Result: Those few buyers who are willing to be out there have all of the power. If this particular seller won't take the offer they make, the next one over, or the one after that, will.

Most sellers would agree that this is a challenge. Buyers think it's great. When I originally wrote this, sellers outnumbered buyers 44 to one. It's a real challenge to have a successful sale in such an environment.

What's a seller to do about this? Quite simply, ask yourself if you have to sell or if you have other options. If you have to sell, make up your mind that you are going to do whatever is required to make a transaction happen. This can be a lot: cleaning your house up, making it attractive, pricing it better than the competition, and not kidding yourself. The offer you are going to get still won't be anything like what you might have gotten when the market was hot, but that was when the ratio of sellers to buyers was about three to one, often less. You will be much more likely to get an offer, and remember, you decided that you need to sell.

Lest you think you aren't competing with other sellers, go find a real expert in your area to help you right now. In the entire history of United States real estate, no buyer ever bought a property because it was that seller's "turn." You are always competing against other sellers, but a buyer's market makes it far more obvious. Buyers make offers on your property because something is attractive to them where other properties are not. This can be features, this can be location, this can be willingness to do what other sellers are not, or this can be price. Usually it's a mixture. In the sort of market like when I originally wrote this - remember that 44 to 1 ratio of sellers to buyers - it's likely to be all four in great heaping gobs.

If you don't need to sell in a buyer's market, get it off the market! If you are not going to accept a much lower price than it might have gotten when the market was hot, you are wasting your time. Those few buyers who are willing to get off the sidelines are bottom feeding and bargain hunting. If you have a better choice than feeding the bargain hunting and bottom feeding buyers, take it. If your property sits on the market, then when the market does turn back, the fact it sat on the market is going to count heavily against you. The agents in the area know that it sat, believe me. I was in a half day class the day I originally wrote this with several hundred other agents. Everybody I talked to agreed that the only transactions that were happening in that market were all happening completely on the buyer's terms. If you are not willing to meet those terms, you are not merely wasting your time, but actually sabotaging your future prospects of selling for a price that you would like.

If you are not willing to do what it takes to sell, get it off the market. Not only are you sabotaging your own future plans, you are adding to all of the excess inventory that's out there as a glut on the market. Indeed, for every additional property for sale in the neighborhood, people who are willing to do what it takes to sell the property are going to have to do a little bit more. Most often, this means "settle for a lower price than they might have gotten otherwise." Just the fact that there are 238 three bedroom houses listed in the same zip code gives buyers substantially more leverage than if there were fifty, or twenty. This drops the market that you are hoping you can use to sell the property two or five years from now, and gives it further to come back, which means that the pricing level will be lower when you go to sell your property for real. Individually, extra properties on the market may not make much of a difference, but collectively, they certainly do.

If you do need to sell in a buyer's market, get all traces of the "they'll do what I want" mindset out of your head. This isn't about pride, this isn't about profit, this isn't even about breaking even. This is about stopping the bleeding. We have established that if you do not need to sell, you shouldn't have your property on the market in this environment. But you do need to sell, which makes the alternative of taking less than you think the property might be worth better than the alternative of losing it completely. For as long as buyer's markets last, that is the attitude I (or any good buyer's agent) am cultivating in my buyer clients. If you won't sell, I'll talk to your lender after the foreclosure - if someone else has not already sold to me by then. When I wrote this, in San Diego, the only power sellers really had was the power to say, "no," and if your alternative is losing the property to foreclosure, a rational, informed person will pay thousands of dollars out of their own pocket instead, accepting offers way below what they owe on the property. And if that or something similar is not your alternative, then why is your property on the market at all? Why are you contributing to the apparent glut of supply to no good purpose?

Caveat Emptor

Original here

I went out previewing properties a couple days ago. That particular client's situation being what it is, I was concentrating on vacant properties. But over half the vacant properties in that area had restricted showing instructions. "Call agent first," or "call for appointment to see."

When the property is vacant, there just aren't any common reasons to restrict showing. It's not like the buyer's agent is going to surprise grandma in the shower or even could make off with the big screen TV. If you're really trying to sell it, if it's vacant, it's empty, at least of your stuff, and the stager's (if there is one) had better be insured. If there really is some reason to restrict showings, it should be somewhere on that listing report. But I'm seeing this schlock on lender-owned properties, where there is exactly zero reason for it, at least as far as the owner is concerned.

Sometimes, it goes so far that they will lie about availability. I call the agent about the property, and am told it's not available. I then get a friend to call as an interested party, and they're told it is still for sale. There just isn't a way to spin that as anything other than a gross and willful dereliction of the listing agent's obligations to his client.

What the listing agent is trying to do is control access, so that people like my clients have a gatekeeper. Why? So that the listing agent has the ability to block other agents from showing the property, therefore forcing people who want to view the property to become their clients also, and keep both halves of the commission (as well as forcing people to sign exclusive buyer's agency contracts just to see it). If the offer they bring in isn't as good, or isn't as quick (thereby costing the owner money), they still made twice as much or more in commission if they represent the buyer as well.

I strongly suspect that many agents - and yes, I'm keeping track of who, even though I'll never share it - play gatekeeper with offers as well. I send over an offer, follow up, and I never hear back. I call the agent, and am informed my offer was rejected, but I never see anything with the client's signature or even initials. I don't list many, but when I do, every single offer gets a written response, even if it's just "Offer rejected!" signed by the owner. It's illegal for me (as a prospective Buyer's Agent) to contact the owner directly to confirm that they know about an offer, or I would. I could really get behind a law that said I could send a postcard to the owner that says: "Dear Mr./Mrs. X. My client made an offer on your property recently at 1234 Name Street. If you are already aware of this, please disregard this notice. If you are not, please contact your listing agent about the details. If they cannot satisfy you as to whether you previously saw it, please direct all complaints to the California Department of Real Estate at XXX-XXX-XXXX." Boy would that be a good use for postage. Agents who did their job would have nothing to fear; agents who failed would be out of the business fast.

The motivations of the seller are to show that property as often as possible, to as many people as possible. No showing means no offer. No offer means no sale. Therefore, anything which is a nonessential impediment to showing that property should be dealt with, and agent restrictions are one of these. Believe me, I understand about not wanting client phone numbers in MLS databases, because the last time I had a listing decide they wanted to postpone the listing (therefore withdrawing it from MLS), they told me they got over a hundred solicitations from agents who ignored both the "do not call" list and the fact that I still had a valid listing contract at the time, which they didn't bother to ask about. It's illegal to solicit another agent's listing in California. If it wasn't, people who list their properties would be getting phone solicitations from 8 AM until 9 PM every day, and the junk mail would kill entire forests.

But the seller, whether they realize it or not, wants their property shown as often as possible, to as many people as possible. That's how you get get good offers, or even better, multiple offers that you can play off one another. Anytime you make it more difficult for anyone to view your property, you make it less likely they will view it, less likely they will make an offer, and less likely that it will be a good offer. The sharks out there don't care about viewing restrictions. They're willing to make their low-ball offers sight unseen, albeit with inspection contingencies. And even a shark's offer is better than no offer if you need to sell.

So how does a Buyer's Agent deal with problem personality listing agents? About the only thing I can do is not waste my time and most especially that of my clients on their nonsense. The only one with the power to deal with such antics is owner of the property. Just insisting that you want to see all offers isn't enough. How are you going to know? You can ask that instructions go into MLS for making certain that you get duplicates of all offers. E-mail, fax number, address, or even a PO Box if you have one. Buyer's Agents can't bypass the Listing Agent, but they can send duplicates if the MLS instructs them to.

Even better is to insist that the Listing Agent forswear the possibility of Dual Agency, or they don't get the listing. In other words, no matter what, they will not get the Buyer's Agent's part of the commission. As I have said many times, make them pick a side of the transaction - yours - and stick to it. The listing agent can refer buyers to another agent, or the buyers can go without representation - it's not your problem. Actually, as a seller, you would prefer that the buyer go unrepresented. Not only will you get a better price from the poor fool, you get to keep the Buyer's Agent Commission. But this way, the listing agent has no motivation to not present offers from other agents, and you can give them a flat $1000 to handle the paperwork so they won't shoo suckers away. You are perfectly within your rights, by the way, to make whether you are going to pay a buyer's agent commission part of your decision making process on offers, but it isn't a good idea to make too big a deal out of it. Most of the reasonable offers you get will be represented by a Buyer's Agent of some stripe.

Nor does it demotivate them from open houses and all that. It is more likely that the people I meet at open houses will want to buy something else anyway. Oh, I do sell listings through open houses - but the one who actually buys that house due to the open house is usually a contact of the neighbor who comes in with no possibility of buying themselves. Curious neighbors at open houses may be the most likely source of the kind of sale price that makes clients happy - if you treat them correctly. Internet marketing is cheap and easy and effective enough that it's worth doing just to get the listing commission. And when the property goes into escrow and people call about the ad in the monthly magazine I put an ad in, well I just find something similar if not better to sell them. Remember that I'm always looking for bargains, and I've usually got several properties in mind where the sellers are more desperate than I ever allow my listings to get.

This isn't all of the games that listing agents play to try and get themselves a larger commission. Many try to require a pre-qualification letter from a particular lender, which is over the border into illegality, or even requiring that you use their loan brokerage, which a dead center violation of RESPA - no borderline about it. I ignore either of these requests, and I'm not above bringing the latter to the attention of the Department of Real Estate. The vast majority of all pre-qualifications are worthless. Nonetheless, the tactics I've suggested cover you against them pretty thoroughly. One more worthwhile tactic if you don't follow my advice about disallowing Dual Agency is to walk into their office at random intervals, and insist that they pull an agent report - as opposed to client report that is all the general public is usually allowed to see - for your property in your presence and give it to you. You are allowed to see agent reports on your own property (and only on your own property), as the privacy reasons that restrict agents from showing agent reports to the general public do not apply. Look at the showing instructions. Does it say what you want it to? Are the requests for making offers restrictive? If not, you may have legal grounds to terminate the listing, and you should want to, because the reason MLS evolved the way it has is to encourage the widest possible interest in your property. A listing agent who wants to restrict that so that they can receive both parts of the commission is moving you back into the days of the single listing half a century ago, and that is not in your best interest, not for price, not for timeliness of sale, and not for the ability of prospective buyers to actually qualify.

Caveat Emptor

Original here

Here's the real issue about commissions: They need to be structured to incentivize good results - rewarding those agents who do good work, penalizing those who don't. The current structure, where the brokerage gets a flat percentage of official sales price - doesn't really motivate agents to perform. It really doesn't make a huge difference to the brokerage whether a property sells for $500,000 or $400,000. Assuming a 3% commission, they get $15,000 in the first case, while getting $12,000 in the second, despite that any monkey should be able to sell a $500k property for $400k. Basically, they get 80% of the reward for doing nothing, but that failure makes a huge difference for the property owners. If they owe $400,000, that's the difference between going on to their next property with about $60,000 in their pocket or coming up short about $30,000 and having to do a Short Payoff, with all of the resultant consequences to that family's future. Nonetheless, at 3% commission, all this means is the difference between $12,000 to the brokerage and $15,000. There is a dissonance between the interests of the owner, who this makes a $90,000 plus difference to, versus the agent who will still get 80% of the same paycheck if they do nothing but persuade the owner to accept the first lowball offer that comes along.

This dichotomy of interests encourages all sorts of games, from "buying a listing" (leading a homeowner to believe the property will sell for more than it will in order to secure the listing) to failing to negotiate hard to accepting too many listings to be properly serviced. If I can really service six listings, and I take ten, the individual selling prices will suffer while I make more money - ten times $12,000 is more than six times $15,000. Most agents - just like most people - will do what aligns with their personal interests.

The major alternatives - "net listing", where the consumer "nets" a certain amount and money over that goes to the brokerage, and "Flat fee listing" don't really float my boat either. The first has the advantage of pay for performance and severely discourages agents from over-promising on price; nonetheless the homeowner isn't motivated to maintain the property, and the agent is a little too motivated to wait for a better offer that isn't likely to come. As for the "flat fee listing", all that motivates the listing agent to do is get it sold - never mind the price. Whether the owner makes $60,000 by selling for a great price, or loses $30,000 by not getting so great of a price, that's all the same to the agent with a "flat fee" contract. But the owner wants it to make a difference to the agent, because they want that agent to get the best possible price, not just the first offer. As for the "flat fee in advance" listing, why should that brokerage want the property to sell at all? They've made their money already! If the property sells, now they have to do all that work and assume all that additional liability!

What we really want is a fee structure where the agent is motivated to get the highest possible price as soon as possible, the latter being more important than is generally recognized, as carrying costs eat profits very quickly, especially if the family vacates so as to show the property to best advantage and get the best price, or if they've already moved to their new home for whatever reason.

There should be several terms in this equation. It should take the form a+b+c+... For every factor the owner and the agent can agree upon having an effect upon consumer benefit, there should be a term in the compensation equation. Note that if the agent doesn't measure up in some way, any of these terms (except the one for doing the base paperwork) should be able to go negative. It's likely that good agents should be making more for listings than they are, while ineffective bozos quickly go bankrupt.

I'm not concerned with getting paid for a listing that fails to sell. In fact, I consider the concept anathema to a good agent - or any other business. If I do not get the job done, I do not deserve to be paid. Nor does any other agent or any other business. The world doesn't pay off on a good try (let alone a bad one), and my experience is that listings that don't sell aren't likely to have been a good try. I just visited a listing yesterday, a preview for a prospective client. Showing instructions said "vacant -go" Got there, it's a combo lockbox, but no combo anywhere. Spend half an hour in the front yard on the cellphone trying to get a combo from agent, listing office, the number the listing office referred me to, the number I was referred to from that, and so on. Finally gave up. How many others like me have there done that? Sounds like an agent who wants both halves of the commission to me, discouraging prospective buyers represented by other agents. Sound like someone you want to work with? Sound like someone you want to reward if you do inadvertently sign up with them?

This doesn't change the fact that if it does sell, there's a given amount of work no matter what the price is, and a given amount of liability. That's just part of being in this business. No matter how careful you are, no matter how good you are, eventually something is going to bite you. It's just a fact of life, and is the reason for E&O insurance. Just because I haven't been bitten yet doesn't mean it won't ever happen. The commission structure needs to recognize this fact of life, or it will fail. But this is not how agents should earn most of their money, and most agents don't do this paperwork themselves, but have assistants paid as little as they can get away with to do it. A flat fee of $1000 is probably about right in California. Enough to pay the rent, the utilities, and the receptionist who actually generates the paperwork off WinForms for most offices.

Performance pay is a separate issue, and should be a separate term in the equation. I'll happily pay $20 to make $100 ("here's another $20 if you bring me another $100!"). The most central idea of engaging an agent is to get a better price for the property. My client shouldn't be expected to pay me if I'm not performing services of value - enabling them to get higher price for a quicker sale and less. Any twit should be able to get $300,000 for a property that's worth $400,000. That's not a valuable service, and that's not something an agent should get paid for. If the agent can't get a good enough sale price to meet even a minimum test of benefit for the client, they should lose money. If the sale price is low enough, it should eat up even the base transaction fee, or even send the commission negative - the agent pays the consumer for so badly bungling the transaction. This is nothing unusual in other businesses. Even doing mortgages, I'm perfectly prepared to pay money out of my own pocket if I can't deliver a loan on the terms I quote (for reasons other than client not telling me the whole truth, that is!). The goal is complete consumer satisfaction, and taking money when my client doesn't benefit doesn't help my business in the long term either.

This performance pay should be steeper than current standards. Between ten and twenty percent is about what I think will do the most good. Give the agent a good solid incentive to want a higher price if they think its coming, while still reserving the lion's share of the benefit to the client. If I get Joe a price $20,000 higher than he would have gotten without me, Joe should be quite happy paying me a portion of that money by prior negotiated agreement. I would be ecstatically happy to do so in the reverse situation. And if you wouldn't happily pay it, I suggest you need a financial guardian because you're not economically sane. You want the agent to have a personal incentive to make that money for you. But it should be 10-20% of the excess or shortage relative to a base amount - whatever the seller and their listing agent think it could be sold without the agent benefit. It should also be based upon the sale price net of all negotiated "seller givebacks" not related to specific later discoveries (i.e. inspections and requests for repairs based upon them). I am talking about the NET sales price, not gross. If you have to give a buyer back $15,000 on a $300,000 sale, it's really a $285,000 sale, not a $300,000 sale. On the other hand, If an inspection shows unsuspected repairs costing $20,000 are needed, the seller would have to pay that anyway, and it's not the agent's fault that need exists. But the idea is that client benefit should translate into agent commission, and client detriment should translate into money out of that agent's pocket.

There should also be a healthy term built into the equation to reward or penalize the agent for a quicker sale or a slower one. This can be based upon a flat duration, or upon average days on market for properties in the same class. More expensive properties take longer to move - that's just a fact. But this component term should be based upon date of sale, and should be based upon a very high percentage of carrying costs for the property - about thirty to fifty percent, maybe even sixty. I'll happily pay fifty bucks if it means I don't have to pay a hundred - that is real savings! Say average days on market in a given market are roughly 120 from listing to close of escrow, and it costs $4000 per month to carry the property. So for every month above or below four months, at fifty percent carrying costs, the agent gets $2000 more or pays $2000. If it's a six month listing with no offers, the agent pays $4000 at the conclusion. This would force agents to learn what are and are not qualified offers, and force agents to live with the same kinds of tradeoffs that our clients do. No more, "Sorry that escrow didn't close. It happens," when it should be part of our business to know that that offer was pie in the sky in the first place. When it's their own pay being docked, agents will learn to do real investigation.

So far, the structure the ideal listing commission formula looks like this. $X basic commission, plus or minus $Y price performance (based upon 10-20% commission for over- or under-performing a certain price mark, plus or minus $Z time performance. Note that all of these are based upon demonstrable good for the client, and the client ends up with more money in their pocket as a result of every penny that agent is paid in incentive.

There should be one more flat component built in, contingent upon events. You don't want agents discouraging other offers, but you don't want them turning away foolish buyers who don't want a buyer's agent either. If someone is foolish enough to come in unrepresented by an agent, you don't want to shoo them away. So a fee for handling the buyer's end of the transaction is in order if there's no buyer's agent is a good idea - roughly half a percent of the sales price seems about right. Not enough that your agent is turning away offers made through other agents or pretending they don't exist, but enough so that they won't shoo any unrepresented buyers away, either.

None of this has any bearing upon the buyer's agency commission. That's a completely separate issue, and a separate article. But there are two issues you don't want happening to you. You don't want the listing agent discouraging buyer's agents so they can get both halves of the commission, and you don't want them shooing away an unrepresented sucker because it's extra work and liability that they won't get paid for.

Here's the really fun part: all of these terms need to get negotiated with every listing. Furthermore, it would tell a consumer quite a bit about whether they can really expect to get that listing price. I certainly wouldn't take a listing on terms which I wouldn't expect to get paid for, and neither would most agents (unless it's a "Hail Mary" to save their business).

As I've said, good agents would probably make more on this scheme, while poor ones will make considerably less, if they don't end up actually paying the client. You'd have agents advertising their average commission - paying a higher commission would do clients demonstrable good, rather than the standard "statistical studies show" argument NAR wants us to make. "Yes, I happily paid Joe $16,000 because because we agreed anyone could sell it for $250,000 in six months, and he closed a sale for $300,000 in thirty-two days." That's a five percent plus listing commission if the agent can pull it off - far more than any percentage I've ever heard of - that the seller was happy to pay because they demonstrably made more money and spent about $10,000 less in carrying costs! If an agent is that good, they can make that kind of money on every listing, and the clients won't be asking "What do you do to earn that money?" They'll be lining up to pay it! But to earn it, the has to deliver something good for the client, and if he can't help the client, he's going to end up owing the client money. Performance becomes the reason why agents are paid, individual performance for individual clients. It completely kills "buying listings", it completely kills "do nothing" agents as well as clueless ones, it discourages accepting more listings than you can service, it discourages working with more clients than you can handle, and it rewards agents who can actually get the job done better by the only universal measures - more money actually in the client's pockets sooner, with fewer carrying costs. The client benefit always leads to the agent reward - and client detriment always leads to agent penalty.

(the obstacles to it becoming standard practice are immense, because it would completely kill the idea and utility of National Brand Real Estate, or any branding above the individual agent level, and it's the big chains control the industry and lobbying - but that doesn't stop you from negotiating it for your own sale with an individual agent)

This does appear to be legal in California at least. It doesn't require any systemic changes - it all can be written into the listing contract, and it has no effect upon anyone other than seller and listing agent, meaning that if it's legal, there are no other interested parties, and a rational consumer would be as happy as a good agent to sign that listing contract, and happy to pay that commission, because it means they made even more money!

Isn't that what clients want? Isn't that what agents should get paid for? Don't you want an agent that's motivated for your benefit?

Caveat Emptor

Original article here

Found this on a public forum

I need help to stop foreclosure on my home. I need to sell quickly? I am a couple months behind on my payments and want to sell now. I am not looking to make a profit just need to get what i owe.

Boy, did the sharks swarm over that one! There were at least a dozen offers to purchase before I saw it.

Anybody will buy your house for half the market value. The mere prospect of a seller who is desperate and doesn't know any better sends these folks into paroxysms of lust - lust for the profit they're going to make on the property.

Contact an agent about selling at quick sale prices. Offer 2% or 2.5% to the listing agent, 3% or whatever is average or slightly above in your area to the buyers agent. Even a quick sale price should get you at least 80% of value. Yes, that will cost you 5%. But you'll come out with 75% of value net, instead of the fifty you'll get doing business with the sharks. If your loan balance is anywhere under 75% of the value, this puts more money in your pocket. If your loan balance is more than that, it means you'll owe less in taxes when the lender hits you with a 1099. Not to mention that trying to sell a short payoff without a good agent is an exercise in futility.

Now this is not to say that you should list it for 80% of your most fevered imagination of what it is worth. You need to sell, as in have someone offer a price that they can actually pay you, and quickly. You need offers. Ideally, you want multiple offers fast. You do this by not over-pricing the market value of your property, so that you will attract people who want to look, and they think it's a good price so they make an offer. The offer will not be full asking price, and don't waste your time hoping that you will get such an offer. Once that Notice of Default hits, everybody knows that you need to sell. To use one example I'm going through with a buyer client right now, if your property is a two bedroom place that basically looks like wild animals have been living there, and your list price is 99% of the three bedroom down the street, you are not going to get it, and you have a deadline, while your prospective buyers do not. You need to figure out what it is really worth by sales of comparable property happening right now, and then you need to discount that price by enough to make a difference. How much? Depends upon what your local market is like. That's part of what good agents get paid for.

Toss any concept of "negotiating room" or "getting what the property is worth" out of your head. Get your attitude completely out of the seller's market we had a few years ago. In this situation, all of the power is in the hands of the prospective buyers. If you won't sell for what they offer, the one down the street who is a little bit smarter, or a little bit more desperate, will. Sellers have little enough power right now without the deadline of foreclosure. People who need to sell have only the power to say no, and what happens if they don't say yes to someone? I'll tell you what happens: You get nothing. The chances are better of flying to the moon by flapping your arms than of getting some of your equity back out of a foreclosed property, even in the strongest of markets. Since your best alternative is lose everything you have in the property, that's not a strong negotiating position. This buyer does not have to have your property. They can go find a more attractive property, cheaper, from someone else. Their best alternative in negotiations is that they go find some other seller who will sell for what they want to offer. Negotiating position: Very strong. Net result, the buyer offers what the property is worth to them. If you won't take it, they only need a bit of patience to find something else that will. If you didn't need to sell, you could just hold on to the property, of course, but we've already determined that you don't have that option, and time is not your friend. A very large proportion of agents still have their heads in seller's market mode. Indeed, most of the major chains are still telling their agents to think like it's a seller's market. This kind of thinking is of no use in the present market, as residential property owners are re-discovering in San Diego County now that the things that drove the feeding frenzy have cooled off. Even during that feeding frenzy, there were properties that didn't sell. which is a warning now that the market has cooled again. When you consider the time constraints of selling under pending foreclosure, it behooves you to understand your position.

The only power a seller in this situation can get is by pricing it attractively enough that there are multiple offers that a good agent who's willing to work hard and really negotiate with all of them can leverage into something reasonable. Playing them off one against another is all you've got - and please note that the buyer who is willing to give the most is still going to get a better deal than they would have otherwise, because the thing that attracts them is that the property is a distress sale.

The sharks who buy properties for cash won't match the prices you get by selling through the normal marketplace. Ever. But even the normal marketplace does not reward you for being in a situation where you must sell.

Caveat Emptor

Original article here

Don Henley has a fun song off his second solo album called "Driving With Your Eyes Closed". I can't find a video performance, but here are the lyrics. It's got a chorus that ends with the line, "You're gonna hit something /but that's the way it goes."

A lot of what I read about the real estate markets reminds me of that song. Mostly, people are looking in a rear view mirror myopically, and think that's going to tell them where the market is going. Not so.

Let me tell you the most important "secret" about the real estate market - or any other market. Short term results are mostly about mass psychology. People are so into what is happening right now that they will react to it the same way as everyone else without thinking, whether it's fear and greed driving the market up or fear and greed driving it down. The short term, in real estate, is this year, next year, and maybe the year after. But the actual real estate transaction is expensive. It can cost you a couple percent just for the transaction to buy real estate, seven to ten percent to sell, so you've got to clear ten to fifteen percent higher price just to break even on the costs. Those costs will more than pay for themselves, but they are there. An average year in my market is about 5% up, and 20% up in one year is one of the best years local real estate has ever had. Short term flippers work by different parameters than most consumers, but these are the market factors most people have to deal with. It takes about three average years to break even on the costs you have to pay for the transaction.

This is enough to take the majority of real estate investing out of the frame of the short term market, controlled by mass psychology, and into the realm of the medium to long term market, where psychology is a factor, but as time goes on, more and more of your investment results are controlled by pure economics. Supply versus demand. How much people who want housing make. What the interest rate environment is like. Oh, and don't forget the effects of government and public policy. When somebody says, "The market has dropped in the last three months, therefore it's going lower" that is no more correct than the opposite: "The market has been going up - five percent in the last three months alone! Therefore it's going to keep going up!" In either case, making this sort of claim is functionally equivalent to blacking out your windshield and driving by the rear view mirror. "You're gonna hit something, but that's the way it goes!"

Furthermore, there is no such thing as a national market for real estate. It does not exist, and anybody who claims it does is either so clueless as to the nature of real estate markets that you should pat them on the head and say, "That's nice dear. Now run along and play with your Duplos," or they are actively lying. There are factors such as the interest rate environment that influence real estate markets nationally, but there is no national real estate market. In order for a given area to be considered one market, the properties within them must be functionally equivalent for the residents as to location. Let's look at the City of San Diego: No way is San Ysidro, right by the Mexican border, functionally equivalent to Del Mar Heights, twenty-five miles away along the coast on Interstate 5 just north of all the corporate buildings in the Golden Triangle, and neither is equivalent to Rancho Bernardo, which is about that same distance north inland along I-15. All three are part of the City of San Diego, and we haven't even gotten to the suburbs yet, they are three very different markets, with different demographics, different lifestyles, different building styles and all that that implies. For my real estate work, I specialize in and around the City of La Mesa, which borders San Diego on the east, and is different from all three previously described areas, and there are areas of La Mesa which are decidedly different from other areas of La Mesa. These markets are close enough physically to have market interactions, but different enough to constitute different markets - never mind Idaho, Georgia, or Vermont, which are not part of the local commuting area. Talking about a unified countywide market is occasionally a useful fiction, as there are interactions. People are able to commute from home to work and back again, no matter their respective locations within the county. Talking of a national real estate market is blatant nonsense. At most you can talk about a national amalgamation of local markets - a statistical hash of what is going on in all of the individual markets. Even when most real estate markets are in the tank, though, there will be local real estate markets that are doing very well, and others that are poised to do so.

You can talk about national factors influencing all of the local real estate environments. Interest rates, lender requirements, legislation in Congress, federal rule-making in general, all of these have a national influence. The markets themselves remain local.

For longer term analysis, you've got to talk about the economics of an area. Current supply versus demand, and where that ratio is going. What do people in the area make? What is the regulatory environment? How difficult is it to build more housing? What are the population trends? What is the economy of the area doing? What are the factors influencing rental price and availability? How likely is any of this to change in the future? It doesn't matter whether people are getting "priced out" or even how many people are getting "priced out." People have been priced out of Manhattan for decades; it hasn't stopped Manhattan real estate from rising in value. What does matter is whether enough people with the economic ability to pay the current prices are available to buy up the new inventory that hits the market. It doesn't matter that people who bought twenty years ago could not afford to buy their properties at current prices. What does matter is that enough people who can afford it will buy to more than balance out the people who want to sell at current prices.

So while you can talk about national trends, any given property sits in a particular local market, and any discussion of whether to buy a given property has to be rooted in the local market situation. National trends may have an influence upon its value. If interest rates go to eight percent, people can only afford about seventy percent of the loan they can afford if interest rates go to five percent, so falling interest rates are a time of rising prices, other things being equal. Of course, interest rates now are lower than when the market was going gangbusters, and prices aren't rising. The explanation is that there are stronger factors at work.

Nonetheless, if a million people want to own property in an area (say, La Jolla) and only 40,000 people can, then the price will be determined by the 40,000 people willing and able to pay the most. If twenty million people want to live in San Diego County and only three million can, the prices will be determined by the three million people willing and able to pay the highest prices. End of discussion. Not all properties in all locations are equally valuable of course, but the mix will be determined by what prospective buyers are willing to pay the most for. Note that not all costs are in dollars. Sometimes it's opportunity cost, sometimes it's any number of other costs, such as the risk of earthquake, the heat when the Santa Anas roll in, etcetera. Some people absolutely require living in a six bedroom 3000 square foot house, and if they can't afford the prices those command here, they'll go elsewhere despite the fact that they could easily afford something less expensive. Others will put up with living in a broom closet or a cardboard box so long as they can go surfing every day.

Analysis focusing on a market's short term results are largely a study in mob psychology. A few years ago when property was overpriced locally, I couldn't slow people eager to follow the other lemmings with a locomotive. When that changed, with available property prices well below historical trendlines locally, it took taken entire battalions of wild horses to pull individuals off the sidelines due to media coverage. But mob psychology is a changeable thing. A co-worker and I were talking about modifying an old T shirt just before I originally wrote this. The original version has two vultures sitting on a tree limb, discussing the negative utility of patience: "Patience MY ---! I'm going to KILL something!" (pardon the vulgarity.) We're going to change the second line to "I'm going to BUY SOMETHING!" That's the mood of the market we we're encountering then. The people who had been holding off seem to have realized that this is about as good as things were going to get for them. Maybe they're tired of waiting. Maybe they realized things were more affordable for them than they were in 2000, let alone 2004. Maybe they got "priced out" during the bubble and want to move before it happens again. Once you buy, it's not like the seller can come back and ask you for more money later because it turned out to be such a wonderful bargain - you're locking in your cost of housing. Putting it under your own control forever. The vultures were starting to swoop.

(Since then, of course, we've had the federal government ruining the economy and the machinery of lending, while pretending that things are getting better. They're not fooling anyone who's making major economic decisions - as evidenced by national housing statistics. We here in California have been hit by the double whammy of a state government that is also run by special interests and so pretends not to understand basic economics because the alternative is politically offending those special interests.)

Analysis on a local market's longer term prognosis have to ignore mob psychology. It's unpredictable on that scale, and nobody ever knows just when it will turn, or how. But there's only so long mob psychology can trump practical economics, which is the norm that any particular market will follow ever more closely the longer you run the experiment. With the recent decline in values, San Diego has dropped significantly below long term value trends and was still below them even with the aborted recovery, let alone since. This means that considering current supply and regulatory barriers to increasing it, demand of people who want to live here, the values that those people can afford to pay, and increasing demand for housing in San Diego, not to mention the changing dynamics of the rental situation (be prepared for rapid increases in rental rates), right now is an excellent time to buy, as prices are below where you would expect, given the longer term factors influencing the San Diego regional housing market.

Articles which consider only short term price fluctuations are looking backwards as we go into the future. They're looking at where we've been, not where we're going. And as always when you're effectively driving with your eyes closed: "You're gonna hit something, but that's the way it goes..."

Caveat Emptor

Original article here

First off, let me make something very plain. All a CBB (Cooperating Buyer's Broker compensation) can do is give good agent an incentive or disincentive to look at the property. A high one will not, by itself, sell the property. A low one will not completely prevent it from being sold. Buyers, being interested in their own bottom line, will persist in choosing the property that offers them the best property for their purposes at the lowest price, and agents with about an hour in the business should understand this. I not only cannot sell a buyer on a property that isn't at least as good a bargain for them as the competing properties, I won't try. It's contrary not only to my client's interest, which should be the ultimate consideration of any agent, but it's not in my interest either.

With that said, you really don't want to do is give agents a reason to sell the other property instead of yours. A cheap CBB does not motivate the agents to work. Suppose a boss told their workers "You will be paid $10 for every green widget you sell. You will be paid $15 for every purple widget you sell." Assume the widgets are identical in every way except color. How many green widgets do you think would get sold versus purple? Sure, they'll sell green if the customer wants it, but that's not going to be what they suggest first. If a customer came in the door wanting a green widget, they'd get a green widget. But if they walk in the door and aren't sure they want a green widget, the sales staff will quite predictably see if they can sell them the purple widget first. If they can, the green widget sits unseen, untried, and unsold.

In real estate, the person who sets that compensation is the owner of the property. There are lots of properties out there, even in a seller's market. When you go to sell, do you want your property to be treated like a green widget, or a purple one?

This isn't evil. Agents have to eat, pay the mortgage, pay expenses, etcetera, and we don't make as much money as people think. Even less so than most people, agents don't get to keep every dollar their company gets paid for their services, and they don't get paid instantly for waving a magic wand. It takes time, work, and expertise - I've spent six months, hundreds of hours, and over a thousand dollars just in immediate expenses working with clients to close a deal. If the company gets paid $10,000 and the agent has an 80% split (far better than most), they get $8000 gross. Less monthly desk fees, less per transaction fees, and less fixed expenses of staying in business, that's maybe $6500, and social security eats twice as much of that as normal, leaving about $5400 - and we haven't even considered income taxes or advertising yet. For a solid month or more of work, and who knows how much time looking before the clients made the offer that was accepted. With practically unlimited liability, and requiring continuous training and work to keep their edge. If it takes 3 months in all, that's barely minimum wage, and most agents work sixty hours per week at a minimum. Quite often, we've got to reduce our commission to put some money back into the transaction so it can close. Sound like a cushy sinecure to you?

Of course, most agents are working with more than one set of clients at a time, but as you can see, a $10,000 commission doesn't translate into a huge windfall for the agent. If the company only gets paid $8000, that translates into maybe $4100 that the agent can use to pay their family's living expenses and taxes. Which do you think they'd rather have, the bigger check or the smaller? Ask yourself what you'd do in their place. If it's a question of the smaller check or nothing at all, there's no question, but there are a lot of properties competing with yours for the available buyers, and more coming onto the market all the time. Do you want to give agents a reason to try and sell your property, or a reason why they'd prefer to sell someone else's property?

With all of this in mind, a screaming deal will sell. You don't have to worry about whether or not the agent is going to be on your side. Buyers will beat a path to your door, with or without an agent. However, pricing your property as a screaming deal is not something most rational owners want to do. They want to get top dollar for that property, and it takes at least ten percent below the rest of the market - more likely twenty - to get attention as a screaming deal. I've said this before, most notably in How to Sell Your Home Quickly and For The Best Possible Price, but this is twenty percent off the correct asking price, not the owner's fevered dreams of greed. The average CBB around here is three percent. So, save three percent to lose twenty? Not something I'd do. Furthermore, you're not going to put up a CBB of zero, no matter how low it's priced. I've explained before why the seller pays the buyer's agent. Finally, if you end up needing to give the buyer an allowance for closing costs to get the property sold, you're quite likely giving out with the other hand the same money you withheld in the first place, as buyers paying their agent is a closing cost. Why not put it out there in the first place, where it is likely to do you some good?

The differences a higher CBB makes for the seller are three: You don't have to worry whether buyers needing to come up with cash to close to pay their agent will impact buyer cash to close, you get more attention for your property more quickly and more consistently, and you don't have to worry about buyer's agents creating reasons not to buy your property. Put yourself in this situation: Most buyers are reluctant to pull the trigger on a half million dollars. They need some good hand-holding and reasons to buy, and instead, their agent is looking for a reasons to help convince them why they want to buy some other property instead. Do you think it might take longer for the property to sell? With carrying costs of somewhere around two-thirds of a percent per month for most properties, if a CBB a half percent higher gets the property sold three weeks faster, you are ahead of the game. The time difference will almost certainly be more than that, and - statistical fact - the longer your property sits unsold, the lower the price it will sell for.

If you want to offer a low CBB, that's your prerogative. The property had better sell itself enough better than anything comparable to still the doubters - and practically every buyer is a doubter. The lower it is, the worse it will be, the longer you'll have to pay carrying costs, and the lower your final sales price. A low CBB, especially in conjunction with other factors about the listing can advertise to buyer's agents that you aren't ready to sell yet, warning them of a difficult transaction with lots of opportunity to fall apart due to seller issues. If I can find a model match with an obviously motivated seller around the corner, why should I take my buyer to yours? We're going to get a better price on the same thing with the property around the corner, there will be fewer issues with the transaction, and the fact that I'll make more money even though my client got a lower price is pure bonus for being a good agent. Call it karma.

On the other hand, offering a significantly higher than average CBB doesn't work as well as some people seem to think it does. It definitely won't sell the property for more than it's really worth. Furthermore, it raises all kinds of red flags in my mind, and, I imagine, in the eyes of most agents. "Why do they think they need to offer five percent when the average is three?" springs to mind pretty much unbidden. Most often, the property is overpriced. Almost as often, there's something wrong with it that only an experienced investor is going to be able to deal with - and experienced investors don't pay top dollar for a property. Ever. Quite often, there's something unrepairable detracting from the value of the property. It might get the property sold much more quickly - most agents have some investors I can call if we have reason to, and if you get our attention with a high CBB, both we and our clients are happy. So if you're stuck with a property that has something seriously wrong with it, a high CBB and a low price will cause it to see a lot more action. But they have to be coupled together. High CBB won't do it on its own. On its own, high CBB is pointlessly wasted money.

An average CBB or maybe slightly higher will quite likely accomplish what you want; a quicker sale and therefore a higher sales price. If you're a half percent above average, that's not enough to raise red flags, and it will get you attention. Good buyer's agents will still require that it be an above average value for the client, but they will look, where they might not otherwise. It also stands a good chance of motivating them to really take a good long look at the property.

Short Sales are worse than everything else, as far as CBB goes. Short sales usually take much longer, are more often than not overpriced, and there's a much higher chance of transaction falling apart and the agent losing the client as a result. In my area, over eighty percent of all short sales fall apart, and there's not much the buyer's agent can do to alter the odds - it's in the hands of the listing agent. The lender is going to require the agents involved to reduce their commissions. Agents know this, and they can't really fight it. If you're out there on the cheap end of CBB before the lender wants to grab money we've earned away from us, and statistically four out of five short sales self-destruct and lose the client without closing, what reason is there to show your property, as opposed to the one down the street that's not a short sale? Cost my client money and time to no good purpose, when I can usually find them something just as good at a better price that closes faster and without the eighty percent chance of fallout. But there's always a reason for a short sale. I've never seen one yet where the owner didn't need to sell for some reason or another. Why doesn't matter; If a short sale is the least bad thing that can possibly happen to you, the one thing you don't want is for the property to fail to sell, and a below average CBB on a short sale will practically insure that the property won't sell.

If I had my druthers as a buyer's agent, I'd rather buyer's agency commission be set as a flat amount, regardless of the actual sales price, so that the agent isn't shooting themselves in the foot if they can negotiate a better price. On the other hand, it's not a crime for the seller to structure it in a way that produces dissonance between the interests of the buyer and the interests of that buyer's agent. I may not like it, but I take shameless advantage of it when I'm listing property - I advise owners to make CBB a percentage when I'm the listing agent. Just because I understand a happier client is likelier to bring me more business doesn't mean every agent does. Maybe it's because I read Sun Tzu and von Clausewitz at an early age, and military history has always been an avocation with me. Maybe it's because I took almost enough probability and statistics courses in college for it to count as a major. Maybe I'm just competitive by nature. Whichever it is, I believe in taking every opportunity to load the dice in my client's favor before they get tossed. Anytime there are large amounts of money at stake, you're either in it to win or you are a sucker. There's a lot more money involved in real estate than almost anything else.

At higher valuations, reasonable agents expect CBBs to go down. There's not much difference in the actual work between a half million dollar property and a full million dollar one. Higher liability exposure and a little more hand holding and a little more service. Furthermore, the kind of people who buy million dollar properties tend to be better qualified to do so, leading to fewer escrows failing due to buyers failure to qualify.

One of the things I don't understand is that many agents are the worst about CBB. They should know the power, and yet when it comes to their own money they disregard the facts and try and to do it on the cheap. I make a special note when I notice those listings, because it's like they're shouting, "I'm just out for a quick buck! I don't really know what I'm doing!" to those with the ability to hear it. With that information, I keep a special eye on their listings for other clients. Just part of my desire to look for opportunities to depth charge fish in a barrel. When I find one, it always results in a happier client.

Caveat Emptor

Original article here

I just picked a random ZIP code in my local MLS, and out of the first twenty listings I came to, ten had explicit violations of one or more of the sections of RESPA regarding steering right there in the listing. This did not include lender-owned real estate, which has its own set of issues in this regard. All I did was count two common violations.

The first was "Buyer must be prequalified by X", where X was some loan originator. In a way, I understand this. Forty percent plus of all escrows locally are falling out, and the vast majority of them because of unqualified buyers who cannot qualify for the loan. This wastes a minimum of about a month, plus when it goes Active again, it looks like it's been on the market for longer than it really has. Bad thing all around for the seller. The justification used is that for some reason, the agent trusts that particular loan officer to render a real opinion. Perhaps occasionally, a lender owned property will even try to require prospective buyers to prequalify through them. While it might seem reasonable, here's some relevant law from RESPA

Business referrals

No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

They mean that "any thing of value" bit, if you peruse down to the definitions. It's defined very literally by about a paragraph of text that boils down to four words: ANY thing of value. You refer business to them, they give you approvals you can count on. It doesn't matter if you require "only" a prequalification - they now have the prospective borrowers information, including credit information and home telephone number. This means that even if there's no application fee, no deposit, not even a credit report fee, you have still given that loan originator a "business relationship" with the borrower. That makes for legal consideration on both sides of the equation, and both the originator and agent are guilty. This is just as hard a violation of RESPA as a fraudulent HUD 1 form. It hasn't been enforced much of late, but I believe that the State of California could probably put over half the brokerages and lenders in the state out of business over loan steering. I only counted four out of twenty actual explicit requirements to pre-qualify with a specific lender this time, while the last time I conducted the exercise it was eight. Maybe it's getting better, maybe it's not, but twenty percent of a representative sample of listings having an explicit violation of the law right there for everyone to see is not something agents should be proud of. When it comes to holding someone responsible for their representations, pre-approval doesn't mean anything. If you're a real estate agent who doesn't do loans, talk to a lender you trust about necessary information to determine whether a loan is doable. I've created a special form that I send to agents making offers on my listings. Nothing in the way of personally identifiable information except the borrower's name - no social, no contact information - but it does have credit score, late payment history, income information, etcetera, to the point where I can tell whether or not I could do the loan on the terms necessary to make the transaction fly. Furthermore, it does require the loan officer to sign a representation that they aware that a decision as to whether or not to grant credit - in the form of agreeing to enter escrow - will be made based upon this information. They don't need to make representations of opinion - all I'm asking for is verified facts. Armed with those facts, I have a pretty darned good idea if this borrower is capable of consummating the transaction. Doesn't tell me whether they will or not, but that's not what wanting a prequalification or preapproval is about.

But when I'm a buyer's agent, which is most often, I simply ignore these requests that violate the law. Furthermore, this puts me in rather a strong negotiating position if the listing agent repeats the request or brings it to my attention. Now they've compromised their client's interests, by giving the other side (me) a concrete legal issue to aim at them. Game, set, match. As I said, four out of the first twenty listings in a random ZIP code explicitly violated RESPA right in the listing, without counting the ones that say "Contact us prior to making an offer," where that's usually what they want. Four out of twenty where there is precisely zero doubt that they're violating the law.

Actually, that wasn't the most common violation, either. That goes to "Seller to select all services," at six out of twenty - thirty percent. Also from RESPA:

Sec. 2608. Title companies; liability of seller

(a) No seller of property that will be purchased with the assistance of a federally related mortgage loan shall require directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company.

(b) Any seller who violates the provisions of subsection (a) of this section shall be liable to the buyer in an amount equal to three times all charges made for such title insurance.

Even though in California the seller usually buys the title insurance for the buyer, I've had more than one lawyer tell me that failure to negotiate is construed as a violation of RESPA by the courts. It works like this: In the case of simultaneous owner's and lender's policies from the same company, there's a discount for the lender's policy, essentially requiring the lender's title insurer to be the same as the owner's title insurer. Since this happens on every purchase transaction where there's a loan, you have the requirement to negotiate. Seller and buyer negotiate until they come to a mutually acceptable compromise. Neither one of them gets to dictate to the other. Furthermore, failure to consider the best bargain for the client is a violation of fiduciary duty for the agent. It's not the sellers who want to choose services. Other than corporate owned property - lender owned and corporate relocation properties - there just isn't a reason for many sellers to care. The only reason is if they're employed by a title or escrow company, and their fringe benefits include free title or a free escrow. I've seen that once in the last four years.

What's really going on here is title insurance companies providing free farms, or subsidized mailings, or any number of other freebies they use to attract real estate agent business. Or the brokerage has a captive escrow company they're required by the broker to use, despite the fact that failing to negotiate this point is a violation of the law. I've had agents or their idiot assistants tell me that they get "discounted service" even when I've got a lower quote from the competition. Furthermore, the interplay of title company and escrow company is important. If there's no common ownership between the two, the title company will charge a "subescrow fee" that I've seen be anywhere from $100 to $450 (usually about $350) because they're the ones who are actually set up to accomplish some things that are legally the escrow company's responsibility. For instance, recording. What this means is that even if the actual quote is lower from unaffiliated companies, the clients are quite likely better off choosing escrow and title companies where there is common ownership, even if the quote is a little higher - because there won't be subescrow fees, and quite likely not messenger fees between title and escrow. To paraphrase an common saying, $350 is $350, even when there's a half million dollar deal happening. Make certain you get a guaranteed total fee for services quote based upon the actual escrow and title relationship to each other. I'm quite sorry for independent escrow companies - I have no reason to believe they're any less competent or charge anything more than title company affiliated ones - but they're competing at a disadvantage because the title company wants to charge more to work with them, and this is quite reasonable given that they will be performing services that are the escrow company's responsibility. They waive subescrow for their own affiliated companies simply because, one way or another, they're responsible for the work.

I've also heard all sorts of nonsense about competence of title and escrow officers. The fact is that most of them are perfectly up to your transaction. Even corporate owned relocation properties, where there may be some complex tax issues, aren't significantly more complex than your garden variety individual buyer - individual seller, and don't get me started about 1031 exchanges, which are perfectly straightforward from escrow's point of view. Any good agent's agenda is very simple - competent service providers for the lowest total price. The vast majority of the time, this means a title and escrow company with common ownership. Note that I don't care which title company and affiliated escrow company. I'll do business with anyone that hasn't hosed a client, and even if they have, I'll simply require a different title or escrow officer - just because John has a recto-cranial inversion doesn't mean Jane, another officer at the same company, does. Even lender-owned property will negotiate service providers if you approach it right - which is how it should be. Oh, you'll end up with their choice of providers most of the time, but you can get them to pay for subescrow and messenger fees, and quite likely an allowance to meet your lowest quote elsewhere - meaning your client doesn't really have a reason to care. Essentially the same product at the same price to them. Why would most clients raise a fuss about that? Indeed, the only thing worthy of most clients raising a fuss would be if you didn't negotiate for that. Explaining the whys and wherefores of the whole service provider quandry has gotten me a seller or two working at cross-purposes to their listing agent, who had someone all picked out without informing their seller. When this happens, my buyer wins. How could I not use every weapon at my disposal?

The intent of Congress on steering is quite clearly spelled out:

TITLE 12--BANKS AND BANKING
CHAPTER 27--REAL ESTATE SETTLEMENT PROCEDURES
Sec. 2601. Congressional findings and purpose
(a) The Congress finds that significant reforms in the real estate settlement process are needed to insure that consumers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country. The Congress also finds that it has been over two years since the Secretary of Housing and Urban Development and the Administrator of Veterans' Affairs submitted their joint report to the Congress on ``Mortgage Settlement Costs'' and that the time has come for the recommendations for Federal legislative action made in that report to be implemented.
(b) It is the purpose of this chapter to effect certain changes in the settlement process for residential real estate that will result--
(1) in more effective advance disclosure to home buyers and sellers of settlement costs;
(2) in the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services...

Whatever forms those kickbacks and referral fees may take, if your agent is violating this, do you really want to do business with them?

Caveat Emptor

Original article here