Buying and Selling: October 2021 Archives

"what can a consumer recover from title company for undisclosed easement"

Basically, the cost of the immediate remedy, at least here in California.

Here's a standard example. Mr. and Ms. Smith buy a property and they wish to put a pool in. The purchase process reveals no easements and they take possession of the property and start digging. Three hours later, the contractor hits a four foot water pipe buried six feet deep and cutting right across exactly where the pool needs to be.

With a standard owner's policy of title insurance, the title company will pay for the contractor's bill, including the cost of filling in that hole they dug. There may also be a small settlement made for the decreased utility of the property. After all, you can't really do anything about that easement, now can you? Nor can you build anything that conflicts with the easement holder's right of access. No pool, no granny flat, no game room or detached office, at least on that segment of the property, which, given the size of most recent lots, means not at all.

The title company will not, under the basic policy, purchase the property or make a large settlement. The reason for this is that if the standard policy made them liable for things like frustrated purpose of purchase, the standard policy would be far more expensive. People wouldn't want to purchase policies of title insurance, because they insure against risks which are relatively rare. However, those risks are extremely expensive when they do occur. Who pays for that? The other policyholders, of course. For a lot of people, they think of title insurance as junk when it will save your bacon if there's a real problem with title, and increasing the base price would mean that a lot of people would want to pass. The idea is to keep a policy of title insurance affordable, and still cover what it really has to cover, which is losing a property you thought you owned through action of law.

You can purchase a rider or endorsement for extended title coverage. Furthermore, if certain purposes are critical to your reasons for acquiring the property, you can do additional research, or pay to have it done. It can be expensive, but if you don't want this $500,000 property unless you can build a pool, an office, or a granny flat on it, spending the money is an excellent insurance policy. After all, even if you finance the vast majority of your purchase, you're on the hook for every dollar you spend buying the property. Spending a little extra to insure you're not wasting every dollar of the purchase cost makes sense in such circumstances.

Caveat Emptor

Original here

And I don't know why people expect it to be.

Cancel that. I do know why. Popular media. It's not all that common in popular media, but on those occasions I see someone buying a house in the movies or on TV, it's glossed over in terms that amount to the Fairy Godmother waving her magic wand. Partly, this is because the writers don't understand it, but mostly, it's because that if it's not your house, there isn't the necessary degree of emotional involvement to make it interesting. In short, it's boring, something studio and programming executives understand very well. Even on the real estate channels and shows, it's glossed over in ways as to render it basically into a simple magic spell (to the detriment of those agents who pay attention to those shows, and their clients). To an audience, all this stuff is boring, the cardinal sin in the entertainment industry. They can handle repetitive, they can handle stupid, they can handle insanely dangerous - they can handle pretty much anything except boring. To expect an accurate depiction of something so fundamentally boring to an audience is asking the impossible. When you add in how long it really takes (weeks if you're paying cash, months if you need a loan), how are they going to possibly depict that in a 30 or 60 minute TV program or 90 minute movie? Not to mention the fact they have no desire to because it's boring, and boring programs don't keep the audiences the advertisers pay for. There's no money in showing it accurately - the money for the media is in somehow being able to make it interesting. Even if they have to make up stuff that isn't there - and leave out 99.99% of what is there - to do it. Of course, by then what they show bears no relationship to the actual process.

There is nothing simple about an intelligent, informed decision as to which piece of real estate to buy, or securing any necessary financing. You can choose to do it the easy way, hoping that in your "ignorance is bliss" state of mind nobody takes excessive advantage of you. How many millions of people who had that attitude went through foreclosure a few years ago? I have documented pretty extensively on this site exactly how easy the basic research that allows you to avoid the traps these people fell into is. Unsustainable loans aren't the only problem, though, only the biggest problem we're dealing with en masse right now. All of the individual con games that get played with real estate itself are still there, and nobody's proposing to pass any laws that will have any kind of real effect upon the problem.

Here is the situation: Here is a major asset, worth several years of your family's total income. Comparatively minor differences in perceived value make a major real world difference to how much money the seller walks away with. If that seller can net $10,000 more, that's roughly two months of free income from any regular employment they may have, and around here, a $10,000 difference is pretty trivial - the usual bar for quick turn fixing is at least $50,000, more like $80,000 to $100,000. Just because it's money borrowed from the lender doesn't make it any less real - in fact, it's all the more dangerous for that.

Given the high payoff for extremely minor games, people will play those games. People will lick the bugs off a car for $20. People will cheat on their taxes and risk nasty fines, penalties, and jail time for small amounts of money. 419 scams continue to make millions of dollars off their victims daily. People will bear professional false witness for dirt cheap amounts. 7% of the people surveyed said they'd murder a stranger for $10,000. On that scale, how likely do you think it is that they'll make things appear a little better than they are to net $50,000 extra out of a real estate transaction? With several times the amount at stake that takes 7% of the population to murder you, do you really want to take that risk?

There are friendly, amicable real estate transactions where everything goes easy, everything required is disclosed, the people concerned negotiate like reasonable adults, everybody keeps what is reasonable foremost in their minds and deals with the other people involved on that basis. I wouldn't bet on it happening in any particular transaction. Nor are many transactions something like the picture painted by Churchill's most famous speech, "I have nothing to offer but blood, toil, tears, and sweat. We have before us an ordeal of the most grievous kind. We have before us many, many months of struggle and suffering." But if you're mentally prepared for trouble and it doesn't happen, you're going to be pleasantly surprised. All too often, people think they're in for the media "magic wand" version, and freak out when they're confronted with reality. I'd like it to be easy, but frankly, if it were I'd be out of the most interesting part of what I do. Nobody would need an agent if it were easy. Those people who do business with me and through me know how often I use the phrase, "If it were easy, anybody could do it." The context is almost always something has come up, and I have to do some work to make it right, but I'm also making the point that that's exactly what I'm paid for. It's an inalienable part of the job. If it were all peaches and cream, the vast majority of all new agents wouldn't quit (or essentially quit), would they? One of the nice staff people down at my local Board of Realtors tells me that significantly more than half the registered agents do zero or one transaction per year. You can't survive on one transaction per year unless it's maybe a ten million dollar property. You can't even keep up with changes on one transaction per year (but nobody can really do fifty or more transactions per year, either - not and guard their clients interests as you're supposed to)

Buying real estate is a fantastically good idea and great investment, as this and this and this being just the major articles directly on point that I can think of off the top of my head. There are also obstacles, I will admit. Hell, I pretty much proclaim it in big bold type and explain many of those issues in detail. Credit issues, debt issues, how difficult it is to save for a down payment. Unless you're eligible for a VA loan, there are no more "zero down" or "no cash required" loans at this time. I do believe they're come back within a few years years, but it's better to act before the boost in price that their return is going to give the market. The point is this: Nobody can make up your mind to do what is necessary but you. I can and will gladly help with preparation and planning and budget and evaluating property and everything else, but you've got to first be the one to make up your mind that you want the benefits of real estate ownership, and will pay the costs required to get those benefits. Nobody can do it for you. Nor is pretending it's free or easy in your best interest. The buyers who tried to pretend it was all free and easy are pretty much getting smashed between a rock and a hard place right now.

My point is this: You shouldn't expect to buy or sell a half million dollar or more unique asset like real estate in the same fashion you would a loaf of bread or a box of paper clips. Especially not when there are major rewards for making it appear just a little bit better for the other side than it really is. Expecting to do so is an artifact of Hollywood, and it's worse than all of the horrible cliches in all the bad movies and TV shows that have ever been made about most other situations, because the people who get involved in those other situations know (or learn in short order) what a horrible crock of fertilizer it is, while people who get ready to buy real estate generally don't, and have only the one experience to learn. But that one experience often controls their life from that point on - even when they don't understand how, why, or the fact that it is controlling their lives. I don't think I've ever seen anything like an accurate media description of being an Air Traffic Controller or any of the other jobs I've done. I've been witness to or involved with several major news stories in my lifetime. Aside from sports, I don't think I've ever seen any events with which I was familiar accurately reported. The reason for the ability to accurately report sports is shared experience and widespread audience understanding of the key elements through repeated personal involvement, or at least personal observation. Not to mention that people are interested in sports or they just tune out. If you care about Antarctic Rules Underwater Basketweaving, you tune in to the station that reports it, while if it comes on and you're not interested, you pay attention to something else. If you're interested, you understand all the major points of Antarctic Rules Underwater Basketweaving - you've done it or watched it enough that you're familiar with what's important, as should any reporters. But with every real estate transaction, things are different from other real estate transactions. Not only that, if it's not your money, it's boring as hell unless you're at least a pretty decent agent who understands everything going on. But pretty much everyone who hopes for a secure financial future is going to have to buy real estate at least once in their lives. It's going to be a unique experience, and it's not all going to be pleasant. Quite often, it's frustrating as hell, even when it doesn't need to be - but you can't force the other side to be reasonable. Don't expect it to be like Hollywood depictions, and you won't be shocked. Whatever your job is (except show business itself, of course) I'll bet you serious money that Hollywood doesn't portray it correctly either. Why should real estate be any different? But here's one prediction I'll stake serious money on: The more time and effort and often disappointment and frustration you spend going through the buying process, particularly if you've got a good agent working in your best interests, the happier the eventual result will be.

My most spectacular, satisfying results have all come from clients who were difficult, or had difficulties, and kept going to the very happy conclusion. I don't have any objective measurements, but it sure seems like to me those were the ones who ended up happiest with their purchases in the end. The stuff you go through to buy a property is temporary. The benefits you get from having done so are permanent, and usually quite large, as discussed above. Even after you sell such a property, you've got more money than you would have had otherwise, money you can use for whatever is important to you. Real estate doesn't have to be your life to benefit from it - or be ruined by it. Keeping this in mind, doesn't it seem like a good idea not to expect it to be accomplished by a Fairy Godmother waving her magic wand?

Caveat Emptor

Original article here

I have to admit I'm uncomfortable with it and don't like it. As a buyer's agent, here I am getting paid by someone who not only is not my client, but whose interests are aligned, in most issues, opposite to my clients. They want the highest possible price, my client wants the lowest. They want out of the property without spending money on repairs if possible, my client wants the necessary repairs made. The list goes on and on. About the only issue on which the two sides are in agreement is that they want the transaction to happen. Yet it has become essentially universal for the seller to pay the buyer's agent. Indeed, this is basically the only fig leaf protecting Dual Agency. If the money to pay the listing agent came from the buyers, they'd have to ask themselves "whose interest is this agent looking out for?" with the result being that dual agency would die overnight, and if staking dual agency through the heart doesn't appeal to you, you're unlikely to be on the consumer's side. Not to mention the myth of "Discount price, full service" would die just as quickly, on both buyer's and seller's sides of the transaction. There are protections in place to make it both legal and ethical, but getting paid by the seller when I'm acting on behalf of the buyers still makes me profoundly uncomfortable, and that's aside from facilitating these urban legends.

(The buyers are paying the listing agent, but not directly)

That said, let's consider why it happened, what it would take to make it change, and what the cost of that change would be.

The first paragraph makes obvious the benefits if no sellers were to pay buyer's agents - if what the seller paid out in agency fees was reserved solely to the listing agent, usually contingent upon a successful sale. No "Co-operating Broker" percentage. Not to mention the fact that the seller would come away with a larger percentage of the value of their property. Instead of seven to eight percent, the cost of selling the property would fall to between four and five percent. Not paying the buyer's agent sure looks like a win for the sellers, and one would think explaining that it would be part of an agent's fiduciary responsibility to explain, right?

But the reason that it is in any given seller's best interest is almost as obvious. Ask any agent and any loan officer what the number one obstacle to buyers being able to buy a given property is buyer cash. Okay, there are those unethical persons who will tell you that the problem is qualifying people for property beyond their means, but I'm talking about people who want to buy properties they can otherwise afford. Once they get the loan and the property, they will be able to afford the payments - the real payments on a sustainable loan - and keep up the property and all of the other stuff that essentially goes with "happily ever after". The number one constraint upon people wanting to purchase property they really can afford is cash in their pockets (or equivalently, bank account). The cash for the down payment, the closing costs of the loan, and everything else involved. It takes a long time to save that money, over and above the daily expenses of living. Some people find it difficult; others, impossible. Add the buyer's agent commission to that, and that sets the bar of cash they need to save that much higher.

The seller has the built up equity in their property, from the loan they've been paying on and usually, the increase in property value, and if that property commands a higher sales price, this equity is greater, and getting more money is the reason for them being willing to pay the buyer's agent. This willingness means that the pool of potential buyers doesn't need even more cash, which means that more potential buyers are able to afford this property. The more potential buyers able to potentially afford the property, the higher the likely sales price. The greater the economic demand, the higher the price, holding the supply constant, and there is only one such property. In fact, this increase in the sales price is typically much larger than the cash they pay, thus furnishing incentive for the sellers to be willing to pay the buyer's agent as part of paying their own. By shrinking the necessary pool of cash the buyer needs to a smaller percentage of the purchase price, they increase the potential selling price by more than they cash they put out. Furthermore, if everyone else is willing to pay this money and this particular seller isn't, then by making it harder to purchase their property than the competing ones, they shrink their pool of potential buyers, thus costing them more in eventual sales price than they are likely to recover. If my clients have just enough cash for closing costs plus down payment, they're not prospects for that property, because if they had to write the check for the buyer's agent, they fall short. One alternative is to lump the buyer's agent commission into a seller paid allowance for closing costs, but the six percent aggregate limit that most lenders draw in the sand for that can make it a real constraint. Considered on an individual basis, it's better for sellers to simply agree it's their responsibility in the listing agreement, thus removing the money from that allowance.

Indeed, an argument can be made that offering an average or higher incentive (locally, 3% or more) to a buyer's agent is one of the better ways to get the property sold. Not only do many buyer's agents shop that way explicitly, but if they have an exclusive contract that says 3% (as many do, because their clients aren't educated enough to know what a crock exclusive buyer's agency agreements are in the first place, but they'll also willingly trust the chain agent as to what is "standard"). If the Cooperating Broker's percentage is lower than what it shows on the buyer's agency agreement, that buyer will need to come up with more cash to pay their agent, from out of their limited pool of available cash. When that buyer's agent is in a position to demand 3% whatever property their victim buys, even if they didn't find it and weren't involved, that means properties paying less than that aren't contenders for this buyer's business, unless they've got so much available cash that it just isn't a constraint, and that is rare. A better buyer's agent puts a lower number on a nonexclusive contract, and if they get more, that's certainly fine with them, but because they have a non-exclusive contract, they don't get anything if the buyers become disenchanted with them and stop working with them. This gives a buyer's agent with a non-exclusive contract the incentive to find the property that's a real value to the clients as quickly as possible. I care far less about whether I'm getting two or three percent or something in between on a particular property, than I do about finding the property my clients want that's within their budget. My incentive is to make the clients as happy as possible so that I do get paid, because if I don't, I won't. But the buyer's agent with an exclusive contract that pays three percent has a different set of incentives, which is another reason I advise strongly against signing exclusive buyer's agency agreements, and the existence of such creatures is the reason why it may be a good idea for sellers to offer a higher percentage to a buyer's agent. (There is no consumer oriented reason to keep the amount of the Cooperating Broker's compensation secret, and I strongly support making it part of the general public's available information, which it currently is not on my local MLS.)

So sellers offer a commission because it shrinks the percentage of purchase price that buyers need to have, competing for buyer business as well as expanding the pool of possible buyers theoretically able to consider this property, both of which increase the purchase price more than enough to balance the money they spend. If by paying someone three percent, I increase my take by five percent or more, that's money any rational person will spend. The preliminary numbers I've seen indicate that the seller's increased take is about ten percent of gross price, which translates to almost seven percent more money in their pocket if the property is free and clear, and an even larger percentage if it isn't. On a $100,000 property, you spend $3000, get that money back and another $7000 besides - wouldn't you do that? Doesn't happen on every transaction, but those are the statistical averages. It might not be that much in your particular case - but it could as easily be more as less. If the dice were loaded on your behalf like this in Las Vegas, and that the expected value of a $3000 bet was $10,000, most of those reading this would quit their jobs and move there (at least until the casinos went bankrupt). In reality, it's pretty much the reverse: It'll cost you 10% not to put that 3% on the table.

We've seen what a winner this bet is, in the aggregate, and therefore why rational sellers who are allowed the option will opt to do offer a cooperating broker's percentage, which essentially goes to pay the buyer's agent. The economic incentives under the market therefore reduce it to something like one more tragedy of the commons, although unlike the classic example, it doesn't really hurt anyone directly, it just shifts the market price upwards. The only way to change it is therefore to pass a law prohibiting it. Leaving aside the mechanics of such a law and considerations of whether people could find loopholes in such a law (they would), and consider such a law as being proposed. Consider such a theoretical law as perfectly written and trivial to enforce, such that nobody could successfully get around it. I know that this is ridiculous (as should any adult), but let's pretend to believe this fairy tale for just long enough to tear it apart even under ideal circumstances. What happens? Well the market is priced to include the shift upwards in prices that sellers paying buyer's agents causes. It's just a one time shift, but we've already had the up, so now we'd get the down. Obviously, it would further damage current owners who would like to sell, and make prices more affordable to those who want to buy. Okay, so far we have a 1:1 correspondence between who gets helped and who gets hurt, and even, arguably, a $1:$1 ratio in hurt versus help. For every potential buyer who qualifies on the basis of income but no longer has the necessary cash in hand for a down payment, closing costs and a buyer's agent, to boot, we now have someone new qualify who has the money for the down payment, etcetera, and can now qualify on the basis of income. Like I said, direct effects help someone for every person they hurt. Before we leave direct effects, we might ask about how likely people are to vote to harm people who bought into the current system of homeownership based upon the status quo, in order to benefit an equal number of people who aren't - or aren't yet - part of that system at all. That equation doesn't play well very often in the United States.

Now let's consider the indirect effects. You see, people who want to sell and people who want to buy aren't the only ones affected. People who own, but want to hang on to their current properties will also be hurt. When prices fall 10%, everyone with less than 10% equity is suddenly upside-down, with all of the problems that brings. In the current market, the chances of them being able to obtain refinancing are essentially nonexistent. Maybe you're been paying attention to the news recently, maybe you haven't. There's an awful lot of people who want to hang on to their properties right now, and are having a very hard time. Just because I don't think the one proposal that's been made to bail them out directly is a good idea, doesn't mean I want to actively sabotage their efforts. This would flush all but a vanishingly small percentage of them out of their homes and back into rentals - after completely ruining their credit and making it difficult (costly) for them to persuade a landlord to rent to them.

Furthermore, there's a ripple effect across the rest of the loan to value spectrum. People who now have significantly less equity find it harder to refinance, and end up with higher rates, higher cost of money, etcetera. When prices shift downwards by ten percent, someone who had ten percent equity suddenly has none, making their loan much more difficult and costly. Someone who had eighty percent loan to value is now essentially at ninety. Someone who was at seventy is now almost to eighty, and indeed, a a 77 percent loan to value ratio is an eighty percent loan according to all lender guidelines. It's not until you get below sixty-three percent of current value (which becomes seventy once values have shifted downwards), that the differences become small enough to ignore. In a significant number of those cases, this is going to make enough of a difference such that these owners will not be able to refinance even though they need to, or they'll have to accept loans they can't really make the payments on. Whichever is the case, they lose the property. How many people who bought in the last few years have a loan to value ratio below 63%? Not a whole lot, it turns out. Even when value increases would have more than caused that level of equity, they've taken out equity lines to pay for improvements, cashed out for toys, or even in order to put the down payment on more real estate. Maybe they shouldn't have done that. It's not my place to make that kind of judgment. I'm only going to say that they did so having no reason to believe the status quo would change, and intentionally shifting it even further on them is moving the goalposts, and to the extent it causes current homeowners to fall short of their goals of meeting their financial obligations and lose their homes, is vile.

All this leads up to the killer reason: When I first wrote this, according to Statistical Abstract of the United States, residential real estate in the United States was valued at about 25.3 trillion dollars. Let it be devalued by ten percent, and that's 2 trillion, 530 billion dollars in real wealth, just gone. I could freak out enough people just by talking about the thirty billion, or roughly $100 for every man, woman, and child in the United States, but that's only the third decimal place of the loss, in this particular case. Accounting phantom consisting of numbers on paper or not, this is real money, every bit as real as that $100 in your checking account. Every penny that vanishes means that someone doesn't have it to invest in the economy. Whether it's an individual, a corporation, a lender, or what have you, it means that suddenly the last year or so of economic expansion goes poof!. This two and a half trillion dollars vanishing has second and third order consequences, each dislocation causing more troubles further down the line. The global depression of the 1930s had much milder causes, even considered proportionately. You want to know who gets hurt? The little guy and the emerging entrepreneur, who would have been responsible for most of tomorrow's growth. Old Money comes out fine, by and large. The depression was an inconvenience to the Astors and the DuPonts, to be sure, but that inconvenience didn't much effect their personal lifestyle. It economically killed a generation of innovators in addition to causing well documented economic misery among those who were less well off. Rereading this later, let me ask if there is anybody that seriously wants to argue for more of what we've been going through because real estate prices fell?

So now you know why the sellers pay the buyer's agents, you know why it is in the individual seller's best interest that it be so, what it would take to change this, and what the results of such a change would be. I still don't like it, but changing it would cause more damage, and more immediate damage, than allowing the status quo to continue.

Finally, consider this: The only person bringing any money to the table in a real estate transaction is the buyer. Every penny that seller puts out in order to make the transaction happen comes from cash they get from that buyer in one form or another. Either that buyer paid cash, or that buyer took out a loan that compensates that seller with cash. There is no way to alter the fact that the buyer is effectively paying everyone who gets so much as a penny out of the transaction. If the money they pay their own advocate has to go through a third party in order to pass muster with lenders, accountants, lawyers and regulators (and it does, for many excellent reasons rooted in both very basic principles of accounting as well as legal reasons relating to an "arm's length transaction"), then all the ethical issues it causes are something we need to put up with, because putting up with them is better than any possible alternative.

Caveat Emptor

Original article here

A lot of advice gets given to choose a "top producing" agent. These highly corporate offices may have the name of an individual agent attached to them, but they are in fact transaction mills. They have done pretty well for themselves through the downturn by securing a lot of listings and waiting for something to happen. All they have to do is wait long enough, cut the price enough, and they will eventually get an offer on a property. If yours takes six months to sell, in the meantime they have sold 18 others that finally decided to cut the price enough to move. It's not that they did any work besides "sign in the yard, entry in MLS" to move the property, but their production makes it look like they're good to the consumer who asks the easy question, "How much real estate did you sell?" rather than the more important "How well did you do for your individual clients?"

These agencies did well through the downturn by marketing themselves to lenders for selling property or advertising themselves as "short sale specialists." It's not like they did anything hard. Lender gets tired enough of carrying the property or close to the regulatory triggers for selling a property, they'll start taking ridiculously low offers. And their "short sale specialist" is more in the nature of "throw 100 transactions at the lenders. We'll close some of them." In case you didn't understand me, this is the old "Throw enough mud, and some will stick." Statistics on failed listings are not generally kept, and where they are, they usually excuse the agent for "lender wouldn't approve short sale". Sometimes the lender isn't realistic when they refuse the short sale - but more often it's that these nitwits wouldn't do the real work involved. Nor are there any readily available statistics on how well they did for individuals, rather than how many sales they produced or what dollar volume. The corporate transaction mills want that information buried as deep as possible because they're horrid at achieving what should be their most important goal: serving the customer.

I have had more experience than I would like in dealing with these offices. Let me tell some experiences I've had very recently. I represent far more buyers than sellers, so they're going to be from a buyer's agent prospective:

I got to one property to show it, and the lockbox was open and the key was gone. I called the listing agent's number - just a courtesy call of the sort I'd like to have if this happened to one of my listings. I got their office phone tree instead - and no ability to get a live person on the line. Yes, it was still available, but all I could do was leave a message and hope. Actually, something similar has happened at least six times in the last couple of months: A problem making it difficult to show the property, or something that was a real issue with the property that had happened, and no way to get in touch with a live person to fix it. Once, I got there and the door was standing open and there was no way to lock it without the key that wasn't there, and neither the agent nor their office answered (I called the police switchboard after them). Okay, no problem seeing the property, but the ability to secure it afterwards was completely missing. You want this to happen to your property?

Upon several occasions in the last couple of months, I and my clients have made very good, strong offers - and the response we got was like dropping them into a black hole. In other words, none. I tried calling - phone tree of doom again. Leave messages every day for a week - no callback. I tried emailing several times - no response. I tried another fax asking if they'd gotten the offer - nothing there either. At least two of these properties have since had a closed sale for less than the amount my clients offered, both of them curiously enough with the listing agency representing the buyer as well, resulting in them getting both halves of the commission. Great for those buyers and especially for the agency; not so great for the sellers whose fiduciary duty that agency failed in. I strongly advise against allowing your listing agent to represent the buyer as well, or at least not paying them both halves of the commission when they do. It's a fundamental conflict of interest to have a dual agency situation, disclosed or not. Nonetheless, the real point of this is that all of these agencies were too busy to respond to good, strong offers.

On several occasions, I've been told it was a multiple offer situation. That's fine. But rather than individual negotiation and counter-offers, I and my clients are given the incredibly weak line to "Send your best and highest offer" That is to save the agent and their assistant working time, not to get their client the best deal. To get the best results, you negotiate individually with at least the strongest three to five offers. For the others, who are way below market, the minimum response is a generic counter that tells them where the market for this property really is. Sure, some of them are likely to be low-balling with every intention of walking away if they can't get the property for that offer. But there's always the possibility that they will return a competitive offer if they're given more guidance. An agent who won't or can't spend fifteen minutes generating such a counter is not doing the whole job, let alone the agent who doesn't do individual negotiations. Yeah, the property will likely sell. But not for the best possible price. And it's amazing how many of these lazy agent "best and highest offer" deals fall through, putting the owner right back to square one with sixty days on market - and that sixty days on the time counter means that property will sell for less than it could have.

Short sales are even worse than that. You make an offer for a short sale to corporate agents, and they usually intentionally don't respond. The last four I've made were all intentionally not responded to. Instead they just forward all of the offers to the lender. The black hole situation again, even worse because there's not going to be a response for six to twelve weeks. By that time, those buyers are going to have something else and the offers will be useless. Particularly the good offers. They want a property. You can negotiate with these potential buyers, choose one and give them a reason to stay with your property, or you can throw mud at the wall. Actually, it's more like throwing "no stick" mud at a Teflon wall - because it's not going to stick. Furthermore, the back and forth of negotiations with multiple prospective buyers is highly useful and likely to help result in an acceptance. This makes both the seller and the buyer happy. Yes, the chosen buyer can still walk away in the meantime - but you've still got the contact information on all the others. In other words, you're no worse off by picking one particular offer, and you're likely to be better because there's a much higher probability of that best offer sticking around. Of course, not accepting any particular offer means that the property isn't marked "pending" and it isn't marked "offer accepted pending lender approval of short sale" which means the listing brokerage can still use it to troll for buyer clients and a way to make themselves more money by selling those clients something else. Amazing how and why that that works, isn't it? But the listing agent has the responsibility to do what is best for the clients, not themselves. I think this trick violates the fair and honest dealing duty to those buyers as well, but there isn't any real way to argue it doesn't violate fiduciary responsibility to the listing client.

The point I'm making is that while these corporate agents do sell a lot of real estate, and they certainly make an awful lot of money, they're pathetically bad choices for getting the best possible price, let alone quickest sale, and you can kiss actual good service right off your list. There are equivalent issues on the buyer's agency side as well - agents too busy to show property, poor negotiators, high pressure tactics where they are never appropriate. How can you know the agent isn't too busy to give you enough attention?

Personally, I use a points system. A loan is four points from application to funding, a buyer client is fifteen from when they start looking to close of escrow, a listing is twenty points in preparation for market, ten once the initial work is done and the property actually hits MLS through close of escrow. Negotiating multiple offers is two points per offer while negotiations are in process, and is the only thing that can possibly send me "over the limit" involuntarily. I'm only allowed 100 total points; I don't accept business that would drive me over that total (Yes, I've done 100 loans in one month. But loans have become progressively more complicated since then, especially in the last few months, and it's not fair to prospective clients to pretend otherwise). I'm not claiming there's anything perfect or sacred about my system, and agents with more people working in their unit can certainly handle more business than I can with just a contract loan processor and a shared transaction coordinator, neither of which are allowed to talk to my clients. The point is that I have such a limiting system in place; I can and have told people "I cannot work with you right now because it would mean I cannot devote enough attention to everyone else I'm already working with." I also offer them a choice of referrals or waiting.

Talk to most agents and brokerages about such a system or threshold, and they look at you like you're from another planet. Asking prospective agents and loan officers about whether they have such a system and how it works is a good test. Not that the existence of such a system means they're a great agent, but the absence is a real red flag. They can keep hiring office people all they want, but the office is not where the real work takes place. The real work all involves the agent themselves, and there are only so many hours in the day. And if they try and fob you off on some "associate agent" of theirs (in other words, they take a big cut of what that agent makes in return for feeding them business) consider that "associate agent" as if they were who is going to be responsible for your transaction - because they are. That "big name agent" has already done everything they're likely to when they introduce you to their associate.

What else can consumers do? Call their prospective listing agent and deal with their phone tree as if you were an agent with an offer, or even just an agent calling with a concern about the property. If you can't get through to a live person, that's a problem. If you leave a message and nobody calls you back within one business day at the most; that's grounds enough to remove them consideration totally. Pretend you're an agent, at least until you get someone on the phone. For buyer's agents, it's hard to see evidence of their responsiveness ahead of time, but so long as you limit yourself to non-exclusive buyer's agency contracts, you can fire agents who don't measure up at any time - making it a situation where you literally can't lose. Listing contracts, however, by their nature, need to be exclusive right to sell to get the best results. This means you can give any buyer's agent a chance and lose nothing except a little time; for a listing agent you need to be careful about due diligence ahead of time.

As this article should make very clear, there is a major difference between asking the question "Who sells the most real estate?" and "Who sells real estate for the best possible price, in the quickest time, and deals with issues promptly so I get the best results?" You want to make certain you're asking the right question, because if you ask the wrong question, you get the wrong answer and choose the wrong agent.

Caveat Emptor

Original article here

Hi, Dan!
I just came across your website and you strike me as the type of guy who has answers for our situation:

My husband and I built our home 2.5 years ago. We took out a second mortgage last year which brought us up to financing basically 100% of the value of our home. We owe a total of about $305,000 on the home, and even though it was appraised for around $305-310K. if we sell, we have been told we won't get a price anywhere near that, because it is not in a development.

Do you have any suggestions, comments, opinions...which could help us out. We would really like to relocate closer to my brother out in the DELETED area-but we seem to be stuck right where we are given the circumstances-are we?

Gee, around here custom homes usually command a premium over cookie cutters, other things being equal. Not necessarily a huge premium, but a premium. Especially since they typically don't have homeowner's association, which most people do not want.

Nonetheless, I'm hesitant to second guess the agents on the scene when I have zero personal knowledge of your local market. You basically have four options: Stay where you are, rent it out, default, or sell.

You don't state whether you are having difficulty affording the payments, or whether you've got one sort or another of unsustainable mortgage. If you're not having difficulty affording the payments and you're in a sustainable loan, there's no need to do anything. If you're at or close to 100% financing, and you need to refinance, when I originally wrote this you were looking at right around 6.25%, plus PMI of about 1% until your equity improves. It would have been better if lenders were giving second mortgages above 90% financing, but that's not happening right now. I'm going to presume that all refinanced, you'd be looking at a balance of $310,000, which may be a little low. Payment worked out to $1909 on a thirty year fixed rate loan, fully amortized, plus PMI of $258 on the traditional program when I originally wrote this. Rates are much lower at this update, but the principle remains the same. Lenders are not loaning above 90% on a property refinance unless they're already on the hook for the loan and it improves your likelihood of being able to repay the loan.

If your income situation is cramped, you may be able to get "interest only" for five years (or longer!) at a slightly higher rate. If you do an interest only loan, that would be a payment of about $1680. although you need to be aware before you do it that it is a calculated risk. I don't know your market, but mine is preparing to recover and I don't see anywhere not recovering within five years. Nonetheless, getting an interest only loan sets up a deadline for doing something again, and your market isn't under your control or anyone else's. Furthermore, I don't think we'll see rates like today's again, so we're really talking "mandatory sale within five years" unless you start making a whole lot more money. I think it's a reasonable bet given that you already own the property, but it remains a gamble.

Another word on the viability of refinancing: It hinges upon your ability to either get an appraisal that covers the amount of the new loan balance, or to come up with the difference in cash. It is possible to refinance more than the value of the property through the temporary Fannie and Freddie programs, but there are several sticking points that could prevent it if someone decides to be uncooperative. If you're looking to refinance because you can't afford your mortgage, refinancing more than the value of the property is unlikely to make it more affordable. It's probably better to consider another option.

You could rent the property out. I don't know what rentals are like in your area, but if you can get enough rent to cover the monthly expenses (mortgage, taxes, insurance, and an allowance for upkeep and management), that becomes a possibility. If you can cover the difference, that's fine, also. Remember, I think the markets are going to do well once they've digested the hairball caused by the speculative practices of buying with unsustainable mortgages and the loan investors get over their institutional paranoia. If you're short $200 per month and in five years you can sell for $50,000 more, that's an investment I'd make. The question, unanswerable by anyone at this point in time, is where your local market will be in five years. $50,000 is about 16% of $310,000. Here in San Diego, I'd have leaped at that - and been wrong, thanks to our marvelous economic overlords in government ruining the economy. In your area, I don't know. In either case, it's a risk, and you need someone who knows more about your market than I do to advise you on the probabilities.

You could just default. I'm not recommending it. It's a bad option, but it is there. If you want to buy, or even rent, after your relocation, your credit will be hosed. I don't know your state law on deficiency judgments, but that's a concern. Under this same heading is deed in lieu of foreclosure, with most of the same problems. The reason people are willing to grant credit is that we're legal adults, and supposedly responsible. If you give them evidence that you're not, you may not pay for it in dollars directly, but you will pay for it, and typically the interest rate is usurious.

Or you could sell, most likely a short payoff assuming what you've been told is correct. It costs money to sell a property, more so in a buyer's market. Figure it'll cost you about 8 percent of whatever the gross sale price is to get the property sold. Using this as the basis for an estimate, even if you sold for $310,000, that'd only net you about $285,000, so you'd be short roughly $25,000. If the lender forgives the difference, you'll likely get a 1099 love note adding it to your taxable income. If they don't, you could be sitting on a deficiency judgment for the difference. I don't know your state's law, but around here, if someone was liable for the difference, I'd suggest saving the legal fees by agreeing to sign a promissory note. If you fight, you're likely to be wasting the money as well as digging yourself in deeper. They're going to win, and they'll almost certainly get to add their legal fees to what you owe. So unless you really like subsidizing the legal profession, if you're in the situation, I'd suggest considering agreeing to pay without a judgment. Talk to a lawyer in your state about what the law says about your situation, of course, as spending the money for a half hour of a lawyer's time is likely to be considerably less than $25,000 plus interest.

If you accept such a promissory note, I actually have no idea what the rate will be, but even if it's 18 percent, you're still talking about owing only about a twelfth of what you do now. I'm not saying it'll be easy, but you can pay it off in a few years, and it's probably cheaper than the costs of defaulting, even though it does hit your debt to income ratio. People choose defaulting and bankruptcy because it's easier now, but when you go through the total costs rather than just the immediate cash, you're likely to come to a different answer.

Caveat Emptor

Original article here

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

The answer is yes.

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

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

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

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

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

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

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

Caveat Emptor

Original article here

Every so often, I write about professional responsibility.

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

My answer is yes.

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

"overpriced house offer rejected what next"

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor (and Vendor)

Original here

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

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

Caveat Emptor (and Vendor!)

Original article here

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here