Buying and Selling: November 2022 Archives

The phrasing in parallel with Animal Farm is intentional. Sellers need to understand this, and so do buyers, especially in a hot real estate market. Some offers are more equal than others, and knowing how to choose between competing offers on the selling side is critical. On the buyer's side, understanding this and anticipating it so as to make your offer attractive to a seller with a good agent is critical to success in making offers.

Even if they are for the same number of dollars or even for larger amounts, some offers are much less likely to actually consummate than others. If they don't consummate, all that happens for sellers is that they wasted their time, their money, and came up with nothing. Furthermore, once you have a fully negotiated purchase contract, the chances of renegotiating it so the seller gets more money are nil. Most purchase contracts, the seller needs to make concessions due to things discovered to be suboptimal with the property. Sad to say, there are even some very shark-like real estate types that go around making offers with the intention of using every little thing to renegotiate the contract in their favor. They make their offer look superficially attractive and then once they have a purchase contract start demanding concessions right and left.

There are currently three major things likely to prevent a transaction from actually going through. The first is the Home Valuation Code of Conduct sticking the transaction with an appraisal that's lower than the purchase price. I had an appraiser choose two completely trashed lender owned beaters down the hill as comparables ("comps") for my client's beautifully maintained property in a more desirable location, and there wasn't a thing I could do about it even though there were more comparable comps. When this happens, all the issues in When The Appraisal Is Below The Purchase Price for Real Estate come into play. If the loan standards are eighty percent Loan to Value Ratio and the buyer only has 20% to put down, when the appraisal comes in low, the additional cash isn't there to make it happen and the transaction will fail. In some cases, private mortgage insurance can maybe extend it to ninety percent currently, possibly 95% in some cases, but 100% financing is out of the question for anyone but veterans, and adding private mortgage insurance often means the buyers don't qualify on the issue of debt to income ratio. Most often, if the appraisal comes in low it means that either the transaction is going to fall apart, or there is going to be a mixture of the buyer adding more cash to the deal and the seller lowering the price. If the buyer doesn't have more cash to add to the deal, it doesn't take much predictive ability to see that things are going to boil down to the seller deciding whether they'd rather find another buyer or take less money, and it doesn't take much insight to see that a very limited amount is likely to mean you're better off taking an offer where this isn't an issue.

The second thing likely to prevent a transaction going through is issues with the property. Something is discovered during the buyer's due diligence period that causes them not to want the property, or to not want to pay the originally negotiated price. It could be anything. These issues are always with us. The only way not to be surprised by them is for the seller to be honest with themselves and do their own due diligence beforehand.

The third major deal-killer is buyer inability to qualify for the loan. Either they represented themselves as having more cash than they do, they really don't qualify for this loan on this property, or some miscellaneous loanbuster issue pops up. This is why I insist that every qualification letter I write and every letter I'll counsel my clients to accept be a pre-qualification written for that specific property and that specific offer. A generic "They qualify for $300,000" letter is wasted paper. The person writing that letter must also make specific representations as to why the buyer qualifies on the basis of debt to income ratio, loan to value ratio, credit score, and Cash to Close. For my listing clients, it the offer doesn't do this, I send the buyer back to try again. I tell them what the letter must cover, and I will counsel my clients never to accept an offer that doesn't include this information.

Running an automated underwriting program is easy and popular, but never acceptable for this purpose. Automated underwriting results are only valid if they don't change anything from how it was submitted. Let me tell you something that happened to me not that long ago: I got an automated underwriting accept and priced and locked the loan and sent the file through on that basis. My processor, for reasons beknownst only to them, took it into their head to run automated underwriting through again on precisely the same file and got a lesser acceptance that raised the cost of the loan and cost me most of the money I would have made on that loan, and it could easily have changed to an outright rejection of the loan. This was for a refinance where nothing of consequence changed except for a precise appraisal amount that was still well within guidelines. What do you think is likely to happen when the purchase price changes or the the precise loan amount or any of dozens of other factors changes by a little bit? I never accept automated underwriting results for a purchase offer. Manual underwriting rules, however, are universally good, particularly in the A paper world. If something happens at one lender that causes it to have trouble, somebody else will take it if the manual underwriting standards are met.

I should also stress that sellers live in a world where net proceeds are what is important. If the transaction doesn't close at all, the net proceeds to the seller are negative regardless of what was offered. Even if the transaction closes, an offer for $200,000 requiring them to pay $5000 for seller paid closing costs is in actuality $5300-$5500 less net money to them than an offer with no such requirements. A good agent (on either side of the transaction) is going to make careful consideration of this.

So keeping these in mind, which offer is the most attractive to a seller, assuming the same number of dollars and desirability of the offer?

All cash offers are always going to top this list. If the buyers don't care what lenders think, if they don't need a loan or a loan contingency, don't have to be concerned with loan standards, that eliminates an entire layer of complexity that includes most of the likely reasons why things fall apart. An all cash offer without an appraisal contingency is the Gold Standard. They are saying "The property is worth $X to me - I don't care what an appraiser thinks" They can still be intending to over-negotiate every little thing revealed by the inspection, but there is less to go wrong from a "nothing you can do in the initial contract" standpoint.

The next category on the list is offers where there buyer has significantly more cash than lender standards require for the contemplated loan type, particularly if they're planning to use it for the down payment anyway. This means that the buyer has the option of continuing the transaction even if the appraisal comes in low. Since all the incentives right now are for appraisers to come in low on the appraisal, this is happening a lot right now and there is nothing anyone can do about it except repeal those ridiculous appraisal standards. If the buyer has more cash, when the appraisal comes in lower than the purchase price the viability of the transaction doesn't depend upon the seller deciding whether to take less money or put the property back on the market. If the buyer has more cash than absolutely necessary, the parties can meet in the middle rather than the seller being the only one with room to give. Conventional financing purchase offers of thirty percent cash or more and VA loans where the buyer is putting down cash even though they don't have to fall into this category, and even FHA loans where there is a cash cushion. I always want to address the question of "How low would the appraisal have to come in before this transaction has difficulty because of it?" Offers where the buyer has this cash cushion means that if the appraisal comes in slightly low, it isn't just the seller deciding whether to take less or put it back on the market.

I would rather have conventional financing than government. Government involvement puts a bottleneck, or single point of failure on the transaction - if the government won't put their seal of approval on it, we're done. It also takes longer. That said, I need to say that both VA and FHA are unfairly tarred in many agent minds because until a few years ago they were costly bureaucratic nightmares for the seller. The bureaucratic issue has largely changed, but it is still an issue even if it is a much smaller one, and a VA loan in particular does not permit a buyer to pay a lot of very real and necessary costs, so the VA loan needs to be for a higher number of dollars to break even on this point with conventional ones.

If a buyer wants a government loan but can go conventional, that will delay the transaction if they start out government but need to change to conventional, but it should still close. There is a fallback position. This is a critical difference and makes such an offer superior to one where they have no choice but a government loan, particularly some special or limited funding government program like the mortgage credit certificate or locally administered first time buyer programs, both of which are limited budget and usually run out almost immediately upon receiving a new funding allocation.

Both when writing an offer and evaluating one, I always want to address the question of what circumstances or combination of circumstances could cause this to fall apart. As a buyer's agent, I want to show the listing agent that my client wants the property and I have considered how to get around potential failure points. As a listing agent, I have a fiduciary responsibility to help my clients evaluate offers and make an informed choice on which offer to accept based in part upon likely failure points. Comparatively few agents meet that responsibility (one reason we've got such extreme transaction fall out now) but the good ones are all among them. A good listing agent is always looking for evidence in an offer that the buyer's agents have considered possible failure points and how to get past them.

Waiving the appraisal contingency is always an argument in favor of an offer. It can be symbolic, but it says "The property is worth $X to me, and I'm willing to pay that whether or not the appraiser agrees". Nonetheless, if there is a loan contingency attached to such an offer it's not an unlimited blank check. If the appraisal comes in lower than the difference the buyer can cover, the transaction is still going to fall apart. If the buyer has no extra cash, waiving the appraisal contingency accomplishes nothing. But a prospective buyer having $10,000 extra cash and no appraisal contingency should be something that is valuable to well informed listing agents and their clients.

What if your offer is less desirable in these terms, quite likely because you have no choice? Well then you need to offer more money to sweeten the deal and give the sellers a reason to choose your offer over any others. When I'm acting as a buyer's agent, I always discuss how much competition we're likely to see from other offers if my buyers like a property. It's not a perfect science, and I never trust a listing agent telling me how many other offers they have (Unless the answer is "none") or for what dollar amount, but it's like gravity: if you don't take it into account, you're certainly not going to get where you want to go - a successful purchase.

Caveat Emptor

Original article here

If you have three real estate companies sending you emails with multi-listings, if you want to see one of the properties, who gets the commission? There five properties that I want to see the inside of the houses. Company A, B, C, etc. One house is listed by one of the three people that have been sending me emails.Am I obligated to sign up with an agent if I want to see the inside of a house? Do I tell the other agents not to send me anymore multiple listings?

That depends upon you and upon the agent and upon what sort of agreement, if any, you have signed.

If you haven't signed any representation agreements, nobody has grounds to complain. I don't ask for any agreement just to have listings automatically e-mailed to a prospect (within limits), or even an automated site for them to manage those listings. I have to have MLS access anyway, and that comes as part of the package. I look at it as an opportunity: for a few minutes work, I'm likely to end up with a prospective buyer. If one in a hundred of these converts to a transaction, I'm ahead of the game. The ratio is much higher than that. I could use it as an opportunity to set up my toll booth, and many agents do, but although they may be "top producers" because they cut out other agents with an exclusive representation agreement for having their receptionist take five minutes out of their day once to set this up, they're not the sort of agent someone who compares agents in action will likely choose. In any walk of life, the person who has to cut the competition out is telling you they're weak.

If you've signed a non-exclusive representation agreement, the one who is the primary motivating factor behind the sale should be the one paid. This may be the agent who introduces you to the property, or it can be the agent who answers all of your questions well enough that you're willing to make an offer, or (best of all) the agent who opens your eyes to the possibilities of the property after six other agents have shown it to you. It can also be the one who fast talks or pressures you into making the offer, but that's the beauty of non-exclusive agreements. You can fire such agents by just not working with them any more, and they're out of your life and out of the transaction.

If you've signed an exclusive representation agreement, then the person you signed the exclusive agreement with is legally entitled to be paid. This is a problem if someone else really sold the property to you, or if you've signed two or more such agreements. Furthermore, you can't fire bad agents with an exclusive agreement except by waiting for it to expire. You sign a six month exclusive agreement in April, they're going to get paid for any transaction you start through October (and possibly longer) - even if you told them you never want to see their face again before April was over.

Many agents will ask you to sign an exclusive representation agreement before they do anything. You shouldn't sign one at all. Non-exclusive is plenty good to protect the agent while preserving your protections against a bad one. And there is no reason not to sign the standard non-exclusive agreement.

I have heard every rationalization under the sun as to why exclusive agreements are desirable. The only person they're desirable to is insecure or incompetent agents. There is no advantage for the consumer to sign one. Exclusivity prohibits real competition, where the consumer can observe your skills and your attitude in action. Anybody can look good in the office before you've seen a single property together. That's just sales patter. The proof is watching them in action when you're evaluating property together. That's where you can tell the best agents from the friendly idiots, the high pressure commission grabber, and all the other problem personalities around. And sometimes, that's where you find out that they're not so friendly after all. Unless it's showing one of my listings, I won't go out with someone who's signed an exclusive with someone else, and neither will any other agent I know of. I'm not going to show someone the bargain I spent twenty or thirty hours finding so that an agent who couldn't be bothered to get out of their swivel chair can get paid for the work I did, but you'd be disgusted at how often I get the request.

If all you're getting is a 'sit on their hands' agent who never leaves their office to scout property for you, whether they're an explicit discounter or someone pretending to be full service, then the purchase contract itself has confirmation of the relationship and there is no need to sign an agreement in advance of this at all. The same is true anytime you approach an agent with a property you have already determined to make an offer on. The agency relationship is confirmed in the purchase contract, indeed, in the initial offer. There's absolutely no need to sign any kind of representation agreement with them outside of that. It's simply one more method by which rotten agents lock up business, because if you sign that exclusive agreement they ask for, they've got you for however long it lasts. I've been told - by clients - about listing agents who wouldn't communicate an offer until they had signed a buyer's representation agreement - a clear violation of fiduciary responsibility to that owner. I've heard every rationalization under the sun here, as well. "I'm putting my time into this! I deserve to get paid if it falls apart!" is the most common one. My response is to such agents is, "Not yet you don't, and if you're concerned, make sure it doesn't fall apart" The reason agents get paid as much as they do is because their pay is contingent upon a successful, fully consummated transaction. It's right there in all of the standard WinForms contracts. If an agent can't make this transaction go, if this transaction falls apart, they haven't earned any kind of right to mess up another one also. If you, the client, want to stick around once you've seen them in action, that's great! If not, that should also be within your range of choices. An exclusive agreement removes that option.

Caveat Emptor

Original article here

I am an adamant believer in the Non-exclusive Buyer's Agency Agreement. In practical terms, as opposed to the Exclusive Buyer's Agency Agreement, it is so much to the advantage of the consumer that it isn't funny, and it doesn't usually hurt good agents. On the other hand, the proponents have one argument going for them that I do respect, having experienced it more than once. I start a client on the searching process. I explain it's going to take looking at a minimum of 12 to 15 properties before they know what the market is really like in their area in their price range. I find a whole bunch of properties, and start taking them to a few. I offer rational, real world comparisons of their comparative virtues. Ask about what they liked versus what they didn't, what they could live with and what they couldn't. And then, in between, one or both partners gets a wild hair about going to view another property. I've explained what their price range is, but they either don't realize it's out of their range or don't care. They just want to see what it's like. And because the property is out of their price range, it's going to be a more desirable property - that's why the owners think they can get more money for it!

So they go out, and after my careful work of making sure to stay within their budget, on a sustainable loan they can afford, this other agent shows them what, by comparison, is the property of their dreams and says they can buy it!, and he knows where they can get the loan! If this sounds familiar, it happens a lot. "Dan was showing us such ratty properties by comparison! This guy is showing us beautiful stuff we love! Let's buy one!" and the first I find out about it is they tell me they're in escrow on someone else's property.

Most people buy based upon emotion. If you want to make one change in the value of your financial future, learn how to take emotion out of your decision-making process, especially on anything big enough to require payments. Once people have emotionally convinced themselves that they deserve this property, my rational analysis of the situation doesn't have a snowball's chance in July of talking them out of it. I know this very well. I could stamp out buyer's transactions at the rate of three or four per week by showing clients two or three ratty fixers within their budget and then moving in for the kill by showing one immaculate property in ready to move in condition for thirty percent more. But this is hosing people with malice aforethought, and no matter how many others do it, I'd have problems shaving without looking in the mirror, and I need to shave every day that I work. The reason that wasn't within their budget is that they cannot afford the payments, or they cannot afford the real payments. I've said this before, but there are no tricks to make the real cost of the loan cheaper. There are ways to lower the payments for a while, but they always come back to bite you in a few years, and the situation will be worse than if you had taken the sustainable loan in the first place. Buying a more expensive property than you can afford is a way to put yourself on a course for disaster. Kind of like Comet Shoemaker-Levy 9

And that's why there is money in fixers. It's all very well for people to say they are interested in the $400,000 fixer that fits within their budget and that they can fix it up and sell. Particularly first time homeowners, particularly young married couples, and especially if they have children, show them the $600,000 move-in ready property and they will bite almost every time, budget buster or not. Put all three factors together and not all of the wisest people in history together could talk them out of it.

So the smart operator offers $350,000 for the fixer that's been on the market for four months, spends $40,000 on upgrades like carpet and modernizing the kitchen or adding one more bedroom and bathroom, and turns around and sells for $620,000, of which she keeps approximately $186,000 in profit. If the buyer needs them to pay some closing cost in order to make the transaction happen, she still makes $175,000 for a few months work. Not bad, eh?

The average couple won't have $40,000 to upgrade the property immediately. I consider myself very lucky to have worked with two such couples in the last year. Most potential buyers try to minimize the down payment as much as possible. But if they buy that livable fixer, they have a lot more room on their monthly budget and as much time as they want. At 6% interest rate and California standard property tax rates, the $620,000 loan has a payment of $3717, plus $646 in property taxes. The fixer property, even if they buy for $400,000, the payment is $2398 and the taxes are $417. I know that it's smarter to split the loan into two if you can, but work with me for the sake of simplification. So the already fixed property costs $4363 per month, while the fix it themselves costs $2815. That's over $1500 per month difference they have to put towards fixing it up, or anything else they want to. In two years, they've got the $40,000 from that $1500 per month payment difference alone. This is leaving aside the issue that the rate on the bigger loan isn't going to be as low. The new owners can concentrate on the most important updates. Sure, it's a pain. That's why buyers are willing to pay $620,000 for the ready to move in property. Actually, they'll line up to pay $620,000 for the more attractive property. It's just the way things are. And the people who fixed it get done with their two year project, and now it's worth every bit as much as the property that was worth $620,000 to start with. At 5% annual for two years, that's $683,000, and it's getting to the point where I expect our local market to grow faster than that. If they sell, that's approximately $235,000 in their pockets (tax exempt in most cases) instead of in the professional fixer's. If they bought the move-in ready property and then sold, they'd net about $15,000 by the same calculations.

Now most properties, even fixers, won't generate quite this kind of quick windfall. But that is a real example I encountered not long before I originally wrote this. Moral of the story: fix it yourself if you can. By isolating off the emotional appeal, you've made yourself - or saved yourself - a lot of money. And the reason there is money in fixers is because most people won't do this, instead convincing themselves that they're good people and they deserve this beautiful property. And you know, most folks are pretty good people, and they do deserve a beautiful property. But if you deserve the property that's beautiful now, you also deserve the huge cost, and the huge loan with the huge payments to maintain it, and you definitely don't deserve all the profit that the folks who buy the first kind of property make from the sale.

Caveat Emptor

Original here