Buying and Selling: May 2023 Archives

I had the idea for this article some time ago. It took me a long time to decide to share it publicly, because quite frankly, knowing what I know now, I was an idiot. I was still young enough to think I knew more than I did. Now that I've learned a lot more, I still don't know what I thought I knew then, but I'm getting closer. When I repeat transactions of this nature now, I don't repeat these completely boneheaded mistakes.

The year was 1990, and I was still working for the federal government in my first career, air traffic control. Controllers are not your most humble of people, and for better reasons than most. Most days, I could go home secure in the knowledge that without me there, a couple of airplanes would have crashed together, and even if everyone walked away from it, however unlikely that was, there would have been anywhere from a couple hundred thousand dollars in damage to millions. But, as you're about to see, this has nothing to do with competence in real estate.

Before I go any further, let me tell you that things could have been much worse than they ended up being. I understood a lot of things about real estate and finance, even then. Even then, I knew enough to know how simply full of excrement most of the people claiming do it yourself real estate was the way to go were. Ignorant. Guilty of wishful thinking. Neglecting terms in mathematical equations. Just plain wrong.

I simply thought I was better than that. At the time, I thought I did pretty well. But in retrospect, boy did I get taught a lesson by a pro.

Let me tell you first what my problems weren't. It wasn't that I didn't understand how to check out a property. I grew up a contractor's son. From the time I was old enough to wield a paintbrush with a modicum of control, I was helping my dad on his projects. Some of my earliest memories are of helping my dad mix and pour concrete. You name the project, I've pretty much done it. I learned how to spot construction defects, problems, and things that needed to be fixed before I figured out that girls didn't have cooties. I have an excellent idea of what's involved in fixing most of them, much better than you get by watching any of those home repair or decorating programs. Furthermore, I had my dad with me to help me spot potential problems.

I did pretty darned good on the loan. Through both intentional and accidental learning (i.e. formal classes and having friends and co-workers older than I was, and listening to the problems they had had), I had a pretty good understanding of the pitfalls there. I knew what the options to compare were, and I knew why a 5/1 ARM is better than even a 7 year balloon, and how both compare to 30 and 15 year fixed rate loans. Through the financial markets, I understood that there was a tradeoff between rate and cost. I could have maybe shopped it a bit more, and probably should have taken a less expensive loan, but the higher cost for the lower rate worked out in my case.

(Amazing that for all the "do it yourself without an agent" advocates out there, I've never encountered a single person encouraging you to be your own loan broker, despite the fact that I can get a newly licensed person up to speed on common loans a lot more quickly and easily than I can teach them the rest of what they need to know to act as an agent)

My problems wasn't location, or lack of knowledge of the area. I bought less than three miles from my mom's house, about four from my dad's. I had been on that street at least dozens of times prior to buying that property. I knew the area cold, and I love the area even today.

It wasn't a failure to shop, or not knowing what would do well upon resale. I did my homework, and looked at a dozen properties before I made my offer. It certainly wasn't failing to do research, on the internet or elsewhere. I read several books that are still well-regarded today. Yes, this was before the World Wide Web, but newsgroups and forums existed back then, and were easy to access, and I always had a good internet connection. It's become easier to use the internet since then, but the signal to noise ratio has gotten considerably worse. Not that it was stellar in the first place, but I find more spectacularly wrong "information" out there now with an agenda of selling some thing or idea in particular, than I did then. At least in the newsgroups, you could always count upon having opposing points of view. Just surfing the world wide web, you're at the mercy of the publisher of that particular website if you don't know any better.

Now here's what the problem was: My ignorance. Ignorance of the market, ignorance of procedures, ignorance of what everything meant and the implications thereof.

Let's be honest. It could have been much worse than it was, even with everything else covered.

What I was paying attention to was asking price, not comparable sales. Furthermore, since I hadn't been in any of those comparable sales, I didn't have the basis for a valid comparison and pricing. That listing agent did. Furthermore, the local real estate market at that time was getting ready to fall, much like things were in much of 2006. Sellers were just starting to realize things were not likely to fall their way in the future. A good first offer would have been $10,000 less than I offered, then negotiate hard, and settle on maybe $8000 less than I actually paid. Considering prices were much lower then (still under $100,000!), I overpaid by about 10%, and there were enough properties on the market, and few enough buyers, that if they hadn't been willing to negotiate, I could have walked away and found something just as good for about that price in the exact same area.

It gets worse. Because I didn't know what local procedures were, I ended up paying just under $3000, more than a buyer's agent would have made, in various fees that were really the seller's responsibility. Not to mention using the wrong escrow and title company.

All told, my ignorance cost me somewhere between ten and fourteen thousand dollars, out of a purchase price significantly under $100,000, and it could have been much worse. There were no issues with title of construction defects or anything else. This meant ten to fourteen thousand dollars more to pay interest on. Rates then were higher than most people have since become accustomed to (The seller was proud of the fact they had an assumable loan at 10%). I can do a better loan cheaper today on a thirty year fixed rate basis than was available on a 5/1 ARM back then. On top of that, it made the difference between not needing PMI on my loan and PMI being required, at about $80 per month in addition to the extra interest. PMI used to be much more expensive than it is now, also, and the whole piggyback loan thing was not yet a real option.

Lest you not understand, the listing agent was doing nothing other than her job with all of this. She was responsible for getting the best possible deal for her seller. If a sucker swam into the net, so much the better. I understand this now. I didn't then.

One more thing that may not be clear to the average reader: Most real estate transactions doesn't get dissected like this, in retrospect by someone who is now a trained professional with lessons to learn from it. Most people never realize how much they've been taken for, and I did a lot of things right that most people working on their own behalf don't.

Why did I make this mistake? I was in, "I don't want to deal with sales people!" mode, even though that's precisely what I was doing, and even if it had been "For Sale By Owner," that doesn't magically change the fact that the person who wants to sell it has become a sales person by that act. I was so focused on "not wasting money with a commission," that I rationalized doing one of the biggest transactions of my life without expert help. Even if I had ended up paying the buyer's agent commission out of my own pocket (I wouldn't have) that would have been at most a quarter of what not having one cost me, and it could have been much worse. Even so, I rationalized my way into completely wasting four to five times the amount I would have spent. The difference between 99 percent plus of the "do it yourself" crowd out there and me, is that I have subsequently looked at what happened with more experienced and educated eyes, even though what I have now learned makes me want to hide my face in embarrassment.

I could pretend it came out better than it did. This was before I was married, and the only person who was hurt by this was me, and my wife wasn't there, so she doesn't know enough to keep reminding me about what a loser I was (not that she would). But that wouldn't help me not to make the same mistake again. I can have my ego and false illusion of invincibility, of thinking "I'm da MAN!", or I can face my mistakes, learn from what I did wrong, and not make those same mistakes again. I know which bodes better for my financial future, and that of my family. I've decided I can take the ego hit more easily than I can take repeating the same mistakes next time, let alone for one of my clients. I've since acquired one of the most valuable skills anyone can have: The ability to assess when you're beyond your level of competence. I've done a lot of loans since then, and a not insignificant number of real estate transactions, and I keep learning new things with most of them. The largest difference between me, now, and me, then, is that I've learned a lot more about the problems with believing you know something that is not, in fact, true, and how to investigate and research and just plain ask other professionals who have previously dealt with a given issue. This knowledge and experience and skill doesn't come at a price most people consider "cheap". But it will save most likely save you several times what it costs, making that money one of the best investments you will ever make. Offer most people the choice between spending a flat $1000 or a ninety percent probability of being forced to spend between $4000 to $5000, and the rational, logical choice is obvious. It's the cheapest insurance you will ever buy, in terms of real cost to expected benefit - you're getting several times the expected value in return. Now consider that with property values several times higher than that now, the amounts at stake locally are ten times that or more. It may not show up on an accounting form, but that doesn't mean it doesn't exist. It does, and there are an awful lot of people making a good living off people who don't understand that simple fact.

Caveat Emptor

Original article here

Hard as it may be to believe, I've never done an article comparing asking price to sales price. It's way past time.

Asking price is quite simply, a written representation of an offer the seller would be willing to accept. It's amazing how many agents have forgotten that, if they ever understood it. If the seller would not be willing to accept that price, they are committing an intentional misrepresentation when they enter the number as the asking price. In short, fraud. This violates the legal requirement of "fair and honest dealing with all parties" which agents agree to upon commencing the practice of real estate. It isn't fraud on the scale of which many were guilty during the Era of Make Believe Loans, but it is still fraud. By entering an asking price of $X, you are representing in writing that the seller would be happy to accept that offer. But if there are already higher offers from qualified buyers (as is very often the case in some markets) you are defrauding those who come to investigate that property based upon the misrepresented asking price.

Why do agents do this? Some of them hope to generate a bidding war. Bidding wars are certainly nice, but they are unlikely to bid the property back up to the price it could have gotten by setting the asking price correctly in the first place. In such cases, it's the obviously lower than comparable properties price for a valuable asset that attracts potential buyers, and if the low price is no longer applicable you can expect them to lose interest.

Most of them do it as a way to make contact with prospective buyers who don't know any better, so they get a chance to act as that client's buyer's agent. Never call the listing agent to show you a property. Their loyalty should be given first, last, and always to the seller of the property. If it's not, they are failing in their primary duty as an agent and you definitely don't want an agent who would hose their client so they can get more money. If their loyalty is so given to their listing client, it isn't being given to you, the buyer. Either way it's a bad situation you should know to avoid. Because it happens and it isn't rare or even uncommon. In fact, it is disturbingly pervasive, especially when the market is hot.

Sales price is the price at which two unrelated parties decide to willingly exchange a property for money, because both of them believe they are made better off by the exchange. You need to understand that, too. If you don't, petition the courts to appoint a conservator for you, because it is the basis for all economic transactions other than the ones that flow from the point of a gun. If two parties are related - whether parent and child or corporation and controlling interest in that corporation or any other permutation - it is not a true sale because the goods being exchanged on the record are not the only ones being exchanged, and it should not be used for comparison for other properties. Related party transactions are tough to do correctly, and many people don't understand that until they get bitten by it. In fact, an awful lot of what appears in MLS for two days or less is quite likely a related party transaction pretending to be a regular "arms length" transaction. Some are because an agent is hosing their clients, others are because someone wants a loan and therefore is trying to make it look like a legitimate arms length transaction when in fact it is not.

There are still plenty of reasons why both parties can agree on a sales price that leaves each of them better off in their own opinion. One of them needs a place for their kids to grow up, while the other no longer has that need being the classic reason. Perhaps one of them needs to buy another property somewhere else, and the proceeds from this property enable them to do that. I can go on all day, and I'll bet most of you can, also, if you try. The point is that in order to be a viable transaction with a hope of actual consummation (In other words, the exchange of property for other valuables actually takes place), both parties to a purchase contract must believe they will be better off after they make the exchange. Otherwise, one of them is going to find a reason to not actually carry through.

Sales price is generally lower than asking price. Not always, and certainly not where everything on the market is seeing multiple offers within the first week, but in general this is so. There are exceptions to that rule. Just because someone would be content to accept an offer if it were the only one does not mean they will feel compelled to accept that offer in the face of better ones. My objection to the abuses of the process detailed above is in asking prices that everyone involved knows are not anything like the price the seller can expect to receive.

Nor does the act of putting a certain asking price on a property mean that you're likely to actually get that price, no matter how long you wait. I don't know how and why the urban legend about "if you wait long enough, someone will meet your asking price" got started, but it is pure myth. The longer a property is on the market, the less desirable it is perceived as being by most buyers, because what buyers really think is "It's been on the market for sixty days and everybody else passed on it. What's wrong with it?" The longer a property is on the market, the more you are likely to have to reduce your price in order to actually sell.

The numeric relationship between asking price and sales price is complex, and governed by many variables. The ones that leap immediately to mind include the economic target market, the ease of qualifying for a loan, interest rates on loans (The mortgage market controls the real estate market), sales prices of similar properties under prevailing conditions, and most importantly, general economic supply and demand. In other words, how many people want to buy versus how many people want or need to sell. If the first number is higher than the second, expect prices to rise. If the second number is higher, expect them to fall, at least in terms of affordability if not absolute numbers. If you don't believe me, consider how fast real estate market conditions change when a relatively small number of people drop off one side of the buying or selling side of the equation at the same time a few more jump onto the other.

Caveat Emptor

Original article here

How do you transfer house ownership after someone dies and leaves you the house in a will?

The will must be probated. Once all debts of the estate are paid and the court agrees to a final disposition of assets, the executor will then create a deed giving whoever the heir is title to the property. It may or may not be part of the executor's job to record the deed with the county - so make certain it gets done yourself if you are the inheritor. It may cost some money, but it prevents huge problems down the road.

Note that if there's a loan or other liens in effect against the property, the mere fact that your predecessor died does not render them in any way invalid. Most specifically, Trust Deeds still have the power to foreclose if the payments are not made in a timely manner. Sometimes the estate has the money to pay them off; more often it does not and somebody better keep making those payments during probate, which lasts a legal minimum of 9 months, or the issue will be academic before probate is resolved. Nor can estates, in general, secure financing, so refinancing the loan can be difficult. Relatively few dead people earn significant amounts of money.

On the other hand, if your property is in a Trust, then there is no probate on that part of the estate. Title to the property remains in the trust, which didn't die. Control passes basically immediately to the successor trustee, who must comply with whatever instructions are made in the trust with regard to the property, but is otherwise free to do with it as they will within the limitations of the law. Among other issues encountered in probate but not here, this permits refinancing in whatever name happens to have the income to keep making the payments, or sale of the property if nobody does.

Caveat Emptor

Original here