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One of the things that has a lot of issues is any transaction between related people. Actually, this is not limited to purely family transactions, but applies also to transfers among partnerships and their partners, corporations and their officers.

The market theory holding that the value of a property is what is agreed to between a willing buyer and a willing seller is subject to the proviso that neither buyer nor seller has a reason to inflate or deflate what the property is worth to them. If the parties are related, there is an obvious reason to think that this may not necessarily be the case. Parents do things for their children all the time, siblings for each other, and as you're probably aware if you work in corporate America, major stockholders, investors, and executives often manipulate corporate versus personal transactions for less than wholesome reasons. Partnerships do the darnedest things, as well.

The issue, as far as the lender goes, is that they are trying to safeguard their money. Lending is a risk based business, and the lender wants to know that they are not taking more of a risk than they intend to when they take on this loan.

Let's say Jane Jones is CEO of SuperColossal Corporation. She wants to manipulate her compensation, so she has SuperColossal sell her property for half its real value.

This is actually okay by most lenders, if not securities regulators, IRS agents, et al. The loan is based upon the purchase price, the appraisal comes in double the purchase amount, and the lender assumes less risk than they price the loan for. Remember, the property is valued based upon LCM: Lower of Cost (purchase price) or Market value. When market value comes in high, the lender is covered. What isn't so cool is if Jane Jones sells SuperColossal the property back at twice its value. If the corporation gets a loan for 75 percent of value, that's at least a third of the lender's money they're not going to get back in case of default, which becomes likely when Jane is fired and the new CEO asks why they are paying the loan when they owe half again what the property is worth.

Needless to say, the lenders want to guard against that. Many lenders will not do related party transactions, period. For the ones that do, they will want to be very careful on the appraisal, which has now become their only guard against getting into an indefensible position. Many times, lenders may require related party transactions to go through certain appraisers, they may require in house appraisers, they may require multiple appraisals, and they may require that there be no contact between principals and appraisers. Whatever their required precautions, they need to be followed, as failing to do so will cause the loan to be rejected.

I'm going over this to make a point. Many lenders have additional requirements for related party transactions. Some may require full documentation only, others require that the loans have full recourse (they can come after you legally if they lose money). Each and every lender creates their own policy, and if your transaction is between related parties, it is probably more important to inquire about related party transfer policy and requirements than it is to get a good rate at a competitive price. Not much use having a great quote if you can't meet the lender's requirements. Even worse if it causes you to waste time with a lender whose requirements you cannot meet, and now your deadline for the transaction is here and you don't have a loan, and so cannot complete the transaction.

Caveat Emptor

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Pre-Qualification

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One of the most useless and overworked items in the real estate industry today is the pre-qualification for a loan. Sellers want buyers to be "pre-qualified", and buyers are seeking "pre-qualification" to convince buyers they are serious.

The level of work done for a pre-qualification varies. In some rare instances, the loan officer doing the work not only runs the credit, but verifies the income as consisting of the proper income documentation paperwork (w-2s and/or taxes, plus pay stubs and/or testimonial letter) for the loan, and determines how much of a payment you can qualify for based upon known income and known indebtedness, and actually includes the assumed property tax due to purchase price in the payment calculations, and gives you an answer in how much you can qualify for based upon current rates at the time. This is a fair amount of work, consuming hours of time. A loan officer at a direct lender who goes through this whole procedure might be done in two or three hours. A loan officer working for a broker can actually take a full day, or even two, making calls to various lenders and shopping the loan around after the primary calculations are done. On real transactions, I've gone over two days on multiple occasions, trying to find a better loan.

The pitfalls and caveats are many. If the loan officer doesn't run your credit, which costs money, they really have no idea what your credit is like. If they don't verify your income, they are making a giant assumption that what you told them is accurate for purposes of a real estate loan (you get to use gross pay, but there are a multitude of potential adjustments). The payment you qualify for when you actually go to buy a house and get a real loan is a so-called PITI payment, which stands for principal, interest, taxes and insurance. Insurance is always an educated guess, unless and until you have a quote from a prospective insurer on a particular property for an adequate amount of coverage. Taxes here in California will be initially based upon sales price, and unless you live within one of the high property tax areas, is pretty much a set rate for the whole state, but there are many special assessment districts, scattered all over the state. I've seen properties with as many as four of these, although many if not most properties have none. It's much harder in some other states to even come up with a meaningful rule of thumb figure. All of these factors throw the taxes figure off.

Principal and interest - the actual loan payment - is what's left over from your allowed payment. From this, you can compute a principal loan amount based upon known interest rates.

Here's where the games really start. The first question is "What type of loan are they basing it on?" The thirty year fixed rate loan always has the highest rate, which means that if they assume a thirty year fixed rate loan, they are going to be able to "pre-qualify" you for less than somebody else can. What's the lowest rate, and hence the highest prequalification amount? A month-to-month variable or even a negative amortization loan. Somebody assuming they are going to qualify you for a negative amortization loan is going to "pre-qualify" you for the largest loan - more than you can really afford, as millions of people have discovered the hard way since I started writing this site. Which is more attractive to a client who doesn't know any better? That's right, the negative amortization loan. Which loan causes someone who is educated in mortgages want to drag the loan officer into the sunlight and stake them through the heart? That's right, the negative amortization loan. Amazing coincidence? Not really. From personal experience, many people do not want to become educated, even to the level of a competent layperson, and they will get taken for a ride as a consequence. What they want is to look at houses, pick out one they like, sign a couple sheets of paper, and move in. What these people are likely to get is a disaster. For several years, many people in my industry made a very high class living ripping off people like this while setting them up with a gotcha that was going to bite, and bite hard, but not until after they had their commissions and depart the scene. "How many houses are they going to buy from me, anyway?" is the typical thinking.

One more concern is the fact that while sub-prime loan rates are higher, and in most cases they will have a pre-payment penalty, where A paper loan rates are lower and in most cases do not have a pre-payment penalty. However, the highest payment A paper loans will allow is less than the highest payment sub-prime loans will allow, due to lower allowable debt to income ratio. So the loan officer can typically qualify you for a bigger loan based upon a sub-prime loan. See my article "Mortgage Markets and Providers."

Additionally, the rates on loans change every day. If the rates changes, so does the amount you qualify for with the same payment. It takes only a calculator to show that even an honest and complete "pre-qualification" done on a rate that's valid today may or may not be accurate by the time you actually find a home that you wish to purchase.

Another game loan officers play is with the rate versus cost and points tradeoff. It is counter-intuitive but true that it is actually easier to qualify someone for a lower rate. If you qualify for a given loan program at 5.5 percent, you will qualify for the same program at 5.25 percent, but you might not qualify at 5.75 percent. The reason is that the payment is (or should be) lower if the rate is lower, and payment is what qualification is based upon. The cost to you is that most people refinance or sell before they have recovered the additional costs of these lower rate loans. (See Mortgage Rate and Points for details and sample computations.) So they're going choose a loan that sticks you with multiple points - costs you're not likely to recover - all in the name of qualifying you for a larger dollar amount. The money to do that can make a difference on your loan to value ratio, as it eats up your planned down payment. So you want to be very careful that the loan officer's assumptions aren't planning to use the same money twice, because you can't spend the same dollar both on your down payment and buying your rate down.

THERE IS NO WIDELY-ACCEPTED STANDARD FOR "PRE-QUALIFICATION." Let me say that again. There is no widely accepted standard for prequalification. One more time: There is no widely accepted standard for prequalification. Consequently, everywhere in the nation, but particularly in California and other high cost areas, the pressures on providers to "pre-qualify" you for inflated numbers is intense. If you don't qualify for enough to buy any home, they obviously don't have a transaction. If they pre-qualify you for less than someone else, most people are more likely to go to that somewhere else, and the loan officer doesn't have a transaction. The competition is qualifying them based upon month-to-month variable loans or even negative amortization, and so if they don't as well, they don't have a transaction. Few loan officers qualify clients based upon how things really are, and the easy transactions where everything fits and the people qualify based upon traditional measures are mostly long gone. If the agent and loan officer doesn't have a transaction, they don't make any money. If they don't make any money, they don't stay in business, they can't make the payments on the Porsche, their house gets repossessed, their wife has to sell her jewelry to keep them off the streets, etcetera. It's not a pretty picture for them, and it often leads to them putting clients into situations they cannot really afford (I originally wrote that in June 2005, long before the mortgage meltdown became plain to everyone else). Finally, of course, the size of commissions is based upon the size of the transaction, so if they "pre-qualify" you for more, they have the prospect of making more when you buy the bigger house that you cannot really afford.

This doesn't even go into the issues of a stated income loan. Stated income loans are gone now, but when we had them were intended for self employed folks who get to deduct a large number of expenses everyone else doesn't. They were where a borrower couldn't prove income according to industry standards via taxes, w-2s, pay stubs, or perhaps bank statements for sub-prime loans, so they stated their income and in return for a higher interest rate, the bank agreed not to verify the actual income level. Please note that it's still got to make sense for someone in your profession. For example, if you are a school teacher they are not going to believe you $250,000 per year. But people do make up numbers much larger than the real amount they make. It is not for nothing that stated income was often called a "liar's loan". That is fine and good, as long as you actually can make the payment. When you can't it becomes a real issue. Not necessarily for the loan officer, who's going to get their money and depart the scene, and as long as you make the first payment or two they're off the hook. No. The one who's going to have to deal with the mess is you, the client. Keep in mind that as soon as the loan is funded, that loan officer is out of the picture whether you went through a direct lender or not, and they know it. That real estate agent is also out of the picture as soon as you have your house, and they know it. You've got to live with the situation they created, and they kind of know it, but often it just isn't important to them, and certainly not as important as seeing that they get paid, and paid as much as practical. So watch out, and shop around. The person who "pre-qualifies" you for the lowest amount may be the one you should do business with, because they are using assumptions you can actually live with. Go over their numbers with a calculator in hand.

The stated income loan leads into our next issue, which is that few people will expend the necessary effort to do a "pre-qualification" correctly. It takes several hours to do an accurate "pre-qualification" correctly, but a Wildly Assumptive Guess takes just a few minutes. You may imagine which is done more often, especially since the numbers will change with available rates anyway. This especially applies if the agent does not run credit or does not get income documentation. Due to the availability of the stated income loan when I first wrote this, there was no absolute need to obsess about accuracy and being sure of the numbers, and many loan officers still don't understand that this has changed. Due to pressures to come up with high numbers, loan officers still make assumptions that range from pretty optimistic to wildly optimistic. This is wonderful if you just want to be able to say you were a homeowner for a few months while the bank forecloses on you. It's not so great if you're trying to get into a survivable financial situation.

You may get the idea that when it comes right down to it, most "pre-qualifications" are convenient fiction, worth an approximately equal size of toilet paper, if not quite so soft on certain portions of your anatomy. You'd be correct. So "Why are they so ubiquitous?" becomes the obvious question.

The answer is sellers and seller's agents. Sellers are going to go through a significant amount of trouble and expense going through the motions of selling their homes. Furthermore, they can only have one proposed sale in process at a time and they may have a deadline. They understandably want some kind of reassurance that this buyer can actually qualify for the loan. For their part, seller's agents can be some of the laziest people I've ever met when you come right down to it. They've paid the money for the advertising that draws people or joining the big well-known National Brokerage With Television Advertising! Once they get the signature on a listing agreement, many think they're entitled to sit around with thumb you-know-where and wait for the commission to roll in. They don't want to go over the buyer's pre-qualification with the seller, and most of them have no idea as to how to do it. But they certainly don't want to carry out their part for more than one proposed transaction, hence their desire for this Magical thing called the "pre-qualification."

The correct way to respond to this concern, for a seller, is simple and yet many people think it's hard-nosed. Require a deposit. Require it be remitted to you on the last day of escrow as part of the initial contract, whether or not the loan funds. Now the standard form in California, as a default, makes the sale conditional upon the loan for seventeen days, but this can be changed by specific negotiation. True, you might scare away some buyers who aren't certain that they're qualified, and in buyer's markets this may scare them away entirely. But you won't enter into escrow with anyone who's unsure. You shouldn't rely on a "pre-qualification", which is basically just a piece of paper that's now been filled up with meaningless markings and so can't be used again for something more important, like a game of tic-tac-toe.

Furthermore, many buyer's agents, knowing how useless a "pre-qualification" is, don't want to take the time to do them themselves and so tell their clients to go get one somewhere else, but that when the time comes they have someone who will do the actual loan. It didn't take very long for the word on this practice to get out, and so loan officers and agents with a very short time in the business learn not to do them unless they are going to get something out of it. Which basically means control of the transaction or an upfront payment. I certainly can't name anybody with more than a few months in the business who will do a "pre-qualification" unless a client either signs a Buyer's Agent Agreement or pays them a fee or does something that assures them they will get a transaction. And if your agent says go get a "pre-qualification" on your own, go and get another agent. If they or the loan agent they recommend can't be bothered, then obviously they are too busy to give you the necessary attention to get your transaction done properly and on time. It's very hard to fight the system that requires a "pre-qualification," no matter how useless it is, but it's part of the work they signed on for. They should do it themselves. If they try to get someone else do do their work, consider it a Red Flag not to do business with them, because they're already trying to skate by without doing work that they should be doing. Being a good agent or loan officer is work, and that's what we get paid for. Somebody who's trying to do less work now is likely to try and skate by without doing important work later.

Caveat Emptor

Original here



This article was inspired by closing one of many transactions where my clients did not make the high bid (or even close), but did get the fully negotiated purchase contract and the property. By building an airtight case that this client was capable of promptly consummating the transaction, I persuaded a rational seller to accept less money than they might theoretically have gotten from another interested party.

Let me make it very clear that this does not work every time, and you have to offer them something else they want that nobody else is offering. It takes a seller with a certain amount of knowledge of the market to make it work, and their agent cannot be clueless either. Your first time home seller with no knowledge of the reasons why transactions fail, or how frequently, is not likely to realize where the probability of money is. So after that seller eats carrying costs for the property for two to three months at several thousand dollars per month before they discover that the buyer cannot consummate the transaction, they might start to get rational about what's important - providing they haven't lost the property to foreclosure in the meantime.

The better the agent is, the more likely they are to be on the side of the more certain transaction. Over forty percent of all escrows started in the last year locally did not result in consummated transactions. Why did all those transactions fall apart? The loan couldn't be done. No other reason but "the loan couldn't be done." Transactions that fall apart for other reasons - newly discovered major repairs, and all of the little problems with interpersonal relationships that strike between contract and recording - are mostly unknowable in advance. We can all spot the purchase offer (or seller's counter) that says "Danger, Will Robinson!" but most of them aren't that bad. And the fact is, no matter how unwilling sellers may be to deal with newly discovered issues, they're stuck with them and the buyer isn't. Nobody's going to buy a house where you can't flush the toilets, as I had to explain at length to a listing agent not too long ago by way of explaining why his client was going to have to replace septic or hook it up to the sewer (Indeed, both law and lenders will make it very difficult). The most important question in the mind of any rational seller or listing agent has got to be, "What assurance do I have that this buyer can consummate this transaction in a timely fashion?"

As a buyer's agent, that's what you want to sell in a competitive bid situation: increased certainty of the transaction happening.. Confidence that you and your client can make it happen, given the opportunity. Show the sellers why these buyers are qualified. Telling nothing but the truth, paint a coherent picture of an easy transaction. This is one of the big reasons why real estate agents need to understand loans, whether they're on the listing or buying side. Walk the walk, don't just talk the talk. If your clients are all cash buyers, pound the point home - demonstrate they've got the cash in the bank and get rid of that financing contingency! What's the credit score? What's the income, how stable is it, what's the debt to income ratio? The loan to value ratio? With client approval, you can even remove the account numbers from statements, and show them where the funds for the down payment are coming from!

Pre-Approval or Pre-Qualification letters will not get this job done. Neither one of them means anything real. I'll write them because other agents want them (usually for pure cover their *** after the transaction fails - again - because they don't understand what they're doing), but the only one I trust is one that I wrote. Why should I expect any other agent to give them any more weight?

The more qualified the buyers, the bigger the down payment and deposit they're bringing in, the better this works. A good sized deposit says you and your buyers are confident you can get it done, particularly if you'll waive one or more of the usual contingencies.

You do need both a good agent and a good loan officer to make it work. If the loan officer and agent are both the same person, that's even better, but this isn't happening with a discounter if the listing agent has more than an hour in the business, even if they're a discounter themselves (although I've never had a competitive bid situation happening with a discounter's listing. I don't wonder why, and you shouldn't either).

This pretty much can't work if you're in a Dual Agency situation. That agent counsels the owner to take the offer made where they get both halves of the listing commission, but the owner gets less money? Ten minutes in court or a regulatory hearing and that agent is toast. Yes, some agents are that stupid - but this is a mistake nobody makes twice, because once puts them out of the business. Not to mention that that owner is going to figure that the agent is out to line their own pocket at their client's expense.

For my buyer clients, I'm always looking for something valuable to the seller that isn't cash, or isn't purchase price cash. A high likelihood of the transaction closing is one of the best, because it doesn't cost my clients a darned thing, and yet it really is valuable to sellers.

Caveat Emptor

Original article here

I don't know how many people have told me the story of the Purchase Offer That Was Accepted But Couldn't Be Done. They come to me because they lost their deposit or are about to and they want some way to make it not happen.

But it's never happened to offers I write for my buyer clients. I doubt it ever will. There are many reasons why real estate agents need to know and understand loans. First off, to save their backside. Somebody defaults on a purchase money loan, the agent is an obvious target to drag in. E&O insurance plus fiduciary responsibility equals rewarding target for lawsuit. The second reason is even more important than that: Saving the client relationship. What could possibly be more damaging for a buyer's agent than losing a client's deposit? There really isn't much. When I write a purchase offer, the built in structure is always of a loan I know that I can do.

This is particularly important where there's less than 20% down payment being contemplated. For about ten years, there was pretty much always been a loan that could be done, no matter how poorly qualified someone was. Many real estate agents got used to that, writing (and accepting) purchase offers essentially "in the blind" as far as the loan went. That has now gone by the wayside. Stated Income and NINA loans are no longer available as I write this. Even full documentation loans add new curlicues every week as burned investors add more and more things they won't do to the list. Even if you make plenty of money, any loan over 80% loan to value ratio has far more stringent qualifications than a few years ago, and 90% or higher loan to value ratio is very difficult unless there's government insurance involved.

All government programs - VA loans, FHA Loans, FHA Secure (not a purchase money program), Mortgage Credit Certificate, and locally based first time buyer assistance - every one of these has always required qualifying based upon full documentation of enough income to repay the loan.

Given this, you have to know if you can afford it before you make an offer. You're going to spend roughly $1000 to pay for an inspection and an appraisal as soon as you have an accepted offer, not to mention you're tying up a deposit of several thousand dollars in escrow - a deposit that's potentially "at risk" if you are unable to qualify for the loan that will allow you to purchase the property.

I know that I'm not very respectful of pre-approval, let alone pre-qualification. This is because there are no real standards for either one, and I've seen enough pieces of paper swearing a loan could be done when it in fact could not to make a fair sized bonfire. There are several reasons for this. There just isn't anything to gain personally, and everything to lose, for a loan officer to tell someone "Sorry, but you do not appear to qualify." So they issue the pre-qualification or pre-approval on hope and a prayer, because they might be able to get a loan done. You do not want this to happen to you. Even if they tell you truthfully that you need to reconsider your loan and your purchase, you are provably better off than if they string you along with messages like Think Happy Thoughts About Your Loan and you end up spending money for the appraisal, inspection, etc, and end up losing your deposit. Probably the best way to insure that this doesn't happen is to insist upon a frank discussion of what the qualification standards are, and what your limits are under those standards. If you're right at the edge of qualification standards, might I suggest you consider "pulling back" slightly? There are often bumps in the road and you don't want one bump to mean you cannot qualify.

You want to make the loan officer go over the numbers with you. Debt to Income ratio, Loan to Value ratio. Add up all of your other debt, add up the full payments for principal and interest, property taxes, and homeowner's insurance. What percentage of your verifiable monthly income (monthly average over the past two years) is that? How much do you have available to use in your bank and investment accounts? Does that cover the projected down payment and sufficient money above that for the closing costs you'll need to pay? If you need to buy the loan down with three points in order to qualify on debt to income ratio, is there still enough available to make the required down payment?

In some cases, writing the purchase offer correctly - structuring the transaction with the loan in mind - can make a difference between a loan and a purchase that can be done, and one that cannot. This is definitely the case if you are looking for a loan over eighty percent of property value. The only 100% financing available right now the the VA loan. It can be done, even in declining markets, but you have to be extremely careful to write that purchase offer in consideration of loan requirements.

If your real estate agent is a highly qualified loan officer, it's no sweat. I write every purchase offer with prospective loans in mind. If I don't know I can do the loan, I find another way to write the purchase contract so that it can be done.

The time of writing a purchase contract and worrying about the loan after acceptance is gone, and it may not return. Even for well qualified borrowers with plenty of income and down payment, it can't hurt to get a loan officer involved when making an offer. For those with marginal income and not much down payment, getting a loan officer involved before you write an offer (or accept a counter) can make the difference between a viable transaction, and one where everyone's wasting their time and money. Yes, you can potentially renegotiate a purchase contract later. Is there anyone who wants to tell me that's as good as getting it right in the first place? Do you think you might be opening the door to issues of trust between buyer and seller getting in the way on those renegotiations? Do you think that the seller might demand fresh concessions, where if it had been negotiated correctly in the first place, you would have something that's essentially the same terms as the initial contract? Not to mention time lost, delays in closing, opportunities for the entire transaction to go south? Write your offers with loans that can and cannot be done firmly in mind, and you won't need to renegotiate for the sake of the loan.

Caveat Emptor

Original article here

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

Here goes:

Spend some time making your property shine before you put it on the market. Doing it yourself is better than giving an allowance. Spend the effort to find a good listing agent, and sign a listing agreement at least a week before you want people to know your property is for sale. Consult the agent as to what can be done to make the property more attractive before anyone sees it. Agree to pay your listing agent for the good they do, and offer buyer's agents at least an average commission - you don't want them trying to sell someone else's instead property to the people who like yours.

The property is only worth what someone will pay. Price it correctly from day one. You'll end up with more money, faster, than if you start too high and reduce the price. Not all goods are in the form of cash - decide what's important to you, what's not, and how much money it's worth, before you have an offer.

Once the property hits the market, make the property as available for showing as you possibly can. If you don't show it when people want to see it, they might not come back. If you possibly can, don't be there when your prospective buyers are.

Negotiations are give and take. You shouldn't expect to get unless you're willing to give, and a stubborn attitude can sabotage your sale. Remember, you have a property and you want cash. There are lots of other properties out there

How's that?

Original article here


I've been saying this for a long time: Short sales are poison for buyers. I don't know why people encourage buyers to look at short sales, because there is no advantage for buyers that I am aware of. In fact, there are several decided disadvantages. I'd much rather make offers on lender owned property, or anything else for that matter. Short sales are the absolute bottom of the barrel as far as buyer desirability.

For those sellers who desperately need to sell, which is pretty much every short sale, I really am sorry. But I have a fiduciary responsibility to my buyer clients, who come to me wanting a better property for less money, and less hassle. The facts of life in short sales work against getting a bargain, while sabotaging our (mine and my clients) ability to control the transaction. Therefore, I advise against. Much better for buyers to look for lender-owned or other property.

The main issues lie with the lenders, who are in denial of the situation. I've never come across anyone in any lender's short sale department who didn't have their head stuck in cloud-cuckoo land. Instead of making a prompt approval or disapproval of an offer, they sit and delay and hope for a better one. When I originally wrote this, I would usually have the purchase financing ready to go in about two and a half weeks from the date of the purchase contract. For any other property, it's pretty trivial for the listing agent to be ready to close by then. We're done, and my client is happy.

For short sales, we usually won't get word as to what the lender is going to do for at least a month after that. I've literally never had an approval from a short sale lender within what used to be a normal escrow period of thirty days. This has implications for the buyer's loan. Mortgage Loan Rate Locks are more expensive for longer periods. Pulling a rate sheet at random, a 45 day rate lock adds a sixth of a point to the costs for a thirty day lock, while a sixty day lock adds four tenths of a point. On a $400,000 loan, this works out to roughly $667 and $1600, respectively. If you need an extension, a tenth of a point (roughly $400) buys five calendar days. Some lenders aren't extending locks at all for loans above the conforming limits. Or buyers can float the rate, leaving themselves at the mercy of the financial markets as to the loan they might eventually get. None of these is an optimal situation from a buyer's point of view.

When they do respond, the short sale lender will always try to squeeze more money out of the transaction. They're in denial about their loss, with the practical effect of making that loss worse. The property is only worth what it's worth. The first few days on the market are the best time to get the highest offer. If you didn't get an offer then, you're not likely to get more money later, as I said in How to Sell Your Home Quickly and For The Best Possible Price. But loss mitigation departments are congenitally clueless about this - and they will forget whatever you manage to teach them within 4.3 nanoseconds. They are structured towards shaking the most possible money out of the transaction, and seem completely unable to learn that all this does is result in a failed transaction, no matter how many times it happens. What's that definition of insanity again?

So what usually happens (after 45 to 60 days - weeks after my buyer clients could be living in any other property) is that the lender wants two things: A higher price out of my buyers, and a commission reduction on my part. I'm not going to say that I'm in love with commission reductions, but I'll agree in order to make clients happy. But the deal-killer is that they want the buyer to make a higher offer. Ladies and gentlemen, I went out and negotiated a good deal that my client is willing to accept with the seller, despite all of the delays and problems in short sales, and here's this third party essentially vetoing the purchase contract. If I did get a heck of a deal, it's now gone. In any case, my clients are going to be unhappy, being presented with what amounts to an ultimatum: Pay more money or lose the property. Show of hands, please: Is there anybody reading this that would be happy to get such an ultimatum? Unilaterally attempting to alter the purchase contract is forbidden with any other transaction. Why in the world would a rational buyer want to subject themselves to that? Why would any but the most clueless of agents not discourage them from doing so? I'm not going to say it's impossible to get a great bargain on a short sale, but it is highly unlikely.

I do consider my clients being willing to deal with a short sale to be worth some serious concessions in the purchase contract, as does every other buyer's agent with any experience in dealing with them. So it's not difficult to negotiate a pretty good bargain initially - but it's extremely difficult to keep that contract intact when the short sale lender gets involved, because their priority, the only thing that's on their radar screen, is shaking as much money as possible out of all the participants.

Nor is there anything I can do as a buyer's agent that's going to make the transaction fly faster, or prevent the short sale lender from sabotaging it. I can argue until I'm blue in the face. They're not going to listen to me. They might listen to the listing agent, but not the buyer's agent. I can help the other agent with what to say, but I'm still relying upon someone else to convince that short sale lender. Whatever they do, they're going to take their own sweet time responding, hoping for a better offer.

The cold hard statistics is over eighty percent of all short sales fall apart, and most often it doesn't even get as far as whether the buyer is qualified. The short sale lender wants more out of the buyer, wants the seller to come up with more money than they've got, the buyer gets tired of waiting and moves on - something. No matter what is is, my buyer isn't going to be happy. Quite often, I get the blame, at least in my client's mind, for the transaction failing - even after I warned them as to why this was a bad idea in the first place.

If you do get an approval from a short sale lender, quite often they're written on a ridiculously short deadline. Given all of the facts above, I'm not going to advise my buyer clients to spend their money on appraisal, inspector, etcetera until we do have an approval. That's just money thrown away if the short sale lender doesn't approve it. But waiting on them means it's likely to take more than a week to get the loan done once we do have an approval - and dealing with a one week deadline was an actual experience I had once. Not to mention the effects of waiting for such an approval on the buyer's due diligence period, and possible exposure to loss of my client's deposit (at the very least, it's sitting there tied up in escrow while everything gets sorted out).

Seller paid closing costs, integral to most transactions currently, are also extremely difficult to get approved. These are money out of the lender's pocket, and they're going to require a higher than what they consider "market" price in order to compensate them. This is intelligent and reasonable, but if you're looking for a bargain due to them not understanding their bottom line, it's not going to happen, and in fact, when one or both of these things are part of most transactions, the "market" is priced to include them. Result: The buyer who needs one or both of these is likely to have to pay more for a short sale than any other property they might fix their eye upon. And those buyers are wanting me to find them a better property, cheaper. Are you still in doubt as to why I advise buyers against short sales?

Since I originally wrote this article, another category of problems has become endemic as well. Listing agents are playing "bait and switch" on the price - advertising prices far lower than any offer the lender will likely accept. Such a sale isn't going to happen, and the agent knows it - but that's sure a good way to get prospective buyer clients to call, giving the listing agent an opportunity to gain a new client! Furthermore, because there are so many of them and they are time intensive, many brokerages are delegating the negotiations with the lender and asking prospective buyers to pay for it.

It is far more fruitful for most buyers to focus on properties in other categories. For this particular property, better to wait until is is lender owned, at which point the bank is on the hook, paying money out of their pocket, and usually the money tied up in this non-performing asset costs that lender heavily in leverage on their working capital. Lender owned properties get turned over to different employees, with different performance incentives, with the instruction of getting that property off the lender's books! The money this costs the lender is their own management's fault.

For any lenders reading this and not liking it: The responsible party is you. If you don't want them to become lender owned and cost you much more money, get real about your short sales! Publicize your criteria so buyers and their agents will know they're not getting into a "black hole" situation, and respond in a timely and reasonable fashion without trying to leave people who weren't involved (the prospective buyer and both agents) holding the bag for your mistake. It will save you money by dealing with the situation before it goes to Trustee's Sale.

As far as writing this article goes, the only one I have any sympathy for is the current owner, who really does need to sell. No matter what past sins they may or may not have committed, that owner is currently trying to face reality and deal with it. As the buyer, however, unless you believe that seller's plight is worth wasting several tens of thousands of your dollars, there's nothing you can do. Buyers should avoid short sales. They're not likely to end up happy.

Caveat Emptor

Original article here

From an e-mail

I've been talking to agents lately and I ask them about the things I've learned about from your site. I thought I would say things like "I want to apply for a backup loan" and they would say "Good idea!" instead of "Why would you do that?" I try to answer the why and next thing you know none of my why's make sense anymore. Here is a summary of that conversation:


Me: Okay, so I need to get a "pre-approval" or "pre-whatever" from a lender so I can put an offer on this house . . . that sounds fair . . . but I want to shop my loan around and in fact, I want to get a backup loan.

Agent: Backup loan? What for?

Me: Because from what I understand what you are told at first isn't what gets delivered and you are at the mercy of the loan officer if you don't have a backup plan

Agent: They have to fill out the form and give you what they promise so you are protected.

Me: So it's the law that they deliver what they fill out on this form?

Agent: No, it's not the law but they wouldn't dare change the terms or I wouldn't recommend them.

Me: Well, most people don't know they're getting screwed until later and most of the ones that notice don't do anything about it.

Agent: Well, if you hire me to be your agent then you should trust my advice . . . otherwise why would you hire me?

A similar conversation ensued when I talked about a "exclusive" vs "non-exclusive" buyer's agent agreement. "There is no such thing as "non-exclusive"". What is the benefit to you? If I have multiple agents then they all work to find me the perfect house and the one that finds me the one I like is the one that get's rewarded. Nope! If you tell an agent you have other agents he won't work with you. Okay, well, I wouldn't tell the other agents. But any good agent is going to make you sign an exclusive agreement.

Anyway, the sales techniques here are right up there with car salesman.

Let me ask you about your experience with monopolies? Your electric provider, mass transit provider, cable provider - do they furnish top notch customer service? Do you think someone might be able to do better, cheaper? Quite likely, because monopoly situations encourage rent seeking behavior. Monopolies are the classic example of rent seeking - do business with them, or not at all, meaning you're stuck with whatever service they choose to give you at whatever price. Why in the world would you do that to yourself?

Only two possible reasons: You don't have a choice or you don't know any better. You do have a choice in real estate, no matter how much various people may choose to pretend you don't. I certainly haven't noticed any shortage of real estate agents or loan officers. There's something like 7500 licensees in San Diego County alone. That leaves you don't know any better. It doesn't matter whether it's through ignorance or not following through on the knowledge.

In fact, if you think about it, someone who insists upon exclusive rights to your business is telling you they're worried about comparisons to other professionals. They're telling you they're afraid they can't compete and they're not willing to try. Does this sound like someone who's likely to give you the best service? Someone who's not willing to compete?

Just because an exclusive agreement isn't in the consumer's interest doesn't mean that it isn't very desirable for agents. In fact, most agents take a lot of classes in learning how to lock your business up and cut out the competition before anyone else gets to the starting line - several times more training than the average agent ever takes in learning how to actually give good service and good value to their clients. Look at the average agent symposium sometime. There will be easily ten times more offerings in how to get clients and cut out the competition than there will be in how to get your clients the best value. If the average agent doesn't offer a non-exclusive buyer's agency contract, they can pretend such a thing doesn't exist. It does exist; it's available in every state. In California, it's form BBNE in WinForms, the standard computerized package. But if they can persuade you to sign an exclusive contract, they're guaranteed to get whatever buyer's agency commission is due - before they've done any real work, before they've demonstrated that they are really going to guard your interests at all. I've written about the drawbacks of an exclusive agreement before, and even given examples in shopping for an agent, and the games that get played with consumers by agents. If you've signed an exclusive agreement, you're stuck. If you don't, you're not - indeed you keep far more control in your own hands.

Some agents will try to sidetrack you with an exclusive agreement "but you can fire me any time you want!" The first question is where is that written into the agreement? Show me please. In fact, the standard exclusive contract is written to be very difficult to break for any reason. The second question is that even if it is written in, how is that not functionally equivalent to a non-exclusive contract? The answer to that is they've still got your business locked up until and unless they make an obvious blunder. As long as they don't make that obvious blunder, they're still in the driver's seat. But this doesn't mean that they're a good agent - you have no standards for comparison. Indeed, you are agreeing not to acquire any standards for comparison. Matter of fact, they can be the worst excuse for an agent ever and still not make any mistakes that most people are going to fire them for. Plead for one more chance, and most people will give it - dozens of times. The bottom line is that they still avoid any chance at having to compete.

Now just because your agreement is non-exclusive doesn't mean you have to go find other agents. At least half of my clients never talk to another agent. But they have the option of doing so, and that knowledge is one of the things that motivates me to do the best job I can for my clients, and why I keep the list of clients I'm working with at any time short enough so that I'm certain I can handle them all with no deterioration of service. If I don't, they can fire me and find another agent as easy as crossing the street. That motivation just isn't there if you give someone an exclusive agreement. Do you want the agent whose motivation is to concentrate on giving a few clients the best job they can possibly give, or do you want the agent who's a half-notch above getting fired, whose motivations are to lock up as many clients as possible, secure in the knowledge that none of those clients are likely to actually fire them? And if they're confident they can give you such a terrific job, why are they requiring an exclusive agreement? If they're really that good, they should be eager to compete. That's the best confirmation of their abilities possible - the fact that someone else tried and couldn't do it! As I've said, most of my clients see the job I do and never talk to another agent, and most of those who do end up telling me how much I shine by comparison. But it takes confidence in my own ability to offer that non-exclusive agreement. The ones who won't are telling you that they don't have that confidence. Do you think there might possibly be a reason for that lack of confidence?

Probably the largest number of agents and loan officers compete by being what I call "Social predators" Involved in Boy Scouts, Soccer, Little League, the church, PTA, whatever. They try to make those they come into contact feel obligated to do business with them, because they are after all, a good guy (or girl), they help the cause, etcetera. Surely such a person is worthy of trust? Surely they will treat you right? They lock up the business with an exclusive agreement or a large deposit, raising the barrier to competition as high as they can. This effectively sets you up for the kill. My personal experience leads me to believe that such agents and loan officers are responsible for a truly outsized proportion of the people who are losing their property to foreclosure in the current crisis. It seems like everyone I come across who's in the process of foreclosure has a "social predator" story to tell, although many of them don't realize it. Most of them have no clue what happened until I dissect the entire process and show them that their "little boy's wonderful scoutmaster" bent them over and took advantage. The thought process is natural, but the conclusion does not follow from the premise - a thing most people don't understand until how it bit them (past tense) is plainer than the nose on their face.

Ronald Reagan loved a very applicable phrase: Trust but Verify. It's not accident that this principle, which he applied as President, served him and the country very well. On a more personal level, you are willing to trust agents with your business (otherwise you wouldn't be talking to them), but you want to verify that they're earning it. You're not willing to take trust to the level of the spouse who's clueless about their spouse telling them they worked late when they come home at 3AM six nights in a row smelling like someone else's perfume or cologne. This is the best function of a non-exclusive buyer's agency agreement. This means you still have the right to go out and get the only valid standard of comparison: Another agent who has the same opportunity to do the same job as them.

In your situation, I'd be very blunt: "What you're telling me about requiring an exclusive contract makes me believe that you know very well you don't measure up to a good standard. In fact, the harder you argue for an exclusive agreement, the less willing I am to believe you are worthy of one. I'll willingly give you a chance to earn my business with a non-exclusive agreement, but I'm not going to sign any exclusive agreements with anyone. Since you're not willing to sign a non-exclusive agreement, I am wasting my time. Good-bye." They have as long as it takes you to get to the door to change their mind. Walk out and never look back - find someone else who will offer non-exclusive agreement.. In fact, taking this stand in your self defense is the first and most critical point of Shopping for a good buyer's agent. The standard non-exclusive contract is truly a bet you cannot lose as a consumer. There literally is no risk. Doesn't matter if they're a freshly minted licensee who's never done a transaction in their life (How often do you hear that from someone who actually has significant experience?). Go ahead and sign a non-exclusive agreement, and the worst that can happen is they don't get the job done. You're still free to use anyone else who does. You have lost exactly nothing - as a matter of fact, both you and that agent are mathematically, provably better off for having signed that non-exclusive contract! Hiring them thus can only increase the probability function in your favor! This improvement may be marginal or even zero, but so long as you do your due diligence it cannot be negative.

The same thing applies to the loan officer an agent recommends. The reason they're choosing that loan officer has nothing to do with the best choice for you and everything to do with the best choice for them. That's a loan officer they trust not to screw up the transaction by telling you, "You know, I'm not certain you can really afford this property." That's the loan officer they trust, by hook or by crook, to have a loan ready at the close of escrow, no matter what it takes, so that that agent can get paid - and if you're facing foreclosure six months down the line, hey, they got paid. Has nothing to do with how good that lender's loans are, how competitive they are, or any other advantage to you - only that they trust that loan officer to insure their paycheck. That's what the agent is really telling you. The loan officer may be really good, and very competitive on price. Then again, they may not, and the one thing I'd bet significant money on, sight unseen, is that they will never tell you that maybe you're stretching beyond your means - that agent will never send them another client if they do! The only agents I'm certain could tell the difference between good loans and loan officers and bad ones if it bit them are the ones who are also loan officers themselves.

If an agent is recommending a loan officer on the basis of "This person wouldn't dare cheat my clients!", ask them for a copy of the initial MLDS (California) or Good Faith Estimate (the other 49 states) and a copy of the final HUD 1 for that loan officer's last five transactions with their client. (sarcasm on) What, they don't have them? What a surprise (end sarcasm). But if they don't, how can they possibly know whether that loan officer does or does not quote accurately? You've just asked for the only possible evidence, and they don't have it! Nor does this cover how well they compete on price. As long as the terms are the same and the rate/cost tradeoff is better, a loan is a loan is a loan. I used to advise people to apply for more than one loan, but changes in the lending environment have put the kibosh on what was an easy and effective way of managing your loan thus. Now you need to have a real problem solving discussion with several potential loan officers and evaluate the solutions - a much more difficult task for a lay consumer, because neither I nor any other loan officer is doing back up loans any longer. Rate shopping on the phone doesn't cut it any more because loan officers can lie like rugs and low-ball worse than any remodeling contractor and now they can point to a federal form for false credibility

You're right that these sales techniques have a lot in common with used-car sales. Everybody in any sales business wants to avoid competing if they can - it means they don't have to work as hard, and get higher profit margins. Consumers, for their part, need to learn to understand what actions mean, and that actions are important, not words. That's part of the reason why I'm writing this article.

Sales persons, properly handled, are your best friends in the whole world. Nobody solves your problems as well as an expert with the motivation of getting paid for their trouble, and there always seem to be problems that lay people don't realize exist until they're bitten, which is almost always far too late to avoid all the damage that's coming down the pike. Kind of like having a Terminator after you. If you don't have your own very special protector, they're going to get you. I don't like having my clients bitten - not tomorrow, not next year, not ever. One bad transaction can ruin you as an agent or a loan officer, and I intend to be doing this for the rest of my life. So I'll do everything I can to keep it from happening before it happens, and you want someone just as dedicated working for you. The only way to be certain is to watch them in action over time. But if they're asking you to sign that Exclusive Agreement beforehand, how in the heck can you possibly have the knowledge of their business practices to give it to them?

Caveat Emptor

Original article here


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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

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

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

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

Knowing that difference is money.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

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


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

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

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

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

How was that?

Caveat Emptor


Original article here

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

Found this on a public forum


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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

Copyright 2005-2014 Dan Melson All Rights Reserved

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