General Real Estate: December 2007 Archives
One of the worst things about the loan process, and indeed, found throughout the whole real estate industry, is the idea that if you can just delay telling the client about something they won't like, it's more likely they'll continue with the transaction anyway.
The horrifying thing from a consumer's perspective is that it works.
Hundreds of thousands, if not millions or tens of millions of people, become victims of this common psychological fallacy every year.
This makes use of the fact that longer something goes on, and the more they do towards it, the more heavily that people become psychologically invested in that particular goal, even to the point of obsession. This happens in other areas, too. For instance, whether you're for or against the Iraq War, you've probably noticed that as time goes on, and the more the other side of the debate does to further their position, the less they're likely to be disposed towards consideration of yours, the more shrill they get, and the more hardened in place their mental armor, regardless of the facts. I'm not writing this to take a side; I'm writing this to illustrate that this is something both sides have observed - accurately - about the other.
So what is the practical effect of this in the real estate world? The honest practitioner who tells you right away that something is wrong loses the business, while the shady character who pretends everything is proceeding right on course gets rewarded. If it's a loan, in neither case is the loan they initially talked about going to be delivered, but by pretending that it is until such time as the final papers are ready, the shady character still gets the business. The practitioner who tells you the truth, and tells it right away like they should, behaves like everyone says an ethical practitioner should behave, loses the business, while the crook who pretends nothing is wrong still gets paid, because when the final documents are submitted they're still not going to point out the differences - so if you don't spot them yourself, you're going to be unknowingly signing far different documents than the loan you initially agreed to. I've said this before, but in loans, it's good if they tell you about problems right away.
In the practice of buying and selling real estate, agents often face analogous situations. Leaving aside the fact that the listing agent is working for the seller and not the buyer, you need to understand that if a buyer's agent conceals bad information about a property until after the contingency period has passed, they've got a much higher probability of a sale, and therefore getting paid. A good agent will tell you about all the issues they see on every property as you go, while the agent you might wish on your worst enemy is enthusiastic about every property. The former is due diligence and properly discharging that fiduciary duty I keep writing about, trying to make certain the client understands what they're getting into because there is no such thing as a perfect property. The latter is about grabbing the easiest commission they can, as quickly as they can. A good buyer's agent will be present for all inspections if they can; a bad one is too worried about getting sued. A good buyer's agent wants that inspection and appraisal and title report done the instant the purchase contract is fully executed, if possible, and goes over them with you. A bad one delays ordering them, and mails or hands them to you without comment. There is a seventeen day contingency period for loans and inspections on the default contract; if anything is concealed longer than that without there being an obvious reason why it couldn't have been discovered until that moment, you have been the victim of such a practice. It isn't like them not telling you means the property doesn't have that problem; it only means you don't know about it yet. If you buy the property in ignorance of a defect, though, it will still be present and you'll still have to deal with it - and without any help from the current owner who has gone their merry way with your money.
I get emails every week from people who have been burned by both of these, and there isn't a way to fix it retroactively, and I only have a few thousand regular readers. This stuff happens all the time, and quite often, people don't even realize it has happened to them. So how do you defend yourself from this situation, knowing that this is where the incentives lie?
For loans, ask questions, ask for Loan Quote Guarantees that mean something, and apply for a back up loan. Be forgiving if your loan person tells you about a difference between their quote and the final numbers right away, particularly if they tell you why. Most important of all, read your final closing documents carefully. Until then, they can pretend that everything is all sweetness and light, and the crooks do.
For property, it's a little bit harder and starts earlier, when you're looking for a buyer's agent. Go out looking with several, and keep looking at least until you find one that tells you bad things about every property as a matter of course. There really is no such thing as a perfect property. Never use the listing agent as your buyer's representative, as they have an obligation to get it sold, for the highest possible price, and telling you the whole truth isn't conducive to that. Always shop by purchase price, never by payment, which varies with loan rates anyway. And most importantly, go over those reports yourself. Be there for the inspections and appraisal, and go over all of those and the title report as well. Above all, make certain you never sign anything without a full understanding of what it says. Many times, critical disclosures get hidden among trivial stuff that happens with every purchase, so they can catch you off guard.
Real estate transactions are for a lot of money, and people in the professions do get paid thousands of dollars per transaction. Nonetheless, trying to save yourself commission costs is far more likely to cost you more money than it is to save it. But with such large amounts at stake, you want to take precautions against being sold a fairy tale that has no chance of actually ending up with happily ever after. The real world is what it is, whether or not they tell you about it. If someone made an honest mistake about something, the sooner they tell you about it, the more likely it is they are honest. If they delay telling you, all by itself that's a stronger indictment of their ethics and practices than anything a grand jury can do.
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