Beginner's Information: October 2007 Archives

My husband and I bought a golf course-view house in DELETED. We closed 5 days ago; moved-in 4 days ago; and 2 days ago found out that the golf course is scheduled to close. It was announced by the golf course management 2 years ago at the home-owners' association meeting, and the seller and her realtor most likely knew. But they did not disclose it to us, even though they had ample opportunity to do so. They had advertised the house everywhere as golf course view. We definitely would not have bought the house if we had known that the view is there only for 2 more months. We paid for the view and know that homes without a view like that go for a lot less.

Now a school or more homes are scheduled to be constructed in its place. What are our legal rights? Can we "return" the sale of the house?

Please advise. Thanks.

First off, get an attorney who specializes in real estate in your state, and ask them. Each state has its own law.

Here in California, agents and sellers are liable for disclosing not only what they knew, but what they reasonably should have known. They are required to disclose all such information that a reasonable person might consider in their decision on whether to buy a particular property, and by well precedented legal extension, whether to pay a particular price. Cases have been decided based upon an increased water bill, that the court ruled should have tipped the owner off to the fact that there was a leak somewhere, and water is notorious for its erosional capability, among other things. Were you in California, it appears as if you might have a very strong case. I have no idea whatsoever about whether it's worth pursuing, even if the law in your state is similar. For that, you need to talk to a local attorney.

The first question that attorney is likely to ask you is what evidence you have that the former owner knew, or should have known, that the golf course was closing. Announced at homeowner's meeting is good. In the minutes is better. HOA informing all of the residents directly would be better yet. Neighborhood vows to get together and fight the closure? Probably best, especially if your home's former owners were somehow listed as being members or directors. That's the evidence they knew part.

Evidence that a reasonable person might not have bought that property at that price is pretty easy to come by in this case. Golf courses are highly desired, highly sought after neighbors on the part of many people, and golf course views are valued. Schools, not so much. People want good ones close, but they don't want to deal with playground noise, or high school football stadium noise for that matter. Advertisements of the property as being next to a golf course, or looking out over a golf course, would likely be good evidence to have, because it would show that the owners knew that golf course view was a part of their value, and they were committing this deception maliciously.

Then we get to the real crux of the matter: How certain are you that they didn't slip one piece of paper that says, "The golf course is closing so they can put a new school in" into that ream or four of paper you signed at closing? Or a few sentences on one of the standard disclosures? Not only whether they informed you, but also when and in what manner can be important. If they had a marching band blowing a fanfare to attract your attention to this fact before you had come to a final agreement, that likely blows any case you might have out of the water. If they slipped it into your stack of papers at closing, that might be a horse of a different color. Talk to your lawyer about that.

Now as to remedy. No matter how egregious it was, you're unlikely to get a free house out of it. Possibly, if the agent knowingly misrepresented the situation and you can prove it. Less likely if all you can show is that the seller know, but the agent may have been acting in good faith accordance with the seller's wishes. They shouldn't do this, but let's stipulate nobody is perfect, and maybe they weren't being paid for that part of a listing agent's services. You may also be able to sue your agent, if you had one, for failure to protect you from these scalawags and perform their due diligence. Then again, if you didn't have a full service buyer's agent, you're not likely to be able to sue them successfully. If you're stuck with the former owner as your only legal target, you may still be able to get not only damages, but legal fees and possibly punitive damages out of it. Alternatively, you might also be able to force them to buy the property back, if you so desire, instead of the other remedies. Talk to your lawyer.

Caveat Emptor

Over the last couple of decades, there's been a rising movement, mostly on the part of those who want a piece of real estate agents business, to sell agents as a toll booth. Tollbooths sit there, guarding the entry to the road you want to travel on. Once you've paid, you get access to the wonderful world of MLS and making offers on real estate - or having offers made upon your real estate. This movement has accelerated in the last ten years or so, with the universal advent of broadband internet connections and ungated sites with all of the listings for sale in a particular area.

Even a large number of allegedly "full service" agents and brokerages have sold themselves based upon the tollbooth model. "Sign up with me, and you get access to all of these wonderful things along this road to where you want to go."

Unfortunately for these agents, there's always someone willing to provide a cheaper tollbooth.

The bar to get into the real estate business, when you really look at it, is absurdly low. I've seen good arguments with valid points for either making it much more difficult or eliminating licensing requirements altogether. Score seventy percent or above on a multiple choice test that doesn't have math any more complex than multiplication and without any practical applications whatsoever, pay a toll of $100 or so to the state of your choice for licensing, and another $100 or so for MLS access, and you're in business! They even let you use a four function calculator for the math!

It shouldn't be any great surprise that we have large numbers of agents who think that's all there is, let alone members of the general public. Therefore, agents who pretend to be agents - and look like they might be, on paper - can cut the toll to access MLS and the world of making and receiving offers on real estate. They pretend that they do something important, sitting in their offices with a fax machine and WINForms. It even looks impressive enough, on the surface. "I went into this lady's office, and she fired up a computer and it spit out this contract for me to sign, and she faxed it off to the other agent and now I'm in escrow! Best of all, she's going to give me 2% of the purchase price for doing business with her!" So all of the friends and relatives, who according to the way they think are making $5000 or $10,000 by using this person, drop by, and she makes $2500 to $5000 on every single one of them, by pretending to do something valuable, that can really be done by any high school graduate capable of using a word processor. Alternatively, "I went to this guy's office, signed a listing contract that pays him 1% up front instead of 6% when it sells, to put my house on the MLS, He even let me pick the price I wanted to sell it for!" Now every agent worth their license knows what's wrong with both of these scenarios (and if you don't, you should learn), but the average person who doesn't know what they're getting into. They don't even know what they don't know, and they think they're getting a real bargain.

Lest it be said that I'm being all holier-than-thou, I'm perfectly willing to make $2500 to $5000 acting like a high school graduate with a word processor and fax machine. And a license, can't forget that license! I'm even happy to do this work! And if all you need is someone to grant you that access, like paying toll to access that road, I'm perfectly happy to collect my little toll and send you on your way. Instead of one double to triple size toll that takes me dozens to hundreds of hours to earn, I can earn one of these single size tolls every couple hours. People who come to me for this level of service may wonder why I never try to "upsell" them on the more expensive package, or at least the majority who don't understand what's really going on do. Furthermore, the probability of such tolls coming back to bite me, legally, is practically non-existent. I made no representations as to the state of the property - I didn't even go visit! I advised them of their responsibilities ("get an inspection!", "fill out this TDS!") and have their signature on documents that say I did. And I never promised their property would sell, or that the property they're buying was worth what they were offering. Whether or not they realized that's what they were doing, they were saying they were perfectly capable of handling all those aspects for themselves, and they signed that piece of paper that says what I am and am not going to do for them.

But once again, there's always someone who's willing to build a cheaper tollbooth. That's not the future of a successful real estate agent, to get paid less and less for doing nothing, anymore than that's the future of a successful software company, a successful health insurance plan, or a successful anything. And for those people who think they're getting a some kind of bargain, would you be happy paying a word processor that kind of money for a couple of hours of work? There's always someone willing to operate a cheaper tollbooth, but unless you really understand what you're up to, a tollbooth is not what what you are really looking for.

What's going on, of course, is people who don't understand what they're not getting are just thinking in terms of cost. If you don't understand what you need to, if you don't even understand that there is more to what a good agent does than MLS access, a word processor and a fax machine, if you've dealt with agents who expected full pay for being MLS access, a word processor and a fax machine, then you think you're getting a deal when someone offers you a discount. But if you're an agent, you have to ask yourself why people should be willing to pay you that much money when people are willing to take less. If you're one of those discounters, you should be asking yourself why people should continue to be willing to pay you 1% when there are people who will do it for 1/2%. And if you're one of the latest wave of internet based super discounters, making money hand over fist, you should be wondering why they should continue to pay your half a percent when someone starts offering it for 4 tenths of a percent, 3 tenths, or less than one tenth. They can still make money at that level, but anyone can do nothing just as well as anyone else, and with a little more time, we get down to the economically stable point where you have people in a sweatshop in Bangladesh typing on a telephone line for $10 per transaction, all working on one license that the owner of the company got 15 years ago, even though they haven't been inside a listing since. Or completely automated, without human interface at all. No service, no knowledge, no liability, and no protection for the consumer, but they certainly are cheap. That's the endpoint of the tollbooth model of business, and it's visible from here.

If you want to know how this shortchanges the consumers, check out any one of dozens to hundreds of domestic real estate forums. Every day, you see people talking about having already made a mistake that is going to cost them a dozen times what a good agent would. These people generally want to know how to get out of the situation unscathed, but you know and I know that's not likely to happen. You've got to be ahead of the curve and not make the mistake in the first place. There are sharks out there for whom such people are nothing more than their lawful prey. Some of them are the agent sitting on the other side of the transaction. Others are investors, hoping to snare someone who doesn't understand everything they're doing. It's a beautiful house, they love it - what could go wrong? The list of tricks that get played on sellers is, I believe, probably longer than the list that gets played on buyers. More tricks, smaller market shares.

One of the things I keep harping on is the fact that real estate deals are for large amounts of money. Numbers big enough so that 10% is more than a lot of people make in a year, and I've seen at least a gross of 10% coups - or bigger - pulled off in properties I have actually been in and compared to others on the market within the last year. What does this mean? If you're a shark who can pull off one 10% coup per month, you're in Fat City. You've got the Manhattan Penthouse, the private jet, and the rock star lifestyle - more and more so as your deals get bigger and more frequent. If you pull off one 10% coup per year, instead of making $60,000 per year, you're making $100,000 per year immediately, and with just a few years like that, you're living the rock star lifestyle also! And you know the best part of all? Most of the suckers think they got a bargain! I went and talked to the guy that got taken worse than anyone else I was sure of a while back, who paid over 40% more than he could have had a basically identical property for a quarter mile up the road, and he's happy as a clam, because he likes the property and he got 2% of that 40% back in the form of cash! Even if you can consistently pull off 5% coups, or 2%, you're in the money.

When I'm acting for buyers, my business model is that of a big game hunting guide. For this, you need to know the lay of the land (market), where the most desirable game is, the tricks to spotting its trail, the ruses it may use to escape, etcetera, etcetera - and all before some other big game guide leads their client to bag my client's trophy. My goal is to make a 10% net difference to my client's final position, Either 10% cheaper, or a property comparable to one that might legitimately fetch 10% more. Buddha forbid my clients don't end up with anything, but that's preferable to shooting some farmer's prize cow, or the farmer themselves! Meanwhile, the people who don't understand this are singing Tom Lehrer's Hunting Song (here's a third party performance), whether they realize it or not. Considering appraised value, the lowest difference I've made thus far this year was a little over 15%, and that's just negotiating capability and market knowledge. I've got a couple of strictly honest appraisers, and not one of those purchase appraisals came in lower than 115% of purchase price. To change the independent element (me negotiating purchase prices for the right property), those same appraisers have torpedoed almost 30% of the refinances I was hoping to do. Add the number of traps I've kept those same clients out of by spotting problems before we made on offer, and it adds up to quite a chunk of change they've got in their pocket, or that they don't owe some lender, because I my job as an agent, not the least of which is that I take responsibility for not selling them something they can't really afford.

As a listing agent, the process has a lot more lead time. I can interview buyers in the morning, and if they're as ready to buy as they think they are, get an understanding of their situation in an hour or so, be looking at properties myself that afternoon and showing the ones that pass my muster to them the next day. Listings are tougher, and more like a fishing expedition. First, you have to know what kind of fish you're able to catch with the bait you have available. You're not going to hook a sperm whale with krill. You've got to know where these target fish hang out. Then you've got to figure out how to make the bait look attractive to the target fish, how to get them to notice this bait, how to get them to hit it hard enough that you can set the hook and haul them in. Among the factors you have to understand is how much patience the client has. Just like in fishing it doesn't do any good for the fishermen to keep hauling the line out of the water before the right fish is willing to hit it. Sometimes the situation isn't right - usually because the bait won't catch what the fisherman wants, no matter how much you do. A lot of the people I counsel to wait, or who don't like the asking price I want to set on a property will go sign up with someone else who's willing to promise the moon to get that signature on the listing agreement. I've never had one of them call me up to gloat that I was wrong.

You may have noticed that both of these analogies are pretty violent, and the better known activities they emulate tend to end up very badly for the big game, or the fish, at least on a successful mission. Nor is there any kind of "catch and release" program. Whether you realize it or not, that's the way the game is played. The language is normally civil, not something out of pro wrestling trash talk, but it's no less deadly for being played with offers and contracts instead of rifles and gaffes. Military men who intend to kill the enemy if they can are very careful and very respectful of capable opponents - they live longer that way. They know somebody's going home in a body bag, and they don't want it to be them. With the amount of money at stake in real estate, the incentives are there. Look at some of the reality shows on TV, and what the contestants go through for much smaller prizes. The tollbooth model of agency seems to be producing an ever larger number of willing fish and game. Actually, they're eager!

Real estate may be the largest transaction of most people's lives, but most people don't do it very often, particularly not in the same area. People will move cross country to a new city they've never been in before, and expect to buy real estate within a month. They'll expect the rules for sellers now are the same as the rules for buyers ten years ago when they bought - if they even understood the market then. They have been led so far astray by the popularly pushed tollbooth model of real estate, that they have no idea what they're doing wrong - or what they're not doing that they should be.

There's not only marketing to consider on the listing side, and search on the buyer's. There's knowledge of laws, of procedures. There's negotiating tricks that put you into a better position, or prevent someone from disadvantaging you. There's sucker bait, and being able to recognize it - or far more than someone who doesn't do this for a living can. There's buyer qualification issues and property maintenance issues. Do you know how to spot them? Here's a couple free hints: The answer to the first has nothing to do with prequalification letters, and the answer to the second should not be, "Get an inspection!" The former are a waste of paper and the latter is leaving an issue to be resolved at the final point of no return and hoping it gets caught there, and hoping the other side is willing to renegotiate the agreement in accordance with your views as to what reasonable is. There are location issues, condition issues, amenities issues, price issues, market issues, financing issues, and issues that mix several of these.

There Ain't No Such Thing As A Free Lunch in the real world or in real estate. You can be careful, do your own due diligence, pay the fees for superior service, and get someone who acts as an effective guide to big game, or an effective charter sportfisher, or you can pay your little toll and likely end up as the fish or venison on the table. Yes, it's work. No, it's not easy. If it was, anyone could do it just as well as anyone else. Since that is not the case, then we need to consider alternative hypotheses, and using the one that best fits the facts.

The people who habitually dine well on fish and big game? Either they buy and sell enough real estate in that area that they are effectively agents themselves, or they've learned what a fantastic investment paying a good guide is. Yes, the good guides can also eat very well off their profession. That doesn't change the fact that you end up with a better dinner, even considering the chunk of meat you paid them, and if it keeps you from being the meat on the table, well, you make your own call how much not having your financial antlers nailed to a wall somewhere is worth to you. Think of it as financial evolution in action.

Caveat Emptor

I saw your article on about exclusive buyers agents and I have a couple follow up questions pertaining to my own situation that I am hoping you could shed some light on.

I don't have any buyers agent (currently). However I have spotted 2 houses in an area that I think I would like to make an offer on. Both of these houses are listed by real estate agents. I am obviously eager to save as much money as I can and think it would be great to try and save on the agent undefined if at all possible (I have bought FSBO before, so I am familiar with the process and I don't see much value add with an agent since I have already found the properties).

However I just don't get it - if I make an offer on the property by working with the sellers agent then the sellers agent gets both commissions? Is there a way to just take the buyers agent commission off the sales price? If there isn't then I guess there is no reason not to go and find a buyers agent to assist me? Seems like a waste of money.

I have found an buyers agent that who said he will give me 50% of the commission if I sign an exclusive buyers agent contract with him however I am worried that my hands are tied if I don't end up purchasing one of these properties I have already identified (ie I could end up paying 1/2 his typical commission if I found a FSBO).

Any insight you could provide would be of great help - I love reading your stuff.


The first thing I need to clear up here is the nature of listing agreements. The standard listing contract form gives the listing agent the full commission for both buying and selling, and if someone other than them represents the buyer, then they agree to pay the buyer's agent a portion of that. If there is no buyer's agent, they keep it. Since you have to make your offer through the listing agent, the listing agent is get that commission, and that is as it should be. Note that I believe it is stupid to act as agent for both parties in the same transaction because seller's interests and buyer's interests are often at impasse, and when you're acting as agent for both sides, there are many potential issues which, if they happen, are lawsuit material one way or the other no matter what the agent does. If I find a buyer for my own listing, I'll find another agent I trust to do a good job, and that way there is no conflict of interest. But greed is a powerful motivator, as you yourself are illustrating. The fact is that if the listing agent wants the full commission, they will probably end up with it, and justifiably so, as they found the owner a buyer, didn't they? That's what the contract says the seller's commission is for. You saw their sign, you saw the house they listed, you made an offer through them, the house got sold through their efforts. According to the terms of the listing contract, they found you, whether you realized it before now or not. The buyer's agent commission is for an agent who has a buyer who sells them that property, as opposed to the one down the street.

Many agents make side agreements to rebate part of their commission in certain circumstances. But that potential rebate contract in this case is with the seller, not you, and is none of your business. Unless the agent has a release to discuss it with you in writing, they are violating confidentiality to do so. The seller may sell to you cheaper because of such a clause, but they are under no obligation to do so.

Now before you dismiss this with, "That's Stupid!" or something worse, because it appears that things are stacked to cost you money, consider that this has evolved over many years as the best and cheapest way to preserve everybody's best interests. Without these forms, there would be a lot more lawsuits filed over commissions, with the side effect that the lawyers get rich, and the money ends up getting paid anyway on top of that. The listing agent commission is partially a hold over from the old single listing days of half a century ago. Over time, the buyer's agent commission evolved as a way to open the system up, so that homes sold faster and those agents and offices without a large, pre-built client base could break into the business. But it's still intentionally structured that way as a way to motivate that listing agent to advertise the property far and wide and especially in all of the most effective venues. It costs money for that sign in the yard. It costs money for MLS access. It costs money for advertisements in the paper. It costs money for all the trappings that enabled someone to go find that agent and list the property in the first place. It costs that agent money just to stay in business whether they have any clients or not. It costs the agent money for the advertising to attract clients in the first place. And chances are, if they hadn't spent that money, you wouldn't have found that property, and the owner wouldn't have sold it. Consider also the liability issue, which is huge and real. Are you volunteering to give up any legal rights for a complaint? Didn't think so. Which means they have to go through all of the disclosures, and they're still liable if they make a mistake. How many people do you know that do major work in their occupation for free, even though they're still going to be liable for potentially hundreds of thousands of dollars if something isn't perfect?

People think agents are making money hand over fist, when the reality is that unless they're putting in the long hours and hard work to make multiple transactions happen every month, they're just barely scraping by. Most of the successful agents I know put in sixty hours or more per week, and if they are putting in less than forty, I'll bet money on no other data that they'll be out of business in a year. This is not a cheap business to be in, or an easy one. I don't blame you for wanting to economize - it is a lot of money. If you don't think about what it's getting you, and what you're getting, and what agents are giving you, and the liability they're assuming, and what they have to spend to stay in business, and you just look at the check the brokerage is getting, it seems like a lot of money.

Put yourself in the shoes of a seller. You have a property, but you want cash. Real estate is not liquid, a property interchangeable with billions of other shares in planet earth that you can call a broker and sell over the phone because there's a ready market for shares in planet earth which are all interchangeable. Instead, each and every property is unique. This means it is bought and sold on the basis of those unique individual characteristics. You want results, you want your property sold for the highest possible price, you don't want it coming back to haunt you if there was something wrong you didn't know about, and it costs money and it takes work to make buyers want to buy your property.

Sometimes the agent gets lucky, and it sells quick. Sometimes the agent works hard - and they really do work - for months with no offers despite all of it. We're coming off of a market where a monkey could have sold a residential property within a week for more than the asking price, and entering a difficult period. This requires an adjustment in thinking if you're going to do well. Average total commission paid is up locally in the last few months, from five to six percent. Particularly in a rough market, if the seller tries to sell it themselves, it will statistically take longer, and they will statistically net less money from the sale, not to mention what they spent on the property in the meantime. Some few get lucky. People win lotteries and casino jackpots, too. Betting that you'll be one of them is a sucker's game. Any number of studies and statistics show this fact, and many brokers make a good living buying FSBOs to then resell for a hefty profit. The last broker I worked for is one example. In one month, we sold four properties he bought from FSBOs, all for a substantial profit, even in a down market. Sellers tried to think like you do, and it cost them over $150,000 net of commissions, and these were all fairly quick sales. Had we tried harder to get maximum value for his money, we could likely have gotten more, but he's not complaining.

Now, with that said, let's look at your current situation. I've already covered the fact that the listing agent is entitled to that commission. Now let's put you on the other side of the table from a guy whose responsibility it is to get the best possible price for the property, and his commission depends upon how good a job he does. He does this constantly, for a living. He's set up with information to ensure that he gets the highest price. It's cost effective for him, in a way that it isn't if you aren't doing it constantly. Betting that you're better at his profession than he is would be like him betting he's better at your profession than you are. My money is on "you end up paying more than you have to."

Here's a dead giveaway that an agent's job is trickier than you think it is: That you're even talking about an exclusive buyer's agent contract in this situation. So long as you already have the property in mind, there is comparatively little risk and a lesser amount of work for him in the situation. He's not going to have to drive you around to four million properties over the next twelve months to maybe find one you want. This is a buyer's agent's dream situation - cut straight to the bargaining, no preliminary work. If this one falls through, he can either look for more or blow you off, depending upon what he has time for. Offer him a general non-exclusive buyer's agent agreement with a fifty percent rebate if you find the property yourself, as you did in this situation. This motivates him to do his best bargaining and looking out for your interests without sabotaging the transaction. If this one falls apart, he's still got motivation to find you something on your terms, and you're not bound to him unless he introduces you to the property or you use him for negotiations, etcetera. You get a negotiator who knows your market and should know most of the tricks and is working on your behalf, and if this one falls through you have someone who's motivated to find your something with better tools and more relevant skills at his disposal than you have. He gets a commission which, if smaller, is also easier and walked its own self in the door rather than him having to go out and spend time and money to drag it in. Everybody wins. If he won't do it, find someone else in your area who will.

(Before anybody asks, I don't propose client contracts that I wouldn't accept)

Caveat Emptor

It may not come as a shock to you, but loan officers, along with many other salesfolk, speak a different language than the rest of the population. What will probably annoy you, however, is the number of times they'll say something that sounds like a phrase out of English, but really is from Salesgoodspeakian, a bizarre tongue in which the true meanings must be learned by osmosis from the particular subculture's dialect, while intending to communicate something entirely different to the poor schmuck who, after all, doesn't understand salesgoodspeakian.

This post is intended partially as humor, partially as education. I'm going to start it with a few of the most common ones, and update it by adding more and reposting from time to time. If you've got a good one, either with or without translation (and whether from one of my fields or not), please send it to me along with the context, if appropriate (danmelson at). Even if you don't have a translation, I'm pretty good at major dialects of salesgoodspeakian. It is to be noted that these phrases are not red flags, but more in the nature of yellow flags. If they just occur on a stand-alone basis, it's something that's likely to proceed from yellow to a red flag, particularly with repeated yellows. On the other hand, if the person uttering them proceeds to issue a clarification in plain English, issues an amplification rendering the translation void, or translates and explains the salesgoodspeakian, it's possible you've just been given a real world green flag that this is an ethical person. For instance, my absolute favorite loan to do is a true zero cost to the consumer A paper loan (and no prepayment penalty!), which I usually explain as "Nothing added to your mortgage. You've just got to do the paperwork with me, and come up with the money for the appraisal, which will be returned to you when the loan funds". And it's also possible you've been given a reinforced red because they lied.

And yes, I've had clients who came to me report every one of these. Some of the translations are a little exaggerated to make the point, but the spirit remains the same.

The salesgoodspeakian to English phrasebook:

Mortgage dialect:

"Stress free loans" two percent higher than you'd qualify for with better documentation and a little more work and less greed on the loan officer's behalf.

"Won't cost you anything out of your pocket" - Six points and $5000 in well-padded closing costs added to your mortgage loan balance, though.

"Thirty Year Loan" fixed for the first two, if they're feeling generous that day, but it does have a thirty year amortization. With five year prepayment penalty of course!

"How does a 1% rate sound?" Like you're a misleading weasel trying to get me to do a loan that digs me in deeper every month with a three year prepayment penalty that keeps me trapped even after I figure it out (See Negative Amortization Loans)

"Industry standard" - Everybody else at this company does it that way, too, because the boss says to, and I don't know any better. (This is very much the "G" rated translation. Please note that there are industry standards - things that pretty much every company in the industry does. Some of these standards need to change, some just are, and some are actually beneficial).

"Everybody knows there's 2% origination fee." Actually, everybody knows no such thing. But if I told you about it in the first place, you might have gone with somebody honest.

"Brokers can charge you anything they want" - so can I, but brokers have to disclose their compensation and I don't.

Found on the same billboard:

"Rates as low as 4%!" on an "adjusts every month" loan that's going to 6% next month and who knows what thereafter. With five points. While I have you on the phone, let's sign you up for it.

"No Points!" we've got no points loans. Not on the loan we quoted above. I'm really so terribly sorry you misunderstood. Now, about that 4% loan, what's your name?

"Low Fees!" compared to the multimillion dollar Oil For Food bribes, $23,000 is low. Now about that 4% loan, what's your social?

"Easy paperwork" but the start rate goes to 6% for the first month, adjusting to 8% next month. Still five points. Not for the rate we quoted above. I'm really so terribly sorry you misunderstood. Now, about that 4% loan, when can you come in to sign?

Real Estate information is asymmetrical. One of the central facts of real estate transactions is that the seller always knows more than the buyer. They've lived in the property for years, and had to deal with any defects first hand. Even if it was rented out, the chances are that the tenants contacted them over every defect those tenants encountered. It's not like tenants are noted for their desire to spend more money on behalf of someone else. The vast majority of the time, that seller could quote you chapter, verse, and receipt number for every repair they've had done, tell you more than you ever wanted to know about the time the tenant called them at 3AM to take a plunger to the toilet, or about the time the water heater exploded while they were on vacation and they came back to a property filled with water up to the window line on the second story. Water bills, stucco cracks, the cracked slab that was revealed the last time the floor covering was replaced. The question is: Will they?

The law is quite clear. The owners are required to inform prospective purchasers of any known issues, or for that matter, issues that they reasonably should have known, that a reasonable person might consider in their decision of whether or not to purchase that property, and by obvious (and well precedented) extension, on whether or not to purchase it for a particular price. Failure to do so can make you liable for the entire purchase price, repairs, legal fees, and even damages. Please, consult with a lawyer as to your responsibilities. I'll bet you a nickel, in advance, they advise you to disclose whatever issues with the property there may be.

Nonetheless, two factors stop a lot of owners from proper disclosure. Particularly in this market, those owners may be hoping just to get out even, or even simply owe less money in taxes than they might after the lender accepts the short payoff. The old "blood from a turnip" argument. It's one of the maxims of the legal industry never to sue people who are broke. You can get a judgment. What you won't get is the money.

The second factor is that the current owners intend to shield their assets (via homesteading, etcetera), leave the country, or simply hope you're not going to sue due to one of a number of reasons. Mostly, these amount to denial. If you've got to put out $50,000 to get the property into the condition you were lead to believe it was in when you bought it, it's worth their while to pay the lawyer and chase you down.

The various inspectors are your friend. Quite often, I encounter resistance from clients about spending the money for the inspection. I make it very plain that I will try my best to spot defects, but I am not a licensed inspector of any kind, and there aren't very many agents who are. I've met exactly one who was, and let's just say that I'll bet significant money that my clients end up happier than his, and expect to win a lot more often than I lost. Especially if the clients were asked how happy they were five or ten years out.

Admittedly, inspections cost money. However, on the scale of the value of real property, this is money you need to spend. $400 to make certain that a $500,000 property is basically sound. Look at it this way: Would you spend an extra eighty cents for a third party vouching for quality on a thousand dollar item? Particularly if you can sue them if they're wrong? Say you were looking at a $10,000 used car. Would it be worth $8 to you to have your favorite mechanic tell you what, if anything, was wrong with it? I'll bet every single one of you who drive answered "Yes," and that's even without the liability issue. The point I'm trying to make is that these are equivalent bets. It's just that "$400 is a lot of money." Well, $500,000 is a considerably larger pile of money than $400, and it's no less real if you happen to be borrowing the whole amount. In fact, it's even worse, because if you lose $500,000 cash, all you've lost is $500,000. If you borrow $500,000 and lose it, not only do you have to pay it back, you have to pay interest on it until you do. Not to mention that it's kind of hard to refinance, among other problems.

However, you don't want to be putting out that $400 inspection fees for properties you're not going to buy anyway, because there's something wrong that a knowledgeable agent can spot before it gets that far. Nor do you want to spend it before you've got a fully negotiated contract, especially in the current market, because the fact that you've spent $400 inspecting their property before negotiating a contract can be interpreted by sellers as giving them more power. Furthermore, negotiations post contract are always subject to whether the other side wants to be reasonable about their end of what the inspection reveals. You've already got a deposit in escrow, and my experience has been that it's easier for the owner to break an escrow that's not going anywhere, than it is for the former prospective buyer to force the owner to release their deposit money from that same escrow. You'd really prefer to find out about Vampire properties before you put an offer in.

This is one of the many areas where a good buyer's agent pays for themselves many times over. If they spot the vampire property before you make an offer, that's a minimum of about two weeks and $400 you saved, and it's likely to be a lot more. If you put a $5000 deposit down (and nobody sane accepts offers without a deposit), now you're wondering whether the other side is going to return it, which not only might necessitate hiring a lawyer, but also impact your Loan to Value Ratio until and unless you get it back, and could very well impact your Debt to Income Ratio. Time, money, headaches. All saved because your agent spotted the problem before you put an offer in. There aren't any spaces on the HUD-1 to document them for the government, but they're all real.

So when you're going around looking at properties, it's a lot more important for your agent to look critically at what might be wrong with the property, and compare and contrast it with other similar properties on the market, than it is for them to tell you about how the floor goes so well with the walls, or how gorgeous the view is. Most people really can figure those latter qualities out for themselves, and if they really want input, a good agent is happy to provide it, although most people will only be asking for confirmation that other people feel the same pain in the optic nerve that they do. The real job of a buyer's agent is to consider things other than the transient decorations that are likely going away. Physical situation (including defects!), orientation, and of course, location, location, location. How easy will be to maintain or improve the property's value? What will it be like to live there? What does the future hold for the neighborhood, at least according to current plans? What's the commute like? How's the grocery situation? What about other shopping? City services, how far to common activities? Most importantly for most people with kids, What are the schools and how good are they, really? None of this stuff is part of the standard disclosures from seller to buyer, because the buyers are theoretically just as capable of finding it out as the sellers. Not true in practice, I might add, because the seller has usually been dealing with these and other neighborhood issues the whole time they've owned the property. These and other questions are some of the reasons why good agents can only cover so much area, and why it's a real good idea for even current residents of a neighborhood to find a good agent and use them to help them buy a property.

Caveat Emptor


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