Beginner's Information: January 2008 Archives
Somebody sent me this story via e-mail: Feeling Misled on Home Price, Buyers Sue Agent
Marty Ummel feels she paid too much for her house. So do millions of other people who bought at the peak of the housing boom.
Knowing only this, I would have no sympathy. This is part of the risk you undertake with any investment - that it may decline in value. There are no guarantees that any investment is a good one. I worked hard to inform potential buyer clients about the state of the market when it was in the danger zone, and it cost me a lot of money. Quarter million dollars, absolute minimum. Most of them just went over to other agents who pretended that we could continue to gain 20 percent plus per year indefinitely, or were too ignorant to know better. Not precisely the most ringing endorsement possible, but it was hard to get people to hold off when the market was going crazy. Fear and Greed.
The situation now in my local market (San Diego) is 180 degrees reversed from that. This is the best buying opportunity in at least fifteen years, and probably the best we'll ever have from this point forward. I've done everything except promise free beer to try and get buyers off the sidelines now, but they're looking back at what the market has done, not where it is going. Fear and Greed has another side.
Getting back to the subject at hand, however, here's the deadly piece of information:
Ms. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.
The question I want to ask is did the buyer's agent actively hide it or was he unaware of it? Not that being unaware is any excuse. If you have a fiduciary duty to someone who's buying a property, how can you not check out what sales there have been in the immediate area in the last few months, at least on MLS? This was a million dollar property, for crying out loud, but it would apply just as strongly to a "cheap" condo. If you're not willing to do the work, you shouldn't take the client. If you're never willing to do the work, why are you in the business?
If the agent was aware of these sales but actively hid them, that leaves the realm of negligence and into the realm of active malfeasance. He deserves to lose his license as well as the case, and this would be the wedge that might do it.
Now we get to the crux of the matter:
"We have seen so much misrepresentation over the last five years," he said. "So I appreciate where these buyers might be coming from: 'I'm a lowly consumer, you're certified by the state of California, you didn't do X, you didn't do Y, and I got hurt.' "
This is exactly what an agent is agreeing to when they accept the task of agency, real estate or otherwise. This isn't some pick-up game of softball where you pick your friends. Buyer or seller, you're not just picking someone who's going to get a check for thousands of dollars. If that were the case, real estate agency would have died by now. You're picking someone whom you believe is both capable of everything necessary to guard your interests, and willing to speak up even though it may cost them a commission. I get at least one e-email a week complaining about what a rotten job one agent or another did. When I respond back and ask them how and why they chose that agent, the response is always something along the lines of, "I met him and thought he was a good guy."
This isn't about who you're going to have a good time with at the football game this afternoon, which that means of choosing might suffice for. You're not choosing a date for the ball, you're picking an alleged professional who's supposed to competently guard your interests on a transaction that's probably several years worth of your earnings. Whether you pay for the property with cash or with a loan, it's still the same number of dollars, and you're still going to have to pay that loan off if something goes wrong. Treat buying real estate like what it is: putting enough money on the line to quite literally beggar you for life if you make a mistake.
I wrote an article a few weeks ago titled Which Makes More Difference - Buyer's Agent or Listing Agent? The answer was and is resoundingly that a buyer's agent makes more difference. Yet many people who would never pick a listing agent in such a casual manner will choose somebody they meet at an open house or go without representation, trusting the listing agent to look after their interests. But the listing agent has a contractual obligation to get the seller the highest possible price - not to negotiate it as low as possible. If something is in the seller's interest but against yours, you can bet the seller's interests are going to win. It's a win for listing agents if the buyer doesn't have an agent of their own - for perhaps an hour of extra work, they get paid double, and without taking on any new liability if they're even moderately intelligent.
Picking someone you meet at an open house is nearly as bad. HELLO! Earth to prospective buyer! They're a LISTING AGENT with a contractual obligation on behalf of that seller and who knows how many others. If they're not trying their best to sell you that property, they're violating their contract with the seller - but you want an agent who's not only going to tell you about the problems, but also about what it really means to you. There is an irreconcilable conflict of interest there. A good - by which I mean competent as well as ethical - agent will not put themselves or their clients into that kind of situation. I write it into every contract that I will not represent both sides in the same transaction, and make it clear to prospective listings exactly where the line is. If I bring someone I've contracted to represent as a buyer to one of my own listings, I am breaking that fiduciary duty to one or the other of them - perhaps both. It's one thing if someone calls me out of the blue asking to see a property I have listed. It's something completely different to bring someone I already have a buyer's representation agreement with to that listing with an eye towards possibly buying. The same objection applies if I try and get that prospective buyer who called out of the blue to agree to let me represent them in buying. Who gets less than my best efforts, and is that something you want as a consumer with hundreds of thousands of dollars on the line? That's what you're volunteering for when you pick a buyer's agent in either one of these fashions.
It goes back to the illusion of comity. Agents are salespersons, and it's much easier to get a sale, and particularly a better price, if you pretend everybody here is everybody else's friend. In fact, that's pretty much the only way to make Dual Agency fly. Give someone an obvious path of least resistance. But let's consider the nature of the item at issue: A middle of the line detached single family residence is $500,000. How many people would you trust not to try to finagle an extra 2%, when it means they make an extra $10,000 - two months gross wages - whether they are buyer or seller? To very politely and non-confrontationally slip away with an extra ten percent that means $50,000? I've seen people finagled out of forty percent of the purchase price by a sharp or lucky listing agent, and they never did figure it out. I went out and interviewed a few on purpose not too long ago on the subject of their recent purchases. Whether out of ego defense or just sheer ignorance, every single one of them was very happy with the purchase, and they told me they would do the same thing again.
Agents fall into the trap of "go along to get along" as well. It's one thing to be collegial. Two boxers each out to pummel the other into senselessness can be polite. The formality of the old code duello, governing two gentlemen so angry at each other that they're going to shed blood to settle the matter, was faultlessly polite. Often, though, agents go too far and get into you scratch my back and I'll scratch yours mode "You don't beat me up with your buyer, I don't beat you up with mine, and only the buyers get hosed, which we'll make good when they want to sell it with a whole new set of
suckers buyers." The whole thing turns into a repeating cycle of suckers who don't know any better.
Well pardon me for not believing that just because you were taken advantage of in the purchase of the property does not entitle you to take advantage of someone else when you sell. Two wrongs still don't make a right, and they never have. The property is only worth what a buyer is willing to pay - if you don't like what is offered, you need to persuade me and them it's worth more - and to do that, you have to risk that I will persuade you it's worth less, because that's what negotiation is. Neither side gets to bully the other, and there are always other properties on the market. The other alternative for the seller is to find a buyer willing to offer more, which brings us back to the illusion of comity again. In this market, that's the real trick, isn't it? It's no coincidence that people find out about issues like this primarily during buyer's markets. When fear and greed are driving prices crazy, a bigger fool is very likely to materialize. When it takes something on the order of a divine command to get someone to be willing to buy, those who are willing to buy have thing much more to their liking.
To give the mass media credit where credit is due, they have managed to cover the basic point that listing agents represent sellers, and have a responsibility to the sellers, not the buyers. Thirty years ago, it's my understanding that Dual Agency was far more common, and the illusion of comity less likely to be dispelled, where now, roughly two-thirds of all transactions at least do have a buyer's agent involved.
But what if that buyer's agent doesn't understand the difference between comity and collegiality? That seems to be the most likely explanation for the situation illustrated in the NY Times article I linked at the beginning of this piece. To be fair, many agents on the listing side suffer this fault as well. The illusion seems to be essentially that as long as we keep it all in the family, nothing will go wrong. Furthermore, the buyers in the article were in exactly the same situation as the ones I interviewed on their overpriced purchases. Fat, dumb, happy - and ignorant, until something went obviously wrong. When prices fell, they went looking for someone else to fix their bad situation upon. And if prices falling was the only concern, neither I nor anyone else should have any sympathy whatsoever for them. But it wasn't just the bad luck of a down market, forseeable or not. This agent not only did a horrible job of discharging his fiduciary duty, he didn't tell his victims about relevant facts which would have made that failure obvious before the transaction was consummated. It's interesting to note that had he admitted his failure, he probably still would have gotten paid, because even if the buyers had moved on, they probably would have kept him - people do the silliest things. However, this was a real estate transaction, where pretty much everything is a matter of public records that are kept forever. The buyers or their lawyer did the work and dug into the records, and predictably, hit paydirt. The agent undertook the duty, should have understood the duty, and basically decided to act like a minimum wage worker with a fax machine despite the fact he was paid $30,000 to guard the buyer's interest. Hello! That commission check is not a reward for a winning personality! Well, I suppose in a market rising 20% per year where it's hard to do anyone lasting damage, it can be, much to the eventual distress of their client. Because no market can sustain that kind of increase over time unless the income of those able to buy the property keeps pace. I don't need to ask for a judge's ruling on that one.
People want their daily routine to be without confrontation, violence, or real argument. It's a temptation to just go along. The little stuff - a dime missing out of your change, having to sit through an extra cycle of the traffic signal - just isn't worth making a big deal out of. It's a path of least resistance thing. But when you accept the responsibility for someone else's interests, it's not your call to make, and we're usually talking months worth of wages, occasionally years. I may advise someone that the deal is about as good as I think we're going to get, but I still have to spell it all out. That's why I make the money I do for the work I do when I'm working on a full service basis - it really is reliably worth several times what I make to my buyer clients. And that's why the agent that just sits in the office with a fax machine can rebate half or two-thirds of that co-operating broker's percentage, and why I am perfectly happy to work on that basis if that's what a particular buyer wants - if my only liability is passing along faxes, I'm making ten times more per hour for less liability. I've written about this before, but pay attention to what you're getting in services as well as what you're spending for them.
The divine only knows how many other people bought property and are now in this situation, and how many lawsuits we're going to see because of it. I have zero sympathy for the agents and brokerages involved. They have richly earned whatever judgments are rendered against them and any license action under taken by the Department of Real Estate. But the consumers involved assisted their own downfall for just taking the obvious, apparently easy path to a transaction, by not taking the time to shop for a good buyer's agent in the first place. If you were getting ready to buy a property, which situation would you rather be in this time next year? Find a dedicated buyer's agent who will guard your interests while explaining what you need to know, or just take the path of least resistance? As of this moment, the folks the New York Times wrote about are out $75,000 in legal fees, and who knows how much in property value, their own time, and the quality of their lives, because they chose the latter path. Nor does anyone know at this point how much of that they're going to get back. But speaking as someone who knows intimately the endpoints and results of both paths, I know which path I'd choose.
There's really nothing mysterious about this. There are some subsidiary tricks and issues, but the most important thing is obvious. The economic games theory is crystal clear, as is the research into what really happens. But most people don't like what the theory says, and think it somehow doesn't apply to their
ego wonderful property.
Price the property correctly in the first place.
Negotiating strategies are variable. In seller's markets, your optimum marketing and negotiation strategies are far different that in buyer's markets such as most of the country has right now. But every optimum strategy, in every market, starts with the same piece of advice. Price the property correctly from the moment it hits market. That price won't be the same price it would have been six months ago, and it won't be the same price it would be six months from now. But just because it changes over time does not mean there isn't an optimum price now, and now is when you're trying to sell it.
A good listing agent can keep you from under-pricing the property, and can keep you from giving away the farm or losing the sale in negotiations. But nobody can reliably get you more than the property is really worth, and the attempt is almost certain to end up costing you lots of money.
Here's how things work if you price the property correctly. You put it on the market, you get people coming by to view it because they can afford it and the basic numbers fit. If middle class properties are priced correctly, you're going to get offers within the first two weeks - probably more than one, even in the buyer's market we have going right now. You all negotiate in good faith, you reach an agreement with one of the prospective buyers, you go through escrow in 30 days or less, and within sixty days the property is sold.
But when you over-price it, here's what happens: When buyers compare your property to the others that are available and competing with yours, yours falls short. Result: They make offers on other properties, not yours. It's as if you wanted to sell a $20 bill for $50. Guess what? It's precisely the same situation with a different commodity.
Time goes on. You spend money on the mortgage, the property taxes, the insurance, and the upkeep. Plus any number of other possibilities, for instance if there are HOA dues. Even if there aren't, let's consider a median sales price in the zip code my office is in: $390,000. Let's say you've got a loan for eighty percent of the value at 6%, pro-rated property taxes at 1.25%, and $100 per month for insurance. You paid $1560 in interest charges for one month. That's cash, right out of your checking account! I don't count the cost of principal because you're paying that to yourself, but pro-rated property taxes would be slightly over $400 per month, and add the $100 per month for insurance and you're well over $2000 that not selling for that month actually cost you, plus the phantom of another couple hundred dollars principal out of your checking account that you're essentially giving the bank to hold for you until the property sells - unless that extra month decreases the eventual sales price, which it will. It's worse than this if your property is highly encumbered, or caught upon the fact that prices are receding in most of the country. That $390,000 property today would have been $500-$520,000 at the peak of the market, and lots of folks were buying then and are discovering now that those prices weren't real. So if your property doesn't sell for 4 months (the average days on market locally), that's nearly $10,000 out of your pocket that you're not getting back. Actually, it's worse than that.
Your period of highest interest is right when the property hits the market. The longer it's on the market, the fewer people will come by. The buyers who already looked have already made their comparison and decided they're not interested. The buyers who are new to the market will see that it's been on the market for thirty, sixty, ninety days or more and wonder "What's wrong with it?" The larger the "Days on Market" counter goes, the less inclined they will be to go view the property. Remember, at this point it's all numbers as far as the buyers are concerned. You can stage the house, paint it, remodel the kitchen, replace the carpet, landscape the yard, and nobody will notice because these don't translate to attention grabbing numbers. The property is what it is, has what it has, and the counter is ticking up, and every day this property sits . The only number you can change to induce people to come back is the asking price, and guess where it has to go? That's right, down. At this point, you have to give them a reason to come back and look that has its root in numbers. If you're now the cheapest property in your class in your area (or more precisely, the lowest asking price), that has a good chance of working. Maybe if you're now the second cheapest, you'll get a smaller amount of interest. But if there are still a significant number of lower prices in your class, this won't work. Nobody comes back to look at the 18th cheapest 3 bedroom home, even if there are 1000 others in the zip code, despite the fact that these numbers say you're in the best 2%. You've got to be priced significantly below the market to drag people back, where you didn't have to be nearly that low if you priced it correctly in the first place. Furthermore, attempting to negotiate the price back upwards is extremely unlikely to work. People came to look and made an offer based upon your implicit representation that the asking price would be an offer you'd be happy to accept, and if that turns out not to be the case, expect them to walk away no matter how hot the seller's market.
Tricks exist to reset Days on Market, of course. The various MLS affiliates are wise to most of them and getting better at catching them. Not to mention that the buyer's agent is going to check back and see if it's been on the market anytime recently, if they don't happen to recognize it off the top of their head. Listing Agents are becoming correspondingly more reluctant to play games to reset that Days on Market because they can lose the ability to place properties in MLS altogether. Buyer's agents are tired of this game, and many of them are perfectly willing to put their competition out of business by bringing their malfeasance to the attention of the MLS operator. I haven't done it yet, but I'm becoming more tempted in a couple of cases.
I see a lot of nonsense put into MLS by owners, and by agents who know better about how high the automatic valuations, CMAs, and appraisals for a given property are. These are all worthless. For one thing, this data can be manipulated, and sellers have just a little motivation to want it manipulated in their favor. More importantly, none of these influence sales price, and representations that they do or should is worthy of ridicule. What influences whether you get any offers, and from that, sales price is how good of a deal prospective buyers think they're getting, which in turn flows from the asking prices for comparable properties, as well as recent sales. If there's only two properties available for sale in the Zip Code that thousands of buyers want, sales prices are going to be increasing rapidly. Reverse this if the opposite situation applies. Incidentally, these are reasons a buyer's agent needs to be a fount of information on both the attractive points and the not-so-attractive ones.
With this information freshly in mind, what does all this say about the competence and ethics of an Agent who accepts the listing at a too-high price "to see if we can get it"? Nothing good. They're deliberately inducing the seller to harm themselves in order to get that listing. It's hard to put a monetary value on hurt feelings of betrayal when the agent starts pressuring them to drop the price the instant they have the signature on the listing agreement, but for a lot of folks, that's even worse than all of the cash it's going to cost them.
Lest anyone mistake me, this is no way relieves the need for an agent, and a good one. How many of the comparable properties that sold in your area in the last few months were you in? How familiar are you with all of the competing comparable properties? Try and put it on the market without that knowledge, and you're basically spinning the roulette wheel as to whether you're in the right ballpark, price-wise, with completely predictable downside if you're not. Who's your target buyer? What are the effective ways to attract their attention to the property? How to convince them they need to make a better offer? I guarantee that buyers don't care about "what you want to get" for the property! If real estate were easy and obvious, anyone could do it about as well as anyone else, and that is definitely not the case. Finding a good agent isn't trivial, and their pay isn't what most people think of as "cheap" but it will more than pay for itself in time and money.
The attitude of the seller is also critical. Sellers that expect to be treated like royalty are royally hosing themselves. If everything has to be convenient for you, you won't get as good a price as if you make everything convenient for the buyer, and in buyers markets, it often makes the difference between a good price and not selling at all. What are you willing to do in order to sell your property, to make it more attractive to buyers with special issues? Especially, what are you willing and able to do if it will get a higher price? Being willing and able to offer things that other sellers are not is an excellent way to appeal to buyers with special needs, perhaps even to the point where they have a choice of your property or none at all, no matter how many properties are "for sale" where the owner can't or won't. Do you think that might induce someone to offer a good price? To use some examples I've encountered recently, are you willing and able to carry back part of the purchase price? That's one way to give yourself an advantage over competing properties in any kind of market. Are you willing to work with someone who has a need for immediate occupancy? Can you carry the property for an extended escrow period if you're properly compensated for it? A good agent can use all of these, and others, as wedges to get the property sold, sooner and for a better price, but they can't do these things for you. You have to be willing and able to do them.
There are a few other things: Have the property ready to show before it hits the market, do what you can to enhance visual attractiveness (it's amazing the difference polishing furniture that's going to leave with you can make!), and especially make showings absolutely as easy as possible. It's a better sales tactic to get the family heirlooms and other valuables out and type, "Just Go!" in the showing instructions than just about anything else (although "5 minutes notice so we can be gone!" is even more effective), and permissive or restrictive showing instructions can make all the difference. If you've got tenants in the property who want 24 hour notice, you're in a world of hurt in a buyer's market, and even in a seller's market you're going to find that your traffic and final sales price will suffer because of it.
The asking price should take all of these factors, and more into account (and almost entirely as subtractions from a theoretically perfect sales situation), but choosing an optimum or near optimum asking price in the first place will make more difference than anything else, because the money a seller ends up with is about the time it takes to sell as well as final sale price.
It's the same reason the phone company doesn't want to compete, General Motors doesn't want to compete, Wal-Mart doesn't want to compete, Disney doesn't want to compete, and Microsoft will do everything in its power to appear as if it doesn't have to compete. They make less money when they have to compete, and they have to provide a better quality of product.
But people know that all of the above have competitive alternatives. If you don't like one brand of automobile, there are dozens of competing alternatives. Ditto retail outlets. "Kid safe entertainment" is a bit more of a niche market, but there are competitors if you'll look. Finally, we should all be aware that computer OS's are one of the biggest Drazi Wars there are. But there is competition.
But many agents and loan officers make their living by pretending there is no competition, or by actively manipulating consumer choices to preclude the possibility of competition. This takes many forms, from requiring large deposits for loan officers through exclusive agreements with agents. There's nothing fundamentally evil about this - everyone needs to make a living. But there's nothing that says any particular consumer - by which I mean you - has to put up with it. Furthermore, the agent or loan officer who is confident enough to work without these devices is likely to be a better, stronger practitioner. Ask yourself who you'd more easily believe has more on the ball: Someone who tries to keep you from considering the competition, or someone who's happy to compete? If you were interviewing two applicants who want to work for you, who'd be more likely to get the job: The person who walks out as soon as they find out you're considering someone else as well, or the person who gets their act together and out-competes the other applicant? If you were interviewing with two companies who wanted to hire you, which offer would you be inclined towards: The one where you have to hide the other interview, or the one who's willing to compete head-on for your services?
Nobody's going facilitate competition for the job they want. Nonetheless, it is to your advantage to force them to compete. If you don't understand why, consider that for all the griping about various phone companies, the situation is far superior to what it was when there was only one. Here's a particularly poignant reminder of that era.
Here's the facts of the situation: If you're only going to talk to one provider, they can quote you anything they want. There is no check upon the situation. If I were the only loan provider in California, I could charge anything I wanted. I'd auction my services to the highest bidder, work a couple hours, one day a week, make as much money as I wanted and go on to spend the rest of the time having fun with my family. If anybody didn't like the level of service, that would be their problem. But that's not the case. In fact, the further it is from being the case, the harder I have to work, the less money I make per transaction, and the better the service I need to provide. It's also the case on the voluntary level, which is to say if you voluntarily restrict yourself to one potential provider, as well as the involuntary. It doesn't matter how many loan providers and real estate agents there are, what matters is how many you talk to.
People in the real estate business get told all the time that the way to success is to avoid competing, especially to avoid competing based upon price. If ever a week has gone by without some clown wanting to charge me a thousand dollars to learn how to avoid competing on price, or avoid competing, period, I certainly can't remember it. They work, by and large, on two levels - pretending you're the prospect's friend while engendering fear of the competition. "You know I'm your friend, George. You know there are sharks and cutthroats out there who will take your money and leave you high and dry, but you know I won't do that, George." And there are sharks and cutthroats out there. The guy talking to his friend George here is one of them. This is the way he talks George out of checking up on him, comparing his services and prices to either objective standards or to any other provider's. Nor are women any superior - in fact, I've had a report of one of the worst sharks I'm aware of preaching a "female solidarity" line of attack to cut out her competition. Other sharks attack via ethnic or religious solidarity, or even political similarities. What these have in common is that none of them have anything to do with competence at real estate, and they may not have anything to do with conscience. I've seen people preaching the gospel about taking care of your fellow man while extorting thousands of dollars from their client's pockets. Newsflash: The sale of Indulgences went out with the Reformation, and for good reason, too. I'm certain it happens with other religions, as well, it's just that there's fewer members of those religions around.
One of the ways I constantly see this abused is even people who should know better advising their readers to "ask someone you trust for a referral." Well, referrals are great - if the person making the referral knows what they're talking about. If they don't, it's just another goat lined up for sacrifice, willingly led in by the previous victim, If not worse. Here's an article from just a couple days ago (HT: FraudBlogger.com, who always has a relevant example of bad behavior handy). No matter how trusted the source, it still needs to be fully vetted - you need to do your own due diligence, and part of that is comparing them to some other potential service providers.
There just isn't any valid advantage from the consumer's point of view to forking over a large deposit or the originals of any documents to a loan provider. They don't need originals, and the only thing that large deposit does is give them some money to hang onto if you find a better loan. All of the better loan providers I'm aware of work on the basis of "fees at point of service," not requiring a deposit in advance. In fact, a cash deposit can induce people to accept loans that are many times the amount of the cash deposit worse than other, available loans. People understand that check they wrote out of their account is real money, where most of them are a little bit hazy about loan costs paid by rolling them into the loan balance. I saw someone pass by a loan I had that was four thousand dollars cheaper up-front and would have saved them $1000 per year they kept it because another lender already had a $1500 deposit from them. Here are a few more pointers on shopping for a real estate loan.
Admittedly, I have come to the reluctant conclusion that it is in the consumer's interest to list their property for sale via an Exclusive Right to Sell. However, this doesn't mean you're not going to shop extensively. This only means that you're going to make that commitment to one agent once you have done that research. Failing to do so risks locking your property up with an incompetent agent. When you ask "what's so bad about that?" ask yourself if you'd be happy taking ten to twenty percent less for the property (or worse!), after you keep paying the mortgage six more months? Around my area, with the median sale being $423,000 last month, and assuming a loan at six percent on eighty percent of value, not only does signing up with someone who can't get the job done cost you $42,000 on the sale, it'll cost you about $2200 cash for every month that property doesn't sell! Realize it or not, you're risking a lot of money on an agent, and just because you're not writing a check to them directly at sign up in no way changes this. However, I don't advise going with the agent who asks for a short term listing, either. That's an appeal to cowardice - decide by theoretically not deciding, and make no mistake, you are deciding when you sign a listing agreement for any period of time. This isn't to say you can't bargain the time for commitment down if you're willing to take a chance on a less experienced agent - it's just saying don't decide by pretending not to make a decision. That way lies disaster. Here are a few more tips about Shopping for a listing agent.
For buyer's agents, there really isn't a reason for an Exclusive Agency Agreement, except to allow an agent to wrap up your business for whatever period of time. There isn't hardly an excuse. The only place I can see it being an effective alternative for the consumer is if they're working the foreclosure market, and that agent is spending the money for all of the "quick notification" services so that the client doesn't need to. But the vast majority of the time, agents are locking in people who simply don't know any better with an exclusive agency agreement. I've seen listing agents who wouldn't show a property without an exclusive buyer's agency agreement - a clear violation of fiduciary duty to the seller, not to mention a huge Conflict of Interest if they actually want to put an offer in on that property. Non-Exclusive Agency Agreements protect the buyer's agent just fine, but they also give you the right to fire non-performers by just not wasting any more of your time. You can also use them to separate the wheat from the chaff among buyer's agents. Sign any number of Non-Exclusive agreements you want. The good agent will still do their work; while the lesser agents will select themselves out. While we're at it, here's a few more tricks to finding a good buyer's agent.
Agents and Loan Officers don't like this. It means they might not get the business when they're exposed for the buffoons that some of them are, and it means they might not make as much money for the time they put in. Nor is exercising your choices as an informed consumer simple - far from it. You also need to consider what agent services are worth how much to you. But considering the average price of real estate around here, and the cost of the loans that most people need in order to buy, doing proper diligence beforehand will save most people more money than they make in a month - perhaps more than they make in a year, possibly more. When you consider the differences in that light, the hourly pay for doing your due diligence about agents and loan officers and forcing them to compete is absurdly high.
This is a nationwide program for first time home buyers that helps them qualify for the loan by saving them even more money on their tax bill. With that said, however, the state of California accounts for more than 50 percent of all MCC Certificates.
Each individual area has its own administrator. Within the County of San Diego, for instance, there are three individual programs, although one company administers two of them. You must submit your paperwork to the correct authority, under the correct program. Each program has its own allocation of money, and if you submit to the wrong program, the application will not be approved, wasting your money.
Now, before I go through all the rigamarole of the program, what does it do for you? Simply put, it boosts the value of the mortgage interest deduction.
Here's how it works. During the escrow period, the time between the purchase contract being agreed to and the consummation of the transaction, you apply for a Mortgage Credit Certificate (MCC) through the originating lender. This means the people who take the loan application. This program is emphatically open to loan brokers. If the broker participates, it does not matter whether the funding lender participates, because it is not required that the funding lender participate, only that the originating lender participate. There is a nonrefundable upfront fee involved. This fee is paid to the authority administering the program. Some brokers may front this money on your behalf, but they will expect to be paid back several times over upon funding. Remember: There is no such thing as a free lunch. Your lender submits the application and the fee, and receives an approval from the authority on your behalf. This approval is good for up to 120 days, and in most cases, it may be transferred to another property conditions if this escrow falls apart.
What does it actually do for you? It converts part of your mortgage interest tax deduction into a direct tax credit. 20% of your mortgage interest, to be precise. This applies to both first and second mortgages on which interest is being paid and payments are being made. It does not apply, however, to first time buyer assistance loans on which there are no payments, or only nominal payments.
Let's do some math! Let's say you're buying a property for $400,000, using 100% financing. Of that, $320,000 is a first mortgage at 6%, and $80,000 is a second mortgage at 10%. Let us examine the situation you should be familiar with, the normal mortgage interest deduction, first. This is the situation without MCC:
You also have property taxes of $5000 per year (California rule of thumb. Yours may vary), which are deductible. Total: $32,200. The amount over this is deducted from your income before computing tax. The net benefit to you is based upon what exceeds the standard deduction you'd get anyway. For married couples, this will be $10,300 in 2006. $21,900, at a 28% tax bracket, sees a net benefit of $6132. This shaves a $511 per month off of your federal tax bill.
Now let's look at the situation with MCC:
So you get a $21760 deduction and a direct tax credit of $5440. Your deductions total $26,760 with property taxes, using the same numbers from the first scenario. Les $10,300, your real deduction is $16,460, times 28% tax bracket is $4608.80. That's the reduction you see on your taxes due to the deduction. You'll also see a tax reduction due to the credit of another $5440, for a total of $10,048.80 tax benefit, or $837.40 per month. That's over sixty percent more you save off of your federal taxes. What's more, is because the credit is a known number, not subject to alteration as to your deduction status or other tax situation, it can be used to help you qualify for the loan. That $5440 credit works out to $453.33 per month that can be used to help you qualify for the loan. I just took the training for this program, and I know I'll have some interesting arguments with nonparticipating lender underwriters, but I'm going to have the documentation on my side. They say, "Show me on paper," and I show them on paper. United States Government paper. IRS Tax code citations. Anybody want to bet how that turns out? One more thing before I change the subject: This only applies to federal income taxes, not state. For state income taxes, if any, the situation with and without MCC is identical.
Participation in this program is not universal. There are fees to be paid, and some cities can't or won't. Many entire states do not participate. In other cities, there is no qualifying housing. For instance, within the county of San Diego, the City of La Mesa is not currently participating, although they have stated an intent to return to the program. The Cities of Del Mar and Solana Beach also do not participate, due to the complete lack of qualifying housing within those two cities.
There are basically three qualifications, in addition to submitting your request to the correct regional program and buying a property in a participating area. First, you cannot make more than the appropriate income limits. In San Diego County, this is currently $82,800 per year for a household of one or two persons, $96,600 for a household of 3 or more persons. Qualifying income adjusts annually. Second, this is valid for owner occupied dwellings only. You must occupy the home, or intend to occupy it as soon as the purchase is finalized, and then you must actually occupy it. Therefore, only single family occupancy properties are eligible; no duplexes, apartment buildings, or other properties with more than one living unit. Condominiums are fine, as are manufactured homes on owned land, as these are both single family dwellings. If you move out, you will lose the benefits of this MCC. As a side note, any tenants displaced by this program are entitled to compensation from the program, so if the current owner is renting to someone other than the prospective buyers, expect the application to be refused. It must be vacant, owner occupied, or rented by the prospective purchasers. Third, and finally, the property must be within the maximum limits for size of the purchase. In San Diego County, these limits are currently $503,700 for a resale property, $490,000 for a newly built property being sold by a developer. In some "targeted" census tracts, specifically designated due to their low income, the qualifying limits for the purchase are higher: Currently $615,700 for resale, $598,900 for brand new properties. About these census tracts, more very soon.
Now, what is a first time buyer for purposes of this program? A buyer qualifies if they have not owned their primary residence for three years or more. This is proven via federal income tax returns. You may own another property off far away somewhere else, too far away from your job to commute, at least according to the interpretations I heard.
There is a way for people who are not first time home buyers under this definition to take advantage of this program. Remember those "targeted" census tracts I talked about two paragraphs ago? If you buy in one of those "targeted" census tracts, it does not matter if you're a first time home buyer or not. As long as you meet the other criteria, most particularly including owner occupancy, you are eligible. These targeted tracts change with every decennial census. We're in the middle of such a period now, so no changes are anticipated soon, but they do change from time to time.
Now, there are some financing limitations on this program. It is aimed at people who really can afford the loans they are getting, and so these loans must be done full documentation. Stated income loans or NINA/No Ratio loans are not eligible. In other words, you must prove you make enough money to justify the loan. Furthermore, the emphasis is on being able to afford the loan. Negative amortization loans are not allowed with this program, nor are ARMs or hybrid ARMs with an initial fixed period of less than three years. Interest only loans are allowed, but they must be both fixed rate and interest only for at least five years. Finally, because the money comes from the same place as the CalHFA and Cal-Vet loan, it cannot be done in conjunction with those loans. I think it's a better program for the vast majority of buyers anyway. For instance, the MCC can be layered with a local purchase assistance program, which those cannot.
There are two major flies in the ointment. The first is refinancing. The MCC dies when you refinance, unless you get it reissued. This involves another fee, and getting an RMCC (for Reissued Mortgage Credit Certificate), and doing so within a deadline. There are no income restrictions once you have the MCC on getting an RMCC, but if your property has ballooned in value 200% and you do a "cash-out" refinance, the RMCC will apply only to that portion of your loan that relates to your original loan amount.
The second fly is the possibility of paying recapture taxes. This program was originally established under President Reagan, and people were selling the properties for high profit in short time frames. This caused it to be de-funded, as it was painted as causing windfalls for folks. But it proved popular enough that they brought it back, albeit with the recapture provisions. If you actually sell, as opposed to merely moving out and renting, within nine years of purchase, there's a formula for whether you'll have to pay taxes on the gain or not. But the maximum possible tax is half the gain, and the money they get helps them keep the program going. It has to do with how much your income was versus the guideline you qualified under, plus a yearly five percent adjustment for inflation and people earning more later in life. This is based upon the maximum qualifying income guideline, not what you actually made when you qualifies. Furthermore, it is waived in cases of death or divorce. In general, avoid selling in years you get a major windfall. It is to be noted that the competing programs have this recapture feature as well.
When you weigh the advantages of the MCC against those of the competing programs, as well as against doing without such a thing, the value of this program to the middle income home buyer becomes clear. Indeed, this national program is probably the broadest brush, easiest to obtain home buyer assistance program there is. Funding is not unlimited, so there can be points where it may waste your money to apply, as there is no money available in your area right now. Furthermore, a lot of lenders seem to sign up to lure first time home buyers in, and then direct them to loans that are not eligible for MCC; this is a major part of what motivated me to undertake the training myself. Furthermore, it's not free. But if you fulfill the requirements, the payoff is enormously better, at a cheaper price, than anything else of which I am aware.
what happens when house doesn't appraise?I presume this question meant "for the necessary value according to the lender's guidelines".
Lenders base their evaluation of a property upon the standard accountant's "Lower of Cost or Market." This is intentionally a conservative system, because the lender is betting (usually) hundreds of thousands of dollars upon a particular evaluation, and if something goes wrong, they want to know that they'll be able to get their money back.
When you're buying, purchase price is cost. When you're refinancing, there is no cost basis, we're working off of purely market concerns, except that for the first year after purchase, most lenders will not allow for a price over ten percent increase on an annualized basis. Six months, no more than five percent. Three months, about two and a half. Mind you, if you turn around and sell for a twenty percent profit three months later, the new lender is going to be just fine with the purchase price, as long as the appraisal comes in high enough.
But as far as a lender is concerned, you can see that no matter what the appraisal, the property is never worth more than purchase price on a purchase money loan. There is a transaction between willing buyer and willing seller on the books and getting ready to happen. It doesn't matter if the appraisal says $500,000 and you're buying it for $400,000. The lender will base the loan parameters upon a value of $400,000.
But what happens if the appraisal comes in lower than the agreed purchase price? For example, $380,000 instead of $400,000? Then the lender considers the value of the property to be $380,000, no matter that you're willing to go $20,000 higher. You want to put $20,000 of your own money (or $20,000 more) to make up the difference, that's no skin off the lender's nose. Matter of fact, they are happy, because it means they still have a loan, where they would not otherwise.
Keeping the situation intact, if you planned to put $20,000 down (5%) on the original $400,000 purchase price, the loan is probably still doable, albeit as a 100% loan to value transaction instead of a 95% one, which means it will be priced as riskier and the payments on the loan(s) will doubtless be higher than originally thought. The same applies if you were going to put $40,000 (10% of the original purchase contract) down, except that the final loan will be priced as a 95% loan ($360,000 divided by $380,000 is 94.74 percent, and loans always go to the next higher category).
Suppose you don't have the money, or won't qualify for the loan under the new terms? That's why the standard purchase contract in California has a seventeen day period where it's contingent upon the loan (many sellers agents will attempt to override this clause by specific negotiation). If you get the appraisal done quickly, you have a choice. You can attempt to renegotiate the price downwards. How successful you will be depends upon several factors. But if you're still within the seventeen days, the seller should, at worst, allow the deposit to go back to you, and you go your merry way with no harm and no foul, except you're out the appraisal fee. This is not to say that the seller or the escrow company has to give the deposit back; they don't. You may have to go to court to try and get it back, depending upon the contract. The escrow company is not responsible for dispute resolution. If the two sides cannot agree, they will do nothing without orders from a court. If the seller wants to be a problem personality, you can't really stop them without going through whatever mediation, arbitration, and judicial remedies are appropriate.
Suppose the appraisal comes in low on a refinance? Well, that's a little more forgiving in most cases around here, at least with rate/term refinances where you're just doing it to get a better loan. If you have a $300,000 loan and you thought the property was worth $600,000 but it's only worth $500,000, that just doesn't make a difference to most loans. Your loan to value ratio is still only sixty percent, and it probably won't make a difference to residential loan pricing (commercial is a different story, and if you have a low credit score it might also make a real difference). On a cash out loan, it can mean you have to choose between less favorable terms and less cash out, however, especially above seventy to eighty percent. There are ways to prevent wasting money on an appraisal, but once it comes in, it is what it is. If the underwriter sees one appraisal that's too low, they're going to go off that value, and if you bring another appraiser in, the underwriter will usually average the two values, so even if the second appraiser says $400,000, the underwriter who has seen a $380,000 property will value it at $390,000 (not to mention you pay for two appraisals). And a low appraisal can mean that the reason you were refinancing becomes impossible, so you're better off walking away.
There is no such thing as a free lunch, but lots of people will pretend there is.
It seems to me that many people consider compensation earned by real estate agents as paying some kind of toll. They think of it as admission to the world of MLS, to showings and writing offers. Kind of like a tollbooth on a road somewhere. If there's another place just down the road that offers the same access cheaper, it makes sense to pay your access fee there.
If you think of what an agent or loan officer makes as a toll, just a cost of getting into the arena, it makes sense to go cheap. If you think of it as a payment for knowledge, expertise, service, someone who not only helps you CYA and prevents major mistakes, but makes a positive difference to the result, a different dynamic emerges.
There are existing offices modeled after every level of service from zip on up. It costs them nothing to say "Full service for a discount price," but that doesn't make it true. Like a certain ex-president who "did not have sex with that woman!" you have to consider what definition they're using in making that claim. If sitting in their office with MLS access and a fax machine is "full service" for them, by their lights they are providing "full service for a discount price." Remember how in my loan article Questions You Should Ask Prospective Loan Providers, I listed a whole bunch of questions the intent of which was to nail down how much of the truth they were telling you, and whether they intend to Guarantee their quote, you want to ask prospective agents what services their fees cover. Among other things, this exposes the "full service for a discount price" claim to be yet another Great Lie on the level of "I gave at the office," "The check is in the mail," or "Yes, I'll respect you in the morning."
The bottom-most level is essentially a fax machine and MLS access. I've met some where the fax machine was purely a service that converted email to and from from fax. I've even met some where I suspect they didn't have MLS access and were working off one of the free public real estate sites. They never leave the office; all they are about is access. This level might be good for you if you know as much as a good agent, like say, you were a good agent but lost your renewal application in the mail. Otherwise, you're setting yourself up for an experience like my first purchase.
Above that is the level of service that actually help you with paperwork. They still never leave the office, but at least they've got access to WinForms and some kind of checklist for paperwork. They're still not helping you with your investigations or marketing, but at least you might get some kind of more or less complete list of the disclosures you're required to make as a seller, while as a buyer you're going to be quite firmly told to get an inspection. Not that they're going to be there for the inspection, or help you interpret it, or help you figure out if maybe you need something more. They may or may not be aware of a large percentage of traps for the unwary that lie in these documents and the inspection, but at least they help you with the most basic level of CYA.
Assistance in negotiation may or may not become an option at this level. Since the ones at this level never go out and look at property, they can't have any real clue as to its virtues and faults, especially as compared to whatever else has sold in the area in the last few months, but at least they have may have enough of a clue as to general market conditions to keep you from making or accepting the wrong kind of offer. This is the level of the CMA, or comparative market analysis, which takes somewhere between 5 and 20 minutes and about the intelligence of Mongo from Blazing Saddles. At least you shouldn't make an offer or accept an offer that is completely and totally off base for your type of property in your area. The higher up the ladder of service you go and the more involved with the specifics of your market and your property the agent is, the more valuable this service becomes. Top agents that know enough about the property and the "comparables" can potentially negotiate the other side ten to fifteen percent (or more, in a market that favors you) from the numbers that someone using a lesser agent might be stuck with. I know because I've seen it happen - I've made it happen or not happen, and in one case, seen the next buyer pay more than fifty thousand dollars more than the contracted price I negotiated for one buyer who suffered an attack of insanity at closing.
At the next level above paperwork, you've got the agent who may go out and visit the property. For a listing, they're going to measure your property, take some notes for the listing, and maybe give some advice as to how to stage it or put you in touch with a stager. For a buyer, they're more or less willing to open the front door on properties you've told them you want to view. Both sorts will make the effort to sell the property, the listing party more than the door opener. The listing agent's client is only happy when the property sells while most buyers bristle at more than a certain level of sales talk. In both cases, however, they're trying to get that buyer to sign up with them, preferably (from their point of view) with an Exclusive Buyer's Agency Agreement, so the pressure won't be real high in either case. This is also the level at which open houses become something that agents really want to do, in order to snare buyers' business. It is to be noted that there are a lot of agents who think they really are providing as much service as any other agent with this level of service. They aren't. They're still clueless or nearly clueless as to how it compares with everything else on the market in the area, or that was on the market, because they haven't gone and visited any on their own.
Somewhere along about this level of service and above, the agents may actually be willing to get out of the office to meet the inspectors and appraiser. After all, they've now got a negotiated agreement and it's in their interest to further the transaction so that they can get paid. They may also help you interpret what all of these reports say. Not necessarily; but at least it starts being a possibility, rather than pushing all of this off onto the clients or the other agent. This is where a lot of lawsuits start, so many brokerages actually prohibit their agents from being present at inspections - at most they can open the door and leave. I'm not a lawyer, but if I'm presenting myself as being an expert at real estate, not being present for the inspection seems to be evidence of gross negligence, just on the face of it. On the other hand, if the clients are representing themselves as being competent in this area in order to receive discounted service, that's fine with me. I actually make more per hour of my time with less legal liability.
Above this level of service, the services provided by good listing agents and good buyer's agents diverge dramatically. So much so that they cannot even be meaningfully discussed at the same time. Since a listing agent is essentially a marketer while a buyer's agent is charged with analysis and comparison among alternatives, this shouldn't surprise anyone. They are different functions at the heart, and many agents who are very good at one are considerably less proficient at the other. Fact. I can point to great listing agents who are putrid on the buyer's side, and vice versa. Often, it's as simple as attitude. Some listing agents can't stop thinking like listing agents, while some buyer's agents can't stop thinking like buyer's agents, and they are completely different thought processes. It took me a while to learn this, and I can point to a lot of agents whom the evidence indicates have not yet done so.
For the listing agent, the question largely resolves to pricing, plus what degree of staging and precisely how much marketing they are going to do. Note that even the most exhaustive marketing campaign is not likely to get more than the property is worth, but it can mean you get top dollar instead of significantly less, particularly if you price it correctly and have the property ready for the market when it hits the market. Pricing too high to begin with "to see if you can get it," is the mark of an inferior agent "buying" the listing, as you won't be likely to get the higher price and it will almost certainly reduce the final sales price by more than any lucky windfall might be. Particularly in the buyer's market most of the country has right now. These are all obvious things of value - when that agent spends time and money marketing your property, they're spending their own resources, not yours. How to word an advertisement, when to run it, where to run it - all of these are expertise. Go check out how much marketers with far lower sales who don't use their own resources and who draw a salary get paid make in the corporate world before you make a snap judgment as to whether it is or is not worth the money. Here's one example, and keep in mind that this is only a part of what a good listing agent does.
On the buyer's agent side, the question is more singular: How much property scouting are they going to do? Are they going to wait until the client asks to check out a property or are they going to go check out every possibility in the market? Are they going to go out on their own to eliminate definite turkeys before telling you about the cream? Still more important is are they going to tell you about good and bad, reasons why it's good and why it may be deficient, on every property, but that's something you can only observe in action. This is the paramount and unanswerable reason why you shouldn't sign any exclusive buyer's representation agreements unless you are so certain of this agent that your spouse can tear your arm off and beat you to death with it if you're wrong. They need to cover what the property has and what it doesn't, and what it's going to take to bring it up to an acceptable level where it is deficient. Structural flaws, basic amenities, floor plan, lot layout, etcetera, not to mention location location location. Not just now, but for any future sale that you might later decide to make. This whole thing is so time intensive it can't profitably be done on any basis other than the complete combo package of buyer's agent services, and it requires a level of expertise and market knowledge that cannot be acquired on the fly, and aren't cost effective to learn for one transaction. You'd make maybe thirty cents per hour. I might believe fifty or even seventy-five cents per hour in a high cost area like San Diego. However, if you have an agent with this knowledge and the right attitude, there's nothing else that will make nearly so much difference, both in terms of price and in terms of final satisfaction with your purchase.
If you don't want "the full package", that's fine with me and every other agent I know of who's capable of the full package. As I said, we make more per hour with the lesser packages even if we get paid less. But we can also work with a lot more buyers wanting less intensive service, or a lot more sellers, and make more money overall. Furthermore, it's a lot easier for someone who makes a regular habit of doing "the full package" to perform lesser services than it is for someone who doesn't to perform greater. That market knowledge we get from the other clients we have? It doesn't magically disappear because this client isn't paying me to run around scouting properties. Usually I'm working with multiple clients in my area and while one wants the whole nine yards, another doesn't. Just because I'm not scouting for you doesn't mean I'm forgetting about all the stuff I scouted for someone else. But someone who doesn't make a habit of it is working from the same zero base I'd be working from outside San Diego County.
Somebody once asked me about Hourly pay instead of commission for agents. Just as you'd expect, agents can charge less if the client is going to pay an hourly rate for their time regardless of whether there is a transaction. That's called transaction risk, and is a real risk of this business - the chance that, if you're paid on commission, you can spend dozens to hundreds of hours with someone, as well as lots of money, and not make a thing. If the client chooses to bear the transaction risk, that's fine with me, and they'll at least have the opportunity to pay me less for a successful transaction - although they'll still pay the cash if there's not. As I just wrote, that's the risk they are choosing or not choosing to take. Neither agents nor clients can have it both ways. The cash alternative is potentially a lot less expensive, but I haven't met a whole lot of people who like the idea of writing me a check for actual dollars they earned and saved without any certainty of a happy outcome for them. When you get right down to it, most clients do not want to assume transaction risk. But neither agents nor clients can have it both ways.
Some agents have huge lists of what they do, specifying point by point all the services they provide, splitting the services up into the largest number describable to make it seem like more. Others lump them together by more general categories, and may do anything that belongs within the due diligence and responsibilities they agreed to, where the "splitter" figures since it wasn't covered, they aren't doing it. Nonetheless, either way is basically valid. A written representation that they perform specifically named services obligates them to do so, but there is rarely a significant difference between someone who does that and someone who lumps them into more generic categories. I suppose it's all a matter of whether you want someone with a detailed checklist and someone who goes around looking for something they might have missed even though it may not to be on a checklist - but it applies to your transaction.
You may have noticed that I haven't attached any specific numbers to any of this. That's because it's both variable by market and negotiable within a market. The more services you want, the more money the agent will want to make. Ditto with resources, both time and money, you ask them to invest. If you're determined to get the best bargain you can, you need to shop agents and compare their competence and their attitude as well as their price. If you want to negotiate pay with a professional negotiator, well I've got admiration for your chutzpah. Plus I have to admit that it's a fair test of those abilities. Even if those negotiations turn out bad for you, imagine where OJ Simpson would be today if he had a cheap lawyer. Or Britney Spears. Or Bill Gates, the massiveness of whose fortune lies in one legal victory over IBM, as well as his lawyers outlasting the government anti-trust lawyers at a later date.
My service bundle is 100% negotiable, and not being a slave to NAR or the brokerage oligarchy that controls it, I'll fight any effort to change this. My understanding is that any such effort is doomed under California law (at least), but I am not a lawyer and I'll defer to other expertise there if it wants to chime in.
But I do think it reasonable that agents and brokerages be forced to specify what services they do and do not offer, and what they are and are not responsible for in a given transaction, at least by category. Good full service agents do this now. The next dedicated discounter I see who does this will be the first. The very services which are most time consuming and lead to the largest liability are the very ones that dedicated discounters will not fulfill and will do their darnedest to pretend don't exist. But they're also the ones that make the most difference for most clients, and would rank as most important for those clients if they were asked to rank them.
Over the course of the last few months, I've gotten mass messages from basically every lender I do business with, saying it's time to "get back to basics". About a week ago, my favorite A paper lender became the last to do so. This is a company that to the best of my knowledge, never offered a negative amortization loan, never had a stated income loan for 100% of value, and was steadfast about avoiding all the problem loans that the rest of the industry dived headfirst into. As a result, not only could they offer beautifully clean underwriting and rates that varied from pretty darned good to absolutely unbeatable, but they're sitting pretty today, their loss rate being not significantly higher than it was five years ago, and what little difference there is being attributable to declining values that are a background to the industry rather than loose loan practices.
My response to each and every one of these messages, however, has been, "What do you mean, back to basics?"
The dynamics of how to create a happy customer never changed. Oh, you can make them happy right now by getting them into the beautiful McMansion they have no prayer of really affording. But debt to income ratio isn't just for the lender's protection. If you use one of the many tricks available to circumvent it, you can video-record them jumping up and down with excitement and crying for joy on move-in day, but they'll also remember you all through the long process of losing the property, and by the time it comes to move-out day, they'll know that you failed to do your real job. What do you think the prospects of referrals and repeat business are? Well, maybe referrals to attorneys and repeat business from the FBI fraud unit, but those aren't things most of us want.
Many people, sometimes surprisingly sophisticated people who should have known better, were ignoring critical factors about personal finance and economics because after six to ten years of the housing markets going crazy, it must have seemed as if the laws of economics had been somehow repealed. Nope. Not ever going to happen. They're a bit more complex than physics such as gravity, and they are subject to distortion through mass psychology in the short run, but the bottom of that canyon is still waiting, no matter when Wile E. Coyote looks down. You'd think people would learn something through experience after a few repetitions.
Yes, most people want the huge mansion on 64,000 acres. People want hot and cold running servants and manna from heaven, too, but very few people get it. But there are reasons things like that are beyond the means of the average person, particularly in high demand urban areas where all the jobs are. Most of us have budgets that won't stretch to any of the above, and we're better off understanding this fact from the get go. As real estate agents and loan officers, it's part of that fiduciary duty we learn about getting licensed to make them aware of these facts as they pertain to real estate and mortgage loans, not encourage them to stretch beyond their means for a property and a loan they can't really afford.
During the era of make-believe loans, it became possible to pretend that somebody could afford a bigger, more expensive home than they really could. Many alleged professionals, both agent and loan officer, became aware that they could make the easy sale and a much higher commission check by fudging a number here and a key fact there. They made quite a good living by doing so, rationalizing that if they didn't, somebody else would. Those agents and loan officers who stayed on the right side of things lost a lot of business to people who didn't. And it's always possible to talk a bigger better deal, and the last few years have taught those of us who don't how to deal with those miscreants. But whether you believe in karma or not, stuff like that will come back around to bite you. It's one of those laws of economics that can't be repealed by the legislature. One way or another, their time of reckoning is coming. We all know what happens to those hogs at the trough.
So it's not "back to basics." Basics have always been there. Basics has always been the way to make the clients happy, not only on move-in day, but for the rest of their lives - long after the neighbor who didn't pay attention to basics has lost their home and their financial future to the foreclosure process. Basics, and explaining how they benefit the client, is how you build a real book of business, instead of one-time scores that are going to have you fighting lawsuits from jail. This has never changed, and it never will. Basics are the world we all live in, and when you understand them, you understand why.
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