Beginner's Information: June 2008 Archives


About a month ago, I wrote Top Ten Reasons Your Home Isn't Selling. It was well received so I thought I'd take it from the buyer's perspective. Once again, I'll try to inject as much humor as I can.

Number 10: The Commute: It never ceases to amaze me the number of people who will commit themselves to living in a neighborhood they've never lived in before without a real evaluation of how to get from there to everywhere else they need to be. Don't just drive from the house to work once when there's no traffic. Try to drive back and forth at the times you'll be driving it every day. Or if you're a public transportation person, figure out what that's going to be like before you're stuck doing it. Take into consideration that the commute is going to get less and less enjoyable as time goes on. Be certain in your own mind that you're going to be okay doing this as often as you have to. If the commute is intolerable, then as certain as gravity you're not going to be living there or not going to be working there. For genius IQ points (or at least subgenius), try the paths you're going to have to take to your other common destinations. Grocery stores, the mall, your Tuesday night class in whatever, the kids' scout meetings. If you have to travel or work in different locations, do those trips also. An good agent should ask about all this, and be aware of the effects. An Evil Agent, will, of course, induce you to buy property where you'll have to sell it - generating more commissions.

Number 9 Beautiful Surfaces: They've just put Travertine and Italian Marble all through the room you want for the nursery! Too bad about that six inch wide crack in the foundation they covered up! Still, it's obviously the house you've got to have! At least until the first time your toddler breaks multiple bones falling on those tiles. Unfortunately, by then it's too late. And just wait until the old cast iron plumbing fully closes up or springs a leak, but at least it puts out the fire caused by plugging too much into eighty year old wiring! Yes, beautiful surfaces are nice - and one of the best ways to get novice buyers to pay too much.

Number 8 Insufficient shopping: You looked at one house and fell in love. Unfortunately, it was the crummiest most overpriced house in the neighborhood. Other people trying to get out before the new needle exchange program opens down the street are going to be praising you for paying so much that their house will appraise for whatever value they need it to! Seriously, if you don't look at ten to fifteen properties, you're definitely short of market information, even with the best agent in the world ;-). I have seen people shop more for $20 toaster ovens than half-million dollar real estate. Scary.

Number 7: Skimping on Services: Trying to do without title insurance or inspection is a recipe for disaster. I've said this before, but title issues really do happen, and it's not always with the person who may appear to be the current owner. Ditto the inspection. I don't think I've ever had a property where the inspection didn't reveal anything I didn't know about the property. I've had the stuff the inspector found be trivial, but never non-existent. Here's one thing that seems to be a rule: if you're getting a good bargain, there will be something you want an inspector's opinion on before the sale is final. People understand cash, and many don't understand the concept of insurable risk. By the time you join the ranks of those folks out half a million dollars worth of property and still on the hook for the loan, you may have a different opinion.

Number 6: Location: Backing out of your driveway onto the high-speed expressway, your spouse's vehicle is flattened by the bus returning this week's escapees to the maximum security prison a quarter mile down the road - past the explosives factory, the toxic waste dump, and the chemical plant. She's taken to the emergency room at the hospital for the violently insane across the street, and neither you nor your lawyer ever do come up with conclusive proof of what happened after that when the airliner landed short of the runway. Seriously, there are many things that can rule out a location, from the above through several milder forms of ambient environmental issues, down to misplaced improvements. You might be able to move a building. Nobody has ever figured out how to move the land it came on.

Number 5 The Loan: The only way to qualify for the dollar amount you need is to take an unsustainable loan or a loan that is guaranteed to self-destruct. I'd like to be humorous here, but this is somewhat less funny than the most politically incorrect joke I've ever heard, let alone what I'm willing to print here. Betting on rising values and falling rates to enable you to refinance more favorably is literally putting your home and your future on a craps table. This leads into-

Number 4 Didn't Adhere To Budget, and not having a known budget in the first place is the ultimate case of this. I've written at least one two three articles directly upon the point of figuring how much you can afford. Figure out your budgetary limit first, and shop by purchase price, not payment. This isn't to say you have to spend the maximum, but the worst ways people shoot themselves in the head (not the foot) is by falling in love with the property that's too expensive for what they can really afford. In How to Effectively Shop for a Buyer's Agent, I tell you to immediately fire any agent who wants you to look at a property that cannot be obtained within the budget you tell them about. The asking price can be a little higher than your limit, with the understanding that if you can't get the price down that far via negotiation, you're not interested.

Number 3 Assuming Something That Isn't True: Josh Billings was correct. It's not what you don't know that gets you - it's what you know that ain't so. I've been the unwitting victim to this, and I've seen enough other transactions to have come to the conclusion that people who deal in real estate without an expert fall into two categories: Those who know they got taken, and those who don't realize it yet. There are so many tricks and traps that get played upon the unwary that there is literally no way to write about all of them because new ones are invented continuously. You have to be someone who deals with these issues every day to have a prayer of realizing the pitfalls of some of them. Consider that if some trick motivates a buyer to pay 10% extra for a $500,000 property, that's $50,000 extra in the seller's pocket and out of yours. I've learned to question everything, and to ask, "What are the possible explanations for this?" Unless you're an agent yourself, you probably wouldn't believe the grief this saves my clients.

Number 2 Failure to Plan: A good agent has contingency planning in effect for everything, and those plans don't include permanent vacations in countries without extradition. If you're seeing all this stuff for the first time, how likely is that to happen? Even the second or the third? The reason I do so well for my clients is that I've got a solid plan from the time they contact me for the first time, and I have plans to deal with everything I don't control. This includes everything from if they get their hearts set on exactly the wrong property to negotiations before and after the contract to what happens if the inspection reveals something major, and how to lay the groundwork in case stubborn negotiating partners don't see it may way, or the universe decides to jump in with an unpleasant surprise . If you don't have this sort of plan, may I suggest you hire someone who does. Because failure to have a plan in place will cost you large amounts of money.

Number 1 Not Having a Strong Buyer's Agent. This is the first thing you need to shop for, before you so much as look at online listings. Have at least one in place before you look at any property, even new development. You want one who's going to go digging for both good and bad. There is no such thing as a perfect property, because if everything else is perfect, the price certainly won't be, and if you're only willing to settle for the perfect deal, you're either wasting your time or asking someone to take advantage of your ignorance. If you use the seller's agent, they have a fiduciary duty to present that property in the most favorable light. Given the choice between an agent pretending problems don't exist until the small print disclosures and an agent who fails to do their legal and contractual duty, which would you choose? If you don't like this choice, then you want to apply the information in How to Effectively Shop for a Buyer's Agent. Having a good buyer's agent will make more difference than anything else in your real estate experience.

Caveat Emptor


Over five hundred years ago in Europe, there was a con game that was more practiced than any other con game in the history of the world. It was simply the thing to try on the new rube in town. Someone would claim to be selling a suckling pig in a sack ("poche", from which we get "pocket" as the diminutive, as well as "pouch"). You have to understand the situation back then to appreciate what was going on. Suckling pig was tender, delicious meat, the sort that the average person of the time might only eat a few times in their life. Perhaps never, if they were poorer than average. It was highly sought after, and commanded quite a price, in terms of the average person's wages.

In reality, of course, what was in the pouch wasn't a pig at all, but rather a cat. Most modern Americans don't realize this, but "roof rabbit" was eaten back then, because the alternative was often starvation. Before potatoes were brought back from the New World, Europe did not find it easy to feed its population. Nonetheless, I'm given to understand cat meat is nasty disgusting stuff, a food of last resort, because cats are almost 100% carnivores. However, the victim of this scam didn't usually get to eat the cat, either, because they were expecting a pig, which was not nearly so nimble. As a result of this, when they opened the sack, the cat would escape. This con gave us three phrases that are very popular today: "Let the cat out of the bag," and "left holding the sack," as well as "Buy a pig in a poke."

So what if prospective buyers have a hard time viewing a property?

This isn't 500 years ago. People that have the financial resources to buy real estate in the United States today aren't likely to be that trusting. If they were, some alleged Nigerian millionaire would have relieved them of those resources. In fact, in advice given since at least 1530, people have been advised ""When ye proffer the pigge open the poke."


Why? Because if you don't, people are going to presume it's a cat (at best), and they're only going to offer what cat meat would be worth to them, which may not be anything. But if you show them that there really is a delicious suckling pig in the sack, they may be willing to pay the premium prices that suckling pig - or beautiful turnkey property - commands.

I don't know how many times I've gone over this with clients. People aren't looking for reasons to buy your property, they're looking for reasons not to buy your property, and, "They don't want to let me look at it," is more than sufficient reason to lose interest.

Does that have anything in common with the educated pig buyer? You bet it does. They wanted to see the pig, otherwise it was only worth the cat price (i.e. nothing unless they were starving, and then not much).

The entire process of real estate has evolved with inspections, appraisals, etcetera is precisely because the information possessed by the parties at the time of the contract is asymmetrical. That's fancy talk for the seller knows more than the buyer. The entire viewing and inspection idea has evolved from this basic fact, and the need to remedy most of the imbalance of information.

But if prospective buyers have a hard time being allowed to see the property, they are not going to make good offers. The idea is that there's probably a reason that seller won't let them look at the property, and they're most often right in that presumption.

Every time I start looking through MLS for property that might suit my buyer clients, I run across several of the stupidest ideas in real estate. I can handle one and usually two hour notices, but when someone asks for four, they're not likely to get it. I've got someone who wants to go look at property now, or wants me to go look at property now and get back to them on it, and I'm usually trying to shoehorn a few extras in while I'm in the neighborhood. If I can see your property, I might think it's worth my clients attention. If I can't, I definitely won't.

But four hour notices aren't anywhere near the worst: 24 hour notices are at least as common. In a way, I understand. Tenants can legally require 24 hour notice, but it's to my listing clients advantage to come up with some reason to cut that as far as possible. What are the tenants paying, $2000 per month or so? Offer to rent a storage locker for them and rebate some rent money, and your average tenant is going to agree so fast your head will spin. This kills the "I'm worried about them stealing my stuff!" angle as well. Always be ready and willing to show, and since every day the property doesn't sell not only adds carrying costs but means a (statistically) lower sales price, the money you spend generating cooperative tenants is a fantastic short term investment, better than anything short of a jackpot lottery win, and a lot more dependable.

That's not the worst, though. That dishonor goes to "property shown with accepted offer." Here we go with the cat thing again. The question that goes through my mind when one of my buyers asks about one of those is, "How bad could it be?" Why that question? Because the worst case scenario is precisely what the property is worth until the seller opens the "poke" and shows us the "pigge" instead of the cat or worse. Contingencies aren't going to cut it. Contingencies are for when you know a little bit and want to know more. In this instance, the buyer doesn't know anything, because they haven't seen it. The fact is that in the absence of any observational evidence, I figure there's a reason why the seller doesn't want us to know, and negotiate accordingly. Mind you, if you're willing to take a blind risk this can generate a fantastic bargain at the right time, with a seller who's ready to listen to reason about the effects of this upon value. But most aren't.

I can't blame the seller who doesn't understand this. The fact that they're clueless on this point is evidence of agent failure. This is one more way that agents "buy" listings and hurt their clients. Failing to make the client understand that showing restrictions lower perceptions of value as well as sales price is a major agent failure. Because the agent does not make certain the client understands the way that buyers approach properties, that agent is failing in their fiduciary duty, and their client will end up paying more money in carrying costs as well as getting a lower sales price because of it.

A while ago, I wrote an article on Top Ten Reasons Your Home Isn't Selling. It's no coincidence that talking about real estate in this context explicitly hits the three biggest reasons why real estate doesn't sell. Not only is it a direct instance of problem number three ("Showing Restrictions"), but by restricting showings the property becomes less valuable ("Price") and highlights a major shortcoming of the listing agent. And since these folks have won gold, silver and bronze medals in the "shooting yourself in the foot" event, may I suggest that after some appropriate time has passed, this may become a very lucrative desperation mine?

Caveat Emptor

(click for Part 1 of Save For A Down Payment or Buy Now?, which deals with the basic question of how well saving for a down payment increases affordability)

But suppose, instead of waiting because you can't afford the payments now, you buy a $250,000 condo now - and then sell it for your down payment later. In other words, you buy what you can afford right now instead of waiting and saving until you can have the home of your dreams. Then at some later time you sell the condo for the down payment on the home you really want.

Let's look at the trade-offs for the condo. I'm going to assume that the condo's equity is the sum total of the saving you are doing, and I'm going to manipulate rents until I get $833 per month cash flow difference (you $10,000 per year savings). This yields a monthly rent of $977.46. You can't rent $250,000 condos around here for $1000 per month, but we'll stick with the situation I figured even though the argument in favor of buying the condo is far stronger. Let's also assume it costs 7% of the value to sell the property, make allowances for property taxes, HOA fees, etcetera. It'd be a bear if I didn't already have the spreadsheet done, but here are the results:



Year
0
1
2
3
4
5
6
7
8
9
10
Value
$250,000.00
$262,500.00
$275,625.00
$289,406.25
$303,876.56
$319,070.39
$335,023.91
$351,775.11
$369,363.86
$387,832.05
$407,223.66
Monthly Rent
$977.46
$1,016.56
$1,057.22
$1,099.51
$1,143.49
$1,189.23
$1,236.80
$1,286.27
$1,337.72
$1,391.23
$1,446.88
Equity
0.00
15,431.56
31,674.53
48,772.18
66,770.15
85,716.58
105,662.21
126,660.56
148,768.08
172,044.30
196,552.03
Net Benefit
-17,500.00
-13,443.41
-9,518.73
-5,769.20
-2,244.10
1,000.56
3,901.27
6,386.11
8,373.86
9,772.91
10,480.08

Now, I have to admit this seems marginal. You've only got an extra $10,000 in your pocket after 10 years. So you sell the condo and buy your house, and plugging these numbers into the affordability spreadsheet improves the affordability of the house you really want by 8% in only 8 years. Nonetheless, this is 2.5 times the affordability increase afforded by investing the money.

Now let's consider the situation as it really exists. That $250,000 condo rents for about $1300, which makes a big difference to what you save. It's like taking the previous situation, and adding $322 per month to your investments as well. Here's the numbers for the condo, adding the investment, and coming up with a total.



Year
0
1
2
3
4
5
6
7
8
9
10
Value
$250,000.00
$262,500.00
$275,625.00
$289,406.25
$303,876.56
$319,070.39
$335,023.91
$351,775.11
$369,363.86
$387,832.05
$407,223.66
Rent
$1,300.00
$1,352.00
$1,406.08
$1,462.32
$1,520.82
$1,581.65
$1,644.91
$1,710.71
$1,779.14
$1,850.31
$1,924.32
Equity
0.00
15,431.56
31,674.53
48,772.18
66,770.15
85,716.58
105,662.21
126,660.56
148,768.08
172,044.30
196,552.03
Savings
$0
$4046.11
$8515.91
$13453.74
$18908.64
$24934.73
$31591.84
$38946.03
$47070.31
$56045.30
$65,960.08
eq+sav
$0.00
$19,477.67
$40,190.44
$62,225.92
$85,678.79
$110,651.31
$137,254.05
$165,606.59
$195,838.39
$228,089.60
$262,512.11

Now let's paste these last numbers into the affordability sheet and see what we get:



Year
0
1
2
3
4
5
6
7
8
9
10
available
$0.00
$19,477.67
$40,190.44
$62,225.92
$85,678.79
$110,651.31
$137,254.05
$165,606.59
$195,838.39
$228,089.60
$262,512.11
price of house
$500,000.00
$525,000.00
$551,250.00
$578,812.50
$607,753.13
$638,140.78
$670,047.82
$703,550.21
$738,727.72
$775,664.11
$814,447.31
payments
$3,631.97
$3,670.64
$3,709.34
$3,747.86
$3,786.00
$3,823.49
$3,864.42
$3,928.79
$3,993.62
$4,058.65
$4,123.58
affordability
1.00
1.02
1.04
1.06
1.08
1.10
1.12
1.14
1.15
1.17
1.18

So we see that this strategy has increased the affordability of the house you really want by 12% over only 6 years, holding background assumptions constant. This is twice again the affordability increase rate from the last example (2%/year as opposed to 1), and so almost five times the affordability increase rate of just saving for a down payment. Furthermore, those payments on your condo are mandatory, and the increases in value happen of their own accord, whereas most saving programs run by individuals falter a bit over time, nor is there any such thing as a 10% return per year tax free. In short, I'm comparing a real world real estate investment with a hopelessly idealized other investment. Saving for a down payment makes comparatively little sense unless you are not yet in a position to buy, either due to stability, insufficient income to buy anything, or because your situation does not permit 100% financing.

Taken all together, this forms a powerful argument for not waiting until you can afford your dream house, but buying what you can afford as soon as you are in a position to do so with the intention of trading up later. Delaying means you cut the later years off of the results, not the earlier. The benefits to real estate don't start until you put your foot on the ladder. If I had known this when I was in my twenties, I'd be millions of dollars better off today. So plan ahead, and start working towards your goals now. You can never go back in time with what your figure out later, or with the effort you expend later.

Caveat Emptor

An email asked a question I should have thought to answer a long time ago, and the answer may surprise a lot of folks. I've been vaguely aware of this for a couple of years, but I was amazed how strongly the numbers solidified my views!


My wife and I aren't ready to buy a property yet, but we are trying to plan how much to save for our down payment. You've mentioned that there's a spectrum from nothing down to 20+% down broken down by 5% increments, but how do you choose where to be on that spectrum? I can see that there are tradeoffs between the amount you have to save, the cost of your mortgage and the like, but I don't have a good way of thinking about those tradeoffs. And, since we're in the DELETED area, 20% down could easily get into the six figures, so it can be quite intimidating.

Given the way leverage works in even a slightly appreciating market, it is generally to your advantage to buy as soon as 1) You are sufficiently stable in your employment and expect that you're going to be in the area at least another three to five years, 2) You have enough of a reserve that the first minor bump in the road will not lead to disaster, and 3) You make enough to afford the payments. However, what usually happens is that people get a raise, a promotion, or a new job, or more often, they get married or have a baby and that is what sets their thinking on the road to buying a home.

Let's consider a $500,000 property and an 80% first trust deed with an appropriate piggyback 30 due in 15 second if needed, since that was generally returning more favorable rates than a Home Equity Line of Credit when I wrote this. Upon most recent revision, second mortgages weren't going above 90%, and 100% financing is difficult unless you're a veteran. Picking a random lender from a couple days ago and thirty year fixed rate loans, when I originally wrote this, I had 5.875 for about 9/10 of a point plus closing costs, or about $7100 total cost. But there are potential adjusters - and relevant to this situation, having subordinate financing for 100% CLTV adds one full discount point ($4000 in this case) to the first mortgage, or you can drop down to 6.25 for the same cost. 95% financing only adds 1/4 of a point in the same situation, or you can get a 6% even for the same cost. At or below 90% CLTV, there is no add to the first mortgage. If we're at 80% with a $100,000 (20%) down payment, the 5.875 first is all there is. Taking dead average credit scores (720) with this same lender, the closing costs are $500 (flat) when you do the second concurrently. 85% CLTV would be an 8% second on $25,000 for a down payment of $75,000 (15%) plus closing costs. 90%CLTV would be $50,000 down payment (10%) and leave you with a $50,000 second at 7.375%, benefiting from a bump down in rate for hitting a certain dollar value. 95% CLTV requires a $25,000 down payment and leaves you with a $75,000 second at 7.75%. 100% CLTV (no down payment) leaves you with a $100,000 second at 8%. It would be 8.25, but you've hit another economy of scale break point.

Here's a table:





CLTV

80

85

90

95

95

100

100

1st TD

5.875

5.875

5.875

5.875

6.000

5.875

6.25

2nd TD

n/a

8.00

7.375

7.75

7.75

8.00

8.00

Cost

$7100

$7600

$7600

$8600

$7600

$11600

$7600

1st pay

$2366.16

$2366.16

$2366.16

$2366.16

$2398.21

$2366.16

$2462.87

2nd pay

$0

$183.45

$345.34

$537.31

$537.31

$733.77

$733.77

interest

$1958.33

$2125.00

$2265.63

$2442.71

$2484.38

$2625.00

$2750.00


So you see that having a down payment is a very good thing. Now this is for a fairly ideal situation. If you are in a stated income situation, the rates are slightly higher and step somewhat more steeply, and currently, 80% loan ot value for stated income is the highest anyone is going. If your credit is significantly below average, the rates start higher and step up more steeply still. It gets rough if both apply.

However, this doesn't take place in a vacuum. Let's say you can save $10,000 per year, and earn 10% tax free on what you save. But while you do, housing prices are still going up. Let's assume 5% per year on average. We will also assume that you can get a 6% for the first and 8% for the second whenever you buy, and that taxes at 1.2% of value per year, here's the projected situation:






Year

0

1

2

3

4

5

6

7

8

9

10

down

$0.00

$10,500.00

$22,050.00

$34,755.00

$48,730.50

$64,103.55

$81,013.91

$99,615.30

$120,076.83

$142,584.51

$167,342.96

price

$500,000.00

$525,000.00

$551,250.00

$578,812.50

$607,753.13

$638,140.78

$670,047.82

$703,550.21

$738,727.72

$775,664.11

$814,447.31

CLTV

100.00%

100.00%

100.00%

95.00%

95.00%

90.00%

90.00%

90.00%

85.00%

85.00%

80.00%

payments

$3,631.97

$3,736.52

$3,842.45

$3,949.44

$4,057.11

$4,165.04

$4,272.73

$4,379.60

$4,484.99

$4,588.14

$4,694.16


Where payments is the total of mortgage and monthly tax payment pro-rated when you buy. Examining that column, we see that this is an argument against waiting. In fact, assuming a 3% (compounded) raise per year, the property is only 4% more affordable in year 10 with a $167,000 down payment! This neglects rises in rents and other costs of living!

(Here is Part 2 of Save For A Down Payment or Buy Now?, which tells one way to increase affordability more and faster)


Quite a lot of the time when I view a property, I get requests for feedback.

Usually it's an automated email. Other times, it's some office assistant who wants to fax me a form which will "only take a few minutes of your time".

The point of these, and the various other methods that get used, is to shift the burden of the work they should be doing from the listing agent, which is where it needs to be, to other people. Basically, my competition is asking me to do their job for them. The only time I will respond to requests for feedback is if the agent involved will spend at least as much of their own personal time as it takes for me to provide the feedback. In other words, the agent - not their flunky - has got to listen to me talk, and then write it down themselves. If they start arguing with me, it's no longer a request for feedback, it's a sales call. But in any other circumstances, they're telling me this feedback is not important enough to justify their time, so why should it justify mine? I don't have any responsibility to their client; they do.

The point of both of these, and three or four other methods that get used, is to pressure their listing clients to drop the price. Many offices have multiple employees gathering this information, the idea of which is to get the client to lower the price because the agent didn't do it in the first place. They get the listing by promising a price they know they can't get, and then use the feedback information to hammer the client into reducing the price. This is actually two cardinal sins in one action, and I'll be damned if I'm going to help these slimeballs not only hose their clients, but also take listings away from good agents doing their fiduciary duty by failing to do that duty. This should also tell you how good an agent who uses their great feedback system as a major selling point is likely to be. Agents who know the market don't need a feedback system.

This whole rigamarole is easily avoidable by the agent doing the job they agreed to by accepting the listing.

Here's the way it should work: Agent knows the market. Agent persuades listing client to put an appropriate asking price on the property before it hits the market. Listing gathers lots of traffic, who like what they see. Appropriate offers come in, negotiations ensue, a contract is agreed upon, escrow is opened, and the transaction is consummated. Everybody emerges happy. Time elapsed: under thirty days from listing to contract, under sixty to completion. The only hard part is the pricing and staging discussions with the client, at least a week before it hits MLS. By accepting the conflict then and doing their job in the first place, the agent avoids a lot of problems that will happen later if they do not. Furthermore, the client emerges from the successful transaction not only happier, but objectively better off in that they get more money from a quicker transaction.

Here's the way these problems start: Instead of the above situation, an agent doesn't know the market the property sits in. Maybe they work across town in a different suburb. People decide to list with an agent whose office is near their office for convenience. Unfortunately, that's twenty or thirty miles away from the neighborhood they live in, and the agent might be vaguely aware that the area the property is in actually exists. They have no clue what the market in that neighborhood is like. An agent from twenty miles away is one of the best predictors I know of a mis-priced property. They have no idea of the market in the immediate area. I was just in a very nice property today priced $110,000 more than a very comparable property two blocks away. It's got an extra 3/4 bath, the comparable has a nice California room. The comparable has been on the market for months, and it's only $30,000 overpriced. This should give you an idea how badly overpriced the newer listing is. The listing office is way up in Carlsbad. Big Mistake on the part of the homeowner, and it's going to cost them.

More importantly than market knowledge, the agent didn't do the most important part of their job.

Here's what happens: Homeowners are usually quite proud of their property, and they understandably want the highest possible price for it. They see high asking prices, and they think they should be able to get them. Few members of the general public understand the relationship between the market, asking price, and sales price, not to mention how long it takes to sell. So when they interview agents, they're looking for the agent that will promise the highest sales price.

Here's the issue behind that: How does the client know if the price an agent says they can get is real and deliverable? The answer is that they don't. Ladies and gentlemen, I get paid on commission. I'd like to be able to get $2 million for a tiny condo in The 'Hood. The fact is that buyers choose to make offers upon the property that appears to be the best bargain for their needs and desires. The entire idea of listing and marketing the property is to attract the attention of the buyer whose needs and desires that property meets better than any of the available competing properties. Yeah, there's an element of seducing the buyer into liking the property more so they will pay a higher price. But like a lover, an agent can never seduce two people at once, so if they're seducing the seller they're not seducing the buyer. Not successfully, anyway.

So what a bad agent does is promise whatever sales price they think will get the owner to sign that listing contract. As soon as they've got the contract, they start planning ways to get the owner to decrease the asking price.

What's the harm in that, you ask? Those buyers they are trying to appeal to look at the property online. They see that too high price, and decide they're not interested. The buyers who do come by see that they can get something better for the same price so they make offers on the other property. Thirty days out, pretty much everyone on the market has decided they're not interested, and new buyers coming onto the market see that it's been on the market for over a month and their first question is, "What's wrong with it?" They don't want to go look at it. A good buyer's agent like me might be able to talk them into seeing it if the agent sees a bargain, but they don't see a bargain because it's overpriced. In order to lure the buyers back, you've got to cut the asking price to below what you could have gotten if you had priced it correctly in the first place. Otherwise, you're waiting for months until people like me think you might be willing to negotiate to something advantageous for my clients, and that's going to end up even worse for you. Meanwhile, whatever reason you wanted to sell the property is on hold. Being hammered by your agent to lower the price, you get so desperate that you'll take offers you would have trashed when the property first hit the market.

Here's the cute part, if you're one of these agents: Because these properties eventually do sell, and lots of people fall for this trick, that sleazeball looks like a "top producer." They've always got a large number of listings in the pipeline, Waiting for Godot. When one of them finally has the price dropped far enough, it sells. Since in the production metric used by the real estate industry, they are getting their 3% of lots of different properties, they're doing great for themselves and it appears that they're successful - precisely the sort of agent many people look for. In reality, their clients end up hurting. A freshly minted licensee who approaches the listing correctly will reliably achieve results superior to this.

Unless you're basically an agent yourself, the pricing discussion should be difficult. There is a fundamental tension between the desire to get the highest possible price for a property and the need to price it competitively with other properties. If a prospective listing agent does not understand this, ditch them. If this tension is resolved easily, there are two possibilities. Far more common of the two is that the agent isn't doing their job. They could be ignorant of the market, or they could be seducing you into a listing contract by talking a Bigger Better Deal that they cannot deliver upon. There really isn't much difference. The other possibility is very rare around here, although it was more common when prices were going up like crazy: The homeowner doesn't try to overprice the property.

How can a homeowner deal with this issue? The only foolproof way is to really understand your competition - the other comparable properties for sale in your area. You also need to know about the properties that have actually sold, because it's not uncommon that some idea of inflated value creeps into a neighborhood, and all of the properties sit on the market unsold until they figure it out, while the next tract over is selling a little bit better. Since it's unlikely that the new owners are going to allow you to view their recent purchase, you're pretty certain to be at an information disadvantage.

Keep in mind, however, that the pricing discussion should be difficult. If it's not, there's probably something wrong. Furthermore, unless you're Martha Stewart, the "what to do so it shows well" discussion is likely going to be uncomfortable as well. Remember that it's for your advantage. I'm trying to make you more money, faster, by making your property more appealing to buyers. If the agent doesn't tell you how to clean it up and get rid of the clutter and make certain it stays presentable, that tells you that everything is either already perfect (unlikely) or that they're shying away from telling uncomfortable truths you need to hear. This is never a good sign in an agent.

Avoid listing agents who don't work your area consistently. If their office is more than ten miles away from your property, they're not likely to be a good agent for you. I am willing to list properties outside my area, but I am very upfront that it's going to take me a few days to size up the competition and the recent sales before I'm ready for the pricing discussion. An agent from further away who doesn't make a point of telling you this is dangerous to your pocketbook. My website tells people where I make a habit of working, and by extension, where I do not. Theirs should do the same thing. My website also talks about bargain properties in La Mesa and the nearby communities where I work. This is further evidence that I really do work that market.

The pricing discussion is important, and getting it right in the first place will reliably put more money in your pocket sooner than overpricing it. The agents who won't face the uncomfortable task of persuading you to price the property properly in the first place are not agents you will be happy with later. Keep searching until you find an agent who will work for your best interests, even if it risks irritating you.

Caveat Emptor

There are many ways of suckering real estate consumers, and cash as an inducement to get people to swallow a raw deal is one of the most common.

From sellers (usually developers), "free" upgrades are one of the most common. They overprice the property by $50,000, and make you feel like you're getting a deal with "$10,000 worth of free upgrades" that really cost much less. In many cases, they're pre-installed and if you wanted to buy one without the upgrades, they would be unable to accommodate you. But if you're not working with a good buyer's agent who is looking out for your interests, you'll never hear about better properties offered for less.

From agents, they offer commission rebates or reduced price listing packages. But to pretend that these packages offer the same level of service as more expensive packages is ridiculous. If you're looking for a cheap MLS listing service, I've seen them for less than $100. But if you want someone to market your home, look for the buyers you really want, or negotiate on your behalf, you are going to be extremely disappointed. When you are dealing with a strong sellers market like we've had for most of the last decade and don't care if your property sells for the best possible price, discount listing services may be the way to go. If you are dealing with a buyer's market, if you have some issues with the property, if you really want someone to market it in such a way as to find your ideal buyer and get the best price, the more expensive agent who does more work is likely to get you enough more money to more than pay their increased compensation.

Agents who offer a portion of the buyers agents commission back are not likely to be the most active agents out there. They do not typically advise you as to the state of the market and whether there is a better buy out there. They aren't looking for the better bargain, they don't know enough about the state of the market to be strong negotiators, and they're certainly not out scouting properties looking for issues before you make an offer. They do the minimum necessary to get a commission. It is trivial for a more involved agent to get you a better overall bargain.

Some sellers will offer cash back to the buyers. This needs to be distinguished from paying the closing costs you would normally pay as the buyer, which is legal and acceptable, providing it is disclosed to the lender. When the seller offers to put cash back in your pocket, you have the choice of either disclosing it to your lender or not disclosing it. If you don't disclose it to the lender, congratulations! You have just committed fraud, and lenders do get their dander up over it. If you do disclose it to the lender, they will base their loan off (at most) the net sales price, which is the official price minus the rebate. This shoots yourself in the foot other ways, as well, because it will likely increase your tax assessment, and could increase your cost of insurance.

Cash back from a loan provider is most often an intentional distraction, so that they don't have to compete on the real price of the loan. They tell you you're getting $10,000 cash back instead of how much the loan is costing, they can hit you for an extra $2000 in closing cost markups and three points of origination, not to mention that what they are really doing is adding all of that money AND the $10,000 to boot to your balance, where you'll not only owe the money, but pay interest on it for years. Plus it's likely that they stuck you with a higher than market rate of interest as well, because you were distracted by what you thought was free money, so they make more money there, also. Shop your loan by the terms, rate, and total cost to you. All of this can trivially eclipse the $10,000 they put in your pocket - even if they weren't adding it to the balance of the loan.

Offers by a lender to pay your appraisal fees are most often trying to lock up your business from their competition. They're not competitive on price, so they apparently offer you a $400 freebie, while charging you $2000 extra in marked up closing costs, those same three points of origination I talked about, and then they ding you $500 for the appraisal on the final paperwork. This is one of the best ways to get a very high markup on a loan that there is. If you like paying more for a loan than you need to, a "free appraisal" is one of the best ways to go about it.

Finally, this article wouldn't be complete without mentioning several of the ways that quoting low payments for a loan can mess you up. The average consumer may know better in other contexts, but they still shop for real estate loans by which one has the lowest payment. This is basically financial suicide. There are so many loan providers out there pushing negative amortization loans, in which your balance owed increases from month to month in order to allow you to make lower payments, that even when I warn potential wholesalers that I don't want to hear anything about negative amortization loans, at least half of them get themselves thrown out of my office by trying to get me to sell them. They also have higher real interest rates - the price you should pay the most attention to - than many other loans. Right now, you can most likely get a thirty year fixed rate loan at a significantly lower real interest rate than the equivalent cost for a negative amortization loan.

Nor is this the only game played by quoting low payments, merely the most prevalent and most egregious right now. Even if you manage to dodge that bullet with those who quote you low payments in order to sell you a loan (unlikely), there are still all of the standard games that get played with payment. They fudge the math, they "forget" to include the costs in the computations, they pretend you are going to pay the costs of the loan out of pocket when they know good and well that you intend rolling them into the loan, they just lie about their rates and the costs to get them, or, to be able to quote a low payment, they quote you the rate that costs so much that you will never recover the costs of that loan over its entire lifetime. The payment is determined by how much you borrow, at what rate, with what length repayment schedule. The math is the same regardless of the lender. You need $X for the obligations - either the current loan or the purchase. Adding the least cost and being charged the lowest interest rate (always a trade-off between the two) makes for a lower real cost to the loan. Remember, when you refinance, or buy another property, you're paying for your loan rate all over again, so all that money you paid to get a lower rate is gone when you let the lender off the hook by refinancing or selling the property.

Greed is good, Gordon Gecko not withstanding. But let's make it rational greed, because thinking that you are getting a freebie and not asking what it really costs is likely to cost you many times the amount of what you think you're getting for free.

Caveat Emptor

Must you sell if you list at a specific price and the broker comes up with a qualified buyer?

in the US in general, no you do not have to sell, but you could still be liable to the broker for their commission. You might also need to justify why your decision was non-discriminatory (assuming that it wasn't), but if (for instance) your broker brings you someone you have had business dealings with in the past, and they have tried every manouever possible to scam you after reaching agreement in those past dealings, you are (usually) quite justified in refusing to do business with them.

Talk to a lawyer, but generally speaking, if you do not have complete and perfect agreement between the parties on the contract, you do not have a valid purchase contract, and if you didn't want to do business with (say) Bill Clinton or George W. Bush, such is your right as long as you refuse to do so on the basis of them being a particular individual, not based upon them being members of a class protected under anti-discrimination law.

In general, nobody can force you to sell. But it can be expensive not to. I am not familiar with any cases where a real estate agent, listing or buyer's, was awarded a commission even though there was no transaction consummated, but that doesn't mean it couldn't happen. Refusing to sell on the basis of race, sex, religion, sexual orientation, or lifestyle is setting yourself up for a lawsuit.

On the other hand, just because someone offers you full list price does not mean you have to accept it. If the other terms are onerous, if it comes attached with conditions you don't care to accept, or if it is merely from an individual who you have done business with in the past and are unwilling to be involved with again, you are usually within your rights to refuse the offer.

Caveat Emptor

Copyright 2005-2017 Dan Melson. All Rights Reserved

 



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This page is a archive of entries in the Beginner's Information category from June 2008.

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