Intermediate Information: October 2006 Archives

"buyers agent refuses to make offer" was a search hit I got recently. This is yet another reason not to sign exclusive buyer's agent agreements.



My guess is that the CBB is lower than the agent would like. The CBB is the "cooperating brokers" payment - that share of the selling agent's commission that will be paid to another agent who brings in the buyer.



Now, to repeat what I've said before, the listing agreement gives the entire commission to the listing agent if they bring in the buyer themselves, or if the buyer has no agent. But if they want buyer's agents to bring their buyers to this property, or if they want it to sell quickly, they'll make certain the buyer's agents have a good reason to bring the buyers by - in the form of a high CBB. Three percent seems to be average around here now, up from 2.5 about a year ago, and properties that want to sell go higher. Even the discount brokers that will settle for 1% to list (or a flat fee) will tell you to offer at least three to a prospective buyer's agent. It's not mandatory, of course. But it does work to sell the property.



Now, the default buyer's agent contracts (exclusive and non-exclusive) in my area specify a 2% commission from the buyer to the agent but state that any commission paid by the seller is to be used to offset this first. What this means is that as long as the agent finds you a property paying at least 2 percent to buyer's agents (CBB) the buyer pays zero. See Buyer's Agents: What Do They Do? for more information. (If they don't find you a property, no commission or other obligation is incurred)



Now my attitude is that as long as my buyer isn't going to have to come up with cash out of pocket for my commission, I want to move from "looking" to "negotiation". Because my contract with the buyer is non-exclusive, they are free to look elsewhere, and with other agents, cutting me out of the process entirely if I don't perform. Therefore, my motivation is to find them the property they want, and get the transaction moving. This isn't particularly virtuous on my part; That's where the incentives are. I haven't seen a CBB lower than 2 percent ever, that I can recall, except for a few greedy, almost always drastically overpriced FSBOs.



Suppose, however, Joe Realtor has your signature on an exclusive buyer's agreement. Now he's got your business locked up for six months or a year, no matter what. You can't buy anything without Joe getting paid. This creates a different incentive. Now Joe can pick and choose what properties he wants you to see, what properties he wants you to make an offer on. If you don't like his work, you are still stuck with him until the agreement runs out. If you go elsewhere and buy a property, Joe still gets paid, without really doing anything. If Joe gets two and The Other Guy gets two, and the CBB is only three, that's one percent you've got to pay out of your pocket at a minimum. Maybe two percent, because The Other Guy is going to take the viewpoint that he did the work for that property, and is entitled to the full commission. When lawyers get involved, you never know how it'll end up. My only advice to to heed Sancho Panza's words of wisdom, "Whether the pitcher hits the stone or the stone hits the pitcher, it's going to be bad for the pitcher." The legal system makes a pretty good substitute for the stone.



So Joe Realtor thinks he's got your transaction locked up with an exclusive agreement. So he's thinking of this transaction as being in the bag, and he wants to make it as large as possible in his favor. So if the CBB is listed as 2.5, or even 2, he isn't interested. He wants three at least, more if he can swing it. He also wants the transaction to be as large as possible, by the way, and if he can think of a way to talk you into a property where the only way you can qualify is a stated income negative amortization loan, boy has Joe got a paycheck coming!



Now it happens that flatly refusing to make an offer is one of the ways to potentially break an exclusive agency agreement (the relevant legal stuff varies). On the other hand, Joe's not going to let you go willingly. By the time you've spent fourteen months in court and thousands of dollars for your lawyer, you will probably wish you hadn't, particularly when it turns out that your claim is a "he said this, the other guy said that," case, as you have no documentation. Better to just wait until any claim Joe may have is moot. Better still not to sign the exclusive agreement in the first place.



Now, if you're a seller wanting to make the best possible profit, you might want a listing contract which gives more than half of the overall commission to the buyer's agent. The larger their commission, the more buyer's agents you attract, and therefore, the more buyers. It's a "catch more flies with honey" sort of thing. Mind you, the listing agents will resist this, but until you sign their contract (which has to be exclusive, by the nature of things, at least for a given property), you are the one who holds the power to control the transaction by walking out. Don't stint the listing agent, as they're the professionals who you're counting on to help you out in marketing and negotiation. But giving incentives for buyer's agents to bring buyers to your property, instead of the one two streets over, is typically money better spent in all but the strongest of seller's markets.



Caveat Emptor.

One of the most common things I'm seeing as I roam about the East County looking for bargains: Agents not doing their jobs.



Now single family detached homes that are priced appropriately are selling, and for appropriate prices, even at 37 sellers per buyer. Condominiums aren't moving unless they are brand new with lots of glitter, but appropriately priced detached homes are selling. I can find all of the evidence of this you would care to see, because I've already seen it. Willing buyers and willing sellers. It's just that what an appropriate price is has shifted.



Let's change mental gears here for a moment. Here's the real differences between sellers markets and buyers market: Competition. Specifically, which side of the sale is competing. In seller's markets, which is the mindset most sellers and most listing agents are still in, buyers are competing to buy the properties that are for sale. Because of this it is the buyers who have to compete to look attractive - highest offer, quickest offer, fewest contingencies. They have to offer more money or a bigger deposit or something else that the seller needs and nobody else wants to do. With the buyers market we have now, it's the sellers who have to compete, and most of them are not doing it very well.



I want to make very clear that sellers are always competing against other sellers, even in the strongest seller's market possible. But in a buyer's market, it's not enough to have your property "out there." In a seller's market, the prices will often catch up to unrealistic asking prices, given time. In a buyer's market, prices are not increasing, and in this strong of a buyer's market, they are going down. In other words, the longer it takes, the worse you look. You have to have some stand out aspect to your property. It can be physical attractiveness, or it can be low price. Price will get buyers in the door, but it takes a strong agent to sell a fixer to the average buyer, no matter how attractively priced, because the scumbag with the office down the street will show them something a more attractive that they really cannot afford, but with a negative amortization loan, done stated income, they can make it look like they can afford the payments, and a buyer who hasn't had this explained to them ahead of time will think they've just gotten the Taj Mahal for the price of a dirt floor shack, except of course, they haven't. And the other way to stand out is to be priced the same, but more attractive. Don't tell buyers you'll give them a carpet allowance, replace the carpet. Don't tell buyers that all they have to do is spend two months and $20,000 fixing it and they'll have a property worth $20,000 more. That won't wash in a buyer's market, if it ever does. The party who does the work, even of engaging a contractor, gets the payoff. Why should your buyers take the risk and do all that work and spend $20,000 cash that most buyers don't have (and cannot be part of the purchase money loan) when they can go down the street and find all of that work already done for maybe $10,000 more - or even the same price? I assure you it's happening all over San Diego County right now. Some seller just out-competed you for that buyer's business. The only good news for sellers is that most of your competition isn't trying very hard yet, so small bits of competition can look very attractive.



Even lenders are still in denial for their owned properties, and they are the ones with the hardest issues of all. They must get rid of the property. They don't have any choice. Even if it was in the same shape as surrounding properties - which it rarely is - they have a deadline to get rid of that property, and everyone knows it. They also have other constraints that other sellers do not. These make the property worth less, as they rule out certain buyers and make others less willing. In a buyer's market, every buyer counts. I had two clients putting in offers on different lender owned fixers in the last two weeks. One might comp out at the asking price of $450,000 if it wasn't lender owned - which automatically makes it worth about ten percent less than the comps. Add the fact that it's an ugly fixer that would be worth maybe $400,000 at most if it wasn't lender owned, and they will be extremely lucky to see $360,000 out of it. Not supposition, not guesswork, fact. The fact is that there's a beautiful owner occupied comparable on the same block asking $459,000. It's even a bit larger. There is no doubt in my mind whatsoever that the beautiful comparable would take $450,000. Actually, I just checked again and the beautiful comparable is in escrow now. One owner that competed well, one that is not competing well. I told the agent for the lender's fixer this, and she said, "I've been in this business forty years and I know what I can get for that property!" I offered to bet her $10 she couldn't close escrow on it within ninety days for over $390,000 net - essentially a zero risk bet from my point of view. From hers also, if she thought the property was really worth more. She wouldn't take me up on it. Furthermore, she's violating her fiduciary duty by not explaining this to her client. Doesn't matter how long she's been in the business. What matters is whether she reacts well to this market.



About five miles away, another lender owned fixer asking $480,000 because that's what the lender is on the hook for. And you know, it is a better neighborhood. Unfortunately for them, just because you were silly enough to lend them that much two years ago when the market was peaking doesn't mean someone else will pay you that much for it now when the market is in the tank. What matters is the comparable properties, and there's one just around the corner that anyone would rather have listing for $470,000. Above par house for a below par price. Hasn't gone into escrow yet, but it will go fairly soon, unless someone else lists a better property cheaper, and they might even get a little bit of a bidding feud on it, despite the strong buyer's market. This lender owned fixer is in rotten shape and has several issues that turn the average buyer off. I initially thought my client's offer was lower than it should have been, but the more I thought about, the more I think my client came closer to the mark than I did initially. Horrible floor plan, necessitating major work to make it attractive. Yard not suitable for children, despite the fact that there's a school on the same block that the agent is using as a "come-on". These people will be lucky to get anything over $350,000 for it, but the agent sent me a blanket, "Anything less than $400,000 will be rejected without counter," despite the fact that I explained how much work it will be to bring it up to the neighborhood standard. I left her some messages, and she didn't respond. The implication to me was clear: She is in denial, and doesn't want to hear plain facts explained. She's got dozens of REO listings - maybe because she was a great bargainer in seller's markets, maybe because she knows someone, maybe some other unknown factor. She's not dealing well with this market. I don't know if she doesn't know market conditions or just acts like she doesn't. If nobody puts an offer in good enough to get past the blanket rejection, it doesn't make much difference, does it?



This the times when good listing agents really earn their money, as the gentleman listing the $470,000 comparable is. It may not be the great publicity of getting the highest price ever in the neighborhood, but getting it sold quick and for something like asking price in this market is a real achievement. Especially with as many distress situations as are out there - people that have to sell, for one reason or another. (I'm doing very well for my buyer clients, but it's depth-charging fish in a barrel. You really find out how good someone is when the market favors the other side of the transaction.) There are dozens of FSBO and discounter listed properties in the neighborhood, sitting on the market for months. The last six months of Canceled, Withdrawn, and especially the Expired sections of MLS have all that and more, but that one property is going to sell quickly, and sell for a good price. That agent has already earned every penny he will get paid, and it isn't even in escrow yet.



The person who "buys" listings, telling the people that they can get them more money than anyone else, more money than the market will support, had a nice long run. When prices are moving up strongly and there aren't many houses to be had and everyone wants one, well a monkey could sell that house at that price given enough time, because given a few months the market will catch up to all but the most egregious of overpricing.



That is not the way things are now. Buyers have all the power, and they know it, because buyer's specialists like me have told them if nothing else. Inventory is over nine months worth of sales at the current pace, more properties are coming on the market and the worst time of year for sales is approaching. Given these facts, What do you think is going to happen? Where do you think the market is headed, at least in the short term?



(and incidentally, what kind of bargains do you think those few buyers willing to get off the sidelines can drive?)



The longer listing agents wait to talk some sense into their sellers, the worse it's going to be. The more days on market, the further the market falls, the more the sellers will have to move to meet it - and the more unhappy they will be with their listing agents. The agents I respect will refuse a listing rather than ask for a price they aren't going to get except by freak coincidence. They get the same no transaction either way, but if they refuse the listing, they haven't created unreasonable expectations, they haven't failed to live up to those expectations, and neither party has wasted months finding out what that agent should have known in the first place.



Now, I've seen agents telling people that because interest rates have stabilized or even moved down, that will revive the market. This is complete and utter nonsense. I initially wrote something stronger, but my internal censor really wants to keep this family friendly. Yes, payments drive the market - when it's a seller's market. Buyer's markets are driven by the bottom line, because there are lots of sellers and only a few buyers and if this seller won't cut them a deal, the one down the block who is a little more motivated will. When every listing gets three offers within a week and buyers are getting desperate, they'll bite off on another $1000, $5000, or $10000 because "It's only $10 (or $50 or $100) more on the payment. They shouldn't, but they will. When buyers have the power and they know it, they'll tell the sellers to pay that $10 per month, because they're not paying the extra in the first place. It is the sign of someone who does not understand supply and demand to think otherwise, and I certainly wouldn't want that sort of numbwit as my agent. Your agent is your expert. If they are not an expert, why are you hiring them?



Now, looking forward. What's going to break the logjam and get the market moving? Well, absent sudden 25% inflation or something else equally unlikely, the current market has the effect of adding to inventory while those who can afford not to sell drop off. We've had over a year of this now, and a lot of would be sellers have discovered that they don't have to sell. They can stay in the home, or they can rent it out or let some family members use it. The ones left are looking an awful lot like a listing interview I helped another agent with today. Negative Amortization loan, darned near a $4500 real monthly cash flow requirement, equity all gone, and they comparable rentals are all around $1800 per month. There is no way on earth these people are coming away with any money, and the longer it goes the worse it will get, but he said another agent told him they could get an amount that's at least $60,000 over market, just by comparable listing prices, never mind what they're actually going to get an offer for. No, he didn't sign up with us, quite predictably. He's been told what he wants to believe, and this other agent is going to put him another $10,000 or $20,000 in the hole, and nobody would be happier than me if that other agent had a liability for what they're going to do to this client.



So with more people that have stronger reasons to sell, very large inventory with more coming onto the market, and buyers quite aware that they have a level of power they haven't seen in over a decade, what's going to have to happen in order to change this? Basically, that inventory is going to have to clear. It can go one of three ways: the owner finds an acceptable alternative (increasingly unlikely), the owner decides to get serious about competing for a buyer's business, or the lender takes it over. I've mentioned that the lenders are evidently still in denial, but they have legal requirements to dispose of those properties within a certain amount of time. The closer they get to that time expiring, the more desperate they'll get. Once the regulators climb onto that lender's back, they don't climb off cheaply, nor easily. Quite frankly, if I were a major lender, I'd take the entire thing as a write off if someone offered me a dollar any time in the last week, and I think some lender's listing agents are going to have rude awakenings before this is all over. I'm strongly considering sending my agent's resume out to some lenders. But my real point is this: Sellers can compete on the individual level any time they want to, and the sooner they want to, the better off that individual is likely to be. Eventually, the seller's aggregate is going to have to compete much harder for the business of the buyers that are out there, and for the buyers they want to lure off the sidelines. It took a long time to sink in, but the fact has sunken in to prospective buyers that the market got overextended. You can ameliorate your expectations and come out as well as possible, you can hope for the bigger fool of a bygone day, or you can take it off the market, if you have a sustainable situation. There aren't a lot of sellers with sustainable situations out there right now.



Now, one word about rapacious buyers before I go. I know I've said you've got the power. But if you or your agent has done your homework, when you settle upon a property that you're going to make an offer on, that usually means it's more attractive to you for the money than anything else. There is a strong temptation, given the current market, to low-ball just a little too hard. Don't do it. Everything I've said about unrealistic sellers ending up with no transaction applies to you also, albeit less strongly. There is a point below which every seller out there will tell you to take a hike, no matter how desperate they are. If they owe $350,000 altogether on a $450,000 property, sure, they could it to you and be out from under at $350,000, but the vast majority of folks will see that you want every last penny of the equity they thought they had, and they're going to tell you to do something rude, vulgar, and otherwise unprintable in a family friendly format. They will lose the house outright, and take major long term hits to their credit, before they do that. In this case, you end up with what the unrealistic seller gets: Nothing. Exactly how much should you bid? Ah, that's part of the Art of Buyer's Agent-Fu. In other words, it varies, and it takes more information - sometimes a lot more information - before I can give a good answer in a specific situation. The answer is never guaranteed, which is why it's an art, not a science. But I can guarantee you'll find out about the downsides of poisoning the well in this fashion if you step over that ill-defined line.





Caveat Emptor.

Well, sometimes. Okay, most of the time. But not always.



Foreclosures: Bargain hunters beware!

Myth no. 1: A big spike in foreclosures is right around the corner...



...That's because in most of the country, anyone who has owned a home for even a year or two is likely sitting on enough equity to sell or refinance if the loan payments become unaffordable.

Used to be true. Not so much any more. When prices are going up 20% per year, this is true. When prices have slid about 10 percent since last year locally, anybody who bought for peak or near peak prices is in trouble, not to mention the folks in negative amortization loans that got into a situation where they can't afford the real payment, and now they owe thousands of dollars more than they paid. Nonetheless (as the article mentions) the banks want the loan repaid. They don't want to own the house. A "hard money" lender will foreclose fast and hard, but a regulated lender wants the loan repaid, and they'll pretty much take a loss anytime they foreclose, and it's always bad business, because it's always someone who won't use that bank, and who tells all their friends and family. The bank isn't going to have a representative there to tell their side of the story, so no matter how justified they were in foreclosing, it's bad for business. They will put it off as long as they possibly can.



It can take a couple of years after payments start being a problem before the lender decides to cut their losses and foreclose. Sometimes the individuals concerned go to heroic lengths to stay out of foreclosure, drawing out all their savings, even their retirements to meet the payment. They are usually ill-advised to do so; nonetheless I understand the emotional attachment that occurs. The peak for foreclosure is usually somewhere around the fourth year of the loan. Foreclosures are up now, locally, but look for them to start going up further at the end of 2007, as the option ARMs really took off in 2004.

Myth no. 2: Foreclosed houses sell for far less than their market value.



In a study of foreclosure sale prices in more than 600 counties nationwide in 2005, Christopher Cagan of data provider First American Real Estate Solutions found that, on average, foreclosed properties sold for about 15 percent less than comparable homes in the area that were not distressed. But in states where real estate prices have risen the most, including Arizona, California and Virginia, foreclosed properties sold for within 5 percent of full market value.

This is true. Furthermore, many foreclosure homes have maintenance and repair issues. If I can save my several tens of thousand dollars of equity by fixing the property up a little bit and cutting the price a little in order to sell it before foreclosure, I'll do it. On the other hand, if I bought it for $500,000 with a 5% down payment on a negative amortization loan, and now it's only worth $420,000, my investment is long gone, and any work I do and any money I spend is helping nobody but the bank. Some people may strip the copper out of the walls for scrap (I've seen what one such person left behind). Some people may even take a sledgehammer and break things in one last act of spite.



In highly appreciated areas, the auction is usually the worst time to buy. Get them from the owners before the lenders pile on all the default and foreclosure fees, while there is still something to save for the owner, equity-wise. Get them from the lenders as REOs after they fail to sell at auction. Depending upon who forecloses, that can wipe out entire trust deeds. For instance, if there's a first and a second on the property, and the first forecloses, that second is gone. Dust. History. Worthless paper with unimportant markings, basically good for fire starter. If it originally sold for $500,000, and there's a $400,000 first and a $75,000 second, but the property is only worth $420,000 now, that second holder is crazy if they show up to the auction to defend it, especially since the holder of the first has added thousands of dollars in fees, every penny of which gets paid before the second gets a penny. The second is unlikely to get a penny, and bidding on it is throwing good money after bad. It's a waste of an employee's time, if nothing else. For buyers at auction, there's a key phrase to remember: cash or the equivalent. You don't win the auction and then arrange financing; you have to have that first. This doesn't apply to sales before and after the auction. Nor does California's ninety percent rule.



Now, you are not (if you're smart) buying at auction sight unseen. You can usually make an appointment to see the property in the days before the auction. You should also look at other properties in the area. Know the market before you bid. Know what you intend to do with the property, know how much it's going to cost. Depending upon the law where you are, there may be a building inspection required, or perhaps you can take an inspector with you. This costs money, so you may want to preview once before you haul the inspector out there. Do your homework before you toss your money into the ring. That's what the people who make money at foreclosure auctions do. It's practically a full time job if you want to do well, and if you're not doing it all the time, a good agent is a lifesaver. Every situation is different, and it takes a certain amount of experience to know the best way to approach buying a given distressed property. You're competing with people who do this full time for a living. Ask yourself questions like "Why should I be willing to pay more for this property than Joe, who's been doing this for twenty years?" Auctions get crazy and emotional. If you have someone there to help take the emotion out of it, you are less likely to waste large sums of money. If you have someone there to help point out the pitfalls, yu've probably just saved yourself every penny of their commission and thousands of dollars more besides. So long as they do what they say they will, of course.



Caveat Emptor.