Intermediate Information: October 2007 Archives

I want to sell my home for sale by owner. Is 1.5% a good amount to co-broke? Or will agents avoid me?

In most of the country, this is a buyer's market right now. You need to compete more strongly for that buyer's business than anyone else in order to win the sale.

When I'm working with a buyer, the contract says that I get a certain percentage. So it doesn't matter what your co-broke (aka CBB, paid to a buyer's agent by the listing agent or seller) is to me. If you don't pay it, my buyers will. Furthermore, my contract is non-exclusive, so I have incentive to get them into whatever property is going to make them happiest, as soon as possible. If I won't (or can't) do it, somebody else will, and that's how it should be, so if your property really is the best property for that client, the low co-broke won't stop me. As I said, I get my minimum percentage from any property I help the client with. Better the minimum off yours than nothing when somebody else turns them onto yours.

Even to agents in situations comparable to mine, however, a low CBB like that is very indicative of an owner who is overly greedy, has over-priced the property, and won't negotiate it down to anything reasonable. I've seen this at least dozens of times, probably hundreds. No exceptions to this rule yet. Better I just don't waste my time or worse, that of my clients.

This is on top of the constant issues of dealing with a For Sale By Owner (FSBO), 99% plus of whom want me to act as their agent. or at least do the work of their agent and assume that liability, as well as the buyers'. Well, I don't do dual agency anyway, and I certainly don't do it unpaid, and because there's nobody with E&O insurance on the other side of the equation, I can do all of my due diligence and then some, but because the seller lies, I still end up sued by an unhappy buyer because I'm the only one involved they can get money from. FSBOs have literally 100 times the disclosure problems agent represented properties do. Trying to persuade owners who think they did everything they need to by putting a sign in the yard to fulfill the rest of their legal obligations is a painful process, and getting them to negotiate in good faith is chancy. I've had - and heard from other agents - more "chiseler" episodes from trying to buy a FSBO property. The probability of dealing with the "chiseler" goes up by at least a factor of 10 for all FSBO properties. And if you think I don't cover this with my clients, you're wrong. It's part of my job to let them know the risks of what they might be getting into, before they're in the middle of them. A good percentage of all clients comes straight out and tells me that they don't want to consider FSBOs once I've explained the facts.

Yes, a lot of this is "guilt by association" type judgments. Nonetheless, it's how you are asking people to view you. People who hang out with outlaw biker gangs are presumed to be outlaw bikers. Doesn't matter if you wear a suit and tie and a $400 haircut have a nice genteel manner. You're an outlaw biker gang member, and until and unless people get to know you as an individual, that's the perception you're going to have to live with. (Lest my meaning be mistaken, I'm pulling a hypothetical example. I don't think I've ever actually met or seen an outlaw biker gang. There was a large biker club seated next to us at a restaurant a couple weeks ago. Their clothes and haircut were a little out of the ordinary, but they were mostly like other folks. Had a great conversation about our respective kids with one couple). I'd like to have the time to individually know all of the properties available well enough to discard guilt by association, but there aren't enough hours in the day.

Finally, if my buyer's cash is a little tight in the first place, and buyer cash to close is the number one obstacle to a successful transaction, the fact that they're going to have to come up with that money out of their pocket can be a deal-killer right there. It's a "lose your license" offense for agents to attempt to negotiate a higher CBB at point of offer in my state. Agents do it anyway, but I have zero sympathy for them when they get caught. But having to come up with that extra amount of cash can drive my buyers below a breakpoint on the loan, and possibly even torpedo the loan altogether, which means it's significantly harder to convince myself your property is the best one for the client.

One more thing: For agents who get exclusive buyer's agency agreements, as opposed to the non-exclusive ones I work with, your property is not a contender. Period, end of sentence. You're making them work too hard, plus they want the highest CBB they can get, and they get paid no matter who helps the buyers buy, and they have enough control to make it very difficult for a buyer to go to a place with a low CBB. Not to mention that their usual CBB is higher and this means yet more difference between what you're paying and what their contract calls for, meaning that even if their client should somehow find your property, and love it, the cash to close issue is going to make it very difficult for them to do business with you.

So you make the call:

Buyer's market, you have to make your property look more attractive than anyone else's to even attract attention. Price, condition, location - you've got to have something that stands out above the market to attract an offer in the first place, and the others have to be competitive as well..

Add the fact that a low CBB tells experienced buyer's agents that you're someone to stay away from

Add all of the FSBO issues, and there's a lot of them. They're not minor from the agent's perspective, and they're even worse from an informed buyer's.

Then top it off with hitting the buyer's cash to close, potentially killing a viable deal, and both the buyer and their agent want to know why they should bother with your property, as opposed to the one across the street, with a CBB that pays the buyer's agent what they've got coming without the buyer having to come up with cash, with an agent on the other side who at least might know your market and price it correctly, and is unlikely to try to deceive my client by not disclosing known issues, and is going to get all of the work done in a timely fashion without me having to work them over, because they want to get paid too, and they don't want this transaction coming back to bite them any more than I do.

Which one do you think buyers and their agents are going to find more attractive? Even if they're equivalent properties priced the same?

Caveat Emptor

I am buying a home, but the contract said they wont sell the oil rights, what does this means? should I buy

That was J Paul Getty's great contribution to real estate, and why he got so rich. He retained the mineral rights on every parcel he sold, and it has become standard practice in the industry nationwide, if not worldwide, with respect to most property. Such rights typically pass without any rights of ingress (meaning they can't enter your property), but it typically isn't difficult for the holders to buy rights of ingress from someone in the area. This means they can't sink a mine shaft on your property unless you sell them the rights to do so. It is to to be noted that you're not likely to be real happy if one of your neighbors sells them access, either, but you can't control that directly. Zoning boards and conditional use permits and all of that, not to mention the courts. I'm neither a lawyer nor any kind of elected official so I am not going there.

Odds are that the person selling you the property does not, themselves, own the mineral rights. Most developers have bought the property without mineral rights attached, or if they did buy them, they have most likely long since sold them to some speculator. Even if you buy from a developer, they probably don't own the mineral rights any more, let alone the property's post developer homeowners, who didn't buy them in the first place. Since they can't sell what they don't own, that's what the contract is going to say, period. If you want a parcel with mineral rights, look elsewhere. If you want a place to live, all it means is that the chances of you getting a mineral windfall change from remote to zero.

Caveat Emptor

I am about to close on a condo unit. At the last minute, we received the resale document from the management company. All units are being assessed a one time charge of $3000 due in full Nov. 1 for roof repairs needed. I have not closed yet, but we are in contract. Who is responsible to pay this assessment? The current owners (sellers) or me, the buyer? I do not want to pay for this assessment as I am not the unit owner at the time this special assessment was placed.

This is a good question, and applies not only to HOA assessments, but property taxes, etcetera. The owner of record as of the assessment date is responsible.

However, assessments of this size generally have to approved by the association at large, so there was almost certainly a vote of the owners, so they knew about the assessment, and it should have been disclosed to you. Even if the owners at large didn't vote, it shows up in the minutes of the board, which the board is required to inform the owners of. The current owner knew, or should have known, and kept it to themselves in violation of the law. Most states treat this as fraud on the current owner's part (talk to a lawyer in yours). One more issue is why did the condo certification not show this assessment?

As for you reaping the benefits, that would be the case if they paid it now and you bought the day after. Tough cookies for them. It's part of owning communal property.

If they had disclosed this like they should have, it's likely you would have negotiated something as part of the purchase contract. As it is, you now have them in a hammerlock, because even if the assessment is due after the contracted closing date, their failure to disclose does mean that a reasonable person might not have entered into the contract you did. Even if it's not criminal fraud, it is a legal tort, and you're likely to recover legal fees and maybe damages if you sue (again, talk to a lawyer before you draw any lines in the sand). If they're smart, they'll pay the assessment out of sale proceeds and save themselves all that. On the other hand, if they were smart, they wouldn't be in this predicament, would they?

You probably have the option of bailing out, as well, even if the contingencies have all expired. Of course, all of the standard warnings about your deposit apply. Just because it falls out of escrow doesn't mean the escrow company will return the deposit. The other side has to agree, or you've got to get a judgment. Again, they're likely to end up responsible for your legal fees as well as their own and not getting the deposit anyway, so it would be smart for them to just agree. Unfortunately, all too many people aren't smart - they're hoping to scam something. The vast majority of the time, it costs them more than they might possibly have scammed even if they were successful.

One more thing: Your buyer's agent should have covered all this. If you decide to bail out of this transaction, fire them. If you've been using the listing agent as a Dual agent handling both sides of the transaction, you've just had a practical demonstration in one of the hundreds of reasons why that is a very bad idea. Go get yourself a Buyer's Agent that is going to work on your behalf.

Caveat Emptor

This has been knocking around my head for a while, and I've written on closely related subjects before. But the idea behind this essay really just gelled in my mind within the past couple days.

Here are the facts of the situation, whether you're talking about San Diego or Manhattan, the Bay Area, Los Angeles, or any of the other densely packed, high cost areas where all the employment and career opportunities are.

Fact 1: Land is expensive. The cheapest unimproved little 8000 square foot irregular lots in the area I work most - no tests done, no utilities on the lot, even though they may be close, no permits whatsoever and zoning R1 at best - run just under $200,000. Matter of fact, I consider that one basically unsuitable for housing due to the freeway that runs through where the back yard would be. Here's the worse news: Prices are going to get higher. They're not making any more land. Demand is increasing. More people want to live in those high density areas every year. More businesses want to open. Not far from my office, there's a 9500 square foot R1 lot someone is buying for about $250,000 with a condemned residence on it. He's going to have to scrape it himself, and assume all risk of the city issuing the permits for new construction, and he was glad to get it, even though he knows the soil needs to be repacked also. (Manhattanites may jeer at the low price if they'd like - for now). Land is a scarce good in high density areas - the very places where everyone wants to live, needs to live, because they have to live within commuting distance of their career. Lots like this are where we're going to get buildable lots in the future, and usually, those purchasing them are going to pay for the single family residence that happens to sit on it now. There. Is. No. More. Dirt.

Land with residential structures, specifically, 8000 square foot lots that happen to have one residential structure are equally costly, in and of themselves, as the 8000 square foot lot next door which happens to have six residential structures, Or a commercial warehouse, manufacturing facility, office building, etcetera. They use the same amount of area on the earth's surface. With the exception of location and the soil that happens to be there, everything else that's been done to that land is completely artificial. This starts with the utilities that may or may not be there, extends through zoning and conditional use permits, and arrives at specific structures that may be in existence. All artificial. Absolutely nothing to do with any natural virtue of one parcel over another.

The first statistic I find says that cost of construction per square foot is roughly $150, while commercial buildings sell for roughly $300 per square foot locally. So, you can pay $200,000 for that lot, build one fifteen hundred square foot building, and sell for roughly $450,000, having made $25,000 net (450-225-200), and that's providing there's no existing structure. Or you can build six twelve hundred square foot two story buildings (or six one story units, three upstairs and three down), still have space for some kind of communal outdoor area, sell for $360,000 each, and make $2,160,000, leaving $880,000 net, still maybe $600,000 if you had to pay for the single family residence that used to be on it as well. I'm intentionally neglecting transaction costs, by the way, which swing the figures even more decisively in favor of the high density alternative. Question: Under which of these two scenarios is it more likely that they'll cut the price? Under which is it more likely they'll raise it? Question: Even if the price isn't cut, which of these two alternatives can more people afford? Which is a more efficient use of the land? Which ends up giving the better return on investment, indicating that more of them will be built? There's hardly an infinite supply of either, but which is likely to remain more affordable, as builders build more and more of them in relation to the alternative? Shared lots, particularly when paired with communal outdoor areas, make a whole lot more economic sense than single family residences, they will always be more plentifully available, and the more demand is placed upon a given amount of land, in the form of people wanting to live, work, and play there, the more strongly the economics will favor shared lots. New Yorkers have been used to this for decades. Now, some other areas of the country are becoming just as solidly built upon, if not yet nearly to the depth Manhattan has seen. In fact, by the standards of most cities worldwide, Manhattan isn't particularly dense. Many affluent old world cities have it beat like an dirty old rug when it comes to density per square mile. It's just that it seems dense by comparison with the rest of the US, where we have long been accustomed to lebensraum.

Corollary: The closer to commercial and recreational opportunities a particular parcel is, the more desirable it is. For those skimming this in their sleep, this means the price of that land is raised by people competing more strongly for it. This is one of those things everybody knows (ask people whether the lot by the beach is more expensive than the one twenty miles inland), but few people stop to think about all of the implications. The closer you want to live to the commercial zones, the closer you need to live to all the commercial zones, the more valuable the underlying land is and the more likely it will have some sort of communal lot arrangement. It doesn't matter if you don't drive, can't afford a car, or what, any more than nature cares how badly you want to fly in applying the force of gravity to you. It's nothing personal, any more than the saber tooth picking out one of our ancestors for dinner was after payback, movies or no. It's just a fact of the universe, and the fact that it's economics, measured in dollars, does not make it any more mutable than if we were talking about the thrust of the rocket, measured in Newtons.

For those reading this whose response to the above is governmental in nature, you cannot mandate the building of more affordable detached single family residences. The economics is not there to support it. Developers will build what can make them a profit. They won't build what won't make them a profit. Putting up regulatory hurdles only makes the affordability threshold rise further. You can have the city, the state, the federal government subsidize people into them, but that amounts to giving a band-aid to a decapitated body, economically, because the number of people who can be thusly accommodated is microscopic as compared to the number of people there are who can't afford where prices are now, let alone where they are going if you try this route. Furthermore, limitations on the benefits when these people sell such units short-circuits all of the economic reasons why people should get into home-ownership. It amounts to creating, not a class of homeowners, but a class of privileged renters! It's not even permanently privileged renters. Those of these I've been involved in have clauses where if the bureaucratic or political masters can manufacture a reason, you can be dispossessed. If there are no such restrictions on the sale of the unit, then the lucky recipients get a windfall at the expense of taxpayers and/or everyone else who buys within the development! Kind of like forcing taxpayers to buy hundreds or thousands of dollars worth of lottery tickets per year at the point of a gun, with the suckers getting about their current fifty cents per dollar back, only in the form of real estate rather than cash to those few lucky winners. Except, such winners won't be random. It's like if the bureaucrats and politicians could pick the lottery winners. But I digress.

My point is this: in high density areas, single family detached homes are going to get less and less affordable from this point on. So, for that matter, is everything else. Go back to supply and demand. Demand, which is to say, population of people who want to live there, is increasing. Supply is constant. If I have three apples to sell, and there's only two people who want one, the price is very low. If I have three apples to sell, and there's three hundred people who want one, I set up an auction and the three people willing and able to pay the highest prices get apples, while I get a lot more money than the first case. Same principle with real estate. It doesn't matter that the other 297 people can't afford it. It matters only at which point that 297th person drops out of bidding, leaving the remaining three winners.

(Some people are going to note that we have to put those 297 people somewhere, which is true, but that's not the concern I'm addressing here, although I will state we can plan to do so in a way that's economically logical, or it will happen anyway, no matter what the law and the planning commissions may say. The first way will be a lot more pleasant for everybody.)

If you're in a high density area, you can leave or stay. If you are able to leave, as for instance, retirees can, you're not who I'm planning for here. If you're one of those few who are sufficiently affluent to be able to afford whatever the economic costs are, you don't really care. Real Estate is still going to be every bit as fantastic an investment as it has always been. In fact, the higher the demand goes, the better the investment it's going to be. Real Estate does not increase, over the long term, at the same rate as wages. It increases at that rate plus an additional factor to reflect increasing demand in a constant supply market.

Suppose in my previous example, that I have some magical way to convert one apple into ten oranges? Persons 288 through 297 get together and outbid number 298. They can't have an apple. They decide, however, that it they can't have an apple, they do want an orange and are willing to pay for it. Between them, they outbid person number 298 for that third apple, and have me convert it into ten oranges so that they each can have one. I make more money, and persons 288 through 297 are happy, also. The only person who's unhappy is person 298, who then decides that if he can't have that apple, either, he at least wants an orange, and so he goes and trades some of his money to person number 288, who, if he doesn't have an orange after he makes the deal, does have more money than he started with, assuming it's a willing sale. So now I'm not the only person who has made a profit. Person 288 has also made one. Similarly, person 299, who observed person 298's experience, and still has his apple, voluntarily decides he wants to convert his apple into ten oranges, and offers me something I want in exchange for doing so (remember, I'm the one with the magic trick, aka the construction industry). Person 299 now has ten oranges, and proceeds to sell them to persons 279 to 288. This nets him enough to buy the remaining apple from person 300, who goes and buys person 279's orange with some of the proceeds, while person 299 decides that at this point he's happy and wants to keep this apple for themselves. Look at all of the people who made a profit and came out ahead because I could convert one apple (detached single family residence) into ten oranges (condominiums). Every single choice of every participant here was purely voluntary, and would not have been made if the recipient had not been made happier thereby. Note also, that there's eighteen people who have a place to live, where they would have been homeless if I (the construction industry) couldn't convert apples into oranges. These are all cold hard facts.

Like it or not, Manhattan and the surrounding area represent the way that other high density areas in this country are going to go. Let's leave all the non-essential stuff out of this, and consider only the economics. When the cost of land is high because there's a fixed amount, the only way you can create more space is along the vertical axis. You can go down, or you can go up. You can put multiple units on the same space where there was one. You can stack them fifty high or more. In any of these cases, it's no longer single family detached housing. The better you plan for your city's density, the more of your citizens have a home and the fewer that go homeless or have to relocate. My transform apples into oranges ability in the example above raised the number of people who are able to afford housing by a factor of 7, but that's hardly the maximum possible.

If you don't have the money for an apple - single family residence - now, it's going to take some kind of major change in your circumstances to enable you to afford one. Get your law license, your medical license, win the lottery, make several million dollars in business, get a professional sports contract, something. Your circumstances are not going to change by magic. If you're a shoe salesman, even if you're making $20 per hour, and you're not doing something to change that, it's not likely to happen on its own. Matter of fact, it's going to keep getting more difficult. Right now there's 300 people who want to live in your area. What happens to the price when there's 500? A thousand? Ten thousand? This is an easy answer, straight from the pages of your first economics lesson. The price goes up, and not just in relative but in absolute terms.

If you don't have the money for an apple - single family residence - now, you can choose one of two options. You can decide not to play. Stay a renter forever, or at least until you realize what a mistake it is. Rents go up, and landlords have to pay mortgages and property taxes also. They can also decide to stop playing the landlord game and sell for what they can get at any time. I've heard from a lot of bitter renters who were displaced when their former landlords decided to take the money and run when the market was hot. Furthermore, the rental market is going to keep getting more expensive as the population, and therefore demand, increases also. Right at this moment, there's even more upwards pressure on the rental market as people who lost their properties through foreclosure need a place to stay. The vacancy rate locally was 2.6% in the middle of last month. There is no way around one cold hard truth: Renting leaves decisions about your future in the hands of others, and of random fate.

Your second alternative is that you can decide to buy an orange - a condominium. Condominiums are going to see every bit of the long term gain single family detached housing will, at least proportionally. So you've only made $300,000 when your $300,000 condo doubles in price, as opposed to your $500,000 house doubling in price. Actually, I'll bet you that from this point on, in areas like San Diego, they see just a little bit more appreciation than single family detached homes. Right now, there's still a very large proportion of renters telling themselves they're going to own a house someday, but they're not interested in a condo. As that becomes more and more out of reach for them the majority of them - all of the rational ones - are going to switch their goal to the closest practical equivalent. Condos are never going to be as expensive as single family detached homes, but more people can afford them, and they're going to be more expensive per square foot of living space. Why? Because of the implicit cost of all that land that the single family detached home is not using for living space, which isn't taken into account. Because so many more people can afford a tenth of the lot than can afford the entire thing. When you've got the last single family residence on its own quarter acre lot on Manhattan, someone who sees the profit to be made in higher density construction is going to make you an offer you won't want to refuse, and eventually, you will sell voluntarily. Maybe that person will even be the owner, themselves.

This doesn't happen all at once. It happens piecemeal, over time, but it does happen. Already, I can take you back to the neighborhood I grew up in and the surrounding area. I can show you all of the buildings that weren't there thirty or thirty five years ago, and San Diego hasn't been completely built up anywhere near that length of time. Some of them were vacant land then. Most, however, have been converted from lower density to higher density. I cannot point to a single place that's gone from higher density to lower. People who are middle aged now or older have watched it happen in slow motion, so slow that all of the implications haven't sunk in to most of us, yet. Indeed, the slowness has allowed a lot of people to keep pretending it isn't happening. This doesn't change the fact that it is happening.

Some people don't like oranges (condos). For that matter, some people don't like apples (single unit detached housing). The ones who can afford single unit detached housing but prefer condos don't have a problem. The ones who can afford condos but prefer single unit detached housing do. I've gone over the most obvious solution to this problem before, in Part 2 of Save For A Down Payment or Buy Now?. There are others, but they all involve similar principles of solution.

The bubble everyone (including me) was talking about two years ago is gone. In fact, it's more than gone. San Diego is experiencing a strictly temporary depression in prices, caused by psychological factors, just like 9/11 hurt the stock market for a while, and for precisely equivalent reasons. Mass media always paints things as being better than they are when they're good, and worse than it is when they're bad, causing people who believe mass media to over-react. This means opportunity, while it lasts, until a critical mass of people figure out that things aren't so catastrophic as they have been painted. Some people will see this article, and instantly decide to try to time the market. Don't. You'll mis-time it, with results worse than if you just acted. There are any number of studies that confirm this. I've debated, in person and via email, three bubble advocates in the last week. Every single one of them has tried to start moving the goalposts on me, citing prices of college for the kids, prices of cars and this and that. These extraneous factors have been there for decades. They've never been absent. They're been living in the equation so long that people forget they've already been taken into account, even thouth they've been there all along. But that's the only way these folks with so much emotional investment in the bubble can pretend that prices are going to keep going down.

The condominium market, in particular, has been hit hard for several years. Stuff that was legitimately worth $300,000 several years ago declined in price to where $225,000 was a good offer, and that was before this year's shock to the financial system. There are condo owners who wanted to sell four and five years ago who still have their units, but no one's been making offers. Part of this was "too much, too fast" - converting apartments to condominiums and building new condominiums, in the hope of cashing in on the rush, but the rate got above the current market requirements to a certain extent.

The larger part, however, at least in my estimation, has been "elephant hunting." This is a well known phenomenon in just about any sales occupation, but real estate has been rewarding turning squirrels into elephants these last few years. The hardest part of making money as a loan officer or as an agent is getting clients to work with you, and it takes about the same amount of effort. When you've got a set of buyers (or borrowers) in front of you, the temptation is there to sell them the a larger home with a larger loan than they can really afford, so you get a larger commission. The sort of warm body loans that were available the last few years facilitated this practice. The people want to buy, but can't afford what they want? Instead of trying to talk them into limiting their budget to what they can afford, which risks them leaving your office and going to your competitor, sell them what they really want, with a stated income loan. If you need to lower the payment, make it a 2/28, spread it out over forty or fifty years, add an interest only period at the beginning, or just scrap all that and put them in a negative amortization loan from the get-go, further inflating your loan commission. I've seen estimates that over eighty percent of the sales locally in the last two years used one or more of these tricks in support of it. Like I said, turning squirrels into elephants so you can hunt elephants. These people should almost certainly have been buying condos, but weren't. Given the state and shape of the socio economic pyramid locally, there should have been more condominiums bought and sold than single family detached housing, by a factor of about 3 to 2. That was not the case. The ratio was over 2 to 1 the other way. And if that's not quite a sufficient indictment of the ineffective regulation of the real estate profession to measure up to Emile Zola's "J'accuse!", it'll nonetheless have to do.

In case you haven't been paying attention to the financial news lately, the loans that enabled these tricks are now gone. History, and they're not coming back for years at least, until the lenders develop collective amnesia again. Meanwhile, agents and loan officers who are used to hunting elephants are complaining that they're all gone. Well, they weren't really elephants in the first place, but the lax loan standards made it possible to get an elephant's worth of meat off them, at least for the agents, the loan officer, and the seller. The buyer and the lender, of course, ended up holding the sack. My sympathy for the lenders is non-existent. They knew better. My sympathy for these buyers, on the other hand, is great.

So the condo market has been dead due to the loans situation, while agents and loan officers hunted elephants who were really squirrels. Now that it's rectified, agents won't have a choice. If folks can only afford the price of a condo, It's condo or nothing. Every single one of my A paper sources still has 100% financing for full documentation loans. If any of you don't understand what that means, it means you still don't need a down payment if you can document enough income to afford the loan. For that matter, most of my sub-prime lenders are still offering 100% financing through bank statement qualification. Lack of down payment is not an issue. Ability to afford the payments on the loan is.

Let's hypothetically consider a $225,000 loan on a $225,000 condominium with homeowner's association dues of $250 per month. As I sit here and type this, for one point total retail, I've got a thirty year fixed rate loan at 6.125%, with PMI of just under 1%, which I'll round to 1%. I would prefer to split the loan into two in order to save money for my clients, but as I said here, that simply is not on the list of alternatives right now. Payment on the loan is $1367.12, of which $1148 is tax deductible. PMI is $187.50, and will go away as soon as the buyer has 20% equity, which will likely be sooner than you think. Property taxes, at 1.25% (mine are lower), add $234.38 per month and are also deductible. Total: $2039.00 per month, and most buyers are going to get a significant amount of that back from lowered income taxes (married: roughly $150 per month, single, roughly $250 because the standard deduction is lower). Income needed, $4078 to $4531 gross salary per month, or from just under $49,000 to just over $54,000 gross per year, at most. This is well below area median income for 2006 of $64,900, and it's done with a sustainable loan, without any stated income tricks, without any government programs for first time buyers, or anyone else, no MCC, nothing. These buyers are doing it completely on their own, without a down payment. If they have a down payment, it gets a lot more affordable than this, fast.

Tell me you don't want a condominium, and I'll tell you that's fine. Come up with 10% down, and I can get you that stated income loan you need in order to buy the single family detached property that's all you're willing to buy - but I'm not going to let you pretend I didn't warn you about the consequences. Don't have the down payment? The fastest way to get it is to buy that condo, and I can prove it!

I've been aware for some time that I'm probably going to sell more condominiums than single family detached houses for the rest of my career. No, I don't have any objection to hunting elephants and in fact, yes, I would rather do so. It's just that there's more people who are going to be buying and selling condos out there than there are single family detached from now on, and I'd rather have the money from helping them than not have it, so I might as well hunt squirrels along with elephants. Not only will I make more money, those of my clients who do what is necessary to become elephants will likely come back with more business. And the fact that they listened to me about how to do it (and that this advice worked!) will be the obvious primary reason behind their ability to buy something bigger and more expensive later, making it even more likely they'll come back to me. Not that a 3% commission on that $225,000 condo is squirrel feed, but when it leads to 2.5% of $600,000 to sell it in a few years as well as 3% of $1,000,000 when they can afford to buy that property they can't afford right now, my clients won't be the only ones smiling from ear to ear.

Caveat Emptor

Be prepared for trouble before it happens, know how strong your position is or isn't, and don't ever overplay your hand.

Real estate transactions are the largest transactions most folks get involved in. Even small percentages of $500,000 or more are lots of money. A 1% difference in the purchase price, or cost of repairs, means more money than a lot of folks take home in a month. People will lie, cheat, and steal for much smaller amounts that that. It's a bad bet in general, and a worse one in real estate, but people do it. The new siding that hides the clues that say cracked foundation. The new paint that hides the water stained ceiling. New, well padded carpet over old wood where rot has set in. These are just the tip of the iceberg.

The most common game, though, I call the chiseler. Someone who comes into the transaction and may actually negotiate the initial contract reasonably, then proceeds to demand more than is reasonable every time there's the least little item for possible concern. There's another agent in my office has one for a client right now. I've told that agent that I'd drop that client at least half a dozen times. Even if the transaction gets finalized, this chiseler is going to come after this agent as soon as there's anything he can manufacture a complaint about. The other side is a desperate seller, or they'd have told this guy to get lost long since. The chiseler is getting a screaming deal just from the basic contract, and he's wanting hundreds of dollars in concessions to fix stuff that costs a dollar nineteen. My opinion is that before the transaction closes, he's going to ask for one thing too many and they're going to tell him no, and the transaction will be off, no matter how desperate they are.

"If you want peace, be prepared for war." Ancient wisdom. I'm not advocating it for real estate. Wars are expensive and usually a net loss, whether they're waged with bullets and bombs or lawyers and contracts. There's always another property for sale, always another buyer. You never have any more power over the other side in the transaction than they choose to grant you. It may be intelligent for them to grant it, but you can't make them. Similarly, they never have any more power over you.

A quick lesson from the annals of real warfare. In 279 BC, Pyrrhus of Epirus fought the Roman legions at Ausculum. He won the battle, but when congratulated upon doing so, replied "One more such victory, and we shall be undone." The Romans could afford the losses much more easily than his army. It set the scene for the Battle of Beneventum, after which he gave up fighting the Romans. From the experience of Pyrrhus comes the term, Pyrrhic victory. He was supposedly a brilliant general, but if he was so brilliant why couldn't he win a battle without catastrophic casualties?

Any time lawyers get involved in a transaction, it's a reasonable bet it has become a Pyrrhic victory at best. Chances of recovering actual money in your pocket greater than your legal fees are slim, no matter how rotten their case or how much worse off than you they end up. You still don't have a transaction, and meantime, you've likely scared off other buyers or missed opportunities at other properties.

Knowing when a transaction is broken and being willing to counsel a client to get out of it are two of the hallmarks of a good agent. Recognizing it before it has become undeniable is crucial. Precisely when the transaction is broken is itself a function of the market. The current market certainly allows buyers to drive much harder bargains than has been the case any time in the previous decade, but there is a point at which even the most desperate seller should tell them, "No," to further demands. Of course, a really good listing agent won't let it get that far, any more than a good buyer's agent will. I'm perfectly willing to tell my clients in private that they're on the verge of messing up a contract that gets them the best deal they can reasonably expect, all because they tell themselves they want a little bit more. But if that messes up a good transaction, nobody ends up with what they wanted. See the chiseler, above. In order to know what's broken and what's not, you have to really understand the market.

None of this is to say that capitulation is the first order of business, any more than scorched earth. Both are the province of the agent that needs to get fired. What is necessary is judgment and market knowledge and an understanding of what a good compromise really is. A good agent has contingency plans for everything in negotiating, and throughout the transaction. If they do X, we'll do Y. If they want A, we want B. If they don't want to go for that, we'll offer D for C instead. The other side does not necessarily have to lose for your client to win. Indeed, it's the good agent that knows how to substitute other things for money, and the good agent who knows how much of the clients agenda to reveal. Information is always power, but sometimes knowledge of the other side's agenda enables us to craft a compromise that makes both sides happy.

Right now, if a given seller won't recognize that desperation is the only valid reason for marketing a property when there are 40 plus sellers per buyer, a good buyer's agent doesn't need much reason to abandon a property. Just the fact that this seller is trying to act like it's still the seller's market of a few years ago is enough, and the sooner the idiots doing anything to get listings including misrepresentation of the market realize this, the sooner this will change. My most important questions at every listing presentation have been and will continue to be concerning their need to sell and what possible alternative plans there might be. When things are this bad for sellers (and this wonderful for buyers), the only reason for a property to be on the market is if there is no other reasonable alternative. I've told several people, everyone who had a reasonable alternative, "I'd love to sell your property, but given the state of the market right now, the kind of sale you want is not going to happen. I can list your property for sale, but it's not going to sell in this market unless you outcompete all the similar properties that are already for sale. All it would do is frustrate both of us, and get you angry at me, and for good reason. Here's my card, and if you decide you need to do what it's going to take, please call me. Otherwise, I'll check back in a few months and we'll discuss the state of the market again. I'm confident that waiting will get you more than enough extra money to be worth it."

There are currently over 20,900 properties for sale in San Diego County, and only 269 went Pending in the last week. Never mind an allowance for fall-out, that's a 77:1 ratio. Other things being equal, it would be a year and a half before you could expect to get an accepted offer. Other things aren't equal, of course. The longer a property is on the market the less appealing it becomes, and the more you have to do to make it sell. Only 163 sales actually went through, a ratio of 128 to one, and we're still dealing with contracts reached during the tail end of the busy season. If you need to sell, you can do what it takes now, or you can do what it takes later. You will have to give up more later, even if the market recovers next summer, because by then your property will have been on the market nine more months.

This is great for buyers, by the way, but for sellers it's horrible. Unfortunately, a lot of sellers and a lot of listing agents still think it's 2003 from the way they're acting. Nobody can force them to come to grips with reality, so if they're not going to listen to reason, it may be the listing agent's fault but the owner is the one who's going to suffer the consequences.

You can't learn this stuff on the fly, by the way, nor can you prepare retroactively - you have to be ready when the offer comes in. If the owner doesn't understand the state of the market before the offer arrives, nobody ends up happy. It's like the exact opposite of 2003, where if the buyer didn't understand what it was going to take to be successful before they started looking at properties, they were going to end up homeless and frustrated, or rooked. If you don't hire a sharp enough agent, you can't go get them when it drops in the pot. First off, you won't be able to recognize that it has dropped in the pot, and you're now roast. Second, because the reason it doesn't drop in the pot with a sharp agent is because they're prepared, and they never let it get that far.

Don't ever confuse "sharp" with "experienced," or "high producer." Yes, a certain amount of experience is helpful and I learned a lot on my first few transactions. But the only times I've ever heard anybody say, "I've been in the business for three geologic eras" is when they were trying to defend something indefensible. The last time it was a woman who I found out didn't have a valid listing agreement (and it wasn't a small technicality, either!) bragging about her forty years in the business. And often the reason that someone is a high producer is the willingness to throw their client under the bus in pursuit of a commission check. Ask what problems they've dealt with lately and how they handled them. There are always problems to be dealt with; it's the nature of the business. Sometimes it's the property, more often it's the people. Not every transaction, but if they don't have a certain proportion, it's more indicative of inability to recognize a problem than it is of not having any. On the loan side, I've done more loans than 99 percent of the loan officers out there, and I deal with problems by recognizing them and fixing them before the underwriter sees the file. It's not my experience - there are plenty of loan officers who've been in the business thirty years who still insist upon doing it the hard way. It's not the fact that I've done X number of loans in a month. I've learned more since the month I did 100 loans than I knew then, by an order of magnitude. As a matter of fact, high volume is incompatible with significant problem solving, either in loans or in sales. There's only so much time in the day. It's that I've learned how to recognize this stuff and deal with it before it bites my client, even if I have to work much harder or do more work or wait a little longer than I originally thought I would. That's what makes a good agent or a good loan officer.

Caveat Emptor

This is one of the biggest issues with my local real estate market. Because the San Diego market has very high demand and limited supply of property, prices are high. A reasonable two bedroom condo runs around $300,000. A 1200 square foot three bedroom, two bath detached home in decent shape on a 7000 square foot lot costs around $500,000. There are areas that are less expensive, and buyers have a lot of leverage right now, but those are real ballpark numbers. These numbers are sustainable, because even though a relatively small fraction of the population can afford such numbers, that fraction is enough to absorb the properties that come onto the market for sale. It doesn't matter if minimum wage people can't afford your property. All you need is one willing buyer who can. We're not the most expensive area of the country, but we're up there,

When you put people into this sort of environment, a certain number of them are going to want more expensive property than they can really afford. Most of them have what they believe are really excellent reasons for it. "My kids need a yard to play in!", "I've got two kids who need their own room!", and "I've got to live where the schools are the best!" are three of the most common. Other people will say they've got to live within so much distance of the ocean, they've got to have so much space, or they've got to live in a "safe" neighborhood. What they all have in common is that they're rationalizations.

There's nothing wrong with wanting a better property. I want lots of things I can't have right now. There's a car company called Morgan. They make cars that may not be the fastest or the most luxurious, but they are an absolute blast to drive. They've got a waiting list two years long. If I ever actually buy one, then in my own mind I will officially have more money than sense. I can think of roughly an infinite number of charities that would put that money to better use. But it's not wrong for me to want one - it's just stupid if I buy one without being able to afford it, and if I ever can afford it, it'll be my money to do as I want (although I hope I'd donate it to something like Soldier's Angels instead). I don't think I've ever met anyone who doesn't want something they can't really afford. It's not a crime, and it's not a sin, and it can even give you motivation to get to where you can afford it. It is self-destructive if you act on your desire before you get to that point.

Nonetheless, a lot of people, will convince themselves that because they're good people, they "deserve" this property even though they cannot afford it (or cannot afford it yet). They manage to convince themselves that what they're doing is really okay, and it'll all come out okay in the end. I must disagree, because if they "deserve" this property, they "deserve" the loan that comes with it, and "deserve" all the bad stuff that will happen when (not if) they default on their payments. The odds are strongly against everything coming out okay in the end.

If you've got the cash, you can do anything legal with it that you desire, among which is buying any property you desire. But these folks want this property now, and they don't have the cash and can't afford the loan. If either of these were not the case, well then I submit to you that they really can afford it, after all.

There aren't any loans that really make more than a marginal difference in whether you can afford the property. This isn't to say it's not worth shopping around, it is. The difference between the 6.125 thirty year fixed I can do for one point, and the 6.375 the branch of that same lender in the supermarket I was in this morning wanted two points for is quite noticeable. On a $400,000 loan, that's a difference of over $4000 in initial cost, and $1000 per year of interest, not counting the fact that the borrowers will have to borrow more money for the other loan. But with reasonable and equal assumptions about equity, property taxes, etcetera, none of which are under my control, the family who gets my loan will pay $2957 per month ($2042 cost of interest), requiring monthly income of $6571, while the other loan would cause their monthly total of payments to be $3023 per month (2125 cost of interest), and the income to qualify is $6716. The difference is only about 2.2 percent. It still amounts to a lot of money, but the odds are that someone who qualifies for my loan will also qualify for the other, they'll just pay $83 per month more for the loan. This apparently small difference is one of the expensive lender's best defenses against smaller companies willing to do the loan more cheaply: it just doesn't seem like that much of a difference. Even if you dropped to a 5.875% 5/1 ARM that I had as of I'm writing this, that only drops the monthly cost of housing to $2893 ($1958 cost of interest), a further difference of only $84 (while raising the income qualification to $7613 per month, because the allowable debt to income ratio is lower). This works out to a lot of money - as I said, $4000 plus $1000 per year for however many years you keep it, but it just doesn't seem like that much to most borrowers. Nonetheless, these loans are all good loans if you qualify. That's what's real. That's what's sustainable.

But if you want the property, loan officers can use one or more tricks, such as stated income, negative amortization, or teaser loans with a low initial payment where the rate will adjust upwards at a certain time, particularly if they're "interest only" until that time. Such loans can make it appear as if you can afford the property, when you really cannot. In the vast majority of cases where they are used, such loans are unsustainable . Let's say you think of the payment as your actual cost of housing, which may not be true. You decide you need to cut your cost of housing, but you still want the same property. Lenny the Loan Shark hauls out an interest only 2/28 at 6%, and voila! cost of interest is only $2000, and the total of monthly payments drops to $2526 under the same assumptions as the previous paragraph. But in two years, not only is that rate going to jump to 8.25% (assuming the market stays exactly where it is today), but it'll start amortizing at the same time. Net result? In month 25, your loan payment goes to $3055 (cost of interest $2750), an increase of over 50%, but your overall monthly cash flow to stay in that property goes to 3581. It's more likely you can afford $3023 now, the worst option from the previous paragraph, than $3581 in two years.

Suppose you want to stretch a little further than that? Lenny pulls out a negative amortization loan, even though he calls it by one of dozens of friendly sounding pseudonymns, like "Option ARM," "Pick a pay," "Flex pay," or "1% loan". As soon as the grapevine picks up on one name for these nightmares, they come up with another. One of our local sharks is pushing these on the radio right now. Gosh, doesn't "1% loan" sound good? Why would anybody choose something different when those are available? Who wants to pay more interest?

The answer is that they're not really giving you a loan at 1%. Think of 1%, or whatever it is, as a "make believe" rate. Pretend it's your rate, and make that payment ($1286 for the loan, giving a total of monthly checks you write of $1812), and just don't pay attention to what's happening to your balance. Until of course, the loan hits recast, and you realize that they've really been charging you a variable rate above 8% this whole time, and now you discover that instead of $400,000, which you really couldn't afford the payments on, you now owe 110 to 125% of this amount you originally borrowed, and now they start charging you for the whole payment every month. Let's say you now owe $480,000, and your payment on the loan alone jumps to $3784, plus the same assumptions as previously, leads to a total of monthly payments of $4310 three years out. If you couldn't afford the real cost of housing at $2893, let along $3023, how likely is it you'll be able to afford $4310 three years down the line? How many people do you know that get 43% raises over three years? Now, how many people do you know that don't?

As for stated income, the thinking goes something like this: So what if you don't qualify by standard measurements! Those old banker stick in the muds don't ever want to loan money to people who really need it! You can make the payments, right? You're going to pay them back, right? We'll just tell them you make what you need to make in order to qualify! We do need to choose this short term loan to give you a payment you can make, but that's no problem! In two years, we'll refinance you into something better!

I'm perfectly willing to do unsustainable loans if the client can convince me they're aware of the downsides and risks. You're a legal adult, and being a legal adult means you're able to assume responsibility for your own mistakes. But doing this requires me to go over those downsides and risks in person with that client. Hiding it among 500 pages of disclosures while you're signing the final paperwork is not acceptable. People who accept these loans are putting themselves into a situation where it's essentially going to be mandatory that they refinance within two to three years. If the equity situation deteriorates, if their credit has gotten worse, if they've had late payments, they are not going to be able to obtain a loan on terms as good as what they initially had. If they didn't need a lower payment than could be had on a sustainable loan, they could have had a loan without any of these downsides. Nor is refinancing free. The fees can be paid by accepting a higher rate, but that higher rate itself means a higher payment, leading to questions of whether they can still qualify. For that matter, rates change over time. What it available rates then are significantly higher? Unlike everyone else, the person who accepts this type of loan does not really have the option of waiting for the rates to get better again. They need to understand that before they sign up to start it, not thirty days later when they're looking at final loan documents, and most people don't think they have any other choice but to sign.

All of this also begs a couple of other questions. What about pre-payment penalties, which I haven't touched on until now? What about the fact that the client who gets these loans is stretching beyond their real limits in most cases, and the credit score and situation is more likely to deteriorate than improve? Finally, most importantly, even if none of these concerns manages to bite this client, what makes you think that better loans will be available in two or three years? There just isn't anyone who can reliably predict the state of the loan market that far out.

In short, by attempting to circumvent one of the central questions of whether they qualify, these persons are not only short-circuiting a protective measure intended for their benefit as much as the lender's, but they're laying themselves open for unscrupulous providers. All of this is part of the reason why San Diego, which started out expensive and got more so, was on the bleeding edge of the bubble. If people want the house of their dreams right now, and they're seeing the market increase 20% per year with no end they can see in sight, Fear and Greed are both telling them to do whatever it takes - lie, cheat, steal, deal with shady practitioners, in order to get into that property. This was, predictably as gravity to anyone who understands macroeconomics, the wrong decision, but these folks didn't take the time to understand the market. Not to excuse them from all culpability, but here were people they thought of as credible experts, real estate agents and loan officers, telling them to do it. A rough equivalent would be if my lawyer told me it was permissible to haul off and shoot someone (other than in self defense). I'm still going to prison if I do, and rightly so, but the lawyer would certainly bear a certain amount of culpability. There is no magic wand that makes murder legal, and there is no magic wand that makes loans and properties well beyond your means affordable. Many of these were working class folks, told they qualified for a home that looks like it came straight out of Architectural Digest. This was a wedge that enabled them to be taken advantage of. It was a welcome message, it made them feel good about themselves, and it appeared to give them something that they desperately wanted, but fearful that there was no way they could afford. Yes, they were fooling themselves, but they've had a lot of company throughout history. While I cannot excuse their failure to heed warnings that most of them were given, or their failure to maybe do a little bit of research on something that any rational adult should have known was too good to be true, I can also understand it. It's a mistake I can see myself having made in different contexts.

There are variations in the market, but finding the beautiful mansion you can afford is not a matter of persistent looking, waiting for one to go on sale for the right price, or even just somehow finding the right loan. This isn't the meat section of the supermarket, where they try to lure you in with loss leaders in order to sell you the rest of your groceries for a higher price. People only buy one property or get one loan at a time. The lenders want you to pay a high cost of money, and they will play all sorts of games with payment, and what you have to pay for with money out of your pocket, or checks out of your checking account, in order to secure what they really want: You paying a higher cost for the money you borrow. That's what gets them paid. You paying a higher cost for the money you borrow than you might otherwise, gets them paid more. Much more. They can take a small portion of it and make it seem like you're getting something for free, and still come out way ahead. And there's really only one place all this money can come out of in the end: Your pocketbook. The lenders who really have superior loan prices and rates don't play these games, because on the margins they make, they can't afford to.

Getting people to be realistic about what they can afford is probably the hardest part of a buyer's agent's job, especially when your competition is telling them they can afford something they can't. It isn't popular, and you'll lose more than a few potential clients, but you'll keep yourself out of court, out of regulatory hearings, and out of jail.

For consumers, I advise you to limit yourself to sustainable loan types, fully amortized and fixed in interest rate for five years or more. There are exceptions, but if you're the kind of expert who can recognize those exceptions, you've stopped reading before this, because this article hasn't taught that person anything they don't already know. Set yourself a fixed budget in purchase price dollars, based upon your ability to afford the full payments at current rates, and refuse to go over that. If you've got a good buyer's agent, you can get a better property for less money than you might otherwise pay. If you're willing to rehab the place yourself, you can get a better property for less money, even considering the money and time you'll spend doing so. Think of it as your pay for handling the job in place of the soon to be former owner. If you shop around, you can find significantly better loans than if you don't. But you're not going to find a palace for the price of a dump. If you do, there's something wrong with the situation, and if you aren't so certain that you understand what it is and why, that you can give someone permission to tear your arm off and beat you to death with it if you're wrong, chances are you should run, not walk, in the other direction.

Caveat Emptor

There's been a great deal of jawboning in the real estate community recently over "divorcing the commissions", changing the current practice of the seller paying the commission of the buyer's agent. Well, I've said my piece on that, why I don't like it but it's in the seller's best interest to pay the buyer's agent commission, because they can expect to end up with more money in their pockets because of it.

That got me to thinking about issues of how to improve seller satisfaction. As I said in Exclusive Right to Sell Versus Exclusive Agency, it is in the client's best interest to sign an exclusive right to sell, because the agent will have no mental reservations about whether they will get paid if the property sells.

Nonetheless, exclusive agreements always leave a lot of room for agents to misbehave. Quite illegally of course, but if such behavior is undiscovered, it will not be dealt with, and the law places quite a few impediments on monitoring your listing agent. When I'm acting as a buyer's agent, my client knows whether they want to put an offer in, they know whether or not they've signed it, and they know that because I'm working on a non-exclusive agreement, if I won't do my job, there's no reason someone else can't.

This doesn't apply when there's an exclusive agreement in effect. It's illegal in California (at least) to solicit listings from people who already have a listing agreement in effect, but that doesn't stop some agents. Last time I had a listing come off MLS, I forgot to change their phone number to mine. My client told me they received in excess of 100 calls that day, from agents who wanted the listing. None of them asked if there was still a listing in effect, which there was. None of them bothered checking the "do not call" list, which the phone number was on, evidently thinking that the fact it came off MLS meant my clients somehow didn't care about about the "do not call list." This is why agents usually don't want to put client phone numbers on MLS, and why even if they do, they'll change it before it comes off.

But a lot of agents go well past that stage. They decide that if the listing commission is good, that plus the buyer's commission is better. If they don't want to pass an offer to the client, there is no way to make them. I can point to agents where I suspect that incoming offers go straight from the fax machine to the wastebasket, it they even get printed. This has gotten so bad that my local MLS service has finally given buyers agents the right to present offers to the sellers in person. Not to be present for discussions, but to present the offer. I can't make them accept the offer, but this way the listing agent can't pretend it doesn't exist. Furthermore, enough buyer's agents tell the listing client where the market really is, and the listing agents are going to have trouble pretending the property isn't overpriced. Agents who "buy" listings by pretending they can get more than the market will support are going to be in a world of hurt. The first offer is usually the highest offer you'll get, and letting the first offer go will usually result in less money

Sometimes, listing agents bypass such tactics in favor of making showings difficult. They simply make showings difficult for other agents and their clients. The clients and I have time now. An hour is usually no big deal. But requirements for four hours notice or to "make appointment" are more often intended as barriers to other agents clients, and anyone who calls them directly gets preferential treatment, after they've signed an exclusive buyer's agency agreement, of course. Some agents go so far as to claim they're trying to sell the property, while in reality using the listing as a way to chum for buyer prospects who don't know that's a rotten way to shop for a buyer's agent. When the property sells, these agents lose their wedge for meeting more buyers, so they don't want it to actually sell.

Net result, they're not exactly shutting out the clients of other agents, but by putting up barriers to showings, they make it much less likely that anyone not represented by them will put in an offer. But you, as the owner, want to get the best possible price from your buyer, for the quickest sale - not limit yourself to the one who gets your agent paid twice for the same transaction, or to being the bait for buyers. A listing agreement is not a license to abuse that owner.

The person with the power to challenge this is the owner. They do have a right to monitor their own listing. You should periodically wander into your listing office, and demand a full copy of the listing, as seen by other agents. An agent who doesn't play these games has nothing to fear. An agent who does, deserves to get fired. And if you get showings but no offers, there's something wrong. It may be that the property is overpriced too high, it may be that your agent is rejecting them out of hand, or it may be that they don't really want to sell your property. Another tactic to fight all of this is to limit the listing agent to one side of the transaction. I don't have any problem agreeing to only the listing side commission when I'm marketing a listing - if the buyer is silly enough to want to be unrepresented by a buyer's agent, that's not my client's problem. Actually, that's a good thing for my listing client in most cases. Nonetheless, it doesn't mean it's in my client's best interest to shoo away prospective buyers represented by other agents. It's not.

But perhaps the deadliest scheme to a client's well being is the agent who wants to buy their client's property themselves, or recruits a straw buyer to buy it for them. Never ever sell to your listing agent, and be very careful that any buyer represented by them is not a straw buyer. Most often, they'll wait until you get desperate before trying this trick, and a nasty one it is, too. Get the listing, Shoo off other buyers, wait until the client is desperate, then make a lowball offer yourself. Unscrupulous agents can make more with this trick than any commission, and they don't have to share the return that comes from flipping the property with anyone else. If there's a buyer's agent involved, it makes this scam a lot tougher to pull off because there needs to be collusion between the two in order for it to work. I should mention that there are agents and brokerages who brag that they'll buy the house if no one else will. To someone who understands what's really going on, this is like a mile high flashing neon sign that says "Stay away from the shark!" I suppose it's possible for it not to be a scam, but I wouldn't be a nickel on it at a thousand to one payoff.

One thing I'd like to see, for those places that haven't granted buyer's agents the right to present offers themselves: The ability for offering agents to drop the owners a standard postcard, through the local MLS provider if that's what it takes. Enter the address of the property, pay fifty or seventy five cents, and the association sends a postcard out to the owner of record that says "Someone made an offer to purchase your property. If you already know about this, this postcard should be of no interest to you. If you don't, chances are that your agent failed to pass along an offer that was made. If you contact the association, we will provide the contact information of the person or agent who made the offer."

There's a lot of listings out there right now that say, "shown with accepted offer only." This is ridiculous, and nobody's going to make a decent offer for such a property. Me, I just laugh and move on, unless I see evidence that the owners may be desperate enough to accept a half price offer. Listing agents who don't explain this to the client are not working in the client's best interest. There could be another standard postcard that tells owners their showing instructions are too strict, although it would have to have something attractive enough about it to make it worth my bother. Agents who faithfully adhere to their duty have nothing to fear, and such things would actually enhance their credibility. Agents who don't would be in a world of hurt, and there could also be consequences for agents who claimed they made an offer, but didn't. This is the age of transparency and accountability, and such a development favors both.

Buyers and buyer's agents can complain all we want to zero effect. The listing agent doesn't have a responsibility to us, so we have no grounds for action, legal or otherwise. But when owners are informed that there is a failing of the listing agent's responsibilities to them, and the owners want to complain, that's a different matter entirely.

Good agents should want to change for more transparency, if we're going to prosper as a profession in the Age of Information. The first group that gets the idea of competing with MLS with the addition of verifying agent performance is going to reap the vast majority of the market very quickly. We have to be verifiably demonstrating to the client on the value we provide, or there is no reason not to go with any cheaper alternative that presents itself. It's not like the clients enjoy giving us money that would otherwise end up in their pockets. If we want to do well, not only as individuals but as a profession, we have to be able to demonstrate that those dollars clients pay us translate into more dollars in their pocket. If we cannot do this, they are correct to choose the cheaper alternatives.

In the meantime, what can you do as an individual to combat these tendencies? Make the listing agent's compensation a fixed percentage, with only a small amount of additional compensation if they accept dual agency or the buyer is unrepresented. They're supposed to be trying to sell the property to all comers, not raising the bar against potential buyers who won't cause them to be paid double. Monitor your agent, so you're confident they're not putting up barriers to sale. Most importantly, learn as much about your market s you have time for. If you know your market, it's a lot easier to spot the agent who's working on their own behalf, and ignoring your best interests.

Caveat Emptor

About a year ago, I took a look at a lender owned property a few miles from my office. It was ugly. I mean ugly. The yard was a mess, there was a deck that was rotting. The facade looked like it hadn't been painted since before President Kennedy was shot, and really needed to come off besides. Inside, the carpet was gone, the vinyl in the kitchen and bathroom looked like it was waiting for the return of President Truman, and most everything else looked even older. The color scheme was something out of the art deco age, too. You know the pastel salmon and blue.

But it had good intrinsics! Dynamite location within a mile of three freeways, although it didn't get traffic noise from any of them. The area is a resurgent one, and it's within fifteen to twenty minutes of just about everything, even during rush hour. The schools - especially the high school - are top notch public institutions. The property itself did not have any basic structural flaws that I could find - just an old and ugly surface. And that's not mentioning the fact that it had excellent sight lines and a pretty darned good view.

I tried real hard to get one set of prospective clients, a couple with two kids, to put an offer in on the property. Based upon what they had told me, they could afford the property with a thirty year fixed rate loan with even a little left over, even at the asking price, and the property was livable as it was. It just wasn't modern or gorgeous, and they still had room in their budget to fix it up. They could have spent roughly $40,000 for professionals to come in and fix the whole thing, or they could have cut those costs in half or more by doing it themselves. At the end of the process, they would have had a wonderful property worth at least $120,000 more than they paid for it, with at least $80,000 in smart sweat equity. Furthermore, the property taxes would have been lower, they would have had plenty of room in their budget for disasters, and on and on the list of advantages goes.

These people decided not to pay attention to me. They wanted something that was beautiful now, and someone else persuaded them to stretch past their real the limit to buy into a fairly new PUD on the other side of that particular suburb. HOA dues, and no room in the monthly budget for anything to go wrong. Not to mention they had to use an interest only 2/28 to qualify, and they called me not too long ago and said they've got a late payment, but they were hoping I could do something for them. The answer was unfortunately no. I really hope for their sake that the market takes off next spring, because otherwise they're going to be hosed as far as refinancing goes, and they're going to need to. I didn't say a thing even implying, "told you so", but to my surprise, he volunteered the information that he now wished he had listened to me. Unfortunately, he can't go back in time with what he knows now.

A flipper ended up buying that property for cash. He did a light surface rehab, and it's beautiful. He spent less than $500 getting someone to clean up the yard and haul away the wood from the old deck. He stripped off the old facade and put good quality siding on. Carpet went in before he even moved in, the vinyl is now a fairly nice tile, and the two bathrooms he basically resurfaced, one at a time. Kitchen cabinets he re-stained, and updated the sinks, the faucets, and the appliances. Put up a white picket fence, seeded grass, painted the inside, and now the property is on the market again. After all the costs of rehabbing and selling, he's going to come away with at least $40,000 pure profit, assuming he paid to have all the work done. Plus, he got a place to live for six months out of the deal, at least a $10,000 value even for a rental.

My point is this: Flippers aren't the only ones who can do this. In fact, the math works even more strongly in favor of someone buying a place to live. No $40-50,000 to get the property sold. The lower purchase price means lower taxes, which last as long as you own the property. I know that career and kids are tough enough, but the property was livable as it sat, and you have however long you want to get it rehabilitated. Net difference to their situation: almost a year and a half of the income it would have taken to qualify. If I offered you a year and a half worth of pay to work overtime for less than six months, most people would jump at it, kids or not. Add to all of this the fact that this is money you didn't borrow, so you're not paying interest on it every month. At 6% interest, every $1000 you don't borrow saves you $5 per month, and this was a fair number of thousands of dollars.

There is a reason Why There Is Money in Fixer Properties. I can understand if you're a big executive who needs to move into something beautiful so you can have social professional or client sales meetings there right away, but this just doesn't describe most people. Not to mention that those folks aren't looking to scrape into a property - they make the money to easily afford the beautiful modern six bedroom home overlooking the ocean.

I'm not going to say that you'll never find a bargain property that isn't already beautiful. I'm saying you're at least a hundred times more likely to find this sort of bargain in a property that isn't beautiful yet, and that the vast majority of the time, the big stroke in value goes to the people who make it beautiful. I had another couple a few months ago,and they listened to me about fixer properties, more than even I was really comfortable with. They bought a property that was almost a century old, and all through the inspections, I kept saying things like, "I expected worse." Turned out the property was more solid than even I gave it credit for. I drove by a couple weeks ago, and the property has been fixed up significantly. Furthermore, I'll bet they could sell for a profit, even now, and there's still a long way to go. These people have basically zero pressure on their pocketbook, and zero stress in their life. They can still save money. They can still live like they were accustomed to. The only difference is that now they are owners rather than renters, and they have placed their cost of housing forevermore under their own control, they get the tax advantages of owning, and so on and so forth.

People stretch beyond their real means to buy that beautiful new gorgeous eye candy property all the time. It's never a sure bet, and when the market isn't going up twenty percent per year, it's considerably more risky. Far better to restrict yourself to a property you can afford with a sustainable loan, and that gives you some monthly cash flow for emergencies. You shouldn't plan to have a need to refinance for at least five years, but if such a need should happen, you're likely to be able to do so. If you'll buy a solid property that needs some updating and beautifying, it's likely to be a financially rewarding experience, and any number of professional property flippers can attest. There's no reason why you can't take advantage of this fact to find a property to live in, instead of the quick flip for profit. In fact, it makes even more sense to do it for a property you intend to live in for a long time.

Caveat Emptor

Copyright 2005-2017 Dan Melson. All Rights Reserved


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This page is a archive of entries in the Intermediate Information category from October 2007.

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