Market Update: The Conejo Valley and Beyond

Wow, where to start.  As is with communities across our great land, when a large employer announces substantive changes to the number of people they are going to employ in that area, every aspect of the local economy is affected.  Such is the case here, along the Los Angeles/Ventura County line.  When rumors began circulating that Amgen, the area’s largest employer, was preparing to lay off a large part of their workforce, you could almost hear the gears of the local economy, grinding to a halt.  amgen for sale cropWhat would the impact be?  Home prices would have to come down as all those laid off employees scramble to list and sell their homes as they’re forced to relocate to other biotech hubs like Boston and San Francisco, right?  The sudden shadow that hung over our valley seemed to reach every corner and the attitude of home buyers moved from optimistic as inventory was increasing and prices appreciation stabilizing, to trepidatious and cautious.

At the time of the rumors, I focused on the math: how many people would actually be laid off locally, that would have to sell and move to find employment?  The number kept running around 1,000.  Then right when we were preparing for the worst, Amgen’s CEO announced an additional 1,100 people would lose their jobs and the market reacted as one might expect, it shut down right?  Wrong.  It is true, the market has softened, traffic at open houses slowed and the number of closed sales declined – somewhat.  In fact given the time of year and the overall health of the real estate market nationally, we actually don’t seem all that different and are simply mirroring everyone else.  We are not substantially slower, the sky has not fallen and if you ask my buyers, there’s still not very much on the market.  So what gives, because that makes no sense at all?

Tile Door Detail  One thing we can all agree on is that real estate is local, for more information click here.  But to understand locally we must first look at the broader market to better frame our discussion.  Nationally the market is slowing and appreciation, abating.  It’s slowing because 2013 brought broad based and rapid property price appreciation as the attitude shifted from, “We’ll never see homes appreciate again,” to, “I think we can all agree we have already bounced off the bottom.”  So the appreciation we experienced was a combination of large swaths of investors, be it “Mom and Pops” or institutional investors like Blackrock buying cheap homes and the herd mentality that “It must be safe to buy now.” This continued until June 2013 when Federal Reserve Chairperson Janet Yellen, announced the end of QE (Quantitative Easing) in the form of the Fed’s bond buying.  Interest rates jumped nearly a full percentage point and the market cooled.  There would be no “irrational exuberance” here, to borrow a phrase from Ms. Yellen’s predecessor Alan Greenspan.  She put the brakes on the housing recovery and it worked.  The market cooled, but it did not halt.  In fact as the economy and consumer sentiment improved, property values and sales gently increased into 2014.  Something however was missing.  Traditional first time buyers (mid 20’s to early 30’s) in many parts of the country had been priced out of the market due to 2013’s rapid appreciation.  Moreover, many of the Millennial’s were and are, still living in their parent’s basements.  Household formation, the key component of first time home ownership, was not happening at the pace it historically does.  In his article yesterday, syndicated columnist Lew Sichelman cites NAR statistics that less than 30% of 2014 buyers are first time buyers.  The historical average he states is 40%.  Without first time buyers buying the fixer/older homes he reasons, the market cannot achieve its full potential.  He goes on to attribute this to the lack of move up buyers due to a shortage of new homes, often the catalyst for existing homeowners to sell: they want a new home.  And while I agree with this idea, it doesn’t go far enough.

The reasons these first time buyers aren’t buying homes has as much to do with a lack of income growth as it does to available inventory.  Moreover, analysts love to point to the fact that our young would-be buyers are saddled with student loan debt making qualifying more difficult.  Add to this tighter lending standards in general, despite near historical low interest rates and a shift in where this demographic wants to live (ie: close in, not out in the burbs somewhere) and you get a buying foundation akin to sand.  The lower end and first time buyer market is the foundation for all property values and appreciation, without them, the whole market is shaky.  This means that typical first time buyer-fixer type homes are not only not appreciating, they may even be dropping.  Thus inventory declines as sellers decide to wait for a higher prices or in many cases wait because they are still upside down having not yet climbed out of the hole from the housing crash and simply cannot sell.  This in turn has changed what first time buyers look like.  First time buyers are not late 20 and early 30 year olds as they once were at all, they are 35-40 with 2 small kids coming much later in life than in years past and they are dual income with no time nor interest in fixing a home up.  So instead of buying older fixers where they can use their sweat equity to build equity, first time buyers are buying turnkey properties and these properties are far and few between as compared with older properties that need a little TLC.  First time buyers look different and act different and this has changed the dynamic of homeownership.  The impact of this is that we should expect prices to remain flat until such time as incomes grow, household formation gets back on track and builders start building more homes to motivate more homeowners to sell.

So back to our local market… It is true that there is great unease amongst buyers and we have already experienced a 5% drop in values since summer. But there are still buyers out there.  In fact there are lots of them, even here where we are bracing for substantive job losses.  How do I know?  Ask a lender if they have any preapproval letters out and they will tell you they have files filled with them, but that those buyers just aren’t buying.  I held an open house a couple of weekends ago and I had 4 noncontigent buyers come into my open house, none of whom worked for Amgen but all of them in the market for a home.

So what does this all mean?  The way I see it, there will be pressure on prices until all those who were laid off either decide to sell or stay.  I expect this to become clearer in the spring.  In fact I expect that spring will bring a lot of new listings to the market place and this will offset the typical spring “bump” we get in prices.  But that also means that there may be no better time to buy than , click here to search for homes.  It means as a buyer, you want to be a little more aggressive on your offers and if you’re a seller, a little more open to negotiate.  Herein lies the key to navigating this market: be a participant, not an idle bystander.  If you are a seller today, don’t wait until spring because you will have more competition and they’ll have the benefit of seeing how long you’ve sat and price their home accordingly.  If you are a buyer, don’t be afraid to make your deal today if you find a home you want.  One thing is certain, the future is never predictable whereas the present is, well, the present.

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Pitfalls And The Process of Buying And Selling Real Estate

It’s a delicate balance, a real estate transaction.  There are a lot of things that can and do go right but a lot that can and do go wrong.  Just this past Friday the escrow company a seller picked out sent the wrong wiring instructions to my buyer’s lender and when the bank funded the loan they sent $400,000 to the wrong title company.  Talk about a mess.  Fortunately the money was retrieved and we closed on time.  Speaking of money, have you ever wondered how the money gets exchanged in a real estate transaction?  Some states have the two parties and their attorney’s sit opposite one another at the closing table to exchange the money for title.  In California we use a neutral third party called escrow to effect the transaction. When speaking with a client, I like to describe the fundamental role of escrow this way:  Picture me holding out both arms.  To one side the buyer hands me a bag of money one, and the other the seller hands me the deed.  Then picture me crossing my arms.  This is escrow’s most fundamental task.  Without this service one could imagine the exchange as the buyer gingerly holds out the money and hopes the seller doesn’t grab it real quick and run away.  So escrow is a facilitator.

Escrow is also charged with coordinating the required paperwork for the title company.  The escrow officer orders the preliminary title report often referred to as the “Prelim” from the title company.  The prelim tells everyone who owns the property, what liens are held against the property, including tax liens and mortgage liens.  The prelim could also show any recorded judgments against the seller as well.  The title company provides the insurance that the buyer is purchasing the home with clear title.  Escrow also receives the lender’s paperwork like the loan documents from the buyer’s lender and they ensure the buyer receives all the necessary reports and disclosures to complete their due diligence.  These might include items like home owner’s association minutes and budgets, rules and regs; the clear termite report if that was negotiated; the natural hazard disclosure report which in California includes everything from earthquake zone disclosures, to red legged frog protected habitat disclosures.  The NHD as it is often referred, will also have important information like radon zone classification and ratings and most recently the additional disclosure of gas transmission line disclosures.

Once a home sale is successfully negotiated by the parties, the real estate agent(s) will forward the contract to the designated escrow company.  This is referred to as “opening escrow.”  So who pays for this service?  Customarily this is shared or “split 50/50.”  Like all aspects of a real estate transaction, this needs to be written in the purchase agreement and is a negotiated item.  I one time had to pay the buyer’s side of escrow because I missed the line that called out a 50/50 split and since it was my fault, I picked up the cost rather than my seller.  It only takes one time; I haven’t made that mistake again.  By the way, escrow companies are regularly audited, at least in California, by the Department of Corporations.  This ensures they have the appropriate bonds to protect the parties in the event someone makes a critical mistake or an unscrupulous employee try’s something fraudulent or illegal.  For the most part the risks to both buyer and seller have been largely mitigated by these audits and the Association of Realtor standard Residential Purchase Agreement or RPA.  Of course “For Sale by Owner” transactions do not have the safeguards in place like transactions where licensed real estate brokers and agents are involved; a pretty good reason to not sell your home on your own.

There is however, one point in almost every transaction where there are no protections, where there is risk for the buyer: When the buyer actually takes possession and sees the property for the first time, without the seller and their stuff inside.  Per the California Association of Realtors RPA, the seller is required to deliver the home to the buyer in substantially the same condition the buyer bought it in.  The fixtures and everything negotiated for is still there, left behind for the buyer.  The buyer will almost always conduct a final property verification or walk through prior to the close of escrow.  But what happens when a seller takes the drapes or they remove a light fixture when they move out?  What’s the buyer supposed to do and what can the agents do?  You might think that the buyer would hold up the close of escrow and demand either the return of the items or some form of compensation.  But more often than not, the buyer doesn’t actually see the empty home until the seller has moved out the day of closing.  Unless negotiated otherwise, a seller is not required to vacate their property prior to close of escrow and the money exchanged and the deed recorded in the buyer’s name.  Thankfully, the removal of included items doesn’t happen very often.  What does happen however, is that a seller moves their stuff out and they leave damage behind that either no one knew about and no one anticipated.  I recently had a transaction where the seller moved out and left behind a 2’ water damaged portion of hardwood floor.  There had been a large potted plant that hadn’t been move in years and once moved, revealed that the pot had leaked and the floor was a buckled and stained.  In this case I had the seller and had to tell them they were going to have to compensate the buyer or have the floor repaired.  It turned out a repair meant refinishing the entire wood floor.  The seller had no interest nor willingness in giving their buyer a brand new floor, and since every home is sold “as is,” a negotiation ensued whereby the seller agreed to write a check to the buyer in the amount of $1,000; roughly a third of the cost to replace or refinish the floor.  Luckily I had an upstanding seller and an understanding buyer, but can you imagine if the seller said, “Go pound sand,” and walked away from their responsibility?   On occasion this does happen.  More common examples of issues at close are when a seller takes away their area rug revealing a faded and sun damaged wood floor that was not evident when the carpet was down.  Or when a flat screen TV is removed and the wall behind was never painted.  Even little things like picture frame hangers and nail holes can be a problem.  One time I had a seller conscientiously pull out all the nails and meticulously patch and paint every hole with a small roller.  But when the paint dried it became clear that the walls had faded and the touch up made the walls look like a Dalmatian.  The seller was gone and the buyer had to repaint and boy were they pissed.   Even the best intentions can sometimes cause a problem with a transaction.  I think of all points in a transaction, this is the one I am always most nervous about.  Usually resolution falls on the shoulders of the Realtors involved.  I make a call, the other agent makes a call.  Most of the time it’s little dollars and the situation gets resolved amicably.  Just another example that using a well-respected Realtor for representation doesn’t cost, rather it saves.

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RAW: My Approach To A Changing Market

RAW: Recognition Acceptance Willingness.

I met with a couple the other night who are considering putting their home up for sale.  As I prepared for the meeting, I began in my usual way, by assembling the comparable sales data. This would allow me to assess our market and in this case, make and substantiate the argument that our market was going through another correction.  When the market is changing, pricing and marketing strategy become of paramount importance.  The ability to recognize, plan and ultimately strategize an approach when the market is in flux, is why the real estate industry will never be a purely online enterprise because the market is always in flux.  To use a military phrase, boots on the ground, will always trump an aerial flyby for accurate data collection and interpretation.

I meet all kinds of people in my business.  Every client is different which means I have to be ready for any one of a thousand different scenarios when sitting with a potential buyer or seller.  The reasons a seller is selling affect how we approach selling.  Timing, equity and urgency all factor into the approach, but in the end has little to do with the ultimate sales price.  The “I need to get ‘X’ out of my home to make this worthwhile” idea, bears little relevance on how the market views a property nor what it will sell for, only what the seller would be willing to sell for.  Everyone has their own motivations and because of this, I need to quickly assess that motivation and determine if I can help them and ultimately if I can be successful.  If a seller wants an impossible amount for their home, I will likely decline the listing.  Admittedly this doesn’t happen very often, but it does happen.  There’s an old saying that goes: “It’s better to be the second wife and the third Realtor.”  Funny, but as is with such old jokes, not so far from the truth.

As it turned out the couple were very sweet, thoughtful and inquisitive.  They weren’t thrilled with my current outlook but seemed sincerely appreciative of my candor.  With the market correcting, I wasn’t about to “buy” this listing.  This would just hurt my sellers and cost me money.  “Buying a listing” is the practice of a Realtor overstating the value of a property so that when a seller is thinking about which agent they’ll hire, they say, “Well that agent said we could get $30,000 more,” and this often sways a seller to hire the agent that says they can sell for more.  Unethical?  Perhaps.  But since pricing a home for sale is not an exact science, it can really come down to a matter of opinion.  However, if you know you are competing for a listing, it can be very hard to resist the temptation of adding a few extra bucks when you sense the seller isn’t of the same mind set as you regarding price.  Predicting a higher sales price than your competition isn’t always wrong though.  When the market is on the rise, predicting a movement to the upside is to your client’s benefit.  I’ve prided myself on recognizing this before my competitors and in doing so have helped my buyers and sellers to get better prices.  But when a market is in a correction and prices are flat to softening, buying a listing does no one any good.  It gets the seller committed to an agent and when they are unsuccessful, the agent simply approaches the seller with a price reduction.  That’s not to say all Realtors do this or that I am never wrong or have never taken a listing that I believe was priced incorrectly.  But when I do take such a listing, I am pretty forthright with my sellers.  It doesn’t mean they’ll listen to me but I do make my opinion known.  It’s a little funny really that I am hired for my experience and expertise, yet sometimes my sellers just feel they know more than me.  What can I do?  It’s ultimately their home and every decision theirs.  The only decision I control is whether I take the listing.

When the market is transitioning from one favoring buyers to one favoring sellers, I encourage my buyers to pay a little more to get the house and the sellers to ask a little more than the last comparable sale.  But when the market shifts from sellers to favoring buyers, the dialog is a lot more complex.  For my sellers I try to get them to understand that a declining market is like a game of musical chairs: the goal is to get a chair, any chair, before there are no chairs left.  For buyers the obvious temptation is to say, “Wait, prices are coming down.”  But this is not necessarily the right advice.  Take the market we have today. It is clear to me that prices are in a retreat; that we are giving up some of the 2013 gains.  As I wrote in my last blog, the market trend lines in real estate are never straight up or down, nor are they smooth when looked at month to month.  On the contrary, they are jaggedy little devils that go up and down and side to side, one week to the next.  But here’s the thing… if you find a home you like, you should buy it, or at least try to anyway.  If the price doesn’t seem consistent with the market’s direction and you believe the market is going down, as a buyer I recommend offering less.  And the longer the home has been on the market for sale, the lower you should offer.  That is not to say you are going to steal the home.  “Stealing a home” to use that rather unsavory phrase, requires the presence of duress.  That is, the seller must be under undo stress to get out of the property.  This could be purely financial maybe because they are going into foreclosure or perhaps personal like a divorce or death or imminent job loss or transfer, but in any event there has to be duress.  By definition however, this is not market value.  Market value is what a willing buyer and a willing seller agree on without the presence of duress.  So if the market is in decline and a seller can’t sell for what they thought they could and makes the decision to accept an offer from a would be buyer for less than asking without the presence of duress, that is by definition the market value of that home at that time and place.  So when the market is softening as it is now, a savvy seller is going to be more aggressive on their price in hopes that they’ll capture that one buyer in the market for a home like theirs.  Since they are competing with all the other sellers in their market for that same buyer, it is not advisable to be offering the same value as everyone else, you have to offer more.  The property that offers the most for the least is going to be the one that sells first.

Meanwhile the savvy buyer is going to write a more aggressive offer on the home they like not because they are trying to steal it, rather because they want it.  They just want it for less than the seller is listed at.  A buyer can’t be afraid to write in a softening market and a seller can’t be too quick to say no.  Ultimately the two sides have to come to an understanding if there is to be a deal.  Thus the key to a changing market be it up or down comes down to the RAW truth: Recognition, Acceptance and Willingness.  So with that, go out and make the deal, because a buyer should never lose a dream home over a few bucks and a seller should never walk away from a sure thing when the next one could be months away.  Remember, it’s always better to get a chair, any chair, than to be left standing when the music stops.

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We May Be In A Drought, But Rain Is Coming

A changing real estate market is a lot like staring in the mirror; day to day you look the same, but over time you find you actually look a lot different.  That’s just the way it is.  For months we’ve been feeling a slowdown in real estate.  Little things stand out, each giving some indication we were cycling out of a seller’s market and back into a buyer’s market.  Seasonal – that’s what most agents thought; spring is always strongest and summer is solid and by August we feel the summer buyers going away and with them, the urgency to get in and settled before school starts.   Heck, August is the slowest month of the year we reasoned and this year held true to that, it was slower.  However as we venture into fall, were seeing a greater indication that we are in a market adjustment rather than just seasonal slowdown .  Sure, great homes are still selling really fast, the problem is there aren’t very many of those and your more average properties aren’t moving quickly at all and usually require some price adjustment and if you’ve got a light to moderate fixer, you showings are like a ghost town; lifeless and lonely.

If you look at a graph on real estate it is never a straight line.  At best if you look over a long enough period the line is rounded and smooth, but even then it’s not a straight line.  Zoom in and it’s all jagged, reflecting subtle fluctuations from one month to the next.  So to jump right in and assume that the sky is falling because the last month was slower than anticipated is unwarranted.  However, string enough months like this and you have a trend.  This is how the Conejo Valley market is today, trending lower.  The question now is, how slow are things going to become?

There are always several forces at work at any one time when assessing real estate trends.  There’s the National economy which is improving but there is still no real inflation or better said, wage inflation.  This means people aren’t making more money than they’ve been so prices really can’t be expected to go up until we make more money and can afford a greater house payment.  Then there’s the local economy.  Is there a shift in hiring?  Are people coming in or being let go?  This is really important for a couple of reasons.  Obviously if people are coming in there is an increase in demand for housing and that puts pressure on inventory and prices as demand exceeds supply.  By contrast if people are losing jobs they aren’t looking to buy and quite possibly looking to sell which puts pressure on prices to the downside as more people compete for fewer buyers.  There’s also the confidence level that goes along with a changing employment picture. People don’t make big decisions and take on more debt when they aren’t sure they’ll have a job.  Moreover even those secure with their job are affected by the overall insecurity.  If all anyone is talking about is layoffs, it’s pretty difficult to be positive.  The area’s biggest employer, Amgen, is in the process of restructuring and it is having a numbing, slightly depressive effect on the community’s overall attitude and confidence.

Our inventory is actually relatively stable.  After a couple years of absurdly low inventory, below 300 units some months, we are hovering around mid-600 units for sale and have been so for several months. What’s changing is the number of sales which are down in the neighborhood of 20%.  Seasonal?  Yes, but that is being exacerbated by the job insecurity.   And it’s not just Amgen employees that are feeling insecure. It’s the local sushi restaurant owner and the local small business owner, because the insecure corporate employee is changing the way they spend their money when they are not sure they’ll have a job in a month.

National economy, local economy and let us not forget national politics (it’s an election year) and Geopolitics.  There’s a little bit of that going on these days too.  In total it adds up to one big pause.  Then add into the mix the seasonal nature of real estate and what you get is a slowing trend.

When the market was on the rise, there were only a few Realtors who recognized it early and coached their sellers to boost the price.  Most were months behind the curve.  But when a slowdown is happening, everyone starts to see it around the same time.  Listings that should be having lots of showings get a scant few; sellers who overshot their prices during the spring market find themselves falling down the elevator shaft of price reductions with the prices going down faster than they think are willing to reduce.  New listings of course have the benefit of seeing the older ones flounder and will undercut their competition, which in turn creates a vacuum effect and pulls everyone down even further.

When does a market decline slow?  When buyers come back to the table or inventory declines.  What makes them decline in the first place is a shift in the supply/demand balance.  The same thing makes them go up too.  So we’re going to give a little of those 2013 gains back and frankly this is natural because the line on the graph is never straight up or straight down or flat across, it’s always bouncing.  Just hold onto your hat because you’ll want to when it rains and you’ll need it when it’s sunny again too.

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Just How Local Is The Real Estate Market?

Real estate is local.  That’s what they say anyway… usually it’s the final tag line in an article or interview discussing real estate values and market conditions.  Kind of an afterthought really, yet factually just relevant enough that it needs mention.  The funny thing is, real estate is so local that any broad analysis can easily be useless.  Let me explain.

In our area along and near the Los Angeles/Ventura County line, we have half a dozen towns and a population under 200,000.  To our east lies the San Fernando Valley which if a city unto itself would be a top 10 largest city in the country; to the south, Malibu.  We’re in the weird part of California where the Pacific Ocean is both south and west of us.  We’re just a mere 35 minutes to downtown Los Angeles… at 4 am, same for Beverly Hills.  Yet those are markets included when analysts speak about L.A.  The statistics include real estate in and around the greater Los Angeles metropolis.  If you live here, you know just how stupid that sounds but that’s how analysts look at trends in the L.A. market.  Fact is, Beverly Hills real estate has almost nothing to do with Westlake Village.  The only connection is that they’re both real estate an located in Southern California.  If you were looking to buy smaller in Beverly Hills and for the same money you can buy bigger in Westlake or Calabasas, then there might be a distant relationship, but it’s just not close enough geographically nor in lifestyle to really be a consideration.

Is there a connection between the value of property in one place and to another close but still far away?  Sometimes.  I remember back in 1994 when the market was at or near the bottom of that early ‘90’s collapse.  There was a total fixer in the flats of Beverly Hills listed in the mid $900,000’s.  I said to an associate, “If you can buy in Beverly Hills for the $900’s, then you better be able to buy in Studio City/Sherman Oaks in the $800’s; and if you can buy there in the $800’s, Tarzana best be in the $700’s, Woodland Hills in the $600’s etc.”  So there is a relative connection in their pricing, but it’s pretty thin.

My brother in law, David Bader, sells with the John Aaroe Group in Beverly Hills.  He has a client who builds spec homes.  Sometimes those homes are in L.A., maybe the Hollywood Hills and sometimes in the south east Valley, like Studio City.  David tells me people are paying $1.3M for a teardown in Studio City and building a $3M home on it. He says that there’ll be multiple offers on both the teardown buy and the estate home sale.  Same is true in West Hollywood, Bel Air, Brentwood, Santa Monica, Venice, all over the Westside.   The market is so hot it can burn you to touch it.  Is there a correlation with what is happening in Santa Monica or even Studio City to what is happening in Westlake?  Not really.  They are on fire while we are just smoldering.  It’s a different buyer with different priorities and very different money.  And with very few exceptions the person that wants the Westside is probably not even considering the Valley and almost certainly not Calabasas and definitely not Westlake or Thousand Oaks.  But that’s OK, because the person looking to buy in Thousand Oaks is not considering to buy in West LA either.  Here they would be buying fabulous public schools and an easy suburban family lifestyle, whereas the Westside is the City, celebrity glamour, nightlife and private school.

It’s interesting, just 15 years ago there used to be subdivisions and model homes sprinkled all over the Conejo.  Today, barely a one.  Yet just 10 miles away in nearby Moorpark, another small Ventura County hamlet, there are some new homes being built.  That’s not very far away, 18 miles, but the impact of those homes on our affordability and housing market is nil.  So 18 miles isn’t local enough.  How about comparing the east part of our Valley in Agoura Hills, a small city next to Calabasas to Thousand Oaks just 7 miles away.  Is there a relationship between Agoura and T.O.?  Yes, but someone who’s looking Agoura is probably not willing to drive the extra 10 minutes to buy in Thousand Oaks or Newbury Park.  Sure, there’s some exceptions, after all it’s just 7 miles, but sometimes your buyers would have you think it were a thousand.

Amgen, Thousand Oaks’ largest employer, recently announced a sizable layoff.  This has cast a bit of a pall, over the west end of our valley.  It’s felt strongest in Newbury Park and Thousand Oaks where many employees live.  So now we are talking about 5-7 miles, that’s pretty local.  Break that down even further and look to certain newer subdivisions where the concentration of Amgen employees is greatest and there’s an even stronger effect of the Amgen Pall.  We are now talking about a square mile here and a square mile there.  We are talking really local, Hyper Local.  But that’s the nature of real estate.  You’ve heard the old adage that the three most important words in real estate are location, location, location.  I like to think of this as: the town, the neighborhood, the street and lot.  Does one sale in a neighboring subdivision have an impact on another similar home in a different subdivision?  Maybe, maybe not – not if the buyer only wants the one subdivision, then the value of a sale just a couple streets over is of little consequence.  You can’t get much more local than the street and lot.  So if you ask me, is real estate local?  I say, you better believe it.

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Trulia Acquired By Zillow

The cost of doing real estate just got a whole lot more expensive.  You know there’s an old joke: What’s the difference between and California real estate license and a California driver’s license?  Not everyone in California has a driver’s license. 

The real estate industry in California has long been plagued by easy licensing and the cheap cost to start a real estate business.  It’s a little like the idea that the American Dream is that everyone should own a home.  As we saw with the real estate meltdown of 2007, clearly not everyone should own a home.  The same is true for the practice of real estate; not everyone should be allowed a license.  There is a reason that when asked about their experience during a real estate transaction, most real estate professionals are held in esteem only slightly better than used car salesmen.  The reason is simple, too many people that have no business doing real estate are doing real estate.  Ever looked into becoming an attorney or getting a license to sell insurance?  How about securities like stocks and bonds?  Getting your Series 6 or Series 7 is tough.  Even to become a sheet metal worker requires an apprenticeship.  Real estate?  Pay for an online class, take a bunch of practice exams and sit for the state exam and voila, you can sell real estate!  Yeah, you need to find a broker to hang your license with but that’s about as tough as standing in the street and yelling, “Free money” and having people put their hand out.  It’s easy.  And the fees?  Not that much.  For about $1000 you can get out there and sell real estate.  However, that’s about to change.

With Zillow’s purchase of Trulia announced today, we may actually see the cost of doing real estate go up.  It’s always been the case that the best real estate agents are spending money to advertise their clients’ properties.  They spend money on prospecting and marketing for the clients and themselves.  The consolidation of the advertising arena means that there is less competition for ad dollars and that means higher costs to the consumer who in this case is all the real estate agents.  If suddenly to be competitive you have to spend real money marketing properties online, agents without the benefit of deep pockets are going to find it more difficult to compete.  This is welcome news for seasoned real estate agents.  It means fewer newbies can offer the level of marketing because it is going to cost more.  It also benefits the traditional brokerages who are constantly fighting over the same licensees.  A broker that pays for services from Zillow, is going to have a better draw than one that does not.

Zillow and Trulia have said they anticipate keeping both brands alive.  We know this will not be the case.  Score Seattle, sorry San Francisco, you lose this one.  It is only a matter of time before the bean counters and Wall Street demand the elimination of duplicate and overlapping costs.  No need to have two CEO’s, same for HR, admin and eventually sales and marketing.  I can hear Carl Icahn and Bill Ackerman now…

So the real estate marketing world is going to change.   Fine with me.  It will cost me more and to that I say, “Great!” because eventually I’ll probably benefit. 

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Pushing A Buyer To Lift Contingencies, What Options Are There?

Most sellers begin the process of selling their home with a few common misconceptions.  The usual ones revolve around condition and price; “someone will pay my asking price because they’ll fall in love with the home just as I did.”   Or the, “I lived with it all these years (some problem discovered on the inspection), my buyer can too.”   One of my favorites is the, “I need to get “X” amount out of my home, so we should price it with that in mind.”  These are all typical seller positons that generally soften up when confronted with the reality of home selling.  The one that is trickiest however, is the one after you’ve gone under contract, where the seller expects the buyer to perform and do the things the buyer is supposed to do, like get a loan approval and lift loan, appraisal and investigation contingencies.

Now I’m not talking about someone deliberately committing fraud, that’s a whole other can of worms, no I’m speaking to the process in California whereby the buyer has definitive timelines that they are contractually bound to adhere to.  These timelines include, apply for a loan, do investigations and include lift any and all contingencies. 

What does this mean lift contingencies anyway?  The California Association of Realtors Residential Purchase Agreement (RPA) defaults to a 17 day time allowance for a buyer to do their due diligence, their investigations, which would typically include a physical inspection (which could also mean inspecting for mold, geological conditions, Radon testing, structural, roof etc.)  It also includes things like verifying the insurability of the property, examination of HOA docs, and ensuring clear title to the property.  Sometimes a buyer might even have a contingency on selling their current home, but this is a little different so I won’t be addressing this specifically today.  The most critical contingency is on the buyer obtaining financing which includes having an appraisal done to validate the sales price.  At the end of the buyer’s due diligence, the buyer is supposed to sign off on contingencies or cancel the transaction; Paragraph 14 b (3)At the end of the time specified (or otherwise specified in this agreement) Buyer shall, Deliver to the Seller a removal of applicable contingency or cancelation of this agreement.”  In other words, at the end of the default of 17 days (unless otherwise agreed to) the buyer either lifts or cancels.  It is not until the buyer lifts all their contingencies that their deposit can be forfeited.  A buyer has no money at risk until they lift all contingencies.  In other words, the buyer can cancel escrow and get all their deposit back.  Does the buyer need a valid reason to cancel?  Technically, yes, but how can you ever prove otherwise?  It’s really pretty impossible for a seller to try and prove the buyer isn’t cancelling for one of the allowable reasons as say opposed to, they just changed their mind.

So what happens when day 17 comes and goes and then day 18 and 19, and the buyer still has not lifted their contingencies as required under the terms of the agreement?  What happens really depends on how strong the seller’s position is.  Do they have a backup offer in place or is this the only buyer?  Does the Realtor sense the buyer is stalling for reasons other than the loan or appraisal ie: they are still trying to assemble all the down payment monies?  Are the buyer and their lender really moving forward or are they playing games, maybe hoping rates are going to drop?  Is it even reasonable to expect a buyer and their lender can actually get financing in 17 days?  You end up asking yourself, do I have a deal or don’t I?  The answer to these questions will dictate the response from the seller. 

Let’s say you have a back-up buyer.  In that scenario, on day 15 the seller’s Realtor might send out a “Notice of Buyer to Perform,” NBP.  This is required for a seller to cancel.  Under the terms of the agreement, a seller cannot cancel until the allotted time frames have expired and a notice to perform was delivered to the buyer 48 hours prior to the unilateral cancellation by the seller.  Huh…?   A seller has to give 48 hour notice (unless otherwise previously agreed to) before they are allowed to cancel the transaction.  If a seller decides they want to cancel but haven’t yet delivered the notice, a seller must add on the 48 hours before cancelation is possible.  The buyer has to be given the opportunity to lift contingencies prior to cancellation.  But what if you don’t have another buyer and you are reluctant to cancel your one and only buyer just because they are a little slow in getting loan approval?

This is the most common snag in the sale process; the buyer’s lender is late and without a back-up offer, you’re not going to blow out your buyer just because off a few days, but do you really have a deal?  The reality is, many homes sale contingencies are not lifted on time.  But what happens when a couple days turns into several, then into weeks, then what?  This is when the remedy is the lesser of two evils.   If I start to sense a real problem, I usually encourage the seller to send the Notice to Perform even if they do not intend on exercising the option to cancel right away.  That’s correct, the seller can send the Notice to Perform without actually cancelling the transaction.  This is a little like an old western movie where the sheriff pulls out his revolver and sets it on the bar.  He’s letting everyone in the room know that if things get out of hand, he’s ready to shoot.  But that doesn’t mean he has to shoot, only that he now is ready to should the need arise.  Because the Notice to Perform must be delivered for the seller to cancel, it can be delivered at any time and so the 48 hour clock is ticking.  It is in this situation that the seller’s has discretion to cancel.

Can’t a seller just cancel anytime?  No, a seller can only cancel for buyer’s failure to perform, ie: lift contingencies.  Yet the buyer can cancel at any time, even at the last minute.  California courts have ruled that you can’t force a buyer to buy, but your can compel a seller to sell.   Ya ‘Gotta love California.  The lifting of contingencies is important because up until they are lifted, the buyer can cancel without any forfeiture of deposit.  Once the contingencies are lifted however, their deposit is susceptible to forfeiture and the seller can cancel the buyer and keep the deposit.* 

*Keeping a deposit is never as easy as it sounds.  Why?  Because a seller who has an open escrow, is still in escrow until it’s closed by mutual agreement (with the buyer) or the court of law or through arbitration.  That means that the deposit can only be handed to the seller, and escrow closed, when the buyer agrees to allow this. “Wait a minute,” you say, “The buyer has to agree to let me keep their deposit and to cancel escrow, even after they wasted my time and defaulted?”  Yes.  So when they don’t agree what happens?  A couple of things can happen, first you can negotiate to give them some of the deposit back while keeping the balance.  More often than not this is the outcome.  Second, you can continue to sell your home, but you’ll have to disclose to the new buyer there is an open escrow elsewhere and then when you accept an offer, open the new escrow with a new escrow company.  Then eventually after mediation and arbitration with the original buyer, you win, and the arbiter awards you damages, you keep the deposit money and have closed escrow with the new buyer.  So it’s not exactly as simple as cancelling your buyer for failure to perform and then just keep their deposit.  By the way, the maximum allowable forfeiture?  3% of the purchase price, which is why almost every deposit in a California home purchase is 3%; that’s the maximum a seller could retain under the liquidated damages clause in the event of buyer default.

Knowing all this about default and attempts to keep deposit, what’s a seller to do when a buyer won’t lift their contingencies when they’re supposed to?  Here is where it really comes down to your agent, their status in the real estate community and their interpretation of the situation.  Emotional sellers at this point really need an agent who’s knowledgeable, one whom they trust and one who is hopefully familiar with the other agent.  The agent is going to have to speak with the buyer’s agent and really assess this: Do you have a deal or not?  For me, I am the hammer.  I make the other agent stay on their client.  I hammer them over and over and over, to get those contingencies lifted.  I’ll send the notice to perform, even when we really don’t want to cancel.  I’ve had agents yell at me because I’ve done this and I’ve told them, “We aren’t cancelling this minute but if your client doesn’t get their act together and release contingencies, we will.”  It doesn’t always work and sometimes the delays are totally legitimate.  Sometimes they are due to honest mistakes but sometimes they really are deals going off the tracks and it takes a hammer to get them to either “Putt or get off the green…” 

It’s never easy when a deal starts falling apart, but more often than not a good set of agents can keep a deal moving forward and get you to the finish line, close the escrow, so that everyone can live happily ever after.

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