What The Heck Kind Of Market Is This?

I have some clients that just love real estate.  They watch HGTV and Millionaire Real Estate Agent, Fix and Flip etc.  They are on Zillow or Redfin all the time, it’s a passion for them yet when it comes time to buy or sell, they’ll call me because no matter how much they learn online, they don’t want to mess with a major financial decision without a professional’s help.  “The Real Estate Guru” one young client said his parent’s call me.

One of the things that I help my clients with is interpreting the market.  For example, a couple of my clients are convinced we are in a bubble, rates are going to rise and the market is due for a correction.  That would be great for them as buyer’s… if only it were true.  As you probably know if you follow my writings, I am a stat guy.  I follow my local numbers as close as anyone except maybe my friend and manager Chuck Lech (checkout the LechReport here). He’s given me some great data this month and I’d like to interpret that data for you.

Currently the Conejo Valley has just 350 active listings (search available inventory here).  This is very low. supply_demandv2 In fact, it hasn’t been this low since we had 281 active listings in February 2013.  The important thing here is that back then, from January to June of 2013, prices rose on average between 15-20%.  Demand out weighed supply so prices rose.  Also noteworthy today, is that the number of homes priced under $750,000 is down a whopping 48% vs. 2015 and 34% vs. 2016.  Plainly put, prices in this range are rising as demand out strips supply.  Delving  deeper, I’m drawn to the contrast of homes between $750,000-1,000,000 vs. $1,000,000-1,500,000.  Naturally one would assume that as the price range rises, demand would wane, inventory would rise as affordability declines and it would become harder and harder to find buyers as you go up in price.  But that is not what is happening, to a point anyway.  The data shows us that in the $750-1,000,000 the inventory is virtually unchanged when compared to both 2015 and 2016.  Here we are finding many of the homes that were in the sub $750,000 range but as prices have risen, were pushed up to the new category.  That explains a little bit of why the sub $750,00 inventory is so low.   When looking at the $1-1.5M range, inventory in 2015 and 2016 were identical but that number is down 35% in 2017.  Once again that means prices are poised to rise in this range.  But what about this $750-$1M range?  Shouldn’t the pattern of lower year over year inventory apply here as well?   And if it doesn’t, what gives?

Allow me put on my speculation hat for a moment.  We know interest rates have risen over the past year.  We also know we live in an area that has not seen substantial income growth.  I’m thinking part of the problem is that homeowners with homes in the sub $750K are finding it difficult to make the move into their natural next place, the $750K-1M range so they aren’t selling (see homes that have recently sold in this price range here).  hsThis explains in part why the inventory is acutely low under $750K.  While this could be purely about affordability it could also be that they don’t like the home selection in this range as much as the home they currently own. That, coupled with a higher interest rate thus higher cost of ownership, why move?  I suspect this is magnified in the west end towns of our Valley like Newbury Park and Thousand Oaks west of the 23 freeway.  Why?  Perhaps this is a result of higher paid employment in LA; you know, Los Angeles city pay vs. local employment.  People living in the east end of the Conejo Valley, commute to Los Angeles where incomes are higher.  The recent Rotary/CLU Economic Forecast breakfast made it very clear that income growth, job growth and population growth in Ventura County is basically stagnant.  We have an aging population as younger people can’t afford to live here especially in the Conejo Valley.  While zero population growth may be the most concerning in the macro picture, slow job and income growth hits us in the wallet and that’s about as micro as you can get.  Looking at the rise in demand/shortage of inventory for the $1-1.5M range, I’d suggest that perhaps those buyers have experienced superior income growth and/or superior price appreciation for existing homeowners.  Not coincidentally, there’s a greater concentration of these properties in the most eastern edge of Ventura County and into Agoura and Calabasas.

Whatever the reason, the fact is you’d have to go back to 2005 to find more sales between $1-2M than we had in 2016.  With demand obviously high and inventory declining, one has to conclude there will be upward pressure on prices.  Supply and demand is a lot like gravity.  We might think we can defy it for a moment, but eventually it catches up with us.

To the question of are we overheated or over valued (are we in a bubble?), I’d say no. Lending is still very restrictive so only qualified people are buying. Moreover, I’ve just speculated on why some ranges are stronger than others but to the greater question of inventory, we can’t forget 2 important facts affecting California inventory: We stopped building for the better part of 6 years from 2007-2013 so our natural growth of supply is way, way behind historical averages and foreclosures. By some estimates, this number is in excess of 700,000 units. This trend (Allow me to remove my speculation hat and climb on my soapbox for a sec…) is unfortunately worsening in Ventura County as a result of poor land governance by local municipalities and by the NIMBY (Not In My Back Yard) mentality. As recently as two weeks ago the City of Camarillo turned down a proposal to build much-needed homes at the bottom of the Camarillo grade.grade Reasons cited were traffic
concerns and the loss of the “Gateway” view of a farm field (immediately adjacent to an existing subdivision mind you) entering the Camarillo plain. This fool’s errand ignores that traffic is increased by not building not the other way around. In fact, the CLU group stated that as a result of slow growth policies, 80,000 cars travel into the Conejo Valley while just 40,000 leave every day. This is because there’s insufficient housing closer in but no shortage of employment. Another reason most people are unaware of, is that our supply was shrunk incalculably by the banking industry’s behavior during the financial crisis. Just as the real estate market was showing signs of stabilizing, say around 2012, major lenders, their books filled with defaulted properties, decided it would be better for them to sell off the foreclosed assets in bulk sales to investment firms and hedge funds like Blackstone and American Homes (located right here in Agoura Hills). These firms converted large numbers of foreclosed properties into rentals. They fixed them up and they rented them creating privately held or publicly traded REIT’s (Real Estate Investment Trusts). To be clear, we are talking about thousands of homes in California alone. These homes are for all intents and purposes were permanently removed from the saleable population because of strict Wall Street guidelines governing REITs.
When you add all this up you get a picture where affordable housing is disappearing. Inventory is going to remain tight and until such time as we find ourselves in a recession, nothing is going change this course nor slow price appreciation down.

Posted in Demographics, Economics, Home Buying, Home Selling, Real Estate, Thousand Oaks, Tim Freund | Tagged , , , | 1 Comment

The Effects On Real Estate Of Trump’s Executive Order On Immigration

If you live near a big city or one of our coasts, you were probably pretty surprised and likely disturbed to hear the President banned entry or re-entry of immigrants from one of 7 Middle Eastern and African countries.  From the various reports I’ve read, you were probably less affected if you lived in middle America.  Maybe there aren’t as many immigrants there, though that would seem odd since immigration is such a lightning rod issue in middle America.  To try to bring home the impact and implication of this Presidential Executive order, you need look no further than its potential effect on real estate.

I have a listing in the City of Thousand Oaks.  It’s been on the market for about two weeks.  In that two week span I had 5 offers.  While we in real estate don’t look at the color of our client’s skin, we can’t help but notice their country of origin.  Often times our clients were born abroad.  Very often they are here on one type of visa or another working for one of the many tech or biotech companies that have made their home in California.  In the case of this specific listing, the 5 offers I had were from buyers whose point of origin was from outside the U.S.  I had 3 offers from Chinese nationals with visas to work here, all engineers or scientists.  I had an offer from a young family from Iran, but presumably of Armenian descent based on their last name.  In their letter to the owners that accompanied their offer, was a picture of them and their two babies with Santa caps on in front of a Christmas tree.  The fifth and final, which was the highest and an all cash offer, came from an international biotech businessman from Iran.  He wanted his wife and children here so his girls could attend high school and college in California.  We took this man’s offer.  It was the highest by a small margin and was all cash.  We signed off on the offer on Friday, opened escrow and planned for inspection Monday.  On Saturday the man flew home… to Iran.  My immediate reaction upon hearing the President’s order banning people from Iran from entering our country was concern for my seller.  He and his family have relocated and was thrilled to get such a great offer from such a great buyer, but that was before the Executive Order banning Iranians from entering our country.  I’ll never forget sitting in my car Saturday morning listening to Fox News on satellite radio and thinking, my God, we are now in a binding contract with someone who may never be able to re-enter our country.

I have to assume the President was well intentioned in his ban, but here I am, a Realtor in a suburban community in Southern California and my client’s and I have been directly, immediately and negatively affected by this Presidential Executive order.  2 out of my 5 offers were buyers who were born in Iran.  3 from China.  Could they be next?  Aside from all the terrifying possible implications about racial and religious profiling, just strictly talking business, this action is bad for business.  It’s bad for real estate and it’s bad for the tech companies that have provided so many jobs world wide because they depend on these highly intelligent and highly skilled workers to do the work that there aren’t enough qualified Americans to do.  Just look at the outcry from Microsoft and Google.

When you think about all the foreign property owners in the U.S. you can’t help but be more than a little concerned for the American real estate market.  I mean what if foreign owners feel that American real estate is no longer a safe place to invest?  What if they begin liquidating?  In Nazi Germany when the Jews had to sell either as forced by the government or out of desperation to get something for their assets, they sold at a steep discount.  We saw what happened during the Great Recession to real estate values when distressed sellers and banks sold en masse, value plummeted.  I’m not suggesting this is what is going to happen but I am suggesting that this creates an air of uncertainty and uncertainty is bad for real estate and bad for business.

Bad for business.  Never thought President Trump would be accused of that.

 

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It’s Mine

 

It’s mine, it’s my house.  It’s a cute little bungalow; it’s a darling condo with a view of the greenbelt; it’s the estate home I deserve, with the pool and outdoor BBQ… oh the steaks I’ll grill!  Heck I’ve worked my tail off to get here.  I’m so excited!   We just closed. I can’t believe it, it’s mine!

Real estate.  I help people buy and sell real estate.  It’s what I do, helping people with that most important decision.  This is what it’s all about.  It’s the feeling you get.  The satisfaction.  To own a home, your home.  This is real estate.  Real estate is homeownership, real estate is life; there’s nothing better, no moment prouder, none more satisfying.  Owning a home means more than a roof over your head, though it is that.  It’s getting somewhere that our parents did – or never did.  It’s about making all the sacrifices of saving.  It’s cleaning gutters and cleaning floors.  It’s calling plumbers and air conditioning guys and telling the landscaper he needs to spend more time weeding and less blowing.  It’s trips to the paint store and Home Depot.  It’s Thanksgiving, prom and birthdays.  It’s bringing home baby; it’s hugs, lunches, it’s saying goodbye.  Goodbye to friends.  Goodbye to kids; goodbye to pets, God we love our pets… is there anything better or anything harder?  And it’s goodbye to the one that spent a lifetime with you; finding a book with a picture as a page marker.  It’s remembering.  It’s forgetting.

Real estate is home.  Home is life.  Your home, my home, our home, this life.  This is real estate and this is home.

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When Should You Consider Doing A Pocket Listing?

I was recently on a listing appointment when the seller asked me, “Do I have to go on the multiple listing?” I was a bit surprised by this and asked my elderly seller, why they wouldn’t want to go on the public market place when that’s where they get the greatest exposure and likely result, the best price? Her answer was very telling. She said she didn’t want to go on the MLS because she didn’t want a bunch of people going through her home. Interesting right? I mean how the heck does one sell one’s home without being “On the market?”

Studies suggest that the 3 most stressful things in life are death, divorce and moving and not necessarily in that order. boxesWhat my client was saying in the example above was that she just wanted her home sold and didn’t want to go through the process of selling. (Ask Tim about your home here) But is that even possible and more importantly, if it is possible, is it realistic and even if realistic, will I be doing right by the seller if I do the listing in this way? The answer is yes.

When a home doesn’t go on the MLS but is an active listing (listing agreement has been signed) it’s called a pocket listing. A pocket listing is where an agent and seller sign listing papers but intentionally agree to not go on the multiple listing service. To keep it, “In the Realtor’s pocket.”  In my MLS rules, a broker must publish a new listing within 48 hours of signing or else have the seller sign an exclude from the MLS document. Pocket listings are frowned upon by the Association of Realtors.  Why?  The reason for the tight timeline and the exclude document is that in years past an unscrupulous agent might tell a client that they are on the market when in fact they are not. The reason this evil agent might do this is obvious: to sell to their own buyer their listing earning both commissions for themselves. Obviously if no one knows about the listing, the listing agent has a much better chance of selling it themselves, right? A quick aside: Dual Agency is allowed in California provided both parties are fully aware of the dual agency relationship. When only one side knows of the relationship, this is called a Divided Agency and it’s illegal and the quickest way for an agent to lose their license.

In our story, my elderly client just wanted her home sold. She’d been in the home nearly 60 years and the whole thing was entirely overwhelming. Being a SRES, a Senior Real Estate Specialist (click here for more on what a SRES is or contact me for more information) I am acutely aware of the difficulty our seniors face when finally making the difficult decision to move. Clearly this was the case with my client. The question then moved from “Yes, I can do a pocket only listing,” to “How am I going to do this?” It’s interesting really. sresPocket listings aren’t the least bit uncommon in the ultra-luxury market. Often times a home is sold in a “Private sale” and only becomes known through public records and from scuttlebutt as people hear about a big sale and word gets out. Let’s face it, there are only so many people in the world that can spend $50M+ on a home therefore being on the MLS is not always required. But in the more moderate price ranges it is quite challenging to sell a pocket listing. So how would I do it?
Faced with this task I told my client that I’d first market to select Realtors that I knew worked in the neighborhood. Since I have a frequently visited website (www.1000oaksrealestate.com) I would add the listing as a Featured Home to my website as well as include it some of my mailers and marketing pieces in a way to inform my circle of friends and past clients of this great pocket listing all the while without giving up the address. There would be no sign of course and I explained it was likely to take more time than a normal listing. As someone who lists a lot of homes, I have the advantage that people call me for information on my listings. This allows me to tell people inquiring about one home for sale, that I had this other pocket listing too. All of this pleased my client, but I bet you’re wondering, will it work?
I put my plan into action in late fall. I showed the home a couple of times using word of mouth but to no avail. Then I included it in my bi annual newsletter, The County Line Gazette (Click here to receive your copy of the County Line Gazette). gazz-prt-scLow and behold I got a call from a Realtor. Understand that I don’t send my newsletter to other Realtors but that’s who called. “How’d you hear about it?” I ask. “My client’s parents got something in the mail from you and knew their kids wanted a home like this so they’d called me,” the Realtor said. Cool! Perfect! This is exactly what we wanted. I showed it and guess what? That’s right, they wrote an offer. You can imagine how pleased the seller was. She really didn’t’ think I’d sell it and then when I got her a good price without having to have “People go through her home,” she was thrilled.

Another time a pocket listing is a good idea is when the seller is only somewhat interested in selling.  In this scenario, a seller might engage a Realtor by saying something like, “If you have someone who’d be interested in my home, I’d be willing to sell if the offer made sense and the price was right.”  Often this is the seller whose not terribly motivated and doesn’t want an agent to spend a bunch of time and money marketing their home when they really aren’t sure they want to sell or someone who doesn’t want the task of always keeping their home “Show ready.”  As an agent who does pocket listings, I don’t love this kind because working for a unmotivated seller isn’t what I like to do.  It’s typically a waste of time.  Still, it can work and is especially useful when working with an agent who is very active in a certain neighborhood where the likelihood that they might have interested buyers, is better.
A pocket listing isn’t usually the best way for a seller to sell but it has its place and can be used effectively in the right situation. And sometimes, it’s is just what the doctor ordered.


New Listings This Month

 

newlistingrockspring

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Top 10 Reasons To Sell In 2017

As homage to David Letterman, here are the top 10 reason you should sell your home in 2017.

  1. Your home has gone up and you want the home of your dreams.
  2. You’re new job is finally paying you what you’re worth and you’re getting killed in taxes so time to sell and buy up.
  3. Your mother in law’s arrival makes your home way too small and the current bedroom count, one fewer than is minimally necessary.
  4. Your neighbor is so close that you hear every argument they have and the temptation to stay out of the conflict has gotten to be too much.
  5. Climate change necessitates a swimming pool and its cheaper to sell and buy a home with a pool than to build one yourself.
  6. Now that your child is school age, you realize your Realtor (Contact Tim Here) was right, you should always consider schools when buying.
  7. The return of the LA Rams means you now have the excuse for a man cave you’ve been looking for.
  8. You bought an Airstream at the latest RV show only to find out your HOA doesn’t allow RV storage.
  9. Your spouse says it’s either move or remodel and has already picked the Beverly Hills designer to help.
  10. And the tenth and final reason to sell in 2017, the outcome of the US election has prompted you to seek permanent residence status in Canada.
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The Significance of Horiike vs. Coldwell Banker on Dual Agency

justiceYesterday the California Supreme Court ruled on dual agency.  Dual agency is when a broker represents both the buyer and the seller in the same transaction.

In Horiike vs. Coldwell Banker, the dispute arose from a discrepancy in the listed square footage and the actual square footage.  The seller had represented that the home in Malibu was 15,000 square feet when permits showed it less than 10,000.  Apparently, the garage and basement were included in the seller’s calculation of the total living area, which as a rule is a no-no.  The listing agent, was apparently aware of the possible discrepancy.  The court ruled that because Coldwell Banker was the broker for both agents, the seller’s agent should have disclosed this possibility to the buyer.  The court reiterated that it’s an agent’s duty to “Disclose any material fact to the buyer that affects the value or desirability of the property that are not known to or within the diligent observation of the parties”.  Hello?  This is a requirement not only in dual agency but in every transaction, even when each party has their own representation.  It’s literally in the first document signed by the seller when a listing is taken and again when a buyer makes an offer.  The document, Disclosure Regarding Real Estate Agency Relationship uses the exact wording the court used.  In fact, one would have to assume the court inserted the language directly from the California Association of Realtors document.

In the case before the court, the Association of Realtors argued that because the buyer had their own agent, the listing agent had a “unique” responsibility to the seller having been the listing agent first.  Why would they do this you ask?   realtor_imageThe Association’s supposition was that even though Coldwell Banker had a dual agency, since the listing agent was not representing the buyer, the listing agent should have loyalty and a fiduciary obligation to the seller first.

What makes the Horiike case unique is not this idea that all material facts need be disclosed in dual agency because that is always the case and the agent really should have disclosed the need to verify square footage regardless of agency since he was aware of a possible discrepancy.  What’s significant is that the decision serves as a reminder that while there may be two different licensees (agents) in a dual agency transaction, the fact they are under the same brokerage as was the case in Horiike, means the listing agent must behave the same as if they were representing the buyer themselves.

Let me explain the distinction.  When I represent a buyer and a seller in a transaction, I always make extra sure anything I know or suspect about the property is brought to the attention of the buyer.  And if a seller tells me something in confidence, if I feel my buyer needs to know this fact because it may affect the way they feel about then property, I tell the seller we need to tell the buyer.  But some disclosures aren’t always clear.  For example, earlier this year I had a dual agency and I noticed that the windows in the living room had a weird orange powder or film in between the panes of glass.  The seller said, it had been that way when they bought the home from the previous owner.  I suspected this was a symptom of a problem with the window seal.  So, I made a point of telling my buyer that the windows may have a problem that wasn’t necessarily just cosmetic.  You would think that of course Tim would want to protect the buyer since he was representing both buyer and seller and you’d be right, I watch out for my clients.  But what if I wasn’t representing the buyer and they had their own broker?  Would I have gone to the lengths of disclosure of suspicions if I were not also representing the buyer?  The C.A.R. contract is quite clear, it’s the buyer’s responsibility to investigate.  The seller has a duty to disclose and an agent to observe.  What would I tell the buyer, I saw something that could be something and maybe you want to investigate?  At what point, does that breach my fiduciary responsibility to the seller to represent their best interests?  I mean I’m no window expert and it’s my duty to protect the seller not cause fear in the buyer on speculation on something I have no real knowledge of which could damage the seller I represent.

When I am representing both buyer and seller however, my role shifts to that of facilitator and I tell my sellers this because they may or may not be willing to allow me to shift into that new role.  They may want me to only represent them (contact Tim here if  you want more information about my services). In the past, if a seller wants this, I get my manager or another agent from my team to assist in representing the buyer.  It keeps things neutral.  This however is the crux of the Horiike ruling:  That even if I get another agent from my office or even another office of my broker, my role changes.  I am a dual agent.

Before I continue it’s worth mentioning that the court’s decision in this case was interpreted very narrowly and to the specifics of this case, so what follows is more of a potential interpretation should this ruling be interpreted differently somewhere down the road.

In Horiike, the court ruled that in this case, that the agency relationship specifically for the listing agent changes when the same brokerage is on both sides of the transaction, even though buyer has their own agent representing them.   Thus it could be inferred that the distinction is that the listing agent’s responsibility shifts to that of dual agent when in any transaction with another agent from the same brokerage.  The listing agent must act as if they are representing both the buyer and the seller even though there’s a buyer’s agent.  It’s as if the buyer’s agent doesn’t exist.  It’s a subtle difference but should a future case interpret Horiike in this way, it is a difference with implications potentially huge for the real estate business.

In a world where there are brokerages comprised of hundreds or even thousands of agents, this potentially creates a real conundrum for sellers.  Again I want to caution that the following is not the  interpretation of the judge in this case, rather a hypothetical “what if” should a future case be interpreted far more broadly than Horiike vs. Coldwell Banker was.  In this example, let’s say a seller listing a property decides it’s not such a good idea to list with a large brokerage.  A large brokerage with lots of agents under a broker could mean there’s a greater likelihood that their agent could be forced into a dual agent role, even though there are two agents in the transaction. While this is still a possibility in a small boutique brokerage, clearly  with the larger brokerage, there’s a greater chance a seller loses their agent’s independence.     Moreover, the seller would have to decline an offer if they are not willing to allow dual agency.  And what does that mean for a buyer?  If my agent is with a large brokerage and I want to see a property listed by the same brokerage and it turns out the seller is unwilling to entertain an offer from that brokerage because they don’t want a dual agency, that buyer can’t exactly go to another broker to write the offer over.  This is because the agent originating an offer for a buyer, is the only one entitled to the commission. procuring_cause This is called “Procuring Cause.”  If I’m a buyer, who’s going to write my offer if they won’t be entitled to a commission?  So, the Horiike ruling is potentially not without consequence and could lead to a move towards smaller independent offices and away from the huge Coldwell Banker, Keller Williams and Century 21’s of the world.  Now personally, I don’t believe that dual agency is ominous and in fact I do it a few times in any given year to the benefit of both my buyers and sellers.  That said, I guess this is another good reason for an agent to be with a boutique brokerage, like I am (Learn more about Tim here).

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The Trouble With Escrow

When it comes to most anything, it’s safe to say California leads the way.  Mario Salvio and the free speech movement at Cal Berkeley in the early 60’s; the environmental movement of the 1970s began following the Santa Barbara oil spill even medical marijuana in the mid 1990’s.  Regarding innovation, it’s hard to argue that California isn’t the world leader given we are the birthplace of the microchip and all that has followed.  When it comes to real estate, California’s no different.  Her licensing is one of the nation’s most respected and stringent.  In fact, a California Brokers license like I have, is honored in more states than any other without relicensing.  (Learn more about Tim here)  So naturally as a leader in so many ways, you would think we are cutting edge with regards to the method or process we us to transact real estate.  This is evident in our use of escrow.

If you’ve ever bought or sold a piece of real estate in California, you know we don’t use mortgages rather, a deed of trust (a cutting edge benefit to the lender) and we don’t use an attorney to close. California is an escrow state.  This means that there is a neutral 3rd party at the center of a real estate transaction (Picture Rich Uncle Pennybags from the Monopoly game with a bag of cash in one hand, keys to the property in the other, crossing his arms and handing the keys or the money to the buyer and seller).  hand-with-money-compressedThis is fundamentally what escrow does.  Unlike many states where closing is done at a table with lawyers, buyers and seller sitting across from one another, California relies on an escrow service to conduct and facilitate the transaction.  Escrow generally runs smoothly so most people don’t give it much thought, but that doesn’t mean it isn’t rife with potential problems.

Let’s start with the question: What is escrow in the first place?  Escrow is at the center of the process, essentially the hub of the real estate transaction wheel.  Once a contract has been negotiated the broker(s) send the paperwork to escrow.  The escrow company, as dictated per the terms of the agreement, receives the contract, assigns an escrow number and “opens escrow.”  Escrow then sends instructions to the parties restating the terms agreed to in the contract: Price, timelines, closing date, earnest money to be deposited, financing terms if any and commissions.

Escrow will order the Natural Hazard Disclosure Report, any homeowners association documents and the preliminary title report.  Eventually they will coordinate the preparation of an estimated closing statement for the lender and at the end arrange the signing of loan documents with a notary public.  Escrow then notifies the title company who sets up and records the deed.  Upon confirmation of the recording of the deed at the county recorder’s office, title sends the money back to escrow where they tally the final figures, payoff any liens and distribute the proceeds to the appropriate parties.  There is no “meet at the closing table” and there are no lawyers involved.  It’s very efficient as compared to the “old way of doing things” as it is done in many Eastern and Midwestern states.  California once again is leading the drive towards a better way of doing things.  Alas however, there are some flaws.

I recently completed a rather persnickety transaction that exemplified some of the problems with the escrow system.  First is the issue of the property condition and possession.  As we neared closing a final verification of property condition or walk through, was performed.  (Search for your dream home here) This is designed to ensure the home is in substantially the same condition at closing as it was when purchased.  But as it turned out, the seller left personal belongings behind so the house really wasn’t fully empty at closing.  Yikes!  Problem 1: How does a buyer know if the seller isn’t required to be out prior to closing, that the seller has everything out or is even out at all?  Answer: They don’t.  Unlike sitting at a closing table where the seller has moved and the home is ready for turnover and keys are exchanged for cash, with the escrow system the buyers have no know way of knowing if the seller is actually out.

The second problem is the property condition.  With the walk through taking place in the days leading up to closing and with the seller still in the home, you can’t really see everything.  I once had a walk through where the home looked fine, but once we closed and the seller moved out we found a large potted tree had leaked water on the wood floor and underneath was ruined.  What then?  Fortunately, the seller was still in town, recognized the issue and agreed to pay the buyer to have the floors refinished.  But what if they would have already left?  How would the buyer collect?

The third issue is regarding possession.  With escrow the buyer’s loan funds, the down payment is in and everyone is ready for the close but the seller doesn’t actually have the money, it’s still with escrow.  It’s not until after the close that escrow sends the money to the seller.  Let’s say it’s the end of the month and the recorder’s office is backed up, not at all uncommon.  The recording eventually happens but not until after the escrow’s wire cutoff through the Federal Reserve Bank.  freserve3Huh?  That’s right, wired funds must pass through the Federal Reserve and they close around 2 pm Pacific.  So the deed is recorded and the buyer is the legal owner and ready to take possession of their new property, but the money hasn’t been deposited into the seller’s account yet.  This just happened to me and making matters worse, it was the last day of the month which also happened to be a Friday.  So not only did the buyer get the property before the seller received their proceeds funds, the seller had to wait until the following Monday to get their money!  And lest you think this rarely happens you’d be mistaken, it happens quite often.  Unlike a closing table where the keys are exchanged for the money, escrow always and by definition has to set up the recording and then record the transfer all before seller gets their money.   In the transaction I just closed, the seller was livid that the buyer was going to have the keys before they had their money and wanted me to hold the keys and not give them to the buyer, even though the property had recorded and the buyer officially owned it!  Thankfully in that example, escrow was able to rush the file through and beat the wire cutoff with just minutes to spare.  That didn’t stop the seller from giving me an earful however.

So it goes that California’s use of escrow may in fact be the most efficient method of exchanging real estate for money, it is not without a certain amount trust that everything will work out right and everyone will do and perform as they should.  Something that traditional closing easily avoids.

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