Best And Final, eDocs And The Demise Of Real Estate Practice As We Know It

Posted on July 22, 2013 by Tim Freund

There was a time when a buyer walked into a property, accompanied by their Realtor, fell in love and wrote an offer for what they hoped would be the home of their dreams.  Once written, the offer was personally delivered by the buyer’s agent to the other agent at the seller’s home where the buyer’s agent would introduce him or herself and their buyer to the sellers by presenting the offer.  It was an opportunity for the parties to get to know one another and to try to reach a meeting of the minds.  After the presentation the buyer’s agent would thank the sellers and leave, at which point the agent for the seller and their sellers would decide whether to counter the offer or accept it.  Occasionally there would be outright rejection, but that really wasn’t very common.  In the rare occasion where there were multiple offers, the seller would counter all the offers (not always the same terms or price) and if all the offerors agreed to the seller’s counter, the seller would have to pick one based on down payment or other terms or sometimes just because they wanted to sell to one family over another.  It was personal; real, not abstract and usually involved a handshake.  Contrast that with the way real estate is handled today.  A buyer sees a property with their agent; decides they would like to make an offer so the agent writes it up and sends it to them electronically often using an electronic signature via Docusign; then forwards the offer to the other agent, who in turn presents it to their seller.  If it’s in “multiple” meaning multiple offers, the agent will counter with the phrase, “Best and Final,” indicating all prospective buyers go back to the drawing board and write a new offer and then the seller will pick.

The phrase “Best and Final” is relatively new and while primarily used by banks, it is being used by a lot of Realtors these days.  Best and Final’s origins date to around 2007 when the banks, during the crash of 2007-2012, found they had so many offers on low priced distressed properties that best way to get the highest price with the least amount of hassle was to ask for “Highest and Best” or “Best and Final.”  A buyer understood this meant there would be no counter, rather the bank would accept one of the many they had based on the second round of offers.  It worked for the banks and was tolerated by the buying public because the banks had the properties and were impersonal Goliaths and buyers just had to deal with it.  Fast forward to today when there is a shortage of inventory and multiple offers are somewhat common.  Today Realtors, many of whom are unfamiliar with the days before Best and Final, use this as a method of counter offer.

So what are the ramifications of Best and Final?  Well first of all, it rewards buyers who don’t come in with serious or strong offers because it gives that buyer a second chance.  This second chance may seem like a good idea, but it is not really fair to the client who wrote strong to begin with.  “Not fair?” you say, “Who said business was ever fair?”  True enough, but because real estate transactions have so many moving parts and span over what could be a 60 or 90 day escrow period, fair is a pretty important thing.  Moreover, in the California Disclosure of Agency Relationships, it is stated that the agent has “a duty of honest and fair dealing and in good faith”.  One could argue that Best and Final is not dealing fairly or in good faith.  Further, it sets a table for a contentious escrow, one where the buyer might seek to exact revenge on the seller during the escrow process.  This is especially true if there is a discrepancy between the agreed upon sales price and the bank’s appraised value of the property, a condition we are seeing a lot of as prices are rising.  Starting off a transaction of this magnitude on good and friendly terms should really be a goal rather than a nice byproduct.  These days, over bidding is a little like when a Realtor try’s to “buy” a listing by telling a would be seller that their home will sell for more than it really and reasonably will, just to get the listing.  Thus buyers are often simply over bidding just to get the deal accepted and then when the appraisal comes in predictably short, renegotiate the price lower.  Additional negotiations may also be tainted like when the buyer decides to use the Request for Repair as a vehicle to renegotiate a lower price.  Very often the seller, who thinks they have a solid deal, may already be in escrow on a replacement property and now find themselves “over a barrel,” forced to concede the grinding buyers lower price.  A seller will often do this rather than potentially lose their replacement home of choice by virtue of having to cancel their current buyer and now forced to resell after having fallen out of escrow.  Not exactly the desirable position the seller may have had before accepting the “Best and Final” offer the first time around.

Now I’m not the kind of guy who laments the days gone by or the “good old days,” if there ever really were “good old days.”  Rather I am looking at a change in methodology that I don’t see benefiting either buyer or seller.  By no longer meeting your business partner, which after all is what a buyer and seller are, partners in a transaction, you create an impersonal business relationship and folks, buying and selling a home is a whole lot different from buying something on Amazon.  For this, we have the convenience of email and eDocs to thank.  Because of these technological “advances,” we no longer meet to transact real estate and this to me is not so much a shame, as it simply serves no one’s best interest.

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Thoughts On Interest Rates And Housing

Posted on July 7, 2013 by Tim Freund

Mortgage rates have risen 1.10% since May and while 1% may not sound like much, it represents an increase of 67% and that does sound like a lot.  Effectively rising interest rates means a home buyer can afford less and have to pay more for less, presuming that buyer is using conventional financing.  It is widely presumed that an increase in borrowing costs means a decrease in home values since it costs more to finance, so the home therefore, should cost less to offset this rise in borrowing costs.  This may be true at some point, but before home values can come down, they have to stop going up.   Let me repeat, before prices can come down, they have to stop going up.  This I predict, is where we are now.

It’ been widely reported that home values have been rising at the fastest clip since the boom year of 2006.  According to the latest reading of S & P’s Case-Shiller, home values have recovered to roughly early 2004 price levels.  With double digit year over year increases in every Metropolitan Statistical Area, the recovery is clearly broad based, and with the exception of San Francisco, the largest increases have taken place in the hardest hit areas.  So clearly prices have risen sharply over the past 12 months.  This increase will continue for a couple more months because the data Case-Shiller uses is based on closed transactions and there is an inherent lag since closed sales represent properties that have gone under contract as much as 60 or even 90 days ago.  However, once we get a couple of months out from now, we should begin to see a slowing in the rate of home value appreciation and interest rates would be one of the principal reasons for this.

Another reason we should see a slowing in appreciation is that prices never go straight up, just as they never go straight down.  Any month over month evaluation will show a jagged line, sometimes moving upward, sometimes downward and sometimes flat.  This is just common sense and should be expected.  During times of rising rates consumers who are affected by a change in borrowing costs have traditionally turned to variable rate loans as a way to improve affordability.  Recently a client of mine asked me why anyone would take an adjustable rate.  I explained that first, many people don’t anticipate staying in a home more than 5-7 years and in fact this is the national average.  So by taking a shorter term a borrower receives a lower rate which offers lower payments but comes along with some greater risk.  I told him that I have an adjustable hybrid loan that will adjust in a couple of years and that while it is concerning from a long term perspective, my history is that I refinance every handful of years and have never kept a mortgage longer than 5 years, ever.

There are analysts who suggest that this approach to borrowing is no longer a viable option and that the period of declining rates is over.  Like the home value graph, interest rates never stay the same; never go straight up nor never go straight down.  Naturally there will be a low at some point and perhaps we’ve experienced that.  So to say we are no longer in a period of “declining rates” would not be inaccurate if we have really hit bottom.  It is both accurate and inevitable.  There has to be a bottom eventually and since we can’t decline from the bottom, rates have to go up some and even if they go up a little and then stay flat for a while, they’ve still stopped declining.  To suggest however, that we are entering a period on intense interest rate increases like we had in the 1970’s and 1980’s, is to suggest that we are heading into a world of hyper-inflation, where the economy is so hot that to damper down the economic engine, the Federal Reserve would have to actually raise interest rates dramatically.  Remember, thus far all the Fed has done is to suggest that if the economy continues to improve, they will begin slowing their aggressive stimulus (Quantitative Easing 3, QE3) of buying $85B worth mortgage backed securities per month.  That’s correct, the Fed has not even begun slowing stimulus let alone actually raised interest rates.  Moreover, I would argue in fact that the 1970’s and early 1980’s were the exception to interest rates trends rather than the rule.  Remember how when rates were dropping we would hear things like, “We haven’t seen rates like this since the 1960’s?”  That’s right, rates were low in the 1960’s.  They were also low in the years preceding the 1960’s all the way back to WWII.  So when you consider interest rate trends in terms of decades, I score that decades low 6 (1940’s, 50’s, 60‘s, 90’s, 00’s and 10’s), decades high 2 (1970’s and 80’s).  I consider this decade on the low side because even if we were to rise significantly and double, we would still be well below double digits, plus we’re also 3.5 years into the 2010’s already.

Getting back to my point about the relationship of interest rates and home values, this rise in rates will likely have an effect in that it will slow appreciation and frankly, that is really welcome news.   We don’t want to find ourselves in a bubble like 2004-07 and according to Case-Shiller, we are only at the beginnings price levels of that bubble.  So yes, the rise in rates makes homes more expensive, but if slowing appreciation is the byproduct, then I say “Bully!”  We can’t have homes go straight up without having our incomes increasing too and in this day and age of the global economy, as much as I’d like to say rising incomes are imminent, I suspect not so much.

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Personal Debt, Student Loans and Real Estate

Posted on June 5, 2013 by Tim Freund

UCLA’s Anderson School of Economics reported yesterday that the economy is not growing and in fact, that it is “not even normal… it’s bad.”  Not exactly the warm and fuzzy one might expect given the overwhelming indications from Wall Street and Main Street that things are getting better.  In their commentary UCLA economists actually state that rising student loan debt will lead to delayed home purchases by young people, as they have to face the prospect of paying off student loans.  This in turn will slow growth and restrict our nation’s Gross Domestic Product.  GDP is the value of all goods and services produced by the country and is the primary measure of our nation’s economic health.  This subject is very close to my heart as both a parent of two college kids and as a real estate professional.

On the night I graduated from high school, it was spring 1980.  As I proudly removed my graduation robe and changed into my civvies for what was sure to be a night of rambunctious partying, my dad slipped me a hundred dollar bill and said that I shouldn’t worry about college, he was going to pay for it.  When I asked him how I could ever repay him, he replied, “Just do the same for your kids.”  Little did I know that his five figure commitment to me, would mean a high six figure commitment by me.

College today is obscenely expensive.  Tuition has skyrocketed, as has student housing and books.  Did you know that many professors write their own books for their classes there by obligating their students to by ultra-expensive books that cannot be purchased anywhere but the on campus student bookstore?  And then there is the whole student loan debacle.  During my freshman year, in December 1980 to be exact, the prime rate stood at 21.5%.  Simultaneously, my dad’s law practice was struggling.  So when I had the opportunity to take out a$2,500 student loan at 7%, my dad said, do it, and he’d pay me back.  That $2,500 loan would pay for my entire year’s tuition, housing and books.  I ended up taking out a student loan each of my four years.  Sadly, shortly before my graduation, my dad passed away.  Over the next 10 years with the help of my wife, we paid off my student loans.  We popped champagne the day we sent in the last $118 check to Sallie Mae.

Fast forward to today, prime rate stands at 3.25%.  When the real estate market collapsed 5 years ago, my daughter was heading off to her freshman year and my debt to my father came full circle; it was my turn to pay for college.  Sure, while the market had boomed I had socked some money away using a 525 college fund and a 401K, but as the market crumbled, so did our household income and we were forced to use our savings to pay our obligations and keep our business going.  That’s what savings is there for, we reasoned, and we survived.  But college couldn’t wait.  Neither could my son who graduated just two years after my daughter.

With two kids in college, we did (and continue to do) what American families are doing every day, we took out student and parent loans to pay for college.  Imagine my surprise when the guaranteed loan my daughter could get was only $5,000 (when her UC Santa Barbara tuition costs nearly $15,000) and the interest rate was 7.5%!  Let me put this in perspective: I took out a loan in 1980 for $2,500 which covered tuition, housing and books, at an interest rate of 7% when prime was 21.5%, but my daughter could only take $5,000 paying just a third of tuition, not housing nor books, at an interest rate of 7.5% when the prime rate is 3.25%.  Makes a lot of sense, right?  Ask Elizabeth Warren, the freshman senator from Massachusetts, who is trying (against significant Republican resistance) to tie student loan rates to prime, if it makes any sense.  Let me answer this, it doesn’t.  Shackling our kids with debt just to remain competitive with the rest of the world, makes zero sense here in the most affluent nation in the world.

The significance of UCLA’s Anderson School of Economics prediction that today’s youth will be saddled with historically high levels of personal debt, constricting our national GDP and overall economic prosperity, cannot be understated.  This is in stark contrast to today’s improving picture where personal debt in 2013 is at the lowest level since 2006.  My generation is deleveraging (reducing our borrowing via credit cards etc.) but our children’s is not.

There’s so much talk about Social Security going broke and Medicare becoming insolvent, but these concepts are nothing if the economic future of our nation – our youth, cannot afford to buy homes, buy goods and drive our economy due to impossibly high student loan debt and the ever increasing cost of higher education.  If something isn’t done about this and done soon, we can expect this: reduced growth and declining GDP and little money to fund all the social programs many of us will ultimately depend on.

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Something To Keep In Mind

Posted on May 29, 2013 by Tim Freund

Yesterday was an interesting day for anyone involved with real estate.  Whether you’re a Realtor, mortgage broker, buyer or seller, the events of May 28 were pretty incredible.  As is the story on the last Tuesday of every month, the S & P Case-Shiller housing index numbers were published.  They showed what anyone buying or selling a home already knows, that prices are up and up substantially from a year ago. The report attributes these gains to an improving economy and a shortage of available inventory.  Duh, right?  They go on to say that their Statistical Averages posted the single largest gains since the housing boom.  This in turn did what?  It caused bond traders to dump long term bonds and rates went up the most in one day since 2010.

Bonds are funny things and when the price of a bond goes down its yield goes up.  So for example say a bond is valued at $100 with an interest rate of 4%, the yield is 4% (4/100 = 4).  But let’s say the traders don’t want to buy them at $100 and only want to pay $90 for a 4% bond (4/90 = 4.4) or 4.4%.  To repeat, as the price of the bond drops, the yield goes up.  In this example the price dropped 10% from $100 to $90 and the rate went up 10% from 4% to 4.4%.  So when the price goes down, the rate goes up.  And what are mortgage interest rates tied to?  The 10 year bond.  Thus yesterday bond traders dumped bonds, in essence wanting a higher yield or rate than they were getting on the 10 year bond and the effect of that drop in price was to make mortgage interest rates go higher.

It is a common misconception that higher rates means a drop in housing values.  To understand this and further, what yesterday’s numbers portend, you have to understand why interest rates rise and fall.  The Federal Reserve sets monetary policy as a tool to manage inflation and the nation’s economic growth.  Too much inflation everyone agrees is a bad thing because as products cost more, we can buy less with the same amount of money.   When the costs of all goods goes up, so does housing.  But a little inflation is a good thing.  Rates rise when the economy is doing better and drop like they’ve been when the economy needs help and it’s the Fed’s job to manage that relationship between interest rates, inflation and the health of the U.S. economy.  Simply put, when the economy needs help, rates come down when it is stronger, rates rise.  Yesterday’s rise was the bond trader’s response to the perceived health of the economy.  Because bond traders deal with long term rates, they have to try to anticipate the Federal Reserve’s response to an improving or declining economy.  Getting back to rising rates and home values, rates rise with inflation and so do home values.  Homes are not somehow excluded when the price of all goods and services rise, they rise too.  So rising rates don’t necessarily mean declining home values.

As to the Fed… they continue to believe that the economy remains fragile.  Thus they are still buying bonds and lots of them, which keeps demand for those bonds is high and when demand for anything is high, the price goes up; when bond prices go up, the yield… goes down.  So yesterday the price of bonds dropped and the yield went higher but the Fed is still buying so the rise is most likely a knee jerk response to some positive economic data.

When bond traders are predicting a continued improving U.S. economy and that the Fed will eventually raise rates, they sell.  But is that a bad thing?  If you are buying a home using conventional financing, the cost of the home just went up as your borrowing costs went up, so yes, that’s a bad thing in the short term.  However, if the health of the economy is improving, isn’t that a good thing?  The answer is a resounding yes.  We have been hearing that the rise in home values has been disconnected with wages.  That wages have been declining with stubborn unemployment and people needing work are willing to do a job for less than what they used to.  But when the economy improves, unemployment drops.  When housing improves, builders begin building and hiring and those people in turn spend money which leads to more hiring and unemployment drops a lot.  Home building is and always will be, the engine that drives the economy.  And with prices of homes rising, you can bet that builders are going to build.  When I was growing up there used to be a cement mixing company and on the side of their trucks was the phrase, “Find a whole and fill it.”  That’s what builders are going to do to address the shortage of available home inventory, they will build and that means they will hire.  And what happens when hiring picks up?  Demand for skilled workers becomes more competitive and wages rise, thus everyone makes more money.

In the end, yesterday’s housing data tells us this: home values are going up and the economy as predicted by the bond trading community is getting better, and we will all be better for it.

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Stayin’ Ain’t An Option

Posted on April 28, 2013 by Tim Freund

For the past couple months I have been of the contrarian opinion that we don’t have a supply problem but rather a demand problem.  That is, here in the Conejo Valley anyway, we are selling a comparable number of homes to many past Aprils; that supply therefore was historically consistent but demand was unusually high; that our inventory was starting to increase and that as prices rise, so would inventory and thus sales.  So in an attempt to test my theory, I looked at older data collected from 2003 to today and what I found was concerning and suggests I may be mistaken.

In looking at data over the past decade, what I see is that sales begin rising in April and then boom into the summer months.  In the bullish years of 2003-5, they explode, nearly doubling and in some months more than doubling April figures.  I guess you could call my view as ‘the forest for the trees thing’.  What I mean is, I’ve been looking so closely at monthly data that I didn’t see the wider picture of what a “hot spring” meant for the even hotter summer sales months.  You often hear that month over month data is unreliable.   I guess this is what they are talking about.

In terms of numbers in our area, the first week of July 2005 hit an all-time high of 104 closed sales.  By contrast the last week of November 2007 hit a low of 9.  This past week we closed 56 transactions.  56 is a very solid number, but with inventory running at a scant total of 334 total available units, one can see that 104 is a crazy high number and that getting much above low 50’s without significantly more homes to sell during the peak summer months, next to impossible.  It doesn’t appear that even with the average price per foot rising by some 17% year over year for this week in April, it will be enough to prompt more property owners to sell.

Is the problem investors?  Maybe.  An agent from near by Simi Valley told me yesterday that he finally got a buyer of his into escrow after being out bid by Blackstone’s real estate LLC on 12 other properties.  Is that really true?  I don’t know for sure.  Simi Valley is a much more affordable community in general than the Conejo Valley, so maybe it’s true there, but I don’t think investors are as big an influencing factor so much here in and around Westlake Village and the LA/Ventura County Line.

I guess if I am to leave you with a take away from all these numbers it’s this: prices still haven’t risen enough to get more people to list and ease the tight inventory environment we are in.  And that can only mean one thing: prices are going to continue to rise for the foreseeable future.  Is it time to panic if you are a buyer? No, but I recently wrote a jump blues/rockabilly song  called “Stayin’ Ain’t An Option” (I used to be a professional musician in my previous life BRE – Before Real Estate) and the chorus goes like this:

You better get on board ‘cause the train is leaving the station.                                                    It’s pulling away, better grab your coat and hat                                                                            You got little time to waste, better move and make haste                                                 ‘Cause stayin’ ain’t an option and this locomotive ain’t comin’ back

And to quote Forrest Gump, “That is all I have to say about that.”

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It Wasn’t That Long Ago…

Posted on March 29, 2013 by Tim Freund

As the Supreme Court prepares to render a decision on the equality of marriage, I was reminded yesterday that it wasn’t that long ago, when equality in housing did not exist.

I was at a new listing I have coming out, checking up on the painter’s progress, when the daughter of the elderly owner popped in.  As we looked around the home, she noticed some items stacked on one of the beds.  Amongst the things was a wonderful architectural rendering of a midcentury modern home.  “This shouldn’t be here” she said.  Intrigued by the lovely watercolor I asked her about it.  It was a home designed by the architecture firm Wong and Wong, the architects of the Occidental building in downtown Los Angeles which was at one time, the tallest building in LA.  The rendering had a distinctly Asian bent to it, with a deck that wrapped around two sides of the home and concrete square steps surrounded by a reflecting pool leading to the front doorstep.  It really was incredible.  My client told me it was her childhood home.  She said it was the early 1960’s and that the home was almost never built.  When I asked why, she said that her father, being of Asian descent, was told that he couldn’t buy in that neighborhood.  It was in the Crenshaw District and apparently only whites were allowed.  Being a WWII veteran and a successful dentist, her father was not to be deterred.  He used a 3rd party proxy to buy the land so as to build a home for his family.  He stay in that home until he passed away in the mid 1980’s.

It wasn’t that long ago that being of color or of certain religious faiths or ethnicities meant you were not allowed to purchase real estate in certain neighborhoods.

As we spoke I was reminded of another similar story I heard a few years back about a neighborhood in Studio City that had written in their C, C & R’s that no Jews, Blacks or Asians could live there.  It was actually a deed restriction.  Sometime in the late 1950’s a successful African American judge, also using a 3rd party, purchased a home and then sued the association for the right to live there.  He won.  Despite his legal victory, the association documents remained unchanged.  Since it would take a majority vote of the entire community to amend the C, C& R’s and would cost money, it was decided the documents containing the offensive language should be left alone.  In fact they still probably read the same.  It wasn’t until about 10 years ago that the California State Legislature passed a law allowing subsequent home owners to have prejudicial language removed from deeds and documents without a vote of the association.

My father in law sold home back in the sixties.  He told me it was common practice for some agents to tell a prospective buyer that “this is not the right neighborhood for you.”  Real estate professionals would sometimes even take out a red pen and circle certain communities and then tell their client they couldn’t or shouldn’t look in there.  It was called “Redlining” and it is now illegal to do.  Another practice was called “Blockbusting” where a real estate agent would come into a community using scare tactics to get home owners to sell.  “You better sell now, because those people are moving in, in droves.”  It’s hard to imagine this was the way our country was, affecting entire groups of people; where they could live; where they could go to school; what bathroom they could use.  That was less than 50 years ago.

In 1996 I was working for a new home builder when my partner at the time was selling a new home to a local fisherman.  Out of the blue he asked her, who would be living next door.  When she asked what he meant he replied, “Listen, it’s bad enough I’m buying from a Jew, but I don’t want a towel head living next door.”  Prejudice and discrimination is incredibly ugly.

The real estate industry has come a long way since the days of redlining and blockbusting; when good people were forced out of one neighborhood and into another.  So has our nation.  As we think about the Supreme Court and the life changing decisions they are charged to make, let’s try to remember the discrimination that was once considered acceptable, not all that long ago.

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To Do An Open House Or Not To Do An Open House, That Is The Question

Posted on March 24, 2013 by Tim Freund

As I prepare for another Sunday open house, I thought I’d share some thoughts on this age old practice and pose these questions: Is it worthwhile holding an open house?  And does opening your home to the public actually accomplish anything?

To answer this we should first ask, to whom am I directing the question?  If I am asking the real estate agent the question, the answer is almost always, yes.  Why?  Simply, an open house is a great way for a Realtor to get in front of potential clients, collect their name and contact information, and hopefully pick up some new business in the process.  I held an open house last Sunday at a new listing of mine and I had no fewer than 50 groups through.  50!  That’s a lot of potential clients; a veritable gold mine for anyone in the real estate trade.  But you may ask, “How is that in any way a benefit to the seller?”

Aside from the obvious hassle of having to vacate your home for an entire Sunday afternoon, holding an open house means added work for a seller.  As you can imagine, there’s the cleaning and primping to show your home in its best light.  However if you are serious about selling, you should be doing this daily anyway.  OK, so prepping isn’t unique to a day of an open house.  You will have to take a moment and secure your valuables.  After all, even the most observant Realtor can’t be in all rooms at all times and I’m not just talking cash and jewelry either.  Pharmaceuticals are often the target of open house visitor-thieves.  If you are a senior and you have a lot of medication storing those meds can be a real hassle.  As an FYI, do you know what the number one medication stolen out of homes for sale is?  You’re thinking Vicodin aren’t you; well according to the National Association of Realtors it’s not Vicodin which is #2, rather it’s Viagra.  I guess the would-be thieves figure a seller isn’t going to run to their agent and say, “Someone’s stolen my Viagra!”  OK, so security is an issue.  In addition, there are also the dirty feet and shoes that will be all over your freshly cleaned carpets.  So getting back to the initial question, is there really a benefit to a seller in holding an open house?  Sorry sellers, the answer is yes and they’re what I call, “Free Agents”.

In this day and age where “information all” is available on the internet, a new-old phenomenon in real estate is happening.  It used to be, back in the day, that the only way a house hunter could learn about available homes was through a Realtor.  Armed with a newsprint book, updated weekly, real estate brokers controlled the listing information and the consumer had no choice but to call upon the real estate agent to access that data.  Thus the only way for a buyer to circumvent that process was by visiting open houses.  Follow the signs; that was the mantra.  So what’s different today?  Well obviously the data of available homes is out there for all to see.  No more MLS book that only the Realtor has.  But here’s where it gets interesting if you are a seller.  Because the information is there, many of these house hunters prefer a home search where they are in control not the real estate agent.  To stay in control, savvy buyers are gathering listing data online but even with that knowledge, they still can’t see a home on their own; they remain dependent upon a Realtor unless… they can visit an open house.  See, “Free Agents” don’t necessarily start their hunt with a Realtor.  They often want to do their own due diligence and research, especially in the beginning of their search.  Remember, this is the generation of computer comfortability and Free Agents like to research on their own first.  So by holding an open house, you allow these quality buyers access to the one thing the internet does not, the home itself.

You might argue, and many sellers believe this, that quality buyers will have representation.  And while this is in fact true, it’s really an issue of eventuality.  This is because the buyers I’m referring to, while serious, are not quite ready to work with an agent so they don’t have representation, yet.  Most of us shoppers have a fear of sales people (think used car salesman in a plaid leisure suit) and that fear is that a “sales person is going to sell me something”.  Free Agents often fit this category.  Perhaps they had a bad experience or perhaps they just feel they are smart enough to research homes on their own.  Regardless, they want to see the inside of a home and an open house is the only way they can do it without engaging a real estate agent.  One point that I’d like to make is this: house hunting is not an issue of intelligence, but rather one of experience, market and neighborhood knowledge and frankly just knowing what to look for.  This is why people hire me to help them find a home for them.  They know that I have those attributes and they trust me to help them buy the right home, and most importantly, not make a very costly mistake.

This brings me back to the Realtor liking open houses because it’s a great way to pick up good client-prospects by impressing these free agents with market knowledge.  So here it is in a nut shell, open houses are good because the Realtor holding it gets a chance to impress and pick up new clients; the seller has someone trying to make a connection with Free Agents who may well be their buyer and the prospective buyer gets a chance to do some hands on research before engaging the expertise of the real estate community.  In Negotiating 101, this is called a win-win-win.  The seller wins, the buying public wins and the Realtor wins.  That said, I better hurry, I’ve got an open house to get to!

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The Problem With Pipeline

Posted on March 16, 2013 by Tim Freund

Pipeline.  I suppose the word stems from the bringing of water from the well to the parched.  Perhaps it comes from the ancient times.  King Herod is supposed to have built miles of waterways to water the lands of Israel.  Where ever its source, the word pipeline might as well be lifeline, for its presence is the difference between struggle and survival.  It’s a word that carries undue weight.  On Wall Street, pipeline means products are forthcoming.  Investors scrutinize a company’s “pipeline” to gauge and forecast what a stock’s value should be in the future.  “Apple has 3 new products in their pipeline.” Or “Drugs in Amgen’s pipeline are too far out in the future to place a valuation…”  In business pipeline everything. When I sold new homes for Shapell Industries, pipeline meant predictable income.  I could see how many homes the builder was releasing and figure that over a certain amount of time I would sell those homes and then the builder would release more.  If I had 20 homes a phase and an estimated 3 phases released in a given year, I could calculate my income based on my “pipeline”.  In real estate resale, my pipeline is my next listing.  In residential real estate, it’s very difficult to know exactly where the next deal is coming from. If you’ve been watching, listening or reading lately, you know that the real estate market is recovering and values rising rapidly.  For many this has come as a big surprise, almost “out of the blue”.  But if you were watching closely, it isn’t nearly such a surprise.  Consider that the home-builder stocks have gone exponentially higher over the past 12-18 months.  In fact KB Homes is up nearly 30% just since December.  The reason is rather simple actually; when you have a shortage of inventory in housing, there’s only one industry that can manufacture the product needed to meet that demand and that’s home-builders   That’s why home-builder stocks have been rising for 18 months straight.  But notice I said 18 months.  The shortage and need for housing clearly isn’t a surprise to everyone since builder’s stocks began rising long before the general public caught on.  The interesting question though is were the home builders in tune with this or were they just marveling at the recovery of their stock’s lost value and a sleep at the wheel? I will admit, I am not in contact with any CEO’s from any of the nation’s home builders and in my area along the Ventura/Los Angeles County line there is no home building from which to assess.  However, I have been by the Shapell project in Porter Ranch (an upscale suburb within the San Fernando Valley) and I can tell you that they did not see this coming and are not ready.  Their pipeline is in a word, depleted.  They have like many builders plenty of land, of that there is no question, but they are not ready to utilize it today.  There’s grading, plan submission, utilities, streets: all the components that need to be in place before the first nail is hammered.  They could easily be a year and a half out.  Were all home builders equally caught off guard?  I would guess yes they were.  After all, the market was so bad and prospects so dim, how likely was it that home builders were preparing for the housing recovery 18 months ago, before there was any consistent signs of a recovery at hand?  So while Wall Street has rewarded home builders with record stock appreciation, it may be many, many months before the home building industry will be producing enough units to offset the skyrocketing demand for housing. Why do I believe that?  Although we have seen increases in the number of building permits filed over the past several months, universally critics of the housing rebound have pointed out that many of those permits are for multifamily housing.  Moreover that while construction is adding to the employment rolls, it is far more measured than a full blown recovery would suggest it should be.  Why?  Pipeline.  Because of the lag between preparation and delivery in the construction industry, the somewhat uninspired permit and employment numbers suggest the building industry was unprepared for the now vibrant housing recovery.  That’s not to say Wall Street investors were wrong to reward building stocks as they have.  Perhaps their margins will be greater than they’ve been since builders will be able to take advantage of the housing shortage by increasing each unit’s profitability.  Still, with people like Spencer Rascoff, CEO of Zillow saying that some markets are “Bublicious” and predicting a burst is coming, one has to be a little concerned that builders are not prepared to fill he demand through, you got it, pipeline.  Chase and Bank of America, two of the nation’s largest banks, are predicting substantial home appreciation in this year through 2015.  If supply weren’t going to be constrained for the foreseeable future, they as lenders on these homes, would not likely make that prediction. So what’s it all mean Alfie?   What I think it means is this: prices are going to rise and do so substantially until such time as underwater sellers unable to sell at today’s prices, can sell at tomorrow’s because of appreciation and when builders can build enough homes to address the shortage that currently plagues our marketplace.  Yes, it’s a little scary that we may be in the eye of another housing bubble hurricane, but more than likely it’s just a powerful storm whose winds are blowing around us.  The good news is clear: housing values are going up and builders will begin building just as soon as they can and in doing so have an immediate and profound impact on hiring and thus on unemployment.  This in turn will increase the coffers of Washington through broad based increases in tax revenue, reducing the deficit and strengthening our economy even further.  All we need now is a little pipeline.

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The Problem With Appraisals

Posted on March 14, 2013 by Tim Freund

By definition appraisals are backwards looking.  The designed purpose of an appraisal during the loan and purchase process, is to demonstrate to the lender that the security (the house) for the note (the loan), is worth the price the borrower is paying for the property.  The way this value is established is by looking at comparable sales (comps) of similar or “like” properties.  The problem however, is that unless the market is in a static or stable state, the comps are going to reflect different market conditions than the one in which the appraiser is hired.

So how is value established?  The appraiser will be looking for comps to “bracket” the value of your home.  Bracketing is where there is a comparable property that recently sold for more than your home and one below and hopefully a bunch in and around your value.  The key is the one above.  It could be a larger home or more upgraded that the appraiser can make “adjustments” in value for, so long as it’s higher.  It might be a little farther away, but finding the top bracketed comp is critical, especially in a changing valuation environment.

Obviously you can see that by using data of homes that closed a while back, maybe 4 or 5 months ago, the market could have changed dramatically.  For example, when properties are declining in value, as was the case from 2007 through 2011, an appraiser would be basing their assessment on a closed sales, whose value has come down since its sale date; that the price it sold for six months ago, was higher than it would sell for today.  In response to this situation, the lenders at that time were knocking 10% off the appraised value because they insisted the blanket of a “declining market value” be ascribed every property.

When a market is appreciating like it is now, the comps tend to be lower than the same homes are selling for today.  One would think therefore, that the lenders would apply the same logic and accept an appraisal that gave value to a property due to the “appreciating market value.”  This however, is not happening.  So scared are the big banks that appreciation is running out of control and that we are in an overheated market, that they are instructing appraisers not to use “appreciating market value” as a data point when determining the value of a given property.  Technically there is not supposed to be any  direct contact between an appraiser and the lender, only through an intermediary called the appraisal management company.  But don’t think for a minute that this conversation isn’t taking place at upper levels, because it is and guess who owns the appraisal management companies, you guessed it, the big banks. This has led many deals to fall apart or caused sellers to accept less for their property or increasingly common made buyers to come up with extra the cash to make up the difference.

Lenders have certain criteria that they use when making a loan.  The most common is a minimum loan to value ratio.  This is the relationship of the loan amount to the value, reflected as percentage to the value of the property. This is where the whole 20% down payment thing comes from. Why 20%?  No reason in particular, it’s just become the benchmark for all home loans.  It’s kind of like asking, why is 87 octane regular gas and not 91, which is premium; there’s no real reason, it just is.  Anyway, so a borrower puts 20% down and the “Loan to value ratio” is 80%; the loan is equal 80% of the value of the property.  The problem arises when the lender’s appraiser brings a value in less than the agreed to purchase price.  So for example, let’s say I offer to purchase a home for $500,000 and put 20% down ($100,000).  My loan would be $400,000 or 80% of the purchase price.  Now let’s say that I offered to pay $500,000 but the bank’s appraiser determined that the value based on older comparable sales was only, $480,000.  Since the bank is only willing to lend up to 80% of the value of $480,000, the loan amount ends up $384,000, not the $400K I need.  But the seller didn’t agree to sell for $484,000 and I only have $100,000 which when added to the new 80% loan amount of $384,000 equals $484,000.  Uh-oh.  Because of the low appraisal, we are short $16,000.  Now what?

If an appraisal comes in low, there are a few obvious scenarios.  First is to appeal the appraisal, but you have as much chance of having an appraiser admit to his employer that he made a mistake, than you do seeing a cow jump over the moon.  You can also go get another loan from another lender, where maybe the appraiser sees things differently.  You, as the buyer, can come up with the difference in cash, provided you have it.  In an appreciating market where the seller can probably sell the home again quickly, this is the most common scenario.  But if you don’t have the extra cash, you’ll have to ask the seller to come down the $16,000; also not super likely in an appreciating market.  Maybe you can negotiate something in the middle or if the seller says come up with the $16K and you simply don’t have it, you cancel.

Yikes!  A low appraisal, as you can see, can easily kill what was, a perfectly happy transaction.  Not to mention how it shakes the confidence of the buyers who until the low appraisal, were sure they were getting a good home at a fair market price.  So how can this situation be avoided?  First and foremost is that the listing agent has to do their job.  They have to meet the appraiser armed with comps.  If you are a seller, you have to ask your agent how they handle these situations because let’s face it, if you sell your home and then it doesn’t “make value” due to a low appraisal, you either have to re-market the property and find another buyer or have one of the a fore mentioned scenarios take place.  You don’t want to lose your buyer but you also don’t want to come down in price either.  If the appraiser is from out of the area, the listing agent can request a different appraiser.  This can be found out when the appraisal office calls your agent to schedule the appointment.  When the agent meets the appraiser with his stack of comps, he needs to ask the appraiser about his take on the market and get tough if the appraiser won’t speak with him.  Most appraisers are cool and welcome the agent’s input but every now and then you get a jerk, and the agent has to stand tough if the appraiser is uncooperative.  Another way to avoid this issue is to steer clear of the big lenders, Chase, Citi, B of A or Wells.  They are the worst because they have the most exposure should they lend and then the market drops again and since they own the appraisal management companies, have undue influence.  As a seller, you can’t dictate who a buyer uses, but if the buyer’s preapproval is coming from one of the big boys, you may want to consider a different buyer especially if it is a multiple offer situation.

Let’s face it, appraisals are opinions of value.  They are the opinion of one person at a given space and time.  They may be right, they may be wrong, but there’s no denying they are an important part of the process and one that should not be underestimated or ignored.

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Low Inventory? Don’t Panic, It’s Just A Seller’s Market

Posted on February 26, 2013 by Tim Freund

By now you’ve heard that the real estate market is back and that there really isn’t much for sale.  You look around your neighborhood and there aren’t many for sale signs and when one goes up, it seems a sold sign appears the very next day.  So what’s a buyer to do?  As my old grand pappy from Georgia used to say, “Cecil, when it’s time to buy, we buy.”  OK, so I didn’t call my grandfather, “grand pappy,” but he was from Georgia and his wife, my grandmother, was Cecilia and he did have a way of putting things.  He also had a firm belief in the fundamentals.  Supply and demand dictates market value and owning that which is in demand, was always a sound investment.

My Grandpa Jack was a stock guy.  He didn’t like bonds, never thought they kept up with the market as a whole.  He also didn’t completely understand technology, or new technology anyway.  If you couldn’t touch it, he was wary.  That’s not to say he didn’t like Big Blue, IBM, because he did, but that was back when they made something.  In his day, he liked companies like 3M; he liked the railroads like Norfolk Southern; goods had to be transported after all he reasoned.  He liked energy and he liked retail.  I wouldn’t exactly call him a gambler, but he did like his margin account.  During the depression, his affinity for risk caused him to lose most everything, but not his house.  My grandfather firmly believed in real estate but not as a speculative investment, that’s what the stock market was for, rather he viewed real estate as a safe haven for his money and shelter for his family.

My grandfather didn’t move a whole lot.  In fact in his 89 years, I think he only bought three homes in his lifetime, selling two to climb into the next one.  A home to Grandpa Jack was security.  It meant shelter; a roof over his family’s head.  My grandfather spent many years on the road and away from his family.  Having a home to call his own meant his family was safe and gave him a place to come “home” to.

If you’re home shopping along the Ventura/Los Angeles County line today and are in the $750,000 and below price range, buying a home probably feels like an exercise in futility.  But patience and calm is what your Realtor should be counseling right now.  There is little doubt we are firmly in a seller’s market and prices are rising.  The inventory is low because people are buying property as quickly as a home comes on the market.  This notion that low inventory is the reason prices are rising is self-evident.  It’s like saying the ocean is wet or snow is cold.  Of course low inventory is fueling appreciation, duh…  Are prices up?  Yes, but if you’re a buyer, finding the right home should always be the focus.  I started by telling you about my Grandpa Jack’s belief in the fundamentals and right now the fundamentals indicate real estate to be a sound investment, a long term investment.  I’m telling my buyers, don’t get caught up in the hype of speculation and most importantly, don’t panic.  Yes it’s a seller’s market, but the right home is out there.  It may not be out there this minute, but it’s out there and with the help of your Realtor you’ll find it and when you do, it will be great.

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