The Trouble With Appraisals

Posted on April 25, 2012 by Tim Freund

You just sold your home and you are so excited.  After years of a difficult and sometimes impossible housing market, things are finally improving.  You hired your Realtor, fixed up the old place, put the sign in front and Wham! You sold it.  Everything looks great; the buyer has good credit and they’re pre-approved.  The inspection is done and there’s nothing earth shattering on it so you are really over the moon… that is until the appraiser comes.  You know the appraiser right?  They’re the person in charge with validating your sales price.  What?  You mean a buyer and seller can’t just agree on a price and make the deal you ask?  Sure they can, but if there is going to be financing, the bank wants to know that the value of the property they are lending is what you have agreed to sell it for.

If a borrower is putting a lot of money down, more than 20%, then the issues with the bank largely go away, because even if the appraisal and the sales price differ, there is plenty of extra buyer money put in the cover a shortfall on value… a shortfall on value huh?  Why would there be a shortfall on value?  Let’s say that you paid $520,000 for a home and there was another home down the street, perhaps much larger that also sold for $520,000.  Yours was nicer of course, maybe it was even a one story so it had a greater desirability because you can’t do stairs at your age any longer or maybe you’re just planning for the future.  The home down the street is considered a “Comp” or comparable sale.  The appraiser will use that home to establish the “value” of your home.  This is not market value, it is lender value.  Market value is whatever a willing buyer and willing seller agree to without the presence of duress – Real Estate Principles – it’s the first thing you learn.  But market value is not at issue, what is, is the bank’s risk tolerance. The bank wants to maintain a minimum of a 80/20 ratio of loan to value.  Therefore, if you were putting 20% down on our $520,000 example, you are putting down$104K leaving a loan amount of $416,000, a loan to value of 80%.  However if that bank appraises that property at $500,000 and you bought it for $520K, you are short $20K and have to bridge the gap somehow.  The loan to value is either going to be greater than 80%   This means higher borrower costs by virtue of lender required default insurance, also known as PMI. Why? because $400K is 80% of $500K not $416K as before at $520, so you would have to put your $100K down, plus the additional $20K to get to $520K – make sense?  That means you need $120K plus closing costs not the original $104K.  In other words because the appraiser failed to make value, you have to come up with an additional $16,000 because the bank is only going to loan you $400K when you actually need $416K.

I tell my sellers that there are four scenarios that happen when an appraisal comes in light (low); the seller comes down in price , the buyer comes up with additional cash, the parties meet somewhere in the middle or the deal falls apart.  Can you appeal the appraisal?  Yes, however it’s about as hard to get an appraisal changed as it is to escape North Korea.  Why?  To answer this, you have to understand the new role of the appraiser.  When the market dumped and fingers were pointing in every direction looking for fault, the most defenseless group was the appraisers.  They didn’t have a big Washington lobby like the Association of Realtors; they weren’t big Wall Street investment houses or nationally chartered lenders, rather just a rag tag group of hard working folks who took the blame for appraising homes at ever higher valuations.  Are there examples of fraud and deception? Sure, but that crown fits a lot of heads.  But being that they had no advocate, Washington went after appraisers with a vengeance and the end result was a requirement that a third party “Management Company” be created to be a liaison between the lender and the appraiser, so that it was a blind assignment for the appraiser, that is, without any connection to the mortgage lender.  What do you think happens when you add a middle man to the process?  That’s right higher cost to the consumer; lower fee paid to the appraiser and now big profits for the management company.   And guess who owns the management companies?  That’s right, the lenders.  So when Wells Fargo needs an appraisal for a loan, they call RELS, their appraisal management company.  This is why consumers now pay more for an appraisal and good appraisers are leaving the business and why it’s next to impossible to win an appeal.

The significance of this incestuous relationship is that as the market improves like it is now, there are buyers willing to pay just a little bit more than a previous buyer for a similar property.  But the banks don’t give a hoot; they only care about their risk and if the value can’t come in and the deal falls apart, so what?  To the family who loses their dream home over an appraisal, well that’s just tough nuts.  This just happened to one of my buyers and he’s going to lose the house to someone else with more cash on hand to pay the difference.  This story is really unfortunate but with an improving market comes new problems and new bumps in the road.  The good news is that at least the market is improving and we are having a conversation about the problems of juxtaposing rising values with older comps, and that is a silver lining indeed.

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The Secret To Home Sale Negotiaton

Posted on April 12, 2012 by Tim Freund

I tell my clients there is just no short cutting the negotiation process even though everyone wants to.  Even the most astute buyers and sellers, prefer the easy negotiation to the tough slog.  When an offer comes in, a seller must be prepared to go back and forth a few times, maybe more than a few.   Why is that?  The answer might surprise you: trust.  The seller doesn’t know the buyer and therefore hasn’t established any level of confidence that the “other side” isn’t trying to take advantage.  When the Israelis and the Palestinians begin the laborious task of trying to settle their arguments over land, security, repatriation, etc., the level of their success has hinged on who the negotiators are and how much mutual trust exists.  Remember back to when Yitzhak Rabin was breaking with his conservative party and making broad concessions to Arafat, and vice a versa and peace actually for a fleeting moment seemed attainable?  This was only possible because the two adversaries knew each other well enough to know, that if one said they were going to do something, the other knew that he meant it.  Fast forward to today and the parties have so much distrust, that any meaningful progress has been scant, with each step seemingly like trudging through mud.

Apply this concept to home buying or selling.  Let’s say for argument sake that we have a home priced at $665,000 and a buyer comes in with an offer of $610,000 (8% off asking) and well below even the lowest of comps.  This type of initial offer does nothing to establish a level of trust between the two parties and is usually doomed from the get go.  The buyer is probably thinking, “I’ll come in low and worst case, meet the seller in the middle at perhaps a target selling price in this example of $637,500 or $640,000;” or maybe they really want the home and are even willing to pay fair market for it, but believe the only way to not get “taken” is to start really low.  To the seller, the buyer appears ridiculous offering so low.   I tell my sellers that when a buyer comes in really low, you really have almost nowhere to go.  However, I also tell them that we always want a deal to fall apart on the other side of the table, not our side, so you try and you counter.  I might suggest to the seller that they come back with a counter offer just a little off asking, maybe $663,000 or $662,500; something that shows the buyer that the seller is willing to negotiate and serious about selling but that there is much work to be done and they have to get “up” if that work is to be fruitful.  Yet, there is little optimism at this point, and let’s face it, some serious doubts exist in the sincerity of the buyer and this creates distrust.  If the buyer by contrast had come in at $630,000, the spread between the two sides is much smaller and the middle is around $647,500, still apart but at least the seller can kind of see where the target price for the buyer is.  When the offer is low, the buyer’s target price is a total mystery.

For the benefit of this example, let’s just say that the seller actually had priced the home spot on with the comparable sales of similar homes in the neighborhood; and that market value is somewhere between $650K and $660K.  Obviously even a price of $647,500 is still too low and further, may be well beyond the scope of what the buyer is willing to pay.  So here’s what typically happens; either the buyer quickly realizes this is not going to be fruitful negotiation and quits or presuming they really do want the home, they will quickly get up into a range where a successful conclusion can potentially be reached.  The target is clearer.  This however, is not how you “steal” a property.  To do that, the seller has to be vulnerable; ie: they are under distress or have been languishing on the market for a really long time and just ready to deal and get out of the property.  If a seller is not in a weak negotiating position, as steal simply isn’t possible and the only way a buyer can buy this property, is to “come correct” and bring a reasonable offer.

Consider this alternative scenario; the buyer wants the home and recognizes that the market value is somewhere in the a fore-mentioned mid $600K range, so they offer $635,000.  Now the two sides are only 4.5% apart with the middle $652,500.  Immediately, the seller perceives a little more trusting relationship because the offer is not insulting and rather suggests there is a buyer who wants to make a deal and buy the house.  Clearly, the higher the initial offer, the greater likelihood a deal can be put together; the seller is more apt to get to the middle a little more quickly.  We still have to “ping pong” some, but at least now the seller might be willing to come off 1% or more to show they are genuinely interested in selling.   This occurs because there is a greater sense of trust that at least both sides really want to make a successful transaction.  By the way, having two agents that know and like one another is also a very important component.  If they have trust between them, that will go a long way towards building trust between the principles.  What’s interesting here is that it raises the importance of agent selection.  How is that agent perceived in the real estate community?  If you are working with someone who is not well liked, as a seller or buyer, you may find that you are immediately at a disadvantage.  If you are a Realtor, it is essential that the reputation that precedes you is one that helps, not hinders.  This is especially true in small to midsized communities where everyone knows everyone.

Back at our negotiation table, we still have a gap.  We also may have much tighter limits as to how far we are willing to go up if we are the buyer.  If the buyer has come to the negotiating table with a strong opening offer, there may not be a lot of play in the amount they are willing to go up; and that’s OK.  I tell my clients that if we come back with a with a near-end-game counter, we can dig our heals in and stand pat or come back with a very slight increase in the next counter.  This is OK and it’s also OK to walk away.  Ultimately that is the trump card that both side have; the willingness to quit and move on.   But here’s the idea: when I negotiate, my goal is to get the chasm between the buyer and seller close enough where one side, the other or both, recognize they are within striking distance of a deal and the bird in the hand is worth two in the bush.  By starting close to an asking price, a buyer very often actually gets a better deal because they have developed trust with the seller and the seller better understands the buyer’s wants and will often be willing to take a little more off the price.  Naturally much depends on the level of motivation of the parties and the realistic-ness of the asking price.  For this reason, I counsel my sellers to price their home correctly and not price it too high.  The argument for “leaving room to come down,” and “the buyer is just going to offer lower anyway,” is not an approach that I believe is successful, because if a home is overpriced, it takes longer to sell, the price reductions are ultimately much larger than an initial lower price and if think we back to the “steal a home scenario I mentioned earlier, a seller becomes vulnerable as time is not a seller’s friend, even if they all the time in the world.

One last thought, when we negotiate, it is often forgotten that we are negotiating price and terms.  Very often we can give concessions on terms, and this in turn builds trust further.  Terms are concessions too and are often traded in exchange for price or other terms.  A seller for example may need a rent back until school ends and might be willing to come off price a little sooner in exchange; a buyer may be willing to come up if the seller will close faster perhaps preserving an interest rate lock expiration or even sell to a buyer, based on the buyer’s current home closing first.  If a party wants or needs certain terms, it is very reasonable to expect the other side will offer those terms in exchange for some other concession on additional terms or on price.

In the end, a successful transaction requires a measure of trust.  Establishing that trust early in negotiations and building on it throughout the process is the great secret to great negotiating.

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The Great Recession and the Retooling of the American Realtor

Posted on March 22, 2012 by Tim Freund

The Great Recession has caused Detroit to reinvent itself; Main Street to redefine itself; Wall Street rethink itself; Silicon Valley to reboot itself and the American Realtor to retool them self.  In fact all of the above will have retooled themselves in one way or another by now.  The way business was done before has forever been changed and those who’ve not adapted themselves will have fallen the way of the video tape.  This is neither new nor surprising.  It’s the nature of the every economy dating back to the earliest of mankind, that to survive, we must adapt…

Gor: “Thag, how much you want for rock with hold in middle.”

Thag: “2 Fish and sharp stick”

Gor: “Bong ask one fish and one stick!”

Thag: “Bong Neanderthal .  Rock with hole, roll.  Make work easy.  But today lucky day, give, one Fish, one sharp stick and club.”

Gor: “OK, deal.”

Thag: “Deal.  Now give club, me need go find Bong, hit in head… 1 fish and 1 stick, who he think he is?”

In 1990 I started selling real estate for a new home builder in Northern California.  I had many customers from companies I‘d never heard of; new companies called Sun Microsystems, Adobe and Oracle.  Apple I’d heard of but those people weren’t buying where I was selling; I was selling to young employees of the “start ups”… The thing was, I was the new kid on the block then.  Having only just become licensed, I didn’t experience the market boom of 1988-89.  Someone would come in and I’d hop right up and hand them a brochure; ask if they’d like me to show them around and I was always very proud of this line; ask them, “Are you a home owner form the area”?  To this they would either say yes; or we own a home but not around here, or no, we’re renting… Ding, ding, ding… alarms went off and I knew I had a “live” one.  By contrast the guys I was selling with – and they were almost all men back then – would sit at their desks, reading the newspaper, smoking a cigarette; they did that in the office in those days, and when someone would walk in, they would say, without looking up from their paper, “The models are over there, grab a brochure and let me know if you’re interested”.  They continued to do this until they went broke and went into home appliances or mortgage lending or cars.  Was the reason for their failure a bad market or perhaps their lack of effort, or maybe failure to adapt?  Obviously the bad market was a big part of it, but the main reason was their failure to adapt; to recalibrate their approach and recognize that the old way of doing business no longer cut it.  As a newbie, I didn’t know any better; heck if I sold a house I was over the moon.  I wasn’t used to selling out 20 homes on lottery, with people lining up to buy.

Just as the American Auto Industry has been forced to make fuel efficient, technologically advanced, safe and reliable cars, Realtors today have had to become expert in everything from staging and decorating homes, to human psychology and counseling, aiding and assisting people on the verge of financial ruin.  Who knew 8 years ago that there would be such things as distressed property specialists?

I just had a short sale deal fall apart after bank approval because the other Realtor failed to properly educate their client.  They failed to tell their buyer that the bank that was forgiving the debt by agreeing to allow the property to be sold “short”, was not going to agree to do any repairs.  You can imagine my disappointment and frustration when, after inspection, the buyer wanted things repaired.  The bank even accepted their ridiculous repair estimates and I was able to get an additional $35K off the price, but the buyer wanted the repairs done, not the lower price.  Aaaargh!  How dumb does that Realtor feel now?  They went from having a deal about ready to close, to uh.., nuthin’.  The Realtor had failed to adapt to the conditions we find ourselves in, didn’t properly educate their client and they lost the sale.

Adapt or die.  I don’t remember who said that but it sure is true.  So what’s next?  Most Realtors, those who are still around anyway, have reeducated themselves to this tough market; grinding sellers down off their price 10% or more in some cases.  But can they sit by now and expect the market to remain this way forever?  The answer is no, and they’ll need to retool themselves again if they want to keep up.

The British rock band Keane, wrote a beautiful song a few years ago with a chorus that went, “Everyone’s changing and I don’t feel the same”; it’s a great song by the way, in case you haven’t heard it, but the message resonates with me because it serves as a reminder that nothing stays the same forever, even though we might not feel the changes right away.

The housing market is changing as we speak.  It’s shifting to a balanced market from a buyer’s market and my hope is that it stays that way a while and doesn’t just blow through that barrier and quickly become a seller’s market.  The pendulum always swings too far to one sided and then the next.  It seems there’s never Goldilocks’ middle porridge that’s “just right”, it’s either too hot or too cold.

The Existing Home Sales numbers came out yesterday in line with Wall Street estimates… thank heavens, because I wasn’t worried that the numbers would be more bad news, on the contrary, I worried that it would be too much good news and the bond market, which dictates residential home loan interest rates would tank, causing rates to rise significantly.  For you doubters and fence sitters, just wait until the pending homes sales data comes out towards the end of the month and then hold on tight.  Like in the recent hit movie “Hugo”, this rocket’s going to the moon.  By the way, rates are up about a quarter point, just in the last week, so interest rates are already changing.  You can always count on Bond Traders to show the way of things to come…usually anyway.

As for us Realtors who want to be doing this into the next cycle and the one after that, adapt or die; that’s the battle cry.  We better get ready by watching and listening and be prepared to retool again, because the numbers don’t lie and the numbers suggest the market has shifted.  We’ll need to reeducate our buyers, because if we don’t, they will miss out on homes by offering too low, and Realtors will be left wondering what’s going on and why we’re not getting paid.  Then we’ll make our way to Sears to sell refrigerators… that is if Sears still sells refrigerators.

Bong: “Thag, what want?”

Thag: “Why you offer sell Gor, wheel so cheap”

Bong: “Wheel old, take too much space in cave, wife complain.  Me now sell fire, want see?”.

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Dear Abby I’m Not…

Posted on March 16, 2012 by Tim Freund

The following is an excerpt from a recent experience…

Dear Tim,

We need to speak with you about our situation.  My husband has lost his job after having his income decline over the past several years.  To stay afloat, we’ve had to draw on our home equity line of credit and or credit cards.  We are filing for bankruptcy but we want to stay in our home, is there anything we can do?

Sincerely,

Desperate and Struggling

Dear Desperate and Struggling,

Yes, I can try to help you to short sale your home (where the bank allows you to sell for less than you owe), but you might want to read my blog, TheRealEstateConversation.com because I published a 4 part article on how to successfully obtain a loan mod.  Let me know how it goes.

Tim

Dear Tim,

Will you handle it for us?

D & S

Dear D & S,

I’ll look into it.

Tim

After attempting to modify Desperate and Struggling’s loan for 6 months they were declined.  Their income was just too low even though the lender agreed to reduce the interest rate to 2%, extend the amortization period to 40 years and forbear part of the loan balance, which they were willing to do.  Forbearance is the postponement of a portion of the debt without a re-payment requirement until the remaining balance is paid off either via monthly payments, refinance or sale; and is also done without accrued interest.  To accomplish this however, and to comply with the Government’s HAMP (Home Affordable Modification Program) mandated 31% DTI (Debt To Income) ratio, the bank was going to have to forbear 65% of the loan – well above the mandated cap of 30%; this was something the lender was unwilling to do.  This meant the race was run and there was no way D & S could keep their home.  Now we have to short sell.

Dear Desperate and Struggling,

I heard at a recent short sale event for Realtors that Chase frequently sends out a “Solicitation” letter asking troubled homeowners to short sell their home instead of being foreclosed on and they will pay you as much as $30,000.  Unfortunately many homeowners either don’t open the letter, or just ignore it.  So, I contacted your lender and asked them if they ever sent you such a letter.  They said they did back in July.  However, they won’t send me a copy.  Did you ever receive such a letter?

Tim

Dear Tim,

We don’t recall it but when you come to list our home you can look through all out correspondence from Chase.

-D & S

When I went over to the seller’s home and they signed the listing agreement with me, we went through their pile of paperwork from the lender and guess what I found in the pile of bank mail?  That’s right, the “Solicitation” letter! 

At this point Desperate and Struggling’s story hasn’t got an ending; rather it’s a real story of real people fighting for real financial survival.  I will be listing their home soon and am hopeful that my next posting about this couple will end, not with their signature Desperate and Struggling, but rather, Happier Than We’ve Been In A Long Time.  Wish us luck.

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How Important Are Comps? OR A Funny Thing Happened On The Way To The Closing.

Posted on March 12, 2012 by Tim Freund

Just how important are comparable sales in the home selling process?  In “Real Estate Principles,” the fundamental course for all real estate licensees, students are taught that market value is, “Whatever price a willing buyer and willing seller agree to, without the presence of duress” – duress meaning pressure from distress, divorce, job loss, health, etc.  The duress component is a little ironic considering the effect of distressed sales in the market place.  In fact there are markets where appraisers choose to completely ignore distressed sales because they are not comparable at all to the “regular” sales.  Buyers of course are quick to point out every distressed sale when justifying a low-ball offer.  So just how important are comps really?

When we experience a market in decline like we have just gone through, the low sale comps become an increasingly difficult current to swim against.  Many times I have am able to justify my clients’ asking price or counter offer price by picking the comps that best support my value argument.  Sellers invariably want to cherry pick comps to support an unrealistic asking price, and will always point to the “one” highest sale as proof of their argument for a higher valuation.  So do sellers look at comps?  You bet – sometimes.

Sometimes?  What about when a market is changing?  How do comps fit into an equation where the numbers are all over the place?

As a general rule I tell my clients that any offer that differs more than 10% from the asking price leaves virtually no where to go with negotiations.  For a seller, 10% below asking represents a low-ball offer, even if the comps support it.  This is an example of sellers who do not look at comps, or do and choose to ignore them.  When I list a property I explain my “10% rule observation” to the seller and I usually get the “If I don’t ask for it, I can’t get it” argument or “the buyer is just going to negotiate anyway so I need to leave room to come down.”  Then there’s the “But I NEED to net ‘X’ amount off this sale to live on or buy my next home” as if that has any relationship with the market value of their real estate.  Many Realtors will give in to this seller’s price opinion just to get the listing, figuring after it doesn’t sell, they can get a price reduction to where it should have started all along.  This is called “Buying the Listing”.  Aside from the obvious, it creates a problem for a buyer who may legitimately want to the home, but is not going to over pay.  Thus that buyer is left with two choices – write more than 10% off, a doomed approach especially on a new listing, or wait for the inevitable price reduction.

When I sit down with my buyers to write an offer we have the same discussion although the buyer doesn’t care about what the seller thinks, only what the comp-supported value is.  So really the first part of the discussion has to focus on what kind of market are we in and is it clear cut?  If we are truly in a transitional market, then the comps have to be adjusted p or down to reflect the changing market condition.  If we can buy any one of a number of comparable properties (a buyer’s market), we are going to push for a lower price than the comps and the seller has little choice but accept our lower offer if they want to sell, because if they don’t we’ll go buy another property.  However, if we are in the mode of waiting for something new to hit the market, the buyer must understand so must there be other buyers doing the same and therefore, the market may be more of a seller’s market, and that means we may have to pay above the comparable sales even if those comps are just a couple months old.

Here are three examples of offers I wrote for buyers this past week.

The first offer I wrote was for a very expensive home.  We were told the seller wanted $3M.  The highest sale of a similar or comparable home was $2.775M and noting had approached $3M in this neighborhood in 15 months; there had even been a model match (the exact same floorplan) that had just closed 2 weeks earlier for $2.6M – a solid 15% below this seller’s asking price.  We went in using the comps to back-up and support our offer but the seller didn’t even respond.  As I said before when you write for more than 10% off there really is nowhere to go.  Still we came up to the high side of the comps and even added a little extra to motivate the seller to accept.  But the seller argued that we’re in a changing market; that inventory is low, and that their home is worth even more than we’re offering –  “the person who buys our house won’t be looking at the comps.”  Uh, I’d like some of that Cool-Aid please because I don’t know any buyers who aren’t looking at the comps I said.  Ultimately we let that property go, because a small premium is one thing but a 7.5% premium did not make sense, changing market or not, it’s not changing that much, not yet anyway.

The second offer I wrote was for an older property in a quality neighborhood.  The home had just come on the market for $595K which seemed like a pretty good price given what else was available in this neighborhood at this time; that is until we looked at the comps.  The comps showed the market value (even at a premium which my client was willing to pay because he liked the home) was around $530K.  Uh-oh, more than 10% off asking price. The buyer likes the home but again wasn’t going to over pay and certainly not that much, so after considerable discussion and analysis we offered 9% off asking in the hopes the seller will have a reality check and come down.  I also immediately checked with the buyer’s lender because I needed to know how quickly we could get an appraisal on the property since there are two nonrefundable out of pocket expenses a buyer must incur when buying a home: appraisal and inspection.  In our area each cost about $500-$600.  Normally, knowing the home is sound (which we learn by having an inspection), is usually the first thing we do before authorizing the lender to order the appraisal.  However in this case, we have serious doubts the property will “make value” and we would then have to cancel since the seller would likely be unable or unwilling to come down to the appraised value because of how much they owe.  Therefore,in this case  knowing the condition of the property  becomes secondary to whether we can finance this property.

The third offer is on a property listed for $539,000 and agent told us about how much she thought the seller might come down and while it was still a bit of a reach for the buyer, it was a really nice home with a beautiful pool and totally move in ready.  Better to pay a little extra I argued, for turn-key home at 4% interest, than pay less but have to come up with thousands of dollars cash after closing to fix the place up.  Then we looked at the comps.   The comps suggest $490-515K is market value for this place; uh-oh again, almost 10% off, even in its really nice condition that’s a stretch.  Now what?  There are no comps that support the higher asking price, but there seems to be a shortage of homes on the market in this kind of condition.  We’ve also been told, there’s another offer coming in today from someone else.  So now we are to compete for a home that is overpriced?   Yikes.

Back to the initial question, do the comps matter?  The answer is yes but… only in so far they are a guide to market value but not a definition of market value, because in the end, market value is, just as the RE Principles suggest, “Whatever price a willing buyer and willing seller agree to, without the presence of duress”, and that is never more difficult to determine than in a transitional market.

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Hug A Realtor Day

Posted on March 10, 2012 by Tim Freund

I know what you’re thinking, “Is this guy a nut job or what?” or maybe, “That’s the dumbest idea I’ve ever heard…. Hug a Realtor… they’re a bunch of over paid, fancy-car driving so-and-so’s.”  I mean, talk about an easy gig right?  It reminds me of that Dire Straits song, “Money for nuthin’ and the chicks are free.”   Okay, I get it, so now tell me how you really feel…

But seriously, we have Labor Day, a day in which we honor organized Labor;  Veteran’s day; Memorial day, where he pay homage to our lost heroes; Father’s Day; Mother’s Day, Grandparent’s Day; President’s Day; Secretary Day – actually I think that’s for a whole week; even Boss’s Day – talk about dumb… So why not, Hug a Realtor Day?

Most people see Realtors driving their fancy cars, wearing designer clothes, touring luxurious mansions and of course getting paid huge commissions often times for homes that could, “sell themselves”.  Admittedly, I consider Realtors the “Rock Stars of the business world”, but let me shed a little light on why we deserve our own day and why it should be tomorrow.

Last week I closed escrow on a bank owned property listed by Jordan Cohen of ReMax.  Now here’s a guy that sells homes for pro athletes like Pete Sampras and Elton Brand, but he just closed escrow with me on a little one story in a quaint subdivision, nothing glamorous, just a home owned by Bank of America and he’s out there in his jeans, pulling up his for sale sign, picking up the lock box.  Ahhh, the glory of real estate; also known as grunt work.  Or how about this? Have you ever seen a Realtor putting out open house signs in your neighborhood?  How about putting out signs in the pouring rain, or picking up a muddy stake sign in the dark, and placing it in their “expensive” car?  Perhaps you’ve seen a Realtor in high heeled shoes that sank into the soft grass in the middle of that rain storm…  What about the old adage of the Realtor business card saying something like, “Working 24/7 for you”.  My wife frequently laments my taking a call at 9:00 at night, or getting up in the middle of a movie to tend to the needs of a client.  I work when others are off – it’s just the nature of selling real estate.  Clothes…I was showing a $2M home last week and the prospective buyer complimented me on my Mark Nason shoes; my shoes!  Don’t think buyers and sellers don’t notice clothes and cars, because they do and they want to be impressed; and frankly they should be, after all, they want to know that the person they are entrusting their most important financial decision to, is successful, and what quicker way than to look at their car and clothes.  Real estate is not a business that conforms to the book, The Millionaire Next Door.  Having a lot, but not showing it, does nothing for promoting one’s real estate business.  “You are what you drive”, “Clothes make the man” and “Dress for Success”; these aren’t phrases that made their way into our social consciousness without reason.

Realtors often get involved in very intimate and personal inner-family issues.  Sometimes there are divorces or deaths, where the principles are very often emotional and with good reason, but none the less, not rational.  I was once told by a retired Beverly Hills cop that I was “lower than the lowest used car salesman”, because of issues having nothing to do with me, but rather I was the punching bag for a man frustrated that we couldn’t find a home with bedroom downstairs with a sliding glass door, so his dying mother could step outside during her final days.  She died before we closed escrow.  He never apologized and I never asked.  That was 16 years ago by the way.  Some things in the business of selling real estate, are hard to let go of.

So why tomorrow?  Tonight’s the beginning of Daylight Savings Time that’s why.  Except for dairy cows, most everyone likes DST except for tomorrow morning when we lose the hour of sleep.  There’s more sunshine and longer days to go enjoy the out of doors, especially here in Southern California, but Realtors dread it because it means open house hours change from 1-4 every weekend, to 2-5.  It means more clients can see property after work, which means, dinner will be served later and later.  When I sold new homes, tomorrow was the worst day of the year because DST meant the office hours changed from 10-5 to 10-6; God how I hated that.

Thus I propose tomorrow shall from this day forward be known as “Hug a Realtor Day” because darn it, we deserve it.

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Case-Shiller-Schmiller, Here Comes Mr. Toad’s Wild Ride

Posted on February 29, 2012 by Tim Freund

I’m not sure I can explain why the Case-Shiller Index posted a decline for January except to say their numbers aren’t reflective of my experience.  Further given the National Association of Realtors’ Pending Home Index numbers reported just a day early showing skyrocketing activity, I can only presume that Shiller’s numbers are what economists call a statistical anomaly.  Either that or Shiller is just wrong.

Why do I feel that way?  Simply put, our market is on fire.  I looked at the numbers where I live and work, the Conejo Valley, on Monday and it confirmed my experience that buyers are buying with a fervor not seen in a long time and that the available inventory is declining.  How much you ask?  Allow me to preface by saying that all real estate is local so my numbers along the Los Angeles/Ventura County Line is just one market and yours may be different.  Here’s just a little local historical perspective: In fall of 2007, at the worst of the financial meltdown, out local inventory stood at just over 1300 active listings and a mere 10.5% of the total, under contract.  Last month that number stood at 677 total actives and 44% under contract.  Because there are so many short sales under contract which are so long in closing, that 44% number is somewhat distorted.  About half of those 44% pending sales were short sales (where the homeowner is selling for less than is owed and the banks or banks have to accept less than is owed in order for the transaction to close).  Given that sensationally high number of pending sales, 44%, I also looked at the “regular sales” by excluding all distressed properties completely.  The number of homes under contract using this approach was considerably lower, but still ran at 31% of the regular inventory.  In other words, 31% of the non-distressed inventory was under contract.  That’s quite a lot when compared to 10.5% using all available inventory in fall of 2007.  Fast forward to Monday when the total number of active listings was down from 677 to 581 – that’s a 14% decline month over month – this, when we should begin to see an increase in inventory heading into the traditionally hot, spring selling season.  The pending numbers were even more telling.  Considering all properties distressed and non-distressed, a staggering 50% were under contract!  That is absolutely incredible.  Moreover, looking at only non-distressed properties, the number of homes under contract jumped from an already high 31% to an unbelievable 39%, an 8% rise in non-distressed pending sales month over month.

So what’s it all about Alfie?  Here’s my take: the market is rebounding and Case-Shiller is wrong.  Perhaps Shiller’s numbers are wrong because there was a rush of investors or low end buyers trying to close before year end and that drove the median price down; I blogged about median price sales statistics recently in case you missed it – or perhaps banks sold and closed a rash of foreclosure resales before year end and that influenced that number.  An article by none other than Zillow in November 2010 hypothesized that Shiller’s Seasonally Adjusted (SA) number was disproportionately tilted towards the negative because of the decline in regular sales during the last quarter as non-distressed sellers either pulled their homes off the market for the holidays or postponed closing them until after the first of the year, thereby reducing the offset of higher priced regular sales against the lower priced distressed sales.

No matter how I look at it however, I see one thing: inventory is declining and sales are increasing.  In economics we are taught about a thing called supply and demand.  The concept is simple: when the supply outstrips demand the price for those goods and services have to decline to entice buyers.  Conversely, when the demand exceeds the supply, prices rise.  Seldom is there truly balance.  I once asked another Realtor about recognizing the bottom of the market.  She said, “Picture a ball being dropped.  When it hits the ground, that’s the bottom, but by the time you realize the ball’s hit the ground, it’s already bouncing back up”.  This is what I think is happening.  The market is rebounding and that is going to put pressure on prices.

Last summer when Ben Benanke told the world he was going to hold interest rates down until 2013, I was highly critical of him.  I argued that by guaranteeing low rates for the next two years, he effectively took away one of a Realtors’ best sales tools: the “fear of loss close”.  We couldn’t say, “You’d better buy now before rates go up”, because everyone knew rates were not going to go up any time soon.  But now I have a different spin on this.  As our economy continues to improve and as we draw closer to the 2013 date, the pressure for buyers to jump in and buy is increasing.  And as that deadline gets nearer, that pressure is going to become acute and prices will inevitably skyrocket.  It’s starting now, albeit only as evidenced by the declining inventory, but that is the first step.  In the Bay Area’s Silicon Valley for example, sellers are pulling their homes off the market or delaying listing all together because of the looming explosion of already announced hiring by Facebook, following their much anticipated IPO.  The thinking is that all these new employee’s and millionaires are going to drive pricing up.  For us not living in the golden valley of technology, does that mean we should follow their lead and wait to sell since prices are going to go up in our neighborhoods?  That really depends on where you plan on moving after you sell.  If you are planning to sell and then buy, isn’t it better to sell low and buy low rather than sell high and buy high?  The answer in my opinion is definitely yes.  If however, you are leaving the area or planning on renting after you sell, then there’s likely no harm in waiting for your home to go up in value before selling.  Who’s right then, me or Case-Shiller? Call me cocky, but I believe I am, so hold on tight, because this ride’s about to get wild.

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Real Estate Fraud and the Broken Moral Compass

Posted on February 24, 2012 by Tim Freund

I have been selling real estate for 22 years.  When I was younger I worked for a family owned developer selling tract homes.  It was a coveted job and one that required the highest ethical standards.  It was hammered into us that the developer was an easy target so we had to protect the Company by always being above board.  We weren’t allowed to refer business to Landscapers, painters, mortgage people – no one.  Even the suggestion of a kickback could lead to immediate termination.  No amount of short term gain was worth losing your job or worse, your license to sell real estate.  I had a young family and was vigilant and steadfast in my determination to hold my ethics above any possible reproach.  It may sound old fashioned or even “high and mighty,” and while I do consider my honor paramount to my persona, it was equally about self preservation: I feared nothing more than losing my license.  To lose my license was to render me unemployed.  I’d have to get a job selling cars or appliances because I would no longer be able to sell homes.

Fast forward to the wild west of today’s resale market – the fraud and unethical behavior of some Realtors is enough to make one’s stomach turn.  Understand, I am not condemning all Realtors.  The National Association of Realtors has very clear ethical guidelines which every Realtor must adhere to.  But during these tough times there are some people who simply “bend the rules.”  Maybe bending here and there isn’t criminal, but if you bend anything far enough you break it.  That’s what’s happening and it’s disappointing, disheartening and it seems there is no one to stop it.

So what exactly am I talking about?  Short sales mostly and here are examples of what’s happening:

A seller is losing his or her home.  They opt to do a short sale, but they aren’t going to walk away from all their investment with nothing so what do they do?  Sometimes, they make an agreement with the buyer through their agents to sell their personal property (furniture, pool tables etc.) for a ridiculous sum of money.  The buyer agrees and the seller gets some money.  Clever, right?  Perhaps, but it’s also lender fraud.  The lenders require an affidavit that states the seller is getting nothing.  It also means that agents cannot rebate any commission to the seller, yet this happens even though it is also fraud.  How about this – a seller short sells and then is allowed by the buyer to remain in possession as a tenant.  Seems like a win-win, but everyone is required by the lender to sign a document stating that the seller will not remain in possession.  The Realtor is obligated to report it, but they don’t – leading once again to lender fraud.  Or this scenario:  the Realtor is approached by a distressed seller about selling short.  The Realtor knows that the property is really nice and has a buyer, but only if the buyer can “get a steal.”  So, the agent sells the home for a ridiculously low price to the buyer, but the home hasn’t been listed on the open market which the bank usually requires.  To get around this, the agent lists the property at the stupid price, generates a ton of interest, receives several offer yet already has a signed offer at the stupid price by their own buyer.  Since the agent works for the seller (and in this case the buyer too) and not the bank by fiduciary statute, the bank never knows about the multiple offers because the agent is not obligated to tell the bank about them.  When the appraiser for the bank comes out, the agent does everything in their power to guide the appraiser to the agreed upon stupid price.  So long as the value comes in within 5-10% of the sales price, the bank will usually go along with the sale even if that sales price is stupid low.  The agent gets both sides, the bank and the neighborhood (because of the effect of the now ridiculously low comp) gets screwed.

One of my “favorites” is this one:  the agent gets a “shill” offer – an offer from someone they know, typically a really low all-cash offer.  This allows the agent to start the short sale process with the bank, eventually getting an approved short sale.  When the “shill buyer” inevitably cancels, the agent re-lists the home for something close to whatever the bank approved, now usually well below market.  Again, this seems like a win-win: the real buyer gets a shortened process and a crazy-sick price, the agent gets a quicker sale and the seller gets out without being foreclosed on.  It might sound good, but it’s unethical and more importantly illegal because it’s lender fraud.

Here’s a question: how many offers can a seller sign for one property?  Answer:  one.  So how can a home be listed as active in the Multiple Listing Service when there is either a real buyer or a “shill buyer” with a seller-signed contract in hand?  It shouldn’t be, yet it’s happening all the time.  The agents will say that due to the nature of short sales, buyers often cancel during the process so they need to keep marketing the property for their sellers.  Yet MLS rules clearly state that if a home has an accepted offer, it must have a changed status and can no longer be listed as “active.”  While not lender fraud, it is clearly against the National Association’s code of ethics.  The vilest breach of ethics however, is the collusion that exists with some investors and some Realtors who have formed multiple LLC’s to acquire distressed properties.  They’ll buy a property, sometimes even their own, at steep discounts using many of the afore mentioned tricks and then resell it or even sell it back to themselves (at the crazy low short sale price).  This is called “flopping” and has been targeted by the Justice Department and local law enforcement yet it still goes on every day.

The most troubling thing that I have to deal with, given this mine field of an ethical landscape is the acute frustration and disappointment the buying public has as a result of all these shenanigans taking place.  It’s not like the real estate profession is held in the highest esteem by most people to begin with.  Somewhere just above a used car salesman but below the appliance salesman.  It’s the old “a few bad bananas spoil the whole bunch” kind of thing.  Sadly, honest Realtors like me and many of my brethren, get stepped on by the public because of this.  We are often not respected so people blow off appointments and waste our time house hunting only to circumvent us by going to the seller’s agent directly after we’ve introduced them to the property and so on.

W.C. Fields used to say, “There’s a sucker born every day.”  We saw this with unscrupulous mortgage lenders taking advantage of under educated borrowers during the “hey day” of easy lending.  We see agents and investors persuading unwitting buyers to sell their homes under market, and we see the elderly particularly vulnerable to being taken advantage of.  Is it a sign of the times?  Perhaps.  In a tough economy people get desperate and do questionable things to survive, so is that it?  I really don’t think so.  Rather I think it’s just too darn easy to take advantage of the system and the temptation to do so just too great for many to handle; that combined with the seldom prosecuted crimes of lender fraud.  In the end, it’s hard to keep your head above water when you’re swimming with alligators.  Maybe doing the right thing is just a thing of the past, heck Wall Street has gotten away with murder for years and corporate America does the same by avoiding taxes and circumventing environmental regulations.  Clearly real estate agents are far from the only bad guys out there, it’s just that it’s so darned disheartening to have to deal with this day in and day out and to have to explain to some really nice would be buyer, why they didn’t get this great deal or that amazing dream home.

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The Guiding Light, All My Children and What We Know About Housing In 2012… So Far

Posted on February 17, 2012 by Tim Freund

Growing up, my mom was a stay-at-home mom.  Each day while doing the laundry, cleaning, and preparing the evening’s dinner she would watch soap operas on the television.  It really didn’t matter which show was on; the premise was always more or less the same:  a long lost brother returns; Erica Kane has a vindictive affair and someone cheats death through the miracle of Daytime TV medicine, often coming back after several seasons of absence.  So too is our housing market making its miraculous return, having been written off as dead and taken off life-support, as millions of viewers watched, helpless to change it yet hoping for a happy ending.
To read the morning paper is to get a confusing picture of the California real estate market: prices down; sales up; distressed properties make up 50% of the marketplace… Sounds pretty bad right?  But is it really?  As a reminder, real estate is local so if you live in communities like the Inland Empire, Stockton, Patterson, Modesto, you may think me way off base because these markets are down as much as 60%+ and recovery may be a generation or two away.  But I don’t work in those areas or even follow them except at a cursory glance.  However, I do sell in Ventura and Los Angeles Counties and have many friends and family in the San Francisco Bay Area, and keep an eye on Santa Barbara and San Diego because I like to visit those places, and these markets are nothing like the media suggests.  There is little doubt in my mind that our market is healing, but like any serious injury, the healing process has taken a long time, but like they’ve said on General Hospital many a time, “Doctor, the patient’s alive!”
So what’s really happening?  Luke married Laura.  They need a house.  They find a house; they buy it and move in.  First time buyers are alive and well.  They’re finding that renting is more expensive than owning for the first time in a long time.  Investors are buying too.  They’re buying homes at the foreclosure auction for cash.  This brings down the average and median price.  But then they are often rehabbing those properties and “flipping” them, which brings up the price.  Jumbo financing is harder to obtain, making higher priced homes harder to qualify for so fewer sell and again the numbers show a decline.  It is true that people who need to sell, but can’t find a buyer, will be forced to lower their price.  But the same is true when a buyer finds a home that has more than one suitor – something we are seeing more and more of as the inventory numbers decliner.  When this happens the price is actually going up or at least is firmer.  Sales are up.  This is a number we can hang our hat on.  Month over month, year over year, the number of sales is just that – a quantifiable figure that can be compared to previous periods of time.  Prices reflect many elements, like size condition, location, views etc. but sales are much simpler and reliable.  So not all numbers are the same, and in fact some numbers even lie.
If the market is really getting better, then why are home prices down?  To answer you have to consider which “home price” is being referred to as being “down”.  Median home price is generally the number used most often.  Median is the number at which half the homes sell below and half above.  For example, if 100 homes sold last month and 60 of them are at or below $500,000, and 40 are above, the median is going to be below $500,000 because more than half of the sales are below that number.  Yet does that mean your $750,000 home has dropped?  Not necessarily.  All it means is that there are more lower priced homes are selling than higher; the median is like the middle point.  “Isn’t that the same as the average”?  No.  The average can be pulled up or down by as few as one property.  Consider what happened to the average sales price in Bel Air when Candi Spelling sold her 56,000 square foot mansion for $85M. If 9 other homes sold for $5M in Bel Air that month, the average home sold would be $65M, while the median was $5M.  Both median and average are important value indicators but are easily manipulated.  I mean, did anyone who owns a home in Bel Air think their $5M home was worth $65M because of the Spelling sale?
Totally confused?  It’s OK; the whole median/average numbers thing is confusing.  But know this: sales are up and really that’s the key to any housing recovery; because as the sales increase, so do prices.  More sales equal higher prices – it’s the whole supply-demand thing.  If there were an infinite supply of homes it wouldn’t matter, but as no two homes are the same, the supply is not infinite.  And as the distressed inventory declines as it is currently in many of the markets across the country, the supply will become constrained under the demand that accompanies an improving economy.
So like Dorothy Michaels (played by Dustin Hoffman, playing an actor playing a woman) says in the show with-in-a show – soap opera themed movie, Tootsie: “… She was deeply, deeply, deeply, deeply, deeply, deeply loved by her brother.  It was this brother who, on the day of her death, swore to the good Lord above that he would follow in her footsteps, and, and, and, and, and, and, and, and, and, and, and, just, just, just, just, just, just, just, just, just, just owe it all up to her. But on her terms. As a woman. And just as proud to be a woman as she ever was. For I am not Emily Kimberly, the daughter of Dwayne and Alma Kimberly. No, I’m not. (now in a man’s voice) I’m Edward Kimberly, the recluse brother of my sister Anthea. Edward Kimberly, who has finally vindicated his sister’s good name. I am Edward Kimberly. Edward Kimberly. And I’m not mentally ill, but proud, and lucky, and strong enough to be the woman that was the best part of my manhood. The best part of myself.”
Confused?  Don’t feel bad, it’s been a rough several years, but we’re finally coming out of it… just take my word for it.

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I’m Mad As Hell And I’m Just Not Going To Take It Anymore

Posted on February 10, 2012 by Tim Freund

Peter Finch in Network, remember?

Well I’m glad that’s over.  What?  Didn’t you hear?  The banks are settling the foreclosure debacle for $25 billion… that’s billion with a ‘B.’  I guess that means it’s all behind us now.  The banks are going to pay for all those bad loans they made… the banks are going to pay; huh… by the way, just who are “the banks”?

Perhaps I’m being a bit facetious.  My wife might say even a little obnoxious, but let me explain…

This whole foreclosure settlement thing?  I just don’t get it.  The States and Federal Government have settled a potential civil lawsuit in which the banks are purportedly guilty of using shoddy foreclosure practices to take peoples’ homes that were delinquent on their mortgages.  The wronged parties here are the – who? Oh yeah, the delinquent homeowners who weren’t able to do what, modify their mortgage?  Fight back the lender?  Prolong the time they are allowed to stay in their home without paying?  Oh right, they were misled by the loan reps back in 2005-6 and got in over their heads blah, blah, blah… No one wants to see people lose their homes, but how is a $25B settlement going to do anything to do about that?  Here’s what I think: nobody’s going get that money, but somehow I suspect we’re all going to have to pay for it.

So what happens when The Banks have to shell out $25B?  Where does that money come from?  Perhaps it comes out of their reserves.  But wait, if it comes out of their reserves, they’ll have to replenish those reserves right?  So, they’ll need to charge higher rates to lend to homeowners and small businesses, while paying savers ever lower rates.  After all isn’t that how the banking industry makes their money – the spread between borrowing costs and lending income?  They will also have to lend less as they replenish their reserves, remember that whole “Stress Test” thing?  All this just makes it even harder to get a loan.  Oh great, that will mean even fewer transactions for guys like me.  So who benefits from this settlement?  You got me… the guy who lost his home maybe?  Or how about the one who lied on his loan app about his income maybe?

Look, I know it probably sounds callous, but enough is enough.  After all, who do you think is going to pay for the $25B anyway if not you and me?  The banks, right?  OK, who is that?  The stock holders?  The CEOs?  The whole thing is so Kafka-esque.  I’m feeling a bit like a cockroach on trial.  And who is distressed, how do we even define that?  I’m distressed because declining values have cut my commissions, and there are fewer transactions.  Heck after 5 years of recession, we’re all distressed.  Seen the cost of college lately?  I have 2 kids in college and tuition is going up and up; oil is $100 a barrel and oil companies’ profits are soaring!  In fact the oil companies made more exporting refined diesel than keeping it here, thus driving up the costs of all the goods I buy.  But of course we didn’t feel that because Corporate America cut wages and busted Unions, so the average American worker makes less, in order to keep the price of those goods down.  So terrific, the goods cost less at the store but we make less so we are all more distressed, and worse still, can’t qualify for a new mortgage, even if we still have good credit.  So how’s the $25B settlement going to help?

Presently, I am helping 3 clients try to modify their loans.  There’s no money in it for me of course, it’s all pro bono – I’ll get the short sale listing if I am unsuccessful I suppose.  Will the some of the $25B settlement go to these folks?  I hope so, but I doubt it – they haven’t been foreclosed on wrongly.  Sure, they are all either out of work, been out of work, or taken jobs at a far lower pay scale than they were earning 6 years ago when the bought or refinanced their homes to begin with, but they still have their homes, so I doubt they qualify for any part of the settlement.  Should the bank modify their loans?  Yes, but not because they ought to, but rather because it makes good business sense.

At this point you may think me bitter, and I suppose that’s a fair observation, but I’m really not.  Rather, I’m just disappointed in the “let’s sue the banks” thing.  Banks like any corporation need to make money, so the issue shouldn’t be how much we get them to pay out, but rather what can we do to give them incentive to help people in distress?  No jail time would be a good start.  Maybe the Government will figure out a way to take the money each bank is required to contribute to the settlement, make them apply it to the troubled borrowers who still have homes.  I read that’s what it’s supposed to be used for; that the money will be used to help to get the banks to write off some of the debt that’s keeping a foot on the throat of underwater homeowners… we’ll see…  Personally, I feel the U.S. Attorney General should be focusing not on settlement, but rather on the criminal angle and put some of these high level corporate folks away for a while, like they recently did with Wall Street insider traders.  The rewards of profitability are just that, profits, the penalty for cheating can’t be simply payouts, that’s too easy, rather prison time, because that’s what corporate America really fears not paying a penalty.

So, $25B… did you want that in a check?  Hold on, I’ll get my checkbook.

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