Real Estate Myth... I'll Find it Myself?

If you really want to waste a lot of time, and potentially a lot of money, use this phrase while shopping for your next home: “I’ll find it myself.”

I have heard people use this phrase hundreds of times in my career, many of them think better of it after some time. But, often people don’t even know how much hassle and headache they could have avoided by taking my advice.
Here’s why:
Most of the agents in my area do some marketing, in newspapers, homes magazines, and online, but not all of us work with buyers. Sure, if we get a call from one of our ads, we’ll follow up with that person and try to sell them the listing they called us on. But, many agents, if they can’t get a double-dip (selling their own listing with no other agent involved, essentially doubling their commission) they won’t bother to work with that buyer at all. So, you end up chasing down the listing agent, only to find that five phone calls later, his assistant will be happy to meet you at the open house…..yesterday.

Don’t like that one? Here’s another reason:
Many agents (especially the ones that do bank-owned homes and other motivated seller types) don’t advertise at all. They just wait for other agents that work with buyers to bring them a deal. In fact, you can troll the neighborhoods looking for signs and they might not even have a yard sign. So, you’ll end up missing the house that could be the best deal in the neighborhood you want to live in, because you never knew it was available.

Here’s yet another way to look at it:
In the real estate business, when we take a listing, we work for the seller. We are “seller’s agents.” That means, when you call the number on the sign, the person on the other end of the phone is mainly concerned with getting the best possible deal for his client, the seller. Nobody is working for you, in your best interest. What you really need, no matter how sophisticated and savvy you think you are, is a “buyer’s agent.” You need someone who is working for you, in your best interest. You need someone who can negotiate with your needs in mind. What do you think hiring a professional negotiator might cost you? How about nothing… the seller has already agreed at the time of listing that they will pay the commission to the listing agent, an the listing agent has already allocated how much he will be paying the cooperating agent that brings him a deal. So, you have everything to gain and nothing to loose by choosing one agent as your single point of contact and representative. Why would you spend all of that time calling 37 different agents for information on the 37 different homes you’re interested in, when all you really have to do is call one?

I have heard one reason that seems, on the surface, to be compelling. It goes something like this: “If I call the listing agent, he can cut a deal with the seller and reduce his commission so that I can get the house for cheaper.”
Let’s explore this for a minute:
So, you’re looking at a $200,000 house and the agent says he’ll kick in a percent to make you’re deal work (in these cases, which might actually happen, that’s the typical arrangement). That works out to $2,000 or about $14 per month on a 30 year mortgage. Not a lot of money, if the listing agent is telling you the truth. You see, that agent is a person, just like everybody else. He has two things that he is protecting, his clients’ interest is one, and his own paycheck is the other. How would you know if he didn’t kick in the extra $2,000? The answer is you wouldn’t. You are not entitled, as the buyer, to examine the sellers’ closing statement. The commission agreement is between the listing agent and the seller. You are not even a party to it. It really has nothing to do with you at all. So, why not know what you’re getting, and just negotiate the best deal you can?
So, sure, you can use the internet and the newspaper, troll neighborhoods looking for signs, call up ten dozen different agents, coordinate appointments with all of them, try to keep the names and phone numbers straight, and hope that you’re getting the best deal you can. Or, you could call one person that is a member of the appropriate MLS services for the area, build a relationship with them, and have them represent you in the largest financial transaction of your life.

Your choice….do what you want….who knows, it might be fun meeting all those new people.

Home Inspectors... the Good, the Bad, the Indifferent

As you can imagine, I’ve attended quite a few home inspections over the years. With all of that experience, I’ve developed a lot of perspective on the subject.

First of all, if you’re not aware of what they are, let me briefly explain. After you write an offer on a home, and the seller has accepted, we build into the contract an inspection period. Usually it’s about a week, 5-7 days is most common. Basically, it’s a kind of “due diligence” period, where you get to review your buying decision and make sure everything is basically what it should be. I recommend to my clients they take this time, if they already haven’t done so, to check out the neighborhood, schools, and costs of ownership like probable future taxes. Just to make sure that they are comfortable with their purchase. The main thing that happens during this period is the home inspection. This is when you hire someone to make an independent mechanical evaluation of the house, to determine that everything has been honestly represented. That way, you should know exactly what you are getting. This is the part of the process that often causes the most tension for both the buyers and the sellers in the whole transaction. Mostly the tension comes from one of two places, either the buyers thinking that this is yet another opportunity to negotiate, or the quality of the home inspector. Very often, it’s a combination of both.

You see, when you hire a home inspector, you are relying solely on his knowledge and integrity. Unlike real estate agents, there is no licensing process, no code of ethics; all you have to do to become a home inspector is get someone to pay you to do a home inspection. Because of this, it’s very hard to determine if the guy you picked is any good.

I’ve seen inspections that last 15 minutes. I’ve seen inspections that last upwards of 3 or 4 hours. I’ve seen inspectors tear apart perfectly good houses by pointing out imaginary problems and scare buyers into walking away from them, just to find another house and call him back for a second inspection (not to mention a second fee). I’ve also seen inspectors overlook glaring defects in houses that could potentially cost the new owner thousands in repairs and headaches.

In my dealings, I’ve met a couple that I know and trust, so I recommend them to my clients because I know, from experience, that they will give them thorough and honest service. That doesn’t mean that all of the rest of them are no good, just that I know that my resources are good.

If you still want to find your own inspector, follow these guidelines when you’re interviewing them:

1.) Ask if he has a professional trade license.
The most knowledgeable home inspector will likely be a guy that is an older, semi-retired tradesman. Licensed electricians, plumbers, builders and general contractors know what went into the construction process of the house you’re considering buying. In fact, depending on the age of the home, they may have been involved in the process of building that one or others like it in the area.

2.) Ask if he is a member of ASHI (the American Society of Home Inspectors) Or NACHI (the National Association of Certified Home Inspectors)
The people in the first group will typically not have joined these groups, it is a fairly new organization that has developed a limited Code of Ethics and has standardized the forms that inspectors use. It’s not a perfect protection, but, at least it’s something.

3.) Ask what the home inspection includes.
In particular, ask how long the inspection usually takes (an average size home in fair condition should be in the 2-3 hour range). Also find out what will be looked at. What you want is a complete, foundation-to-roof inspection that covers all of the mechanical devices in the home. Ask if he’ll be looking in the attic, crawling around the crawl space, and checking things like wiring and plumbing systems.

4.) Most of all… do an attitude check.
Pay attention when you call and ask your questions. If you detect any amount of arrogance or bluster, hang up fast. The home inspector you want should be honest, humble, and patient. You don’t want someone who just wants to blow through as quickly as he can so he can collect his fee.

Follow these guidelines and your home inspection will be informative and interesting. Most of all, you’ll know if you’re making the right decision about your next home purchase.

Urban Legends... Who's Working for Whom?

Remember Aunt Maude from a few posts ago? She’s everyone’s Real Estate Armchair Quarterback that has all kinds of real estate advice. One of the classics goes something like this:

“Never use anybody recommended by your real estate agent, those guys are all in cahoots and will do whatever necessary to get a deal closed.”

While it is true that some agents I have come into contact with over the years were snakes only out to make a buck, most practitioners in my business are honest, hard working people that do this because they like helping people. I know I get paid for my efforts, why shouldn’t I? I work hard, but I put the needs of my clients first. I am in a business more of representation than of sales. So, when I meet people that serve my clients well, I remember them and recommend them to others.

I have met a lot of contractors, painters, and insurance agents in my career that I would recommend; however, there are two types of extra service providers that I end up recommending most often: Loan Officers and Home Inspectors. Both of these groups, in my experience, contain more bad eggs than good. Here are a couple of quick stories and some recommendations:

Very early in my career, toward the end of my first year, I learned the Loan Officer lesson. It didn’t cost me much, but my clients paid for it dearly, they might not even realize it, but they are still paying for it today. This couple called me up, as excited as can be, brandishing their pre-approval certificate, ready to buy their first home. They already had their loan guy, so I didn’t ask many questions. I just found them the house of their dreams, showed it to them, and asked them if they would like to write an offer. They were ready to go, so I called their Loan Officer to ask him what variety of terms they needed so I could structure the deal properly for their loan terms. He was very vague, but I was directed to write it to accommodate one of those FHA downpayment assistance programs. So, I did my best and got them the best deal I could. The nightmare scenario went something like this: the new tax assessment was due out on the first of December, we wrote the deal late in October (plenty of time to get a deal closed for a loan guy that does his job) he couldn’t get it done until two weeks into December. This led to my buyers needing a couple thousand dollars more at closing for tax prorations. Did I mention that they were using a zero down program? By the way, he never gave them a good faith estimate, so they had no idea how much the loan would cost them. When they finally got the final figures, the day before closing, they just about had a heart attack. The house had appraised for much more than our purchase price, so, the night before closing, the Loan Officer called the listing agent and had him raise the price and the concessions to cover the extra cost. Even at that, my buyers brought all of the money they could scrape together to the closing and still I needed to give them a dollar out of my pocket for them to have enough money to close. After the closing, I took a look at the HUD statement and saw that the bump up in price and concessions (about $10,000) went in the form of junk fees to the LOAN OFFICER!

Still want to listen to Aunt Maude? Fine, at least follow these guidelines when you’re shopping for a loan:
1.) Never, Never, Never pay an application fee for a pre-approval.
These people, after I smelled trouble, felt bound to this loan shark because he had taken $400 from them and he claimed they would get it back as a credit at the closing.
2.) Get a “Good Faith Estimate.”
This is a form that is required by law at the time of application. You should ask for it by name. It lists all of the costs associated with the loan and the estimated interest rate.
3.) Shop rates and terms.
Yes, even if you decide to use somebody recommended to you as “the best guy in town” talk to at least two or three different lenders. Do it on the same day, too, rates adjust every two hours on weekdays, so you want to make sure you are comparing apples to apples. Try to compare the same types of programs too, rates and terms vary depending on what type of program you’re getting.
4.) Beware of Junk Fees.
As you read the Good Faith Estimate, keep your eyes open for words like “points”,” origination fee”,” discount fee”, and others.

Follow these guidelines and you’ll likely save yourself many headaches and probably thousands of dollars. This post is a little longer than I expected, so I’ll save Home Inspectors for next time.

Real Estate Myth... Flat Fees are Cheaper?

Something that is popping up all over the country lately, in this dot-com world where we live, is flat-fee real estate. I thought this seemed like quite a scam when I first heard about it. But when I saw it in action, I found it to be one of the worst schemes I have seen in my career.

A couple of years ago, I had a client, a very nice lady that lived in a quad-level house and needed to move into something that would be more accessible for her disabled son, come to me with a home that she had seen at an open house that she thought would be just right. She asked me to write the offer for her, contingent upon her home selling (I had just listed it a couple of weeks prior). I tried to pull it up on the primary MLS service for the area it was located in, but I couldn’t find it. She gave me a copy of the Listing she had picked up at the open house, and I immediately knew why I was having so much trouble. It was listed in the wrong MLS service. I am a member of a couple of different listing services, so I was able to pull it up to find out the number of the listing agent. Imagine my surprise when I called them and they gave me the seller’s number! They gave me a direct line to their client and told me to have at it! I couldn’t believe that they didn’t want anything to do with negotiating the sale, until I met the lady that owned that home.

She had signed an “Exclusive Agency” listing with them. They had collected a $400 fee from her, two years prior, put the listing up on the MLS service (the wrong one for the area, mind you) and that was all they were going to do for her. I had to meet her, with no representation at all, explain to her that she would be paying me a commission as a buyer’s agent (she had no idea, even though it was in the agreement she signed, it was never explained to her) and I had to be the one to tell her that her home hadn’t sold in two years because it was listed in the wrong MLS for 30% over market value. An offer presentation usually takes a few minutes to maybe half an hour if all of the agents are experienced and have briefed their clients on what to expect. I was with this lady for over three hours!

The worst part about the whole ordeal, my client, the buyer, changed her mind about the house after she sold hers. Sure, she forfeited her tiny deposit and bought another house, but I don’t think the lady with the flat-fee listing ever sold her home. She kept it up for sale for another year or so, and I never saw that home change hands. But, she saved the commission. It only cost her $400 and three years of doing her own open houses.

That’s what flat-fee real estate will get you, headache and extra work. Think about it this way, when you go to a sit-down restaurant, when do you pay for your food? At the beginning of a meal or at the end… after you are satisfied with your service? Why should real estate services be less important than your steak dinner? It’s only your home…

Urban Legends in Real Estate.... Cheaper is Better?

There’s a progression that I’ve seen that takes place with a lot of people that want to sell their homes. I’ve watched it over and over again, and it works out the same just about every time. It goes like this: FSBO, Discount…Full service.

There are several reasons for this, but mostly it’s because people commonly think that low or no fees will mean extra money in their pocket at a real estate closing.

In interest of full disclosure, if you’re just stumbling on to my blog for the first time, I am a full service agent. I work for a full-service broker, the largest and most successful in my market area. But I am writing this because it’s true. In fact, I have been the last link in the chain many times myself over the course of my career. Here are a couple of stories; the names have been redacted to protect the participant’s identities. Also, it doesn’t matter who they are as this is a very common tale.

A couple of years ago, I took a listing from a very nice couple in Macomb Township. They had been listed with another broker in the area, and their listing had expired. They really were ready to move the house when we met as they had been on the market for over a year with no bites, and the house that they had built was ready to move into. When we met to talk about my listing their home, they told me all about the experience they had had to that time.

When they decided to build their house, things were really booming. The builder told them that the timetable would be at least 10 months, and the extras they wanted were more expensive than they expected, so they decided they would save some money by going FSBO. They weren’t really pressed for time, and the selling market was very strong, so they went to one of those websites that offer services to Owner-Sellers and bought the most expensive package. It was, they thought, a whole lot cheaper than using an agent but they did have to pay them up front for the whole thing. After about 6 or 7 months, they started to get a little anxious. They hadn’t seen any offers, and they knew that the new house would be finished soon. An agent had knocked on their door and had offered them a very cheap listing commission, so they decided they would chalk up the cost of the FSBO website to experience and really get things moving.

Well, the really cheap deal that that agent had offered them was what we call a “net listing.” Basically, it’s an arrangement between the seller and the listing agent that says that the seller wants to have a certain amount of money at the closing, and the agent can have the rest of the money that is left over. These are actually illegal in Michigan. There are several laws on the books like this that are designed to protect consumers from unethical practitioners like this one. Well, it goes without saying that she started at a very high listing price. When these poor people called her to reduce the price to a more reasonable asking price, she did, until the price started to get close to that net price. Then she stopped returning calls until the listing agreement expired.

Finally, desperate and irritated, they called me. I listed their home, now vacant because they had moved into the new house, for a reasonable price, and sold it in a relatively short amount of time. All’s well that ends well, but they finally got an opportunity to get it done right. That’s not always the case with people in this cycle. Sometimes they get a sale before they go through the whole cycle, and sometimes that’s the worst thing that could have happened. I don’t have time to write about it now, but look to future posts to see how paying up front for real estate services can really come back to bite you.

More Urban Legends in Real Estate

When I got my real estate license, it was early 2001. This was at the tail end of the strongest sellers market that the state of Michigan has ever seen. True, across the country, the real estate market has remained brisk until very recently. But our market correction began late in my first year in the business. I’m actually glad of that, because it has helped me to develop skills that I may not have if things had been easier.

The conventional wisdom at that time was “list high, and get the best deal you can.” That’s all well and good when there are tons of buyers breaking down the doors of a handful of homes for sale. But not now, market times and listing inventories are up and buyers think they are in the driver’s seat (arguably, in a lot of cases they are). Yet, I still see lots of agents that are using this philosophy. And they are wondering why they can’t sell their listings. Owner sellers are notorious for this as well, but they have an excuse at least. The typical owner seller is not in the real estate business and their best knowledge of market conditions may only be the last experience they had, five or ten years ago. But, real estate professionals should know better. Often, I think they do know better, but some guys will say just about anything to get a listing. I call this “buying the listing.” All you have to do is tell the seller the highest number they could ever imagine getting for their home and the listing is yours. Then you spend the next six months begging for a price reduction. This is seller’s market thinking. For the time being, the sellers market is gone.

Let’s talk about a real world strategy for combating the real world challenges we face. In a buyers market, when you’re selling, the best value wins. Notice I said best value, not best price. The best price is that pig house down the street with livestock and ants crawling through the living room. It has to be the cheapest, it has no choice. You as a smart seller are going to give the best value. First, get the house ready to show; everything clean, smelling sweet like a petunia, with fresh, neutral paint on the walls, make sure to eliminate all clutter, on the walls (get rid of your daughters eminem posters, get most of the calendars and to-do lists off of the refrigerator) on the floors (get rid of furniture that doesn’t make sense and clogs walkways). Keep reading for other hints, I’ll post more later on; I don’t want to get off subject for now. After the house is ready, talk to your Realtor® and have him or her do a Comparative Market Analysis. If you haven’t had a lot of time to do tons of research, ask about a Total Market Analysis. The latter is going to be more of a conversation as opposed to a written report, but it will give you the information you need to know what to expect after the sign goes up. Look at the prices of your direct competition, and the historical information on the homes that have sold of similar size and shape to yours recently. Then, and this is the hardest part, be honest with yourself as you choose your price. Don’t assume that yours is the nicest, prettiest, most welcoming home in the entire neighborhood and therefore should be priced 10 to 20% higher than the highest sold price. Instead, use the average sold price as your baseline and choose your price based upon how soon you would like to move. The end result, if you use the strongest marketing possible, will be a quick sale for close to or at asking price.

Yes, the market cycle that we are in right now could be categorized as a buyers market. But that’s not the end of the world. People are still buying and selling houses all the time. But you have to be smart about it, asking for the moon will not get you there. The market that we are working with today is actually very normal. Selling a house shouldn’t be super easy; it’s the most expensive transaction most people make in their lifetime. It should take a little time and effort. But, if you choose the right professional, and are smart about the process, it will be a positive experience.

Urban Legends and Real Estate

I am often struck by the fact that everyone and I mean everyone thinks this real estate thing is simpler than it is…

There was the PHD that got her real estate license a couple of years ago and joined our office. She went around to every solitary soul and asked what the system was that produced the money for her to make. The answer over and over again was the same… hard work and persistence, know your business and share what you know with people that want to know it. She didn’t buy it, she was convinced that there was some magic bullet that would just make the money appear in her bank account. “I’m a Physicist” she’d say “everything is systematized.” Needless to say, she went back to academia after about 6 months.

Then there are the clients I work with that have the “rule of thumb.” Either they ask me “how much less than asking could I get a house for?” Or they share their homespun wisdom. “My Aunt Maud says that you should always offer $10,000 or 10% less than the asking price.”

The $10k or 10% is interchangeable; it mostly depends on the price range. Either way, it could be completely disastrous.

Let me dispel the myths right now. And let me do it while I still have the picture in my mind of the couple I just had in my office tonight. They have a very nice home, are very motivated to sell it, and were offering it at a “break even” price… well below market value. And Aunt Maud just helped write the offer I had to present to them tonight.

Here it is straight and simple. Sometimes, a good deal is a good deal. Offer prices are a subjective thing that should be handled on a case by case basis. What a savvy buyer should do is have their buyer’s agent, find out and share with them what similar homes are selling for in the area. You might even call it a Market Analysis. The result will be, you will know if it is a good deal or not.

For example:

The house of your dreams is listed for $200,000. Your agent does a Market Analysis on it and finds out that other homes like it have sold recently for $150,000. Aunt Maud just lost you 30 or 40 Thousand Dollars, depending on whether she is a percent or a dollars aunt.

Example 2:

The house of your dreams is listed for $200,000. Your agent does a Market Analysis on it and finds out that other home like it have sold recently for $250,000. You listen to Aunt Maud and the seller tells you to get lost, and sells the house to another bidder for full price. Aunt Maud cost you the house of your dreams and a whole boatload of instant equity.

I know these are extreme examples, but I am trying to make a point here. The point is this. There is only one rule of thumb when you are buying a home. Get a good, competent, honest buyer’s agent to work with you and verify value when you are ready to make an offer. There is no shortcut, there is no magic formula. Just smart shopping and good representation.

So..... How's the Market?

The conversation always seems to migrate over to this question every time I meet someone.

Them: So, what do you do for a living?
Me: I’m a Realtor®.
Them: Oh…….So…..um….how’s the market?

Maybe I’ll fumble around with some statistics, or tell them about my latest listing that I just sold. Whatever it is I say just doesn’t seem to be satisfactory in summing up anything in a qualitative or quantitative way. But fear not! The National Association of Realtors® has just released its annual study. (The study was released on January 17, 2006. I got these statistics from the article they published on www.realtor.org .) Here are a few highlights.

90% of all home buyers use a real estate agent when they are looking for a home. Buyers understand that when it comes to finding a house, Realtors® are the people to ask.

77% of all buyers use the Internet when looking for a home. It might seem like these two statistics work against each other. Not so, buyers look online to see listings, they call a real estate agent when they are ready to buy. So, the way to sell homes is to have a real estate agent with a strong web presence. That way, your home is exposed to the greatest number of buyers. By the way, my broker just spent about $80,000 on our new site, take a look at www.timhall.us ; you’ll be impressed.

The typical buyer looked for a home for about two months, walked through nine houses, and moved twelve miles from their previous residence. That means that an average showing appointment has an11% probability rate of becoming a sale. Also, local advertising is key in getting your home sold. So, make sure that your home is being advertised locally, and make it easy for buyers to come see it. If you have had a lot of showings (over 10) then, it must be time to examine why it hasn’t sold yet. Look at what marketing is being done (we spend $3.2 million annually, all locally), look at your pricing, look around your house. If you were a buyer, would you buy what you see for the price you are asking?

13% of the market is For Sale by Owner. That seems like a lot, doesn’t it? Well, read on. 39% of those transactions were what we call “closely held.” That means that they were sales that were between people that knew each other. So, if you still have that red and white sign that you bought down at your local hardware store in your yard after you have talked to your neighbors, cousins, aunts, uncles, brothers, sisters, kids, and bridge partners then you are not in that category. That leaves 6.6% of the market as real FSBO.

Oh, one more thing about FSBO. The average sale price of that type of transaction was 16% less than transactions done with the help of a real estate agent. I only charge 6%; that means that when you use me, you put 10% more into your pocket at the closing. If the phone number is getting hard to read on that sign you stuck in the yard, do yourself a favor and call me. You are not saving any money; all you are doing is giving yourself a headache and throwing money down the drain. By the way, that 10% more that I’m putting in your pocket is 10% more that you will get, not 10% more than you think you’ll get.

One more statistic for now….

44% of buyers and 43% of sellers chose the real estate agent they used on the basis of a personal referral. I know this is a little self serving, but, if you appreciate the knowledge and expertise that I bring, tell a friend. I have been doing this business for over five years now, and I truly do appreciate it when you send me your friends and family. That is the greatest quality service award that I can earn.

I hope you find this helpful. If you would like more information about the survey, or about more local market information, please don’t hesitate to call me at any time.