Friday, June 28, 2013

Homeowner Associations: Good or Bad? Pt. 1

The customary notion of a Homeowners Association (HOA) Board is of a group of cranky old grayhairs with nothing else to do sitting around a table thinking of ways to bust individual home owners for violating rules no one knew about, and aided by a steel-spined, squint-eyed property manager who levies fines and tells you that you can appeal at the end of a two-hour meeting next month.

The fact, though, is that a HOA Board is of a group of cranky old grayhairs with nothing else to do sitting around a table thinking of ways to bust individual home owners for violating rules no one knew about, and aided by a steel-spined, squint-eyed property manager who levies fines and tells you that you can appeal at the end of a two-hour meeting next month.

Seriously--should Christopher Guest ("Best in Show," "Mighty Wind") do a movie about a community, its HOA and its HOA Board? With Willie Nelson, Eli Wallach and Gene Hackman playing the board of directors, and Jane Lynch in a supporting role as the property manager? Well, maybe.

The problem for homeowner associations is that the work really is specialized, technical and kind of hard. And a lot of it isn't very interesting, unless you like to spend hours reading insurance policy fine print and then arguing over it. Yet board members come from a variety of backgrounds--education, health care, civil service, whatever--few of which have anything to do with property management: Contracts, real estate law, landscaping and property maintenance. 

It's not rocket science, but it's hard and usually unfamiliar. A neighborhood of two hundred homes, with a playground, clubhouse and a swimming pool could well have an asset worth $1 million or more. If you think of a board managing a pricey asset, the prism you see them through changes, too. The prime directive of any HOA board is to preserve and, if possible, enhance, individual owners' property values through property management.

Consider owning a home. It's so cool when it's new, but over time, the trim cracks, the paint fades, the water heater conks out, the a/c condenser dies and so on. And you, the owner, has to pony up for repairs and maintenance. Wouldn't your life be easier if you calculated the life of every task or repair and saved something every month to pay for it? That way, when you needed to repaint the house for $6,000, you'd already have the money in the bank and not have to worry where you'll come up with it.

That's pretty much what your HOA dues are for. Some of the dues is for repair and replacement of common area property that deteriorates over time. The rest pays for ongoing maintenance and for the property manager, who knows all when it comes to, say, getting the Ph balance right in
the pool, shaving sidewalk heaves, nursing trees back to health, watering the grass without having sprinklers go on during a rainstorm, and so on. They also handle property transfers, code invoices  pay the monthly bills, manage operating and capital funds, collect from delinquent owners, pull their hair out over short sales and foreclosures and deal with hundreds of emails daily.

Why are board members so weird?  First of all, it's the personality who wants to serve on a board: He or she is the type who wants to get involved, with the hint of righteousness that attends that personality type. But HOA volunteer work is the only volunteer work where the beneficiaries could care less. Board members often feel as though they work in a vacuum, since neighbors never will know how many hours it took board members to come to a consensus in order to save each owner three dollars a month.

Contracts are a huge part of board work--contracts for community management companies, contracts for landscape companies, contracts for building repair and so on.  As lay people, each board members' impulse is to interview different people and companies to see whom they like. A professional, on the other hand, carefully lays out detailed criteria for the job and has companies bid. The criteria sheet later serves as a measuring stick for contract compliance and accountability. Think of the plans and specifications, for example, a building contractor uses to bid a job.

There's no "That's not what I thought you meant," or "We seem to be having a communication breakdown" with a proper contract bid sheet. And lay people are not prepared or qualified to create these. When things break down, as they inevitably will, contentiousness ensues, with the board members fighting and blaming each other while the property manager looks at the ceiling.

No one likes C C&R Nazis, the cranky neighbor who hides behind the juniper shrubs and looks for off-leash dogs. But no one likes a cyan house with Christmas lights in June in an earth-tone neighborhood. For the most part, C C&R's have to do with how the neighborhood looks. Weak or non-enforcement of CC&Rs is a huge responsibility, first because it's so necessary and second because it's so personal. Board members are neighbors, too.

Neighborhoods with a strong board are immediately obvious. The landscaping is trimmed, the the fences are fixed, no derelict vehicles are in driveways and the aphids have moved on. It may be an imperfect way to do things, but it's the best there is.

Part 2 will follow next week.

Thursday, June 27, 2013

What's a Short Sale? What's a Foreclosure? What Should You Do?

The number of short sale (sometimes called (pre-foreclosure) homes and foreclosures may have diminished from a few years ago, but they haven't gone away. If you're underwater and just suffered job loss or some kind of financial emergency--usually a medical one--you know how real the situation is.

A short sale results when a home sells for less than the underlying debt and closing costs. For example, a home once worth $300,000 and has a mortgage for $280,000, but only sells for $250,000 on today's market. Reduce that by $15,000 for broker commissions and other sales costs, and it leaves $235,000 for the lender. The lender is therefore "short" $45,000.

Of course, there can be, and usually is, more than one loan. Other debt, such as past-due HOA assessments, property taxes, mechanic's liens, judgments and the like may also be on the home. With defaulting borrowers, when it rains, it really does pour.

A foreclosure occurs when the lender sends you a formal Notice of Default and waits the required number of days before taking your house. That's a non-judicial foreclosure, by the way, which means no judge is involved. Lenders can also go to court and sue. That's called a judicial foreclosure.

When a borrower simply gives the deed to the house back to the lender instead of goiung through the foreclosure process, that's called a deed-in-lieu of foreclosure (DIL).

If you're faced with financial catastrophe and can't pay your mortgage, what should you do? In general, a short sale is better for most people. If your home is HAFA eligible, you may even get up to $2,500 in relocation assistance. And Freddie Mac and Fannie Mae both say a borrower will be mortgage-eligible two years following the date of the short sale.

The credit score recovery time from a foreclosure (or DIL) is longer. Moreover, don't forget that little box on the mortgage application that says, "Have you had a foreclosure within the last ten years?"Also, you won't be able to buy another home for five to seven years.

It's hard to say for sure what happens to your credit score. FICO says either a foreclosure or short sale will ding your credit score by as much as 160 points, and makes no distinction between the two. At least that much will happen, and probably more, since all the unpaid mortgage payments have been stacking up.

One downside to short sales is a deficiency judgment. A deficiency is the amount the lender agrees to forego in the sale. Some lenders in some states will sue for the deficiency and likely win. Down the road sometime, the borrower will find the deficiency amount has to be paid, often with accrued interest.  Usually, though, a lender will forgive the amount of debt, especially on the first mortgage. The wording will have to be in the short sale agreement, and a lawyer really should look over the paperwork. It's also important to have a broker who's competent (not necessarily "experienced") in short sales and has a negotiator on staff or retainer.

The forgiven debt is probably taxable at both the state and federal level. As for the second mortgage, negotiate the amount down as much as possible--go for ten cents on the dollar--and sign a promissory note for it, if you can.

People with extreme financial hardships may want to consider foreclosure. If the financial future is looking really, really bleak, foreclosure might be a necessary option.

First, if you find yourself in straits this dire, your credit is already shot, so the relative benefit of a short sale isn't there. Second, you have to have a place to live. While it doesn't have to, the foreclosure process can take months, even years. You'll have a roof over your head. Many say that doing so is taking advantage of the system. At the same time, though, the foreclosure statutes are there to describe what happens in the event borrowers don't pay. You're not breaking any laws, and the process may give you some needed recovery time.

Tuesday, June 25, 2013

Sellers, Buyers: You Need to Know About Pocket Listings

A pocket listing is one that the real estate broker does not place into the local Multiple Listing Service (MLS). If you're a buyer looking online, you won't see it. 

As a broker, I sometimes took pocket listings. The sellers didn't want their homes to be in the MLS because they just weren't ready to jump into the showings drama just yet. Sometimes, they needed time for repairs and cleanup. Sometimes, their target date was a few months into the future, but if I, as broker, found someone looking in that price range and area, I could show the home.

Most brokers took pocket listings for pretty much the same reason. Now, though, in today's hot sellers' market, some brokers are taking pocket listings so they don't have to pay a commission to a buyer's broker. The seller saves, the buyer saves and the listing broker still gets paid. MLS' don't like the practice, even though they won't say so, because it upsets the cooperative arrangement among brokers that make MLS' functional.

This article in Inman News discusses what the California Association of Realtors is doing about it. The fact is, there isn't much any association can do, because cracking down on pocket listings hints at price fixing.

My take is that--this being America and everything--people should be free to do what they want. And who doesn't want to save a few bucks?

Monday, June 24, 2013

What Is Mortgage Underwriting?

In another era, the so-called Three C's of Credit were Character, Capacity and Capital. For home loans nowadays, the three C's are pretty much the same but are more commonly called Credit, Collateral and Capacity. Mortgage underwriting is the process lenders use to assess a borrower's risk to the lender through the three C's. It's a detailed and document-oriented process, which sometimes annoys borrowers.

First is the application with your loan officer or mortgage broker. She looks for red flags, then turns it over to a mortgage processor.

Next, the processor assembles all the documents--application, bank statements, pay stubs, investment accounts, financial statements, tax returns, and so on, as well as verifies student loan account balances, auto payments, credit card debt, and so on. Your credit report will be procured. The borrower will also have to obtain an appraisal of the house and provide it to the processor. The processor will make sure sure the package is complete and the documents are in order, and turn it over to the underwriter.

The underwriter will look at your debt-to-income ratio, which is your recurring monthly debt divided by your gross monthly income. Most lenders like to see this number to be at least 36, but the lower, the better. There's no hard and fast rule. Each lender has its own rules, and they can change fairly often. The lender is nearly always at the mercy of an insurer, such as FHA or VA, or an investor, such as Fannie Mae or Freddie Mac. Insurers and investors have their own rules.

The underwriter also determines whether or not your credit score conforms with the lender's guidelines. These vary from lender to lender. The credit history is important. The borrower's time on the job also comes into play.

The appraisal helps determine the value of the collateral, but other factors, such as the property type and loan purpose, come into the mix. Home equity loans, investment loans, and owner-occupied loans all have different underwriting rules (and interest rates), as do specialized loan products such as the FHA 203k. Loans with larger downpayments are viewed favorably and may offset negative elements elsewhere in the loan package. Different property types--condominiums, attached homes, zero-lot-line homes, homes located in Planned Unit Developments (PUD), and so on--matter.

That's because the lender looks at the loan, not the house. They make money lending, and underlying every loan decision is what would happen if the loan didn't get paid and the lender had to take the house. Condos are harder to sell than detached homes, for example. PUD neighborhoods with private streets are harder to insure and manage. Lenders don't want any house, but some are more undesirable than others.

Underwriters also look for factors not immediately obvious. These may or may not include easements and other title glitches, joint maintenance agreements on common driveways, odd floor plans, problems in a home inspection report or red flags contained in the appraiser's remarks.

One of the most frustrating things for me, and my clients, was an underwriter requesting paperwork about the time the loan was supposed to close. The two main causes were (a) the borrower not getting documents into underwriting in time, and (b) the loan officer being unfamiliar with required documentation and not asking for it upfront. Sometimes, a lender will change underwriting rules mid-process and cause a delay.

Here's some do's and don't's. DO get paperwork in right away. DON'T argue whether or not a particular document should be required. It's not negotiable. DO try to close before the end of the month. If closing lingers past the first, new pay stubs and perhaps account statements will be needed. DON'T yell at your loan officer. Notwithstanding the above, it's hardly ever his or her fault.

This post is meant to provide an overview. Each application and loan package is different, as are rules for various lenders, insurers and investors.


Friday, June 21, 2013

Contingencies, Counter-offers, Concessions and Other Addendums: A Recipe for Disputes

People tend to believe that a typical residential real estate sales agreement--the kind that Realtor associations generate for their members--are binding contracts. Technically, they are, but they're so they're so full of weasel clauses and poorly-worded addendums that virtually anyone can get out of one. Moreover, the penalties for non-performance only deal with earnest money disposition and arbitration. My real estate attorney in California used to to call these "agreements" as "deposit receipts."

What's a concession? Simply, someone agrees to give up something. A seller agreeing to pay some closing costs is a concession. A buyer agreeing to give up the refrigerator is a concession.

What's a contingency? It's a condition that needs to be met before the contract becomes binding. Clear title is a contingency. So's a home inspection. Financing almost always is as well.

What's a counter-offer? It's a reply with modifications in response to an offer. A buyer offers $270,000 for the house. The seller counters with $280,000.

An Addendum is an attachment to the Sales Agreement, signed by both parties, altering the original terms. "The parties agree that Close of Escrow will be June 30, 2013," for example, if the original closing date was June 25. Many contingencies, concessions and counter-offers occur using an Addendum.

Wording is not always clear. On one of my listings, for example, the buyers' offer was "subject to" the sale closing of their existing home. My client- seller accepted. But the buyer's agent got annoyed with me for not placing my listing into "pending" status. I wouldn't do it because the sale of the buyers' existing home still had a home inspection contingency. To me, that meant it could fall through, and I didn't want my client's home to not be an "active" listing.

The buyer's broker pointed out that our MLS rules considered a home with an accepted offer, contingencies or not, as a sale, not a "contingent sale." In other words, "subject to closing" didn't mean it was contingent. If that sale was part of an offer on a new home which the seller accepted, then that seller's home, i.e. my listing, had to be shown in MLS as "pending" and not, as I thought, a "bumpable" (contingent) offer.

As things turned out, everything turned out fine and everyone ended up happy. But what would have happened if my client had gotten cold feet and terminated the offer, even if it were shown on MLS as "pending for a week or more? 

Probably nothing, except a really angry buyer and their super ticked off broker. They could have sued, I suppose, but it was unlikely any court--or mediator--would have awarded them anything. The language just wasn't clear.

That's an unusual illustration. Home inspection contingencies are common and offer better examples. Most sales agreements specify the type of inspection (whole house, roof, pest and dry rot, etc.) and create deadlines, first for the parties to agree on repairs and second, a date certain by when repairs should be made.

For example, the Agreement might say, "Buyer and Seller have ten days from the date both parties signed this Agreement to complete repair negotiations..." The legalese will be more detailed, but you get the drift. The date for completion of repairs will be in the Buyer's Repair Addendum.

Here's an example of poor language in a Repair Addendum: "Seller to repair water damage in living room window." What if the seller doesn't do it? What if the seller scrapes and paints the window sill, but the damage resulted from poor installation and recurs? Unfortunately, this kind of language error brokers make is very common, causing angst, stress, and even killed deals.

Language has to be very clear and should always contain "if-then" clauses. The above example might better say, "Seller to retain licensed contractor to inspect window damage and its cause within two days. Repairs to be performed by licensed contractor and must be completed on or before March 3, 2013, when Buyer will perform a reinspection. If repairs have not been made, or if they have not been made in a workmanlike manner, then Buyer, at Buyer's sole option, may terminate this Agreement." This wording is much clearer, in that it says who determines the cause, who repairs it, a deadline for completing the work, and what happens if the repairs are not complete and/or properly performed (the "if-then").

The above example points out the major weakness in how real estate transactions are commonly conducted with respect to counter-offers and contingencies with addendums. In filling in blank spaces and writing addendums, real estate brokers are, I believe, practicing law. Without a license. Realtor associations seem to understand this weak spot and their attorneys work very hard to keep the pre-printed language concise and up-to-date.

It's very important for all parties to a real estate transaction carefully read and understand what's written. And it never hurts to consult an attorney if anything is unclear.

(Note: As a four-year Latin student, I realize the plural of "addendum" is "addenda." But I'm using the English plural, which seems more common.)

Tuesday, June 18, 2013

How to Choose a Real Estate Broker (Seller's Edition)

The time comes to sell your house and move on. The real estate landscape you found so interesting years ago, when you bought the home, is suddenly a foreign country. What's your house worth, what can you net and how much do you have to pay to get the job done? Do you need a real estate broker?

The answers, really, are somewhat easier for sellers than buyers. For buyers, the money they pay a broker is embedded in the transaction. For sellers, however, the broker fee is right out there and is likely the second biggest charge on the HUD-1 settlement statement right after the mortgage payoff. I've previously written on whether or not sellers should use a broker. Today's post assumes you will use one.

The relative transparency of the sales commission (or other fee) helps frame the transaction as a business deal: The broker will sell your home, and you will pay her to do so. The question a seller needs to ask, then, is "How much do I pay and what do I get for that?"

Buyers look for homes by price and neighborhood. Therefore, the most important task your broker has is to make sure each and every buyer looking in your area and price range knows your home is for sale. Placement in the Multiple Listing Service is especially important, as brokers have tools to syndicate listings on dozens of websites. Buyers use sites such as Trulia, Zillow and Redfin to shop, and your home needs to be there.

That narrows the discussion with brokers you interview. You want to know how they'll get your home out there and what they'll charge you to do it. Keep your discussion focused on that element. Make sure you know, in concrete terms, what you'll be getting and what you'll be paying. By "concrete," dismiss phrases such as "I have buyers out there who want your home." What you want to hear is "I'll do Y and charge you X."

In a perfect world, sellers would create a formal Request For Proposals (RFP), a tool any project manager is familiar with. With an RFP, you'd list every desired service you can think of, by category, along with incremental pricing, and send out the form to a host of real estate brokers for them to respond with services and concomitant pricing. Your choice of brokers would result from an apples-to-apples comparison.

Unfortunately, sellers aren't always sure of the services they need and set out interviewing brokers with little basis for a discussion. That's asking for even more uncertainty, as they'll hear something they like with each broker, and come away pondering which broker they liked the most or was the nicest or whatever.

You don't want to do that. You may not know all the services, but you know the most important: Listing, advertising (not the annoyingly misused "marketing"), sales forms, CMA, signage, and so on. 

What to be wary of: 
  1. A real estate agent contacting you with an offer of a "free" CMA (Comparative Market Analysis). Don't bite. It's not really free. It's a tool used to begin and control the discussion. Any real estate broker will provide you with a CMA or other help in pricing your home, but don't have the CMA discussion until after you've decided who you want to retain.
  2. While I'm on it, there are still brokers out there who will suggest too high a price for your home to induce you to give them the listing.
  3. The sales agent answering your questions with other questions. It's a sales tactic used so the agent will tell you what you want to hear. For example, a seller might say, "Do you think our home will sell quickly" and the broker says, "Would you be happy if it sold in three weeks?"
  4. Overly fancy presentation materials. You need to focus on the pig, not the lipstick on it.
  5. Brokers who say they "negotiate." Negotiation is about leverage, and brokers have none with a prospective buyer. Brokers present offers and counter offers, over which buyers and sellers make decisions. Good brokers (and there are lots of them) will counsel their clients. Whatever else that is, it's not negotiation.
What should it all cost? I once calculated my actual hours including travel time on a $275,000 listing and came up with eighteen hours. At my $125 per hour rate, that came to $2,250--a good bit less than a 2.5% ($6,875) or 3% ($8,250) sales commission. Most listings require a few more hours (the above example sold quickly), but it gives you an idea of actual time worked compared to compensation.

Traditional brokerage firms' commissions range from 1.5% (Redfin on homes $200,00 and up) to 3%. An additional 2% to 3% is added to pay the buyer's agent, so you'll be looking at sales commission quotations ranging from 3.5% to 6%, depending on local practices. Real estate brokers claim that fees aren't fixed and are negotiable. Most don't like talking about the commission, though, so you may have to bring it up and offer what you want to pay. And don't forget--if you retain a broker to sell your home, he or she is usually amenable to giving you a lower rate if you use him or her to buy your next home.

If you pay a 5% commission on a $300,000 home with your broker receiving half that amount, you're paying her or him $7,500. For that much money, you're certainly entitled to know what you're paying for. That's why you really need to have the what's-this-include discussion in advance.

And there are unique situations. If your home is a short sale, where the sales proceeds will not pay the underlying debt without the lender taking a haircut, it's a different set of rules. Lender short sale guidelines generally require the use of a real estate broker, and a full sales commission rate is expected. 

Short sales take an inordinate amount of work and are enormously frustrating. Things may be different now, but I found one of the biggest reasons for short sale fails was incompetent listing agents--even those who claim to be "experts" with dozens of sales in their histories. I would not list my short sale home with a broker who did not have a short sale negotiator he or she used, whether that negotiator was in-house or an outside service. 

I know of one exception to this statement in Oregon--a broker who does nothing but short sales and was doing them before the crash. She was amazing, both personally and professionally. She's also an exception.

Investment properties have a slightly different set of guidelines I won't go into here.

Just remember the takeaway: Know in advance what services you're paying for, and how much you'll be paying for them. This transparent arrangement makes the relationship between broker and selling client stronger.

Friday, June 14, 2013

How to Choose a Real Estate Broker (Buyers' Edition)

In selecting a real estate broker, people tend to turn to someone recommended by a friend or family member if they already don't have a broker. I think there are better ways than that. After all, you'll be paying up to 3% of the purchase price of your home for the broker's services. Selecting one should be done with care and forethought.

Anyway, some ideas:

1. An experienced broker isn't necessarily the best choice.

If you select a surgeon, you tend to look to someone who's done the surgery many times, right? Maybe that's good and maybe not. When my son needed ACL surgery, we selected an orthopedic surgeon with a clinic in a Division I football town, where this kind of surgery was routine. The clinic and doctor enjoyed a national reputation. But he botched things.

When it came time to select a primary care physician in Colorado, I purposely passed over the experienced docs and chose one not far out of medical school. New physicians are more likely to be current on the latest in medical research and not set in their ways.

The point is that an experienced real estate broker isn't necessarily the best fit. Many newly-minted licensees are far more up to date on tech use and social media than their older peers (I know of one guy in the Portland Metro area who still refuses to use email). Moreover, I've found that younger licensees tend to have college degrees. Some people don't think that's important, but I do, even if the degree is in an unrelated field. People with degrees have developed problem-solving skills and can make sense of disparate information.

2. Good brokers run their practices like businesses.

That's because they are businesses. Your transaction should be considered a business deal. What's that mean? It means the whole process should be about you, the client, what you want, what your goals are from beginning to end. Buying a home is stressful, and it should be professional and pressure-free.

Pressure comes in the form of statements such as, "Competing buyers are waiving the right to a home inspection. I don't recommend it, but you should know what you're facing," delivered when you're writing an offer. Why is this statement a red flag? Keep in mind that the brokers don't get compensated until the transaction closes. If you've looked at a lot of homes, that broker has worked quite a few hours for no money and may be thinking of ways to get a deal closed one way or the other, even subconsciously. Brokers have bills, too.

Nonetheless, statements such as that suggest it's still about the broker and not you, the client. If the broker were running things like a business, he or she would have had a long conversation with you before ever looking at a single house to lay out market realities. That's how good business is done.

A good buyer's broker will want to have the conversation at the first or second meeting, and be prepared to spend a healthy amount of time. If the person doesn't initiate the discussion, go find someone else. Bring a list of questions and your goals. Expect detailed and concrete answers. Statements such as, "I'm sure we can find the home of your dreams" is not what you need to hear, as nice as it sounds.

3. They need to know something about issues related to real estate, not just sales.

While brokers don't need to be building experts, they should be able to observe, say, a blown window seal or issues relating to the geographical area, such as settling in Colorado or dry rot in the Pacific Northwest. Buyers often don't know these and can be tempted to think "that's just the way it is" when they see something unusual, and let it go unquestioned. It's the broker's role, here, to suspect a problem and direct you to an expert with answers. 

 Basic knowledge of title, real estate law and mortgage markets is also important. They can't practice law or offer mortgage advice, but they can ascertain your needs and direct you to the right place.  Oh--never take just one mortgage referral. Get three or four.

4. Beware of bullshit.

Bullshit might be worse than an outright lie. With a lie, you'll know a some point it isn't true. With bullshit, you never know for sure.  Here are some examples of bullshit:

"I'm a neighborhood expert." Oh? Says who? And what does that mean? Brokerage firms and companies such as Zillow or Trulia exhort brokers to become "neighborhood experts." What's that supposed to mean, and why is it important? With no objective correlating metrics, anyone can claim neighborhood expertise, and many do whether they know much about the area or not. Find a home on Zillow and a list of neighborhood experts will pop up. They didn't get there by passing a test, believe me. They paid Zillow for the exposure, and the amount they paid is reflected by the prominence with which they show up. The same is true for Realtytrac and most other sites.

"I'm a Top Producer." Oooh. Compared to whom? To what? And moreover, who cares? Anyone who feels compelled to crow about his sales volume is more concerned with inducing you to think how wonderful he is than in getting down to business. In my three-plus decades in real estate, I've found that ten percent (or less) of the brokers do ninety percent of the business in any market. And most of them say very little about their personal volume.

"I can get you a great deal." Oh right. How? Seriously, would a seller discount the property to a broker because the broker was the cat's meow? Run if you hear this phrase. It likely means the broker is getting a something extra out of it.

"I'm a short sale (or foreclosure) expert." Well, that might mean she took a one-hour class on it last week.

There are plenty of other examples, but the best way to judge is to determine if the statement (a) means anything anyway, and (b) is verifiable with objective information.

5. Big name brokerages are not better than one another, nor are they better than independents.

A brokerage makes it's money by collecting part of each agent's commission, usually ranging from 10% to 40%. The lower the agent's volume, the higher the percentage split, and vice-versa. Since a commission cut is the source of revenue, bigger firms tend to exhort, pressure, or otherwise encourage its brokers to ramp up their individual sales volume however possible, and they support it with sales training, inspirational videos and programs, accountability meetings and so on. Many of these brokers tend to be all things to all people.

Small, boutique firms focus on niche markets. Individual brokers have their own even smaller niches. That said, any of them can work anywhere in a given market and may have the expertise to do so. But they don't have the resources, such as lawyers, transaction coordinators, tech support, short sale negotiators and so on, that big firms have. Aligning yourself with a big, a small, or an independent needs to be considered.

And there's no branding among brokerages. Remax is no better or worse than Coldwell Banker. Moreover, there's very little branding among individual agents, try as they may to brand themselves. Many try to do it with absurd or catchy slogans, putting their names on bus stop benches or shopping carts, paying for flashy websites, using their high school yearbook photos  or whatever.  But that's not branding, in the sense of Neiman Marcus versus Sears, whose brand names speak for themselves. That's advertising.

The ones who do have a brand are those who run their practices as businesses, and then, it's not really a brand. It's just being a professional. These can work for any sized firm.

There's more, and I may update this post as ideas come along. Feel free to ask any questions that come up.

Wednesday, June 12, 2013

Want to Sell Your Home? Here's How

Selling a home can begin a series of arguments you have with yourself and your significant other, assuming you co-own. The first is the question, "Is now a good time to sell?"

We all read how "hot" the market has become, something that should be taken with a grain of salt. Most of those saying how "hot" things are generally have something to gain from a sale. While it's true that pricing, in general, has risen and that listings are few, it's also true that a lot of people are still under water. Of those who aren't, many have pretty slim equities. An earlier post discusses the issues, so I won't get into them here.

Anyway, here are some others.

1. Should you hire a real estate broker?

In 2013, it's easier than ever before to sell your home yourself, although I'd recommend using a lawyer. The old argument for using a real estate broker was that they were the gateway to exposure through Multiple Listing Services (MLS). While it's true that you still need a Realtor to get into an MLS, it's also true that you can get terrific exposure for your home through sites such as Zillow and Trulia. Most buyers begin their home search online without a broker, and yours will show up quite prominently.

Redfin, a brokerage with a robust and useful website in regions where it's located, also lists homes that are For Sale By Owner. If your home is priced at $200,000 or more, Redfin will provide you a full service listing for 1.5% of the sales price--far less than the standard 5% or 6%. Redfin also has a home pricing tool showing comparable sales and suggestions for adjustments based on how your home compares.

Sites such as Postlets, owned by Zillow, give you a place to upload photos of your home and syndicate your ad to other popular websites, including Craigslist. Buyers search for homes by location and price, so your number one task is to ensure that every buyer out there looking in your area can easily find you.

But don't write off using a licensed broker. Home selling may not be rocket science, but it is difficult and specialized work. Brokers' marketing tools are a lot better than those available to lay people. Brokers are trained, experienced and and they do this stuff for a living, which is why they're professionals. Services they offer vary from broker to broker, but they can help price your home, offer use of documents that protect your interest, navigate the way through the frustration of offers, counter-offers, and home inspections, analyze quality of buyer's financing, host open houses, and so on. 

Using a broker also offers you a degree of personal security--no unvetted strangers will come to your home. Most buyers will be represented as well, so you you need to ask yourself if you're comfortable negotiating with a professional. If you decided to use a broker, you can negotiate the fee, especially if you agree to use the broker to help you buy a new home.

2. Take lots of pictures.

And take good ones. If you take a photo of the bathroom, show the whole thing, not just the toilet. Buyers are trying online to visualize themselves and their stuff in your house, and you need to make it as easy for them as you can.

If you're so inclined, create a two to three minute video of you talking about your home and post it on You Tube or Vimeo, or both. Say what you like best and what you like least.

Consider setting up a website for your home. It's very easy to do on Wordpress or Blogger.

3. Get rid of clutter.

Clear off all counters. No kitchen tool or spice jars, no toasters, no vases in the kitchen. No toothbrush holders, makeup jars or razors in the bathrooms. Clear off nightstands and dressers. Remove the pictures from the refrigerator. Confine family and religious pictures to the bedrooms, and minimize them as much as you can. Stow items such as electric guitars, boom boxes, posters and the like often located in kids' rooms.

In the living areas, get rid of furniture that crowds. Just move it to the garage (don't worry if the garage is cramped). Clear the coffee tables of magazines, knick-knacks and so on.

Why? Clutter makes your home look smaller than it is, and it also draws attention to the clutter instead of the home. You'll be surprised how much bigger your home will look, even to you,when clutter is removed.

4. Fix and repair stuff.

When a buyer sees some flaw, even a small one such as knicked-up door jams or a light burned out, she or he immediately wonders what else is wrong that's not immediately obvious. Moreover, the buyer's home inspector will likely find anything wrong. 

Fix known problems. Get a furnace and air conditioning inspection and servicing. If you have rooms that are, say, painted with lollipops and angels or firetrucks on the wall, re-paint the room. If  possible, re-paint the whole house in a neutral color.If you can't re-paint, touch up every nick and scratch. Remove glitter and stars from bedroom ceilings. All appliances should be in working order. Torn carpet needs to be fixed. Replace all burnt out bulbs.

If you have outdoor landscaping, be sure it is fresh, weeded and trim. Keep landscaping away from the sides of the house, or a good home inspector will note it a possible cause of dry rot and insect infestation.

5. Clean the home.

And not just broom-clean. The bathrooms and kitchens need to sparkle, so remove water spots and mold. The beds need to be made and clothes kept off the floor. Don't just dust the furniture, but also the tops of the floor kickplates and stair rails, for example. Get rid of pet hair, and don't leave a dirty cat box. Vacuum every day, or at least before showings.

Don't use plug-in scent thingies.

6. Showings.

Turn on every light in the home before you show it. Lock up any medications you have. If possible, have cookies in the oven or just baked. Think of your home as a model home and do your best to make it look that way.

And don't be afraid to ask questions about the prospective buyer if someone, even a broker, calls to see the home. Ask a general question or two, such as, "Is this buyer local or from out of town," or "Is this your first home." You don't want to be nosy, but even innocuous questions such as these indicate that this is business, not entertainment.

7. Open Houses.

I always hated them, because most of the people coming through are the neighbors. Which, really, as a broker, I should like. Why? Among the biggest reason brokers hold open houses is to sign up clients from the people who come through. Selling off an open home is extremely rare. That said, it does happen, and people who are serious house hunters often tour Open Houses on weekends. They also show up on Zillow, Trulia, Redfin and others.

Always be aware of safety issues with Open Houses.

8. Sales Forms.

You can obtain forms at office supply stores or online, but this is the part where you really need to use a lawyer, if you're not using a Realtor. Filling in forms is, in my view, practicing law, and it's something lay people need to think long and hard about. A few hours of an attorney's time is worth the cost.

Colorado has state-approved forms downloadable from the state website. Other states may also have these. 

All in all, plenty of information is available online, and the most important thing you can do is educate yourself. And feel free to send me any questions!

Monday, June 10, 2013

What Are Closing Costs?

Sometimes first-time home buyers are fortunate enough to have a twenty percent down payment, whether through savings or gifting. Most, however, rely on FHA's low down payment (3.5%) program. In either event, however, they'll hear the term "closing costs" tossed around by their lender, broker and others. And since changes happen, even seasoned buyers and sellers are often surprised at what they find at closing.

Closing costs are a very big deal for first-timers, though. That's because their cash reserves often are tight. FHA loans permit the seller to pay up to six percent of closing costs, so it's a no-brainer to ask for them in a purchase offer. 

From the seller's point of view, though, a buyer asking for closing costs amounts to a six percent discount (or whatever the buyer requests) off the asking price. And asking for closing costs may limit the buyer's ability to negotiate the price of the home, which adds stress in the current (in many places) seller's market. It's problematic to offer 95% of the asking price and ask for closing costs besides.

So, what are closing costs?

1. Lender loan fees, discount points, etc.: The first is the Loan Origination Fee, usually shown as a percentage of the loan amount. Sometimes, it's a flat fee. It varies by lender.

Next  are "Points." One point equals one percent of the loan. If you pay points upfront (discount points), it's because your lender is charging fees to give you a lower interest rate (also see YSP, below).

You should also see fees or or points charged by your mortgage broker, who has shopped your package to several places to try to find you the best program. Or should have, if he/she isn't lazy!

2. Other loan charges: If you didn't have to pay the appraiser up front, you will see an Appraisal fee. The lender will also charge a fee for obtaining your credit report. An inspection fee can appear, especially if there were repairs that had to be made before closing.

If you paid less than twenty percent down, you'll be required to have mortgage insurance. Some mortgage insurers require an application fee. Some don't.

You may also see an item on your HUD-1 closing statement saying, "Yield Spread Premium," or YSP. If your mortgage broker has matched you with a lender's program whose terms and conditions are higher than "at par," your broker receives compensation. You don't pay it directly, but it  must be disclosed. The term "at par" simply refers to the lender's interest rate at which it will neither pay YSP or require discount points.

A less common fee but one which will increase over time is the Assumption Fee, which is what a lender charges when a buyer assumes the seller's existing loan. With rates at historic lows, more seller loans will be assumed as interest rates rise.

3. Lender Prepaids: The lender requires you, the buyer, to prepay certain items at closing. These are the Mortgage Insurance Premium (MIP), loan interest from the day of closing to the end of the month when closing occurs, and Hazard Insurance (really, the home owner's insurance policy you'll buy anyway). Depending on where the home is located, there may be a charge for Flood Insurance.

4. Impounds: As a buyer, your monthly payment will include Principal, Interest, Taxes and Insurance (PITI). Your lender will set up what's called an Impound Account to disburse your payment to each of these. Property taxes and hazard insurance are generally paid once per year, so your lender may require some prepayment of these. Also look for HOA charges to show.

5. Title, Settlement and Related: Someone will act as the Settlement Agent, the person who has prepared the documents, calculated the charges for both sides and administers the closing. Often, this person is the Escrow Officer, but some states don't have escrow. In any event, this person or firm must be paid, and the fee will appear. Very often a fee for Document Preparation (you'll hear "doc prep") is also levied. Some documents have to be notarized, so you'll also see a Notary Fee.

Title: If Title seems complicated, that's because it is, and it's a topic for a separate post. You'll see charges for title search, which looks for recorded and unrecorded claims and exceptions that could affect clear title. You already will have been given a full Preliminary Title Report showing the results of this search. Sometimes, charges for this work are included in the Title Insurance Premium.

Title insurance: The Seller is required to insure title for the buyer, and the price is determined by the sales price. The buyer is required to insure title for the lender for the amount of the loan. Charges for both will appear on the HUD 1 for Buyer and Seller. Also, you may see charges for Endorsements that some lenders require which generally expand coverage. These vary widely, so ask for an explanation.

Less common are Attorney Fees, but sometimes, an attorney may act as the Settlement Agent. 

6. Other Fees: These could be Survey Fees, Inspection Fees, Recording Fees, Transfer taxes, and others. Most aren't very big, but $50 here and $75 there can add up. Sometimes, Homeowner Associations charge a fee when a property transfers to cover internal costs.

Some jurisdictions have Transfer Taxes, which is a tax required when title to real property changes from one person to another. This tax can be significant. The seller often pays, but not always, and it's a charge that may have to be negotiated. Surveyors aren't cheap, either, but whether or not there's a survey probably depends on local practices.

7. Real Estate Sales Commission: This item is likely the biggest charge for the seller and is usually  but not always, shown as a percent of the sales price. The disbursement to the buyer's agent and the seller's agent is shown. While it's true that  the payment of the sales commission is usually deducted from the seller's proceeds, buyers tend to think they aren't paying a commission. They need to think again. That purchase price is funded with the buyer's mortgage and down payment.

Buyers and sellers won't necessarily see all of these fees, but they might. They could also see charges not noted here, as local conditions vary and as rules and regulations are refined and created. But the above is a good snapshot and offers an insight into what closing costs are.

Details of specific charges to specific loans notwithstanding, there's a larger point, here: Shop around for a mortgage loan.

Thoughts or comments? Let me know!

Friday, June 7, 2013

What's the Difference Between a Condominium and a Townhome?

Since townhomes (also called rowhomes or townhouses) often look similar to condominiums, most people think they're the same. They're enormously different and can
be enormously confusing.

Okay, the Cliffs Notes version:

1. They are radically different property type.
2. Townhomes (also called "rowhomes" or Townhouses) are closer to single-family detached homes than they are to condominiums.
3. Townhomes may or may be part of an HOA. Condos always are. And a condominium HOA can hose individual owners far more than a townhome HOA can.
4. Townhomes are easier to finance and get better interest rates than condos.

Part of the reason for the confusion is that "townhome" or "rowhome" or "townhouse" also refers to an architectural style, where a single building has multiple units whose walls are attached. Worse, the property type of the units in such a building may be either townhomes or condominiums! You can't tell the difference by just looking. You need to check the property type on the tax record.

Why? Because a townhome is more similar to a single family detached home than it is a condo, appearances notwithstanding. The owner owns the walls, roof, and the ground under it. An owner will have fee simple ownership to the property.

With a condo, by contrast, the unit owner owns only the airspace inside the unit. Everything else is owned collectively by all owners in the community, which is represented by the Condominium Owners Association (COA), and individual unit owners pretty much have to do what the COA says. If you buy a condo, you'll get a deed for your tiny fraction of common ownership land.

Townhomes don't always have Home Owner Associations (HOA) managing maintenance and aesthetic affairs. If you own a townhome and a tree falls on your roof, you're on your own, just as you would be if you owned a single-family detached home. With a condo, the COA would fix things.

In fact, townhomes often don't have HOAs. Most commonly, these are two- to four-unit buildings, but sometimes larger. The advertising copy almost always says, "No HOA fees!" That always annoyed me. No fee may mean no monthly payment, but it also probably means no, or weak, governing documents describing who does what. What if your neighbors painted their home teal? What if they replace their lawn and landscaping with beach sand? What if the collective roof leaks and they won't pay their fair share to fix it? There woldn't be much you could do without good governing documents, a fancy name for C C & Rs.

Townhomes are much easier to finance than condos. All things being equal, it's easy to get an FHA loan on a townhome, but problematic for condos. The whole condo building has to have been FHA-approved. Even with a conventional loan, condos receive higher interest rates than townhomes.

I can't tell you how many real estate brokers I've run into who didn't know the difference. In fact, shortly before leaving Portland, OR, I got into a kerfuffle with one. He'd used condo sales for his rowhome listing. I tried explaining the difference and even showed him the comps, but he'd have none of it. It cost his client at least $30,000, because the place sold before the ink was dry on the listing, and no wonder. He was dumb as a frickin' post anyway, but I felt sorry for the client.

To further complicate all this, condos do not always have attached walls. I've seen a few neighborhoods where they look like single-family detached homes. However--you guessed it--the COA still owns all the common area. Appearances are deceiving.

There's more, but that's the gist of it.

Wednesday, June 5, 2013

What Is a Lease-Option? Should You Do One?

In down markets when nothing seems to be selling, home owners are sometimes tempted to explore a lease-option. Similarly, buyers think that they might find a terrific deal on a home with very little money down. They also don't have to qualify for a loan.

A lease-option is actually two transactions on two separate property rights--a lease and an option. Each can exist without the other. You may rent out your property. You may also sell an option on your property (and if you're a buyer, you may purchase an option).

The payment of a real estate commission may enter into the discussion. See below.

In my earlier days as an investor-developer, buying options was fairly routine. Say we wanted to explore the feasibility of developing someone's property and not want to gamble by buying it with no assurance of getting it re-zoned or development-ready. We'd pay the owner a sum of money for the right to buy the property at an agreed-on price within a certain time frame.

For example, an owner may have wanted to sell his raw land for $300,000. We'd pay him, say, $10,000 for the right to buy his land within six months for the $300,000. This right to buy is the option, for which we paid $10,000. If we did not exercise the option, he'd keep the $10,000. If we exercised the option, the option price would be credited against the $300,000 purchase price.

When a home buyer and home seller agree to a lease-option, the option gives the buyer the right to buy the home at a price both agree upon, within a certain period of agreed-upon time. For this right to buy at a set price--the option--the buyer pays something.

How much? Nothing is set in stone. For argument's sake, use 3% to 5% of the purchase price. The length of the option will be one consideration in negotiating the amount, as will the house price. The buyer needs to know the option cost will be non-refundable if the option isn't exercised.

Next is the lease, which is an entirely separate transaction. Here, the seller rents to home to the buyer at whatever the market rental rate is, or whatever both parties agree upon. The option agreement may or may not be referenced in the lease. Whether or not the term of the lease is concurrent with the term of the option is up to the parties.

The price of the home will likely be influenced by the length of the option. If the option runs two years, for example, the home will probably have a higher price than if the option runs three months. Sellers need to set the price low enough to make sense to the buyer, but high enough to account for inflation and market forces that may occur within the option period.

It's never a good practice to fight for the last dollar. When both sides feel they made something at the end of the transaction, it's been a good deal.

Real estate commissions: If your real estate broker secures a client willing to enter into a lease-option, the broker will expect a commission, usually based on the future purchase price. This situation may present a problem for the seller. First, the buyer may not exercise the option--his right-to-buy--and the house won't have sold. Why pay a commission on a sale that doesn't happen?

Second, the seller probably won't collect enough in the option price to pay the broker. Is payment of a commission a solvable problem?

One solution is to offer to pay the commission when the buyer exercises the option. That way, if it isn't exercised, no commission is owed, and the broker takes the same risk as the seller. Some of the larger brokerage houses won't permit delayed payment of a commission. Some will, and independent brokers can do what they want. I know I wouldn't pay a commission on a sale that may or may not happen. You may also work out a flat fee or hourly rate with the broker.

Do not let a broker prepare the option agreement. Some firms have pre-printed forms that seem to address all issues, but I strongly advise people to have an attorney prepare the option agreement.

And the lease? Some brokers are also licensed to engage in rental properties and have pre-printed leases. An attorney may also prepare the paperwork, which is what I'd recommend.

Disclaimer: Nothing in here is meant as either legal or real estate advice. If you want to enter into a lease-option arrangement, consult with appropriate professionals.

Monday, June 3, 2013

Home Sellers: Is Now a Good Time to Sell?

It can be hard to make any sense of the chatter out there. Most of it is driven by those who stand to make their livings when transactions close, so it's in their self-interest to cast the facts in the best possible light. Real estate sections in newspapers, for example, always quote real estate brokers. Even though the information they offer may be accurate, it's akin to asking Newt Gingrich if Republicans are smarter than Democrats.

If you're of a mind to sell, tune out the hype and chatter and instead, focus on your goals for selling. If you need a larger home, focus on the reasons why and how you'll manage two transactions--selling the old and buying the new--and how to make that work. Sure, price is a big part of that discussion, but what you lose, or gain, on one end you will probably lose, or gain on the other. 

Selling one home and buying another is stressful, so work on minimizing stress by laying out the hypotheticals and what you would do if one happened. For example, would you make an offer on a new home subject to your old one selling? What if the seller refused your offer? Would you accept an offer on your home subject to a buyer selling her present home? What would you do if you had an accepted offer on a new home and the deal on selling your present home fell apart? You can't solve these, but you can save yourself some grief if you think them through.

In most places, it's a seller's market, which means there are too many buyers and not enough sellers. That said, many homeowners are either still underwater, even, or only have a little equity.

It's also my belief that interest rates, already starting to tick up, will continue to do so. And I don't believe buyers' incomes are going up all that much. The monthly payment they can afford to make is the same whether mortgage interest rates are high or low.

If interest rates go up, therefore, house prices have to either flatten out or drop. This possibility is something you should figure into your thinking on whether or not you should sell now or fairly soon.

If a prospective buyer were to ask if now was a good time to buy, I'd note that we've had, for the last year or so, a juxtaposition of ridiculously low interest rates and low home prices, by historical standards. With the market in the early stages of recovery, this phenomena will change. Prices are already moving up, and so are interest rates.

Sellers should consider this notion as well.