Wednesday, July 31, 2013

What HGTV, Your Broker, nor Anyone Else (Except Your Dad) Will Ever, Ever Tell You

A previous post on what it takes to own a house enjoyed a small spike in readership, if Google Analytics is to be believed, and not believing in Google Analytics is kind of like not believing in air. Right?

Anyway. A personal story, the kind of thing I usually save for The Plucky Observer.

The story starts with our dog, Pippin. She's an eight-year-old English Cocker Spaniel who has not been sick, ever, save for recurring regenerative disc disease which sounds much worse than it is, is chronic but inexpensively treatable if it doesn't progress to Stage 3. Her health trajectory suddenly turned the other direction with the discovery of a tumor in one of her anal sacs.

I know, I know, nobody wants to read about butt stuff, but stay with me, here. After ultrasound and surgery, the glands were removed along with the malignant (as it turned out) tumor. Now, with her $1,800 bill paid in full, her prognosis is reasonably good.

We had bought a house just over six months ago. Nothing unusual there. We've moved seventeen times in our forty years together. This house is a zero-lot-line patio home of early 1970's vintage, complete with tiny bathrooms, cottage cheese ceilings and a lot of other, shall we say, original equipment.

We did not get a home inspection, something else I've written about. I knew what we were getting into, and we knew we'd be doing some extensive remodeling anyway. Moreover, I knew no repairs would be negotiated in the market we were in. The seller would have simply put the home back on the market. Never forget that negotiation is about leverage, not charm.

We did do quite a bit of upgrading and re-doing, with much more to come over the next couple of years as our monthly budget allows. However, a few days after the dog's surgery, we discovered a flood in our basement caused by a water heater that decided to break. The carpet pad is ruined. The carpet may be ok. Some of the drywall may not be okay. Anyway, big mess and a new water heater.

When we walked through the home prior to buying, I learned the water heater was a 2004 vintage. A normal life cycle for an average water heater is about ten years, so apparently, ours missed that memo and expired early. The result: $500 for a new water heater (we did have a home warranty which covered the balance) and $300 for the water cleanup.

We ended the day $800 poorer than the day before. Add in the dog's surgery bill, and $2,600 evaporated faster than rain in Death Valley.

When people imagine themselves owning a home, they rightfully compare the monthly payment with rent. And that's okay. But what no one ever tells them is the other stuff, namely, that life goes on, and even when life is good, there are still sick dogs and broken water heaters.

At the end of a given month, it can make all the difference.

Tuesday, July 30, 2013

What Is RESPA and What Is TILA?

People applying for a mortgage will encounter the term, "RESPA. and "TILA." RESPA is an acronym for the Real Estate Settlement Procedures Act and, and it's purpose is to eliminate certain unethical, even deceitful practices once common in the real estate and mortgage professions. TILA--the Truth in Lending Act--is kind of a cousin, in that it applies to all credit and not just mortgages. While various states sometimes have their own augmentations of the federal law, TILA requires disclosure of important information on the true cost of credit.

The worst or the pre-RESPA abuses occurred a long time ago, before RESPA was enacted in 1974. Kickbacks to and from real estate brokers, lenders, insurance providers and other real estate vendors were common and drove up the price of mortgages. Worse, these charges were hidden, so people didn't even know they were paying them.

Borrowers experienced a lot of bait and switch-type tactics. A lender might offer a certain favorable loan, but the borrower had to use the lender's affiliate company for, say, title or homeowners insurance, who would charge a higher fee. This fee would be kicked back to the lender. Real estate brokers might be paid an undisclosed fee for directing borrowers to a certain lender.

RESPA requires full disclosure to a borrower (see a previous post on Good Faith Estimates) and prohibits the kickbacks and charges for services that don't get performed. It also offers remedies if a consumer is cheated. For example, the borrower was promised a 5% rate but then receives a loan with an 8% rate at closing, a RESPA violation with consequences may have occurred. Here's a useful link to HUD for consumer FAQ's on what RESPA does and does not cover.

The Truth in Lending Act (TILA), enacted in 1968, intends to make sure borrowers know what the loan costs and what the term, Annual Percentage Rate (not the interest rate) and other loan charges are. As with RESPA, it's updated regularly.

TILA disclosures will not only tell you how much you're paying for the loan, but how much your total payments are over time. Most home buyers are stunned when they see how much more the total of their payments are over thirty years compared with the price of the home!

By knowing the APR versus the interest rates, bvorrowers are brtter able to cmpare the actual costs of a loan from lender to lender. Lending programs vary quite a bit, and borrowers' situations can be unique. Because of TILA and RESPA. people can make pretty good apples-to-apples comparisons.

Insiders sometimes call RESPA "Reg. X" and TILA "Reg. Z." Both are periodically updated and received huge scrutiny and rule changes following the housing bust of 2007. This link provides a good summary of recent changes to Regulation X and Regulation Z.

Was this post useful? Let me know!

Monday, July 29, 2013

What Is a "Good Faith Estimate?"

Good Faith Estimate (GFE) is yet another of those terms getting tossed out there at house buying time that sounds like it means more than it appears. It sort of does. One main purpose of the GFE is so that a borrower can compare the cost of a loan from lender to lender.

You give your application and basic information to the lender or mortgage broker when you apply for a loan. Within three days, you must receive the GFE from the lender. It will provide you with cost information about your loan--the term, the interest rate, closing costs, escrow charges and the lender charges should you move forward with the loan.

Once you receive the GFE, you'll need to accept it, showing you want to proceed, before you're charged anything, except for a credit reporting fee. If you don't like what you see, you can refuse to accept it and head down the road to another lender. 

If the lender denies your application before the three days is up, it does not have to give you a GFE. It has up to a month to tell you why your application was turned down. You have two months to ask why in case you don't hear or didn't inquire right away.

After the GFE has been issued, the lender/broker can't change the amount in the origination fee box. And when the dust settles and the loan documents are ready for your signature, the costs to you can't have increased more than ten percent from the GFE. Remember--it's an estimate, not a hard bid.

The number of possible fees can be kind of eye-opening and they're too numerous to enumerate here. Examples are the origination fee, which your lender charges for the loan, plus appraisal fees, processing fees, underwriting charges, perhaps advance fees such as mortgage insurance premiums. You'll also see such fees as wire transfer fees, recording fees, document preparation fees, escrow charges, notary fees, and so on.

Your lender or broker should be happy to go over these with you. They vary by the type of loan.

One of the reforms instituted after the housing crash in 2007 was heightened regulation on GFE's. They've been around for a while, but those required in today's market are better and more accurate than before.

Thursday, July 25, 2013

How to Write an Offer for a Home

What should you do when writing an offer for a home? Just send a letter with check attached? What about repairs? What if you find out later the listing agent and the seller were lying and you want to back out? So many questions! And with so much money at stake, a home buyer is understandably nervous, nut just about the questions she or he does ask, but about those she or he don't know to ask.

This post assumes you're using a real estate broker who has access to either state- or Multiple Listing Service (MLS)-approved forms. MLS lawyers design and continually update the documents in order to protect the interests of, first, brokers and brokerages, and second, buyers and sellers. If you are not using a broker, you really do need to retain an attorney. Some people retain both, and in some states, use of an attorney is customary.

Understand, too, that I'm not licensed anymore. Nothing in this post should be construed as real estate (or legal) advice. Terms and conditions of purchase offers need to be as varied and dynamic as peoples' needs, and they need to seek professional advice in meeting them.

The sections in the MLS forms offer protections against problems so many lay people, not just first time buyers, worry about. In essence, you, as buyer, will have your earnest money at risk, but the language in the forms will protect your earnest money and ensure the seller will verify most everything claimed about the home--the quality of the title, known structural flaws, pending homeowner association assessments, and the like. It will deal with home inspections and repair issues and deadlines. Lay people should not attempt to deal with all these without professional help.

I'm also assuming you know what the price should be, how much your down payment is and what your loan looks like. You and your broker can determine what the earnest money should be. You will also have your own set of contingencies to enter into the contract.

The house a buyer looks at usually contains both real property--the house, lot (if it's not a condo) and fixtures (see below)-- and personal property, which would include a refrigerator, window coverings, free-standing range, and the like--including the light bulbs! If you, as buyer, want any of the personal property to be included, you have to ask for it.

Always ask for the window coverings, even if you hate them (some updated MLS contracts already include them, but be sure). Do you want the fridge? Ask for it, and to be really hard-core, describe it by brand name and model number. Same for the fireplace equipment and anything you want that isn't physically attached to the structure.

Buyers will often put personal property in the same category as fixtures. As a general statement, fixtures are, well, things permanently attached to the real property, like a sink or toilet. Note that many kitchen ranges are free-standing and may not be attached, so they should be included in your offer. Same for things like above-ground pools, hot tubs, and playground equipment.

People sometimes disagree on what is or is not a fixture. What, for example, is a high-end, built-in refrigerator? It's not always clear cut, and care should be exercised.

Once again, be sure your offer clearly describes the personal property you are asking for. If your offer says, "Seller to include the washer and dryer," what would you do if you took possession and it was a different washer and dryer than the set that was there when you saw the home? If the language wasn't clear, you could be stuck.

I try to be detached and not give individuals a shout-out, but one really good broker, Margaret Devereaux of Remax Equity Group in Hillsboro, OR, always attaches a printed copy of the MLS listing to the offers she writes. Doing so really can clear up future misunderstandings. (Disclaimer: Remax Equity Group in Hillsboro is where I worked for three years). 

All in all, writing an offer has to be done very carefully, with thought, and with attention to detail. A broker with MLS forms and/or a lawyer will go a long way towards protecting your earnest money, but give plenty of thought to items you want that aren't real property.

Question for the day: If you buy a home with a back yard apple tree laden with fruit, who gets the apples, buyer or seller?

What Do Real Estate Broker Rankings Mean?

We've all seen the huzzahs: Broker X is a Top Producer. Coolguys Realty is Number One. Broker Y is Number One. Everybody's Number One, with no Number Fours. What, if anything, does it all mean, not just generally, but for you in particular?

The answer, really, is not much, because there's no way of measuring if it means anything. If a broker is a "top producer" or "number one," it means that his sales volume is high. It could mean this particular broker works very hard. But dollar volume isn't a reliable indicator of quality. 

A broker who sold a $1 million home has the same dollar volume as a broker who sold ten $100,000 homes, right? And even in this comparison, we don't know who worked harder, or, more important, better. After all, the ten inexpensive homes might have resulted from a blanket order by a foreclosure asset manager, and the million dollar house might have been in a trust whose beneficiary needed the money for health care while the heirs worked overtime to impede the sale.

Equating quality ("top broker," "top firm") with sales volume is a natural result of real estate brokerages' business models. They make their money  by taking a cut of their associate brokers' commissions. More sales results in more revenues. And individual brokers themselves compete with each other, measuring relative success in commission dollars. While that's fine for them, it isn't necessarily fine for you. 

Really, there are lots of ways that car dealerships and real estate brokerages can claim to be proclaim Number One and offer a reason--high number of sales, oldest local, customer satisfaction (measured or not), whatever. When I was licensed and had my own tiny brokerage, I could have claimed to be Number One because we were cooler than everyone else. That and two bucks gets you a cup of coffee at Starbucks.

Does experience count? Yes and no. Of course, you want someone who knows the ins and outs of sales forms, of market conditions, and of usual customs, such as knowing to ask for window coverings and other personal property when writing an offer. And if you're buying or selling a short sale property, you want someone who knows the difference between a servicer and investor.

But if a broker is a so-called (or even self-described) "top producer," meaning she closes lots of deals, meaning she's quite experienced, does that mean she's good for you, has time for you and will connect with your needs? Keep in mind that brokers get paid when the deal closes, which may mean the transaction is more important than you, especially near the end when everyone is under pressure.

I've posted before on how to choose a broker if you're a buyer, and how to do it if you're a seller. No need to go into it all again here. But the real question is, how do you measure quality? Who really is Number One, how do you know, and is number two or three or ten all that bad? More to the point--does it all matter anyway?

Better and more consistent education and training from state-to-state would help tremendously. At least the baseline bar would be raised. Compare real estate brokers' situation to attorneys. Is the lawyer with the most money best for you? Maybe, maybe not. But even if you choose one who's new or who enjoys a modest practice, you know you're getting someone who has been well-educated, had to pass a rigorous bar exam and interned with a judge, public defender or district attorney.

Real estate brokers do not receive the same level of training, even though each transaction is someone else's money in the tens to hundreds of thousands of dollars. When I received my Oregon license, the state didn't even require licensees to have a high school degree or GED (the requirement changed in 2011 to require high school diplomas). It's pretty much the same in every other state I've been involved in. My own view is that real estate brokers should at least have a bachelor's degree, with an emphasis in real estate and finance. Even some kind of fairly rigorous community college certification with similar emphases would be an improvement.

Admittedly, it's all worked fairly well up to this point. Most people know Number One claims don't mean all that much, save for a good advertising handle, and somehow folks muddle through, find a broker who works well enough and move onward. But I believe that situation will soon change.

Fewer and fewer young people are choosing real estate sales as a career path, for whatever reason. Moreover, the Millenial Generation may be the best-educated group to hit the workforce ever. And real estate industry surveys show that this generation doesn't like working with brokers. Demographics once again will dictate a change in how things are done.

Until then, who's Number One? Whoever shouts loudest and longest, I guess. Really, though  there's only one Number One. That would be you, the customer, and as long as you keep that thought front and center, you should do just fine.

Tuesday, July 23, 2013

Is Now a Good Time to Buy a House?

Lots of people who are thinking about buying a house feel overwhelmed with news stories on the market. Prices rising? Well, they seem to be, in most places. Sales up? Well, they were until May, when sales of existing homes dropped. Too many buyers competing for fewer homes? Should increasing mortgage interest rates push a buyer off the fence?

My advice: Take a deep breath and exhale slowly. Then, do it again. If you really want to buy a house, you will, at some point, and it will be the house you want, in the general neighborhood you want, and at the price you want to pay.

If you're a fan of a football team that's been playing badly and is falling in the standings, it feels as though this is the way it's going to be all the time. And so it is for home buyers: The way the market is going right now feels like the way it's going to be forever.

My take is that unusual and non-recurring forces are affecting the current market. First, I suspect the competitive pressures resulting from too many buyers chasing too few homes for sale is a temporary phenomena. Because of the economy and lending restrictions, buyers held back, and the current activity is from pent-up demand.

Second, with so many homes for sale having been foreclosures and short sales, buyers had to compete with cash investors. Moreover, downsizing Baby Boomers brought cash to the table. It's tough for first-timers to compete with that.

I believe that low-to-negative equity among current owners is a leading cause of low inventory for sale. People who may want to sell can't. Even if they aren't underwater, their equity is so low (or nothing) that they may have to bring cash to escrow to pay for sales commissions and other closing costs.

Most of the commentators I see do not agree with me when I say that rising mortgage rates have to drive down home prices. To me, it's arithmetic, since a buyer can make the monthly payment he or she is qualified for. If rates go up, the payment has to go up, and the only way to get the payment down is to lower the price. 

All of which means that the housing market in most areas has yet to find a definition or otherwise "get legs." The way it looks right now isn't the way it's going to be in a couple of months, so if you're looking, don't be discouraged.

And don't feel pressure to overpay, waive your contingency rights or otherwise give in. A house is waiting for you if you'll be patient.

Thursday, July 18, 2013

Who Serves on Homeowners' Association Boards and Should You Do It?

Many people live for years in communities controlled by a Homeowners Association (HOA) and never think much about it one way or the other, except that board work looks dreary, tedious and thankless. Others dutifully go to most, if not all, meetings just to see what's going on, or maybe just because they think they should. Still others watch every move an HOA board makes and expresses their opinions, usually noisily. 

But who from these groups actually commits to board service? Should you consider doing it?

Appearances notwithstanding, HOA boards are kind of between a board of directors of any corporation,and a city council. What HOA boards may do is spelled out in the governing documents (Articles of Incorporation, Bylaws, C C&Rs). As a general statement, though, HOA boards manage the business of the community--maintenance, collections and disbursements, budgeting and covenant enforcement. HOA boards are not customer service organizations.

Work can be divided, generally, into two areas: business administration and community development. The former includes Architectural Review, contractor selection and oversight, budgeting, and similar work. Community development would deal with Pool and or Recreation committees, for example, or any other social program or activity designed to bring owners together.

If a community is large enough to have a professional community manager or management company, so much the better. While managing community business isn't rocket science, it is technical and, at times, difficult. Community managers are professionals and are trained to handle this kind of work.

Regardless of what kind of work individual members choose to do, an HOA Board has a single prime directive (does this sound like Star Trek?) which defines all activity: To preserve, and where possible, enhance, individual owners' property values.

Robert Swann (and I don't know who that is) said, "The greatest threat to the planet is the belief that someone else will save it." That's also true with communities. Each of us in this world is a unique individual, and some are more inclined than others to want to get involved. Board members, then, may come from any of the groups mentioned in the first paragraph.

And, to be fair, many people kind of think the community is better off if they don't serve. Agree or disagree, but it's a valid opinion. The work can be chronic. Some issues--C C & R complaints, fee increases, landscaping changes and so on--often cause resentment with the other owners, all of whom are neighbors and a few of which are friends. And owners seldom say anything when a board does well.

I served on an HOA board for nearly four years. The first part was enjoyable and I believe the board did some useful work, but after the final third or so, I swore I'd never do it again, for the reasons mentioned above.

But tonight, in a new community, I'm off for duty one more time. We'll see how it goes.

Have a comment or question? Let me know!

Monday, July 15, 2013

Should You Buy a Short Sale Home?

Although the number of short sale homes may be declining, the overall supply of listed homes is low. Potential home buyers must therefore consider the possibility of buying a short sale. What are the advantages, and what are the challenges?

A short sale property is one where the sales proceeds will not pay the underlying debt. The owner is underwater, and the lender(s) is (are) stuck. If the lender wants to get paid anything at all, it can either foreclose or consent to a short sale, which means it will settle for less than the mortgage.

As a rule, lenders hate foreclosing. By the time they've endured their own bureaucratic delays and stood through the foreclosure statutory waiting period, as much as three years may have elapsed, during which time they've been paid zilch. The home they take back is  nearly always trashed, sometime badly. It may even have squatters, which requires another legal process to get squatters out. The lender also has to deal with an asset manager, a specialized company which liquidates foreclosed properties, and still pay a full real estate commission.

How big a loss does a lender take if it forecloses? On average, around 35%. Sometimes it's less and sometimes it's more. But lenders have strong motives for allowing a short sale and taking a smaller loss.

Here are some challenges for buyers to endure and, if possible, overcome:

  1. A short sale home with one loan is rare. While they exist, expect the home to have a first trust deed, a second (often a home equity line of credit, called a HELOC), and a mortgage insurer. Sometimes, other debt may be involved, such as HOA fees, mechanics' liens, court judgments, etc. All of these creditors have to sign off on the short sale.
  2. The company you're dealing with on the first lien (mortgage) is usually the servicer, not the owner, of the loan. Wells Fargo, Bank of America, Chase and most others are active servicers on loans that aren't theirs. Yes, it can be confusing.
  3. The investor(s). Almost immediately after issuing a mortgage loan, the lender sells it off to an investor. Examples are Fannie Mae and Freddie Mac. But during the real estate froth ending in 2008, companies such as Goldman Sachs bought the loans, divided them into fractions and sold them to other investors such as pension funds, insurance companies, hedge funds, etc. all over the world. A single first mortgage could have dozens or hundreds or thousands of investors, and they all have to be satisfied.
  4. While short sale homes tend to be less trashed than foreclosures, they nearly all need work. Most of it is cosmetic, but it can add up. And owners are known for taking out the appliances before leaving. It all adds up to more cash the buyer needs to come up with. These items can affect the underwriting from the buyer's loan.
First mortgage loans that aren't Freddie Mac or Fannie Mae loans are generically referred to as "Treasury loans." When the U.S. Department of the Treasury issued its Home Affordable Foreclosure Alternative (HAFA) guidelines to expedite short sales, the program covered only treasury loans. It took Fannie Mae and Freddie Mac a while to come along, but they now have their own short sale guidelines (this was weird, because Freddie Mac administered HAFA but wasn't guided by it). VA and FHA loans have their own special protocols.

While it's not important for buyers to know these detailed rules, they should appreciate the work than needs to be done when the seller assembles a short sale package, usually a minimum of sixty-five pages long and often more. The listing agent does need to know them, and know them well, and if he or she doesn't, the sale could blow up at the last second.

The second lien holder, under HAFA, is allowed up to $6,000 for it's loan. This amount often translates to less than ten cents on the dollar. Second lien holders, as you might imagine, are less than enthused about agreeing to such a hit. But if the first lien holder forecloses on the home, the second lien holder usually gets nothing.

The mortgage insurer usually stays silent on its acceptance until the final seconds. Other lien holders'
 acceptance or rejection varies. Also, the Broker Price Opinion (BPO)--a kind of appraisal-lite servicers use--can add time.

How long can it take to get approval for a short sale? The olden days of two years and up are gone. Certainly, a few close in 30 days or so, but plan on waiting 60-90 days. If the process takes 120 days or more,my guess is there's a problem and you should move on.

Be prepared for the listing agent to not return your or your agent's phone calls. It's frustrating when this happens, but it does. When I was licensed, I found unprepared listing agents to be a major cause of failed short sales. It's to the buyer's advantage if the listing broker uses a short sale firm or negotiator, who are experts. Also, find out if the listing agent is using the Equator platform. Servicers and brokers handle protocols and communications online, here, and Equator offers links for buyers to check on the progress. You can also find short sale homes for sale on Equator.

Fannie Mae, through it's Homepath Program, offers fixup assistance and financing. Wells Fargo also offers help. The most reliable is the HUD 203k program, where borrowers can get enough to make the repairs but not complete them until after escrow closes. The 203k program is detailed, so be sure to use a lender who specialized in them as well as contractors who know the paperwork.

For all that, good deals are to be had. There's no set amount of savings, but a 10% - 20% savings below market isn't unreasonable to expect. With patience and understanding, a buyer could do herself a favor by buying a short sale home.

Questions or comments? Let me know!

Friday, July 12, 2013

Are You Really Ready to Buy a House? Five Top Questions to Ask

When people start thinking about buying a home, all kinds of thoughts and questions enter their conversations. "Why not keep part of the monthly payment instead of giving it to some landlord" is one. "It will be nice not to have to hear the neighbor's stereo rattling the wall," might be another. "Can I save for the downpayment" always comes up.

While those are important, here are five questions to answer in deciding if owning a home is right for you.

1. Do you make enough money to cover costs of maintaining a home?

All too often, would-be buyers consider the downpayment and the monthly mortgage payment to be pretty much the cost of owning a home. But maintenance and repair is a significant cost. If the motor fails in the refrigerator, for example, can you afford to replace it?

Buyers-to-be coming from rental properties are used to calling the landlord if something breaks and are often unprepared to handle unfortunate events on their own. The life cycle for a furnace, for example, might be 15-20 years. If the furnace in your new home is eighteen years old, are you prepared to deal with a new one?

2. Are you willing to Stay in the Home for Five Years?

On a $200,000 mortgage loan at five percent interest, about $240 of the nearly $1100 monthly payment goes to principal for the first few years. That's not much equity buildup. And a home purchase has a many upfront costs, such as appraisal charges, home inspection fees, points and so on, which can run into the thousands of dollars. If you sell fairly soon after buying, your chances of having enough equity to recoup the upfront costs are extremely low. If you use a broker to sell, the sales commission has to be added onto the other selling costs.

If you bought a home for $200,000 and sold it two years later, you could have accrued expenses and sales costs of $12,000 to $15,000 or even more. Would the home have appreciated in two years to cover these costs? Probably not.

The five year timeline is arbitrary, but it makes the point. If you think you might get a job transfer or go to grad school, you should consider delaying the home purchase.

3. Are you set for a never-ending home improvement project?

Fixing plugged disposals and toilets, painting rooms, changing the flooring, mowing the lawn, planting the garden, shoveling snow--this stuff goes on and on and on. Some is optional, more is not, so buyers need to steel themselves to the notion that they won't be going out on weekends and instead will be spending a lot of time at Home Depot or Lowe's.

Which can be rewarding, by the way. New owners very often discover their inner carpenter or gardener and enjoy the work it takes to not only keep their homes up, but make them nicer than they were. But buyers are better served if they understand and appreciate what's coming up.

4. Can you adjust your wants and make compromises?

Here's a nasty fact: The perfect home doesn't exist. Even people who have built their own homes, including Yours Truly, don't end up with the perfect home.

Especially in the current market of low inventory, buyers will need to back off on some of the features they want. Bedrooms may be too small, the master bath may not have a tub, the garage may not be big enough, and so on. Repairs and upgrades the buyer can't yet afford to make may have to be accepted for now.

This is especially true with short sale and foreclosure homes, most of which have been left unattended or even trashed. For better or worse, these homes make up a significant part of the homes buyers will be viewing. Serious buyers, therefore, need to make some compromises.

5. Will you take the time to really understand the market?

When I was licensed, I liked representing buyers because they knew the market better than sellers did. They knew more, because I made sure of it.

HGTV programs notwithstanding, learning the market is hard and tedious work. Buyers have fun with the first batch of homes they view, but after fifteen or twenty, the thrill wears off. Spending evenings and weekends looking at home after home, most of which just won't do, wears people down.

But the tradeoff is that at some point in the process, those buyers know what a house is worth, and the knowledge is empowering. But it takes work to get there, and people entering the housing market need to appreciate the effort they need to make.

Of course, there are more questions people may ask, but I think these are the most important. Do you have thoughts of your own? Let me hear them!

Thursday, July 11, 2013

A Time to Exhale

No post today. Well, actually there is.

Most everyone has heard the aphorism, "Don't forget to stop and smell the roses."

Today, I stopped just above the 10,000-foot elevation on the Continental Divide in the Rockies, with glacier peaks on one side and a mountain lake on the other.

It wasn't roses, but it was pretty damn good.

Wednesday, July 10, 2013

Is Staging a Home Useful and Worth the Money?

Some think staging a home for resale brings a higher purchase price and quicker sale than homes not staged. Unfortunately, the evidence one way or the other is weak.

When you put your home on the market, you need to do everything in your power to make certain potential buyers can visualize themselves living in your house. The first order of business, then, is to get rid of clutter, such as everything stuck on the face of the refrigerator, everything on the kitchen and bathroom counters, religious and family pictures in the most public rooms, excess furniture in the living and family rooms, cardboard boxes of stuff on the floor, guitar stands, stuff on top of end and coffee tables, and so on. The list can go on and on and on, and this part is only Stage One.

Closets may also be part of Stage One. Overstuffed linen closets are a turnoff, for example. Clothes closets shouldn't have so many clothing articles hanging that the rod bends in the middle. It's best if clothes are arranged by type and hung with the same style of hanger, making the closet look roomier.

Stage Two includes highly customized decor, such as luminescent little stars on the ceiling, too many paint colors in a single room, clashing carpet patterns or colors from hall to bedroom, appliques on walls, rock star/political figure/ actor posters on walls, and just about any of the personal touches people use to individuate private spaces.

Stage Three has more to do with traffic flow and how furniture is set out and pieces matched. Stage Four involves phases of redecoration and even remodeling.

So, what to do? If you can't Stage One de-clutter on your own, get a stager to do it for you. De-cluttering is far and away the most important step. It makes your home feel bigger and cleaner than it really is. Don't worry about putting the excess "stuff" into the garage. Buyers will know you're moving and not be surprised.

Stage Two is nearly, if not just as, important. Note that Stage One and Stage Two are virtually free.

Stages Three and Four are really important as well, but the decisions in executing them have to be made in a larger financial context.

My sense is that the importance of full-on staging is related both to the price of the home and to market conditions. A home listed at $1 million and up better look as though it's worth it, and if you have a home in that price range, you can probably afford a stager.

For low- to mid-priced homes, it's not so clear cut. If you are using a broker, ask if staging is included in the listing fee. It often is with the busier listing brokers. For most homes in most markets, a staging consultation would probably be $100-$200.

If the market is slow, with too few buyers and too many sellers, staging might provide the edge you need.

All of which is to repeat that the evidence one way or the other isn't clear. In the absence of that, common sense will just have to do.

Agree, disagree or have an opinion? Let me know!

Monday, July 8, 2013

Should Brokers Compete for Your Business?

Several years ago, I wrote a post questioning the ubiquitous six percent commission real estate brokerages generally ask for to sell homes. It wasn't so much that it was a lot to pay as that sellers seemed so willing to fork it over without much of a question. Nor did an alternative full-service compensation seem to be available.

A couple of months ago at The Plucky Observer, I wrote a post on what the *Next Big Thing* might be in real estate. Most of it was about a startup called Lessthan6percent, one of a budding group of young entrepreneurs trying to revolutionize the way homes are bought and sold. When Max Diez, one of the founders, contacted me about some service enhancements, I decided to write an update on the changing scene.

Several forces are forcing change. First, as a group, real estate brokers rank low in public polling. No surprises, there. Second, evidence suggests that Millenials and Gen-X'rs don't like working with real estate agents. Third, traditional brokerages are having trouble attracting young people into the profession.

At, sellers may anonymously and privately submit their property and needs, and within forty-eight hours, they'll receive competing proposals from the website's top-ranked real estate agents. The site enhancements are a page redesign on how the program works, videos of their "top agents," and a home price comparison to the S&P 500, the latter of which strikes me as not particularly useful. The other two definitely are.

I have a small problem with how agents get ranked, though. Run a Google search on "Top Real Estate Broker in _____," and you'll get dozens of answers. I don't know what Lessthan6percent's metrics are, but you'll be stuck with them. Still, this innovative service goes a long way to force transparency and competitive pricing correlated with specific service. The videos should mitigate the smarm 'n' charm factor.

Redfin pioneered the way with consumer-centered brokerages. Starting out as a software company, it hired brokers much later, paying them with a salary and having their compensation tied to customer reviews. I've only met a few Redfin agents, but they rank as the most competent I've ever known. at Redfin's websites are robust, information-rich and easy to use, allowing people to do quickly and easily what they would do anyway with a traditional brokerage, only without the filtering and the hassle. Redfin listing fee is 1.5%, full service (with some price point limitations), and they rebate commissions to buyer-clients where allowed by law.

A new one to me is Findwell, located only in the Seattle, WA area. It's program is similar to Redfin's, and while offering robust property information required for buy/selldecision-making, its website is more detailed on its brokerage services than Redfin's. I can't leave this without giving Findwell's Mythbusters sub-page a shout-out. As with Lessthan6%, though, I don't know Findwell's metrics for evaluating brokers.

A couple of twenty-somethings in New York whose friends hated working with real estate brokers just launched a New York-based brokerage called Suitey, which you can read more about in this Inman News article. Suitey's business model is a direct child of Redfin's, to whom its founders give credit.

The point of this post isn't to plug companies so much as it is to suggest a trend, and maybe even *The Next Big Thing.* I've been predicting these kinds of real estate compensation models for years, and have been consistently wrong. When I had my own brokerage, I offered a variety of fee scenarios, including hourly fee-for-service. Few clients used anything but the traditional model, though, presumably not wanting to pay upfront, even though the savings were significant. 

But it's looking like demographics, declining home ownership, and perhaps a severely-challenged real estate market may be firing up a change. We'll see, though if change is coming, it will take time. There's a lot of inertia inherent in the traditional brokerage model. To paraphrase T.S. Eliot, it will not come with a bang, but a whimper.

Agree with me? I'd love to hear from you.

Friday, July 5, 2013

How to Make Money Buying Real Estate Notes

If you want to make money in real estate, one way is to don a lender's hat instead of trying to be a flipper or other type of traditional real estate investor. Lenders nearly always come out pretty well. They don't particularly care about market ups and downs. They just make sure their check is there every month. 

Most people aren't in a position to offer mortgages, but there is a way to make money in real estate notes. And not just a little--a lot of money is out there in the form of seller-carry-back notes. A seller-carry-back note is one in which the seller of a property accepted a note from the buyer as all or partial payment, usually because the buyer was cash-short or couldn't get a traditional loan for one reason or another.

Here's a typical situation. A seller had his or her $150,000 house listed for sale for a very long time during the 2007-2010 crash, with no takers. The house had a $100,000 mortgage. Finally, a buyer came along but only had $100,000. The seller would take the $100,000, and carry back a note, secured by a deed of trust (or other form involving equitable title, such as a land sales contract--see below), for $50,000. The interest rate is six percent, interest-only payable monthly, with the entire note due in ten years.

Now, it's four years later. The seller has been receiving the $250 monthly interest check but would really like all his money. Maybe he needs cash for a personal emergency or just has some other need. At that point, he may begin looking for a place to sell the $50,000 note. That's where the investor comes in.

Say you bought the $50,000 note for $35,000. The monthly interest check of $250 would be a 8.5% yield--not bad in today's investment climate. But in six years, the note is due, at which point you'd receive $50,000 when the buyer pays it off. That's a whopping 43% return.

Truth be told, most notes out there that might be for sale don't have the favorable characteristics  of the above example. The seller's equity in the home isn't usually that strong. Buyers who have paid with a note instead of cash can be a little on the flaky side. Due diligence with credit analysis, property appraisals and use of a lawyer is a must. And the investor will need a collection system, whether that be the investor or an escrow collection company, and send out the tax forms at year end.

While there's no going rate on a purchase price for one of these notes, the traditional starting point has always been for half, or even less, of the principal balance. It depends on the due date of the note, the credit quality of the payer, the value of the underlying real estate in case the investor had to foreclose, economic conditions, how desperate the seller of the note is, and so-on.

Carry-back notes can be secured with a deed of trust, where a trustee acts in the event of non-payment, or a land contract, which requires the holder to sue in court in the event of non-payment. In a land sales contract, the buyer has what's called "equitable title" until the note is paid. With a trust deed, the Beneficiary has equitable title.

Every locale I've lived in has had firms or individuals who have been engaged with note purchases for a long time. The competition can be pretty fierce, and most of them are experienced at note and credit analysis and at price negotiation. But that doesn't mean there isn't room for newbies. And the notes don't have to be for $35,000, as in the above example. People carry back notes of all sizes--$2,500. $5,000, whatever. You can (and should) determine your risk and exposure before jumping in.

While it's definitely not for everyone, note purchasing offers a way to invest in real estate.

Tuesday, July 2, 2013

I Promise This Doesn't Really Suck

And I'm so wary of boring the s**t out of people (note the use of asterisks in deference to this being intended for a general audience). If anyone finds these daily postings annoying or whatever, please accept my deepest and most humble apologies.

 The tra-la-la-la-la of HGTV notwithstanding, most of real estate is tedious and boring and fraught with terminology that people just didn't understand, and worse, they don't want so say so. This blog is supposed to be nothing more than a real estate primer.

A huge chunk of real estate brokers is the main exception to the preceding paragraph. Too many of them don't understand the terminology and really don't care. I can't tell you how many I ran into who didn't know the difference between a short sale and a foreclosure or who thought the lender in a short sale home owned the property. Most don't know the difference between a townhome and a condo. I could go on, here, but I won't.

My hope is to give people a place to not just look up terms they don't quite get, but do it anonymously and see the terms used in actual situations. Beyond that, I want to de-mystify the process of buying and selling homes. Those who are involved in it, from real estate brokerage firms to mortgage lenders to title and escrow companies, keep the pretentious and exaggerated opaqueness of the process alive, not so much from evil intent (though a few do) as from a conspiracy of personal interests.

So, I don't really care if people don't voraciously gobble up my posts every day and, in fact, I'm rather pleased most have something else to do. But I do hope people will remember the blog, look stuff up when they need to and tell their friends who might be casting their eyes towards the real estate stars.

Monday, July 1, 2013

Homeowners' Associations Pt.2

The first post on Homeowners' Associations (HOA) was kind of general. So's this one, likewise intended to get people to--if not like and embrace HOAs--at least understand and respect what they do.

When I was a licensed broker, one of the statements many other brokers made--and placed in their listing advertisements and ticked me off--was the statement. "No HOA fees!" Touting the absence of fees might make the sale easier, therefore paying the broker, but the absence of HOA fees is usually not in the buyers' interest.

It's true that HOA fees tacked on to a house payment impact the ratios lenders use when determining the borrower's mortgage amount: The lower the fees, the bigger the mortgage, and the more house the borrower can buy. And less underwriting hassle!

When we first arrived in Denver, we made an offer on a home that's typical of those proclaiming "No HOA fees!" It was unit one of a two-unit townhome--new, terrific neighborhood, attractive building and lot with an upgraded interior. My first few thoughts were these: What happens if the neighbor lets his landscaping die, or worse, removes it? What if the neighbor paints his trim shocking pink? What if the neighbor develops a roof leak (we shared a common roof) and didn't fix it?

The answer(s)? Not much. The property had a short agreement attached to the deed that neighbors were supposed to fix stuff and keep it repaired, but there was no enforcement mechanism. We withdrew our offer.

An HOA would have solved the problem. It would have contemplated nearly everything that could have gone wrong and created a way to enforce it. It also would (likely) have created a fund for repair and maintenance of the roof.

Larger townhome developments usually go even further and set up funding for window, wall and deck repair and maintenance. It's a great deal for the owners who, in effect, save monthly for future repairs. And when it comes time for rare but costly problems such as construction defect lawsuits and remediation, rowhome owners have a much easier time pursuing their interests than owners with no association.

Condominium owners are in a similar situation, with a huge difference. Unlike individual rowhome owners, condo owners do not own their buildings, but instead own a fractional interest in the building and common area. Read here for the difference between condos and rowhomes--it's night and day.

 However, Condominium Owners Association (COA) boards, because of the nature of common ownership, are more powerful than HOA boards. A suit against an individual condo owner could easily impact the entire association, and actions of the COA board can seriously bind individual owners.

For example, say a COA board borrows money to install a swimming pool, with repayment coming from COA dues, and a significant number of owners don't pay. The lender can sue, and if it wins, the remaining owners will have to pay the deficient amount caused by the non-paying owners. This situation could not happen in a rowhome or single-family detached HOA unless each owner assigned her or his individual rights to the HOA.

People buying rowhomes in a HOA should be careful with their homeowner's insurance providers. Too many insurance agents are not aware of the difference between condominiums and rowhomes and give the rowhome owner a condo policy, which may not be enough in the event of a large claim. An insurance provider needs to correlate the individual owner policy with the HOA's policy to be sure one starts coverage where the other leaves off.