Friday, November 14, 2014

Can You Make Sense of the Housing Market? More to the Point, Should You?

Here are some recent housing market headlines:

"Falling home prices is a good thing." --Zillow.

"Falling home prices is not a good thing." --Lynn Effinger, Housing Wire,

"Sales of existing homes are down." --Bloomberg.

"Sales of existing homes are up." --Bloomberg.

"Student debt keeps Millennials from buying homes." --Goldman Sachs

"Millennials will too buy homes." --Builder Magazine

"Now is a great time to buy a house." Anyone from the National Association of Realtors, anytime.

I can seriously go on with this. You know, the mortgages-are-easy-to-get alongside the too-few-can-qualify kind of thingy that pervades all things real estate. Two points, though. The first is that nobody really knows. Not knowing never stopped anyone from opining, though.

The second is that the competing, self-cancelling buzz creates confusion and discomfort among both buyers and sellers. Why pull the trigger when you don't know which way the barrel is pointing?

It's good to consider a couple of data points few ever talk about. The first is the low number of homes on the market. Besides many owners still having zero-to-low equity, it's worth remembering that many of these houses are owned by Baby Boomers who don't want to sell because there's nowhere for them to go. They don't need to move for a new job, most aren't retiring in Palm Springs or Scottsdale, and they're not ready for assisted living. Inventory will be low for a long time.

The second is that people just don't get paid enough and their job security isn't all that great. That situation seems to be improving (says Janet Yellen), but until wages and job security uses, not much will change.

So what do you do if you want to buy or sell? Heck if I know, and neither does anyone else. Buy or sell, I guess.

Monday, August 18, 2014

Don't Blow Off the Home Inspection

When you buy a house, a home inspection can be one of those things everybody hates. For buyers, it's one more impediment, and who has to pay for repairs, anyway? For sellers, it's one more impediment, and who has to pay for repairs, anyway?

A home inspection report is like a certified letter: It seldom bears good news. The hard part for buyers is sorting out if the bad news is a little-bit-bad or a-lot-bad. Unfortunately, no one is there to help. While no news may be good news, bad news may be worse news, so do not forego the inspection, even if your Realtor tells you that competing offers waived the inspection contingency.

There are some common problems with home inspections. First, they seldom uncover serious construction defects, which can only be discovered with an invasive inspection (and which most home inspectors aren't qualified to perform anyway). A home could pass inspection but still be full of dry rot. Second, some inspectors don't properly prioritize areas needing attention. A furnace needing cleaning and a new filter is far less serious than water damage under a sink. Third, some inspectors are either inattentive or just plain not good. I recall one instance when my client's inspector failed to note instances of open wiring--a deal killer on an FHA loan (and yes, I pointed it out to the inspector).

Some states regulate home inspectors. Others don't. In Oregon, where I practiced, the state regulates them, but a license means they took the course work and passed the test. That's often not enough. In Colorado, my home inspector--a great guy, by the way--included a bid to do the work his inspection discovered. Hmmm.

Buyers often rely on their Realtors' recommendation for a home inspector. That's a good place to start, but it's not enough. In the instance cited above of the inspector not noticing open wiring, I had used the recommendation of a colleague because my own inspector was unavailable. That means my colleague had to have recommended the bad inspector to clients prior to my alert.

Whether or not your state licenses these individuals, choose an inspector who's experienced at doing this kind of work, and if you can find one who's done a lot of houses in your chosen neighborhood, so much the better. Some inspectors will disagree, but choose one who's worked in the construction trades. Former skilled workers and contractors seem to have a better sense of how the house goes together and can prioritize reapirs. In my experience, they also will note potential detects not on the standard checklist. And ask for the printed report along with recommendations for annual maintenance.

For lay people, a problem with home inspections is that too much of it is about risk management. Brokerages recommend them because inspections are a defense in case there's a lawsuit, and inspectors sometimes exaggerate certain repair items for the same reason. If you're buying (or selling) a home, the only risk you want managed is yours, thank you very much.

Who pays for repairs? Buyers don't want a pig in that poke they just bought, nor do they want that shiny new paint and carpet to be lipstick on the pig. Lender-required repairs really aren't negotiable--they have to be done before the loan closes--and the others depend on the type of sale (traditional or distressed) and the tolerance of the parties.

Any financial transaction has to be analyzed for upside-downside, and a home inspection is crucial in mitigating downside risk for buyers. Don't pass on one.

Monday, August 4, 2014

What Buyers and Sellers Totally Get. Will Brokers?

"People will still come to us because of our better service, and  if we don't have what they want, we can special order it!" That's what independent booksellers claimed when Borders and Barnes and Noble outgunned everyone else in the world of books.

"People still need us because of our superior service in selling or buying a home," says the cacophony of real estate agent voices on hearing the news of the merger of real estate tech giants Zillow and Trulia. Real estate journalist Brad Inman predicted it means the end of brokers and brokerages.


Brokers point out that Zillow's data is inaccurate. Many listings are out of date and the "zestimates" are from la-la land. One even noted that Zillow is just "one nerdy guy in a hoodie away from being Myspaced." Funny guy.

Okay, that last part possibly has some legs. After all, the train to nowhere of AOL, Myspace, Napster, Webvan, Lycos, and many others hasn't completely left the station. Besides, didn't Barnes and Noble and Borders pretty well get Amazoned?

But the other part about Zillow's property inaccuracies is off the mark, because guess what, brokers? Consumers don't care. I'm reminded of my own house hunt on moving to Denver Metro, when my wife kept saying, "But Zillow says...," despite my years of talking about the bad information. If a broker's wife doesn't care, who does?

The fact is, Zillow and Trulia (shall we call it Trillow? Zillia? Godzillow?) are established brands with bottom-up trust and loyalty. Moreover, no contact with a real estate agent is made until the consumer initiates it. Consumers like that. I like that. You can find a house without an intermediary. If you're plucky, you can sell your house without an intermediary.

Most buyers and some sellers totally get this, with more to follow. Brokers do not. Well, to be fair, some do, but many are in De Nile. And I don't mean the river in Egypt.

Realistically, the effects of this sea change won't completely happen in 20 seconds or so, especially with sellers. That's because a huge number of owners bought their homes in the 1980s and 1990s, when life was Life, as in the '50s-era magazine. Many of these sellers aren't into the way the tech world operates in 2014.

At least, not yet. The average age of a Realtor is somewhere around 56. First-time buyers are in their 30s. Sellers? Older, but getting younger fast.

But let's take the Zillow folks' at their word in their oft-repeated assertion that the company merely plans to be an advertising platform. Can you see a website containing every house in the U.S being searched rabidly by home buyers and, soon, sellers?

Oops. And on this site, anyone with some service to hawk advertises it--home inspectors, mortgage lenders, title companies, contract lawyers, Home Depot and Lowe's, and, dare I say it, Realtors.

Shoot, if I just graduated law school, I'd be tempted to peddle a real estate contract service on Zillow. If I were a lender, I'd think of some spiff for someone filling out an application. If I were a real estate agent, I'd think it was time to go back to the drawing board and decide what I was selling and what it cost.

Buyers already know they don't need Realtors to house hunt. For sellers, the question is no longer, "Will you buy an ad in the real estate section," it's "Will my house be on Zillow?" And they can DIY that one for free.

In truth, service is all real estate brokers have ever had to sell anyway, despite claims of buying and selling houses. Service is in their inventory. Houses ain't. And it's not the service itself. It's what consumers will pay for it. Services can be advertised featuring price, quality, or an amalgam of both. Any consumer knows that, right?

As my appraisal instructor preached, the only certainty is change. The best of the real estate pros will not only adapt, but prosper.

Wednesday, July 9, 2014

Homeowners: I'm HARPing on You!

Have you owned a home for more than five years? Would you like to save some serious money? This is not a pitch or a scam.

Do you

  • Own a home with a mortgage from 2009 or prior?
  • Current on your payments, with no late ones?
  • Have a loan-to-value ratio of 80 percent or more--even  underwater?
  • Have a mortgage insured by Freddie Mac or Fannie Mae (about 40% of the loans issued during the boom were Freddie or Fannie; their websites have tools to help you find out)?
  • Have an interest rate at least 1.5 points higher than the current rate (about 4.12%)?
The above, pretty much, are the Home Affordable Refinance Program (HARP) criteria to qualify to refinance your mortgage to current rates. If your interest rate right now is more than that and you haven't refinanced through HARP, you're throwing money away.

Why careth the Captain, you say? Because 676,000 owners nationwide are HARP- eligible and could save, on average, $200 a month according to this article in the Washington Post. Included, for example, are more than 7,000 borrowers in Oregon, 34,000 in California, 5,000 in Colorado, and 82,000 in Florida, to name a few states.

Hello? Whaddup, people?

What should you do? Call your lender. Call a mortgage broker. I mean, come on, call somebody. Don't just sit there and pay out money you could be saving. Or spending. Or paying down your principal. Or investing.

And it might pay to get going on this. The HARP deadline has been extended several times, but there's no guarantee it will happen again.

Tuesday, June 17, 2014

What You Really Need to Know to Buy a Home

Sometimes, The Captain (that's moi) needs to get off his high horse and get back to basics on what this blog is supposed to be about. A Facebook post from Neighborworks America kind of kicked my figurative butt into doing this post, namely, on what you need to do to buy a home. Fortunately, it was a figurative kick as well.

Anyway, here's where to begin.

1. Decide how big of a loan you can afford. A lender can help you, but here's a quickie DIY way to give you a ballpark idea. Take your monthly gross income and multiply it by 30%. That's an approximation of how much you should spend on housing per month.

Here, things get a little trickier. Included in this figure is not only loan principal and interest, but property taxes and insurance. Depending on the loan and how much the down payment is, you might have to pay mortgage insurance premiums as well.

Here's a word picture, though, to help make some kind of sense of all this stuff. The principal and interest payment on a typical 30-year mortgage of $200,000 at 4.5% interest is $1,013. Add property taxes of $2,500 per year, home insurance of $700 per year, and a mortgage insurance premium of 1%, and the payment pops up to $1,447 per month. Does that help see what's going on?

One more thing. The 30% affordability marker is front end, in that it's where you begin the analysis. At the back end is the debt-to-income ratio (DTI). The DTI is the ratio of all of your monthly debt payments, including the mortgage, to your monthly income. To get a mortgage, you need a DTI of 43% or less.

2. Check out interest rates. is a good place to start. When it comes time to see a lender, check out at least three and get a Good Faith Estimate from each to learn the true costs of borrowing. Lenders charge an origination fee and points, escrow fees, this fee, that fee, and so on, and they vary by lender and available programs. Not all loans with the same quoted rate are equal.

3. Do you know your credit score? It assesses your risk and isn't based on income. The higher the FICO score, the lower the interest rate you can get. Don't go to any of those website that offer *free* FICO scores or *free* credit reports. Some lenders can help you find out, or you can get a rough estimate from FICO at

4. Determine how much you have for the down payment, closing costs (maybe 1%-3% of the loan), and a reserve for surprise repair costs, moving expenses, and any miscellaneous thing that comes up. Whatever you have now for these popup costs won't go away. In fact, there could be more, because landlords fix stuff that owners have to fix themselves.

Finally, if you've got decent credit but are a little short for the down payment, assistance is available. I read somewhere within there last two days (forget where) that nearly all the programs offering assistance are now, for the most part, fully funded. Where to look? Depends on where you live, but once again has an article on where to look. Just scroll a little more than half way down.

Questions? Don't be afraid to ask. I don't bite and my mom always said I was reasonably nice.

NOTE: Here's a link to a LinkedIn article I wrote on branding for real estate brokers.

Wednesday, May 21, 2014

A Housing Market? Not. What's a First-time Buyer to Do?

If you invest in stocks and the Dow drops for a few days, you'll convince yourself it's been that way for weeks and will be that way forever.

If you follow a baseball team and it hits a losing streak, you'll convince yourself it's been that way for weeks and will be that way forever.

If you want to buy a house and keep getting shut out for whatever reason--escalating competitive offers, nothing listed in the school zone you want, whatever--you'll convince yourself it's been that way for weeks and it will be that way forever.

Here's the biggest difference among the three: With housing, it's really true. That's because there is no housing market to speak of, and there won't be for a pretty long time. Of course, micro-markets exist hither and yon, but the 2014 housing market has yet to gain traction. This article from Housingwire explains part of it--an abysmally low number of homes for sale--but doesn't get into another reason: Too many existing homes are Baby Boomer-owned, and Boomers don't want to sell. There's really nowhere to move to even if someone did come along and buy their older, non-updated houses.

Other reasons abound. Family formation is down and too many people of first-time buyer age drag around a ball and chain of student loan debt. In some states, foreclosures are on the rise again. While unemployment is trending down, income is, too. It also seems to me that so many jobs in 2014 don't have any security attached, even though I have no data. Why apply for a mortgage if you worry about being a pink-slip stat next year?

The fact is, sales for the year are down and prices are up, and I won't get into the Picketty thing. And did I say it's still hard to get a mortgage? It's a hugely competitive world out there, not just for buyers, but lenders, home inspectors, title and escrow offers, and real estate brokers.

What's a buyer to do?

If I were a buyer right now, I'd get an address list of a bunch of homes in a neighborhood I liked, and then send every owner a letter telling them I was in the market. As an owner of many homes over the years, I can assure you that real estate brokers send such letters all the time. The only difference between you, a buyer, doing it and a broker doing it is that you really do have a hot buyer--yourself.

Be sure to get a pre-approval letter from a lender before actually sitting down with a seller. And I recommend professional help navigating these home-purchase waters. To a lay person, the lingua franca of real estate people sounds very much like English, but the people of the real estate world string the words together in ways that seem mystifying.

Get proactive, and the frustration over home buying won't be that way forever anymore.

Thursday, May 1, 2014

Why Give Right Reasons When Wrong Ones Are There?

When the tobacco companies paid for studies saying no link existed between lung cancer and smoking, did people believe them?

If the contractor who does your home inspection includes a bid to do the repair work along with the inspection report, would you give your head a skeptical scratch?

When a mechanic tells you your car is kaput and then offers to buy it, wouldn't you roll your eyes and sidle towards the door?

Someone please tell me, then, when a real estate agent tells you now is a great time to buy a home, why does he or she think you'll believe it? When was the last time you ever heard one say now is not a good time to buy?

Having once been a real estate agent, I can sympathize with them. Many work pretty long unpaid hours, spending a lot of time on clients who aren't that serious, who think their homes are worth more than they are, who make absurdly lowball offers in competitive markets, or who just turn to another broker to write the offer for no apparent reason.

In other words, if no one buys a house, brokers don't make any money. That's arguably not optimal in 2014 America. Why not tout home ownership at every opportunity?

But still. Isn't a little authenticity in order? I recently read a real estate broker's article in Realty Times which said that people who bought at today's low rates and low prices would build up equity in four years and get money back when they sold, unlike the hapless renter schmucks who forked the monthly payment into the landlord black hole. Moreover, the article intoned, there are all those tax benefits from owning a home.

I've heard the same arguments for more than thirty years. Rates are always low and about to go up. Same for prices. National Association of Realtors economist Lawrence Yun touted the opportunity of home ownership in 2006, and was still doing it in 2009. And oh, those tax benefits!

Did the writer of this article miss the memo on the number of underwater homeowners? And how about the niggling little point that more than seventy percent of homeowners don't itemize on their tax returns, and therefore don't use the tax benefits? I'll give this writer a tiny bit of credit, though. She didn't call a home an "investment," which these broker-writers generally do.

Sometime, I'm going to write a post on five compelling reasons to own a home. None of them will be equity buildup and none will involve tax benefits.

And someone just might actually believe it.

Wednesday, April 30, 2014

Taxicabs, Then Uber. Real Estate Brokerages Then ???

Long-time real estate journalist Brad Inman published this piece about a coming disruption in the real estate industry, comparing it to such upheavals as Uber has caused for the taxicab biz, and other examples. It's in line with some thoughts I've had for years (except he does it better), some of which I wrote about for LinkedIn, which you can read here if you're interested. I've been following Inman News off and on for decades, and Brad continues to be on his game.

In my article, I wrote that demographics and technology are likely forcing a change in real estate buying and selling as we know it. Brad took a slightly different--and probably better--tack by discussing the changes between brokerage and consumer brought about by the internet, such as Zillow and Trulia, and comparing the situation to the upheavals technology caused in other industries.

A few years ago, I fooled around for about 20 minutes with the idea of setting up a website that would serve as a real estate exchange, where people could post their homes for sale, for free. Revenue would have come from various real estate professionals advertising services on the site. A programmer friend looked into it and me know how much work it would take--a lot--and friends and colleagues in the real estate trade didn't seem to think much of the idea. Sadly, I went home and locked myself in the closet.

Now, I'm wondering if that's what Zillow et al aren't up to. Redfin's part way there, since they're already licensed. But what if Zillow and Trulia started pitching to sellers to list for free on their sites? These websites already make their money by getting brokers and others to advertise. Free listings would only up the advertising game.

Upheaval is coming, but like the Big One on the West Coast, we just don't know when.

Tuesday, April 8, 2014

The Return of FHA Spot Loans on Condominiums?

Most people don't even know what an FHA "spot loan" is, and most of them don't care and wouldn't care even if they did know what one was. Anyway. If you own a condo and you're trying to sell it, but can't, or you're trying to buy one, but can't, you're in the minority of lay people who probably know what a spot loan is.

Since 2009 (some say 2010), a condominium project had to have FHA certification before units could be financed with FHA loans. Those are the cool low-down (3.5%) loans detached homes and townhomes are eligible for. But un-FHA-approved condos? Not. But that may be changing, according to this article in today's Inman News.

In the olden days before FHA changed its mind, units in non-approved facilities could receive spot loans, whereby a certain number of units could get FHA-insured loans placed on them when sold. To receive FHA's blessing, a condo project had to prove up this really dumb and inconvenient stuff, like being in good financial condition, the units having kitchens, the walls and foundation being in decent shape, and other such tedious details.

So, who cares, and why?

Condo owners for sure. If they want to sell, someone can buy without having to put at least 20% down. Some first-time buyers might care, too, because condos often offer a lower-priced alternative to scarce detached homes and townhomes.

Condominium Owners' Associations will do the happy dance, especially those too cheap and lazy to go through the FHA certification process (and, to be fair, some tried, but were denied approval because of kind of dumb technicalities; hey, this is the gummint, after all).

Real estate and mortgage brokers will be doing the High Five and Butt bump.

Not so developers, at least for a while. For years, they've been blaming construction defect laws for not building condominium projects. Colorado, Nevada, and Mississippi legislatures (and others I couldn't find) have at least considered bills to modify CD statutes. But now, the truth will out: They haven't been building new projects (a) because the economy isn't great, and (b) no one could buy the condos anyway because of the lack of FHA financing.

What does The Captain think? Hmm. The jury's out. I have always had a love-hate relationship with condo-minimums, but I'll save that for later. And I'm also scratching my head over what looks like one more step along the Yellow Brick Road to Subprime Oz and the masked men behind the curtain.

Tuesday, April 1, 2014

This Old House: Market Killer?

An exit strategy for old houses
I've reduced the first three drafts of this post to this one sentence: Guess what, Boomers? Younger buyers don't want your old house.

When the 3.5% to 5% downpayment is added to the closing costs of the loan--usually 1% to 3%--first-time buyers don't have a lot of geedas laying around for fix-it work.

And your--our--1990's and 1980's (and older) suburban homes don't just need work. They are boring houses in boring neighborhoods run by cranky HOAs with school districts in decline. Okay, that's not universally true, but still. It sort of is true. When new construction houses are the same price and more appealing than older ones, what does it mean for the recovery of the overall market?

Mostly, it means what the data show: Sales of existing homes are down for the eighth straight month.  The National Association or Realtors has weighed in, touting high prices because of low inventory and blaming cold weather for everything else. Now Is a Great Time to Buy a House and Always Has Been, and of you don't believe it, ask a Realtor.

In other words, the headlines announcing the loud sucking sound of buyers inhaling homes is really more of a wheeze. Look around the suburbs of Denver Metro and you'll see block after block, neighborhood after neighborhood, community after community of houses decades old, occupied by members of the Flower Power Generation and all wondering if they can sell their houses to someone and if they did, where would they move. And it's not so different in suburbs everywhere else, where the only thing residents can walk to is the corner fire hydrant.

That said, the way things are now isn't the way they will always be, a statement which defies the feelings of day traders and baseball fans. As I learned in an appraisal class years ago, the only certainty in real estate is that nothing is certain. Change is inevitable.

Buyers: A killer deal may be had in someone's old house. Tell your friends, and before long, you'll have a community.

Friday, March 21, 2014

Dodd-Frank: Are Investors Who Offer Seller Financing Too Big to Fail?

Our latest post talked about lease-options and how they worked. Lease-options can offer home ownership to people who may otherwise not qualify for traditional financing when they want to buy a home. Many, if not most, lease-option deals today include seller financing. Moreover, in many rural areas, sellers often use land contracts, which are also a form of seller financing.

But seller financing had some pitfalls. Many contracts contained interest rate adjustments that were punitive, while others featured balloon payment clauses that most buyer-borrowers couldn't pay. The Wall Street Reform and Consumer Protection Act, affectionately know as Dodd-Frank, has something to say about the issue. This law is the most significant piece of lending oversight legislation passed since the Great Depression.

Lease-option-type investors who offer seller financing are deemed to be "loan originators" under the statute and therefore must abide by the same underwriting rules that mortgage brokers and lenders have to follow. They must verify, for example, that their buyer-borrower customers fall within prescribed debt-to-income limits and, in general, have the ability to pay the loan. Loan originators must also abide by the Truth-in-Lending Act (TILA).

All seller-carryback loans must be fully amortizing, that is, they may not have balloon payments. If the interest rate is adjustable, the  index it adjusts to must be "reasonable," such as LIBOR, and adjustments are subject to both annual and lifetime limits. While most investors who offer seller financing are fair and legitimate business people, some are unscrupulous and have employed onerous loan terms that would, in effect, cause borrowers to default and lose their option and loan payments.

The law makes exceptions for certain small investors that allow for relief of some of the rules. However, even these investors must abide by the rules in the preceding paragraph, even as they are exempt from SAFE (see below).

Lay people and most real estate professionals don't realize that Dodd-Frank isn't regulatory, that is, it can't come in and shut down seller-finance investors who abuse the rules. All Dodd Frank does is give consumers grounds for litigation. The relief granted, though, is significant and pretty much gives consumers all their money back plus some. Who wins and loses the suit is pretty clear cut, but the aggrieved party still has to litigate.

However, the state SAFE Act (Secure and Fair Enforcement of Mortgage Licensing Act), signed by President Bush in 2008, is regulatory. This law requires state licensing of mortgage originators under state laws that meet federal standards. Since this law is regulatory, its enforcers can shut down violators.

All this may seem kind of complex. That's because it is. Questions? Give me a shout.

Wednesday, March 19, 2014

Lease-Option, Seller Financing and We Buy Homes

The Captain's warning: Nerdgasm alert, so this post won't apply to everyone.  There. I said it.

Post-Great Recession meltdown, a lot of people got bounced from their homes, both voluntarily and otherwise. Most of them became renters. Other stuff happened and still is, such as financing becoming difficult to get unless you have a credit score the size of Barry Bonds' home run total. And oh, a proliferation of hand-painted signs that said, "We Buy Homes" began decorating light posts.

What's that all about? It's investors great and small, some flaky, some traditional. Heck, the largest buyer of single family homes right now is the Blackstone Group, which, if you're looking for a house, is one of your greatest obstacles.

But with the advent of investors, low rates, low home prices, and limited access to loan, comes seller financing, very often with a lease-option. How does it work? Let's take a buyer with a low-to-middling credit score who wants to buy a house, can't get traditional financing, and who meets an investor offering a lease-option. The investor sells the buyer an option--that is, the right to buy the house at a certain price and within a specified time--and leases the house to the buyer until the option is exercised.

For example, a buyer pays $3,000 for the option to buy the investor's house for $200,000 and has three years to exercise the option. The investor also rents the house to the buyer for the three years, during which time, the buyer pays the rent on time and otherwise improves his credit score in order to get financing at the end of three years.

A common variation is to have the amount necessary for the buyer's down payment (if he exercises the option) to be added to the monthly rent. At the end of the three years, for example, the buyer may want to apply for a 5%-down loan, or $10,000 on a $190,000 loan, when he exercises his option to buy the house for $200,000. Many investors allow the option fee--in this case, the $3,000--to apply towards the down payment, meaning the buyer only needs to come up with $7,000. Over three years, he'd pay an extra $194 per month--$7,000 divided by 36. Slick, huh?

If the buyer does not exercise the option at the end of three years, the investor keeps the extra $194 monthly payments. If the buyer obtains a loan, the investor sells him the house, likely at a decent profit. That's what investors do.

But many investors also provide the financing themselves. When the buyer exercises the option, the investor carries back the deed on the house, and the payments become principal and interest payments instead of lease payments. The buyer gets title ("equitable title," in this case) and the investor gets a trust deed.

Usually, though, investors don't want to carry a loan for thirty years and insert a balloon payment into the contract. The buyer makes payments as though they serviced a traditional mortgage, but the whole loan balance becomes due--balloons--at a certain point, usually five years. If the buyer can't pay, the lender forecloses.

But the federal Dodd-Frank Law and the state SAFE Acts have something to say about this. Just what will be the topic of the next post.

Thursday, February 27, 2014

A House-buying Strategy for 2014: Accommodate the SDTs!

In my time as a real estate broker, buyers could usually find a home in three or four months. Sure, there were exceptions. But even when things got tight for first-timers in 2011-2012, they could usually find an acceptable house in that time frame. Pressure came from too many buyers, many of whom were downsizing Boomers or investors with cash. Also, many of the homes were short sale properties or even foreclosures that needed work. That was hard to accommodate with the few financing programs available.

The point being, if one is to be made, that there's always Some Damned Thing (SDT).

Now, it's a cacophony of media voices yowling like cats in a Jacuzzi. Prices going up (better hurry before it's too late). Now is a great time to buy a home (and it always will be). Interest rates are low (and they might go up any second). Not enough listings. Everything gets backup offers with escalator clauses. It seems as though that's all we're reading or hearing about these days.

Except the reporters' sources for their news are almost always real estate brokers. Isn't that like asking R.J. Reynolds if tobacco is good for you? It's the au courant SDT.

In reality, prices have either stabilized  or stopped their growth trend in most markets. Sales of existing homes have been off for several months, and the pace of new homes has slacked (of course, micro-markets have their own trends). Applications for purchase money mortgages have fallen off.

But still: What's a buyer to think? Well, The Captain has an idea: If you're thinking about buying a house, stretch out your time horizon a little bit. If I were still advising clients, I'd suggest moving their house-acquisition time up a good bit, like six months or even more--maybe even a year.

That way, you don't have to jump at the first house you see. If told you have to add an escalation clause or you'll lose the house, you can just say, "Whatever," instead of freaking out. If told listings are few and competition is tough, you can say the same thing.

Why? Because not only do you have the money, Honey, but you've got the time. You may miss out on a house, but if your time horizon is out there a ways, you'll find another one and make your decision without pressure.

And you can put any SDT to rest.

Tuesday, February 25, 2014

Broker Compensation Changes Pt.2?

We've written posts before on how real estate brokers are paid, most recently this one talking about startups and others whose brokers don't get paid through a sales commission. Are changes for real?

The fact is, I don't know. Based on the money, you'd think so. But it's an H.L. Mencken public out there, made up of people who'd rather bite than switch. Why the home buying/home selling public continues to retain substandard brokers over good ones and pay everyone the same same based on the close of a transaction makes no logical sense. But then, neither does quantum mechanics nor Winter Olympics on the Black Sea.

In my final year of being licensed, I worked with three clients who paid me with a fee-for-service (FFS) arrangement. Two were sellers and one was a buyer. They paid upfront and saved thousands of dollars compared to a sales commission.

But I'd offered an FFS option for a couple of years, and no one was really interested, even after assessing how much money they'd keep. I've heard the same thing from other brokers over the years--people just choose the commission despite compelling evidence of significant savings with FFS. Change is slow, for whatever reason.

Returning to our lens is, about whom we've written before. Apparently, this thing isn't going away. One of their brokers is hitting it pretty hard. We'll see if it has legs.

Will things change? Maybe. Brokerages are having a difficult time attracting young people to the profession, and it may be that Gen Y people just don't want to work on a commission basis. But change is problematic for most brokerages, because their business models revolve around keeping cuts of their agents' commissions. But the status quo light bulb is flickering.

Another factor is the present market. Despite the sunny exhortations of those whose objectivity is compromised by their professions, this market isn't going to be great any time soon. It's not flatlining by any means, but it's pulse is suspect, meaning steady commissions could be problematic. That's not going to attract many newbies unless they can count on a paycheck.

Friday, February 21, 2014

Can Real Estate Brokers be Ranked?

There's a movement afoot led by the big box franchise brokers to rank the agents they employ. Be concerned. First off, be concerned about any afoot movements. Second, big box brokerages haven't had many good ideas since Eisenhower was president.

Third, I say "employees" euphemistically at best. Real estate brokers are all independent contractors, receiving no benefits, workman's comp, nor anything else from their putative employers. But still, here's what's right with said afoot movement: Brokerages claim they want to give consumers an idea of whom they're (consumers) doing business with. Fair enough, on the face of it.

But here's what's wrong with said afoot movement: Nearly everything else. Brokerages make money one way--taking part of their agents' commissions. If a company ranks its own product, how can the ranking be objective? If Nordstrom, say, claims its shoes are better than Macys', who cares? It's self-serving.

The brokerages use individual agent sales volume to rank the agent. What does that tell a consumer? Pretty much that the broker so ranked is making a lot of money. Is someone who does a ton of volume the best fit for you, ipso facto? Probably not, just using simple probability.

The not-so-subliminal message to lower-volume brokers is "Hey, get with the program or we'll give you crappy rankings." What if the broker is a new licensee learning the ropes? What if the broker is, say, a CPA who only sells properties for trusts? What if the broker is newly retired and just wants to stay a bit active?

In the Captain's view, top-down definition of ranking terms is anti-consumer. Redfin, Yelp, Google, and many others have shown that bottom-up ranking--user reviews--are more useful. The big firms need to get off this wagon and if they want reviews, seek them from the public. Present and former clients are a good source, but so are ex-clients who may have dumped the agent for whatever reason. Moreover, the brokerage itself needs to be reviewed, not just the agent.

I hope agents rebel and don't allow this to happen. It's neither in their best interest, nor in the consumers'. his afoot movement needs a big, fat boot.

Wednesday, February 12, 2014

The Howl of the Wounded Moose

I've got a den with a river view
Inman News published on Feb 11 an article on by a certified residential appraiser wondering why real estate brokers escaped blame over the housing-led financial crisis. He went on to write about the low entry bar to receiving a real estate broker's license  and how much more rigorous both education and training is for appraisers.

The wounded moose howled.

He received a few thoughtful comments, but by and large, they were the verbal equivalent of brokers exercising their Second Amendment rights. But it got me to thinking--what do lay people think? What kind of education and training should real estate brokers have?

The Colorado statute on broker licensing has an interesting preamble attached. I don't recall it word for word, but it says something to the effect that in representing buyers and sellers, real estate brokers are practicing law without a license. However, it goes on to say, the way real estate sales are being conducted doesn't seem to be particularly harmful, so the state won't require law licenses just yet for real estate brokers.

In other words, no harm, no foul.

Most buyers and sellers believe that a standard, MLS-developed real estate purchase agreement is a contract to buy and sell a house. That may be true in the abstract, but that's not what they really are. If you look at the language, penalties for not performing offer almost zero relief to either side. It's also designed to keep brokers out of court.

The reality is that it's primarily an earnest money agreement--who gets the earnest money if things fall apart and the centre cannot hold. And even fighting over that is a fool's game most of the time. For these reasons, new home builders have their lawyers create the contracts and don't use standard Realtor forms.

But back to the point. Should real estate brokers be required to have a bachelor's degree? An apprenticeship of sorts, as appraisers have to have? Should they have to have specialized training in finance?

It all gets down to the fact that despite the majority of real estate brokers being pretty much okay, there are a lot of bad actors out there, and there are enough of them that the public consistently gives brokers low esteem rankings. At the same time, the public consistently hires the bad ones along with the good ones.

I'm interested. What do you think?

Wounded moose howl, but what does everyone else say?

Wednesday, February 5, 2014

Pay No Attention to That Man Behind the Curtain

Here's all you need to know about the housing market for 2014: Nobody knows.

This factoid from Inman News caught my eye. Demand for purchase money mortgages is down 17% from a year ago. What does that mean?

Mmm, well, it means that demand for mortgages to buy a house are off. To which I hear a resounding echo of, "Oh."

Prognostications of the 2014 housing market are mostly cotton-candy upbeat. Most come from sources who are not exactly unbiased. One of my favorites--I forget where exactly I saw it--is that house prices rose last year more than at any time since 2007. That's good, because lots of owners formerly underwater can breathe a little. But the same article neglected to mention that pricing hasn't hit 2006 levels.

Gloom and Doomers are whispering "housing bubble" from the shadows. Spin and Grinners are shouting, "No it's not! from the rafters.

What's a poor prospective homebuyer supposed to do? Answer: Watch shows on HGTV and get yourself in the mood.

The country is in a recovery, we're told, but we're far from recovered. The jobs situation is looking up. Profits are up, but wait--the stock market's been tumbling. China's economy? No one sees behind the great wall. Emerging markets? The markets of the future, and they always will be. Except now, they account for half the world's economy. So, what's gonna happen?

At the risk of repeating myself, nobody knows. Don't forget, Denver was favored to beat Seattle in the Super Bowl.

The Captain's advice: Stay with the basics. Don't be pressured, but don't put things off. The house you want at the price you want is out there.

After all, the only ones who know are those who say they don't know.

Friday, January 17, 2014

How (Not) to Pick a Real Estate Agent and Live to Tell About It

Hey Man...wanna buy a house?
I'm bald. Wanna know why? One of the reasons is that every time I hear a real estate broker say his services are "at no cost to the buyer" I pull my hair out. I now have a big bald space ringed by hair (which got gray as well). Give me a sackcloth and I'd look like a friar.

But back to the topic at hand. For a full rundown on who pays the broker, check out this link. It's for both buyers and sellers. And this link has some ideas on how to choose a broker if you're a buyer.

Anyway, here's the problem. The buyer's broker will say the seller's broker pays him. It's technically true. The seller's broker (aka listing agent) has a compensation contract with the seller. To participate in MLS listings, sellers' agents have to agree to split the commission with buyers' agents. House sells, seller pays seller's agent, seller's agent pays buyer's agent.

Does that mean the buyer isn't paying his or her agent? You tell me. As buyer, your money makes the whole transaction transact. Is your broker really representing you at no cost to you? Kind of, sort of, and not.

Say you're buying a $300,000 house. The seller is paying a 5% commission to the seller's broker, and the seller's broker splits that with your broker, or $7,500 each. Question: Can you write into your offer, "Buyer's broker to receive $5,000 and the purchase price will be $297,500?"

Nope. Both brokers will tell you that the compensation arrangement comes from the seller, as explained above. Compensation can't be written into a buyer's purchase offer.

Okay, say you. Can you write, "Commission to be 4%, with purchase price to be reduced by $2,975?" Nope again. See preceding paragraph. The compensation contract is with the seller, not you.

So do you, as buyer, have no dog in the compensation hunt? Yes, you do. Try this: Threaten to cancel your offer if you don't get what you want, and watch everyone scramble to keep the deal together.

The difference between a lie and B.S. is that a lie understands that truth exists, while B.S. does not. If you're a buyer and your broker tells you he'll represent you at no cost to you, it's technically not a lie. But it's definitely B.S. Do you want a bullshitter to represent you?

In all of my years, the best real estate agents never told a prospective buyer that the broker's services were free. That's the one you want. You'll live to tell about it and you'll both be happy, do well and lead prosperous, fecund lives.

Sunday, January 5, 2014

Five Reasons You Should Buy a House in 2014

Most real estate professionals will always answer with a sunny "Yes!" when you ask them if now is a good time to buy a house. The Captain does not, as prior posts show. It depends on a person's time and circumstances. But if the stars seem to be aligning for you and you're still unsure, here are five reasons why you should consider leaping into the homeownership void in 2014.

1. You won't have to go to your in-laws for holidays. Whether you're single or have a partner, the issue of where to go for Thanksgiving or Christmas dinner will go away. I mean, you can go if you want to and endure tipsy political rants, boozy-breathed advice and what-not, but if you own a home and have spent time decorating it for the holidays, staying home is a clear and unarguable choice.

2. Your landlord can't raise your rent. It only makes sense to put yourself through this rent-versus-own calculator before you make a decision, but most cities are going through the tightest rental market in memory. If your landlord raises the rent to cover the ubiquitous "increased costs," whether or not they actually exist, what're you gonna do? A monthly mortgage payment, though, stays the same. Bonus: Mortgage payments are usually due on the first and late on the tenth. Those extra few days can be nice. If your rent is a day late, you pay a late charge.

3. You can turn up the television or stereo as high as you want. Enough said.

4. You can have a water heater bigger than a margarita glass. Yes! You and your partner can both take long, hot showers (or baths) and have plenty left over to do a couple of loads of laundry. Added bonus: the washer and dryer are down the hall, not down the block.

5. You can hang pictures at 3 a.m. if you feel like it. And paint every wall in the house a different color. And cook smelly food. And have a range vent that actually works, not to mention door handles and faucets that don't wiggle.

So, see? This space can be as fair and balanced as anyone else.

And all the best for 2014!