Looking Out From the Garage: February 2008

Once again... off to the inbox to see what needs to be answered:

Lane, we want to sell our house in a few months.  What would be the best way to increase the value and get it to sell faster?

Good questions, both.   

First, what I always recommend is that your house be clean, uncluttered, and depersonalized.  I recommend that most sellers consult with a stager at least a few weeks before listing.  They might recommend paint, removing wallpaper, or updating some parts of the house.  These will increase the value and help it sell faster.  

Paint (especially if doing it yourself) will increase the value well beyond the investment.  Going to the local home improvement store and dropping $200 may yield a couple thousand dollars in return.  That is a pretty good Return on Investment (RoI).  Of course, the right colors will do the best job... and that is part of the stager's job.  Bold colors are usually not the ticket... but they might end up being exactly the ticket for some homes.  

Having a garage sale and getting rid of "stuff" that allows your house to have more open space is also almost always a good idea.   I can't imagine any better RoI than collecting $500 and then increasing the sale price of the house by a couple thousand.  And then you won't have to pack or move that stuff...

Replacing carpet, or refinishing wood floors may also be a good investment.  But, now we are talking less about money and more about time on market.  You might (or might not) clear the $2000 for new carpet.  You probably will get the return from spending a few hundred dollars to have the floors redone if they need it... at all).

Doing much more will probably not result in an increase of value that will offset the cost, much less give a positive RoI.  But, updating a kitchen or bath may certainly speed the sale.  Most buyers don't really want to buy a house to renovate.  They might say they do, but when it gets right down to it, they pick the pretty one. 

So, there you have it.  Keep in mind that I haven't seen your house, and we haven't consulted a stager.  

Final thought...  I keep mentioning consulting with a stager.  Some agents will tell you they do their own staging.  They may.  They may be good at it, too.  But, I have an accountant and a lawyer.  I am not a stager, and I don't have the same level of training.  My stagers aren't real estate agents.  If one spends all of their time staging, they will be better at it than someone that does it occasionally.  Same thing for real estate agents.

Cleaning out the old inbox, and getting these questions answered...

Lane, should we sell into this market?

Talk about a tough question...  Here is the short answer.

No.

That said, if you have to sell, you have to sell.  If you have to sell, remember that this isn't 2006.  Don't expect 2006 prices.  Yours may be higher, but probably not.  Don't expect to have a party a couple of days after an open house to open all of the offers. 

But, if you are moving up in the market, have good credit, and a good level of equity, this could be a good time for you.  Take the "loss" on selling your home, and buy into some future equity on a more expensive home.  If you plan on staying put for a while... go ahead.  If you can find the right deal, and outlast a downturn (we are in one right now, but I am betting we start back up quite soon) you'll be fine in the mid and long term.  If you are not staying put, or just can't even think you might be in the house for 7 or ten years... this might not be your time.  

But, it might come back sooner than that.  We can't know where the market is going and when it will get there.  if you don't have equity, or don't need to access the equity, and can find a renter, that might not be a bad solution. 

Bottom line:  It depends on you and your situation.   

{Back in the day, I wrote a post called Dear Mr. & Mrs. Unrealistic Seller.  It was my first feature, and still sits as my busiest post with over 1500 views and around a 100 comments.  Ever since October, I've wanted to write the balancing post...}

I just wanted to drop you a quick note to let you know how excited I am about our upcoming home search, and recap the exciting events so far.  This is great fun, and I'm sure will be worth every minute. 

Let's talk about the introduction. 

I'm so glad that you found me through that lead aggregation website.  Sending me the emails with replay addresses to MickyMouse@DisneyWorld.com was hilarious.  I never get enough of that.  Nevermind the bounced emails, and the bad phone number... I laughed so hard when that lady threatened to sue me for calling. 

Of course, the real gem was the initial search.   

It isn't like there are a plethora of homes in Gwinnett, Forsyth, DeKalb and North Fulton that are priced from $100,000 to $725,000... with 3 or more bedrooms.  Of course, I couldn't actually run the search, since I didn't have anywhere to send the results.  Honestly, I was shocked when you called from the blocked number to ask why you didn't get the results.  Please forgive that my ESP was down, and I couldn't guess the email address you wanted me to use... or how you wanted to get the listings down to less than 40,000.  

And those early showings.

After we spent a while exchanging emails and a few phone calls, it was great to get down to only a few hundred listings... that you wanted to see... without prior notice.  That is what makes this job exciting.  Having NO idea when I should jump for a buyer that doesn't even want me to know his name.  I understand how upset you got when I didn't want to meet you at a property instead of my office for the first meeting.  There isn't a good reason for me to know anything about you other than you and your wife's first names.  It was a pleasure to make that first acquaintance, Marge and Homer... and your lovely kids Bart and Lisa.  After I started to feel like I wasn't going to die at a showing, it was great fun.  The expensive lunches you wanted to order and leave me with the bill for were great, too.  

And who could forget our conversation about the Buyer Brokerage Agreement?

I don't know why any agent tries to get one.  You should be free to look at hundreds of properties with one agent, and have them do all of the work and then get cousin Earl to come up from Savannah to write an offer.   

And who could forget the first seventeen offers?

Those crazy sellers...  How could they possibly turn down your offers for 50% of list?  I mean, you did offer to pay all closing costs, after the first $10,000.  And that sale contingency for your current home shouldn't be an issue... even if you don't have it on the market, and won't tell anyone where it is.  I also don't see an issue with the 45 day inspection period... or the additional language allowing non-licensed or trained inspectors.  I'm sure that Aunt Alice knows more about electricity than some silly person that is professionally trained and certified.  

Completely changing the criteria was a ball.

Just when I thought I had it dialed in... well, life is a series of changes, right?   

And the rebate...

It doesn't matter that we have looked at hundreds of houses over the years.  Who cares about the $3,274.13 in lunches and dinners I've purchased while we were out looking... I'm not keeping track.  I should be so glad to help you that rebating all but $238 of the selling commission will be fine.  I like to work for $.38/hour.  I'll make up any loss in volume.   

You know me by now.  This does not represent an actual client, but rather a compilation of contacts from a lead generation service.  I did not spend much time looking for real properties with these people.  I actually did have a couple that wanted me to schedule lunch at a specific restaurant... that runs about $40/head for lunch... and didn't think I should even mention a Buyer's Brokerage Agreement.  I had a few people that wanted to offer crazy amounts.  One threatened to sue me for not being willing to write the offer.  He was shocked to learn that buyer's agents don't have to write all offers... but that it was only seller's agents that had to present them.  He didn't want to sign a BBA, either.  And at one point he slipped and mentioned that he was working with 9 or 10 different agents.  When I fired him, he angrily told me that one agent rebated 80% of the commissions, so all of the real offers went through him (the rest of us were just idiots to be used).  

So, this one is all blown out of proportion, too.  But, if you find an agent that will work under these conditions, assume that they:

• are a heck of a negotiator
• have been there, done that
  
• saved the client money and time
  
• have an amazing level of experience
• are well respected by the other agents they interact with. 
  

Professional agents have higher standards.  We want to work with buyers that are ready to buy, and are able to buy.  I don't mind sending listings for months while you get a feel for the market.  But, that doesn't mean we should go out looking at property for a year, when you aren't planning on actually doing anything with the info.  

We know the market, and know the value of a property.  We have an idea what a reasonable price should be.  It may or may not be accepted, but we know that most 50% offers aren't serious.  

So, if you are a serious buyer, let's talk.  I can find you the home you want, while the unprofessional agent is busy dealing with people that are playing games.  

Back to the mailbox.  These are the types of questions I am getting.  Here is what I have to say:

We are thinking about buying a new construction home.  In the Sunday Paper the builders seem to be giving away the world.  What is the deal? 

New home communities that have been around more than a year or two have a very difficult balance.  The people that have already bought, might have bought at a price that is higher than the current market will bear.  But, the builder would probably be committing financial suicide if they were to go back to those previous buyers and start giving away money.  At the same time, imagine the impact if the builder were to drop prices by 20% for the community.  The previous buyers could be devastated... and angry. 

The way the builders try to balance this act is to give away inducements.  Instead of cutting the price (which would be reflected in the tax records), they give away upgrades... or TVs... or cars.  The thought behind this is that for the purposes of future valuation, as agents and appraisers view the tax records for prices paid by other owners, those prices will be higher, maintaining value for all of the residents.  

Here is the backlash.  Imagine a buyer moving into a property that they paid $300,000 for in 2008.  The paid 5% down ($15,000).  When they bought the house, they got a flat screen TV ($2,000) and a Mini ($28,000).  In effect, they received a discount of $30,000 (10%).  Their mortgage is $285,000, but their real equity is only $270,000.  Over the long haul, it won't be an issue.  The value will come up, and the mortgage payoff will go down.  But, if that buyer had to sell right away, they could be in a lot of trouble.  

The challenges.  Here is the big problem.  The house has to appraise for the loan amount.  The bank shouldn't care if the buyer is getting a Mini and a big screen.  Those aren't connected with the property in the future and are not subject to the loan.  

At this point, we could wander off into the causes for many people to walk away from their homes and allow the banks to foreclose... the value and the mortgage are not in line with each other.  This isn't a big issue in Gwinnett County, or most of the Atlanta market, but is in markets that have seen larger drops in market value.   

The bottom line is that the incentives are nice, but the value is the primary consideration.  Also keep in mind your personal time frame.   If you are going to stay put for a while (vaporously defined as more than 7-10 years), the inducements might be nice.  If you might be transferred, or like to move more frequently... probably not so good.

I decided to hit my inbox and see what sort of questions consumers may have...

Lane, we are thinking about buying a house in 6 or 8 months.  When should we start looking?

A lot depends on the remainder of your situation.  There are a few things we need to look at first:

• How did you arrive at the time frame for when you want to buy?

Is there a specific event that will happen in that time frame that will allow you to buy a house?  If so, you may not need to dive in quite yet, but there isn't an issue with signing you up on a Client Gateway to see what is available.  However, many people start to burn out after looking at homes for months on end.  I also wouldn't recommend going out to look at houses... because you might like one that won't be available when you are ready to buy.  If you are able to buy now, but just don't think the market is good... you might want to start looking.  We don't know where the market is going.  We don't know where interest rates are going.  We don't know what properties are going to be available.  It wouldn't be fun to just miss a perfect house because you thought the price might drop another 1%... when the seller might be willing to take that hit to sell today.

• Have you been to a good mortgage broker?

Honestly, this is the first thing you need to do.  Regardless of your financial situation (unless you are a cash buyer), you need to get pre-qualified.  Even if you have great credit, perhaps the broker might be able to give you a bit of info/strategy that could bump you up to a slightly better rate.  You might also be shocked at the current rates, and find that it is cheaper in the long-run to buy with a lower rate than to wait... of course, we don't know where the rates are going.  

• Are you in a lease?

If you are renting a house or apartment, in might be worth it to pay the penalty and buy a house.  It might not.  It depends on the individual deal.  Some builders might be thrilled to take the hit and pay your lease penalty in order to sell a house.  Some individual sellers might as well.  Others may not.  In some cases, the deal might be too good to pass up.  It wouldn't be prudent to pass up a deal that saves $20,000 because you don't want to pay a $5,000 release fee.  

It is very difficult to give generic advice for the situation without knowing more.  Even the personality of the buyer makes a difference.  I have had people that looked at 3 houses and bought (number 2).  I have had people that looked at 75 houses before committing (to number 16).  Some people like to see listings for months.  Others get bored after a week unless they are visiting houses.  

In almost all situations, I would advise buyers to sit down with a good mortgage broker.

I decided to hit a few of the questions that I see regularly in my inbox...

Lane, we are looking for a house between $300,000 and $325,000.  When you sent us listings, you sent them a little outside the range.  I see houses here for $273,000 to $336,000.  Why?

There are a few different reasons.  When taking into account the other requirements you had for the house; number of bedrooms, basement and parking situation, etc., there just weren't many homes in the specific range you were looking at.  The very last thing I want to do is send you one property, and say... "That's it."

On the higher end, I added a few thousand dollars because many sellers are willing to negotiate a bit.  So, I would hate to eliminate a house that is listed for $325,900, knowing that there is a good chance we can get the price in line with your expectations.  At the same time, there may be houses listed at $340,000 or $350,000 with sellers that might be willing to negotiate to your range, but there is a much higher chance that your hopes would go up without a good chance of getting the house.  

On the lower end, not only are there deals, but there might also be houses that have a correctable flaw.  Perhaps we could find a house in a great location, with the appropriate layout, but it need the kitchen updated, or needs an additional garage.  If that property is priced at $275,000, and would meet your criteria with $35,000 in renovation, it could make the short list. 

In either case, I could widen the range, but the returns of useful information diminish.   

As we get deeper into the buyer interview, you can see more of the reasoning, and we can eliminate more properties based on your desires and capabilities.   

Did you see the post yesterday on Hot Topic? 

Unintended consequences of regulating mortgage brokers

Unintended consequences seem to be one of the themes I keep coming back to.  

Government, doing things that are designed to sound good for the news crews and the uninitiated, doesn't often accomplish the desired effect.  The foreclosure crisis "solutions" are another example.   Back to the subject at hand...

The regulation in question is surety bonds or net worth requirements, which are intended to keep mortgage brokers honest by assuring that they have some skin in the game—real assets that can be taken from them if they screw up. But in a National Bureau of Economic Research working paper, Morris Kleiner of the University of Minnesota and Richard Todd of the Federal Reserve Bank say this:

In particular, we find that tighter bonding/net worth requirements are associated with fewer brokers, fewer subprime mortgages, higher foreclosure rates, and a greater percentage of high-interest-rate mortgages. Although we do not provide a full causal interpretation of these results, we take seriously the possibility that restrictive bonding requirements for mortgage brokers have unintended negative consequences for many consumers.

The post poops on other aspects of the bill as well...

The bottom line is that another law, another program and some more regulations aren't always the best ways to tackle problems.  Sometimes, stepping back and taking stock is a better plan.  Doing nothing can actually be a valid plan. 

Perhaps some politicians ought to figure that out.  If someone really wanted to run on a plan of "change", perhaps a bigger change would be to stop making another agency every time somebody passes gas... 

And they were smart voices. 

Wandering around in the Rain, there have been scores of bloggers pointing out that the federal government trying to "fix" the foreclosure crisis.  Now, Inman News is saying the same thing.   (the link will only be good until it goes behind the curtain)

Most families facing foreclosure today were on weak financial ground, he says, and "will defy every effort" at workouts. "Even extraordinary rewrites will beget re-default, the poorly maintained house creating deeper loss in the ultimate foreclosure, the troubled inventory overhanging the marketplace and preventing recovery," Barnes writes.

And goes on to say...

In an effort to prevent foreclosures, consumer groups and Senate Democrats want to give bankruptcy judges the power to cram down mortgage loan modifications over the objections of lenders. (see recent blog post, and watch Inman News headlines Monday for details on how the cram down provisions in S 2136 have been rolled into a more sweeping foreclosure prevention bill, S 2636).

Supporters of cram downs say voluntary efforts by loan servicers to engage in workouts with borrowers haven't done much to slow the pace of foreclosures, and that any increase in mortgage rates won't be as drastic as the industry predicts.

Although Barnes didn't address cram downs in his latest column, I thought it was interesting that he raised foreclosures and mortgage market liquidity in the same breath, and concluded that it's the credit crunch, not foreclosures, that pose the biggest threat to a recovery.

They also point out...

Pavlov and Wachter's December 2006 paper, "Aggressive Lending and Real Estate Markets," looked at the use of ARM loans in 22 Los Angeles neighborhoods where prices fell more than 21 percent between 1990 and 1995. Perhaps not surprisingly, prices fell harder in neighborhoods where ARM loans were more prevalent. But the study's most surprising finding was that it wasn't the higher default rates on ARM loans that sent home prices plummeting, but their lack of availability during the downturn.

So, a lot of people that study these things are saying that the government, trying to provide relief is doing EXACTLY the wrong thing.  Of course, it is populist to go after the banks and talk about corporate greed and not personal responsibility.  (BTW, remember that those ideas are coming from both sides of the aisle).  Instead of helping people and getting us past this, it will only delay and increase the severity. 

The cry of all of the people that aren't being foreclosed are losing value is a valid one... but, is it not worse to drag the problem out and make it take a decade for price recovery than to let the market find its bottom and work through it in just two or three years?  Would those responsible borrowers and homeowners not be better served by the restoration of their equity sooner, rather than later?

Feel free to post links back to other blogs with arguments on both sides of this issue.  (Note:  I did not post links to A/R blogs that echoed this sentiment.  There are a lot.  I have read a bunch of them.  Feel free to post links to your blog.  I didn't want to miss a good one... and there are many.)

Game on... 

This isn't the first time I've written about this, but recently, after reading a post by Lenn Harley, called HOW TO SUCCEED IN REAL ESTATE, GET REINTERMEDIATED.  It got me thinking.  

As many of you may know, I am a car guy.  So, I will use a car reference.  As mentioned in the comments I left in Lenn's post:

As an example, let me offer up auto mechanics.  There is no state licensing requirement.  There is, however, a trade organization that rates their skills.  The ASE.

Now, if a mechanic makes a mistake on a fuel system or a brake system, accidents can happen, people can die (I know, it is dramatic, but it happens all of the time).  There is no state license to rebuild a brake system, or work on a car.  Sure, the systems are complicated... but they aren't impossible.  Heck, some owners work on their own cars.  

The ASE (National Institute of Automotive Service Excellence) test mechanics.  The tests are not easy.  It takes training.  It takes continuing education.  There are dealer trained mechanics that are good... and they can't pass the ASE.  Of course, there are some people that have passed the ASE that can't solve a particular problem, they aren't wizards.  

And, while real estate transactions are certainly complicated beasts, death is not a likely outcome of a mistake... but, if one makes a mistake with the anti-lock braking system of a car... well, brake failure is not a good thing. 

Do I think that real estate professional should be less qualified?

Absolutely not.  On the contrary, I think we need MORE qualification.  However, the states seem to be unwilling or unable to make that happen.  So, I think we need to make their irrelevance complete.  Here's why;

• Consumers often assume that qualifying for a real estate licenses gives a level of competence to properly conduct a transaction. 
  
• Since being a licensee entails having that competence, all licensees must be able to properly conduct a transaction.  
  

As a licensee, I know that there are others with licenses that are just as valid as mine that are just not competent.  In some cases, they don't know what they are doing.  In other cases, they don't care.  In a few cases, they know and care, but are doing it wrong on purpose... for their personal gain.  

So, if there isn't a license, like there isn't a license to work on cars, there would come a responsibility on the part of the consumer to actually look for a qualified agent.  Sure, there would be cheesy, fly by night brokerages that would pop up and not be worth the paper in their fax machines... but there are now.  

So, what would a consumer do?

Look to the organization that already says it is a collection of the best agents.  The NAR.  Of course, there would have to be a major change of mindset at the NAR for that to happen.  

• Membership would need to require more than 4 hours and a checkbook.
• They would need to focus on vetting the quality of agents, rather than just going for power through size.
• The NAR would have to let go of the local MLSs.

Right now, there are about 1.3 million REALTOR(R) members.  If the NAR required additional education and performance standards, there would be fewer.  That would mean less money and less power for the leadership (both elected and staff, as well as lobbyists).  It would be exclusionary.  Of course, that exclusion would be based solely on performance and ability.  

I think this would solve a couple of problems.  Think of the blow to the DoJ and their lawsuit if the NAR got out of the MLS business and turned these MLSs that are still operated by local associations over to non-connected concerns.  And, if the NAR membership shrank, and didn't include the VAST majority of real estate practitioners, but only the top 25%, they would certainly have a hard time coming after them in a trust-busting maneuver.  

Bottom line...

I think that real estate professionals need to be MORE qualified... and that qualification should be voluntary.  Instead of the alphabet soup that consumers don't care about behind our name, the tag REALTOR(R) should mean that we are qualified and capable... the best.  Just like knowing that the ASE patches on the sleeve of your auto tech means that he or she is fully capable of working on your ride.   

I ran across an interesting site... I don't know how... that might be of interest.

Politifact.com

It attempts to gauge the comments for and about various political candidates factually and without spin. I found that it was fair... but less than perfect. Kind like a political Snopes. However, from the limited looking I did at the ratings, they seem to be inaccurate on both sides, and don't seem to be trying to give anyone a pass.

Where they seem to fall down is with definitions. In some cases, they slice the definition pretty thin and call a statement true or not based on that. In other cases, they seem to let things slide a bit more.

But, at least they have a catchy tune...