Searchlight Crusade

One of the most common things I’m seeing as I roam about the East County looking for bargains: Agents not doing their jobs.

Now single family detached homes that are priced appropriately are selling, and for appropriate prices, even at 37 sellers per buyer. Condominiums aren’t moving unless they are brand new with lots of glitter, but appropriately priced detached homes are selling. I can find all of the evidence of this you would care to see, because I’ve already seen it. Willing buyers and willing sellers. It’s just that what an appropriate price is has shifted.

Let’s change mental gears here for a moment. Here’s the real differences between sellers markets and buyers market: Competition. Specifically, which side of the sale is competing. In seller’s markets, which is the mindset most sellers and most listing agents are still in, buyers are competing to buy the properties that are for sale. Because of this it is the buyers who have to compete to look attractive – highest offer, quickest offer, fewest contingencies. They have to offer more money or a bigger deposit or something else that the seller needs and nobody else wants to do. With the buyers market we have now, it’s the sellers who have to compete, and most of them are not doing it very well.

I want to make very clear that sellers are always competing against other sellers, even in the strongest seller’s market possible. But in a buyer’s market, it’s not enough to have your property “out there.” In a seller’s market, the prices will often catch up to unrealistic asking prices, given time. In a buyer’s market, prices are not increasing, and in this strong of a buyer’s market, they are going down. In other words, the longer it takes, the worse you look. You have to have some stand out aspect to your property. It can be physical attractiveness, or it can be low price. Price will get buyers in the door, but it takes a strong agent to sell a fixer to the average buyer, no matter how attractively priced, because the scumbag with the office down the street will show them something a little more attractive that they really cannot afford, but with a negative amortization loan, done stated income, they can make it look like they can afford the payments, and a buyer who hasn’t had this explained to them ahead of time will think they’ve just gotten the Taj Mahal for the price of a dirt floor shack, except of course, they haven’t. And the other way to stand out is to be priced the same, but more attractive. Don’t tell buyers you’ll give them a carpet allowance, replace the carpet. Don’t tell buyers that all they have to do is spend two months and $20,000 fixing it and they’ll have a property worth $20,000 more. That won’t wash in a buyer’s market, if it ever does. The party who does the work, even of engaging a contractor, gets the payoff. Why should your buyers take the risk and do all that work and spend $20,000 cash that most buyers don’t have (and cannot be part of the purchase money loan) when they can go down the street and find all of that work already done for maybe $10,000 more – or even the same price? I assure you it’s happening all over San Diego County right now. Some seller just out-competed you for that buyer’s business. The only good news for sellers is that most of your competition isn’t trying very hard yet, so small bits of competition can look very attractive.

Even lenders are still in denial for their owned properties, and they are the ones with the hardest issues of all. They must get rid of the property. They don’t have any choice. Even if it was in the same shape as surrounding properties – which it rarely is – they have a deadline to get rid of that property, and everyone knows it. They also have other constraints that other sellers do not. These make the property worth less, as they rule out certain buyers and make others less willing. In a buyer’s market, every buyer counts. I had two clients putting in offers on different lender owned fixers in the last two weeks. One might comp out at the asking price of $450,000 if it wasn’t lender owned – which automatically makes it worth about ten percent less than the comps. Add the fact that it’s an ugly fixer that would be worth maybe $400,000 at most if it wasn’t lender owned, and they will be extremely lucky to see $360,000 out of it. Not supposition, not guesswork, fact. The fact is that there’s a beautiful owner occupied comparable on the same block asking $459,000. It’s even a bit larger. There is no doubt in my mind whatsoever that the beautiful comparable would take $450,000. Actually, I just checked again and the beautiful comparable is in escrow now. One owner that competed well, one that is not competing well. I told the agent for the lender’s fixer this, and she said, “I’ve been in this business forty years and I know what I can get for that property!” I offered to bet her $10 she couldn’t close escrow on it within ninety days for over $390,000 net – essentially a zero risk bet from my point of view. From hers also, if she thought the property was really worth more. She wouldn’t take me up on it. Furthermore, she’s violating her fiduciary duty by not explaining this to her client. Doesn’t matter how long she’s been in the business. What matters is whether she reacts well to this market.

About five miles away, another lender owned fixer asking $480,000 because that’s what the lender is on the hook for. And you know, it is a better neighborhood. Unfortunately for them, just because you were silly enough to lend them that much two years ago when the market was peaking doesn’t mean someone else will pay you that much for it now when the market is in the tank. What matters is the comparable properties, and there’s one just around the corner that anyone would rather have listing for $470,000. Above par house for a below par price. Hasn’t gone into escrow yet, but it will go fairly soon, unless someone else lists a better property cheaper, and they might even get a little bit of a bidding feud on it, despite the strong buyer’s market. This lender owned fixer is in rotten shape and has several issues that turn the average buyer off. I initially thought my client’s offer was lower than it should have been, but the more I thought about, the more I think my client came closer to the mark than I did initially. Horrible floor plan, necessitating major work to make it attractive. Yard not suitable for children, despite the fact that there’s a school on the same block that the agent is using as a “come-on”. These people will be lucky to get anything over $350,000 for it, but the agent sent me a blanket, “Anything less than $400,000 will be rejected without counter,” despite the fact that I explained how much work it will be to bring it up to the neighborhood standard. I left her some messages, and she didn’t respond. The implication to me was clear: She is in denial, and doesn’t want to hear plain facts explained. She’s got dozens of REO listings – maybe because she was a great bargainer in seller’s markets, maybe because she knows someone, maybe some other unknown factor. She’s not dealing well with this market. I don’t know if she doesn’t know market conditions or just acts like she doesn’t. If nobody puts an offer in good enough to get past the blanket rejection, it doesn’t make much difference, does it?

This the times when good listing agents really earn their money, as the gentleman listing the $470,000 comparable is. It may not be the great publicity of getting the highest price ever in the neighborhood, but getting it sold quick and for something like asking price in this market is a real achievement. Especially with as many distress situations as are out there – people that have to sell, for one reason or another. (I’m doing very well for my buyer clients, but it’s depth-charging fish in a barrel. You really find out how good someone is when the market favors the other side of the transaction.) There are dozens of FSBO and discounter listed properties in the neighborhood, sitting on the market for months. The last six months of Canceled, Withdrawn, and especially the Expired sections of MLS have all that and more, but that one property is going to sell quickly, and sell for a good price. That agent has already earned every penny he will get paid, and it isn’t even in escrow yet.

The person who “buys” listings, telling the people that they can get them more money than anyone else, more money than the market will support, had a nice long run. When prices are moving up strongly and there aren’t many houses to be had and everyone wants one, well a monkey could sell that house at that price given enough time, because given a few months the market will catch up to all but the most egregious of overpricing.

That is not the way things are now. Buyers have all the power, and they know it, because buyer’s specialists like me have told them if nothing else. Inventory is over nine months worth of sales at the current pace, more properties are coming on the market and the worst time of year for sales is approaching. Given these facts, What do you think is going to happen? Where do you think the market is headed, at least in the short term?

(and incidentally, what kind of bargains do you think those few buyers willing to get off the sidelines can drive?)

The longer listing agents wait to talk some sense into their sellers, the worse it’s going to be. The more days on market, the further the market falls, the more the sellers will have to move to meet it – and the more unhappy they will be with their listing agents. The agents I respect will refuse a listing rather than ask for a price they aren’t going to get except by freak coincidence. They get the same no transaction either way, but if they refuse the listing, they haven’t created unreasonable expectations, they haven’t failed to live up to those expectations, and neither party has wasted months finding out what that agent should have known in the first place.

Now, I’ve seen agents telling people that because interest rates have stabilized or even moved down, that will revive the market. This is complete and utter nonsense. I initially wrote something stronger, but my internal censor really wants to keep this family friendly. Yes, payments drive the market – when it’s a seller’s market. Buyer’s markets are driven by the bottom line, because there are lots of sellers and only a few buyers and if this seller won’t cut them a deal, the one down the block who is a little more motivated will. When every listing gets three offers within a week and buyers are getting desperate, they’ll bite off on another $1000, $5000, or $10000 because “It’s only $10 (or $50 or $100) more on the payment. They shouldn’t, but they will. When buyers have the power and they know it, they’ll tell the sellers to pay that $10 per month, because they’re not paying the extra in the first place. It is the sign of someone who does not understand supply and demand to think otherwise, and I certainly wouldn’t want that sort of numbwit as my agent. Your agent is your expert. If they are not an expert, why are you hiring them?

Now, looking forward. What’s going to break the logjam and get the market moving? Well, absent sudden 25% inflation or something else equally unlikely, the current market has the effect of adding to inventory while those who can afford not to sell drop off. We’ve had over a year of this now, and a lot of would be sellers have discovered that they don’t have to sell. They can stay in the home, or they can rent it out or let some family members use it. The ones left are looking an awful lot like a listing interview I helped another agent with today. Negative Amortization loan, darned near a $4500 real monthly cash flow requirement, equity all gone, and the comparable rentals are all around $1800 per month. There is no way on earth these people are coming away with any money, and the longer it goes the worse it will get, but he said another agent told him they could get an amount that’s at least $60,000 over market, just by comparable listing prices, never mind what they’re actually going to get an offer for. No, he didn’t sign up with us, quite predictably. He’s been told what he wants to believe, and this other agent is going to put him another $10,000 or $20,000 in the hole, and nobody would be happier than me if that other agent had a liability for what they’re going to do to this client.

So with more people that have stronger reasons to sell, very large inventory with more coming onto the market, and buyers quite aware that they have a level of power they haven’t seen in over a decade, what’s going to have to happen in order to change this? Basically, that inventory is going to have to clear. It can go one of three ways: the owner finds an acceptable alternative (increasingly unlikely), the owner decides to get serious about competing for a buyer’s business, or the lender takes it over. I’ve mentioned that the lenders are evidently still in denial, but they have legal requirements to dispose of those properties within a certain amount of time. The closer they get to that time expiring, the more desperate they’ll get. Once the regulators climb onto that lender’s back, they don’t climb off cheaply, nor easily. Quite frankly, if I were a major lender, I’d take the entire thing as a write off if someone offered me a dollar any time in the last week, and I think some lender’s listing agents are going to have rude awakenings before this is all over. I’m strongly considering sending my agent’s resume out to some lenders. But my real point is this: Sellers can compete on the individual level any time they want to, and the sooner they want to, the better off that individual is likely to be. Eventually, the seller’s aggregate is going to have to compete much harder for the business of the buyers that are out there, and for the buyers they want to lure off the sidelines. It took a long time to sink in, but the fact has sunken in to prospective buyers that the market got overextended. You can ameliorate your expectations and come out as well as possible, you can hope for the bigger fool of a bygone day, or you can take it off the market, if you have a sustainable situation. There aren’t a lot of sellers with sustainable situations out there right now.

One word about rapacious buyers before I go. I know I’ve said you’ve got the power. But if you or your agent has done your homework, when you settle upon a property that you’re going to make an offer on, that usually means it’s more attractive to you for the money than anything else. There is a strong temptation, given the current market, to low-ball just a little too hard. Don’t do it. Everything I’ve said about unrealistic sellers ending up with no transaction applies to you also, albeit less strongly. There is a point below which every seller out there will tell you to take a hike, no matter how desperate they are. If they owe $350,000 altogether on a $450,000 property, sure, they could it to you and be out from under at $350,000, but the vast majority of folks will see that you want every last penny of the equity they thought they had, and they’re going to tell you to do something rude, vulgar, and otherwise unprintable in a family friendly format. They will lose the house outright, and take major long term hits to their credit, before they do that. In this case, you end up with what the unrealistic seller gets: Nothing. Exactly how much should you bid? Ah, that’s part of the Art of Buyer’s Agent-Fu. In other words, it varies, and it takes more information – sometimes a lot more information – before I can give a good answer in a specific situation. The answer is never guaranteed, which is why it’s an art, not a science. But I can guarantee you’ll find out about the downsides of poisoning the well in this fashion if you step over that ill-defined line.

Caveat Emptor

I sold my house in (state) in august 2001 I hired a title attorney whose (local company X) acted as a agent for (national company Y). The facts are that there were errors and omissions which led to negligence in the performance at the closing of the property. The property taxes for the year 2000 were not paid. The title company did not do their duty and gave clear title to the buyer. Now, more than 5 years later Company Y is claiming I owe them these back taxes plus accrued costs. I would kindly appreciate some feedback

Yes, you owe the money.

The title insurance policy you bought insures the person who bought the property. Property taxes are part and parcel of all land ownership. A reasonable person should have paid those taxes. But they didn’t get paid.

This doesn’t mean that someone didn’t screw up. Every title search needs to include a search for unpaid liens that includes property taxes. That’s just the facts of the matter.

However, this does not relieve you of your duty to pay those taxes in full and on time. If it was an obscure mechanics lien recorded against your property for erroneously for work that was never done, you’d have a great case. If it was for stuff that you paid, and had reason to think you paid in full even though you were short, you might have a case. But not stuff that every reasonable property owner knows has to be paid, and didn’t get paid at all.

Let us consider what would have happened if you still owned the property. The county would be sending a law enforcement official around with delinquency notices, which would include interest and penalties for late payment. If those weren’t paid, they’d send law enforcement around another time with a tax foreclosure sale notice. You would have to pay those taxes.

It’s no different because you sold. Because it’s a valid existing lien on the property, albeit one they missed during title search, they paid it to clear the buyer’s title, as the policy requires them to do. On the other hand, when an insurance company pays a bill like this, and title insurance is insurance, they acquire the right to collect payment via subrogation. This fancy word just means they paid the damage on behalf of someone, and now they have the right to collect payment, just like auto insurers who pay for the damage to your vehicle and go sue the party at fault, for which that person’s liability insurer usually pays. The person with the liability to pay that property tax bill is you. Now, I’m not an attorney, so I don’t know, but there might be a case you can build against the person who did the title search for the interest and penalties that have accrued since the search. Before that, the bill was all yours, and given that it was for 2000, should have been paid before August 2001. On the other hand, that title company might not have had a duty of care to you, despite the fact that you were the one who paid the bill, as the insured was your buyer, not you. Furthermore, the cost of paying the attorney can often go to several times the cost of paying the taxes and penalties. You’d need to, you know, talk to an attorney for more information. You might want to call company Y and ask if they’ll settle for the bill as of the sale date, because they don’t want to pay for an attorney any more than you do, and they did screw up, and if they hadn’t, you would have paid the bill back then, right? Company Y can then recover the balance from their agent, company X.

Any lien that exists before the sale, discovered or not, is your responsibility. The only time that I think you are going to get off the hook is if you are dead and your estate probated and distributed before the lien is discovered. Basically, you’ve got to die to get away with it. Perhaps intervening bankruptcy might do it as well. I don’t think so, but I’m not a lawyer. If you had died, the title company would still have paid, as the policy requires to protect the buyer, but would have had no choice but to eat whatever amount they paid, because there would be nobody alive who they would have a valid claim against.

Caveat Emptor.

I saw your article on on Searchlight Crusade about exclusive buyers agents and I have a couple follow up questions pertaining to my own situation that I am hoping you could shed some light on. I don’t have any buyers agent (currently). However I have spotted 2 houses in an area that I think I would like to make an offer on. Both of these houses are listed by real estate agents. I am obviously eager to save as much money as I can and think it would be great to try and save on the agent undefined if at all possible (I have bought FSBO before, so I am familiar with the process and I don’t see much value add with an agent since I have already found the properties). However I just don’t get it – if I make an offer on the property by working with the sellers agent then the sellers agent gets both commissions? Is there a way to just take the buyers agent commission off the sales price? If there isn’t then I guess there is no reason not to go and find a buyers agent to assist me? Seems like a waste of money. I have found an buyers agent that who said he will give me 50% of the commission if I sign an exclusive buyers agent contract with him however I am worried that my hands are tied if I don’t end up purchasing one of these properties I have already identified (ie I could end up paying 1/2 his typical commission if I found a FSBO). Any insight you could provide would be of great help – I love reading your stuff. Thanks,

The first thing I need to clear up here is the nature of listing agreements. The standard listing contract form gives the listing agent the full commission for both buying and selling, and if someone other than them represents the buyer, then they agree to pay the buyer’s agent a portion of that. If there is no buyer’s agent, they keep it. Since you have to make your offer through the listing agent, the listing agent gets that commission, and that is as it should be. Note that I believe it is stupid to act as agent for both parties in the same transaction because seller’s interests and buyer’s interests are often at impasse, and when you’re acting as agent for both sides, there are many potential issues which, if they happen, are lawsuit material one way or the other no matter what the agent does. If I find a buyer for my own listing, I’ll find another agent I trust to do a good job or have them sign a non-agency agreement, and that way there is no conflict of interest. But greed is a powerful motivator, as you yourself are illustrating. The fact is that if the listing agent wants the full commission, they will probably end up with it, and justifiably so, as they found the owner a buyer, didn’t they? That’s what the contract says the seller’s commission is for. You saw their sign, you saw the house they listed, you made an offer through them, the house got sold through their efforts. According to the terms of the listing contract, they found you, whether you realized it before now or not. The buyer’s agent commission is for an agent who has a buyer who sells them that property, as opposed to the one down the street.

Many agents make side agreements to rebate part of their commission in certain circumstances. But that potential rebate contract in this case is with the seller, not you, and is none of your business. Unless the agent has a release to discuss it with you in writing, they are violating confidentiality to do so. The seller may sell to you cheaper because of such a clause, but they are under no obligation to do so.

Now before you dismiss this with, “That’s Stupid!” or something worse, because it appears that things are stacked to cost you money, consider that this has evolved over many years as the best and cheapest way to preserve everybody’s best interests. Without these forms, there would be a lot more lawsuits filed over commissions, with the side effect that the lawyers get rich, and the money ends up getting paid anyway on top of the lawyer’s fees. The listing agent commission is partially a hold over from the old single listing days of half a century ago. Over time, the buyer’s agent commission evolved as a way to open the system up, so that homes sold faster and those agents and offices without a large, pre-built client base could break into the business. But it’s still intentionally structured that way as a way to motivate that listing agent to advertise the property far and wide and especially in all of the most effective venues. It costs money for that sign in the yard. It costs money for MLS access. It costs money for advertisements in the paper. It costs money for all the trappings that enabled someone to go find that agent and list the property in the first place. It costs that agent money just to stay in business whether they have any clients or not. It costs the agent money for the advertising to attract clients in the first place. And chances are, if they hadn’t spent that money, you wouldn’t have found that property, and the owner wouldn’t have sold it. Consider also the liability issue, which is huge and real. Are you volunteering to give up any legal rights for a complaint? Didn’t think so. Which means they have to go through all of the disclosures, and they’re still liable if they make a mistake. How many people do you know that do major work in their occupation for free, even though they’re still going to be liable for potentially hundreds of thousands of dollars if something isn’t perfect?

People think agents are making money hand over fist, when the reality is that unless they’re putting in the long hours and hard work to make multiple transactions happen every month, they’re just barely scraping by. Most of the successful agents I know put in sixty hours or more per week, and if they are putting in less than forty, I’ll bet money on no other data that they’ll be out of business in a year. This is not a cheap business to be in, or an easy one. I don’t blame you for wanting to economize – it is a lot of money. If you don’t think about what it’s getting you, and what you’re getting, and what agents are giving you, and the liability they’re assuming, and what they have to spend to stay in business, and you just look at the check the brokerage is getting, it seems like a lot of money.

Put yourself in the shoes of a seller. You have a property, but you want cash. Real estate is not liquid, a property interchangeable with billions of other shares in Planet Earth that you can call a broker and sell over the phone because there’s a ready market for shares in Planet Earth which are all interchangeable. Instead, each and every property is unique. This means it is bought and sold on the basis of those unique individual characteristics. You want results, you want your property sold for the highest possible price, you don’t want it coming back to haunt you if there was something wrong you didn’t know about, and it costs money and it takes work to make buyers want to buy your property.

Sometimes the agent gets lucky of the market is hot and it sells quick. Sometimes the agent works hard – and they really do work – for months with no offers despite all of it. There are times where a monkey could have sold a residential property within a week for more than the asking price, and there are times when no matter how good the agent is, you still need luck. This requires an adjustment in thinking if you’re going to do well. Average total commission paid is up locally in the last few months, from five to six percent. Particularly in a rough market, if the seller tries to sell it themselves, it will statistically take longer, and they will statistically net less money from the sale, not to mention what they spent on the property in the meantime. Some few get lucky. People win lotteries and casino jackpots, too. Betting that you’ll be one of them is a sucker’s game. Any number of studies and statistics show this fact, and many brokers make a good living buying FSBOs to then resell for a hefty profit. The last broker I worked for is one example. In one month, we sold four properties he bought from FSBOs, all for a substantial profit, even in a down market. Sellers tried to think like you do, and it cost them over $150,000 net of commissions, and these were all fairly quick sales. Had we tried harder to get maximum value for his money, we could likely have gotten more, but he’s not complaining.

Before we go any further, let’s look at what a buyer’s agent really does. It isn’t just pop you into the house and watch you wander around. While you’re oohing and aging over the beautiful kitchen and the brand new carpet, I’m looking for foundation cracks. I’m analyzing floor plan. I’m looking at location and real condition of the structure and how good a design the property is and whether I can see issues that are going to cost you money down the road and considering eventual resale value and comparing it to other nearby properties I’ve seen. I have talked buyers out of superficially attractive properties on each and every one of those points in the last month or so, saving them a lot of money and headache down the road. The listing agent is working for the seller, and it would be a violation of fiduciary duty for them to say anything about any of these negatives.

Now, with that said, let’s look at your current situation. I’ve already covered the fact that the listing agent is entitled to that commission. Now let’s put you on the other side of the table from a guy whose responsibility it is to get the best possible price for the property, and his commission depends upon how good a job he does. He does this constantly, for a living. He’s set up with information to ensure that he gets the highest price. It’s cost effective for him, in a way that it isn’t if you aren’t doing it constantly. Betting that you’re better at his profession than he is would be like him betting he’s better at your profession than you are. My money is on “you end up paying more than you have to.”

Here’s a dead giveaway that an agent’s job is trickier than you think it is: That you’re even talking about an exclusive buyer’s agent contract in this situation. So long as you already have the property in mind, there is comparatively little risk and a lesser amount of work for him in the situation. He’s not going to have to drive you around to four million properties over the next twelve months to maybe find one you want. This is a buyer’s agent’s dream situation – cut straight to the bargaining, without any of the preliminary work that takes so long. If this one falls through, he can either look for more or blow you off, depending upon what he has time for. Offer him a general non-exclusive buyer’s agent agreement with a fifty percent rebate if you find the property yourself, as you did in this situation. This motivates him to do his best bargaining and looking out for your interests without sabotaging the transaction. If this one falls apart, he’s still got motivation to find you something on your terms, and you’re not bound to him unless he introduces you to the property or you use him for negotiations, etcetera. You get a negotiator who knows your market and should know most of the tricks and is working on your behalf, and if this one falls through you have someone who’s motivated to find your something with better tools and more relevant skills at his disposal than you have. He gets a commission which, if smaller, is also easier and walked its own self in the door rather than him having to go out and spend time and money to drag it in. Everybody wins. If he won’t do it, find someone else in your area who will.

(Before anybody asks, I don’t propose client contracts that I wouldn’t accept)

Caveat Emptor