Libertarians and the Art Of Politics

(Originally written in 2005. Still valid)

Of all the political parties, my personal sympathies lie closest to the official platform of the Libertarian Party. Nonetheless, I have never been a registered Libertarian, never sent them money, and likely never will.

The Libertarian Party, you see, is primarily interested in ideological purity. They’ve been hijacked by those among the most extreme of all libertarians, and have consistently taken an “all or nothing” approach to politics. If you’re not for the purists ideological position, you don’t belong.

This is a good way to marginalize yourself, and indeed, the Libertarian Party has done just that. Their candidates consistently run somewhere in the mid single digits. You tell each other you’re “fighting the good fight” and congratulate yourself when everybody is disgusted enough with the major parties that you get 8 percent of the vote. This is a great way to keep the faithful together, but a truly awful way to move things in your direction politically. The impact on the political process of the Libertarian Party is basically zero. The majors may be aware that the Libertarians exist, but with all the libertarians off doing their own thing and no observable effect upon which of the two major parties wins, they have no reason to care.

Other groups no larger than the Libertarian Party wield an outsize political influence. For instance, the bisexual and homosexual political groups have a base that, depending upon who does the counting, runs from three to five percent of the electorate, but angering this constituency is something no politician does lightly. Why? They may be more affluent than average, but not notably so, and probably no more so than Libertarians. Well, they do give money, while libertarians are not noted for their generosity towards other parties’ politicians. But mostly, because they engage the major parties. They practically own the Democrats, but they have a lot of influence in Republican circles as well. More to the point, for a long time they have worked to earn political capital from the majors. For years, they endorsed – and worked for – any candidate who was less unfriendly to their issues than their major opposition, graduating to working harder for candidates that were actually friendly, to the point now where the issue is not usually which candidate is friendly to gay issues, but which candidate is friendlier. It was a long hard slog for them, and perhaps they’ve abused their power a little of late, but you have to respect and admire them for what they have accomplished. They have taught politicians nationwide that “gay-bashing” is hazardous to their political ambitions, while being “gay friendly” is conducive. They may not be a major block, but given how narrow many victories are, they are a critical one, including and especially if a major party wants control of the legislature. Three points away from your opposition’s candidate and towards yours might not tip every race, but it will tip enough such that if you’re competitive in the first place, you’ll win it. But in order to do it, you have to work with the major parties.

This is the lesson that libertarians need to learn if they want to have an effect on national policy. It may be very gratifying to a certain mindset to keep your ideals so pure that there is no chance of any actual effect upon the course of the country. But if you focus less on getting into office yourself, and more on rewarding politicians who come closer to your positions than their opposition, you wield more real power. Eight percent is a joke in an election, if that’s all you get. But the difference between forty-six and fifty-four percent is the difference between going back to your old career and going to the capitol. Newly elected legislators are known to be grateful to those who put them “over the top,” and to want to keep those folks on the list of people that are happy with them.

Furthermore, a lot of ordinary citizens really like moderate libertarian positions, but are profoundly uneasy with “purist” libertarians. Ronald Reagan’s coalition made smaller government one of their principal planks, and it won on two of the strongest electoral margins in living memory. Decriminalizing or legalizing marijuana polls very strong numbers, but change the question to “should every currently illegal drug be legalized?” and the vast majority will turn against you. The rational, obvious thing to do is take the easy victory, and see how it works out. In a few years, it may be that the electorate will support legalizing the next echelon of currently illegal drugs, and dropping restrictions on marginal cases. This also has the advantage that if it turns out that we’re wrong, we find out about it before we’ve got thirty million heroin junkies and fifty million cocaine addicts.

Indeed, true libertarian policies have never been tried on anything like the scale of the United States, so incremental steps in that direction is likely to be a good thing. Libertarian politics and economics and social science sure looks good on paper, but so does communism. One of the major things wrong with communism, it seems, is that it requires communists to acquire power. All the power, to where there is no opposition force with enough power to restrain them. And that following communists acquisition of power, they insisted upon an immediate and as radical shift as they could possibly manage, with the results anyone who hasn’t been living in a bubble these past eighty years is all too familiar with. It didn’t work, but the communist rulers would not admit it, and no one inside the system could force them to. I can hear people snorting with derision about the very notion of libertarians practicing censorship and coercion, but are you prepared to bet the future of the United States on it? Especially when there is no necessity, that’s a sucker bet – a pointless risk where you could lose but can’t really win because there is nothing to gain by giving any group a monopoly on power.

I see nothing in any major libertarian-backed policy that requires an “all or nothing” approach. Indeed, for most of them an experimental movement in that direction, intentionally either limited in scope or in accomplishment, would be important confirmation of libertarian theory, assuming it is successful. There is clearly not adequate evidence to presume that no further experimental proof is necessary, and that libertarian theory must be implemented in full without further error checking.

In short, I could be wrong. We could be wrong. If so, incrementalism will reveal it.

Therefore, there is no rational reason for libertarians not to engage with anybody “going their way”. Small government republicans and chamber of commerce republicans on one hand, and civil rights democratic groups on the other. Whichever politician, whichever major party, is willing to give more precedence and importance to libertarian values. Work with them, do your best to help them beat their opponent. Once upon a time, libertarians wielded significant power in this way. Indeed, I happen to believe that the statist ascendancy dates from the libertarian self-destruction as a potent political force. The country could only benefit from a libertarian return to the fold of the major parties.

Jihad versus Hirabah

Enrevanche sent me an email about a Chapomatic article and his own response on the distinction between Jihad (or “holy war”, a name for war in the name of religion), and hirabah, which to quote

The term hirabah refers to public terrorism in a war against society and civilization. In legal terminology it is defined as “spreading mischief in the land,” but its precise meaning, as defined by Professor Khalid Abou el Fadl, is “killing by stealth and targeting a defenseless victim in a way intended to cause terror in society.”

Well, I see the distinction, and the fact that so-called “moderate” islamics are starting to see and acknowledge the distinction is something of a good sign. But it is something to note that Chapomatic’s source is something of a fixture in the foreign policy community himself, and while railing against the foreign policy apparachtniks accommodation-ism, may thus himself be looking for a more accommodationist way than is truly appropriate.

I do not, and can not agree that it is ever appropriate to kill or commit violence in the name of religion. Period. End of Sentence. The whole concept is something that needs to become socially unacceptable worldwide. This may seem like a meme of intolerance on my part, and to a certain extent, it may even be correct. Nonetheless it is no more morally equivalent to the idea of killing or violence in the name of religion than those who resisted Attila the Hun were morally equivalent to him in that they believed in the use of violence to defend themselves against rape, pillage, and vandalism. Had Attila not assaulted the world, there would have been no need and no real desire to use violence against him and his people.

With this said, I find the concept of differentiating the two, as opposed to not, to be about as acceptable as the Mensheviks – marginally less bad than the Bolsheviks, but still a rotten, poisonous idea at the core. If the choice is that I must accept those who believe hirabah is distinct from jihad, or simply accept jihad as a permanent world idea, I’ll take the former. But neither has any component that is desirable, and jihad itself is an abominable idea.

The idea that it is acceptable to kill, to commit violence, or even to use force in the name of religion is part of what we are fighting here. And I mean nobody should be allowed any kind of illusion that it is acceptable in any way, shape or form. Not Atheists, not Christians, not Hindus, not Buddhists, not Jews, not anybody. (Actually, the Buddhists and especially the Jews have an excellent record of not doing so, at least within a longer time frame than other major religions**.) You can drag your minor children to worship if you so desire, but that’s the utter limit of what I’m willing to accept. Faith, by definition, is not subject to proof, scientific evidence, or any such. Faith must come from within, or it ceases to be faith and becomes a straightjacket. If your adult children wish to leave the faith, they must be free to do so and still be members of your society. Anything less takes us back at least to the Thirty Years War, if not all the way to the Dark Ages in Europe, where priests and kings all over Europe fought over who was to rule and who merely to reign. Every other world religion has come to terms with this philosophically. Islam, which otherwise has many admirable qualities to it, has not. It is this failure which we are fighting right now. When it is remedied, if it is ever remedied, the rest of the (current) terrorist problem will solve itself quickly.

(While I’m talking to their points, I also want to mention in passing the term “splodeydope” which both Chapomatic and Enrevanche use. I generally approve of it. I haven’t done any research but seem to recall something about the suicide bomber’s genesis in that the original suicide bombers were actually camels, and it was only later that they were replaced by humans for a variety of reasons. But splodeydope conveys contempt, derision, and all of the other suitable connotations, as well as a denotation sufficient unto the task of accurately describing the function. In conversation, I’ve never been asked to define it by anyone who had previously not encountered it, and I’ve caused several people to laugh significantly by its use, thus causing me to believe that they had not previously encountered it. I’ve confirmed it in a couple of cases. So it passes an intuition test as well. And I believe I first remember hearing it in the 1980s or early 1990s, so where LGF may have been instrumental in its spread, it’s much older than that)

UPDATE: A Commenter was confused as to what I was saying, and I see why, and so I edited. Original wording of starred paragraph:

With this said, I find the concept of Hirabah to be about as acceptable as the Mensheviks – marginally less bad than the Bolsheviks, but still a rotten, poisonous idea at the core. If the choice is that I must accept those who believe hirabah is distinct from jihad, or simply accept jihad as a permanent world idea, I’ll take the former. But neither has any component that is desirable.

**Also added the words “at least within a longer time frame than other major religions” to the succeeding paragraph

Improving your Credit Score and Tradelines

Working with a borrower all day today. Truly ugly situation because he doesn’t have a long history of credit, and this is the major obstacle to getting the loan done. He actually makes the money, and has a sufficient history of making the money to justify the loan “full documentation”. But: He only has one usable line of credit, and it is only 9 months old. Most lenders require a minimum of three tradelines, at least one of which must be open for 24 months.

On the other hand, there exists a method to help this person. What he is going to do is approach close relatives with long term stable, paid up lines of credit, and ask if he can be added to one of their revolving accounts as a co-user. He does not have to get a charge card, or actual access to the account, he just needs to be added to the account as a co-borrower, and he will get the benefit of however long the trade-line has been open. He doesn’t even have to know the account number (and the credit report omits several digits, so he doesn’t get it there, either).

This has two effects. First, he will get the benefit of the length of the trade lines, and second, he will get the benefit of the tradelines being paid promptly and on time for however long. Preferably, these are low limit and low to zero balance accounts, because he will be dinged for any necessary payments on his debt-to-income ratio. But it will likely raise his credit score significantly (I would guesstimate at least sixty points) by giving him a several year history of on-time payments, as well as giving him an adequate history of tradelines.

Nor is this fraudulent in any way, shape or form. This is being done in full consultation with the lender. The lender has been notified in writing and approved of this. It may seem like I’m always going off about fraud, but in this case something that may appear a little shady actually turns out to be something that both the bank and the regulators can live with. So if you’re thinking that loans are always about NO NO NO, here’s a very strong YES to go along with it.

Caveat Emptor

Buying One Property While Selling Another

Most people don’t stay in their first house their whole life. At some point, they want to move to a different home.

There are several ways to approach the transaction, but you have to decide which way fits you. You can approach it with an idea to maximizing profit, maximizing cash flow, maximizing speed, minimizing stress, or minimizing inconvenience. You really only get to choose one, but it’s a good idea to rank them from most important to least important so that both you and your agent know where your priorities lie, and perhaps you can do some things from your lesser priorities.

If this was a commercial site, looking to seduce you into listing with me, I’d probably have some corporate salespeak flack telling me to say you can have it all, but instead I’m going to tell you the blunt truth: You can’t, not reliably, and any representation to the contrary is a lie, the words of a fool, or both. You can certainly do things in each of the categories (and others) but if you don’t go into the transaction with a clear view of what is most important to you, chances are you won’t get whatever it is that is important to you. Some people do luck out, especially in hot markets, but when the market is cooler, the fact is that you take what you can get, and the probability is better that you will get what is most important if you decide what is most important and stick to it.

If you choose to maximize profit, move out of the old property and into a rental unit, and make whatever cosmetic alterations you’re planning before the property hits the market. Newly renovated vacant units show better, and therefore sell better, than anything else. Your time of highest interest is typically for the time period immediately after it hits the multiple listing service. Particularly if you have pets or children, who are both highly efficient entropy generators, you want to move out if you can afford to. Since this is very costly in terms of cash flow, many cannot afford it. Nonetheless, in most markets under most conditions, the return you will get will repay your investment, as there are few obstacles and conditions to your prospective buyer moving in as soon as they can consummate the sale. Furthermore, because the property is vacant, they can more easily picture themselves living in it. Ask any artist which is easier to work with – a blank canvas, or one that already has a painting on it? Then consider that the average buyer has the imagination of a rock, which is why properties with just a little more oomph are much easier to sell. The less of your family there is in the property, the more potential buyers can picture theirs in it.

Staying in the property causes not only stress from whether the property is clean enough to show every day, but also from prospective buyers and their agents having both a window of observation on your life and the potential opportunity to debark with some material piece. I imagine it happens, but not nearly so much as to warrant the stress sellers put themselves through on this point. As an agent, I’m always aware that my good name is on the line as well, and I’m always watching prospective buyers, even though I’ve never had anyone attempt to remove anything (that I’m aware of). Nonetheless, many sellers insist upon being physically present, which often has the effect of chasing people away that I, as the agent, could have sold the property to given a freer hand. Given real estate practicalities, your concern over a couple of $15 CDs that might have potentially wandered off could have just cost you tens of thousands. So if you’re concerned, move anything valuable or irreplaceable like jewelry and heirlooms out, and resign yourself to replacing anything remaining. You’ll likely come out ahead in the end.

If you’re looking to maximize speed, moving out is a good idea also, but you’re also going to want to price your property significantly lower. The higher the price, the harder it is to sell the property, the fewer people that can be expected to look at it, and the harder it will be for them to qualify. If you’re priced 5 percent above anything comparable, the appraisal probably going to come in lower than the sale price, and not many people want to pay a premium for a property. It’s going to take longer to sell. If you’re priced a tad below the comparables, however, well everyone wants to buy homes with some built in equity, and the bank sees their loan as being less risky, so it’s a little easier to qualify (They’re still going to stick with the LCM principle, but from experience, they’re less sticky about the little stuff if the appraisal is a little above the price).

If you’re concerned about cash flow, on the other hand, moving out is not the way to go about things. For one thing, you don’t have the money, or if you do, you’re going into stress mode about whether some short deadline is going to be met, which can cause you to be forced to accept an awful deal that you would not otherwise have considered because you’re running out of money to pay for all the extra stuff you weren’t paying for before. If you think ahead, and make your agent aware of your concerns, you’ve got a better chance to come out ahead in the end.

Suppose your priority is to minimize stress? Then you typically stay put while researching other properties, and ask for a contingent sale, possibly with a leaseback that gives you a certain amount of time to find alternative lodgings. Alternatively, if cash flow isn’t an issue, you might start looking right away, either with or without a “bridge loan” (cash out against your current property, as a down payment on the new one). Bridge loans are great, they are wonderful, they can do all sorts of things for you, but they are aren’t cheap. Before you do one, consider whether there is a real need. If you have some cash and are a good credit risk, the better option may be to borrow more against the new property. Perhaps the better option is to split finance the new property and pay off the second loan on the new property when the current property sells. Because “bridege loans” are cash out refinances, then all things being equal, it’s probably a better idea to get the money through a purchase money loan. It’s even possible (albeit rare) that despite paying for two loans, the math may favor getting some money via a bridge loan, and borrowing the rest through the purchase loan on the new property.

If you want to minimize inconvenience, you probably want to stay in the property until it sells, and quite probably for a while thereafter, so you’re going to want a short term leaseback as a condition of the sale. Many people do this to avoid moving the kids out of school in the middle of an academic year. If they’re staying, it also gives them some time to find another property in the same district, or even that attends the same school. But here again, remember that you’re limiting your buyer’s options, which has the effect of possibly scaring off the ones who would otherwise have offered you the best price, or causing them to not be willing to pay so much for it (“Darn it, my kids are in the middle of a school year, too!”) If it’s a buyer’s market, you’re likely to pay a certain price – or rather, your buyers are likely to be willing to pay less – but if it’s worth it to you, you also get what you pay for.

There are other potential factors, certainly, and other strategies to maximize the blend of “goods” that’s best for you. But these are the ones that most people need to think about ahead of time, and these are the ones where failing to consider them ahead of time will reliably cost you the most.

Caveat Emptor

Surveillance – Should it be Illegal?

Balloon Juice has a piece on how you can get anyone’s phone records for just over $100. And this evidently surprises not only him but the place he got it. Since the 1970s, the technology has existed to monitor every conversation in any room that has windows from basically any distance. The great defenses have been anonymity (why should anyone care about this), expense (it wasn’t cheap) and processing power (somebody had to actually listen to all the garbage in order to extract any jewels). With modern programming, computers can take the place of human listeners at the first filtering, it’s becoming cheap enough such that most folks can afford to plant bugs in dozens of locations if they want to, and with it so cheap, anybody is a potential target.

The same thing goes with cameras. If it’s worth it to me, I can monitor anything you do from anywhere that is visible from public spaces, and most of the ones that aren’t. Credit reports (the social is both login and password, and anyone can find it out if they’re motivated enough). Any other information you’d care to name.

There is no defense. Not de facto, not really de jure. Outside of some pretty campy science fiction (the original Thunderbirds) I haven’t seen anyone seriously propose any kind of detector for this. Failing that, the only way to stop it is nearly microscopic level sweeps of surrounding terrain on a continuing basis. And it’s difficult to prove it belongs to anyone in particular.

Given this, there are essentially two options for individuals. Live in denial until you’re caught, as happened to Congressman Cunningham. Or don’t do anything such that you’d care if it was on page one of every newspaper and the lead of every newscast for a week.

Now, if there is one thing that everyone should have learned from recent celebrity trials, it’s how difficult it is to convict anyone with resources (money) of anything substantial. Given this, making it illegal to spy means that the powerful and wealthy can spy on the less powerful and wealthy, but that the average person could not spy on the powerful and/or wealthy.

I find this idea intolerable.

So we arrive by process of elimination at the conclusion that we need to make all of this specifically legal.

What we gain from this step is also non-trivial. Identity thieves are nailed much sooner. Criminals of every real sort find it much more difficult to ply their trade when they can be captured on film at any moment. The powerful, who would be especially scrutinized, learn to live clean or live poor or live in prison. Yeah, there would be “Exclusive pictures of Congressional orgy!” in all the tabloids. We’re all free not to purchase them, and the fact they undergo scrutiny of this sort constantly motivates them not to do anything they’d really care about being caught at. In fact, this kind of routine scrutiny would swiftly cause most sorts of victimless “crime” to be decriminalized, at the very least. There’d be some show trials, and after a very short period of time, it would become evident to even the most die-hard legislator of other people’s morality that this nonsense just isn’t viable any more.

I’m not exactly happy about the national security angles myself. But National Security is going to be the object of this sort of thing no matter how illegal it is. Treason and Espionage are two of the oldest and strongest death penalties on the books. The people who do these things know this, and do it anyway. On the other hand, legalizing scrutiny makes it much easier for those abiding by the law to find the real bad guys. And legalizing scrutiny means that we can watch our law enforcement, as well, and know if they are really staying within the limits that we have prescribed for them.

My Favorite Investing Books

A week or so before Christmas, I got an e-mail asking me what my favorite books for investors and real estate folks were.

My response?

Unless you’re going to practice professionally and undertake the study necessary to do a good job of it, personal financial advice books are largely a waste of money. The only reason I read them is to find out what the latest rationalizations are for avoiding professionals.

Every personal finance book I’ve ever read has an agenda of selling more (and future) books that conflicts with the ostensible purpose of making the reader as wealthy as possible. The one book in this category I’ve seen where this was outweighed by the good advice is Rich Dad, Poor Dad – which I suspect is already on your list. In fact, the best method of long term success is finding a good professional and making a long term individual plan, and the money you pay that professional is likely to be the best investment you’ll ever make.

This is why the approach I take on my site is often weighted towards mathematical models, to debunk the nonsense and hype. My recommendations for reading would tend be in the way of college texts and similar things.

Any comprehensive logic text. Make valid arguments a habit. Spot bad links in an an argument.

A beginning psychology text is critical. Learn the importance of psychology in personal finance and get to the point where you always challenge your conclusions.

Double entry Accounting and tax texts. You cannot play the game well if you do not understand the system for keeping score.

One each freshman (college) calculus, physics, and chemistry books, that teach how to handle numbers and approaches that handle the entire system, with plusses, minuses, and second and third order effects. Learn that optimizing individual terms of an formula does not necessarily optimize the entire formula, and the more complex the system, the more likely this is to be true.

The NASD Series 6 and 7 license exam prep books. You have to be sponsored to take the tests, but anybody can read the prep books.

One of the California Principles of Life Insurance license exam prep books. I understand New York state may have an even better program.

Above all, believe it or not, various military works. Sun Tzu, Frederick the Great, and Von Clausewitz in particular. Sun Tzu is easy reading, but if you’re not careful, you’ll miss something critical. Frederick is fairly straightforward. Von Clausewitz can be heavy going
but teaches too much to be foregone.

For real estate investors, I would add a good real estate license prep course. For mortgage loans, well, the reason that’s such a heavy area of concentration for this site is because there is nothing out there that I’ve found, and misapprehensions are legion.

There is no shortcut to competence or genius. Looking for shortcuts is a good way to waste your time, your money, and lose a substantial chunk of change when you could have made money instead. Nor is studying the market the only requisite for success. You won’t often find people recommending you read a couple books and act as your own lawyer, and some of the best financial planners I know pay almost no attention to the day-to-day happenings of the market. Paying a professional puts somebody in your corner who should know better – and if they don’t, if gives you someone that you can hold responsible, something that is not a feature of any of the self-help books that make a lot of people a very good living, but in my experience do more damage than good.

Caveat Emptor

Mortgage Life and Disability Insurance

Every few days, I get junk mail wanting me to buy Mortgage Life and/or Disability Insurance.

Buy regular policies instead.

These are not, in general, good policies of insurance, because the benefits go straight to someone else.

Mortgage Life Insurance is straightforward enough. It’s decreasing term insurance – the insurance company’s favorite kind of policy. As it goes along, the payments stay the same, but the coverage decreases as you pay off your mortgage. The problem is that until you get into your sixties the cost of insurance per thousand dollars should not increase swiftly enough to counterbalance the fact that you are theoretically paying your mortgage down. Not to mention the fact that level term policies exist for about the same amount of money, and that term is a poor form of life insurance in the first place.

The idea is that if you croak, the mortgage gets paid off. As in the money goes straight to the lender. Well, even assuming that you don’t refinance, this is a bad deal for your family. Let’s look at the situation, and the time value of money. I keep using $270,000 as a mortgage amount, so lets stick with that. Assume you have a 7 percent thirty year fixed rate. Or you can invest the money and keep paying the mortgage out of the proceeds. You pay the loan off, and your family have nothing, while still needing to come up with property taxes and homeowner’s insurance and maintenance money. But let’s say you put it into a variable annuity that earns a net of 9% (the market does 10-13 over time, depending upon who you ask). Your monthly payment is $1796.32, and adding reasonable amounts for property taxes and homeowner’s insurance, it goes to about $2170 per month. You end up with 363 months of payments – 3 months more than you could possibly need. On a forty year schedule of payments ($2050 monthly PITI payment), the money would actually last 590 months – an even better situation. So instead of having nothing and needing to come up with money every month, your family’s housing needs are completely taken care of, with a bit left over, and that’s on a somewhat pessimistic projection. Even if the fact that the market isn’t even over time messes them up, at a minimum they’ve got many years of making the full house payment before they have to think about selling. Additionally, they have the option of using some of the money for other things like say, college for the kids so that they can support the surviving spouse. Or college for the spouse, so that they can support themselves. One hopes that you get the idea. Furthermore, if you have a regular policy of life insurance, your family can always choose to use it to pay off the mortgage. With mortgage insurance, you do not have that option. I can tell stories of people who had it, and the family lost the house anyway because they didn’t have the cash flow for the other expenses of owning a home.

Mortgage Disability Insurance is the same concept, applying to disability insurance instead of life insurance. If you are disabled, it makes your payment after some elimination period (the elimination period is the time after you qualify but before you receive benefits – short elimination periods are expensive!).

This has two problems, same as mortgage life insurance. First off, that’s a horrible way to allocate tax-free money – straight to anyone else. The second problem, unlike mortgage life insurance, is that it’s not enough money. Disability insurance should replace fifty to sixty five percent of your income, depending upon your situation. Depending upon the lender and the program, maximum qualifying debt-to-income ratio is 36 to 50. This is a total of all debts, including mortgage, property taxes, insurance, and any other monthly obligations like credit cards, car payments, etcetera. All mortgage disability pays is your actual mortgage loan payment, and it shouldn’t take a mathematical whiz to see that this is clearly going to be insufficient unto the task. You’re going to need another policy anyway, so why not just buy one good one and save yourself a second set of administrative costs?

Caveat Emptor

What I Look For In a Mutual Fund Family

Reading the papers, I see all kinds of garbage about mutual funds. Probably the biggest single piece of garbage is that only the so-called “no load” funds are any good. They focus only on the cost of the “loaded” fund, as if there is no benefit to be had from the fact that the “load” pays a professional advisor to help you out. Indeed, it has been well established by DALBAR that net returns of investors with paid advisors, in aggregate, tend to significantly outperform those of investors without.

It’s not just investment knowledge, no matter how much people protest that they know every bit as much as the professionals. If you aren’t, you don’t. It’s investor psychology and not being so emotionally involved in the problems and knowing what to do in the first place so as not to spend so much of your money on basic mistakes. This isn’t play money you’re working with, and if it was, the experience wouldn’t help when it came to making real investments. When you don’t get do-overs, and the time you’ve lost and wasted is the worst thing about the situation, and when the average investor makes three avoidable mistakes costing twenty percent or more of their portfolio value, five percent plus a quarter of a percent per year doesn’t look like such a bad investment. On the same theory that a lawyer who represents himself has a fool for a client, show me a financial adviser who handles his own “big money” without paying for advice and I’ll show you an adviser to stay away from.

With that said, some people are bound and determined to do it all themselves. That’s fine, so long as you admit to yourself that it’s likely to cost you money, and that the ego thing is more important to you than the money.

What I look for, what most professionals look for, in a mutual fund family, is three things. Good Asset Class coverage. Sticking to a fund’s stated modes. Willingness to change a fund management if the performance lags the class over time.

Good Asset Class coverage has to do with the standard categories of funds. Small versus large versus mid cap. Value versus Income versus growth. Bonds versus stocks. I want to see funds within the family that “hit the corners”. Large Cap Growth, Small Cap Growth, Large Cap Value, Small Cap Value, Investment bond, Government bond, “High Yield” bond (aka “junk”), Income, and preferably multiple international choices as well. I may not put money in every category, but I want it available to me. I insist that Value be Value, not “growth and income.” Real Value funds are harder to “sell” laypersons on, but long term, they tend to outperform growth.

The second thing I want is that the management sticks with the fund’s asset class, and doesn’t play funny games with the definition. I don’t like funds that break type to chase today’s returns. A full explanation as to why is beyond the scope of this essay, but For a quick illustration: A few years ago, there was a very hot no-load fund family. Literally top of the demand curve. Everyone wanted their funds. They advertised like hell to attract business, and it worked. They got almost fifty percent of the money coming into mutual funds for a while – and every single fund of theirs put their money into basically the same companies. I did a comparison on them and could not find two of their funds with less than a forty percent investment overlap. This was basically using increased demand to drive price, and hence, temporary paper returns. But this couldn’t last, and they went from being the darlings of the market to absolute bottom in one year.

The third of the most important things that I look for is willingness to replace a bad fund manager on behalf of the family management. I’m not looking for immediate replacement if they lag the class for one quarter. I’m looking for family management that is willing to replace someone that consistently lags the class over time. This is harder to get than you might think. Typically by the time that someone has risen to fund manager, they’ve been with the family for a while and know where most of the bodies are buried. “Charlie” who heads the family goes golfing every week with “George” who’s doing a rotten job and deserves to be replaced, but you don’t fire your golfing partner. It’s all among friends, right? Well, no. It’s my money this clown is wasting.

There are a couple other things that are highly beneficial. Limited number of investments, preferably a maximum number set in the prospectus. Twenty to thirty investments is the optimal tradeoff between diversification and dilution, and most funds are too dilute. Availability of Sector funds is also a big plus. But none of them is as important as the big three.

Caveat Emptor

The Economics of Housing Development

The genesis of all of this is Something’s Gotta Give, a report (.pdf format) from the Center For Housing Policy. Furthermore, there is an article in the Washington Times from UPI that connects the dots on the tactical level.

The Center for Housing Policy report details some of the costs to society. Not surprisingly, when people are forced to spend a large portion of their income on housing, they have less to spend on other things, and so they can’t spend as much on other things. Lest you think I’m talking about Lexuses, Lattes and Liposuction here, I am not. I’m talking about bare minimum things like food – as in people going hungry because they don’t have enough to eat. Far from talking about liposuction, I am talking about basic medical care and insurance. I am talking about clothing, which, rightly or wrongly, people use to judge the worth of other people, and people who cannot afford good clothing are not given the opportunity to advance because no one will hire them. I am talking about basic transportation needs, without which people’s job-hunting prospects are limited to the places they can walk. If you cannot get from work to home and back again in reasonable amounts of time, then you’re either not going to live here or not going to work there.

Nor am I talking about the needs of some nebulous underclass. As the NHC report makes clear, these are people earning up to 120 percent of national median income. Furthermore, they are among the fastest growing classes of worker.

Below the first level effects, there are others lurking, largely unmentioned in the report. But malnutrition, parental depression, and lack of good medical care are the causes of many other ills. Malnutrition allows health problems to become chronic and generates more health problems. These are people who have more difficulty getting and holding jobs. So long as we have societal programs of social insurance, these folks are going to cost us, as a society, tens to hundreds of billions of dollars annually. If they can’t hold a job, they’ve got to get money somewhere. No job means welfare or crime, and both are bad situations not only for that person, but for everyone else as well. Poor or no medical care makes any problems they have worse than they need to be, further increasing both explicit costs, what we actually spend on them, and implicit costs, money they don’t make, taxes they don’t pay, and other stuff that they suck out of society. Long commutes people suffer in order to buy housing they can afford means less parental supervision of children, leading to delinquency, increased crime, and other problems a few years out. Most critically, difficulty with money is the number one cause of divorce, and when families go through a divorce, the standard of living suffers even more and more long term societal troubles ensue.

Who is causing all this bad stuff? The short answer is that we all are. The cold hard fact of the matter is that they are not making any more land. Housing needs land. Land that is in use for other uses, whether it is industrial, commercial, open space, or other housing is not available for housing. Higher population means we (as a society) need more places to live. Anytime we add a person or a family, we add the need for that person to live somewhere. We can’t just push them under the workbench in the garage until the next time we need them. Well, actually, I suppose we could, but I am certainly not going to vote for policies like that, nor, I imagine, is a majority of the electorate. So that fry cook at Lenny’s, the cashier at the supermarket, and the nice lady who helps you carry your purchases out to the car at Home Despot, all need places to live.

Cold hard fact number two: In the high density places where jobs are to be found, land is expensive. In fact, it is far and away the most costly thing about a place to live. I can show you places where the lot goes for $350,000, while the finished home goes for $500,000. Considering the economic realities: Developer has to buy the land, then apply for permits that take years, then put the homes up for sale. Developer has to pay for the land, the cost of the money to own it for the years that are necessary, the property taxes, the cost of the permits, the cost of the people to get the permits, the labor and materials to build, and of course, they have to pay the people that sell the finished product. Except for the comparatively minuscule costs of labor and materials to build, these are all fixed costs! They are what they are. So if the developer pays another $5000 for labor and materials, and can sell the house for $200,000 more because it’s got two more bedrooms and Italian marble floors, that is obviously the way for them to make a better profit. So they build the higher end home, which cannot be afforded by the lower income buyer. If the government requires so many homes to be set aside for lower income people, that merely increases the money they have to charge for the rest. Plus the “low income” buyers are likely to sell as soon as their contract limitation on doing so runs out. Just because Mr. and Mrs. Lower Income Couple only make $40,000 per year doesn’t mean they don’t realize they can make enough money to pay their rent for the rest of their life by selling the home that the city forced the developer to sell them at a reduced price for a huge profit. It’s not like there’s any difference between their home and the house next door that the developer sold for full price. I assure you that they are keenly aware of this. This makes getting into low income housing akin to winning the lottery in expensive parts of the country, and that is not what it is intended for.

There are obvious solutions to this. More housing. High density housing. Shortening the approval process, and making it less expensive and less uncertain. But the observable trend is in the other way. Why?

This is where it comes down to you and me. We’re making it tougher for the developer to get those permits. When developers offer to buy property with the intent of building, neighbors come out in force to protest. Oh, we use all of the high-sounding names like “open space” and “habitat protection” and “quality of life” and even the mostly honest “No higher taxes to pay developers costs!” They come out and throw obstacles in the way of the project and sue in court and delay as best they can – which raises developer’s costs, forcing the rest of us to pay for them. Or at least the people who buy those properties.

But the real issue, the elephant in the room that everyone desperately wants to ignore, is scarcity. We all want housing to be scarce. Why? Because we’re already owners, that’s why. If there’s not enough of something, the price goes up and people wanting to buy have to pay the people who already have more money in order to buy. Whether people who obstruct developers will admit it to themselves or not, they are trying to vote themselves a profit at other’s expense. The cashiers who work at the stores in the strip mall where you buy groceries need to live somewhere, and the lower on the socioeconomic scale they are, the closer that they have to live. It has almost nothing to do with the “Eeevil!” developers or any other corporate alleged malefactor. If they have to charge two million dollars per house to make a profit, they will build two million dollar houses. Or three. It’s the buyers that pay for it, and these buyers are real people just like you are, who need a place to live just like you do, and if they can’t get one in a sustainable way, will do it in an unsustainable way, as too many people have.

If you really want to watch something both amusing and eye opening some time, go to a planning commission approval hearing where you have nothing at stake. Let’s say the proposal is thirty miles away on the other side of the city and you never go there. And watch them try to have a discussion about high density housing.

Oh!, the carrying on I’ve seen! The histrionics! The burying of the real issues! The hysteria! Ask for the mike and mention “property values” and the NIMBYs will go ballistic, guaranteed. “It’s not about that!” some will scream. Then why, once all of the other concerns have been dealt with, do they continue to oppose the project? Or do you think it’s really about a little bit more traffic on the roads, or open space that most of them can’t see and never go use? “Ruining the character” of a neighborhood where they might know two or three other families at most? Why then, won’t the people live near where they work? “Because it’s not a nice neighborhood!” “Explain,” you will say, and they will oblige with “Because it’s all condos and apartments and it’s a nasty neighborhood and and everything is expensive and property values don’t go up!” And there the real agenda slips out. Figuring it out, and getting them to admit it, is about as challenging as dynamiting fish in a barrel.

Recently, the City of San Diego made a rational attempt to plan for housing affordability, lessened commutes, etcetera. Called the “City of Villages” concept, it envisioned more decentralized and distributed services, employment, and shopping, and in particular, a lot more high density housing with neighborhood parks and social centers. It may still come about, but over the objections of suburbia which sees their future increase in property value drying up. Over the objections of members of my profession who have tried everything they can to obstruct it. Let’s face it, when everybody who has a job in a county of about three million people is trying to get to one of three places, and then out of those same three zones where everyone works, all at the same time, it’s a recipe for a traffic jam. Add in the fact that the median commute is something over twenty miles, and many people drive well into the next county over (80-120 miles) and it’s a recipe for an extended traffic jam. We have three full-blown interstates and at least a dozen spur and connecting freeways, and they’re all jammed solid at least ten miles and two hours one way every morning, and the other way at night.

People in my profession aren’t exactly blameless for the high cost of housing. Real Estate, as a profession, is responsible for a significant amount of price increases due to encouraging speculation and selling exclusive lifestyles. Actually let’s stop for one quick moment and consider the idea of “exclusive lifestyle.” Doesn’t it have to do with excluding the masses? Making yourself one of the well off? Raising ones’ self? It’s not like the money to buy you out is coming from nowhere, and the poor schmuck who buys the property is going to have to deal with every penny of it.

Every time I go into the MLS, a large percentage of the results have the statement “Quiet cul-de-sac,” and these are all homes built within about the last thirty years. Cul-de-sacs were comparatively rare before then. Even in San Diego, with all of our hills and slopes and irregular terrain, neighborhoods older than that are designed for open access. The streets are laid out on a grid. Major and secondary roads cut all the way across entire developments. You can get from point A to point B without going around the whole thing. Cul-de-sacs were rare, and mostly there because the developer could get a few more homes into irregular terrain that way.

This suddenly changed sometime right around 1970. Suddenly developers realized that the “exclusive” label added to the value they could receive. Now streets were designed not to encourage access, but to discourage it. They start and stop and start again for no reason other than to discourage access. The quickest way to get from one major road to another, on the other side of the development, is to go all the way around the development. The developers lost very few homes to the redesign, if any, but now they could sell the cachet of “exclusivity,” as in keeping the helots out. The start of accelerated growth in home prices traces to this period. It’s also worthwhile to note that when these “keep the peasants out” neighborhoods start downhill, they tend to go a long way down, very fast.

The motivations for driving the prices up on the behalf of my profession are certainly understandable human motivations. We make more money on bigger transactions from the same amount of work and expense. That doesn’t make them good for society, but more money for your clients and higher profit for performing your professional function is at least an honest motivation. Ditto for the City, County and State. You’re taking up X number of square feet of land, and they’re not getting any more land in their jurisdiction. If the price goes up, they can sock you and they can sock the merchants and they can sock everyone in the area for more money. More money means more money for salaries – their salary. Their cronies. More lucrative contracts, necessitating more campaign contributions.

Fact: Given the current economic situation, the only way to get developers to build more housing that low income people can afford is to make housing for low income people more profitable than other housing.

How do you accomplish that? Allow more high density housing, but force them to plan the impact correctly. Enough parking, water capacity, sewage. Give the developers the parameters up front, so they know whether or not they can meet it, and enact a “must issue if standards met” law. Let the community get involved in setting the standards, if they want, but make them universal throughout the jurisdiction. Same standards for hoity-toity-ville as for the wrong side of the tracks. And make the citizens themselves subject to the same requirements. Make waivers as tough to get for homeowners as for developers, and come down hard on non-permitted activity. I just pulled up a couple dozen properties on MLS, and the well over half of the listings had the notation somewhere that “X may not be permitted.” In my experience the owners know damned well that they didn’t have the proper permits, but that it’s very easy for the people who buy it from them to get a waiver as theoretically innocent, and they know that there’s very little enforcement even if the new owner doesn’t get it retroactively approved. So they put on an extra bedroom or bathroom without permits, knowing it made the property more valuable when they sell it, and because if they don’t get a building permit, their property won’t be reassessed until they sell. Incidentally, most of them don’t use licensed contractors, either, but rather what our wonderful government euphemistically calls “undocumented workers” because contractors have to report where they did the work and woe be unto the contractor that does something without the proper permits. This means that the people who go through the process that society has agreed is necessary to perform competent, safe work in accordance with code, pay their people in accordance with the law, report their income so that a fair share of taxes are paid – the people who are playing by the rules – get cut out. Either do away with those rules or come down on the people who violate them, please. But I suppose that since it’s “the little guy” who wants to make some money illegally, that makes it Okay? Even when in order to buy the property, this “little guy” has to have income in the top ten percent of the population? Didn’t think so.

I am not trying to get all holier than thou on anyone here. I am as much of a capitalist as anyone, and more so than most. Capitalism works, but it works better when everyone has to follow the same set of rules. I’m tired and disgusted of bending the rules on behalf of one class but not another, because of lying, self-serving propaganda. My younger brother works – when he can find work – as an on the books construction worker at about $13 an hour or so. This works out to $26,000 per year if he was working full time all the time. This is well below the federal poverty line for a family. So far below that were he married and his wife working a minimum wage job, they still wouldn’t beat the poverty line. Compare this to the “handymen” who work off the books, without any qualification beyond their word that they can do the job right, and who claim they make $80,000 per year when they’re asked how much they make in order to get a loan. The taxes they don’t pay means that you and I pay more. The property taxes their clients don’t pay mean that you and I pay more. The permits that their clients didn’t get means that there are more building code issues out there that someone else is going to have to deal with – after said client makes the inflated profit on the sale of the home, despite not having properly paid the increased property taxes they should have.

Contrast this with the hell a developer has to go through, often for years, in order to get a project greenlighted and never knowing for certain whether some stupid technicality will put the whole thing back to square one. For smaller developments, it’s hard to find a place where it they are economically feasible, even with higher sale prices.

Furthermore, no developer with a lick of sense is building condominiums here in California right now. For ten years, they have unlimited liability for anything that can be considered a “construction defect.” There are several highly profitable law offices that actually make a career out of going around nine to nine and a half years after the project is sold out, and telling homeowner’s boards they can get them money. Usually this is done without any prior complaints, and they don’t have any knowledge of actual conditions there – they just know they can get money. There was a period not too long ago where you just couldn’t find condos that weren’t going through a lawsuit, which is why it was eventually dropped from many underwriter’s standards. I’m certain that a certain percentage of them had legitimate complaints, but there were just too many lawsuits filed with exactly the same sort of timing for anything else to be the explanation. For the record, what the developers are doing is building them as apartments, and then they are being converted after the unlimited liability period has expired. This is a severely bad thing, societally, but a full explanation would digress too far.

If a developer wants to build high density housing, there should be a fixed set of steps – parking, utility upgrades, etcetera – they have to go through, and then approval is immediate and mandatory – provided they actually sell the units for the stated price. If they renege, they are prevented from selling at all until they’ve gone through the whole approval process from the start, with no mandatory approval.

Put this into law, and watch the prices of available housing drop. We could even structure it into tiers, Tier A where the approval process is basic and automatic, Tier B with somewhat higher prices but more hoops and less certainty, and so on. I would love to be able to find young families affordable three or four bedroom condos – but three bedroom condos are like hens’s teeth whether or not they are affordable, and four bedroom just doesn’t exist, period, affordable or not.

For the last decade or so, the various governmental entities even been requiring developers to set aside infrastructure projects which, under current rules, are more properly the realm of government. They have to build schools and deed them to the government. Funny, but I thought with the increased tax base they are getting, that was the government’s job. It doesn’t do anything beneficial for the price of the homes in the rest of the development. Ditto parks, which are an excellent and admirable idea, particularly near high density housing, but should not be part of a government shakedown to cut down on the profit margin of land the developer paid their own money for, and went through an extended approval process for. The population is already there, and whether the developer builds new housing for them or not, the government would be responsible for finding school and park space. At the very least, the government should reimburse the developer for the proportional cost of the land and utility capacity, and do the building themselves.

Many of you reading this are thinking about money – dollars and cents. And you know, that’s fine. I like it when clients make money on their property. It’s part of my job to help them make money on their property. But there’s a difference between a reasonable profit at 5% increase per year, and extortion because you happen to own a place to live and there isn’t enough housing to go around because you’re doing your best to get policies enacted to make certain that there isn’t enough housing to go around.

The gentrification has reached the point in many areas of the country where you need to be in the top ten percent of all income earners in order to afford to buy a place to live – any place to live. That’s great and wonderful if you’re seventy years old and you can sell your home for a three quarter of a million dollar profit to your retirement nest egg and go live somewhere cheap. It’s not so hot if you’re a young working class couple looking for a place to live that you can afford and here is where all the jobs are. The damage done to the latter far outweighs the benefits that accrue to society because of the former.

If this continues, what happens next? Instead of having to be in the top 10 percent, now you’ve got to be in the top five percent, or the top one percent. If mommy and daddy never owned a house, or were so unlucky as to sell for less than stellar profit, you won’t either. If there’s no place to live that you can afford, you have to stay with mom and dad – but what if they don’t want you, or they’re in no shape to host you, or they just don’t live in the only place you can get a living wage job? Suppose now you’re twenty-five or thirty, engaged or even married, and still cannot afford a place to live? This is a recipe for social disaster.

At one percent homeownership rates, we’re below what the homeownership rates were when we had tenements and slum lords, even if they are single family homes in older areas of town. And many people who have been engaged in “condo flipping” are themselves priced out of the market. There are damned few folks who cannot be priced out of the market if it gets bad enough, and if policies remain unchanged, who is to say that it will stop just before you become one of the victims, the permanent underclass? Even if you’re one of that fortunate class who isn’t priced out, when there are ninety-nine people who want housing for every one who can actually afford it, what do you think is going to happen at the ballot box, or in the streets if necessary? I’d rather start now, while we can plan it rationally, as opposed to later when any old low quality crackerbox will be thrown up in panic mode anywhere and anyway it can be just to keep people from rioting in the streets.

Other things that need to happen. Tax codes need to be rewritten. this article traces the most recent acceleration to 1998 – coincidentally about two years after the $250,000 profit exclusion on housing ($500,000 for married couples) was enacted. All you had to do was live in it for two years, and bang! you didn’t pay taxes on the gain. I believe that instead of keeping it in the current “cliff” form (after two years you qualify for the full exclusion), I think it needs to be phased in over a longer period of occupancy. Two years gets you maybe $50,000, then another $25,000 per year until ten years are done. It’s hard to argue that someone who makes more on flipping houses every two years than they do on their day job deserves to make that money tax free, when the poor shlub who can’t qualify to get into the first house pays taxes on every penny he earns.

I also suspect that we would benefit from more limits on Section 1031 exchanges (and reverse exchanges), which has to do with not taxing profits from real estate when it’s replaced within six months with other real estate. Don’t get me wrong, it’s a beneficial code section overall and I’ll keep helping clients with them, but I have to question whether someone who makes an exchange and then refinances to strip equity is really doing something to earn all that tax free money, or just engaging in paper transactions that make it look like they contributed something. I don’t blame the participants for taking advantage of what is in the code, but some of what I have seen, and much of what I have heard about, is of questionable economic benefit to the country.

Zoning also needs to be heavily looked at, and not just for high density housing. “Granny flats” are just too useful, but prohibited by blanket R1 zoning with no exceptions allowed in too many neighborhoods. Many folks don’t want and don’t have room for granny to live in the same dwelling, but if they could put up a small second dwelling, whether attached or not, granny could live there rather than off somewhere else where the choices are often “completely alone” or “in a nursing home,” by which I mean they are one of the best ways to keep granny out of a nursing home. Furthermore, granny flats are also good for young adults who may not be able to easily afford housing on their own. None of this was a problem before 1970, and it’s not a problem now – except in so called “modern” “exclusive” neighborhoods where we’ve made it a problem.

I hope this article will start a certain amount of discussion about what’s really going on, and whether it is of net benefit to the country, and the people in it.

What Type of Real Estate Listing Agent to Choose

On a regular basis, I see advertisements for real estate offices that say “discount broker – full service”.

This is nonsense.

A discount broker has consciously chosen a business model whose economics do not permit them to give the same service provided by a full service provider. Here’s the rundown.

A discount broker’s listing agreement typically calls for them to receive 1 percent of the sales price, and the “selling broker” to receive the area standard, whether it’s 2.5 or 3 percent (perhaps higher in some areas). Some few will reduce the selling broker’s commission if it’s them.

A Full Service broker’s listing agreement typically calls for both sides to get the same 2.5 to 3 percent.

So a discount broker is saving you 1.5 to 2 percent of the cost of selling your home.

But what does a selling broker or agent do?

They put your property on MLS and put a sign in the yard, of course. And when there is an offer, they serve as “go between” on the negotiations.

This is all a discount broker can afford to do. They have expenses of being in business. Rent, machinery, assistant’s salary, etcetera. It’s not like they get to freely spend every dollar they are paid, and you’re not paying them enough that they can do more. Furthermore, their business model requires them to sell more properties than a full service broker, just to stay in service. The difference in their compensation between a $450,000 sale and a $470,000 sale is only $200. Which would you rather have – the high likelihood of a $4500 paycheck in a couple weeks, or the hope of a $4700 paycheck eventually? They’re human too. They are much more likely to advise you to take the sale in the hand now even when you would likely do better to wait. Even though it would make a difference of nearly $20,000 to you (and that may double the money you actually get from the sale in many cases), it’s not important to them. Full service brokers are hardly perfect either, but they tend to be at least somewhat stronger negotiators on your behalf. At least the $20,000 difference it makes to you means $500 or 600 to them.

A Full Service broker can afford not only the Multiple Listing Service and the sign in the yard, but also ads in the papers and other places that people actually see. MLS is the single best way to sell a house, but hardly the only one. Signs in the yard help me find clients and keep my fellow agents from bugging you for the listing, but rarely actually sell that house. Ads in the correct papers at the correct time are the second best way to sell the property, and full service brokers can not only afford them, but they are motivated to do them by the “carrot” of the doubled commission if they also find the buyer. Open houses also help significantly, and full service brokers and their agents have a business model which makes holding frequent open houses worthwhile and advertising them correctly a paying proposition. Furthermore, you’re likely to see better offers off of these sale sources. MLS offers are more likely to be people looking to buy on the cheap, whereas advertisements and open houses target people who want to live in your neighborhood. Once you have an offer, full service types tend to be tougher negotiators. Finally, once you accept an offer, the prospect of getting a larger paycheck motivates them to work harder getting the sale consummated, including being at the property for inspectors so that you don’t have to. Some discount houses do a decent job of this last, but full service do better.

Which of these alternatives is better? Well that depends upon the state of the market and your situation. In a white hot market where everything that gets listed gets four offers within three days and bidding wars break out between prospective buyers, a discount broker or agent is likely to be the way to go. If, on the other hand, the market is a much cooler one like most of the country nowadays, and it takes considerable effort to bring in any offer, or if your property has issues that make it undesirable (less ‘curb appeal’ than average), you’re likely to want a full service broker or agent.

Your situation also plays a part. If you don’t care if the property sells tomorrow, next year, or at all, a discount broker is more likely to meet your needs. After all, if you don’t get a good offer, you’ll just keep the property. On the other hand, if you need the property to sell fast, or if you need the offer to meet certain criteria, and most especially if it would be difficult for you to accommodate inspections yourself (for example, if you’re now hundreds of miles away), a full service broker or agent is likely to be the choice for you.

I have seen many sales where paying a full service commission would have caused the seller to end up with more money in their pocket. See my article Production Metrics versus Consumer Metrics for more.

Discount Real Estate Brokers should also not be confused with Discount Mortgage Brokers. The “discount” part of a real estate broker’s name usually refers only to listing agreements – people who want to sell a property. For customers who approach them as property buyers, these places usually receive the same full commission that anyone else does. There are exceptions where they rebate part or all of their commission for buyers, which should be disclosed and committed to in writing. But typically if you use them to buy, if it’s 3% for the full service folks, it’ll be 3% for them. Furthermore, I have directly encountered several of them who benefit from the presumption that any loans they provide will be as low cost as their real estate services, and this is far from the case. I’ve had direct dealings with very well known discount real estate brokerages, and their margin on the loan they got their borrower was much higher than mine – from triple to more than four times what mine would have been. My responsibility was to my clients, so I kept my mouth shut and got my clients their money for the sale of the property. But inwardly I was definitely wincing.

Caveat Emptor