An inconvenient truth

South Cocoa Beach shoreline.

A question that most buyers' agents mistakenly assume their clients know the answer to is; How do Realtors get paid? I am questioned about it enough to know that it is not understood by all. In most residential sales in Florida the seller pays all the Realtors' commissions. Let's look at a hypothetical example of the most common scenario involving a sale of residential real estate in Florida.

Alfie, a veteran agent with Snapper Realty, takes a $100,000 listing from a seller who agrees to pay Snapper 6% for selling her condo. Alfie puts the listing on the MLS offering to pay a buyer's broker 3% for bringing a buyer who closes on the property. Dilbert, an agent in his sixth month with Flounder Properties, brings a buyer who likes the property and a contract is executed for $90,000. The contract closes 45 days later. Snapper and Flounder each receive a check at closing for $2700 (3% each) from the seller's proceeds. Alfie, being a veteran and a mid-level producer, is on a 75/25 split with Snapper and gets a check for $1975 after paying a $50 E & O insurance fee. Dilbert, being a new agent, is on a 55/45 split with Flounder and gets a check from Flounder for $1435 for his first sale ever after only seven and a half months on the job. Not bad for a few minutes writing an offer and presenting it. Right? What was Dilbert doing the seven and a half months before he got his first check?

If he was an aggressive and devoted new agent it went something like this ( this is a fairly accurate description of my first year in real estate except that my one check that year was less than Dilbert's); on days he wasn't sitting floor duty or previewing listings, he showed more than 150 properties to 15 different clients and drove 2000+ miles showing those properties. He wrote 14 offers for five of the clients, five of which were accepted but four later cancelled for various reasons. He finally got the one remaining past all the usual barriers and closed seven and a half months after he first donned the blazer. His formula for success is now apparent. Get some listings, show more expensive properties, write more offers, get a higher closing ratio and a better split with his broker. If all that falls into place, he is on his way to riches in real estate. Should that be slow to happen, he only has to close nine sales per year like this one to creep over the US poverty threshhold of $11,344 after subtracting his self-employment tax of 13.3% (2011). This is before his expenses like MLS fees, association dues, electronic key rental, auto expense, license fees, continuing education and so on. His first few years as a used condo salesman may include a diet heavy on Ramen noodles.

Alfie is in a better position because of his higher split and his listing activity. He only has to close slightly over $2 million to gross 40 large after self employment tax. Realistically, because there are always some sales mixed in that pay less than 3%, dear Alfie needs to close more than $2.5 mil to bust into the highroller range north of $40 Gs. Lucky for him this year, one of Dilbert's clients stopped by an open house at one of his listings, liked the house and he was able to write up a several hundred thousand dollar contract, close the sale and pocket his biggest check of the year. Unfortunately, they never mentioned Dilbert. Poor Dilbert is still wondering what happened to that couple. He showed them a couple dozen houses and actually wrote an offer on one before they disappeared. When he finds out what happened, if ever, it'll be another step in his education.

Buyers take note. If you find a Dilbert you like who is working hard to find you a place, remember him when you're out cruising open houses or browsing listings online. If you speak directly with a listing agent mention that you're working with Dilbert and have him write and present any offers you make. Otherwise you might wind up making an unintentional big monetary gift to a listing agent who by law can't advocate on your behalf when putting a deal together on her listing. For instance, she is prevented from telling you that the seller previously accepted an offer for less than yours and would probably take less than you're offering. Dilbert is not likewise constrained and can advocate on your behalf. If you let the listing agent handle both sides, Dilbert gets a big goose egg for all his prior efforts and your underwear could be flapping in the breeze with your best interest uncovered and your wallet a little lighter.

For the record, neither the equal split between brokers nor the 6% total are universal. There are listings paying as little as 2% either because the listing broker is keeping the lion's share for himself or because the total commission is 4%. Dilbert's take-home pay in a 2% scenario isn't going to put much of a dent in his expenses. He may find it prudent if not a matter of survival to not show those listings paying lesser amounts. Sellers take note. Know what your listing agent is offering to the buyers brokers and consider the implications of choosing the low bidder for your listing.

Idiot, n. A member of a large and powerful tribe whose influence in human affairs has always been dominant and controlling. Ambrose Bierce

Juicy rationalizations

Shrimp boat at sunrise.

Six ways to present an offer:

• Here's an offer for your property. I think it's fair.
  
• Here's an offer for your property and it's fair because it's exactly what the property appraiser's site says the market value is.
• Here's an offer for your property which is more than fair because it's 10% higher than Zillow's estimate of the property's value.
• Here's an offer for your property which is fair because these carefully selected comps I've included support that price. Never mind that two are nowhere near the size of yours and the other is a side view.
• Here's an offer for your property. I know it's worth more but this is all I can pay.
• Here's an offer for your property. It's fair because the last four comparable sales (attached) justify a fair value right around my offer price.

Unless offering full asking price, it is usually productive for a buyer to include some justification or rationale for his offering price. Usually. I've seen every one of the above examples employed over the years. Some of these strategies appear to begin the negotiating process with a better chance of success. However, using a flawed or obviously slanted approach can sometimes have a detrimental effect. The absolute best approach to determination of value is using recently sold, nearby comparable properties of similar size and condition and adjusting for differences. Cherry-picking only the comps that support one's offer is not an effective strategy if offering to an even slightly informed or well-advised seller. The same goes for sellers trying to falsely justify an inflated asking price. Two sources of estimated value commonly used by buyers to justify their offering prices are Zillow and the property appraiser's "market value". Both are often wildly inaccurate.

Zillow.com publishes an estimate of value for every residential property, called a Zestimate, on their website. I often see buyers, sellers and their agents using Zillow as confirmation of their opinion of value, when that Zestimate happens to coincide with their opinion. Is it an accurate estimate and should it be taken as credible? Let's look at recent sales and see just how accurate Zillow was with their estimate of value right before the sale. I used the first page of results for recent residential sales on Zillow (22 sales) of properties in Cocoa Beach for my research.

Of the 22 recent sales the Zestimate immediately prior to the sale was within 5% of the selling price for seven properties. Not bad. Five of those sold for more than the Zestimate and two sold for less. Another five sales landed between 5% and 10% of the Zestimate. All but one of those five sold for more than Zillow's estimate. That means that slightly more than half (55%) of recently sold properties closed within 10% of the Zillow estimate of value, all but three closing for more than the estimate. That means in a broad sense that we can trust Zillow to be within 10% around half the time.

What happens the other half of the time? The skew gets extreme. Four estimates were 20% or more off the closing price, all of them closing for more than the Zillow estimate. One closed for 20% more, one for 35% more, one for 85% more and one property that had a Zestimate of $163,000 sold for $325,000. That's 99% higher than Zillow's published estimate of value.

What does this mean for a buyer or seller of property? Feel free to use the Zestimate as substantiation of your opinion of value if it is to your benefit but don't place any value on it other than as a tool when negotiating with an uninformed party. Don't be surprised if your opponent rejects it as she may have done her own research or may be a reader of this blog.

What about using the property appraiser's "market value" as a gauge to establish fair value for a property? Using the properties that have recorded from the same list of 22 recent sales, the PA's "market value" was off more often than Zillow's and by a wider margin. Most often it was far below the eventual selling price but a few estimates were way above. Don't expect any accuracy except by accident when using either of these estimates of value. There is a reason appraisers use side by side comparisons with other recently sold, nearby properties of similar size, adjusting for differences when doing most residential appraisals. It is the only consistently accurate gauge of market value available to us. The amount of error and variation in the online estimates of value make them good for entertainment if one is so inclined but not as a reliable guide to a property's value.

By the way, the "I know it's worth more but this is all I can pay" offer has it's place. If a buyer wants a property but can't pay what the comps suggest is a fair price, it's sometimes worth a try. The seller may reject the offer but there's always a chance she will accept it. I've seen that kind of offer accepted.

"I don't know anyone who could get through the day without two or three juicy rationalizations." Michael - Jeff Goldblum's character in The Big Chill

Cornering the market

This is a question posted by a reader in the comments to an earlier post. I thought it relevant enough to respond in a post rather than the comments.

I'm new to shopping for a condo. Of course, your blog is helping tremendously but, I'm left hanging on at least one subject. I see corner units appear to be valued more than interior units. One owner told me the SE corner is more valuable. because the ocean breeze blows gently from the SE and it keeps the air circulating when the windows are open. I heard the lighting is better on a SE corner unit and saw the difference between NE and SE corner units at dusk. I also noticed wrap around balconies on corner units are not all created equal, but normally offer more outside space than interior units in the same buildings. I am perplexed over the value of a corner unit versus an interior unit in the same building. Is it merely buyer/seller preference or is there a no-kidding tax appraiser or lender appraiser value placed on a corner unit versus an interior unit?

This is much discussed and a question which has no clear answer. As pointed out, corners come in all shapes and sizes. All other things being equal, a corner should command more than an interior unit. However, all things are rarely equal. Besides the issue of size, here are some questions a buyer or an appraiser must consider when comparing a corner unit to a non-corner (by no means a comprehensive list);

• Is the balcony better than the interior units? Some interior units have better balconies than the corners like the double-wide interior units at Cape Winds. Some buildings like the Constellation have extra balconies in all units, corners and interior.
• Are there more windows or extra balconies and do they make the unit more or less desirable?
• Does it have a better garage? Often the prime garage units or extra garage spaces are assigned to the corners.
• Is the privacy and/or view compromised because of a building next door or the pool deck just below? A southeast corner with a wrap balcony staring at the building next door might be less desirable than an interior unit in the same building.

I would generally prefer a southeast corner to a northeast because of the exposure to the southern winter sun. However, if there is a building immediately next door to the south, maybe not. The northeast corner in that particular building might have better views and more privacy. With our winds generally out of an easterly direction I don't see a significant wind exposure difference between northeast and southeast. In some buildings which have neighboring buildings on both sides the interior units might command a higher price than the corners. Ultimately, each corner unit has to be judged on it's features. There is no one-size-fits-all adjustment. I asked a local appraiser this same question last week. This is the response;

Adjustments for corner unit vs interior are obviously most relevant when a condo is new and there is a selection of units to choose from. For existing condos, I do not make an adjustment for end unit vs. interior, as, like you indicate – there are just not enough comps to extract a supportable adjustment.

There you have it. Thanks to the appraiser for the input. Draw your own conclusions. You probably know what you like when you see it and what it's worth to you. Hopefully the seller of that perfect unit is willing to accept what you're willing to pay. Good luck in your search.

"Under some conditions, it is rational for competitors to make their products as nearly identical as possible." __Hotellings law

Out with September [updated again 10/16]

A tasty snook caught in the surf with a Yo-Zuri minnow.

October 1, 2011 and the mullet run is in full force with billions of mullet making their annual migration down the beach shadowed by predators of every sort; tarpon, snook, bluefish, jacks, Spanish mackerel, sharks, ladyfish, trout, redfish and others. It's almost impossible to drop a baited hook or lure in the water without it being immediately crushed by a hungry something.



UPDATE 10-16 - The sold numbers for condos changed since the original post when the tardy listing agents finally recorded their sales for September. I edited the numbers below to reflect the changes. The trend didn't change, just the total sales.

Mortgage rates continued their drop in September with the average 30 year fixed rate hovering just above 4%. That extremely low rate didn't seem to be a factor as far as condo sales were concerned in Cocoa Beach and Cape Canaveral. Of the 32 condo sales in September recorded on the Cocoa Beach MLS, 25 or 78%, closed for cash. Things were a little different with single family home sales with only three out of eight (38%) closing for cash.

Two of the eight single family home sales were foreclosures but there were no short sales closed in the month. The highest sale was a foreclosed 5 bedroom canal home in the Cocoa Beach Country Club area that sold for $680,000. The lowest price was $155,000 for 3/2 in Harbor Heights, the other foreclosure. It sold after 14 days on the market for $5000 more than asking price. Another of the Enclave of Cocoa Beach homes closed, this one for $515,000. The eight homes closed for an average of 95% of last asking price.

No condos closed in the month for more than $349,000. Slightly more than half were oceanfront. Of the 32 recorded sales, 47% were distressed, seven foreclosures and eight short sales. The short sales took an average of 105 days from contract to close. The 32 condos sold for an average of 91% of last asking price.

Condo inventory in Cocoa Beach and Cape Canaveral this morning stands at 365 units, seven of those in a yet-to-be-built building and 15 at Mystic Vistas. There are 39 listings asking more than $500,000. Ten units have closed for more than $500,000 in 2011. By contrast, 150 units have closed for less than $100,000 this year with just 55 units actively for sale right now asking less than $100,000.

[update 10-16] What I forgot to mention in the post above was the extreme fall-off in the number of condo sales. With 32 recorded condo sales, September 2011 was the slowest month this year. We have to go back to December 2009 to find a month with fewer sales. With inventory at such a depleted level this trend is likely to continue. It's getting very difficult to find attractive deals in the well picked-over MLS and priced-right new listings are selling quickly. A third of all sales in September sold in less than 30 days on the market. The more specific a buyer's criteria, the faster he should be prepared to move when a matching property gets listed or price-dropped into reasonable range.

The temp was in the low 60s this morning when the sun rose over the ocean and highs for the next 10 days are not expected to exceed 84. It's a great time to be in Cocoa Beach. Our summer visitors are gone for the most part and the winter guests have yet to arrive. The beaches are deserted, there is very little traffic and you can walk onto the Cocoa Beach Country Club golf course without a tee time. Not to mention the fishing is on fire and the occasional passing tropical storm blesses us with clean surf. See you on the beach or in the water.

"In the short run, the market is a voting machine. In the long run, it is a weighing machine." ______Warren Buffett