Wednesday, March 28, 2012

Can we trust the comps?

Buyers, sellers, appraisers and real estate brokers all rely on the MLS and property appraiser's records of sold properties to assist in determining fair value of other properties. While usually accurate there are some recorded prices that are inaccurate. Buyers and sellers sometimes deliberately manipulate the recorded price of real estate sales. Other times the details of a sale may unintentionally cloud the reliability of the recorded price. Developers commonly record sales at numbers higher than the actual selling prices, especially in a declining market. For instance, a developer is selling units for $575,000 but the market softens and he must reduce prices to sell the remaining units but doesn't want the public records to show that. Rather than dropping the prices, he begins offering a credit back at closing. Example: He accepts $500,000 for a unit but records it as having sold for $575,000. The buyer received a "decorator" or other randomly named $75,000 credit back at closing. The buyer paid $500,000 but the record reflects that the unit sold for $575,000.

In another scenario a sale may record at a number lower than the actual price paid. A buyer hoping to purchase more than one property in a development would benefit from a low recorded price on his first purchase. By designating an arbitrary portion of the sales price to the contents (or any non-installed items) and paying for them in a separate sale, the sale of the unit records at a lower price. For instance, the seller may want $320,000 for their unit fully furnished. The buyer can agree to purchase the unit for $290,000 and the contents for $30,000. Never mind that the contents were worth $5,000 to $10,000 max. The buyer now has a low comp, $290,000, to aid in his next negotiations and the seller may benefit from a reduced capital gain. It is entirely legal to sell the contents as a separate sale and the amount paid for the contents is entirely subjective but the result is misleading comps. Unless the listing agent went back and changed the MLS listing to unfurnished, which often doesn't happen, appraisers and other agents are left with the impression that the unit sold furnished for $290,000. Even if she did change the MLS listing to unfurnished, the arbitrary high $30,000 distorts the real sold price.

Cash for contents is common in short sales as sellers are walking away with zero proceeds from the sale of their property. It doesn't make sense to just give away the contents with the property if they can legally be separated and sold. Participants in most short sales are required to sign an arm's length agreement stating that there are no "hidden agreements, implied terms or special understandings" between the buyer, seller and agents involved that have not been disclosed concerning "the above mentioned property". Now whether or not the contents concern "the above mentioned property" is unclear. A short seller agrees to sign a contract for $X if the buyer will hand over $Y in cash to the seller at closing for the contents. The result is inaccurate comps especially if those contents include the appliances that are typically included in a sale or if the amount paid for contents is inflated as in my first example. Best strategy if you're trying to figure out the value of a property is to make the acquaintance of someone with daily involvement in your market. Full time real estate agents who are active in your market will know stuff that doesn't get included the public records. Of course, the details of some sales will never be known except to the participants. Key takeaway here is to take all comps with a grain of salt and to greatly mistrust any anomalous comp. Even if accurate, a single crazy low recorded sales price doesn't usually mean that all similar properties should sell for around the same price. Developer sales are always suspect. Skepticism, as always, is healthy.

Dr. Delp - It's part of a science called "phrenology".
Evil Roy Slade - What's science?

Friday, March 23, 2012

Short sale vs just walking away

Much has been written about short sales, foreclosures, strategic defaults, deed-in-lieu and other forms of getting out from under an underwater property. I'm often asked why a distressed property owner should attempt a difficult short sale when they could just stay in the property rent free until the bank finally forecloses, years in some cases. Short answer; the deficiency (the amount of loss the bank incurs) does not go away in the case of foreclosure. The bank can come after the borrowers for up to 25 years in Florida after the foreclosure. The deficiency accrues interest in the interim. The bank has five years to file the deficiency action and then has 20 years to pursue the debt even if the borrower moves to another state. They may be able to garnish wages, attach bank accounts and even seize property. Good article on the subject here.

In a short sale, there is the chance of either being released from the deficiency outright or replacing the original promissory note secured by the property with an unsecured and likely smaller note. Here's a link to a very detailed explanation  of the differences in foreclosures, short sales and deeds-in-lieu from Florida real estate attorney, Richard Zaretsky. Many thanks to him for taking the time to share his knowledge and experience.

If you're in a situation where you can't or don't want to continue making your payments, don't just sit there waiting for the bank to knock on the door. The consequences of inaction could haunt you for a very long time.
Andy- Aunt Bee wants to see new models; she's thinking of trading in her old car.
Goober- That's a good thing - that car is on its last leg.
Andy- You said it was in tip-top shape.
Goober- That's before I knew she was going to trade it in.

Wednesday, March 21, 2012

Feedback Backlash

I commented briefly in January about buyers' feedback. Feedback is an ingrained part of the real estate listing process, intended to assist sellers market their properties by providing comments and suggestions from buyers who have viewed the property. I have never heard another agent question the usefulness of the practice. Most sellers seem to embrace the idea of getting comments from potential buyers and their agents. I have always questioned the benefit of feedback and just had my contrary opinion reinforced when an agent told me about an encounter she had at an open house this past weekend. A visitor to the open house told her that they would not do business with the agent or her brokerage because she had left negative feedback when she showed this person's property months earlier. The feedback was from a buyer who looked at the property and didn't like the floors. The seller's agent asked for honest feedback and the buyer's agent relayed her client's comments. For that she and her brokerage are blacklisted and mistrusted. Hearing this I think buyer's agents would be well-advised to never leave critical feedback lest their honesty damage them with unreasonable sellers. That brings up another danger of feedback. What does an over-priced seller do with feedback that says her price is just right? Never mind that it may have come from a well-meaning but unaware buyer's agent. She will likely resist lowering her price to a fair level and may not sell her property.

Here's my take on buyer feedback. The way it works these days is usually that the buyers' agents receive an email or fax asking for comments on any listing they show including opinion of price, condition, how well it showed and any comments. Any informed seller already knows whether she is priced right and is aware of the condition of the property, so, feedback is usually worthless except to report new damage to vacant properties. Feedback does, however, provide an opportunity to buyers and buyer's agents. Is any good buyer's agent going to leave feedback suggesting that the price is too low or even just right? Never. Why not take an opportunity to plant a seed of doubt in the seller's head about the price. It may pay dividends when an offer is presented. Considering the open house encounter I think my new feedback routine will be to shower praise about the condition of the property regardless of my client's opinion of it but continue to suggest that the price is too high. That way I don't insult any sellers who are merely fishing for compliments but at the same time chip away at their resolve about their price. Sellers, you're better off listening to your agent and/or doing your own research and dismissing feedback as unreliable and sometimes intended to influence your perception of the value of your property. If you don't trust your agent's opinion get a new one.

"If the human brain were so simple that we could understand it, we'd be so simple we couldn't." ___unknown

Tuesday, March 20, 2012

Comps and offer substantiation

I remember talking to an appraiser in the mid-2000s about his method for time adjustments for sold comps. For instance, in a rising market, successive sales are generally higher than the previous sales so, to establish present value, some adjustment must be made for appreciation. His comment to me then was that his underwriters would only allow a maximum adjustment of 1.5% appreciation per month even though we were seeing much higher rates of appreciation in some market segments. Seems crazy now but that was the state of the market in 2002 through 2007. To establish present value in a declining market it stands to reason that the reverse would be true. If any appraisers are reading this I would be interested to know if you have been making time adjustments for depreciation in the recent declining years and, if so, how much.

As prices plunged after 2007, prudent buyers capped their offers somewhere below present value to allow for more depreciation. They or their agents then had to explain the rationale for expecting to purchase below what the comps suggested as present value to the seller and her agent. Sometimes the sellers got it and were willing to sell below present value to relieve themselves of the risk of further price erosion. Sometimes they didn't. Until recently, most of those who went ahead and sold for less than they wanted made the right decision. Recent sales in many complexes seem to indicate that the trend is reversing. That will call for a shift in strategy for buyers. Research is still vital to the offer process but expecting to purchase below the last sales may be unrealistic in many cases in the current market. Determine present value, quantify wiggle room and prepare for some mission creep.

Speaking of comps and offer justification, the world's most thoughtful and eloquently articulated argument for an offer means nothing if the seller is unwilling to accept that research and/or reality. Research is only part of the battle. There are some properties that can't be purchased anywhere near current value. Just because a buyer's research proves that $300,000 is a fair offer doesn't mean that the seller won't continue to cling to her dream of $400,000. Some deals can't be done. Just move along. Reality is subjective.

"Possession isn't nine-tenths of the law. It's nine-tenths of the problem." _________John Lennon

Thursday, March 15, 2012

Revisiting "compliance" fees

I just wanted a little sun and you throw me in the water and then take my picture with my hair a mess. Geez. Humans.

I thought the nasty practice of brokers ripping off their clients with impressive sounding junk fees was primarily a thing of the past. I was wrong. Readers who've been reading this blog for a few years may remember a post from 2007 titled "Unarmed Robbery - Broker Style" In that post I talked about the unsavory practice of real estate brokers and agents charging their clients bogus fees disguised in official sounding names like "regulatory compliance fee", "transaction fee", "broker compliance fee" and so on. I was introduced to the practice when a brokerage I was working for was bought by a large franchisee of a national real estate company. As part of our indoctrination into the world of high-profit real estate practice, agents were "encouraged" to tack onto each of their transactions a fee of $395 to $495 to be paid by our clients. Initially we were told it was to cover the cost of the department handling transactions post-contract to closing and it was called a "transaction fee". After resistance from a few clients and agents (yours truly included) the name was changed to "regulatory compliance fee". Agents were still "encouraged" but not forced to add it to their clients' closing costs. I left that brokerage and haven't given junk fees much thought since.

Last week one of our agents received an offer on one of her listings that asked for the seller to pay the buyer's closing costs. Not that unusual. What was unusual was that in the list of closing costs was a "compliance" fee of $175 being charged by the buyer's broker. I have no idea if the buyer knew that he was going to be paying his broker $175 or not. It's not unusual for a buyer to pay their broker when he is not being paid by the seller's broker, which is the usual situation. It is, however, unusual to be charged by your buyer's broker when he is already being paid by the seller's broker as he was in this instance.

Before you close a real estate transaction, read the settlement statement closely and question any fees you don't understand. Any not-previously-discussed fee going to either real estate broker on the settlement statement other than the commission is suspect.

" you get older you sort of settle into a perpetual state of buyer's remorse." ___P. Lutus

Monday, March 12, 2012

Cocoa Beach - state of the market

Current market conditions - March 12, 2012 - Cocoa Beach and Cape Canaveral
(all data is from the Cocoa Beach MLS)


Condos and townhomes____369 ( 29 asking more than $500,000 )
Foreclosures______________20 ( 9 of those at the Pier Resort )
Short sales________________31
Total distressed____________14%
Sold since Jan. 1___________52

Single family homes________73 ( 46 are waterfront )
Short sales_______________5
Total distressed___________7%
Sold since Jan. 1__________11

Inventory of all property types is very picked over with a lot of the current inventory having been on the market for well over a year. Readers of this blog know that the "days on market" number is easily manipulated by listing agents wanting to give a languishing listing a fresh look with a zero DOM number. That means without looking at each listing's history individually, it's impossible to get the exact number but trust me when I say a large percentage of the current inventory is very old. Number one reason that so much of our inventory is old: it is overpriced. The priced-right new listings that are coming on the market are getting contracts quickly. Those that are optimistically priced continue to collect dust.

The percentages of distressed sales are at their lowest level since 2008, the year we saw our first short sale. If there truly is a backlog of pending foreclosures that the "experts" have been predicting for well over a year, there is a ready group of buyers in our market standing by. I don't doubt that this may be the case in some other markets but, based strictly on my daily involvement, observations and street-educated gut, I doubt seriously that we'll see any significant supply of new foreclosures in our two city market. Short sales are a little easier to predict and it seems obvious we'll see less and less of these. My take is that most property owners who were going to short sell or default as their property value slid underwater knew it was happening several years ago and have already disposed of the property. As always, I could be wrong. Wouldn't be the first time. The sold numbers appear to support me;

YEAR - distressed sales
2007 ----- 0
2008 -----15%
2009 -----36%
2010 -----56%
2011 -----32%
2012 ----- ? - for sale condo inventory is at 14%, single family at 7%

"The wind and waves are always on the side of the ablest navigators."
_____Edward Gibbons

Sunday, March 04, 2012

Continuing Ed - Home Buying

Home buying scenario 1; Fiscally prudent Basil decides he wants to purchase a home in Cocoa Beach. He is mistrustful of realtors and decides to do his own research, select the properties that interest him and contact the listing offices directly to see them. He decides not to use a buyer's agent which he mistakenly thinks will cost him more money. After viewing multiple properties with multiple listing agents he decides to offer on one that seems perfect. He asks the listing agent what she thinks he should offer. She suggests that a low offer will not get a response as the seller is "very close" to her bottom line at the current asking price of $350,000. Basil offers $340,000 and the list agent calls the next day with the good news that the seller has reluctantly agreed to sell if Basil will come up to $342. Basil is thrilled and agrees. He didn't have to pay a buyer's broker and he got a good deal, he thinks, on a home that is almost exactly what he wants.

Scenario 2; [months earlier] Savvy Sammy decides, with retirement approaching in a couple of years, to go ahead and begin a search for a Cocoa Beach home. He does some research, makes a few calls and selects a buyer's agent to assist in his search. With Sammy's list of criteria, his agent begins distilling the active listings to get to a prime list of possible matches. Sammy and Sara fly to Cocoa Beach three times over the next year to look at properties and decide what features matter and finally find a house that they like and want to make an offer on. Sammy asks, El Dubya, his buyer's broker, what he should offer. El Dubyah says, well, considering that this home has been on the market off and on for the last three years at steadily decreasing prices I think we can afford to be aggressive. Two very similar houses in the same neighborhood closed last month and the closed prices suggest that a fair price for this one is around $325,000 but I think we should start lower and hope to end up around $325. Sammy offers $315 and the seller counters at $340. Sammy bumps up to $320 and the seller counters at $332. While Sammy and Sara contemplate the seller's counter, El Dubya sees that a new listing has popped up on the next block at an attractive price. It is slightly larger and has a new seawall and dock. Sammy decides to offer on it rather than increase his offer on home number one. A deal is struck on the 2nd house for $320 and house number one remains on the market asking $350 until Basil comes along two months later and pays $342 with the listing agent's hints that that is a good price.

Neither Basil nor Sammy paid a realtors commission. Both sellers paid 6% to their listing broker. The listing broker for house number 2 paid El Dubyah's broker 3% of the seller's total 6%. The less-than-helpful listing agent for house number 1 kept the entire 6%.

Take-aways: Rarely does a buyer get a break on price by going directly to the listing agent. That agent is prevented from advocating for the buyer in the deal and cannot divulge what the seller might accept even if the seller has previously agreed to a lower number with another buyer. While the agent technically can't advocate for the seller either, the dynamics are unlikely to ever be in the buyer's favor. Even if the agent agrees to reduce the total commission, both buyer and seller are expecting that savings to land on their side of the settlement statement. The result most often is that the buyer pays more than he would have had he had an advocate on his side of the deal.

A good buyer's agent who is active in the market will almost always have information about a property, a neighborhood or the market in general that can be used to hammer out a better deal for the buyer. Just as important, a good buyer's agent will not allow his client to have excessive exposure in the contract language without that buyer's knowledge. Buyers who decide to eschew their own representation better be familiar with customary division and amount of closing costs, escrow amounts and where it's safer being held, inspection periods, assignability, contract time periods and a few other potentially costly areas. Penny wise, pound foolish.

"Sometimes if you want to know for sure whether the stove is hot, the only way to find out is to touch it."  __ Jack Reacher