Real Estate Snippets

Market Impact on Commissions

Why is it the real estate agent always gets blamed?  It's not that we don't want to take responsibility if we make a mistake or if we're wrong, but being the fall guy, the patsy, or the person that finger's pointed at gets tiresome.

I've noticed this particularly as the market has changed.  When there were more St. Paul buyers than houses and the only way to win in a multiple offer was to be the top bidder, the real estate agent was blamed for suggesting a higher price.  Since the agent's commission is based on a percentage of the purchase price of the home, the agent's suggested higher price was sometimes attributed to greed.  Afterall, the agent really only wanted the bigger paycheck! 

Doing the math often disproves this motive.  Commissions are  always negotiable, but for example purposes only, let's suppose the commission for the buyer's St. Paul real estate company is 2.7% of the purchase price.   On a $200,000 purchase, the buyer's real estate company would receive $5,400 to be split with the agent.  If the agent suggested increasing the purchase price to $210,000, the new commission amount would be $5,670, a difference of only $270 of which the agent may only be getting half!  An increase that small doesn't motivate most agents.  What does motivate them is getting the house that the buyer wants (and by implication, then getting paid!).

The irony is that now agents are suggesting that St. Paul sellers and buyers lower their prices.  Has the public given any thought to the fact that agents are now suggesting a price that will decrease their commission check as well?  Most have not.  The price reductions are far out stripping the increases of before.  The price reduction is hitting the real estate agent's pocketbook as drastically as it is the St. Paul sellers.  Whether we like it or not, we're all suffering the same consequences with this new market!

How Not to Get Paid

There's a simple way not to get paid in the real estate world.  Don't complete your paperwork! 

Many  brokers will not disburse the commission to an agent in their office if they have not handed in a completed file.  In our St. Paul real estate office, a complete file consists of:

• the agency disclosure form signed by the client before signing the contract
• the buyer's representation contract or the listing contract
• our company's disclosure form regarding an administration fee that is charged at closing
• a controlled business arrangement disclosure if the client is using the services of a sister company
• an MLS input sheet for listings
• a multiple offer directive for listings
• a net sheet for listings
• all pages of the purchase agreement signed by all parties, numbered, and with a final acceptance date written in on the signature page
• any counteroffer addenda which change the terms of the first purchase agreement
• all addenda including financing addendum, inspection contingency addendum, contingency on the sale of the buyer's house, personal property addendum, etc.
• all disclosures including the seller's disclosure acknowledged by all parties, lead paint, methamphetamine, well and septic, and arbitration
• a copy of the city point of sale inspection
• a certificate of completion for any repairs required by the city point of sale inspection
• a copy of the settlement statement from the closing
• a closing worksheet that summarizes the transaction giving contact info for buyers, sellers, real estate agents, and title companies

There are other forms that are not common to every transaction, but this list gives a sense of how much paperwork is required of the real estate agent.

On one of my listings a seller's disclosure was given to the buyer's real estate agent in June.  The disclosure has still not been returned to me with the buyer's signatures on it.  I've called and e-mailed the agent multiple times and finally got desperate enough to contact his broker.  Still no signed disclosure has been returned to me.  The buyer's agent finally admitted to me that, whereas I gave him the disclosure, he neglected to get his clients to sign it!  The buyers did not attend the closing or I would have gotten their signatures at that time.  The agent's broker told me his agent had not yet been paid for this file.  That would seem to be motivation to get one's job done, but it doesn't seem to be enticing this agent to action.  In the meantime, my file is waiting for the paperwork to be completed because the other agent didn't get his work done!

What to Disclose

In Minnesota every single family residence (house, townhouse, or condo) that is listed is required to have either a seller's disclosure or an agreement between the seller and buyer that the disclosure will be waived.  The seller's disclosure, or its alternate, are supposed to be displayed for all potential buyers to review during a showing.  Questions on the disclosure range from what form of title evidence the seller has (abstract or torrens certificate) to whether the mechanicals in the house are functioning.

The listing agent cannot fill out 9 page the seller's disclosure form.  Only the seller can answer the disclosure questions.  My rule of thumb for St. Paul sellers is to disclose everything they know about the property.  If an issue is disclosed, a buyer cannot sue for remedy after the closing. 

Minnesota law allows for some exceptions to my "tell all" rule!  The exceptions include no duty to disclose that the home was occupied by someone suspected of having HIV or AIDS; that the home was the site of a suicide, accidental death, natural death or perceived paranormal activity (ghosts!); that the home is located in a neighborhood with adult family homes, community based residential facilities or nursing homes; or any information about a predatory offender in the neighborhood IF the prospective buyer is given info about how to find predatory offender information (which is in the purchase agreement).

The irony behind these exceptions is that many buyers want to know about a death in a home, ghosts, residential facilities, and definitely predatory offender info.  Because the sellers' disclosure does not require disclosure of such facts, more responsibility is placed on the buyer to do their "due diligence" in researching this info.

Dues Are Due

Today was the day.  The REALTORS® in St. Paul who want to remain REALTORS® and not forfeit use of the MLS or membership in their local trade association had to pay their dues by today.  A thirty day grace period exists with a late fee penalty but beyond that the non-paying REALTOR® member would get booted out of the club, lose access to the MLS, not be allowed to join some real estate companies, and be demoted to real estate agent.  As Bill on Saturday Night Live would say, "Ooooooh, noooooo!"

Now a real estate agent who is not a member of the REALTOR® association still has a legal right to sell real estate in Minnesota if the real estate agent has passed the Minnesota state licensing test, maintained continuing education credits including fair housing and agency requirements, and has a broker willing to hold their license.  Their license is issued by the State of Minnesota making it legal for an agent to sell real property throughout the state. 

Membership in the Association of REALTORS® does not make selling real estate legal.  The state license does that.  Membership in the Association gives the real estate agent the right to call him/herself a REALTOR®, to directly access the MLS and to use the electronic lockbox system.  That isn't true in all states, but in St. Paul it is.

Selling real estate is pretty hard without the MLS.  In fact it's a formidable task.  It's also pretty hard to sell real estate without access to the electronic keypad which opens the electronic lockboxes.  Most difficult of all is that many real estate companies require membership in the association before one can sell with their company.

Imagine a non-member agent using another agent's (REALTOR®'S) website to find a property for a client, calling for an appointment and being told there's an electronic lockbox.  "But I don't have a key," says the forlorn agent.  "Well, I'm sorry, sir, but that's how you gain access to the property."  The next call would be to the listing agent.  "Will you meet me at 1234 Looksee St. at noon tomorrow so I can show your listing?"  "Why don't you use the lockbox?"  "Because I don't have a key."  "Well, I'm sorry, but I'm going to be out of town tomorrow and can't meet you there."  The discouraged non-member agent asks for someone else to meet him there.  "I'm afraid they'll want a referral fee for doing YOUR job for you.  Why don't you just pay your dues, join the Association, and do the showing yourself?  Wouldn't it be easier?"

Granted, there are a few mavericks who manage to sell real estate without becoming REALTOR® members, but the numbers are small.   Many are investors licensed so they can buy and sell for themselves.

So, today was an important day for St. Paul REALTORS®.  The bottom line on my membership dues statement was $583!  Of that amount, $389 is the minimum required for membership.  Almost $200 is for voluntary fees like prepaid education and charity.  The fees come due when sales are traditionally low and REALTOR® budgets tighten up.  This year it will be interesting to see how many REALTORS® choose to become agents or quit the business all together.  Perhaps some REALTORS® have discovered that being REALTORS® isn't the easy job they thought it was and the pay isn't so good anymore?  Will they bite the bullet and pay the fee?  Or will they disappear into the night?

The Pregnant Pause

It happens frequently.  Something meaningful is said, and then a pause ensues.   It's a pregnant pause.  The comment leaves one waiting for something to be born.  It's pregnant and full of anticipation.

Pregnant pauses happen in many environments.  A probation officer might ask a question and wait in silence for the answer.  The interrogator presses an issue and waits in silence.  The negotiator sighs and says, "My client will only do . . . " and waits in silence.  Attorneys question a witness and wait in silence.  Silence from a blogger makes the readers anxious.

Silence is difficult.  It makes us uncomfortable.  We all want to fill the silence.  It's solitary confinement while free.  Discomfort with silence makes the waiting person weak.  The waiting person's discomfort gives power to the one who issued the last statement; the one who chooses silence.  The pregnant pause has been launched.

In real estate, the pregnant pause is a negotiating technique.  Some use it easily.  Some have to learn its use. 

When the other party to the transaction refutes every reason a client has for an action, a pregnant pause may be the most judicious move.  Instead of fighting over terminology or fighting over what is a priority, the agent may need to sigh and say, "My client will only do . . . " and shut up.

Real Estate Perception

It's all about perception.  Just like the Hindu fable of the blind men and the elephant, what one sees in the real estate transaction is not always real or complete.  Recently, this fact has become very apparent in my St. Paul sales.

1. The prospective buyer saw discoloration on the basement walls and assumed there had been leakage.  Because no leakage was disclosed on the seller's disclosure, the buyer assumed the seller was dishonest, became mistrusting, and moved on to other houses.
2. A patch in a wood floor was "discovered" in the buyer's final walk-through (their 4th time in the home).  It was assumed a chair was purposely placed over the patch to conceal a cosmetic defect.  The buyers' mistrust of the seller's honesty led to insistence that the floor be professionally patched and refinished.  The sellers were offended by the implication of deceit which caused unnecessary tension in the transaction.
3. The decorating in the St. Paul house was very dated even though the mechanicals were all less than 5 years old.  The buyer assumed that because the house was not "pretty" other things had been let go and moved on.
4. The basement reeked of a sewer gas like smell.  The buyers checked around the bathroom and laundry areas trying to find the source of the smell, but were unable to locate it.  The smell was overpowering and they assumed there was a major plumbing issue.  The buyers moved on.
5. The yard was not mowed and the flower gardens were filled with weeds.  The buyers assumed the house was a disaster inside and chose not to view the house.

The real truth in each of these cases:

1. The basement had never had water as evidenced by the stacks of cardboard boxes stored on that wall when the home was listed.  None of the boxes were on palettes nor showed any sign of water damage.  The seller had been over zealous in wanting to seal out possible water intrusion and applied a sealant to the mortar between the blocks causing the discoloration.
2. The chair had been purchased just 2 weeks prior for the sellers' new home so was not even in the home on the previous 3 times the buyers visited.  The sellers did not consider the patch a defect because that was the natural place to put a rug for doffing their shoes when entering the home.
3. Dated cosmetics in a mechanically sound home is not unusual of a pre-retirement seller.  Often the mechanicals have been meticulously maintained, but the cosmetics don't seem old because they have not malfunctioned.
4. This was an embarrassing situation.  The teen son had visited the bathroom just before our arrival and while he flushed, he did not put the exhaust fan on.  We were able to revisit the home at another time with no further sewer smell.
5. The house was great inside.  The seller had recently lost a family member and was unable to maintain both the interior and exterior upkeep alone.  A choice was made to keep a clean house to the detriment of the yard.

Jumping to conclusions about the motivation of the other parties in the transaction, or about the condition of the house, can negatively impact the real estate transaction or prevent finding a home that fits the buyer's criteria.  Asking questions without jumping to conclusions can make the transaction go more smoothly.

Differing Views

The same situation is not always viewed the same by parties on opposite sides of the transaction.  This applies to witnesses describing a crime scene as well as how buyers and sellers view the same house!  The real estate agent's role is to find the meeting ground between those different perceptions.

When a St. Paul real agent calls with the results of the buyer's inspection, there sometimes is a laundry list of items the buyer wants addressed.  The list may be long because the buyer has unreasonable expectations and wants a new house when they are buying an existing house.  Sometimes the list is long because the agent didn't prep their buyers about what to expect from the inspection and what is reasonable to ask.  Occasionally, the buyer's "hot button" is something that is totally unimportant to the sellers.  The key to dealing with "the list" is to find out what is most important and negotiate from there.

For some buyers mechanical things are unimportant.  On one of my listings, Mr. Proud of My Mechanicals was sure the new Greenfield wiring he had installed in his middle class rambler would attract many potential buyers.  The wiring cost a massive amount to install.  It was his "hot button".  Much to his dismay, buyers did not see the wiring as anything fantastic.  Many actually thought it archaic since most entry level buyers are used to Romex cable for wiring. 

What sold Mr. Proud of My Mechanicals' house was his wife's decorating.  Their home looked like a page from Better Homes and Gardens.  Updated colors, spotless housekeeping, tasteful furnishings and decorations are what sold his house.  He shook his head in confusion when the buyers were unwilling to pay "extra" because of the Greenfield.  His blinders to other opinions kept him from realizing that what was important to him, mattered little to the rest of the world.  The Greenfield was his elephant in the room.

In like manner, a poorly patched hole in the floor left from a removed heat run may stand out like a sore thumb to a potential buyer and be irrelevant to the seller.  To the buyer, the patched floor becomes a major defect and that's where they focus.  To the seller, other things can be more important.  They have lived in the house and may not have considered the floor to be an issue.  To the buyer it's the pimple on the nose, the elephant in the room.

The tricky part for the agents involved in the transaction is to find a compromise from two opposing perceptions of a problem.  The person who sees the elephant wants a large compensation.  The person who thinks the issue is irrelevant doesn't want to give compensation.  The larger goals of buying the house and selling the house have to be kept in mind when a compromise seems difficult.  The simple question, "Do you want to walk away from this house (or sale) because of . . . . " sometimes brings the client back from emotional la-la land to more rational thinking.  The elephant becomes manageable.

IF, however, the client is still adamant about the elephant, it is the agent's job to negotiate for the best compensation possible, whether the agent sees the elephant or not!

Amortization Schedules

An amortization schedule is a list of all the payments one will make on their mortgage.  Mortgage interest is charged on the unpaid balance of the loan and is recalculated every month.  The monthly payment remains the same but the portion of the payment owed for interest is reduced every month because the interest is figured on the unpaid balance.  The portion of the payment credited to reducing the debt increases every month.  A graph of the way principal and interest is applied over the life of the loan makes a big "X" with the interest (blue in the chart below) being high in the beginning of the loan and low at the end and the principal (red in the chart below) being the reverse.

Some clients ask about paying off their mortgage before the full 30 year term.  There are several ways to do this.  The easiest is to add extra money in each payment to be applied to the principal.  Some lenders provide a bi-monthly payment plan which shortens the life of the loan as well. 

When my husband and I purchased our first home, our lender suggested we pre-pay the mortgage by using an amortization schedule and paying the next month's principal as the extra amount on our payment.  Never having heard of an amortization schedule, let alone seen one, my brain didn't get this concept.  Lender Bob whipped out a partial amortization schedule like the one below to demonstrate.

"It's quite simple," says Lender Bob.  "On your amortization schedule, your normal payment is in yellow.  If you add the principal from the next month's payment (green on the chart) as extra principal, you have just shortened the term of your loan an extra month without having to pay that month' interest.  You can't skip the next month's payment because you did this.  You still have to make one payment each month until the loan is paid off.  So, for your second month's payment the red square is your regular payment.  Paying the blue amount shortens the life of your loan by another month.  By making only those two payments, you'll have 356 payments left instead of 358."

Now that seemed like a plan to me.  I like instant gratification.  Making a willy nilly extra hundred dollars here and there didn't seem like progress to me, but knowing I had chopped off two extra payments that would have cost $2,462.86 by paying only $383.51 made a lot of sense.

We quickly learned this system only works for the first few years of the loan as the principal amount increases each month.  We successfully pre-paid for a few years and then had to go back to the normal system of adding a couple hundred extra dollars each month instead of the next month's principal amount.  As we approached the vortex of the payment distribution in the first chart, our budget forced us to abandon our lender's system!

Common Grounds II

Writing about diversity and against discrimination can be a can of worms.  The quote, "You can please some of the people all of the time, all of the people some of the time, but you can't please all of the people all of the time"  (poet, John Lydgate), is definitely true in the realm of equal rights.   

In a recent continuing education class, the instructor cited a study to determine if "steering" was still prevalent in the real estate industry.  The study was done in the top 20 metro service areas which included the Minneapolis St. Paul metro area in  2001 through 2006.   Two trained groups of testers with similar qualifying criteria were sent to randomly chosen real estate offices.  One thousand of the five thousand testers were Caucasian and the other four thousand were from emerging markets.   All had good credit, adequate income, high credit scores, desired a 3 bedroom or larger home, and worked downtown.  The vast majority of Caucasian testers were shown homes in the suburbs.  The variable group of minorities was shown downtown homes 87% of the time.  The prospective buyers were "steered" to neighborhoods based on their race or ethnicity!  If any of us believed that discrimination was dying off, this study should quickly show that discrimination is still alive and well . . . even among real estate agents who are trained NOT to be discriminatory!

Because of fair housing laws against steering and against discrimination, real estate agents are cautioned not to talk about the quality of St. Paul neighborhoods.  A St. Paul buyer has to determine if the neighborhood is right for him/her based on their own criteria and then inform the agent of where they want to live.  An agent can give website resources for demographic criteria (many neighborhoods have some great websites), for school information, for job opportunities, for crime statistics, etc., but cannot make the judgment on the quality of the neighborhood for their client.  Besides which, my judgment of a neighborhood may differ greatly from that of many of my clients and friends.

As with all laws, there are some negative repercussions with this law as well.  Several times my clients have racially mixed or have adopted minority race children and wanted to make sure they moved into a racially diverse neighborhood for their comfort.  This scenario received the same answer from me as anyone who was avoiding a diverse neighborhood.  These couples would also have to inform me of their neighborhood choice because I could not steer them to or from a specific neighborhood!

People who are relocating find this law problematic.  They come into an entirely new community with no info at all and rely on their agent to choose for them.  The same answer is given relocation clients.  Check the web.  Talk to neighbors.  Talk to the police department.  Go to the schools.  Drive the neighborhoods at different times of the day or night.  Be aware of how comfortable you feel.  I'll even drive you through the different areas, but don't expect an answer about whether this neighborhood is "good" or "bad"!  I truly can't answer and since I don't live there, I also don't know!

What's a Girl to Do? Part 2

My colleague was asking two questions when she threw her hands in the air.  "What's a girl to do?" encompassed more than one aspect of her last transaction.

The listing agent was a heavy hitter, a top producer, a multi-million dollar producer, a "professional" (by Chris Galler's definition) . . .  Let's see.  Are those all the labels this agent had earned?  No, he had also earned the labels of condescending, disrespectful, lazy, law breaker, and sloppy in my colleague's eyes.

"What's a girl to do"?  Outside of the closing room and in the broker's office, repercussions for the agent's actions were discussed.  Strategy was examined.  The agent's actions were worthy of a report to the Commerce Department, but would the offense be shrugged off by the clout of the big company and the agent's top producer status?   A report could be made to the governing Board of REALTORS®  as well, but a fine would be minimal for a top producer's pocket.  The MLS?  Probably not the right venue.

At the very least a "courtesy" call to the listing agent's broker needed to be made.  Because the real estate broker holds the licenses for all of the agents in their firm, the broker has supervisory responsibility and liability for any agent's wrong doing.  The buck stops with the broker.  The broker would want to know.  At least the broker should want to know!

In like manner, my colleague's decision on what to do will rest in her broker's hands.  It will be his/her decision what action will be made, because my colleague is also under the supervision of a broker.  "What's a girl to do" is not just her question.  Ultimately it becomes the broker's question.

Click here for part one of "What's a Girl to Do?".