Real Estate Snippets

Take It In the Shorts

Sellers and REALTORS® have already been identified as casualties of the market turn, but no one has considered the mortgage companies.  The foreclosure rate is increasing like wild fire and more and more the term "short sale" is being discussed.  Many REALTORS® had never heard of short sales until this year.  I guarantee you, most sellers had not heard the term either.

So what is a "short sale"?  Put bluntly, it's when the mortgage company "takes it in the shorts".  A short sale usually happens when the seller is delinquent or defaulting on their mortgage payments and the property cannot be sold for the amount that it is mortgaged for.  Homes purchased last year with zero down payment that are listed for sale this year have lost value in most cases.  Because the market changed rapidly and without warning, the properties for sale this year are taking deep discounts and sellers are making huge concessions.  To attract a buyer, listed houses have to be the best and the cheapest.  The others are not selling.

If the seller purchased last year for $150,000 with no down payment and the house is only worth $120,000 this year, it's impossible for the seller to get a purchaser for $150,000.  In order to sell the house for $120,000, the mortgage company has to agree to the loss.  Because the purchase price is short on the funds needed to pay off the existing mortgage, it is called a "short sale".

One might proclaim, "What a deal!", but that's not the case.  Not only does the mortgage company lose $30,000 plus attorney fees in the above scenario, but the seller will be issued a "1099" for tax purposes by the mortgage company at the end of the year.  A 1099?  Instead of getting a W-2 for declaring employed wages, the seller is issued a 1099 for "self-employed" income.  The seller has to pay taxes on the $30,000 that was lost on the sale.  The IRS figures that this money was distributed to someone when the house was purchased and, therefore, someone has to pay taxes on it.  Since the money was not received by the mortgage company, it is assumed the seller received the money and spent it (which they did . . . on their house).

A frustrating characteristic of most short sales is that the time is not short.  Frequently the lender is slow to approve a loss of this much money.  The decision has to go through channels and committees, and everyone knows how cumbersome channels and committees can be.  Market trends statistics have to be provided; forms have to be correctly and completely filled out;  and the decision maker has to be present instead of on vacation.   

The advantage to short sales is that this may be the only options sellers have to bail out of a difficult financial situation.  Choosing to pay taxes on the "lost" money is many time better than having a foreclosure on your credit report.

(c) Bonnie Erickson 2006

Hold On to Your Property!

People who have lost their properties to eminent domain probably feel like the property has been stolen from them even though they have been compensated.  There's something about not wanting to sell and being forced to sell that gives owners the sense of loss in an eminent domain case.  What most people are not aware of is that there are other ways that your property can be "stolen" from you. Two other ways to have your property legally "stolen" are through adverse possession or prescriptive easement. 

Acquiring property through adverse possession is allowed in 49 states.  Adverse possession is more commonly called "squatters' rights".  To acquire someone else's property this way, one must move into the abandoned property without permission for the prescribed number of years (This varies by state between 5 and 30 years.) and pay the property taxes.  Properties susceptible to this kind of "theft" might include properties inherited by out of state owners or without heirs.  Once the years of possession and tax payment have passed, a quiet title action can be made to acquire the property.  Ways to prevent adverse possession are to check the property regularly, evict the interloper/s, or post a notice that permission to use the property can be revoked! 

The second way to legally "steal" a property is by prescriptive easement.  This use of property by a non-owner usually describes a driveway access, fence encroaching on the neighbor's property, or some other use of the neighbor's property on a regular basis.  The perfect example was my own home who had the neighbor's fence five feet over the line into our yard.  To prevent loss of this five feet of property, the neighbor had to sign a letter stating he knew the property was ours and that permission to use the property could be revoked.  The neighbor's statement was filed with our property abstract!  A second example of this is one of my current listings.  The seller owns an "L" shaped lot.  The lot appears to be rectangular since a portion of the neighbor's yard is split by a fence making the seller's property look rectangular.  Had my clients continually used that property without the owner's permission for the number of years Minnesota requires, they could have attempted to gain the property by quiet title action.  To protect themselves, the neighbor sends a written letter to my clients every few years offering to sell the lot portion.  Like adverse possession, granting pemission for use eliminates the ability to gain ownership.

Information for this article taken from Bob Bruss' "Bob's Notebook".

(c) Bonnie Erickson 2006

Neighborhood Styles

Americans love their cars.  Because we love our cars, street engineers are constantly looking for ways to improve traffic flow, to build bigger and better freeways, and give us more efficient systems for getting from here to there.  When we choose our homes, however, we don't love our cars.  We want areas with minimal traffic.  We want to be away from traffic noise and the bustle of freeways.  The dilemma is how to solve the problem of quiet community neighborhoods with ease of commuting to the work place.

The perfect solution to this dilemma appeared at one time to be the cul-de-sac, putting homes in a sack with only one road in or out!  The definition of cul-de-sac is

• a street, lane, etc., closed at one end; blind alley; dead-end street
• any situation in which further progress is impossible.
• the hemming in of a military force on all sides except behind.

The cul-de-sac limits through traffic because it is closed at the end.  It is a destination only, not a place to drive by.  From the air it may appear one trunk road comes into the area and branches go off from the trunk to several different culs-de-sac (That's the correct plural according to the definition above!).  Culs-de-sac also allow development in areas that have wetlands or other natural barriers that can prove challenging for developers.

According to NPR, buyers are willing to pay up to 20% more for a house on a cul-de-sac.  The perception is that culs-de-sac are safer.  The children can ride round and round the circle at the end of the street and not worry about busy traffic.  Regrettably, the same NPR publication states that culs-de-sac have the highest rate of traffic accidents involving young children under 5 being hit or backed over by a car.  By extrapolation the child would be hit or backed over by a family member or neighbor, instead of a stranger.  The thought is gut wrenching.

Some communities are moving away from culs-de-sac.  It's thought that communities designed around culs-de-sac discourage walking to destinations and increase the amount of car use.  The newest "planned" communities actually have whole neighborhoods with only a couple entrances and exits from the community.  These neighorhoods are connected with walk paths throughout the neighborhood that can be used for strolling, walking to the local market or coffee shop, or going to the community park and/or pool.   The emphasis is on sidewalks, porches, and walking.  (Sounds a little bit like the way things were built in the old days in St. Paul!)

I can't help but compare the two styles of development.  Culs-de-sac would encourage community with the 5 or 6 immediate cul-de-sac neighbors, but might discourage knowing your neighbors beyond that.  A false sense of safety might encourage parents to allow children to "play in the streets" without teaching them to watch for traffic; or the children may become lazy regarding parental warnings because traffic seldom comes by.   Culs-de-sac have no local community gathering spots to encourage community.  Sidewalks are absent requiring walkers to walk in the street or on someone's yard.  The new planned communities encourage greater community interaction by providing venues for walking and moving out of one's own street.  Sidewalks make walking safety a priority.  Destination spots for walkers are provided.  The greater community gets to recognize one another and look out for one another.  Children ride their bikes on the sidewalks or on bike paths.  It will be interesting to see the results if statistical comparisons are ever made.

Lists

As corporate trainer at my real estate company, I'm asked to make lists.  Lists of what to bring to an appointment with a buyer prospect (those that we "wanna be" our clients); what things need to be done at a listing appointment; what forms must be included in a file: what equipment needs to be taken to a listing appointment; all the tasks that an agent does for a client;  the steps in the transaction; and finally, the list of what lists an agent should have! 

Because I'm an abstract random learner, I early learned to use lists for survival.  My natural tendency to jump all around is curtailed with lists.  Lists keep me on task.  Lists improve my level of performance.  They also help me remember what I forgot to remember.

Today's class of trainees was awarded the great privilege of listing what the fiduciary duties of an agent were.  There are only six and they bear the weight of true representation for a client.  Despite their recent licensing class time regarding agency, listing the fiduciary duties was a struggle for a couple.  We use the anachronym "el-see-dora" to jog memory:

• L oyalty
• C onfidentiality
• D isclosure
• O bedience
• R easonable care
• A ccounting

Every licensed agent owes their client the duties listed above.  Is your agent even explaining them to you?  If not, ask your agent to explain agency.  Remember the agent is supposed to represent you, negotiate for you as though their life depends on it, and give you each of the duties listed above.

Encroachment

The curmudgeon from Chicago wants to hear more about my new construction experience.  Happy to oblige, happy to oblige.  Our experience is the very reason consumers should use an agent to buy any home including new construction.  So many things happened, and it definitely was a good preparation for my future real estate career.

Once the city granted the set-back variance for our house, we proceeded with purchase of the lot.  We had to buy the lot outright; it could not be financed.  Or, we could convince the builder to buy the lot and proceed with the building.  Fortunately we had saved enough to buy the lot outright, but then we had to deed it to the builder!?  I was confused and somewhat mistrustful.  It finally made sense when the purchase contract specified that the lot would be considered as our downpayment on the home.  It also made sense that a builder would not want to construct a dwelling on property that did not belong to him.  His risk of our not getting financing or of his not being able to sell the house because the lot was ours would have been huge.  Once it was explained and we appeared to be protected, I relaxed a bit.  We should have had an agent!

The survey of the property revealed an encroachment and the forward progress was once again stalled.  Encroachment?  What on earth?  Encroachment?  An encroachment is the unauthorized use of someone else's property.  We knew the neighbors were parking their cars on the lot prior to our purchase so was this the encroachment?  No big deal.  We'll get them to move the cars.  The problem was not the cars nor did the solution seem to be that simple.  The neighbor's fence was 2.5 feet over the property line and the mortgage company was requiring that it be moved.  This is a great way to make friends with new neighbors!  All I could think of was the problems we had had with the window breaking neighbor.  Would our new neighbors be more understanding and agree to move the fence?  We were amazingly fortunate that they agreed to move the fence if the lender would not accept a written acknowledgement that their fence was encroaching on our yard.  Good fortune smiled on us again when the bank accepted the written statement.  This written statement was supposed to be filed with the abstract, although I never checked to see if it was there.

Progress was being made.  Only hundreds of hurdles to go before the house was done!

Set-Backs

The second home my husband and I owned was custom built for us.  We found a beautiful corner lot with a creek running through it in the small area in which we wanted to live.  We were excited and ready to break ground long before the lot was ours or the plans had been finalized.  It was a beautiful lot.  It never dawned on us that it wasn't technically buildable!  There was a reason that beautiful plot of land was left vacant in a completely developed residential section.  In our case, the lot wasn't big enough to place a house at the proper set-back because of the creek in the backyard.

Set-back may be a new term to some.  A set-back is the distance from the lot line at which a structure can be built.  Cities vary in the set-back requirements and the requirements will also vary by type of structure, i.e., house vs. garage vs. shed vs. fence, etc.  In our case we were dealing with the distance the front of the house had to be set back from the curb.  I never realized that most houses on a block all line up at the same distance from the curb until our contractor said the lot could not hold our dream house!!!!!  My first reaction was panic, but the contractor reassured us that this problem could be overcome with a variance.  If we applied for a variance, the city planners would review our plans and specs and decide if they were willing to allow us to twist the home ever so slightly on the lot so we were within 5 feet of the set-back requirements.  The "twist" gave the visual impression that we were in line because one corner of the house actually was at the set-back requirement and the other corner had no house to line up with!  I hoped the city would grant the variance and I thought the fact that the lot had become a parking lot and general eyesore for the neighborhood would be in our favor.  Nevertheles, it was not a guaranteed decision and it felt powerless to have someone else have to decide the fate of our dream.

We had made the purchase agreement for the lot contingent on it being buildable.  We had had soil tests done, a survey (which revealed an encroachment), and now this variance.  Money had been invested.  It all seemed like a lot more work than I had imagined.  Had I been in real estate at the time, I would not have been so naive.  Thankfully, the city approved our variance, and we were given the okay to move forward to begin a new construction nightmare.

Disclosures

The mantra for the seller could be "disclose, disclose, disclose".  Some ask my advise about disclosure.  My thought is that the more that is disclosed of what you KNOW to be true, the better off you are after your property is sold and you have moved.  Why?  Because any item that is disclosed in writing prior to the sale alerts the buyer to the condition and gives them the opportunity to reject that condition and move on or to continue with the purchase of the home.

In Minnesota we have several seller disclosure forms that are required.  There is a methamphetamine disclosure; a 5 page seller's disclosure about the general condition of the property; a well disclosure; a septic disclosure; and the federal lead paint disclosure for all houses built before 1978.   The "meth" disclosure is new.  I laugh at the legal size single spaced document that could be boiled down to 2 paragraphs:  the seller does know of meth production in the house, OR the seller does not know of meth production.  Now tell me what self respecting producer of meth in a house for sale would disclose such a fact?  If I was a crook, I certainly wouldn't have the scruples to be honest about how I'm breaking the law!   There is a section on the 5 page seller's disclosure that succinctly asks to check whether the seller is aware, or not aware of, meth production in the house.  If this simple paragraph is on the seller's disclosure, why fill out both forms?  Redundant?  You betcha!

Another amusing thing is also on the seller's disclosure.  Page 5 attempts to delineate what does, and does not, have to be disclosed.  Did you know that as long as you give the prospective buyer the info on how to check for a predatory offender, that the seller has no obligation to reveal that info?  Now to me that would be a material fact that would definitely affect my ability to quietly enjoy the house!  Other things not required to be disclosed are that a death occurred in the property from suicide, accident, or natural causes.  For some cultures and belief systems this is also a very important deterrent to quiet enjoyment of the property.  The other category that is not required to be disclosed is the perception of paranormal activity (ghosts)!  Note that the words used are "perceived paranormal" which implies it's all in one's mind.  Secondly, whether I believe in ghosts or not, I would not want to buy a house that someone said had ghosts in it.  That would be just too freaky.   It's there in black and white on the disclosure that when there is a ghost in the house, one is not required to disclose that fact.  I'll pass on that one for sure!

Jack (or Jill) of Many Trades

If I were to describe the many tasks my job description encompasses, it could fill many pages.  The unspoken things a real estate agent does to help their client are usually the most nebulous and the hardest to pin down.  Today was a perfect example.  My family and I were 45 minutes out of town celebrating birthdays and doing a substitute Easter gathering.  A call came in from an agent trying to show my new listing.  She tried repeatedly to open the electronic lockbox on the property with no success.  The box was jammed.  We were packing to return home so I mentally scheduled a trip to the lockbox instead of an evening relaxing in front of the t.v.

At home I collected my tools of choice: a small putty knife, a long phillips screwdriver, a spark plug timing tool, several small crochet hooks, my electronic keypad, a hammer, a bolt cutter, a hack saw, a sheetrock knife, and one husband.  One of these miracle tools was bound to loosen the jam in the box.  On the 12 mile commute, I remembered the keys in this box were held together by a twist tie and guessed the twist tie had bent over the side and caused the jam.  I hoped there would be clearance enough to use one of my tools to shake it loose.  The worst case scenario would be removal of the door handle to free the box for professional servicing.  The husband was along to address this scenario!

We set to work upon arrival.  The box was well and surely jammed.  It wouldn't even release from the door handle!   The crochet hooks fit through the tiny gap but didn't have the strength to pull the key carrier down.  The spark plug tool also slipped through but had no gripping ability.  Knitting needles could only be used if the box was off the door.  The hammer?  Only a last resort.  I slipped tool after tool into the narrow opening hoping beyond hope one would work.  Ten minutes later, a repeat performance with the putty knife did the trick.  That beautiful click and release sound was heard.  I was able to pull the key carriage out and sure enough, there was the twist tie bent over the edge of the box.

So what part of the job description does this task come under?  Problem solving, the fiduciary duty of reasonable care, or maybe lock smith?  They all apply, but rarely would I think to include this administrative duty in a REALTOR's job description!

Fiduciary

Come on, now.  Don't tune me out for using big words!  A fiduciary, that's what I am.  Yup.  And I was a fiduciary for a few years before I realized how important and serious a role it is.  So, here's my plunge into agency.  Brace yourself!

A fiduciary is someone chosen by a "principal" to do business on their behalf with a third party.  In the real estate world, the fiduciary is the real estate brokerage and its agents that you (the principal) hire to act on your behalf to sell your home to a buyer (third party) or to find a home for you to purchase from a seller (third party).   The fiduciary or agent acts in your best interests to negotiate the best terms and price for you.  The key words are "on your behalf".  That means the real estate agent you hire has to keep your best interests in mind (not their own) at all times in the transaction.  A good agent works very hard to remember this.

Fiduciary is a legally defined role.  That is why states license real estate agents.  As I've said before, they are very different from salespeople.  A real estate agent is required by law to give the following duties to their clients:

• Loyalty - act only in the clients' best interest
• Obedience - carry out the clients' lawful instructions
• Disclosure - tell the client everything the agent knows about the physical condition of the property or other material facts that would impact the client's use and enjoyment of the property
• Confidentiality - "mum's the word" when it comes to telling anything personal about the client including how much you can afford to spend, where you work, your marital status, etc., unless the agent has permission in writing
• Reasonable Care - perform the fiduciary duties carefully and thoughtfully for the client's advantage
• Accounting - Keep a paper trail of any money or property received from the client

Books have been written on fiduciary duties and agency, and agents argue extensively about agency.  I'm not going to go on and on in this post, but there's more to come in the future.  Be forewarned!  I've gotten on my soap box and I'm not likely to come down so soon!

Real Estate Agents, REALTORS®, and Accountability

Did you know not all real estate agents are REALTORS®, but all REALTORS® are real estate agents?  All real estate agents must go through training and testing to meet their state's minimum licensing requirements.  What makes REALTORS® different is their membership in the professional association of real estate agents called THE NATIONAL ASSOCIATION OF REALTORS®.  The NAR® requires its members to adhere to a strict code of professional ethics which can be reviewed by clicking here.  Only REALTORS® are allowed to use the registered mark REALTOR® and the corresponding logo.   Membership in NAR® creates another avenue for professional accountability.

Did you notice the term "licensing requirements"?  Every real estate agent, whether or not they join NAR®, is licensed by the state in which they do business.  By becoming a licensed agent, the real estate agent is bound by law to keep their client's interests foremost in all transactions.  That also means the state has the authority to make the agent accountable for properly representing their clients.  Real estate agents are required to act on your behalf when representing you in buying or selling real estate.  This is part of the agent's licensing requirements and is their legal duty to you, as their client.

For more about agency, go to the agency page at www.BonnieErickson.com.