Real Estate Snippets

Real Estate Commissions

Some things make me go, "Hmmm".

It seems funny to me that during the feeding frenzy when buyers were offering more than list price for St. Paul homes, comments were made by the public that the real estate agents were motivated to increase the price because they wanted a higher commission.  The reverse sentiment is not true today when agents are suggesting that sellers list their homes for less than the seller could have listed in 2000, sometimes a reduction as much as 25-30%. 

Why is it that the consumer isn't aware the agent is working toward the same goal the client wants:  to buy or sell a home?   In the feeding frenzy years, the price increases were in smaller increments over a longer period of time.  The agent's increased commission on an additional $5,000-$10,000 purchase price generally would be in the hundreds.  The decrease an agent takes on commission by suggesting a 25-30% reduction in list price generally is much larger than hundreds.  What the agent realizes is that the client needs to sell.  If the seller doesn't sell, their goal to move is thwarted and the agent gets paid nothing! 

Doesn't the fact that the agent will get less in commission lend some credence to his/her advice about a lower list price? 

Mortgage Solicitation Calls

All we wanted was a small second mortgage to complete a combination retaining/support wall on our apartment building.  We completed the financial statements required, the application which duplicated the financial statement requests, provided the supporting documentation through tax records and bank statements, but what we DID NOT DO is sign up for a bazillion calls from other mortgage companies!  Our home line was ringing off the hook and caller ID proclaimed some pretty exotic mortgage company names.  Many of the mortgage solicitor's scripts began, "As a result of your recent inquiry about a mortgage . . . ".

We frowned and questioned until the light bulb finally lit.  We had hit the trigger list!  How annoying.

A vague recollection fuzzed through my brain that there was a brouhaha  with the credit unions about selling trigger lists.  Somehow it seemed this practice had been discontinued, but our experience supported the belief it had not.  The information about the brouhaha can be found at Rain City Guide with several other supporting entries that one might find helpful.

Since our application was in late October of 2008 and the settlement occurred in July, it's obvious the practice is still in place.  Knowing that my personal financial information is being sold to the world is not a comforting thought.  Getting the calls was even more frustrating.  How long does it take to make a change that the courts mandate?  Or is it that only TransUnion has discontinued the practice and others have not?  Either way, trigger lists are still being used and it's totally annoying!

Real Estate Changes

Change is constant, and that oxymoron is one of the constants in life.  So why are we always so surprised when change occurs?  Probably because as humans we resist change.  Sameness is comforting.  It doesn't require adjustments in our own lives.  It's predictable, and therefore, easy to accept.

Change, on the other hand, creates unrest and makes us ill at ease.  It's not predictable.  We don't know what to expect so we become anxious in anticipation.

Changes in the real estate market have challenged real estate agents tremendously.  Agents who will survive this downturn are having to change with the market instead of holding fast to old ways of doing business.

Some changes observed recently in the St. Paul real estate market include:

• New terms have become household words.  Terms like "short sale", "negative equity", "registered vacant building", and "bailout" are discussed over beer in the bars.
• A foreclosure on a person's credit no longer is a permanent credit problem.  The number of years for recovery of good credit after foreclosure can be counted on one hand.
• Prices have plummeted with ramifications on many levels including lower commissions for real estate agents, losses for sellers, and good buys for buyers.
• Listing agents and home sellers are often requiring pre-approval for a mortgage from more than one lender because some lenders have withdrawn their mortgage funding at the last minute.
• City loans like those offered in St. Paul are being used more frequently for acquisition of a house and for fix-up money after the home is purchased.
• Real estate agents are working longer hours for less pay because much of the listing inventory is foreclosures or short sales.  Many times a buyer has to submit an offer on several houses before finally getting an acceptance causing many more showings and much more paper work for their agent.
• The public as a whole has become more aware of how intertwined different aspects of the market are.

Marketing Schemes

Enough of these letters have come my way that my immediate reaction is that they are a scam.  Regrettably, not every recipient of the above letter is going to be  wary of the offer presented.  The letter is carefully laid out to appear like an official document sent from the FHA when it actually is an attempt by a mortgage company to solicit mortgages. 

The mortgage company name has been blacked out to protect the company's reputation and to protect me from being sued!  The fine print at the bottom of the letter clearly states the mortgage company does not represent the HUD FHA, but the consumer's eyes are drawn to the bolded words "FHA Division" and the highlighted bar that reads "ATTENTION:  READ THIS FHA NOTIFICATION IN ITS ENTIRETY".  The letter is a notification ABOUT changes in FHA financing in an attempt to capture refinanced loans, but the letter is not FROM the FHA.

The command to read "this FHA notification in its entirety" could be represented as a warning to the consumer to read the entire letter including the fine print on the bottom when the marketing expert who created this advertisement knows the consumer will not get that meaning.  The average letter recipient focuses on the government looking logo and the words "FHA notification" and "FHA Division".  A sense of urgency is created through these powerful words.

My caution to readers is to read the fine print.  It's in the fine print that the mystery of this "notification" will be solved and the consumer will be protected.

Common Sense Mortgages

The Federal Reserve first published their proposed Regulation Z back in January, 2008, with a deadline for public comments to be made by April 8, 2008.  The proposal now has been enacted with some important (I think) changes to be made to mortgage lending practices.  I say I think they are important because I thought they were being done before, but apparently I was wrong!

The first set of changes were made to regulations for higher priced mortgages (sub-prime loans with high interest rates).  They seem common sense to me.  Why do they even have to make these rules?

• Lenders cannot give a loan to borrowers that do not have the ability to pay back the mortgage.   Well, duh!  I thought this was the case already.  It seems sub-prime mortgages (given to buyers with borderline or worse credit) formerly were not required to be sure borrowers had income to make their mortgage payments!  And we wonder why so many people are losing their houses?  A subset of this regulatory change is that borrowers must qualify to make payments on the highest possible payment of an adjustable rate loan rather than the introductory rate they qualified for before.  This is a caution I made to all of my clients who used ARM's to make their purchases.  It is just common sense to make sure you can make the worst case scenario of adjustments work!
• Income and assets apart from the collateral of the house have to be verified!  Oh, so they mean the borrower can't just SAY they make $100,000 per year?  They actually have to prove it?  Common sense, I say again!
• Escrow accounts have to be set up so the borrower pre-pays 1/12 of their annual taxes and insurance into this special account from which the lender draws to pay the annual tax and insurance bills.  Mortgages for people with good credit do this.  Wouldn't it just be common sense that people with less than good credit would have to do the same thing?
• Pre-payment penalties are only allowed within strict circumstances.  There are no pre-payment penalties allowed within 60 days of an adjustable interest rate being reset.  This allows borrowers who want to refinance in order to avoid a high interest rate to do so without a financial penalty.

The next set of rules applies to most mortgages including prime mortgages.  These, too, seem like common sense.

• Lenders and borrowers cannot influence appraisers to assign a specific value to a home.  Considering that appraisers get a copy of the purchase agreement before doing their valuation, it seems they are already being influenced.  The purchase agreement certainly states the "goal" value in the purchase price!
• Seven changes in how lenders can advertise were made including that they must disclose when a low rate is just an introductory or "teaser" rate; an ARM must be disclosed as an ARM; and if the current mortgage servicer's name is used, it must be disclosed that the offer provider does not represent the current company.
• Lenders must provide a good faith estimate of the costs of all types of home loans including a payment schedule within 3 days of application.  These are currently only required on home purchase loans.
• Companies collecting the loan payments must credit the payment when it is received and not hold it; late fees can no longer be "pyramided"; and pay-off figures must be provided in a timely manner.

Some of these changes needed to be made, but some of them really are common sense!  I know if I was the lender I certainly wouldn't give someone a couple hundred thousand dollars without knowing they had the means to pay me back!

The Mortgage Fiasco

Have you ever noticed how the pendulum swings back and forth but never goes from the extremes to the center without lots of repetition?  So much of life is like a pendulum including real estate and the mortgage market.  For every action on one side of the cycle there is a reaction to the other extreme.

Today the mortgage market has swung toward conservative.  In fact, lending practices have become so stringent that acquiring a mortgage has become very difficult.  Just a few short years ago lenders were so liberal in their application approvals that one only had to be alive (although there's rumor that some deceased borrowers were even approved for a loan!) to get a mortgage.  Aaron Dickinson has an interesting article on how loose lending got us to this sorry state, and now tight lending is keeping us there!

The irony about the swing from easy lending to difficult lending is that neither is good for the market.  The easy lending practices allowed buyers who really couldn't afford a home to get a mortgage.  (A true breeding ground for default.)  The lenders who cast a closed eye at applications that were obviously not realistic, or who encouraged borrowers to get a mortgage with teaser rates that would inflate more quickly than the buyer's income seemed as surprised by the turn in the market as others were.  Big companies were caught with their hands in the cookie jar, ever reaching for bigger profits.  The fall of Bear Stearns, the demise of Indy Mac (a notorious subprime lender), tightening of home equity lines of credit, and the rise in foreclosures took the lenders all by surprise?  I think not.

Even I had wondered when it would end and I'm not an economist.  Surely the people in the know knew that easy money with no downpayment gives little incentive to stay the course when times get tough.  Why would an upside down borrower remain faithful to his lender when so many don't remain faithful to even their spouses whom they know and care about?  The money was too easy to get.  The consequences of defaulting were too easy to bear.

So now the pendulum has swung from almost everyone getting a loan to the other extreme.  The real estate pendulum has begun to center itself and balance will eventually return . . . if we live long enough!  ☺

One Fate of Registered Vacant Buildings in St. Paul

It looked like this in 2003.  In 2004 the new owners had installed new siding and greatly improved the exterior look.  It was light gray siding with new windows and doors and white trim.  It was the nicest looking house on the block.  On December 5, 2007, it was blue tagged.  It joined the ranks of many others labeled as "registered vacant" in St. Paul. 

The full story is unknown to me.  Maybe the city was unable to get a response from the owner whose tax records show a California address.  Maybe the owner paid to have the building removed.  Maybe (I hope) the business to the west of the house bought the property to be used as a parking lot.  Maybe . . .

At one point the windows were boarded because former tenants were found illegally entering the building to salvage their belongings.  Two week ago the front yard was dug up and the steps and cement disrupted.  No attempt was made to salvage the detailed dental molding of the fascia.  It was the original from 1890.  Even the siding, windows and doors could have been reclaimed by a "deconstruction" company.  It didn't happen. The disturbed front yard was the sign that this building was going the way of so many registered vacant buildings.  It's fate was sealed.  The coffin only needed to be nailed.

Wednesday the registered vacant building above looked like this.  Just 6 months and 12 days after it was condemned.  I guess they gave credit for holidays to get to the extra 12 days.

To my dismay the house next door is now sporting a blue sign as well.  St. Paul is becoming a veritable wasteland of registered vacant buildings!  As of Monday, the 14th, there were 1993 buildings on the "hit" list.  Some with history that will never be restored.

The Negotiation Dance

Negotiating for the purchase or sale of a home in St. Paul often involves more than just the home seller and the home buyer.  The complex negotiation dance often has other participants on the dance card.

Immediate participants in the negotiation are the real estate agents representing each side.  Usually each agent knows what their client's hot buttons are and works to fulfill their clients' desires.  The hot buttons are as diverse as the home sellers and buyers.  For some the closing date is the most important detail to "win" in the negotiation.  For others it is price.  Still other are concerned that both sides give similar concessions.  Sometimes the breaking point for a client might be whether a single small item is included in the sale or a small thing has to be fixed.  The steps to a fully executed purchase agreement are as unique and various as the steps taken by ballroom dancers.

Because most sales involve financing, another silent participant in the dance is often the lender.  Home buyers and sellers may ask for things that the lender does not allow.  To the buyers and sellers, the request seems simple, but the lender acts as judge and jury for everything written in the purchase agreement.  If the lender says the request is against the rules, it cannot be granted even if both parties agree.  The lender will not give a mortgage if that request is included in the purchase.

An example that is usually not allowed by FHA mortgages is the establishment of an escrow account to pay for work to be done after the closing.  An escrow account is similar to a savings account that is created with money from the closing and is used to pay contractors for work to be completed after the closing date.  The money is usually held by the title company.  If, for instance, the closing was one week away, but the  sellers agreed to paint the house trim, replace concrete, or fix broken windows, the home sellers might suggest they put money from the sale of the house in an escrow account to pay for the work to be done AFTER the closing.  Unless the seasonal St. Paul weather prevents completing the work before closing, FHA will not allow the money to be escrowed.  The work has to be done before they will give funding for the mortgage.

Even though the home seller and the home buyer are in agreement and dancing together on this issue, it matters not.  The lender will not allow the work to be done after the closing with escrowed funds to pay the bill.  The lender participant in the negotiation dance prevents the dancers from dancing their own steps.

Much like a dance contest coach, the real estate agents involved in the negotiation are aware of the dance rules and what their individual clients bring to the floor.  The goal is to help the dancers accomplish their goal of winning (successful sale of the home) while incorporating each clients' unique requests within the framework of the dance rules.  It's a beautiful thing when the dance is done right and the goal is reached!

Wisdom from an Elder Real Estate Agent

Eight hours of continuing education to renew my real estate license seems like a long haul all in one day.  Real estate agents tend to like moving around a lot.  Sitting in one chair for 8 hours without use of a computer or cell phone is a bit overwhelming for many.  For me, it was especially a tough day as a tenant had awakened us the previous night with water  spilling from his ceiling.  The short night made for a difficult struggle with the sleep sheep during class!

The instructor was entertaining.  Thank goodness!  And experienced.  Over 38 years in the business made him an expert.  In addition, he chose real estate as his career right out of graduate school.  He has worked all of his adult career as a real estate agent!  Amazing!

So, I listened.  Not just to the content of the course, but to his wisdom.  Early in his career he realized that he didn't want to work with some clients.  When asked to meet with a prospect, he sees it as a great opportunity to determine whether that client is a fit for HIM!  If he feels the client is unreasonable or unrealistic in pricing, he chooses not to represent them. 

The whole concept is liberating.  In today's market if a client doesn't see that their St. Paul house has to be priced below the value of two years ago, what headaches could be saved for the agent if the agent chose not to work with that client.  Instead of spending nights worrying about how to market a home that is overpriced, don't list it, was the elder's advice.  Don't compromise your professional expertise just to get a commission that will never happen.  If you walk away in the beginning, there will be another to replace that client who IS realistic.  The realistic client is the one wants to devote time worrying about.

This elder REALTOR takes the reins in any interview and clearly tells the prospect that they, too, are being interviewed!  What a novel idea!

Back In the Day

The MLS listing sheet had an interesting comment:  "Largest home in neighborhood of homes that sold for $500,000."  Is this a marketing ploy, or is this listing agent still living "back in the day"?  My buyer client had an interest in the home so we did a search for comparable sales in the last 18 months in that specific St. Paul suburban neighborhood.  The highest sale price in the last 18 months occurred over a year ago and the sale price was $334,000.00 with $10,000 in seller paid closing costs!  That price minus the seller concessions netted the seller a purchase price of $324,000! 

Obviously, the value the listing agent was referring to was from "back in the day" when sellers and builders could ask any price they wanted for their home and the buyers were willing to pay.  That real estate market is long gone and it doesn't help to market this St. Paul listing by mentioning ancient history.  Yesterday's half a million dollar home is listed today at $350,000.  That's quite a hit for the seller and lender and quite a deal for the buyer . . . if they can afford to heat this beautiful mansion.