Author Archives: seattleeric

Love thy Neighbor

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Here’s a humorous story that came through my inbox. I usually have very low expectations for forwarded jokes and other crap people send me, but the punchline on this one had me roaring, and literally, laughing out loud.

A city councilman, Mark Easton, lives in a Utah neighborhood. He had a beautiful view of the east mountains, until a new neighbor purchased the lot below his house and built. Apparently, the new home was 18 inches higher than the ordinances would allow, so Mark Easton, mad about his lost view, went to the city to make sure they enforced the lower roof line ordinance. Mark and his new neighbor had some great arguments about this as you can imagine – not great feelings. The new neighbor had to drop the roof line – no doubt at great expense.Recently, Mark Easton called the city and informed them that his new neighbor had installed some vents on the side of his home. Mark didn’t like the look of these vents and asked the city to investigate. When they went to Mark’s home to see the vent view, this is what they found…

After reading this, I honestly thought this story apocryphal. I am always skeptical of these stories, and immediately researched the validity of this story. It’s true! Here are a few links to learn more about it. From Snopes, the Urban Legend Site and on a blog, a local news video of the controversy.

The Wisdom of Crowds

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At a client conference in my last job, one of the keynote speakers was writer James Surowiecki, author of the book The Wisdom of Crowds. Pulling notes from his book, he made a compelling case that large groups of people are smarter than an elite few, no matter how brilliant; better at fostering innovation, coming to wise decisions, and even predicting the future.

[photopress:crowds.jpg,full,alignright] The most fascinating example (and there were many) of this wisdom is in the investigation of a submarine that had sank and disappeared. The Navy had limited information regarding its location, and all searches came up empty. One smart fellow had the idea to consult a wide range of experts – in oceanography, ballistics, physics, engineering, etc., and ask them to come up with a probable location of the submarine. All the answers were collected and analyzed, and an ‘average’ location was charted based on the data. Chillingly, the sub was found within hundreds of yards of that location.

With large sample sizes, crowds form a network, and the best solutions bubble up from the collective thought. Though it sounds very Borg-like, we witness examples of it every day. The financial markets often sniff out trends and problems before they hit the front page. There is no collusion or any critical mass of explicit cooperation here – these trends are created by the cumulative wisdom of the market’s millions and millions of participants.

Which brings me to the potential wisdom of the Chicago Mercantile Exchange’s housing futures index created by Karl Case and Robert Shiller. Theoretically, this market would allow individual homeowners to hedge their investment by purchasing future contracts based on their metro level housing market. Let’s say I owned an apartment in NYC that is worth $1.5mm today. I could buy contracts that would pay me if the market dropped by 20%. I would effectively lock in a certain value for my property at a future date with these contracts.

If this concept takes off, the swings in the housing market would flatten considerably. If Joe homebuyer sees the contract prices that are based on next year’s housing values reflect a substantial drop, Joe homebuyer will be less likely to overpay for a property. Also, if Joe homebuyer could basically buy insurance against a large correction, the real economic impact of such corrections would be dampened by the payout of this ‘insurance’. However, Surowiecki has doubts that such a ‘wise crowd’ can materialize in the near future. As explained in a New Yorker article on this market, culture and habit matter as much as economic rationale. He writes:

“Even today, it’s clear that otherwise rational people harbor deep-seated beliefs that make housing futures a tough sell. People generally don’t hedge individual investments, because they don’t like to limit their potential gains in advance. That’s especially true when it comes to housing, because of the ingrained assumption that, over time, real estate is guaranteed to be an excellent investment—even though Shiller, in a recent book, shows that, allowing for inflation, American home prices barely budged during the twentieth century. In that sense, the housing-futures market has what is known as a framing problem: selling a contract seems like betting on housing prices to fall, rather than simply insuring yourself in case they do.”

This market debuted only about four months ago, so there is by no means any critical mass to it. It’s thinly traded, and it only offers futures on 10 US markets (Seattle is not one of them). Interestingly, the trading activity indicates a correction in the ten covered markets over the next year (with Denver showing the least downside). I would love to have had Seattle on the list. But, if trading activity increases, I would imagine that more markets would be added – and Seattle’s got to be high on that list.

Given that real estate is extremely localized (e.g. neighborhood by neighborhood), would a market that had critical mass (millions of contracts exchanged per day) be a driving force in the direction of a metropolitan market’s value? Would the average increase or decline be pretty darn close, even if street level values varied significantly block by block? My guess is that they would be extremely influential in how money moved in and out of the housing market. Such an efficient market would provide opportunity for long term homeowners to hedge their investments, speculators to make bets on the direction of the market, and renters to protect themselves from ‘missing out’ on appreciation.

In other words, many of the financial benefits of the American dream of homeownership could be had without ever buying a home. Take things a step further, and perhaps a fully matured and stable housing futures market would advance the dream of disintermediation further than Redfin or Housevalues could ever do. With good market info, long term home buyers wouldn’t have to worry so much about overpaying on a property if the market indicates a strong future value. Therefore, a precise valuation that an agent might be able to give versus that of an automated system may not worth the extra money it would cost in agent fees.

Light Fixers – Before and After

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As a follow up to Ardell’s post about finding those homes where the owners just didn’t take the time, or have the money/energy to bring the home to retail condition, I’d like to share a few before and after photos. These two sets of photo are from light fixers my wife and I rehabbed last year (our first two, actually). We put about $15K total into each property, and each sold within a week of listing.

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This first set of photos shows the before and after condition of the kitchen in a small rambler up in northeast Marysville. We used the existing cabinets, adding new pulls and hinges for a simple update. New paint, vinyl flooring, appliances and fixtures rounded out the upgrade.

This second set of photos shows how a little paint (and some nice staging) can go a long ways. This home is in Shoreline.

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If we had chosen to do the work ourselves, we could have cut down total rehab costs to close to $10K. Now, on the other hand, as a preview for a future post on major rehabs, here’s a final before and after (total costs for this job in the $120K range). This one is on the market right now, but in the spirit of neutrality, I’m going to hold off on discussing this in detail until after it’s sold.

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Redfin is missing 20% of Listings?

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I’ve heard a rumor, and I can’t figure out how to verify this using custom searches on Locator, but is it true that 20% of residential properties don’t appear on the MLS feeds to the Redfins and Homevalues of the world (as well as Windermere, John L. Scott, etc.). I was told that a good 1 out of 5 properties don’t have that checkbox selected that gives the MLS permission to ‘advertise on the public web’. First off, I’m surprised that so many agents would bypass the exposure; however, if they are doing it either making individual decisions, or by encouragement from their brokers, the net effect is chilling on the disintermediation plays. Consumers searching for properties using these discounters (or any of the major brokerages web sites), and not having the services of an agent to find the best properties using Locator, are shortchanging themselves.

Can anyone confirm or otherwise clarify this information? If true, it’s a dirty little secret.

Lease Options – Investor, Tenant, Agent: Win/Win/Win?

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Within the segment of consumers who want to be homeowners, there’s a subset who cannot qualify for a loan, and will therefore not be a homeowner until they can. Typically, these folks have a credit profile that precludes them from qualifying for a loan that can work within the parameters of their income and debt. In the past, the only alternative to buying was to continue to rent while working to fix credit issues, and decrease debt (and if income happened to increase along the way – a bonus).

Today, this segment of folks have the ‘Rent to Own’ option available to them. Popular with conservative investors who want the advantages of appreciating investment property, but without the hassles of rental income, the Lease-Option is an arrangement whereby an investor leases a property to a tenant, who is also extended an option to purchase the property within a certain time frame (two years is typical in the Puget Sound market). For an investor, the Lease-Option playbook is extensive – there are multiple approaches to this type of investment.

However, a program that seems to be growing in popularity is the ‘Pick Your House’ program that agents offer potential homeowners. The scenario the agent shares with the tenant is that they can pick the house in which they want to live (as long as the price of the home – rather, the monthly costs associated with the home – falls within the tenant’s budget). The agent then finds an investor to purchase the property. The rent is structured to cover all the investor’s monthly costs (PITI). Additionally, there is typically an option fee that the tenant pays to the investor up front. I’ve seen it fall into the 1% of property market value. Though non-refundable, this fee is applied as a credit toward the purchase price should the tenant exercise the option. Sometimes, a small portion of the monthly rent is applied toward the purchase as a credit as well. The option price is calculated under certain assumptions (such as 8% annual appreciation), and the price therefore might be set at 10% over current market value at the end of two years. This allows the tenant to capture some equity upon exercise, assuming appreciation is higher. Additionally, the tenant is contractually obligated to manage small repairs (where a renter would just call the landlord), with the investor taking care of larger repairs (in excess of some agreed upon dollar amount).

It’s a good way for a potential home buyer to get his foot in the door – as a matter of law, they have an interest in the property with the option (this can and should be recorded with the county to protect the tenant’s interest).

The option can be lost if the tenant defaults on the terms of the lease, or if he chooses not to exercise the option. Here’s the kicker – I’ve read/heard that the default rate for lease option tenants hovers near 70%. The biggest reason seems to be that bad habits are hard to break. If the tenant is counseled correctly, the lease period is an opportunity to repair credit, pay off debt, and position the tenant to qualify for a loan needed to exercise the option. The reality is that tenants don’t pay their rent, continue to over-extend themselves, or decide upon a different direction with their life that requires a move.

Unscrupulous investors and scammers will take advantage of these tenants and pull the option from underneath them for the smallest deviation from the lease terms. In fact, Lease Options were outlawed in Texas due to the scams. However, if the investor enters the transaction and deals with tenants fairly, it’s a win/win for the investor and the tenant/optionee.

I am wondering about the ethics of an agent working with a tenant to pick a house, then bringing in an investor to purchase it. At first glance, it seems that there is a clear conflict of interest. Isn’t there? Maybe not. The tenant is informed and gives consent to the process from the start. The agent is there to help find the home, but the investor is actually purchasing it. However, since an option – and therefore an interest in the property – is involved, does this create a technical conflict of interest? The investor is more concerned with the profile of the tenant, and with making sure that the numbers work for the transaction. The tenant is more like a client to the agent. They are driving around with the agent, evaluating neighborhoods, and picking the home, subject to investor approval.

Are ‘Pick your Own’ Lease Option programs a win/win/win for the tenant (who may successfully purchase the home by exercising the option), the investor (who gets a fixed return assuming an exercised option) and the agent (who gets the commission from the transaction)? A fourth party, adding another ‘win’, is the mortgage broker who may very well finance the deal for the investor, and create a relationship with the tenant that leads to financing the exercise of the option down the road.

Full disclosure – as an investor, I have purchased four properties with tenants who had options to purchase. However, none of them were acquired in the ‘pick your own’ method discussed above. I acquired the contracts by paying an assignment fee.

The Super Agent

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It seems to me that the agents who post and comment on RCG are ‘mom and pop’ agents whose business is limited to their ability to work with clients directly throughout the real estate transaction. I’ve not heard from any of the ‘Walmart’ agents who have built organizations allowing them no upper limit on their ability to service clients. In fact, many comments and posts have implied that the latter approach is bad for the consumer. Is Walmart bad for the consumer? We all may hate how Walmart shuts down mom and pop stores that can’t compete with the scale and volume pricing of Walmart, but does this have anything to do with the end consumer? Macroeconomically and politically, absolutely; however, consumers have voted with their wallets that the Walmart model makes sense.

When an entrepreneurial agent builds a business, hiring a licensed assistance, then listing specialists, then buying specialists, then a business manager, then a lead manager, why do the lone agents seem to have little respect for the organization they have built? Given the state of the industry today, as others have defined it, where new agents get little training and modeling by experienced agents, wouldn’t such a scaled organization be welcomed? Think of the licensed assistant? It seems to me that by working with an agent so successful and productive, this assistant would be exposed to every type of transaction, and grow up to be a better agent.

To me, it’s the scaled super agent business organization that would be the best place for a new agent to learn the ropes. As many have written here on RCG, the traditional brokerages have little motivation to spend a lot of time growing an individual; however, a good super agent aligns incentives so that the training and modeling he/she provides others within his/her organization contributes to the organization’s bottom line, and such an investment pays off as productivity grows.

Do consumers suffer with these super agent organizations? The mom and pops would claim they do, for in their paradigm, the real estate transaction can only be truly successful if the agent is hands-on throughout. Do the consumers feel slighted, unsatisfied? My guess is no, for the most part. No matter big or small, an agent needs a bedrock of referrals to succeed long term. Clearly, these super agents excel in lead generation and marketing, but a happy client is a happy client, and they’ll refer their friends.

As a new agent, and as an investor, I would love to be in a position where I could lead an organization and model it for success, and get paid handsomely for it. If any super agents are out there reading RCG, I’d love to see your perspective represented here on these pages.

The MLS and Creative Sales

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It’s amazing the stories I hear about the self-policing that occurs on the MLS (some of it seems more like snitching, in my opinion). One of the big no-no’s is listing any reference to an open house in a listing’s marketing remarks. The reason for this rule seems clear enough; with so many of the big guys subscribing to feeds of all the listings, the MLS doesn’t want to bite the hand that feeds it. The Windermeres and John L Scott’s don’t want prospective clients to go to open houses on their own, they want their agents to represent these prospects.

On the more creative side, an agent I know had her hand slapped after she tried to emulate an auction situation, using her MLS listing to attract buyers. She is also an investor, having bought the home in question on a lease-option. The previous owner did a beautiful rehab job, but ran out of money and needed out fast. She stepped in, leasing the place (the lease payment covering holding costs for the owner), with a year option to buy for what was owed by the seller. She also took a chance and put another $15K into the home to finish it out (a risk since she didn’t own the home). With her large equity position given the market value of the home, she decided to test the waters, and create a situation that would attract more offers.

First, she offered a buyer’s agent commission of 4%. Then, in her creativity, she made her first mistake. In the agent-only remarks, she explained that the 4% would be added to the highest bid price. This was also clearly stated in the auction rules posted at the property during the open houses, available to all potential buyers. Her thinking was to put walk-in buyers on the same footing as buyers with agents (there were two open houses over the course of a weekend, then bids were accepted – no time for lockbox enabled agent visits), thereby creating an apples-to-apples comparison when reviewing competing offers. In other words, the final bid price would be the net (of commission) price. If a buyer with an agent offered the highest bid at (for example) $100,000, then price would be grossed up to $104,000, with the investor/agent/seller paying out the $4000 commission to the agent at closing. If a walk-in buyer offered the highest bid, then no commission is necessary (since she is the owner of the house, there’s no need to pay herself a commission…she’s getting all the profits anyhow). I can understand why she got in trouble for this. The MLS is for agents, not joe consumer. Agents would naturally prefer that the buyer’s agent commission is included in the final cost of the property. With this gross-up method, savvy buyers (even dumb buyers) would realize that they would have saved $4000 had they gone directly to the open house without an agent.

The other creative step she took was to include the word ‘auction’ in the agent remarks. She listed the home at her acquisition cost, knowing that it’s true market value would grab the attention of agents. Her objective was not to deceive, thus the reference to an auction (all bids would be reviewed at the end of the second open house).

However, on both counts, other agents snitched her out. I think each of her creative marketing ideas went against the traditional thinking of the industry.

In trying to offer a grossed up commission (and super-sized at that!), she was bringing the bright light of transparency to the transaction. Though her intent was not to ‘out’ agents who don’t discuss compensation with their clients, this is clearly the first thing many agents thought about. The agents would publicly claim that ‘it isn’t fair’ to raise the price 4% after a final bid has been made. On the contrary, as long as the this is known from the beginning, there should be no problem. If buyer’s agents openly discussed compensation with their clients, then clients would have a better chance of understanding that grossing up the offer to capture commission is not a big deal.

As for trying to market an auction, I think agents didn’t understand what the investor/agent/seller was trying to accomplish, or they were thinking of a Sotheby’s style of auction, which would be uncomfortable for agents and buyers alike. In either case, it was just strange enough to be deemed out of place on the MLS.

I’m guessing that some agents reading this are thinking, “yeah, this seller/agent should burn in hell for what she tried”. However, being an investor myself, I applaud her creative approach to trying to maximize the price she can fetch for her property, and for trying to structure the commission so that agent represented buyers and walk-ins are treated equally.

The Best Client Relationships are Solidified in the Darkest Moments

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[photopress:austinpowers.jpg,thumb,alignright]“Allow myself to introduce….myself” – Austin Powers

I’m in my first few months as a full time working agent. I retired from my career with a successful Internet marketing company after 8 1/2 years of helping grow it from a six person start up to a public company with offices on three continents. I left because I had lost my passion for the industry; I didn’t go to work each day looking forward to the challenges that awaited me. I needed something new. It took me two years to discover it, but after spending the last year with my wife investing in real estate part-time, I realized that I had found my passion. I had found my bliss. Real Estate. I got my license initially as a way to list our own investment properties for resale, but realized that real estate sales and investing got me excited. Here I am, starting fresh in the sales industry, juggling a number of balls related to real estate – client acquisition, client management, project management (on my investment properties) and property acquisition. It’s been extremely stressful (waking up in the middle of the night, in a cold sweat, fearing that I’d calculated time incorrectly and missed an inspection deadline), but also extremely rewarding (I sure don’t miss rush hour traffic!). This is my first post of any substance, and the goal of my commentaries is to reflect the sum of my experiences (which are currently few in real estate sales) Right now, I have little sales experience, a modicum of investment experience, and lots of client service experience taken from my previous careers in tourism (during my 20s), and online advertising (the bulk of my 30s). I’m thrilled that Dustin invited me to post.

“Customers don’t expect you to be perfect. They do expect you to fix things when they go wrong” – Donald Porter

One reason that I have succeeding in client service roles throughout my careers is that I tend to remain eerily calm when surprising and unfortunate situations arise (whenever one of my kids start choking, my wife completely panics and starts screaming; I set aside the adrenaline and calmly unlodge the blockage with a textbook execution of the Heimlich Maneuver). In business, I refer to the actions required to resolve these problems as firefighting. Most of the time, firefighting is required due to errors made by others outside of my control. However, no matter who is at fault, the client only has an opportunity how I deal with problems.

Rule Number One – Listen…Then Solve Problems

I get into trouble a lot with my wife whenever she starts telling me about her problems. I listen just long enough to identify the course of action needed to solve the problem, then interrupt her and explain how I’ll fix her problem. Big mistake. Most times, she isn’t looking for my to solve a problem, she just wants to unload her problems on to me…it makes her feel better having talked through it. After I validate her feelings, I can then ask if she wants me to help her with anything.

The same principle applies with clients. They come under stress from parts of their lives to which I have no exposure or access. For example, they may start complaining that they haven’t seen enough houses, and imply that I should pick up the pace and increase the number of showings. Before I try to problem solve and start scheduling more showings, I’ll listen carefully and try to determine why they are asking this question – especially when there has been no hint of this kind of issue before. In most cases, compartmentalized stress from situations spill over into my world. Instead of taking it personally, and before getting defensive or simply agreeing to the request (especially when I know I have been working hard on the buyer’s behalf), I’ll listen to what they are saying, acknowledge that I appreciate what they are feeling, then ask a series of questions designed to determine if there really is a problem they may have with me. If there is, I’ll offer solutions.

When I worked for Princess Cruises, I learned of an interesting statistic about customer service. Clients who wrote to the company complaining of a negative experience on their vacation demonstrated a greater loyalty to the company – they more likely returned on a second cruise – versus a random sample of cruisers. Why? These clients’ feelings were validated with a reply from the company. Was this loyalty bought with credits or discounts on subsequent trips? No, in most cases, it was a personally written letter or return phone call, where the clients felt that the company listened to them.That amazed me at the time, and you know what? It has born out in practice many times for me personally.

Rule Number two – Admit Your Mistakes, and then Proactively Solve Them

Here’s a situation I just saw in my first deal. My client had asked for a bunch of repairs on the 35R, including a certification showing a resolution to a possible Carpenter Ant issue. We eventually arrived at a deal, but instead of a fresh blank amendment stating the new price, I included the original 35R showing the repair list. All of you seasoned agents can see where this is going. It’s the day of closing. Both buyer and seller have signed around. I’m ready to pop the bubbly celebrating my first deal. Then I get a call from the Mortgage broker. The lender is requiring that an inspector clear both the carpenter ant issue and a dry rot issue (also in the report). Yikes. This made it past both the mortgage broker, and the loan processor prior to closing. I could have started yelling at these folks for not catching the problem when I submitted it (they have enough experience to know that submitting such a list is a red flag). Nope. I went into firefighting mode. I called the listing agent, told him of the problem; I called my client, admitting my mistake and letting him know that I’d cover any costs or penalties associated with this mistake. I then scrambled to get a pest control company out to the house to treat it and clear it, and I called the contractor who has worked on a couple of my investment properties to check the dry rot issue (which truly wasn’t an issue), and he cleared it.

The listing agent was impressed with my dedication and focus on solving the problem. Not only for my client, but his clients would have been impacted by a scheduled, near simultaneous closing for their next home. The listing agent told me that upon sharing my efforts with his broker, she said she’d love to have me be one of her agents. The deal closed a day late, and cost me $250 for the pest control, but beyond that, there was no negative impact to either side. My client was thrilled, and appreciated my honesty and my hard work and scramble to fix the problem. In my opinion, this is the type of client service that wins clients for the long term (especially if the client is an investor, as this one is), and wins referrals from satisfied clients.

In closing, no one is perfect. When I first started my client service career as a tour guide, I tried to please everyone, all the time – trying for perfection. This is impossible to achieve. However, by communicating honestly, and by performing my absolute best under less than ideal situations, any negative perspectives my client had were turned into positives. Anyone can do well when nothing goes wrong, and the client may very well come to the same conclusion, and deciding to use someone else next time. However, when the client saw how hard I fought for him during this adverse situation, he experienced my character, and will remember that in future situations, I’ll have fought for him. This helps create loyalty.

“To Achieve Perfection is not Nirvana, It’s a Self-Imposed Life Sentence” – Seattle Eric

New Book – Must Read!

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Editor’s Note: I’m excited to introduce Seattle Eric as a new contributor on RCG. It must be six months ago that I first approached Eric to see if he would be interesting in coming on as a contributor because I really liked the writing style he demonstrated on his blog about life as a Seattle real estate investor. Now that he’s bitten the bullet and switched to a career as a real estate agent, I’m even more excited to have him on board!

For my first post on the RCG, I’d like to promote my new book, which so happens to also be a topic of much interest recently. All proceeds will benefit…well..me.

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(available while supplies last….shipping and handling extra…)