Woohoo!! Merv's got it DOWN!!

Posted on October 17, 2006 by ARDELL

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[photopress:sc.jpg,thumb,alignright]At first glance it might appear that Greg Swan and I are like-minded when it comes to commission issues. but not so. Greg and I do agree that the buyer should not be led around thinking they are getting a free ride compliments of the seller, and we are both part of a growing minority in that regard. We do in many ways lead the cause of buyers controlling their side of the fence, though sometimes Greg goes a little over the net on that one.

But Merv has got it DOWN!!! Agents like Merv and I are running the test cases that will prove to be the real answer to all of this. No One Size Fits All commissions. A range of prices for various scenarios. A range of prices based on a collaborative effort of determining the client’s needs…a collaboration between the agent and the consumer.

Merv, I am totally with you on this one, and I too have case studies, though by and large, and specifically as to commission negotiations, I was not planning to unveil mine until Jaunary 2007. You GO BOY! Woohoo! The agent and the client TOGETHER determine the services and advices that the client both wants and needs. The agent cannot participate in the consumer cutting themselves short of what they need, to be successful in the client’s goals. Nor should the agent build everything around a total package of high fee services, that always leads to a win for the agent, by including more than the client needs.

For instance, just closed one where the buyer represented himself, after first trying a “full service”/full fee agent. The seller and I gave the buyer the FULL 3% buyer agent fee. Buyer just moved into his new home and is thrilled! Seller is happy and has moved on, after unsuccessfully trying a full stripped down mls only version, before hiring me. Total fees paid in that transaction – 2%. In another instance, on a different property, a buyer called and said she was going to represent herself. I asked her a few questions and she knew absolutely nothing about what I was talking about and was missing several key details needed to represent herself. Seller and I said NO, you can’t represent yourself, you just don’t have the background of knowledge needed, in this particular case, on this particular property. Total fees paid in that transaction (different fully represented first time buyer) – 6% split 3% to me and 3% to buyer’s agent. Portion of my fee used to make repairs to property. I made more on the one where the seller paid 2%, than I did on the one where the seller paid 6%. So much for percentages…they are truly irrelevant.

The agent needs to be involved in determining whether or not the buyer or seller’s wants and choices, fits the consumer’s objectives AND abilities. The consumer in turn has to be realistic about what they can do themselves, and what they can’t do themselves. It’s a collaboration with neither party “dictating” to the other.

THIS is the model of the future. Just as you can hire an attorney to fully represent you, or to partially represent you to save some money, you should also be able to hire a real estate agent to fully represent you or to partially represent you. But no attorney is going to get into the middle of partial representation unless he makes the judgment call that the client is fully capable of handling a portion of the duties. No agent should hand over responsibility to someone without making the judgment call that they know what they are doing, with regard to the services selected and not selected.

A buyer who assumes responsibility for selection of property, via the internet or other means, should not pay the same fee as one who needs agent advices. A buyer who just can’t assume full responsibility for all lender issues, should not pay the same fee as one who needs no assistance with the lending issues whatsoever. A seller who has everything ready when you walk in the door, should not pay the same as someone who needs the agent to help with getting the property ready for market. A seller who can’t read the contract, should not be able to purchase a service that says “all offers to be submitted to the seller direct”, nor should an attorney/owner pay a real estate agent to explain a contract.

No one size fits all commission! No trading in one “one size fits all” for another “one size fits all”! That’s where Greg and I part ways. I love that Merv…and Pam. Get Merv’s blog on your MUST READ list today!

Exotic Loan Programs and Potential Foreclosures

Posted on October 15, 2006 by ARDELL

[photopress:Dollar_20Squeezed.jpg,thumb,alignright]Every “exotic” loan program has a potential appropriate user of that program. What we are seeing more and more today, is the industry using these perfectly good programs inappropriately, to “get the deal done”. Before I go into my take on the situation, let me point out two relevant sites worth reading. One is on “Non-traditional mortgage product risks and the other is HUD’s warning regarding Predatory Lending.

None of the programs being used today are new. What IS new, is the fact that they are being used by the wrong people for the wrong reasons, with the assistance of the real estate professional and the lendng reps. The Feds in their statement, acknowledge that these products have been around for a very long time, and have been used appropriately until recently. On the HUD site, the main point that ties into the “exotic loan” problem, is when lenders are “Making loans without ample consideration to the borrower’s ability to repay”.

Client A has $100,000 in a 30 year bond he purchased 28 years ago with an interest rate of 14%. He has $1,200,000 in various retirement investments. He has $50,000 in a savings account for emergencies. He is 57 years old and is buying a view condo for $750,000 that he plans to live in forever. He earns $200,000 a year and plans to work for at least 8 more years, possibly longer. He decides to buy the condo with zero down and an interest only loan.

That example may sound ludicrous, but 12 years ago they were the ONLY guys I saw using interest only loans. Their investments were earning well over the interest rate on the mortgage. They weren’t going to take money from an investment earning 12% to put down on a property where the mortgage was only costing 7%. Until recently, interest only loans were an investment decision, not a means to qualify for the home purchase.

Basically what the Feds are saying is that the exotic loans are, and have always been, very good programs used sparingly in the past by very savvy and knowledeable people. These lower payments were not meant to be used as a means to qualify for more house than you can afford. They were meant to be used by people who more than qualified at a higher payment, but chose the interest only option for reasons other than to qualify for the home purchase.

The key phrase in the Fed paper is “consideration of a borrower’s repayment capacity”. The key phrase in the HUD warning is “ample consideration to the borrower’s ability to repay”.

Zero down loans replaced VA and FHA for the most part. High rates on the second mortgages replaced PMI. Ten years ago a person might put 5% down and take out a 95% first mortgage and a lower rate, but they had to pay “Private Mortgage Inurance” on the top 15% of the LTV. The PMI amount was not tax deductible. The payment on the second at the higher rate was lower than the loan plus PMI payment and fully tax deductible. A conventional loan with a high rate second may “look” bad, but actually the numbers usually work better than a regular loan with PMI (the old fashioned way) or a 3% down FHA with an up front plus monthly MIP (Mortgage Insurance Premium).

Bottom line is that ALL of the “exotic” loan programs have valid and good uses. Let’s include “stated income”. Stated Income loans have long been used appropriately by people who more than qualified for the loan. Stated Income was often used by someone who had income they didn’t or couldn’t report on their tax return. There was no question but that they could afford the monthly payment, problem was they couldn’t PROVE it, or were not willing to prove it. Maybe it was some limo driver earning $23,000 a year and getting $1,000 in tips he wasn’t reporting. Maybe it was someone with a cash business that was showing $65,000 a year on his tax return and stuffing the rest in his mattress. Maybe it was a prostitute or a mob member…whatever. It was someone who could make the payment, it was just somebody who didn’t want to prove that they were able to make the payment, and so used a “stated income” loan. Stated Income loans are not supposed to be used as a means to “pretend” that you make more than you DO earn.

Zero down loans are NOT for investors! Yes I will yell that one from the tallest building. I heard that lenders “start to question” a guy who has SEVEN zero down loans in a short period of time. DUH! Why’d you let him get to seven, when he shouldn’t have had ONE! Zero down loans are only for people buying a home to LIVE in it.

So, bottom line. When you start seeing foreclosures, don’t assume the market is headed south. Understand that lenders are not following the Fed and HUD guidelines to give “ample consideration to the borrower’s ability to repay” before approving the loan. Maybe the guy who bought at $450,000 only qualified at $400,000 and was stretched beyond his limit. Maybe the guy who bought 6 homes zero down, stacked costs and stated income in 18 months time, got caught in the web he weaved when first he to practiced to deceive, the underlying lender with full knowledge of the real estate agent and the loan broker. Maybe all the guys who took the $6,000 seminar on how to buy lots of property with no money and no job, are all going down…but that doesn’t mean they are going to take the whole market down with them.

I went to a closing with someone else’s client as a “favor”. I got to the table and asked them if they knew that the payment including taxes and insurance was 60% of their gross income! The lender said, “the lender isn’t impounding taxes and insurance”. The buyer said, “We thought the payment was going to be $300 less than that AND included the taxes and insurance. They asked me if they could sell the house in six months if it was impossible to make the payment. I said not with the costs stacked into the price and the prepayment penalty stacked on top of that. I stood up from the table and said, no one is signing today. How many foreclosures will come about because no one stood up and said, “No one is signing today”.

If someone readily qualifies for the payment at say 33% of their gross income (not 60%!) and has a reasonable “back end” when you add their other debt payments to say 40% (not 73%) and isn’t using stated income, no impounds, interest only and subprime loans to get around the high back end, all is fine.

The “Exotic” programs have their place in the lending industry. We just have to stop agents and lenders from using these programs inappropiately as loopholes to “Get the Deal Done”. If the buyer doesn’t like any of the homes he can afford, send him home. Don’t send him to a lender who can figure out how he can qualify to buy a more expensive house, that he will like better, but can’t really afford.

Cocktail Party Primer

Posted on October 13, 2006 by Dustin Luther

I’d like to open this thread up to a conversation on the health of the Seattle market…

but there is a catch. I will not allow it to dissolve into a conversation about racism, liberals, RCG, or faith. If you’d like to have a reasonable intellectual conversation, you are more than welcome to participate. If you attack me, RCG, or any contributor, then I’ll happily delete your comment.

By the way, please consider this post the “anti-linkbating” post. Not only will I quickly delete any off topic comments, but more importantly, I will mark those comments as “spam”. That will allow me to ban your email, name, IP, etc. from the site after only a few off-topic comments.

Two days ago, Michael Lindekugel of Team Reba made a very interesting comment. No one ever challenged him on the merits of his argument, so I think it makes an appropriate starting point into a discussion on the health of the Seattle market:

It’s the hot topic at most cocktail parties. Is Seattle going to experience a bubble and burst? The short answer is no…..the long answer follows:

We experienced a busy market with a shortage of supply and increasing demand resulting in four or five offers and short “Days On Market

Get Creative

Posted on October 11, 2006 by Eileen

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[photopress:ebay_1_2.jpg,full,alignleft]

We lost IT. We use to have IT and now we lost IT and now you can get it on ebay! This IT is that huge chunk of our commission that used to come from being the gatekeeper to the multiple. At a listing presentation our competition was only another agent that charged the same fee (there were a few reduced fee offices but it wasn’t a trend).

But they don’t need us anymore for that. They can get it on ebay. And they can get listed for under $400! Of course, taking and uploading the listing in the multiple is just the beginning, but if we’re going to separate out tasks like the actual listing going into the multiple, why not separate out all the tasks and see what they’re really worth. I agree that uploading the listing is a pretty simple task and a lot of agents just fax it in so it probably is only worth $400 (you have to be registered with the mls for this, plus it involves contracts and accuracy of the listing information)….. if that’s all the service a seller wants.

So, last summer I decided to address all of the things that agents do by breaking up the tasks and establishing a monetary value to each. It’s the ala carte menu of listing services and I googled and googled but couldn’t find anyone with anything complete enough online. I even took the coursework to get licensed as a consutant from the National Association of Real Estate Consultants (NAREC) so I could see if someone had already done all that work.

I separated out the tasks ranging from $20/hr for real estate data input, filling flyer boxes, dropping off keys, etc. (a high school kid couldn’t do all of this) to $300/hr for negotiation and problem solving. Wow, I was surprised at how often I worked for $20/hr. I tried to figure out what I’d be charged by different people doing different levels of work and then added a profit margin.

The $300 work i assumed would be done by the senior agent taking the listing and running the team but personally doing tasks that take a lot of experience and skill like price opinions, market timing, the totally important negotiations with both buyers and the buyer’s agents and solving all those problems (I had a list of 88 things that can go wrong with a transaction). Personally, this is where I’d prefer to spend my time.

The results are on the LTDre.com website if you want to see how it works. My slick computer tech even built it to automatically compute based on different packages and house price.

What got me thinking about this was today’s Inman article on bloated commissions and how much I agree with it. The article suggests, “consumers would benefit most from fee-for-service real estate companies that base compensation on flat fees, hourly fees and other specific payments for services rather than relying on a commission rate that is based on a percentage of the sale price of a home.

Do the Banks Own Seattle?

Posted on October 10, 2006 by ARDELL

[photopress:bank.jpg,full,alignright] The photo is of the Bank I worked in for twenty years. Lots of memories in there and lots of pranks pulled up on that balcony 🙂

I was perusing The Tim’s blog while writing something on my blog earlier today, and ran into the comments regarding King County median income and median home prices, again. I never seem to draw the same conclusions as other people. So I tested my thinking on the subject. From my way of thinking, at least SOME of the people have SOME money to put down when they purchase a house. So the median income is relative to the median mortgage used in the purchase, not the sale price. Isn’t it? So I calculated some random stats you might find interesting to prove that the Banks and Mortgage Companies don’t TOTALLY finance EVERY home purchase.

First I went to the high end and found that Seattle high end homes were financed at only 36% of value. That includes 40% of the randomly chosen properties sold in the last 3 or 4 months that were bought with cash and no mortgage at all. Mercer Island and high end Eastside, like Clyde Hill and Medina, financed at a higher rate of 49.5%. Both represented about $28 million dollars worth of homes purchased. Seattle financed $9,750,000 of their $28,000,000 purchase prices while Mercer Island, Clyde Hill and Medina financed $13,500,000 of their $28,000,000. Still plenty of equity though, so NO, the banks do not own the McMansions 🙂

One thing I found that was surprising to me up in the high end is that one of the most expensive homes sold was sold all cash…not surprising. The occupant at the time of sale was a tenant! That cracked me up. Why would someone rent a Six Million Dollar house? Oh, well…just a random observation.

Then a went down to the $475,000 to $500,000 price range, more in the median range and pulled through separate market segments. South Seattle was 90% financed. North Seattle was 85% financed and Eastside was only 70% financed. Why would the Eastside have more people with more money to put down on their homes? Easy. Cheap condos. The condo market was really cheap two to three years ago, and is still relatively cheap by Seattle standards. So people who bought those instead of renting 3 to 5 years ago had built up enough equity to put an average of 30% down on their single family home purchases.

Just random stats that I found interesting. The banks own 90% of South Seattle, 85% of North Seattle, 70% of Eastside and only 35%-50% of the most expensive homes. At least the ones that everyone who is reading King County median income/median home price stats are talking about, those bought recently.

Charts on a map

Posted on October 10, 2006 by Galen

From Altos Research. I couldn’t get the zip codes to work when I zoomed in.

Love thy Neighbor

Posted on October 9, 2006 by seattleeric

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.

There will never be a real estate bubble

Posted on October 9, 2006 by Galen

When Susan Ryan posted Just Say No To Bubble Talk, where she states “There is no real estate bubble and never will be” (emphasis mine), she probably wasn’t thinking of the traffic and links she would bring in through such blatant link baiting. But in one crazy statement, she swung for the fences and brought in over dozens and dozens of angry replies.

In a sort of a reverse of the Greg vs. Ardell 100-posts-in-24-hours contest, I propose a link baiting contest. Can you write the most outlandish post that warrants over 88 angry replies (current count) in the shortest period of time? Extra credit if you hit 100 in a day. The prize: an autographed photo of Jerry Falwell, a man who understood link baiting before the internet even existed.

The fine print: If a Rain City Guide member takes up the gauntlet, other co-bloggers (or “cloggers”) can only count for one angry reply (that means both of you Russ and Ardell!). You’re on your honor not to comment on your own posts or ask friends to do so. Any single angry responder can count for up to 5 comments, but after that you get no credit for making them angry.

I will take myself out of the running right now, as I don’t know enough about the gold standard to argue on its behalf or enough about the illegality of the IRS to argue against it.

Update: OK Folks, we’re done. Unless you have something to say that hasn’t been said, which includes almost all points of view on the real estate market, views on the writers of Rain City Guide or the writers and commenters at Seattle Bubble, and views on the intelligence or lack thereof of nearly everyone in the United States, lets move on. Do someting that makes you happy (and please, no comments about duking it out on a blog making you happy!). Please, no cheers, no jeers. Seriously. Move on.

The Wisdom of Crowds

Posted on October 7, 2006 by seattleeric

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.

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