The Inventory Crunch: Will It Ever End?

22 Mar

Any potential buyer who has set foot through the doors of an open house will immediately recognize that something’s amiss: What are all these people doing here?

That flood of buyers walking through the door is a symptom of an ongoing housing inventory shortage.

Inventory is down. And by “down,” I mean “seriously and insanely off balance.”

The result? Massive bidding wars. Prices spiraling upward. And there’s no end in sight. This is great news for sellers. Definitely not so much for buyers.

When will the current inventory crunch end?

It’s hard to say, of course. But when prices are heading downward, many sellers rush to unload their properties before prices fall even further. Once sellers sense that the bottom has hit, many of them will sit and wait for prices to increase further before they sell. As prices climb, more sellers will list–and eventually inventory (and prices) will re-stabilize.

The result? Nobody’s listing their properties today.

As of this week, available housing inventory in Los Angeles was down by nearly 50% compared to a year ago, and is a whopping 70% below the inventory peak in November 2007.

Meanwhile, prices are going up and up and up. Check out these statshots from the Department of Numbers:

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And, just to show that this is consistent throughout other parts of Southern California, here’s how things are looking in Orange County:

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Look at that. Asking prices are up more than 30% in L.A. and O.C. in the past year alone

One piece of positive news is that inventory has been slowly but surely ticking upward since the beginning of the year. But buyers are still coming out in droves. Why? With 1) improving consumer confidence, 2) interest rates that are likely to stay historically low for the foreseeable future, and 3) sufficient time having passed so that former homeowners who lost previous homes to foreclosure can qualify for new mortgage loans, many buyers are still seeing now as a good time to purchase.

Bottom line:

Buyers–Allow plenty of time to search. And expect to have substantial competition for any home you’re considering buying. Expect that you will lose out on a few properties before you find an offer that sticks.

Sellers–This really is the best seller’s market in a half-dozen years. If you’re thinking of selling, consider that you’ll be able sell quickly and command top dollar (not to mention other lucrative terms) for your home.

If you’re considering a home purchase or sale, feel free to contact me and let’s talk.

Redfin: “Is This a Housing Market, or a Soviet Grocery Store?”

18 Apr

I’m going to borrow the title of a recent Redfin blog for this post.  Why?  Because I don’t think I could come up with a snappy headline that could come close to capturing the reality of the current market here in Los Angeles.

Many buyers are taken by surprise that their offer was not accepted (or even countered), or that their favorite home went into escrow while they were pondering whether to write up an offer.  This makes sense, of course:  for the past several years, media reports have continued to drive home the point of how terrible the housing market is.

Here in Los Angeles, however, the market has taken a significant turn over the past 12 months.  I encourage you to take a minute and read the link, but here’s a quick rundown of Redfin’s report.  And trust me: the numbers can be felt in the “real world” of real estate.

So here’s the gist:  Over the past year, home prices have been remained relatively stable.  This has brought many new buyers, buoyed by a sense of security that home prices have largely finished falling as well as continued low interest rates, into the marketplace.  Per Redfin, March 2012 saw a 24.6% spike in home sales in Los Angeles proper compared to February 2012; this is consistent with a month-to-month countywide increase of 25%.

And that’s good news for everyone, right?  Well, that’s only part of the story.  Home inventory has been shrinking considerably for the past 12 months.  Inventory in L.A. city limits was down 16.7% from February 2012, and a whopping 38.7% from March 2011.  Nearly every city in L.A. County had similar numbers.   This translates into fewer days on the market for most properties, and a more highly competitive bidding situation for buyers.

Of course, national projections are for an increase in foreclosures as lenders–who have lately slowed their pace of reclaiming distressed properties due to robo-signing scandals, among other reasons–begin to step up their efforts to foreclose on delinquent mortgages.   The true extent of this in the local marketplace is unclear, since major lenders and loan servicers have also been making efforts (some more sincerely than others) to improve the process for review and approval of short sales.  This may lead to a future increase in inventory, but in the meantime, buyers should expect heated competition for the best properties and the best neighborhoods.

So what shall a buyer do?  In fast-paced markets, a few pointers:

1.  Do not expect a screaming deal.  In fact, a full-price offer may not always be adequate.  I recently submitted an over-full-price offer for a condo buyer in West L.A. who was planning to finance with 20% down, only to learn that they were beat out by not just one but five all-cash offers.  This is not uncommon.

2.  When you see a property you like, act fast!  This means we should view the property as soon as possible.  If you like it, submit your offer quickly.  You may not be the first or the only offer, but it’s definitely better to be there early than too late.  On a similar note, I very strongly advise buyers to have pre-approval (NOT just pre-qualification) lined up with their preferred lender before viewing properties.  If you happen to find the right place, you’re in a better position to submit a quick bid. (If you are in need of a lender, I have several highly knowledgeable and responsive mortgage consultants who have served my past clients very well.)

3.  Come in strong.  By that I mean submit your most reasonable offer, or depending on the situation, even your “highest-and-best” offer.  In many cases, buyers do not have the luxury of making a lower offer with the expectation that the seller will counter back at a lower price than they may have been willing to make.  Of course, be wary of offering too high on an overpriced property–especially if you are financing.  A very strong offer is more than just about the price, of course, so we should look at the overall picture of the offer you are considering and discuss possible creative ways to make yours look more lucrative in comparison to any others that may have come in.

For sellers?  If you need to sell your home, and are in a position to do so, this is probably the most favorable time in the past several years for you to do so.  It’s important, though, to be sure your home is priced competitively–even aggressively–in order to get multiple bids quickly.  The faster you can start collecting offers on your home, the more you will be able to take command of the transaction.  Homes that come on the market overpriced still run the risk of languishing, only to later sell at a more significant discount.

If you want to discuss your particular buying or selling situation, please feel free to contact me.

Buyer Investigations and Requests for Repairs: What, How, and When?

14 Jun

If you’re a buyer, or thinking about becoming one, you are no doubt aware that you are allowed the opportunity to inspect the property after the seller has accepted your offer.  The “inspection” is actually a multi-step process that should include many different aspects of the property and its surroundings.

In California, the standard Residential Purchase Agreement includes the following clause:

Unless otherwise agreed: (i) the Property is sold (a) in its PRESENT physical (“as-is”) condition as of the date of Acceptance and (b) subject to Buyer’s Investigation rights; (ii) the Property, including pool, spa, landscaping and grounds, is to be maintained in substantially the same condition as on the date of Acceptance; and (iii) all debris and personal property not included in the sale shall be removed by Seller by Close of Escrow.

 A.  Seller shall, within the time specified in paragraph 14A, DISCLOSE KNOWN MATERIAL FACTS AND DEFECTS affecting the Property, including known insurance claims within the past five years, and make any and all other disclosures required by law.

 B.  Buyer has the right to inspect the Property and, as specified in paragraph 14B, based upon information discovered in those inspections: (i) cancel this Agreement; or (ii) request that Seller make Repairs or take other action.

 C.  Buyer is strongly advised to conduct investigations of the entire Property in order to determine its present condition.  Seller may not be aware of all defects affecting the Property or other factors that Buyer considers important.  Property improvements may not be built according to code, in compliance with current Law, or have had permits issued.

One important point, as a prelude to our discussion about buyer investigations, is to note that the property will be transferred to the buyer in as-is condition.  When making an offer, your price should reflect the condition of the property as you see it, with the expectation that it will be delivered to you in that same condition (with all personal property will be removed from the premises).

However, the “as-is” clause does not excuse the seller from informing the buyer of any relevant, known material facts that might affect the value, desirability, or usability of the property.  This is well established law, and the seller is expected to inform the buyer of anything the seller either knows or “should have known” about the property. (I will note that sellers of foreclosed properties are generally exempt from this requirement on the grounds that the seller is likely to have never seen the property, and certainly has never lived in it.) But, as noted in the clause above, the buyer should never rely on the seller to know the condition of every part of the structure, nor should the buyer expect the seller to know what things might be of importance to you.

In addition, both the listing agent and the buyer’s agent are required to do a visual inspection of the property.  The agents’ inspections should not be relied upon beyond what is visibly evident, though; their disclosures will not reflect things that require climbing into attics, moving furniture, lifting rugs, etc. (There are reasons for that which I won’t get into at this time.) So there are plenty of things that you, as the buyer, will need to consider as you plan your own inspections and investigations.

What Does the Buyer Investigation Include?

The simple answer:  Anything and everything you personally feel is important.

The Residential Purchase agreement form offers some important things to investigate.  Specifically, the buyer has the right to inspector for lead-based paint and other lead-based paint hazards; inspect for wood destroying pests and organisms; review the registered sex offender database; confirm the insurability of the buyer and the property; and to satisfy him or herself as to any matter specified in the Buyer’s Inspection Advisory form (which lists quite a few other factors to consider).  However, unless the seller agrees, the buyer is notpermitted to do any invasive or destructive investigations (sorry, you cannot remove the hardwood floor to look at the concrete slab underneath), nor can you bring in a building code/zoning inspector or any other government employee unless required by law (some cities, such as Pasadena, do require inspections prior to close of escrow).  The contract is not written with the intent of the above being an exhaustive list, nor do I mean to suggest buyers should not give consideration to other factors.

Geologic evaluations may be useful for homes built above, on, or below steep hillsides.

Geologic evaluations may be useful for homes built above, on, or below steep hillsides.

Obviously, an inspection by a qualified home inspector is very important, and I will always strongly recommend this be done.  A good inspector will look at all of the home’s major systems.  This normally includes evaluating the electrical system (including major appliances such as the furnace, pool pump, etc.), looking at the condition of the roof and foundation, making sure doors and windows function properly, and so forth.  A thorough inspection can take up to several hours, depending on the size and layout of the house.

The home inspector’s report is generally many pages long.  Normally you will see a summary of items (sorted by major issues, more minor issues, and other notes/comments), followed by a detailed list of each item evaluated in each part of the property.  You should read this report in its entirety.

Your inspector, or your agent, may recommend other professionals evaluate the house.  If water is slow to drain throughout the house, or there are signs of leaks, a plumber may be needed. (I always recommend having a plumber send a camera into the sewer line to check for any impending—and costly—sewer issues, even if no obvious sewer problems are evident.) Perhaps an electrician, or mold remediation company, or tree surgeon, or even a structural engineer, might need to be called in depending on the property conditions.

Depending on the terms of the contract, the buyer may also be responsible for termite inspections (though, at least locally, it’s more typical that the seller will arrange this part).

If you are planning on remodeling or renovating, the buyer’s inspection period is also a good opportunity to bring in contractors to give written estimates as part of the inspection period.  This allows you the option of backing out of the contract without penalty if the remodeling project will be more costly than anticipated or even impossible to do.

You, as a buyer, should also “investigate” the property by looking around at the neighborhood.  Walk around and see what other types of buildings are nearby that might affect your enjoyment of the property.  Is there a school playground across the street?  That might be great if you have school-age children, but maybe not so much if you work from home and prefer not to be disturbed by daytime noise.  Are there business nearby that might produce early-morning truck noise?  Also, chances are you have seen the property during the day, so try to see the house and the general area at different times and days.  Drive through the neighborhood on a Saturday night to see if the neighbors are inclined to have loud parties (or, perhaps, you might notice that the street light shines right into the upstairs bedroom).  Is the house down the street from a church?  Drive by on a Sunday morning to see what the parking situation is like.  Remember that only you know what is most important to you.

OK, So Then What?

So now that you’ve done your buyer’s investigation, what next?  Well, if you are satisfied with everything exactly as is, then you’re done.  Your agent will provide you with a Contingency Release form for your signature, and he or she will submit that to the seller, who will no doubt be very pleased.

If your inspection uncovered something that concerns you, you can either cancel the contract or request that the seller take some sort of corrective action (provided that you are still within the inspection period specified in your contract).  Keep in mind that the seller is not required to agree to any repairs.  In California, the seller isn’t even required to respond to your request at all (though I advise my own sellers to at least respond, even if the response is to reject the request entirely).

What Repairs Should I Request, and When When Do I Ask for Them?

Sellers may reject requests for correction of obvious defects, such as this damaged floor.

Sellers may reject requests for correction of obvious defects, such as this damaged floor.

Well, as a buyer, you can ask for anything and everything if you so choose.  But, in my opinion, the timing and the type of repair is important.  There are really two opportunities to submit a request for repairs, and in my opinion those opportunities are best approached somewhat differently.

The first opportunity comes at the time of initial negotiations, when you are submitting your offer.  If you want the seller to repair issues (cosmetic or otherwise) that would be obvious to anyone walking into the house, this is the best time to submit them.  For example, if there is an obvious active water leak or the garage door is visibly damaged, I normally recommend including this in the purchase offer because a reasonable person would immediately notice these things.  However, keep in mind that the seller will balance the cost and inconvenience of doing those repairs against the price you are offering.  Also, the seller may have adjusted his or her original asking price downward to reflect the present conditions.

Your second opportunity to request repairs comes after you have done your own investigations into the condition of the property.  In all likelihood, your inspector(s) will have given you a laundry list of things that are “wrong” with the house.  This might include substandard wiring, or nonfunctioning appliances, or an aging roof.  Again, you can request any repairs you want.  However, the longer your list of requested repairs is, the more resistant the seller will probably be to making any of those repairs.  Remember, for example, that the wiring was probably up to code when the house was built, and the fact that it is not compliant with current building codes does not necessarily mean the seller should be held responsible for updating the electrical system now.

So, at this point, obvious issues that you knew about when you submitted the offer are most likely to be rejected.  Minor issues that will not affect the safety or utility of the house (e.g., a broken light fixture or a window that is stuck shut) are probably not going to be accepted either.  I would suggest prioritizing your requests and focusing more on things that fall into the following items:

Health and safety issues:  Many sellers hate the thought of something terrible happening to the buyers as soon as they have moved in.  Serious mold issues, water leaks, immediate fire hazards, major vermin issues, or structural problems are the sort of thing you want to worry about most.

Costly issues previously not known:  If it turns out that the sewer line needs replacement, you can expect to pay several thousand dollars for the repair.  Many buyers are not going to be in a financial position to immediately make those repairs.  The seller (especially if it’s a distressed property or a short sale) may not be able to make those repairs either, but it might be possible to negotiate a partial credit to defray some of the costs.

 

This kitchen would require installation of a stove to qualify for FHA financing.

This kitchen would require installation of a stove to qualify for FHA financing.

Financing issues:  Buyers who are financing through loan programs (such as FHA) that require properties to meet certain minimum physical standards may find themselves in a position where, in order to close escrow, some repairs may need to be made.  This could be correcting peeling paint, repairing a broken window, or replacing a malfunctioning stove.  While these are not directly related to the buyer’s investigation per se since they are part of the lender’s appraisal, these are often known by the time the buyer’s inspections are completed.  If the buyer’s ability to close escrow is contingent upon correcting these issues, the seller is often quite motivated to accommodate these repairs if the cost is not too outrageous.

Bear in mind, of course, that these are very general guidelines; each property and each transaction will be different.  One must keep in mind the nature of the seller and the contract itself; many contracts, especially those for foreclosed properties, very clearly state that the property is being sold “as is,” with the seller unwilling to make any repairs whatsoever.

Remember that the goal of all parties in any real estate transaction is to make the sale happen.  Any negotiations should be handled reasonably, with that goal firmly in mind.  Your agent can help you come to a decision about how to handle any inspection and repair issues.

Getting Your House Ready to Sell: What Is “Staging” and How Do I Do It?

7 Jun

So, you’ve made the decision to put your home on the market.

Of course your house is perfect just the way it is, and everyone is going to love it just as much as you do from the moment they walk through the door, right?

Well, not so much.

In all likelihood, prospective buyers (and their agents) will see your home quite differently from how you see it.  Your sleek and minimalist abode might become “too stark,” your homey and comfortable pad might become “too cluttered,” your eclectic styling might become “just plain weird,” and on, and on, and on.  No two buyers are alike, of course, but as a seller who is preparing to put your home on the market, your goal should be to appeal to the number and type of buyers who are most likely to want to pay top dollar for your house.  If you have a halfway competent agent, he or she should be able to help you get your house ready.

Staging Sounds Difficult.

Honestly, it really isn’t.  I’m pretty sure nearly everyone has been to a model home for a new housing community at some point in their lives.  Generally, the developer will bring in a professional decorator to furnish the house.  Notice how they placed a comfy-looking recliner facing the large picture window?  Did you see the upstairs bonus room that’s large enough for a pool table and an entertainment center?  What about the clean, lush landscaping?

Obviously, nobody is asking you to go out and buy a pool table.  But you can take away a couple important messages from model homes:  First, a good decorator will arrange the furnishings so that they draw attention to the best features of the home.  Second, the home is not overly “personalized”—that is, you don’t feel as though you’re walking in on someone else’s life.  These will both make a huge impact on how welcoming your house feels to a complete stranger.

Let’s look in a little more detail at some ways to help buyers better appreciate your home, thereby helping you get more money out of your home.

Outdoors

The first thing you should do is go to your curb, stand across the street, and assess the outside of your house.  Is the yard overgrown?  Is the lawn dying or unkempt?  Is the paint peeling?  Are the rain gutters falling off the eaves?  Is the driveway full of unsightly oil stains?

Flowers are an easy way to add color to your yard.

Flowers are an easy way to add color to your yard.

Unless you’re marketing your home as a “fixer,” get those things taken care of!  Your buyers are going to be forming an opinion of your home from the moment they pull up.  You want them to feel welcomed.  You want them to feel drawn in.  You want them to feel as though they could come home to that sharp-looking house every day.

So re-seed the lawn.  Buy some flowers and plant them along your walkway.  Sweep up the pine needles that are covering half the yard.  Re-paint the trim if need be (of course, this can cost a fair amount of money—but you will almost certainly make that money back in increased value).

Once you’ve done that, step into your backyard and take a look.  Clean up and remove any stuff you aren’t using—the dog house rotting away in the corner, the old swing set that hasn’t seen any action for a decade, and so on.  Make it as welcoming as reasonably possible, though you needn’t break the bank doing so.  For example, if you have a bare patio, a few tastefully positioned potted plants can make a huge difference.

Indoors

Here’s where you are probably going to have to do the bulk of your work.

The Free Stuff:

You want your kitchen to look like this.

You want your kitchen to look like this.

First and foremost, your house needs to be clean.  I mean sparkling, immaculate, totally totally CLEAN.  Floors, walls, showers, toilets, and even inside your refrigerator.  Buyers are going to assume (perhaps consciously, perhaps unconsciously) that if you can’t bother to keep your house clean, you probably aren’t the sort of person who has been maintaining the air conditioning, furnace, plumbing, electrical, and other costly systems.  Conversely, a clean and organized house will imply you are generally detail-oriented and that there are probably fewer underlying issues that might negatively impact the value of your home.

Once you’ve cleaned your house, it’s time to think about packing a few things away.  Remember: you want buyers to picture themselves living here, so you may want to take a few steps to de-personalize your place.

What does that really mean, you ask?  Here’s what I would do.  Bring in an impartial friend, or your agent, or your neighbor, or someone else who hasn’t been in your house countless times.  Take them into each room, and ask them to point out the first thing they notice.  If the first thing they notice in your living room is the 3’ x 5’ portrait your 6-year-old nephew painted of Uncle Herbert and Aunt Ethel that is hanging over the fireplace, take it down and put something less eye-catching (read: less distracting) in its place.  Why?  You want them to notice the cool fireplace, or the twin sets of French doors, instead.  Ditto for the kitchen.  Get that collection of Elvis Presley commemorative plates into a box, and show off the new appliances instead.

Why is this important?  I’ll tell you two quick stories.  First, I visited a house fairly recently where an entire room whose walls were filled—floor to ceiling—with family photographs.  It was not only distracting, it was borderline creepy. (OK, fine, it was downright creepy.) Not only did I not want to buy the house, I wanted to leave.  Immediately.  Second, once I had gone out with a friend during his own home shopping adventures; when we walked into one of the homes, we saw that the living room was similarly crammed full with the owner’s collection of snow globes.  At the end of the day, what stood out about that house?  Not the view, not the yard, not the large master bathroom…but snow globes.  I don’t even know if the house had a view, a yard, or a large master bath, because the only things we could clearly remember were the snow globes.

You do not want your kitchen to look like this.

You do not want your kitchen to look like this.

Bottom line: You don’t want a buyer’s clearest memory of your house to be something not related to the house itself.  It’s not uncommon that buyers will see five, six, or even ten houses in a single day.  If they can’t name a single remarkable characteristic about the house itself, you don’t stand a chance of selling your home to that buyer.

One other easy, and generally free, thing you can do is to look at each room and decide if what’s in there makes the room feel too small or too cluttered.  If it is, get your stuff out of there.  Put it in a box—you’ll need to do that anyway when you’re packing to move—and put it somewhere else.  You can get away with storing a few things in the garage, of course; however, if your garage is already too cluttered, or if you have a lot of stuff you’re clearing out, or if you are one of the few people who actually uses your garage for storing your cars, consider renting a storage unit for awhile.

Moving furniture around, or out, also helps. There’s generally no need to buy new stuff to make your place look better, but you can certainly do a lot with what you have.  Lose the ratty chair, or the enormous sofa that requires you to squeeze around it to get to the back yard.  That bookcase that’s blocking one of the windows?  Get it out of there, now!

The Stuff that Costs Money:

Assuming your house is in decent shape already, you shouldn’t need to spend much money fixing things up.  It’s good to fix any obvious defects such as a broken toilet or that sort of thing.

New paint is good.  It makes the house sparkle, especially if the old stuff is faded or scratched/gouged/scuffed/covered with your kids’ fingerprints.  But if you’re going to paint, you might consider going away from white.  I know, white is safe, and I admit that every single interior wall in my own house is white (that was a conscious decision; I wanted to draw the eye toward the beamed ceilings instead), but you might consider adding some warmer (but not too strong) colors, or tasteful accent walls (again, not too strong).  That will of course depend on your floorings and furnishings; the last thing you want is for your home to be an unsightly clashing of colors.

What about carpet/flooring?  Should you replace it?  Personally, I would say no.  Flooring is expensive, and many buyers are going to want to install flooring to match their own tastes anyhow.  If you have hardwood, tile, or some other hard surface flooring (my own favorite is polished concrete), re-finishing or re-grouting isn’t a bad idea and often doesn’t cost too much.

If you have carpet, a good shampooing and/or steam cleaning might be in order.  That will not only help to remove stains, but will also help your house smell fresher.  I don’t recommend replacing carpet, though.  If for some reason you do need to re-carpet, here are two tips:  First, use a neutral color; spending thousands to install forest green carpet will do little to increase the value of your home, and most buyers will factor in the cost of replacing that carpet into their offers.  Second, don’t use the cheapest quality you can find; buyers will recognize lousy carpet and will see it as having little or no added value.  My advice for carpet: if it needs to be replaced, offer to credit the buyer a specific dollar amount toward the cost of replacement so they can pick the style and color of their choice.

Sounds

Your goal, when you are planning for open houses or showing appointments, is to make buyers feel as though they’ve stepped into a serene retreat.  If your house is well-soundproofed—good insulation in the walls and dual-paned windows help—then you may not need to do anything.  If noises do intrude through the house, or if you just want to create a nostalgic feeling, soft piano or light jazz music can be helpful at accomplishing both (but don’t blare it through the house—you want it to be subtle!).

Sounds of nature will make your home feel more relaxing.

Sounds of nature will make your home feel more relaxing.

If the house is affected by ongoing noise—say, a barking dog next door or a major street behind the house—you may need to get more creative, and to spend a little more money addressing the situation.  Often, landscaping or improved fencing can make a huge impact.

Oh, and be sure to turn off any electronic equipment that creates an irritating noise.  I once brought buyers into a house that had some piece of equipment that was causing such an obnoxious, high-pitched warbling noise that we left after viewing only half the house.

Smells

I’ve seen widely divergent opinions on this.  Some agents will argue that you want your place to smell “homey.”  I’ve been in some model homes where the sales agents will bake chocolate chip cookies throughout the day, so that in addition to having a free snack, the house will smell like cookies.  Now, we don’t all have the wherewithal to stay at home baking all day, so we have the options of potpourri, flowers, or those wonderful sprays/scent sticks that smell like potent and synthetic imitations of an actual, attractive scent.

If I may veer off into a brief moment of psychology, your sense of smell is different from all your other senses in that, compared to your other senses, it is more directly wired into the parts of the brain that process both long-term memory and emotions.  So smells have a very powerful influence on one’s emotions.  Ever catch a whiff of something that immediately takes you back to a very specific moment in your childhood?  I mention this because smells associated with a negative experience can be strongly aversive.  Someone who had been, say, brutally attacked in the Otis Spunkmeyer factory (I suppose it’s possible…) would probably not love the smell of your freshly baked chocolate chip cookies.

Further, a strong scent could suggest you’re trying to cover up another smell.

So if you’re going to use a scent, I’d suggest it be very subtle and non-specific.  My advice: you want your house to smell “fresh”—meaning, odor-free.  That means you should keep the trash can free of stinky objects, keep the bathrooms, refrigerator, and the cat’s litter box cleaned, and avoid cooking foods that leave strong, lingering odors.  Again, having your carpets thoroughly cleaned will also help get rid of any lingering musty odors.

Wrapping Up

Hopefully after taking all of these steps, your home will look and feel fantastic when buyers walk through the door.  Of course, there are many other factors (price, location, general market conditions, etc.) that will affect the level of buyers’ interest in your home, but making buyers who feel at home in your home will do much to influence them to pick yours over the more poorly maintained place three doors down.

I would encourage you to talk to your real estate agent, as he or she should be able to give you more specific advice regarding your own house.  Best of luck!

Why Your Home Is a Lousy Investment…But Is Still an Excellent Investment

14 Dec

We’ve all heard it before: renting just puts money in someone else’s pocket.  Why would you do that when you could be building equity in your own home instead?

One major argument espoused by those who encourage home buying is that your rent will continue to go up and up and up, while your major expenses (mortgage, property taxes, etc.) are largely fixed.  Of course, consider how many of these people are saying this because they have a vested interest in your homeownership:  your local mortgage company, your local Realtor, your friend who really wants you to buy the house next door to them so a new meth lab doesn’t move in to replace the one that was there before.

These same people will also emphasize that, not only do your costs not increase when you own a home, you also get the added benefit of being able to deduct your mortgage interest on your tax returns.  Does that sound contradictory?  It should.  Early on, most of your mortgage payments go to pay down your principal.  What this means is that you have less tax-deductible interest as time goes by; eventually, the tax advantages of home ownership become less and less important.  Of course, you can also deduct your property tax payments from your income taxes…but do you really want to pay taxes in order to realize the benefits of receiving a small portion of them back come April 15th?

And let’s not forget building up equity:  Realtors in particular love to remind you that real estate, on average, appreciates at a rate much faster than inflation.  What a surefire way to become a millionaire, simply by paying your own mortgage!  Well, as it turns out, there’s a major flaw in that argument too.

So is homeownership really a good deal?  Actually, despite all the misleading evidence, home ownership remains—on the average—a financially savvy move.  Let’s take a look at some of the numbers.  Yes, there is going to be some math involved (sorry).

Let’s Look at Apprecation

I’m going to start with the last issue I mentioned—inflation—first, because much of what I’m going to say will hinge on this.  If real estate truly does gain faster than inflation, eventually we hit a point where nobody can afford to buy a home, and homes stop selling.  Hmm.  Does that sound at all like the bursting bubble we’ve seen in the past couple of years?  In actuality, it is true that home prices have increased faster than inflation:  the average new home sales price increased 5.4% annually between 1963 and 2008 (per the U.S. Census Bureau), which matches the average price of existing homes sold between 1968 and 2009 (per the National Association of Realtors).  Compare that with the average rate of inflation of 4.4% per year within the same period (per the Bureau of Labor Statistics).

So real estate is clearly a hedge against inflation, right?  Well, not so fast.  Let’s keep in mind that the average home has increased dramatically in size—from about 1000 square feet in 1950 to well over 2000 square feet by 2000—at a rate of about 1% per year.  If we discount this average increase, we can see that a home of x square feet would appreciate at a rate of roughly 4.4% per year.

Does that number look familiar?   Yep, on the average, and barring any external factors (such as skyrocketing crime rates, collapse of or sudden boom in the economy), any given home should appreciate precisely at the rate of inflation.  Not such a great investment now, is it?

So Renting Is a Good Option, Then?

Hold on.  Obviously, there are going to be dramatic local differences in appreciation rates.  Between 1998 and 2008, the average sales price of a house in Detroit fell from slightly more than $70,000 to just over $20,000.  Compare that with Los Angeles County, where home values increased in value from $191,700 to $340,000 within that same period.  And of course, the times change as well; L.A. County looks like a great place to invest, unless you had decided to take the plunge in 2006 when the median price was nearly $600,000.  So you can build some serious equity, in certain areas, at certain times.

But if it’s your home, no matter how much equity you have, you still need somewhere to live.  If you cash out that equity by selling your house, you either have to 1) buy a new one or 2) rent.  If you time your sale right, you can sell at the peak of a real estate boom, then rent while you wait for the market to crash, and buy a nicer house for dirt cheap at the bottom of the market.  Obviously, opportunities to do this sort of thing don’t come often, and I don’t recommend using that as your principal investment strategy.

Where was I?  Oh yeah, renting.  Renting can be a good option; as the last real estate downturn was beginning, I was renting a house for about $2300 a month.  That was a fair amount of money to be “throwing away” to my landlord, but consider that comparable houses were depreciating at a rate of $5000 or so a month.  Once the numbers worked out better and I found a house I really enjoyed, I bought it.  Of course, I did lose some equity after that as the market slid a bit further, but that underscores one other point: the decision to buy or rent isn’t solely a financial decision.

But I digress.  Let’s crunch some numbers.

Some Financial Assumptions

Let’s say you happen to have $60,000 in cash sitting around and are deciding whether to buy a house, or rent and invest it in the stock market instead.

We will assume inflation increases at the average rate of 4.4% per year, and that a given house will appreciate at that same rate.  The stock market has increased, on average, at a rate of 9.4% per year between 1900 and 2009, so let’s assume it continues at that rate.

Just for fun, let’s also assume that you live in an area with a rather favorable property tax rate of 1.1%, which (in keeping with Prop. 13 limits) increases at a rate of 2% per year.

And let’s also assume that your comparable rental unit falls under the City of Los Angeles’ rent control ordinance, and your rent can be raised no more than 3% annually.

In the interest of simplicity, I’m going to exclude tax deductions (since those are going to be variable based on your personal tax situation), homeowners’ insurance rates (which will cost more than renters’ insurance), any HOA fees, and maintenance/upkeep costs (since, again, those will vary).  You should consider those in your personal financial plan, but let’s just keep things simple in our little imaginary world, OK?  Good.

Ownership Has Its Rewards

So you take that $60,000 and buy a $300,000 house with 20% down.  You finance the rest with a 30-year fixed-rate mortgage at 6% interest (yes, you can get lower rates now, but historically that’s pretty darn good).

After 30 years of 4.4% appreciation, your $300,000 house will be worth $1,091,700.  Hooray!  You’re a millionaire!  If you sell the house, that is.  I imagine that after 30 years, you’ll be ready to take your winnings and retire to Arizona.

Except that, after 30 years, you will have made $518,010 worth of mortgage payments and paid $131,015 in property taxes.

So what’s your profit?  If you take $1,091,700, then subtract the $518,010 in mortgage payments, $131,015 in property tax payments, and your initial $60,000 down payment, you’re ahead $382,675, which is a 638% return on investment, or about 6.66% per year increase on your initial $60,000 investment.  Not too shabby, actually.  It’s even better than putting your $60,000 in an account with a 4.4% annual yield; it does help to be able to leverage borrowed money to your advantage.

But What About Investing that $60,000?

Excellent idea!  You put your money into stocks, and you ride the market for 30 years.  With the value of your stock portfolio increasing in value 9.4% annually, you wind up with $888,528.  Subtracting your initial $60,000 investment, you just made a profit of $828,528—a far more impressive 1,380% return on your investment.

So, clearly, you would be a fool not to invest that money in the stock market.  Hello!  You’ll more than double your profits compared to building equity in your home!

Except that you still need to live somewhere.

Oh, yeah.  I forgot that part.  So, let’s say you find a nice rental that is comparable to that nice $300,000 house you were considering.  Let’s say you get a screaming deal of $1,400 per month on the place and you stay there for 30 years.  Assuming the aforementioned 3% annual rent increase, you will have paid out $799,267 in rent.

Subtracting your rental costs, you’ve made a piddly $29,261 from your original $60,000, for a net return on your investment of 48%.  Plus you have to continue to pay your rent.

What If I Already Own AND Have a Spare $60,000?

Obviously, then you can stand to make some serious bucks in the stock market.  A 1,380% return on your investment is pretty sweet.  But real estate investing can be lucrative too, if you’re willing to stick it out for the long haul and don’t mind your money being tied up in highly illiquid assets.

Let’s say you use that $60,000 as a down payment on a $300,000 house, and you rent it to someone at $1,400 per month for 30 years while they “invest” their money in the stock market, and you increase their rent 3% per year.  After 30 years, you have $382,675 in profit from simply letting the house sit, plus $799,267 in rent payments.  That’s $1,181,942, or a 1,969% return on your initial $60,000 investment, after 30 years.

Of course, I’m over-simplifying things: few places will be continuously occupied by the same tenants for several decades (though I do know of some that have been).  That’s bad in terms of clean-up, vacancy, etc., but good in terms of being able to raise the rent to current market rates when tenants move out. (In reality, single-family homes in L.A. are not subject to rent control laws.) And we all know that rental properties—and their tenants—don’t just take care of themselves, so they can require more active involvement on the owner’s part than buying and selling stocks.  And mortgage interest rates tend to be higher for investment properties than for owner-occupied properties.  And so on, and so on.  I told you I was going to keep things simple.  If you’re a serious investor, you’ll already know the ropes (and you probably aren’t even reading this blog); if you’re not an investor but are considering becoming one, hopefully you’ll know that you need to consult with your own investment counselor, tax advisor, spouse, and so on.

The Non-Monetary Benefits

I have always been of the opinion that we should not look at our home as financial investments, but rather investments in ourselves and in our communities.  However, many of the other benefits of home ownership do relate to property values as well.  Neighborhoods that are primarily owner-occupied tend to be considered more desirable than neighborhoods that are primarily tenant-occupied.  Residents’ sense of permanence very directly produces increased community involvement, pride of ownership, and all sorts of other intangible benefits that in turn lead to increased property values.

By being involved with your neighbors, you’re not only improving your own quality of life, but you’re also protecting your investment—whether you look at your home as an investment or not.

The Crisis of Credit Visualized

29 Oct

For anyone who’s genuinely curious about how the current credit mess happened but (like me) gets utterly lost when people start throwing around terms like “collatoralized debt obligations,” I found this series of videos earlier.  They’re well worth the time to watch.

Part I:

Part II:

And one more great video. The Financial Crisis Explained: Subprime Mortgages

Enjoy!

New to L.A.? Get to Know Your Town!

21 Oct

Greetings, everyone!  I am certain that you have been eagerly awaiting my next blog post, but have been dismayed to see the days tick by without hearing from me.

Right.  Well, I do have a darn good reason for my absence, and it eventually ties into my primary topic, so let’s go for a short ride.  I was asked to attend a conference in Atlanta last week, so while I was out there I used the free airfare as an excuse to take a rather exhausting road trip.  After a red-eye flight from LAX, I left Atlanta on the morning of Friday, October 1st; I returned to Atlanta nine days later, having logged 3500 miles on my rental car and 23 states visited.  Over that time, I visited more than 100 cities, first driving westbound through the South, then turning north at Shreveport and loosely following the Missouri River into North Dakota, then heading southeast and around the Great Lakes into Michigan, then heading back in a southeasterly direction through the Appalachians and finally back to Atlanta.

Yes, that’s my idea of a relaxing vacation.  I think I am physically incapable of being lazy.

This was by no means my first cross-country trip, but I am always amazed at how many fantastic sights there are to discover along the way.  Adorable downtowns.  Dramatic parks.  Countless historical sites.  And of course, there is always an impressive cast of characters:  Miss Mary, a waitress at a Waffle House outside Atlanta, and quite possibly the sweetest person I have met in my life; Lee Wonnacott, whom I met in eastern Tennessee and who is on a mission to visit and document as many veterans’ memorials in the United States as possible; the wonderful staff and fantastic confectioners of Roers Family Bakery in Alexandria, Minnesota; the list goes on and on.

Though I largely had very little time to spend in each town, I did come away a rather extensive list of places I decided I absolutely must re-visit someday.  So much to see!  So much to learn!  So many places in which I actually pictured living (though, of course, I am not sure I could part with the Southern California weather and deal with the harsh Midwest winters or the Southern summers again; been there, done that!).  Of course, this was from the perspective of someone who had never visited most of these places—knowing so little about many of these various cities and towns, I wasn’t always sure what I “should” be seeing while there, or how I would actually learn about any of them in the highly unlikely event that someday I actually do decide to relocate.

And that brings me, several paragraphs later, to the main point of today’s post:  If you’re a new (or long-time) resident to this glorious city called Los Angeles, how on earth do you make sense of your new town and discover what this great city has to offer?

In a city as large and varied as Los Angeles, you will never be at a loss for things to do.  If you’re new in town, you will no doubt be compelled to visit the most popular spots in the city—Hollywood, Santa Monica Pier, Griffith Park, La Brea Tar Pits, and the other “big name” attractions.  Don’t get me wrong, those are must-see attractions, but those are barely the tip of the iceberg.

This is going to sound corny, but when my wife or I discover some place we want to visit, but our schedules don’t allow us to get there right away, we jot down the name of the place or activity on a piece of paper and toss it into an envelope.  Then, when we have a free weekend and want something to do, we randomly draw one of them out of a hat.  This helps us be sure to get out and see some of the more obscure museums, parks, downtowns, or other venues we would not be likely to recall.  I suggested that to a friend of mine, who loved it so much she and her husband started doing that too.  The drawback is that quite often, when I pull up Facebook, I discover that they’re visiting a lot of the places I wanted to see!

Upcoming events. Countless websites listing upcoming cultural and entertainment events exist.  A few that I like to use:  1. The Auto Club. If you’re a member of the AAA/Auto Club of Southern California, I highly recommend paying attention to the “Out and About” section in Westways magazine.  Their editors have a fantastic capacity for pulling together an eclectic selection of events.  2. The newspaper. Most major newspapers, of course, will include upcoming events in their print editions.  The Los Angeles Times has listings of upcoming events on its “Find Local” section online (scroll down to Events).  L.A. Weekly is an excellent source.  The Daily News usually has a calendar of events in its print edition as well.  3. L.A.-geared websites. There’s LA.com, LAist, Eventful, and the list goes on.

Car shows and auto museums. Southern California is the car capital of the world, and a glance at the sheer number of auto museums and car shows certainly reflects that.  The So Cal Car Culture website features a current and comprehensive listing of upcoming car shows—some free, some paid—as well as cruise nights across the Southland.  The big daddy of them all is the Cruisin’ for a Cure show, which runs each September in Costa Mesa.  The Bob’s Big Boy in Toluca Lake and freshly-rebuilt Bob’s Big Boy Broiler in Downey have recurring car shows and cruise-ins as well, plus have the extra bonus of some eye-popping architecture to boot.  Top on the list of museums (at least in my book) are the Petersen Automotive Museum, the Nethercutt Collection, and the more recently opened Murphy Auto Museum.

Other museums. Wikipedia, surprisingly (or not), has an impressively thorough directory of museums in California, including such oddball attractions as the Bunny Museum in Pasadena and the Museum of Jurassic Technology in Culver City. (However, they omitted the Museum of Death in Hollywood.) L.A. has many more mainstream cultural institutions, of course, including the renowned Getty Center and Getty Villa, the L.A. County Museum of Art, the Museum of Contemporary Art, the Norton Simon Museum, and so on.

Modernism. I have been an active participant in the Lotta Livin’ forums for several years, and have found out a great deal of off-the-beaten path entertainment options oriented toward mid-century modernism and mid-century culture in general.  Check out their “Modern Calendar of Events” section for all sorts of events in Southern California and beyond—many of them more obscure than the next.  Retro shows, screenings of old movies, architecture symposia, you name it.

Historical and architectural tours. There are plenty of opportunities to get guided tours of the city, and I don’t mean the cheesy “celebrity tours” you see cruising around Hollywood and the Westside.  I mean actual ones where you learn the history of the city.  The Los Angeles Conservancy has a wide variety of self-guided and guided tours of Downtown Los Angeles and vicinity; I’ve done nearly all of them, and each one is an eye-opening experience even for those who are familiar with Los Angeles.  The Conservancy also has links to many other tours run by affiliated organizations.  For a more offbeat experience, Charles Phoenix—L.A.’s King of Kitsch—periodically runs tours of Downtown Los Angeles (and occasionally other sites); his unique and hilarious perspective of the town is excellent.  His “field trips” (and they really are, complete with school bus rides) are not cheap, but they are highly worthwhile.  For the more macabre among you, Dearly Departed Tours runs some very interesting Hollywood tours from a very unusual perspective.

As a personal plug, I’ve also developed a guided walking tour of Downtown Los Angeles.  It’s a long walk, maybe 10 miles or so long, but is a great way to see a great deal of the history of the area.  Drop me a note if you’re interested; if our schedules allow it, I’m happy to show you around too.  It’s free since I 1) enjoy downtown and 2) could really use the exercise, but I do have to limit it to very small groups.

Hiking/biking.  I’ve found that hiking and cycling are great ways to see the area.  Localhikes.com has a good (though not necessarily comprehensive) listing of trails to explore.  The L.A. area unfortunately does not have an abundance of bike paths, but the L.A. Bike Paths website offers a few to explore.

Geocaching. For those of you who’ve never heard of it, geocaching is essentially a GPS-based treasure hunt game (Wikipedia does a much better job of explaining it than I can).  I enjoy it because it helps me discover new, out-of-the-way places I never would have discovered on my own.  It’s also something you can combine with other activities, especially hiking or urban exploring (or, one of my favorite pastimes, off-roading)  You do need a GPS, but it’s otherwise free to play; check out the Geocaching.com website, where you can find listings of geocaches near you.

And finally… I can’t pass up an opportunity to plug Hidden Los Angeles, which has been a fantastic resource for discovering many things to see and do, even for this longtime Angeleno!  You can find almost any sort of activity on this website.

Of course, there is no way I could ever hope to provide an exhaustive list of what there is to do in and around Los Angeles, or even an exhaustive directory of websites where you can find this information.  L.A. is a big place, and you can find almost anything to do at almost any time of the day, any day of the year.  For those of you who are not yet greatly familiar with the terrain, I do hope this has been of some use to you!  I look forward to your comments; let me know what you like to do in this great city!

No Surprise Here: 43% of Sales in California are Foreclosures

30 Sep

Newsflash:  In case you have been living in a cave, you might be interested in knowing that foreclosures continue to dominate the market.

RealtyTrac’s latest numbers on home sales are out.  While Nevada landed on top of the pack in terms of the percentage of homes (a whopping 56%) sold during the second quarter of 2010 that were foreclosures, California was a not-too-distant second at 43%.  This is something that should not be entirely surprising:  many buyers avoid short sales, and sellers who are not underwater on their mortgages have little incentive to sell unless they absolutely need to.

Consider, though, that the average foreclosure sold at a 39% discount compared to non-foreclosure sales.

That’s great news for buyers.  The sheer number of foreclosures puts a great deal of downward pressure on prices of non-distressed properties.  And if you happen to be handy with tools, you can save huge by buying a foreclosure and putting in a little bit of sweat equity.  However, buyers also need to keep in mind that many banks have already priced their properties with that discount figure in mind.  You may be in for a surprise if you think the bank will consider lowball offers; often, the bank has already priced the property for a quick sale, and many banks won’t seriously consider offers that are significantly below their asking prices. (That’s not to say they won’t be willing to negotiate at all, especially if the property has been languishing on the market for some time.)

Of course, these numbers are terrible news for sellers, especially those without significant equity in their properties.  It is true that appraisers and brokers do not include foreclosures in their estimates of value on similar properties (only “arms-length” transactions can be factored into valuations), and foreclosures often have significant problems—we’ve all read about stories of angry owners destroying their homes as they’re being forced out—that often appeal to very different pools of buyers than non-distressed homes.  However, sales prices of foreclosed properties continue to have a profound effect on equity sales.  Equity sellers who are selling “fixers” will need to price their homes to compete with foreclosed properties.  Even sellers who have pristine, move-in-ready homes must be prepared to negotiate with buyers whose offers are going to be in a strong position to walk away if you’re not willing to budge on price, and who will simply move on to Plan B: buying that foreclosed house down the street from you and then doing a little work.

Attention Buyers: What Your Real Estate Broker Doesn’t Want You to Know

22 Sep

Tonight’s blog is a sequel to yesterday’s buyer-oriented post.  All right, buyers, here’s what other brokers are going to hate me for telling you.

It’s OK; I’m comfortable with animosity.

No, it really isn’t always a great time to buy. It’s certainly always a great time for you to buy—for your agent, that is.  Though it isn’t always the case, real estate agents are normally paid by the seller on a commission basis.  That means if you don’t buy a house, they don’t get a check.  Is it really in your best interest, then, to take their word on current economic data, mortgage rates, and the like?

Truth be told, most agents are going to assume you’re reading the news, but there are always going to be a few unscrupulous ones who will stretch the truth a little.  I went to an open house a few Sundays, and the agent (a highly experienced broker with years in the business) tried to convince me that I had to buy now before the new real estate sales tax took effect.  This “sales tax” was allegedly a 3.8% federal tax on all real property sales that was part of the recent health care legislation.  One problem:  IT ISN’T TRUE.

Oops.

I can’t say for sure whether this broker was being deliberately deceitful or simply ignorant, but it astounded me that such mistruths were being spoken.  These guys should know better.

Anyway, the moral is, do your own research.  Look at the leading economic indicators for your area.  Look at the trend upward or downward of home prices when compared to rental prices (you’ll see a future post about renting vs. owning; you might be surprised).

Of course, the “right” time to buy is going to be different for everyone.  I sat out the last real estate run-up, renting a house that was costing me less than half the cost of what the mortgage would have been had I bought the house at the peak of the market.  I felt fortunate to ignore the calls of friends and real estate agents to buy now, before I got priced out forever.  I rolled my eyes; I knew that real estate is cyclical, and after every major boom is a major bust.

My house is a 1350 square foot house in a nondescript San Fernando Valley neighborhood. (I mention that only as contextual purposes.)  I bought it as a foreclosure for $225,000 less than the previous owner had paid, 18 months earlier.  Had I drank the Kool-Aid, I would have been the one losing the house instead of benefiting from the crash.  Of course, had I waited even longer, I could have paid less for a similar house, but the important things to me are that 1) I don’t have to stretch to make my mortgage payment, and 2) I’m paying less than I was paying as a renter.

However, money is only one factor.  I enjoy having a bigger yard than I had before, and have enjoyed renovating the house and becoming more involved in my neighborhood than I ever had before.  There is a certain feeling of pride, belonging, and of course stability that having a real “stake” in my neighborhood provides.  That’s something you really can’t put a value on.

Your story will differ.  Maybe interest rates are low now, but it might be worth your while to improve your credit score.  Maybe you expect prices to continue falling, but with your second child on the way, you need more space.  Maybe you need to see whether your new job is going to pan out.  Maybe you don’t quite have the 20% down payment you were hoping to have, but the house you’ve dreamed of owning for years just came on the market.  There are many reasons why it is or is not the right time for you to buy.

Your agent isn’t necessarily “your” agent. I’ll probably have to do another post on agency laws and agency disclosure requirements, because it can quickly get confusing (and, unfortunately, boring).  Some states have slightly different definitions, but in California, there are three types of representation:  1) single agency, where the agent represents the seller only; 2) single agency, where the agent represents the buyer only; and 3) dual agency, where the agent represents both the buyer and the seller. (Dual agency is fraught with potential conflicts of interest, and requires the agreement of both parties.)

In 30 seconds or less, here’s what you need to know.  The fact that you are the buyer doesn’t necessarily mean that your agent actually represents you.  That’s right.  Unless you have an explicit agreement (usually in the form of a written buyer-broker agreement) with your agent, your agent technically represents the seller.  The agent still owes you the duty of fair and honest dealing, but his or her fiduciary responsibility is to the buyer.

So be careful.  As the buyer, make sure you have an agent clearly representing you under option #2 above.

If you’re a buyer, and you’re submitting an offer directly through the listing agent, be aware that the agent can never represent you only, and anything you tell the listing agent (e.g., “Sure, I’m willing to pay their asking price, but I want to make a lower offer first”) can be used against you in negotiations.  That’s a great way to find yourself on the wrong end of the deal.

Commissions are always negotiable. To quote yesterday’s post, “Always!  Always!  Always!”

Agents will tell you that they work for the buyer for free.  You don’t have to pay a dime!  That may be technically true, but remember that the seller typically pays your agent from the proceeds of the sale of the house.  OK, fine, but who pays for the house?

Many people know this already, but for those of you who are new to the home buying process, here’s how it works.  When the seller signs a listing agreement with their agent, the listing agreement includes a certain percentage of the sales price as that agent’s commission.  Their agent will split the commission with whatever other agent produces the buyer.  So if the commission is, x%, your agent gets 1/2 of x% and the seller’s agent gets 1/2 of x%. (Actually, the agents’ brokers also get a cut of the proceeds, but let’s keep it simple.)

Again, this isn’t technically true, but you’re essentially paying the buyer a certain percentage extra for having your own agent.  If your agent’s commission was completely eliminated from the equation, the seller would probably be willing to accept a lower sales price.  Of course, agents do invest considerable time and cost in helping you find a home and navigate through the transaction, so they aren’t going to work for free (unless your best friend or a close family member happens to be a broker).

However, what you might not know is that you can negotiate to get some of your agent’s commission refunded back to you?  It’s called a buyer rebate; familiarize yourself with this term, because it can put money back in your pocket after you close escrow.  Sometimes it’s as easy as simply asking your agent if he or she will give you a rebate.

Now, agents who work for traditional brokerage firms might not have as much flexibility in allowing rebates.  This is simply because many of these firms take a large cut of your agent’s commissions.  However, agents who work for flat-fee brokerages as well as independent brokers themselves can often offer a substantial rebate without sacrificing service. (One more shameless plug—Perkins Realty Group fits into that category!)

Your agent’s “good” inspector or mortgage guy might be good…just not for you. Not surprisingly, most buyers don’t have a handy list of home inspectors, pest control companies, escrow agents, or title companies.  But before you blindly take your agent’s advice, do your own research and make sure these companies or individuals have a good reputation.  A few minutes on the internet is usually all you need.

There’s a difference between an inspector who is good and one who is good for you.  A friend of mine who is a home inspector** in Texas is known—only half-jokingly—in his field as a “deal killer.”  The thoroughness in his job has led to discovery of previously unnoticed defects that affected property values, and has wound up scuttling more than a few real estate transactions because the banks would no longer finance the property.

**(In the interest of full disclosure, I have no business relationship with the aforementioned home inspector.)

His discovering those defects certainly worked well in the buyer’s favor, but there have been agents who have stopped referring clients to him after a deal fell through.

Yep.  Because he did his job well, he lost business. So, who do you think those agents are referring their clients to now?  My guess is they’re calling up an inspector who won’t sink the deal.  The agents still get their commissions, and the owners hopefully won’t get a house that’s about to collapse.

Again, I don’t mean to imply that this is the norm.  It most certainly is not.  Defects found by an inspector who does “too good” a job may cause a deal to fall through, but most agents will recognize that having someone like that on their team will win even more customers.  Most agents will understand how badly their reputation will suffer if their recommended inspector misses something obvious—and expensive.

But do your own research anyway.

_______

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Attention Sellers: What Your Real Estate Broker Doesn’t Want You to Know

21 Sep

When you buy or sell a house, you expect that your real estate agent will be completely honest and up-front with you.  In my experience, most are.  In some cases, though, you might be surprised what goes unspoken.  Read on.

Commissions are always negotiable. Always!  Always!  Always!  This is especially true when the economy is doing well and the real estate market is booming.  The more listings the agent can get, the more properties he or she can quickly unload, and the more quickly those commissions add up—and if taking a lower commission is they key to getting those listings, you can bet they will do that (especially if prices are skyrocketing!).  But regardless of the market conditions, “always” always applies!  Have I said “always” yet?

Here’s why.  The Sherman Antitrust Act forbids real estate brokers from agreeing upon a “standard” commission structure.  Two or more brokers so much as discussing their commission rates could be seen as a potential antitrust violation. (It is of course true that, in practice, most commissions fall within a fairly similar range—but don’t let that fool you for a minute, commissions are always—always!—the result of individual negotiations between the agent and the client).  A savvy broker will recognize that these days, not everyone even has enough equity in their home to pay the “standard” rate even if they wanted to.  If he or she won’t budge, unless that particular brokerage offers some sort of amazing service that nobody else can offer, my advice would be to move on; a broker who refuses to see eye to eye with you on this part of the transaction just might refuse to see eye to eye on other issues as well.

All those newspaper ads are marginally useful at best. It’s true.  Having a photo of your house in the paper, or in one of those glossy “Homes for Sale” magazines you find on a rack on your way out of the grocery store, is great for your broker.  The message that is actually communicated to readers is, “Look at how many listings I have!  You should call me!”  That’s fantastic for your broker, but not much good for you.  Want proof?  Check out this graphic, based on 2008 data from the National Association of REALTORS®.  A mere 4% of buyers’ first exposure to the home they wound up buying was through print media…and an advertisement in a wide-circulation newspaper or magazine can cost hundreds of dollars per publication (or much more once you start talking about large, full-color spreads).

Let me back up quickly to reiterate this.  That’s right.  4%.

Ouch.

So then, what do fancy print ads do for you, the seller?  Well…they give sellers the impression that the broker is going all-out in his/her effort to sell your house…and give your agent an excuse to charge you a higher commission! (Of course, I will always submit print ads for my own listings as part of my overall marketing package if sellers prefer that I do so; however, I do adjust my own commission rates upward a notch to compensate.  The choice is always in the seller’s hands, as it should be.)

So then, how do most buyers find their new homes?  Let’s go back to the aforementioned chart.  The fact is, 90% of buyers found their house through friends/neighbors/relatives or the seller directly, through their own internet sources, through a recommendation from their own real estate agent, or by simply noticing a yard sign while driving around.

That’s right.  90%.  For what actually takes very little work.

Yard signs are cheap.  Internet listings are, for the most part, free (for example, listings that a REALTOR® enters into the Multiple Listing Service here in Los Angeles are automatically indexed on more than 300 different real estate websites!), although a good agent will know which sites to best target (especially true for “niche” properties such as architecturally significant homes).  The MLS costs your broker money, of course, but that’s a requirement for doing business anyway.  Word of mouth most certainly is free.

So consider that when you’re discussing commissions with your agent.

Open houses are not necessarily for the seller’s benefit. Consider the odds of a random person walking in to your open house and 1) deciding the house perfectly meets their criteria, 2) not liking any other houses they may see before or after better, and 3) actually being in a position to buy at that precise moment.  I have no doubt that this occasionally does happen, but I have only once or twice personally observed this.

According to NAR Research Economist Jessica Lautz, 46% of buyers used open houses when searching for a home, but only 10% found them useful.  I haven’t been able to pin down any precise statistics about how many buyers buy a home they first see at an open house, but anecdotally, my guess would be in the very low single digits (I remember hearing somewhere between 1-2% at some point, though I want to emphasize I have no data with which to back up that statement).

So why do brokers love to hold open houses so much?  Of course, it gets your house some exposure, but it’s a surefire way for the broker to get more business.  Think about it: who shows up at open houses?  1) People who are kinda-sorta looking, but not seriously enough to think about going out with an agent.  2) Neighbors who are curious to see the house because they’re considering selling theirs at some point in the foreseeable future.  3) Neighbors who are curious simply because they like the idea of looking in other neighbors’ houses, but aren’t planning to sell their house anytime soon (but who just might happen to remember your agent’s name if and when they decide to sell).

Hello!  Open houses are gold mines for brokers!  Not so much for the sellers.

Here’s the kicker: once again, agents use open houses to justify higher commissions.  Don’t get me wrong—I actually agree this could be appropriate if the seller wants to have unusually frequent open houses, although an open house itself costs very little (or nothing at all).  Consider, though, that most open houses are held on the weekends, which takes away time from their ability to tour other homes with buyers (who, incidentally, also tend to be most readily available on the weekends).

By the way, if you do plan to hold open houses, be sure to ask your agent whether he or she will personally be in attendance.  One age-old tactic is for your listing agent to arrange the open house but send a newbie agent who doesn’t have any clients of their own and therefore has their Sunday afternoons free, while your agent is out with other clients.  This is great for the new agent since they get to build their own database of leads, but bad news for you, since the substitute agent probably doesn’t know enough about your house to most effectively communicate to visitors your home’s most salient “unseen” strengths (for example, if you’ve paid off a special tax levy in full instead of opting for annual assessments, or if you’re including a number of custom-built pieces of furniture with the sale).

However, a bargain-basement commission can come at a cost! Despite the above, the old adage of “You get what you pay for” is still true. Your agent’s performance could certainly be impacted if you go too far in pushing for a “rock-bottom” commission while demanding nothing short of the royal treatment for your home.  By that, I simply mean that there is less incentive for your agent to put your property on the top of his or her list.  Obviously, he/she owes you a fiduciary (and legal) duty to put forth a good-faith effort to find a buyer for your house.  But you can bet that when deciding whether to call back another agent who has an inquiry about your house, or another agent who has an inquiry about a separate listing with your agent’s “normal” commission, guess whose call will be returned first?  Talk frankly about this possibility with your agent; if he or she is more than momentarily hesitant about accepting a listing with a lower commission, consider finding someone who is not hesitant but who still has a proven track record of sales.

In that vein, consider that most agents work for a broker who takes a sizable cut of their commission earnings.  Consider pairing up with the broker directly, or think about finding an experienced agent who works for a brokerage that takes a smaller percentage of its agents’ commissions—many so-called “flat-fee brokerages” will do just that—and which will in turn allow the agent to be more flexible with his or her fees. (Shameless plug, of course: Perkins Realty Group can meet you on both counts.)

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Up next…Attention Buyers: What Your Real Estate Broker Doesn’t Want You to Know!

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