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.

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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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Thanks for reading… A quick intro

17 Sep

Hello, and thank you for finding this blog.  My name is Andy Perkins, Broker/Owner of Perkins Realty Group, a small residential real estate brokerage based in Los Angeles.  My goal is to bring you some unique perspectives about the real estate market, from a Southern California perspective.  I decided to pursue a career in real estate in part because I was tired of dishonest real estate agents.  That is not to suggest that by any means real estate agents are all dishonest, but I’m sure you know (as I do) many people whose level of respect for Realtors as professionals is on par with lawyers and used car salesmen.  My hope, then, is to help buyers, owners, and sellers become more informed consumers.  Hopefully you will find what I have to say interesting, entertaining, or at least worthwhile in some fashion.  We’ll see how that goes.

I am no fan of blatant self-promotion, so it is not my intent for this blog to be all about me (really, I’m not that interesting!).  However, I do feel it is important to lay out my own story, and present my credentials, so you know where I’m coming from.  A quick “About Me” follows:

My SoCal connections. I’m a California native and UCLA graduate who has lived in the Los Angeles region (sometimes off and on) for 28 years.  Presently, I live in the San Fernando Valley with my lovely wife and a couple rather neurotic cats.  As I am sure you know, Los Angeles and its surrounding areas form an incredibly diverse—and occasionally crazy—metropolis.  The result is a region full of unique and varied opportunities, and I have spent a great deal of time seeking them out.  There are very few corners of Southern California I have not studied, visited, and absorbed.  The result is an in-depth knowledge of the real estate market that spans all of the Los Angeles region.

My professional career. After working in the commercial real estate field in Texas, I returned to California to pursue a career in the field of biomedical research administration over the course of the next twelve years.  Interestingly, there are a great deal of similarities between real estate and research administration.  In both fields, large amounts of money are at stake, and careless errors can cause serious financial damage.  Both are high-stress fields where time is absolutely of the essence and many deadlines must be met.  Both involve serious legal consequences for failure to follow through on one’s obligations.  Both require a high degree of discretion and confidentiality, and a breach of that confidence can have serious repercussions.

Two series of events precipitated my return to the real estate field.  First, while observing the hysteria of the early 2000s that ultimately led to the massive real estate crash in the latter half of the decade, I concluded that many real estate agents were helping to feed that hysteria for their own benefit (and at their clients’ expense).  I cannot tell you how many agents I heard proclaiming that everyone should “buy now or be priced out forever” (does that sound familiar?).  Second, I watched as far too many of my friends went through real estate transactions where their agent offered cringingly bad—sometimes flat-out unethical—advice.  Many of them were badly burned.  That was simply not right, and something had to be done.  At that point I decided it was time to return to real estate.  It is not easy work, but I find it to offer a great deal of personal satisfaction.

My passion for design. For as long as I can recall, I have had an appreciation of and passion for architecture.  While I was never convinced that I would be a competent architect myself, I did a great deal of college coursework relating to architecture, urban planning, and design.  I believe this gives me a unique perspective in the real estate field that your average Realtor will not have: the capacity to recognize the specific design details that give a house a certain “flow” or “feel.”  How does the house relate to its surroundings?  How did the designer create a layout that feels especially spacious?  How well does the house interact with the outdoors, and how is that accomplished?  And what can you, as a potential buyer or seller, do to embrace and showcase those positive elements?

My personal love is mid-century modern design, and I am honored to call a 1956 William Krisel-designed home my own.  One of my reasons for getting into the field of residential real estate is to put buyers in touch with a home that is a true and genuine reflection of their lifestyles and personalities.  I have watched far too many amazing houses get destroyed by insensitive remodels, and few things are as satisfying to me as seeing a unique or historically important house purchased by someone who truly appreciates its characteristics.

My personal life. When I have the fortune to take some time away from work, you can find me outdoors, enjoying Southern California’s wonderful climate: hiking, mountain biking, 4-wheeling, or simply wandering around town and taking in the sights.