Tag Archives: ethics

Motivation…

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A while back I was at a real estate seminar for agents.  I ended up being quite disappointed before walking out… because the ethics of the business model were lacking, in my opinion.

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Sign coconut (Photo credit: @Doug88888)

The basics of the seminar revolved around acquiring more and more listings, which isn’t a bad thing… however, the problem was that the “leader” of this particular seminar was advocating agents ignoring the needs and desires of the sellers they are supposedly “representing” by using the listings to their own advantage, even if that means misrepresenting their purposes.

I have dealt with sellers for whom selling the property was desirable, but not necessary or imperative.  Others NEED to sell and expect their agent to do everything in their power to make that happen.  While a seller that is on the market looking for a specific price may be fine with their agent using their property as a promotional location (high traffic for the rel estate sign, etc.), a seller that has to sell is much less likely to feel the same way.

And the problem is when an agent uses the property of a “must sell” seller as a personal promotion, all of the while telling that seller what they want to hear… that they are doing everything in their power to get it sold.  That is exactly what this seminar advocated.

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Wayback Wednesday… The Bigger Price Myth

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This is one of those things that I hear about all of the time.  I face it all too often.  I go on listing appointments and either an agent before me, or one that comes later “buys the listing“.  Of course, not literally, but figuratively.

They tell the seller what the seller wants to hear… regardless of reality.  They tell the seller that they will sell the house for more money.  It is an appeal to the ego… and sometimes even defies logic.  But, it gets the listing.  Obviously, the seller generally wants to hear that their house is worth more.

It usually happens for one of two reasons… the innocent one and the not so innocent one.

The innocent reason is that the agent just doesn’t know any better.  Through inexperience or bad data or poor technique working with the data… or even misreading the market climate… they arrive at a price that isn’t really realistic.  And the window for a price is pretty small.  At 20% over real value, the house likely won’t be seen in the current market.  At 10%, many of the prospective buyers will dismiss the house even if they come look at it (most buyers won’t make a serious offer more than a few percent off of the list price).  Even at 5% over reality, many prospective buyers won’t offer… or they will push it to the back of the line.

The “not so innocent” reason is that the agent KNOWS that the sellers will list with them if they give a higher price estimate.  It is a LOT more common that most sellers would think.  In fact, there is an entire sub-industry in real estate involving strategies and support for these agents.  One of the popular strategies is to build in price reductions at predetermined intervals.  The sellers should ask a simple question… “If you are confident of the price, why would you build in price reductions?”  Of course, the market DOES shift, sometimes unexpectedly.

The idea, as stated in much of the materials supporting this strategy, is that the agent can tell the seller, “OK, we’ll try it at your price, but if nothing happens in 30 days, we’ll cut the price to ____.”  There is always the chance that there will be a buyer that will drop out of the sky, with cash (since the asking price might not clear an appraisal) and no desire to have an appraisal of their own done.  But… not that likely.  And that is where the issue I take with this as a deliberate strategy begins.  We know, from tons of studies, that over-priced houses generally end up selling for less, after spending more time on the market.

It goes like this…

  • The house starts off as over-priced, so it gets fewer, if any showings.
  • After a period of time, the price starts to ratchet down… but it has already missed that magic window (when a house is first listed) when the most buyers look seriously at it.
  • Since it has been on the market longer, the buyers that DO run across is wonder WHY it has been on the market so long.
  • Vicious cycle…
  • Price gets cut more to get showings.
  • When the offer comes in, it is lower than it likely would have been to start with.

Here is the post I wrote about this very issue a couple of years ago.

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A Seat at the Table…

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Millions of American families are facing foreclosure.  Millions more have already been through the process… and there are millions that don’t know it yet, but they will be staring at foreclosure proceedings in the future.  It is an epidemic, one that is difficult to escape.  Not impossible… but difficult.

Foreclosures are accelerating for a couple of reasons… but one of them is momentum.  As a neighborhood faces foreclosures, the values of the non-foreclosed homes dwindles.  Foreclosures generally bring lower prices, which pushes down the prices of non-foreclosed homes… which pushes down the prices of the foreclosures.  It is a self-perpetuating cycle.  Buyers are afraid to jump in because they see prices still moving down.  Sellers get desperate to get out because they see their equity (if they have any) drying up.  The cycle continues.  Some of the people that needed to move couldn’t hack the values anymore, and they let their home slide into foreclosure.

Those that are marginal or that trying to be proactive call their banks.  They talk with them about short sales or loan modification.  For the vast majority seeking a loan modification (we are talking 98%+ here), they might as well talk to a brick wall.  Short sales are slightly more common, assuming the seller only has one mortgage.

Banks simply aren’t really open to talking with the homeowners about their situation.  And there are a variety of reasons.  Some of them they are willing to say (in an unguarded moment, perhaps).  Other reasons the people in the Loss Mitigation department might not even realize… if they do, they aren’t talking.

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    The borrower doesn’t have enough income anymore to support the modified loan (in their opinion…)

  • If they grant a principal reduction to one borrower, they will be flooded with others expecting the same thing.
  • The “other bank” won’t accept an amount that is inside of their guidelines.
  • There just isn’t enough staff/resources to handle the load.

And the big one that nobody seems to talk about…

  • The banks insurance on the loan will cover them in a default, limiting the amount of loss they will suffer.  However, if they modify or allow a short sale, their insurance won’t kick in.  That increases their loss.

This is the one that really needs to be worked on.  The insurance company… the people that REALLY need to be involved in loss mitigation, don’t have a seat at the table.  And the big losses are at the loan insurance level.  Whether it is a private insurer like AIG (remember their bailout?), a government sponsored entity  like Freddie Mac or Fannie Mae or a public loan guarantor HUD, they don’t have the chance to be actively involved in the process until it is too late.

To Fix it…

The first thing that would need to happen is for the entity that insures of guarantees the loan to have an active role in the decision about modification or foreclosure.  Right now, in the case of a short sale, it is up to the “investors”, those that actually own the loan (often that is NOT the bank).

When a homeowner inquires about a loan modification, the bank should do their best to determine two things… they should look at the value of the property and the homeowner’s ability to pay.  What they should be looking for is to find at what level the homeowner would likely be able to pay.  At that point, the insurance company (or loan guarantor) should take over if the numbers look like they would be bearing the loss.

 

graph shows U.S. foreclosure trends (quantity ...

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Example:

 

  1. Bob the homeowner loses his job and ends up working for less money.  He can no longer really afford his home, but doesn’t want to walk away.  He paid $300,000 for the house and owes $285,000.
  2. Bob contacts his bank.  The bank determines that the house would likely sell in a foreclosure sale for $210,000.  Bob would be able to qualify for a loan of $220,000.  The banks insurance kicks in at $240,000.
  3. At this point, the insurer would review the file.  If the bank takes the house, they would have to pay the bank whatever loss they suffered under $240,000.
  4. Rather than the bank going through with foreclosure, the insurance company agrees to pay $30,000 if they re-write Bob’s loan to $215,000.

Bob ends up owing a little more than the house might fetch in a foreclosure sale.  The bank doesn’t incur the costs of foreclosing and having to get the property ready for sale.  The insurance company takes a hit, but it might be a smaller hit than they would have taken had the house been foreclosed.  And there is less risk for everyone involved.

 

 

Free Money Collection in Cash

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Of course, the example above is completely fictitious.  The numbers are pulled out of thin air…  And honestly, there are a LOT of people that would not be helped in such a situation.  The goal, however, isn’t to save every homeowner in the country that is upside-down.  The goal is to minimize losses to consumers, the banks, insurance companies, GSEs and the government, while helping people that still have some capacity to participate.

 

 

People without income or expenses too high to make a reasonable payment are not going to be helped.  People that take advantage of the system once and are trying to get a third chance would likely not be helped (I would call a program like this a good second chance).

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Get out of your mortgage for FREE?!?

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Probably not…

But that doesn’t mean that people aren’t trying it… and it doesn’t mean that people aren’t getting in trouble for it.

Here is the way it works (and it all sounds so legit…):

  • Mr. and Mrs. Consumer buy a house and get a mortgage from MonsterMegaMortgageCompany (MMMC).
  • MMMC sells their mortgage to Investor Pool #1.
  • Then it is bundled and sold to IP#2… and #3 and #4 over a span of a few years.
  • Mr. & Mrs. Consumer start having problems, and despite everything they are facing foreclosure.
  • To try to get help they contact a “Foreclosure Mitigation” Law Firm that fights the foreclosure by filing a “missing title” lawsuit.
  • The law firm (or other entity) charges an up-front fee (maybe $2000) and then monthly fees (maybe $1000 or $1500)… as well as a contingency fee upon settlement of either 50% of the reduction or 75% or 80% of the value if the mortgage were completely eliminated.
  • After stringing along Mr. & Mrs. Consumer for a few months or longer (collecting fees), they fail to actually prosecute the case.
  • Mr. & Mrs. Consumer lose their home…

According to a few of the sources I looked at, their are no recorded examples of any suit of this type EVER being resolved in the consumer’s favor.

The basis of the lawsuit is that if the mortgage holder can’t produce the documents from the mortgage, it will be set aside and the consumer will own their property free and clear.  Sounds nice, huh?

Before getting sucked into something like this, here is a little more reading…

Source 1

Source 2

The State of California is going after one of the firms involved in this practice.  I would expect that there are similar cases in other states.

Times are tough…  scamsters know it, too

People being foreclosed on are all over the place.  They are vulnerable to people that approach them to “help.”  There are a variety of scams and plans that mostly just revolve around generating a profit for the “helper.”

Be careful!  There is help for many home owners that are in trouble… but the easy sounding solutions often aren’t what they are cracked up to be.  If it sounds too good to be true, it likely is…

I would love to lose my mortgage, too… but this isn’t the way…

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Broker Fees?

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I’ve seen an annoying new trend.  Buyer and Seller “Broker Fees”.  It may go by various names, but amounts to the same thing…  what Clark Howard would call a Junk Fee.

Entrance to Baltimore

Entrance to Baltimore

These are quite different from the other fees that may be involved in a real estate transaction, and there are a LOT of fees.  The lenders have fees, the closing attorney has fees, there are state fees, county fees, insurance fees, delivery fees…  Simply put, buyers and sellers are paying plenty of fees.  Adding some BS junk fee like a paperwork fee, transaction fee, administrative fee or broker fee is just adding insult to injury.

There is already a commission or sales fee that the real estate broker and agent are sharing.  There is no reason to add another official sounding fee on top of this that is after the negotiated amounts.

And, that is how it usually works… the seller negotiates the fee for selling their home, and everyone shakes hands… and then the agent mentions that there is a $495 paperwork fee or something along those lines.  They say it is required… maybe not saying that they are the ones requiring it…

In the case of buyers, after going through the buyer’s agency agreement and telling the buyer that the commission is generally paid by the seller, they hit the buyer up for a transaction fee… again, saying it is a requirement.

There are various reasons for this…  What it mostly comes down to is that people and companies in the real estate industry are hurting for income.  But, many of our clients aren’t exactly rolling in money… and even if they were, it isn’t right to tack on junk just because we think we can… Some agents are working for companies that charge US a closing fee for closing a transaction instead of charging a split and the agents are passing it along.  It should be part of their cost of doing business.

I just say NO!

No additional fees.  You will know EXACTLY what you are paying for my services prior to delivery and prior to completing the negotiations.  I try to deliver more for EVERY client than other agents… but that doesn’t mean I need to add junk fees on top of fair fee structure.

And there are some different options available for sellers… but that is another post.

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