How Can Your Tell When a Real Estate Salesperson is Lying?

(NOTE: This blog on my web site contains links to all the statistics and articles I quote. Go to http://www.CallYourNeighbor.com and click on the link to my blogs.)

Good question. Some people might say, “Their lips are moving,” but I think the American Bar Association could hold the copyright on that punch line. Since first writing this blog, I have added to it several times. Suffice it to say no one will ever write a definitive treatise on this subject. Nonetheless, what follows should be helpful, and at least cover some of the biggest whoppers told.

If you are selling your house, and someone who is trying to get the listing is telling you that you can get your dream price, there is a pretty good chance you need to beware. Never choose a REALTOR® to list your house based on the price they promise you they can get unless they will put in writing an offer to buy your house themselves for that price in sixty days. Then jump on it!

So one quick trick anytime you wonder if they are telling the truth is to ask, "Will you put that in writing?" If they say, "Sure," call their bluff and hand them a piece of paper and a pen. While you're at it, look over everything I've already put in writing (my FAQs, blogs, Testimonials, etc. . . .).

If you're selling FSBO and someone tells you they have a Buyer who wants to make an offer, but you have to list with them first (exclusive listing, not an open listing where you can still sell it without them—like I offer Unrepresented Sellers), red flags should be waving.
Ask for, and check, references. By the way, here are mine: Testimonials If you really want to check references, call the local Board of REALTORS® and ask what committees is this person on currently or in the recent past. Typically organizations will put their most trusted and respected people on their finance committees (where I’ve served the last three years) and ethics or professional standards committees (where I’m in my fifth year of service).
If someone tells you there aren't any real problems to worry about with a First Right of Refusal Contract, a Contingent upon something else closing Contract, or a Lease Purchase, run. See my blog here on "Contracts to Avoid."

Are they consistent? Do they change their advice depending on their needs? For example, my advice is always: "Whether buying or selling, if there is a neighborhood expert, use him or her." So, if a buyer wants to buy one of my listings in Piney-Z, but they have got something else to sell across town, do I change my advice and say I will list their home for sale? If I'm consistent, and I want to get my listing sold ASAP, I help them find their neighborhood expert to sell. For the good of everyone involved, I refer the business. And I can prove in writing this is what I do. Click to see proof.

If someone says, "Nah, you really don't need a lawyer," get one FAST, and one that specializes in real estate law. Often when I encounter a problem with a customer my first advice to them is consult a lawyer. That way, 1) if I am making a mistake, hopefully someone can catch it before harm is done, and 2) it is going to be very hard for anyone to prove malice of intent against me when I'm advising them to get a lawyer.

After buying and selling a couple of houses and being lied to by people I thought I could trust, I decided the best way to answer that question was to take the real estate pre-licensing class so I would know. Well, I liked what I learned. Then I decided, “I may not be the best real estate person in the world, but I can be better than most of the people with whom I’ve dealt.” So, here I am.

Twice when selling homes I was begged to accept a low offer and told by two different REALTORS®, "The first offer is always the best." I wondered at the time, how would you prove that claim? When I asked them, "But what about the price you told me we could get?" both responded, "Now is just not a good time to argue about that." I have told every agent who has put their license with me I will fire you on the spot if you ever tell a Seller the first offer is always the best. That claim is the mantra of the people the book Freakonomics compares to Ku Klux Klansmen (see below). Now I know, and now you know.
One thing I tell my Buyers is that if I lie to them, I will have to face them at the Home Owners’ Association Meeting, at the swimming pool, the annual Bar-B-Que, . . .. If I lie to them, they get to call me down in front of my neighbors, and ruin my business.

That hasn’t happened, and won't happen (see David Tucker's Testimonial and what he says about "honesty.")..

What has happened, is several people who have bought my listings have called me when it was time to resell. In all, 302 of the new houses sold in Piney-Z have already been on the market as a "resale," and 46 of those "resales" have been on the market a second time. Of those 46 Sellers, 4 had been "my" Buyers, and 3 of those 4 listed with me (that's a 75% Customer retention factor in an industry where most people rate real estate sales people below used car sales people). Of those 46 Sellers, 14 had been working with another REALTOR® when they bought my listing, but 7 of them listed with me. That's a 50% cross over factor in my favor. Altogether 14 of the 46 stuck with the same REALTOR® they had used previously, and I was that person 7 of 14 times. As many of my customers chose to work with me again and chose to keep their old REALTOR® combined! (Click here to see statistics taken from the Tallahassee Board of REALTORS® MLS on September 17, 2008, and viewable in an Excel spreadsheet where you can see all MLS closed re-sales by address, closing date, listing agent, and selling agent, then sort them and count them yourself. You will see I list more, I sell more, and I have more repeat customers than anyone else servicing Piney-Z Plantation.)

Another way to tell if someone is lying, ask them for hard data. When it comes to backing up sales claims in Piney-Z, I give you all the MLS data in a form you can search, sort, and compare. Click here to see statistics.

It also stands to reason, the real estate professional who is lying to you about real estate in general probably doesn't want you to get your hands on good, professional information that will show them up. So ask, "What resources do you give or loan your customers to help them sort through this process?" I will give you a copy of Elizabeth Razzi's The Fearless Home Seller, loan you my copy of her The Fearless Home Buyer, loan you two books on staging, and several of David Knox's DVD on everything from picking an agent to pricing you home. Click here to see Training Materials. And, I offer you all the National Association of REALTORS® materials for Buyers and Sellers http://www.realtor.org/buyers_and_sellers.

Before you hire a REALTOR®, read the Introduction and Chapter Two, “How is the Klu Klux Klan like a group of real estate agents?” in the best seller, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt and Stephen J. Dubner (HarperCollins, 2006). Click here. What you will learn is many real estate sales people will list with you promising to get you top dollar, then beg you to take a low offer when it comes in. Reason being, if your asking price is $200,000 and the offer is $190,000, your $10,000 loss, at 6%, split with the Buyer’s Broker 50-50, then split with their Broker at up to 50-50 (70- 30 if you list with Keller-Williams), could be as little as a $150 loss to your real estate salesperson. And most people would rather know they are getting a $2,350 check this month than work another month or two and hope to get $2,500 some time in the future. “A bird in the hand . . ..” Your loss; their gain. Hence, “the first offer is always the best (for the listing agent!).”

How can you tell if a real estate person is lying to you? Compare what they say to the facts, the statistics in the Multiple Listing Service, other printed resources, and check their references.

Thank you, and Good Luck!

Bill Groover

Applying HIgh School Algebra to Real Estate

Years ago in high school algebra I studied topics I was sure I would never use in real life. And thus far, at age 57, I have yet to run into one quadratic equation which I needed to solve. But as a real estate broker I have finally run into some of the various types of numbers discussed, such as real numbers, rational numbers, irrational numbers, and imaginary numbers.

Real numbers are the numbers for which a home buyer writes checks. Other numbers exist on paper, but only the numbers corresponding to dollars going into or coming out of my checking account really matter.

Rational numbers are logical numbers. For example, a house that was worth $250,000 two years ago may have lost 10% of its value, while a house that was worth $450,000 may have lost 15% of its value because the market has been worse for larger homes than for smaller homes. If I sell a house that had been worth $250,000 for a 10% loss, or $25,000, and buy a house that had been worth $450,000 for 15% less, or $67,500, my $25,000 loss just got swallowed up by someone else’s $67,000 loss, and I “made” $42,500! That figure is a rational number.

If I take out a mortgage on that new purchase and I finance 80% of the $382,500 for 30 years at 6%, at closing I will sign a “Truth in Lending” statement that tells me if I keep the house and the mortgage for thirty years and never refinance, I will eventually pay over $660,000 for this house. Since the average homeowner sells every five years, it is highly unlikely I will stay in this house anywhere near that long. And, since as I have mentioned I am already 57 and will be 87 in 30 years, it is further less likely I will pay $660,000 for the house. Thus if I worry about the total of payments on the TIL it becomes an irrational number.

Unless I am paying cash for a house, even the price is not a real number. Remember, only the numbers on checks you write (or someone writes to you) are REAL numbers. So, let’s say I’m the average home buyer buying the average house in Leon County in the Winter of 2008. In February I think I’m going to be smart and wait for interest rates to come down and prices to “continue falling.” Bad time to buy, right? Be smart and wait, right? In February of 2008 the average price of a house sold through the Tallahassee Board of REALTORS® Multiple Listing Service was $227,438, and interest rates were as low as 5.5% for thirty year fixed. But by mid March, that average price had gone to $244,470 and the interest rates had hit over 6%. So I have saved a half percent on my mortgage and had saved around $17,000 on the price of my house. Pretty smart, huh?

Wait a minute. Prices AND mortgage interest rates went UP from February to March (NOTE: This blog was originally written in March of 2008, and a shortened version was published by the Tallahassee Board of REALTORS®. Interest rates may change, but the math behind my logic won’t.). If I bought the average house in February and financed 90% (pretty typical) for 5.5%, my monthly principle and interest payment would have been $1,162. But if in March I financed 90% of the average house at 6%, my new payment is $1,319, or over $150/month MORE, plus the down payment check I would write would be about $1,700 MORE! And by my definitions, $1,319/mo. and $1,700 are real numbers and $150 will be an irrational number because it just doesn’t make sense. I would have outsmarted myself.

Imaginary numbers describe the amount of money I lost by not selling my house at the top of the market. In the last two years I have “lost” a good 15% of the value of my home. But since I bought my house over four years ago, I have still “made” a good 15% over what I paid. Still no one has written a check for any of these numbers, thus they are not real numbers yet (see above). I am estimating, or imagining, profit and loss. The money I have lost is hardly more real than the square root of -1. It exists only on paper, similar to “i.” But as I demonstrated, if you subtract an imaginary number from someone else’s imaginary number, you get an effect kind of like multiplying a negative number times another negative and getting a positive. If you subtract your smaller imaginary number from someone else’s larger imaginary number, you get a positive, real, and very rational number.

Prices have been going up. The market in Tallahassee has bottomed out. Interest rates are fluctuating, and since they more closely follow the price of crude oil than they follow the FED’s short term interest rate, I don’t expect them to fall. Many experts are saying if you plan to buy in the next few months, lock now.

Conclusions: the time to buy likely will not get any better than it is right now, especially if you are considering “moving up.”

Who knew Algebra could be so much fun AND PRACTICAL?

Contracts to Avoid

First, let me say I am not a lawyer, and what I am saying is only my opinion. I encourage you to consult a member of your state BAR Association who specializes in real estate before you use this information to make any decisions. It is good advice to advise any consumer to always consult a lawyer before they sign a real estate contract. But I will insist on my customer, Buyer or Seller, consulting a lawyer before they enter into a contingency contract, a first right of refusal contract, or a lease purchase.

The Attorney of Record for the Board REALTORS® to which I belong told me to always get a lawyer to write a Lease Purchase, and not to call him. There are just too many opportunities for conflict.

For one thing, if a party is going to lease a house for one year and then purchase it, one of two things could happen. Either the value of the house will have gone up more than anticipated, and the Seller will want out of the contract, or the value will have gone down and the Buyer will not want to close. You just stand too good of a chance to get to a closing where one party wants out of the contract.

I extend this good legal advice to contingency contracts and first right of refusal contracts. I like a “win-win” contract, fair to all parties, so my customers and I can stay out of courtrooms. Too often contingencies and first right of refusals only benefit one party. Always get a lawyer who has a fiduciary responsibility to make sure that contract benefits you.

The following hypothetical situation shows good reason to avoid a First Right of Refusal Contracts or a Contingent upon Your Buyer’s House Closing Contract. Imagine your house is listed for sale with a REALTOR.® A Buyer sees your house and would like to buy it, but can’t commit right now. I’ve seen Buyers who wanted to “tie up” a property until their house sold, they found out for sure about a new job, they got an insurance settlement, or their credit improved. So their REALTOR® tells them they can put one of these contracts on it and improve their chances of buying it when they are able. Both contracts basically allow the Seller to continue to market the property and get other offers. On a first right of refusal contract, if a second offer comes in, the Seller notifies the first Buyer who then has a few days to commit to buying the house, or pass. So the Buyer is basically making sure he or she can buy the house at an agreed upon price if and when they become able to close.

On the Contingent upon Closing Contract, the contract says the Buyer will close on the sale if the house they are selling closes before the agreed upon date. It the Buyer’s sale does not close for any reason, the Buyer is released from the contract and typically gets their deposit back. The Sellers, who took their house off the market for however long they agreed to, get nothing. A win for the Buyers, but a lose for the Sellers.

From a Sellers’ point of view, I can think of no good reason to get tied down to either one. Recently I had another REALTOR® who wanted to bring my Seller one of these contracts. My advice to the Seller was to thank them and promise the Buyers they would be notified and given opportunity to make an offer if the Sellers receive an offer. From the Seller’s point of view the main difference is I have given my word to notify the Buyer’s agent as opposed to their being legally bound by a contract to do so. Also, if the second offer is more than the first, they can accept the second offer. If they had given the first Buyer the first right of refusal, they could have to turn down more money. Of course the first Buyer may lower the offer they would have made if prices continued to drop. But if prices had dropped and the Buyer wanted out, and they had a small enough deposit, they could probably walk anyway. If not, there are always the financing and inspection clauses that may be used. It’s hard to make a Buyer buy a house if they have changed their minds, even with these contracts.

Why else would a Seller accept one of these contracts? I cannot say exactly. But quite possibly the offer can be made to sound better than it was. “At least this Buyer is a ‘bird in the hand.’ And it shows other Buyers this is a sellable property. Buyers want the houses other Buyers want, and this contract advertises that fact.” Since I have never, and would never, encourage my Seller to accept a first right of refusal contract, I do not know what sales pitches can be thrown.

But accepting either of these contracts effectively does something else. For all practical purposes they take the house off the market. While this contract can be made to sound like a “bird in the hand” for the seller, a better analogy would be that of “a scarecrow to other birds,” or Buyers.

In both of these contracts, the problem is many REALTORS® might believe they could be wasting their time to show a house under any type of contract, and they won’t bother. I can remember being taught several years ago 20% of real estate contracts fail. Conversely then, if I show a house under any type of contract there is an 80% chance we can’t get it, regardless. If a Buyer wants to see a house that is under contract, I will tell them they may. But I will also tell them there is a good chance, perhaps as much as 80%, they are wasting their time. Most Buyers I have told that have said, “Is there anything else we can see?” And, as long as there was, they looked elsewhere.

I once knew a real estate person who put a first right of refusal contract on a house s/he wanted to buy and told me s/he was just trying to tie the house up and keep it off the market until s/he could get his/her house sold (no bargain price there, I will promise you). S/He was surprised when someone showed it and presented a contract as s/he didn’t expect many experienced people to bother.

But above all else, hear this: I am not a lawyer, and what you have read is one person’s opinion based on his experience and understanding. If you are in a position where one of these contracts is an option for you, consult a real estate attorney. Get their advice, and have them go over the contract before you sign anything. Especially if you are working with me!

Do Foreclosures Affect Home Prices?

How are Foreclosures Affecting Retail Home Values in Today’s Real Estate Market?
By
Bill Groover, PhD, CRS, GRI, CLG

To fairly and accurately understand how foreclosures are affecting the housing market, you need to consider several things. First, how do Appraisers determine a house’s value? Then you need to know how distressed properties factor into their thinking. If you are a Buyer, you need to look at this information and some other realities in order to have the big picture. And finally, I include some afterthoughts for REALTORS®.

I. A Primer on Appraising

Appraisers arrive at a “fair market value” of a home by looking at several things, beginning with the sales contract on the subject property, and continuing with recent sales in the neighborhood. They note what isn’t selling and distressed sales, but they don’t always give them significant weight in an appraisal.

When comparing houses, Appraisers want to start with “matched pairs.” Matched pairs are houses that are pretty well equal in size, lot, condition, amenities, and location (ideally, same subdivision). If they have a subject and three or four matched pairs among recent sales, comparables or “comps,” they will look at each house’s sale price and then start adjusting them. If the subject house is 1800 SqFt, and one of the pairs is 1950 SqFT and sold for $250,000, that would be $128/SqFt. Since the second house is 150 SqFt larger than the first, the Appraiser would likely subtract $19,000 from the $250,000 price the larger house got to make the two houses more equal. If the subject house has a one car garage and the norm for the neighborhood is a two car garage and the comp house has a two car garage, the Appraiser would want to know what the market is paying for the larger garage and subtract that value from the comps price. Values for these features are available from professional trade publications. Likewise, if the subject is the only one with ceramic tile flooring in the kitchen and bathrooms, the Appraiser will add some value to the comp houses. Many factors will be looked at, including the condition of the roof, the presence or absence of a deck or screened in porch, additional entrances to the house, and landscaping.

While Appraisers are extensively trained to make all these value adjustments, they know the best comps are the houses that are most closely matched and require the fewest adjustments. After adjusting the comp houses to be as much like the subject as possible, the Appraiser then adds or subtracts all the modifications and gets an estimated comparison value for each comp, weighs them according to their individual value as a matched pair, and averages them to get an estimated value for the subject. All of these steps are taken following the guidelines and directives of the Uniform Standards of Professional Appraisal Practice, or USPAP. (NOTE: Please understand this description of an Appraiser’s work only skims the surface, but is fairly accurate for what can be described in about 400 words.)

II. Distressed Sales as Comps

If a comp house was in foreclosure, it was likely sold “as is,” whereas the other houses are usually sold under contracts that guarantee certain “warranted systems (i.e., electrical and plumbing)” were functional. An “as is” contract or house would not be as valuable as a warranted house. How much that value difference would be is a rather subjective amount and depends on more factors than can be delineated in one short article. Also, most people going into foreclosure do not fix up their houses to go on the market. The best foreclosure houses typically need paint from front door to back, and new carpet.

Also, in a “short sale,” it is common knowledge that the Lender is “motivated” and is willing to take less than what is owned on the property. Lenders want to “get rid” of the property. That knowledge alone will drive down the offered price. All of these issues devalue a property. And finally there is the “stigma factor” associated with a foreclosed home. Many Buyers just won’t even look at a house in foreclosure because of the risks involved (see Buyers and Foreclosures below).

Thus a distressed house can require a lot of adjustments to match it up, and dollar amounts for these adjustments can be impossible to estimate. It is much easier to estimate the added value of a screened in porch than to estimate how much the stigma of foreclosure is costing that Seller. Appraisers do not use distressed sales as comps if they do not have to, and if less than 15% or 20% of the recent sales were foreclosures, they usually don’t have to give them equal weight with the other sales.

Therefore all of these factors need to be taken into account when comparing the value of a house that is not in foreclosure to one that is. It is not be totally inappropriate to estimate foreclosure houses typically get at least 5% to 15% less than they would get if they were not in foreclosure, their Sellers were not under duress, and they were fixed up to be competitive on the market. Also, in general, unless the majority of houses on the market in a given subdivision are distressed sales, foreclosures should not be used to set the value of non-foreclosure homes. If an Appraiser has several good matched pairs that are not distressed, they will choose them. Otherwise they are comparing rotten apples with oranges. To quote an Appraiser: “If we don't feel the short sale or foreclosure is at market value, we do not have to put weight on it. “

In other words, just because one lucky Buyer got a great deal and bought below market doesn’t mean all others get to expect the same thing. Or, again to quote an Appraiser, “ONE SALE DOES NOT A MARKET MAKE. If there is one foreclosure and five arms length transactions, we are not going to place a significant amount of weight on the foreclosure.”

Think with me logically for a moment. Appraisers know they could be drug into court to defend their appraisals. Do you think they want to sit on a witness stand protected by objective, published, accepted values for adding to or subtracting from the value of a property, or do they want to defend their more subjective estimates, which they know the Plaintiff’s Attorney will be calling W.A.G.s?

III. Buyers and Foreclosures

Buyers need to know, if they want to pay foreclosure prices, they need to make an offer on a foreclosure house, and wait anywhere from one to six months for an answer from the selling Lender. When a Buyer presents an offer to a Seller, typically there is a deadline of twenty-four hours or so in which the Seller must respond or lose the offer. Banks don’t respond so quickly. I’ve seen a bank sit on an offer for a month before they even order a “Broker’s Price Opinion” with which to compare the offer. They appear to be quite patient in hopes someone else will bring them a better offer. The Buyers who wait even one month for a selling bank to accept an offer risks losing their rate lock (see my blog on Interest Rates and House Prices). And while waiting on a dream deal they can lose out on many great deals. “The perfect is the enemy of the good.” Saving money on a foreclosure can be a very expensive proposition. As one Appraiser said, “Buyers salivate over the prices, then die of thirst waiting for an answer from the bank.” If saving big bucks buying foreclosures was a sure thing, everybody would want in, and there would be no real advantage left.

Offering a Seller who is not in foreclosure a price like they are is similar to trying to win the lottery. It can happen, but don’t count on it. And trying to find a good REALTOR® to help you can be tough. The experienced and knowledgeable professionals know they can waste a lot of time helping an unrealistic Buyer pursuing their dreams. We have to invest our time into the Buyer in the hopes we can eventually catch a Seller who is desperate and will sell way below market, and further depress the market upon which we depend. I’ve learned. Even though there are very few Buyers out there, I will let Buyers intent on saving a bundle waste someone else’s time. I want to work with Buyers who want a bargain, but will pay a fair price. Buying, and Selling, foreclosures is simply trying to pick up a turd by the clean end.

IV. Real Estate Professionals and Foreclosures

For a real estate sales profession to include foreclosed houses in the neighborhood comps to show a Buyer without pointing out the disparity in value is misleading at best and malpractice at worse. Personally I report them separately with a brief caveat pointing out the difference.
When I am working with a Buyer who wants a major bargain, I sit down with them and make sure they understand the problems and the risks involved with their plans. In all investments, rewards and risks are related. If they want the big reward of a huge savings, they have got to be prepared to suffer the huge losses associated with the rewards, such as the cost if interest rates go up a half percent while they wait, or the cost of losing some very good deals while they are holding out for that dream deal.

I will also go over all the comps for the neighborhood with the Buyer. I may point out that on occasion a lucky Buyer finds a distressed Seller who is willing to sell way below market for whatever reasons. As their REALTOR®, I am happy to get them a tremendous bargain if it is possible. But, they cannot expect it. If they are determined to get the best deal anyone has gotten in that neighborhood, then the Buyer needs to understand that virtually everything that sells is a bargain today And I’ve got to determine how much of my time am I willing to spend gambling on them winning a lottery?

Conclusions:

If an Appraiser has sufficient matched pairs to use, the foreclosures in the neighborhood may be mentioned in the report, but they will not be the first chosen comps to determine the value of a house. If you think you can use houses in foreclosure to define a market, please remember to begin your statement with the words: “Once upon a time . . .,” or, if you are former military, “Now this ain’t no s_ . . .!”

DISCLOSURES (i.e., the Fine Print): I am licensed in Florida as a Real Estate Broker and as a Mortgage Broker. I am not certified or licensed as an Appraiser, a Lawyer, an Accountant, or a Financial Planner.

I admit up front I have a vested interest in what I am writing and saying, but that interest doesn't mean I am wrong. What I have written is my personal opinion, typically backed up with experience and statistics taken from the Tallahassee Board of REALTORS® Multiple Listing Service, the TBR Market Trends and Statistics Committee, and/or the Tallahassee Real Estate Blog. I will say in writing this blog I consulted with several Appraisers and I did do some additional reading and researching. So I am not just shooting from the hip.

I would add, however, if you simply dismiss my thoughts because you don’t like them, you need to have some damned good reasons and facts to support your argument. I would suggest you need better information than what I offer to discredit me. The desire a Buyer has to believe they should be able to buy a top quality house for the same price as a foreclosure (or even lower since EVERYBODY knows prices everywhere are still falling) does not constitute truth. If you think your desires do constitute truth, you probably need to be in counseling for other things, too.

Everyone should know backward looking statements about housing prices and mortgage interest rates are not guarantees that future prices and rates will behave the same way. No one actually knows what prices and rates will be in the near future, much less in six months or a year. Consult your Attorney, Certified Public Accountant, Appraiser, or someone else you can hold liable and responsible for financial and especially income tax advice. If you take my advice and make money, I have no claim to a percentage. And if you lose money, the same non-existent claims apply.

Thank you, Bill Groover