SPRING BRINGS HOPE OF FULL HOUSING RECOVERY

AJC 2015 MAR 22
by John Adams

I hate Daylight Saving Time. In fact, this whole clock thing needs a major overhaul.

It’s time for the geniuses at the General Assembly to put aside their partisan wrangling and address something that truly matters: like leaving my alarm clock alone.

As a concrete example of the problem, this morning I woke up at 5:03 AM DST. I was unsure if that meant it was actually 4 AM or 6 AM – an important distinction. I became confused and disoriented and went back to sleep.

All this leads inevitably to my point: spring has arrived. And with it, three glimmers of hope that the sluggish housing recovery may finally be preparing to reach some form of conclusion.

Glimmer Number One: The good folks at Fair, Issac & Co. have decided that medical debts are less indicative of your overall credit worthiness than, say, past due credit card payments. This is great news for homebuyers.

According to credit repository Experian, some 64 million consumers have a medical collection on their credit report. The change means that, once paid, that particular item will no longer affect your FICO score. And in the meantime, unpaid medical debts will have a lesser negative impact.

As a result, credit scores will rise automatically for many consumers, making it more likely that they will qualify for a home loan.

Glimmer Number Two: Banks are easing loan qualification guidelines, making it more likely buyers will be approved.

According to a survey conducted by the Federal Reserve, more than two-thirds of loan applications for “prime” home loans were approved in December of last year. That is the highest level recorded by the agency since 2011. Lenders reserve their best loan programs for this group of consumers.

And this easing is not only for the most highly qualified. Banks are reducing credit score requirements and lessening hurdles for FHA, VA and USDA home loan programs.

This is important because FHA loans offer a low 3.5 percent down payment, making this program especially attractive to first-time buyers. It is these entry-level buyers which fuel resales and drive the housing market.

As a little icing on the cake, FHA recently lowered its mortgage insurance premiums (often called PMI) for all 30 year programs, making these popular loans even more affordable for buyers without large cash down payments.

Glimmer Number Three:

After the economic downturn hit the housing market, loans to investors dried up. Bank regulators decided that “speculative” real estate loans were evil, and pressured banks to stop making them.

As a direct result, it became almost impossible for an investor to do what investors do: buy abandoned and damaged houses, repair them and make them acceptable for the general market, then either rent them or resell them at market value.

This type of activity was critically needed as the tide of foreclosure swept over metro Atlanta in recent years. But only those with huge cash reserves were able to participate. As a result, vacant, run-down houses crippled literally thousands of metro Atlanta neighborhoods, driving down property values.

Current tax laws punish investors who buy, fix and sell, so most investors choose to hold their purchases as rentals for at least several years. And with no long term financing available, rehab activity declined dramatically.

But here’s the good news: private equity firms are entering the market offering long term mortgages to affluent investors who want to buy real estate for rental purposes. And unlike Fannie Mae and Freddie Mac, both of which set arbitrary limits on the number of loans an investor may have, these private equity firms carry no such restrictions.

These loans are currently aimed at fairly high-level investors, with applicants seeking a minimum of $500,000 per loan. But if these firms experience success, I guarantee that banks and government-sponsored enterprises (FNMA, for example) will open the spigot for smaller borrowers.

The bottom line here is clear: the long-awaited housing recovery has been starved for liquidity for several years. I, for one, am hoping that these early signs of “easing” will signal the beginning of the end for this housing nightmare.

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Buyer Broker Column Brings Good Questions

AJC 2015 MAR 08

by John Adams

My recent column on QUESTIONS YOU SHOULD ASK A BUYERS BROKER actually brought more questions than I expected, as well as a complaint. I will respond to the commonly asked questions today:

Q: You said that, typically, the home seller pays the full commission, including a fee to the agent working with the buyer. That doesn’t make sense to me. Why shouldn’t each
side, the buyer and the seller, pay their own agent?

A: That’s a great question, and in a perfect world, that’s the way it would happen.

However, the reality is that the buyer is often strapped for cash. in fact, most often the buyer is trying desperately to minimize their cash outflow in order to save for the costs associated with the purchase.

These typically include moving, buying needed appliances, redecorating, and lots of other expenses we refer to as incidentals.

That reality translates into this reality: homes which can be purchased with a minimum of cash are more attractive to buyers than homes which can not.

Since every seller wants to sell as quickly as possible, the listing agent encourages them to include in the commission a sufficient sum to pay a cooperating broker.

In addition, the practice allows the listing agent to “double-dip” if the listing agent is able to sell the home without a cooperating broker, as often happens. The compelling rationale for this practice is “We sold the house – what’s the difference?”.

Q: Isn’t it a conflict of interest for an agent who is NOT working as a BUYER’s AGENT to receive a portion of the commission that the seller is paying to the LISTING agent? It sounds like that agent is actually representing the SELLER’s best interests, not the BUYER?

A: That is exactly the argument put forth by brokerage firms which choose to only represent sellers OR buyers, but never both. And there is something in that thought process which rings true.

However, I must report (and admit) that I worked with hundreds of buyers very closely in their search for a home in years gone by. At that time, buyer brokerage was unusual, though legal.

In each of those sales transactions, I acted as a sub-agent of the listing broker, and technically represented the seller. In fact, I had a “fiduciary obligation” to the seller.

But the truth is that I almost never had even met the seller, and could not have acted in their interest had I even wanted to do so, which I did not.

In fact, I wanted to see my buyers get the best possible deal they could in the transaction, and then hopefully recommend me to friends, neighbors, and associates.

You might suggest that my acts were a violation of my fiduciary obligations to my client, who, at that time, was my client. That may be the case, but that is what happened.

Q: Don’t you feel bad about that?

A: No, I do not.

Q: OK, but what about this? We all know that the real estate commission is usually a percentage of the purchase price. Isn’t it true that by helping the seller obtain a higher purchase price, you were actually helping yourself obtain a higher commission? Isn’t that a direct conflict of interest?

A: Actually, in a substantial number of my transactions, our initial offer set the final commission as a fixed dollar amount, so that the commission did not enter into anyone’s negotiation strategy.

Also, the commission differential is typically less than $70 per thousand dollars of purchase price, so half of that is hardly worth describing as a “breach of duty.”

Q: Quite frankly, after reading your column, I have decided to simply bypass agents altogether and only work directly with owners. Won’t that solve the problem?

A: Yes, it will. Under your scenario, the commission and who represents whom is clear from start to finish. However, that complicates matters.

For starters, the majority of homes available “for sale” in today’s market are already listed with traditional real estate brokers, and the commissions are already negotiated between the listing broker and the seller.

Even if you approach the seller directly and offer to purchase the without a commission, the seller is contractually not at liberty to do so, either now or in the near future.

In addition, by choosing to seek a home without the benefit of a real estate professional, you are forfeiting an extremely valuable resource and a knowledgeable ally to guide you through the minefield on the path from looking at homes to actually owning one.

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John Adams is a real estate broker, investor, and author. He answers real estate questions every Sunday at 3 pm on WGKA-am(920).

Questions You Must Ask Before You Let Them Become Your Buyer’s Agent

AJC 2015 FEB 22

The Top Three Questions You Must Ask Your Real Estate Agent
Before You Let Them Become Your Buyer’s Agent

by John Adams
In Georgia, real estate agents can help you in a variety of ways as you search for a house. Typically, the agent working with the buyer is called the buyer’s agent, and technically represents the seller. That’s because the seller is typically paying the full real estate commission, which is usually split between the listing broker and the selling broker. The buyer’s agent acts as a “sub-agent” for the selling broker.

In recent years, buyers have been given the option of actually employing their own agent who will represent them and not the seller. This type of arrangement is called “buyer’s brokerage,” and allows the selling agent to actually promote and protect the interests of the buyer, not the seller.

The theoretical advantage of buyer’s brokerage is that your own agent has no conflict of interest between you (their client) and the seller. The downside is that you must become contractually bound to work with the buyer’s broker you select, and may be responsible for paying a sales commission if the seller does not offer to pay a full commission.

Buyer brokerage in residential settings is still relatively new, but it is a growing trend. But before you even get to that point, I believe there are several important questions you must ask before you decide on buyer brokerage as your preferred way to buy.

  1. If I sign a buyer brokerage agreement with you, am I restricted to working solely with you in my search for a house? What if we don’t click as a team? Can I easily cancel our agreement without any penalty?

Some agents are so confident of their own ability to get more business, that they require prospective buyers to not only sign a buyer brokerage agreement, but also to pay a nonrefundable retainer fee to demonstrate commitment on the part of the buyer.

Whether or not such a fee might apply to the subsequent purchase is unclear to me, and I could never recommend such an arrangement. There are simply way too many good real estate professionals in this market to lock yourself financially to just one person, even before you’ve had a chance to work with him or her.

I have no issue with signing a buyer brokerage agreement, but it must stipulate that the buyer has the right to terminate the agreement upon written notice to the broker.

  1. What happens if you or I happen to find a house being sold “BY OWNER,” with no provision for any real estate commission? Do I have to pay you, and if so, how much? And is that negotiable?

Let’s say you have signed a buyer brokerage agreement with Broker Hart, and you have not yet found the right house for you and your needs. One day, you see a “for sale by owner” sign in front of what looks to be the perfect house. On the sign it also says “no agents and no commissions.”

You knock on the front door, tour the house, and fall in love! This is what you’ve always wanted! You shake hands and agree to draw up a contract tomorrow, then you call your agent with the good news.

At this point under some buyer brokerage arrangements, you might have an obligation to pay 3.5 percent (or posssibly more) of the purchase price to Broker Hart at the closing table. To make matters worse,your lender may be unwilling to fund such a payment, even if you wanted to pay it.

And finally, you’ve read here that all real estate commissions are negotiable between client and principal. Yes, your buyer broker has the right to set a minimum fee for his services, but no, not all brokers operate under the same fee structure.

Independent brokers are sometimes able to be more flexible in commission arrangements than traditional mainstream companies. So don’t be afraid to discuss these matters thoroughly before you sign the brokerage agreement.

And finally,

  1. What are the names and phone numbers of the last six buyers you worked with? Did each of them successfully find a home through you? May I contact them myself to ask candidly about their experience?

If the agent is unwilling to share this information with you, you should assume they are hiding something. My advice in that case is to move on to another prospective agent.

Also, look out for agents who may be working only part-time or just beginning their career.

I specifically remember an incident that occurred when I had just started as a real estate agent. I discovered that a friend of the family (a professional salesman, by the way) was trying to sell his house. I asked him if I could list the house for sale with my broker. He politely told me he wanted an agent with more experience.

My feelings were hurt at the time, but in retrospect, I wouldn’t have listed with me either if I had been in his shoes. There is simply no substitute for “in the trenches” experience.

The decision to work with a real estate professional is an important one. It  may well influence your success or failure in your goal to own your next home. But it’s a personal decision as well.

Asking these three questions should help you make the right decision for you and  your needs.

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