Update 1-22-09: Still reading this #1 blog post on short sales for a background on the process? Well it was written over a year ago. Short Sales are now closing MUCH more frequently in SOME areas (an 0 in areas like McLean). Subscribe to this blog for I plan to run some numbers on the % that are closing. My guess is the range is 1 in 3 (vs 1 in 20) before. However closing rates can be as high as 80% if your buyer agent asks the listing agent these questions: Top 10 Short Sale Questions.

(Update 6-16-08: This post was written on 2/08, this marketplace is changing ever month. Make sure to subscribe to the blog to get updated on the marketplace, like an upcoming post on more Short Sales starting to close.)

As of 2-08, most Short Sales in Northern Virginia are what I call “FAKE Listings.” (note that this is Virginia, every area is drastically different)

Only 1 in 20 sells.
In Arlington only 3 have sold out of 65 attempts.

I briefly went over Short Sales when I defined all SOL Homes including REOs, Bank Owned Etc. But Short Sales need more attention, as they are very tricky and misleading.

A Short Sale is a listing for sale that requires “Third Party Approval.” That means that 1, or 2!!, banks are owed MORE than the list price.

For Example:

1. Home is bought for $500,000 with 5%, or $25k down.
2. Home has a $475,000 mortgage.
3. Value dropped below $475,000
4. If the seller is facing foreclosure, they slash their price for a quick sale
5. A Short Sale is attempted at $450,000
6. If the bank accepts it, the BANK eats $25,000 (see Phantom tax for Seller)

The Theory Behind Short Sales: Banks would be better off to accept a loss now, versus going through the legal expense of a foreclosure, just to end up selling it for less later. Win win, right? Wrong. Read on.

Bank Trick 1: “Sure, we will consider a Short Sale, IF YOU KEEP PAYING US.”
Yep, a bank sees a desperate seller, and a potential $50,000 loss. They then mislead them into thinking that they might consider taking a bath on the deal IF the owner keeps paying their mortgage. The bank then ignores offers for 2-4 months in order to squeeze out another $2,000 x 4 or $8,000 profit. Brilliant. The bank then takes it over after foreclosure and sells it for $10,000 OVER the Short Sale List price. $18,000 better off, NOT doing a Short Sale.

Bank Trick 2: Sometimes the bank has mortgage insurance and it is CHEAPER for them to let it foreclose versus allowing a Short Sale, which is NOT insured.

For example, I was at an NVAR short sale class and a Realtor asked the speaker, “Why after 60 days, calling 2 times a day (120 calls) with a full price Short Sale offer, did the bank not call us back?” The speaker claimed it was due to an overworked staff.

I asked:

1. Did they tell you they would consider a Short Sale IF you kept paying $3,000 a month? The answer was Yes.
2. Was the home bought with Mortgage insurance? The answer was Yes.
3. Bingo! Why eat $50,000, by accepting the low offer, if the bank a) gets $3,000 a month and b) is insured against a foreclosure and NOT a Short Sale.

She was pissed. She realized that she had been “had.” But this goes on ALL THE TIME. It can take MONTHS to hear back.

Another example:

1. A seller in Clarendon 1021 tries to sell his property and profit $30,000 at $600k. (Yeah right!)
2. Then he drops it to $570,000. No bites, but the foreclosure is pending!
3. They SLASH it to $530,000
   (sidenote, I get flooded with calls from friend that want to pick it up for a steal at $470,000! I said that it was impossible… since I’d buy if that price was a possibility.)
4. It sits for another month, then the listing disappears after 100 days!
5. A month later it is “bank owned” and listed for $560,000
6. It sells for $540,000 in 26 days.
   

The moral here is banks are not dumb and the market isn’t so horrible that they will take all these lowball offers. They sold it for $10,000 OVER the previous list price (which probably had lower offers).

Reston homes from $300k to $400k.
- 20 Active “Short Sales” in Reston (watch out for “Not a Short Sale” listings)
- 73 were Withdrawn, or Expired.
- 3 Under Contract (1 under contract since Nov 2007! Many UC do not close.) />Only 3 sold in the last 24 months. 3 closed sales in 100 attempts!

1. Dropped From $480k to $400k, sold at $400k (Full list)
2. Dropped from $430k to $400k sold for $380k (5% under list)
3. Dropped from $380k to $350k sold for $345k (2% under list)

Arlington Short sales.
- 25 Actives
- 37 Withdrawn
Only 3 have sold in ALL price ranges in all of Arlington in the last 2 years.

1. Listed at $335k, sold for $335
2. Listed at 700k dropped to $620, sold for $600k
3. Listed at 480k dropped to $420k sold for $420.

In Alexandria, only 8 have closed in 2 years out of 80 attempts.

(most were at list, or 2% under list, some were $20k over list)

I show this, so you don’t think “Wow, they are desperate, we can now lowball. These 3 were the ONLY successful ones. Probably because they gave the bank a real offer.

Ok, so enough already with the War N Peace, what should I do?

Advice for Regular Sellers

1. Do NOT blindly compete with a Short Sale. If you get an inexperienced agent, and they see 3 Short Sales in your neighborhood, and they have you compete against these “fake” listings, you can lose $25,000. Hope you “saved a ton” on that agent. (see Realtor Rebates)

Advice for Sellers Facing Foreclosure

1. Watch out for the bank tricks to “keep paying.” Talk to a lawyer that specializes in bankruptcy to help guide you. They MIGHT recommend stopping payments immediately and saving it up for a rental.
2. Use an agent that has completed (as in CLOSED, not listed) at least 1 Short Sale.
3. If you have mortgage insurance, be extra careful, the bank might prefer that you foreclose.
4. Get bank approval for your list price before listing it. Put in the listing remarks “List Price approved.” Otherwise you will get lumped into all the other Fake Listings and ignored by smart buyer agents.

Advice for Buyers looking for a “steal” (see “deals” post)

1. Avoid Short Sales, or expect to wait 2-3 months and expect to put in 5-10 offers on Short Sales before one is accepted. A Short Sale in my building now has 4 offers. He says he is expecting a reply any day now… sorry, but yeah right!
2. Look for Approved Short Sales. Ask if the bank has been contacted and if a price has been approved. Multiply time estimates by 4. Ie. 3 days= 12 days.
3. Consider offering near, full or OVER list. What! Over list! Are you nuts! CNN says this is a BUYER’s Market! I know it sounds crazy, but if you and your agent see the price is well under your other options… I’ve said time and time again, I’d rather you pay $10,000 OVER list on a house that is $50,000 under the competition versus “saving” $50,000 on a home that is overpriced by $100,000. Ignore list price, focus on VALUE.
4. Focus on Bank Owned. These units get replies in a day or two. (See video of Realtor buying a Bank Owned property)

Advice for Buyer agents & Listing agents

If you get one to close, change the remarks to SHORT SALE, NOT TO BE USED AS A COMP in hopes that the appraiser will take that into consideration and not trash the neighborhood (buyer agents, demand it of the listing agent to try to help your client’s “deal” not turn into destroying his own investment).

Sidenote: A home should NOT go under contract until the BANK signs it, but many agents will make this mistake. The seller signing it means nothing, and it should stay on the market as Active.

• Updated Correction 2-29-08 I’d like to thank DAAR CEO Jeanette Newton for this correction. I’m excited that she is participating in blogging!
• My above sidenote about when to go Under Contract is 100% wrong. So let me explain… IF a seller signs the offer, as written, it is to be listed by default on the MLS as Under Contract with No Kick Out. The problem for the seller is that most MLS websites will remove the listing, so the chance of a better offer (and a higher chance for the bank to accept) is slim to none.

  Here are a sellers’ options (please comment if you know of more options) :

• 1) A seller can counter the contract and add in a “Kick Out” so further offers can be reviewed. The listing then can be set to Under Contract with Kick Out (this was suggested by Loudoun Realtor Tony Arko). But only a buyer agent looking on the back end MLS can find UC/KO. (A Kick Out means “there is still a major contingency here, feel free to submit another offer, it still can be considered and the first contract might be kicked out.”)
• 2) Another way to keep it active (like the unit in my building with 4 offers) is for the seller to send the “offers” unsigned to the bank. Why not try and keep your home as “Active” for as long as possible? Some banks will require the seller to sign, so try #3.
• 3) Or lastly, the seller might add “acceptance of the contract is contingent on lender approval.” or “contingent upon review and approval of the lender.” That one line can keep it “Active.” I am not a lawyer, so please verify any additions you make to a contract with a lawyer.

• As a buyer agent I would prefer it to be “Under Contract” if I was the listing agent, I would want it to be Active. So it depends whose side I am on, it is part of the negotiations. You can even counter with “Increase your price $2,000 and we will place it UC/KO.”

New Trick: Now that Short Sales are getting a bad wrap, some listing agents are NOT disclosing that it is a Short Sale.

Conclusion as of 2-2008: Short Sales in Northern Virginia suck.

Question: Realtors, should you have a “No Show” policy for Short Sales that aren’t approved by the bank? Are they really “for sale” if the owner (the bank) doesn’t even know about it? Feel free to just tell your clients “read this blog.”

n style="font-weight:bold;">-Written by Frank Borges LL0SA- Broker FranklyRealty.com

Please report typos.

p.s. See Washington Post Article on Short Sales

• Top 10 Questions Before Showing Virginia Short Sales

• FranklyMLS.com, 1st to Scrub for Short Sales & Post Article

• Feb 2009 Short sales are closing!

I was intrigued by Dina ElBoghdady’s exposé today: Realtor Discourages Use of Outside Lenders, Long & Foster Pushes Own Mortgages, where she questions an email sent by Mr. Foster to all Long & Foster agents.

She wrote, “[The email] chastised his workers for funding mortgages through Bank of America more than 2,200 times last year [vs using L&F owned Prosperity Mortgage].”

Flashback/Prognostication (wow that really is a word!), I wrote about this topic months ago with my “Affiliated Business” or Illegal Kickbacks? post.

RESPA is a rule that bans kickbacks in real estate transactions. However some companies have gone the technicality route and found ways to comply with the law, but perhaps not with the intent.

While using an “affiliated partner” should not result in money being put directly in an agent’s pockets (Remax found a way to give partial ownership in title companies to Remax agents), how is that different than what Foster said when he says he “wrote the memo to make agents understand that each time they use Prosperity, they’re helping Long & Foster, which in turn enables the company to provide better resources and more advertising for agents.“

Let me break it down:

“Illegal” as per RESPA:

1. Agents tell customers to use partner.
2. Agents receive a cash kickback or profit sharing.

“Legal”?

1. Agents tell company to use partner.
2. Company receives benefit.
3. Company gives agent more advertising (indirect benefit).

Um… Ok, got it!

Now there is nothing wrong with having reliable partners (lenders, title companies etc.). And Wes Foster even had a great marketing program that offered $5,000 in mortgage payments if a deal went sour with their lender. As an agent, you don’t want your client using some web bank that has no loyalty to the customer, or agent. Somebody that won’t care if they pull the rug out from under you at the last second. Instead you want accountable partners with track records for getting the deal done.

But there is a fine line from a recommendation from an agent receiving ANY benefit, direct or indirect from that referral. And even if the client signs 37 disclaimers saying they are being referred to a partner.

I have loan partners. I don’t allow them to give me kickbacks (direct or indirect) beyond a $10 sandwich (trust me, I could get free lunches for a year if I wanted to let any lender take me to lunch).

Also I know a top producing agent at Weichert that isn’t allowed to say that she is #1 in the office since she doesn’t use the partnering lender or title companies. While this isn’t a monetary incentive (kickback), it is similar in that it is a penalty for not funneling deals to their partners.

Why this is important for buyers:

You need to know who is recommending what, and what benefits that person is getting. Otherwise abuse in the system can lead to price gouging. There is currently a case against Coldwell Banker where even though their agents got disclaimers signed, the suit questions whether the agent acted in their fidiciary duty and routed clients to overpriced partners.

Have you experienced pressure from your broker to use “partners?”

If you are reading this post via an RSS reader or via email, make sure to come back to Blog.FranklyRealty.com to read the 20+ comments and debate. (not signed up yet? Join in the upper right of the blog.)

- Written by Frank Borges LL0SA- Broker FranklyRealty.com

(please report typos)

Appraisals 101: An appraisal is a report that is supposed to be a 3rd party impartial review of a property (usually under contract) to make sure the price is in line with recent closed sales (not counting houses still “for sale”). This protects the bank from buyers buying overpriced houses, which are at higher risk for default.

I first wrote on this topic of inflated appraisals: Builder Tricks Part 3! Independent Appraisals & Fiduciary Duty. I showed why builders try to require “in house lenders” that happen to have appraisers in their back pocket that miraculously make the numbers come in. Ultimately consumers who suspect foul play should pay $300-$400 and get a real “independent” appraisal of their purchase.

First let’s understand the position that some appraisers are in.

• Transaction volume is down 20%. (I’m not talking prices, but quantity of deals)
• As prices fall, it is harder to make the numbers come in (especially with new construction).
• Appraisals are subjective. “If I push it another $10k, or $20k, I can probably still argue my defense.”
• If your appraisals stop “coming in” (hitting the contract price), even though you are supposed to be “3rd party” and unmanipulatable (MS Word says that isn’t a word, but I disagreely), you will stop being hired.
• Suddenly, you can’t buy lunch.

So eAppraisalIT got sued by NY Attorney General since “eAppraiseIT’s president, sent emails to his superiors at the parent company… [that they] would “roll over” and submit to Washington Mutual’s demands on appraisals.”

Why is this important to you if you are buying today?

Many contracts have an appraisal clause/contingency that allows you to renegotiate or back out of a contract if the property does not appraise, even for new constructions put under contract months or years ago.

By knowing that these shenanigans exist, you won’t simply say “oh well, it appraised, so it must be fine.” Now you will say “who appraised it, and who do they work for, ME or the lender wanting the deal to occur.”

Why is this important if you are NOT buying today?

If a system’s checks and balances are off kilter, and no longer checking or balancing, fraud affects everyone.

If just one neighbor falls prey to these practices and

• Can no longer afford monthly payments
• Can’t refinance since the house was overvalued
• Forecloses or has to liquidate their property for $50,000 under fair market,
• You effectively just lost $50,000 in equity.

This matters to everyone. This is just the beginning too. Most of the spotlight has been on lenders and their aggressive practices. Now they are going after the support services that are part of the conspiracy. The problem is it is harder to prove. Rarely do you get an email from the president showing a hand caught in a cookie jar.

I still see stuff everyday.

• True Story: One builder closed a property $70,000 under asking price. Upon closing, they properly listed the property as “CLOSED,” thus showing the close price. A day later they CHANGED it to “WITHDRAWN.” This is supposed to be an MRIS/MLS (up to) $3,000 violation. Net result, appraisers can’t see it (they search “closed” properties) and I know a buyer that followed their skewed appraisal and overpay by $50,000. I have reported this MLS data fudging 3 times over 2 months to MRIS with no action/reply so far.

• True Story: A client with their own lender said “For $200, we can make the appraisal come in [$20,000 higher] to refinance your property.” This stuff is happening everyday.

- Written by Frank Borges LLOSA- Broker FranklyRealty.com

p.s. Please note just like there are shady agents, there are shady appraisers, but that doesn’t mean that they are all shady.

p.s.s. Please email me typos and email or post your examples of questionable appraisal practices.

Earlier in the year, builders (condos and SFH) were finding buyers were backing out of new construction contracts. Some left 2-7% deposits on the table, some fought for their deposit (ask for specifics). Can you blame them? If a property has dropped $70,000 and you put a deposit for $20,000… um, I know that stinks but why not just leave your deposit on Monday, and go in on Tuesday and buy another one for less?

So now the builder has inventory that they need to move and fast! The liquidation sales are here! And “These prices won’t last!” But are they a good deal? I’ve said before that (No Such Thing As a “Good Deal”) but now I want to specifically look at new construction homes.

The decision is VERY tough for buyers.

You can buy a new place:

• Get a $10k-$100k “savings” on a new construction vs a similar new resale (or off the sticker price) BUT
• Risk further liquidations, dropping your unit value another $50,000+

Or you can buy a resale:

• It might cost $5k-$15k more, BUT
• The lower supply, reduces Supply and Demand risk.

I’ve heard from a source in a new construction project that they were considering hiring an auction house out of Boston to dump the rest of their 30 units, once and for all! So a buyer might get a $50k “deal” today, to find their value dropped $50k the next day.

Supply and demand is crucial, and with new constructions, it can be out of whack.

For example, take my Clarendon Condo (please take it!!) I saw as many as 40 of the 400 units (10%) on the market at one time. That was bad, prices tanked faster than other Arlington condos. Down $150,000 from the top price to the current lowest price.

Meanwhile the new construction Phoenix Condos in Arlington two blocks away has about 180 total units. Only 31 have closed and about 20 are under contract. They still have 130 units to move!

One agent just told me they got a steal of a deal there. They were able to get a deep discount off list from the builder through the sales office: McWilliams Ballard. She was brilliant. She made them show her actual HUD1 statements of other units (since nothing recorded yet on the MLS or tax records) and she went down from there.

But what about the other 130 units? Are they going to sell for the same or more? Probably not.

But her final price was $100,000 UNDER a comparable list price for 2 units in my building!

When she initially asked about my building vs the Phoenix, my first reaction was “All else being equal, I’d rather buy where there is less inventory, so you have less downward risk”

• Sidenote, when I say “all else being equal” I mean after you account for the % off list you can get on the resale, and you adjust for amenities, view, floor, size etc.

I might, if you were ready to buy, go as far as recommending paying $10,000-$20,000 MORE for a unit in a location with less inventory risk (5% at Clarendon 1021 vs 72% at Phoenix)

But the decision gets tougher if that spread is more like $50,000 to $100,000.

Another example: A Realtor that I highly respect is currently focusing on new construction. She was thrilled that she got $70,000 off list (about 10%) for a home 2 months ago, yet last weekend at a “big sales event” she got another client $125,000 off at the same community!

So her first client effectively LOST $55,000 in 2 months!

What? You want me to: “shut up and tell you what to do”?

1. If you decide to buy, make sure your horizon is long enough, otherwise rent (See Video: Don’t Buy).
2. Pick exactly when to buy (read Attn. Market Timers! The EXACT…)
3. Calculate the difference between this “Sale” unit to the AFTER NEGOTIATED price of the resale. Maybe even put in a few offers into resales and SHOW THEM what their competition is (see “Round Robin” Buying)
4. Get copies of HUD1s (closing statements to prove sales prices) and look at subsidy and parking spots (sometimes a $30k spot gets thrown in, make sure you compensate for that)
5. Ask about how many they have left, and get proof! (watch out Wilson 1800 in Arlington likes to make you think they are “almost out” until they suddenly “release more”)
6. Use a knowledgeable Realtor, you don’t get a better deal going in alone.
7. Consider putting into the deal a $30,000 escrow to be given to the buyer if further price reductions occur.
8. If it is a preconstruction consider putting a clause to reduce the price if other units sell for less (but watch out, see Lowest Price Guarantee)
9. Be patient when negotiating. You can either get a FAST and high deal or a SLOW and low deal. Slow play it.
10. Pray

Written by Frank Borges LL0SA- Broker FranklyRealty.com

So with this trouble comes questionable practices in order to unload properties. Get a Realtor (the price is built into the condo, you won’t get a better deal without one) to represent YOUR best interest.

I already called out one Arlington Condo builder with my: Beware: New Constructions Illegally Not Disclosing Seller Subsidies. After that article came out, that builder suddenly started disclosing their $50,000 seller subsidies. And Builder: Guaranteed Lowest Price* where builders use subsidies and decorator allowances so as not to technically drop the sales price and have to recalibrate earlier contracts.

Well I found yet another builder expanding on those tricks. This time the builder will list a property and the day it closes, it will withdraw the listing! Why? Because when a place is listed for $599,900 and closes for $529,000, they don’t want the public to know. Also the tax records (where I found the sale) does not allow for disclosure of the seller subsidies (the MLS does require it).

So not only are they hiding a $70,000 price drop, the seller subsidy could range from $5k to $25k. By hiding this data, the appraisals can be kept up for future closings! Sounds to me like fraud, but that is just my opinion.

Speaking of appraisals, if you are buying a new construction and using their “preferred lender,” I have heard of multiple situations where the builder is applying pressure on the lender to “get it done,” which is code for “fudge the appraisal so the numbers work.”

And that is code for JAILTIME. That is FRAUD.

If you suspect something fishy is going on, pay the extra $200-400 and get your own independent appraisal (without mentioning what the lender’s appraiser came up with). If they come in over $15,000 different, somebody got some explaining to do (insert Ricky Ricardo voice).

After the independent appraiser’s report is complete, ask him to look at your lender’s appraisal report. If he says it appears fraudulent, report it to the FBI. Yes the FBI is very interested in hearing about fraudulent lender practices.

Now one last word about lenders. I don’t want you to think that they are all crooks, or even that some are. But you have to understand the phrase “fiduciary duty.” That is defined as “The legal responsibility for investing money or acting wisely on behalf of another.” Agents have that duty with their clients… but lenders don’t.

Again, lenders, albeit nice, helpful etc etc, they do NOT have a fiduciary duty to look after your best interest. Their duty is to their employer. So know your rights, get that second appraisal and don’t get bullied into a fraudulent loan.

Lenders, I hope you didn’t find that offensive. Appraisers, what do you think about faulty appraisals and how do you suggest handling it? Do you ask the appraiser that is “off” if he really wants his appraisal reviewed by the state board (or who else would you recommend?)

Best of luck,

- Written by Frank Borges LL0SA- Broker FranklyRealty.com (Now paying $1 per typo)

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For the most part I don’t really believe in the idea of a “Good Deal” (see post Buyer’s Market?” No Such Thing As a “Good Deal” ), but you can get a better deal if you are open to being flexible and buying with your mind (and agent) and not with emotions.

Too often I find buyers that want an aggressively low price, but then they fall in love with one place and they fold their cards rather quickly.

Reintroducing the non-patent pending “Round Robin” buying approach that I initially touched upon on 1/5/07 Tip #1 From Mom: Don’t Trust Realtors That “Sell” You On Buying.

I learned from my mother that you never know the situation or needs of the seller. Some might be pressed to sell quickly for they fear the market is getting worse, or are approaching a foreclosure. Meanwhile others might have the mentality of “If I don’t get what I want, I’ll just rent.”

How do you know which is which? Ask them (indirectly), one by one.

Round Robin System

1. Be flexible. Find two or three homes that you like. Don’t think in terms of whether you like them at X price, think in terms of “I’d prefer house #1, but I’d consider ABC if it was $X off”
2. Put in ONE offer. Let that agent know that you have 2 or 3 properties and you would like to first offer on their property. (Ethically you can only put in one offer at a time. Even if you have “outs,” your contract has to expire or be countered (a counter nullifies the initial offer) before you can move on.)
3. Review counter or accepted contract. The seller can a) accept, b) reject or c) counter. If the counter is something you want to work with, keep it alive. Otherwise
4. Move one, offer elsewhere. The negotiation isn’t over, but you tell the listing agent that you will now offer on another property. And since your client can’t make two open offers, the listing agent is still invited to re-submit. I like to end with a “we may or may not come back in a few days if the other houses don’t work out.”Sidenote: Why would I reveal my strategies? A listing agent might be reading… GREAT! Then they know I’m serious when I say we are offering elsewhere and may or may not come back.
5. Repeat as necessary (are you really supposed to “shampoo, rinse and repeat?”) with a slightly higher price, until somebody bites.

Again, this technique isn’t for everyone. It might sound sexy to be aggressive and all your officemates might talk about “lowballing” and nobody wants to overpay, but if you want that extra $5k- $25k, be prepared to spend $5 on some sleep meds.

Love to get your comments. Do you do this? Do your clients have the stomach for it? Do you consider it unethical?

– Written by Frank Borges LL0SA- Broker/Owner FranklyRealty.com
703-827-4OO6 Please report all typos, I don’t like looking stupid. If you like this post, sign up for new blogs daily, use the form on the right of the page. Keywords: Negotiate, low-ball, purchase agreement, contract, offer, buying strategies

So in theory, if you bought a place for $400,000 and a few months later, that exact or similar unit dropped to $390,000, you would get notice that your unit is now $10,000 cheaper for you.

This was even featured in the Washington Post (thanks to me) on Dec 2006 Read Article. Supposedly they have already made 3 price corrections for past buyers.

Now comes the MISSING ASTERISK.

1) They won’t say the amount of the price corrections (we asked). This leads me to think that they were probably just token $5k or $10k adjustments and more used for marketing future units. The ability to say “we have dropped 3 times” sounds good. But if you don’t disclose the amount, it is just marketing in my book.

2) Seller subsidies don’t count! Let me repeat that. SELLER SUBSIDIES DON’T COUNT in the guarantee.

Example:

• Joe buys for $400,000
• Builder drops prices to $395,000
• Joe gets a $5,000 reduction
• Builder keeps prices at $395,000 and offers $20,000 in closing costs for newer sales
• Joe gets NO REDUCTION or Extra closing costs. The “guarantee” doesn’t apply!

Joe effectively is paying $20,000 MORE than the other unit, even though there is a “guarantee.”

3) Free upgrades don’t count!

Example:

• Joe buys for $400,000
• Builder drops prices to $395,000
• Joe gets a $5,000 reduction
• Builder keeps prices at $395,000 and offers $20,000 of upgraded kitchen and bath
• Joe gets NO REDUCTION or upgrades. The “guarantee” doesn’t apply!

So what is my point?

1) If you bought here or anyplace similar, talk to a lawyer before you close on your unit. It might cost you $500 or $1000 but save you over $20,000

2) Use a Realtor when you buy units like this. We might not know everything, but knowing something like this can save you $20,000. The builder either pays your Realtor to represent you, or they give a bonus to the sales staff. The cost to you is the same.

3) Make sure your Realtor writes into the contract that the guarantee should be based on NET and include all subsidies and upgrades as provided by an audit (write in the ability to check their books).

Ray, an agent with FranklyRealty.com wrote more about this Park At Courthouse, Arlington Condo

Don’t miss the comments! And make sure to sign up for future blogs on the right side of the page.

- Written by Frank Borges LL0SA- Broker/Owner FranklyRealty.com
703-827-4OO6

Please report all typos, I don’t like looking stupid. If you like this post, sign up for new blogs daily, use the form on the right of the page.

1) At a much higher interest rate, or
2) With closing costs and/or points through the roof.

1. Either way it is highway robbery!

I’ve debated before about the close call of buying vs renting and even steered many people toward renting by dispelling the myths of “making your landlord rich” and the “tax savings” etc. See Don’t Buy Ask Why blog.

In today’s market, even after the declining prices, renting is still cheaper, even after all the tax “breaks.”

(and those of you who want to use technicalities and say “what if I put 50% down,” you can go to the back of the room. Rent Vs Buy numbers should be done as if you were doing 100% financing, or else they aren’t accurate.)

So, if the rent vs buy (see RvB NYT Article I was in) equation is a close call for somebody with a good credit score, let’s look at the equation with somebody with a POOR credit score putting NO money down and paying up the wazoo in high rates or closing costs.

Let’s first back up and talk about how loan officers make their money.
They either make their money
1) Up front with “points” or
2) On the back end with a higher rate.
3) A combo of the above.

(Sidenote: With subprime there is more tom foolery, up front points and padded profits since the lender is trapped and feels they have fewer options. Also the lender charges more for the added hassle factor.)

They make the same money either way, so which route they show you is called MARKETING!

So with Subprime, lenders love to pile on the points (closing costs) and say “the seller is paying for it.”

Um, hello, McFly! DON’T BE FOOLED! YOU ARE PAYING IT!

Example:
$300,000 with $15,000 “seller subsidy”
or
$285,000 with $0.00 subsidy

Which do you think the seller will prefer?
They are the SAME. So lets stop pretending that closing costs are free found money. It is your money.

So the subprime lender wants to mask the TRUE rate of your loan, which is something like 1 0% and they “buy it down” to a more sexy 6% loan (sometimes for only 2 years, then it adjusts higher or they scam you into another refi). Why? Because you “can’t afford 10% a month” And their solution is for you to take the $15,000 (that you also can’t afford) and fudge the numbers to LOOK like you can afford it!
That is like moving money from one pocket to another pocket.

And then they change hats in a couple of years and give you a “no points” or “no cost” refinance. As per the #2 “how a lender makes money” above, they make it with a higher interest rate. Because there is no seller to “pay closing costs” they use marketing again and they build the fee back into the loan with a higher interest rate. Regardless they are making money off you yet again!

Back to your subprime loan on your current purchase. Another way to look at it is if you opted for a no points 10% loan, you kept that $15,000 in the bank and you used $500 per month to subsidize (apply toward your ultra high loan) your monthly loan. That $15,000 would last you 30 months!

So when running the numbers, to get a TRUE idea what your REAL costs are, you need to ask:
“What is your rate with NO POINTS.”

The numbers will suck, but that is reality (or is it realty?).

Recently I ran the numbers and found that for a subprime loan, after all expenses, condo fees, taxes etc were included, the total monthly amount was:

Subprime loan for a 1bdr total = $2,500 a month

I asked the person what it would cost to rent that same place.

Answer: Rental amount= $1200

Renting will save this person $1,300 x 12 or $15,600 EACH Year!

That is over $45,000 TAX FREE in 3 years if they rented!

Sidenote: You have heard about being able to write your interest off on your taxes right? Keep in mind that this tax break is for the rich! Yes, if you are not rich, you get substantially LESS tax breaks. If you are in the 15-20% tax bracket, you get to “write off” your interest, but you get HALF the credit that somebody in the 30-40% tax bracket gets. And if your loan is large enough, it can LOWER you into an even lower bracket. Sounds good, but this is BAD since it lowers the amount you get to write off.

So what are the possible reasons one might come up with to justifying hurrying into a place now with a poor credit score?

1) Some might say “But rates may going up.”
To that you have to look at your loan. Many subprime loans are ARMS and they adjust after a couple of years. If rates go up, and you have an ARM, you will just REFI into the higher new rates. If your subprime loan fixes your rate for 30 years, you will have to do the math. (avoid loans with teaser rates that start lower for 2 years, if you can’t afford it now, you can’t afford it later when it goes up)! I bet if you take that $45,000 in savings over three years, and you fix your credit and buy a place in 3 years, even if rates go up, you will still be much better off.

2) “What if home prices are going up and I need to get a house fast!”
More reason NOT to buy. If the market is going up, all is dandy, but you have to run the numbers if the market goes down! You will be stuck in your house for years until the market rebounds. And no, you can’t just rent it, since rent won’t cover the mortgage.

Sidenote: Watch out, subprime loans also oftentimes have large prepayment penalties. You can’t just refi or sell without paying the bank ANOHTER $5,000 to $20,000! So you are locked in!

Remember TEASER= TAZER
Do not get a loan that automatically goes up later. Those are called Teaser rates. Teaser rates will HURT when they go up 20-100%.
If you can’t afford it now, you won’t be able to afford it later!

Fix your credit scores first, and THEN consider buying. Here is where you can get started to fix your credit scores.

Bottom line is the American Dream is NOT for people with low credit scores.

Sorry, I know the white picket fence, or small condo gives you that warm and fuzzy, but so does heartburn.

It just doesn’t make any financial sense.

And the blog doesn’t end here. I promise there will be heated debate under the “comments” section. Please add your comments. You might learn MORE from the comment than from this blog.

- Written by Frank Borges LL0SA- Broker/Owner FranklyRealty.com
703-827-4OO6 Please report all typos, I don’t like looking stupid. If you like this post, sign up for new blogs daily, use the form on the right of the page.

This blog was inspired by this 8 minute phone call, watch the video.

America was lured in by the… 20 year long regurgitated story “Attack on the 6% Realtors” and comments about “saving thousands.”

After watching such a biased infomercial, of course Redfin seems like a no-brainer. Well my blog readers have a brain, so here it goes…

Sidenote: Normally I’m not a fan of NAR, but I did agree with most of their comebacks (click to see).

I have written extensively on my bias opinion on the pros and cons of rebating and discounting including:

• For Buyers: Realtor Rebates. Free Money or Expensive Savings?
• For Sellers: Go FSBO! Save $20,000! Realtor Tells All!!

I would like to focus on the “savings” comment put forth by 60 Minutes’ case study.

“WE SAVED $27,000″* NOTE THE ASTERISK!

After they were done laughing and giggling on their couch about how they saved $27,000 and how they could spend it on their wedding, they made an under-the-breathe comment that they sold their place for…

“$10,000 under what Redfin recommended that we list it for.”

In this comment I see two things to question:

1) “$10,000 Under List”

2) “The list price recommended by Redfin.”

So let’s start with the latter…

If some of their agents do as many as 8 closings a week, might it be remotely possible that they might have a strategy of listing low in order to sell fast? I’m not saying they do, but would that make sense to anybody besides me?

And for the “$10,000 under list,” while I oftentimes say that “Many Listing Agents Suck” See RealtyTimes article or my blog, one has to wonder if another motivated agent that had more time to devote to the listing might have:

1. Landed them full list ($10,000 higher)
2. Started higher and ended higher ($15,000+ higher)
3. Got a bidding war going, resulting in a much higher net ($32,000 like our Realtor Megan’s listing, see blog).

In my biased opinion, the best way to get the most for the house isn’t to find one buyer, but to find at least TWO buyers. I don’t believe in pricing low to start a bidding war, but I do believe in getting as many buyers into the process as possible. A process that can take an extra 8 hours in one day for one agent, while netting the client another $32,000.

Back to the “$27,000 total in savings,” that was for buying and selling. If we assume that they bought a bigger place, they probably “saved” $12,000 on the listing and “saved” $15,000 on the purchase.

I’m confident, and I have references to back me on this, that I can consistently do at least $12,000 higher than a discount agent. I wish there was a way to prove this with statistics, but they would just be manipulated.

Instead I can only give real world examples:

1. Megan, with FranklyRealty.com, had a recent listing (See Bidding Wars? It’s The Staging Stupid!) The initial discussion regarding the starting price at the listing appointment was roughly $550,000 (seller’s opinion). After staging, light remodeling and further research, and many hours of work, the starting price was set aggressively at $570,000. The end result was 3 offers and a ratified contract $13,000 higher. While I’m confident in these number being an example of hard work, Redfin might also find an example of an agent that did a similar great job. And if that person was so great… I would hire them and pay them double, because they are worth it. (think about that for a second, if you could offer value way beyond discounting, wouldn’t you start charging accordingly?) 

   Sidenote: ZipRealty, another discount firm (some disagree with that term, see blog comments/debate), according to one blog is full of disgruntled, newer, and underpaid agents that are overworked. External blog: What’s Wrong with zipRealty

    

2. FranklyRealty.com Saves Client $152,000 should be the next 60 minutes update.

The above is actually a true story. It was a hot seller’s market, and with proper marketing and about 10 stressful non-stop hours the $499,000 listing was bid up to $601,000. One thing is to bid it up, another is to actually close at this price. Especially after several attempts to renegotiate, and appraisal issues. Yeah sure, I got a few bucks for the incremental difference, but that is nothing compared to the unexpected $102,000 in their pockets. Sure they could have “saved” and sold it fast FSBO, but they wouldn’t have been able to get anything near wha
t I got them (their words).

Then on their purchase, they loved a house that was getting 8 offers. At FranklyRealty.com we don’t write normal looking offers, and that sets us apart immediately. Each offer is different. I can’t publish all my tricks here, but when was the last time that you saw a contract that put the Realtor’s ENTIRE commission on the line as a promise that we wouldn’t renegotiate the offer? That is powerful. Also we run a CRA ™ Comparative Realtor Analysis report (see it here on RealtyTimes.com) amongst many other systems that net our client more.

A good agent should approach buying a house like an acquisition of a company. Thus winning contracts for less. In this case the 8 offers were bid up to approximately $800,000. Why in the world would somebody take our lower offer? Well because money is not the only motivating factor. When we got that house for only $750,000 my clients were in shock after just getting approved by the lender to get bid up to $800,000. They saved $50,000.

So it doesn’t matter if the market is hot, cold or you are buying or selling, an aggressive agent can save you much more, and do it in a way that all parties are smiling in the end.

Ok, I got sidetracked. The point is that what a great agent does can’t be compressed into 8 closings a week per agent.

So you have to pick one:

1. “save on commission” or
   
2. “net more.”

Bottom line is,

I used to rebate… but then I got… good.

Frank Borges LL0SA- Virginia Broker/ Owner FranklyRealty.com

Blog.FranklyRealty.com Featured in BusinessWeek, CNBC, WSJ etc.

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Keywords: Housing bubble? Arlington, Alexandria, mls, homes, Real estate, Virginia, Alexandria, 22201, 22314, Fairfax Va, DC Realty, Realtor

Now I have reported to MRIS another violation.
Lets see what they do about it.

New Construction Fudging the Reporting of Seller Subsidy… how conveeee….enient.

Before I get started on tricks that the builders are using to unload inventory, did you know that it doesn’t cost you anything to have a Realtor represent you? The cost is the same to the buyer, oftentimes the on-site sales agent gets the double commission. Sometimes a “free” buyer agent can save you even more, even if you think you already squeezed $100k out of them, who cares, if your buyer agent knows they recently dropped a place $200k around the corner. Price drops are relative, and a good Realtor can help protect you. See I Need A Buyer’s Agent! But For My Car.

So back to builder fudging. On the MLS, when a listing closes a Realtor must enter in the closed price. This can easily be verified by the tax records once it comes out. A Realtor is also required to post the seller subsidy amount. The “seller subsidy” is the “cash back to buyer” or “cash toward closing costs” and it is a marketing scheme to make a listing look more favorable, even though I tell my buyers to ignore them and just to net everything out. A $515k place with $15k back should be viewed as a $500k. Don’t let that marketing confuse you.

• Damn side note: I once had a listing for $325,000 and an agent said “but the developer is offering an amazing $15,000 in incentives, will you match that?” The builder’s price was $350,000. I said “Sure. I’ll double it! I’ll give you $30,000 back with a price of $355,000, Deal?” So make sure you NET everything out!

Anyhow, the builders are in a bad situation right now. Especially Arlington County condos in Virignia. They have already sold a ton of units at a great price, but they need to sell the rest of their inventory without pissing off the current owners and people under contract.

So how do they do this?
Well one way is through fudging the “seller subsidy”. If a place is $600,000 and they want to drop the price to $580,000, they will instead give $20,000 worth of “seller subsidies” or “cash back.” Effectively the sale is $580,000, but it gets recorded in the tax records as $600,000 (which is fine). The part that is not fine is they are leaving off the subsidy information on the MLS. Insert Dr. Evil’s voice: How convenient!

How do I know they are fudging the MLS?

• The graph to the left shows one builder’s last 40 sales. Not one included a seller subsidy. Meanwhile I have been in their sales office. As with EVERY builder, they give huge seller subsidies. Yet not one is posted here, as required by the MLS.
• The box on the right side of the graph are 50 Arlington Condos sold in 2006. About 40% have seller subsidies.

Why does seller subsidy disclosure matter?
If you are considering buying a $500k condo in Arlington, you will look at the past sales as one of a dozen metrics to value a home (I wish I could show all my tricks on pricing and offering on homes, but the competition might be reading this, email me if you want a sample). If the builder just sold a nearly exact unit for $500,000 and recorded no subsidy, you might actually consider buying the unit near $500k. However, if you knew that there was $20,000 cash back, and the net price was actually $480,000, that is basically a Honda Civic value of information ($20k).

So in conclusion, make sure your buyer agent knows the market well and knows about tricks like those and other listing agent tricks that could cost you $20,000.

For all those super smart people that think like my Mom (read Mom Blog on not trusting Realtors) did “I don’t need no stinking buyer agent,” this stuff happens all the time. (shameless plug here: sign up to get emails of new blogs, the sign up box is at the bottom)

And you all think all we do is push paper and get you to buy quickly?

- Written by Frank Borges LL0SA- Broker/Owner FranklyRealty.com
703-827-4OO6 Please report all typos, I don’t like looking stupid. If you like this post, sign up for new blogs daily, use the form on the right of the page.

Videos at YouTube.FranklyRealty.com

*Thank you to MRIS continued: I would like to thank MRIS for warning agents about MLS fudging.(the local MLS system) for posting a bulletin board on Matrix (the back end Realtor system) warning listing agents that Data MLS fudging is illegal and will not be tolerated. I believe my MLS Data fudging Blog (Part 1 and Part 2) and the resulting Business Week article probably lit a fire under them. While I wanted to copy and paste that notice, it wa
s gone after 24 hours. Oh well. Update: I found the link to the notice.

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