The Risky Loan Flap And What’s Next

By Joel Persinger
YourRealEstateDude.com

The media has been buzzing and people have been chattering about all the bad news surrounding risky loans for weeks. Everybody seems consumed by the fact that foreclosures are up, lenders are going down the tubes and the politicians are donning their superhero outfits and promising to come to the rescue of the poor innocent homeowners who were swindled by the bait and switch antics of evil lenders.

Only this morning a friend of mine sent me an article announcing the California Legislature’s plan to “Clamp down on risky home loans.” As I read the article I kept asking myself, “Why doesn’t somebody write something that isn’t just a lot of finger pointing and political grandstanding?” Nobody else appears to be ready to do so, so I will.

It is fair to state that some lenders sold loans that were not in the best interest of the borrowers and that some borrowers were eager to take risks that were foolish in the extreme. Some lenders took unfair advantage in order to make a buck. But it is irresponsible to insinuate, as some media stories have, that every lender who provided a buyer with a risky loan is a crook or that every borrower who took out such a loan is a victim. Some borrowers had delusions of grandeur and made foolish decisions based upon what their itching ears wanted to hear. In cases of which I am personally aware, borrowers made decisions in direct opposition to the specific advice given them by knowledgeable professionals. So, for your sake, I’m putting all finger pointing aside and taking a look at how this situation might affect the market.

As real estate markets ebb and flow, one of the factors that affect them is the availability of money. When money is easy to get, people find it easier to buy a home and sellers find it easier to sell one. However, when money is more difficult to get, buyers have more trouble qualifying for loans, purchasing a home is more difficult and selling a house is more challenging as well. But what does that have to do with “sub-prime” lenders going into the tank and the government stepping in to create more regulation? The answer lies in the availability of money.

By way of example, I received a courtesy call from a loan broker yesterday concerning clients with questionable credit scores. He was curious if I had any clients with poor credit. In his words, “It’s going to be much more difficult to get them a loan.” According to this loan broker, some lending institutions he works with have stopped taking loan applications for sub-prime loans. A sub-prime loan is a loan offered to a borrower with a poor credit history. If this trend continues, it has the potential to remove these poor credit buyers from the marketplace, further reducing the number of available buyers.

If the corresponding reduction in the number of available buyers is significant, it will mean that sellers may need to make further adjustments in their strategy to be more competitive. Price reductions and incentives such as paying the buyer’s closing costs may be just the start.
While it still remains unclear exactly what effect, if any, these issues may have on the market, if you’re planning on buying or selling any time soon you would be wise to keep your ear to the ground and your eye on the horizon.

Everything is negotiable

By Joel Persinger
YourRealEstateDude.com

Many years ago a friend of mine performed what I believed was a minor miracle. He went into a retail store and made a deal. I was looking for a portable keyboard stand at the local music store and had gone in with him to check prices. I had been to the swap meet many times and knew how to haggle, but I was firmly of the belief that such deal making was not possible with firmly established stores. My buddy, on the other hand, was not held back by such belief. Knowing that my birthday was coming up, he went back to the store later that day and purchased the stand as a gift for less than half the asking price. When he told me about the deal I asked how he did it. He said, “Come on, Dude! Everything’s negotiable.”

In the same way that I once believed that haggling with a retail chain was taboo, it is a common misconception in real estate that everything is standard. In fact, almost everything about a real estate transaction is negotiable. Negotiable items include commission paid to the realtors, the price paid for the property and the terms of the agreement. Many sellers seek to negotiate the commission paid to the agent and most everyone haggles over the purchase price of the property, but few buyers or sellers negotiate the terms of the agreement. This is due to the misconception among buyers, sellers and real estate professionals that a real estate transaction is a standardized process and therefore most parts are non-negotiable. Nothing could be further from the truth. The timing of taking a property off the market is one example.

In a standard real estate transaction an offer is made on a home that is for sale. When the offer is accepted or an agreement on price and terms is reached, the home is placed in escrow and taken off the market. The seller’s agent marks the property as “pending” in the multiple listings and all advertising stops. When the property closes escrow and the sale is completed, the sellers move out, the buyers move in and “Everyone lives happily ever after.” But what happens when the escrow doesn’t close?

In a market such as this one, it is common for escrows to “fall out”. In other words, the buyer can’t or won’t continue with the purchase and the escrow doesn’t close. Generally, there are no back up offers because the property was taken off the market when it entered escrow. As a result, the property would be placed back on the market and advertising would have to ramp up all over again. This is less than ideal for the seller since the process of selling the property must start back at square one. One way to avoid this situation is to negotiate non-standard terms.

I recently had a client who received an offer on his property from a buyer who had a large down payment and appeared to be ready to buy. I advised my seller to insist upon terms that would allow him to keep the property on the market to obtain backup offers until such time as the buyer had demonstrated that the loan was firmly in place and that she was ready, willing and able to purchase the home. The buyer agreed to the terms, we placed the home in escrow and the property remained on the market. About a week later the buyer cancelled. But, in this case, the marketing of the property had never skipped a beat. The seller was in a much better position to continue marketing the property because we took the approach that everything is negotiable and in every market there are ways to hedge your bet. This is only one example of many. So, keep an open mind and start haggling.

The Power Of The Home Inspection

By Joel Persinger
YourRealEstateDude.com

Some years ago home buyers and their agents discovered the value of having a professional home inspector take a critical look at a house before escrow closed. The idea was a good one because it helped protect the buyer against undisclosed defects in the property while providing an opportunity for the buyer to request repairs before the sale was done. Consequently, professional home inspections became a staple of buyer representation in real estate. What continues to surprise me is that very few sellers take advantage of the same type of inspection.

Let’s take a look at the process that follows a home inspection during an escrow. The buyer and seller settle on price and terms and the property enters escrow. Once the property is in escrow the buyer hires a professional inspector to look over the property and provide a written report detailing his findings. The buyer’s agent takes that report and uses it as a basis for writing a “request for repairs”. This is a document used to ask the seller to make repairs to the property prior to close of escrow. If the seller refuses to make the requested repairs, it’s a sure bet that the buyer will ask the seller for money. Either way, the seller generally ends up paying.

For years I have been advising my clients to have a professional home inspection done at their expense prior to putting their homes on the market. Beyond the obvious fact that it helps you cover your rump from a disclosure point of view, there are two reasons why you should consider doing this when selling your home. First, with the home inspection completed in advance you will already be aware of what the buyer’s inspector is going to find before you negotiate the purchase price. You may even want to make some repairs before placing the home on the market. Second, should the buyer’s inspector claim needed repairs that are not reasonable, your agent can use your inspector’s report as a tool to negotiate a deal.

Just such a situation occurred with one of my clients last year. The home had been remodeled and a room addition added. Following my advice, my client hired a professional inspector to take a look at the house prior to placing it on the market. Once in escrow, the buyer’s agent brought an inspector to inspect the property. The buyer’s inspector wrote a scathing report about the property including his opinion that the roof needed repairs worth $5,000 and the electrical breaker box was wired incorrectly. The buyer submitted a “request for repairs” in which he asked for $7,000 from the seller to address these issues. I called my inspector who was happy to come back to the home for a follow up. He compared the report generated by the buyer’s inspector with his own and re-inspected the items in question. In his opinion, the roof showed some wear in one section but was serviceable and the breaker box was fine.

Armed with this information and the fact that my inspector has 30 year experience, I contacted the buyer’s agent and got the buyer to back off. The buyer agreed to have the seller select an electrician and roofer of the seller’s choice to take a look at the property. The electrician gave the breaker box a clean bill of health and the roofer quoted a cost of $1,200 to make the needed repairs to the roof. The bottom line is that my client spent $450 to have an inspection done in advance and saved $5,800 when it came time to negotiate the request for repairs. So, if you’re thinking of selling your home and you have the urge to pinch every penny along the way, my advice is to pry open your wallet and pay for a home inspection in advance. It just might be the best money you ever spend.

Don’t shoot the messenger!

By Joel Persinger, GRI
YourRealEstateDude

Real estate is the only industry I know of in which the service provider is expected to provide hard work and professional advice without any guarantee of payment. When you visit your doctor to get a diagnosis, you are expected to work out paying the bill ahead of time. When you visit your attorney, you provide a retainer and sign a fee agreement before he spends more than the customary first consultation with you. Your tax adviser is the same. If you want your tax returns after he’s prepared them, you had better bust out your check book and start writing.

Your attorney, doctor and CPA will all happily give you the straight honest facts even if you don’t like them. After all, that’s what you paid them for and you have paid them. Your real estate agent, on the other hand, hasn’t been paid and won’t be unless you buy or sell the property. Anywhere along the way, if he tells you something you don’t like there’s a good chance that you can fire him without paying him a dime and hire another one. Many people do just that. The result being that the agent put forth time, money and effort and never got paid. Is it any wonder that many Realtors are afraid to tell their clients the plain, unvarnished truth?

I hear people complain about real estate agents all the time. They complain that agents make too much, work too little or simply can’t be trusted. No matter the reason why their house didn’t sell or their purchase fell apart it always seems to be the agent’s doing. Often, when I am talking with someone who is passing along such laments, I find out that prior to hiring the agent about whom they are so eagerly complaining, they had employed another one but fired him when he told them something they didn’t like.

Any experienced Realtor will tell you that sellers don’t like to hear that their property isn’t worth what they think, and buyers don’t want their agents to tell them that using a risky loan to buy a giant house they can’t afford is foolishness. Nevertheless, when the house doesn’t sell or the risky loan blows up in their faces, the first person to catch the blame is the Realtor. The simple truth is that people are all adults when they make crazy deals, but they’re all victimized children when the deals go wrong.

Over the last several years I have had many clients come to me with the desire to do very risky things. Hot real estate markets such as that which we had a few years ago will do that to people. They see dollar signs and lose all good sense. In each case, I gave them the straight truth and advised against taking such risks. I am glad to say that most took the advice to heart. Those who didn’t, fired me and hired someone who told them what they wanted to hear. Now that the market has changed dramatically, I’ll leave their current bad situations for you to imagine. I suspect that you won’t have to imagine very hard.

As your real estate dude I’m hear to remind you that your Realtor should be one of your trusted advisers whom you expect to give you straight forward, truthful advice regardless of whether it’s what you want to hear. When an experienced, professional Realtor tries to protect you by giving you advice even when you don’t want to hear it, he’s risking his job in the process. Such a person is a trustworthy advisor worthy of your respect and loyalty and his or her advice might just save your financial fanny. So, no matter how much the advice may run counter to your plans, listen, consider it carefully and please, no matter how tempting it might be, don’t shoot the messenger.