Wednesday, September 30, 2009

Real Ethics in Real Estate Transactions

Recently someone said I should write an article on the need for increased real estate ethics. I told them, “There’s no such thing as real estate ethics”. After a moment to let that sink in, I finished my comment. “There is only ethics.” We become our own worst enemy when we live under the assumption that every situation allows for its own code of behavior. For many, our ethics become malleable to a situation instead of our response to the situation becoming malleable to our established ethics.

Every real estate transaction potentially involves at least a dozen different parties. Two realtors and their brokers, the appraiser, the home inspector, the pest inspector, the mortgage provider and the national lender, the title company, a survey company, a well and septic inspection and a contractor to affect any necessary repairs. We all have heard of or experienced horror stories involving straw buyers, forged income documents, shoddy repairs, and grossly inaccurate home disclosure documents. Is it any wonder that buyers and sellers express an anxiety level that is off the charts?

Every participant in a real estate transaction has undergone some level of training, whether formal or informal, and each of these professions has at a minimum, annual “continuing education” programs that in most cases is required. Most of these remedial courses contain a small section on ethics for their particular business. The trouble is most people settle for a level of ethics that simply “keeps them legal”. This then becomes the standard of measure which everything they do in their business must pass.

But is this standard too low? Is it enough to do our jobs with the aim of performing only what is legally required, or do we need to raise our sights to some higher ground?

Think with me for a moment the difference that would be made if everyone in your next real estate transaction operated under one simple rule. “I will treat you in the same way I would want to be treated; and I will handle your business the way I would want someone to handle mine.” That’s it. The Golden Rule applied to real estate transactions. What would such a transaction look like?

Appraisals would portray accurate home values. In recent years one of the primary reasons home values shot up was because of inflated appraisal reports. As a result the entire appraisal industry is currently under close scrutiny and the natural response is paranoia. Many appraisals report an artificially low home value. This is because appraisers don’t want to risk losing their license. But left unchecked, this practice could prove just as potentially damaging to the real estate industry as was the practice of inflating home values.

Home inspections are a critical part of any real estate transaction with both buyers and sellers anxiously awaiting the inspector’s report, but for very different reasons. If the report reveals repairs, the sellers will have to pay and the buyers will demand that the repairs be made correctly and be performed by a licensed contractor. I have personally experienced customers who have closed on a home only to find out that the heating and air system that passed inspection only a few months prior now needs replacing.

Mortgages are a necessity for most home buyers. Investigations have shown that in many cases uneducated home buyers were steered into risky adjustable rate loans that now place them in jeopardy of losing their houses. The industry is filled with stories of surprises at closing that involve much higher interest rates and inflated closing costs. The buyers have already removed everything out of their old home while the workers wait for closing to move their belongings into their new home. They have few options but to sign the papers at the higher interest rate.

It’s a nice thought that everyone would conduct their business and personal lives under the same code of ethics. But how can this be accomplished? How is possible for the Golden Rule to become the standard of ethics? How can this be made the bar under which everything must pass? Let me suggest that when the cost of doing what is right exceeds the price we are willing to pay that we make the difficult choice to pay the price and treat others better than we would want to be treated. This is a great concept that almost everyone believes is true, all that is lacking is the will to implement its practice into our lives. Will you be the first to commit to living by this one simple rule?

Friday, September 25, 2009

Senior's Purchase New Homes Make No Payments

Right here in Edmond and all around the nation, Seniors are downsizing to smaller homes making the purchase with a mortgage that requires no monthly payment for the remainder of their lives.

It’s called a Reverse Mortgage and it has become more popular than ever before, especially with Seniors who are selling their larger homes and opting to purchase newer smaller homes to gracefully age in place. This is exactly what Lydia Cross (not her real name) is doing.

I met Lydia just this week after she had spent the better part of three weeks working with a local bank to get financing for a new home. Her existing home was too large and in truth, too opulent for her needs. Five years ago Lydia’s husband passed away and left her in good financial shape. She purchased the larger nicer home to entertain her friends and family. Lydia is 72 and after experiencing significant health problems earlier this year, she’s ready to simplify life.

She put her house on the market and it sold rather quickly. In the meantime Lydia had found another home that better suited her needs and made an offer to purchase which was accepted. About the first of September she signed contracts on both houses and spent the better part of three weeks working with a local bank to get financing. The bank exhausted every avenue to secure the financing Lydia needed and only after visiting with her financial planner was she directed to call our office.

We examined the Reverse Mortgage from every angel and Lydia was convinced that this was not only the only way for her to get the financing she needed, as it turned out, it also helped her maximize cash flow for her remaining years. Here’s how her scenario works.

First Lydia will receive considerable proceeds from the sale of her current home. Because every Reverse Mortgage is custom fitted to each Senior’s needs, she will need to bring $103,000 to closing to cover down payment and closing costs. The purchase price of her new home is $305,000 so her new which leaves her a new loan amount of $202,000.

Her fixed interest rate for the rest of her life is 5.65%, a rate just slightly higher than conventional 30 year rates. If she were to take out conventional financing for this amount at 5.25% her monthly principal and interest payment would be $1,115.45 but with the reverse mortgage, Lydia can live in her new home and never make a monthly payment for as long as she lives. I explained to Lydia that when she passes, her estate has 12 months to settle the mortgage by either selling the home, or securing replacement financing.

But Reverse Mortgages have a few associated costs that can be surprising if they are not anticipated. The first is the up front mortgage insurance fee. A Reverse Mortgage is an FHA loan and as such like all FHA mortgages has a mortgage insurance premium attached to the front of the loan. This fee is calculated as 2 percent of the maximum amount that can be borrowed plus a 0.5 percent annual premium. For Lydia this added $6,100 to her closing costs.

Another sizeable fee is the servicing set aside fee. Each Reverse Mortgage charges either a $30 or a $35 a month service fee. This amount is multiplied by the number of month until the borrower reaches the age of 100. For Lydia this was a total of $4,730. This amount is not added to the closing costs, instead it is set aside out of the equity of the home, and the unused amount is returned to the estate when the note is settled.

Closing costs are the most controversial part of the Reverse Mortgage discussion. For some Seniors it is the sticking point that finally deters them from pursuing the idea any further. For others it is a necessary part to realize the opportunity of living out their years with fewer liabilities and a greater cash flow to better meet their needs. Before making your decision about a Reverse Mortgage, consult your financial planner and a Reverse Mortgage specialist.

Friday, September 18, 2009

October to April; Best Time to Buy Home

The other day my wife and I were having dinner with a group of friends and I overheard someone with the group at the next table say, “We’re ready to buy a house, but we’re waiting until spring so we can get the best deal.” Really? The best deals are only available in the springtime?

It’s funny how an urban legend gets started.

Statistics at the Oklahoma Association of Realtors website ( support that more homes are sold each year during the second and third quarters than are sold during the first and fourth quarters. This has been true at least since 2002. I know this because that’s as far back as the OAR website displays the data. One quote from that website speaks volumes.

For the second quarter of 2009:”The average cost of a home in Oklahoma has decreased by 3.4 percent compared to Second Quarter 2008. In Second Quarter 2009 the average cost of a home sold was $145,413 compared to $150,559 in 2008. Statewide, 12,130 homes were sold in Second Quarter 2009. This is 11 percent less than the number of homes sold in Second Quarter 2008 in which 13,626 homes were sold. The average Days on Market was 115, and the average Median Price was $106,901.”

If you wait until spring and summer to purchase a home, are you certain you’ll be getting the best deal? Or is it possible that just the just as many good deals and even great bargains could be available during the fourth and first quarters of the year?. Let’s briefly examine the conditions that could make this October to next April one of the best times to buy a home.

High Home Inventory: More homes are available for purchase now than at any time in recent history. Across the state the average days is on the market 115 days before being sold. That’s almost four months. That means that if a home was put on the market in June (one of the peak months for home sales) that same home could very well still be on the market today. And with 11% fewer homes being sold (April through June, 2009) you can expect to find more homes on any MLS database search that meet your criteria.

Time on Market Affects Price: When a home is first listed on the MLS, it receives a great deal of notice from Realtors. But the longer that home remains on the market the less notice that home usually receives. This is why many Realtors suggest dropping the asking price. This kind of change brings the home to the top of the search criteria when Realtors check the MLS.

Don’t Forget Foreclosures: The news is filled with numbers of new foreclosures throughout the country. Oklahoma has its share of these numbers and many of these homes are in good shape and can be picked up for a great price. If you elect to go down this path, make certain your Realtor has experience negotiating a short sale. This is a transaction where the holder of the lien agrees to accept a price that is less than the note they currently hold against the property.

$8,000 tax credit goes away December 1, 2009: There’s still time for first time home buyers to close on a home and claim this tax credit. However, time is running out. Check with your Realtor and your mortgage provider for all the details.

Hungry Realtors: One of the things I love about America is the structure of our economy. Hard work and industry are rewarded by greater income. When fewer homes are being sold, skillful Realtors survive by going the extra mile for their buyers and sellers. Skillful Realtors feed their families all year long by working hard to get you the best deal.

Hungry Mortgage Brokers: The same truth that applied to Realtors applies to Mortgage Brokers. The number of refinances has dropped right along with the number of applications for home mortgages. This motivates the skillful and hardworking Mortgage Brokers to do whatever it takes to get your business and that can include reducing the amount they make on your loan.

Friday, September 11, 2009

6 Vital Home Rehab To-Do's

A good friend of mine called me yesterday to continue a discussion we started about an abandoned home in his rural neighbourhood. Most of his neighbourhood lots are 1+ acres. The abandoned home sat on 5 acres and had a 20’ x 40’ shop next to the house. The 2,100 square foot home, the shop and the 5 acres just sold for $199,000!

There are plenty of good deals out there just like this one. If you’re interested in finding them, there are plenty of creative ways to go about that task. Just be careful because there seem to be more horror stories than fairy tails when it comes to successful home rehabs.

Well, here are 6 must do’s for anyone in the market for a home to rehab and sell, or for anyone with immediate plans to rehab a home they already have.

Limit your potential exposure: If you’re looking for a home to purchase and rehab, keep in mind that should you need financing, current lending guidelines limit financing to 70% to 80% for investment properties. This means that in addition to the money required for any updates and repairs, you’ll need a 20% to 25% cash down payment. Don’t forget to include 6 months of total payments (principal, interest, taxes and insurance) as verifiable reserves. Most likely the underwriter will require that much for each investment property you own. It’s probably best that you settle for properties with a maximum sales price of about 70% of the current appraised value. The property my friend and I were discussing was sold for about 72% of its value. But the necessary repairs would be minimal, so it was a great deal for the person who bought it.

Be conservative about what the home will be worth after affecting repairs: The correct industry lingo is After Repair Value (ARV). Our local real estate market is relatively steady, even still, changes regularly take place. It’s unwise to trust sales comparisons from over 6 months ago. Use sales within the past three months to establish the ARV. Also limit your search to one-half mile or less and only use home that are very close in size and share many of the same amenities. The local MLS will show the active listings and pending sales, but these are less effective comparisons and should be used discriminatively. There are plenty of REO (bank owned) sales and these should be included in your comparison to establish what the home will be worth after the repairs have been made.

Get multiple bids for the necessary repairs: Do yourself a favor and get at least three bids for the necessary repairs. If you don’t have a ready list of reliable and quality construction professional, contact several realtors you know and trust and ask them for referrals.

You’re the coach; build team consensus: America still has a capitalist economy and the contractors and real estate agents you hire want what you want. Maximum return on a minimum investment. Contractors want to do the least amount of work and make the greatest possible profit. Agents want to do as little marketing as possible and earn as much commission as possible. So why not commit to contractor bonuses if work is finished on time and under budget? Why not pay the agent their full commission and bonus them $1,000 if they sell the home by a specific (realistic) date? You’re the coach, so lead the team.

Plan for multiple exit strategies: In any building/remodelling project, there are always surprises, delays, added expenditures and the potential for disasters. Make sure you visit with your property insurance carrier and that you have correct coverage for your project. It’s also a good idea to have additional cash reserves to cover any cost overruns. What do you do if the property doesn’t sell? Make certain that the property cash flows well so you can rent it and hold onto the property.

Begin marketing the home for sale immediately: It’s never too early to begin letting everyone you know that you’ll soon have a home for sale. Tell your friends at the coffee shop, let your realtor friends know. Tell your friends at work. Attach a flyer to your email messages. Use Twitter, Facebook and LinkedIn. Take advantage of every available avenue to advertise your project. Market early, market daily, market often and market continuously!

Friday, September 4, 2009

Made in the Shade

Okay, I’m ready to laugh about it now, but only just now. And the time between now and the last wound suffered has been only a few days. So I may ramble on a bit, just to give you fair warning.

I’m smiling only because I’m amazed at how such a simple straightforward project as purchasing suitable coverings for two small windows, can turn into a screenplay for a new Pink Panther movie. Perhaps I’m overstating the case, but I swear that the comedy of errors surrounding this home improvement task would make Tim the Tool Man’s Top Ten List.

Our home faces the west, and well, since the sun sets in the west, we had to do something about the windows. We installed wood shades over the square windows and that worked well. But over the study window and over the front door were two “eyebrow” windows that would require specialized treatment.

My wife steadied the stepladder as I climbed, tape measure in hand to garner semi-precise dimensions for “close-enough-for-government-work” pricing estimates. These openings weren’t oversized, but every evening from late spring through early fall the brightness from the sun made it nearly impossible to navigate the kitchen; and the heat it generated made it unbearable in the study.

We took these measurements to several stores where blinds and shades are sold and one sales associate after another showed us our choices and tallied up the cost. I think it should be required for builders and sellers to disclose just how much it costs to properly treat an eyebrow window. At the prices we were quoted the word “treat” was inappropriate. I consulted my Thesaurus and found more appropriate terms such as, extravagance, indulgence, delicacy and luxury. This search led me to other words like doctor, nurse, cure and heal.

Our original thoughts were to have matching wood blinds custom cut. I’ve shopped for used cars that cost less. Seriously, are there people out there who actually pay thousands of dollars for something to hang in the window collecting dust? I guess so.

After several days browsing through decorating magazines, we settled on the idea of a shade. A window covering made of a durable material formed into cells that fan out from the bottom center of the window similar to a Chinese hand fan.

The look of this window treatment was pleasurable, but not extravagant, delightful but not luxuriant (yes, more Thesaurus words). And the price was more “general practitioner” than “specialist”. So we set the appointment for the installation expert to come and take exact measurements of our two windows.

Three days later I met the installer who not only took exact measurements, he also taped thick brown butcher paper over the openings and cut templates for the manufacturer to use when making the custom cuts. He left and the next day we returned to the store to place the order.

The sales associate called out the price and I actually smiled as I handed her my credit card. After consulting the computer she said, “Your shades should arrive in two weeks.” Okay, I thought, two more weeks of the heat and the sun spotlighting our dinner preparations. And we left the store.

Three weeks later (yes, that’s 3) the store called to let us know that our shades had arrived and that we needed to schedule installation. Four days later (yes, that’s 4) I met the installer who admitted, “I’ve never put these kind of shades in before. But hey, how hard can it be?”

Four hours later (yes, that’s another 4) the installer was leaving and I was on the phone with the store complaining that the shades for which we had waited an extra week were cut at least two inches short in all directions. How could that be? I mean the installer had cut an exact template of each window. I watched him do it myself.

We were assured that the re-order of our purchase would be made immediately and that we could expect delivery in three weeks.

Four weeks later (yes…) our new shades arrived. The installer came out five days later and we now have shades to cover the two eyebrow windows. The whole process required just over three months, numerous phone calls four installer visits and I now know why they call it window treatment. In the end, the windows get treated better than the customer.