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Investing in Rental Property … A Primer

August 14, 2015 By Rick Jarvis

Everyone fears a broken toilet at 2 am ...
I may be jinxing myself but I have never had a toilet break at 2 a.m.

“I want to invest in rental property.”
“I want to flip houses.”
“I am thinking about owning some apartments … what the deal with those?”

We hear this constantly.  And we love it because it means someone else is in the nascent stages of realizing what many have known for years – owning property is a fabulous way to build wealth.

Here are some things to consider.

Toilets Never (OK, Rarely) Break at 2:30 in the Morning …

It is amazing how many people have a fear of rental property and summarize their fear by saying, ‘I don’t want to be fixing a toilet at 2 in the morning.’  A quick secret – I have owned rental property for well over 20 years and I have yet to have a toilet break at 2 in the morning (and yes, I realize how badly I am jinxing myself). Have I had inconvenient timing on repairs?  Of course.  I even had a fire destroy a building (and no one was hurt, thankfully) but the unforeseen is the reason you buy insurance.

At the end of the day, the benefits of ownership far outweigh the cost of maintenance.  When you grow your portfolio to a certain point, then you hire a management company and download the burden of maintenance to someone else.

Credit Reports Tell All

If you take nothing else from this article, please take this away – understanding what a credit report is telling you is the number one way to eliminate unnecessary work from your portfolio.  While a busted pipe under the house is an annoyance, its impact is minimal when compared to a habitually late tenant or one who requires eviction.

Every time I found myself in front of a judge filing a ‘Pay or Quit’ notice or Unlawful Detainer, it was because I ignored my inner voice and took a flyer on someone with a marginal credit profile.  All credit is not created equally … you need to understand what cause credit scores to fall and more importantly, why.  I would far rather lease to someone with a bankruptcy or foreclosure than someone with a judgement from a landlord and utility company.

What Feels Comfortable?

I don’t have a great understanding of the retail market and thus, I own no retail space.  I am also not familiar with executive rentals, so I don’t have high end residential properties for lease.  I have a far better feel for 1 and 2 bedroom apartment rents, suburban and urban office rents and 3 bedroom house rents in good school districts.  So guess what I own?  Yep, apartments, some office and several single family homes in good school districts.

If you are going to invest in property, buy what feels comfortable to you.  You will inherently have a better feel for the market and you will worry far less.

Know Finance

The best property owners do one thing extremely well – they correctly finance their properties.

Securing the lowest interest rate for the longest period is important, but sometimes flexibility can be important, too.  Partial releases, renewal options, penalty-free payoffs, floating rates, caps and assumption clauses can all impact finance, too.  Typically, if just a single family home, the Fannie Mae/Freddie Mac investment products will suffice, but when you begin to look into multi-unit properties or acquisition/rehab strategies, finance changes.

Correctly financing your property minimizes risk and increases cash flows.

Management Companies and Tenants

I like to think that there are two kinds of renters – future buyers and habitual tenants – and you need to treat each differently.  Management companies, like Realtors, attorneys, architects, Doctors or accountants, do different things well.  Don’t assume that a management company is good at managing all types of properties.  Know who will best manage your property.

In Richmond, for example, the Downtown market can have student apartments, young professional apartments, ‘work force’ apartments and ‘affordable’ housing in close proximity.  Each of these properties should be managed differently and often times, those who are good at one type are not as accomplished at the other.

Exit Strategy

Buying investment property can be easy relative to the sale investment property.  The number of buyers for a single family home in (say) Brandermill is far greater than the number of buyers for a 12 unit apartment property in Jackson Ward.  It does not mean that you should or should not buy one or the other, it just simply means that it may be easier to quickly unload a single family home than a 12 unit (or more) property.

Likewise, the way you sell each is different, too.  A single family home rental offered for sale should be vacated, cleaned up and renovated to achieve maximum value while an apartment property should be sold while fully leased.  Make sure to manage the leasing of the property well in advance of the sale to give yourself the best chance to maximize the contract price and minimize marketing time.

Summary

I highly recommend ownership of property as a vehicle to wealth accumulation.

Despite the ups and downs of the for sale markets in the last decade, rents have increased substantially and are currently as historically high levels.  Having someone living in your property, making the payment to the bank through the rents they pay and hopefully putting a few dollars in your pocket along the way is one of the most risk free and time tested way of creating wealth over time.

And if your toilet breaks at 2 am you can call me to complain …

Dollar Per Foot, a Critique

July 29, 2015 By Rick Jarvis

‘How much a foot?’
‘What is the per foot on that home?’
‘Feels like a lot per foot!’

‘Dollar per Foot‘ is probably the most used of the comparative statistics in the valuation of housing today. Every buyer references it at some point during the home buying process — as do most sellers. And so do Realtors, architects, appraisers, developers, builders and your local tax assessor.

And while we are all guilty of using $/SF at some point, we need to be extremely careful to make sure we are using it correctly.

Dollar Per Foot is (Unfortunately) the Main Comparison Metric

The name itself suggests that the measurement is the ratio of the price of the home relative to its size.

Stated differently, if you were to buy one square foot of the home, how much would it cost?

Untitled

 

But it isn’t quite that simple because the $/SF metric does not account for anything other than the FINISHED amount of square feet in the home relative to its price.

$/SF is measures the FINISHED space in the home and views all SF equally, including finished basements and 3rd floors

Do you what factors are not considered to be in the $/SF measurement?

  • garages
  • unfinished basements
  • oversized lots or extra lots
  • water frontage
  • fencing
  • screened porches
  • exterior hardscapes/landscaping
  • other outbuildings
  • roof decks
  • views
  • age of systems
  • poor floor plans
  • beds/baths

Do you know what else $/SF doesn’t adjust for?

  • finished 3rd floors are given the same credit as the first two levels
  • finished basements are give the same credit as the first two levels
  • finished bonus rooms or other finished rooms over garages or outbuildings

So as you can see, the $/SF is a metric with many flaws.

So is $/SF Worthless??

Far from it.

Citizen 6 in the Fan District
Do you think new homes built in decidedly modern aesthetic are accurate indicators of $/SF in Richmond’s Fan District?

$/SF can be a great measurement when the following conditions are met:

  • the homes being compared are similar in age
  • the homes being compared are on similar lot sizes
  • the homes being compared have the same amount of unfinished space
  • the homes being compared have similar materials

When you are comparing two homes in the same neighborhood, with similar characteristics, then using $/SF as a measurement is fine.

However, far too often, the $/SF is used far too broadly and without any consideration for the many factors that can skew the results. I cannot tell you the number of times I have heard a client say that Home A is a better $/SF than House B — and thus a better deal — without making any adjustments for a finished 3rd floor or far better lot.

Some Great $/SF Applications

One the best applications for $/SF is seeking the neighborhood highs and lows.

In every neighborhood, properties will trade in a range where no home’s value rises above or sinks below. Finding these data points can be extremely helpful when trying to establish pricing, especially when pricing unique properties.

MLS provides a function that will allow agents to quickly identify neighborhood value characteristics.
MLS provides a function that will allow agents to quickly identify neighborhood value characteristics.

The more narrowly the homes in the data are defined, the more valuable this feature becomes in establishing the limits for the values. Agents familiar with this feature will be able to help a buyer or seller understand where the subject property fits into the range of values.

Using $/SF as a Time Machine

In case you missed the memo, 2008 – 2012 was a rough stretch.

Almost every market was impacted — equities, banking, real estate, manufacturing, retail — no asset (and no individual) was spared its wrath. The financial crisis was a wholly unpleasant adjustment in values and real estate arguably led the way.

As we continue to put that ugly period further in the rear view mirror, many who made purchase decisions at or near the apex (2006/7) wonder if the 20-30% loss has recovered enough to now sell. Using $/SF as a measurement is one of the best ways to tell.

Untitled_3

 

As you can see from above, a yearly breakdown of $/SF vividly illustrates the relative health of different marketplaces. Using the same geographic data but changing the time periods measured is a fabulous application of $/SF and can lead to some great strategy decisions.

Using $/SF in Reverse

Often times, we recommend to our clients to look for HIGH $/SF to find underpriced housing.

Wait … what??

In certain cases, $/SF values considered higher than the neighborhood averages may indicate that the improvements on a piece of property are low and might be a good spot for an addition or lot split. Having a situation where the value of the land is at or near the value of the improvements often times means opportunity for the shrewd investor.

Many of the close in neighborhoods of the 1920-1940's have many homes with extra lots suitable for building as part of the sale
The remarks in this listing from 2005 references an extra lot.  Note the dimensions in the Legal Description and the actual Lot Dimensions to see that they were combined at some point.

As an example, decades ago, it was a fairly common practice for an owner to purchase the adjacent lot to give their home extra privacy. Over the ensuing decades, these unimproved lots were often merged with the improved ones and simply sold as a package. As pressure to create more housing closer to the city center continues to increase, a growing number of builders are looking for infill lots and will pay a premium for the opportunity to build a home upon them.

Similarly, it is fairly common to see a small ranch or colonial-styled home nestled in amongst larger homes, especially in the neighborhoods of the 1930’s to 1960’s. If market values within the neighborhood exceed the cost of construction by a wide enough margin, these undersized homes present opportunities to add space to the home and create value.

Knowing how to set search parameters in MLS to identify possible opportunities for the contractor/developer/flipper can be of great service to the investment-oriented client. Mastering this application of $/SF will help an agent identify these ‘value-add’ scenarios and create both loyal clients and repetitive income streams.

Condos and $/SF

The Vistas includes TV and phone in the dues. Few projects include this expense.
The Vistas includes TV and phone in the dues. Few projects include this expense.

In case you haven’t noticed, condos tend to trade a higher $/SF than single family homes. Far more often than not, the $/SF for a condo in the city of Richmond is anywhere from $5 to $20 higher than comparable single family.

Likewise, the $/SF for condos can vary wildly not only from project to project, but often times within the same building.

Why is this?

  • Condos compute square footage differently. They generally measure floor space while single family measures from the outside of the walls — thus condo $/SF tend to be higher than single family homes.
  • Condos tend to be more valuable on the upper floors or where the views are best. A condo on the 2nd floor looking at the parking deck should have a different price than a 10th floor condo looking at the River
  • Condo A might include more in the dues than Condo B and thus trade a premium.
  • Larger condo units sometimes include more parking than smaller condos — even in the same building.

So when applying the $/SF measurement to the condo market, you really need to makes sure the external factors influencing values are taken into consideration before any decisions are made.

Summary

Beware of the overuse of the $/SF metric as many sound decisions have been undermined by the misuse of the statistic.

As we continue to speed towards the era where more and more data is more and more available, we need to remember that access and analytics are two different things. The creation of new and complicated statistics is easier than ever before, but it does not necessarily mean they are relevant, accurate or applied correctly.

At the end of the day, the $/SF statistic is one of many and tells only one piece of the overall story. Make sure to understand its application and relevance before you make your decision.

Price or Terms – Which are More Important?

July 14, 2015 By Rick Jarvis

In the real estate business, the focus of almost every conversation is price.

‘How much are they asking for their house?’
‘What is the assessment?’
‘What does Zillow say it is worth?’
‘They paid WHAT?!?’
‘The offer is for HOW MUCH?!?!’

You never hear:

‘I can’t believe the rent back was for 3 days!’
‘The due diligence request was TOTALLY reasonable and allowed for the correct framework for agreement.’
‘Wow! What a shrewdly written escalator clause!’

Listen, the price a property transfers for is obviously important, but it is not the only part of making a good deal. Many other factors contribute to the making of a really great deal, other than what someone paid.

Price or Terms, You Decide

A real estate contract is made up of two things – the PRICE for the property and TERMS under which both sides must abide. It is the former that garners all of the attention but it is the latter that matters more in many cases.

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Look at it this way – how much space in the contract is dedicated to each aspect?

In Section 4 of Page 1 of the Richmond Association of Realtors Residential Purchase Agreement, you will find the following language discussing price:

“The purchase price of the property is __________, which shall be paid to the seller at settlement, subject to the prorations described herein…

The standard contract then goes on for another 8 pages to cover the other items that go along with the purchase of a home!

Just to clarify – the purchase price is handled with one sentence yet the rest of the contract is 8 pages long. And just so you realize, the contract is 8 pages BEFORE adding the required disclosures and any addenda.

Does that tell you anything?

Did you realize the ‘Standard Provisions’ alone run from A through K? Did you realize that Section #21 is labelled ‘Other Terms’ and is blank? Did you realize we can add as many addenda to the contract as we need to?

Wow.

Terms

The contract cover numerous bases:

  • Financing
  • Inspections
  • Title
  • Numerous Disclosures
  • Closing
  • Fees
  • Representation
  • Default

While it is not standard practice to negotiate each of these individual points in a standard residential contract, there is room to push and pull in order to either create wiggle room or close some outs (depending on which side you are on.) When you begin to examine other types of real estate contracts (commercial property, leases, options, land, new homes) then you introduce elements that fall outside of the generally accepted norms.

At One South, we pride ourselves on having a great deal of exposure to contract structures and practices due to our experience in many different arenas. Here are some things to think about.

Know Your Outs

Getting into a contract is easy but getting out can be hard, expensive, or worse – both!

Knowing on the way in, how you can get out, is important. And while you should not enter into a contract with someone for anything if your expectation is to get out later, if circumstances change and a seller is not in a giving mood, you may have to exercise an out.

In any contract, there are points where contracts can be far more easily ‘blown up’ than other points. Likewise, the closer you get to the settlement date the harder (and more expensive) it becomes. Understand the potential points in a contract where you can extricate yourself without penalty (or even lawsuit) before signing on the dotted line.

Know What Matters to Both Parties

This was an actual event — while driving home from vacation, my middle daughter in the front seat turned to my eldest in the back seat and said, ‘My sunglasses are in my bag in the back. If you get them for me, you can borrow my headphones.’  My eldest reached into the back and, without incident, got both the sunglasses and headphones. This NEVER happens in my house. NEVER. Any request made by one daughter to the other is generates a heated negotiation that usually involves me either turning up the TV or leaving the room.

This time, for reasons I am still unsure as to why they happened, it was different. My younger led with an offer of value to receive value. It was a stunning display of WIN – WIN. As a Realtor, I had never been so proud of my young negotiator.

via GIPHY

 

The lesson is as follows — we all value things differently. My middle daughter does not hate my choice in music nearly as bad as her sister so her headphones were of far more value to the elder one. But since she was sitting in the front seat and we were driving west in the afternoon, sunglasses were important. It was a perfect trade.

For someone who is attempting to sell a home and buy another one, time and flexibility matter. Allowing a seller not only the time, but the certainty to go out a buy their next home is HUGELY important to them. The use of a ‘Rent Back’ agreement is appropriate.

I once saw a seller of a large lot home toss in the John Deer tractor for free … and the purchasing suburbanite with a push mower ate it up! The ‘Bill of Sale’ is the correct tool in this scenario.

Being able to pay in a currency that matters more to them than you is always smart.

The Richmond Association of Realtors offers us over 150 different contract forms to use.
The Richmond Association of Realtors offers us over 150 different contract forms to use.

Understand Contract Structures

A contract is a flexible and malleable instrument … it can do a lot of things. Having been exposed to not only the common practices in the residential market, but the commercial and development market has given us insight into a wide range of techniques.

In the recent spring markets, multiple offers were far too common. Securing the winning offer when 3 or more people are bidding is hard. Most offers in a competitive situation include escalation clauses. Writing an escalation clause that secures the property while simultaneously paying as little as possible is an art.

Another example might be a using study period (in lieu of property inspections) and/or other phraseology to limit exposure for both parties. Often times, limiting both upside and downside is a technique that can provide a framework for a buyer and seller to reach an agreement.

Lastly, when working with buyers that need to sell a property before they qualify for another, the ‘Contingent Upon Sale’ and/or ‘Right of First Refusal’ contract is often required. It is critical to not only understand the differences, but the correct application of these contracts to best serve the client.

I shudder to think of the number of times a bid was lost or a price was escalated unnecessarily from faulty structure or from not understanding contract options.

At the end of the day, trade price for terms and you will win far more than you lose.

Conclusion

This post could have been faaaaaaarrrrrrr longer.

It is hard to say demonstrate competent contract writing in blog form as each set of circumstances is unique. The subtleties and nuanced structures should vary by the parties involved, marketplace conditions and each individual’s goals.

And while expressing what we know succinctly is challenging, I think it is fair to highlight some of deals we have negotiated to give you a sense of the depth of our experience:

  • 176 unit apartment to condo conversion
  • Both the site acquisition and subsequent sales of new infill homes in Richmond’s Fan District sold prior to construction
  • 100 acre land sale and rezoning from agricultural to commercial that involved parties from multiple markets
  • Using a 1031 tax exchange construct to acquire a single vacation home by liquidating a 22 property portfolio
  • Acquisition of several warehouses to be rezoned and subsequently renovated into Historic Tax Credit based mixed-use properties
  • Lease purchase of a single family home in suburban Richmond
  • Multiple new home sales as both listing agent an buyer’s agent
  • A non-warrantable warehouse condo with partial seller financing
  • Multiple acquisition/renovation and subsequent lot split in an urban neighborhood
  • Thousands of single family homes sales as either agent or brokerage

We know a thing or two about using the contract to our client’s advantage.

 

 

 

What Are You Going to Do to Sell My Home?

July 14, 2015 By Rick Jarvis

It is probably the most asked question by the selling public when interviewing agents for the sale of their home.  I think it is often misunderstood.

how are you going to

Each agent has a standard response to this question (it is usually some type of list) where they will tout all sorts of activities designed to impress the seller.  Some are these actions are critical and some, well, not so much.  As a matter of a fact, I once saw an agent that had broken down the home selling process into ‘113 Simple Steps’ (I kid you not.)  I always wondered if skipping a step meant failure, but I honestly didn’t have the heart to ask.

While choosing an agent to represent you in the sale of your home is important, it is not simply about tasks (otherwise ‘Mr 113 Steps’ would win every time), it is about applying the correct tools to the correct situations.

Below you will find some questions to ask and a list of things we can do for you.

What Type of Sale is Required?

In theory, all housing is unique.  In realty, much housing is very similar.

Selling contemporary infill, high performance new suburban and 20 year old town homes all require a different mix of tools.
Selling contemporary infill, high performance new suburban and 20 year old town homes all require a different mix of tools.

How an agent would approach a sale in Founder’s Bridge is largely the same as in Tarrington.  That said, selling a condo in a historic warehouse will differ greatly from selling a home on 15 acres in Goochland. The key is knowing what works in which segment.

The geographic location, the time of year, the price of the home, the type of property, the buyer’s likely profile and the age of the home all drive the correct mix of techniques.  A spring open house in the Museum District for a property priced below $400,000 might mean 100 people or more touring the property in a 2 hour period while an open house on the same day in rural Hanover County might not generate a single tour.  Similarly, putting a vinyl sided colonial built in 1992 in Estates and Homes magazine is probably not money well spent.

Just know that the ‘one-size-fits-all’ technique employed by many agents is the wrong way to go about it.  Find an agent with not only a big tool kit, but an understanding of when to use each.

To Team or Not To Team?

One of the trends in our industry over the last decade has been the rise of the real estate ‘Team.’  Teams named for the lead agent or for some esoteric concept have sprouted up everywhere. In my opinion, teams are a good thing.

It seems like all pictures of teams require the 'arms crossed' pose.  Why is that?
It seems like all pictures of real estate teams require the ‘arms crossed’ pose. Why is that?

The rise of the team is important because it acknowledges that at each level of real estate, increased specialization is beneficial.  From pricing to marketing and syndication strategies to contract administration to understanding the nuanced requirements of selling in historic or mixed-use environments, the more specific knowledge a team can bring, the better the level of service for the client.

At the end of the day, the collective value brought by a team based approach is generally better than the ‘one agent island’ employed by the majority of agents in any given market.

How Important is Zillow to Selling a Home?

When Zillow was launched in the 2006 (and cousins Trulia and Realtor.com soon thereafter), it changed our industry.  By bringing the home search process out from behind the MLS curtain and putting it on public display, it forever changed the public/Realtor dynamic.

The percentage of buyers and sellers using agents is as high as it has ever been.  Zillow and Trulia seem to think otherwise.
The percentage of buyers and sellers using agents is as high as it has ever been. Zillow and Trulia would like you to believe otherwise.

The narrative that Zillow, Trulia and Realtor would have you believe is that they disrupted the SALES process … which is, in fact, untrue.  The percentage of For Sale By Owner is at its lowest point in history and the percentage of buyers employing a Buyer’s Agent is at its highest.

What Zillow changed is the SEARCH process … not the SALES process.  It is a subtle, yet an important distinction.

This is the key takeaway –  these platforms that allow Realtors to promote properties almost instantly across a network of websites have changed how we, as agents, acquire new clients, but it has not really changed how properties are sold.  When we (Realtors) adopt an aggressive digital strategy that heavily leans on Z/T/R, the reality is that we benefit more than you do.

Be careful in mistaking an agent’s Zillow strategy as a marketing plan for your home – they are two different things.

Word_Cloud_GeneratorSo How Can You Tell the Professionals?

When you know how to correctly apply the tools, your metrics improve.

We will put our metrics up against any other company in the Metro:

  • Our marketing times are low
  • The pricing to our sellers is above the Metro average in terms of price AND of ‘price per foot’
  • And the ratio of the sold price to list price is nearly a full percentage point higher than the market average

You can read more about the way One South compares to our competition here…

Examining how well a brokerage performs on these metrics will go a long way in determining how well they know which tools work best for any given situation.

The List of Stuff We Do

All that said, if you just want a big giant list, here it is …

  • The MULTIPLE LISTING SERVICE is a big part of our every day.  Keeping the database current takes time and know that agents are fined or otherwise punished for non-complinace.  Oh, Zillow and Trulia would not exist if it was not for the data contained in MLS.
  • We spend an inordinate amount of time on the VALUATION of properties.  We help sellers understand values and we help buyers understand values.
  • We PROVIDE INSIGHT, GUIDANCE and PERSPECTIVE.  Of all of the things we do, trying to explain how we are going to help you navigate an unforeseen issue before it arises is hard.  Sometimes, problems are easy to predict  (short sales are more likely to have title issues, old houses are more likely to have inspection issues, condos are more likely to have lending issues) but being able to handle the last minute issue that can derail closing is what we do every day.
  • We hold OPEN HOUSES for our clients and we will often do OPEN HOUSES for the brokerage community to introduce new properties to the marketplace.
  • One of the primary ways we raise awareness  is via the E BLAST where we send new listings, price changes and other updates to the brokerage community.
  • ZILLOW – see the section from above.  Managing Zillow, as well as TRULIA, REALTOR.com and the hundreds of other sites vying for the public’s eyeballs takes a great deal of time and effort to do right.
  • People still love a well done PRINT BROCHURE.  Despite the digital movement and the ubiquity of online information, the public wants one … so we continue to create them.
  • PROFESSIONAL PHOTOGRAPHY is a must.  While cameras, cameraphones and a host of other ways to capture and improve images exist, when the pros shoot it, it just looks better.  Use them.
  • The LOCKBOX helps record who goes in when and reports a ton of information.  We should place one on your front porch/door/railing to provide protection for your key.
  • Often, on the sign, we will place an INFO BOX so that when someone walks/drives by, they can grab a shortened version of the brochure and find out some basic info on the house.  The Zillows and Trulias of the world have largely rendered the need for the info box obsolete
  • Some swear by the VIRTUAL TOUR while others are more ho-hum about it.  Well done photography can often times be stitched together to create the VT, but nothing replaces an actual tour.
  • Individual PROPERTY WEBSITES can be very important, especially when the property rises to a certain level.  If the home is architecturally important or very specific details are required to tell the story, the a site dedicated to the property should be created.  We do this in-house, typically.
  • The rise of VIDEO in our industry is unmistakable.  The problem is, well done video is hard, expensive and time consuming.  In a market where properties are moving quickly, video may not be worth the effort.  It depends on the goal.
  • In any given day, especially in the spring, ANSWERING INQUIRIES thoughtfully and correctly has consumed the day.  An agent’s job is to answer the inquiry (from both the public and peers) in such a way that generates showings.  It is an art.
  • You would be surprised how much time is spent SCHEDULING.  Life goes on despite a For Sale sign in the front yard and trying to coordinate everyone’s schedule (buyer, seller, agent, family, inspector, contractor, insurance agent, appraiser, running late, running early, need to reschedule) can be as time consuming as any activity we do.
  • Any good agent is also adept at SHOWING.  A typical showing will take close to 2 – 3 hours ‘all-in’ when you include preparing, printing, travel time, actual demonstration of the property, turning lights on (and off) and locking up.  And often times, we show up, meet the client and show the property only to find out afterwards that they are already working with a Buyer’s Agent who they never called to show them the property.
  • Obtaining FEEDBACK that is relevant and valuable is also an art.  It takes time and you have to be diligent.  Buyer’s Agents are busy and don’t normally have the time to stop what they are doing and tell you why their client did not like your home.  Good listing agents are diligent about the feedback loop.
  • We NEGOTIATE CONTRACTS and then we NEGOTIATE INSPECTIONS.  Remember, contracts are combinations of a price AND terms.  Many tend neglect the terms in exchange for price and it is a shame.  So much seller benefit can be gained by focusing on the terms of a deal.  Without going into too much detail and giving away all of our secrets, we firmly believe in negotiating with a plan in mind.  Know where you stand.  Know the market.  Know your goals.  Negotiate accordingly.
  • Lenders/Loan Issues delay closings more than any other reason.  COORDINATING WITH THE LENDER is the most critical thing we do while the home is under contract.  Making sure the lender has copy of all of the paperwork, contract, addendum, pest report, necessary inspections, addenda, HOA Docs and every other piece of paper they need in order to get the loan underwritten and in the closing queue to make sure we do not miss a date.  As a matter of a fact, One South views this piece as so critical, we have an entire staff dedicated to making sure that the lenders have what they need from us.
  • COORDINATING WITH THE CLOSING ATTORNEY is as equally important.  They need the same things as the lender (plus a few others) and with the volume of sales flowing through the system right now, getting everything to the closing attorney promptly (or making sure the Buyer’s Agent did) is a big part of representing you client.

You’re Gonna Be Mad at Us…

July 6, 2015 By Rick Jarvis

You are about to get really mad at your Realtor … and your lender … and your attorney.

And you know what?  It isn’t our fault.iStock_000013841997_Large_jpg

Beginning in late 2015/early 2016, the way real estate transactions are closed will change and change substantially.  Since becoming licensed in the early 1990’s, this is by far and away the most fundamental structural change I have even seen in our industry.

Dodd – Frank and the CFPB

In 2010, the Wall Street Reform and Consumer Protection Act (also known as Dodd – Frank) was signed into law by President Obama.  With its signing, Dodd-Frank brought sweeping change to the way the financial markets were regulated.  It also gave birth to the Consumer Financial Protection Bureau (CFPB).

Dodd – Frank (and the CFPB) was created in direct response to the financial crisis. It was designed to put more controls in place, as well as harsh penalties for intentional fraudulent practices, to prevent another complete economic collapse on the scale of what happened in 2008.  And as the real estate market (ok, lending) was one of the chief culprits in the meltdown, it too, fell under the changes brought by Dodd – Frank.

Fast forward from 2010 to 2016, and we are now seeing the full impact of Dodd – Frank.  The changes are far from all positive.

The Financial Crisis

One of the main goals of Dodd – Frank was to protect a largely uninformed public from unscrupulous and predatory lenders.

The Dodd-Frank legislation is 848 pages if you care to read it.
The original legislation is 848 pages if you care to read it, but click here for a synopsis.

During the run up to the crash of 2008, a largely unregulated lending market began to create mortgage products which were intentionally disingenuous. These highly leveraged adjustable interest only loan products were not designed to help someone own a home, but to extract as much in interest payments as possible.  The loan products created mortgage time bombs as rates adjusted upwards and payments on the loans increased well beyond buyer’s ability to repay them.

Those who created the loan products were able to insure them against default (which was totally insane and probably the biggest cause of the crisis) and thus carried no risk … which only encouraged riskier and risker behaviors.  Cracks appeared in the financial dam in late 2007 and by summer of 2008, all forms of lending effectively ceased, largely freezing the real estate market in place.

Know Before You Owe

Would 2008 have happened if the borrowers of the world knew what they were borrowing?  Hard to say.

Regardless, it appears that the CFPB does feel that way and thus, the changes now being put in place.  In order to create an environment where consumers were far more certain about the products they were signing on for, the CFPB has adopted the philosophy of ‘Know Before You Owe‘ in an attempt to save borrowers from the evil lenders.

Know_Before_You_Owe___Consumer_Financial_Protection_Bureau
Gotta love when the Federal Government uses logos and catchy sayings

The key to protecting the borrower from the lender, in the opinion of the CFPB, is more time, longer forms and harsh penalties. By completely revamping the lending practices of mortgage originators, the CFPB is effectively forcing lenders to disclose more fully and far earlier than before with extremely large penalties for non-compliance.  Hopefully, consumers will have more time to comprehend the loan products they are committing to and lenders will be far more reticent to push the boundaries of good faith knowing fines exist as large as $1M per day for willing non-compliance.

Disclosure Earlier is Good, Right?

An informed consumer is a better consumer … this cannot be argued.  Forcing the lenders into better disclosure earlier in the process means a better informed client.  Once again, this is a good thing.

In order to force lenders to fully disclose earlier, the CFPB has demanded two major changes.  The first change is in how disclosure happens.  The closing statement that had been used for decades is being replaced by new form that is both longer and in more detail.  Effectively, the Truth in Lending Statement and the HUD 1 Closing Form (aka Closing Statement) are being merged into one mega-form now called the Loan Estimate and Closing Disclosure.  It can be argued that this change is more annoying than structural and will not really have an impact other than some short term confusion as attorneys, lenders and Realtors get familiar with the new terminology.

The second, and far more impactful change, is that all of these documents must be delivered to the borrower a minimum of 3 days prior to closing.  Gone are the days when the HUD would arrive 30 minutes prior to closing and everyone saw it for the first time when they sat down to sign paperwork and made any and all adjustments to the form while sitting at the closing table.  The closing attorney (or title company) had the power to make minor adjustments to the closing statement in real time to fix errors or omissions.  No longer.

Sequential closings are going to experience a ton of problems...
Sequential closings are going to experience a ton of problems…

You Only Hurt the Ones You Love

On the surface this sounds like a great idea … lets get everything ironed out earlier!  Having a chance to review the package well in front of closing feels much better than hoping that the closing statement will be correct when you arrive at closing with movers on the way and your sick kid at your sister-in-law’s house.

But what happens if the statement is wrong?

Any amendment requires the 3 day process to begin anew. Imagine going to a walk through and seeing that a repair was not done correctly and the seller and buyer agree to escrow $1,000 for the repair … guess what??  You gotta wait ANOTHER 3 days to close.  Or what if the builder forgot to show a $2,500 credit for the upgraded appliance package?  Yep, 3 more days…

The ability to make adjustments to the closing statement is now, for all intents and purposes, gone.  In its place is 3 days of pain, stress and frustration while the paperwork is amended, resubmitted and subject to another mandatory 3 day review period.

When you think about the impact this will have on closings where multiple homes are expected to close in sequence, you can begin to see the trouble this will cause.  If any one of the loans in the chain requires modification, it will slow down the process by a minimum of 3 days.

And heaven forbid if you have used an internet lender in a different time zone.  I can’t imagine the pain this will cause.

While I agree with full and complete disclosure, the CFPB has not anticipated the ancillary impact this requirement will have.  Removing the ability to make legitimate modifications to the closing statement is not consumer protection.

Marginal Buyers Lose

The sequential closing is a hugely important part of our the market, especially for buyers who have little equity and are unable to qualify without the sale of their home.  The 3 day right to review will wreak havoc on the closing process that we have all become so accustomed to and understand so well. By outlawing what are benign and minimal, but necessary, last minute changes to the closing statement and forcing a minimum of a 3 day wait upon the parties is either going to:

  • Discourage the practice and force marginal buyers to stay in place
  • Force many last minute panic moves or late closing penalties on the marginal buyer
  • Force buyers to accept incorrect closing statements due to penalties for non-performance exceeding the incorrect costs on the closing statement

I am not sure that this is what the CFPB intended.

Sorry…

I am already rehearsing my apology.

The first time the problems arise (and they will), the buyers and sellers of the world are going to get angry.  ‘What do you mean we aren’t closing for another three days?!?!  The movers are on the way!!!  My new job in Poughkeepsie starts Monday!!’

Sorry.  I really cannot help.

I fully expect to take many daggers because of someone else’s mistakes and there will be nothing that I can do about it.  Nor can the attorney, nor can the lender.

At the end of the day, the old world is no more and we now have a far more regulated and inflexible process that, I feel, will cause more harm to the consumer than protection.  The lending institutions of the world that caused the crash are no more.  Enacting rules to prevent their fraudulent practices is akin to closing the barn doors after the horses are long gone.

But the doors are now closed and those who are left in the barn are now trapped with far less room to maneuver.

 

 

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