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Sunday, January 31, 2010

2010 Housing Market: "Year of the Tortoise?"

"Lessons" For Every Housing Market

Should I stay or should I go now?
If I go there will be trouble
And if I stay it will be double
So you gotta let me know
Should I stay or should I go

--The Clash, "Should I Stay or Should I Go?"

According to the Chinese zodiac, 2010 may be the year of the tiger, but in the housing market, it's definitely the year of . . . the tortoise.

The Buyers who've been looking the longest -- upwards of a year(!) or more in some cases -- have definitely seen their choices improve during that span, particularly in the upper brackets.

For example, I'm personally aware of several homes in the west suburbs that originally listed in the $800's way back in 2008 that are still for sale, except that their asking prices have dropped into the $600's.

The lesson such Buyers have learned? (assuming, of course, that they really are Buyers)

It pays to wait.

Re-wind to 2003

Contrast that with the lesson Buyers "learned" 6-8 years ago.

Back then, Buyers discovered that waiting a year to become more financially established, save up a bigger downpayment, etc. was a mistake.

That's because the housing market was appreciating -- strongly.

I remember one client in particular, a young couple who wanted to buy a $200k house around Lake Nokomis, and decided to hold off for a year.

While they were socking away another $10k, the $200k houses they were eying suddenly started fetching $220k or more. And interest rates had climbed, adding insult to injury.

In fact, the foregoing phenomenon was repeated annually for a stretch of 5-7 years, if you (correctly) count 1998 as the beginning of the epic housing bull market.

Take-home lesson: don't wait.

Sooner or later, it will be better to be a housing "hare" again ("early bird" might actually be the better term, as in, "the early bird gets the worm") . . .

"Technology Losers" . . . and Ostriches

Technology Adapters: Early, Late . . & Never

If you've yet to "Facebook," "Twitter," "Link In" (yes, they're all verbs) or otherwise seriously partake of the orgy of social media apparently going on out there, I'm sure you'll relate to the following:

If Caroline Cua’s iPhone looked anything like her closet, where she keeps her dozens of pairs of shoes, she would have screen after screen of applications. But instead her iPhone is nearly empty.

And that’s just fine with her, until she finds herself among friends whose iPhones are studded with icons. When a fellow iPhone owner asked recently to see her apps, she grew self-conscious. “I said to him, ‘O.K., now I’m officially feeling like a loser,’ ” she recalled.

--"Skirting the Glut of iPhone App's: When Phones Are Just Too Smart"; The New York Times (1/2/2010)

Actually, there's an even more antediluvian state than the self-described "technology loser" (above): "technology ostrich."

That would be anyone putting off buying an iPhone because they don't want to be one of the technology losers walking around with only 5 app's installed on their smart phone.

Like me!

In my defense, I know lots of other seasoned Realtors walking around with not-so-smart phones because . . . they still work!

In my case, they also open up Realtor lockboxes (because my Treo has an infrared beam, I don't need to carry around a separate "fob"); and synch, reliably, with my calendar and contact list.

If it ain't broke . . .

Paul Volcker: 'No Substitute for Structural Change'

Volcker's Clarion Call

Imagine being able to consult Albert Einstein about a physics conundrum, or FDR or Lincoln about an existential national emergency (like the one we're facing now, perhaps).

Having Paul Volcker, the 82 year-old former Fed Chairman, still on the scene and available to advise and guide is truly a stroke of good luck.

So what is he prescribing?

Basically, the same thing he's been saying for over two years, only now with a little more traction:

I am well aware that there are interested parties that long to return to “business as usual,” even while retaining the comfort of remaining within the confines of the official safety net. They will argue that they themselves and intelligent regulators and supervisors, armed with recent experience, can maintain the needed surveillance, foresee the dangers and manage the risks.

In contrast, I tell you that is no substitute for structural change, the point the president himself has set out so strongly.

I’ve been there — as regulator, as central banker, as commercial bank official and director — for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to “lay off” tough regulation will remain — most notably in the fair weather that inevitably precedes the storm.

The implication is clear. We need to face up to needed structural changes, and place them into law. To do less will simply mean ultimate failure — failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future.

--Paul Volcker, "How to Reform Our Financial System"; The New York Times (1/30/2010)

Let's see . . . as a nation, we can heed the distilled wisdom of one of the country's wisest, most successful financial stewards and public servants . . . ever.

Or, we can do what Wall Street wants (basically, nothing -- but keep the government backstops and free money flowing, thanks very much).

Not much of a choice.

P.S.: If you read the entirety of Volcker's piece, you'll note that he demurs -- because of space limitations -- on a number of thorny issues, including revamping how U.S. home purchases are financed:

We also face a large challenge in rebuilding an efficient, competitive private mortgage market, an area in which commercial bank participation is needed. Those are matters for another day.

Let me translate the above: 'Fannie Mae and Freddie Mac are toast. Time to start over' (as even Barney Frank now admits).

Saturday, January 30, 2010

Non-Exploding ARM's

Setting the Record Straight on ARM's

It's easy to think that every adjustable rate mortgage ("ARM") burned the borrowers who took them out.

After all, aren't so-called "Option ARM's" supposed to be financial time bombs?

They are, but most ARM's don't function that way (at least, the ones most common outside of Southern California, Arizona, and Florida).


With an option ARM, the borrower effectively chooses to re-pay whatever they want --including virtually nothing -- for a prescribed period of time (usually 5 years).

Any shortfall is simply added to the balance of their mortgage.

So, an Option-ARM borrower who decided to make only tiny monthly payments could easily see their loan balance double, as all the accrued interest piled up on the (unpaid) principal.

As millions have now discovered, a mushrooming mortgage balance on a house that's rapidly losing value is a nasty combination.

Plain Vanilla ARM's

Fortunately, that's not how most ARM's work.

While the formula varies by lender, the plain-vanilla version typically features an initial teaser rate that's fixed for a prescribed period of time (often, 5 years). (FYI, big banks today are offering 5/1 ARM's at 3.625%, vs. fixed, 30-year rates just under 5%).

After that, the rate re-sets annually based on a predefined formula; popular ones include LIBOR ("London Interbank Offer Rate") or 10-year U.S. Treasury notes, plus anywhere from 2% to 4%.

Another feature of ARM's is a ceiling on how much the maximum upward bump can be over the life of the loan.

Sitting Pretty

So, where does that leave people who took out ARM's in 2005, that are re-setting in today's environment of infinitesimal interest rates?

In many cases, with rates that are re-setting lower.

Thanks, Ben! (as in Fed Chairman Ben Bernanke, whose appointment to a second term was just confirmed by the Senate yesterday).

P.S.: Another reason why ARM's have bit fewer people than you might expect: they sold their home before their interest rates re-set.

Given that the average homeowner moves every 7 years, statistically, a high percentage would retire their ARM loan before the 5 year re-set date ever arrived.

In fact, that's one of the strongest arguments for getting an ARM in the first place, i.e., why pay a premium for a 30-year mortgage when your time horizon is much shorter?

Friday, January 29, 2010

The Downside to Pitching Upside Potential

"Just Needs Your Cosmetic Touches"

When the home you're selling is lit by the equivalent of kerosene lamps, you've really got no choice: one way or another, you're going to have to inform prospective Buyers that they'll need to do extensive updating and/or remodeling (my favorite Realtor euphemism for that: 'Just Needs Your Cosmetic Touches!").

However, lots of times it's not so black-and-white.

When that's the case, I tread carefully, for the following two reasons.

One. Beauty is in the eye of the beholder.

The Kitchen that was remodelled 15 years ago may be a little tired to one prospective Buyer . . . but a perfect fit for another.

Or, the prospective Buyer has lots of little kids and doesn't want a home with all the latest bells & whistles; they'd rather have the discount (and the extra space). Which leads to . . .

Two. You don't know the prospective Buyer's budget.

I remember showing a home just east of Lake Calhoun to clients who loved the neighborhood, but were stretching to afford it.

The showing was going great until the listing agent showed up (he was meeting other clients), and enthusiastically pointed out where he'd spend $50,000 on dormers to create a view of the lake from the now-dark attic.

There was no way my clients could afford that, and suddenly the home they liked fine the way it was seemed "less than." Though they didn't outright say it, I know it would have gnawed at them to own a house with potential they couldn't realize.

So, they opted for another home more within their budget, that felt complete the way it was.

Prediction: No More Goldman Sachs

"Pulling an Altria"

Here's a bold prediction: Goldman Sachs won't be around in 5 years.

No, I don't think the government is effectively going to revoke its corporate charter, putting it out of business (basically, what happened to Arthur Andersen in the wake of the Enron debacle).

Nor do I think the government is going to break it up into smaller, less "Octopus-like" constituent parts.

Rather, I think the name "Goldman Sachs" isn't going to be around.

Just like reviled cigarette maker Philip Morris spun off its food division, Kraft, and renamed the remnant "Altria," Goldman Sachs is likely to spin off something -- anything -- to appease the government, then re-name the surviving company.

If only changing your stripes were that easy . . . .

Blithely Walking Through "Open Doors"

Spam and All Its Clones (Online and Off)

My door's always open, Jones . . . so be careful you don't walk in by mistake.

--Cartoon showing a CEO sitting at his desk, addressing the janitor in the hall

As someone who works in sales, it's always amazing to me how many people violate the first rule of prospecting: don't start out by annoying -- or antagonizing -- the prospect.

If you have a phone and a front door, you certainly know about all sorts of invasive, poorly-timed (is there a right time?) telemarketing and cold calls. (To me, at least, it certainly seems like "do not call" lists have become increasingly porous.)

However, as a Realtor (and blogger), you're an even bigger target.

Here's what I routinely encounter:

The unwelcome open house guest. Broker opens, at least in the Twin Cities, are held every Tuesday from 11 a.m to 1 p.m. Although the target audience is other Realtors, if a non-Realtor type sees my signs and wants to take a look, great (I am trying to sell the house).

What I'm not receptive to is sales pitches from "newbie" home inspectors and lenders, like the one who showed up at my Broker Open this Tuesday.

I do appreciate how tough it is out there -- but, hey, it's tough for Realtors, too!

When I'm hosting a Sunday or Broker open, I'm working for my client, trying to sell their home -- not your captive audience!

Now if only a great handyman or electrician showed up at my open houses . . .

Stealth blog posts. The artful kind actually start out commenting on your post. However, a couple sentences in, they drop the pretense and shamelessly start pitching their product or service, larding in multiple links and Web addresses for good measure.

Note to Readers: I try to catch and delete these, but as you've probably realized, a couple still sneak through.

Spam. No, spam targeting Realtors isn't qualitatively different than "regular" spam.

Rather, the difference is quantitative: maybe 10x as much, often with mailbox-busting attachments riding along.

So, here's my suggestion to all the folks out there trolling for new business:

If you really want my attention, do what I do: send a handwritten note. Seriously.

P.S.: One of the most effective put-down's of a heckler I've seen at a stand up comedy act is this one: 'Hey, do I jump up and down on the end of the bed and distract you when you're trying to work?!?"

Thursday, January 28, 2010

"The Trader Joe's" Housing Market

Ready to Eat -- er, Move Into -- Homes

Call it "The Trader Joe's" Housing Market (or more accurately, the "middle-aisle-at-Trader Joe's" housing market).

That's where the ready-to-eat, frozen meals are stocked.

Not only are they attractively packaged, the right number of servings (4-6), and good quality -- but they're great values, too.

Similarly, homes that are selling well in today's challenging market are . . . attractively packaged (staged), the right size (for families, anywhere from 2,000 to 3,500 square feet), well-built and maintained -- and offer a good value.

In Demand: Move-in Condition

Perhaps most importantly, they're in move-in condition.

That attribute seems especially important now.

Judging from my own clients, it certainly seems that few people have the time or inclination to do significant remodeling these days.

In the majority of family households today, both parents work full-time.

That leaves little time for cooking meals (cue Trader Joe's) and kiddie supervision, let alone meeting with interior decorators or picking out new tile for the bathroom.

Of course, unlike the home purchase itself, which can be financed with a mortgage, remodeling costs are typically paid for out-of-pocket -- a tall order in a recession.


No, I didn't really need to learn (yet) another acronym ("SOTU," I now know, stands for "State of the Union Address").

And, no, I didn't watch it or read about it.

But judging by "the markets," there must have been something about (re)regulating Wall Street or raising taxes in it . . . (maybe both?)

Real Estate's Invisible Hand

Lots of Hats: The Office Manager's Role

What makes you think I got out of social work?

--Josh Kaplan, Edina Realty- City Lakes Office Manager (and former social worker)

If you've ever bought or sold a home through an agent who works for a big broker (Edina Realty, Coldwell Banker Burnet, etc.), your deal was very likely guided -- at least a little bit -- by someone completely unknown to you.

(If your deal was especially challenging, make that guided a lot.)


Your agent's office manager.

All those bathroom breaks your agent took during that complicated closing?

It's a fair bet that they were actually on the phone with their office manager, getting direction.

(In my own case, I vividly recall frantically speed-dialing Josh Kaplan, my office manager, in the middle of a closing involving a South Minneapolis duplex. The buyer -- yours truly! -- had neglected to require that the tenants' security deposits be assigned as part of the Purchase Agreement.)

Even if your agent is a veteran, it's still likely that their office manager influences how they conduct their real estate practice.

Here's a (partial) list of all the hats that the office manager wears:

Recruiter. The office manager decides who your colleagues will be.

The reason that the City Lakes office is one of the most diverse, interesting (and productive) in town is because Josh picked the Realtors in it (and vice versa).

Referee/Umpire. Real estate is a competitive business, full of big ego's, turf battles, and occasionally (too) sharp elbows -- and that's just the Realtors!

The office manager gets to sort them all out.

Business Coach. Even excellent agents go through slumps, have the occasional tough deal (or a string of them), can get burned out, etc. The first door they knock on is usually their office manager's (see next).

Psychologist/Social Worker. The reason real estate agents seem so unflappable is that they do all their venting behind closed doors (their office manager's).

Trainer. No one learns how to sell real estate in a classroom. You learn by doing it, and by being in an office where the culture is cooperative and dedicated to continuous skill-building.

Ethical Guidepost. The office manager sets the tone for what is and isn't acceptable. The Realtors in the City Lakes office are known for their professionalism and ethics, because Josh makes those priorities.

Businessperson. At the end of the day, the office manager's ultimate responsibility is to make sure that their office is profitable . . . so that it STAYS OPEN.

The City Lakes office is consistently one of Edina Realty's most profitable -- and has been a standout the last few years.

Thanks, Josh! (Do I get that vacant corner office now?)

P.S.: One last office manager "hat," at least in my own case: proof-reading and vetting (sensitive) blog posts.

Today's Guest Goldman Basher: Thomas L. Friedman

Friedman on Goldman Sachs

Tired of me (deservedly) bashing Goldman Sachs?

Here's what the eminently fair-minded Thomas L. Friedman has to say about them:

The behavior of some leading Wall Street banks, particularly Goldman Sachs, has been utterly selfish. U.S. taxpayers saved Goldman by saving one of its big counterparties, A.I.G. By any fair calculation, the U.S. Treasury should own a slice of Goldman today. Goldman has been the poster boy for banks behaving by “situational values” — exploiting whatever the situation, or rules that it helped to write, allowed.

--Thomas L. Friedman, "Adults Only, Please"; The New York Times (1/27/2010)

Unfortunately, at least on this issue, I put Friedman in the camp that "just doesn't get it."

Unplugging the Monster


Because he still thinks carrots -- rather than sticks --are the way to get bankers to start making loans, and start reviving the economy.

Dear Tom, I have a news flash: we're just about out of carrots.

Which is not to say that I'm endorsing sticks.

What we really need is an altogether different banking system: one that's less centralized, less politically powerful, and most importantly of all -- less capable of wreaking havoc on the general economy.

The monster that today's Wall Street has become doesn't need to be tamed or placated -- it needs to be unplugged.

Part II: 'It's the Internet, Stupid'

Realtor Referrals -- "Outgoing"

Payback (The Good Kind)

I suppose that there are some people out there who hesitate to give out referrals for fear that a favorite contractor will somehow forsake them if they ever become too busy or popular.

I find just the opposite is true.

Once someone comes to see me as a steady source of referrals, I find that I jump to the front of their list.

So what kinds of people do I refer, and to whom?

Stagers, for one.

I regularly work with several excellent stagers, and am always happy to give their names out to Realtors who are looking for a good one (more should be).

Another thing I do that I know is appreciated is write enthusiastic, even glowing reviews (when justified) on Angie's List.

In a way, that's simply a referral addressed to a broader audience.

By contrast, if I have a negative experience, I tend to just make a note in my files and move on. The exception is if I feel like the experience was so negative that other people deserve a "heads up."

Stagers, Handymen, and Inspectors

Another person I regularly recommend to my homeowner clients is my regular handyman, who's been keeping the evolving Kaplan household ship-shape for more than a decade.

You couldn't ask for a more ethical, competent, or conscientious guy.

If I ever hesitate to recommend Dan, it's only because I'm not certain the prospective customer is worthy of Dan -- not the other way around.

Of course, the other frequent referral Realtors are regularly called upon to make are home inspectors.

Most experienced Realtors have established relationships with a handful of inspectors that they know and trust.

In my own case, I encourage my clients to interview a couple, excellent inspectors, and hire the person they're most comfortable with.

In all these cases, the underlying premise is that someone who did good work for me, will also do good work for you if I give you their name. So that makes two people better off as a result of my having made the referral (three if you consider the good will and appreciation that comes back to me).

Just don't expect me to give you the cell phone number of our favorite babysitter . . . .

Wednesday, January 27, 2010

When the Cover-Up is Worse Than the Crime

Damage Control: Advice to Prospective Sellers

As Watergate made plain, the cover-up is often worse than the crime (although in Richard Nixon's case, ordering a burglary was plenty bad in its own right).

The same principle applies to selling homes.

Here are three examples where covering up a problem is worse than simply leaving it be (or preferably, fixing it before prospective Buyers ever show up).

One. Odors.

I don't know about other Realtors, but whenever I smell the distinctive aroma of a plug-in (or more accurately, my clients do, because my sense of smell is atrocious), my hackles immediately go up.

What is the Seller trying to hide? Is there a water intrusion problem somewhere? Other damage? Is the smell mold, or could it just be mustiness from not having the house opened up recently?

If in fact a home smells moldy, the homeowner should identify the source of the water -- which is always the culprit -- and eliminate it.

Even if the offending odors are from an especially pungent dinner the night before, it's still better not to try to mask it.

(Advice to Sellers: you may want forego preparing especially spicy or exotic dishes while your home is on the market -- or at least those days you're expecting lots of traffic. Seriously.)

Similarly, if the home smells of fresh paint, that can be a cue to look for wall or ceiling damage resulting from a defective roof, recent plumbing problems, etc.

Two. Noise.

Whenever I hear too-loud background music (I guess that would make it "foreground" music), I look outside: is the home on a busy street? Is it close to (or under) the flight path? Is there a commercial business near by?

"Foreground Music"

I think a good rule of thumb in such cases is, if you notice the music . . . it's too loud.

It's also surprising to me how often music that the Sellers assume is tasteful and mood-setting . . . isn't.

Three. Concealed damage.

Probably the most egregious example of covering up damage that I've personally encountered was the shoe I tripped over -- 10 seconds into the showing -- in the middle of the Seller's Living Room floor.

Directly below: a hole in the floor that went all the way through to the basement.

Aside from being dangerous (physically, liability-wise, etc.) it's also dumb: my Buyers had seen all they needed to to know that this wasn't the home for them.

As a practical matter, the cues that there may be underlying damage are (usually) much more subtle: the too-big or oddly out-of-place rug (covering damage to the flooring); a wall hanging that seems misplaced; a piece of furniture that you keep bumping into (again, covering floor damage); a shade that's pulled down because one or more window panes are broken.

If the prospective Buyer catches the problem early, their trust is shot; if they catch it later, during a second showing or even at the walk-thru, they're likely to demand a big price concession or may even threaten to walk if the problem is big enough.

Even if they stay in the deal, I can guarantee that the now-distrustful Buyers will ratchet up their scrutiny of everything else in the home!

None of the foregoing scenarios makes the Seller better off than if they had simply dealt with the problem in a straightforward manner from the get-go.

Can't Anyone Write a Headline Anymore?

Misleading, Sensationalized Headlines

Just days ago, Barry Ritholtz called out The Wall Street Journal for its (increasingly) misleading, out-of-context headlines.

I just ran into another example yesterday on the otherwise credible, which aggregates the top 30 or so business-related print and blog pieces daily (mine have appeared more than a dozen times in the last two years!).

Compare this headline on RealClearMarkets (look under "Evening Edition" for Jan. 26):

"Looks Like the S&P Is Going to 1,200 or Higher" -- Jeremy Grantham

With this quote, directly from Grantham's (excellent) piece:

I thought last April that the market (S&P 500) would scoot up to 1,000 to 1,100 on a typical relief rally. Now it seems likely to go through 1,200 and possibly higher. The market, however, is worth only 850 or so; thus, any advance from here will make it once again seriously overpriced.

Just in case the foregoing is too subtle, Grantham continues:

Equity markets almost always peak when rates are low, so moving in desperation away from low rates into substantially overpriced equities always ends badly.

See my point!!?

P.S.: If you haven't read Grantham's missives, you should; they're every bit as pithy as Warren Buffett's. In particular, his "Lessons Learned in the Decade" at the end of his most recent quarterly newsletter is full of great nuggets.

In fact, when it comes to "pithy financial insights," these two are really on a plane of their own (Michael Lewis and Thomas L. Friedman also write at this altitude, but, unfortunately, they both cover business all too rarely).

Tuesday, January 26, 2010

"Final Cut," Realtor Version

Who Gets to Exercise "Editorial Control?"

"Final cut" in the movie business means who gets final say over the editing process.

Directors want it because it assures them creative control; the studios want it because they're bankrolling the film --- and want it to make money.

Something similar goes on in residential real estate with all the marketing materials a good Realtor generates for a listing; that starts with how the home is presented on the Multiple Lising Service ("MLS"), and can include various postcards, brochures, flyers, and ads (print and online).

While I always welcome clients' input -- indeed, it's indispensable for truly capturing a home's essence -- I'm ultimately in charge of composing, editing, etc.

There are two reasons for that.

One. Expediency.

It's not unusual for me to work on a high-end marketing piece over the course of several days.

That includes drafting the copy, selecting the photos, doing the layout, reviewing multiple proofs, etc.

For all but the basic pieces, that process is done in coordination with a professional desktop publisher (thanks, Nobu!).

"I Can't Believe That's My House!"

The way life is these days, the proofing and editing process resembles a marathon game of online ping-pong.

I'm sure there's the stray client who would like to be cc:d on the most recent proof at 2 a.m., but even if they were, it would slow down the process unacceptably.

Two. I'm good at it -- and so are the photographers, desktop publishers, etc. I work with.

In fact, my marketing prowess is why clients hire me -- that, and the fact that they have their own jobs to focus on; I'm a good negotiator; have an attorney's knack for drafting contracts (I was one); have an excellent track record, great references, etc.

My clients always know that they'll be the first to see the final product, and, on the rare occasions that there's a mistake or omission, will immediately correct it.

Usually what I hear, though, is an incredulous "I can't believe that that's my house!!"

P.S.: the photo above is the stunning(!) Family Room in my new listing at 4121 W. 28th St. in St. Louis Park's Fern Hill neighborhood.

If you want to see it in person, drop by the Broker Open today from 11 a.m. to 1 p.m., or, the Open House this Sunday from 1 p.m. to 3 p.m.

Giving Populism a Bad Name

"Random Attacks on Enterprise & Capital"

You know that Wall Street is feeling at least a little heat right now because the Op-Ed pages and blogs (at least certain ones) are ramping up their attacks on what they take to be misguided "populist fervor."

Typical on this score is David Brooks, The New York Times' "house conservative":

The rich and powerful do rig the game in their own favor [but] simply bashing them will still not solve the country's problems. Political populists never . . . seem to grasp that a politics based on punishing the elites won’t produce a better-educated work force, more investment, more innovation or any of the other things required for progress and growth.

--David Brooks, "The Populist Addiction"; The New York Times (1/26/2010)

Brooks goes on to vaguely warn that "if populists continue their random attacks on enterprise and capital, they will only increase the pervasive feeling of uncertainty, which is now the single biggest factor in holding back investment, job creation, and growth."

So, Mr. Brooks, when disgusted taxpayers finally begin to insist that their government protect them from (still more) Wall Street looting, they're . . . "populists?!?"

And when they demand that a broken, dysfunctional financial system be reformed, they're engaging in mob rule?

And when voters demand that Wall Street lawbreakers be held accountable and the nation's laws enforced, they're guilty of . . . "bashing?"

Not So Random

Actually, what Brooks labels "random attacks on enterprise and capital" are anything but; they're aimed at specific companies, like Goldman Sachs, and have a specific, core agenda.

Namely, that too-big-to-fail -- not to mention anti-competitive -- financial institutions be . . shrunk.

That savers' deposits not become chips for Wall Street gamblers.

That epic Wall Street leverage -- as high as 40:1 -- be curtailed (that means not being able to buy $1 of assets with 2 pennies of your own -- and 98 cents of debt).

And that the nation's financial laws be drafted and enforced by someone other than . . . Wall Street.

Far from being a radical agenda, the foregoing principles have been enshrined as the law of the land for much of the last century.

Indeed, when it comes to what Mr. Brooks calls "attacks on enterprise and capital," it would be hard to top Wall Street's recent record.

Monday, January 25, 2010

December Drop in Home Sales

Crying Wolf About April 30?

Sales of existing homes in December fell 16.7 percent from November to a seasonally adjusted annual rate of 5.45 million units, the National Association of Realtors said Monday.

--"Existing Home Sales Drop More Than Forecast"; The New York Times (1/25/2010)

My take is that a big chunk of the drop is explained by the (then) Nov. 30 deadline for qualifying for the first-time home buyer tax credit.

As you may recall, at the 11th hour, Congress extended and expanded the credit.

The new expiration date is April 30 (deals actually have another 60 days to close).

And no, I don't expect a flurry of transactions ahead of the new deadline -- at least not more than would normally occur in what is otherwise a seasonally very busy time for the housing market (at least in Minnesota).

How to Break Up Goldman Sachs

How to Break Up Goldman Sachs?
Let Them Figure it Out

As we drill down into the details of ideas for breaking the economic and political power of over sized banks, we need this litmus test against which serious suggestions should be judged: Does a proposal, at the end of the day, imply that Goldman Sachs should break itself up?. . . . If the answer is yes, we are making progress in moving our financial system back toward where it was in the early 1990s, when it worked fine . . . and was much less threatening to the global economy. If the answer is no, we are merely repainting -- ever so gently -- the deckchairs on the Titanic.

--"Obama’s Plan to Be Judged by a Goldman Breakup: Simon Johnson"; Bloomberg (1/22/2010)

My award for "quote of the week" (even year, at least so far)?

The one above from Simon Johnson, former chief economist at the International Monetary Fund and now MIT Business School professor. In other words: one smart guy!

Even people who agree with his sentiments are likely to be tripped up by the complexity of the undertaking.

They shouldn't be.

I personally don't have a blueprint for breaking up Goldman Sachs into say, $20 billion relatively nonthreatening "Baby Sachs" (given its current balance sheet, it would spawn about 30(!) progeny).

But I can think of a great way to come up with one: let them figure it out.

After all, they're supposed to be smart guys (or at least, they keep telling us).

Just to keep it on the up and up :) . . . let a three-person Super-VIP Commission sign off on whatever Goldman proposes.

My nominees: Paul Volcker, Nell Minow, and Simon Johnson.

"The Vikings are Dead, Long Live the (2010) Twins!"

The Agony of Defeat (Again)

I tell non-Minnesotans that the *saddest days I recall growing up in Minnesota, in order, are:

1. The Vikings' first Super Bowl loss to the Chiefs in 1969.
2. Hubert Humphrey's funeral in the mid-70's.
3. The Vikings' Super Bowl loss to the Oakland Raiders (not a dynastic team -- see next).
4. (Tie) The Vikings' Super Bowl losses to the Pittsburgh Steelers and Miami Dolphins (both juggernauts, and heavy favorites).

Yesterday's loss in New Orleans doesn't make the top 10.

Heretical as this may sound, after witnessing all the fumbles yesterday, I was secretly even a bit relieved: it's hard to imagine the team matching up well with an even stronger Indianapolis Colts team in Miami in two weeks.

Losing the NFC championship game (again, for the 5th time) is a bummer; losing a 5th Super Bowl would have been a very big bummer.

At least we're still tied with the Buffalo Bills at four.

*The Vikings' loss to the Atlanta Falcons on January 17, 1999 in that year's NFC Championship game also makes my personal "top 10" list (even though I was living in Manhattan at the time) because: a) they were heavily favored, and would have had a good shot at winning the Super Bowl if they'd gotten past the Falcons; and b) it was my wedding day, at the Puck Building in Tribeca (a Manhattan neighborhood).

In fact, the usual split between groom's friends and family and bride's friends and family was even more pronounced at my wedding: in my case, the former were all listening to radio's and stealing away to watch lobby TV's broadcasting the game.

At least all the (relatively) glum, Minnesota faces weren't an omen: my wife and I just celebrated our 11th anniversary last Sunday (the Vikings' win over the Cowboys), and have 3 kids.

Stuyvesant Town Collapse

Strategic Default . . . Minus the Consequences

Imagine you bought a house 4 years ago for $540,000, putting in a (very) modest 2% down payment, or $11,000, and borrowed the other $529,000.

Today, your home was worth $180,000 (no, not a typo), yet you were still faced with making payments on the original $529,000 mortgage.

What would you do?

Now, change two of the facts: 1) the property in question isn't a single family home, but a huge Manhattan apartment complex called "Stuyvesant Town": 2) the buyer isn't a person, but a big-time real estate investor, Tishman Speyer Properties.

Oh, and one other thing: add 4 zeros(!) to the numbers cited above.

So, Tishman paid $5.4 billion for Stuyvesant Town less than four years ago; today, the property has lost more than 67% of its value, long ago wiping out Tishman's 2% equity stake.

Current estimated value: $1.8 billion.

Is the suspense building yet?


Well, on a massive scale, Tishman just did what hundreds of thousands of underwater homeowners in especially stressed housing markets like Florida, Las Vegas, and Southern California have already done: it "strategically defaulted" on its mortgage.

That is, it handed title to the property over to the lenders, and walked away.

Left holding the bag: pension funds representing California and Florida school teachers, amongst (many) others.

Unlike homeowners who lose their home and credit when they default, Tishman is unscathed:

The Stuyvesant Town deal is one of several Tishman Speyer did at the top of the market that the company is trying to save. But the company itself isn't threatened. It took advantage of easy credit and investors' eagerness to buy into real estate during the good times. As a result, it didn't put much of its own cash into deals.

Of the $5.4 billion price tag on the Stuyvesant property, Tishman invested only $112 million of its own money, with about $56 million from Jerry Speyer and Rob Speyer, co-chief executives of the New York-based company.

--"Tishman Venture Abandons Stuyvesant Deal"; The Wall Street Journal (1/25/2010)

The article then notes that against the $56 million it put in, Tishman collected more than $10 million in property-management fees running the property.


I guess that would be Exhibit A in artfully using "other people's money."

Sunday, January 24, 2010

The Equity Sharing Solution to the Fannnie/Freddie Morass

Revisiting "Capped Upside, Unlimited Downside"

[Note to Readers: this post originally ran Christmas Week, when it was read by . . . no one. In the wake of Barney Frank's announced plan to abolish Fannie Mae and Freddie Mac, I'm "popping" it to the top of the list.]

If you lend someone 97 cents to buy an asset that costs $1, what happens if the value of that asset falls to 95 cents?

How about 90 cents? Or 70 cents?

What if the borrower then loses their job?

Add eleven(!) zeroes . . . and you have the plight of Fannie Mae and Freddie Mac in a nutshell.


One way or another, these so-called Government Sponsored Entities ("GSE's") -- and now FHA -- provide the bulk of the capital that finds its way into the U.S. housing market.

That capital takes the form of loan guaranties, mortgage origination, secondary market loan purchases, etc.; cumulatively, the foregoing aid -- investment, if you prefer -- amounts to hundreds of billions annually.

When dropping home prices -- and now, recession-induced job losses -- blow multi-billion dollar holes in these entities' balance sheets, what should the government do?

It would seem to have three choices: 1) shovel more money in; 2) require higher downpayments, to provide for a higher margin for error; or 3) get out of the housing subsidy business altogether, and pull the plug on the GSE's.

Option #3 has seemingly been taken off the table, because of the threat it would pose to housing prices generally.

Option #2, much less draconian, would also seem to undermine already shaky home Buyers' purchasing power, and therefore has also been rejected.

Which leaves option #1: support the GSE's with unlimited, open-ended capital infusions.

In fact, the government just decided to do exactly that, in an announcement purposely released on Christmas Eve to minimize scrutiny ("Fannie & Freddie, Uncapped").

High Costs, Dubious Benefits

Unfortunately, simply shoveling more money into these GSE black holes may be the worst strategy of all.

In the short run, it turns would-be home Buyers into armchair economists, trying to guess what the government will -- or won't -- do next to support home prices.

In the long run, massive government housing aid distorts prices, crowds out private lenders, and risks debasing the U.S. dollar -- thereby ushering in runaway interest rates.

If you think housing prices are under pressure now, just wait until long-term interest rates -- now around 5.25% for a 30-year mortgage -- hit 8%. Or 15%-plus, as happened in the early '80's.

Option #4

So what is the way out of this morass?

Go back to what happens to Fannie and Freddie as home prices fluctuate.

When housing prices fall, the GSE's suffer major impairments to their capital as borrowers default.

However, when home prices rise (yes, that can actually happen!), the most they stand to recover is the amount they originally loaned.

Heads, borrowers win; tails, the government loses (sound familiar?).

Instead, the GSE's should insist on sharing in any upside that borrowers enjoy.

The Stanford Model

Stanford University long ago established a similar housing subsidy for faculty struggling to afford expensive Bay Area housing.

In return for down payment assistance and low-cost mortgage money, the University effectively becomes a "partner" with the faculty-homeowner, enjoying a cut of the appreciation when the home is sold.

Emulating Stanford's approach not only would help the government's balance sheet, it would relieve pressure on foreclosures while putting borrowers on notice that there's no free mortgage lunch.

Over time, one might expect that realization to curtail their appetites . . .

Realtor Staging Secret #37

Cheap Way to Lighten a Dark Basement

Want to lighten up a dingy, dark basement?

Here's what you should do:

One. Empty everything but the washer and dryer (cover them instead).

Two. Spray paint everything white. Yup, everything: the floors, the walls, and especially the ceiling.

I've seen (and recommended) this strategy a number of times -- and the results are dramatic!

Barney Frank: 'Pull Plug on Fannie, Freddie'

Dear Barney: Read This!

Imagine Ted Kennedy, before he died, admitting that the health care reform bill was a mess and that everyone should start over.

Or John McCain saying that campaign finance laws were unworkable, and should be scrapped (actually, the Supreme Court just said that).

So it's big news when Congressman Barney Frank, the biggest benefactor of Fannie Mae and Freddie Mac, announces that they're hopelessly flawed and that the U.S. housing finance system should be re-built from scratch:

The remedy here is ... as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance," said Rep. Barney Frank (D., Mass.), the chairman of the House Financial Services Committee.

--"Fannie Mae, Freddie Mac Should Be Eliminated, Frank Says"; The Wall Street Journal(1/22/2010)

Since Mr. Frank seems to be casting around for new ideas, I thought I'd direct him to my proposal for digging Fannie and Freddie out of the multi-trillion mess they're in (want the two word, Reader's Digest version? Here it is: 'equity sharing'):

When housing prices fall, Fannie Mae and Freddie Mac suffer major impairments to their capital as borrowers default. However, when home prices rise (yes, that can actually happen!), the most they stand to recover is the amount they originally loaned.

Heads, borrowers win; tails, the government loses (sound familiar?).

Instead, Fannie and Freddie should insist on sharing in any upside that borrowers enjoy.

Stanford University long ago established a similar housing subsidy for faculty struggling to afford expensive Bay Area housing. In return for down payment assistance and low-cost mortgage money, the University effectively becomes a "partner" with the faculty-homeowner, enjoying a cut of the appreciation when the home is sold.

Emulating Stanford's approach not only would help the government's balance sheet, it would relieve pressure on foreclosures while putting borrowers on notice that there's no free mortgage lunch. Over time, one might expect that realization to curtail their appetites . . .

--Ross Kaplan, The Equity Sharing Solution to the GSE Morass; City Lakes Real Estate Blog (12/29/2010)

Will this happen?

I doubt it.

Instead, my guess is that Congress will take a page from the mutual fund industry when it has a big loser on its hands.

Namely, the fund's stewards put the "loser fund" out of its misery by merging it with another fund with a better name -- and track record.

Saturday, January 23, 2010

Edina Realty's Crystal Ball

On Tap for 2010: Social Media, and
(More) Foreclosures and Short Sales

No, I don't predict the direction of home prices.

But housing trends are another matter.

Fortunately, if you're an Edina Realty agent, corporate does that for you (or at least helps).

Each year, senior management highlights at the annual meeting -- and reinforces during the year -- the themes and issues it expects to drive the marketplace over the coming twelve months.

From experience, their track record is pretty good.

So what is management emphasizing now?

Training on how to get up to speed on two things: 1) So-called "social media" like FaceBook, LinkedIn, Twitter, etc.; and 2) handling foreclosures and short sales.

If there is an honorable mention, it would be becoming proficient with alternative financing (contract for deeds, assumable mortgages, and various other "seller-facilitated" financing).

Tweaks to City Lakes Blog Roll

New Links: 'Behind the Mortgage,' 'St. Paul Real Estate'

For the uninitiated, a "Blog Roll" is where each blogger can add links to other Blogs or Web sites that they're fans of.

In my own case, it's: a) based purely on who I regularly read personally (vs. quid pro quo's or commercial considerations); and b) a short enough list to actually be meaningful.

So, I've limited my blog roll to about a dozen links.

For the first time in over a year, I'm shuffling that group.

The additions are Alex Stenback's Behind the Mortgage, and Teresa Boardman's St. Paul Real Estate.

Alex is a plugged-in local mortgage broker who consistently is on top of the latest trends and issues affecting borrowers.

Teresa Boardman is . . . a character.

She's also a professional calibre photographer who happens to be a (very good) Realtor, judging by her blog.

Be sure to check out their blogs regularly -- I do!

Did They Really "Give it Away?"

How to Tell if it's a "Fire Sale"

Realtors hear it all the time (often from neighbors or prospective Sellers protesting about the value of their home):

"Oh, they gave it away."

"The Smith house? That was a fire sale."

"They sold for way too little."

How to Tell

Whenever I hear the foregoing, I typically respond with the following three questions:

One. How long was the home on the market?

It's awfully hard to make the case that any given home sold too low once it's gotten a couple months -- or years -- of market exposure.

That's true even if the marketing has been, shall we say, lacklustre (see "Fire Sale" Factors, below)

Two. Did you see the inside?

It's surprising how many people who are convinced that a home sold for too little . . . have never been inside! Or, if they were, were last in 25 years ago.

It's pretty hard to assess the value of a home you really don't know very well (if at all). Which leads to . . .

Three. Did you inspect it?

I'm aware of several transactions where the ultimate selling price was at least partly explained by major issues uncovered during the inspection.

In one case, a slate roof that looked fine from the street . . . wasn't. Replacement cost: north of $30k.

True Fire Sales

Of course, none of the foregoing is to say that some homes do appear to sell for too little.

In fact, I'd (conservatively) estimate that as many as one-third of the homes on the market fail to maximize their selling price.

Here are the factors that I think are most responsible:

--Poor (or no) staging
--Poor (or no) marketing, including unflattering or out-of-season photos
--Initially overpriced, which leads to too-long market time, which ultimately leads to a discounted selling price
--Major discount due to minor deferred maintenance (I tell Sellers that every $1 in deferred repairs can easily subtract $3 from their selling price).
--Bank-owned property
--For Sale by Owner ("FSBO"): usual pattern is, from way-too-high, to, way-too-low
--Restrictive showing instructions: Buyers won't buy something they can't get in.
--Estate sale with out-of-town owners (sometimes, they don't have a clue; other times, they explicitly tell the listing agent that selling fast is more important than maximizing the price).

Plus, perhaps the biggest yellow flag of all: the home sold the first week (or day) it was on the market -- or even before it hit the market.

The Buyer's agent?

The same agent representing the Seller (called "single agent dual agency").

(Note: to really know if the price is below market . . . you (still) have to know both the home in question and the market.)

Friday, January 22, 2010

1st Open Sunday!

South Tyrol Hills Sleeper!

Where: 1340 Fairlawn Way, in Golden Valley's South Tyrol Hills neighborhood
What: Sprawling 4 BR/3 Bath Mid-Century Split-Entry with almost 3,600 finished square feet -- including a 600 (!) sq. ft. Great Room.
How much: $444,900
When: market time -- 3 days
Who: listed by Ross Kaplan, Edina Realty - City Lakes

If you're looking for a dynamite, well-built family home in a close-in location, please come by my open house this Sunday from 1:30 to 3:30 p.m.

The highlight of the home?

The huge Great Room, featuring vaulted ceilings, an (Italian) granite Fireplace, and skylights.

A great family home -- and a great value!

(If you don't know the area, South Tyrol Hills is south of 394 and east of 100).

Reform Shorthand: Where's Volcker Standing?

The Wall Street Journal's Take on Wall Street

President Barack Obama proposed new limits on the size and activities of the nation's largest banks, pushing a more muscular approach toward regulation that yanked down bank stocks and raised the stakes in his campaign to show he's tough on Wall Street.

--"New Bank Rules Sink Stocks"; The Wall Street Journal (1/22/2010)

So, government's iron fist is once again coming down (too) hard on private enterprise, imposing (more) bureaucratic red tape on businesses, and hurting job growth and the stock market.


Umm . . . well . . . not exactly.

If the Journal had asked me to re-write the lead, here's what I would have said instead:

President Obama belatedly announced the first, limited steps to address the root causes of today's economic melt-down: reckless Wall Street banks that have required trillions in taxpayer bailouts to deal with the consequences of their highly leveraged, bad bets -- bets that have caused millions of Americans to lose their jobs, savings and homes.

In other economic news yesterday, Goldman Sachs announced blowout earnings from . . . making more, reckless bets with taxpayers' money.

In my opinion, the only thing worse than 'governing-by-poll' is 'governing-by-Dow-Jones,' i.e., doing whatever makes the stock market go up, and refraining from whatever makes it go down -- at least in the short run.

With the market now down a couple hundred points in the wake of the newly announced bank "reforms," it will be interesting to see if Obama sticks to his guns.

P.S.: want a short-hand way to tell? Figure out how close (or far) Paul Volcker is standing from him (yesterday, he was standing at his side).

Buying a Home: Is Now a Good Time?

Not Following the Herd

Be fearful when others are confident and confident when others are fearful.

--Warren Buffett

Of all Buffett's quotes, the one above might be the most popular; it's certainly the most cited the last 2-3 years (and was quoted frequently by Ben Stein at Edina's annual meeting Wednesday).

So, is now a good time to buy a home?

No one really knows for sure.

Instead, ask yourself: 'is the prevailing mood more optimistic or pessimistic?

That one, at least, is an easier call.

As every investor, from Buffett to Ben Graham to George Soros on down knows, there are more and better investing opportunities in a cautious, "cool" market than a hot one (unless you're shorting).

Thursday, January 21, 2010

Go Get 'Em, Nell!

"Oprah," "Ellen" . . . and "Nell!"

Nell Minow, scheduled to testify before Congress on Friday on the subject of Wall Street pay, is one of my favorite people . . . in the world (at least that I'm not related or married to).

She has been following executive pay for decades, and no one is smarter or more incisive about the issue (she's also a veritable quote machine).

[Full disclosure: once upon a time, she was also one of my first backers and clients when I was doing investor relations consulting, a couple (professional) lifetimes ago.]

My suggestion, if you happen to be in front of a TV Friday?

Skip "Ellen" and "Oprah" and tune in to . . . Nell!

Here's Floyd Norris on Friday's lineup:

Today, Barney Frank, the chairman of the House Financial Services industry, announced a hearing on “Compensation in the Financial Industry.” It will be held Friday morning. Such haste is not usual. But neither is a Republican senator from Massachusetts. The witnesses for the hearing are:

1. Lucian Bebchuk, professor of law, economics and finance, and director of the Program on Corporate Governance, Harvard Law School
2. Nell Minow, editor and founder, the Corporate Library
3. Joseph Stiglitz, university professor, Columbia Business School

There are no defenders of Wall Street in that crowd.

--Floyd Norris,"Bad for Banks"; The New York Times (1/21/10)

And, no, I don't expect any of the witnesses to be AWOL (not an issue for Nell, who lives in the DC area).

P.S.: leave it to Frank, who knows which way the political wind is blowing, to assemble a blue ribbon panel of Wall Street pay critics (at least when it suits his purposes).

Facebook Nation?

Facebook More Populous than . . . Europe!

Once upon a time, to convey exactly how big California's economy is, experts would point out that, if California were a country, its economy would rank 7th or 8th in the world.

By that same yardstick, Facebook's growth is even more impressive.

If its users were a country . . . it would be the world's fourth largest.

(Got that tidbit from Edina's Annual Meeting yesterday.)

P.S.: Hey, Readers: any interest in more Ben Stein jokes??

Toting Up the Equity Hit

The $7 Trillion Hole in the Economy

Would you be tightening your belt if your house had dropped $50k-$60k in value in the last four years?


And if you'd taken out a home equity loan against your home when it was worth $50k-$60k more . . . almost definitely.

Now, take that $50k-$$60k drop in home equity, and multiply that by . . . . every homeowner in the country.

Yup, that's how much the average homeowner is down since 2006 ($54k per home, to be precise).

That equates to a national average 30% drop in home prices from the peak, or over $7 trillion in shrunken home values.

Hmmm . . . could be that that something to do with the not-so-robust economy (at least away from Wall Street).

Wednesday, January 20, 2010

Actor-Lawyer-Economist -- and Keynote Speaker -- Ben Stein

Rent-a-Joke: [Fill in Name of Chief Rival Here]

One gets the feeling that Ben Stein, who gave the keynote address at Edina Realty's annual meeting today, is an old hand at "riding" the corporate meeting circuit.

The clues?

--The crowd-pleasing shots he took at Edina Realty's senior "pooh-bah's" and their corporate jet (do they have one??)

--His repertoire of amusing jokes and anecdotes, including this one (loosely paraphrased):

To celebrate the 12th birthday of Hassan, his most beloved son (of dozens), the Saudi King chartered a Boeing jet to take Hassan and dozens of his friends abroad.

While in flight, the King asks Hassan if he likes the jet.

"Of course," Hassan answers. "It's amazing."

"Done!" the King announces. "It's yours."

When the jet lands at LAX, a fleet of limousines meets the birthday party, who set out for The Beverly Hills Hotel.

Once they've settled into their rooms, the King asks Hassan what he thinks of the hotel.

"Unbelievable," Hassan answers, genuinely dazzled.

"It's yours, I'm buying it for you!" The King declares.

The next day, the fleet of limousines takes the group to Disneyland, which has been emptied for the enjoyment of the private guests.

In the middle of a ride, the King asks Hassan, "So, what do you think of Disneyland?"

"Oh, Father," Hassan answers. "You've already bought me enough for my birthday. Please don't buy me Disneyland. All I really want is a Mickey Mouse outfit."

So the King bought Hassan . . . . Coldwell Banker Burnet.

Realtors vs. Politicians

Securing One's "Base"

No, I'm not going to weigh in on the Massachusetts Senate race (at least not on this blog).

But I am going to note -- as I have before -- the surprising parallels between politics and real estate.

Politicians have a core group of supporters, called their "base."

Realtors have a core group of clients and prospects, called their "sphere."

In both cases, the key to success is to secure one's base while at the same time expanding one's appeal to the broader public.

Realtor's "Sphere"

While Realtor "spheres" can be professional, social, interest-based, etc., a tried-and-true sphere is still geographic: where you live.

One of the most gratifying things for a Realtor is to establish a reputation as the "go-to" Realtor for their immediate neighborhood.

Surprise! Realtors are competitive animals with (at least) average-sized egos.

Conversely, one of the most discouraging things is to see a rival "hoist their flag" (a For Sale sign with their company's logo) in your own backyard (or, more accurately, across the street).

Fortunately, I've had more of the former experiences than the latter!

What is a "Cooperative Client?"

How Realtors Grade Clients

Clients may have a select few words for their Realtors, but Realtors also have some favorite words for their clients.

No, not %!%*#!

Rather, how "cooperative" they are.

What do I mean by that?

For Sellers, client cooperation boils down to these three things:

1. Pricing. A cooperative client picks a listing price consistent with what the Comp's suggest is fair market value for their home.

Should no offers emerge after a reasonable amount of market exposure (40 to 120 days, depending on the price bracket), they'll entertain a 3%-5% price reduction, as market conditions and feedback indicate.

2. Staging and Prep. A cooperative client repairs anything that's broken, and, if their city has a point-of-sale inspection, does what's required to pass.

Depending on their home's size and condition, they also spend a reasonable amount -- typically anywhere from $200 to $2,000 -- on staging and cosmetic updates (painting, light fixtures, etc.). Or, they expend the equivalent in "sweat equity."

3. Showing-Ready. Once their home is on the market, a cooperative client keeps their home in impeccable condition, and is accommodating about allowing showings.

In addition to the foregoing, a cooperative (model?) client is someone who refrains from calling after hours, unless there's a major issue (negotiating a deal qualifies); is relatively conversant with technology (the easiest way to shuttle documents around is electronically); and is generally appreciative of your efforts.

And guess what?

A client who does all those things makes it easy for their Realtor to do the best possible job for them!

Tuesday, January 19, 2010

Listing Agents' "Dirty Little [Marketing] Secret"

Buyers Who Find Sellers

Want to know listing agents' "dirty little marketing secret?"

Sometimes, they don't find Buyers -- Buyers find them.

With today's advanced technology, social networking, etc., it's increasingly common for Buyers' Agents to broadcast exactly what their Buyers are looking for.

They do that at Realtor meetings; on Broker Web sites (Edina Realty has a for-Realtors-only area called "Network One"); and on MLS through something called "reverse prospecting," which lets Buyers' agents share their search criteria with listings that are good matches.

Even better from the Listing Agent's perspective: the Buyers who find you are usually the most motivated, and have already decided that they want the kind of house your client is selling!

P.S.: I used to -- but don't anymore -- send out blind mailings on behalf of clients interested in a very specific geographic location.

That's because the home owners who respond -- and there are always a handful -- typically are not serious about selling, or have an outlandish idea about what their home is worth (which is essentially the same thing).

Bank Foreclosure "Gotcha's" :)

"Inspect All You Want" (They Said)

Welcome to the Hotel California
Such a lovely place, such a lovely face
They livin' it up at the Hotel California
What a nice surprise (what a nice surprise) bring your alibis

Mirrors on the ceiling, the pink champagne on ice
And she said we are all just prisoners here of our own device
And in the master's chambers, they gathered for the feast
They stab it with their steely knives but they just can't kill the

Last thing I remember I was running for the door
I had to find the passage back to the place I was before
Relax said the nightman We are programmed to receive
You can check out anytime you like but you can never leave

--"Hotel California" lyrics; The Eagles

While it's still fresh, I thought I'd start a collection of favorite "gotcha" clauses in bank foreclosure contracts that I've run into recently.

Actually, "gotcha" would suggest purposeful intention; what often seems to be going on is that . . . no one's home -- in every sense of the word.


--One size fits all. Once upon a time, Target sold mittens in its Southern California stores. Today, lenders with foreclosures in Florida -- where defective Chinese dry wall has been a big problem -- are requiring disclaimer language in Minnesota, where no one has heard of the issue.

--"Inspect all you want." Another bank included an Inspection Contingency that looked like the standard Minnesota form up until the last sentence; that's where the Buyer waived its right to back out of the deal, regardless of what the inspection revealed.

Ummm . . . that would be the whole point of the inspection, especially one that turns up major issues that the bank won't address because it's selling the property "As Is."

Even if the property is being sold "As Is" -- make that, especially when the property is being sold "As Is," with no disclosures -- Buyers want to inspect to determine the property's true condition.

--The Bank can get out, for any reason. The flip side of locking the Buyer in is letting the bank out.

Another bank contract included a clause on the last line of a 28 page contract allowing the bank to cancel the deal, at any time, for any reason.

Such a contract really isn't a contract, it's more accurately a "memorandum of understanding."

By contrast, a contract imposes reciprocal rights and obligations, and is binding upon the parties.

--Bank language supersedes Buyer's language.

Every bank deal I've seen so far (more than two dozen) starts with the bank tossing out the standard Minnesota real estate forms, and substituting its own custom, undefined contractual language.

Typically, the first sentence of the bank's substitute forms states that the "bank's forms supersede the Buyer's, and wherever there's a conflict, the bank's forms govern."

So, not only are the bank's contracts often full of ambiguous, undefined language -- they trump the standard Minnesota contracts where there's a conflict.

--"Knock Yourself Out" Inspection clauses. Another variant of the "modified" Inspection clause I've seen allows the Buyer to inspect, but makes them responsible for de-winterizing the property, re-winterizing the property, and paying for any damage that doing so causes.

So, theoretically, a Buyer could arrange to have the water turned on, have the place flood because the pipes are busted . . . then be liable for the damage! (even though they decide not to buy the home).

Bottom line(s): a) foreclosures aren't for novices; and b) the price had better be attractive enough to compensate for all the foregoing risks and hassles.

Monday, January 18, 2010

Listing Presentation "Tiebreakers"

Throwing the Runner-Up a (Very Hollow) Bone

It's not uncommon for homeowners, in the course of interviewing agents to list their home, to be deadlocked between two (or more) agents.

What then?

To sew up the listing, I guarantee that at least one of the agents will promise that, if the homeowner hires them, they'll give the other agent's clients "first crack"at the home once it's on the market.

That way, if Agent #2 "brings the buyer," they can still split the commission with Agent #1, giving the former a substantial consolation prize.

Solomonic, right?

Not exactly.

Hollow Bone

There's no mistaking the two-fold appeal of this "gesture": 1) it makes the first agent look especially fair, even magnanimous, towards their rival; and 2) it lets the conflicted homeowner "off the hook" for passing up another agent they may have sincerely liked -- without feeling guilty about it!

In fact, however, such a pitch is invariably an empty gesture -- and the Agent making it knows it!

Here's why:

The best way to attract a Buyer for any given home is -- big surprise! -- to list it.

After all, the listing agent's name is on the sign in front of the home, on MLS, on the postcards marketing the home, etc. Plus, they're the ones hosting the Sunday open houses.

Of course, the listing agent is also the one hosting the Broker Open, when all the other local agents tour the new listings.

Statistically, the odds are vastly greater that another agent will be representing the home's ultimate Buyer.

Infinitesimal Odds

That's because even a very busy, very established agent is likely working with at most 8-10 Buyers at a time.

In turn, each of those Buyers is likely to screen an average of 60-80 homes online, and ultimately tour 12-15 of those before deciding which home to buy.

So, out of approximately 26,000 homes for sale metro-wide, the universe of homes any agent's clients are likely to be interested in seeing at any given moment is . . . perhaps 120 (8 x 15). And that assumes there's no overlap between any of the clients.

If you like statistics, that's less than .5%.

For those reasons, I focus my listing presentation on what I'm going to do for the client -- not my competitors if I'm hired.

It's also the case that a Realtor promising to let the runner-up have "first crack" can just as easily have that argument used against them: after hiring me recently, the first thing the client did was request that I call the other Realtor to make sure any of their Buyers were first in line.

P.S.: Alternative Math. If the foregoing statistics are too complicated, consider this: in my experience, the odds of any given showing leading to a purchase are about 1 in 10 (10%). Now assume (optimistically) that the odds of any given house being suitable for a Buyer I'm currently working with might also be 1 in 10.

Combine the two, and the odds of my having a Buyer for any given home are less than 1-in-100 (1%).

Saturday, January 16, 2010


Natural Catastrophes -- U.S. & Foreign -- Post-Katrina

No matter what this country's problems are, they pale in comparison to those facing Haiti, especially now.

Even though its residents aren't Americans, it's hard not to see a little bit of post-Katrina sentiment motivating the truly massive relief effort apparently underway, i.e., no one should be left to fend for themselves in the wake of a such a catastrophic natural calamity, no matter their citizenship.

And though it may seem remote, my guess is that many people have a closer connection to Haiti than they might guess.

In my own case, the wife of a good friend is from Haiti, as is their adopted daughter.

Fortunately, the relatives of both live in the northern part of the country, removed from the worst damage.

Liking (vs. Loving) Your Clients

Friends, Family -- & Clients: Tough Mix

You can love your pet, just don't LOVE your pet.

--"The Truth About Cats & Dogs" (1996)

That's one of my favorite lines from the movie starring Janeane Garofalo and Uma Thurman.

Oddly enough, it also applies to Realtors' relationships with their clients (and I mean that in a non-patronizing way!).

Certainly, there are lots of Realtors out there who've successfully worked with close family, friends, etc.

However, Realtors who LOVE (vs. love) their clients do so at their (and their client's) peril, for a couple of reasons.

One. They tend to over-identify -- and therefore react emotionally.

Case in point: your best friend/client gets a lowball offer -- not exactly uncommon today.

Instead of taking it for what it is -- a sort of backhanded compliment -- you get indignant, or even mad.

That doesn't help advance any possible deal.

Two. They suppress bad news.

Your best friend/client's home isn't selling -- or even getting showings -- after 4 months on the market.

The obvious conclusion is that it's overpriced, understaged -- or some combination of both.

Instead of relaying that news, you ignore or deny it, letting market time continue to creep up and making the inevitable upcoming price reduction bigger than it has to be.

Three. They over-empathize.

Your best friend/client has lost their job, and is underwater on their house (that is, they owe more on their mortgage than their home is currently worth).

Instead of telling them what their home is likely to sell for, you let yourself be persuaded that it's worth what your friend "needs" it to be worth (memo to sellers: homes are never worth what you "need" -- only what the market is paying).

Bottom line: friends need to be loyal, supportive, and empathetic.

Realtors need to be objective, rational, and business-like.

The two roles may not be mutually exclusive . . . but it's not a natural combination, either.

P.S.: So what about Realtors who don't even like their clients? Or come to hate them? (Rare, but it can happen.)

Thought #1: everyone probably already knows. Thought #2: probably best to move on, for everyone concerned.

The predicament reminds me of a cartoon that shows a lawyer on the operating room table, when suddenly there's a blip on the EKG monitoring his heart rhythm. The lawyer bolts upright, and says to the surgeon, "I'll have you know, I'm one of the best medical malpractice lawyers in town, and if you screw up this operation, I'll bankrupt you."

The second frame of the cartoon shows a thought bubble above the surgeon's head, with him thinking to himself, "Hmmm. . . . . "

The third frame shows the lawyer back on the operating room table, with the EKG now . . . flat.

Are Municipal Inspections a Waste of Time?

Inconsistent Provisions, Fees, Enforcement:
A-Not-So Necessary Evil

Until recently, I've always defended municipal point-of-sale inspections -- required by 14 municipalities locally, including Minneapolis, St. Paul, Bloomington, and St. Louis Park -- as a well-intentioned (if annoying and occasionally, expensive) hurdle for home Sellers.

Typically, so-called Time of Sale Inspections focus on safety-related concerns such as the working condition (or not) of the heating system; basic electric features (GFI's in Kitchens and Bathrooms); and plumbing (for example, back-flow preventers).

However, after seeing all the various inconsistencies and loopholes over the years, I've come to the conclusion that their costs don't justify their benefits.

Here are the five reasons why:

One. Buyer's inspections cover the same ground much more thoroughly.

Once upon a time, a Buyer's inspection was considered optional.

Not anymore.

In the nine years I've been selling real estate, I've never represented a Buyer who declined to do an inspection -- nor would I ever recommend it.

Even if a home was selling in multiple offers -- not so common these days -- I still wouldn't recommend waiving the inspection, as some especially eager Buyers have been known to do.

On a scale of 1-10, a good Buyer's inspection is a "9" or "10," typically taking 3-4 hours and costing $300-$400, depending on the size house.

The city inspection?

I'd rate even the best ones as no higher than "2" on that same scale -- and have seen them performed in less than 30 minutes (even though they can cost north of $200).

Two. Dubious logic.

By definition, point-of-sale inspections kick in . . . only when title changes hands.

So, Golden Valley wants to know that, prior to sale, each home's sewer connection to the municipal system meets minimum standards.

However, if that's such an urgent priority, Golden Valley should implement that requirement city-wide, immediately, not just require it as a condition of a home sale.

After all, most Golden Valley homes don't change hands in any given year -- and some don't sell for decades.

How is such spotty enforcement furthering the city's goals?

Expensive & Redundant

Three. Inconsistent Provisions, Fees, Enforcement.

Some cities have their own inspectors (St. Louis Park, Bloomington); others outsource their inspections (Minneapolis, St. Paul, Maplewood).

Of the latter, the primary qualification to become a "certified city inspector" -- as best I can tell -- is to fill in a form and pay a fee.

While each city's approved list of certified inspectors contain many experienced, reputable inspectors . . . I've certainly encountered my share of incompetent inspectors.

In fact, one of my first listings (representing the Seller) involved a Minneapolis home that had just gotten a clean "point of sale" inspection.

Unfortunately, the deal collapsed when the Buyer's inspection revealed -- with lots of documenting photos -- that my client's roof was clearly past its useful life.

My client ultimately put on a new roof (and, I believe, was genuinely unaware how bad the existing roof was) . . . but by then the Buyer had walked.

Less egregiously, I've seen homes blocks apart in the same city undergo city inspections within weeks of each other, and one will get written up for plumbing and electrical violations, while the other -- in worse condition -- gets a pass.

Four. Confusing compliance.

In some cities, home owners must correct any "repair or replace" ("R&R's") items before the home can be offered for sale (Minneapolis); in others, the items must be corrected prior to closing (St. Louis Park).

If the homeowner can't or won't address the R&R items, cities typically allow responsibility to be transferred to the Buyer.

However, the protocol for doing so -- paperwork, escrow provisions, post-sale timetable for correction -- vary widely.

Finally, at least one city (Maplewood) requires a point-of-sale inspection . . . and nothing more: there's no requirement that anyone fix anything, before or after the closing, let alone a reinspection requirement (which most cities require).

I suppose this state of affairs is more agreeable to homeowners, but then what's the point?

Five. Potential to Mislead Buyers.

At least some unsophisticated Buyers, when they learn that the home has passed the city inspection, erroneously conclude that it's in good condition.

For all the reasons discussed above, that conclusion is most definitely not warranted.

Ultimately, at least in my opinion, there's scant evidence that municipal point-of-sale inspections help to ensure that the city's housing stock meets minimum standards.

After all, some of the local cities with the best housing stock (Edina, Wayzata, Minnetonka, Plymouth, etc.) don't have them.

Friday, January 15, 2010

"Please Remove Shoes"

"Please Remove Shoes??" Please Remove Carpet (Tack) Strip!!

Removing your shoes at the front door before proceeding to show a home is one of those courtesies that Realtors -- and their clients -- invariably respect. Ditto for the other, standard showing instructions ("turn off lights, leave card, don't let Fluffy out").

Removing your shoes in winter in Minnesota is especially important, because not doing so could easily leave the owner with a big cleanup headache (if not a bill for carpet cleaning).

Especially if your client ends up wanting to buy the home, that's not an auspicious start.

In fact, I even wear a scruffy pair of slip-on's whenever I show homes, just to make it easier to comply.

However . . .

The implicit quid pro quo is that the homeowner's floors are clean, debris-free, etc.

And that there aren't things like nails sticking out of carpet strips in lower level storage areas!

(Guess how I discovered it? Ouch!!)

P.S.: And yes, the shoes go right back on the second it's apparent that the request is, shall we say, "inappropriate."

Thursday, January 14, 2010

Crack Dealers vs. Wall Street: 'Top 10' Differences

Selling Tainted, Addictive Products

What's the difference between crack dealers and Wall Street?

Here's my "Top Ten" list:

Ten. The "product" crack dealers sell is a lot less tainted.

Nine. Crack dealers don't take out life insurance policies on their victims, er . . . clients.

Eight. Crack dealers don't plough a share of their profits back into hiring lobbyists to re-write the nation's drug laws to suit their interests. Or donate millions to the campaign coffers of key members of Congress overseeing them.

Seven. Speaking of profits . . . Crack dealers don't get multi-million dollar bonuses.

Six. Crack dealers wreck blocks, and sometimes even whole neighborhoods. Wall Street has laid waste to an entire economy and jeopardized its currency -- not to mention savaging millions of homeowners, savers, investors, retirees, and small businesses.

Five. Crack dealers don't require bailouts adding trillions to the U.S. deficit.

Four. The police prosecute crack dealers.

Three. Crack dealers don't become senior advisers to the President, Federal Reserve, and U.S. Treasury.

Two. Crack dealers don't solicit business (usually) from retired teachers, firefighters, etc.

One (Tie). Wall Street's "supplier," The Federal Reserve, operates legally and in plain sight//Crack dealers aren't under the illusion that they're "doing God's work" (as Goldman Sachs CEO Lloyd Blankfein was recently quoted as saying).

Speaking of Mr. Blankfein . . . consider this exchange yesterday between him and Phil Angelides, head of the Commission investigating the financial crash:

It sounds like you’re selling a car with faulty brakes and then buying an insurance policy on the car,” Mr. Angelides said. Mr. Blankfein emphatically responded that the investors buying these products were sophisticated and some of the biggest institutions in the world. Mr. Angelides [then] pointed out they represent the pension funds of teachers and firefighters.

--"Live-Blogging 4 Top Bankers on Capitol Hill"; The New York Times (1/13/2010)

Actually, I think the crack analogy is better.

How else do you explain the response of millions of Americans to Wall Street's offer of essentially free mortgage money, and the chance to cash in on the real estate boom?

Sure, you pity the crack addict for their sorry state . . . but you put the pusher behind bars.

Instead, we give Wall Street billions in bonuses, and their companies trillions in bailout money. More accurately, we give them trillions of our kids' money, that they'll have to re-pay.

Disgusting. Truly disgusting.

Last Minute Multiples

"Jilting" Buyer #1 for Buyer #2

Topic A at this morning's Exceptional Properties meeting was how to handle a deal that's been verbally signed off on, when another, significantly stronger offer materializes before all the necessary signatures are in place.

The scenario's relevant because, in today's slower market for upper bracket homes, by the time an offer eventually comes in, several other Buyers are likely familiar with the home and mulling an offer, too.

Hearing that another Buyer has jumped first can then become a catalyst for one or more others to do the same.

So, does the Seller switch to Buyer #2 or not?

It's up to them.

Legally, they have every right to, because until there's a written contract . . . there isn't. A verbal agreement to sell real estate in Minnesota and virtually everywhere else simply isn't enforceable.

That doesn't mean Buyer #1 won't be upset (and likely take it out on the Listing Agent, who actually has a legal duty to relay Buyer #2's offer).

However, all parties to a real estate deal need to know, well before negotiation begins, that it's not done till it's fully executed (that is, signed).

Once there's agreement on all the terms, everyone needs to be available to promptly sign to make that happen.

P.S.: signed offers are a two-way street: more than one Buyer has been known to change their mind and balk at signing a Purchase Agreement that they verbally committed to.

Now that's a Discount!

Was: $1.5 Million; Now: $599k

Where: 142xx Trace Ridge Road in Minnetonka, just west of 484
What: 4 BR/5 BA with 4,650 square feet on a .79 acre lot
How (much): list price is $599k
When: originally listed at $1.5 million in 2005
Who: co-listed by Mark Jelinek and Michael Mohs of Edina Realty (Mark is a colleague in the City Lakes office)

There may be a home on the market in the Twin Cities that's listed at a lower percentage of its tax assessed value (47%) or at a deeper discount from its original asking price (more than 60% off) -- but I'm not personally aware of it.

Two caveats for prospective Buyers:

One. It's a short sale. That means one or more banks have to agree to reduce the mortgage(s) on the home.

Short sales can be a long shot (sorry, bad pun), but if the listing agent has lots of experience dealing with them (Mark does) . . . the odds go up considerably.

Two. At least until a lower purchase price knocks down the annual property taxes, the current tax bill is a whopper (over $16k, about double what would typically go with a $600k house).

Wednesday, January 13, 2010

The Re-List Stigma

"Re-hash" . . . "Re-Tread" . . . "Re-List"

"Re-hash." "Re-tread." "Rehabilitate."

Detect a theme? Namely, the association with old and/or damaged goods.

So, too, prospective Buyers tend to look at re-listed homes with one (or two) raised eyebrows.

Even if the only stumbling block the last time around was a too-high asking price -- probably the explanation for 75%-plus of all re-listed homes in today's market -- there's still an unspoken concern that maybe the home didn't sell for another reason. That's still there.

(In my experience, the other 25% of re-lists are due to poor marketing, staging, deferred maintenance -- or some combination thereof.)

Re-List Hurdles

Of course, the other hurdle re-listed homes have to overcome is the presumption that they're still overpriced.

To re-but that, sometimes the only solution is a dramatic price reduction.

The lesson for homeowners (and would-be Sellers)?

Do it right the first time around.

P.S.: two other "re's" come to mind for "re-list": 're-group' and 're-do.'

From Open Enrollment to . . . Closed?

Is Beverly Hills a Harbinger for Minnesota?

Once upon a time, parents sought out neighborhoods with good schools, low crime, and amenities like parks, nearby shopping, etc.

All those things still count, but with the advent of "open enrollment," which allows families to effectively choose their (public) school district, the "good schools" criterion mattered . . . . just a little less.

That may be about to change, if Beverly Hills, CA is an indicator:

[Out-of-district] students used to be a financial boon for Beverly Hills, bringing millions of dollars in state aid with them. But California’s budget crisis is changing the way schools are financed in many wealthy cities, suddenly turning the out-of-towners into money losers.

--"Beverly Hills Schools to Cut Nonresidents"; The New York Times (12/20/2009)

The issue came to a head last night, when the Beverly Hills school board voted to immediately dismiss 470 out-of-district students, and phase out the remainder ("Beverly Hills Blocks Outside Students"; The New York Times, 1/13/2010). The school board's ruling was nearly unanimous, another omen.

Will this issue "travel" to Minnesota?

We'll see.

The obvious local counterpart to Beverly Hills is . . . Edina.

P.S.: As a Stanford undergrad once upon a time, it seemed that everyone I met from Beverly Hills had been class president.

Actually, I wasn't that far off: at least back then, I discovered, Beverly Hills High School elected new class presidents monthly (you've got to assume that the admissions departments at elite schools caught on to this pretty quickly).