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Sunday, October 31, 2010

Financial e.coli

Laws, Sausages -- & Securitized Mortgages

Laws are like sausages — it is best not to see them being made.

--Otto Von Bismarck

To "laws" and "sausages," now add "securitized debt," circa 2004-2008.

It turns out that Wall Street's financial sausage factory was even more toxic and laxly run than previously thought.

The latest chapter is apparently a breakdown in the very essence of what makes a securitized mortgage, securitized: the link between the mortgage, and the property securing it.

Due to sloppy or non-existent documentation, investors in such paper may not have rights to the collateral -- millions of homes -- after all; if that's correct, "fasten your seat belts, it's going to be a bumpy night," as Bette Davis might put it.

Financial e.coli Outbreak

As the daily headlines (continue to) make clear, the financial e.coli outbreak traceable to Wall Street has sickened not just the U.S. economy, but a good portion of the world economy.

If a real sausage factory caused 1/1,000 of the harm, it would be shut down, fined into oblivion, and its operators jailed.

Much the same fate would befall the government inspectors responsible for overseeing the factory; the private company that put its Good Housekeeping seal of approval on the factory's output; and any other actors associated with the shameful enterprise.

How shameful?

Imagine the uproar if a corrupt food inspector -- charged with abetting food poisoning -- defended itself by claiming that its bogus ratings were "protected free speech," as the credit ratings agencies are now risibly arguing.

Calling Upton Sinclair

So, what's happened to Wall Street and its enablers, post-crash?

And exactly what is their defense to the foregoing?

In the hope that doing so would somehow revive the economy Wall Street wrecked, the Federal Reserve and Congress have actually showered Wall Street with more money since 2008 (courtesy of quantitative easing and TARP, respectively).

Meanwhile, Wall Street has escaped responsibility of any sort by arguing -- try to keep this straight -- that: a) the financial sausages it sold were not tainted with e.coli; but b) if they were, it was because investors wanted to buy tainted sausages; and c) should have known the sausages were tainted; because d) Wall Street told them they were.

Or not (see, SEC v. Goldman Sachs).

And "a." through "d." don't really matter, anyways, because of "e.": selling tainted financial sausages . . . was all perfectly legal.

Any political commercials out there discussing this??

I didn't think so.

P.S.: What do you do with an e. coli -tainted batch of (financial) sausage? Recall it.

Is the (Home) Buyer Serious? Here's One Clue

Requesting a Sat. Showing on Wed.

I don't have any statistics backing me up, but it sure seems like there's a relationship between how far in advance a showing is booked, and how serious the Buyer is.

The explanation?

Here's my theory:

Serious buyers are methodical, and methodical Buyers carefully plan what they want to see.

Which is smart: the best way to learn the market is to see a succession of homes at the same price point, in the same general location, all in a row.

That takes a little more advance planning.

It's also the case, that, in late Fall in Minnesota, the market is slower-moving.

So you can set up showings for the weekend several days in advance.

The bottom line?

As a listing agent, when I see a showing booked on Wed. for the upcoming weekend, I take it more seriously than one I see booked two hours -- or two minutes -- ahead.

The latter are almost always what I call "what the hell showings," by Buyers who are already on the block looking at something else.

Or . . . maybe they just have a very disorganized Realtor.
P.S.: contrast this post with an earlier one, "Unserious Buyers."

Saturday, October 30, 2010

Virtual Staging: Ready for Prime Time?

Just Don't Call it 'Doctoring'

What's holding up virtual staging?

Virtual staging is the practice of digitally altering photos to show an empty room as it would look fully furnished and accessorized.

Much faster and cheaper than the real thing, you'd certainly guess that by now the technology isn't rocket science.

And yet virtual staging is just now debuting in housing markets like Manhattan -- and non-existent, at least as far as I'm aware -- in the Twin Cities.

Three guesses as to what's going on (or not, as the case may be):

1. Ethical concerns and lack of guidelines.

What do MLS rules say about virtual staging?

Nothing, beyond proscribing false or misleading advertising.

But is virtual staging false or misleading if the Listing Agent explicitly discloses it?

In fact, that's precisely how Manhattan brokers are handling the issue (see, "Furnished with Pixels").

All such photos are labelled "virtually staged," and juxtaposed with unaltered photos of the raw space.

Works for me -- and I suspect, most Buyers.

2. No Vendors
.

I suppose it's possible that I may have missed the flyers and emails from virtual stagers amongst the deluge of other email I already receive.

But I doubt it.

Nor have the professional photographers I regularly work with started offering it.

If no Realtors are demanding virtual staging, and no vendors are pushing it . . . nothing's going to happen (clients don't know enough to ask).

3. Realtor Inertia.

Realtors can be creatures of habit, just like other people.

So, they market listings the way they always have.

They also can be under a great deal of time pressure to get a listing on the market.

Neither of those factors is conducive to trying something new.

It all adds up to a bit of a Catch-22: vendors aren't pitching virtual staging because they aren't sure if there's a market for it.

Meanwhile, Realtors aren't clamoring for it because they don't want to be guinea pigs, possibly incurring MLS' wrath (and fines).

May the (Task) Force Be With You

The solution?

Let the big brokers (Edina Realty, Coldwell Banker Burnet, ReMax) take it up with MLS and the Board of Realtors, and work out some initial guidance (and safe harbors for Realtors operating in good faith).

Consider this post my application for the relevant task force.

And if you're a virtual stager reading this blog, feel free to contact me -- I've got a listing coming up in two weeks that's a perfect candidate.

Post-Election Headlines

"Democrats Lose House?!"

If current trends hold, how much do you want to bet that at least one major newspaper (OK, maybe just The Onion) runs some variation of the following headline:

Banks Balk at Short Sale,

Dem's Lose House

Not necessarily fair -- but more than a little true . . .

P.S.: I'd sure recommend title insurance for the Republicans, though.

Friday, October 29, 2010

Refinancing Motive #23: Making Your Home More Saleable

Is Your Mortgage Assumable?

The interest rate on your mortgage is already low (or, you don't have a mortgage).

You're allergic to paying bank fees.

And you're not contemplating moving any time soon.

Should you still refinance?

The surprising answer is, perhaps "yes" -- especially if your current mortgage is not assumable.

That latter feature could very possibly be the difference between having a sellable home in a few years and not -- particularly if the Federal Reserve's current machinations result in an inflationary spike (and dramatically higher mortgage rates).

Then, the couple grand in refinancing fees will have turned out to be very cheap insurance.

Your lender will let you know which mortgages are assignable, and which aren't.

Playing "Black Friday," 2010

How to Buy a Cheap Flat Panel TV Before Christmas

Don't worry, this isn't a(nother) dire post about the stock market.

It's about how to buy cheap electronics between now and Christmas.

Strategy #1 is to wait for Black Friday -- traditionally the day after Thanksgiving, when Christmas shopping kicks off -- and get up at 4 a.m. to wait in line for whatever stupendous deals the stores announce this year, then risk that they'll have already run out before it's your turn.

Strategy #2?

Buy whatever you want now, when supplies are ample and the lines are nonexistent; keep the receipt; then check back in 30 days to see if the price has dropped.

If it has -- and it probably will -- most stores will rebate you the difference.

In fact, given that Black Friday keeps moving up each year (as retailers maneuver to get the jump on each other), you can likely buy something anytime past mid-October and still be within the 30 day "check-back" period.

Just check the fine print -- this one seems obvious enough that it's possible that the retailers have put the kibosh on it.

Tax Assessed Value as Yellow (or Red) Flag

List Price = $800k, Tax Value = $400k

As I've written previously, a home's tax assessed value isn't particularly relevant for establishing a home's actual, what-will-it-sell-for market value.

Rather, fair market value is determined by: a) scrutinizing the comp's, or comparable sold properties, to set a list price; then b) testing it on the market.

While in theory the tax value should approximate market value, there are all kinds of reasons why they can diverge.

So why do Realtors still consult the tax assessed value?

Speaking for myself, I always check to see if the assessed value appears too low.

Especially if the home hasn't sold recently, that can be a sign that major remodeling was performed without the requisite permits.

If the home has sold recently, it's possible that the appropriate permits were pulled, but that the new tax assessed value simply hasn't caught up yet.

Thursday, October 28, 2010

Realtors & Politicians

Turf Wars (the Literal Kind)

What do Realtors and Politicians have in common?

No, it's not a willingness to tell you whatever you want to hear (Realtors who make the mistake of doing that soon regret it).

Rather, they both like to place signs with their names in 2' high letters on your lawn.

Putting Money Into Your Home -- Smartly

Home Improvements: 'The Good, the Bad, and the Ugly'

Pornography is hard to define, but I know it when I see it.

--Supreme Court Justice Potter Stewart

Oddly, I could say the same thing about good home improvements: they're hard to define, but you know one when you see one (ditto for home improvements that are bad or otherwise "off").

If you forced me to come up with a definition, it would be that a good home improvement is organic and accretive; the "acid test" is whether, when it's done, it seems like it's always been there.

In that vein, a neighbor on my block is in the middle of what looks like a $15k or so landscaping project.

The focal points: neatly defining the (formerly scruffy) perimeter of the front yard with a limestone retaining wall, which subtly picks up the decorative stone highlights in the nearby Tudor home (and takes the home's already strong curb appeal from a "7" to a "10"); and a decorative stone walkway from the home's front entrance to the sidewalk.

When it's done, no one -- excepting the owner and perhaps a few neighbors -- will be able to tell it wasn't original.

Nice. Very nice.

P.S.: as I've written previously, late Fall (around Halloween in MN) is a good time to get a landscaping deal.

"The Book on Real Estate"

Sequel to "Agent Remarks"

In the spirit of, it's much easier to come up with titles for yet-to-be-written books, than to actually write them, here's the name for the sequel to "Agent Remarks," my initial effort (also as yet unwritten).

Drum role . . . .

"The Book on Real Estate."

That way, people will be able to say that . . ."Ross Kaplan wrote 'The Book on Real Estate.'"

Actually, with almost 2,000 posts and approximately half a million words already published on this blog, I probably already have the raw material for a book or two.

Approaching the Zero Bound

"An Attempted Hypodermic
Straight to the Economy’s Heart"

A fascinating, even feverish dialogue is taking place right now -- joined by some of the financial world's most influential thinkers -- concerning what will happen next week, and what economic consequences will flow from that outcome.

The elections next Tuesday?

Try, the Fed's much-signalled intention to initiate another round of quantitative easing (also called "printing money") when it meets next Wednesday.

Here is Bill Gross' take, from his perch at PIMCO, the nation's (world's?) largest investor in bonds:

Quantitative easing is temporarily, but not ultimately, a bondholder’s friend. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates.

--Bill Gross, "Run Turkey, Run"; PIMCO Investment Outlook (Nov., 2010)

So why do it?

Because the Fed, caught in a liquidity trap, is out of other options.

Gross again:

Ben Bernanke can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it (more quantitative easing) is all he can do.

--Bill Gross

Will "it" work?

Gross, whose credentials are as good as anyone's, thinks the jury's out.

Wednesday, October 27, 2010

Rising -- and Falling -- Real Estate Bar

Want to Stand Out? Drop > 10%

Want some anecdotal evidence about housing market conditions these days in the Twin Cities?

Higher Bar. Edina Realty, the Twin Cities' largest broker, requires price reductions of 10% or more to qualify for intra-company email distribution (I believe the policy actually dates back to this Summer).

Previously, the requirement was 5%.

The logic?

Five percent drops are now run of the mill; to get Buyers' attention (and qualify for email distribution), the number's got to really be eye-catching (no such threshold exists for circulating price drops within a branch office).

Lower Bar. Meanwhile, the bar for hosting Exceptional Properties meetings in the Southwest Region (the geographic area including my office, City Lakes) continues to drop.

Three years ago, the floor was at least $1 million -- and most homes hosting the meeting were well above that.

Tomorrow's meeting is at a home listed for $589k.

P.S.: many Realtors, including yours truly, have custom email distribution lists to market their listings. The trick is knowing the difference between judicious use of such lists -- and spam.

(E)mailbox Buster

Realtor Bad Etiquette

In the non-realtor world, it would be the equivalent of butting in line, or cutting someone off in traffic.

For Realtors, a common example of bad etiquette is blitzing several thousand Realtors' mailboxes with a 17 megabyte electronic flyer like the one I received yesterday -- an anvil of an email if there ever was one.

For non-geeks, that's equivalent to several hundred regular emails.

The peak for such emails is usually Monday, when over-zealous Realtors hosting Broker Opens the next day try to stir up as much interest as they can.

To stand out, it's natural to want to include as many high-end photos as possible.

However, that can be done less obnoxiously simply by adding (hypertext) links.

When I get email whoppers that overload my email box, like most recipients, I just hit "delete."

Bubbles as Policy Tool


Grantham: 'Almost Criminally Inept Fed'

The Federal Reserve's asymmetric policy of stimulating stock moves by setting artificially low rates and then leaving the bull markets, when overstimulated, to bubble over, is dangerous. It is probably the most dangerous thing to inflict on a peace time economy with two possible exceptions – runaway inflation and a housing bubble.

--Jeremy Grantham

Leave it to Jeremy Grantham to lay bare exactly why the Fed has so many market watchers -- myself included -- baying at the moon in exasperation.

On the one hand, it denies any duty or ability to contain the damage from asset bubbles (or even recognize them!).

On the other hand, it pursues policies -- first zero percent interest rates, now quantitative easing -- guaranteed to inflate serial bubbles.

Grantham devotes most of his current quarterly letter (see, "Night of the Living Fed") to explaining why this is irresponsible, and -- in the case of housing -- especially dangerous.

Amongst other things, in their wake burst asset bubbles leave squeezed consumers, taxpayers, savers, retirees, pension funds, states, and municipalities -- and, when they are compelled to clean up the mess, ultimately a broke Fed and federal government.

Grantham again:

Distorted asset prices have been like the deliberately misplaced signal lanterns, which the Cornish, in the stormy west of England, used to lure ships onto the rocks for plunder. Individuals, as well as institutions, were fooled into believing that the market signals were real, that they truly were rich. They acted accordingly, spending too much or saving too little.

So what does Grantham prescribe, besides not inflating any more bubbles?

Noting on the one hand the "army of non-frictional unemployed ready to get to work," and on the other hand the country's "dreadfully deteriorated infrastructure and desperate need for improvements in energy efficiency" . . . Grantham thinks it's obvious.

You owe it to yourself to read the entire article.

Tuesday, October 26, 2010

"Why Didn't it Appraise?"

Multiple Choice Quiz

Test your knowledge of today's real estate market, and answer the following question:

Which of the following are to blame when a home does not appraise pursuant to a Purchase Agreement and mortgage application?

(Note: the home being appraised is called the "subject home"; its peers, which establish value, are individually known as "Comp's," or "Comparable Sold Properties").

A. Nearby foreclosures torpedoed the value of the (non-foreclosure) subject home;
B. The appraiser didn't know the area;
C. The appraiser didn't know various negatives associated with one or more Comp's (dated Kitchen, poor condition, bad floor plan, etc.) that depressed their market value.
D. The appraiser was missing the last, fully executed Counter-Offer or Purchase Agreement Addendum -- and therefore was using a too-high price.

Answer: all of the above.

Of the foregoing, the only circumstance that is entirely avoidable is "D."

However, an attentive, hands-on Realtor can also help avert/mitigate "B." and "C." by being proactive.

P.S.: And yes, some homes fail to appraise these days . . . because the purchase price simply isn't supported by valid Comp's.

I'd put that number at 15% or so -- up from 5% a few years ago.

"Treason Toy?" What's a "Treason Toy??"

It's a Bit Like "Soviet Jewelry" *

I'm noodling with a (darker) blog post tentatively titled "Wall Street's Financial Treason," so my ears perked up when I thought I heard someone say "treason toy" at this morning's office meeting.

They did, kind of: they were making an announcement about a holiday fundraiser called "Trees 'N Toys."

*Old-time Saturday Night Live fans will recognize this as the title of an Emily Litella (Gilda Radner) bit whereby she confuses "Soviet Jewry" and "Soviet jewelry."

Name that Headline!

August Case-Shiller Index

U.S. home prices fell in August from a month earlier, ending their climb since April, according to the S&P/Case-Shiller home-price indexes. The index of 10 major metropolitan areas fell 0.1% in August compared with July, while the 20-city index declined 0.2%. Adjusted for seasonal factors, the 10-area index fell 0.2%, while the 20-area declined 0.3%.

--The Wall Street Journal (10/26/2010)

What's the predictable headline on a .1% drop in home prices in August, released at 8 a.m CST this morning?

"Home Prices Drop."

Call it the flip side of what I heard an Edina office manager announce at a recent meeting, based on an increase in showings the previous week from 900 to 901: 'Showings are Up!'

So what do I make of the latest Case-Shiller numbers?

Not much.

Activity in the Twin Cities continues to be what most agents would characterize as "sluggish."

Deal "Good Will"

Flexible vs. Strained Purchases

What's goodwill between the Buyer and Seller in a deal worth?

Usually, at least a couple hundred bucks -- which is why I encourage my clients not to go overboard negotiating for the last $50 (in a bigger deal, I'd up that to $250 or more).

Case in point: my client had neglected to remove a washer/dryer, as required by the (last) Addendum to the Purchase Agreement.

It was an easy oversight to make -- the home had four of them.

What happened next?

The Buyer's agent, who caught the slip during the walk-thru, made a few phone calls and took care of it.

Whether the issue is changing the closing date, dealing with walk-thru issues, working through an appraisal "hiccup" -- whatever -- the problem is more easily surmounted if the Buyer and Seller have a positive, cooperative working relationship with one another.

It also makes the closing much warmer.

Monday, October 25, 2010

What is the Opposite of "Creative Destruction?"

Live by the (Innovation) Sword, Die by the (Innovation) Sword

To every action there is always an equal and opposite reaction.

--Isaac Newton

First, there was the original kind of destruction, "destructive destruction": things like wars and earthquakes and other scourges that have always afflicted mankind, without anyone noting silver linings.

Then, in the 1940's, economist Joseph Schumpeter posited a beneficial form of destruction, "creative destruction," i.e., the notion that undergirding capitalism's success is a continual process of technological innovation, by which newcomers oust entrenched incumbents -- only to be displaced themselves eventually.

So, just as department stores like Montgomery Wards and Sears supplanted mom-and-pop retailers, Wal-Mart later supplanted Wards and Sears.

Two More Strains

But, in a world of Newtonian "equal and opposite reactions," two more strains of creative destruction logically must also exist: 'creative construction,' and 'destructive construction.'

The latter is best exemplified by so-called "bridges to nowhere": expensive, unnecessary public works whose only legacy is greater national debt.

The opposite of that would be worthwhile public projects, whose benefits more than outweigh their costs.

Best examples of the latter?

The Tennessee Valley Authority, which helped electrify the Southeast; Eisenhower's interstate highway system in the 1950's; and a little project initally underwritten by the Defense Department, now called "the Internet."

Why I Like Neighbors -- Reason #37

"Nosy Neighbor?" Try, Best Ally

At least to some Realtors, neighbors are time-wasters and tire kickers.

They come through open houses not to buy, but to see how their Kitchen compares with their neighbor's, to get interior decorating ideas, or to see what their own home is likely worth.

All (occasionally) true, but neighbors can also be the best salespeople for their block -- who better to field a question about local schools, kids on the block, nearby shopping, etc.: the next-door-neighbor . . . or the Realtor trying to collect a commission?

Neighbors at open houses know who they are -- but prospective Buyers typically don't.

All they know is that the house that they may be interested in buying is full of lots of other prospective Buyers, too.

Free Recruiting

It's also the case that neighbors recruit their friends to move nearby.

Holding an open yesterday in Golden Valley, the next-door-neighbor came over to tell me that she was hosting a party for her son's football team later that afternoon.

If I gave her a stack of marketing flyers, she was happy to set them out where her house full of guests would see them.

I did . . . and she did.

What's Selling: Cedar Lake


Acing the "Ooh!" and "Aaah!" Factor

Where
: 2700 Chowen Ave. South in Minneapolis' Sunset Gables subdivision (just south of Cedar Lake)
What: Moderne-style Art Deco with 5 Bedrooms and 5 Baths, and 3,800 finished square feet
How much: listed for $875,000; sold for $823,050 (94% of asking price, and more than $35,000 over the tax assessed value).
When: less than 3 months on the market; closed Friday (Oct. 22).
Who: listed by Ross Kaplan, Edina Realty City Lakes; selling agent Paul Larson, Coldwell Banker Burnet

What's selling in a tough market, especially for upper bracket homes?

Trophy properties like 2700 Chowen Ave. South, just south of Cedar Lake in Minneapolis.

This historically designated home probably generated more "ooh's" and "aaah's" than any other home I've listed, for good reason: prospective Buyers salivated over the original fresco above the Fireplace, the custom millwork and period Art Deco light fixtures, and all the space and light.

The clincher?

A $200k-plus first-floor addition (2004) complete with its own washer dryer and private, courtyard entrance.

"Traditional Seller" -- Decoded

Mom, Apple Pie -- and No Banks

Probably the most popular term on MLS at the moment -- right after "mint," "move-in condition," and "experienced short sale agent" -- is "traditional seller."

No, that doesn't mean the owners believe in "Mom and apple pie," dress conservatively (no face jewelry or tattoos), or otherwise have an "Ozzie and Harriet" profile (if you're too young for that reference, think, Phil and Claire Dunphy from Modern Family).

Rather, it means that: a) the Sellers have title to the home, not a bank (it's not a foreclosure); and b) they don't need the bank(s) that hold their mortgage to take a haircut for them to be able to sell (it's not a short sale).

Listings with this language are most common in areas where foreclosures and short sales are dominant, and "traditional sellers" need a way to distinguish themselves.

Sunday, October 24, 2010

Obama, Wall Street, & Public Perception

The Necessity of Choosing Sides

The guerilla wins if he does not lose. The conventional army loses if it does not win.

--Henry Kissinger

What does Kissinger's famous maxim about guerilla warfare have to do with Barack Obama and Wall Street?

That in every great engagement, there are always two battles being waged: the real one, and the one over people's perceptions.

It's this latter war that Barack Obama is losing badly vis a vis Wall Street (although the real war -- to tame and hold Wall Street to account -- ain't going so great, either).

The New York Times' Frank Rich cuts to the quick of Obama's problem:

Since Obama has neither aggressively pursued the crash’s con men nor compellingly explained how they gamed the system, he sometimes looks as if he’s fronting for the industry even if he’s not. Voters are not only failing to give the White House credit for its economic successes but finding it guilty of transgressions it didn’t commit.

--Frank Rich, "What Happened to Change We Can Believe In?"; The New York Times (10/24/2010)

Exactly.

President Obama, time to (re)read your Machiavelli (and Kissinger).

P.S.: best line from "Inside Job," reviewed on this blog previously: asked why there’s been no systematic investigation of the 2008 crash, economist Nouriel Roubini answers: “because then you’d find the culprits.” Graphic (above) from NY Times.

"Hut. Hut. Hut."

Quarterbacks, Football and Otherwise

"5897."

"T-Y-R"

"927-5201 "

"525-8800"

"377."

Brett Favre at the line of scrimmage?

Try, the listing agent (me) imparting to the Buyer the various house codes and contact information at the closing (my client, the Seller, was out-of-town, and had pre-signed).

Those numbers and codes (not the real numbers) correspond to: the code for the lockbox (left on the front door); the security system code; the Seller's new home number; their handyman's number (scheduled to do a repair, post-closing); and the code for the garage pad.

As I always like to say, "the listing agent is the quarterback of the deal."

Lake Minnetonka Walk-Out Rambler

Downtown Wayzata Stunner

Sprawling walk-out rambler overlooking Lake Minnetonka. Stunning
lakefront views, all-brick, over 100,000 square feet, opulent finishes.

Missed the property described above on MLS?

That's because it's not on MLS (and no, the 100,000 square feet isn't a typo).

Actually, it's not even a residential building, although it's built to resemble one.

Give up?

It's TCF's headquarters building, just west of downtown Wayzata (I was across the street for a closing on Friday).

The only blemish I could come up with is a too-close resemblance to Fannie Mae and Freddie Mac's headquarters, also built in the "faux residential" style.

Friday, October 22, 2010

Counting Open House Traffic

"Party of Five" -- Or Twelve

If a dozen people came through your Realtor's Sunday open house, would that qualify as good traffic?

It all depends.

If the 12 people were the couple contemplating buying, 4 of their friends, 2 siblings, and both sets of parents . . . I'd say, "no," not really (and yes, I actually had such a group come through one of my open houses once).

On the other hand, if twelve individual Buyers came through, that would qualify as good traffic.

Which is why Realtors will typically quantify open house traffic in terms of number of discrete parties through -- not number of bodies.

No Free Houses

Mortgage Foreclosure Mess

Two weeks or so into the mortgage foreclosure mess, some of the dust is settling regarding what could potentially be hundreds of thousands of homes improperly foreclosed upon by the big banks.

First, what's not going to happen: people who lost their homes in such fashion are not going to get them back, with their mortgage somehow erased.

My guess is that people are watching too much CSI, or Perry Mason re-runs, or whatever TV program shows "perps" walking because of a technicality (due to police improperly seizing evidence, not informing defendants of their Miranda rights, etc.).

News flash: if you were months (or years) delinquent on your mortgage and were foreclosed on as a result . . . the courts ain't giving you your house back.

Issue #2: Banks' Put-Back Exposure

Meanwhile, the issue that very much appears in play is whether the big banks will have to effectively buy back billions in mortgages they sold to investors.

The same sloppy documentation that led to defective foreclosures apparently may also be legal grounds for investors to escape billions in losses on now very soured mortgages.

If investors can show that the banks misrepresented the types and characteristics of the mortgages they securitized (bundled) and sold, they may essentially be able to return them for a full refund.

Bracing for that possibility (and the huge losses that would result), the stock market has punished the share prices of several big banks.

"De-flooding" Contractor

I found myself driving down Highway 100 this morning behind a big, red van advertising "de-flooding" services.

No, that isn't a word, but I suppose it does the job . . . .

"Trickle Down Hardball"

Progeny of "Trickle Down Economics"

Want today's housing market -- at least in many locales -- in a (sober) nutshell?

Here it is:

Home Sellers now divide into two groups: those with equity, who can afford to sell; and those who are underwater, and can't.

The ones who can afford to sell, are -- but are having to seriously discount their price to do it.

Those who are underwater need to do a short sale, which for the most part banks are blocking.

When that happens, most underwater homes ultimately become bank-owned foreclosures.

Step 2

Home Sellers who can sell further break down into two groups: those who turn around and buy something else; and those who don't (either because they become renters; move to assisted living, if they're older, etc.).

The former group, having just been on the receiving end of a "hardball market," feel no compunction about playing hardball themselves as Buyers.

So, they do.

They make aggressive offers on the properties they're interested in, and drive very hard bargains.

Multiply this dynamic by millions of Buyers and Sellers nationwide . . . and you've got a pretty fair understanding of today's housing market.

Thursday, October 21, 2010

House Sitting: What Could Go Wrong?

Hornet Bodies "the Size of AA Batteries"

Jonathan Franzen's non-fiction -- and it's impossible that this story could be made up -- is as good as his fiction ("Freedom," "The Corrections").

Click here for his account of house-sitting for friends in the current New Yorker.

Communicating with a Realtor

"Shouting" -- At Least to a Realtor

You can tell email newbie's because they start out USING ALL CAPS, until someone they've sent an email to lets them know that that's the online equivalent of shouting.

What's the equivalent to a Realtor, whose success depends on quickly and efficiently communicating with lots of people, and generally being accessible?

Simultaneously sending/leaving them redundant voice, email, and text messages.

OK in an emergency . . . not cool otherwise.

Multiple Offers . . . in Progress

"Hmm, I Wonder Where That Lockbox Key Went??"

An interesting little contest is shaping up over a certain Twin Cities foreclosure that came on the market yesterday for 50% of its tax assessed value.

I am withholding the address because I have a client interested in buying it, but here's the background:

A saved search on my computer popped up the home 90 minutes after it hit the market yesterday morning.

Because the agent remarks indicated the home was "As is," and the price was tantalizingly low, I called the listing agent to make sure it didn't need hundreds of thousands of dollars in repairs.

"Negative," he said.

"But, it's already sold," he continued.

"The bank already signed an offer that came in the first 45 minutes it was on the market."

The Plot Thickens

Yowza.

With all the details involved in getting a Purchase Agreement executed, it's almost inevitable that there'll be at least one loose end -- especially if there's a bank involved, as is the case here -- that will give one party or the other an out.

And with instant, multiple offers, that's exactly what the bank wanted.

So late last night, I received an email from the listing agent indicating that the first, supposedly accepted offer wasn't in fact completely executed, and that all interested parties were invited to join the bidding.

Sand in the Gears

Once whoever took the keys and lockbox cover returns them, that is.

It turns out that the (vacant) home wasn't available to be shown almost all of yesterday because the lockbox keys (and cover) had been removed.

The agent's email publicly asks whoever took them to return them -- their identity isn't really much of mystery to the listing agent, who knows exactly who got in yesterday and who didn't (or soon will).

The listing agent's email continues that the bidding process for the property will be delayed until the key is returned, and that if it isn't promptly returned, the locks will be changed to accommodate agents whose showings were thwarted yesterday.

Nice to see a listing agent handling it this way: level playing field, open and transparent communication to all interested parties, etc.

Real Estate "Whodunit"

Ditching the lockbox key is actually pretty rare (If I had any doubts about the screaming deal this home represents -- I don't now).

It's also more likely to backfire on the agent pulling it; clearly, it's already seriously annoyed the listing agent, which is never a good thing.

It's also eminently traceable, given how well-documented showing requests are today (100% computer-driven).

By contrast, in my first week of law school school in 1987, when a certain dusty treatise that everyone needed for a research project disappeared . . . it wasn't so easy to trace.

Want to find out what happens to "the home with the missing keys" next?

Stay tuned . . . .

Wednesday, October 20, 2010

Hump Day? Not for Realtors

Think of a Realtor's work week as the "opposite George" of careers: pretty much the antithesis of a typical, 9-5 desk job.

So, Wednesday isn't the peak of the work week -- it's the sag in between weekends (and when more than a few Realtors take their days off).

Of course, the opposite of being at your desk at 8 a.m. sharp weekdays . . . is meeting clients at your office at 8 p.m. to write an offer.

"MFOTH" - Defined

WTF??

If you're slightly dyslexic like I am, you can be temporarily thrown by the MLS category "MFOTH."

No, it's not what it sounds (a lot) like.

It stands for "Multi-Family, Other."

(And no, "BMF," "HMFIC," "BAMF," and "DTMF" have nothing to do with real estate.)

A Tale of Two . . . Chairs

"Hedonics," Defined

After almost 13 years, I finally popped for a new (home) office chair yesterday.

The chair I retired -- actually, handed down to son #2 -- was an ergonomically correct, (then) state-of-the-art job purchased from a Relax the Back store in Manhattan for almost $800 in early 1998.

Truth be told, it was an engagement gift from my then-fiance (not very romantic, unless you consider functionality romantic -- which I do).

While still serviceable, the gas lift had worn out, leaving me literally deflated and my rear end only about a foot off the ground.

Chair #2

I replaced it with a Chinese knock-off of the trendy Herman Miller Aeron chair pictured above.

Office Max had it discounted from the usual $175 to only $99.

Based on my "challenges" assembling various Ikea products, I braced for a long evening parsing instructions, puzzling over seemingly missing and mismatched parts, etc.

Instead, I found the instructions to be clear and concise, and assembled everything in 20 minutes, tops.

Chair Buyers vs. Chair Makers

Using only these two chairs as a microcosm, what can you say about how the economy has changed the last 13 years?

A couple observations come to mind:

--Cheap, overseas manufacturing is a mixed blessing.

As consumers, we definitely benefit from cheaper, imported goods.

As taxpayers and U.S. citizens, though, the loss of U.S. jobs undermines our well-being -- especially if your job used to be manufacturing office chairs.

Call it "the Wal-Mart effect" in a nutshell.

--Prices of many goods, especially manufactured ones, have experienced marked price deflation.

In fact, the $800-to-$99 price drop understates the deflationary effect.

That's because $1 in 1998 is worth about half that in 2010.

--Advances in product quality and features make apples-to-apples price comparisons difficult.

Not only is my Office Max chair dramatically cheaper than my old one, it has features the other one lacked: lumbar support adjustments, tension settings, etc.

How do you track price changes when products actually become better over time?

This challenge has given rise to the pseudo-science of "hedonics."

Hedonics Example

To take another example, consider a circa 2010 car, selling for $25,000, that has anti-lock brakes, power steering, and front and side air bags as standard equipment.

Now compare it to its 1995 counterpart -- lacking those features -- that sold for $15,000.

The $64,000 question: did car prices go up the last 15 years, and if so, how much?

At least nominally, they did, because $25,000 is more than $15,000.

On the other hand, the 2010 car buyer got more for their (less valuable) $25,000.

The answers to the foregoing are far from clear, and the stuff of what economists spend their time arguing about (no doubt sitting in their $99 Chinese knock-off chairs).

Tuesday, October 19, 2010

How to Identify a "Motivated Seller"

Keys: Price -- and Price Reductions

How do you identify a motivated seller?

No, it's not because they scream on MLS that they're "motivated," "priced to sell," "won't last," etc.

Rather, the home is priced aggressively -- and, if it doesn't sell, is reduced at regular intervals thereafter.

A good example of a home meeting the foregoing description is 6xx Drillane in Hopkins (pictured above).

Pricing Pain & "Fence Sitters"

Since debuting on the market in July at $259,900, here is its price history:

Aug. 24: reduced to $249,900
Aug. 27: reduced to $239,900
Sept. 1: reduced to $234,900
Sept. 15: reduced to $224,900
Oct. 1: reduced to $214,900
Oct. 15: reduced to $209,900

Detect a pattern??

And yes, it's certainly possible that prospective Buyers, watching the relentless price cutting, are holding back, waiting for still more.

But eventually the value will be so irresistible that someone will bite, rather than risk losing out on a great deal to another Buyer not as patient.

In fact, as I've previously blogged, one not uncommon scenario is that, once one "fence sitter" monitoring the property jumps in with an offer, others follow.

The result is multiple offers that produce a price "bounce."

Objections

So, why hasn't it sold yet?

The home needs substantial updating, which can be a hurdle for Buyers at this price point.

Plus, it's a California rambler, which means there's no basement.

Minnesotans -- especially Minnesotans with kids -- prefer basements for their storage and "rec rooms" (perhaps more accurately named "wreck room").

"Inside Job" by Charles Ferguson

See . . This . . Movie

Calling Charles Ferguson's "Inside Job" a documentary is like calling The Gettysburg Address a speech.

Bar none, it is the clearest, most succinct explanation of the Wall Street-engineered financial crash -- whose aftermath we are still very much dealing with -- that I have seen.

More than a movie, it is a public record -- a brilliantly spare narrative (with pictures!) explaining what happened, how, and who the principals were.

No Consequences

And still are.

As Ferguson correctly notes, the culprits are still mostly running things, with the exception of a handful of CEO's who were allowed to resign . . with eight figure golden parachutes (that would be between $10 million and $100 million).

"Inside Job" gets all the villains right -- people and institutions like Alan Greenspan, Goldman Sachs, Richard Fuld, Angelo Mozilo, AIG Financial Products, Robert Rubin, Phil Gramm, Larry Summers, and the credit rating agencies.

It also gets the much shorter list of heroes and good guys right: Brooksley Born, Paul Volcker, and Nouriel Roubini.

Ferguson also, I believe, correctly characterizes how history will perceive Barack Obama, at least when it comes to the economy: as the President who, instead of reforming Wall Street, recruited from and deferred to it (same as his predecessors, to be sure, but less acceptable from someone so identified with "change," in office when effecting real change was actually a possibility).

Academics-for-Hire

The only surprise, if you can call it that, is the spotlight the movie shines on the despicable -- albeit supporting -- role played by some of the nation's leading economists, in leadership positions at some of the nation's most influential universities.

Just like physicians who shilled for the pharmaceuticals without disclosing their lush consulting fees, people like Summers and Martin Feldstein (Harvard) and Glenn Hubbard and Fred Mishkin (Columbia) provided Wall Street with intellectual cover while getting rich serving as consultants, board directors, and academics-for-hire.

At least for me, watching "Inside Job" inexplicably conjured up emotions I recall from almost 40 years ago: a mixture of admiration, fascination, and disgust watching people like Howard Baker and Sam Ervin on TV conduct Congress' investigation into Watergate.

Echoes of Watergate

Watching them home in on the Nixon administration's deceptions, one got a sense that truth was finally being served, and that power was being wrested -- however painfully and slowly -- by the good guys from the bad guys.

Which also underscores the difference between Watergate and now: unlike the select Senate committee that Baker and Ervin served on, Ferguson is (only) a movie-maker.

Whether the indictment he so clearly lays out will be acted upon very much remains to be seen.

Monday, October 18, 2010

Money & Politics

Local Elections,
National Fundraising

"All politics is local."

--Tip O'Neill

"Most politics is national."

--Fritz Hollings

Former South Carolina Senator Fritz Hollings makes a great case for campaign finance reform.

In a piece titled, "Money is a Cancer in Politics," Hollings notes the oceans of money needed to wage competitive campaigns for Congress today -- much of it raised from outside the district being contested.

So, political lightning rods like Michelle Bachmann can now raise millions weekly from around the country by tapping into (unrestricted) corporate and PAC money. (Thanks, Supreme Court).

Ditto for Bachmann's counterparts on the left, such as Nancy Pelosi.

Indeed, as Hollings' article points out, even rank-and-file Congressional races are flooded with outside money today.

Lack of (Political) Standing

If you live in Anoka or Buffalo or St. Cloud or any other city actually within Minnesota's Sixth District and want to contribute to Bachmann (or any other candidate for that seat), that should be your right.

But why should someone living in -- say, Peoria, Illinois -- effectively have a voice in who represents St. Cloud in Congress?

And vice versa.

The judicial system long ago developed a concept to deal with this problem

Called "legal standing," it means you can't bring a suit over an issue unless you have a personal stake in it.

It seems obvious that our political system needs something analogous (call it "political standing").

But so, too, does it seem obvious that corporations cannot be legal persons (they are), and that it's stupidity to allow corporations to make unlimited campaign contributions (they can).

P.S.: hat tip to Ned Krahl for forwarding the Hollings article.

"Civil," Indeed

Mozilo Settles With SEC for $68 Million

The best way to rob a bank . . . is to own one.

There's a reason why bank robbers -- at least the "blue collar" kind -- get charged with criminal (prison) rather civil penalties (read, fines): if it were otherwise, they'd just write a check if/when they were apprehended, and go on their merry way with whatever was left, net of attorneys fees.

So, no, I'm not impressed that former Countrywide CEO Angelo Mozilo has settled, civilly, with the SEC by paying a $68 million fine.

Not only does the settlement outrageously not require Mozilo to admit guilt -- it explicitly says that he doesn't -- it allows him to keep, and enjoy, another couple hundred million he harvested even as his bank played a major role in blowing up the housing market.

South Bryn Mawr Multiple Offers?

Blast from the Past

In a sluggish market, the sale -- just posted on MLS on Friday -- caught my eye: a South Bryn Mawr Colonial listed for $424,900 sold for almost $50k above that. After two months on the market!

That didn't compute, for 3 reasons: 1) there's a lot of inventory in Bryn Mawr at that price point at the moment; 2) the house -- with 3 Bedrooms and only 1,700 square feet -- didn't appear to be dramatically underpriced; and 3) it had already been on the market for two months.

As I've written before, multiple offers usually occur either right away, or, after way too much market time (and accompanying price reductions), to the point where the home is substantially undervalued, and can actually enjoy a price "bounce," courtesy of multiple offers.

Neither of those scenarios applied here.

The explanation?

Clerical error, confirmed by the listing agent (and corrected this am).

In fact, the home sold for just a little under the $424,900 asking price.

Sunday, October 17, 2010

Tarnished "Windfall"

Slim Pickings
I really never stopped to think about the origin of the word "windfall"; like most people, my association with the word is positive (who wouldn't want to be on the receiving end of a "financial windfall?").

So, it was dismaying to discover while apple picking last weekend that "windfall" -- at least when it comes to apples -- is just another euphemism.

In this case, it's what the orchard called the rotting, leftover apples on the ground.

Even at a deeply discounted price per bag, I didn't see the orchard getting any takers (we didn't).

P.S.: we heard from several people that 2010 was a tough year generally for Minnesota apple growers, apparently because of poor Spring weather.

Curing the "I Wanna's"

"You Say Tomato, I Say To-Mah-To"

My just-turned six daughter has a bad case of the "I wanna's": "I want to eat that kind of food" (mac 'n cheese, not vegetables), "I want to watch this TV program," "I want that new toy" (OK around her birthday, but not the next month).

Etc., etc.

So bad, in fact, that my wife and I forbade her from uttering any more "I want's" the other morning.

Which slowed her down about . . . a second.

Her new mantra?

"I wish . . . "

"Always be . . . Selling"

Lockbox Combo as Marketing Tool

After doing a couple thousand showings (and opening that many lockboxes), it's rare that I run into something unusual -- at least that doesn't involve a foreclosure.

But up until today, I can't say that I've ever opened a lockbox where the three letter combination was part of the listing agent's marketing: "Wow!" (no punctuation or exclamation marks).

Fortunately, it was -- "wow," that is (otherwise, it would have begged the unfortunate alternative, "Bow-wow." Sorry).

Realtor Haiku

This could be a trend with legs.

Other suitable lockbox adjectives, depending on the property: "Big," "Hot," and "Hip."

P.S.: Probably the worst last name I can think of for a Realtor these days is "Short" -- because every home they list would, by definition, be a "possible Short sale" (sorry, again).

Saturday, October 16, 2010

"Must Be One Helluva Place!!"

Rental Double-Takes

I assume that I'm not the only Twin Cities Realtor still adjusting to the addition of rental data on MLS (since Sept. 1).

So, in addition to finding "for sale" properties on searches I've saved for various clients (what Realtors call "hot sheets"), there's now the stray rental included.

If you're skimming quickly (like I am), the tip-off is price: $1,500 or some such, vs. $200,000, $450,000, etc.

So, when I saw $20,000 the other day, I did a double-take: what Twin Cities home rents for $20,000 a month??

Manhattan Prices in Mpls.?

It turns out that it wasn't a rental, it was a home for sale -- and that's the asking price!

Presumably, there's a quick solution to the above, which I've yet to do: tweak all my saved searches to exclude "rentals."

However, with only 300-odd rentals total on MLS, the problem doesn't come up that often. Yet.

P.S.: So what is the most expensive rental on MLS now?

For $9,950 a month, you can rent 1006 Wildhurst Trail in Orono, a 6,400 square foot home in Orono with 5 BR's, 7(!) Baths -- and 140 feet of shoreline on Lake Minnetonka.

Update: "National Moratorium on Foreclosures"

Make That Four Theories
(#4. Overreaction)

In my post on Thursday, "National Moratorium on Foreclosures," I puzzled over the seeming disconnect between the stocks of publicly-traded title insurance companies (barely affected), and the supposed tidal wave of claims headed their way due to defective mortgage foreclosures.

I posited three possible explanations: 1) the aforementioned companies don't have exposure in the markets where the problems are most severe; 2) they've already laid off their risk, through reinsurance, derivatives, or the like; and/or 3) the banks, not the title insurance companies, are going to take the hit.

Based on this week's stock market action, the clear winner is theory #3 (all the too-big-to-fail banks -- including Bank of America, Wells Fargo, and JP Morgan Chase -- had rough weeks).

SARS vs. AIDS

But I'd now also add a fourth theory: the problem, while serious, has been exaggerated.

Think of it as the financial equivalent of a possible health epidemic.

In 2003, much of the developed world was bracing for a full-blown outbreak of SARS ("severe acute respiratory syndrome").

The quick spike in (well-documented) cases -- fanned by all manner of media -- was certainly alarming.

And SARS in fact was extremely lethal if contracted.

But ultimately, nothing like the pandemic officials initially feared occurred.

Other scares like West Nile virus have followed the same trajectory.

It's too soon to tell -- all 50 state attorneys general are now looking into the matter -- but it's possible that the stories about homeowners with no mortgages having their locks changed in the middle of the night are the (rare) exception, not the rule.

At least in Minnesota, the fact that I haven't heard first-person accounts from a pretty broad circle of clients and friends tells me that that's at least plausible.

Minnesota Nice for "Back Off?"

Vanity License Plates

Not that I ever tailgate, but I'd think twice about getting too close to the car I saw yesterday with the license plate, "IRITABL."

Maybe that's their point.

Or, the owner is named Irit Abelson ("Irit" is a common Israeli name).

Friday, October 15, 2010

No money for foreclosure staff? Hmm, I wonder why . .

"I Gave (and Gave) at the Office"

It's awfully hard to buy the line that banks may not have -- ahem -- strictly complied with the letter of the law in foreclosing upon hundreds of thousands of homes because they were understaffed.

Let's see
. . .

Take the staggering compensation earned by guys like Ken Lewis (ex-CEO of Bank of America) and Jamie Dimon (current CEO of JP Morgan Chase) -- call it, conservatively, $200 million apiece since 2000; divide by what a real worker -- not a "Burger King" flunkie -- makes (call it $40,000 a year); and what do you get?

Money for 5,000 foreclosure positions at each bank.

Think that would have avoided a few problems??

P.S.: what would the government do to an airline that paid its executives millions while neglecting basic plane maintenance and safety?

If there then was a crash -- and we're still dealing with the consequences of a horrific (financial) crash -- you can bet that there'd be hell to pay (not billions in bailout money, with virtually no questions asked).

"Giving Good Invoice"

Does Your Contractor Know How?

In a very popular post last year titled "Contractor Etiquette," I discussed the qualities that distinguish good contractors from not-so-good contractors.

In a nutshell: the former do quality work, at a fair price, when they say they'll do it.

And clean up afterwards.

Above and beyond that, the very best contractors excel at communication, not just with their client, but -- in the case of bigger, noisier jobs lasting months -- the neighbors as well (also commented on in my earlier post).

Other Qualities

To all the foregoing, I would add one more item:

Great contractors use their invoice(s) to clearly document their work.

That's especially important in the context of a home sale, where the last hurdle to finishing off the Inspection Contingency (and therefore finalizing the deal) often is the owner agreeing to fix something.

Handing the Buyer a clear, complete invoice marked "Paid" is the best way to discharge such obligations.

Ideally, that invoice also is on professional letterhead, with the contractor's business address and even license number.

Bonus points: the contractor provides both a hard copy, and an electronic version (for distributing easily to multiple parties); and references any permits that were pulled, if that applies.

Calculating Seller Taxes

Even when the contractor isn't performing work required by the Purchase Agreement, clear and complete documentation is still very important -- sometimes years after the fact -- for bigger jobs like a home addition.

Then, the former owner will need that information to establish their basis in the home, which factors into whether (and how much) they'll owe in capital gains taxes as a result of the sale (married sellers can exclude up to $500k from capital gains taxes; singles, up to $250k).

P.S.: last requirement, at least for work not done in the context of a home sale: the contractor provides their invoice on a timely basis -- not months later, when the job details (and quoted price(s)) have dimmed.

Thursday, October 14, 2010

Are Title Insurance Companies Bracing for a Tidal Wave of Claims? Nah.

National Moratorium
on Foreclosures

Surprise, Surprise . . . the same banking behemoths that recklessly originated trillions in dubious mortgages -- fuel for Wall Street's securitization juggernaut -- are apparently now running roughshod over the rights of delinquent borrowers as they seek to foreclose on their homes.

How big a problem is this?

And who's going to pay for it?

Background

To investigate (a little), I checked the stocks of three, large publicly-traded title insurance companies.

My theory is that if hundreds of thousands (millions?) of homes were wrongfully foreclosed on, there is going to be a tsunami of title insurance claims in the offing, brought by Buyers of those homes who in fact . . . may own nothing.

So, is the stock market clobbering the largest, publicly traded title insurance companies, in anticipation of all those pending claims?

Claims? What Claims?

Hardly.

Three of the biggest, publicly traded title insurance companies -- Fidelity National, First American Financial, and Old Republic -- are all trading in the middle of (or above) their 52 week price ranges.

Which is certainly curious, given their presumed exposure to this brewing mess.

I don't have a ready explanation, but my guesses are: 1) the companies somehow don't do much business in the markets (FL, CA, Las Vegas) where the problem is greatest; 2) they've already reinsured or otherwise laid off the risk of those claims (or think they have -- can you say, "insolvent counter-party?"); and/or 3) the title insurance companies -- and their investors -- figure that the banks, not they, will ultimately bear responsibility.

And by "the banks," I mean "us" -- the taxpayers now standing behind those too-big-to-fail entities.

P.S.: maybe "tidal wave" should be "title wave."

Earnest Money: When More is Less

Law of Diminishing Returns

If you don't like technical, legalistic real estate posts -- stop reading here.

Earnest money (called "unrest money" by at least one recent Buyer) plays an overlooked but critical role in every real estate deal.

Typically 2% to 5% of the purchase price, given by the Buyer to the Seller as part of the offer, earnest money actually accomplishes two things: 1) it establishes the Buyer's financial bona fides and commitment to the deal (think of it as the "down payment on the down payment"); 2) it serves as what lawyers call "liquidated damages" if the deal goes south.

In layman's terms, it is an upfront, agreed-upon estimate of what the Seller's damages will be if the Buyer fails to close (typically, for lost market time).

In other words, if the Buyer walks, the Seller keeps the earnest money, and both parties move on.

Theory vs. Practice

Except that in practice, earnest money can become a bitter bone of contention.

That's especially the case if the Buyer feels the Seller shares responsibility for the deal not closing -- and the earnest money is unduly large.

Then, instead of simply forfeiting the amount and walking away, the Buyer may decide that it's worth fighting over.

They can threaten litigation; refuse to formally cancel the deal, which prevents the Owner from selling to anyone else (and can then require that the owner go through the hassle of obtaining a statutory cancellation to get free of the Buyer); or cause various other mischief and headaches.

Ironically, in the rare instance when one of the foregoing scenarios occur, Sellers belatedly realize that the hefty earnest money check that was supposed to protect them instead can mire them further in a mess.

Wednesday, October 13, 2010

You Are . . What You Wait in Line For??

Life Stages

It occurred to me, waiting in line the other day, that you're defined -- at least a little bit -- by the lines you stand in.

Here's my snapshot of various life stages and the things they go with:

Age 15
: the new Star Wars movie (or today's equivalent).

Age 40: the new Toyota Prius gas/electric hybrid.

Age 65: the Costco pharmacy when it opens at 10 a.m. (there the other morning, I confess, but not a regular . . yet).

"Did They Really Get $1,500 a Month for That?"

Rentals on MLS

One of the quirks of following rentals on MLS -- available since Sept. 1 -- is that there's no way to track the difference between what landlords are asking, and what they're actually accepting.

Over on the "for sale" side of MLS, Realtors and appraisers alike know to skip homes that are "Active," and instead only scrutinize actual, closed sales (called "Comp's," or "Comparable Sold Properties").

At least so far with rentals, there's no analogous way to do that.

P.S.: after six weeks, the local MLS now has over 300 rentals listed -- a big jump, but still a fraction of what Craig's List has, and a drop in the bucket compared to the 28,000-plus active "for sale" properties on MLS.

"As Is" Misconceptions

Realtor, Layman Definitions

To home sellers, "As is" usually means that they're not going to do any updating or staging to get ready for market.

So, the dated carpet, scuffed hardwood floors, and out-of-fashion interior paint . . . are going to remain dated, scuffed, and out-of-fashion.

All fine, by the way -- as long as the price reflects those things.

Realtor Definition

By contrast, "As is" to Realtors means something entirely different.

Namely, that the Seller is waiving the disclosure requirements, and that the Buyer is assuming responsibility for any and all needed repairs -- of which there are usually several (if the Seller knows of material problems, they're still obliged to tell Buyers).

That's in addition to the Buyer assuming responsibility for any items ("repair or replace") required by the city inspection, if the municipality has one.

To take the risk, time, and money to address these problems, Buyers understandably expect a hefty discount.

Guilt by Association

Which is why Sellers whose homes are dated but are otherwise in good repair are usually ill-advised to sell "As is."

Instead, it's almost always in their interest to tackle any minor repairs, complete the Minnesota Seller's Disclosure . . . . and then let the home's condition speak for itself, without the stigma of selling "As is."

P.S.: selling a perfectly good (but dated) home "As is" is like electing to take a college course "Pass/Fail" when you would have gotten an "A-" (something I actually did years ago, which says more about the (fluffy) course than it does about me).

Monday, October 11, 2010

Staging Lite

Staging on a Budget

Regular readers of this blog know that I'm a big fan of staging.

But what if you don't have the money?

Or you have a 5,000 square foot home, and staging would be prohibitively expensive?

I'd still make the case that a half (or a quarter) loaf is better than none.

Establishing Priorities

So, especially for a home that has a focal "Great Room," staging just that room sets a nice tone -- and can help Buyers visualize how the rest of the house would look staged.

Another version of "staging lite" involves a home with larger spaces that have already been emptied out, either because the owner has moved, or the furnishings were very dated and have been donated or sold (typically, as part of an estate sale to ready the home for market).

Then, a combination of area rugs and inexpensive wall art (prints, mirrors and the like) can define rooms and help Buyers visualize the space better.

Social Work Wisdom & Real Estate

Keeping Negotiations Positive

"I'm not mad at you, I'm mad at your behavior."

Anyone who's ever been a social worker -- or the offspring of one (me) -- can relate to the above (although when you hear it at age 7, it does seem a tad bit, shall we say, "conceptual").

Still, the comment can be useful to keep in mind during real estate negotiations, on two levels: 1) both sides are playing roles -- either that of Buyer or Seller -- and that it's important to keep the identity of the individuals separate; and 2) Buyers and Sellers themselves are distinct from the agents representing them.

That last distinction can be particularly helpful in a tense negotiation: often times, what appears to be Realtor "bad behavior" -- like an especially "aggressive" offer, or digging in on what seem like petty issues -- is actually attributable to their client (and therefore more condonable).

As a result, it's easier not to (over)react, and keep the negotiation positive.

Betting on the Incumbents

Goliath vs. David

No, I don't know how the elections next month are going to turn out.

But when it comes to the stock market, here's a tip: bet on the incumbents.

That's because today's economic environment is particularly hospitable to "incumbents" -- established, large companies -- and hostile to upstarts.

At least, that's what the capital markets are indicating.

So, "mega-cap" corporations with already strong balance sheets -- think, Microsoft, McDonalds, Johnson & Johnson, Pepsi, etc. -- are able to borrow billions at infinitesimal interest rates.

Meanwhile, smaller companies apparently are still finding themselves on the outside of a "credit drought."

"Uptown West Apartments"

Make that,
"Uptown Very West"

"Close only counts in horseshoes and hand grenades."

I'd actually add a third category to the above: real estate developments.

So, once upon a time when I lived in Manhattan, I rented an apartment at One Columbus Place, that was neither "One" nor on Columbus Circle, its putative namesake.

In fact, One Columbus Place and its next-door sibling, Two Columbus Place, were both about two blocks -- and one very major Manhattan avenue -- to the west.

Stretching the Envelope?

To that genre, now add "Uptown West Apartments," located in St. Louis Park just east of Highway 100 and north of Highway 25 (Highway 7 to us old-timers).

The new signs in front loudly announce the complex's new name, along with the fact that it's under new management (the latter explains the former).

So, is the name merely "stretching the envelope" -- or tearing it?

Put it this way: if you're at least contiguous to the area you're claiming proximity to -- think, West Virginia and Virgina -- you're stretching the envelope.

However, when you're almost three whole neighborhoods away (in this case, Sunset Gables, Fern Hill and practically all of St. Louis Park's Triangle neighborhood) . . . I'd argue you that you're tearing it.

Sunday, October 10, 2010

King Derwin's Magicians -- and Ours

Waiting on Economists'
"Chants and Charms?"

"A mighty good chant," said the King, looking very pleased. Are you sure it will work?"

All the magicians nodded together.

"But," said the King, looking puzzled, "How long will it take?"

"Be calm, oh, Sire, and have no fears," chanted the magicians.

"Our charm will work in ten short years."

--"The 500 Hats of Bartholomew Cubbins," by Dr. Seuss

Watching an inspired production of the famous Dr. Seuss story by The Children's Theatre yesterday, I couldn't help noting the parallels between King Derwin's magicians, and Barack Obama's economic magicians.

Just like Dr. Seuss' magicians, our government magicians profess confidence that their "spell" -- TARP, zero percent interest rates, quantitative easing, etc. -- will have the desired effect.

King Derwin pronounces the magicians "fools," and promptly dismisses them.

Meanwhile, in the real world, we are giving our latter-day magicians more power, and waiting for their chants and charms to work.

P.S.: How do you say "economist" in Japanese?

Friday, October 8, 2010

Watch this Space: 4121 W. 28th St.

New-and-Improved in Fern Hill

The Seller (my client) moved out in July.

Guess who moved in?

Not the Buyers -- their contractors.

Six months from now, this 1937 Colonial will have undergone a top-to-bottom renovation costing well into six figures.

Take a project like this, multiply by 10 (conservatively) over the last 2-3 years, and you have the ingredients for a very healthy neighborhood.

Which Fern Hill certainly is.

Profiting from Bubbles: 'Grab Marshmallows'

What's an Investor to Do?

[But] as long as the music is playing, you've got to get up and dance.

--Former Citigroup CEO Chuck Prince

Perplexed by a stock market that (inexplicably?) is once again on the rise -- along with all manner of commodities (oil, gold, silver, etc.)?

That, despite at best conflicting economic signals (continuing weak employment numbers, constricted lending, soft housing, etc.).

You shouldn't be.

Behind the scenes, the Federal Reserve has signalled its ongoing commitment to print money as a way to stimulate the economy, via a mechanism euphemistically labelled "quantitative easing."

"Grabbing Marshmallows"

So how should investors play such an environment?

If you have the stomach, take Barry Ritholtz's advice (my paraphrase):

When the Fed adds even more gasoline to the conflagration, [investors] should grab some some marshmallows and sticks and head over to the boy scout jamboree campfire.

--Barry Ritholtz, "Do You Wanna Be Right, or Do You Wanna Make Money?"

Note to the intrepid: the trick is not waiting around for the embers.

Pre-Approval Letters & Written Statements

What Are They Really Worth?

Put it this way: the picture of toilet paper should give you a hint.

First, some background.

In Minnesota, the first things that typically lead off any offer to purchase residential real estate are the Buyer's earnest money check, and a pre-approval letter from a lender (unless the Buyer is paying cash).

The standard pre-approval letter recites that the lender has initially screened the Buyer's finances and credit scores, and, based on that quick review, says that the Buyer can afford the home.

In practice, a pre-approval letter almost always means . . . nothing.

Most lenders will issue them in less than 10 minutes on the phone with a prospective borrower, after collecting the most basic information.

Meanwhile, their express language explicitly states that nothing in the pre-approval letter obligates the lender issuing it to actually fund the loan.

The Written Statement

Which is where the Written Statement supposedly comes in (think of it as "the Final Approval" Letter).

Once the Buyer and Seller reach agreement on terms, the Purchase Agreement typically includes a Financing Addendum that calls for the Buyer to deliver a Written Statement within 2-3 weeks.

The standard Written Statement recites that an appraisal satisfactory to the lender has been completed; presumes that the lender has finished vetting the Buyer's W-2's, recent tax returns, and any other Buyer financial "bona fides"; and lists any outstanding conditions remaining -- usually pro forma ones, like the Buyer not blowing up their credit or losing their job.

Once the Buyer delivers the Written Statement to the Seller, the Buyer's loan is supposed to be finally underwritten -- and the Buyer's earnest money becomes non-refundable.

O-for-2

Except that in practice, that's not how it works today.

Now, skittish lenders can and do reserve the right to revisit the loan at any time up until closing.

They may request additional Comp's to substantiate the value of the collateral (the home being purchased); ask the Buyer for (still) more financial documentation; or tweak (tighten) their underwriting standards.

Or all of the above.

The result?

What was supposed to be a finally underwritten loan suddenly . . . isn't.

All of the foregoing means two things:

One. Buyers and Sellers today, especially when upper bracket properties are involved, should consider drafting custom language to address the Buyer's financial qualifications, and defining when their earnest money becomes non-refundable; and

Two. Sellers shouldn't load up the moving van until they know, for sure, that the Buyer's financing is good.