Realtor Dreams -- and Nightmares

Ticking Clocks and Cold Sweats

As an undergrad and Law School student, I would occasionally dream that I was hopelessly behind on an exam, with time running out (once, the exam was literally in an unrecognizable foreign language).

As a lawyer, that was replaced by a new, albeit infrequent nightmare: that I was months behind turning in my timesheets -- used to bill clients -- and that my records were nowhere to be found (imagine trying to account for every 10 minute increment of your 12 hour day, for weeks on end, months after the fact!).

So, now that I've been a Realtor for closing in on a decade, what gives me a night-time cold sweat?

Try, lapsed Inspection Contingencies.

The other night, I dreamt that my wife bought a new house without me, and neglected to do the Inspection in time (you waive the inspection if you don't perform it within the prescribed time period).

And no, that's never happened in real life, either to me personally or a client.

P.S.: For the life of me, I can't recall any CPA dreams -- my other vocation -- either good or bad.

"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.

Spiking the Ball . . . on the 2 Yard Line

Q: When Doesn't "Sold" Mean "Sold?"

Answer: when it means "Pending" (as, when it's in front of a home that's for sale).

Huh?

At least in Minnesota, once the Buyer's Inspection has been removed, the convention is to switch a home's status from "Active" to "Pending" on MLS, and to put a "Sold" rider on top of the "For Sale" sign in front of the home.

That's the case even though the home hasn't closed yet -- and the Buyer's loan most likely hasn't been finally underwritten (or even successfully appraised!).

Of course, that's in addition to any title work still to be done, as well as any other outstanding conditions that the Buyer and Seller may have contractually agreed -- or be subject -- to (repairs, obtaining a municipal inspection certificate, etc.).

Isn't declaring such a home "Sold" like spiking the ball on the 2 yard line?

Explanation/Rationale

It can be.

However, once any Inspection issues have been resolved, the odds of a deal closing go up dramatically; from experience, I'd peg the odds at anywhere from 80% to 98%.

Why the range?

If it's a cash deal and the Buyer is richer than Croesus . . . it's virtually a done deal.

However, especially if the Comp's are thin and the sales price lacks recent, nearby precedent, the risk of an appraisal issue goes up.

Too, if the Buyer works for a company that's been hit by the recession, or is otherwise vulnerable to layoffs, there's the added risk that the Buyer will lose their job before closing (or otherwise suffer a major hit to their "creditworthiness").

Less likely, but still within the realm of possibility, are such things as Buyer health issues, an unexpected job relocation, major damage to the home (fire or weather-related) -- or even a simple change of heart (and mind).

"Pending" vs. "Closed"

So, to repeat, why not put up a sign that says "Pending" rather than "Closed" -- or remove the "For Sale" sign altogether?

My take is that it's a mix of the following reasons:

--Psychologically, putting up "Sold" helps cement the Buyer's commitment (see, "change of heart").

--"Sold" better tells prospective Buyers that the house is spoken for, and not to bother the homeowner.

--Marketing exigencies. Whereas "Pending" sounds equivocal and gray, "Sold" is strong and declarative.

Too, because there is a risk that the house won't close, it's premature to remove the sign.

However, once the risk of not closing is effectively zero, i.e., the Seller has been paid, title has transferred to the new owner, and the "For Sale" is removed . . . there's nothing to attach "Sold" to.

"Negotiating Least"

"Brittle" vs. "Supple" Deals

He who negotiates least, negotiates best.

--saying

OK, so that's not how it goes (the original version substituted "government" and "governing").

But it's still accurate.

There are 3 reasons why that's so, at least that I can think of.

One. While some people actually like to negotiate -- Realtors often do, for one -- for most people, negotiating is stressful.

As the number of rounds of negotiating climbs, stress rises, conflict increases --and the chance of a good outcome slide.

Two. Related to that, while the two sides' stress is rising, their negotiating positions often harden.

That's in contrast to brief(er) negotiations, when positions are more fluid and ground is easier to close.

Three. Real estate deals these days involve more rounds.

First, there's getting to terms regarding the main Purchase Agreement.

Then, there's the Inspection Contingency.

Then, there's the Financing Contingency, which itself is much more protracted these days -- mainly because of stricter appraisal rules.

When the Buyer and Seller have exhausted each other and it's not even the second inning yet . . . the chances of getting a consummated deal ("a complete game," to continue the metaphor) aren't great.

Who Do You Call First?

Done Deal! Then What?

It's 9 p.m., and you've just agreed to terms with the Seller you've been negotiating with to buy their home.

You initialled the last change on the Counter Offer form, and faxed it to your Realtor.

Who do you call/tell first?

A. Your parents, to tell them the good news!

B. Your best friend, to let them know you're moving.

C. Your kids, to let them know.

D. Your home inspector.

Answer: D

That's especially the case in late April, probably the most active time of the year for purchasing a home even without the tax credit expiring in 8 days.

The home inspectors I work with most frequently are working 12-plus hours a day now, seven days a week, and returning my phone calls at 8 p.m. (or later).

With that in mind, it might be a good idea to: a) lengthen the time allowed for an inspection in the Inspection Contingency; and b) consider using an inspection company that has multiple inspectors on its staff.

P.S.: And yes, I've told clients to call home inspectors (or leave a message) at 9:30 p.m.

The OTHER Reason Sellers Love Multiple Offers

Inspection Contingency Leverage

The main reason home Sellers love multiple offers is because it bumps their price -- if not over asking, then usually pretty close.

But there's a secondary reason Sellers love multiple offers: it can result in the Buyer pulling their punches during the Inspection phase of the deal.

Inspection Issues

Once the Buyer and Seller have agreed to terms, the next step typically is for the Buyer to inspect the home.

The standard for any Seller concessions is actually pretty clear-cut: usually, it's limited to a material item (depends on the deal, but typically at least a couple hundred dollars) that couldn't have been discovered beforehand.

So, a forced air furnace with a cracked heat exchanger (or what looks like one) is in bounds; the dated Kitchen isn't.

Looking Over Their Shoulder

Not all inspection issues are black-and-white, however, and how aggressively a particular Buyer pushes -- and how accommodating the Seller is likely to be -- can often turn on who has more leverage.

A Seller with a back-up offer (or several) in hand . . . has more leverage than their Buyer.

Unless.

It's not unheard of for some Buyers in multiple offer situations to make a preemptively high winning bid -- then try to use the Inspection negotiation to recoup at least some of it.

Seller's Comp's vs. Buyer's Comp's

"East is East and West is West"

From experience, here are two good rules of real estate negotiation:

Rule #1. Never argue the "comp's" with the other side.

A comp, or comparable sold property, is a similar, nearby home that has sold recently.

To determine fair market value, Realtors and appraisers alike typically look for three good ones, then go through a "compare-and-contrast" process with the subject home to arrive at an adjusted value.

The first person to do the comp's is the listing agent, in the course of preparing a "market," or Comparative Market Analysis, for the homeowner.

Subsequently, the prospective Buyer's agent will also scrutinize the comp's.

Then, once there's a deal and the Inspection Contingency has been removed, so will the appraiser hired by the Buyer's lender (unless it's a cash deal).

In almost nine years of selling real estate, I've yet to encounter a situation where the Buyer's agent, in the course of negotiating an offer, made the case that the Seller's comp's were unrealistically low.

Nor have I seen an instance where the Listing agent, representing the Seller, readily conceded that their comp's were too high ("You got me! What was I thinking!?!").

In fact, the agendas of each side are so manifestly clear and self-serving -- not to mention transparent -- that it's almost always a waste of breath to engage on this.

Rule #2. If you're going to break Rule #1, you'd better make sure that you know the comp's -- or comp, if there's one in particular that looms large -- better than your negotiating counterpart.

I recently had a deal where the other agent was adamant that, "based on the comp's," my Seller's asking price was out of line.

He placed particular significance on one property in particular.

It turns out that the other agent had never been in the home.

Guess who had?

In fact, I'd shown the home to 3(!) clients, and knew every square foot of the house by heart.

So, I knew that the flattering Kitchen shots masked what was easily $100k in needed updating; the floor plan was off; and that the master bath was tiny -- and couldn't be expanded.

The upshot?

The Buyer significantly raised their offer, and ultimately reached agreement with my client.

P.S.: Trial lawyers have a saying, "never ask a witness on cross-examination a question that you don't already know the answer to." Good advice for Realtors "debating" the virtues of various comp's!