Real estate myths
Parade Magazine published an article this past Sunday written by Vivian Marino titled "Biggest Real Estate Myths". There has been a record amount of real estate "bashing" going on in the media lately and respect for real estate agents appears to be at a record low. New real estate models have been developed in recent years to either eliminate the real estate agent from the transaction (disintermediation) or to reduce the real estate commission paid to the agent and give it back to the real estate buyer or seller in the form of a rebate. Let's take a look at the article; the myth, the author's reality and my comments.
"There’s little wonder that most people approach home-buying with trepidation. This year alone, Americans are expected to borrow a whopping $1.33 trillion in acquiring 7.4 million houses, condominiums and co-ops. Besides being the average person’s largest financial transaction, buying or selling a home is simply one of those areas where mistrust and misconceptions naturally abound. And as the real estate market continues to evolve and new technology gains ground, even widely accepted beliefs that were true a few years back may not be valid today. Here are five prevailing myths to watch out for:"
"1. Only a licensed real estate broker should sell your home."
"Reality. The National Association of Realtors tends to propagate this assertion: You’d turn to a doctor when sick, so why not have a broker handle your most valued asset? But not everyone needs a third party. After all, who knows more about your home than you? Around 15% of today’s existing home sales are FSBOs, or for sale by owner transactions, says Colby Sambrotto, chief operating officer of ForSaleByOwner.com.
Sambrotto thinks most people are anxious simply because they buy or sell homes so infrequently, but he says the Internet already has removed much of the mystique by giving people access to prices and demographic data or letting them market their homes directly online. (Surveys show that 80% of house hunters search the Internet first.) If you do take the do-it-yourself route, however, be prepared to work—especially in this market, where a slowdown in sales has sparked a buildup of inventory."
Howard Arnoff: If someone wants to sell their home without having to pay a real estate commission, good for them. While many try, only a few actually succeed. Statistics show that only 1 out of 10 FSBO'S actually succeed at selling their home without an agent. Several reasons.
Unrealistic pricing and lack of marketing skills for starters. Pricing the home means doing the proper research to know what similar homes have sold for and what competing homes are being offered for. It doesn't matter what you think your home is worth and it matters less what you need to get for your home. If you think you are going to get accurate pricing information from Zillow or another of the automated home valuation sources so readily available today, think again. And as to marketing, if sticking a sign in the lawn, placing tiny classified ads in the newspaper and adding your listing to some kind of internet posting will not sell a house. The home buying public needs to find your home in order to buy it and outstanding marketing must be crucial to your strategy.
Let's say that a FSBO prices correctly and markets well, what's next. Making the home available to show more conveniently than by appointment only when the seller isn't working is critical. Next, let's deal with negotiation. While it is true that no one knows more about the house than the seller, knowing what to say and more importantly, what not to say will enhance your negotiating position. I'm not talking about hiding material facts, I'm talking about negotiating the sale of your biggest asset from a dispassionate position.
Finally, another statistic shows that FSBO'S sell their house for less than houses sold by real estate agents. Why would that be? Put yourself in the position of a buyer who is looking at FSBO's. You know that no real estate commission will be paid by the seller so if the house is priced correctly, wouldn't you offer at least 5% or 6% less than you might have offered at a house listed by a real estate agent. This to me is the fatal flaw of for sale by owner and why despite saving money by not paying a real estate commission, the net proceeds to the seller is often less than when paying a commission to an agent.
Lastly, to say that everyone needs a real estate agent is a lie, to say that no one needs an agent is a bigger lie. People can cut their own lawns but many hire landscapers. People can cook dinner but many go out to eat. People can prepare their own taxes (I think) but many hire an accountant. It's not just convenience, it's knowing yourself and what you are capable of and choose to do.
"2. Your broker wants to get the highest price for your home."
"Reality. Most brokers just want to get a deal done, says John T. Reed, author and publisher of the Real Estate Investor’s Monthly newsletter. “They’ll tell you, ‘I’ll be pushing for the higher price, because my commission is linked to the price,’” he says. But agents may often be pushing for the first reasonable offer. Blame it on the way sales commissions are split—typically, four ways: between sellers’ agents and their brokerage firms and between buyers’ agents and their firms. So waiting a few weeks or even days for an offer of, say, $10,000 higher on a $300,000 home will yield only $150 more for the agent, based on a 6% commission.
Still, Thomas R. Kunz, chief executive of Century 21 Real Estate, points out that the highest price may not always constitute the best deal, especially when considering other terms like closing dates."
Howard Arnoff: I think this stems from a point made in Freakonomics which said that real estate agents sell their personal houses for more money than their clients. Attention getting to be sure. But why? Do they wait for the better offer to come along. I don't think so, because an old real estate saying is that the first offer is the best offer. They sell their houses for more because they buy better. Agents know when they are buying their home that they will be selling it one day and they look at the house from how marketable the property will be in the future.
Here are a couple of good examples. The lot is more important than the house. Location within the subdivision matters. A house at the T entrance to a subdivision that will have car headlights shining into the house is not well located. A house backing to a private view is better than one looking at a neighbor's back yard. And one more excellent idea, if you are selecting new construction and there is one house left unsold on the street or neighborhood, don't buy it even if you can get a "great deal". When the time comes to sell, it will come back and haunt you that there must have been a reason that it didn't sell quickly the first time around and buyers will pass on it when it is time for you to sell it. This just happened to a house on my street which was purchased at least 3 months after every other house was. When the time came to sell, the owners first went the FSBO route with no luck and then hired a real estate agent (not me) and it still didn't sell. I think they are resigned to staying put for the time being.
A good offer is a good offer, but if the seller believes that an offer is too low, they can reject it or counter offer. If the offer is fair to the seller, they can accept. The real estate agent is of no consequence in the decision to accept, reject or counter based on price alone. When listing a house for sale, I attempt to get the best possible price, rather than the highest price. There is a subtle difference.
"3. A low credit score means you won’t qualify for a mortgage."
"Reality. David Reed, a mortgage banker from Austin, Tex., and the author of Mortgage Confidential, says the FICO credit score is just one of myriad factors considered in mortgage applications. And even though it is taken into account, there are no minimum scores expected. “A FICO credit score is not a requirement for most conventional or government loans,” he says.
Borrowers submit information about income, assets and equity for the down payment, which is processed through an automated underwriting system, Reed explains. If an application isn’t approved the first time, it can always be resubmitted after modifications, like raising the down payment. “One client submitted his application four times before we got approval,” adds Reed."
Howard Arnoff: Credit scores are only one piece of the credit application puzzle that offer a lender insight into the odds that the loan can and will be repaid. Formal underwriting investigates the borrower and the property thoroughly before granting loan approval. Because of the problems in the subprime mortgage market today, lending standards have been tightened by most mortgage lenders and more documentation will be required no matter how high your credit score is.
"4. The advertised mortgage rates are what you’ll get from a lender."
"Reality. David Reed says this isn’t always the case, though he stresses that it’s not a “bait-and-switch” tactic. Depending on market fluctuations or economic news, “interest rates can change throughout the day,” he says. “Anything that points to a rosy economy, like more jobs, can lead to potential inflation and push rates up.”
What some people don’t know is that they might be able to customize their loans. All they have to do is ask. Lenders typically advertise 30-year and 15-year fixed-rate mortgages, but applicants can opt for 20 or 25 years, Reed says, which may allow them to build up equity faster but keep monthly payments affordable."
Howard Arnoff: The advertised rate has more fine print than the dozen or so pages found in the mortgage that you will actually sign at closing. The advertised rate is offered to those who have excellent credit and who are putting down 20% on a conforming loan. If you have less than stellar credit or are putting down less than 20%, the rate you will pay for your mortgage is going to be higher. Beware the advertised rates and work with a reputable lender. Your real estate professional can provide you with the names of several mortgage companies with outstanding mortgage lenders. Be especially aware of "teaser" rates, as I've discussed here many times, a $200,000 loan will require a monthly payment of $1200 for principal and interest at 6%, don't forget about taxes and insurance which are paid monthly into escrow. Rates advertising low payments such as $200,000 mortgage for $667 per month have even more fine print and significant consequences that you need to be aware of.
I don't want to pick on Lending Tree, it's just that because they are so big, their ads are just easier to find than other lenders. Here's an example of what they (and others) are offering: $200,000 loan for $667/month!* Refinance Today!
4 Flexible Payment Options! Bad Credit Options!
*Start rate of 1.25% is fixed for the first 30 days with a fixed payment option for the first 12 months. Terms of payment are based on a margin of 3.250% plus the twelve-month average of monthly yields on actively traded United States Securities adjusted to a constant maturity of one year (4.563% as of January 9, 2007). APR of 7.991% and payment of $666.51 per month is based on a 30-year term, $200,000 loan amount at 1.25%, and may change if the index adjusts after the first 30 days. If minimum payment option is selected, deferred interest may accrue. Interest rate quoted assumes a credit score of 620+ with a loan-to-value (LTV) of 80% on a primary residence. The APR and payment will vary based on the specific terms of the loan selected and verification of information and credit. Rates are subject to change without notice. This product may not be appropriate for all borrowers. Please consult a financial advisor to weigh risks and benefits.
A $200,000 house costs more than $667 a month but you have to look at the fine print to figure that out and you really should read this fine print.
And while I'm on the subject of Lending Tree, please understand that when you submit your information to them so that 4 lenders can "compete", your name and information is being sold as a lead to the highest bidders, not necessarily the best lender. I've talked about lead generation companies in various posts on this weblog and what you should know about working with companies that exist to simply resell your information.
I don't want to pick on Lending Tree because it is certainly a good company and its parent Interactive Corp is headed by Barry Diller and is a sister company to RealEstate.com; please take a look at this mortgage company who is selling leads from internet hits when you dig down and read the fine print of their offer.
*LowerMyBills, Inc. is not acting as a lender or broker. The information provided by you to LowerMyBills is not an application for a mortgage loan, nor is it used to pre-qualify you with any lender. If you are contacted by a lender or broker advertising within our network, your quoted rate may be higher, depending on your property location, credit score, loan-to-value ratio, debt-to-income ratio, and other factors. Not available in all states. Not all service providers in the LowerMyBills network offer this or other products with interest-only options.
How is that for some fine print. They aren't the lender, someone in the network will contact you. That means you are a lead that was sold. How nice to know.
"5. Your home must be turned into a showplace before it’s listed." "Reality. Homes in mint condition are the first to be sold, but sellers must be careful not to over improve. Some renovations can exceed what is customary for comparable homes in an area, while others may compromise a home’s character—like redoing the kitchen in a 1920s Craftsman-style house with stainless steel and granite.
Improvements can shorten the time it takes to sell a home but rarely are moneymakers. One survey found that homeowners can recoup 78.8%, on average, for remodeling a basement. Put another way: They’ll lose 21.2%. A less-expensive strategy is to “stage” a home, creating a neutral setting that appeals to a range of tastes. The goal is to draw attention to a home’s merits and minimize its shortcomings."
Howard Arnoff: How did this become a myth? Very few professional real estate agents will recommend renovation in order to sell, rather, declutter, depersonalize and deep clean would be appropriate for most homes. Staging is a wonderful option to showcase the home.
As I stated in starting this post, there has been significant "bashing" of real estate agents. As to these "5 myths", in my opinion number 1 is the real reason for the article and is the only real myth that the author is concerned with, numbers 2, 3 and 4 are mere fodder and number 5 is so off the mark, in my opinion, that it significantly reduces the author's credibility. The sad part of this article is that it is so widely published in Sunday papers around the country that many consumers will simply believe it because, well, they read it in the paper, it must be right.
There may be real estate myths but the question of the value of a real estate agent is only valid with the agent you hire. The real estate agent who brings value to the transaction is the real estate agent that you should hire, whether you are buying or selling a home. If you don't believe the agent you are talking to can add value, keep looking until you find one that will. It's your money.