You can go your own way Go your own way You can call it
In case you hadn’t noticed, sellers can set whatever asking price they want for their properties; the prices do not have to be reasonable, and here in Irvine, they often are not. Can you put yourself in the shoes of a listing agent for just a moment? You have just been contacted by a wouldbe seller, and you excitedly drive over to their property to take the listing. You know the property is worth about $800,000 in today’s market, but you have no idea how much the seller wants to ask. After a brief conversation, the seller tells you they want to list for $1,249,000. How do you feel then?
Think of the thoughts that would be going through your mind as a listing agent:
If I burst out laughing, will they be really offended?
Did the owners see me giggle when they said how much the wanted to ask?
Can I regain my composure before speaking?
Should I thank them for their time and leave?
Do I bother to take this listing?
Can I talk them down to reality in a couple of months? They are so far over the market, I don’t know if it is possible.
If I take the listing, since it has no chance of selling, am I going to spend even one penny marketing it?
Is there a competitor I do not like that I could refer them to?
How would you respond?
A government orchestrated spring rally seems to be upon us. The few people who are not impacted by the recession are picking over the limited inventory of REOs setting market pricing. The organic sellers continue to price in la-la land as evidenced by today’s featured property.
So is this asking price really that ridiculous? Well, the neighbor at 27 Desert Willow just listed for $799,000. Is this property really $450,000 better than that one? You could buy the property at 27 Desert Willow, raze it to the ground, and rebuild a house identical to 14 Desert Willow, and it would probably not cost a total of $1,249,000. Perhaps that puts things in perspective for you.
Highly sought after Plan-Two Alexandria home in prestigious Columbus
Grove. This gorgeous home on a premium lot boasts a huge backyard and
$100K in upgrades. With 4 bedrooms plus loft, 3 full baths, living room
with fireplace & media niche, family room, and formal dining room,
this home has it all. Prepare your favorite meals in this beautifully
upgraded chef’s kitchen which boasts granite slab countertops with full
backsplash, European style Maple kitchen cabinetry w/ Hazelnut finish,
& stainless steel GE Monogram appliances. Relax in your romantic
master bedroom suite with gas burning fireplace, 8-Jet Whirlpool
jacuzzi tub, & spacious walk-in closet. Enjoy designer paint colors
throughout, upstairs laundry room with sink, fully landscaped front
& rear yards, charming front porch, private courtyard, 2 1/2 car
attahced garage & much more. This safe & family friendly
neighborhood shares a community clubhouse, pool, spa, & playground.
New neighborhood park opening soon. Hurry!!
Yes, Hurry!! This one will be on the market forever.
attahced?
Did you notice the realtor did not call it a gourmet kitchen? The Swedish Chef from the Muppets would be proud.
This property was purchased for $1,274,000 on 6/26/2006. The owner used a $1,018,850 first mortgage and a $255,150 downpayment. Apparently, this owner has not emotionally accepted the loss of his quarter million dollar downpayment. I wonder how he will react when he comes to realize that not just has he lost his entire downpayment, but he will be a short sale if he really wants to sell. There is much pain ahead for this owner. Now, while he is still in denial, it is laughable, but later when he accepts the truth, it will just be sad.
{book2}
You can go your own way Go your own way You can call it Another lonely day You can go your own way Go your own way
Tell me why Everything turned around Packing up Shacking up is all you wanna do
Four and one-half percent interest rates create some unique opportunites, defer some big problems, and create other problems. The policy will probably save the Federal Reserve’s member banks billions of dollars, and that is all they care about anyway.
No compromising, a nation going blind The leaders are on their knees The third wave has just begun
When I first wrote about the impact of 4.5% Mortgage Interest Rates, I decried the idea because the subsidy is obviously going to be temporary, and the removal of the artificial props will cause prices to resume their decline. The impact of rising interest rates on future home prices is dramatic.
With more time to contemplate the impact of 4.5% interest rates, I now see they open up unique opportunities for cashflow investors. People buying for cashflow are not concerned with resale value because they do not intend to resell. Profit and loss for a cashflow investor is determined by its income not its resale costs decades into the future. The Federal Reserve with the blessing of the Treasury Department of the US Government is orchestrating 4.5% interest rates to entice cashflow investors back into residential real estate. Without cashflow investors this mess will never get cleaned up.
If prices fall low enough, and if interest rates drop low enough, returns to cashflow investors become very large. In fact, they come to be greater than all competing investments in the marketplace. Under those circumstances, money will flow back into residential real estate, and the plethora of foreclosures both on the market and in the pipeline can be absorbed by cashflow investors seeking superior returns. The next several years represent a once-in-a-generation opportunity for cashflow investors to pick up long-term holds generating superior cash returns. If lenders are stupid enough to inflate another real estate bubble later, profiting by appreciation would be a nice bonus to the cashflow investor.
The very low interest rates also create opportunities for people to purchase 20+ year homes at or below rental parity and avoid the pain of further price declines; however, this is the harder play. Few properties in Irvine are trading at or below rental parity, but they are common in desirable areas of Riverside County (Yes, there are desirable areas there). This NOT a play where you overpay today and wait for appreciation to catch up to you. It only works if you are saving money over renting.
If there are properties in which you would be willing to live for the long term, and if they can be had for at or below rental parity, then you are only hurt by rising interest rates and declining prices if you must sell while resale values are depressed (an event that happens more often than most believe). Eventually–cue the 20 year holding time–fundamentals will rise to support prices at higher interest rates. On an inflation adjusted basis, you can never recover from overpaying up front, but in nominal terms, there will come a point when you can get out at breakeven. Keep in mind, you are trapped in an underwater situation once interest rates start going up and values start going down; however, you are trapped in a property that still costs you less than renting, so you are far better off than the typical homedebtor trapped in their homes today.
Do I recommend this play? No. But it is a legitimate way to acquire a property with 4.5% interest rates and not get burned. I still recommend waiting until (1) prices are even more depressed, (2) the foreclosure crisis begins to wane and (3) interest rates are higher. You will get a better price, and you have the possibility of refinancing into a lower payment if interest rates drop again. You can refinance into a lower payment, but not into a lower debt.
If you look at the cost of ownership for today’s featured property, you see that it costs about $2,200 per month to own. With 4.5% interest rates, this is at least at rental parity and probably below it. If someone can find a rental listing where an updated 1500 SF 3/2 can be rented for $2,200 in Irvine, please post the link in the astute observations. I believe this property is at rental parity–not that people would want to live here for 20 years.
To illustrate why this play does not work for any property other than a very long term hold, consider the impact of an increase in interest rates to 7.25% illustrated below. The long term historic average for mortgage interest rates is 8%. It is realistic to think we will see 7.25% interest rates in the future. When and if that happens, the value of this property would drop another $100,000. Is this property nice enough to be trapped in for 20 years?
Everyone who understands credit cycles knows interest rates are going to rise, it is only a matter of when and how far. As I outlined in Real Estate’s Lost Decade if the FED can somehow control the rate at which interest rates rise, they may be able to hold prices relatively stable. If they lose control (likely) and interest rates rise too fast, then prices will resume their descent. Buying at 4.5% interest rates is fraught with risk; however, many people will buy once prices are at or below rental parity. Usually, buying for cashflow is not quite so risky, but then again, our government usually does not manipulate home mortgage interest rates to such low levels to clean up after a housing bubble.
One of the first problems of the developing bubble was identified by bubble watchers as early as 2003; the widespread use of adjustable rate mortgages during a period of low interest rates. Once interest rates go up, so do the payments on ARMs, and so do the foreclosure rates.
There are three types of ARMs: (1) amortizing, (2) interest-only, and (3) negatively amortizing. When prices reached the practical limit of fixed-rate mortgages, many people turned to adjustable rate mortgages to increase affordability because they have lower interest rates. At first people turned to amortizing ARMs, but that soon gave way to interest-only ARMs and finally to negatively amortizing ARMs.
When the FED aggressively moved to lower interest rates, many cheered that the ARM crisis was averted; at best it was delayed.
The assumption most people made is that all the ARMs written are amortizing ARMs. There is no payment shock with an amortizing ARM unless interest rates rise; unfortunately, reality is that very few of the ARMs still utilized
by borrowers are amortizing ARMs.
The first wave of the foreclosure crisis was subprime. That wave has crested, and its devastation is nearly done.
The second wave that is building now is caused by the deteriorating economy and ARM mortgage recasts (Calculated Risk has a good post on this). As I wrote in The ARM Problem, it is not the reset of interest rates that is the problem, it is the recasting to a significantly higher payment caused when the mortgage goes from interest-only to fully-amortized. The negatively amortizing ARM, also known as an Option ARM is shown in
yellow on the chart above. It is the most toxic loan product ever
conceived. The Option ARM and the interest-only
ARM–and their associated recasts to amortizing loans–are the two loans responsible for the second wave of the
foreclosure crisis.
The third wave will come when everyone still clinging to their adjustable rate mortgage is wiped out by higher interest rates. Everyone who does not refinance into a fixed-rate mortgage while interest rates are this low, and the fools who actually buy a property with an ARM while rates are at historic lows will all be wiped out during the third wave of the foreclosure crisis. The timing of that wave is much harder to predict because nobody knows when interest rates will climb.
Four and one-half percent interest rates almost guarantee a third wave in the foreclosure crisis. Perhaps everyone will purchase with or refinance into a fixed-rate mortgage and this crisis will be averted. I doubt it. Based on what is still happening in our mortgage market, it looks like this third wave is still coming.
CLARIDGE MODEL,HARDWOOD FLOORS THROUGHOUT DOWNSTAIRS, TRAVENTINE FLOOR
AND COUNTER AT KITCHEN, NEW SINK AND FAUCET, STONE REMODELED FIREPLACE
IN LIVINGROOM, NEW EXTERIOR PAINT. BONUS ROOM DOWNTSTAIRS CAN BE 4TH.
BEDROOM.
ALL CAPS
This guy did not abbreviate the word “throughout.” Hurray!
Today’s featured property was purchased on 10/28/2005 for $565,500. The owner used a $452,400 first mortgage, a $56,550 HELOC and a $56,550 downpayment. After opening a few other HELOCs, the owner finally consolidated into a $116,500 HELOC on 10/31/2007.
The total property debt is $568,900. If this sells for its current asking price, and if a 6% commission is paid, the lender stands to lose $169,400.
{book4}
They tried to build a nation, greater than anyone But what they didn’t know was that someone else would have control The mob starts infiltrating, at gunpoint they will roam They show no mercy and the government is on their payroll No compromising, a nation going blind The leaders are on their knees The third wave has just begun
The whole world is corrupted, it’s spinning out of control The third wave is on the roll It’’s slipping through our fingers and rising to the top The third wave is on the roll Roll with me, roll with me
I’m too sexy for my shirt too sexy for my shirt So sexy it hurts And I’m too sexy for Milan too sexy for Milan New York and Japan
Newport Coast is where all the beautiful people live. Newport Coast residents have big fancy homes, and they are so rich and sexy that the rest of us can only watch and be envious–at least that’s what many there believe. A number of very wealthy people do live there. As I looked through the property records, there were many properties owned with no debt. As a percentage of listings, it is higher than what I have seen in other places. Of course, with our highly leveraged society, that doesn’t take much. Unfortunately, like everywhere else in California, it has been invaded by the pretenders too.
Today’s featured property started with no debt, but from 2001 through
2006 the debt went from zero to $7,000,000 in that telltale sign of slow
accumulation through persistent HELOC abuse.
It must be nice to make a million dollars a year off your house. You get to live in a beautiful mansion, you don’t have to do anything, and the house gives you a million dollars a year to spend. Who wouldn’t want that? (Remember The California Social Contract?)
Ponder that lifestyle for a moment…
If you could just get in to a house like that, you get a beautiful home and practically unlimited spending money…
I could see where that would be a very desirable set of circumstances. Do you think they can reinflate the housing bubble after I get one of these houses?
With houses being so desirable, it is no wonder prices went up a great deal, and despite the falling prices all around, the kool aid is still freely flowing, particularly in these high end neighborhoods. They are simply refusing to let the party end; too bad the lenders are not longer helping them out.
Back in the day, the bulls used to claim “it is different this time.” In some ways, it is. What really makes this recession different is the debt levels of Americans. This recession was caused by debt and the collapse of debt structures. This recession will continue until this excess debt is flushed from the system. There are no short cuts.
In past recessions people would borrow from credit cards or other sources and maintaining their lifestyles until the economy picked up and they could either pay off some debt or be issued more credit. That is not working this time because we already have too much debt. The credit card companies already see this coming, and many of them are cutting back on credit lines because they know unemployed borrowers will max out their credit lines before going under. Lenders know debt is the problem, and more debt is not going to bridge the divide. According to our own government, even the lenders need to raise money, and they cannot borrow to do it.
All the pretenders who have been living off their homes are awaiting the re-inflation of the housing bubble. Rising home prices and the resultant HELOC income is the only way their lifestyles can be maintained. This is not going to happen. We hit the ultimate limit of our ability to borrow as a society. We are going to be forced to live within our means, after an enormous amount of painful debt restructuring.
When I look around these neighborhoods of hopelessly overextended HELOC dependent homeowners, I keep coming to the same conclusion; there must be a massive purging of personal debt. We are already seeing this in Riverside County. Entire neighborhoods of homes are turning over, and household debts are being cut in half. It is a painful process characterized by waves of foreclosures and personal bankruptcies, but it is a necessary one. The people in Orange County, and in particular in the beach communities, are in complete denial that this same purging must happen in their neighborhoods. It must, and it will.
Think about it. These people have more debt than they can afford. This problem requires someone who can afford these debt levels to buy them out and pay off their debts. That is the Ponzi Scheme. But what happens when there are not enough people making the incomes necessary to take out the previous debt? Someone is going to be left with debts they cannot afford and nobody to bail them out. The music stops and they don’t have a chair. Right now in Newport Coast, there are hundreds of homeowners dancing and very few chairs.
Property shows really well with beautiful views of the CC hills and the ocean & City Lights.
Judging by the description, even the agent doesn’t give a crap. What chance do you see of this selling?
Unfortunately, a nicer house next door on Shoreridge went into escrow based on a $4.5 million asking price, and 50 Shoreridge (which may have a peek ocean view) sold in January for $4.9 million. A couple of chairs were filled, and this owner is still dancing…
So how did these people do it?
The property was purchased on 4/18/2001 for $1,341,000. It appears the buyers paid cash. I guess having that kind of cash is a barrier to getting started…
On 3/5/2002 they took out a first mortgage for $1,000,001 and opened a HELOC for $1,050,000 which they did not use.
On 7/25/2002 they refinanced with a $1,285,000 first mortgage.
On 4/21/2003 they refinanced with a $1,500,000 first mortgage.
On 11/19/2003 they refinanced with a $2,500,000 first mortgage and opened a $750,000 HELOC.
On 3/11/2005 they refinanced with a $4,750,000 first mortgage.
On 5/5/2005 they opened a HELOC for $975,000.
On 3/21/2006 they refinanced with a $6,000,000 first mortgage and opened a $1,000,000 HELOC.
Total property debt is $7,000,000.
Total mortgage equity withdrawal is $7,000,000 including their $1,341,000 downpayment which is now gone.
It was less than 5 years between the first mortgage and the final refinance. That is $1,400,000 a year from the house. If this property sells for its current asking price, and if a 6% commission is paid, the total loss to the lender will be $890,000.
Last week, a couple of the astute observers argued that this shouldn’t be our concern; it is a problem between a borrower and a lender. Bullshit. The moment we all became liable for these losses through our tax dollars, it becomes very much our business. I think the MSM is missing a big story by not telling the tale of these people. I imagine Joe SixPack would love to see where his tax dollars are going.
I have documented larger losses in Irvine than the loss on this property, but this one is unique because the sale would actually be recording a $5,000,000 gain for the owners. I wonder if the IRS will give them capital gains tax relief? It is a bit over the exempt amount. You don’t mind subsidizing this behavior with your tax dollars, do you?
{book5}
I’m too sexy for my shirt too sexy for my shirt So sexy it hurts And I’m too sexy for Milan too sexy for Milan New York and Japan
And I’m too sexy for your party Too sexy for your party No way I’m disco dancing I’m too sexy for my car too sexy for my car Too sexy by far And I’m too sexy for my hat Too sexy for my hat what do you think about that
Some people claim they are merely victims of bad market timing. But how bad can timing really be? How about purchasing a tiny condo a few days before subprime imploded; that would do it.
The owner of today’s featured property was either stoned, or drunk with kool aid when this deal went through. New Century Financial had not fully imploded when this deal happened, but problems with subprime were front page news in the first quarter of 2007. It wasn’t a good omen for making this a successful flip.
Ignorant investing is common. Most people know very little about the markets they invest their money in. This is not necessarily a bad thing, if this money is trusted to competent professionals, but when people go it alone, the results are often a disaster.
To make money in real estate (or any speculation for that matter), you must have a sense of current value, and what buyers will be willing and able to pay in the future in order to make a profit. The extent of valuation and due diligence during the bubble was minimal; most people just knew real estate was going to go up because it had been for a long time. There was no attempt at valuation or any consideration for how or how much future buyers were going to pay. People bought because it was a sure thing.
Anyone with a moment of forethought would have questioned whether it was a good idea to buy a low-end condo while subprime was imploding. Since subprime was the primary funding mechanism of this market strata, a problem with the subprime industry was going to be a problem with the entire bottom tier of the market. This isn’t rocket science or complex discounted cashflow analysis, this is just common sense.
When people invest without a plan, they stand to lose money. If you are talking about a stock purchase of a few thousand dollars, the results may be painful, but not catastrophic. When you are talking about a piece of real estate priced at $479,000, the results can be disastrous. it certainly was in this case.
WOW! A RARE FIND! GREAT PANORAMIC PARK VIEW! DIRCECTLY ACROSS FROM
BEAUTIFUL PARK & SWIMMING POOL. CLOSE TO THE LAKE. EXCELLENT FOR
WATCHING YOUR CHILDREN PLAY. GROUND LEVEL W/ WRAP AROUND BACKYARD W/
PATIO. THIS HOME IS SPECTACULAR W/ NEW CABINETS AND COUNTERTOPS.
UPGRADED CARPET AND BEAUTIFUL CEILING FAN IN THE DINING ROOM AREA. VERY
CLEAN! A MUST SEE!
ALL CAPS
What is the deal with “W/”? This abbreviation–which isn’t proper–saves exactly two characters. What is the point?
Despite the words, there are only two useful pieces of information contained in that description: (1) the unit has a view of the park, and (2) it has new cabinets and countertops. Everything else is garbage.
As with most properties purchased during this era, this was a 100% financing deal, so I suppose this flipper wasn’t that foolish; he only risked his credit score. This property was purchased on 2/23/2007 for $479,000. The owner used a $383,200 first mortgage, a $95,800 second mortgage, and a $0 downpayment. If this property sells for its current asking price, the bank will have lost $197,094 in just over 2 years. From the lender’s standpoint, that is serious equity burn…
I hope you have enjoyed this week at the Irvine Housing Blog. Be sure
to come back tomorrow as I explore HELOC Abuse Newport Coast Style, and
come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.
🙂
{book3}
They’ll stone you when you’re trying to be so good They’ll stone you just like they said they would They’ll stone you when you’re trying to go home They’ll stone you when you’re there all alone But I would not feel so all alone Everybody must get stoned
It is possible to significantly lower buyer’s commissions, but it will take a change of buyer behavior to do it. Today’s post shows how this could be done.
All businesses create expectations for service with their customers. The Soup Nazi is the best known example of a business owner whose product was so desirable that customers were willing to do whatever was necessary to get it.
Have you dealt with an attorney lately? Attorneys have trained their customers to expect to pay large retainers and to be billed enormous sums for every passing thought the attorney has about the client. They are second only to the Soup Nazi for training their customers to succumb to their wishes.
Realtors have done the poorest job of any industry that I can think of at setting appropriate customer expectations. The customers of buyer’s agents have been trained that it is OK to demand unlimited hours of an agent’s time to be driven around to look at dozens and dozens of properties for no compensation at all. Agents are actually willing to do this because they hope for the possibility of compensation if the looker actually becomes a buyer. As a result, buyers of real estate are subject to paying an inflated cost to cover the cost of those who look but do not buy.
For an agent, real estate commissions are like playing roulette; you don’t know when you will get compensated or how much it will be, but since commissions are so large, it is a game many are willing to play. It is the size of commissions that encourage realtors to play this game, and it further serves to create poor customer expectations.
Lowering buyer’s commissions requires reframing the compensation system to encourage a more efficient use of a realtor’s time. It starts with customers realizing one important point: when you pay a realtor a 3% commission, you are not just compensating them for the time you spent with them; you are compensating them for the time they spent with the other clients who did not buy a property and generate a commission.
This fact has two important implications for developing methods of reducing commission rates: (1) realtors can charge much less if they know they are going to get paid, and (2) realtors can charge less if they do not have to invest large amounts of time in non-paying customers. This efficiency is best achieved if compensation moves away from a commission basis to a pay-per-services model.
If the buyer and the broker have established a billing rate for the services performed, the buyer knows what they are paying for, and they are likely to be more judicious in their demands on the realtor’s time. For those who judiciously use their broker’s time, they will receive a commission rebate at the close. For those that go over their allotment, they may pay up to the typical 3% commission, but the commission will never exceed the amount specified in the listing contract.
What follows is not a service offering. As you may recall, we are in the process of forming a brokerage, but we are not DRE approved yet, so what follows is a hypothetical of how such a structure could be achieved.
What a buyer’s broker does
When you examine the tasks of a buyer’s broker, there are really only four major tasks they perform: (1) research properties for buyers, (2) show properties to buyers, (3) prepare formal bids and negotiate deals for buyers, and (4) coordinate the outside professionals during the escrow process. There is plenty of routine communication with phone calls and emails between broker and client during the process, but the four items listed are the ones that consume most of a broker’s time.
Once the key tasks are identified, a broker could establish a billing rate for each of these tasks and charge accordingly. Depending on the assurance of getting paid, the rates would be different, but the connection between time invested and compensation would be apparent to both the broker and the client. Once clients see that their actions have a direct association with how much they ultimately will pay for the service, they are incentivized to be more efficient in their use of a broker’s time; both parties benefit.
Traditional Commission Program
Many people will not want to be cost conscious when they purchase a property. They will want to take their time, look at many properties, and feel no obligation to be efficient with using a broker’s time. There is a commission structure for everyone, and those people will pay the full 3% (or whatever commission is specified in the listing contract) for full service.
Billable Hours Program
Lowering the commission is relatively easy with a pay-for-services model. In this model, the services demanded of the buyer’s agent are recorded, and a running total of billings is tracked. If a transaction takes place, the broker will be paid at the close of escrow for amounts billed up to the commission amount specified in the listing contract. If no sale occurs, the prospective buyer is not obligated to the broker for any of the billable time.
This model provides an incentive for buyers to be judicious in their use of a broker’s time, but it does not provide assurance that the broker will get paid. Due to the uncertainty of payment, the billing rates will seem rather high, but as previously noted, buyers who complete a transaction are paying for all those who do not.
The billable hours commission structure could work as follows:
A minimum fee of $8,000 is charged at the close of escrow for coordination of the escrow process and other miscellaneous unbilled services provided during the sales process.
Showings cost $200 flat fee plus $200 per property viewed on each tour.
Brokers Opinion of Value reports, which are required before first written offer, cost $600 for each property.
First written offer on each property costs $600.
Subsequent written offers cost $400 each.
The overall commission is subject to a 1.5% minimum charge. Any funds due to buyer’s broker from the listing contract in excess of the amount billed are returned to the buyer.
Example of a Billable Hours program:
Assume a buyer has a budget for properties in the $800,000 range. During the course of the search, they go on 3 home tours and visit 8 properties. They write offers on 3 properties, and after 5 counteroffers, they end up buying a property worth $780,000. How much would their commission be?
$600 – three showing appointments $1,600 – view eight properties $1,800 – first written offers on three different properties $2,000 – five counteroffers required to close the deal $8,000 – escrow coordination and realtor compensation ======================================================== $14,000 – total broker compensation
$23,400 – listing contract buyer compensation at 3% $14,000 – fee to broker ======================================================== $9,400 – refund to buyer after closing
The buyer would pay a total fee of $14,000 to the broker. Since the commission paid at the closing table would be $26,400, the buyer would receive a check for $9,400 from the closing ($23,400 – $14,000 = $9,400). That works out to a 1.8% commission.
Billable-hours programs such as this one are most favorable to high-end buyers because the fees will quickly consume a 3% commission on a low-cost property. Despite this disadvantage, the potential is there to reduce commissions at most price points.
Retainer Program
To get to the lowest possible price point, a broker must know they are going to get paid for the time and effort invested in the process. Since buyers are so accustomed to getting this service for nothing, a typical billable-hours scenario will not succeed because people who do not buy simply will not pay the invoices when the bills come due. However, if a billing rate is established up front—a lower billing rate than the non-retainer structure due to the assurance of compensation—and if a buyer is willing to put up a retainer to guarantee payment, then a low-cost minimum compensation structure can work for both parties. This will be most advantageous for a buyer who (1) knows with certainty they are going to purchase, (2) does most of their own research, and (3) will not be lowball bidding on dozens of properties. A buyer who fits these criteria can get a significant refund at the closing table.
The Retainer commission structure could be structured as follows:
A minimum fee of $4,000 is charged at the close of escrow for coordination of the escrow process and other miscellaneous unbilled services provided during the sales process.
A retainer of at least $4,000 is required to qualify for this program.
Showings cost $100 flat fee plus $100 per property viewed on each tour.
Brokers Opinion of Value reports, which are required before first written offer, cost $300 for each property.
First written offer on each property costs $300.
Subsequent written offers cost $200 each.
The overall commission is subject to a 1.0% minimum charge. Any funds due to buyer’s broker from the listing contract in excess of the amount billed are returned to the buyer.
Example of a Retainer program:
Assume a buyer has a budget for properties in the $500,000 range. During the course of the search, they go on 4 home tours and visit 10 properties. They write offers on 3 properties, and after 4 counteroffers, they end up buying a property worth $480,000. How much would their commission be?
$400 – four showing appointments $1,000 – view ten properties $900 – first written offers on three different properties $800 – four counteroffers required to close the deal $4,000 – escrow coordination and realtor compensation ======================================================== $7,100 – total broker compensation
$11,400 – listing contract buyer compensation at 3% $4,000 – retainer paid in advance $7,100 – fee to broker ======================================================== $8,300 – refund to buyer after closing
The buyer would pay a total fee of $7,100 to the broker. Since the buyer paid $4,000 in advance, and since the commission paid at the closing table would be $11,400, the buyer would receive a check for $8,300 from the closing ($11,400 + $4,000 – $7,100 = $8,300). That works out to a 1.5% commission.
In general, the retainer program will result in the lowest commission rate. If this same example is repeated for the $880,000 property in the first example, the commission would be subject to the 1% minimum charge.
{book7}
Bottom line is that people must be compensated for their time, or they will not perform the task. This is not greed or avarice, it is just a fact of life.
What is stated above is not a service offering; it is a hypothetical example of how alternate commissions could be structured to make the industry more efficient. Perhaps some area brokers reading this post will implement these ideas, perhaps not. As with the post, The New Real Estate Sales Business Model, a discussion of ideas in the public realm is a good thing. The 6% commission model is broken, and its days are numbered. The industry needs to start looking for alternatives to take its place.
Upper level end unit 1 bedroom with a loft that could be a 2nd bedroom.
Cathedral ceilings add volume and spaciousness to this largest 1
bedroom plan in the Lake Condos tract. Living room and balcony overlook
streams and waterfall with ducks. The tract includes pool, spa, tennis
courts and clubhouse. Quiet interior location on a greenbelt away from
the noises of the street. Adjacent to Irvine Valley College, shopping,
restaurants and both the 5 and 405 freeways.
If you were going to stage a picture to make the kitchen look as small as possible, could you do better than today’s picture? This place isn’t fit for hobbits.
P.S. Check out the post at South Coast Homes. Kelli Hart has picked up the story on the Laguna Beach HELOC abuse.
Yes, Hurry!! This one will be on the market forever.
