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Agency and the Ascending Market

The role of a Real Estate agent in a transaction is an ever-evolving one. Remember sub-agency? No? That is a testament to how quickly and totally the job description has changed over the past couple of decades, with every passing generation bringing more empowerment to consumers and choices in levels of service.

The relationship between consumer and agent has shifted from the “customer” model to a “client” model in which a fiduciary obligation is owed to each principal in a Real Estate transaction. Unless otherwise agreed, the professional shuttling a buyer around on weekends in the hunt for a new home is no longer an agent of the seller, but is retained by that buyer to represent his/her interests in full in that pursuit. This is the age of buyer agency in which most modern markets currently operate.

While the relationships and allegiances in a transaction are more clearly defined now than ever (aside from the still-murky waters of dual agency, which is another post entirely), the proper representation of a buyer by a buyer’s agent is not as cut and dry as one might think; rather, market forces dictate that said agent be malleable in tactics.

Take the buyer’s appraisal contingency, for instance. It is a widely conceived and unchallenged notion that an appraisal is performed for the benefit of the buyer (more on the appraisal fallacy). After all, if the property does not appraise for the purchase price during the escrow period, the buyer has the ability to walk from the contract or to use the cudgel of a low valuation to re-negotiate with the seller. As such, it follows that a buyer’s agent would do well to simply stand aside and hope for the appraisal to come in low as it provides an opportunity to secure a potentially better deal for the client.

One thing about conventional wisdom? It typically applies to conventional circumstances.

What of an ascending market in which values are on the uptick and competition for properties is fierce? I, for one, posit that the laissez faire approach to the appraisal by a buyer’s agent may actually run contrary to the client’s interest. You see, appraisers are beholden to concrete data rooted in the values of the recent past. That’s all well and good, but there will not be support for current value in an appreciating market in three month old sale comps. There is a very real likelihood that your (as the buyer) appraisal is going to come in low in such circumstances.

So what’s the problem, you ask? Why not use that happy eventuality to your advantage to secure a better price?

Because the seller has four backup offers.

In a market such as the one we are currently experiencing here in Scottsdale, with heavy buyer demand and a drastically reduced supply of homes (down to approximately 17,000 active listings across the greater Phoenix area), bidding wars tend to result. After fighting off ten other buyers for the home of your dreams, a bad appraisal is, in all reality, going to procure one of two outcomes: 1) You bringing additional cash to closing to offset the difference between appraised value and sales price, or 2) The sale tanking.

The seller is NOT going to reduce his price when he has ready and willing backup buyers waiting in the wings to give him his price.

The role of the agent changes in that rather than the listing agent sweating out the appraisal and the buyer’s agent kicking back with his feet up, the inverse is potentially true. In my current representation of buyers, I have taken to meeting appraisers at the property (with the buyer’s permission, of course) with a copy of the contract, tax record, sales comps, pending sales, active competition, market trend reports … blueberry muffins, candy hearts, etc.

Long story long, do not accept representational practices from your agent that line up more with conventional wisdom than current reality. As market dynamics are in constant flux, so too are the tactics employed to reach your goals. Don’t buy into the notion that “x” is “good” and “y” is “bad” in a Real Estate transaction. Most every facet of a purchase is merely a variable, made positive or negative by its interpretation against the broader context of an ever-shifting landscape.

The buying and selling of homes requires a nimble partnership between principal and agent to keep up with the high-paced game of musical chairs that is the Real Estate market.

Save the dogma for your momma.

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Online Home Evaluation

“Friedster, what the hell are you doing with that chicken?”

Startled, Ned Friedgen looked up to find his moon-faced boss hovering in the doorway.

“Oh. Hi, sir,” the design engineer acknowledged. “Just fiddling with the ‘Nequity’ algorithm again.”

Squawk!

“What’s with the blindfold,” Baron Schlumpf pressed as he eyed the fowl.

Ned’s brow wrinkled in confusion as he gnawed on a piece of vending machine jerky.

“What blindfold?”

“Exactly,” Mr. Schlumpf responded, pulling up a lime green, ergonomic bean-bag chair and plopping down uninvited.

“I understand that this is your first week here,” he said over the chair’s protesting contents. “It’s only natural that you want to ease into things, feel your way around a bit before sticking your neck out.”

He chuckled at his own pun.

“I just don’t understand why-” Ned began.

“We didn’t bring you on board to play it safe,” Mr. Schlumpf continued over him. “If there is one thing we here at Umilleau.com are all about, it’s taking risks. We want you to be bold. We want you to be outlandish. We want you to be the guy that we hand-picked out of the World of Warcraft chat room for this position. We don’t want Ned Friedgen. We want the Friedster.”

Ned hung his head; a palpable air of defeat overpowering his liberally-applied Axe Body Wash as the chicken pecked at his vintage Converse All Stars.

Squawk!

“Ah, don’t take it so hard,” Mr. Schlumpf consoled. “You’ll get the hang of it. The most important thing to remember is that we don’t think outside the box, because there is no box. Take your wildest idea, and make it even wilder. That’s the Umilleau way.”

“There is no spoon,” Ned intoned, affecting his best Keanu Reeves impersonation before biting off another succulent hunk of jerky. He thought it might be bison, but that didn’t seem quite right.

“Take your chicken here,” Mr. Schlumpf continued. “Teasing the plumage into a rockabilly pompadour was a fine start, you just need to dial it up a notch to really take it to the next level.”

“Next level,” Ned asked.

The bird tugged at a red shoelace. Ned decided to call him Elvis.

“We don’t just want a chicken,” Mr. Schlumpf answered. “We want a blindfolded chicken.”

“Is that even legal?”

“We don’t just want a blindfolded chicken,” Mr. Schlumpf pressed on, his loose jowls threatening to consume his skinny, black tie as his excitement grew. “We want a blindfolded chicken that navigates an electrified hopscotch grid with randomly assigned corresponding numbers.”

“Oh my God!”

“Most importantly,” Mr. Schlumpf concluded. “We want it by Friday.”

“You want me to completely redesign the home evaluation metric by Friday,” Ned squealed in horror.

His boss nodded.

“We’ve had a good run with the blind donkey we have been using to select property values from a top hat,” Mr. Schlumpf confided, shifting gears.

“Are you serious,” Ned questioned. “I looked my house up on the site last night, and the value was off by a hundred thousand!”

“An all too familiar refrain,” Mr. Schlumpf admitted. “Alas, Blinky had to die.”

Ned’s hazel eyes bulged out of his head in near perfect imitation of the image of John Belushi under the word College on his grey t-shirt.

“You killed a donkey because he picked the wrong values out of a hat?”

“Don’t be ridiculous,” Mr. Schlumpf retorted. “I’m not an ogre. We didn’t send him off to the great barn in the sky because of the ninety two percent margin of error.”

“Then why,” Ned asked, perplexed.

“Money,” Mr. Schlumpf answered. “The damn thing wanted more money.”

“So what, um … what did you do with him?”

A gleam rose in Mr. Schlumpf’s eye.

“How’s the jerky,” he asked with a wicked grin.

Horrified, Ned spat the last few strands onto the bamboo floor.

“Jesus!”

Mr. Schlumpf bowed his mostly bald head and made the sign of the cross in mock reverence.

“Couldn’t you just ship him off to the circus or something,” Ned asked, trying to wipe the oily taste from his tongue.

“And set an example for the chicken that contract holdouts are rewarded,” Mr. Schlumpf demanded. “I think not!”

Mr. Schlumpf’s eyes narrowed as he wagged a bloated finger at his underling.

“Don’t you go getting too close to the talent, kid,” Mr. Schlumpf warned. “Your predecessor made that mistake. Couldn’t handle the inevitable eventuality. That’s why it falls to you to get a new fortune-telling beast trained up before the East coast FSBO market starts crawling our site this weekend.”

“Can I ask a stupid question.” Ned ventured.

“There are no stupid questions,” Mr. Schlumpf assured him with a conspiratorial wink. “Just stupid people eager to be manipulated.”

“Why don’t we just implement a reliable analysis of a home’s true worth?”

Mr. Schlumpf erupted in wet laughter, ending in a coughing fit.

“Sure,” he croaked between spasms. “While we’re at it, we can call ourselves ‘appraisers,’ or ‘Realtors!’ Maybe catch a plane to look at each individual property we evaluate from two thousand miles away?”

“Look,” he lectured the newbie. “We are creating our own niche here. To survive online in this day and age, you can offer something reliable, or you can offer something revolutionary. We offer revolutionary.”

“Even if it doesn’t work?”

“Especially if it doesn’t work,” Mr. Schlumpf stressed. “Consumers want ‘right now’ more than they want ‘right,’ so they’ll keep coming back as long as the lie is too brazen to doubt.”

“Seems like a business model with a limited shelf life,” Ned argued, deciding he wouldn’t list this career detour when he updated his resume for Monster.

Mr. Schlumpf grudgingly nodded.

“Once the novelty wears off and the public starts looking at your service critically, investor capital dries up faster than a Danny Bonaduce comeback.”

“So you need a shiny, new gimmick,” Ned intuited. “Or a feathery one, as it were.”

They both looked at the quizzical chicken, which was now pecking at its reflection in the funhouse mirror on the exterior wall where a window should have been. Mr. Schlumpf was right. Elvis didn’t strike Ned as particularly captivating.

“How about a card-counting baboon with a purple ass,” Ned suggested at last.

Squawk!

“Now you’re getting it.”

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Won’t Appraise, You Say? Then Bring Me a Cash Buyer!

Won’t Appraise, You Say? Then Bring Me a Cash Buyer!

If only it were that simple. I’ve had this pearl lobbed across the kitchen table by a would-be Scottsdale home seller in denial more times than I can count, and I can count all the way to eleven, thank you very much. After all, it’s self-evident that the single most effective way to combat the potential deal-killing reality of a third party evaluation is not to have one. Thus, it never comes as a surprise when a homeowner objects to the recent sales data by flipping the script on my argument that there is no way on God’s green earth that the home would appraise for the lofty number in his/her head, even if some foolhardy buyer would prove willing to plunk down greenbacks well in excess of true market value.

“You need to find us a cash buyer so there won’t be an appraisal, then.”

While rummaging through my briefcase for the ready supply of cash buyers I keep on hand in case of emergency, I’m dismayed to find that there appears to be a hole in the bottom. All those investor whales who bleed money from their blowholes must have fallen out as their portfolios shrank to guppy size over the past few years.

There are cash buyers out there, but times have changed, people. This is not 2005-2006 where many “cash” buyers were actually relying on draining a HELOC to close. Or those others who have been bounced from the pool by decimated 401k’s and suddenly nonexistent pensions. The cash buyers who are still around in 2010 are genuine Daddy Warbucks types and professional investment syndicates.

Genuine. Cash. Buyers.

And you know what? Those with the coin to be players in the current market are not interested in overpaying for your, or any other, property. The only people buying homes at present, regardless of whether the property is a need or a want, are those intent on a modern day train robbery. When even the value-priced properties linger on the market as the slap-your-momma-value-priced properties are the ones being snapped up, the game plan is to grossly overprice your home in hopes of landing one of these cash buying makos? Seriously? Because they are so darned cute and cuddly, I gather?

As strategies go, I’d sooner advise trick or treating at Dick Cheney’s house as a pheasant hunter.

Happening upon a cash buyer is one of those fun eventualities that is largely determined by price point and fate. Those fortunate enough to have such a creature fall in their laps quickly learn that the cash comes with a steep price: negotiating disadvantage. If you are overpriced, your home won’t even be a blip on Mr. Moneybags’s radar. If you are priced in line with values, he will lowball you. If you are priced significantly under market, he still might attempt to haggle a little. After all, he has cash, and cash is king, right? You aren’t the only one who knows it.

While a cash offer may represent the panacea to the appraisal conundrum, the actual cash buyer is not a willing participant in the “I’m willing to spend whatever it takes, because I simply must have THIS HOUSE” game. He goes across the street and buys the ugly one for 100k less.

Don’t believe me? Let’s try a quick role-playing exercise.

You are a homebuyer in 2010. Through shrewd investment strategy, you have managed to not only hang on to your capital, but to actually amass a larger fortune during these lean economic times. Sensing that opportunities abound in Scottsdale Real Estate at present, you are in the market for a house or two. You might even live in one when you are not at the penthouse in Manhattan, the chalet in Brussels or the flat in London. You’ve studied the market, read all of the stories and spoken with your most trusted advisors. Putting to work the analytical mind that has served you so well in critical financial decision-making to this point … what are you going to buy?

Are you going to spend all day making doe eyes at some overpriced turkey playing hard to get, or are you going to fill your tag by blasting the one with a limp?

Thought so.

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Want Your Sale to Stick? You Have To Sell It Twice.

Want Your Sale to Stick? You Have To Sell It Twice.

Oh, but that little house was turned out the day it landed on the multiple listing service! The hardwood floors all scrubbed and polished. The smell of freshly cut lawn and bougainvillea greeting new arrivals as they stepped out of Mazda Miatas and Chevy Tahoes and Ford Fusions.  The windows so crystal clear that the rogue speck of dirt eventually capitulated and moseyed along to a less lonesome locale.  Everything was just so as you wooed prospective new owners.

You sold your home that very first weekend.  Enchanted the buyers through your concerted efforts to distinguish a well-loved home from the abandoned dreams that haunt the competing bank-owned and short sale properties, you did.  Bent on purchasing the best bargain on the block when their plane touched down at Sky Harbor, the nice relocating couple from South Dakota instead rationalized the higher price tag of your owner-occupied home against the great unknowns that plagued the lower cost, distressed property options.  After several celebratory glasses of wine, they recast the entire episode with your home starring as the greatest value proposition on the market.

It is now day 14 of the escrow period.  The home inspection, a week in the rearview, couldn’t have gone any better.  You were never all that concerned about it.  You change the A/C filters regularly and have the units serviced semi-annually.  You resealed the foam roof with elastomeric last May.  You even placed a home warranty policy on the property prior to hitting the market to fend off any unexpected eventualities, you clever fella, you.  Now, having agreed to correct the double tab at the main breaker box (damn landscapers), replace the faulty GFCI outlet at the pool equipment and fix the malfunctioning shower diverter valve in the hall bathroom, you let out a well-deserved sigh of relief.  Knowing that you have an honest to goodness sale firmly in place, you turn your attention to other pressing matters that had been relegated to the back burner.

And the lawn grows a little taller as the mower doesn’t make it out of the shed this week.  The carpet in the hall gets a little matted down from the higher than normal traffic and a missed date with the vacuum cleaner.  Aside from little Johnny’s peanut butter fingerprints on the lower third of the living room picture window and the fogged up corner of the breakfast nook window by the doggy door, the glass is still pretty passable.  The contents of your cabinets and drawers are strewn about the den and family room, but you have to break a few eggs to make a moving omelet, right?  Besides, you already found your buyer.  No more agents calling to pop in for a showing with ten minutes notice.

Thus begins the great unraveling of your sale.  You see, in 2010, you do not just stage your home for potential buyers.  Matter of fact, buyers don’t even possess the most discerning eyes that will take in your abode during the sale process.  Nope, those hawkish peepers belong to a black-hatted professional who holds the fate of your transaction in his number-crunching hands.

Once you strike a deal, you better keep the joint gussied up for the appraisal, Jack.

Besieged by stringent regulations and menaced by fire-breathing underwriters, appraisers are no longer encouraged to hunt for validation of the accord reached on the open market by a willing buyer and seller.  That’s so 2006.  These days, the poor SOBs have more incentive to impugn a home’s value than defend it.  This is not a knock on their collective competence, but an indictment of the constraints by which appraisers are currently bound.  You counter this institutional bias with the same measures you employed to overcome the price objections of your buyer.

You have to resell the house.

Do not discount the human element in a supposedly objective endeavor.  Consider the properties that most Real Estate appraisers spelunk on a daily basis.  Bank repo after bank repo, the job should come with a snorkel and a mobile decontamination unit.  Given the wide disparity in property condition in the market, the silver lining to cloudy times is an ability to add value to your home though no greater expense than meticulous housekeeping.  It’s your agent’s job the sell the objective proof (most viable comparable sales, list of upgrades / features, comparisons between the subject property and comps, etc), and it’s your job to sell the feeling of mom, baseball and apple pie.

Clean and “not-jacked-up” is the new granite counter tops and travertine floors.

There may not be an input column in a uniform residential appraisal report for “squeaky clean” or “not infested with hobos,” but latitude is given to appraisers for affixing additional value to a property based on conditional comparisons to the properties selected for the analysis.  The dialed-in condition of your home will stand out in full bas relief against the tired housing din.  It is especially critical if you don’t have all of the snazzy upgrades.  You are relying on the impression of value for lack of more readily quantifiable measures.

Don’t give in to inertia prior to what has become the penultimate part of the escrow process.  Treat the appraisal as a showing appointment instead of the contractual procedure that it is and you give yourself considerably better odds at a soft landing at the closing table with the same purchase price with which you began.

Scented candles, they aren’t just for buyers and third dates anymore.

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Your Appraisal Is Wrong

Appraisals are typically regarded as the most accurate measure of a home’s value, and for good reason.  Licensed to perform one task and one task only, appraisers see and evaluate property all day, every day.  While some of us more egocentric Realtors feel that we put more time and effort into our own opinions of value, considering we will ultimately bear the responsibility of bringing the home to market and selling it, that bit of vanity is neither here nor there.  Appraisers, though many underwriters these days are loathe to admit it, are still considered the ultimate authority on worth outside of a willing buyer and seller.

Appraisers, however, are often hamstrung by their own guidelines in keeping pace with the current market.  This can be beneficial, such as when prices were artificially exploding between 2005-2006.  We agents lamented the stodgy appraisers who were too rooted in the past (closed sales) to acknowledge the present (upward trending prices) while values were exploding.  You couldn’t attend an office meeting without a colleague or six bemoaning the bozo appraiser who didn’t grasp the current market.  If only our industry at large had been so conservative.

Normally the protective ally of the bank and the buyer, I have noticed an interesting shift as of late, however. Appraisers have become a seller’s best friend. Before you toss me out on my heretical ear, hear me out.

Appraisers have begun to view the market in two distinct categories.  There is the general non-distressed resale home market, and then there is the foreclosure market.  When evaluating a property, most seem to have taken to lumping properties into one grouping or the other.  Their subsequent findings are based upon the homogeneous pairings:  bank-owned properties are comped against other bank-owned properties and standard resale homes are comped against other standard resale homes.

It sounds great in theory, but the problem with this new pattern is two-fold.  First, there is the matter of pure sales volume.  The action in our current market is more heavily dominated by foreclosure properties than any point in memory.  It’s undeniable.  The mini sales boom that has seen a steady increase in total closed and pending sales in each of the last several months here in the greater Phoenix area is due in large part to the allure of these lower priced options.  As such, it is just not feasible to ignore this growing segment of the market when trying to determine the value of a home.  The data is often quite scarce when trawling for non-distressed sales upon which to base an evaluation.  By and large, the higher priced resale homes just aren’t selling with a great enough frequency to provide adequate comparison data.

The other issue is the problematic assumption that a buyer cares.  If the home next to your own has been foreclosed upon and is listed at $200,000 less, do you honestly think the buyer will buy yours if all other things are equal?  Is a buyer really expected to see anything beyond the price and the condition?  The label of “bank-owned” versus “resale” is wholly irrelevant to what a buyer is willing to pay.  Shoot, I have seen quite a few remodeled bank-owned or short sale properties that put many dog-eared resale listings to shame.  And yet, they are somehow devalued or eliminated from the consideration of value for other homes in the neighborhood simply because of the conjured stigma.  Buyers may start their search with one particular market segment in mind (distressed property shoppers looking for a deal, resale shoppers looking for a well maintained home), but they will ultimately look at everything that fits their price and need requirements.  Labels be damned.

I sure like it when my appraisal tells me my home is worth more by ignoring completely the last four neighborhood comps, but I know the real score.  No buyer will pay me what my current appraisal tells me it’s worth.  No way.  I know better than to be the ostrich who thinks that the homes that are actually selling right now have no impact on my property value because they are “distressed.” Guess what, buckaroo, those sales are distressing the entire market.  There may be microcosms within the market at large, but they are amoebic.  The uneven boundaries protruding against each other as they occupy overlapping space.

So while there is still plenty of benefit in having your home evaluated by a neutral authority, just remember not to spend all of that anticipated equity before your buyer signs on the dotted line.  You just might be unpleasantly surprised when he doesn’t downgrade the competition or recent sales comps like your appraiser did.

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