Buying a home? What's the big deal?

The uninitiated, ie, most consumers, think buying and selling a home is a piece of cake. You put a sign in the yard and an ad in the newspaper and Bingo! Buyers gaily appear bearing gifts in the form of full price offers...or higher. You select the one suiting your needs, and wait for the closing, merrily counting all the money you've saved by selling your home yourself!

Hmmm...if that's the case, why, even in a seller's market such as in 2004 and 2005, did 83% of all sellers still use a licensed agent? Look at it this way. Would you try to invest $250,000 - $500,000 in the stock market without asking a professional financial counselor for advice? Would you operate on yourself? On a more mundane level, would you try to tune up your own engine on today's autos?

In my book "Risk Hotline for Real Estate" (www.riskhotline.com) I offer hundreds of examples of how important a REALTOR(r) is when buying or selling a home or investment property. NAR, the National Association of Realtors, cites numerous studies showing that sellers actually save money using a broker. My book gives many examples, but two of the most important are setting and negotiating price and once your home is sold, negotiating repairs. Unspoken in most transactions is the broker's ability to help you avoid making mistakes (especially when buying) that may cause you immeasurable grief later.

Now that we're in a buyer's market once again, this is more important than ever. Buyers will try to beat you down on price, knowing there are many other homes available for them to choose from. Buyers always assume you can deduct 6-7% off the asking price since you aren't using a broker. Buyers want your home to be in mint condition when they buy...so they won't have those repairs to worry about later.

Everyone assumes the selling and buying process will go smoothly. My partner and I have sold just one home in the past 3 years with no repairs or heavy negotiating required. The opportunities for pitfalls are too numerous to mention, though dry rot, water in the basement or crawlspace, underground oil tanks, leaky roofs, mold, manmade siding, floodplains, hillside erosion, and radon are a few to consider.

Call your REALTOR(r). You'll be glad you did.

Talk about a mixed market!

RMLS' July issue of "Market Action" shows the Portland Metro area in a rapid state of flux. The supply of homes for sale jumped from 2.6 months to 3.5 months in the past 30 days. New listings are up over 11%, pending sales are down 21%, and closed sales are off 16.7%. Surprisingly, home prices over the past year jumped 17.4%, from $263,500 to $309,400. How can that be?

Simple. Last year saw record prices with homes "flying off the shelf." That momentum carried over into the first part of 2006. Home prices were up an average 5% in the firt quarter this year, but only 1% in the 2nd. Economists expect that 1% trend to continue into next year.

The Portland Metro supply of homes at 3.5 months is the highest it has been since February 2004 when there was a 4.8 month supply for sale. That figure last year stood at about 2.0 overall.

Sellers are still in that transitional stage when they still believe that even though the market as a whole has shifted more toward a buyer's market, THEIR home is still worth top price. It's sort of like "All members of Congress stink...except for MY Congressman."

Many buyers are now on the sidelines, waiting to see which direction the market goes before buying. Oregon is more fortunate than California, Arizona, or Florida, for example. They really are in a downslide. Our up and down swings have been far less dramatic, however, which economists will help us keep home prices on a gradual upswing in the next year, perhaps 4-5% annually.

Why it's important to have a Buyer's Service Agreement

All sellers know that when they list their home for sale, they must sign a "Listing Agreement." This agreement commits the seller to give the listing agent an exclusive right to sell the home for for a specific period, say 120 days. In turn the listing agent commits to a fiduciary duty to his or her seller. What is a fiduciary duty?

Much like your attorney has a fiduciary responsibility to protect your interests to the exclusion of others so long as his actions are legal, the listing agent has the same fiduciary responsibility to the home seller.

An "Exclusive Buyer Service Agreement" commits the selling agent to the same fiduciary duty to her or his buyer for a specific period of time. In turn the buyer legally commits to purchase a home or investment property using that broker during that agreed upon time. If they buy a home without having their broker write the sale, they still owe their broker a commission.

Normally the seller pays the commission in a home sale. However, should the owner refuse to pay the commission (such as with For Sale By Owners), the Buyer Service Agreement says the buyer will pay the broker a specified fee based on either a percentage of the sale price (normally 2.7 to 3.15%); the buyer and broker might also agree to a flat fee of say $5000. If the buyer is paying the commission, negotiation for purchase need to take that into account and the offer priced accordingly, since the seller will thus gain that much more in his or her net proceeds.

How does this service agreement benefit the buyer? A lot of buyers never sign such agreements and still purchase a home using a broker. Under this agreement, the selling agent must make consistent efforts to find the buyer the type home the buyer seeks. Should the broker not be diligent in this effort (such as not personally contacting the buyer for one or two months), the buyer may not be liable to pay the commission should the buyer find a home on his or her own. This agreement helps the buyer psychologically also. When a broker knows he will be paid a fee for the effort he puts into finding a buyer a home (which can and often does take months), that agent will work even harder to meet his or her buyer's needs.

If you as a buyer trust your broker sufficiently to have her or him locate and assist you in purchasing a home worth hundreds of thousands of dollars, don't you think you should extend that trust to a formal commitment? The broker, knowing she has a higher standard of performance required under the Buyer Service Agreement, naturally puts even greater effort into finding you the right home...and equally important, in negotiating price, terms, and repairs on your behalf.

Importance of Comparative Market Analysis (CMA)

It is critical that you perform a Comparative Market Analysis (CMA) when you sell or purchase a home. Why? To ensure the home is priced right. We are now in a tighter real estate market in which sellers cannot dictate price and terms any longer. Buyers are very cautious now, fearing a softening or even lowering of home prices.

Oregon's market has softened, but values continue to rise...although slowly. Other states, such as Florida, Arizona, and California, are in a real slump, with values falling 10-15% lower than last year. They had far too much new construction to handle the market in the past two years. Many sellers of existing homes felt they could continue to ask increasingly higher prices without regard for buyer sensitivity to the market. The result? A glut of homes for sale.

In any event, if a seller is too aggressive on price, buyers simply ignore the property. On the other hand, buyers want to ensure that they are not paying too much. A home market analysis helps both parties decide proper pricing.

In my book "Risk Hotline for Real Estate" (www.riskhotline.com) licensees stress the importance of "doing your homework." Your clients need it; mostly likely your company requires it. Definitely your real estate agency expects it.

Look at it this way, a CMA gives buyer and seller peace of mind that the selling/buying price is fair. It gives the listing and selling brokers peace of mind should the buyer or seller later claim the home was priced improperly. They have confirmation that this topic was covered thoroughly with their clients. Clients know that since the broker did perform this valuable service, they did not undersell or overpay.

Risks in broker representing both buyer and seller

When you list your home with a broker, he or she will likely tell you that there might be a situation in which they would represent both buyer and seller. For example, you list your home and your broker gets a call from a buyer that he wishes to write an offer on the home. Your agent explains that he represents the seller, but the buyer insists that the agent represent him also.

This is legal in real estate, unlike being an attorney. The broker likes the idea because he doesn't have to worry about an offer coming in from an inexperienced agent. He has control over both sides of the sale in this instance. Most of the time this "dual agency" as we call it in real estate, works fine.

However, when it goes wrong, look out! If your clients get into a hassle over some aspect of the sale and they deem you, as "their agent," have goofed, you may find you've bitten off more than you can chew. Suddenly the agent goes from hero to goat in one easy step. Both buyer and seller are angry at him or her, and the agent loses not just one good client, but two. Equally likely, the agent may face sanctions from the real estate agency if his sin (negligence or misrepresentation) is serious enough.

In my book "Risk Hotline for Real Estate" (www.riskhotline.com) I discuss an actual situation related to me by another broker (p. 203). This agent sold his own listing, representing both buyer and seller. Since the buyers didn't have the cash to pay for a home inspection, the agent agreed to pay for it himself, since he was to receive both sides of the commission.

The inspector discovered major dry rot and an inoperable sump pump in the crawlspace. Cost of repair: $12,000.

The sellers were furious when they learned "their agent" had paid for the inspection without asking their permission first. On the other hand, the buyers thought he "walked on water."

As luck would have it, the seller's homeowner insurance paid for most of the work. However, the agent lost another listing a few months later when another family member sold his home.

Moral of this story: The broker may have violated his fiduciary duty to his seller. The seller was not angry that the repairs were necessary, just that their agent had broken trust with them by not asking for their approval of his paying for the inspection.

A major theme in my book is showing buyers and sellers how they can be more pro-active on their behalf and understand more about the intricacies of buying and selling a home.

"Risk Hotline" advice about home inspectors

For licensees and customers alike, this is a critical phase of the home buyer/selling process...probably THE most critical phase. In my book "Risk Hotline for Real Estate (www.riskhotline.com) I cover this aspect of the home sale or purchase in several chapters.

For sellers...I strongly recommend you have your own home inspection prior to listing your home, or if you must list right away, have this inspection immediately. It will cost you about $400 but can save you thousands.

Suppose you do not have your home pre-inspected. You negotiate a sale price that you feel isn't as good as you wanted but can live with. Then the home inspector finds $2000 in repairs you had no idea were there. Suddenly your net profit has taken a major hit because you didn't know about problems ahead of time.

Having the pre-inspection and making the repairs before sale gives you the edge in two ways: (1) you know about your problems before the buyer does and can correct them, and (2) the buyer knows you have been pro-active in presenting your home in its best manner, giving the buyer confidence they are making the right decision in purchasing your home.

For buyers and sellers: Do not select a home inspector solely because your brother or next door neighbor used that inspector. Speak to two or three inspectors just as you would when selecting a broker to list your home. Two requisites I recommend are: (1) Be sure they are computerized so they can give you a legible copy of the inspection. Inspectors who still hand-write their reports often write so poorly you can't tell what they've said, requiring endless phone calls to get it right. (2) Be sure they take digital photos of problem areas. This benefits you and the seller because you can both see problems and deal with them more amicably.

Oregon Buyers Advisory in "Risk Hotline"

In my book "Risk Hotline for Real Estate...Learn from actual agent experiences before they happen to you," one of the most important topics I cover is the buyers advisory. Why? Because it is a very important way to reduce risk when buying or selling a home, and for licensees, in reducing business risk.

This document is a detailed source of information about purchasing real property. Jenny Pakula, deputy CEO/staff attorney for the Oregon Association of Realtors says, "Everything a buyer could want to know, would want to know, needs to know about a real estate transaction is in this advisory."

This important document covers over 21 topics, including agent responsibilities to the buyer. If it is this important to the buyer, it is of equal importance to the seller, simply so the seller will know what the buyer will be looking for.

The advisory covers such topics as mold, dry rot, underground oil storage tanks, wells, remodeling, neighborhood crime, and much more. In short, says Pakula, it provides "a myriad of documents that could surface in a real estate transaction."

The Oregon Buyers Advisory can be found online at www.oregonrealtors.org. Be sure to click on the "legal" icon itself, not the sub-icons that will pop up. OAR updates the advisory periodically to keep it current.

(The Oregon Buyer Advisory can be found on pp. 149-160 in my book.) You can look up this topic and many others in my book online at Amazon.com.

Hiring a Contractor - Use caution

NBC's "Dateline" news program had a poignant story on contractors last night which prompted me to write the following caution this morning.

NBC told of two California contractors who had been hired to build or remodel different homes. The owners had paid the contractors hundreds of thousands of dollars to get their work underway. Both contractors got "upside down" as one put it. He took the owners' money but either spent it on his personal bills, or to keep another project going, which he was also "upside down" on. He ultimately declared bankruptcy.

The second contractor simply took that owner's money and left their home in an incomplete condition; worse, he had not properly performed his construction and it had to be torn out and redone.

To add insult to injury, each homeowner was sued by the project's subcontractors and materials providers whom the contractor had not paid. In other words, the homeowners had to pay for the same service twice (plus attorneys fees for fighting all the claims).

These owners made the same mistake thousands of us do each year. Someone refers a craftsman to us and we simply accept that recommendation without doing our own due diligence.

Anytime you hire a contractor, take these steps at a minimum:

1. Get the contractor's license number and call your state contractors board
to see if he/she has any complaints filed. Sometimes the state will only have
knowledge of a complaint. Dig deeper; ask the state for names and contact
information on the complainants. Ask the contractor for an explanation. If
he makes the complaint seem trivial, ask him for the name and number of the
complainant(s) to confirm his statements.


2. Ask the contractor for references. Call those owners and ask if the contractor
was timely, thorough, and clean.

3. Once you select your contractor, make your checks payable to both him and the
subcontractor/materials provider. That way, you won't end up like the owners
above with double billings for services and materials. Be sure the contractor
gets a building permit for the project and that the local inspectors approve
his/her work (foundation, electrical, plumbing, etc) as the project proceeds.
Don't assume the inspectors will automatically do their duty - I heard of a
new home in which the contractor had failed to install attic insulation. The
owner discovered it during winter months when her heating bills skyrocketed.
No inspection had ever been performed.

4. Never give the contractor more than 10 percent down. Then make the payments
in increments as the contractor proceeds.

5. Oregon requires all contractors to pay a $5000 bond in the event they have
complaints filed against them. This bond helps only in small claims...thus
the importance of being diligent in your own investigation of the contractor.

Home warranties boost sale price

RE/MAX Equity Group, Inc. in Oregon recently commissioned American Home Shield (AHS) to conduct an independent survey. The survey was to learn the effects of AHS home warranties on a home's listing and sale price as well as the time it took to sell the home.

The purpose of this study was to see if a home would sell faster and for more money if it had a home protection plan on it. AHS used a 3d party - Cannon and Company, CPA firm located in Memphis, TN - to guarantee integrity in the survey.

What did the survey report:

1. The median list price of homes with a home warranty was 15% higher than those
with no home warranty.

2. Homes with a home warranty sold for a median price of 14% greater than homes
with no warranty. Specifically, homes with warranty sold for a median price of
$220,000 while those with no warranty sold for $193,000.

3. Homes with a warranty sold in 63 days on median average while those with none
sold in an average 72 days.

Jane and I are among the few who provide a home protection plan for ALL of our
clients. We recognized long ago the value of this service to our clients.

Risks in selling "For Sale by Owner"

Unless you just returned from being marooned in Borneo or were on a Yak expedition in Tibet, you're no doubt aware that our real estate market nationwide has bounced around from being red-hot to currently luke warm.

This uncertainty creates a lot of concerns by sellers and buyers alike. What is a home really worth? What offer should I accept? What if I get more than one offer? What is an escalation clause? What are my risks in accepting an offer with an escalation clause? How can I be sure my home will appraise at the agreed upon sale price? Do I lose my sale if the house does not appraise?

What happens if my buyer is not pre-approved? Does "pre-approved" really mean the buyer is fully approved to buy my home? What happens if I accept an offer and the buyer then comes to me with a long list of repairs from the home inspection? Do I have to make the repairs? Does the sale fall apart if I don't make them? What information do I need to keep the buyer from sueing me later if he finds something I didn't disclose? The list is almost endless.

Answers to such questions are critical to the successful sale of your home. A real estate attorney or an experienced real estate team can answer those questions and more.

New Central Air and Heat Pump Regulation

As of January 2006 the US Department of Energy requires stricter energy efficency in all heat pumps and central air systems. In an effort to boost energy efficiency by 30%, all newly manufactured air conditioning and heat pump systems are now required to be 13 SEER ("Seasonal Energy Efficiency Rating") or greater. In previous years the standard was 10 SEER.

One outcome of the new 13 SEER standard is that they are twice as large as 10 SEER units. Therefore they will need larger pads and will take up more space in warehouses and delivery trucks. It also means they may require more than one person to install. This means of course more man-hours and higher costs to both contractors and consumers.

There is an excellent way to avoid these potentially higher costs…a home protection plan. Such plans protect all the major components in your home, such as the furnace, air-conditioner, water heater, electrical, plumbing, and more.

Let us know if you wish more information on this topic.

The Power of Compounding

Mortgage interet rates are low but heading higher. Suppose you wish to increase your mortgage payment to reduce your dept faster. Let’s see how much interest you would save if you paid off your loan sooner.

Let’s assume you have a $300,000 mortgage at 6% interest-only on a 30-year note. Your monthly payment is approximately $1799.00 on a 30-year interest-only note. The interest paid over 30 years is about $347,000. Add that to the $300,000 purchase price and you have a total of $647,000 into the total payment.

However, if you increase your monthly payment just $100 to $1899.00, you will reduce your payment term by 4 years and save $70,000 in interest. If you boost your payment by $200 to $1999 per month, you will shorten your payment period by almost 7 years and save almost $120,000.

Some precautions to take…ask you lender if you have a pre-payment penalty on your contract, and talk to your CPA or real estate attorney about tax consequences.

How to select a good REALTOR(r)

Your first order of business is to select first-rate Realtors(r) who are knowledgeable about the area in which you wish to buy or sell. If you are selling, your agents should be enthusiastic about your home (believe me, if they are not, you'll hear it in their voice or manner). You want agents who are truly enthusiastic about your home. Conversely, don't hire "yes" persons. You want agents who are willing to warn you about issues that may hurt your chances of selling at top price.

For example, my partner and I always recommend our sellers hire a professional inspector to learn about serious problems before putting your home on the market. That way, if your home needs a new roof or has water in the crawlspace, you can correct it and turn a negative into a positive.

This positive action helps you in two ways: (1) You may be able to account for that cost of repair when bargaining your sale price. (2) Eliminating a problem ahead of time gives the buyer confidence you are trying to present your home without serious issues. We also offer great tips on how to minimize cost and maximize profit.

If you are buying a home, you want brokers who are keenly aware of matters that can hurt you as a buyer. For example, can they provide you with testimonials from former satisfied clients? Select agents who recommend a home inspector who (1) is computerized and (2) takes pictures of problem areas. Seeing is believing when you're asking a seller to replace a roof or repair dry rot in the crawlspace.

Portland Oregon Real Estate

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