Understanding FSBO

US News & World Report quoted me in 3 Things to Know About Selling a House on Your Own. It opens,

The internet is full of sites that help homeowners sell property on their own, promising thousands in savings by avoiding commissions, but the National Association of Realtors says commission savings on a for-sale-by-owner transaction, or FSBO, are more than offset by lower sales prices.

The truth lies somewhere in between, according to most objective analysts. So for most sellers, deciding whether to go FSBO is a tough call.

Ali Wenzke, a Chicago writer with a blog called the Art of Happy Moving, says do-it-yourself transactions have worked well for her.

“My husband and I have sold two houses FSBO and purchased one home without an agent,” she says. “Be objective. Work hard. Be flexible to do showings at any time.”

“Anyone can do it and the average home is shown five times or less,” says Sissy Lappin, co-founder of the FSBO website ListingDoor.com.“The notion that no buyers or sellers can understand or manage what happens in a transaction is simply absurd.”

One thing is sure: the average seller’s experience does not necessarily apply in any specific case. What matters is whether you can succeed with a FSBO, regardless of whether your neighbor has.

Adjust your expectations. Experts do agree that FSBO novices should be realistic. Even if you get top dollar and avoid the agent’s commission, the process can be a time-consuming headache. And even if you don’t have an agent of your own, you may have little choice but to pay one representing the buyer, cutting the savings in half.

“While listing on your own seems easy, you are in fact replacing a job which you usually employ a broker to do full time,” says New York-based real estate agent Dylan Hoffman, who is not a fan of FSBOs. “You will need to organize showings, tours, previews and open houses. Plus all the back-end work, like maintaining photos and descriptions on websites, checking for a clear title, etc. An owner would also take on the role of marketing, both digital and print.”

The internet has made the process much easier, with many sites now offering listings, advice and services like printing signs. For a fee, usually several hundred dollars, some services will get your home on the multiple listing service used by real estate agents and buyers, though Lappin says it’s good enough to list on a site like Zillow.com, which is free. The goal is to save the agent’s commission, typically about 6 percent of the sales price, or $18,000 for a $300,000 home.

“FSBO has grown up and sellers don’t have to settle for a red-and-white generic yard sign,” Lappin says.

She says the seller of a $400,000 home with $60,000 in equity would spend 40 percent of that equity if they paid a real estate agent 6 percent commission, or $24,000.

What kind of homes sell without an agent? The National Association of Realtors says about 10 percent of home sales are conducted without an agent, though some critics say the figure is higher. The association says the average FSBO sells for 13 percent less than the average agent-assisted sale. Again, critics like Lappin disagree, with many noting the association’s studies do not look at comparable homes and lump in mobile homes and other inexpensive properties, as well as intra-family deals that tend to have low sales prices. Association figures do show that FSBO is less common with high-priced homes.

FSBO advocates generally agree that doing it yourself is more difficult for the seller, and can take longer. Though you might catch a buyer’s eye right off the bat, the FSBO approach is relatively passive, as you won’t have an agent steering buyers your way. Obviously, the seller must be available to show the house, and that can require weekdays, not just Sunday afternoons.

“It takes a lot of people skills to sell your own home,” says law professor David Reiss, director of The Center for Urban Business Entrepreneurship at New York’s Brooklyn Law School. “Can you engage with potential buyers even as they are criticizing your house and the choices you made about it? Can you distinguish serious buyers from window shoppers? Can you negotiate without giving away the farm or playing too hard to get?”

Anti-discrimination laws limit what you can tell buyers about issues like the ethnicity of neighbors, or even the number of school-aged kids or seniors on the block. And you have to be willing to show to all comers.

Going it alone also means you won’t have an agent’s advice setting the home up to it up to look its best, though you could hire a professional stager.

Negotiating Real Estate Fees

office-negotiationPolicyGenius quoted me in 5 Mortgage Loan Fees and Rates You Should Always Negotiate. It opens,

When it comes to making major purchases or financial decisions, we always hear that mantra, “Everything is negotiable.” You can haggle with the salesman when shopping for a new car, or with the hiring manager at a new job over your starting salary. It’s even possible to negotiate your tuition rates as a college student.

But a lot of the costs associated with buying a house can be difficult to negotiate down, according to mortgage advisor and author Casey Fleming.

“Appraisal, underwriter and processor are chosen by the lender, and the variation in fees is quite small,” he says. “Escrow and title services are typically chosen by the real estate agent of the seller in most areas, so the buyer has little say in what those fees will be.”

There’s also not much way around paying private mortgage insurance — you’ll need no less than a 20% down payment to avoid it.

But, you don’t need to let the non-negotiable items prevent you from bargaining for a better deal on other house-hunting costs. Here are a few fees and costs worth negotiating:

Real estate broker’s fees and commissions

From the outset, consider negotiating your real estate broker’s fees, according to Prof. David Reiss of the Brooklyn Law School, who teaches real estate finance and community development. “If 6% is standard in your community, you can look for brokers who will sell your home for 5% or less,” he says. “Be careful how low to go though, because you want your broker to be motivated enough to sell your property.”

Reiss notes that to gain the most advantage in negotiating their fees, your broker’s listing agreement should outline all the services they’ll provide you regarding advertisements, showing, and the plan in place to buy or sell the property in question.

Honesty Is Best

Grant Wood; "Parson Weems' Fable"; 1939; oil on canvas; Amon Carter Museum, Fort Worth, Texas; 1970.43

Grant Wood; “Parson Weems’ Fable”; 1939; oil on canvas; Amon Carter Museum


Trulia quoted me in 6 Things Home Sellers Are Legally Required To Disclose. It opens,

When it comes to selling your home, heed your mother’s advice: Honesty is always the best policy.

Denise Supplee and her husband, Jerry, had been in their new home in Horsham, PA, for just three months when they started to notice something strange in their bathroom. “You could see mold starting to seep through the paint,” says Denise, a co-founder and director of operations of SparkRental.com. “We had a contractor come in and he told us we were lucky,” she says. “It seemed to be an issue kept to the bathroom and occurred most likely because there was no exhaust fan.” The problem: The seller had blatantly painted over existing mold without ever disclosing it to the Supplees. Although the seller made good and paid for the mold removal — a $1,500 cost — the Supplees could have taken them to court for not disclosing the problem before the sale.

It’s a question that plagues many residential sales: As a seller, what do you — and don’t you — need to tell the buyer about your home? “My rule of thumb is this: If you’re not sure if you should disclose something, you probably should,” says Sam Pawlitzki, a real estate agent with Beach Cities Real Estate in Los Angeles, CA. “Think of seller disclosures like a Carfax report.” Plus, the harm in not disclosing something can result in some serious legal and financial woes. Here’s a list of what you legally need to include in your sellers’ disclosure to keep yourself out of hot water.

1. Lead paint

One item is a must when it comes to being upfront with potential buyers: the use of lead-based paint in your home. “If the home was built before 1978, each party in a transaction needs to sign a lead paint disclosure,” says Pawlitzki. “This is a federal law and applies to every state. No matter if you think the lead paint has been removed or not, it still needs to be disclosed.” However, David Reiss, a professor at Brooklyn Law School in Brooklyn, NY, explains, “If you are not aware of a lead-based paint issue in the house, you are not required by the act to investigate whether there is any.”

Questions Your Broker Might Not Answer

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Realtor.com quoted me in 4 Questions Your Agent Might Not Answer—and Why. It reads, in part,

Want to know how old the roof is on a house, or whether it uses gas or electrical heat? Your trusty real estate agent can tell you pretty much anything you need to know about a home you’re hoping to buy (or at least find answers for you). Yet if you ask your agent certain questions, you might be puzzled to hear nothing but an awkward silence. Why?

It’s not that real estate agents don’t know the answer; they probably do. It’s just that they’re correctly staying on the right side of the Fair Housing Act, which prohibits housing discrimination based on race, religion, sex, or family/economic status.

So that silence is actually a good thing—it means that your agent is conscientiously steering clear of the tinderbox issues hidden within your innocent questions.

Here are the top ones that leave them feeling tongue-tied—plus where you can actually find the answers you seek.

Question No. 1: Is this a good place to raise a family?

This question is often “a lose/lose/lose for the Realtor®,” says David Reiss, a professor at Brooklyn Law School who specializes in real estate. If an agent admits a certain area is not all that family-friendly, “it could imply that families with kids aren’t welcome.” Or, on the flip side, “if the agent says that the neighborhood is a good place for kids, that could be interpreted as saying households without kids aren’t welcome, which is another form of discrimination.”

Housing professionals who try to either encourage or discourage home buyers based on the kid question can, and do, face consequences in court.

Bottom line: Rather than get burned, a cautious agent refrains from presuming where you and your brood will thrive. So if you want to know this info, you’ll have to do your own research  (more on how to do that below).

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Question No. 4: How are the schools here?

Because the racial divide can also run deep in U.S. schools, “a Realtor has to be careful not to let their answer be construed as a coded message about race,” Reiss says. Rather than risk a potentially offensive miscommunication, Realtors may very well introduce you to one of many websites that rank schools—such as Great Schools and School Digger.

Another option: If you have your heart set on your child attending a certain school, download realtor.com’s mobile app, which allows you to search for homes for sale by school district.

Wall Street’s New Toxic Transactions

Toxic Real Estate

The National Consumer Law Center released a report, Toxic Transactions: How Land Installment Contracts Once Again Threaten Communities of Color. It describes land installment contracts as follows:

Land contracts are marketed as an alternative path to homeownership in credit-starved communities. The homebuyers entering into these transactions are disproportionately . . . people of color and living on limited income. Many are from immigrant communities.

These land contracts are built to fail, as sellers make more money by finding a way to cancel the contract so as to churn many successive would-be homeowners through the property. Since sellers have an incentive to churn the properties, their interests are exactly opposite to those of the buyers. This is a significant difference from the mainstream home purchase market, where generally the buyer and the seller both have the incentive to see the transaction succeed.

Reliable data about the prevalence of land contract sales is not readily available. According to the U.S. Census, 3.5 million people were buying a home through a land contract in 2009, the last year for which such data is available. But this number likely understates the prevalence of land contracts, as many contract buyers do not understand the nature of their transaction sufficiently to report it.

Evidence suggests that land contracts are making a resurgence in the wake of the foreclosure crisis. An investigative report by the Star Tribune found that land contract sales in the Twin Cities had increased 50% from 2007 to 2013. Recent reports from The New York Times and Bloomberg reveal growing interest from private equity-backed investors in using land contracts to turn a profit on the glut of foreclosed homes in blighted cities around the country.

Few states have laws addressing the problems with land installment contracts, and the state laws on the books are generally insufficient to protect consumers. The Consumer Financial Protection Bureau (CFPB) has the mandate to regulate and prevent unfair and deceptive practices in the consumer mortgage marketplace, but has not yet used this authority to address the problems with land installment contracts. (1-2, footnotes omitted)

This report shines light on this disturbing development in the housing market and describes the history of predatory land contracts in communities of color since the 1930s. It also shows how their use was abetted by credit discrimination: communities of color were redlined by mainstream lenders who were following policies set by the Federal Housing Administration and other government agencies.

The report describes how these contracts give the illusion of home ownership:

  • They are structured to fail so that the seller can resell the property to another unsuspecting buyer.
  • They shift the burden of major repairs to the buyer, without exposing the seller to claims that the homes breach the warranty of habitability that a landlord could face from a tenant.
  • They often have purchase prices that are far in excess of comparable properties on the regular home purchase market, a fact that is often masked by the way that land contract payments are structured.
  • The properties often have title problems, like unsatisfied mortgages, that would not have passed muster in a traditional sale of a house.
  • They often are structured to avoid consumer protection statutes that had been enacted in response to previous problems with land contracts.

The report identifies Wall Street firms, like Apollo Global Management, that are funding these businesses. It also proposes a variety of regulatory fixes, not least of which is to have the CFPB take an active role in this shadowy corner of the housing market.

This is all to the good, but I really have to wonder if we are stuck just treating the symptoms of income and wealth inequality. Just as it is hard to imagine how we could regulate ourselves out of the problems faced by tenants that were described in Matthew Desmond’s Evicted, it is hard to imagine that we can easily rid low-income communities of bottom feeders who prey on dreams of homeownership with one scheme or another. It is good, of course, that the National Consumer Law Center is working on this issue, but perhaps we all need to reach for bigger solutions at the same time that we try to stamp out this type of abusive behavior.

Dual Agency Explained

photo by Richard P J Lambert

Trulia quoted me in What Is Dual Agency? (And Why You Should Beware). It opens,

Home sellers and homebuyers are two sides of a complementary transaction. Should they each have their own agent, or is one agent enough? The answer: It depends.

You’ve probably heard the phrase “You can’t have your cake and eat it too.” But if you’ve ever puzzled over it’s meaning, here’s a hint: If you eat your cake now, you won’t have any left over to look forward to eating later. In other words, sometimes a person is forced to make a choice between two good options. In the real estate world, dual agency breaks the cake rule: If your real estate agent also represents the sellers of the home you want to buy, you don’t necessarily need to ditch them. In many cases, you can keep your agent and get the house too — if you want to, that is.

Whether you’re buying a home in Providence, RI, or Tampa, FL, it’s typical for one agent to represent the seller and another agent to represent the buyer. With dual agency, one agent works for both the buyer and seller — and keeps the full commission. Dual agency also occurs when agents from the same brokerage represent each party. But like enjoying a huge slice of cake and in return getting a bellyache, there are definitely pros and cons to agreeing to dual agency.

Pro: Streamlined communication

Because one real estate agent or brokerage represents the buyer and the seller, the agent doesn’t need to wait every time communication needs to happen between the parties. Streamlined communication often creates a smoother transaction. “You are in charge of both sides, including paperwork, scheduling, and deadlines,” says Mindy Jensen, a Colorado agent and community manager of BiggerPockets.com. “We’ve all been involved in a sale with an agent who didn’t respond in a timely manner, missed deadlines, and in general did not perform their duties as they should have. For us control freaks, dual agency can seem like a great thing.”

Con: No advice

Because a dual agent is working in a potential conflict-of-interest situation — one client (the seller) wants to get as high a price as possible, while the other client (the buyer) wants to pay as little as possible — the agent can’t take sides or give advice. Bruce Ailion, an Atlanta, GA, real estate agent and attorney, compares dual agency to having one attorney representing both husband and wife in a divorce. “The parties’ interests are adverse and are best represented by independent professionals,” he says.

The agent in a dual agency situation becomes, instead of a coach, more of a referee. “The agent cannot disclose confidential information to either party and has to act in a neutral position during the transaction,” says Emily Matles, a New York, NY, agent with Douglas Elliman. Matthew Berger, another New York, NY, agent with Douglas Elliman, says: “When the listing agent steps into the role of dual agent, they cannot give advice to the seller nor the buyer.” On the other hand, when you have an independent agent, “You are more likely to get the benefits of being a principal getting fiduciary benefits,” Ailion says.

Pro: There must be full disclosure

Whether you’re a seller or a buyer, there’s nothing to fear about dual agency: If you don’t consent to the practice, it won’t happen. “The dual-agent broker must ensure that both parties know of the arrangement and consent to it,” says David Reiss, professor of law at Brooklyn Law School. His advice: “Home sellers should review the terms of the listing agreement before they sign it to see if dual agency is being contemplated.”

Calculating Closing Costs

image by www.lumaxart.com/

Realtor.com quoted me in How Much Are Closing Costs? What Home Buyers and Sellers Can Expect. It reads, in part,

Closing costs are the fees paid to third parties that help facilitate the sale of a home, and they vary widely by location. But as a rule, you can estimate that they typically total 2% to 7% of the home’s purchase price. So on a $250,000 home, your closing costs would amount to anywhere from $5,000 to $17,500. Yep that’s one heck of a wide range. More on that below.

Both buyers and sellers typically pitch in on closing costs, but buyers shoulder the lion’s share of the load (3% to 4% of the home’s price) compared with sellers (1% to 3%). And while some closing costs must be paid before the home is officially sold (e.g., the home inspection fee when the service is rendered), most are paid at the end when you close on the home and the keys exchange hands.

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Why Closing Costs Vary

The reason for the huge disparity in closing costs boils down to the fact that different states and municipalities have different legal requirements—and fees—for the sale of a home.

“If you live in a jurisdiction with high title insurance premiums and property transfer taxes, they can really add up,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “New York City, for instance, has something called a mansion tax, which adds a 1% tax to sales that exceed $1 million. And then there are the surprise expenses that can crop up like so-called ‘flip taxes’ that condos charge sellers.”

To estimate your closing costs, plug your numbers into an online closing costs calculator, or ask your Realtor, lender, or mortgage broker for a more accurate estimate. Then, at least three days before closing, the lender is required by federal law to send buyers a closing disclosure that outlines those costs once again. (Meanwhile sellers should receive similar documents from their Realtor outlining their own costs.)

Word to the wise: “Before you close, make sure to review these documents to see if the numbers line up to what you were originally quoted,” says Ameer. Errors can and do creep in, and since you’re already ponying up so much cash, it pays, literally, to eyeball those numbers one last time before the big day.