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Ethics

Are Realtors Defeating Stimulus?

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foreclosure-hudThis post is an attempt to understand, not to lecture. Allow me to set the stage for you. In our firm, transactions involving HUD foreclosures account for a third of our volume for the past couple of years. Considering the deals that were available in this corner of the market, it was always a viable option for our investor clients looking for homes below market value. But this year, change is in the air. For one thing, homeowners are bidding on these foreclosures more often and winning these bids since they don’t require investor-like discounts and HUD likes to promote home ownership. But most importantly, now more than ever, we’re noticing that a dominant majority of properties are going for asking price or more. Sometimes, much more.

The Research

To make sure that I wasn’t extrapolating data from a few deals into a conclusion with rather serious consequences, I decided to dig deeper and substantiate my hunch with hard numbers. During the period from Jan 1st – Jul 1st 2008, there were a total of 207 HUD properties sold in Harris County, 49% of which sold at or over asking price. During the same period in 2009,  there were a total of 128 solds, 69% of which sold at or over asking price. That’s a 40% jump without even counting the 75 properties currently pending that didn’t make it into the analysis.

Puzzle Pieces

Why does this matter and where does the housing stimulus enter into this? The numbers I presented above were sales figures in the $90,000 to $130,000 price range. My mortgage pros will probably back me up when I say that wide majority of these transactions involve FHA financing. When you purchase a HUD Home with FHA financing and bid higher than the asking price, the Buyer has to make up the difference in cash since the lender is obligated to use the HUD appraisal. What we’re seeing on the trenches, are bids higher than asking by 7, 8, 10 thousand dollars. Most buyers that use FHA financing do so for its lax down payment requirements since they don’t possess conventional type money to put down . Which brings up the question: Where are these buyers coming up with this money to close these transactions? My theory is that first time homebuyer tax credit money is being used to cover the difference.

Questions

  • Is the jump in “at or over asking” solds due to competitive environment or overzealous agents pushing clients into higher bids?
  • If the second option is true, does this constitute a breach of fiduciary duty by these agents?
  • If first time homebuyer tax credit is being spent for this purpose, is it worth the expense?
  • Are you seeing similar trends in other parts of the country or is this a local Houston issue?

I would love your input in the comments.

Houston Real Estate Rainmaker and Uberproud Father/Husband (not necessarily in that order). When I'm not skinning cats or changing diapers you can find me on Twitter or Facebook. I blog about marketing, social media and real estate. I might not always be in agreement, but you can rest assured I'll be honest. Oh, and I can cook a mean breakfast...

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24 Comments

24 Comments

  1. Thomas Johnson

    July 16, 2009 at 10:06 am

    Maybe the HUD appraisal values are suppressed. I do not think there is a new appraisal which would bump the value when these new deals close. If there are 10 HUD homes nearby, and a third of them sell for more than HUD appraisal by say 5%, then the remaining HUD homes would be another 5% undervalued. If there is a deal, cash comes out of the mattress.

  2. jlittleaz

    July 16, 2009 at 10:32 am

    In the Phoenix market, REO drives the prices, but investors drive the REO sales. It can be almost impossible for a traditional buyer to purchase an REO listing in lower price ranges or in a desireable community.

  3. Mike Simonsen

    July 16, 2009 at 10:35 am

    Awesome data Erion! I’m not one to blame “overzealous agents” for this any more than you can blame mortgage guys for the last time around. I take the position that the market situation drives the participant’s behavior.

    However, I do indeed think that this surge at the low end (we see it in the Altos data too) is a function of two years of stagnation, pent up demand, what looks like screaming good deals, cheap money AND the tax credit. The Feds wanted to stem the tide and well… there you go.

    The question is, How much is too much?

  4. BawldGuy

    July 16, 2009 at 12:20 pm

    Hey Erion — I think Mike has it right. Either the buyer wants the home or they don’t. When they realize they’re in competition with others willing to pay more, it becomes gut check time.

    The agents? I’m sure there are a few not doing their honest best for their client. That said, I’m also sure you and your guys are often asked by your buyers for guidance when the bidding begins. You give you best, informed professional opinion. The buyers then make their own choice.

    I also wouldn’t discount the affect the last few years has had on the psyche of entry level buyers. Surely many think this could be one of their last chances to own a home.

    Make sense?

  5. Louise Scoggins

    July 16, 2009 at 12:26 pm

    We are definitely seeing a trend of mutiple offers and bidding wars on MANY of our REO and HUD listings. A lot of them are priced so ridiculously low that a buyer could bid above list price and still be getting an amazing deal. Oh and don’t forget the short sales. I hardly come across a short sale that doesn’t have 2-3 offers already in and the bank is still accepting offers. I also think sometimes the multiple offer situ makes a buyer think “oh this must be a REALLY good deal if other people are already bidding on it”. This is where we, as Realtors, need to truly examine the area comps, see what kind of work this REO property needs, and determine just how good of a deal is it.

  6. Ruthmarie Hicks

    July 16, 2009 at 1:43 pm

    We are still in something of a slump and we haven’t had (so far) the REOs that other areas have had. However, the stagnation of the market has created a lot of pent up demand. Once the prices started to come down – buyers started to come out of hiding. I’m with Mike, no market can stagnate forever.

  7. Erion Shehaj

    July 16, 2009 at 4:42 pm

    @Mikesimonsen

    One piece of information I left out of the original post was this: Last year we were seeing multiple price reductions ($10k a pop) after properties were going through auction without sufficient bids. Fast forward to this year, when properties are selling over an unreduced asking price. Many of these deals carry retail price stickers on them. Pent-up demand has to influence things, sure. But 40% and counting?

    I’m not one to blame “overzealous agents” for this any more than you can blame mortgage guys for the last time around. I take the position that the market situation drives the participant’s behavior.

    I don’t think anyone can argue against the fact that some of the mortgage guys were responsible for some of what happened last time around just like some agents are responsible for some of this issue.

    @Bawldguy

    I disagree with you so rarely that when it happened this morning it got me giddy 😉 I’m all for personal responsibility and “buyers either want the house or they don’t”. But you can’t tell me agents’ advice doesn’t influence that decision. When a first time homebuyer sees the asking price of a home, they don’t automatically think: Hmmm let me go over that. Their agent fuels that urgency by striking the fear of losing the deal into their hearts. Clients are the ones to sign on the dotted line, but this decision is UAI (under agent influence). And if enough agents engage in this practice, you have an overflowing, competitive market like this. Which brings about my question: When an agent influences their client’s decision to go higher than asking, is she serving her client’s interest or her own? When an agent suggest usage of tax credit to cover the difference, is she breaching fiduciary duty?

    I’m by no means suggesting that this is an industry wide issue. The majority of agents selling HUD homes are honest, hard working Realtors. But the issue is, are there enough deal pushers to force the market into this “inflationary” trend? Because if there are, honest Realtors will have to adapt to new market conditions by suggesting that their clients go higher on their bids as well.

    @Thomas

    Many of these deals are not at severe discounts considering condition.

    @Louise

    Thanks for your input re: your market. I have no issue with bidding wars per se as they tend to be part of the game in the distressed property market. My issue is with the increase in the ferocity of these wars which makes me wonder about its authenticity.

  8. BawldGuy

    July 16, 2009 at 5:05 pm

    Erion — We really don’t disagree much that I can discern here. In my comment I said — The agents? I’m sure there are a few not doing their honest best for their client.

    But you also touch on another principle. As pros we should make clear and obvious judgments about value, communicating them to clients. But in your examples I don’t see homes selling for obviously ‘over priced’ figures. Influencing a buyer to pay $120K for an $85K home is something neither one of us would do, sans overwhelming evidence it was worth the higher figure.

    Are all of the buyers either stupid or advised by unscrupulous agents? Not likely.

    That said, there are just as many mistakes made by ‘knowledgeable’ agents in what I’ll call transitional markets as anyone. Example: Coming out of the S & L Crisis many pros advised clients in the way you recommend, but were soon called on the carpet when the market showed that advice was woefully incorrect. Of course, if there are tons of like-kind homes available, the buyer can take their chances, moving on to another opportunity. Sometimes though, that’s simply not the case.

    In the long run, paying a little more for a home doesn’t really come out in the wash, so to speak. Your position seems to assume the agent will always know the future, which of course is not the case.

    Make any sense?

  9. Ken Brand

    July 16, 2009 at 5:29 pm

    Great stuff. I believe the First Time Buyer Credit persuades an otherwise reluctant buyer by offering an intellectual bridge to their emotional desires. Also, I think the super low rates make and extra few thousand dollars in purchase price seem insignificant when turned in to less than the cost of a Latte a day.

    Dear Buyer, if you want it, buy it. You’re rich uncle wants to give you a wad of cash back and the mortgage rates will be much higher in the future.

    Also, I think our Houston market is blessed. In terms of percentages, compared to other hard-hit areas, the low number of total foreclosures compared to inventory creates buyer competition.

  10. Mike Simonsen

    July 16, 2009 at 9:23 pm

    Erion – While I agree that there are bad apples in every bunch, they’re so far down this food chain that I can’t see them as the *cause* of overbids. Overbids happen because of demand vs. available supply.

    And on that note… I’ve got some cool data brewing…

  11. Vivian Hooton

    July 17, 2009 at 3:16 am

    As an REO investor you have hit a topic of mine squarely on the head.

    Louise Scoggins says-A buyer thinks “oh this must be a REALLY good deal if other people are already bidding on it”. This is where we, as Realtors, need to truly examine the area comps, see what kind of work this REO property needs, and determine just how good of a deal is it.

    For me, this is where my Realtor is worth her weight in gold. I can get 5 comps from various sources and have a mean price from one go $75,000 up or down as you look at the mean of the other sources. Usually the MLS comps give a gut feeling of being more accurate.

    As Bawldguy thinks, so do I. He says,
    Hmmm let me go over that. Their agent fuels that urgency by striking the fear of losing the deal into their hearts. Clients are the ones to sign on the dotted line, but this decision is UAI (under agent influence). And if enough agents engage in this practice, you have an overflowing, competitive market like this. Which brings about my question: When an agent influences their client’s decision to go higher than asking, is she serving her client’s interest or her own?

    These are questions that pop immediately to mind if I should be dealing with a listing agent I do not know. Yes, this influence is strong in the marketplace. Yet, as you say, it’s the buyer who makes the final decision.

  12. Missy Caulk

    July 17, 2009 at 10:13 am

    We are seeing HUD homes and foreclosures in some area’s go over asking price. The listing agent tells us all bids due by ??? Make it your highest and best.

    Mostly in Ann Arbor city not the other parts of Washtenaw County.

    Of course we tell our Buyers that IF they want that house.

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Ethics

The problem with a self-policing industry: you have to be a narc

Ethics violations in the real estate industry can make or break a Realtor’s career, depending on the severity, so it would stand to reason that all would be mindful of the rules, but there are always individuals in the field that act as if the Code of Ethics is irrelevant.

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An animated discussion on ethics training

“Does anyone else find it ironic that NAR – the trade association for Realtors – has to mandate that members take an ethics class every four years?” An agent who attended one of my company’s broker opens yesterday posed that question to the wine and cheese grazing attendees. Of course, that opened up an animated discussion on the value of etchics training and the lack of enforcement when the rules are violated.

One agent volunteered that the guy sitting next to her in her last ethics class played games on his cell phone and then cheated during the test at the end of the class. Seriously, dude? You cannot even pay attention long enough to pass what should be the easiest test you’ll ever have to take in your career? Perhaps he was just seeing how far he could push it by cheating during an ethics test, to see if anyone else around him caught the extreme irony there. None of the other agents around him – including the agent he cheated off – turned him in and the instructor didn’t notice.

This same agent later called one of my sellers and tried to convince him to break a listing contract with me, because he had a “guaranteed buyer” in the wings. The seller was an attorney, and this bozo tried to get me cut out of the deal, offering the seller a reduced fee to dump me. The seller held firm and directed the agent to call me, then the seller called to let me know about the conversation.

“But you know if you file something the other agent will know.”

It gets better. After the deal closed, I requested paperwork from our local Board of Realtors to file an ethics complaint. The person in charge said, “But you know if you file something the other agent will know.” Gee. Really? I asked her to send the paperwork over anyway.

I called the seller/attorney and asked him to repeat the conversation to me, because I was documenting it to file a complaint. He turned wishy washy on me at that point and his story changed from “The other agent tried to get me to dump you as the listing agent to cut you out” to “Well he really only asked a few questions and I told him to call you. He probably didn’t mean any harm by it.” So there goes my star witness, who doesn’t want to rock the boat.

I didn’t file the complaint. I resorted to the “turn the blind eye but never trust the sleazeball again” path. And that is what happens to almost all ethics issues I hear about / see in person.

That’s what happens when you have a self-policing group of “professionals” who would rather not “narc” on a fellow agent. After all you’re probably going to end up on the other side of a deal from this guy some day, right? The guy in my example has sold two of my houses since that run-in. Why tick him off by filing a complaint and going through all that hassle? If he stops bringing buyers to my properties then my sellers ultimately lose, right?

Boiling down the CoE

The NAR Code of Ethics takes up pages and pages of tiny print, and it runs each year in their trade magazine (I think it’s the January issue). Does anybody read that? Probably not many. I’d argue none of us ever should have to read it again. Simply follow this advice instead. The thousands of words in the Code boil down to one thing: Do unto other agents, and consumers, and clients, what you would have them do unto you. It’s the Golden Rule. Simple. Well, obviously not, for many agents and brokers.

The sad part is the agent in my example had no clue how close I was to filing that compaint, and if he did know he’d probably scratch his head and wonder why his actions were “wrong.” Making us take a one-day class every few years won’t “make” the unethical agents suddenly operate ethically. Most of them just don’t get it.

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Ethics

Ethics hearings in private a disservice to consumers?

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Fight Club and real estate

For those of you that saw the movie ‘Fight Club’ you’ll remember that Rule #1 is “You do not talk about fight club,” followed closely by Rule #2, “You DO NOT talk about fight club.” Which, believe it or not, brings me to today’s topic: The Real Estate Code of Ethics and Arbitration. Article 17 obligates Realtors to resolve fights disputes with another Realtor through arbitration (not litigation). Arbitration is conducted at the local board level, and I am not aware of a local board that doesn’t require arbitration to be confidential.

I respect that public internecine warfare amongst Realtors isn’t in the interest of our industry, and doesn’t belong in the public spotlight. I’m not here to advocate the collective airing of our dirty laundry. That said, I wonder if our collective agreement to keep our concerns confidential can inadvertently harm the consumer and ultimately makes all of us look a little shoddier?

To find the first arbitration guidelines created by NAR and distributed as a set of suggested rules for boards to follow, we have to travel all the way back in time to 1929. NAR’s first Code of Ethics & Arbitration Manual wasn’t created until 1973, and it credited a 1965 California Association of Realtors version as its model.

Appalling conduct

I can think of two instances in the past year where I was so appalled by the conduct of a fellow Realtor that I went to the trouble to inquire about how to lodge a Code of Ethics complaint with my local board. After weighing the time required to make a competent complaint and comparing it with the best case outcome (a closed-to-the-public hearing in which they were found to have violated the code of ethics), I decided not to pursue a complaint in both cases. My association’s bylaws (and probably yours) give it the power to discipline any member based on the results of a Code of Ethics hearing, “provided that the discipline imposed is consistent with the discipline authorized by the Professional Standards Committee of the National Association of REALTORS® as set forth in the Code of Ethics and Arbitration Manual of the National Association.”

“Sanctioning Guidelines” – (Appendix VII of Part 4 of the 2011 manual for the very curious), guides member boards to impose disciplinary consequences that are progressive and fair, taking all considerations into account. Sample first-time disciplinary actions include suggestions of a letter of warning, a fine (amounts range from $200 to $5,000 depending on the severity of the violation), and attendance at relevant education sessions. Not to sound defeatist, but a confidential letter of warning and a fine of around $200 doesn’t seem like an outcome worth investing much of my time in.

Practicing in the internet era

Given that we live and work in the internet era, and review sites like Yelp abound, it seems a bit odd to me that a local board might know of an agent with problem behavior that is documented yet choose to make that information unavailable to consumers. My understanding is that the results of a code of ethics hearing are confidential with disclosure authorized in a few situations, none of which deal with informing the public.

Many of my fellow colleagues feel that the best response to a bad agent is to be patient and give them enough time to work themselves out of business. I can respect and understand their hands-off approach. But what about the damage that individual does to our industry as a whole? While we whisper, warn in confidence and know amongst ourselves how awful they are, the public doesn’t get the benefit of our perspective. Deprived of it, they turn to consumer review sites like Yelp.

How do you think we, as an industry, can help consumers in their quest to find a trustworthy agent?

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Ethics

Realtors, we really need to get over ourselves already

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A letter from the child of a Realtor.

Real estate now vs. 1987

In Real Estate, some things are always changing, like financing, education, laws, rules and technology. The two that will always remain constant, as long as they are within the law, are following our clients’ directions, and working with their best interests in mind.  I’m not sure we always follow through with this, though.

Some of us knowingly take over priced listings.  Some of us take listings that are out of our area of expertise.  Some of us won’t show short sales or REOs.  Some of us won’t show homes with low co-op splits.  Some of us don’t have Supra/e-Keys, and miss out on those listings entirely.

Putting our interests first

When these things occur we are putting our own interests first, not our clients’.  We may think that by having as many listings as possible is a good thing, that’s what we’re taught after all, isn’t it?  It may not matter that some are overpriced, eventually, whether one month or four months down the line, the price will be reduced.  It’s just a matter of time and money, for our clients, after all.  The same can be said when we take listings outside our area of expertise, just to add on to our inventory.  If we don’t know what we’re doing, on a short sale listing, for example, it will only cost our clients a lot of time and money.  A lot.

By eliminating certain houses our clients see, that may already fit their criteria, we’re taking away their choices.  Distressed sales account for close to 40% of the market.  This is probably higher in some local markets.  There is no legitimate way to ignore roughly 1/3 of the homes being sold.  Co-op fees are often a touchy subject, especially when they are, not “enough.”  If everyone utilized a Buyer Broker Agreement that stipulated what their fee was, the issue would take care of itself.  Not being able to access listings with the use of Supra/e-Keys is a choice.   Choosing not purchase one will mean agents will not be able to access Fannie Mae (and eventually, probably additional Gov REO homes) along with the listings that are already using them.

Our priorities versus theirs

We totally need to get over ourselves already.  We are not bigger than our clients.  Our priorities are not more important than theirs when it comes to the actual listing and selling of homes.

Recently, my awesome parents dug through a few boxes and rounded up one of my first art projects. About 25 years ago I did the poster featured above about my Mom, and her Real Estate career.  It was for an Open House (no pun, honest!!!) for the elementary school where I attended first grade.  It was just, what she did according to me way back then.  Things are way more complicated now, than when I was six.  There’s a heck of a lot more paperwork for one.  But the same basic principle still applies.

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