For the past several weeks, I’ve been focusing my Facebook posts on our real estate company fan page on two topics: local businesses and the horrible impact of the Biggert-Waters Flood Law. They may not appear to be directly related, but they are. Both deal with community. Communities are, or should be, more than the places where we live and do business. They should be a place where we take pride in our surroundings, where we should enjoy living and doing business. They should be a place where we support each other. Because I grew up in a family which ran a real estate company, I was taught from a young age to take pride in my town, and to support local businesses. My Mom used to say: “Spend your money where you make your money.” As a local business owner, I try very hard to do that. I also try to support local projects, meaning everything from cheerleaders to ball teams. It is sometimes annoying to be have people who use real estate agents from out of town then turn around and ask us for support. I always want to lecture them on the connection–if I don’t make money here, I can’t spread it back around here. But overall, our community is supportive of local businesses. So, before Christmas, I tried to highlight all the small businesses in my little town and give my readers information about local shopping. Then, there is Biggert-Waters. My little town of Jersey Shore PA (nowhere NEAR New Jersey–actually on the West Branch of the Susquehanna River), is a classic “river town”. It was built around the early trades in Pennsylvania–trapping and lumber. There were no roads; the river was the road. Half of my town is in the flood plain. Biggert-Waters has effectively made half my town unsaleable. Flood insurance premiums have gone from $800 to $1000 a year, on the modestly priced homes in the flood, which are $80,000 to $110,000 to $7000 to $10,000 a year. This is unaffordable to those buyers who would buy those homes. It also “sticks” many older residents with unsaleable homes. They can’t sell the older two story home and move to a smaller, one story home–there is no market for their homes. Some see this as a problem only for those in the flood plain. That’s very shortsighted. A devastating economic event in one part of a real estate market ripples through the entire market. Already, in our area, homeowners are stating they cannot afford the premiums and they will be walking away from their mortgages. The lenders then will be stuck with this virtually unsaleable homes. However, if you understand economics and real estate, you know nothing is truly unsaleable–at the right price. The prices will fall to a level where cash investors will buy them, then turn them into rentals, hoping to recoup their purchase price before the next flood. These investors will NOT carry flood insurance, because it is too costly. That will shrink the pool of those carrying flood insurance, making a bad problem even worse. The next step is that these investors will appeal their tax assessments, and succeed. This means the taxing bodies will have to raise taxes elsewhere to meet their budgets. Those of you out of the flood plain–brace yourselves for a tax increase. This could have been avoided if some thought had been put into the law, or if the affordability study called for in the law had been completed. One idea which appears to have merit is putting a “catastrophe” amount on every homeowner’s policy in the US–for catastrophes–floods, forest fires, earthquakes, tornadoes, hurricanes, mud slides, volcanoes. Then, instead of having only flood prone properties in the pool, you’d have a larger pool–with a much larger base. Communities also pull together to solve their common problems. The last major flood my community had was in 1972. The entire town pulled together to recover and rebuild. Communities need to stick together, because we are all in this together. Community is loving your town, supporting its businesses, and pulling together when there is a problem.
I lost three listings last week. So what? –might be the reaction of some people. Let me explain. First of all, after 35 years in the real estate business, I don’t often have listings be withdrawn without being sold. These were withdrawn, because I can’t lie to my sellers. I can’t sell these properties. They were: reasonably priced; in great shape; in my prime market area.
In late summer, when all three were listed, I anticipated having three new families in their own homes for the holidays. What happened? Biggert-Waters, or “Biggest Failure” as I like to call it. The Biggert Water Flood Law, which went into effect October 1, 2013, called for the following things: 1)Fill the $24 billion dollar “hole” left in FEMA funds post Katrina; 2)Make all flood insurance policy rates be “actuarially sound”, meaning the cost of the premium would reflect the real risk of the property being in the flood; 3)Have all policy holders contribute another 1% per year into a fund for future disasters ; 4)conduct an “affordability study” prior to implementing these changes.
Well, 3 out of 4 happened. FEMA did not have time to do the affordability study, so it was never done. My listings, in my little town which last flooded in 1972, were priced between $81,000 and $119,900. Existing flood insurance premiums were $800 to $1000 annually. After October 1, those premiums were quoted as high as $9000 annually.
Let’s do some math (something Congress didn’t do). There are 5.6 million flood insurance policy holders in the US. Divided $24 billion by $5.6 million, and you get almost $4300 per policy holder JUST to fill the hole, never mind buying insurance. Next piece of math: Let’s find out if a buyer had an extra $9000 a year to spend on PITI (Principal, Interest, Taxes and Insurance) what it would buy: At 4.75% for a 30 year term, it comes out to $143,775. Hello? If the buyers for these modestly priced homes had that much more money, they would be able to buy out of the flood plain.
My little town of Jersey Shore PA (on the West Branch of the Susquehanna River, and NO WHERE near New Jersey), like many other little river towns, is old. It was founded in the days of trapping and lumbering, when there were no roads—the river was your road. About half the parcels in my town are in the flood plain.
I titled this: “Everyone Loses”, and let me be specific:
1). My homeowners lose. They are all now landlords, and they wanted to be sellers instead. Whatever they would have done with the proceeds from their sales will now not happen. Would that have been a new car? Another piece of real estate? Who knows?
2) I lose, as do fellow real estate agents. The estimated commission dollars are around $19,000. That’s $19,000 that isn’t going into my local economy. I make a point of “buying locally”, so my loss is my community’s loss.
3) My community loses. My community loses because this is going to create tenant occupied neighborhoods, and the strongest neighborhoods are owner occupied ones.
4) Other taxpayers lose: Any properties which sell will probably only sell to investors, for pennies on the dollar. Those investors will (sensibly) appeal their assessed value, resulting in a lower assessed value. That means my county, my borough and my school district will all need to raise assessed values on other properties, or raise millage, or both, to reach their financial needs.
Once again, as a taxpayer, business owner, and citizen, I am looking at the disastrous effects of “well intentioned” but very poorly thought out, legislation.
If you don’t know yet that Biggert-Waters has completely changed the rules regarding the sale of properties in the flood plain, you are either in the desert (lucky you) or oblivious. Some basics: Congress wanted to fix the $24 billion hole in left in the NFIP (National Flood Insurance Program) after Katrina. To that end, they decided to pass the Biggert-Waters bill to make the NFIP solvent, and flood insurance to be “actuarially sound”, as well as building up a reserve for future floods by having policy owners contribute 1% a year to creating and building a reserve. This all sounds fiscally sound and great on paper. In reality, it is a bigger mess than Katrina ever was!
First of all, FEMA was to have completed an “affordability study” before implementing Biggert- Waters. However, such an insufficient time was given to accomplish this, that FEMA didn’t do it. On October 1, 2013, the new law went into effect. Existing property owners who have properties in the flood plain immediately found out their premiums would rise 25% a year “until the program is actuarially sound” (which is some time in the future which no one seems to be able to predict). New policy holders would have to pay much steeper premiums. How steep? Well, in my market, which is North Central Pennsylvania, we are seeing premiums as high as $12,000 or even $15,000 per year—on houses selling for $100,000, give or take. My local geography is river valleys—so many small towns, like mine have flooded. Our last major flood was in 1972. Since then, our residents have dutifully paid flood insurance each year, but not submitted any claims. In my small community, about half the parcels in our borough are in the flood plain—so this is devastating for our local real estate market.
It’s pretty evident Congress didn’t do the math on their bill, and can’t do the math on affordability. Here are two examples: The deficit is $24 billion (by the way that was before Sandy, which was when the bill was passed). The number of households paying flood insurance in the United States is 5.6 million. That means that before they even cover ongoing insurance costs, or contribute the 1% a year to the reserve, each policy holder would have to pay almost $4300. In my community, our lower cost houses in the flood plain have traditionally had flood insurance premiums of $800 to $1200 a year. So, Congress couldn’t do that math, nor (apparently) can they do this math: If a flood insurance policy costs $12,000 a year, that’s a $1000 a month. At current rates (4.75%) and terms (30 years), that “buys” a mortgage amount of $191,700. Put simply enough so even elected officials can get it: If our buyers had another $1000 a month to put toward PITI, they’d be able to buy out of the flood plain!
There’s now a movement afoot to “postpone” the immediate implementation of Biggert Waters. Oh great, let’s just kick another can down the road! We need to fix this, and not just delay it. Some questions to contemplate:
• Why, with so many federal programs running at a deficit, did Congress decide this one had to become solvent—in just one year?
• Why, if making it solvent, were they planning on relying just on the 5.6 million current policyholders? Many people who received NFIP payouts in the past are no longer policy holders.
• Why doesn’t Congress see that putting all the flood properties in the same pool guarantees that the pool will be drained (eventually) because everyone in the flood plain eventually floods (in fact, during Sandy, people who had never flooded before experienced flooding)
• Why not fund all natural disasters with a very small percentage on all homeowner premiums—like .5% or 1% of the policy amount per year—to cover any and all natural disasters: floods, forest fires, earthquakes, tornadoes, mudslides, hurricanes, etc. ?
Other issues that are muddying the waters include the claim by FEMA is that those who don’t carry insurance will not be covered in the event of another flooding disaster. Color me cynical, but show me a politician who will stand in front of a picture of wiped out houses and distraught people and say: “Sorry, no money for you guys—you didn’t have insurance” and I’ll show you a politician who is ending his career!
Some political groups are saying this is “welfare for the rich” and only benefits the “1% who own beach front mansions”. A Wall Street Journal Editorial said that, and I wrote them a letter, which they did publish—explaining that people who buy $100,000 houses are not in the 1%!
Here’s where I see this going, if it is not corrected:
• Sales in the flood plain in places like my hometown have already pretty much dried up. Sales in pending around October 1st already fell apart.
• Owners will walk away from their properties if they can’t sell them.
• Lenders will take them back, and if they can sell them, I predict, as an appraiser, they will only get pennies on the dollar—from investors who are willing to take the risk of owning them without insurance—but only if they can buy them at a very low price.
• Formerly owner occupied homes will become tenant occupied homes, and that is not always positive in a neighborhood.
• After a low price is paid, for an arms’ length transaction, those new owners will promptly go appeal their property assessment.
• The assessment office will then shift more of the tax burden to owners who properties are out of the flood plain.
• Fewer people will carry insurance, thus when the next flooding hits, all of the taxpayers will be bailing them out.
None of this is a pretty picture, is it? We need Congress to fix this problem by acknowledging that the affordability step was too big a step to skip. To me, affordability would include an analysis of median sales price and median income. Is it reasonable for someone who has a house worth $10 million in a neighborhood where the median sales price is $9 million, and the median income is six figures to pay $12,000 a year for flood insurance? Well, its way more reasonable for that person to pay it than a person living in a community where the median sales price is $100,000 and the median income is around $40,000. Congress needs to look at the frequency and severity of the flooding There needs to be a differentiation between frequent, bad flooding, and very occasional flooding, caused by unusual circumstances (the last flood in my town was because Hurricane Agnes came inland and hovered for two weeks). Finally, Congress needs to understand that 5.6 million policy holders, most of whom are middle class, can’t make up a $24 billion deficit that took years to build.
I’ll be doing this 7 hour AQB approved course in Madison WI on 11/5/2013. Hope to see my appraiser friends from Wisconsin there!
This makes the third time (by actual count) in over 30 years in the real estate business that I’ve said that to a seller. I don’t like to have to say it to a seller, but there are things that will push me to say it. This particular seller was difficult from the beginning. He had an appraisal, which was dated. The market had changed. Of course, that was somehow my fault. We presented him with a number of contracts which he either rejected or which fell through for other reasons. Throughout the course of the listing, his attitude would best be described as truculent. He returned phone calls and emails when he felt like it—or not at all. As far as questions and answers go, he was beyond vague. The property is a seasonal one, which is usually sold, in our market, with the furnishings. Most sellers reserve the right to take out of the house personal items. Most sellers will specify those items. He would not. He went from “everything can stay” to “I know I want some stuff, but I don’t know what” to “I can’t tell you what I’m taking”. The water was turned off at the supply from the township. He was incredulous that buyers actually wanted to see the property with the water turned on, and found that the greatest inconvenience ever—despite his assertions that the water system was “fine, no problems”. Eventually, the water was turned on, and to no one’s surprise (but possibly his), this property, having sat vacant for almost 2 years, had some minor, fixable leaks.
Then he had not one (he claimed) but two on site systems. Where were they? He wasn’t certain? Had they ever been pumped? Well, he was “pretty sure” that “at some time” they were. We had a cash buyer, at a price he had said he would accept, whose only condition was to locate and pump the systems. The inspectors, as we know, can flush a transmitter down the toilets and located the system. This seller’s response: “No way! That’s ridiculous! I’ve bought and sold lots and lots of houses and I’ve never asked for that. What are these people trying to pull? How dare you even ask for that? ”
At this point, I decided I could keep my sanity or keep this client. I kept my sanity. In one of my final emails to him, after pointing out (again!) that an inspection insulates him from further liability—because it is now the inspector saying the system is okay—not him—I did remind him that if he knows his system doesn’t work, and fails to disclose it, that is fraud. I also pointed out to him that our listing contract called for him to cooperate with the listing broker, which had simply not happened. So, we cancelled the listing and mailed him back his keys. I don’t know what kind of a day he’s having, but my day is much better since I did this. Life is too short to deal with idiots, and real estate is difficult enough without having the seller work against you.
As many of you know, I’m an appraiser, a broker and an educator. I like to keep my skills sharp for teaching. In my travels, during the past several years, there has been a lot of conversation and criticism on the agent side of the “travelling appraisers”. And most of this criticism is very well founded—the appraiser from a distance, who does not know the nuances of a local market, is much more likely to make an error, come in low (or high) or otherwise screw up. When discussing this with agents, I say: “My appraisal license is good in all 67 counties of Pennsylvania, yet I limit the geographical areas where I do appraisals to the eastern half of one county and the western half of another—because I’m about 1 mile from the county line.”
But what about agents? Your license is also good in all 67 counties (if you are in Pennsylvania, like me) –or however many counties your state has. If you are in Rhode Island, you may very well be competent in the entire state. But usually, markets have nuances.
I just completed a long, tedious, arduous transaction. I was the listing agent. The selling agent lives two counties over from me. Although I can get to the main part of her market in about an hour, evidently she lives further out, because by the end of the transaction she was griping about “the hour and a half it takes me to just get over here.” I did allow myself to say: “That’s why I don’t take business in your county—I refer it.” She managed to get over here to show my listing and write a contract—a bad one, which had to be revised. Before she would write it, she insisted that her manager “had to know” the gross commission and what we were offering as a cooperative fee (she’s not in my MLS). I told her the co-op fee that I would offer her company would be the same as that offered to brokers in my MLS, and that the gross commission was none of her business. Hold that thought regarding compensation—it will come up again. She managed to get the home inspector lost on the way to the listing (evidently she didn’t share my directions, which were clear as a bell to everyone else who used them). When the underwriter began fussing about the size of the site, relative to the size of neighboring parcels, and we needed something to show her, I said: “They want the county GIS map with parcel numbers and acreage showing.” She said: “What’s that?” You know, I could have told her how to get it, but I just did it—because my seller needed to have a closing. She “wasn’t available” for the walk through when her client got early possession. She “hadn’t had a chance to see” what her client was complaining about regarding some abandoned tires left on a stream bank. She “didn’t have time” to find out why the lender’s commitment letter was only for one week—until I finally said: “I can’t do this; the buyer is not my client, she’s your client.”
The icing on the cake was the last two weeks before closing, when this agent began to complain loud and long to me that “this transaction just isn’t worth my time” and “this is just too far to go for this kind of money” and “I told them in my office, I just won’t work on any deal below $XXX,XXX again.” In the meantime, my seller was watching and said: “You’re doing a lot of stuff she should be doing.” I said: “Yes, but you are my client, and my obligation is to get you to closing.” For my seller, the icing on the cake was on the HUD—when in addition to the co-op split (which was half of the gross commission)—this agent charged her buyer a flat fee of almost $200.
Don’t get me wrong—there were problems in this transaction that would have been there had the other agent been just up the street. But the entire thing was much more problematic because the buyer’s agent did not know the area. She’s not the only one. I’m in North Central PA—Lycoming County. There’s an agent in my MLS who currently has in our MLS a listing in Erie. That’s about 5 hours by car away. Just as there is no way an appraiser from Erie knows my area, there is no way an agent from my area knows Erie. Cut the greed, folks—this is why we have referral fees. It is so more professional to refer your client to a local REALTOR® who knows the market than to try and get the commission, instead of a referral fee. If you don’t have a referral network, get into a social networking group of REALTORS® on Facebook or LinkedIn. Or ask. But quit being the travelling agent—it’s as bad as being a travelling appraiser.
An issue that just hasn’t gone away in real estate is that of the travelling appraiser—the one who does not live or work in the area, but nonetheless has travelled there to do an appraisal. Some Appraisal Management Companies (AMCs) have faced this problem by requiring that their appraisers only accept assignments within a particular geographic area, usually a circle around their office, but some AMCs continue to search for the quickest, cheapest appraisal—which may involve an appraiser without geographic competency.
Time after time, real estate agents in my classes are reporting that appraisers are coming from several counties away; they are indicating by their questions (“Where exactly is your town?”) that they don’t know the area, and they are also revealing their lack of competency by statements like: “I don’t belong to your MLS, so I don’t have a lock box key—please meet me at the property. By the way, bring some comps.” To say that this is just wrong is a massive understatement! First of all, the last person who should be the sole source of comparable data for the appraiser is the listing or selling agent—he or she has a vested interest in making certain that the property appraises for contract price, so of course the comps provided will support that number. But on a larger level, the appraiser is violating the Uniform Standards of Appraisal Practice (USPAP), and therefore, violating state law (USPAP is incorporated into all state appraisal license laws, under FIRREA) and actually exposing him/herself to criminal penalties.
Here’s why: if the appraiser is doing an appraisal for a loan, he/she is using a Fannie Mae form. USPAP is clear that if an appraiser accepts an assignment with “assignment conditions” from the client, he or she must abide by these, or be in violatin of USPAP. These appraisal reports have certifications which are pre-printed, cannot be changed, and the appraiser is certifying are “true and correct”. Here are the two that matter, with respect to this problem:
Certification #11 states: “I have knowledge and experience in appraising this type of property in this market area.”
Fannie Mae does not allow “on the job training”—the appraiser either knows the market, or he/she does not. There is no “sorta, kinda, maybe”.
Certification #12 states: “I am aware of, and have access to, the necessary and appropriate public and private data sources, such as multiple listing services, tax assessment records, public land records and other such data sources for the area in which the property is located.”
Again, it’s like being a little bit pregnant—you either are or you are not. You either belong to the MLS, or you don’t. You either subscribe (if a subscription is needed) to online records, or you don’t.
Many MLS services now include regional data. However, just having access to the data is not the same as “knowledge and experience….in this market area”. My MLS system includes data from 5 counties; I personally will only work in half of two counties—both within not many miles of where my office is located. If you, as an agent, or a homeowner, suspect that the appraiser lacks expertise in the market, contact the lender and make a major fuss. The lender should not be hiring an appraiser who does not know the area. If you are an agent, head this kind of behavior off before it happens. When you discuss lenders with your buyers, contact the lender the buyer plans to use. Ask the lender point blank: “How do you (or your AMC) ensure that the appraiser hired has geographical competency in this area?” If the lender can’t give you an answer which makes sense, e.g. “We assign appraisals by zip code, and our appraisers are limited to X number (a low number) of zip codes”, or “We will not assign appraisals that are more than X number of miles from the appraiser’s office” then push back by saying you will need to investigate other lenders and confer with your client.
At the end of the day, buyers want (and deserve) an honest and fair appraisal performed by an appraiser who is competent in all respects—including geography.
This blog was inspired by a cartoon which shows a couple sitting with a real estate agent. The agent says: “Based on comps, I suggest listing at $350K.” Wife: “But we paid $650,000 for it!” Husband: “And Zillow says it’s worth $675,000!” I found the cartoon on Facebook and reposted. The sad truth is that most consumers do not understand Zillow—or House Values, or even their county assessment office—all of which use Automated Valuation Models (AVMs) to price property. The boring stuff first: AVMs use mathematical formulae, including multiple linear regression, to assign values to certain features of houses to come up with a value. As with any program, GIGO applies (Garbage In, Garbage Out). The AVMs out there for use today by consumers, of which Zillow is probably the best known, rely on reported and recorded sales data. This is why, if you live in one of the fourteen states in the US which does not record sales prices, the information you find may be sketchy, and derived from Multiple Listing Services (MLS). You may be thinking: “Well, what’s better than that? A recorded sales price tells me what that house down the street sold for.”
Well, yes and no. A recorded price will tell you the amount they put in the deed as the transfer amount. It will not tell you:
• If there were any “side deals” or cash under the table
• If the seller paid closing costs or other fees on behalf of the buyer, known as “seller concessions”
• If it was an “arms-length sale”, or one under duress, or between related parties, or any other sale which an appraiser would not usually consider
This is where the AVMs fall apart. As I always say when teaching pricing and valuation: “All comparables are sales; all sales are not comparables.” Here’s what I mean: in order for any real estate professional to use a comparable (“comp”) to compare to your home to establish a price or value, it needs to have sold. Houses that are listed and don’t sell indicate what the market won’t pay. Houses that are listed and sold indicate what the market will pay. However, not all sales are comparables. Here are some examples of houses I would not use for comps, as an appraiser:
• The sale between two parties with the same last name, and it is verified that they are related by blood or marriage
• The sale between two parties with different last names, but verification of the data revealed that the party selling the property was acting as executor of her mother’s estate, selling the 2/3 interest she and her sister had to their brother, who already owned a 1/3 interest
• The property that did not sell at auction, and the next week the owner sold it for 20% below my appraised value to a neighbor, who was a friend
• The property that sold for at least 20% higher than market, and upon verification, the buyer was not represented by an agent, was from out of town, and was unfamiliar with the market
You will notice the same word in all four scenarios: “verification”. As an appraiser, I verify data. I’m required to. But any real estate professional who is good at his or her profession will verify data, and will only use data which is germane and pertains to the property. Zillow, and other AVMs, don’t verify data. They throw it all into the mix. Some is high, some is low, and some is just irrational. So, before you decide to sell your house based on a “zestimate”, do yourself a favor and get an opinion from a qualified real estate professional.
It’s 1993, and this is your life: you go to the gas station and fill up your vehicle at $1.16 per gallon. From there, you continue to the grocery store, and pick up a gallon of milk for $1.26 and a loaf of bread for $1.57. Your monthly rent is $532, on average. You have a new car, which you bought for $12,750. You mail your rent and car payments in using stamps that cost 29 cents. The median family income is $31,230 per year, and you are thinking of buying a house: the median price in the US is $126,500. You have checked it out and you can get a mortgage for 7%. You watch those politicians in Washington, shaking your head because they spend $1.408 trillion a year. Overall, the inflation rate from 1993 to 2013 is $1.59, or almost 30% more.
It’s 2013, and this is your life: you go to the gas station and fill up your vehicle at $3.56 per gallon. From there, you continue to the grocery store, and pick up a gallon of milk for $2.79 and a loaf of bread for $2.20. You are paying $1045 a month in rent, and you are being tempted to buy a house –you can get one for $226,400. You just bought a new car, though, for $30,748, so you may have to trade the car. You don’t mail your car payment in—you pay online—stamps are so twentieth century, and besides, they cost 45 cents each. The median family income is $40,925. You watch those politicians in Washington, shaking your head because they are now spending $4.351 trillion a year.
But let’s go back to buying that house. Today’s rates are hovering between 3.25% and 3.50%. In 1993, if you had gotten an FHA loan, you would have put down 3% (I’m going to assume you put down 3.5% in 1993, because FHA has raised the amount down, and I want the comparison to be even). So, to buy that house in 1993, you needed a down payment of $4427.50, and you borrowed $122.072.50 for 30 years at 7%. That made your monthly payment (P & I) is $812.15, which is more than your rent, but you are buying a house.
Today, to buy the median priced house, at $226,400, you need a down payment of $7924. The loan amount is $218,476. Your payment, at 3.25% over 30 years, is $950.82—less than your monthly rent.
Although inflation has been 30%, the cost of a house (even after some very bad years) is up 79%. But the cost of the house, in terms of your monthly payment, is only up 17%. Not only that, it will cost you less than renting—and you will be building your financial future. If you rent for 30 years, you’ll have a drawer full of rent receipts. If you pay on a mortgage for 30 years (fewer years if you are smart enough to pay it off early), you’ll own your house.
One last thought, from a real estate professional who watched the refinancing that accompanied the run up in prices in real estate: buy the house, and pay the mortgage off. Don’t refinance for new cars, or to get out of credit card debt, or to take a fancy vacation. Pay the house off, so that when you enter retirement, you have an asset that you own outright, and your only housing costs are utilities, maintenance and taxes.
–About the blogger: I’m a real estate educator, fascinated by economics and real estate. Catch my “Economics and Real Estate” course live—watch my website at www.TheMelanieGroup.com
Last month, I taught at the Triple Play Convention in Atlantic City New Jersey. It’s a tri state convention for New Jersey, New York, and Pennsylvania. For the first two days, I taught the CRB course: “Real Estate is Risky Business”. On day three, I taught a risk reduction course I had written for agents: “Risk Management: What You Do and Say May Be Held Against You”. On the last day, I taught a course “Pricing the Oddball”, which was approved for appraisers and agents. . At all three classes, risk came up, and in all three circumstances, the approach to risk was different among the types of attendees.
Let’s start with the broker/managers. I had a great group of these folks, including a very nice man from the corporate level of a large, national franchise. He took notes copiously and told me and the class, that he had never considered in detail how much a risk policy should be part of the overall approach from the franchisor to the franchisee. The brokers and managers included large companies down to the two person “Mom and Pop” real estate office. In many cases, the name on the door is the last name of the person in class. One of those in the CRB class is a 4th generation REALTOR®. The brokers and managers, to a one, cared about risk; wanted to identify it; wanted to find ways to avoid or mitigate it, and cared deeply about the reputation of the firm, and themselves.
The agents were a mixed bag. Many of them expressed the sentiment that they enjoyed the class, and realized many things that they aren’t doing they should be doing. This class, as I wrote it, is big on defensive real estate: get all the facts on the property, document what you do; build a file that can defend you, if necessary. Some of them “pushed back” with the “I’m too busy to worry about that, and besides it’s not my job”. This included one student who asserted that even deed restrictions or covenants are not something he researches, because “the title company does that”. Of course, the title company typically discloses those findings at the settlement table, which is often too late for the buyer to change his mind—but not too late to sue the broker. I could sense that some were much more concerned about the next commission check, as opposed to a long term reputation in their community, or a long term relationship with clients.
The final group was a mix of appraisers and agents. Appraisers are, by nature and training, detail oriented people. One of those appraisers shared a story I wished I would have had for the three days previous to this course (which was the last day of the convention). We were covering highest and best use of a property, which needs to be done to price it properly. To determine highest and best use, appraisers determine what uses are physically possible, legally permissible, economically feasible and maximally productive. You start with verifying known facts—like zoning. The appraiser told this story. An agent was called upon by an estate to price a property. She did not check the zoning, and thus did not realize that the zoning had changed from residential to “village commercial”. In this community, “village commercial” allowed professional offices, with the result that as large older homes came on the market, they were being purchased by doctors, dentists, real estate companies, insurance companies, attorneys, etc. The agent used comparables which were residential properties, and zoned residential. Based on her advice, the sellers listed the property for $185,000, and it promptly sold. The new owner converted it (with a minimum of expense) into two professional offices, paved the back yard for parking, and resold it very quickly for $425,000. The agent got sued. The appraiser telling the story had been brought into court as a professional witness for the estate, testifying to the value of the property at the time of sale (which was way more than $185,000!) Other students asked what the outcome of the case was (I was curious as well!)—he did not know, but the true point for me is that she got sued. It cost her time, money and reputation. She may have thought it could never happen to her, but it did.
Risk is inherent in our business. We carry E & O insurance to protect ourselves, and most of us diligently pay attention to details, keep good records, and try to keep our clients and customers happy. But, even an innocent REALTOR® can be sued by a litigious client. Lawsuits cost money, time and reputation. Seasoned brokers and agents will agree that they would rather have a sale fall apart before closing, than suffer through a lawsuit post-closing. As we enter 2013, please be careful out there, and do all you can to contain risk!