About friendly advice

friendly advice
Human behavior (from thediagonal.com).

Home buyers and sellers often seek advice from others.  Even when they’re working with a professional who provides expert guidance.  You might think it’s good to get validation from others on your real estate decisions.  However, a Vancouver consumer study suggests that following friendly advice may be a bad idea (Friends give bad advice; The Sun, 4/14/2011, p29).

Research of consumer psychology and behavior have time and again found that consumers want to be correct in their choices.  They want to feel good about their decisions.  They want to believe that their purchases are the best, and the professionals they choose are tops in their field.  Consumers are known to behave irrationally to prevent the cognitive dissonance that occurs when they are confronted with conflicting thoughts about their choices. And that means they often make poor decisions.

Mintel’s American Lifestyles 2015 report indicated that 69% of those surveyed sought out product and service reviews before purchasing.  While 57% of those surveyed sought out recommendations from social media.  Given the finding, it is suggested that there may be emphasis for communal thinking over “individual preference.”  However, about 38% of those surveyed considered independent review websites as “trustworthy;” while 34% found them useful.  But, 31% found social media contacts trustworthy; while 25% found them useful (Seven in 10 Americans seek out opinions before making purchases; mintel.com; 6/3/2015).

Seeking out friendly advice is part of herding behavior, which has been found to be a part of our everyday decision making process.  A groundbreaking study of home owners’ decisions to walk away from their mortgages (strategic default) during the great recession revealed how people seek and give advice (Luchtenberg & Seiler (2013). The effect of exogenous information signal strength on herding. Review of Behavioral Finance, 5(2),153-174).  The study concluded that people tend to seek advice when they feel that their choice is not in agreement with others.  While advice was readily given by those who felt their choices were believed to be the consensus.

Buying and selling a home may not always feel as if it is a rational process. And you may think it logical to seek friendly advice.  However, indiscriminately following advice may not be the best practice because all real estate transactions are different.  Each transaction presents a different set of variables such as personalities, market conditions, contract terms, etc.

Given the research, more often than not, you are doomed to follow the advice of a friend or family member – even when confronted with the evidence that the advice is ill advised.   You can infer from the Vancouver study mentioned earlier that friends and family feel “pressured” to give you advice on your real estate transaction because they want to be helpful.  Furthermore, herding research suggests that you probably give emphasis to advice from friends and family because following their advice will likely make you feel you are “doing the right thing,” as well as increase your acceptance by them.

Regardless of your rationale, your real estate decisions are most likely based in psycho-emotional needs and/or fears (such as status, acceptance, and avoidance of failure).  Breaking away from the herd is difficult.  Improve your decisions and make your transaction successful by pursuing balanced information and becoming aware of your motivations.

Copyright © Dan Krell

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Build a case to make your lowball offer bulletproof

Home Buying
Infographic from remax.com

The process of making an offer to buy a home is fairly straightforward, provided that you don’t have competition from other buyers.  The offer basically conveys the price you want to pay, and which inspections you want to conduct. Once the documents and addenda are completed, your agent will present the offer to the listing agent, who in turn presents it to the seller. The seller can accept, reject, or counter your offer.

Of course, the best scenario is that the seller accepts your offer without any counter to price and terms. However, if your offer is below list price, chances are that the seller will counter your price. And if your offer is significantly lower than list, the seller may reject the offer outright.

Since the great recession, an increasing number of homes for sale have serious issues due to deferred maintenance. It’s routine for homes in need of repair and/or a total renovation to receive low ball offers. Real estate investors typically don’t attach emotion to their offers, and as such making low offers on property is business as usual. But if you’re like the average home buyer, you may shy away from making a low ball offer fearing being rejected.

You can increase your chances of engaging the seller in working out a deal by packaging your offer correctly. The conventional wisdom is to make a “cash” offer that is non-contingent. The reasoning is that the owner would be more apt to take your lower offer knowing they don’t have to wait for a lender to approve your loan or worry about appraised value; or hassle with negotiating home inspection repairs.

HomeThis approach typically works in a buyer’s market, especially when home prices are declining (as we experienced from 2008 to 2010). However, this tactic may fall flat in today’s market for a number of reasons, including strong year-over-year home price gains, low listing inventory, and increased home buyer competition. Being confronted about their home’s value is a tough pill for a home seller to swallow, especially when they see other homes selling for more. Notwithstanding the seller’s ability to accurately interpret housing data; many sellers have high sale price expectations regardless of their homes’ condition, and rationalize a higher asking price – even when not justified.

Another reason this tactic has lost its effectiveness is that the enticement of a “cash” offer has lost its impact when in actuality it’s all about the sale price. Whether the sale is all cash or financed, the primary concern to the seller is the amount of money they net in the sale.

Non-contingent offers don’t go far enough when making a low offer on a home; you also need to build a case to help the seller understand the rationale of your offer. Have your agent comprehensively analyze the neighborhood market and include the analysis in your offer. The analysis should be detailed and point out differences that add and negate value to the comps and the subject property. Your offer should also include a detailed estimate on repairs and updates (from a licensed contractor).

Making the seller aware of the differences between their home and neighborhood comps, as well as educating them on the costs associated with repairs and updates goes a long way in getting a seller to better understand the value of their home, and moves you closer to making the deal.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Real estate agents getting back to basics and focus on relationships

real estateDon’t be surprised when you’re getting more real estate agent phone calls, or seeing more agents at your doorstep. You may be surprised to know that in this increasingly tech dependent world, agents are getting back to business basics; which is founded in personal introductions, building relationships, and providing personal service.

You see, many real estate agents (like the rest of the population), are realizing the limitations of the internet. What was once the promise of a new market place for products and services has become a super-saturated arena of information, advice, and “content” clamoring for your attention; and is a growing disappointment for many due to the increasing irrelevance of information, not to mention the surge of fraud and hacking.

The National Association of Realtors® (realtor.org) has reported on the growth of internet use in real estate over the last fifteen years in their annual Profile of Home Buyers and Sellers (the 2014 Profile indicated that 92% of buyers “use the internet in some way in their home search process…”). And although the statistic is astounding, it is becoming clear that is still not wholly understood how home buyers and sellers use the internet.

You may not be surprised to know that home buyers and sellers don’t entirely rely on the internet for choosing their agent. In fact, many choose an agent through friend/family referrals, personal introductions, and even serendipitous meetings (such as visiting an open house). Furthermore, buyers and sellers are increasingly aware of the internet’s limitations as well; as one home buyer’s recent statement of “…this home is not what was advertised on the internet…” illustrates the type of misleading information that is often found.

Although many are just waking up to the fact that “point and click” does not sell homes, “big housing data” knows it generates online revenue by capturing your information and selling it to real estate agents, loan officers, movers, and others. Last year’s acquisition of Trulia by Zillow was thought by many analysts to be an industry game changer by merging two of the most visited real estate portals. However, many did not consider that the move was to increase traffic and revenue for two companies that were reportedly not “yet profitable” on their own, by “grabbing a bigger slice of the advertising market” (Logan, Tim. “Zillow Deal to Buy Trulia Creates Real Estate Digital Ad Juggernaut.LA Times. 28 July 2014.<latimes.com>).

More recently, HousingWire’s Ben Lane reported on Zillow’s downgrade by Barclays (“Is Zillow in Trouble?” HousingWire. 20 July 2015. <housingwire.com>), referring to a slowdown of traffic due to saturation and competition. Months after the major acquisition, growth of the online real estate portal is “slowing significantly.”

Just as the growth of the internet created markets and changed how real estate agents conduct business; personal needs and attentions are changing how consumers view the internet, as well as producing voids left by agents and brokers who heavily relied on the internet for business.

The NAR’s recent DANGER Report misses the mark by highlighting perceived shortcomings in Realtor® ethics and competency.  However, the real issue may be more about the lack of professional intimacy; which is necessary for commitment, integrity, and building trust. While some already know it, others are waking up to the notion that the quality of the professional relationship is vital to the consumer’s satisfaction – and it all begins with an introduction.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Herding behavior can interfere with real estate decisions

herding real estateHave you ever wondered why real estate trends develop? When we’re buying and selling a home, we like to think we act rationally and with intention. However, our decision making is influenced externally. We are affected by the attitudes of the experts, family and friends, from whom we solicit advice. We are also consciously and unconsciously influenced by information we get from TV, the internet, social media, news papers, and even from eavesdropping conversations. Your decision making may be based on others’ behaviors that signaled it was the correct thing to do, and in turn magnifies and strengthens the signal to others – which is described as herding behavior.

Herding behavior plays a large role in our daily lives, as well as in our real estate choices and conclusions. Decisions about home buying and selling, which agent to hire, sales prices, and even whether or not we should default on our mortgage can be influenced by herding behaviors.

A 2013 study of herding behavior in strategic default revealed significant findings about our vulnerability to information (Luchtenberg & Seiler (2013).The effect of exogenous information signal strength on herding. Review of Behavioral Finance, 5(2),153-174). To refresh your memory, strategic default (allowing a home to go to foreclosure when financially able to pay the mortgage) became a significant trend that was widely covered in the media during 2010-2012. Luchtenberg & Seiler’s research into decision making and herding behavior suggested that those who are susceptible to information can be easily swayed. Their findings among professionals revealed that low consensus information (“weak information signals”) caused herding when asked to make a personal choice; while high consensus information (“strong information signals”) caused herding when providing advice to a friend.

The notion that the housing and financial crises were caused by herding behavior is not new. However, economist Christian Hott researched if housing bubbles are caused by herding behavior (Hott, C. (2012). The influence of herding behaviour on house prices. Journal of European Real Estate Research, 5(3),177-198). Citing others, Hott explains that herding behaviors are formed by those who are “imperfectly informed” and “learn from the decisions” of others; and that people tend to “overestimate the likelihood of an event” to occur to them when they hear it happened to someone else (expecting the same experience that someone else had). Although Hott concluded that herding was not the only contributor to the housing market collapse, and suggested that mortgage banking was also likely responsible; the findings indicated that herding behavior does play a role in home price fluctuations and housing bubbles.

Cognitive dissonance may also be at work to reinforce your herding behaviors. You may act on information that is not widely acknowledged just because the source is significant to you (such as a relative, close friend or co-worker). And the stronger your belief in the information, the more likely you will in turn confidently give the same advice to others, even though it may be inaccurate and/or irrational.

Breaking away from the herd is difficult; buying and selling a home may not seem to be a rational process – even when confronted with facts. People don’t always base decision of logical choices, but rather base decisions on psycho-emotional needs and/or fears (such as status, acceptance, and avoidance of failure). However, seeking balanced information and becoming aware of your motivations may improve your decision making.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

TRID implementation remakes the home buying process

real estateEarlier this year I informed you about the upcoming Consumer Finance Protection Bureau (CPFB) TILA-RESPA Integrated Disclosure (TRID) rule that was to begin in August. The implementation date was moved to October 3rd for a number of reasons, including feedback from the lender community indicating that they needed more time for compliance.

Fast forward to the present, and we are several weeks away from implementation. Overall, lenders are ready to comply with new disclosures and procedures. Realtor® Associations have also been busy getting members up to speed on expected changes and how to cope with potential issues that may arise. However, many are bracing themselves for the initial implementation to see how transactions will be affected.

Some have offered a different perspective on how the initial implementation may happen. For instance, the CFPB requires lenders to provide new disclosures three days prior to closing; however, some lenders may superimpose a longer waiting period (such as five or seven days) so as to ensure their compliance with the new rule. So any delay would tack on those extra days. Additionally, I have been told by loan officers that the 30 to 45 day mortgage closing process will go by the wayside, and that home sale contracts should allow for at least 60 days to go to closing; as well as allowing for flexibility if glitches arise to ensure compliance with the new rule.

The settlement process will be different. Closing documents will no longer emanate from the title company, but instead will be prepared by the lender and sent to the buyer and seller. Closing will occur at least three days later. Lenders are vetting title companies to ensure compliance with the new rule. As a result, an unintended consequence may be that home buyers will not be able to choose their title attorney like they are used to (as provided by RESPA and state law); and will have to choose from a list of lender “approved” title companies. Hopefully the lenders are not steering buyers to title companies where affiliated business arrangements exist, as that is an entirely another issue that the CFPB is pursuing.

If you’ve bought or sold a home in the past, the current contracts may seem somewhat familiar. However, as of October 3rd, new contracts and addenda will be in use to address the new rule; making it a new experience for everyone. If you’re planning a sale or purchase after October 3rd, make sure your agent is familiar with the new contracts and addenda so as to ensure they are managing timelines properly and understand how contingencies are affected.

The lingo will change too. If you’re borrowing money from a lender, you will no longer be a borrower; but instead you’ll be called a “consumer;” and your lender will be referred to as the “creditor.” Your good faith estimate will be a “loan estimate.” The time tested HUD1 with which we are familiar seeing at closing, will no longer be in use; and in its place will be the “closing disclosure” sent to the buyer and seller.   You will no longer look forward to your settlement day, but instead you will look forward to the “consummation.”

If you are planning to be in the market, you can familiarize yourself with expected changes to the buying/selling process by visiting CFPB’s “Know Before You Owe” (consumerfinance.gov/knowbeforeyouowe).

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.