Real Estate News and Commentary

April 14, 2017December 13, 2022

Demand better consumer financial protection

In an effort to reform the Consumer Financial Protection Bureau (consumerfinance.gov) to become a better steward of consumer protection, H.R.5983 – Financial CHOICE Act of 2016 was introduced during the last congress. The effort to compel oversight on the now embattled agency, as well as provide for a panel of decision makers (in lieu of a single chairperson), is unfortunately highly politicized. As financial consumers, we should demand a better and fair protection agency serving without political motive.

From the Executive Summary of the The Financial CHOICE Act
Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs:

SECTION THREE: Empower Americans to achieve financial independence by fundamentally reforming the CFPB and protecting investors.
Change the name of the CFPB to the “Consumer Financial Opportunity Commission(CFOC),” and task it with the dual mission of consumer protection and competitive markets, with a cost-benefit analysis of rules performed by an Office of Economic Analysis.
Replace the current single director with a bipartisan, five-member commission which is subject to congressional oversight and appropriations.
Establish an independent, Senate-confirmed Inspector General.
Require the Commission obtain permission before collecting personally identifiable information on consumers.
Repeal authority to ban bank products or services it deems “abusive” and its authority to prohibit arbitration.
Repeal indirect auto lending guidance.

Some have hailed the CFPB because it was created out of good intention. There is no question that the CFPB has done a great job in collecting and publicizing consumer complaints. The announcements of consumer complaints seem to be a public airing of consumer grievances, which sometimes signaled forthcoming action from the agency in a specific financial sector.

However, critics contend that the CFPB rules have made lending more burdensome for both lenders and consumers by increasing bureaucratic red tape. It has also increased the cost of lending to consumers by adding levels of compliance measures that are now embedded within the lending process. Critics have also complained that the CFPB’s enforcement is not fair and unequal in focus.

Critics are becoming increasingly vocal, not only because of the sometimes invasive rule making, but more recently of how offenders are chosen and penalized. Jacob Gaffney’s article for HousingWire (Former CFPB attorney pretty much just confirmed the worst fears of the mortgage industry: housingwire.com; January 3, 2017) earlier this year discussed two genuine concerns about the CFPB:

1) “The CFPB targets lenders for enforcement action based on opaque internal decisioning;” and
2) “Monetary penalties seemed determined by revenue, not equalitarian application of said enforcement action.”

Gaffney quoted Ronald Rubin, a former enforcement attorney at the Consumer Financial Protection Bureau, (from a December 21^st 2016 piece “The Tragic Downfall of the Consumer Financial Protection Bureau” published online nationalreview.com) as confirming these concerns. For example, the Wells Fargo fake consumer account scandal, one of the most egregious consumer scandals post financial crises, was not addressed by the CFPB (until it was too late) because Wells Fargo was allegedly “not a target of the agency at that time.”

Referring to the complaint database, Rubin stated:

“The CFPB’s complaint database contained grievances against almost every financial business. Enforcement targeted the companies with the most revenue…rather than those with the most complaints.” He further stated: “Targets (of the CFPB) were almost certain to write a check… Even the size of the checks didn’t depend on actual wrongdoing — during investigations, Enforcement demanded targets’ financial statements to calculate the maximum fines they could afford to pay.”

The recent PHH Corp v Consumer Financial Protection Bureau case highlighted some of the alleged abuse of power by an agency with no oversight. US Appellate Judge Kavanaugh wrote in his opinion:

“That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case…
…This is a case about executive power and individual liberty. The U.S. Government’s executive power to enforce federal law against private citizens – for example, to bring criminal prosecutions and civil enforcement actions – is essential to societal order and progress, but simultaneously a grave threat to individual liberty.”

We’ve followed the career of the CFPB since it was established in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Shortly after the financial crisis, we eagerly anticipated the new agency to help those who were the target of abusive lending and foreclosure practices. Since its inception, however, controversy has embraced the agency.

By Dan Krell
Copyright© 2017

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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.

April 6, 2017July 14, 2019

Listing agent secrets

Listing agent secrets.

There are a number of topics that your listing agent probably won’t discuss with you, or can’t properly explain. Here are several listing agent secrets that you need to know:

Your agent won’t sell your home

listing agent secrets — Agent secrets (infographic from nar.realtor)

Your home will likely sell to a home buyer who is represented by a buyer agent. This notion is supported the 2016 National Association of REALTORS® Profile of Home Buyers and Sellers (nar.realtor), which reported that 88 percent of home buyers used an agent to buy a home. The remaining 12 percent of home buyers purchased through other means, including with the help of the listing agent, or even a FSBO. Although your listing agent may claim to have sold the most homes in the neighborhood, the truth may actually be that they are only facilitators. The listing agent secret is that the buyer agent who actually “sells” the home is labelled the “selling agent” by the industry.

Buyers are not finding homes in print

Print advertising no longer is the means of selling a home. More information from the 2016 National Association of REALTORS® Profile of Home Buyers and Sellers indicate that having a nice spread in a magazine, or posting open houses in the local paper is probably a sales ploy to get your listing. The Profile reported that home buyers reported how they found their home as follows (nar.realtor):

Internet: 51%
Real estate agent: 34%
Yard sign/open house sign: 8%
Friend, relative or neighbor: 4%
Home builder or their agent: 2%
Directly from sellers/Knew the sellers: 1%
Print newspaper advertisement: 1%

Bigger is not better

Another one of your listing agent secrets is that the larger your agent’s brokerage or team, and having a high number of homes actively listed may actually be detrimental to your home sale! An empirical study by Shiawee X. Yang and Abdullah Yavaş (Bigger is Not Better: Brokerage and Time on the Market; The Journal of Real Estate Research; 1995, Vol. 10, No. 1, pp. 23-33) reported the following results:

The amount of agent’s commission is not indicative of your home’s time on market;
The size of the listing firm does not affect your home’s time on market;
Homes listed and sold by the same firm (i.e., dual agency) does not reduce time on market;
The more active listings your agent has, the longer your home may sit on the market because they do not devote to the time to your sale.

Yang and Yavaş suggest that the larger the listing firm, the more incentive to “cheat” days on market by circulating new listings within the firm before entering it in the MLS, which also increases the chances of a dual agency situation. “Private placement,” or pocket listings can have similar dual agency results.

Dual agency could cost you

One of the biggest listing agent secrets is dual agency. Chances are that your listing agent doesn’t totally understand dual agency, and therefor may not be able to explain how it affects your sale and potentially your sale price. The Maryland Real Estate Commission’s “Understanding Whom Real Estate Agents Represent” disclosure states:

“The possibility of dual agency arises when the buyer’s agent and the seller’s agent both work for the same real estate company…The real estate broker or the broker’s designee, is called the “dual agent.” Dual agents do not act exclusively in the interests of either the seller or buyer, and therefore cannot give undivided loyalty to either party. There may be a conflict of interest because the interests of the seller and buyer may be different or adverse.”

One of the listing agent secrets is that dual agency may not be beneficial to you, and can even lower your home sale price. There are a number of empirical studies that indicate conflicts of interest and other issues that arise out of dual agency. But a study by Joachim Zietz and Bobby Newsome (Agency Representation and the Sale Price of Houses; Journal of Real Estate Research; 2002, Vol 24, No 2 pp. 165-91) found that a home’s sale price drops about 3.7 percent when the listing and buyer agents are from the same firm. They stated:

“…the fact that buyers may obtain a lower price by engaging a buyer’s agent from the same ﬁrm as the listing agent raises the issue of whether or not the listing ﬁrm is shortchanging the seller. The evidence appears to suggest that the agency relationship between seller and listing agent may be compromised.”

By Dan Krell
Copyright © 2017

Original published at https://dankrell.com/blog/2017/04/06/listing-agent-secrets/

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March 31, 2017July 14, 2019

Transforming real estate – whom do agents really represent?

The continuously transforming real estate industry continues to change because of two forces, consumers and real estate professionals. It would seem intuitive that the forces should be complimentary, but a deeper analysis might suggest conflicting interests between consumers and real estate agents. Whom do agents really represent?

Efficiency, although not openly stated, is a main goal of both home sellers and real estate agents. Home sellers want to sell their homes efficiently (as quick as possible and for the most money); while the real estate agent may be focused on collecting the most commission in the least amount of time. A.W. Jenkins’ ground breaking research looked into why consumers continued to use brokers in a transforming real estate environment as a means of buying and selling a home. Jenkins determined that the only reason why consumers did not use a more efficient “used house dealer” is because they don’t exist (Home, Sweet Home: Real Estate Brokerage in Canada, Vancouver, Canada: The Fraser Institute, 1989). Jenkins discussed the incentive for consumers to sign commission based broker agreements, even when there are more efficient means of buying and selling a home; including a used house dealer, sell the house on their own, or even pay a flat listing fee.

Anglin & Arnott furthered Jenkins’ line of questioning and came to the conclusion that although a used house dealership (like the used car dealership) may be the most efficient means of buying and selling a home for the consumer, it is not an efficient business model for residential real estate professionals (Residential real estate brokerage as a principal-agent problem; The Journal of Real Estate Finance and Economics; 1991, vol 4, no 2, pp 99–125). The cost of maintaining a used house inventory for the dealer is prohibitive because home resale usually takes longer than reselling an automobile. Another reason for non-existent used house dealers is government regulation: The sale of residential real estate by individuals other than the owner is highly regulated and sets standards for real estate brokerage.

Furthermore, they hypothesize that there may be broker “collusion” in maintaining existing business models:

…Collusion, we argued, is particularly easy to sustain and enforce in the residential real estate market because transactions require cooperation between the buying and selling broker…

As the transforming real estate industry continues its journey, the notion of efficiency has taken a substantial turn in favor of the real estate agent. The advent of buyer agency and dual agency has allowed agents to leverage their name and reputation to other agents through a “team.” Much like the medical office business model of luring patients through someone’s name and reputation, only to see the lower techs; the real estate team has become a popular business mode because an agent can leverage their time by having other agents do their work. To further the confusion, in some cases there are teams within teams. But to understand the structure of the real estate team concept, think of a Russian nesting doll. The team is a smaller nesting doll which is embedded in the larger nesting doll (the broker); and the team members are even smaller nesting dolls embedded within the team nesting doll. To be fair, there are various team models in use today; some are better than others with respect to transparency. The transforming real estate industry has moved towards real estate teams, which essentially operate as a brokerage within a brokerage.

Real estate team advertising and disclosure have become the focus of regulation in recent years, but has not entirely thwarted unscrupulous advertising that intends to mislead the consumer. Furthermore, agents who are independent contractors and sub-contractors of brokers and other agents, can not only muddy the waters of agency, but can further distance the agent’s incentive and duty to their client.

In his article about the dual agency controversy (From subagency to non-agency: a history; inman.com; Feb 27, 2012), Matt Carter reminded us about a 1993 treatise by the former National Association of Realtors general counsel William North titled “Agency, Facilitation and the Realtor.” The essay was written at a time when transforming real estate was about acknowledging buyer agency. Agency relationships between Realtors and their clients were under scrutiny. North was questioning whom agents really represent and if agents actually knew their role. To make it easier for agents to know to whom they have a duty, North made an argument for eliminating the independent contractor status that prevails throughout the industry. He stated:

An approach more difficult of acceptance by NAR membership would be the abandonment of the independent contractor status…The prevailing independent contractor relationship between broker and salesperson encourages “quantity” over “quality…It is clear from the letters which have been received by Realtor News on the Agency issue that far too many Realtors and Realtor Associations simply have no concept of what an agent is, does or cannot do or that their status as an “independent contractor” vis-à-vis their broker has nothing to do with their obligations, as an agent, to the seller or the buyer. It only compounds the public confusion as to the status of a Realtor when Realtors themselves do not understand who and what they are.

By Dan Krell
Copyright © 2017

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March 23, 2017December 13, 2022

Violent crime effects home values

Last week’s alleged horrific and violent crime has propelled our Montgomery County MD community, specifically Rockville, into the national spotlight. And like other communities that have experienced violent crimes, residents will be asking questions long after the spotlight dims. Unfortunately, the aftermath of violent crimes not only leaves a psychological scar on the community, it also affects home values.

Of course, it’s intuitive to think that home values are affected by violent crime. You might ask, how can such a violent act that occurred last week not be in the minds of prospective home buyers? And as you will see in the research below, violent crime will also compel some home owners to move.

A 2009 study by John Hipp, George Tita and Robert Greenbaum sought to determine the interrelationship between crime and “residential mobility” (Drive-Bys and Trade-Ups: Examining the Directionality of the Crime and Residential Instability Relationship; Social Forces; 2009, Vol. 87, No. 4, pp.1777-1812). The findings revealed that although there is no evidence that a year with a high number of home sales increases violent crimes, they found direct evidence that a year with a high number of violent crimes will increase home sales during the ensuing year. The same holds true for property crimes, where a high number of home sales do not lead to increased property crimes, however a high number of property crimes will increase the number of home sales the following year. They also found evidence of a downward trend in home values following a year of high violent crime. The authors of the study concluded that households basically respond to crime by moving. Additionally, many home buyers not only take crime stats into account, but likely consider recent high profile crimes when deciding on a home.

They also found evidence of a downward trend in home values following a year of high violent crime.

There are decades of research on the effects of violent crime on property values. For example, an influential article by Sheila Little published in 1988 discussed an appraiser’s duty to consider violent crime when determining property value (Effects of Violent Crimes on Residential Property Values; Appraisal Journal; 1988, Vol. 56,No. 3, p341-343). She stated; “It is part of appraisers’ responsibilities to make an effort to ascertain the effects of violent crimes on market value of properties.”

Fortunately, communities heal. However, it’s not easy and certainly not immediate; as evidenced by the research of George Galster, Jackie Cutsingerm and Up Lim. They studied how five US cities responded to “exogenous shock,” such as violent crime (Are Neighbourhoods Self-stabilising? Exploring Endogenous Dynamics; Urban Studies; 2007, Vol 44, No.1, pp. 167-185). They concluded that communities have a “self-regulating adjustment” mechanism that help them adjust and stabilize after various external shocks. Although an increase in violent and property crime will elicit a community’s self-regulation mechanism; stabilization takes “considerably longer” than other external shocks, especially when the shock to the community is substantial.

Galster, Cutsingerm, and Lim rhetorically ask how the self-correcting mechanism functions; how does it adjust and stabilize a community? They propose that there are social, economic, and/or political reactions to shocks such as violent crime. They surmise these reactions are manifested as a “powerful momentum” within communities.

Our community’s self-regulating mechanism has already been deployed, as demonstrated by the intense parent and community involvement in Rockville, asking questions and seeking change. And you can expect a “powerful momentum,” as described above, for change. The resulting social, economic, and/or political change will limit the effects of such violent crimes on home values, and demonstrates why Montgomery County MD continues to be the residence of choice for many home buyers.

By Dan Krell
Copyright © 2017

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March 18, 2017October 20, 2020

Misguided house makeover

Do you really need to spend money to make money? Deciding what renovations and updates to make prior to your home sale can be tormenting. It’s easy enough to say that your home needs a facelift; but, the repairs, updates, and painting costs money – and usually lots of it. The suggestion of making renovations and updates to your home before you sell is everywhere, it’s on TV, the internet, and magazines. And if you ask friends and real estate agents, they will also give you a list of “must do’s.” Regardless of how you decide to do a house makeover before the sale, chances are that you’re not doing it right.

There is no doubt that many home buyers are looking for a turn-key home. If your home is not “out of the box brand new,” you probably need to freshen it up, as well as make some repairs and updates. But before you embark on the house makeover by making those renovations, you need to ask yourself two important questions: “How much money can I realistically allot for a makeover?” and “How much am I expecting to net from my home sale?”

Does a house makeover really get you top dollar? Spending money on renovations will certainly make the home sell faster, but not necessarily make you more money. And there is no guarantee that the house makeover renovations you make are to home buyers’ tastes. So if you’re goal is to get top dollar, don’t look at the sale price. Instead keep your eye on your estimated net (the amount you’re left with after the sale minus total renovation costs).

Of course, the best way to maintain your home’s value is to perform regular maintenance. It would certainly make the home prep easier too! But the reality is that many home owners defer maintenance until they feel it’s absolutely necessary. Deferring maintenance can actually cost more in repairs down the line, and lower your home sale price. Spending money to correct all the years of neglected repairs and updates prior to the home sale won’t necessarily get you top dollar.

Not all buyers are looking for renovated homes. One of Stephen B. Billings conclusions in his recent research (Hedonic Amenity Valuation and Housing Renovations; Real Estate Economics; Fall 2015, 43:652-82) was that during the past “healthy” housing market, there was a balance between renovated and non-renovated homes that sold. However, he also found there was an increase in renovated home sales during the housing downturn of 2007.

Selling your home “as-is” would certainly decrease your sale price, but could net you the same or even more if weighed against extensive renovations of the house makeover. Consider that you would only recoup a fraction of the cost of a minor kitchen and bathroom remodel; which averages about $20,122 and $17,908 respectively (according to 2016 Cost vs Value Report; remodeling.hw.net).

Concentrate on the basics of decluttering first. Decluttering can make your home look different and feel larger. Decluttering can set the stage for fo you decide on renovations, and maybe even home staging.

If you decide on freshening up your home before the sale, start with the basics. Focus on deferred maintenance, and make necessary repairs. Consider a fresh coat of paint, and maybe new carpets. Wood floors don’t necessarily have to be replaced or sanded; flooring professionals use state of the art processes to “renew” wood floors.

If you decide on a house makeover, focus first on making repairs and freshening your home. Work out a budget and get several quotes from licensed contractors. Don’t automatically go for the cheapest quote, even if you’re on a tight budget. Focus on quality, even if it means limiting the scope of work. Poor workmanship can sabotage your home sale by making your home look shabby and in need of additional repairs and updates.

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