Irrational home sellers and buyers

Irrational Home Sellers and Buyers
Irrational Home Sellers and Buyers (infographic from keepingcurrentmatters.com)

Have you wondered why so many people rushed to purchase homes in the recent historic seller’s market? Why have home buyers been scarce, even in a buyer’s market? The man with the answers is Ori Brafman. Ori Brafman has an extensive background that includes organizational speaker and consultant, professor, and writer. His new book, co-written with psychologist Dr. Rom Brafman (his brother), is called Sway: The Irresistible Pull of Irrational Behavior (Doubleday, June 2008). The book is a culmination of research that explains what compels us to act irrationally. And may explain irrational home sellers and buyers.

In a recent personal correspondence about irrational behavior in real estate, Ori offers these concepts to explain such seemingly overt irrational behaviors: loss aversion, “getting stuck in the past,” and value attribution.

Loss aversion, a concept described in Prospect Theory, describes why people focus on limiting their losses as opposed to seeking gains. Ori explains that loss aversion explains why home sellers have a hard time selling for less than their original purchase price, even when it means they could potentially lose more by waiting for the downward market to end. He explains that it is not only psychologically painful, but a shot to our ego.  This may explain irrational home sellers who wait for an unrealistic sale price.

This would explain why many irrational home sellers have had a difficult time adjusting list prices in the downward market. Even when a home seller will not realize a loss, they perceive a loss based on home values from a year ago. Based on this perceived loss, home sellers will list their homes for sale at higher than market prices. This fact was validated in a research study conducted David Genesove and Christopher Mayer entitled “Loss Aversion And Seller Behavior: Evidence From The Housing Market” (published in The Quarterly Journal of Economics, 11/2001). This research used data from the Boston real estate market in the 1990’s and serendipitously found that home sellers are unwilling to list and sell for a loss.

Irrational home sellers and buyers can “get stuck in the past,” looking to buy or sell a home for a price they missed some time ago. Rather than pricing their home at a realistic price, many home sellers look to sell for a price they would have sold for a year or two ago. Additionally, this could explain why some home buyers constantly offer low ball prices for homes that have obvious higher values.

Value attribution plays a large role in how home buyers view homes they may purchase. Ori explains that a home buyer might place less value on a home that is priced less than other neighborhood homes, “even when the home meets all of their criteria.” When a home is priced “rationally,” a home buyer might wonder, “What’s wrong with this house?” Home buyers will go through the home and arbitrarily decide which features devalue the home.

Together, these concepts might explain why home buyers have been scarce in this buyer’s market. Many home buyers have placed less value in owning a home in a declining market, worrying about further market declines. Additionally, home buyers irrationally worry about unrealized losses, even when buying a home may be the rational thing to do.

By Dan Krell
© 2008

Original is published at https://dankrell.com/blog/2008/08/29/why-do-people-act-irrationally-when-buying-and-selling-real-estate/
This article is not intended to provide nor should it be relied upon for legal and financial advice. Copyright © 2008 Dan Krell.

Being Organized Will Facilitate the Mortgage Process

by Dan Krell
Google+

Are you ready to jump into the real estate market? Maybe you already own a home but need a larger home; or are you thinking of downsizing to a condo near the town center. If you’re like the average home buyer, you’re planning to finance most of your purchase. Although the mortgage landscape has changed, many things remain the same. Whether you are a first time home buyer or a seasoned home owner, getting organized and being prepared will make the process more enjoyable.

Some home buyers have an idea of how much home they can afford, while others are unaware. Talking to a loan officer can give you an idea of mortgage rates and trends as well as how much you can afford. Putting things in perspective at this stage will shape your home search as you decide the type of home you want as well as where you want to live.

Although many things about mortgages have recently changed, qualifying is still based on your income, credit and assets. Before you talk to a loan officer, get your financial information organized so you can provide accurate information. Providing accurate information to the loan officer will allow them to provide you with an accurate price range; this will save you the time and heartache of looking at homes you cannot afford. Although mortgage rates change daily, the loan officer can guide you with any necessary corrections.

Maryland mortgage applications now require you to provide proof of your income to support your mortgage payment, so getting organized prior to talking to a loan officer is a good idea. Start your own mortgage file; your file should have your recent paystubs, W-2 statements, bank statements, 401k statement, and any other financial information you think you may need (which may include child support or disability income). Self employed individuals will need whatever documentation they can muster (including tax returns) to support their declared income.

Checking your credit report should be considered a sensitive issue as having too many credit checks within a short period of time will lower your credit score, and in some cases alter your ability to obtain a loan. Rather than having your credit checked by every loan officer you talk with, it is a good idea to request your own credit report from three credit bureaus (and place it in your mortgage file).

You are entitled to a free annual credit report from the three credit bureaus. Although many credit companies advertise “free” reports with snappy jingles, you can request your credit report directly from the three credit bureaus (Equifax, Experian, and Trans Union). Be careful, however, many web sites (even the credit bureau websites) will bombard you with offers to watch your credit as well as other credit products for a fee.

Loan officers will request your recent paystubs, bank statements, W-2’s, and your permission to check your credit. However, until you choose a mortgage lender, you may decide to protect your personal information by providing verbal information derived from your documents.

The lender you ultimately choose will require original documents as well as your authorization to check your credit. Your up-to-date file should assist the loan officer in making the mortgage process easy and enjoyable.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of August 18, 2008. Copyright © 2008 Dan Krell.

Why Title Insurance is Important

Title insurance should not be an enigmatic item listed on the settlement sheet, and there should be no question as to its validity. Here is a very basic explanation of why title insurance is important.

Title insurance, like other forms of insurance, is governed by the Maryland Insurance Administration (MIA). Title companies and title attorneys are licensed by the State to sell title insurance.

Title insurance is important because it’s an assurance that the home buyer receives a clean title from the home seller. Clearing a title of all liens and mortgages is not always an easy task. The first step is for the title attorney to order a title abstract.

A title abstract is simply a synopsis of the chain of title, or a history of ownership, that has been recorded in the office of land records in the county court house. The title abstract indicates all owners, mortgages, liens, encumbrances, and easements attached to the property. The title abstract also indicates previous sales and mortgage and lien satisfactions.

Because all the information in the title abstract is obtained from recorded information, it is inevitable that mistakes occur. For example, it is common for mortgage release letters to be lost, misfiled, or never filed at all. Sometimes there are years of information that is lost or destroyed resulting in a break in the chain of title.

Once received, the title attorney will review the abstract and look for any blemishes including unreleased mortgages or liens and breaks in the chain of title. If there are any blemishes found, they need to be cured before issuing a clean title. The home seller can remedy most blemishes by supplying all required documents or paying to release attached liens and mortgages. Sometimes it may be necessary for the home seller to show their title insurance policy so as to indicate they were given a clean title.

Sometimes there are items not filed in the office of land records that may affect the ownership of your home. Some of these items may be heirs of previous owners or undocumented lien holders who may make claim to your home. Title insurance can protect you from these claims. It is rare, but making a claim with the title insurance company can resolve these issues.

Lenders believe title insurance is important. If you are obtaining a mortgage to purchase the home, your lender will require “lender’s coverage” title insurance. The lender’s coverage protects the lender in case there are any unrecorded liens, easements, or other unrecorded defects.

Just as in other insurance policies there are different levels of coverage of title insurance. A basic owner’s title insurance policy typically assures clear title to the property and covers against incorrect signatures, on documents, forgery, fraud, and defective recordation of covenants, encumbrances or judgments.

Extended coverage may include coverage for building permit violations from previous owners, covenant violations from previous owners, living trusts, and a variety of encroachments and forgeries. Title insurance does not cover against liens placed after the effective date of the policy.

Policies and limitations vary, consult your title attorney for more information. Some policies cost more than others because of the difference in title insurance companies and levels of coverage. When comparing title companies, you should also ask about title insurance coverage and rates. You can access more information about title insurance at the MIA website, www.mdinsurance.state.md.us.

by Dan Krell

Copyright © 2006

Surfing for Homes

Before you were surfing for homes on computers, brokers kept track of their listings by card catalogues. As a matter of fact, these old cards were displayed at the old Rockville office of Metropolitan Regional Information Systems, Inc. (MRIS), (the old multiple list service).

During that time before the MLS, brokers were not required to share information and listings with other brokers. This proprietary system allowed the broker to maintain the buyers that came to seek information on homes for sale.

Looking back, home buying was not complicated. Home buyers would go to the local real estate office and see what homes were available. Homes for sale and other information were limited to what your Realtor knew. Most likely, the only homes your Realtor showed you were homes that were listed by that real estate firm. Needless to say, the real estate industry has come a long way since then.

Since the advent of the multiple list service, technology has made a huge impact on the real estate industry. Presently, surfing for homes has never been easier. Home buyers can look for homes on the internet and get listings via email and cell phones. As a matter of fact, if you go onto the internet, you will have hundreds of Realtors (including myself) as well as Real Estate Companies offer to send you home listings.

With all of this information flying around, what’s the most reliable and accurate information available?

The most reliable and accurate information available for Realtor listed homes is through MRIS. Unfortunately, if you are not a real estate professional, you can not have a membership to peruse the database. The good news is, however, that all the other databases and online searches of Realtor listed homes are fed by the MRIS. The quality of the information depends on the website’s ability to update their information from MRIS and how it disseminated.

There are a few popular internet searches that offer free searching without offering information. If you choose additional information or services from these sites, you must fill out an information page giving at least a name and email address. Although you get to search on your own, the sites do promote realtors and other real estate professionals.

Older style internet home search services forward your information to a local Realtor who will send you the information you seek. All these sites are useful and you can get the information you desire as long as your search criteria is specific enough. Unfortunately, if your search criteria are too specific, you will miss seeing homes that you may actually consider buying.

There are many alternative sites tthat allow surfing for homes too (such as craigslist.org). These sites allow specifc posts by brokers and FSBO’s.

Having all the technology and information available online is useful, however there are drawbacks. The main drawback is that most of the information is limited and you must contact someone for additional information. No matter what manner of internet home searching you choose, you will be more informed than not having done the search at all.

By Dan Krell
Copyright © 2016

A Final Walk Through Is Not Always A Walk in the Park

So your home inspection went well. The pest inspection came out all right. Everything is a go with your financing, and the title is clear. Settlement is two weeks away, are you excited about your home purchase? You should be-congratulations! Although everything looks perfect, don’t take your final walk through lightly.

As a home buyer, you have the right to inspect your purchase prior to settlement. As a matter of fact, both the Maryland Association of Realtors (MAR) contract and the Greater Capital Association of Realtors (GCAAR) regional contract have clauses that state your right as a homebuyer to receive the home in the same condition as the day you contracted to purchase the home.

Each clause, although worded slightly differently, states that the home will be delivered to the home buyer free of debris and that all mechanicals, cooling, heating, plumbing, electrical systems, and smoke detectors to be in operating order at time of possession (usually settlement). The MAR contract states that the home buyer can inspect the property up to five days prior to settlement. Both contracts’ make allowances for additional provisions which include home and environmental inspections.

Ok, so there are provisions for the final walk through in my contract, but what is the purpose of having a final walk through and what should I be looking for? The general reasons for having a final walking through is to ensure (among other things) that the home has not been damaged between contract ratification and settlement, that all the seller’s possessions and all trash are removed, items to remain are actually in the home, all mechanical systems and appliances are operational, and that all repairs listed from your home inspection were completed.

Your Realtor should provide you with a checklist of items to be checked by both of you during the final walk through. Generally, you should be looking for cosmetic and structural changes to the home which include damage to walls, staircases, and doors that occurred during the seller’s move prior to settlement; any items that should have been removed by the seller but left behind; and any item that was removed by the seller but should have remained in the home. Additionally, you should check the operation of appliances, air conditioning or heating (depending on the time of year), and any electrical devices including smoke detectors. Finally, you should check that the seller has completed all repairs as agreed in the home inspection addendum.

A Final Walk Through Is Not Always A Walk in the Park

Having a final walk through is just as important when you are purchasing a new home as when purchasing an older home. The builder will schedule a final walk through with you and your Realtor. When having your final walk through on a new home, the builder will check that all the mechanicals, heating, cooling, appliances are operational. Additionally, they will check that any customization that you ordered is correct. You should point out any cosmetic defects, such as dings in the wall, unevenness in paint colors, or any thing else that is not satisfactory. The builder is usually happy to repair or replace items until satisfactory.

If while conducting your final walk through you notice a problem with the dishwasher, what can you do about it? Occasionally, when conducting a final walk through, there are some problems. For example, it is not uncommon for the air conditioning to fail in the summer, or one item from the home inspection addendum was not repaired. If that happens, you have a couple of options. Your first option is to ask the seller for a monetary credit at settlement so you can make the repairs after settlement. Your other option is to delay settlement until the seller makes the necessary repairs.