To say that our local real estate market has been active lately is an understatement. We’ve taken a little trip to Crazy Town, that place where too few homes for sale and too many buyers collide — more often than not, in a deafening crescendo of multiple offers.
In Crazy Town, listing agents find themselves spending a sizeable slice of each day manning the phone banks. From the moment we hit “submit” on any new property that is reasonably presented and priced, we start getting the calls from civilians and other agents alike. A listing agent is suddenly the most popular girl in town.
These calls all begin in much the same way. Before I can truly engage the caller in meaningful dialogue – before I can answer his questions about Homeowners’ fees, granite counter tops, and how much I stand to make and will I give him some of it – I need to know who it is I am talking to.
The first problem is that most of these calls come through our main office line. While I love our receptionist and she generally excels at redirecting calls, she is not a real estate agent. She still doesn’t quite know what we do or the right questions to ask. Consequently, each caller is introduced to me as “a potential new client.” It could be an appraiser, a termite inspector, one of our own agents, or my doctor calling to schedule that little bypass. They are all “potential new clients.” So I must first do some vetting.
Is this the party to whom I’m speaking?
Usually, the call begins like this.
“I am calling about your listing.” (Silence)
“Which listing?” I ask. Because, you see, we usually have more than one listing at a given moment. And while I am quite intuitive at times, I admittedly have yet to master utter clairvoyance.
Several minutes later, having together successfully mapped the home in question (“You know, the green one by that other street, I can’t remember the name, but it ends with ‘Road’”), we are finally getting somewhere. But I still have to dispense with one more bit of business.
“Are you an agent?” I ask sheepishly.
Perhaps because we have become accustomed to communicating in 140-character sound bites, it is rare when a caller introduces themselves by name, let alone job classification. This includes my colleagues.
Why does it matter? Well, if I am speaking with an agent, the conversation would necessarily move in a slightly different direction, since I really don’t care if they dream of having a pool some day — or have been preapproved for a loan.
So, you aren’t an agent. Are you working with one?
“Are you working with an agent?” we ask next. That seems like a simple enough question, but it is one that is usually met with so many stutters and stammers that you would think I just asked them to explain the theory of relativity in Swahili. And usually, once they have regained their composure, the answer is “No.”
“No,” I have learned, can mean many things, including but not limited to:
- No, I am not working with an agent right now. Right now, I am eating a bowl of Grape Nuts and talking to you. I haven’t been working with an agent since this morning when my agent showed me twelve homes.
- No, I am not working with an agent right now. My agent is (on vacation, sitting an open house, not returning my calls, in traction) but I really want to see this house right now and it has to be right now because I am a busy, busy guy. Just open the darn door, already.
- No, I am not working with an agent per se. I will work with an agent when I find the house I want to buy, but only if that agent is the listing agent because I think I can cut a deal and I don’t need no stinking agent anyway.
Now, first let me go on record as saying the reason for my question is NOT ABOUT DUAL AGENCY. Yes, I just screamed. It’s not about dual agency. While I do not happen to subscribe to the theory that dual agency is the root of all evil, it is not something we seek out nor do we prefer it. Rather, the reason for my question has to do with the way agents work and are ultimately compensated.
The Offer of Compensation
When an agent takes a listing, the listing contract specifies a commission and how much of that commission will be shared with another broker in the event it is another agent that represents the buyer in a successful closing. When a listing is entered in our Sandicor Multiple Listing Service (MLS), the listing agent is making a “blanket unilateral contractual offer of compensation to the other MLS broker participants for their services in selling the property.”
If you are “working with an agent,” then, there is the expectation that your agent will perform certain agent-ish duties – like showing you the home, explaining the contracts, providing you with market data, and negotiating and closing your sale.
Notice I included showing the home among the list of buyer agent duties. “But as the listing agent, you owe it to your seller to promote the property and get people through!” you might challenge. Yes, I do indeed. I am happy to – I WANT to – take buyer calls, because I know more about this home than anyone else, and I am best prepared to answer questions and sell-sell-sell. But when a buyer is working with another agent, it is their agent who should be opening that door. Sorry. I know that sounds harsh.
Caveat emptor: On many, many occasions I have accommodated a represented buyer’s request for a showing. But on these occasions, I did so because either the agent begged for an assist (“I’m in traction!”), or because the agent was otherwise unavailable and there was a sense of urgency (like multiple offers on the table). We take our duties to our selling clients very seriously, and we want all interested buyers to have the opportunity to get it while the getting’s good, because this is in our client’s best interest.
The point is, be honest. It’s OK. We are not mean or lazy. In fact, we are quite reasonable people. But it is not unreasonable for you to expect your agent to do their job.
The Code of Ethics and Professional Courtesy
There is also a little matter of ethics. From the National Association of Realtor’s Code of Ethics:
Standard of Practice 16-13 All dealings … with buyer/tenants who are subject to an exclusive agreement shall be carried on with the client’s representative or broker, and not with the client, except with the consent of the client’s representative or broker or except where such dealings are initiated by the client.
Before providing substantive services (such as writing a purchase offer or presenting a CMA) to prospects, REALTORS® shall ask prospects whether they are a party to any exclusive representation agreement. REALTORS® shall not knowingly provide substantive services concerning a prospective transaction to prospects who are parties to exclusive representation agreements, except with the consent of the prospects’ exclusive representatives or at the direction of prospects. (Emphasis added.)
This section admittedly applies to situations where you have a Buyer-Broker agreement with your agent – an agreement in which you have professed your undying loyalty to your agent in writing. While we don’t personally use Buyer-Broker agreements, considering them a bit heavy-handed and preferring to earn our clients’ loyalty, a lot of agents do use these bad boys. And, if I don’t ask the question, I may end up providing “substantive services” unknowingly – like talking comps. Or showing the property.
Even absent a written exclusive agreement with your agent, I ask the question because I consider it a matter of professional courtesy. Sometimes a buyer gets a little anxious; I understand. They know their agent is out of pocket for the next 14 minutes and figure, “What the heck! I’ll just have the listing agent let me in.” But unless there is that true sense of urgency – like the seller is going to accept an offer in the next 13 minutes – I am much more comfortable with the buyer’s agent performing the agency duties for their client.
How We are Paid
This is obvious to agents and most, I think, non-agents, but some people truly don’t understand the nature of our jobs. We don’t make a plug nickel until our client closes escrow. In fact, we are a debt center until and if our client closes escrow. So, if I am spending my time showing homes – my listings or otherwise – to someone who knows that they will ultimately be having another agent write their offer, I am doing pro bono work. I am doing someone else’s work. Which leads us to…
A Case Study
The reason for this particular bee in my bonnet stems from a recent encounter we had with a buyer who was not “working with another agent.” He was calling on one of my own listings. As it turned out, he fell into Category #4, a listing agent-direct buyer. Unfortunately, as is so often the case, our psychic powers failed us this day, and we learned the truth too late.
Since I have already exceeded my self-imposed 4-million word limit, I’ll leave you with the high points:
- Man calls about new listing
- Man is “not working with an agent”
- Man wants to see home but has only two time slots
- These time slots are already spoken for on my own dance card
- I suggest that another agent from our office, one who in infinitely familiar with and has sold many homes in this development, could show him instead. This makes unrepresented man very happy.
- Agent meets man, at which point man treats agent with general contempt and informs him that he will be having any future discussions about this property with only the listing agent.
- Man vaporizes over a period of three days during which time listing agent receives multiple offers and seller accepts one.
- Unrepresented man calls four hours after property is placed in pending status, proudly announcing that he is “ready to write an offer!” Presumably he was also ready to negotiate a portion of my commission, but I will never know. We didn’t get that far.
This, of course, was a bummer all the way around. While the gentleman no doubt thought that, by being disingenuous, he was simply employing a clever business strategy, using people is not cool. Not only did he strategize himself out of a home, he showed disrespect for another individual who dropped everything to work for free this day.
Or maybe he truly didn’t understand how we work and are compensated. Now he does.
Thank you to John Trenton from Refinance Mortgage Rates for this guest post. Unfortunately, this is a situation our clients face from time to time. It is a good reminder that for homeowners facing divorce, there are many challenges but also options. Both your lender and your real estate agent can help you sort through those options.
Buying a home after a divorce presents special challenges, but with some attention to detail it is possible to overcome these situations and acquire the right home for the next phase of life.
Divorce can leave both spouses in difficult financial circumstances, but they each still need places to live. For many, that means buying a home. Often, however, divorced couples are left with a remaining mortgage on their joint home that neither of them knows how to effectively manage.
Home Mortgage Refinance for the Old Home
Before either party can consider a new home, it is important to deal with the mortgage on the former home. While selling the property and splitting any proceeds is often the most logical way to go, that is not always possible.
In cases where one partner wants to keep the home, it is essential for the other party to make sure his or her name is removed from all paperwork to limit liability and protect the individual's credit history in case of default by the other spouse.
A home mortgage refinance is often the best course of action if the joint home is not being sold. The party who wants to keep the home may not automatically qualify for refinancing, however. Proof of income and other paperwork is usually still required, and this can be difficult to provide after a division of assets.
Since the original lender is under no obligation to help with a home mortgage refinance, many find solutions from other lenders.
Considerations for the New Home
Financial experts recommend that newly divorced homebuyers get a letter of approval from a lender before going to see new homes to prove to real estate agents that they have adequate resources to make a purchase.
Before looking at any property, they should also carefully consider what size monthly payment is comfortable for them and how large a home they can reasonably afford in their new financial circumstances.
While it can be difficult to get a new home loan after divorce, some lenders approve clients for larger mortgages than they can handle. It is important for the recently divorced who are considering homeownership to take into consideration the costs involved in upgrading the new home as well as other difficult-to-predict costs that impact the monthly budget like transportation to and from the new neighborhood.
Couples with joint custody of children must consider their proximity to each other when choosing a home location and must make sure both homes have enough room for the children to stay over.
It is also important for divorced people to consider how their social lives will develop after a divorce. A suburban home can seem lonely to those living without a partner, but a downtown condo could be just the thing to spur a new lease on life.
While buying a home after a divorce can be challenging, it is also an important step toward normality for those whose lives have been in upheaval for months or years.
Did you ever wonder why banks seem to approve so few loan modifications and often just foreclose instead? For any home owner, that seems ludicrous. Any rational person would think, “Why can’t they just fix my adjustable rate mortgage at today’s rate and keep me in my home and paying my mortgage? Why would they want to risk having me stop making my payments and incur all those legal fees associated with a foreclosure? Aren’t there government programs that incentivize banks to work with home owners to modify loans?” But you are a rational person, not an insider at the bank. It’s whole different story if you know which rock to turn over.
The cold, hard truth is banks may make more money when they foreclose on a house than when they modify its loan. At this point, it becomes relevant to distinguish between a loan servicer and the investor that actually owns the debt. For example, Bank of America may collect the monthly payments but not own the actual loan. B of A is often only the servicer for an investor who coughed up the cash (or bought the mortgage backed security) for the actual loan amount. Loan servicers (B of A in this example) may make more money when the property forecloses. Being professional paper-pushers, they slap delinquent accounts with late fees, legal fees and other random “processing” fees. If the home forecloses, those back fees must be paid because the servicer is pretty high on the food chain of lien holders. If a loan is modified, often the servicer must waive those junk fees or roll them into the modification agreement. If the fees are rolled into the loan, the servicer gets paid back over the course of 30 years as the borrower pays off their mortgage. The servicer who is not only processing your monthly payments but also handling all your loan modification paperwork asks themselves: “Would I like all my money paid in full soon or potentially have to waive all my fees to process this modification?” To take it a step further, if the investor agrees to modify the loan from 6% to 5% interest rate, the servicer loses money over the long run too. These are the people processing the loan modification applications. No wonder they “lose” so much paperwork from well-intentioned borrowers.
To answer the question “Aren’t there government programs that incentivize banks to work with home owners to modify loans?”…well yes. The Home Affordable Program (HAMP), birthday March 2009, offers banks between $500 and $1500 to work out a loan modification with home owners. Let’s do the math. Thousands of dollars’ worth of junk fees waived + a reduced interest rate = let’s just say it’s more than $500 – $1500. I’m pretty sure servicers can do that math. (Source: HAMP Compensation Matrix, updated Nov 9, 2010).
Let’s consider the investor who is neatly tucked behind the servicer. The servicer is out in front taking all the heat from consumers and the press because they think that servicer actually owns the loans they process payments for. That investor isn’t stupid. They insured the loan on the property in the first place. (Think: AIG). When the house forecloses, it’s very likely the investor is paid in full by their handy insurance policy. That’s why we buy insurance, right? Then when that house goes up for sale on the courthouse steps, that investor (or sometimes the servicer) sends out their people to “buy it back”, so it becomes a “bank-owned property”. If there is no one else bidding on the home, they buy it back well under market value. Then they list the property as an REO / bank-owned property and sell it. As the owner/seller, they bank the profit. Then…this is the gross part…if the home owner refinanced that loan at any point, the investor can also sell the borrower’s “debt forgiveness” to debt buyers for pennies on the dollar. See: http://en.wikipedia.org/wiki/Recourse_debt They can sell the right to collect on that “shortfall” to some vultures for a couple thousand dollars that then have the right to pursue the unfortunate borrower until the day they die. I am not being dramatic here. There is literally no statute of limitations on how long the debt buyer (aka collection agency) has to pursue that borrower. The debt buyer who paid $1000 for the loan then has a tremendous opportunity to make a killing trying to collect as much as they can wring out of the borrower. The grand finale: the investor reports the re-financed loan’s shortfall to the IRS as income to the borrower. Let’s do the math. Insurance pay-out + profit from selling the house as a bank owned property + a little cash on the back end to peddle it to a debt buyer = let’s just say it’s more than $500 to $1500. I’m pretty sure the investors, like their buddies on the servicing end, can do that math.
The media rages: “Why isn’t the HAMP program helping more people stay in their homes? It’s an utter failure! It doesn’t make sense!” Right, it doesn’t make sense to the banks either. Can you imagine what the government would have to pony up to compete with the profitability equation the banks enjoy when they foreclose on a house? If people thought the TARP bailout was over the top, it would pale in comparison.
Just a few ideas about why the banks (servicers and investors) might choose to foreclose on a home rather than modify the loan. My guess is this is just the tip of the iceberg.
As a Realtor®, I find myself having some pretty quirky conversations about credit scores with my clients. I get to tell stories that sound like old wives’ tales and recipes. For example: “I had some clients who were so excited about buying their first home, they went running out and bought a whole new bedroom set. They fell into the ‘No Interest for 3 Years!!!’ trap and financed their new ‘free’ furniture. They almost lost that new home over coveting a new bed.” What? Yep, your lender pulls your credit again just before they ship out the piles of loan documents for you to sign. They want to see if anyone went out and bought a new car, stopped paying their credit cards or…bought a bed.
As you can see from the lovely pie chart depicted above, there are 5 ingredients mashed up into your FICO score dessert. Take, for example, the bedtime story. When my eager young buyers went to Store Credit A-Go-Go (not the real vendor’s name, the real vendor is – uh – bankrupt), they took advantage of the in-store credit option. That carves up that “15% Length of Credit History” piece and mixes it in with the “10% New Credit” ingredients of the pie. 25% of their credit score was hanging in the balance. Since they were only a few points above the threshold required for their loan qualifications, they dropped just enough to fall out of eligibility for their loan program. No dollop of whipped cream on that serving. Their lender barely had time to switch them into a different loan program so they didn’t lose their first home. They ended up paying a higher interest rate because they were deemed higher risk borrowers.
Or my funky ditty about my buyer’s new computer… “I had this buyer once who saw an ad for the biggest, baddest computer known to mankind with monthly payments of only $24 per month (on approved – wait for it – credit)”. Unlike the first scenario, she had a FICO score with plenty of room to move. Instead, she served up a heaping slice of “30% The Amounts You Owe”. When her lender pulled her credit a few days before closing, her total amount owed hopped right out of the mixing bowl into a splat on the floor. You see, boys and girls, even if you only pay $24 a month for your fancy abacus, your score says you owe the whole $3000 now. With her house on the line, she coughed up the $3000 to bring her debt ratio back into the acceptable range required by her loan’s underwriting standards.
Then there’s the new refrigerator another buyer decided she wanted to get from Lowe’s because she could get 10% off if she put it on her new, shiny Lowe’s card. That is a cholesterol- busting combo of “10% New Credit” + “10% Types of Credit” + “30% The Amounts You Owe” + “15% Length of Credit History”. Ouch.
I am chock-full of Betty Crocker greatest hits of close-call credit nightmares. Too bad I get to be the wet blanket all over my buyers’ consumer aspirations while in escrow. “Don’t buy anything. Don’t close any credit card accounts. Don’t move a muscle.”
Fair Isaac Corporation (FICO) launched a consumer education website. (www.scoreinfo.org) They came up with that fancy pie chart showing the breakdown of the factors under consideration when reporting agencies whip up your credit scores. This is not your mama’s apple pie. You should check out the recipe.