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Are Broker Warranty Kickbacks Okay?

For some time there has been a nifty little side business in real estate: Your friendly broker offers a homeowner warranty program to reduce buyer worries about possible repairs.

Such warranties may or may not be a good idea — you have to look at what’s included, what’s excluded, the up-front cost, the cost per incident, the deductible, the term of the coverage, etc. They are, after all, “limited” warranties. Also you have to ask whether the home is new or existing — new homes often have extensive warranties under state rules as well as warranties for specific items and systems such as the dishwasher and heating system.

You also need to ask if the broker suggesting protection is being compensated by a home warranty company (HWC) for such salesmanship, compensation which may be perfectly okay.

HUD has just issued a new rule to clarify the issue and it includes several major points:

First, says FHA Commissioner David H. Stevens, “a payment by an HWC for marketing services performed by real estate brokers or agents on behalf of the HWC that are directed to particular homebuyers or sellers is an illegal kickback.”

Ah, but what about marketing home warranties in general?

Second, “depending upon the facts of a particular case,” says Stevens, “an HWC may compensate a real estate broker or agent for services when those services are actual, necessary and distinct from the primary services provided by the real estate broker or agent, and when those additional services are not nominal and are not services for which there is a duplicative charge.”

Third, the amount of compensation from the HWC for such additional services must be reasonably related to the value of those services and not include compensation for referrals of business.

The Bottom Line

So yup, compensation for the marketing of home warranties is allowed but kickbacks for “naked referrals” (just providing a name) to a home warranty company are not.

In addition to the three points made by HUD there ought to be a fourth; that is, buyers should be told up-front if the broker or salesperson is receiving a fee of any sort for marketing the warranty.

In practice, especially when local markets are slow, what often happens is that the broker or salesperson provides a home warranty with no charge as an inducement for a purchaser to buy. The cost of the warranty is a selling expense to the broker, just like the cost of advertising. The offer of a free warranty is also one reason why a seller might prefer to list with Broker Smith rather than Broker Jones who does not offer such an inducement.

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Compare “For Sale,” “Sold” & “Under Contract” Signs

In our area real estate signs say For Sale, Sold and Under Contract. These signs are a shorthand way to explain the contract status of the property — information which may suggest that the property is off the market, on the market or maybe both.

For Sale

It might seem that a property which is “for sale” is, well, being offered to the public for purchase. Actually, the sign has a somewhat different meaning. The owner IS saying that the property is available for sale, however it’s the buyer who is expected to bring in an offer. Once received, the owner may then accept, reject or counter the offer.

In other words, the sign and a price from the owner are an invitation to bid — it’s the buyer who actually makes the offer. This is why a home can be sold above the offering price even if another buyer makes a full-price offer.

Under Contract

In this case the owner has received an accepted an offer. Since there has been offer and acceptance it might seem as though we have a done deal, a contract. However, virtually all real estate offers are contingentoffers, meaning that each party is committed to the transaction IF certain conditions are met. The buyer might want a home inspection, appraisal, financing or some other requirement which must be satisfactory to him or her. The seller might want a certain deposit amount, quick loan application or other requirement. If the conditions are not met then, usually, the deal is off and the buyer’s deposit is returned.

Because a home “under contract” has not actually been sold — and because some percentage of contracts fall through — the owner of a home under contract may be willing to accept a back-up offer. If the first offer falls through then the owner will consider a back-up instead.

Sold

A sold sign means the deal is done and title has changed hands. This sign should only go up after closing has been completed, though absolutists might argue that a “sold” sign is only right after property records have actually been changed.

With a sold sign, if you want to buy the property you need to speak with the new owner.

Offers, contracts and back-up offers are all complex. Be sure to get help from a licensed real estate broker, attorney or legal clinic before signing such paperwork.

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How To Pick On Appraisers

Many in the real estate community are upset with the newly implemented Home Valuation Code of Conduct (HVCC) and want it suspended or revoked so we can go back to the good-old-says when it was okay to threaten and pressure appraisers.

The HVCC was an agreement worked out between New York Attorney General Andrew Cuomo, Fannie Mae, Freddie Mac and their then regulator, the Office of Federal Housing Enterprise Oversight (OFHEO).

Appraisals are hugely important to real estate brokers, agents, buyers and sellers. If the appraisal is for less than the sale value then the buyer must put up more cash to qualify for a loan, the sale price must go down or both — unless, that is, the sale falls through. In other words, if you’re a buyer you want an appraisal to assure that you do not overpay for the property –a protection which is undermined and eroded when the appraiser is pressured and threatened to come up with the “right” number.

There are a number of points under the Cuomo agreement, but three important items look like this:

___ Mortgage Brokers are prohibited from selecting appraisers. Since the mortgage broker profits when the loan is originated, it follows that such folks are only going to select appraisers who come up with the “right” price valuation.

___ Lenders are prohibited from using “in-house– staff appraisers to conduct initial appraisals. This is a built-in conflict of interest since the lender (meaning, usually, not a mortgage investor but rather a party that originates a loan and then sells it as quickly as possible) wants appraisers to approve any and all deals, otherwise the lender doesn’t eat.

___ Lenders are prohibited from using appraisal management companies that they own or control. This is another overt and obvious conflict of interest — and still another way to screw buyers who are not getting the protection for which they paid if an appraisal is less than accurate.

The solution, say many in the real estate community, is to get rid of the HVCC. Why? Well appraisal costs have risen — that, of course, is not a problem if brokerage fees go up and bank revenues increase. Also, sales are being delayed because it takes time to do an accurate appraisal. Given a choice of speed or accuracy, many in the real estate community prefer whatever it is that produces fees and commissions.

The real issues are different. First, since many purchasers are now represented by buyer brokers and agents it is an outright and absolute conflict of interest for those who represent purchasers to advocate weaker appraisal standards. Second, why on earth should lenders ever be allowed to own or control appraisal companies? This is like guarding a hen house with wolves.

A good appraisal and a professional home inspection are vital consumer protections, well worth the dollars they cost. And if it takes a little more time to get them done right and without pressure on the appraiser or inspector, so what? A home is a long-term investment, why not wait a few more days to assure that purchasers are not paying more than they should?

___ Lenders are prohibited from using “in-house– staff appraisers to conduct initial appraisals. This is a built-in conflict of interest since the lender (meaning, usually, not a mortgage investor but rather a party that originates a loan and then sells it as quickly as possible) wants appraisers to approve any and all deals, otherwise the lender doesn’t eat.

___ Lenders are prohibited from using appraisal management companies that they own or control. This is another overt and obvious conflict of interest — and still another way to screw buyers who are not getting the protection for which they paid if an appraisal is less than accurate.

The solution, say many in the real estate community, is to get rid of the HVCC. Why? Well appraisal costs have risen — that, of course, is not a problem if brokerage fees go up and bank revenues increase. Also, sales are being delayed because it takes time to do an accurate appraisal. Given a choice of speed or accuracy, many in the real estate community prefer whatever it is that produces fees and commissions.

The real issues are different. First, since many purchasers are now represented by buyer brokers and agents it is an outright and absolute conflict of interest for those who represent purchasers to advocate weaker appraisal standards. Second, why on earth should lenders ever be allowed to own or control appraisal companies? This is like guarding a hen house with wolves.

A good appraisal and a professional home inspection are vital consumer protections, well worth the dollars they cost. And if it takes a little more time to get them done right and without pressure on the appraiser or inspector, so what? A home is a long-term investment, why not wait a few more days to assure that purchasers are not paying more than they should?

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Can We See Another Buyer’s Offer For A House?

Question: We made an offer on a home. The broker representing the sellers said a higher offer had been received and asked if we wanted to raise our bid. We declined, but here’s the question: How do we know there was another bid or that it was higher?

Answer: One of the most difficult issues in real estate involves the question of competing bids.

If you’re an owner, you want multiple bids –- the more the better. Your goal is not only to get the highest dollar amount, but also the offer with the fewer contingencies, considerations and requirements.

Alternatively, if you’re a buyer, the world is different. You want to offer as little as possible. Ideally, you not only want to offer a low price you also want the owner to make certain changes and improvements and even give you a “sellers credit” to assist with closing costs.

You can see where this is going. We have two very competitive parties, a buyer and a seller. But what happens when there is more than one bid?

As a buyer you surely do not want to bid too much and, ideally, you want to see other offers to verify that they exist and contain certain terms. But – and here’s the catch – you do not want your offer “shopped” to another would-be purchaser (and neither does any other bidder).

There are other problems here as well. For instance, the fact that someone made a higher offer does not mean such an offer is reasonable in the context of the current market. A competing bid may well be made by someone who is ultimately unable to complete the transaction –- contracts do fall through for various reasons. Lastly, there is the problem of privacy. As a buyer, do you not expect that your offer will be treated as a confidential document and not shared with others? In fact, you could include a clause to that effect to clarify your view and wishes.

So we have conflicting interests. A buyer would like to see competing bids but no buyer wants their hand exposed.

What to do? There are differing views in real estate, but given the conflicting interests of buyers, sellers and still more buyers the best approach looks like this: Bid what’s right for you, and no more.

That is, if you believe a home has a given value and that certain clauses and conditions are necessary for you to feel an offer will be good, then that is your position. The risk, of course, is that your bid may not be accepted -– and you could lose the property.

Alternatively, you may be involved in a bidding war which will have profound costs for you in the future. The higher purchase price will likely lead to a bigger mortgage and steeper monthly payments — a long-term cost that you may regret.

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Syndicated originally by Content That Works and posted with permission.

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Do We Have To Disclose Past Mold Problems?

Question: A new home has had complete demolition of all walls because of mold. What type of disclosure is suggested? What type of an inspection? What does this do to the property value? I am a prospective buyer of a new home that got very moldy throughout construction.

Answer: Mold is a relatively new concern in real estate so many issues relating to it are unsettled.

In this situation, if the walls have been taken down, has the property been re-built? If yes, why would the market value be less than any other home of like size, quality and location if the problem has been resolved? Essentially the home has been replaced and the builder, or the insurance company, is taking a loss.

A complete demolition is a rare situation, but it might pay to take these steps: Contact the state health department and ask if they have resources or recommendations. They may want to look at the home. Also, before signing anything have an attorney review the entire transaction to determine what tests and warranties are required and who will be responsible if mold related to construction returns.

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Syndicated originally by Content That Works and posted with permission.

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The Case For Flexible Real Estate Commissions

It’s been a very interesting few weeks in the Miller household, a time when one investment property was sold and another acquired — in both cases with the help of local residential brokers.

Going through this process as a consumer of real estate services suggests both that local brokers are hugely valuable and also that traditional relationships between brokers, buyers and sellers are in transition.

It’s always interesting to hear self-proclaimed “consumer representatives” discuss real estate brokerage. Inevitably their core issue — often their only issue — is transaction cost. In their eyes it seems expensive to sell real estate, unusually so.

Yet if you equate selling a home with raising money, which is what selling a home really is, then it becomes possible to compare the cost of real estate marketing with the expense of non-profit fund-raising. Given that the Better Business Bureau says charitable organizations should not spend more than 35 percent of their contributions on fund raising, the idea that real estate fees are somehow overpriced seems absurd.

What consumer groups do not normally address, and what might be useful for the brokerage community to consider, are changes to traditional listing and buyer brokerage agreements. With very little adjustment, it’s possible to make such arrangements both more consumer friendly and far better for the brokerage community.

How? Let’s consider some specifics:

*Listing success today is typically related to the attainment of a “ready, willing and able” buyer. But sellers are really interested in something different, the completion of the transaction. Why not avoid both litigation and bad PR and instead relate listing compensation to the sale and settlement of the property? One could then offer a standard owners can instantly understand: No check for the broker without a check for the seller.

*Buyer brokerage agreements seem remarkably broad. Why would purchasers have an interest in agreements which include an entire state? Instead, why not an agreement that’s specific to a few communities and counties where a salesperson has particular expertise?

*Buyer brokers often say their services are “free,” an expression which surely means the purchaser should not have any payment obligation. Given this view, why not have brokerage agreements that authorize buyer brokers to seek payment only from owners and listing brokers — but NOT from buyers? And like listing agreements, why allow any buyer brokerage fee to be earned unless there is a completed transaction?

*Lastly, why not have listing and buyer brokerage agreements that allow for early termination by either party without penalty? Such arrangements instantly end consumer worries about broker relationships. If broker performance is not satisfactory to the consumer, the agreement can quickly end. For brokers, such clauses mean being freed from buyers and sellers with implausible expectations.

Are the ideas above revolutionary — or merely revolting? Do they make any sense at all?

When looking for listing brokers and buyer brokers we expressed an interest in the terms above and the reaction from hugely-successful professionals was universally the same: Sure.

Why? We think the answer is that the representatives we selected are enormously successful and had confidence in their ability to get the deals done. Relating compensation to completed transactions was not an issue — that’s what they do.

But was there additional risk for our representatives? In theory, yes. We could have bought a property outside the counties where we had engaged our buyer broker — but how realistic is that? We might not have finalized the sale of our investment property — but why would we do that?

Here’s another risk for our buyer broker: We could have bought from a self-seller or someone offering a minimal fee. In such circumstances we would have had no obligation to pay a commission.

What if our brokers were wrong and there were no transactions? Part of being in business is risk, nothing is assured. No doubt if deals failed our two professionals would merely move on to the next clients. Alternatively, while other brokers might hem and haw about contract details, our brokers got the business — and hefty checks for their services.

From a consumer perspective, our modified agreements were comforting. They suggested, first, that we were dealing with professional people who wanted to advance our interests. Second, our agreements removed potential entanglements and complications that were discomforting to us.

In the end both our listing broker and our buyer broker were very well paid. The transactions were fast, straight-forward and we will make a point of recommending the professionals who served us so well. In effect, what they earned was not only a commission for particular transactions but also referrals and a potential stream of future income. Not bad for a little bit of flexibility.

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Published originally by The Real Estate Professional and posted with permission.

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Must Owners Accept Full-Price Offers?

No.

A real estate transaction is complex and involves far more than the purchase price. For instance, you bid full price but perhaps someone bid more. Or, you bid full price but require the sellers to re-paint the first floor — effectively asking for different terms and a discount on the sale price.

Why not speak with the broker to see if your offer can be modified to meet the needs of the seller.

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Syndicated originally by Content That Works and posted with permission.

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Can We Get Back Our Deposit?

Question: We purchased a parcel of land on Friday. Two days later we decided to cancel the transaction. (buyers’ remorse). Can we get our deposit back?

Answer: Maybe. You need to ask several questions. For instance:

First, what does the agreement say? Does it have a rescission or cancellation period during which time you can change your mind without penalty?

Second, what do the rules say? For instance, some states require a three-day rescission period for timeshares.

Third, when does the clock start running — and when does it end? The moment you sign? Midnight? Do weekends and holidays count?

Fourth, how must notice be provided? Is a certified letter with a return receipt sufficient? E-mail? A phone call? How do you verify receipt?

Have an attorney review the agreement to determine your rights — and make sure to do it quickly.

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Syndicated originally by Content That Works and posted with permission.

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