Tim's Atlanta Real Estate Blog: August 2008

There are some companies that charge the seller an upfront fee to cover all the expenses of marketing their home.  In order to overcome resistance of the seller taking on that financial risk, these companies usually offer "money back guarantees." 

At first glance, this sounds really good.  But there are some very important strings attached to this "money back guarantee." 

Let's say that a seller paid the company $650 upfront for marketing.  They  guaranteed that at anytime if the seller was unhappy, the seller could cancel and the company would give them back all of the upfront money they had paid.  I think a normal expectation would be that the company would write them a check at cancellation  time and let the seller move on.

But some companies have come up with a weasel's money back guarantee.  They require the unhappy client to wait until after closing to receive their money back.  Why the wait?  Because the company doesn't want to actually pay back the money they originally collected from the seller.  The unhappy client needs to allow the company to set up a referral fee arrangement with the new agent that the unhappy client wants to use. So the next agent gets stuck paying the "money back guarantee".  Pretty slick, isn't it?  Maybe if you're a weasel.

So it ends up that the company that was only charging $650 to do the listing, can actually end up with more by having the listing expire or be withdrawn.  For example, a 25% referral fee on a $300,000 home could be $2,250.  The company collects a  $2,250 referral fee after closing, gives the original unhappy client their $650 back and walks away with $1600 pure profit. It would actually be more profitable to have a listing expire.  Something to think about if you are a seller.

One company that does this had 474 sales in the past year and had 1720 expired or withdrawn listings during that same period.  Do the math.  It adds up to a huge amount of money made off of expired listings. 

A big problem that first time homebuyers face is having an emergency fund to take care of big ticket repairs, especially during their first year of home ownership.  After all the costs involved in getting into a home, usually there's not much cash left over.  What if the AC needs replacing a month after moving in?  Many times buyers will purchase a home warranty as insurance for the unexpected repairs. As a last resort, home warranties are OK but I really don't like them  for reasons I will go into on a future post. 

The recently passed housing assistance act has the government offering a very sweet deal.  It is only available until next July and is for first time home buyers.  They are offering what is basically a $7500 fifteen year no interest loan.  What I suggest for  everyone who qualifies, is to take that $7500 and create your own reserve fund with it.  I would also immediately budget around $200/month to add to that reserve fund.  Only use that money for major home repairs like a new HVAC, new roof etc.

You have to start paying the money back ($500/year) starting 2 years after you get it.  Hopefully you won't need to use it. It will sit there collecting a little interest and will be a little insurance policy for you.  It's like having your own interest free personal line of credit available in case of an emergency.

CCH has a very good analysis of what the details are.

You don't get the credit at closing.  You get the money as a tax credit when you file your taxes for 2008 or 2009.  If you are going to take the credit and want the money sooner, you can always see about adjusting your withholdings.  It's best to talk with a good CPA or financial planner to help you figure out what's best for your particular situation.

Responsible use of this credit is key.  Use this as free insurance until you have your own money set aside in reserve.  Don't take this credit and then go blow it on furnishings or other consumables.  Use it only for home emergencies that will affect the value of your home. 

The Olympic motto is explained very well on the official Bejing Olympic website:

The Olympic motto is made up of three Latin words: "Citius, Altius, Fortius", which means "Faster, Higher, Stronger".

These three words encourage the athlete to give his or her best during competition, and to view this effort as a victory in itself.

The sense of the motto is that being first is not necessarily a priority, but that giving one's best and striving for personal excellence is a worthwhile goal. It can apply equally to athletes and to each one of us.

Usain Bolt of Jamaica easily won the 100 meter sprint in world record time. Watch the replay of the race. Go to the 4:00 minute mark where they show the end in slow motion.

With about 20 meters to go, about 10 more strides, Bolt looks over his shoulder and sees that he is far in the lead.  He begins to coast and pound his chest in victory before he crosses the finish line.

In the preliminary rounds, he did the same thing.  It didn't bother me much then  since I can understand that you want to save your best for when it really counts.  But what's the point of holding back in the finals of the Olympic games with billions of people watching?  If that's not the right time to let it all out, when is?

I guess he accomplished his goal, to win a gold medal.  But did he uphold the Olympic motto?  Did he give his best during competition?  He came in first, but did he strive for personal excellence?  Watching the slow motion video, it's clear that he held back at the end.  The question is: How fast could he really have gone if he had run the full race?

I congratulate him for his victory, but I hate to see someone hold back and not show their full potential.  I really would not care to watch him race again.

I guess this shows you the power of competition.  Without others there to compete with and motivate you to keep up with them, it's easy to start to coast and not do more than you really have to.  I guess that's a big reason for keeping track of points here at ActiveRain.  For those with a competitive spirit, it keeps them motivated to continue on just a little bit more.

Here's to the Olympic motto.

A bank had to reduce a home in Detroit to $1.00 before they could find a buyer. Two years ago it sold for $65,000. 

No crazy financing on this one.  It was an all cash deal.

Homes going for $1.00 should definitely start bringing the buyers out who have been sitting on the fence.

Here's the link to the story.

We've all heard about how to boil a live frog.  You put it in a luke warm pot of water and slowly turn up the heat.  By the time it knows what's going on, it's too late for it to jump out .

I see this happen in many aspects of life.  Little by little, we get used to putting up with a little more heat and discomfort.  Suddenly, we realize how bad things have gotten and then we have a crisis on our hands.  It might be too late to really be able to do anything about it.

I have found that real change usually doesn't happen when you are happy and complacent.  It happens when you finally get sick and tired of compromising here and there and trying to be happy with less and less.  You finally wake up and are ready to take a stand.  It happens when a spark deep down inside of you ignites a fire that spurs you on to take action to make changes in your life. 

You all of a sudden stand up and shout, " I'm mad as hell and I'm not going to take it anymore."  This is a line from one of my favorite movie scenes.  If you have time, watch this video clip of this scene from the movie "Network".  It always motivates me whenever I begin to have that helpless feeling.

It's all about passion.  It's also about not waiting until it's too late before you become passionate about something.  It saddens me to see so many people willing to give up little pieces of their life, liberty and happiness over time because it just is easier to compromise and submit. 

Have you ever had one of those clients who just keeps demanding more and more of you?  You take it quietly because you fear losing a deal.  Finally, you just can't take it anymore and you let them know just how you feel.  You overcome your fear of losing the deal and say what needs to be said.  It's one of the most invigorating feelings I know.  It's the awesome feeling of freedom. 

Here are some excerpts from a speech given on September 10, 2003.  It is amazing how today's housing bubble and Fannie Mae trouble is described so accurately.  It's like the speaker had a crystal ball and could see into the future.

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing.  Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts

This explicit promise by the Treasury to bail out GSEsin times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital

The connection between the GSEs and the government helps isolate the GSE management from market discipline. This isolation from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices

Congress should act to remove taxpayer support from the housing GSEs before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market

 Here's the complete speech.  At the time, I'm sure this guy was considered a nut case and an alarmist.  He probably still is considered a whacko.  Besides, who wants to listen to such things as market discipline, distortion to the allocation of capital, and government interference.  But before we can change things for the better, it's important to know what the problem actually is.  If you misdiagnose the disease, the wrongly prescribed medicine might actually make the patient sicker.

Since he predicted our current situation so accurately, maybe we should listen to what he has to say about the Housing Bill that just passed.

We've heard them all before.  Everyone has an excuse for why they can't accomplish something.  They see someone who's successful and they'll quickly tell you the reason why they can't do the same.  You know:

If only I had more money.

If only I had the right connections.

If only I had more time.

If only I had gone to the right school.

If only I could speak better.

If only I could write and spell better.

If only I could use the computer better.

I went to an Internet marketing seminar last weekend and was treated to a host of wonderful speakers.  They were all pitching their products but I picked up some really profound ideas.  Nothing that I hadn't heard before but for some reason several statements by each individual speaker just kind of came together for me.

We've all heard that "Knowledge is Power".  A more truthful statement might be "Applied knowledge is Power"  The collective knowledge posted here at ActiveRain is more than anyone would need in order to become successful.  But unless you apply some of this knowledge, it's not going to do you any good.  Knowing something is a nice feeling.  Applying that knowledge and seeing results is so much more exciting.

"Freedom comes from taking immediate action".  Have you ever waited to do something until you had everything figured out?  Opportunities come and go and you stand there too worried to take the first step because you feel uncomfortable.  The reality is that you are never going to feel comfortable.  Accept this and get on with it.  The key is to get started now. 

Which leads into the next gem I heard.  "Just do the next logical step".  What if you want to be a top blogger and get more business from it?  What's the next step that needs to be done?  It might be as simple as setting up an ActiveRain account.  Maybe that's too confusing.  So it might be to search for an online video tutorial that shows you how to set up an account.  If that's too difficult, maybe it's picking up the phone and calling a successful blogger who you see on ActiveRain and asking for their advice.  You don't have time?  Everyone has the same number of hours in the day. The key is to just do something now and the rest will reveal itself as you go.

"An excuse is just a crutch".  Unfortunately, crutches become a part of your life that you rely on. You begin protecting these crutches because it's your fail safe way of rationalizing your failures. The sooner you realize this, the sooner you can discard all of these "crutches" that are bogging you down.  

My summary of what I learned last weekend is:

Just do what comes next where you are right now. No excuses.

We've all heard some old timers talk about how cheap they bought  a home for when they were just starting out and how much it has gone up in value.  They are so proud of their investment.  They say that real estate is the easy way to wealth and you are crazy if you don't own your own home. 

A recent featured post had a statement about how someone  bought a home in the early '60s for $66,000 and it is now worth $1.2 million dollars.  It said that it would be hard to find another investment that did as well as that.  I made a very well thought out comment showing  that one could have done better by sticking their money in the S&P 500 or by buying gold.  I stated that a big chunk of that gain was just due to inflation.  Unfortunately, it must be bad manners to disagree with statements made in a post.  I see that my comment has been deleted. 

This is the second time in the past few weeks that a comment of mine has been deleted because I disagreed with the premise of the post.  Doesn't anyone want a good discussion any more? 

So let's see if $66,000 to $1.2 million (a gain of 18X) since 1960 was really that great.

Using the government's inflation calculator, you'll see that $66,000 in 1960 is the same as $487,000 in today's dollars. And that's using the government inflation numbers which have been shown to have been manipulated over the last 20 years in order to downplay the real inflation rate. 

Let's take the governments median home price numbers.  In 1963 the median new home cost $18,000.  In 2007 it cost $247,900.  That's an increase of about 14X. 

Homes cost money to maintain.  Since 1960, how many roofs were  needed? HVAC systems? Water heaters? Paint jobs? Kitchen remodels? Bathroom remodels? Flooring replacements? Appliance replacements?  When you begin adding up all of those costs, things don't look that great anymore.  It's great to live in a home that you own. We all have to live somewhere. There are tax advantages and personal well being benefits.  But the basic appreciation of a home hasn't done as well as other investments.  The transaction costs are high and it's not very liquid.

The Dow Jones was at around 600 back in 1963 and is now around 12000.  That's a 20X increase.  The S&P 500 was around 60 and is now around 600 which is also  a 20X increase.  Stocks are very liquid and very cheap to sell.  I can sell $100,000 worth of stock for only $5 on Etrade.

Back in the early 60s we were still using real money.   A silver dollar actually had about a dollar's worth of silver.  One dollar of  regular silver coins from the 60s is now worth around $13 just for it's silver content.  That's about the same appreciation as the median house.  The nice thing is that silver didn't require any maintenance costs. You could have buried it in the back yard and forgot about it.

This just goes to show you why inflation is such a sinister way to steal the people's money.   You actually devalue their money and most people think they are getting richer.  For a comic book explanation of inflation, check out this link. 

I like owning my home.  It gives me satisfaction and security.  But investing in real estate isn't as much of a no brainer as some might lead you to believe.  There are risks involved and sometimes a lot of costs and hard work to maintain it. 

I've seen first hand the amount of destruction caused by some idiots who go around ripping out copper from homes and businesses.  Recently it cost a church $30,000 to replace their air conditioners that were stolen for their copper.

I wondered how much these thieves make from this copper. I figured that it must be pretty lucrative to get them to risk jail.  Stealing an air conditioner also requires hard physical labor and some method to haul it off. You just don't tuck an air conditional under your shirt and walk away down the street.

Today in the Atlanta Journal Constitution they ran a story about the economics of copper theft. 

I was shocked at how little money these thieves make.  There is about $15 worth of copper in an air conditioner.  Even though copper gets $3/lb. , this one copper fence actually was only paying $.50-$1.00/lb. for ill gotten copper.

Who in their right mind is going to go to all the physical effort and risk of jail in order to make $15?

There are too many legitimate ways to make better money and easier money.  The going rate for day laborers is $10/hr.  People pay good money to get things hauled away.  Many people's trash is worth way more than $15.  There are a lot of homes being demolished to make way for MacMansions.  Why not make an arrangment with the demolition company?

Peaches are $2/lb.  Why not raid a peach orchard and sell them to the corner produce vendors?  It's still stealing but at least you aren't causing thousands of dollars of damage.

I have no tolerance for this type of stupidity and destruction.  I think the courts should crack down on this stuff and make the penalities much harsher.  If you have the strength and resources to steal an air conditioner, you should be able to use those skills in a more productive and profitable manner.

Imagine, as a listing agent,  showing up at a closing and having to explain to your seller that they are going to get $10,000 less than you told them they would. 

Imagine that the contract was as clear as could be but you assumed that the $10,000 down payment assistance in the special stipulations was the same as the $10,000 of seller paid closing costs on the front page of the contract.  So instead of $10,000 in concessions that you explained to them, the seller actually had agreed to $20,000 in concessions.

Imagine that this was only your second closing since you obtained your license two years ago.

Imagine that your commission on this deal was less than $10,000.

Imagine that the buyer and the buyer's agent aren't willing to concede a penny.  They are getting on the phone to their lawyer seeing what they need to do in order to sue for specific performance.

Imagine that the sellers actually used to have a real estate license.

Imagine having to explain this you your broker.

All I can say is that I am so glad that it wasn't me who was the listing agent.  I felt really bad for them but then again, an agent really needs to know how to read a contract.