Some of you will remember my post on the lawsuit in Southern California where the buyers of a home were suing their agent because they felt they overpaid, and the agent had acted to hide that information from them (Refresher available here).

This case had lawyers salivating, and brokers trembling, as it potentially could provide precedent and open the door to lawsuits by home buyers who purchased homes during the recent run-up in housing prices, and are now seeing their local markets stagnate or fall.

According to the following article released by the California Association of Realtors, the jury on the case found in favor of the real estate agent.

There was no mention of the issues that I flagged in my earlier post, namely that the agent didn’t share the appraisal or list of comparable properties with the client, or that he encouraged them to get their home loan through him and use his appraiser.

I’m sure that there are many real estate agents out there who also are great mortgage brokers. I’m not one of them. Frankly, I’m not smart enough to keep up with all the issues in real estate law and the local market, plus all the ongoing changes in the lending market.

Thanks for reading . . .

REALTOR® WINS HIGH PROFILE JURY TRIAL
After only two hours of deliberation yesterday, the jury unanimously vindicated a buyer’s agent accused by his clients of failing to disclose that two other homes in the neighborhood sold for less than what they paid. As a trial court case, this decision in Ummel v. Little is binding on the parties to the case, but has no binding authority for other cases. Moreover, the buyers may file an appeal.

This case involved a couple who bought a home in a coastal Carlsbad community in 2005 for $1.2 million. They regretted their purchase when they discovered that two other homes sold for about $150,000 less than theirs. They sued their real estate agent for negligent misrepresentation and breach of fiduciary duty. Their lawsuit grabbed national attention, given the recent downturn in the real estate market.

At the trial, the agent’s attorney argued that there were valid reasons these two other properties sold for less. One home, for example, had a lap pool which was unappealing to many buyers, and the sellers wanted to rent back the home for two years.

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Well, it was just a matter of time before someone who bought at the top of the market sued their agent because they paid too much for their house. In this article in today’s New York Times, we learn of the sad story of the Ummels who bought a retirement home in Carlsbad, CA to be near their children.

The Ummels worked with a Buyer’s Agent who had a fiduciary responsibility to assist them in finding and purchasing their home. They looked for quite a while, fired one agent and then canceled contracts on two other homes that they had written offers on. I’m sure nerves were getting a little frayed for all concerned by the time they finally bought their home.

“Ms. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.”

Where things get interesting, and their agent, Mike Little, makes the rest of us look bad is stated further on in the article:

“Mr. Little also worked as a mortgage broker. The Ummels say he encouraged them to get their loan through him. Mr. Little ordered an appraisal of the house but did not respond to the couple’s requests to see it, the suit charges.

A few days after the couple moved in, in August 2005, they got a flier on their door from another realty agent. It showed a house up the street had just sold for $105,000 less than theirs, even though it was the same size.

Then they finally got their appraisal, which told them the house up the street was not only cheaper but had a pool. Another flier in early October mentioned a house down the street that was the same size and closed the same day as the Ummels’ but went for $175,000 less.

The Ummels accuse Mr. Little not only of withholding information but of exaggerating the virtues of their house to push them into a deal.

Ms. Ummel said in her deposition that Mr. Little had told them “many times that it was a very good buy.”

The mortgage brokerage that funded the loan, and the appraisal company both settled out of court, but Mr. Little fights on. I bounced this off of fellow contributor Eric Trailer, and we saw a couple of red flags waving.

1) Mr. Little acted as the agent and loan broker. This is legal, but as noted in the article, he now has twice the motivation to get the deal done.

2) He urged them to get their loan through him - again legal, but the ice in sunny Carlsbad is getting thinner.

3) Mr. Little’s appraiser found the house to be worth $1,150,000 to $1,200,000 in the summer of 2005, the Ummels’ appraiser valued the house at $1,050,000. This is about 10-15%, which is pretty significant, but within the realm of possibilities. I’m getting nervous if I’m Mr. Little’s broker however.

4) Mr. Little didn’t share his appraisal the Ummels. (His broker is drinking heavily at this point.)

Long story somewhat less long . . . The Ummels (plaintiffs) are suing because they didn’t get what they felt was appropriate representation from their agent. This is what many consumers expect of Realtors, and books like Freakonomics don’t help.

One of the things we contributors to 3Oceans preach is Transparency in Real Estate. We share the information and tools that we use with our clients, provide data from unbiased sources like Altos Research, and don’t try to do loans and sell houses at the same time.

End of rant, let the comments fly!

Thanks for reading . . .

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If you are a reader of The San Jose Mercury News, or any other paper or media outlet, you know that there is a growing issue associated with home buyers who purchased their homes using subprime loans and are now facing foreclosure as they are unable to keep up with their payments when their rates adjust.

On Sunday, March 17, the San Jose Mercury News ran an article describing how an agent and lender with Century 21 Su Casa Realty violated a number of lending laws and ethical guidelines to get people to purchase homes which are now in foreclosure, in some case because the buyers couldn’t even afford the first payment.

While it is a stain on the already tarnished image of Realtors, it is easy for us in Palo Alto to say ‘what a shame, it won’t happen here’, or words to that effect. But, what is the effect of this issue on homebuyers in Palo Alto and the surrounding communities?

Rachel Van Emon with OPES Advisors, a financial services firm with offices in Palo Alto and San Mateo, recently sent me an article that discusses the effects of impending legislation and revised lending guidelines that will affect the ability of buyers to qualify for products like the interest only loans that so many of us use to buy our million dollar teardowns in Palo Alto and surrounding communities.

The highlights are:

• The Department of the Treasury has issued a Guidance on Guidance on “Nontraditional Mortgage Product Risks.”
• The Guidance specifies “nontraditional” as those loans allowing the deferment of principal and/or interest payments – not just sub-prime loans.
• The Guidance states that borrowers for these products are to be qualified at the “fully amortizing and fully indexed payments.” This means that qualifying payments will be bigger, and it will take more income to qualify.
• The new guidelines are to be in effect by 9/07. Some lenders have already adopted them, and many more will do so in the coming months.
• Virtually all lenders have cancelled their programs allowing 100% financing on a Stated Income basis.
• Guidelines have tightened around lending when other “risk factors” are present such as 100% financing, low reserves, high debt-to-income ratios and condo properties.

In short, it’s going to be harder to pay for that million dollar teardown in Palo Alto starting now, and especially in September.

The big question is whether these changes in lending laws will cool the red hot housing market we are currently enjoying, or if the Valley’s amazing ability to generate disposable incomes and wealth will overcome another hurdle to home ownership. Stay tuned . . .

The entire article is posted for your reading pleasure. Click here to view it.

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Well, nowadays, and at least in the Bay Area, that is no longer the question. Bay Area buyers have become accustomed to hearing agents, and their friends, emphasize the importance of being “preapproved”. But like many overused and underexplained topic, few people actually fully understand the power of a properly executed preapproval, and how to distinguish it from its more commonplace cousin, a prequalification.

If you are in the market for to buy a home, especially in some of the more competitive neighborhoods of the Bay Area (such as Palo Alto, Menlo Park, Los Altos, Mountain View and San Carlos), your agent – if he or she is any good – will ask you to meet with a qualified mortgage advisor as soon as possible to get prequalified or preapproved. This will serve two main purposes: 1) the agent will be able to serve you best by understanding the range of your affordability and not waste anyone’s time, and 2) you will be able to focus your search on what you know you can comfortably afford and not fall in love with something that was not meant to be. The purpose of the initial meeting with the mortgage specialist is to get “prequalified”; however, you can also get preapproved at the same time. So what’s the difference, and who cares?

Prequalified means that the mortgage specialist has taken a detailed discovery interview of your financial and credit background, along with your housing goals. Based on the information collected, s/he should be able to make a professional decision (based on his/her years of experience and the guidelines published by the lenders) whether or not you are “qualified” to get a loan and approximately how much you can qualify for. Let me stress that this is a decision that the mortgage specialist will make, NOT the person/organization who will ultimately lend you the money. Needless to say, the prequalification has the following weaknesses:

- There is no assurance whether you will actually get a loan or not

Preapproval, when done properly, is much more powerful. It is a prequalification taken to the next step. Preapprovals can take 2 forms:

CONFORMING LOANS ($417K and under)
For conforming loan amounts, the mortgage specialist can actually upload your file information into one of two national approval engines (Fannie Mae or Freddie Mac sponsored), and within minutes, obtain a printed formal approval of your loan amount and any pertaining conditions. This approval, because it is governed by a set of approval criteria that is universally accepted by all lenders, can then be submitted along with the hardcopy of your loan file to your lender of choice. That lender’s underwriting department will in turn accept and adopt the findings generated by this online engine. Hence, once you received an from this online engine, you can be fully confident that your loan is essentially approved. The reason that mortgage specialist don’t automatically do this is because (sadly) most people in the industry are not properly trained financial advisors and simply don’t know how to use this application, or are not even aware of it! Those who are aware are often deterred by the extra work and/or upfront cost, and so simply downgrade their clients’ to a “prequalification,” assuming that they won’t know the difference anyways.

NON-CONFIRMING (AKA JUMBO) LOANS (Over $417K)

For Jumbo (non-confirming) loans, preapprovals are a bit more complicated, and controversial. Since the national (Fannie Mae or Freddie Mac) engines that are uniformly accepted by all the lenders approve up to $417K – the conforming loan amount limit – many loan agents simply treat jumbo loan preapprovals like prequalifications. That is to say, they use their judgement to see whether a loan would be approved. In most cases, and especially if the agent is seasoned and dependable, the preapproval will not be at risk. But, if time permits and the agent has access to underwriters, it is always safer to discuss the actual loan package with a specific underwriter and obtain a verbal approval. In this case, the loan is not only in good shape according to the agent, but actually considered “approved” according to the person who would ultimately be granting the funds. This “preapproval” is very important – basically, as long as the borrowers can subsequently provide the required documentation (according to loan type) to support what was disclosed to the underwriter, than the written approval would be provided almost immediately upon submission.

Preapprovals, when executed properly, provide buyers with peace of mind when they need to go in with an aggressive offer, such as bypassing finance contingencies. If a loan is preapproved, either through the automated engine or verbally with an underwriter, buyers can be assured that their financing is confirmed within the payment terms of their comfort level, subject to slight market movements prior to locking a loan. However, if a preapproval was not done properly, and the buyers waived finance contingencies, they could be in a sticky situation. I have inherited many clients who have learned this lesson the hard way, having had to back out of a beloved house they won through multiple offers due to a prequalification error, and risking their deposit in the process.
Lastly, while it’s a hard sell, what people don’t realize is that a strong preapproval from a reputable mortgage specialist should placed the buyers in a more desirable position than even a 100% cash buyer. The sellers have no control over what a cash buyer will do with their money between offer acceptance and close of escrow. While not probable, it is possible that the purchase money could go down the drain through a big Vegas visit, or disappear through a bad stock day. Conversely, if the bulk of purchase money is coming from a reputable lender, and the lender has already preapproved, then sellers can have the comfort of knowing that the money is not going anywhere and not accessible to the buyers for any purpose except to buy the house. As a seller, I would much rather to see a strong preapproval than an all cash buyer.

SUMMARY:

- Make sure you know whether you are getting a prequalification or a preapproval (hint, latter is better!) If the person you’re speaking to can’t explain the difference to you – SWITCH!

- If you are getting a preapproval, ask which lenders you have been preapproved with (and why those were chosen)

- Before you waive finance contingencies, make sure that the person doing your preapproval has verified your credit, your cash reserves, and your household income

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At a social event over the weekend, I got into a conversation about real estate with another guest (not difficult, since it’s on everybody’s minds!), and the discussion unfortunately turned to dirty tricks played by some agents. Even more unfortunately, both the other guest and myself had seen quite a few such tricks, me from within the industry, and he as an interested observer.

So…I‘ve decided to sponsor a “Shady Agent Tricks” competition! The rules are pretty simple: In the comments to this post, submit your entry for something shady that you’ve seen an agent do. It can be something illegal, unethical, or something that’s technically neither but still smells funny. You may not name any agent or mention the agency for which he/she works, or describe them in a way that could identify the person (e.g. here’s something that is regularly done by the agent who dominates the XYZ neighborhood). The competition ends this Saturday at midnight PST, and the judging panel (that would be me) will select the winner, who will be awarded a $10 Starbucks card. The four runners-up will be honored with the glory of being mentioned on my blog plus a linkback to their own (if they have one.) The competition is open to both Realtors and civilians.

Why, you might ask, would a professional Realtor want to expose some of these tricks on his own blog? Isn’t that just bad publicity? I think of it differently. More publicity about shady agent practices is good for consumers, and by extension is therefore good for all consumer-friendly practicing agents. I certainly expect some objections to airing our industry’s dirty laundry.

Here are my entries for the competition…

1) Difficult to show double-dipping trick — Listing agent makes the property nearly impossible to preview or show: open house lasts only an hour; property never gets shown on broker tour; agent convinces seller not to use a lockbox; property only available to show with 24 hours’ notice. Result: Property languishes on the market for several months and then — whowuddathunkit!! — the listing agent comes in with his own buyer. He convinces the seller to take the deal, and pockets the full commission. The listing agent definitely wins, and the seller is left scratching his head about why so few showings happened on the property.

2) Late-to-the-MLS double-dipping trick — Listing agent takes the listing on Monday and markets the hell out of it in the weekend papers plus Craigslist. Mysteriously, the listing doesn’t make it to the MLS by the deadline that week for it to make the local broker tour (where dozens of local brokers will see it and make recommendations to their clients about it), and in fact the listing is still not on the MLS by the following Monday. Due to the intensive marketing, and a dozen street signs, the first open house weekend is flooded (mostly by unattached buyers, since the ones with agents who for the most part rely on the MLS to tell them about new properties weren’t aware of this one) and — voila!! –
the listing agent presents an offer from one of these unattached buyers to the seller on Monday, who accepts it. Again, the listing agent pockets both sides of the commission.

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Image courtesy of creepylawyer.com

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Am I missing something? How does this guy make a living if he doesn’t charge his clients a commission?

Oh, wait a minute…he doesn’t charge his buying clients a commission…as in, “If you hire me to represent you in buying a house, I will not directly send you a bill.”
This is the kind of sleaze that gives our business a bad name…caveat emptor. Better hope the Freakonomists don’t see this ad, or it’ll become the frontispiece of yet another Realtor-bashing spree.

The above link may be gone in a day or two; here’s a screenshot:

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