The Commission Conundrum – Should you negotiate it?

real-estate-commissionI charge my clients what I consider a fair and “standard” commission for the Boston area real estate market. I tell my listing clients that my commission is 5%, and that I don’t ask for more and I rarely negotiate less. Under special circumstances I may take a slightly lower commission (multiple transactions) and in no circumstances will I take less than 4.5% as a total commission.

What makes 5% “standard”?

Commissions are NOT standardized according to any governmental or non-governmental agency or body. In addition, no realtor organization makes anything approaching a “suggestion” as to actual commissions, as it is probably prohibited from doing so. Commissions are determined by the market and are technically “freely” negotiated between agents and sellers. Individual agencies can set their own standards but it would be borderline illegal for brokers from different agencies to discuss commissions. Agents are taught that just talking about commissions with agents from other brokerages can be seen as an anti-competitive violation of the Federal anti-monopoly laws. 5% is merely standard in a colloquial sense based on what I see agents charging in the metropolitan Boston area.

The Statistics

There is no way to track the actual commissions that agents charge. However, we can infer what they are charging by looking at what MLS shows agents are offering as a “co-broke” commission to the buyers’ agents. Agents almost universally “co-broke” or “offer to compensate” the buyer’s agent with 50% of the total commission. According to MLS for the past year:

  1. In Brookline, on 93.6% of the residential listings, the listing agent offered a 2.5% commission co-broke 93.6% of the time, offered less, 5.4% of time, and more, 1% of the time.
  2. In Newton the numbers are similar. The listing agent offered a 2.5% commission co-broke 89% of the time, offered less, 8% of time, and more, 3% of the time.
  3. In Boston, which involves thousands of listings, the numbers are somewhat different. On about 75% of the residential listings, the listing agent offered a 2.5% commission co-broke, offered less 22% of the time, and more, about 3% of the time.

While there are occasions when the listing agent will not compensate the buyer’s agent with 50% of the commission, based on my experience, it happens so rarely that the message here is clear: 5% is what most agents charge most of the time.

If you are a seller, you can probably negotiate for a lower commission from your agent. The statistics indicate that it happens plenty often.  However, I have some questions for you to ponder before you negotiate a lower commission. With the overwhelming majority of listings offering the buyer’s agent a 2.5% commission, do you really want your property listed with only a 2.25% co-broke, or even a 2% co-broke? This puts your property at a competitive disadvantage. On the other hand, what if you negotiated a 4.5% total commission with the co-broke at 2.5% and your agent earning 2%. It is impossible to determine how often this happens but I know it happens. This is problematic for different reasons. Do you want your agent working for 20% less than the buyer’s agent and most agents in general? If your agent will so easily negotiate her own commission down, how easily will she negotiate on your behalf? What are the overall implications of having your agent working for less than most agents most of the time? I would expect the answer depends on the situation, but I also know from experience that you generally get what you pay for.

Real Estate Market Gone Nuts!

After 18 years selling residential real estate I thought I had seen it all, or at least most of it. During the spring market this year I received the most offers I have ever received on a listing, 4 times in a row. The first was a 2-family in West Roxbury. Listed at $469,000, we scheduled a public open house for Sunday, and indicated that offers were due the coming Tuesday night. We had 60 people at the open house, received 12 offers, and are scheduled to close soon for well into the mid $500s. The winning bidder had no mortgage contingency. Next was a very cute and somewhat diminutive house in Natick listed at $359,000. It looked great, we had over 50 people come to the open house, received 9 offers, and sold it for $378,000 after deducting a fairly big sum for a failing porch. The third was a very nice, but dated, 2+bd/1 ½ bath condo in Cambridge priced at $549,000. This time we received 8 offers, with the winning bidder willing to pay a bit over $600,000 and no mortgage contingency. The last one was a mint condition 2bd/2 bath condominium in Allston/Brighton with garage parking built in 2007 and priced at $479,00. We only received 5 offers this time and are selling it for around $500,000.

If you have read the news or talked to other people in the industry I am sure you know that this kind of thing has been happening all the time and is continuing to happen. So what’s going on? I think there are 2 main reasons for the feeding frenzy of this recent spring market. The first and foremost is low inventory. Take a look at this graph showing the inventory  for the condominium market of the Back Bay, South End, and Beacon Hill combined. Other highly desirable neighborhoods around Boston  have similar statistics.

boston-real-estate

The decline year over year from 2012 to 2013 reaches as high as about 33%. Going back 2 years, the inventory is down in the range of 45-50%. In short, inventory has been declining for some time.  This year interest rates also hit an historical low at the beginning of the year.  See below.

US 30 Year Mortgage Rate Chart

US 30 Year Mortgage Rate data by YCharts

I think it is fair to conclude that this spring there was the widespread perception that interest rates were probably as low as they would ever go. This made borrowing  inexpensive, and naturally increased the impetus for people to want to buy homes. The lowest rates ever, combined with the widespread knowledge that inventory was low, created a perfect storm of high demand and low supply. The result has been the consistent scenario of multiple offers and prices shooting up so widespread this past spring. Now with interest rates going up, it will be interesting to see what happens this summer and fall.

Cash is King, but Maybe It Shouldn’t Be

cash-offerWith the recent, and drastic, heating up of the real estate market in the Boston area, buyers in multiple bid situations are again making “cash” offers. Just recently, I had a couple make a very strong offer on a fantastic single family home in Lexington. Like most nice homes in good suburbs, it had just gone on the market and there were multiple offers. My buyers ultimately lost out to other buyers who submitted a “cash” offer. In practical terms, the winning bidders made an offer with no mortgage contingency. It doesn’t necessarily mean that those buyers had ready access to all the funds necessary to close on the property without a mortgage. It only means that they were willing to risk their deposit if they couldn’t come up with the funds at closing. My experience is that even buyers who forgo mortgage contingencies still plan to get a mortgage. Rates are at historic lows and the interest, up to a mortgage of $1.1M, is tax-deductible. In addition, I believe that most buyers who have easy access to that much cash are probably buying more expensive property. So where does this leave responsible buyers (and their agents) who don’t want to take the risk of losing a significant deposit?

I think the phenomenon is simply an expression of buyer desperation. Buyers that waive the mortgage contingency may have lost several bidding wars, and are looking for an advantage. I assert, however, that an offer from a pre-qualified buyer who is also “well-qualified” is not significantly better than a “cash” offer.  Sellers should only prefer the cash offer if the price and other terms are also better than an offer from a strong buyer with a mortgage contingency. Cash offers are genuinely stronger in transactions where getting financing is actually difficult, like commercial properties and multi-unit investment properties. Standard single family homes and condos are simply not that hard to finance.* Buyers with good credit, nothing to sell, and a job are going to get financing. The seller should focus more on the offering price and possible inspection issues. Deals fall apart over inspection issues when buyers are not properly prepared for an inspection and then get scared off by something major that they weren’t aware of before they bid on the property. Deals rarely fall apart after a purchase and sale agreement is signed and the buyers then fail to get financing.

Buyer should never waive a mortgage contingency unless they are really prepared to pay cash. It is simply too big a price to pay even for a small risk. At the same time, I would recommend that sellers only place a very small value on the lack of a mortgage contingency. At the closing, the money is green no matter where it comes from and the goal is to sell the property, not keep the deposit.

Next Up: what buyers can do with regards to the other terms to make an offer as attractive as possible.

*It may be important to inquire as to a buyer’s ability and willingness to put down more money in the event the property does not appraise at the selling price.  This is a real risk in the current market of quickly increasing prices.

The 2012 Results Are In And Uncertainty Lies Ahead

2012-2013-boston-real-estatelThe number of single family homes sold in Massachusetts last year rose by 18.4% compared to 2011, and the median price point rose 1.8%. The number of condominium sales rose 25% and the median price went up 2.6%. For the Greater Boston Area, the numbers were even better.  The single family median home price went up 6.8%, and for condominiums it was up 10.3%. With numbers like these, it is clear that the market has hit bottom and values are recovering. In addition, towards the end of the year the numbers were even stronger, with December posting the 2nd highest number of sales on record in Greater Boston for a December.

At the same time, the rental market is also experiencing a boom. Rents in the Boston area began to show signs of upward movement last year. This year, the rental market is off to a very strong start and I believe that we will see a further increase in rents. A rental agent I work with recently remarked to me that this kind of market “only comes around about once every 15 years.”

The immediate cause of the upward pressure on prices in the local housing market is the pronounced lack of sales inventory. Based on MLS data, the early February residential sales inventory for the downtown Boston neighborhoods for the past few years is as follows:

2010: 1185

2011: 987

2012: 798

2013: 417

Statistically, the situation is similar in most of eastern Massachusetts.  Almost all the real estate agents that I speak with regularly report that demand is substantial, and the “squeeze” is creating a situation where prices are rising fast.  There is no consensus, however, as to the reason for the dramatic reduction in inventory. In my opinion, we are in a market-wide catch-22 “gridlock” situation. Those potential sellers who would like to move locally don’t see much on the market to buy. Without the confidence that they can find a new place, they won’t  put their house on the market. Simply put, it isn’t a good time to sell because there is nowhere to go. The only people putting their homes on the market are those who are truly under real pressure to move. As the spring market is still just getting started, however, the situation may straighten itself out. On the other hand, it may not and we could just continue to see tight inventory leading to higher prices. Either way, we will find out.

Take a look at this month’s Keller Williams video newsletter

New Rental Housing Rights for Victims of Abuse in Massachusetts

domestic-violenceAs I have recently written about landlord/tenant issues in Massachusetts, I thought it apropos to discuss a new domestic violence law that directly affects landlords. Just last month, Massachusetts enacted a new law that gives victims of domestic violence a fairly broad right to break their leases and have the landlord change their locks. The important provisions of the new law are as follows:

  • In order to break a lease, victims are required to provide notice to landlords that they were subject to a sexual assault or rape or under imminent threat of same within three (3) months of the incident.
  • Landlords may request supporting documentation such as a police report or restraining order (which they must keep confidential).
  • Provided the tenant or co-tenant victim provides the proper notice, she can terminate her lease and be relieved of financial liability to the landlord for the remainder of the rental period. The landlord must return any last month’s rent and security deposit.
  • Victims of sexual assault or stalking may require that the landlord change the unit’s locks within 48 hours and at the tenant’s expense. If the landlord fails to act, the tenant may change the locks herself.
  • If the perpetrator of the sex crime or threat is a household member (i.e., spouse/boyfriend), the landlord may authorize changing the locks and withholding the new key from the perpetrator.
  • Landlords who make a good faith attempt to comply with the new law, and do not give a new key to the alleged perpetrator, are generally absolved from liability to the perpetrator for not providing a key.
  • Noncompliance with the new law can result in damages against the landlord equal to 3x the rental amount, plus payment of the tenant’s legal fees, which may be set off against any unpaid rent.

The bill, as finally passed, was signed off by both tenant and landlord industry groups after several years of debate. It is clearly a step forward for victims of abuse. If you are a victim of domestic abuse and you have to leave your apartment, not violating your lease is one less thing you have to worry about.  It also gives landlords a way to deal with a request by a tenant to change the locks in order to keep another tenant out.  Before this law, landlords faced with a request by a tenant to change the locks in order to keep another tenant out faced a difficult situation.  Property owners now have a clearer path to navigate a difficult situation and help a victim of abuse. It is also, as a landlord, one more thing you need know.  A link to the new Massachusetts domestic violence law can be found here. 

This article is a slightly modified version of a January 13, 2013 post by Rich Vetstein on 1/13 on The Mass. Real Estate Blog and posted with his permission. Rich writes on a variety of subjects and I highly recommend you check him out!

In the electronic age, when is a deal a deal?

esignatures-real-estateMassachusetts courts have been grappling with the question of “when is a deal a deal” for a long time. Most communication in real estate is now done via email and other electronic means. It was just a matter of time before a court was faced with whether and to what extent emails, and electronic signatures constitute a binding and enforceable agreement to purchase and sell real estate.

Don’t real estate deals need to be in writing?

The Statute of Frauds is the genesis of the saying “always get it in writing.” The ancient law, originating in England, provides that all real estate contracts must be in writing signed by the party (or agent) to be charged. In the old days, application of the Statute was quite simple. If there wasn’t a written agreement signed in ink, there was no binding deal. Now, email makes it much more complicated.

The UETA
In 2004, Massachusetts adopted the Massachusetts Uniform Electronic Transactions Act (UETA), which provides that parties to a real estate transaction may consent to conduct the transaction electronically via email or electronic signature technology if they use such technology in their dealings (which everybody does these days). The UETA requires some form of electronic signature.  Just what exactly constitutes an electronic signature has not yet been fully determined by the courts. In a recent Superior Court case, Feldberg v. Coxall (May 22, 2012),  the judge ruled that an email signature block or even the “from” portion of the email could constitute a valid electronic signature. Accordingly, the judge found that the buyer would at least have the opportunity to make a case that a binding deal had been reached, despite the seller refusing to sign the hard copy offer. Email signature technology in the residential real estate business

Many real estate agents in Massachusetts still work with hard copy contracts signed in ink, hard copies of contracts,  or, at best, electronic copies (PDFs).  I expect this practice will wane. There are a variety of free Internet services that enable you to sign documents electronically. Check out DocuSign.com (which I was able to register for and use in minutes), e-signlive.com, or rightsignature.com. My office of Keller Williams recently started accepting electronic signatures and takes it one step further by using a company called Dotloop. With this system, all the parties to a transaction can register for access to a common electronic file cabinet. Any party can enter a password to access and electronically sign a document.

A deal is still a deal in Massachusetts, but a signature is not what it used to be.

This article is a modified version of the article “Think Before You Hit Send: Emails May Constitute Binding Real Estate Agreement Without Signed Offer.” Many thanks to Attorney Vetstein for allowing me to use his article.  The Mass. Real Estate Law Blog is absolutely one of the best out there.

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What Condo Association Budget?

condo-budgetCondominium association budgets come in all shapes and sizes. If, like me, you live in a very small association with 2 or 3 units, it may be questionable whether an actual written budget even exists. Large associations, made up of hundreds of units, often have detailed budgets prepared by professionals. In either case, when you went to sell your condo in the past, only the prospective buyer cared about and reviewed the budget. In today’s lending climate, it is standard practice for the buyer’s lender to review the budget. Fannie Mae, the quasi-public company through which most mortgages pass, does not require a written budget for 2–4 unit associations, but does require it on associations of 5 or more units. Many lenders also have an “overlay,” which is essentially an additional requirement that 2–4 unit associations have a written budget. The bottom line is that it is a good idea to have an actual written budget, because it is likely that the lender will ask for it when someone goes to sell a unit in the association.

The lender reviewing the budget will want to see a line item for a 10% reserve. 90% of the annually collected fees must account for all of the regular recurring expenses, and 10% must be saved as reserves. According to the lenders I work with, it is unnecessary to have a separate reserve account. Be careful, however, as buyers looking to get mortgages guaranteed by the Federal Housing Administration (known as FHA mortgages) require condominiums associations to meet stricter requirements.

Most condominium budgets can be set up to show a 10% reserve. All obviously recurring expenses, like insurance, water and sewer, the common electric bill, and all clearly recurring maintenance (snow removal, for example) must be budgeted for in a line item. I also recommend some money be put in a line item labeled “maintenance,” because not having any money for general maintenance is not realistic or credible. Expenses that do not come up every year do not have to be budgeted for in advance and can come out of reserves. For example, if your association plans to spend $10,000 in the upcoming year on a new walkway, the budget can still show a 10% reserve for the year that you build the new walkway. The following year, when you produce a “budget vs. actual” report, you would show that you spent the money out of reserves.  As a matter of fiscal prudence, your association may still want to raise fees or collect money via a special assessment, but that is a different conversation.

I always enjoy a good conversation about condominium association budgets, so please don’t hesitate to contact me or write a comment and tell us about your condo association budget.

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5 Stats that Determine the Real Estate Market

housingPeople often ask me, “How’s the market?” The answer is clearly subjective, but careful analysis of the following statistics leads to at least an educated subjective judgment:

1.Value

Values or prices are usually expressed in terms of how the median price of closed sales compare year-to-year or month-to-month. Because the seasons strongly affect home sales, I recommend considering the median prices for any given month compared to the same month a year ago:

  • In April 2012, the median selling price of single family homes in the greater Boston area fell 2.5%, and condominium prices were up 6%, compared to April  2011.

 2. Volume

The most relevant statistic for sales volume (the number of homes sold) is the number of homes sold compared to the same month a year ago.

  •  The number of single family homes sold in the greater Boston area was up 11%, while condos were up 18.5%.

 3. Inventory

Take a look at how many homes are on the market compared to a year ago.

  •  The inventory of single family homes was down 10% in April, and for condos the inventory was down a whopping 30%.

 4. Days on Market

Still relevant but not quite as important, are the figures for “days on market and “supply.” This is the average time it takes a home to go under contract.

  •  The average days on market for real estate in the greater Boston area stayed relatively stable, declining two days from 122 to 120 days for April 2012 compared to April 2011. For condos, the time fell 19 days from 117 days to 98 days.

 5. Supply

The “supply” is the number of homes on the market divided by the monthly rate that they are selling. For example, if there are 50 homes on the market and 120 homes sold over the past 12 months (an average of 10 per month), there is a 5 month supply. Most experts consider somewhere between 7.5 and 8.5 months supply of homes a fairly balanced market.

  •  The supply of single family homes was down about 10% from 7.9 months in April 2011 to just 6.4 months of supply in April 2012. There was a 4.8 month supply of condominiums available in April, down sharply from April of one year ago when there was an 8.2 month supply.

 If you can get the answer to these statistical questions for the geographic area (neighborhood, town, city, state, or country) that you are interested in, you should have a pretty clear picture of what the real estate market is doing. So how’s the greater Boston area market doing? My analysis is that the greater Boston area is experiencing a transition to more of a seller’s market. The supply is shrinking and demand appears to be growing, pushing prices up and making it easier for sellers to sell. What’s your analysis?

The figures for this post can be found here on the Great Boston Association of Realtors site.

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Has your home’s value decreased? Buy a more expensive one!

trading-upIf your home has decreased in value and you are thinking about selling it, it’s hard to see any silver lining. However, if you have other resources and have been thinking about buying a larger home, this is, surprisingly, the best time to “trade up.”

Here’s why…

I recommend that homeowners consider home ownership a long term investment in the residential real estate market. Most people plan to “stay invested,” buying and selling several homes in their lifetimes, or stay in the same home for decades. Most people enter the residential market when they first buy a home. They leave the market when they sell their last home or leave their last residence to heirs. People might trade up into a more expensive home or make a lateral move or two to something of similar value before downsizing in retirement as “empty nesters.” If you don’t sell your home and completely step out of the housing market by renting for a long time or traveling the world for few years, you stay invested. Similarly, you are no longer invested if sell your home and move to a completely different market, like moving from Boston to Florida. In these cases, you might want to carefully consider your relative position in each market.

Here is an example of how trading up could look when the value of your home is down:

2006: The value of your home (either just purchased or not) – Home A: $500,000

2012: Your home has decreased in value 15%. Current value Home A: $425,000

2012: You purchase your dream home – Home B: $750,000

2027: 15 years later the market has recovered and gone up a total of 30% since 2012

The value of your home – Home B: $975,000

The value of your old home – Home A: $552,500

You benefit in the long run, because you purchased the more expensive home in a lower market. Your home is down today, but the more expensive home is down more!

The point is that it doesn’t make sense to put off selling your home, because you can’t get what you want for it. Sell when it makes sense in your life to be in a different home. Your investment in the residential real estate market will take care of itself in the long term.

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Ask The Tough Questions!

Real Estate ConceptThis week’s post is courtesy of negotiation consultant and blogger, Chad Ellis.

During a recent family visit my father reminded me of an unusual house near where I grew up.  It was a lovely house with a good-sized yard next to a pond.  Perfect for a family, and many families happily bought it.  In fact, the house was bought by a new family almost once a year, for what always seemed a bargain price.  Most families sold the house within a year of moving in.

Nothing was wrong with the house, per se.  The problem was that the yard and pond were the summer home for a large flock of geese.  During the warm season they would arrive and spend the next few months defecating all over the yard, turning what looked like a dream into something quite less pleasant.  When the geese had gone, the new owners would look at their mess of a yard, clean things up as best they could, and put their lovely house on the market.

In my last post we discussed the importance of information.  Clearly the buyers of this home lacked a key piece of information.  But why?  Buying a home is a big deal — for most of us it’s the biggest purchase we’ll ever make.  Paying 10% more than you have to is a huge loss as is buying a house you decide you can’t keep.  Even without the Internet making research fairly easy, it would have been relatively easy for home buyers to learn about the history of the Goose House.  So why didn’t they?

In my experience, there are two reasons people enter negotiations without key information.  First, we don’t make a list of what information we’d like to have.  Second, we become extremely reluctant to ask questions.

If anything, this problem escalates with major purchases.  The same person who will check movie reviews before putting $10 and an evening at risk will do little or no preparation when buying a house or negotiating salary at a new position.  Having more at stake sometimes makes us less willing to prepare, perhaps because it’s more frightening to admit a lack of knowledge when it comes to something important.  If this sounds like you, make extra certain that you commit to asking the sorts of questions we discussed last time.  Then, when you consider about how you might go about acquiring that information, be aware of the options that make you uncomfortable — and spell out the costs and potential gains of that option.  An experienced buyer’s agent you trust can help you to identify the tough questions you need to ask and will know how to ask and where to look to get the answers.

If the buyers of the Goose House had done that, they might have learned about the house’s history…and avoided a costly mistake.

Chad Ellis
Check out my Negotiations Blog:
www.negotiatewithchad.blogspot.com

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