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.

The “Escalation Clause” Conundrum

multiple-bidMultiple offer situations have become so common this year, I knew that sooner or later I was going to have to deal with an offer that contained an “escalation clause.”

What’s an “Escalation Clause?”

When new listings bring in multiple bids, listing agents often create a time table and request that all offers be submitted by a certain time. Usually, the listing agent indicates that there will not be further bidding rounds, and that bidders should make their “best, last and final” offer by the deadline. When a buyer expects that he will not have an opportunity to raise his bid later, it is difficult to determine how much to bid to secure the property without bidding far more than may be necessary. Some agents have begun to put in language whereby the buyer will pay an amount exceeding the highest offer, usually up to a certain amount. This language is often referred to as an “escalation clause.” I recently received an offer with one as follows:

“Buyer agrees to top any offer on the table by $2,000 up to a total purchase price of $490,777 with proof of the other offer.”

Fortunately, another buyer made a bid over the amount indicated in this clause, so my seller-client never had to respond and negotiate with the escalation clause bidder. Escalation clauses are not popular with listing agents. As a listing agent you may likely have one or more offers with firm prices on them. Then you have this other offer with an escalation clause. What do you do? Do you go back to the bidder who made the offer to see if he is really willing to stand by the terms of the clause? What if the ceiling number is truly absurd and it is obvious that bidder is looking for an opportunity to beat the highest offer? Do you show him the other offer? Do you just refuse to play the game and ask him what his final firm number is? Are any of these scenarios really fair to the other bidders and does it matter? I think these issues can be navigated, but I am not sure it is really worth the risk that comes from putting the listing agent in this thorny situation. There is a clear risk that the listing agent may not cooperate with you, and you may never actually get a chance to make your best offer. I think this is a significant risk. The better strategy may be to do the hard work of figuring out how much you are really willing to pay, and then make a firm offer of that amount.

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.

It’s All A Write Off! Tax Deductions For Massachusetts Real Estate Sellers and Buyers

tax-deductions-real-estateOriginal article by RICH VETSTEIN posted on MARCH 30, 2013 · massrealestatelawblog.com. Slightly modified and reprinted with permission.

One of my favorite Seinfeld episodes is the one where Kramer tries to explain to Jerry how tax write-offs work. “It’s all a write-off!” exclaims Kramer who, not surprisingly, had no idea what he was talking about.

With the April 15 tax deadline quickly approaching, let’s talk about some of the taxes, deductions, and “write-offs” arising out of a Massachusetts residential real estate purchase and sale. (Disclaimer: I am neither a CPA nor tax attorney, so consult your own tax professional for specific questions).

Real Estate Property Taxes

Every Massachusetts municipality levies a real estate property tax on residential property. Indeed, the real estate tax is the primary revenue producer for most towns with a limited commercial tax base. The real estate tax rate is set by the local board of assessors and is keyed to the assessed value of your land and home, which is often less than the true market value.

Real estate taxes are generally tax deductible if you itemize your deductions on IRS Form 1040, Schedule A. At closing, the closing attorney will ensure that all real estate taxes are paid up and allocated between buyer and seller as of the closing date. If the end of the fiscal quarter is approaching, most lenders will require that the buyer pay the upcoming real estate tax bill in advance.

Most lenders these days require an escrow account for the payment of real estate taxes, and the mortgage company will actually send the payment to the assessor. However, the homeowner should check the actual property tax bill to calculate the exact amount of real estate taxes paid for the year.

Mortgage Interest Tax Deduction

The mortgage interest tax deduction is typically the largest tax deduction taken by a typical homeowner. The deduction applies to interest paid on a qualifying mortgage for both a principal residence and a second home. It also applies to home equity lines and second mortgages subject to some limitation, discussed below.

If you paid any points for getting a mortgage, they may also be tax deductible, either the year paid or over the life of the loan. This applies to both purchase loans and refinances. (Check your HUD-1 Settlement Statement). The same is true for PMI — mortgage insurance premiums. They remain tax deductible for 2012 and 2013 thanks to the Fiscal Cliff Bill.

Cash out refinances and equity lines have some special rules. If you use the money for a car, a vacation, college tuition, etc., then you can deduct your interest on loan amounts up to $100,000. If you borrow more than $100,000, the interest on the excess is not deductible. However, if you use the money to make improvements on your home, then the money is treated for tax purposes as though it’s part of your home mortgage … so you can deduct all the interest, along with your mortgage interest, as long as the total amount you’ve borrowed doesn’t exceed $1 million plus $100,000.

Consult IRS Publication 936 for more information on the mortgage interest deduction.

Massachusetts Property Transfer Tax

Sometimes called deed stamps, transfer tax or excise tax, Massachusetts home sellers must pay a tax on selling their property. For every Massachusetts county except Barnstable and the Islands, the tax is $4.56 per thousand of the purchase price on the deed. So for a $500,000 sale, that’s a whopping $2,280 tax bill. There is considerable debate among tax professionals as to whether this tax is deductible on your federal and state return. It’s best to consult your tax preparer.

Capital Gains On Sale

If you sell your home for more than you paid for it, you have a capital gain, and in theory you have to pay capital gains tax. However, in most cases, you don’t have to pay taxes on the first $500,000 of capital gain on a home (or $250,000 if you’re married and filing separately). To get this special treatment, you have to have owned the home and lived in it as your primary residence for two years out of the last five years prior to the sale. Even if you didn’t own and live in the home for two full years, you might still be able to exclude some or all of your capital gain; you just won’t be eligible for the full $500,000 exception.

Other Closing Costs

Unfortunately, most of the typical real estate closing costs are not tax deductible. This includes lender origination fees, credit report, flood certification, homeowner’s insurance, appraisals, attorney fees, title abstract, title insurance, county recording fees, and real estate commissions.

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!

A Deal is a Deal

real-estate-dealMy last post explored what constitutes a valid signature on a contract. In this post, I focus on when a signed contract to sell real estate is enforceable.

Most real estate transactions in Massachusetts start with an Offer to Purchase (“OTP”). The buyer signs the OTP and writes an escrow deposit check. After some negotiation, both parties sign the final version of the OTP. Most real estate agents in Massachusetts use a version of the Greater Boston Real Estate Board’s “standard” form. In the section entitled “Riders,” buyers usually reference an attached mortgage contingency and an inspection contingency. For condominiums, buyers also normally write in a contingency to review the “condominium documents.”

The buyer’s legal obligations
Paragraph 5 of the standard offer states that if the buyer does not “fulfill his obligations,” the worst that can happen is the loss of the initial deposit, usually $1,000. In my experience, buyers very rarely lose their initial deposit. I have never heard of an instance where a buyer had a good faith reason for changing her mind and did not get her deposit back. If the buyer makes a sincere attempt to purchase the property, sellers generally agree to return the deposit if the deal falls apart. It is bad business for a seller to try and hold a buyer’s deposit. The only real damage to the seller is loss of market time. A buyer has to behave extremely badly for a seller to consider retaining a deposit.

The seller’s legal obligations
On the other hand, the OTP is binding and enforceable against a seller. The seller’s only obligation specifically articulated in the standard OTP is in Paragraph 3, which says that both parties “shall sign” a purchase and sales agreement (“P&S”) at some point, generally within two weeks. Real estate and contract law requires that both parties act in “good faith” during the course of the contract, which includes bargaining over the terms of the P&S. Although “good faith” is subjective, a seller cannot change his mind about the deal because he just got a better offer or he just no longer likes the basic terms and conditions. If the seller backs out of the deal, and the buyer files a successful lawsuit, the seller will be required to sell the property to the buyer.

Whether you are a buyer or a seller, do not enter into a real estate transaction lightly. You should have the intention of doing what you can to make it work. Buyers have several avenues of escape if the deal no longer makes sense. Sellers, however, are basically locked in unless the buyer becomes unreasonable.

 

* In most cases, just because the buyer can’t get the deposit back doesn’t mean that the seller automatically gets it. The deposit is initially stuck in the agent’s escrow account. The seller cannot receive the deposit until the escrow agent obtains the consent of both parties. Initially, this can prove difficult. Most often, the parties eventually agree to some compromise based on the threat of litigation and the trouble and time related to fighting over $1,000. I have also seen the parties simply fail to come to an agreement and the money never released.

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Don’t Renovate and Sell!

home renovationsHomeowners often consider making renovations before selling. They believe the increased value of their home will exceed the cost of renovation. Unfortunately, this is often not the case. For every dollar you spend on renovations, you generally recoup less than a dollar back.  See the annual report in Remodeling magazine, which compiles statistics on the cost recouped of most remodeling projects.

Based on surveys of thousands of real estate professionals, Remodeling magazine concludes that the highest return projects are around 70%, while the lowest are in the neighborhood of 40%. The magazine sends out surveys to thousands of real estate professionals across the country essentially asking for their experience and opinions. The conclusions can’t be scientifically proven, but as the costs of construction are fairly easy to determine there is no reason to doubt the survey’s construction figures. However, I wouldn’t rely too heavily on the specifics of cost recoupment figures. I have seen the surveys they send out and there is simply no way to compile figures in any truly scientific way. Who really knows how much a particular home would have sold for if the kitchen hadn’t been renovated?? Rather, the opinions of thousands of real estate agents, appraisers and other real estate professionals are probably fairly accurate in a general sense. They should be used as a general guide as to which projects result in higher or lower cost recoupment, and very approximately what to expect.

Interestingly, according to the study, renovated kitchens and baths recoup somewhere around 55-65% versus other projects that return more. Common real estate wisdom says that kitchens and bathrooms sell homes. So what’s going on? The answer to this conundrum is that nice kitchens and baths make homes appeal to more people and easier to sell, but are just not valuable enough to recoup the initial investment.

The value proposition of renovating your kitchen and baths looks much better when you do the renovations a few years before you sell your home. You also get the chance to actually enjoy the renovations. Most real estate agents consider kitchens and baths fairly new up to around 3 years after renovation. For example, you spend $50,000 on a new kitchen and enjoy it for 3 years. You then recoup 65% of the cost at sale, so the renovations cost you about $17,500 and help sell your home.

In real life, it may be difficult to plan ahead. However, if you are considering making improvements to your home, considering recoupment values may help you determine what renovations make the most sense in the long term. After making improvements, I often hear sellers say, “Wow, I should have done this earlier.”

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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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