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.

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.

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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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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What is ENERGY STAR?

Energy-StarENERGY STAR is a joint program of the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Energy designed to help consumers save money, and protect the environment through energy-efficient products and practices.

In 1992, the (EPA) introduced ENERGY STAR as a voluntary labeling program designed to identify and promote energy-efficient products to reduce greenhouse gas emissions. Computers and monitors were the first labeled products. By 1995, the EPA had expanded the label to residential heating and cooling equipment. The ENERGY STAR label is now on major appliances, lighting, home electronics, and has been expanded to cover new homes and commercial and industrial buildings.

Whole Home ENERGY STAR Rating

For an entire home to be labeled ENERGY STAR, it must be built by an ENERGY STAR builder-partner to meet strict guidelines for energy efficiency set by the U.S. Environmental Protection Agency. These homes are at least 15% more energy efficient than homes built to the 2004 International Residential Code (IRC), and include additional energy-saving features that typically make them 20–30% more efficient than standard homes.

The ENERGY STAR label is rapidly becoming more of a selling feature. Home buyers are now very conscious of a potential home’s energy efficiency. The Multiple Listing Service has specific sections where ENERGY STAR rated systems and appliances can be highlighted so that buyers can easily determine if there is ENERGY STAR rated equipment in the home they are considering. However, as the whole-house Energy Star rating is fairly new, it doesn’t yet appear often.  As more and more homes get the designation, you will see it more often and consumers will look for the whole home rating.

The ‘No Cost Energy Assessment’ & Benefits

Locally, the ENERGY STAR program is partnered with a program called Mass Save. This initiative is sponsored by several local energy companies and administered by a company called Conservation Services Group. Through Mass Save you can schedule a no-cost “Energy Assessment” on your home or even your rental property. Depending on the results, homeowners are then eligible for an instant rebate of up to $2,000 for 75% of the cost of installing insulation, and a zero percent interest loan on new heating equipment. The website also contains a wealth of information on saving energy as well as information like current tax credits available for energy efficient home improvements.

As energy costs continue to rise, taking advantage of the Mass Save program, and looking for ENERGY STAR rated appliances will not only benefit you in the short term, but add value to your home when it comes time to sell.

Resources:  www.masssave.com, www.energystar.gov

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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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Inspecting Your Home Inspector

inspection2In my last post, I recommended a useful context to make home inspection issues easier to negotiate for both parties. Buyers, however, still need to make sure that they get a thorough and fair home inspection. Home inspectors are subject to a license requirement, a code of ethics, and standards of practice from the Board of Registration of Home Inspectors, but their results still vary widely. In my experience, multiple home inspectors inspecting the same property are likely to find very different issues. How can you assess your home inspector?

Home inspectors often fall into three different categories. First, there is the highly critical inspector. Real estate agents often refer to these inspectors as “alarmist,” while many consumers merely consider them “tough.” A highly critical inspector can be a good choice if the buyer can maintain perspective. If you are somewhat savvy about home construction issues and not easily alarmed, this type of inspector may be fine for you. However, be wary of the home inspector who thinks it is his or her job to be negative. A home inspector who tells you the roof is “fully depreciated,” but fails to give you an opinion on its condition given its age, is doing you a disservice. A roof that is past its normal life span, might still be in reasonably good condition and last a few more years.

The second category of home inspectors falls on the opposite end of the spectrum.  These inspectors tend to minimize issues and accentuate the positive. Real estate agents often regard these inspectors as “easy.” Beware the inspector who just gushes nice things about the home. He is mostly trying to stay in good graces with the real estate agent and doesn’t want to offend anyone.  If you find yourself in the middle of a home inspection with this type of inspector ask him to be more critical and to provide you details and specifics about the systems he is inspecting.

The vast majority of home inspectors fall into the last category. These are the home inspectors that real estate agents regard as “fair.” They will give you a reasonably balanced assessment of the home as whole, yet still uncover critical issues. The key to getting the most value from this type of inspector is twofold. First, ask a lot of questions and figure out what the inspector knows and doesn’t know about the systems he is inspecting, and his experience with those systems. Second, if he finds any issues of more than minor concern, hire a true expert to take another look at those issues. For example, if the inspector raises concerns about the roof, hire a roofer to look it over.  This last tip is important no matter which category your inspector falls into.

Never stop being a good consumer. Hire a home inspector who comes referred by someone you trust, ask lots of questions, and don’t forget to actually read the report.  If you don’t understand something about the report, ask more questions. For more information about home inspectors, click here.

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