Chapter 9: Kate's rookie mistakes

Houses sit on the market, lenders fail, markets fall, hedge funds blow up, but Kate in the Valley keeps on looking for a house. We're glad, because that means she keeps on writing her house-hunting diary. Enjoy.

I've taken the bait and made some rookie mistakes in my house hunt (as y'all know). The bait for Rookie Mistake Numero Uno can be found in tons of MLS descriptions, it reads:  "All offers considered" or "Bring all offers." I naively thought this meant: "Seller is willing to negotiate."  Ha ha ha!  Nothing could be further from the truth.  More than once, I was the dummy that that took the bait and submitted an offer right away only to get iced for weeks on end while the listing agent attempted to drum up other bids using my offer as the lure. "I already have one offer, this property is going to move fast!" the listing agent no doubt crowed at every other prospective buyer.

And that statement is, of course, the bait for Rookie Mistake Numero Dos.  I thought that "I already have one offer, this property is going to move fast!" meant the house was virtually sold.  Yeah, not so much.  If the seller actually liked the offer, he'd be in escrow not acting like a barker on the carnival fairway.  After getting sucked into this bidding war game a couple of times, I flat out refused to participate. "Oh, you already have an offer in?  Okay. Well, I guess it's not the house for me."  There's always another house, especially these days.

The bait for Rookie Mistake Numero Tres happens at the open house.  The listing agent will ask: "Are you already working with an agent?"  This question seems so innocent but if you're fool enough to say you don't have an agent, then you can be sure that this one will hound you day and night until she breaks down your very will to live.  The phone calls and emails will be non-stop.  After saying that I would consider using one listing agent's services, I turned to leave the house and he literally screamed after me: "I need clients!" Yes. He. Did. An agent in the Fashion Square district, after learning I was unrepresented, ran up the street behind my car flailing her arms because she noticed I didn't leave any contact information on the sign-in sheet. Mr. Kate was stunned.  A duo I met in Studio City have been sending me emails for three months that say things like: "We talked to the listing agent on Property X for you… they are willing to take $50k below list!"  First off, I have never once responded to any of their emails or seen any properties with them, why on earth would they be talking to listing agents on my behalf?  They optimistically sign each email with something like: "We're out there working for you!"  No you are not. I just put my name on your sign in sheet, I didn't bloody hire you.  I finally started leaving a junk email address that I rarely check on the sign-in sheets; I just couldn't take it anymore.  This house hunt definitely has been (and still is!) a learning experience."

Comments? Insights? Be polite.
Read Kate's house-hunting blog here.

Comments

[Cal]

Why aren't you putting a reasonable (48 hours) termination date on the offer?

You really need to not go through the listing agent (not that selling agents are any better), you quite simply dont know what you dont know at this point. The listing agent want to double end the commission so of course they are pushing things.

The best way to get the listing agents off your rear is to print out a redfin or buysiderealty card and leave it with them at the open house, they wont want to talk to you after that. :-)

[AnnS]

(1) In the world of frenetic and often unscrupulous relators, you are at a complete disadvantage as an inexperienced buyer. DIY is a real bad thing when you don't know what you are doing - and it can cause huge prolems in major transactions. Ergo, you can't push through the deal to get a contract.

(2) You have way too little experience to deal with pushy sales people who are trying to make you into their client. And if they show you a listing that is not an open house, you ARE their client even if you sign nothing saying they represent you. If you then make an offer that is accepted, even if you make it directly to the seller or their agent, it is their deal and they get a cut.

Never ever tell a relator anything. The only answer to "are you working with an agent" is to say "It is none of your business at this time. Give me your card but DO NOT CONTACT ME"

(3) You still have not grasp that the prices are still way inflated and will come down.

I looked at your blog. You speculate that a house that is listed at $1,000,000 or something equally ridiculous will end being a rental. Not going to happen as the rent will never be enough to make the payment.

DO NOT BUY SOMETHING IF THE MORTGAGE, TAXES and INSURANCE ARE MORE THAN WHAT IT WILL BRING IN RENT!

You simply do not have enough experience to assess the volatility of the market and the cost-income ratio of real estate, nor, apparently, the patience to wait it out. Instant gratification is not a good thing in business transactions.

Prices will come down. The owners of 2nd homes in my area are trying to get rid of them (all those nasty ARMs and refis to buy them in the first place, you see.) One finally sold - after a 29% price reduction and over 18 months. It just dropped the value of everything around here by around 30-33%. One house has a big impact in a village with 176 homes and all in an area of 1.2 sq miles.

[Pete Viles]

AnnS wrote: "You simply do not have enough experience to assess the volatility of the market... nor, apparently, the patience to wait it out. Instant gratification is not a good thing in business transactions."

Ann: I appreciate the comment, but be real: nobody has enough experience to figure out the current volatility. Nobody. The CEO of Thorburg Mortgage was bragging a couple of weeks ago that the credit squeeze would help Thornburg. This week the company was fighting for its life. Similar story at Countrywide -- earlier this summer, the company was saying it saw an opportunity to build market share; this week, fighting for its life. This is nutty stuff, and nobody knows how it will play out. And Kate lacks patience? Wants instant gratification? How do you figure that? She's been house-hunting for months and months. Mr. Kate is running out of steam, and she's just getting started.

[investorguy]

Use the one percent rule to determine rationale rental rates. If it won't rent for one percent of the purchase price a month, it's not worth buying as a rental. If it's priced at $500,000, it's not going to rent at $5,000 per month. That's why I don't buy rentals here. I buy rentals in Michigan, Florida and Kansas City.

[Jeff]

Disturbing insights from CA. In speaking to client's and prospects throughout the week a great many "investors" have 10-15 homes on I/O or neg-ams and are scrabling for financing that has disappeared. They want new financing but who lends on a money losing deal? This inventory will hit the market in a few months. Lots of SFR's in Los Angeles and Riverside especially.
http://thegreatloanblog.blogspot.com/

[JK]

I don't know what all the fuss is about... I love Kate's blogs! They have helped me a lot. Not that I am going to be out there anytime soon. I believe (and that is all I am qualified to do is believe) that the prices are going to come down even further still! Keep up the good work Kate!

[Me]

Kate, do you use Redfin (or some other broker that will cut you a portion of their commission) when you submit an offer? If you don't go through a Realtor with access to MLS, then you won't get a cut of the commission and there is no savings to you by DIY. Don't get me wrong, I agree with you 100% that DIY is fine. But if you're not finding some way to get a cut of the commission by DIY, then it probably isn't saving you any money.

Also, I agree with the earlier post that you should put a termination date on your offers. Give the sellers 24 - 72 hrs (max) to consider your offer.

[Tex]

I don't think it's true that if an agent shows you one house, he or she is necessarily "your" agent, regardless of whether you've signed anything. My understanding is that under the statute of frauds, all contracts for real estate related services must be in writing. Thus, you are under no contractual obligation to any agent absent a written contract. Although it may be unethical to ditch an agent who has shown you a property, I'm not aware of any legal or contractual obligation. Realtors do have some sort of "code" between them where they won't work with you if you are working with another agent, and will not make an offer for you on a house if the house was shown to you by another agent. But that's between the agents and has nothing to do with the client. Just because an agent shows you one house, that does not mean you are indefinitely wedded to that agent or that the agent is entitled to a commission on a house you subsequently purchase without his or her help.

Which brings me to another point: when an agent asks you at an open house whether you are already working with an agent, just say YES. So what if it's a lie -- Realtors lie all the time. That's the best way to keep them from bothering you based on the above-described "Realtor code."

[BetterVillage]

Kate: Heaven forbid you actually get an accepted purchase offer some day. The minute you run credit... boom... you're on the trigger lists and the mortgage brokers will hunt you down until you change your phone number and get a P.O. Box. Well maybe not.. maybe most of these folks will exit the business with all the turmoil. Or if you should submit your information on line to one of the "lead brokers." Even worse... this is sold to up to 4 loan originators (best case scenario), and then those people often resell those leads. I've heard borrowers being inundated with up to 20 -30 calls from different companies.

[Dr. JwB]

I'd like to believe that AnnS is right when she suggests that purchase prices will come down to be in line with rentals, but it doesn't seem to me that the prices (and therefore the mortgage monthlies) could ever get that low. Once they approach the rental monthlies, then the people (like myself) sitting near the fence on the "rent" side will hope over to the "buy" side. I suspect that demand will cause prices to level out. Perhaps I am over simplifying things?

In an ideal world, we'd wait and then buy those 1 million dollar westside homes for 3000/mo, but in the real world, they'll never lose that much value. But how close they will come to the rental limit, thats the real question.

So, how close to the fence are you? How much more are you willing to pay to own the house instead of renting it? Seems to me that's what will set the prices in the end: The rental prices plus what we all, on average, are willing/able to pay in addition to build equity.

Kate- On the actual topic of this thread, thanks for admitting your mistakes. we learn from them.

[Monkey In Chief]

I really do not understand why Kate wants to buy now. It's clear she, probably quite sensibly, does not want to pay what decent houses are going for where she's looking. There's some possibility the market's at an inflection point and prices are headed lower. The last LA housing bust had flat prices for years after the initial drop so its unlikely that any declines would create only very short term bargains. It would seem to me the more prudent thing to do would be for Kat to wait and see how the market shakes out.

[Blue]

NEVER be honest with a realtor. When my husband and I were house hunting recently, we ran into the same problem with realtors - the snakes. We told them "YES, we do have a realtor, but she hurt her back and hasn't been able to take us out to look for homes so we're on our own until she's up and about again". This was actually true, but in addition to her injury, we wanted to see every square inch of the place we were moving to, and our realtor was only interested in showing us some available properties. If you can believe it, and I'm sure you can now that you've experienced realtors, we called one realty office and when we explained that our realtor was hurt but would the listing realtor be willing to show us the house (after all - it was her listing so she would be making money if it sold, right?). They were VERY curt with me and told me they weren't going to do any work for "free" if they weren't representing us! I told them to go take a jump in a lake and that house is STILL on the market! We spent WEEKS and WEEKS going square by square on the map looking for areas and homes we liked.

We actually sold our house in Southern Cal at the top of the market and OVER price, made a large sum of money, and got the hell out of there to a growing and much nicer place (and I LOVED LA, so I am not someone who was looking to escape) where we were able to buy a beautiful 3,500 sq. ft. brick colonial on 1/2 acre for cash and now have no mortgage. The area we're in now has the nations largest growing economy, a very stable job market and an extremely high median income and quality of life. No one we knew in CA was making it. Everyone was drowning - even highly educated professionals with excellent jobs and no debt. If you're educated, have a great job and live within your means but still can't keep up with the cost of living there - there are fundamental problems. Almost everyone we knew was in this boat. The rest were paying their basic bills with home equity lines of credit which have recently dried up and they are in trouble. My house more than doubled in value in 5 years. I can't see prices dropping that far, but I hope they do, otherwise, who can afford to own homes again?

[don Hosek]

A SFR may not quite get down to the 1% line, but the duplexes, triplexes and 4-plexes should and most larger buildings are there. I actually ran some numbers speculating about what would happen if I won the lotto and bought a duplex in my neighborhood. It turned out that I would do better renting a unit in that duplex and putting the money into CDs at 5%. I think at 3.5% I broke even. If a 5% CD is a better investment than a rental property, then the rental property is overpriced. End of story. A friend's landlord is looking to sell an 8 unit building in East Hollywood. They've nicely renovated it, but you'd have to put down 40% just to not be negative cash flow on the property at their asking price. And since it's under rent stabilization, you can't just raise everyone's rent to meet your expenses. I suspect that the owners of her building are negative cash flow. They put a lot of money into renovations, which is nice, but that, on top of their recent purchase of the building is doubtless behind their desire to sell.

[Ace]

'I'd like to believe that AnnS is right when she suggests that purchase prices will come down to be in line with rentals, but it doesn't seem to me that the prices (and therefore the mortgage monthlies) could ever get that low.'

That can never happen here. This is a city of renters. 70 percent of people here rent. If prices get anywhere near the cost of renting, those millions and millions of people will start buying and push the prices to record highs.

[Ace]

'I don't think it's true that if an agent shows you one house, he or she is necessarily "your" agent, regardless of whether you've signed anything. My understanding is that under the statute of frauds, all contracts for real estate related services must be in writing.'

If an agent shows you a house that you end up buying, he/she is what is called the procuring cause and is typically entitled to a commission. Usually it gets messy and involves a lawsuit.

This happens quite often when buyers use agents to show them houses for long periods of time. Then when the buyer wants to make an offer they call their relative to do it.

[Ace]

'No you are not. I just put my name on your sign in sheet, I didn't bloody hire you. I finally started leaving a junk email address that I rarely check on the sign-in sheets; I just couldn't take it anymore.'

You should never sign a sign in sheet unless you want the agent to contact/harass/stalk you. The sign in sheets are worthlesss for any other reason. They always claim that they are to 'show the seller how many people toured the property' but that is really not true. Most people put down fake information. Good agents never ask people to sign in at an open house. If you hit it off with the agent and would consider letting them help you, then ask for their card.

[Ace]

'NEVER be honest with a realtor. When my husband and I were house hunting recently, we ran into the same problem with realtors - the snakes.'

Come on, that is just bad advice. Just tell the agent that you are not interested in working with them.

A couple of things about realtors:

First, just like any profession, about 10 percent of them are going to be terrific, 10 percent are going to be pure evil, and the other 80 percent are just average. You just have to find the one of the 10 percent of terrific agents. The problem is that so many realtors come and go. 87 percent of new agents actually quit the business before they ever recieve a single dollar of commission. These are probably many of the people that you are running into.

Second, realtors are not employees of a company. Everyone is an independant contractor so there is no great way to monitor how they treat potential customers.

If an agent treats you badly, you should definately report them. If you are treated poorly at an open house, you should let the owner of the house know if possible. You can also call their broker and speak to the manager. Managers dump agents all of them time if they receive complaints.

[Phil G]

Rookie Moves:

1) leaving any valid contact info at an Open House.
2) Not using a buy-side agent.

It's one thing to DIY as a FISBO, but you're not saving anything by not using a agent to represent you as the buyer. I'm not an agent, nor do I particularaly like them, but they serve a purpose when buying.

I've been following her story a little bit but didn't realize until now that she was not using an agent to help her buy. Probably explains a lot of why she's not had any luck on 'bidding'. Can't say for sure, but seller-agents probably don't regard her a 'serious', or regard her as 'crazy' that she's not using a buy-side agent. In the hot market, who needed the hassle??

[PeterB]

Kate, funny, I've had a contrarian approach to purchasing SFR and Rental realestate that has worked exceptionally well. I ALWAYS ask to speak to the listing agent AND tell them I have NO one representing me. You talk about salvitating at the mouth, sheesh. I have purchased three properties in this manor. Of course the agent wants a double end commision. The things they have done to get me into these properties even in a sellers market have been nothing short of miraculous. But of course they still must maintain the "Seller's best interest". What a laugh, they have done things that I'm sure they would lose their license for just so they could get me into the property. So Kate, try it and see for yourself. One agent gave back 2% of his commission at signing to reduce the sales price. I know alot of people will be negative about this but I can share a story or two about each property I purchased here in LA and the shenanagans the realtor pulled on the seller to get me into the property!

[Kate]

Cal:

I do always put a 48-hour deadline in there. The seller's agent would always call for an extension and foolishly I gave it. After the second time it happened, I started refusing extensions.

AnnS:

I'm an experienced attorney, I can get a deal to contract. Indeed, I am giving serious consideration to studying for my broker's license to capture the 2.5% buy side commission. As to your comment about prices coming down... Gee, ya think?

Me:

Yes, I have a discount broker that I really like. We almost never speak. If I find a house I want to bid on, I send him an email, he draws up the papers and stops by my office for signatures. It's great. Of course, I haven't made that call in a couple of months and suspect I might not until after the holidays.

BetterVillage:

Eep. I hadn't thought of that! My pre-approval letters didn't seem to trigger it though. Hopefully you're right, with the changed lending market the solicitations should cool. I haven't seen any of those mortgage pop-up ads lately. Not that I miss them.

Don Hosek:

I don't know that a rental property has to be positive cash flow right away. If it's break even, with inflation it should eventually be positive. I've actually been thinking about duplexes. I certainly can't afford one at today's prices, but if the market truly turns, a smaller one might be a possibility. It seems like it might be a good long term investment even if it wasn't cash flow positive in the first five or ten years.

Ace:

I never considered calling the broker to complain about an agent. I guess that's because I just think of the agent's as not really having a boss other than the seller. Thanks for your comments and advice.

[Tim K.]

Ace wrote: "That can never happen here. This is a city of renters. 70 percent of people here rent. If prices get anywhere near the cost of renting, those millions and millions of people will start buying and push the prices to record highs."

Not WILL it happen here, it HAS happened here, many times. Why, just as recently as 1999 this was the case and I made the exact same leap from renter to homeowner. Now, why didn't everyone else who was renting? I'll tell you - DOWN PAYMENT. Not many people renting $1200/month apartments had $60,000 lying around in cash.

The reason people left renting to go to home owning was because the TEASER RATE monthly payment was close to their rent AND the downpayment requirement was $0. In many cases, it was even NEGATIVE, i.e. they were getting money back from closing. THAT is what is not going to be happening anytime soon, and THAT is why we're heading back to the days of not-so-long ago.

[MyLessThanPrimeBeef]

Years and years ago, I took a real estate class at UCLA extension and I will never forget the wisdom the instructor shared with the class. He was an experienced developer and he said that any time the market acted irrational, he would just go fishing.

Now, I understand not everone likes fishing. So, maybe navel gazing would be a nice hobby to take up on. Be a real Californian! Or go be a Rip Van Wrinkle and come back in 10 years. Like Monkey In Chief said, you wouldn't miss a thing. Honestly, when so people are interesting in real esate - to buy now, or looking for a correction - it is too dangerous to get involved.

[sheila]

it is shocking to normal people that a listing agent does not consider it part of selling a property to unlock the door for prospective purchasers. nope, unlocking the door is, to these lunatics, working for the buyer, and must be compensated as such.

if you try to apply common sense or ethics to real estate, you will lose your mind. as an atty, you know there are plenty of things that make no sense, but are industry standards, so as long as you know them and work around them, you can still do well. same thing here.

the real estate industry is bigger and badder than you. if you really want to get a house, stop tilting at windmills and get down and dirty. know how the game is played, and you can still win. if you are more interested in reform and exposing the industry (a valuable and honorable goal), then you can also win. what you probably can't do, without extraordinary personal sacrifice, is both. that is not a comment on your ability, but rather on the Tao of Real Estate. When you see a boulder, treat it as a boulder, not as a pebble. turn back, go around, under or over, but don't keep walking straight into it. in the end, it will still be there and you will be battered, bruised and exhausted, but no closer to your desired destination.

i hope you find what you want. i enjoy reading your blog.

[Me]

Kate: I should share that I too am an attorney and obtained my broker's license recently because I wanted to capture the 2.5% - 3% commission for myself. (As an attorney, you automatically qualify for a state broker's license, subject to passing the state broker's exam and a standard background check.) Keep posting your interesting blogs. My husband and I have yet to submit an offer on a property and agree that doing so before 2008 may be premature now. I'm not sure how successful our offers will be as I will be my own agent in the transaction. So far, in my interactions with the listing agents, I've been treated with a lot of respect but maybe it's because they're desperate for a sale, or (less likely) because I'm a fellow member of the local realtor's association and wouldn't hesitate to report them if they step out of line. Good luck with your ongoing search. Lots of people are rooting for you!

[vultur]

Shocking that Kate-e-Cakes is STILL unable to get something under contract. Speaking as someone who has acquired millions of dollars of property, I can only assume that our Valley Girl is ill-equipped to deal with the process. Day after day, thousands of homes are bought and sold (even in the worst market ever) yet Kate-e-Cakes has yet to lock up a single transaction.

Katey, please save yourself any further unwanted grief, hire a buyer's agent who can insulate you from the vagaries of the process and concomitantly insulate them from you and your very strong personality. All parties will be better off in the long run I assure you and you will be far less stressed out. While I tend to believe that real estate agents in general offer very little value for their commissions, in this instance a good agent will no doubt earn his or her keep.