The following is a collection of information gathered from various key sources regarding the state of the economy and the impact it is having on commercial real estate and real estate in general, as well as their predictions for the coming months ahead.
It is hardly a secret. Not only is the American economy in trouble, but so is the global economy. Sparked by the mortgage crisis, we have seen the decline of mortgage-backed securities, which was the engine that drove liquidity in the lending industry. When the crisis hit, it was mostly subprime and alt-a mortgage products. However, in a recent interview, Jaime Peters, a Senior Equity Analyst at Morningstar, explained that the crisis has bled into the prime market.
She cited warnings from banks that there is more deterioration to come, as charge-offs continue to trend higher and that they are noticing upticks on credit card usage for everyday purchases, which she said, is an indication of an increasing number of consumers living off their credit cards. While Peters said that big picture credit trends are mostly at the consumer level at this point, she sees commercial real estate as the "next shoe to drop." While this may be true, Philip Blumberg, Chairman and CEO of Blumberg Capital Partners, anticipates a very strong buying year in 2009.
As noted by Blumberg in a recent interview, buyers of commercial properties within the last 3 or 4 years are now realizing the following:
1. They overpaid for the properties they purchased.
2. The economy did not produce the double-digit increases they expected.
3. They cannot get refinancing, so sales are going to be the only option.
4. The result of these circumstances is an increase in buying opportunities for those who are sitting in a good financial position.
Nick Burnell, Partner of Rutney Capital, shared in an interview last month that although the market continues to trend in this direction, there is a struggle between unwilling sellers and buyers because people cannot agree on property values causing a lack of transactional flow in commercial sales. Burnell shares Blumbergs‘ belief that the coming year will present a growing opportunity for investors who wait and a growing alarm for sellers entering in the coming market as it continues to change. The reason, he explains, are as follows:
1. There is a severe dislocation of the market
2. The forces of supply and demand are in turmoil with very little credit around.
3. Huge uncertainties related to the economy.
4. Fears of recession and the continued deterioration and severe dislocation of the market
The real issue, according to Burnell, is how banks are interacting with each other and how they are now afraid to lend to each other. He cites a disconnect between the bank rate and Libor markets. Banks are increasing loan margins on top of lending reference rates, which he said causes the cost of funds to remain unchanged despite rate cuts. Through all of this volatility, Burnell sees interesting opportunities in the institutional commercial property market where yields have expanded and prices were "exceptionally expensive" for the last few years that suddenly seem to be a better value.
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This was a three-day class, and each day was eight hours in length. It was just enough time to experience the "niceties" of certain traditional Realtors, who demonstrated their narrow-minded worldviews, values, and norms. Some had behaved abrasively, as well as, condescending. They revealed their own prejudice beliefs, as many before have done in the past, that unless one is part of the herd, they do not deserve any professional courtesy.
Some traditional agents have gone as far as to say that dual agency is not even an issue, as long as consumers liked them. However, it is an issue when the dual agent cannot negotiate for either side; or when a dual agent company has to remain neutral in the midst of a transactional conflict. What are dual agents being paid for, if they cannot provide the valuable service of negotiation, and if they cannot provide advocacy for neither side?
Now we turn our attention to the culture of exclusive buyer agency. This culture is small, but growing–struggling for recognition and acceptance by Realtor associations that normally favor traditional real estate brokerages. The associations they struggle with do little to educate the public about the option of exclusive buyer agency. Furthermore, they add to the confusion by blurring the real meaning of this agency option. For example–the Washington Association of Realtors has a standard pre-printed form called an "Exclusive Buyer Agency Agreement," yet there is a clause within this form that gives the option to consent to dual agency. If an agreement is truly for exclusive buyer agency, then dual agency should not even be a part of it, because dual agency is a non-issue where this agency option is concerned.
Delving further into the world of exclusive buyer agency, we see a rift within the fragment. This culture is centered on an association that has let former members down in the past. This association is NAEBA. Instead of unity and camaraderie, there were arms-length adversarial attitudes within the group, and no support–as promised in their membership literature. When an exclusive buyer agent breaks away from the disappointing experience, they are then discredited for not belonging to the organization anymore. For example–in a recent Blog–an exclusive buyer‘s broker touted the news of an article he claimed was recommending that buyers only work with exclusive buyer agents who are members of NAEBA. However, upon review, it was realized that the article only mentioned that buyers can find an exclusive buyer‘s agent through NAEBA. The article made no specific endorsement advocating the sole use of NAEBA members.
The final fragment we will explore in the real estate industry is the culture of the discount brokers. Like the exclusive buyer agents, they are new to the industry, and they have also drawn the ire of the industry for going against the traditional ways of doing business. However, they have taken an adversarial position against all Realtors, including buyer agents, and inadvertently exclusive buyer agents. They have unfairly shrouded the entire industry under a cloak of suspicion–leading many consumers to believe that they are the only credible option available. Because certain discount brokers have ties to the media–which is notorious for delivering biased information–they are able to spread their inaccuracies nationwide. They profess that consumers are victimized by the industry, yet they fail to take into consideration that not all real estate professionals are alike. They are content to make sweeping generalizations about matters they are not fully informed on. Certain discount brokers contradict themselves by claiming that they do not practice dual representation (dual agency), yet if a buyer purchases a property through them, and the property is listed with their company, this is dual representation on the part of the company.
The real estate industry is about serving the best interests of our clients, period. It is not about our egos. It is not about our "net gross sales last year," nor is it about out-selling "Sally Sells-A-Lot" next door. It is not about spreading deceitful propaganda and half-truths to induce consumer action, and it is not about suppressing valuable agency options–nor alienating the practitioners that choose to make these agency options available. It is only about the welfare of consumers, respecting their right to be represented, and respecting their freedom to choose how they want to be represented. They have a right to full disclosure as to what their agency options are, because without full disclosure, they cannot make fully informed decisions on matters that can materially affect them.
Food for thought:
Will the real estate industry ever gather and reconcile its fragments for the sake of consumer welfare? Will real estate professionals ever learn to respect each other, and the diverse cultures that have evolved within the industry? Will old-school Realtors ever learn to understand that these diverse cultures are no less deserving of professional courtesy and mutual respect? Will certain discount brokers ever stop spreading inaccurate propaganda and half-truths to induce consumer behavior? Time will surely tell.
Positive change in the real estate industry will require integrity, diplomacy, transparency, tolerance, mutual respect, and understanding. Until we have these ingredients, we cannot fully serve the best interests of consumers, nor can we become a united industry.
With the loss of available cash for new loans, lenders have tightened their lending requirements, and some lenders have been forced to go out of business–filing for bankruptcy. According to an article by RISMEDIA entitled Mortgage Mayhem, the reason for the fiasco in the mortgage market, "—¦is largely based on the fact that market conditions in both the secondary mortgage market and the national real estate market have deteriorated to the point that many mortgage businesses are no longer viable or as profitable as before."
So what does this mean for homebuyers?
It means that it is now more difficult for buyers with less-than-perfect credit to qualify for a mortgage. The Associated Press had quoted George Hanzimanolis, president of the National Association of Mortgage Brokers , "lenders have raised the minimum credit score that qualifies for financing. Most lenders now require bigger down payments, he said, and are eliminating exotic loans or making them more difficult to qualify for." He mentioned, "The silver lining is that people with good credit who can document their income have the same access to home loans as they did a year ago."
First time homebuyers will have a tougher time buying their first home, but hope is not completely lost. The condition in the mortgage market now requires first-timers to do a little more planning, and more saving for the future. Buying a home is not only one of the biggest financial investments of a person‘s life, but it is also one of the biggest responsibilities. It is worth taking the extra time to plan and wait–making sure that all financial considerations are in order, saving enough money for a larger down payment–with some savings left over–and making sure that credit scores are brought up to justify a lower interest rate.
If a buyer’s income is good, but for whatever reason, they cannot qualify for a mortgage, then there is the option of lease-to-own. This is a good way for buyers to be in a home, while improving their situation to qualify for a mortgage in the future. Considering the current condition in the mortgage market, more sellers might be willing to entertain such an arrangement if buyers can demonstrate that they have a steady job situation, and they can support the monthly lease payments.
More Information Sources About Dual Agency:
This is a documentary about what antitrust laws are, and what they mean to everyone–consumers, small businesses, entrepreneurs, free enterprise, etc.
It is now airing on PBS–but, if it is not airing in your area, you can watch it here. Before positive changes can happen, we must all be aware of the problem–and most importantly–we must care about the problem, because antitrust affects us all in many different ways, and in many different industries; including the suppression of exclusive buyer agency in the real estate industry.
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A real estate company is misinforming the public by saying that buyers actually pay for real estate commissions on listed properties. According to information on their web site, “the buyer is the only person bringing a checkbook to the closing, and both commissions come out of the money the buyer provides.”
While it is true that buyer’s bring the money to the table, the seller’s costs of sale are not the buyer’s expense or responsibility. If buyers actually paid commissions, they would be paying the purchase price PLUS sales commission. However, this is not the case with listed properties.
The truth is that commissions on listed properties are actually deducted from the seller’s side of the closing statement–not the buyer’s side.
This means that the seller receives the purchase price first, and then his or her costs of sale are simultaneously deducted to result in net sale proceeds. The notion that buyers pay commissions on listed properties makes about as much sense as employers paying for their employee’s income tax deductions. For example–an employee’s paycheck–he or she must receive his or her pay first (aka. gross pay) before taxes are simultaneously deducted to result in the employee’s net pay.
Likewise, buyers do not pay the seller’s costs of sale on listed properties, because these costs are deducted from the seller’s gross sale proceeds, which gives them their final net sale proceeds.
It needs to be said that inciting consumer bitterness with skewed information is wrong. It is better to bring about positive changes in the real estate industry without distorting the truth. Buyers can save money by negotiating buyer rebates with agents or brokers in states where it is allowed. It is not proprietary to the company mentioned in this news story.