The Curious “Logic” of Home Salesmen

J. Lennox Scott in March (original post deleted, screenshot here):

…if interest rates increase by one-half point from the current rate, as has been predicted by many economists, a buyer with a loan amount of $200,000 will lose approximately $11,000 in purchasing power.

The interest rate differential can be applied to all buyers in all price ranges because with every increase in interest rates, a buyer’s purchasing power declines. As mentioned before, economists are predicting a rise in interest rates in the year ahead and the tax credit expires on April 30, so this is truly a moment in time.

The moral of the story is that as long as your clients buy a home by the April 30 deadline, their purchasing power is at an all time premium. This is a historic opportunity; don’t keep it a secret!

J. Lennox Scott in April:

Yesterday, MSNBC ran an AP story about the effect of rising interest rates on a person’s ability to buy a home. I’ve spoken at length on this subject over the years and I’m happy to see the media is catching on. The bottom line is that it’s important for potential buyers to understand how quickly they can get priced out of the housing market with each uptick in interest rates. The following article does a good job of explaining this concept:

That would be the misleading AP scare-mongering piece that was thoroughly mocked here in April.

So we’ve established the theme here. Fence-sitting buyers, you had better buy now because if you wait, interest rates will skyrocket and you will be screwed! Priced right out of the market! Forever!

Okay, now here’s J. Lennox Scott just a couple days ago:

The tax credit is no longer available, but interest rates have dropped, including on FHA loans which are down nearly half a point since May 1. That means buyers using an FHA loan to buy a $200,000 home will have nearly $9,000 more purchasing power.

…buyers purchasing a $400,000 home using an FHA loan have close to $18,000 more purchasing power. In other words, for the same monthly payment, today’s buyer could purchase a home worth $18,000 more than they could have on May 1, 2010.

Gotta love the logic on display here. Buy now, because interest rates are definitely going to go up, and when they do, too bad for you buyers, you can’t afford a home anymore. If I’m wrong and interest rates go down instead, it’s good news for the buyers that ignored me a few months ago, who should definitely go out now and buy a more expensive home!


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

44 comments:

  1. 1
    ray pepper says:

    http://en.wikipedia.org/wiki/John_L._Scott

    The 3rd generation J Lennox Scott is meeting his demise in real estate thus the legacy will expire.

    Founded in 1931 with an extinction date in 2020 their grip on the old brick and mortar will evaporate. Between the Recession, and thousands of 500 Realty type companies that will be arriving, his fate is sealed. We will continue to see less and less Realtors, an extinction of the NAR and the MLS system as we know it, and what we will be left with is real estate FINALLY being conducted financially responsible powered by a Google- type entity.

    All this Realtor rhetoric gets tiresome year after year after year. The public will only remain STUPID for so long, and it will take this prolonged recession that will encompass us for at least a decade, for people to FINALLY wake up!

  2. 2

    The only people that should be paying much attention to short term rates are those who are in contract and haven’t locked their rate.

    The interesting thing is though–lots of people seem to pay attention to rates. Back during the $7,500 tax credit my estimate would be 10X more people knew whether interest rates were going up or down compared to the number of people that even knew about the credit. Part of that could be due to people considering refinancing, but it seemed to be far beyond that.

  3. 3
    Anon. says:

    So, here is my theory, correct me if I’m wrong.
    When analyzing profit in a transaction (home purchases) I like to consider to “classes” of home purchases.
    1. Purchases that will not be resold within a “short” period of time for some definition of short.
    2. Purchases that will be resold within a “short” period of time.

    Considering the second types of transactions.
    Contradictory to what J.L. says, it would be optimal to purchase a home when interest rates are sky high, and about to fall. Sure, the amount that I may invest in the actual equity is smaller, but I posit that the ROI is greater.
    For example, take the extreme case where I flip a house the month after I purchase. At this point the interest rate is negligible, because I only pay a month of it.
    But when I bought the house, the rates were very high, and therefore peoples’ home price buying power was diminished (because much of their power was consumed by interest rates), and home values themselves had to drop to compensate.
    Then when rates drop like a rock, peoples’ home price buying power increases (because less of their power is consumed by interest rate payments), and therefore the home prices will rise.

    If I flip my house directly after this drop in interest rates, then I maximize my profit.

    Conversely, for the flippers (that’s transaction type #2), interest rates rising is exactly what you do NOT want to happen right after you buy a home.

  4. 4

    It Comes Down to Deflation or Inflation

    With inflation will come higher interest rates, unless inflation and unemployment team up [stagflation, God help us, its worse than depression], then we may still see flat interest rate growth.

    With deflation, the government is horrified, its depression with unemployment. then we’ll see interest rates stabilize too, IMO.

    We will see higher interest rates if there’s no more treasury investors, regardless, like China sells all their bonds. Will that happen soon?

    The uncharted waters we’re in today is like trying to predict will the mud BP throws on the oil hole actually work.

  5. 5
    ray pepper says:

    RE: Anon. @ 3

    Anon, all house flippers I know could care less about interest rates. They are paying cash at the Auctions. They only care about 3 things……………

    a. how cheap they can get it
    b. how quick they can unload it
    c. how quick they can buy the next one

  6. 6

    RE: ray pepper @ 5 – Beyond that, their goal is to get it ready and sold so fast that any short term changes (market, rates, etc.) wouldn’t make much of a difference.

  7. 7
    wreckingbull says:

    When Mr. Scott made that initial post on his blog a few months ago, I attempted to leave a respectful comment pointing out the same thing. They must have gotten hung up in the “comments which do not further my personal gain” filter. They never saw the light of day.

  8. 8
    Hugh Dominic says:

    RE: Anon. @ 3 – Yes!

    It should be desirable to buy a house when rates are FALLING. Because next years buyers will have more purchasing power relative to today and will push prices up. On the other hand it’d be a bad idea to buy when rates are RISING.

    Stable rates imply no upcoming impact on pricing.

    Except that when rates are HISTORICALLY LOW, the effect of rates becomes HISTORICALLY BAD, once all that extra purchasing power gets priced into the market. That’s because rates have nowhere to go but up.

    The best time to buy based on rates is probably as the rates fall, plus a short window of six months or so after they stabilize, and the extra purchasing power gets priced in.

  9. 9
    Anon. says:

    Ray,

    I think you missed my point. I only used the flipper as an example of someone that doesn’t keep their house long to illustrate a circumstance that is beneficial to someone who resells their home.

    My point is, that J.L Scott shouldn’t be using the “rates are going to explooooodde!” argument to convince intelligent buyers, because if they sell any time soon after the rates explode, they will see a decrease in equity.

  10. 10
    One Eyed Man says:

    RE: ray pepper @ 1

    “The 3rd generation J Lennox Scott ”

    I wonder if 3rd Generation who posts here occasionally is Lennox? He has a sense of humor and I think he implied that he was very well to do. Obviously only a very remote chance, there could be a lot of reasons someone would pick the name “3rd Generation.”

  11. 11
    Scotsman says:

    RE: ray pepper @ 1

    “The public will only remain STUPID for so long”

    Bold statement there, cowboy. Wasn’t it Einstein who said the only two things that were truly infinite were the universe and human stupidity. . . and he really wasn’t sure about the universe?

  12. 12

    By One Eyed Man @ 10:

    RE: ray pepper @ 1

    “The 3rd generation J Lennox Scott ”

    I wonder if 3rd Generation who posts here occasionally is Lennox? He has a sense of humor and I think he implied that he was very well to do. Obviously only a very remote chance, there could be a lot of reasons someone would pick the name “3rd Generation.”

    Somehow I doubt that J Lennox would stoop to the level of appearing on the same blog as us nattering nabobs of negativism.

  13. 13
    One Eyed Man says:

    RE: Ira Sacharoff @ 12

    Wasn’t 3rd Generation the person I apologized to for making an ass of myself by telling the car salesman story? As I recall he had said some kind of abusive things Ira. I’ve met Lennox before and Lennox has a sense of humor. I doubt that it was him, but it might be kind of a fun thing for him to do, sort of like the guys in the Yes Men movie. It would be like us taking part in a right wing blog to talk about the merits of a new military build up or something else like that. You could have a great time being sarcastic and having the other bloggers think you were actually serious.

  14. 14
    Jason says:

    Serious question for the SB crowd, those of you who follow this much more closely than me, I’m trying to make sure I understand the issue –

    My reading of what 3rd said is that he’s technically correct regarding the purchase power. Right?

    The issue is his scaremongering, which changes with the wind to make people think it’ll never be this good again. Right?

    If I’m right on the first two questions, then I fail to see what the big deal is. Or rather, it’s not the ‘gotcha’ moment the post seems to imply, IMO. Sure, he’s conveniently using present circumstances to suit his needs (buyers) as circumstances change, but the impression I get from the post is that Seattle Bubble somehow caught him in a hypocritical lie. I’m not seeing the lie, am I missing it?

    First, he’s saying between the tax credit and rates, it’s a great deal. Yeah, prices may still be dropping and rates may not be rising as SB has shown, but that doesn’t make him wrong as far as the credit and low rate combo is concerned, as Seattle Bubble has made clear by showing how high rates used to be. If we’re talking 8+% rates, then yeah, 5% is pretty good. Plus a tax credit. If prices continue going down, ok, sucks if you bought this spring but if you’re buying for the long term, *shrug.* Keep in mind I’m talking about what he actually said, not the scaremongering which I’m granting as a given.

    Then, he’s talking about rates dropping, not rising, a month later. Again, setting aside the scaremongering, it’s a bonus as a buyer right now, relative to 8+% from the 80’s, no? As I said, he’s using current circumstances to suit his need of buyers but is it really that big of a deal? To me it seems he’s not being dishonest (yeah, there are other considerations to factor in that he conveniently leaves out). What is the big deal if rates didn’t go up like predicted? Ok, he was wrong about them rising and historically speaking rates are still very low, so what. It doesn’t change the fact that purchasing power is increased when they drop a month later, again, unless I’m missing something. And by pointing out that rates are very low historically, Seattle Bubble is proving his point, which is that rates are very low and its great to lock them in now. What he doesn’t say that SB does is that you should grab the rates now if you have a nice down payment, plan to stay a long time, etc etc as opposed to speculating and all that.

    If the scaremongering was your point of the post, ok, you got him. But I don’t see his misplaced “logic.” To me, the logic is fine, in both cases what he’s saying is technically correct and not inconsistent. One opinion a month ago does not preclude the other a month later.

    I’ve read this site casually for 3+ years now and while I appreciate the contrarian view, sometimes I feel like you’re so desperate to be right (and have been right, IMO) that at times you stretch to create a “gotcha” moment that doesn’t really exist, like this post, and it takes away from an otherwise great source of information. I hope this last paragraph comes across as constructive criticism and is responded to respectfully. The last time I posted, 3 years ago, with what I saw as a mild criticism to an over-the-top mocking of a buyer quoted in an article, The Tim responded in an angry-blogger-in-his-mothers-basement tone that was completely disrespectful and really turned me off for awhile. I’ve felt like the site has matured since then and hope that to be the case with the response to this post.

    Cheers

  15. 15
    The Tim says:

    RE: Jason @ 14 – I could have been more explicit, but here are my three main problems with Mr. Scott’s posts taken as a complete body of work.

    1) The line in the now-deleted post, he is basically saying that if you don’t buy before April 30 you’re out of luck. He all but guarantees that interest rates will go up and spews all kinds of doom for buyers when it happens.

    2) He completely (and I’m sure intentionally) ignores the downward pressure that rising rates would put on home prices, which is good for buyers.

    3) He says that now that rates are slightly lower, buyers should spend more on a house. Forget the fact that it would be more financially responsible to buy the same size house you would have before the rate drop and just enjoy lower monthly payments. For the salesman it’s all about maximizing the purchase price through whatever means necessary.

  16. 16
    Jonness says:

    4) He completely ignores other factors that could outweigh the amount of house price savings related to interest rates. For instance, if the huge backlog of foreclosures start hitting the market, the Seattle area could see a return to historically healthy home price to income ratios. The gap between current bubbled prices and historically healthy prices is more than the tax credit and low interest savings combined.

  17. 17
    David Losh says:

    It occurred to me over on the Open Thread that The Tim and Lennox are exactly the same. You both have a message to push.

  18. 18
    The Tim says:

    RE: David Losh @ 17 – AND we both breath air!

    It seems to me that Lennox’s message of “no matter what it’s always a good time to buy and you’ll be sorry if you wait” is a somewhat different message from the one I am pushing:

    Don’t take anyone’s word when it comes to what will likely be the largest financial decision of your life. Do the research, and determine if the market is right for you.

    …whether or not to buy is a personal decision that only you can make. Don’t let a blog or a real estate salesman make that decision for you. Consider all the options and risks, and make an informed decision based on your unique circumstances.

  19. 19

    By David Losh @ 17:

    It occurred to me over on the Open Thread that The Tim and Lennox are exactly the same. You both have a message to push.

    Adolph Hitler and Kanye West also have messages to push. Are they exactly the same?
    Lennox Scott has the message something like ” No matter what your circumstances or the condition of the economy, it’s always a good time to buy a house.”
    The Tim’s message is not ” Never buy a house under any circumstances.”
    It’s more ” Do your own research, and don’t simply take an industry mouthpiece’s word for it.”
    Too much ” impartial” information was/is coming from the real estate industry, and The Tim has done a great job of countering that with actual, data driven logic.
    Yes, he does provoke, but what do you expect? He’s a media mogul.

  20. 20

    RE: Ira Sacharoff @ 19 – Scott is urgency. Tim is just the opposite. I think both focus on current prices and what the future might hold way too much.

  21. 21

    By Kary L. Krismer @ 20:

    RE: Ira Sacharoff @ 19 – Scott is urgency. Tim is just the opposite. I think both focus on current prices and what the future might hold way too much.

    Says the guy who won’t make predictions. I predict that in 2010 Kary Krismer will not make a prediction.

  22. 22

    RE: Ira Sacharoff @ 21 – I predict you will be right! Oh, wait . . ..

  23. 23
    David Losh says:

    RE: The Tim @ 18

    There are people making good financial home buying decisions in any market. Real Estate is a one on one transaction, so anything is possible.

    Real Estate professionals, like Lennox, can use data to make good Real Estate purchases in any market. I’m amazed that people, in the Real Estate business, have been making profits through out this market decline.

    Is either point of view a complete picture, no, but Lennox has a perspective from an ivory tower.

  24. 24
    Flotown says:

    as a prospective buyer at some point, I want rates to go up now, so that they don’t spike up after I buy and immediately put me underwater to a point where my mobility is restricted. Buyers are so payment-focused that any increase and rates will drive down prices right now.

  25. 25

    By Flotown @ 24:

    Buyers are so payment-focused that any increase and rates will drive down prices right now.

    Focusing on one factor often leads you to the wrong conclusion. This is actually a good example when many people were predicting that rates would go up significantly after the end of government support in March. Looking at that one factor lead people to the wrong conclusion, because we’re now at near record lows.

    As to your claim, prices did not drop in Seattle when interest rates shot well over 10% in the late 70s, early 80s. Other factors overcame the increase that the interest rates would have otherwise had.

  26. 26
    Jonness says:

    By Kary L. Krismer @ 25:
    Focusing on one factor often leads you to the wrong conclusion. This is actually a good example when many people were predicting that rates would go up significantly after the end of government support in March. Looking at that one factor lead people to the wrong conclusion, because we’re now at near record lows.

    True. For instance, when the bubble first began to burst ~80% of RE agents said “now is a good time to buy because interest rates are historically low and about to go up.” We all know how that advice worked out.

    So potential buyers should look at the big picture. There are many factors that point to continued potential downward pressure on house prices. 1) ~10% unemployment, 2) high foreclosures 3) many buyer’s late on payments 4) world-wide debt crisis 5) interest rates historically low keeping prices historically high compared to incomes 6) high market volatility 7) buyers underwater 8) etc.

    Anybody who spins the current market as a risk-free time to buy is suspect–especially if they sell houses for a living. Thus, buyers should keep these simple rules when buying a house:

    Rule #1: Never trust a RE agent who wears a fancy suit, drives an expensive car, and has an expensive lifestyle to support. This person NEEDS to sell you a house in order to pay for the lifestyle. If you encounter this person, walk away.

    Rule #2: Always do your own research. If the agent attempts to spin something as factual that isn’t, walk away.

    Rule #3: Always remember that people work according to their own best interest. Find an agent with a long-term income growth plan instead of a get rich quick scheme. Over the long-term, it’s better to satisfy your customers than not. If the agent comes off even the least bit like a high-pressure used car salesman, walk away.

    Rule #4: You owe the agent nothing until you sign the papers. Make sure the agent earns your trust and respect before you agree to pay this person many $ thousands in commission. If the agent doesn’t deserve the amount you will have to pay, walk away.

    Rule #5: Now that you know how to hire a good agent that works for you instead of against you, it’s time to learn how to work for yourself and not against yourself so that you can make trustworthy decisions on financial matters. Do not buy a house without having looked at at least 20 other houses in a similar area and price range. Never, ever, ever make a decision to buy while you are looking at the house. In this market, you have plenty of time to sleep on it and make an offer in the morning when your mind is fresh and has had time to sort out the pros and cons of making a major financial decision that will massively impact your financial future. If you feel your decision to buy is even the least bit impulsive, walk away.

    Rule #6: Keep focused on the fact that a dumpy $450/mo. apt is a place to live. A house is a commodity investment that fluctuates up and down in price. If your agent says otherwise, walk away.

    Rule #7: Buying a house in Seattle today potentially carries more risk then gambling your money in the stock market (depending on the amount of leverage you carry on the mortgage). If you can’t take a potential 25% hit on overall price, walk away, continue saving your down payment, and wait to buy until there is less volatility in the marketplace.

    Rule #8: Figure out how much you can safely and realistically afford to spend and don’t stretch a single dollar beyond that figure. If you decide to stretch past a 28:36% front to back ratio, make darn certain the decision is not impulse driven. If it is, walk away.

  27. 27
    Jonness says:

    One other note. Be more afraid of low interest rates than high interest rates. Deflation drives prices downward. Inflation drives them up. Yes, higher rates will temporarily suppress prices as people can afford less principle per month. But if we enter an upward wage-price spiral, you will come out of it smelling like a rose. OTOH, if we hit a downward wage-price spiral, you are potentially heading for bankruptcy. Low rates at a time when the government has printed record amounts of funny money and thrown it into the marketplace equate to SERIOUS risk when it comes to buying a house because it is a sign of having entered a deflationary economy. In a deflationary economy, the old inflation-based house buying rules no longer apply.

  28. 28
    David Losh says:

    RE: Jonness @ 26

    Geez, what a crock.

  29. 29

    RE: Jonness @ 26
    I like the rules. I don’t completely agree with them, but they’re a decent guideline, to be taken with a grain of salt.

    Rule 1. I drive an old car, and wear casual, inexpensive clothing, but I know a few trustworthy real estate agents who became successful with lots of referral business because they’re trustworthy.They drive nice cars because they like them, not because they’re trying to impress anybody. If they want to drive an expensive car, why does that necessarily indicate that they’re lying sleazebags? And yes, I know lying sleazebag agents who drive expensive cars as well. I’m not quite sure how one can easily differentiate. I don’t suppose asking ” Are you a lying sleazebag?” would be very telling.

    Rule 4. Technically, the buyer does not pay any real estate commission. The commission for both the listing agent and the selling ( buyer’s) agent comes from the seller’s proceeds. But of course we know where the seller got that money.

    Rule 5. If you really know what you’re looking for, and find a home that meets all of your criteria, and is selling for considerably less money than nearby comparables, is it really necessary to look at 19 more houses? Yes, there is clearly a lot of overpriced crap out there, but every once in a while I run into a good house at a good price, and it usually disappears very quickly.

    Rule 7: Buying a house might be more risky than investing in a stock market index fund, but maybe less risky than an individual stock. About 15 years ago I bought some stock in a highly touted, recommended company. The very next day the stock was delisted, and the CEO carted off to jail for fraud. If you buy a crappy overpriced house and make all the payments, it will ultimately be yours. Maybe it will have fallen down by the time it’s paid off, but you’ll at least have the yard to plant potatoes in.

  30. 30
    Scotsman says:

    RE: Jonness @ 27

    “Be more afraid of low interest rates than high interest rates”

    Yup, a lot of people miss this. I actually expect rates to continue to drop for a while before starting back up. In a normal market rates reflect the demand for money- low rates signal low demand, probably because of a lack of opportunity to generate adequate returns. There’s a lot more to it, of course, but I’m pretty sure most of what we’re seeing now is preliminary to a collapse in demand and a period of expected deflation.

  31. 31

    By Ira Sacharoff @ 29:

    RE: Jonness @ 26
    I like the rules. I don’t completely agree with them, but they’re a decent guideline, to be taken with a grain of salt.

    I would tend to agree with that.

    Rule #1 (and to some extent #3) could apply to a lot of professions, including lawyers and doctors.

    To rule #2 I would add to run from any agent that claims to know where the market is headed.

    Rule #5 has some issues. I would agree on looking at a number of houses, although I wouldn’t put that number at 20. Also, there are some houses that you can’t afford to sit on–those are the really nice houses and/or the houses that are attractively priced. And I would add: Don’t look at houses until you’ve made a decision to buy and are ready to buy. You don’t want to fall in love with a house and have that affect your decisions on amount or timing.

    Rules 6 and 7 focus too much on price–an American obsession. For 80%+ of the homeowner population, the value of their house right now doesn’t really matter, and for 60%+ it hasn’t mattered for years. Hopefully the value of my house won’t matter for at least 8 more years, because I have no intention of moving for at least that period of time.

    Rule 8 was more important before than it is now, because banks have tightened up some. Without supporting the particular test mentioned, it’s still a good to determine how much you can spend and still lead a comfortable lifestyle.

  32. 32
    David Losh says:

    This obsession with Lennox Scott keeps me thinking of how little people understand about the business of Real Estate.

    There are maybe 100 Real Estate agents in the Seattle area who know what they are doing, do it well, and are successful. Maybe there are 100. Those are the people who work the 24 hours a day, 7 days a week. That’s what it takes to be in the Real Estate business.

    They may go to exotic locations, locations, locations, and what they do is read the classifieds, track transactions, and do deals with who ever will listen. Most people don’t listen. Most people want other people to listen to them. Most buyers and sellers want people in the Real Estate business to listen to them.

    Here’s how it works. After thirty years of being in the Real Estate business you are either retired, or not. After twenty years you stop talking to people who are not directly introduced to you, can prove an ability to perform, and have the desire to buy, or sell property. After the first ten years you are so used to collecting prospective clients, or customers, depending on how you work, it is a second nature, and it is all you do. The first five years you learn, and starve.

    Real Estate is by far the most brutal business to be successful at. It takes dedication, it takes a lot of time.

    A guy like Lennox lives his business. He is a true believer, and has done more than any one I can think of to make your internet experience about Real Estate viable.

    Sure he can be more successful, sure he can stop any time, if he could, sure he could do a thousand other things, but he works instead. He works to make your home buying, or selling experience better than it was, and the best it can be.

  33. 33
    Scotsman says:

    How about a little counter-point to David’s eloquent testament to J.Lennox Scott’s dedication and selfless service to the real estate industry? While I’m sure David has accurately described what it takes to be successful (in any business) and how that success evolves over the years he either fails to understand or glosses over a critical point.

    What he misses is the distinction between service to the industry and service to self. Sure JL has done much to improve the interface between the real estate industry and the internet. That he has done it for a profit isn’t bad, and that he has done it to increase his own wealth and status isn’t bad. His sin is intellectual dishonesty and a willingness to essentially steal from those who are less knowledgeable by playing to their desires and insecurities. “Homes always go up!”, “now is a great time to buy!”, “buy now or be priced out forever!”, “get rich in real estate!”, all are nothing but the public cries of the old time carny snake-oil salesman in a fancy office with a 30″ flat screen monitor. Legal? Oh yes. Ethical in any traditional sense? Hell no.

    JL doesn’t look for the truth in interest rates or the market, he doesn’t look to truly serve his fellow man, he looks for the advantage, the current angle, the gimmick, the inner fear or motivation that can be manipulated for a gain. That associates come and go, the friends come and go, the wives too- only one thing stays at the top- in the mirror, “el numero uno.” J. Lennox Scott. It’s not who he is, or what he’s done- it’s where he drew the line. And for me that line is too close to greed and too far from “noblesse oblige.”

    http://en.wikipedia.org/wiki/Noblesse_oblige

  34. 34
    Jonness says:

    By Ira Sacharoff @ 29:

    RE: Jonness @ 26
    I like the rules. I don’t completely agree with them, but they’re a decent guideline, to be taken with a grain of salt.

    I completely agree. Take them with a grain of salt. They are meant to spark a bit of a flame between the prospective buyer and the prospective seller.

    Rule 1. …They drive nice cars because they like them, not because they’re trying to impress anybody. If they want to drive an expensive car, why does that necessarily indicate that they’re lying sleazebags?

    There are no definitives. The rule simply increases the probability of getting someone who is down to earth and more focused on getting you the best house for your money than getting another sell in order to buy an even better suit. Note that the rule says “wears a fancy suit, drives an expensive car, and has an expensive lifestyle to support.” A nice car is only one out of the three and is not in of itself an alarm signal. Here is a case in point: Ray Pepper refunds 75% of the buying agent’s commission. Last time I checked, none of his agents qualified for all 3 criteria. Otherwise, how could he possibly refund the 75%?

    Rule 4. Technically, the buyer does not pay any real estate commission.

    Then again, Ray Pepper refunds 75% of the buyer’s agent commission. Other agents keep the full commission and attempt to provide additional services to make up for the 300% markup so that you get value for the money you spend. And there are other agents who simply want the money in order to get another fancy suit. I’d prefer to buy the house without picking up the tab for the guy’s new suit. And I can honestly say, I’ve seen more of the latter than the former. :)

    Rule 5. If you really know what you’re looking for, and find a home that meets all of your criteria, and is selling for considerably less money than nearby comparables, is it really necessary to look at 19 more houses? Yes, there is clearly a lot of overpriced crap out there, but every once in a while I run into a good house at a good price, and it usually disappears very quickly.

    It’s not necessary for you because you are a RE agent who understands the market. The average Joe on the street needs to look at 20 houses to even get the most basic idea of what he is looking at. If a good priced house sells in the meantime, so be it. It won’t be the last one the buyer sees, and it is too risky to buy anything prior to understanding the market you are in.

    These RE reality shows where the agent shows the buyer 3 houses, and they select the one they like most is absurd. Buyers should never be rushed, and they should never buy anything until they fully understand the market. It is impossible to understand the market without looking at at least 20 houses. Actually, I recommend looking at at least 100. 20 is the minimum.

    Rule 7: Buying a house might be more risky than investing in a stock market index fund, but maybe less risky than an individual stock. About 15 years ago I bought some stock in a highly touted, recommended company. The very next day the stock was delisted, and the CEO carted off to jail for fraud. If you buy a crappy overpriced house and make all the payments, it will ultimately be yours. Maybe it will have fallen down by the time it’s paid off, but you’ll at least have the yard to plant potatoes in.

    But if you bought the crappy stock without leverage, then your losses were limited compared to the losses on the house. If you bought the stock for $10K, and it went to $0, you lost $10K. If you put $10K down on the house and it lost $100K, and you continue to make all the payments, you lost $100K compared to what you could have bought it for. Well, actually you lost $200K, because it cost you an extra $100K to finance the $100K you lost. It’s better to lose $10K than $200K.

    Yes, the rules were made up for fun based on the experience of having looked for a house in an extremely overpriced market for the last 4 years. Interestingly, as controversial as the rules are, they do hold a certain amount of legitimate weight.

  35. 35
    Jonness says:

    By David Losh @ 32:

    ]
    Sure he can be more successful, sure he can stop any time, if he could, sure he could do a thousand other things, but he works instead. He works to make your home buying, or selling experience better than it was, and the best it can be.

    From the layman’s viewpoint, it appears what he’s working for is a 6% commission and 500 Realty is working for a whole lot less. It seems to me, in order to make my home buying experience all it can be, I need a 75% refund from Mr. Scott.

    Mr. Scott wears an expensive suit, drives a nice car, and has an expensive lifestyle to support. Rule #1 tells me to walk away. See, the rules work in the buyer’s best interest after all.

  36. 36

    By Jonness @ 34:

    It’s not necessary for you [to look at >20 houses] because you are a RE agent who understands the market. The average Joe on the street needs to look at 20 houses to even get the most basic idea of what he is looking at. If a good priced house sells in the meantime, so be it. It won’t be the last one the buyer sees, and it is too risky to buy anything prior to understanding the market you are in.

    These RE reality shows where the agent shows the buyer 3 houses, and they select the one they like most is absurd.

    I would agree with the last point. As to the first what you perhaps don’t realize is that the agent can and typically should be looking at a lot more houses than what the client actually sees. Thus, you can have both over 20 viewing and under 20 viewings at the same time because most of the viewings are vicarious. But 100 is a crazy number. When we were looking (my wife and I, both agents) we probably looked at around 80 houses. And sometimes for the client’s criteria there simply are not 100 houses to look at.

    But that brings up another rule that I think is good. Look at as large of an area as you can. When the wife an I were looking all of King county north of roughly Covington was in play. If you want to be within 1/2 mile of X you should plan on taking a long time to find something and probably paying more than you otherwise should.

  37. 37

    By Jonness @ 35:

    Mr. Scott wears an expensive suit, drives a nice car, and has an expensive lifestyle to support. Rule #1 tells me to walk away. See, the rules work in the buyer’s best interest after all.

    So I guess from that you’d get your investment advice from Pfft over say Warren Buffett? ;-) (I seem to recall Warren Buffett isn’t all that flashy, but I’d guess that his lifestyle beats out Pfft’s by at least a small amount.)

    Seriously, picking a professional based on how much they charge is rather foolish. Undoubtedly the JLS organization has some agents that are a lot better than Ray and some that are a lot worse. The rate they charge means nothing. Back in my bankruptcy days I knew of bankruptcy attorneys charging 2x the going rate that didn’t even understand the basics of bankruptcy.

  38. 38

    RE: Jonness @ 34
    Again, even though I don’t completely agree with your rules I appreciate them and mostly agree with them. I’m really glad you posted them.
    One thing about commissions and commission rebates:
    A brokerage like Windermere or John L Scott requires their agents to split the commission with the brokerage 50/50 until that agent brings in a certain level of business, so that “motivates” the agents to put pressure on clients, to telemarket, etc.
    Agents with much lower expenses like myself have more flexibility regarding rebating commissions, and I assume Ray needs a certain level of volume to both rebate 75% and buy vans with pictures on them.
    Kary’s last post alluded to Warren Buffet and is lifestyle. I read his biography, and Warren is clearly not flashy. He drives an older Buick, and tries to go weekly for the 6.95 steak dinner special when he’s in Omaha, his corporate headquarters. He and his pal Bill Gates played in a bridge tournament, and met before the tournament for breakfast at McDonald’s.

  39. 39
    David Losh says:

    RE: Jonness @ 35RE: Jonness @ 34

    What a crock.

  40. 40
    David Losh says:

    RE: Scotsman @ 33

    I disagree. I think Lennox is a true believer. In his world he could simply dollar cost average his portfolio, and come out ahead. In his role as a Real Estate Brokerage he at least has contributed to the community as a whole. You admit we have all benefited from his work in presenting an internet search to the public. There are a lot of Brokerages who have done nothing, but provide a haven for those snake oil sales people.

    So what I see is that Lennox is promoting internet based tools to help the consumer. You are putting a motivation to that other than good business, or maybe his natural curiosity.

    What I know for a fact is that Lennox doesn’t have to be out there making speeches, or dumping money into money pit internet ventures. He could just be brow beating his agents to get out there, and make more sales. He could be hiding in an office some place counting his money. He could open a string of desk fee offices. He can do a lot of things, but he is out promoting a message,

    I think he is a true believer.

  41. 41
    Scotsman says:

    RE: David Losh @ 40

    “I think he is a true believer”

    You may be right. But doesn’t that put him in the group covered by “ignorance of the law is no excuse?” Just because he’s blind to a greater perspective doesn’t make him or his actions right. I’m not saying he’s evil- just that he hasn’t (recently) considered all of the personal costs to those who have bought because of his relentless pushing. Millions and millions of dollars have been lost and will continue to be lost because of his failure to moderate his message for the times. At some point I have to believe he knew he was wrong- but continued to push, and only for his own gain.

  42. 42
    Rational Expectations says:

    RE: The Tim @ 15 – The point is that the cost of debt is factored into property prices. If everyone can afford more, nominal home prices rise. If no one can afford more, then home prices must drop to meet demand. We are not increasing or decreasing demand, just inflating (deflating) nominal prices to address the supply/demand for money.

    The disinformation about purchasing power keeps being repeated by every member of the bubble booster association, from builders, realtors, to the White House. It is simple people: you are not richer because you are able to go deeper in debt … and if everyone can go deeper in debt, you are poorer. You just bought the same house you would have bought with a higher level of debt.

  43. 43
    David Losh says:

    RE: Scotsman @ 41

    I blame banks, much more than independent Real Estate brokerages. I can’t see Lennox getting up in front of an audience and saying “I was wrong, we were all wrong, and you should stop buying properties until we sort this whole thing out.” As a matter of fact when I think about it, that would be wrong.

    Fortunes are being made today, and will be for years to come. Real Estate is the most resilient of assets to own. Maybe I should write a book on the subject, and maybe I am, but the fact is Real Estate is an adaptive market place.

    Yesterday I was in a home in the Central Area that backs up to another home that has been vacant for six and a half years. The owner comes by to cut the grass, and check the property. He has painted it inside and out during that time. It’s probably one of a half dozen in the same area with the same circumstances that I can think of. The owners don’t rent them out.

    Do the financial on that. Why would some one just hold a property, maintain it, pay taxes, and let it just sit?

    Let’s leave that, then look at the other side of the equation. If you over bought, if you bought in when millions of people were telling you not to, even with the global economy collapsing, like now, should the Real Estate agent, who believes they are doing the right thing, tell you not to buy?

    People are making fortunes today, in Real Estate, by buying properties well. The fact millions of people have bought badly is another testament that the the way they get information, the way they structure the transaction, should change.

  44. 44

    RE: Scotsman @ 41
    I don’t really know J Lennox Scott, just through his statements. For all I know he might be a great guy and a fun person to hang out with. It certainly doesn’t make him a good or virtuous man because he is successful. But you’d think that by repeating the same message, which has been regarded as wrong by a whole lot of people, he’d have lost some credibility, as certainly the whole real estate industry has, and he is one of the industry’s most visible mouthpieces.
    It’s not entirely undeserved, this taint, this stink the real estate industry is though to have. There are people here and elsewhere who assume that if my lips are moving, I must be lying, because I wear that A on my forehead like Hester Pryne from the Scarlet Letter, but agents are sunned more than adulterers..

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