Here is your open thread for the mid-week on December 9th, 2009. You may post random links and off-topic discussions here. Also, if you have an idea or a topic you’d like to see covered in an article, please make it known.

Be sure to also check out the forums, and get your word in the user-driven discussions there!

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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. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

1. 1
Herman says:

By AMS @ 29:

… a marginal analysis that shows that the agent’s benefit on the margin is very little as contrasted to the heavily leveraged ‘owner.’ For selling the home for an added \$50,000, the owner gains \$45,500, over ten times the \$3,500, yet the agent gains \$4,500, which is an increase of 14.3% over the \$31,500 base commission.

I understand that Herman was trying to shift the selling agent’s marginal benefit to better match the owner’s marginal benefit, but that still does not answer the underlying question of market value of the home.

I’m carrying this comment forward from the previous open thread. AMS, I think you’ve captured the thinking behind a marginal commission. To summarize, the marginal commission is structured like this:

* Agent and seller agree on a par value, which is the price they reasonably expect the sale to take place.
* Upon closing, the agent is paid a sellers agent commission.
* Traditionally this is 3% of the sales price, but under a marginal commission, it is zero commission up to 80% of the par value, then 15% commission for each dollar above it.

Example: Agent and seller agree that the home is worth about \$100,000 and that will be the par value. If the home sells for \$100,000, the agent gets a \$3,000 commission. (\$100k – \$80k = \$20k x 15%) If the home sells for \$90,000, the agent gets a \$1,500 commission. (\$90k – \$80k = \$10k x 15%). If the home sells for \$110,000, the agent gets a \$4,500 commission. (\$110k – \$80k = \$30k x 15%)

AMS, you already captured the intent behind this, so let me speak to the other half of your question, which was how best to discover the market value of your home so that you can set the par value, evaluate offers, or whatever you want to use it for.

You could hire an appraiser for \$300. They are supposed to be experts at impartially guessing the market value. (FMV is just a guess at the best price a qualified offer would materialize given reasonable patience, marketing, etc.)

You could hire ten appraisers, and average their results.

But then, the same home marketed by an excellent agent might sell for more than if an incompetent agent handled it. So the agent is a part of the equation that affects the selling price.

If you think good RE agents are experts at appraising, then you could ask one to run some comps, look at your house, and listen to his opinion. The problem with RE agent recommendations is the potential for bias. AMS, you noted that some agents will overestimate the selling price in order to delight the seller and win their listing. I noted that some agents will underestimate the selling price in order to move the transaction as quickly as possible – as long as they think they own your listing, giving up 3% on a few thousand dollars of your sales price is a worthwhile trade against a bunch of time and hassle.

On the other hand, if you’re offering a marginal commission, you could locate five good agents and ask them to compete for your listing. They would compete by offering you their par value for your listing. Alone, an agent would want the lowest par value possible, because it gives him the most room for upside. But you, the savvy seller, want the highest par value because that pays out the lowest commission at a given selling price.

Yes, you still have to evaluate the agents personally, and you may pick one with a lower par value because you favor them for other reasons; a better haircut or whatever.

The effect of a par value auction should be that agents use all their expertise and skill to estimate FMV as best they can, because they stake a big portion of their commission on getting the par value right. Too low and they lose your listing to another agent; too high and they lose commission.

This is exactly the dynamic you’d get if you were asking five contractors to give you bids to remodel your kitchen. They will use all the job estimating skill they have to get you a bid that is not so high that they lose the work, but not so low that they lose money. The dynamic uses the free, competitive market to expose the fair market cost of your kitchen remodel.

By the same token, the par value auction uses competition to expose the best FMV estimate that the agents can provide. And that answers your question. Or just hire an appraiser.

2. 2
David Losh says:

RE: Herman @ 1

It’s the added value commission discussion repackaged; if an agent adds value they would get paid more, if they reduce the price they get paid less. Rather than go into that discussion again, I’ll recount my personal experiences.

Number one is that our company A Spring Cleaning has prepared thousands of properties for sale. It’s what I’ve done for forty years, preparing properties for rent and sale. We have worked with hundreds of Real Estate agents and now only work with a select few. We will probably expand again this year.

In 2006 and 2007 we sold three properties and Marlow Harris at Coldwell Banker Bain, http://www.SeattleDreamHomes.com and http://www.360Digest.com was instrumental in getting the properties sold. She advised me on the first one that we listed with a guy in my office, she listed the second one, and I listed the last one with her recommendations.

David Rush at Windermere at http://www.DavidRush.com is by far the best agent at matching price to condition. He has a great eye for property.

While many people talk about the commission it is a small price to pay in an over all Real Estate transaction. You can do it yourself for less, but as we have found we made more by hiring professionals.

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Trigger says:

We are on a roll. They extended the bailout plan and maybe they are planning to build on this plan.

http://money.cnn.com/2009/12/09/news/economy/TARP_extended/index.htm

Basically the Helicopter Ben will do the money drops. Cash infusion will be everywhere. We will not stop printing. And we will get out of the crisis by sinking more into debt and then printing ourselves out of the debt.

So we will spend ourselves out of the crisis by going into debt and then we will print ourselves out of the debt by printing huge amounts of cash.

http://money.cnn.com/2009/12/09/news/economy/TARP_extended/index.htm

4. 4

RE: Trigger @ 3 – I don’t think the extension itself is a big deal, or that unexpected. What I find absurd though is that they call the money not used “deficit reduction.” Also, I haven’t really looked at Obama’s job plan, so I don’t have an opinion on that.

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AMS says:

RE: Herman @ 1 – “You could hire an appraiser for \$300.”

That is exactly what I recommend if someone has no better way, especially if they are an absent landlord. I also recommend that they speak with the appraiser about the expected time of sale. In other words, it’s simply not enough to have a sale, but I also want to know about how soon to expect the sale.

To summarize your “par value” idea, let’s take a home that has an agreed expected sale value of \$100,000 in a reasonable amount of time, as in your example.

I note that anyone can immediately sell the home for \$80,000. The issue is getting the maximum that the home will immediately sell for. Selling at this price requires no skill or ability. From that point forward, the commission is earned at a rather high percentage. Note that I am just shifting the commission to “par value” (alternatively, using your system I am redefining the par value to the 80% value).

There are fixed costs too, so the final commission structure might be some fixed amount plus a high percentage of the selling amount over the ‘par value.’ Maybe, as a seller, you don’t care about the real estate agent’s fixed costs.

This also gets to the whole issue of FSBO saving the commission. I know that both buyer and seller expect to save the commission, and often the seller are not prepared, nor do they have the sales skills, to sell the home. Ultimately when paying the salesperson you want to make sure that you net out ahead of what you could do on your own. Once again, selling at a low price is easy. There is nothing that a low enough price cannot fix, and price is the ‘easiest’ way to motivate buyers. But a low selling price does not necessarily maximize seller satisfaction.

Finally, all of this does not change the consumer base. While I agree that a skilled salesperson is the best way to go, and I also suggest that a skilled salesperson should be compensated, the maximum selling price in a reasonable time is set by the market, which the professional appraiser will attempt to guess.

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AMS says:

I know I have read messages that suggest that the worst is behind us. That the financial markets have rebounded. Essentially that there is little problem.

If this were true, why do I keep hearing about have another bailout is needed?

“Treasury Secretary Timothy Geithner told Congress Wednesday that the administration will extend the government’s financial bailout program until next fall, saying it’s needed to protect against fresh economic shocks.”

http://finance.yahoo.com/news/Geithner-bailout-program-apf-3043495812.html?x=0

This is on top of extended income tax credits for housing.

This was not what came to mind when I heard the claim that worst is behind us.

???

7. 7

RE: AMS @ 6 – Mainly it’s to stimulate jobs. 2010 is an election year, and going into it with 10% unemployment is not good for the party in power.

8. 8

RE: AMS @ 5 – This reminds me of a seller client who wanted to have the commission vary depending on how long it took to sell. I said I was willing to do that, but I needed to know one thing: Would the commission increase or decrease as time went on? ;-)

9. 9
AMS says:

RE: Kary L. Krismer @ 7 – Well if things were rosy enough, I don’t suspect that there would be any need for further stimulation. What does it suggest when ‘they’ have to stimulate to gain votes? This is all so titillating.

RE: Kary L. Krismer @ 8 – Obviously the commission would increase in time for all the added effort you put forward.

10. 10
Markor says:

Yep. No matter how destructive the bad party is, the other party gets just 2 years to fix it all before the bad party gets swept back into power, to reap ever more profit from further destruction.

11. 11

RE: AMS @ 9 – That’s what the client had in mind, but he could have also been thinking more for getting a faster result.

12. 12
AMS says:

RE: Kary L. Krismer @ 11 – What? He actually wanted to increase the commission in time? I was kidding.

I am going to have to think this over a bit more. I thought it was obvious that a seller wants to sell at a high price and sooner, not later. Thus the commission should be higher the less time it takes. Also if the commission increases in time, what incentive does the salesperson have to sell it sooner? Why not let six months pass to increase the commission?

I’ll think over the case of an increasing market. Just how fast does the market have to increase so that an increased commission in time makes sense. In other words, just how much extra will be realized by both, on a present value basis.

13. 13

The commission schedule was worked out with an open house schedule. So it was as you said at first.

As it turned out we did sell quickly, so he got the lowest commission on the schedule.

14. 14

RE: Markor @ 10 – I’d argue both parties were bad.

15. 15
AMS says:

RE: Kary L. Krismer @ 13 – Hm. This is very interesting. The owner was basically pushed to price the home right. If he priced it wrong, then he’d be punished by paying extra. And in a down market, the owner would be doubly punished. In a rapidly increasing market, he might actually net more, even if an increased commission is paid. This will definitely give me something to consider. It’s almost a time and materials contract, versus the percentage of sale price contract, which is essentially a fixed price contract.

Of particular importance is that there is no price fixing among real estate agents, and thus the compensation is negotiated on an individual contract basis.

16. 16

RE: AMS @ 15 – This was right after the peak, and the seller was particularly concerned about the market, so that might have been his incentive.

17. 17
Scotsman says:

If no one wants to buy, do prices continue to fall? From the WSJ:

“Whitehouse describes one former homeowner with a monthly income of \$8,300. He was paying \$4,800 a month on his home and he was basically working to pay his mortgage. He was really a “debt owner” since the home was worth far less than the amount owed. He now rents a similar home for \$2,200 a month and is enjoying life:

[H]e now has the wherewithal to do things he couldn’t when he was stretching to pay the mortgage. He recently went to concerts by Rob Thomas and Mat Kearney. He also kept his black BMW 6 Series coupe, which has payments of about \$700 a month.

“I don’t know if I’ll buy another house again, because it’s such a huge headache,” he says.
This is one of the tragedies of the housing bubble – it encouraged people to become homeowners before they were really ready and also encouraged them to buy too much home (58% DTI for the mortgage is definitely “house poor”). Many of these people will not buy again for years, if ever.”

18. 18
Herman says:

CNN has labeled Seattle as a region poised for a RE bounce. They are calling the bottom at the end of summer 2010 after declines of another 2.3%, but growth kicking in after that.

http://money.cnn.com/galleries/2009/real_estate/0910/gallery.housing_price_forecast/2.html

While any bottom call is mock-able on this blog, I seem to recall that Fall 2010 was also where The Tim triangulated the Seattle bottom using his 5 estimating methods, some time ago.

The results are in. Get on board people, or be priced out of Seattle forever.

19. 19
Trigger says:

I am trying to figure out of there could be some govt subsidized loan program. It would be really nice if the govt would co-pay for all the shack purchases. Ideally a 50% co-pay would be great. This way it would encourage everybody to splurge on themselves. And we could print the money if there was no money in the budget.

I am wondering if it is worth bouncing this idea with Helicopter Ben?

20. 20

RE: Scotsman @ 17 – I don’t know how much, if any, of that \$4800 a month was for taxes, but that’s probably a loan of at least \$600,000, if not \$700,000. If you have to borrow that much money, it’s a house you can’t afford (unless perhaps you has some other great investment that is keeping you from putting more money into a house). The fact that the guy has \$700 car payments indicates he has a spending problem.

21. 21

RE: Trigger @ 3
One Question Trigger

You borrow a trillion and spend it a wild drunken party year, you now have a horrifying hangover debt, where’s the jobs [beers] for the following year after all the beer is gone?

22. 22
AMS says:

RE: Kary L. Krismer @ 20 – “The fact that the guy has \$700 car payments indicates he has a spending problem.”

Many people do have car payments, but we drive ‘clunkers,’ so we view any car payment of \$700 as a bit loony. It wouldn’t take too many of those \$700 payments to equal the value of one of our ‘clunkers.’ That said, I’m guessing that this guy probably would have excessive mechanical problems if he drove an older vehicle.

No doubt there are people who seek to spend \$1.50 for every dollar they earn.

23. 23
AMS says:

RE: Trigger @ 19 – Just think of the property value support! Extra taxes, extra consumer spending, etc.

Everyone wins, right?

24. 24

Some Excellent Excerpts from Fortune Magazine, Dec 21, 2009, Investor’s Guide 2010

“…MasterCard….Amid the worst economy since the Great Depression MasterCard not only eked out a 1% revenue rise in the first three quarters (because consumers used debit cards more)…”

BTW, Credit Card companies weren’t listed in the stock guide for growth, so now it becomes crystal clear why the 20% drop compared to last year in Christmas retail occurred, we’ve shredded our credit plastic.

“…The 2010 Housing outlook has Seattle…projected price decline…-3.4%…”

Golly gee willerkers, if Fortune Magazine [its generally bullish on stocks and housing] has Seattle pegged for 2010 declines, where’s the beef in the stimulus welfare to America’s upper middle class tax credits?

BTW, IMO Fortune is severely low balling the 2010 price declines, as it predicts a 6.5% increase in prices for 2011….albeit gave no reason, wishful pink pony thinking IMO….we’ve heard this pathetic nonsense before too, year after year, homes in Seattle will go up and they go down anyway….LOL

Ohhhhh….I know the 787 will actually get off the ground this month and Seattle, err, uhhh, South Carolina, I meant, will be swimming in jobs….LOL

Hey, did you know Windows 7 has a default XP operating system mode so your XP software will work….LOL….I guess that means a lot of the business software won’t run on Windows 7, just like VISTA? Brings up another point, if you need to default mode to XP to make it work, why do you even need Windows 7 bogging your computer’s memory?

25. 25
Matsayswhat says:

No cash bonuses for Goldman execs?: http://money.cnn.com/2009/12/10/news/companies/goldman_sachs_pay/

Instead they’re getting stock that they can’t cash out for five years.

I’m sure they’re still making a ludicrous amount of money, but I’m surprised they caved to any public pressure. They really must have been worred that the townspeople were gathering with their torches and pitchforks, lol!

26. 26
Scotsman says:

RE: Trigger @ 19

http://www.prnewswire.com/news-releases/fattahs-emergency-mortgage-assistance-plan-for-the-jobless-moves-close-to-house-passage-78906592.html

“WASHINGTON, Dec. 9 /PRNewswire-USNewswire/ — A \$3 billion emergency mortgage assistance program for unemployed homeowners — authored by Congressman Chaka Fattah (D-PA) and based on a successful Pennsylvania program that Fattah helped create as a young state legislator — is on the verge of passage in the House of Representatives.

“There’s broad agreement that a major threat to homeowners today is loss of their homes because of unemployment and job distress through no fault of their own,” Fattah said. “Our program is a game changer, especially for struggling homeowners in our cities and rural areas and for minorities. It will provide \$3 billion in TARP funds for mortgage payments that will keep these families in their homes.”

Coming next: free houses!!

27. 27

RE: Herman @ 18
A Question for Herman

Are you currently in a big Seattle home mortgage debt, possibly upside down?

28. 28
Tim McB says:

RE: Herman @ 18

This is actually a reply to the Tim. Tim, as Herman mentioned this last year(Jan.?) you ran a series of possible bottom calls: blind optimism, SD comparison, price to rent, your personal call, etc. Is there any way you might update the charts you made to give us an idea about a year later where we are? This could be a good series of posts. Thanks for considering.

29. 29
Scotsman says:

Yeah, I wonder how he qualified for the loan in the first place- maybe something has changed in his life.

\$700 for a car payment isn’t that unusual- there are lots of \$35-55K cars and trucks driving around out there. I wouldn’t do it, but i know plenty of folks who do.

30. 30

RE: Scotsman @ 29 – But that car situation is sort of like the house situation. If you have to borrow that much money (or lease) to drive such a car, you probably shouldn’t be driving it.

31. 31
zippygc says:

Interesting questions arise when reviewing RE news articles from ~two years ago, such as the demolition stat of ~500 demos in Seattle between 2003-2005 begs the question, what is the tear down quantity and rate now? –:

“Just in Seattle’s single-family zones, 492 houses were demolished to make way for a new house or some other use between 2003 and 2005. Citywide, teardowns have picked up since 1998, averaging about 500 homes demolished a year — a 57 percent increase from the average in the preceding eight years.”
http://www.seattlepi.com/local/304253_teardown19.html

What is the tear down quantity now? Opinions?

32. 32
Herman says:

RE: Herman @ 18
A Question for Herman

Are you currently in a big Seattle home mortgage debt, possibly upside down?

I’m not sure why my post came across as hype. I thought it was pretty unbiased reporting of reporting. But to answer your question, my house is paid off and I have no debt.

How much does your wife weigh?

33. 33
Scotsman says:

Agreed, but from my years in banking and a brief experience as a mortgage broker I know it’s a minority that don’t live right at the edge financially. And that was 20 years ago- I imagine it’s much worse now. I remember reading once that more 18 year olds can put there hands on \$200 cash than can those 65 and older. That says it all. Live for the moment, tomorrow will be even better, the system will catch you if you fall.

34. 34
AMS says:

RE: Herman @ 32 – “How much does your wife weigh?”

I’ve often wondered if there is a correlation between weight and finances.

35. 35
DrShort says:

Closed sales are on a same pace in December as November based on warranty deeds filed in the first 8 business days of each month. November also had a couple of furlough days for county employees plus the Thanksgiving and Veteran’s Day holidays so the final numbers Nov vs. Dec could be surprising (ie, no cash for clunkers type drop). But it’s early still in the month, so who knows. A lot of the sales could be postponed closings once the tax credit was extended.