Fliperati

Key Magazine, the quarterly real estate publication from The New York Times, features a great article on flipping houses in its Spring 2007 edition.  It focuses on the intersection of the entertainment industry and the house flipping phenomenon in modern America and it does not present the typical glossy overview of the renovate-to-riches dream.  I enjoyed the article a great deal because it digs below the surface of the usual story about flipping houses and is brave enough to ask questions like: Is there any hard data behind Joe Flipper’s assertion that adding a privacy fence increased the home’s value by X thousand dollars? and What does the current obsession with home improvement say about our values as a society? 

The author takes a cynical look at these questions and there is a clear theme of greed, reckless consumerism and destruction of individuality that underlies the entire story.  It’s not very pretty, as illustrated by the leading sentence in a section titled “How to Obliterate the Self”:

“Many citizens set out to buy a house because of an indistinct yearning, for which an actual house was never the right solution to begin with and may only be a quick (and expensive) fix that briefly anchors and stabilizes them, never touches their deeper need, but puts them in the poorhouse anyway.”

The author connects his thesis through all of the most popular real estate programs currently on TV, even including some snarky commentary on the lead personalities on some of the shows.  From Kirsten Kemp on TLC’s “Property Ladder” to Richard Davis on A&E’s “Flip This House,” no one is safe from deconstruction.

It’s a great read and, although you may not learn anything about how to be a better real estate investor, you may learn something about yourself.

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Based on my descriptions of the Realtors I met over the course of selling my first investment property, you probably won’t be surprised to learn that I hired someone from outside the circle of agents who had already visited the house.  I’m not sure if I discussed this before, but I briefly contemplated hiring the agent who represented me during the purchase of the property.  While I had a generally favorable impression of my Realtor after closing on the purchase of my flip, this viewpoint soured quite a bit when he gave me the run-around on a flat-fee listing.  Back when I was first listing the property, I told him I’d prefer to give him the $500 to put my house in the MLS rather than hand it over to a total stranger at another agency and he said that sounded reasonable but he would have to discuss it with his boss (the named broker at his agency).  After several days of back and forth this was the final verdict: they wouldn’t do a flat fee listing, but they were willing to do a hybrid FSBO/broker setup where I wouldn’t have to pay them a commission if I found my own buyer, otherwise it would be a typical 5% commission setup if the Realtor secured a buyer.  Of course there were also a ton of disclaimers about how any buyer who originally saw the property on the MLS would fall under the 5% commission category (although I have no idea how this could be proven/enforced) and other fine print. 

I understand if flat fee listings don’t fall under their existing business model, but I didn’t appreciate all the fake interest in the idea on their part while they tried to sell me on this other fee structure.  Plus, I still don’t understand how turning down free money fits into any sane business model.  I was trying to give them $500 of immediate income (99% profit since there are no costs to adding the listing beyond the time it takes to enter the data) and they turned it down in favor of attempting to earn a 5% commission on a sale that could take several months in a slumping market.  Plus, that 5% might not even cover their expenses (advertising, mileage, open houses, man-hours spent showing the property, etc) — especially if a series of price reductions were to erode commission value as the costs pile up while the house sits on the market.

So, how did I end up choosing a Realtor to represent me after I was unable to show the property myself any longer?  In short: the Internet!  My impression of most of the Realtors that came through my property was that they had access to very few buyer clients (they kept on telling me: “You have a beautiful property, but there just aren’t any buyers right now”), so I wanted to find someone who was still kicking ass and closing lots of deals.  If I were a buyer looking to find a Realtor to show me around, I would probably start on the web and search for a successful local agent, so I used that thinking to choose a seller’s agent. 

A single Realtor kept coming up at the top of numerous Google searches for local real estate agents and, beyond her strong search engine rankings, she also had a great website with mountains of useful info and a nice marketing platform for her listings.  She seemed to have tentacles in every corner of the web, from a presence on all the major real estate search pages to a dedicated personal section on her agency’s main website to an independent portal of her own at www.[realtorname].com.  I sent an e-mail to her on her personal site and received a reply right away.  Pretty soon we were chatting over the phone and I was grilling her about the local housing market, her sales approach, her current deal volume and a host of other questions.  I was impressed with all her answers and it was a pretty easy decision to hire her.

We set an appointment to meet at my flip a few days later to sign the papers.  That was a very fateful day and I’ll share more about in my next post.

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Okay, the term “Real Estate Agent” is a mouthful, so I’m going to shorten to “Realtor” for the purposes of this post, even though I generally avoid that word because it’s apparently copyrighted by the National Association of Realtors (NAR) and generally requires that little trademark symbol to be written correctly.  That little symbol is a pain and I’m just going to capitalize the first letter and hope that suffices.

Anyway, the point of this post is to share a little bit about my interactions with Realtors over the course of the sale process.  There were generally two types of Realtors that I came into contact with over the past few months: 1) the type that actually had buyer clients who were interested in seeing my property, or 2) the type that used the pretense of previewing my property as an excuse to give the hard sell about why I should list with them.  Unfortunately, neither interaction was ever positive.  The Realtors that had shown my house to buyers were generally aloof and reluctant to discuss their clients’ reactions to the property, the neighborhood, the price, etc.  This boggled my mind since I thought they ought to be happy to be showing such a nice house with the prospect of a 3% commission.  I know that this isn’t much more than a 2.5% commission when you’re dealing with a mid-$300k property, but my impression was that times are tough for real estate agents and every dollar helps.  A friend later clued me in to the theory that Realtors are generally unhappy about representing buyers in a FSBO situation because “they have to do all the work and don’t have the benefit of another experienced real estate agent at the other side of the transaction.”  I had never considered this before, but it does seem to make sense within the traditional perception (as promoted by the NAR) of how difficult real estate transactions are.  In reality, executing the sale wasn’t difficult at all once a qualified buyer was in the picture (and I have experience on both sides of the process now), so I think the value added by Realtors in this regard is generally over-sold by those within the industry.  This discussion could easily fill several posts of its own, so I’ll just drop it for now except to say that I don’t see how there could be that much work involved as long as both sides have competent attorneys (which generally cost a fraction of what Realtors charge, I might add). 

The second type of Realtor I encountered was even worse than the first.  There were 10 or 12 agents who insisted on walking through the property with me under the guise of educating themselves about the house before showing it to their clients.  Not a single one of these Realtors ever returned with a potential buyer — they were just using the walk-through as an opportunity to convince me to sign a listing agreement with them.  This was really infuriating because once the renovations were complete I didn’t have any reason to be at the property except for when I was showing it to potential buyers or doing routine upkeep.  I wasted several afternoons on appointments that were nothing more than protracted sales pitches from hungry Realtors.

My favorite example of this strategy was when I was tag-teamed by two very colorful characters from one of the larger real estate offices in the area.  Realtor A was the charming “local” who had lived in the neighborhood for many, many years and oh my goodness she just knew every house inside and out oh la la la there’s no way I’d ever find anyone who could do a better job than her, while her partner, Realtor B, was clearly a top-producer in the office who had a lofty title and was probably there just to add clout to their pitch.  They came about six weeks after I first put my house on the market and went into an exceptionally lengthy sales pitch about their experience and talent at the end of the walk-through.  Realtor B actually had the listing agreement tucked under his arm the entire time and kept peppering me with glossy promotional materials and a variety of very cheesy lines.  They spent a great deal of time talking about how their office really kicks ass and regularly wins this award and that award blah blah blah and by this point I was ready to vomit.  They had wasted a large part of my afternoon and I was pretty ticked off when I asked: “If your office is so great and your agents sell so many homes in this neighborhood, how come not a single Realtor from your office has ever brought a potential buyer to my property?”  I opened a drawer and pulled out a stack of business cards from Realtors with other agencies at this point to emphasize how many buyers had been through the house.  Their response was that my house had been on their radar for a long time and they were just so busy with other deals that they hadn’t gotten around to this property yet.  Whatever.  I managed to be polite for a few more minutes before showing them out.

I think my original intent was to discuss how I chose the Realtor I actually ended up hiring, but this post has gotten pretty long so I’ll save that for another time.

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So what happened after the November buyers fizzled out?  Well, losing out on a good deal is never pleasant and I took this loss particularly hard.  This was the first time I had ever tried to sell a property and it was beginning to feel like an impossible feat.  The fact that this couple couldn’t get their sh*t together and close on a house that they clearly were in love with made me wonder how I was ever going to find someone with both the desire and the means to buy the house.  It was also frustrating to work with people who approach major decisions (such as buying your first home) in such a lackadaisical manner.  

Although I never took the house off the market and continued to show it sporadically while I was working with the November buyers, I didn’t market it nearly as aggressively as I otherwise would have.  One of the (many) mistakes I made was that I was (irrationally) optimistic about the ability of the November buyers to close on the house and I was lazy about responding to the requests I would get for additional information / showings from other potential buyers (whereas it never took me more than a few minutes to respond to buyer inquiries before I had the offer).  I even ignored a few inquiries from people who didn’t sound very interested or prepared.  Actually, I started ignoring quite a few inquiries after getting burned by a buyer who convinced me to set up an appointment to view the property at a very inconvenient time and then turned out to be a no-show.  I know, I know…  This is a terrible business strategy, but it’s hard to describe how terribly disillusioned I was by the average buyer’s lack of competence and seriousness.

This attitude worsened once the November buyers were out of the picture and I think I only showed the property a handful of times in December.  Fortunately, I had a trip planned for early January and there were a number buyers who were asking to see the house and could only come the week I was out of town.  This prompted me to consider hiring a real estate agent to take over the showings and inject new life into the marketing campaign.  I held real estate agents in pretty low regard by this point (mostly because of their poor manners when showing my property — leaving the door unlocked, leaving the toilet unflushed, leaving lights on, etc), so my willingness to sign a listing agreement was a good indicator of my exasperation with the sale process.  Of the scores of agents that had shown my property, I had a good impression of only two or three of them.  That made it easy to choose someone to take over the listing and I’ll share more about that in another post.

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As you may recall, I was quite happy to report that I had a full price offer on my house back in early November from the couple that had initially inquired about a lease option.  Granted, this was after I had reduced the asking price from my original pie-in-the-sky level, but it was still a number that would have generated a healthy return on investment for this flip and I would have been very pleased with the outcome if the sale actually closed.  Also, the buyers had not engaged a realtor and I would get to keep the 3% buyer’s broker commission that I had budgeted for.  Given that the house had only been on the market for about 30 days at that point, I really couldn’t have asked for a better result than what these buyers had put on the table.

I suppose this made it even more devastating when the deal fell apart.  Actually, the term “fell apart” is pretty generous since they were never really able to assemble much of a deal in the first place.  I had no doubt that they were acting in good faith all along (they were clearly infatuated with the house from the first time they saw it), but I don’t think they had a very solid grasp of the work it would take to get the loan, inspection, survey, appraisal and everything else together.  I was okay with a longer-than-usual closing process as long as I had the mortgage pre-qualification letter in my hand quickly, but this seems to be where they had the most trouble (which isn’t surprising given their disclosure about past credit problems and their need for a co-signer).  I checked in with them on a daily basis after they made their offer and was consistently disappointed by stories about the mortgage company needing unexpected documents or their loan officer being out of the office or their co-signer being out of town.  I say “stories” because I was never certain of how much progress they were actually making since I never saw any concrete evidence of the loan application process they claimed they were wading through.

We finally called the deal off after several days passed without any word from the buyers.  I tried to reach the wife at her office and was told by the receptionist that she was very ill and in the hospital.  I’m not sure if they were struggling with health problems throughout the process, but the next day I received an e-mail from them saying they would not be able to move forward with the purchase because of personal circumstances.  The offer had a mortgage contingency and I had lost hope in their ability to realistically close the deal, so I didn’t make much fuss about the withdrawal and said I hoped everything turned out okay for them.  They indicated that they still desperately wanted to buy the house and would contact me immediately if their situation changed, but by this point I was pretty glib about telling them not to bother unless they could present a pre-qual letter for the full mortgage amount at that time.

Major bummer.

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I of course have to open this post with a very sincere apology for leaving everyone hanging in suspense for so long.  It’s been over three months since I posted my last update and I realize it wasn’t fair to simply drop off the face of the earth like that, but there are a number of reasons why I quit writing in the blog so suddenly (although I doubt anyone will be fully placated by my ideas of good reasons). 

The holidays were the first major catalyst in my blogging hiatus, primarily because my family is in a rural part of the Midwest without any high-speed internet access and I simply can’t stomach using dial-up for any purpose beyond bare-necessity e-mail checking.  I spent quite a bit of time at home around Thanksgiving and Christmas because my prior Wall Street job limited my holiday visits to rushed three-day affairs and I wanted to actually spend some quality time with my family this year.  All that home cooking and the slower pace of day-to-day life back home really sapped my enthusiasm for blogging and distracted me from the flip that was languishing back in New Jersey.  I know die-hard real estate investors would never get so detached from their businesses, but I hadn’t been able to spend that much time with my family in nearly a decade so I was okay with tarnishing my work record over a long break. 
 
The second factor in my blogging absence was plain old superstition.  I hate to admit it, but I have always had a strong superstitious side that is particularly pronounced when it comes to major life events that are influenced by luck, competition or forces beyond my control.  For example, I always refused to speculate on my performance on important exams in school until I had the final grade in my hand.  This behavior was driven by the completely irrational fear that discussing the test would somehow “jinx” my results.  Even though everyone else was busily comparing notes about how ridiculous the essay section was and how Question #3 on the first page was straight out of the textbook, I was like a guilty politician dodging pre-trial interview requests from the media: No Comment.  The same goes for job interviews, first dates and poker tournaments: I’ve always thought that speculation brought bad luck and generally avoided talking about anything until the final result was written in stone.

The fact that the full-price offer on my first flip fell through right around the time I began telling my friends about the sale only reinforced this long-standing policy of not discussing anything until it is a done deal.  After that it was tough to sit down and write blog posts on any new developments when I still had the fear of “jinxing” the outcome.  Crazy, I know, but I’ve never been able to shake that kind of superstition. 

My return to blogging indicates that I’ve closed on the sale of my very first investment property, but I’ll save the details of that story for another post because I’m short on time at the moment.  I promise it won’t take three months this time.

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Good news, Fliperati readers: I received a full asking price offer on my very first real estate investment (my flip!) this weekend.  Now, everybody remain calm.  Seriously.  Please stay in your seats and do not get up until the captain has turned off the Fasten Seatbelt sign.  We all know that getting a good offer is just the beginning of what is oftentimes a very arduous closing process, and this deal definitely looks like it will have its challenges. 

***The alternate opening sentence of this post was: While the vast majority of lease-option transactions end without the property changing hands, it looks like I might have the pleasure of closing on the sale with my lease-option tenants before they even move in.*** 

That’s right – the couple that set me running around last week working on a rent-to-own deal has apparently secured a mortgage co-signer (the wife’s sister) and can now purchase the house outright.  They are clearly completely infatuated with the property (they contacted me daily last week to check-in) and will be very motivated to make the deal work, but there are obviously a lot of hurdles ahead.  They said they will need until the end of this week to get the mortgage approval ready, so I’m not even touching the contract until they can demonstrate that they will actually be able to get financing.  The good news is that they do not have a realtor and are instead relying on their attorney to walk them through the process.  He seems quite competent and I’m optimistic that the sale process will go smoothly even without realtors frenetically working both sides of the deal to make sure it closes.  Even if I have to micro-manage the process, it will be well worth it to save more than $10,000 by dodging payment of a broker’s commission. 

Beyond the financing, I’m a little concerned that they will try to nickel-and-dime me with the home inspection.  The buyers have repeatedly mentioned that the sale is contingent upon a satisfactory inspection and that their $5,000 earnest money deposit is fully refundable if they back out of the deal because of something the inspector finds.  I have been countering these comments by stating that I am still getting several calls per day about the property and will continue to show it until the deal closes.  This has also motivated me to get off my lazy post-renovation butt and take care of the stupid little things around the house that an inspector might make a fuss about.  It’s a little easier to spend time/money on the house now that there’s a possible payday in sight.  Keep your fingers crossed for me…

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So, as part of a somewhat whimsical effort to expand the universe of potential buyers for my first flip, I posted a Lease-Option / Rent-to-Own advertisement on craigslist a few weeks ago and, for whatever reason, I’ve received a number of serious inquiries about this purchase method over the past few days.  Just this afternoon I had a very long discussion with a woman who is quite passionate about the property and I’m suddenly very concerned that I may have to quickly educate myself about this strategy to avoid missing out on a good thing.  I understand the basics, but I’m not even remotely prepared to process a serious applicant and fine tune the example price/terms I advertised on craigslist.  Fortunately, my attorney is well-versed in lease-option transactions and would be able to work through all the legal issues with me.  I’m more concerned about issues such as tenant screening and the financials behind the deal (how big an option payment should I request?  what portion of the monthly rent should be applicable to the final purchase price?  how much will insurance cost me?  what implications does this have for my current mortgage?  will I need to refinance?  what do I look for in a lease-option tenant?).

Any thoughts from Fliperati readers or other bloggers are welcome.  Shaun?  Steve?  FiveMZNYC?  Trisha?  Have any of you ever used a lease-option strategy to sell a property?

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My property was enjoying one or two realtor showings per day over the past week and a half while I was out of town visiting family.  I was very pleased to find a healthy stack of business cards on the counter when I went to check on the house and get the boiler fired up for the first time this season.  I started calling all the agents who brought clients to the property to get some feedback and find out if there was anything I could do to encourage a sale.  Disappointingly, the vast majority of the realtors said they could not specifically recall showing my house and, consequently, could not provide any details about how their clients reacted to it.  This was not encouraging because it indicated that the house was not making much of an impression on prospective buyers or their realtors.

One agent, however, was quite happy to hear from me and she quickly shared the news that my property was tied for first place with another home that her clients were interested in.  A married couple had apparently taken quite a shine to my house and were in the latter half of a two-day “thinking about it” period.  The wife was particularly enamored with the kitchen (yes!) and the husband liked the entire property except for the basement stairs, which he described as much too narrow for regular access to the finished basement.  This must have been a very serious concern on his part because the realtor said it could be the tipping point in their evaluation of the two properties they were choosing between.  I quickly offered the services of my contractor in evaluating options for widening the stairs (seemed like it would be a fairly simple job to open up the wall enclosing the basement stairs and putting a railing in) and I even said I could arrange to have the upgrade completed before closing if they put a strong offer on the table.

Well, they did come back with an offer, but it was definitely not a strong one in my opinion.  Their offer price was $25,000 below my (fair by any standard) asking price and made no mention of the basement stairs.  In presenting the details of the offer, their agent told me they were extremely well-qualified in terms of their income, credit scores and cash available for down payment (more than 20%) and they would close quickly without asking for any seller concessions.  That’s all well and good, but it did not impress me enough to warrant taking a loss on this flip (I didn’t agonize over the numbers, but a rough calculation showed the broker’s commission at this price level putting me into negative territory).  I hope I don’t come to regret this dismissal because I have a feeling these people won’t be coming back to renegotiate, especially if there really is another house that they are equally fond of.  I have a healthy number of showings scheduled for this week – many of which are with unrepresented buyers (read: no realtor commission to pay), but I may be struck with remorse for my lack of tact with this offer (I didn’t even bother presenting a counter-offer) if all my upcoming appointments turn out to be duds.

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That’s right – I’ve gotten a significantly larger number of inquiries about my flip house since I replaced the lackluster yard sign from the flat fee broker with a simple red “For Sale by Owner” sign.  The addition of a “<-- House for Sale” arrow on the corner probably had an impact as well.  While I was averaging 0 – 1 calls per day before the sign change, I received two calls yesterday and seven calls today under the new signage!  Unfortunately, four of today’s callers were only interested in two-family properties (they all remarked that the house looks big from the outside, which I find peculiar because it looks very modest-sized to me), but the other three sounded very interested and will be viewing the property within the next week.  I’m keeping my fingers crossed that this new pace of interest keeps up, but I’m guessing things will slow down again when all the regular local drivers get used to the new signs.

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