Evan Ridley\’s Blog

Open houses simply don’t sell homes.  In fact, to prove my point, I like to use statistics.  According to NAR (National  Association  of Realtors), 1% percent of Open Houses sell.  So, yes it is true that miracles do happen.  They’ve happened in the past to the tune of 1% and I’m sure they will continue to happen in the future at…1% give or take.  Do you really want to spend your valuable time sitting in an open house with your fingers crossed hoping that you will witness a miracle?  I sure don’t.  Since I started in this  business  I have been  criticized  by both brokers, agents, and sellers on my concept of open houses.  It has been very interesting to hear the debate from both sides of the table.  Needless to say, I am still not a fan.  Having held my fair share of open houses when I was getting started in the business I can honestly say I am speaking from experience.  I don’t know about you, but 1% amounts to a great waste of time for me ranking it right up there with floor days. Ill have to address floor days as another topic in a different blog.  I believe activities like open houses and floor days lends itself to the fact that nearly 88% all all new agents will no longer be selling real estate a year from now.  If you take a look at another statistic from NAR, you will find that the average gross  commission  earned by an agent is $63,000.  If you take into account that average agent statistically works an average of fifty hours a week their average gross income earned per hour is roughly $24. Of course, this doesn’t account for self-employment taxes and income taxes generally reducing that in half.  Thank you Uncle Sam.  Also, we have to consider most agents pay their brokers 30-40% of their GROSS commission earned not to mention expenses like advertising, E&O insurance, gas, etc.  My point is we simply cant afford to wait for a miracle making $7-8 an hour can we?  So, what kindof people come to the open house?  For starters, for the first few weeks of open houses it will primarily consist of the curious neighbor.  In addition, you will find those who are looking to sell their house, and then those who are looking to buy one.  Now, for the REAL REASON you hold open houses.  I believe open houses are a decent way of generating leads-not selling homes.  All you have to do is find out which category to lump your visitor in and ask the right questions.  Now, lets pretend you are a buyer.  You are very motivated.  You are even pre-approved with your local bank (by the way, its a good idea to ONLY work with these types of buyers).  My question is: are you going to drive endlessly around neighborhoods all over town checking out every open house hoping it not only fits your needs and budget or are you going to call a real estate agent saving you valuable time?  Thats right.  You are going to do the ladder.  By the way, none of which involves a buyer going to open houses.  That is unless their agent tells them to check out houses on their own time to which typically means they have an broker/buyer agency agreement.  Not a good lead.  So, we have the open house that is good for agents as long as they know how to effectively work their leads.  And two, what are the odds that you’ll find your dream at a Sunday open house? What is the likelihood that your home will sell at an open house? 1%!  As agents we need to be better at this whole concept.  The majority of $7 an hour agents and sellers out there will think they had a successful open house based  solely  by the number of people who walked through the home.  That is a horrible perspective.  In fact, thats the mentality of 100% of a FSBO’s.  This happens because we don’t put the price of the home in the paper, we leave out every major detail and are way to obsessed with the element of surprise.  This leads to illegitimate buyers, that are not well-qualified for the house in question.  This makes the biggest beneficiary of the public open house the agent hands down.

For those of you who enjoy reading  The New York Times I thought it might be of interest to recall  this column from a few years back.  

September 30, 1999

Fannie Mae Eases Credit To Aid Mortgage Lending

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people  and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

”Fannie Mae has expanded home ownership for millions of families in the 1990′s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending,  Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980′s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute.  ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

Under Fannie Mae’s pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 — a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990′s. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University’s Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

The real estate industry at large is becoming more and more trigger happy with  commission  cutting.  This practice is, at best, not good.  Literally, it is hurting every aspect of every real estate transaction.  It has a negative impact on the selling agent, the listing agent, the seller, the buyer, and the broker.  At the end of the day it affects YOU, the agent, the most.  We are in the middle of a real estate recession throughout most of our country, yet we still insist on doing the very opposite of what we should.  We have  declining  prices, tighter credit requirements, longer days on market, more marketing dollars and valuable time spent and when we finally go to closing our checks are shrinking while our expenses and time are increasing.  So, I ask you; In what other business does this make economical sense?  Now, I realize I cannot speak to every agent in every marketplace out there because there may be no way  around  it, but, locally when an agent cuts his or her commission just to get a deal it is a huge sign of weakness and desperation.  Period.  Why weak?  Well, lets play a little be honest.  There is not a real estate agent out there who couldn’t convince a seller to list their house at 3-4 or even 5%.  This takes no skills, and ultimately presents no real value to the seller except their bottom line COULD potentially increase. I’ll touch on why I mention COULD later.  Why Desperation?  Well, these agents don’t have any self confidence and probably couldn’t do it any other way.  If an agent is willing to list a property at a lower commission just to get the listing, imagine what that agent will do with the sellers listing price just to get the deal done.  By doing this you are not only a non professional, but I’ll say this again, you are hurting everyone else.  Sellers need to be aware that the commissions that they pay are in direct proportion to the services they receive.  As far as I am aware most agents are  strictly  commission based.  The harsh reality of how we make a living is that most agents do the exact opposite of what is ethical and right and put their own paycheck before  fulfilling  their fiduciary duties of “care”.  By the way, that means putting the interests of your client above any one  else’s  including your own.  We all know that the commission offered has a big decision on whether or not we show our clients a particular property or not.  As commission only agents why would we encourage an buyer to look at a property that is offering a 2% commission when we can look a little further and show them another home offering 3%?  Unfortunately, for our sellers who think they are getting a good deal aren’t getting their home shown. Unfortunately, for our buyers they aren’t getting an opportunity to look at every property that meets their  criteria  and therefore should be introduced to. Unfortunately, the listing agent isn’t getting paid because they were more concerned about having their name and probably large picture for all of their town America to see. Its EGO and its huge in this business for whatever reason. Unfortunately, Brokers and their “good company name” are getting weathered along with the property.  When commission cutting is done everyone becomes a loser.  If an offer finally comes to fruition, the seller who already had weak representation and most likely not a fair chance and full price or market price still has a desperate agent who will want the deal to close at all costs.  Guess what?  The seller loses twice here.  
Now to be fair, more often than not a seller will ask you to reduce your commission.  Your answer then should simply be “No, any other questions?” Everyone, including myself, appreciates a good deal.  But, if you have a strong marketing plan in place, good strong answers to their objections and a true sense of your own net worth as a real estate professional you should be fine.  Remember, if you reduce your commission you just lost a  negotiation.  You-a so called professional against someone who is hiring you to get them the maximum price for their home in the quickest amount of time possible.  Now, if you absolutely want to reduce your commission don’t deal in full points.  Do a quarter or half percentage.  For example, “Mr. and Mrs. Seller, I cant afford to do what I do as an agent to get your home sold at 5%. The best I have done is 5.5% in the past.”  Then close or do whatever it is you do to get the listing signed.  
My favorite thing to do is to say, “Mr. and Mrs. Seller there is no way I can do this.  Absolutely not.”  Then be silent.  If they don’t say “Okay” then pull out a dollar from your pocket.  Rip 30 or 40 percent or whatever it is you pay your broker and say, “When I collect a commission my broker will take 30 or 40 percent from my check right away.”  Then, rip another 40 percent or so for taxes.  Explain you are self employed and have to pay that 15% on top of your regular income tax bracket.  Start ripping it away for expenses like marketing, your time, everything you have to do that costs money.  Finally, when there is barely anything left to hang onto say, “Now, Mr. and Mrs. Seller what is it exactly that you want me to cut?”  It works really well a lot of the time.  
There are plenty of ways to negotiate  commissions  in favorable territory.  If anyone asks you if commissions are negotiable you of course have to say yes they are.  We start at 6 but it could be 7, 7.5, 8…I could keep going so just tell me when you want to stop.  (make sure you are smiling and chuckling at the same time).  So, there are only a few ways a seller would actually ask you to cut your commission but dozens of ways to convince them its not in their interest.  Let’s get these weak agents out of our business and start earning the money we deserve.

Donald Trump, one of the most famous and even more successful real estate investors/developers of our time once said, “Raising money, whether its derived from investors, family, friends, or borrowed from commercial lenders, is one of the most crucial elements in any real estate transaction.”  I would like to add to that by saying the the utilization of borrowed money can serve many purposes:  First, it creates more leverage, thus enabling you to purchase much more, often 20 or 30 times more than you can have with an all cash investment; it reduces your equity exposure which is essential in declining or troubling times such as the one we are currently in.  Also, and this is one of my favorites, the interest payments on the loan provide a substantial tax deduction.To put this all in the proper perspective, I’de like to ask you a question.  No, this isn’t a trick question!  How many dollars’ worth of stock can you buy with $100,000 cash?  The answer is quite simply, $100,000 worth of stocks.  To be completely fair to both sides I guess you could buy on a margin but thats more complicated than I want to get into here.  If you do already know what “margin” is you probably also know then that you can only leverage a limited number of stocks for a max of about 30 percent of the value.  So, again in almost every stock purchasing  scenario, you can only buy what you have.  Now, if you were to take that same $100,000 and invest in into real estate your options really are plentiful.  You could buy a $200,000 property and mortgage the other half.  You could buy a $500,000 property and take out a mortgage for the remaining 80%.  Since your getting the point you have probably come to the realization you can get a $1,000,000 property by taking on a 90% mortgage.  For those conservative non-risk takers out there let me explain something before we move on.  Lets assume your “investment” property whether it be multi-family, commercial, etc. is only realizing a nominal 8 percent interest per annum, that would be $72,000 a year in passive income.  In most cases that would more than cover your mortgage on the 90,000 outstanding principal and interest payments.  Lets not forget that you have an asset worth $1 million dollars!  So, the point is that when you buy “risky” stocks its up to you.  If you want to invest in real estate you have banks and private investors literally taking you out to lunch begging for your business.  Think about it.  I bet you have never seen a sign or advertisement saying they are willing lend money on things such as stocks, paintings, mutual funds, etc. The advantage of leverage should be pretty clear now.  In the above  scenario  lets assume both investment vehicles each earned 10% in the first year.  Your stocks would have gone to $110,000.  A profit of $10,000.  Your $1,000,000 property would have gone from $1 million to $1.1 million, a profit of $100,000.  That is a 100% return on your investment.  Now, lets say you want to extract your profits or gains. If you chose to put your money in the stock market you would then have to sell $10,000 worth of stock and of course pay Capital Gains on your profits.  This can become very counterproductive very quick.  In the property you could simply refinance, take your cash out and go do it all over again WITHOUT PAYING TAXES. Why?  Because you are borrowing your “equity” from the property.  Since its not considered income you would not be taxed.  Since you didn’t sell your income producing property there will be no talk of capital gains taxes.  This of course can get complicated and thats the reason for the blog.  I hope you all find this to be useful and informative.  If you have any questions please feel free to e-mail me personally at evanjridley@live.com.

Welcome to Evan Ridley’s Blog! This blog will provide you with valuable information, tips, and general insight into the real estate market in Casper.