Excellent piece

1.  Overpriced;
2.  Bad Curb Appeal;
3.  Ineffective Marketing;
4. Interior Clutter;
5.  Undesirable Location.

All very true and accurate reasons that homes don’t sell. Personally the fatal flaw I see repeated too often is overpricing the initial listing and then really never being able to catch-up. I can think of 2 clients of ours currently, an Estate of deceased person and a post-divorce scenario, where more than one person told these clients that the property’s over-priced but some people just don’t listen (I just mailed copies of this article to these 2 clients). That initial 4-6 weeks on the market is the hot time to make a sale…aggressively dropping the price after the initial pricing error is often too little too late.

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Yep, we’re tweaking what we do here towards a dating model. Real estate is one of the last dating niches for a Website no? Could be big money! Well, perhaps I’ll let that idea get snapped-up by someone else and I’m happily married so…

But relationships are VERY IMPORTANT to real estate transactions and I’m constantly amazed that they’re not cultivated better. Why? Because it’s flat-out in everyone’s best interest that the different players in a real estate transaction get along and work well together. Because with minimal exceptions, everyone has the same end goal so why not just make it easier to reach the finish line?

I suppose the explanation for friction within a real estate transaction is in parts related to the sinful nature of man and also the egotistical (yet wrong-headed) need of attorneys or agents to appear “aggressive” but generally it’s unnecessary and foolish. Creating a great working relationship with opposing counsel or the agents/mortgage professional can be the difference between closing and not closing and may literally mean hundreds of thousands of dollars. Here are some recent examples I’ve experienced where a good real estate relationship was critical:

Earnest Money Return. Within every transaction exists the fairly good possibility that it won’t close and that a Buyer will be asking for his earnest money back. And if you’ve been in the business long enough you’ve had a deal or two where the earnest money release wasn’t easy and perhaps never happened. And the issues are rarely substantive, they usually boil down to one party thinking the other is a jerk. I can think of 2 deals in the last 6 months or so that didn’t close and fortunately in both cases where my client was the Buyer, the earnest money did get returned EVENTUALLY. But there was quite a bit of time differential…like 1 day vs. 1-2 months. In the “1 day” deal, there weren’t agents on both sides so it was me and the Seller’s attorney. I didn’t love the guy but we communicated well and when the deal died the money was returned promptly. In the “1-2 month” deal, the two agents were absolutely dysfunctional. I don’t know who was the problem but lets just say that the listing agent would call my office because he and the Buyer’s agent could not work together whatsoever. I felt fortunate the earnest money was ever released.

The Unexpected Post-Closing Holdover. Meaning, the unexpected need for a Seller rent-back a unit/home post-closing or to simply delay the closing due to unforeseen circumstances. Again, this possibility exists in every transaction, and it’s no big deal, UNLESS, the parties simply are unreasonable and can’t work together. I just represented a Seller who had to holdover where actually his purchase contract fell apart pretty much simultaneously with when the sale offer came in. But on the sale everyone liked each other and was extremely professional, my Seller client stayed-over nearly 1 month, he left the unit in good shape, everyone’s friends and he got his full $5,000 security deposit escrow returned.

A Deal That Doesn’t Close PERIOD without Mutual Trust, Goodwill. These don’t come along all that often but maybe once a year and you as a good lawyer or real estate agent really earn your fees because in these deals you can save your client hundreds of thousands of dollars…i.e., the relationship between the parties is excellent or the deal doesn’t close! Earlier this year I had a transaction without any real estate agents on either side so it was pretty imperative that clients/attorneys worked well together even if it were a vanilla transaction. So for starters the clients put together the contract between the two of them and worked out a repair credit. Then the appraisal came in a bit low so the price and credit adjustments had to occur. There was excellent communication between the clients. My clients were actually the heirs of an estate selling this home and weren’t local so even for the walk-thru I met the Buyer at a CTA “L” stop on my way downtown the morning of the closing and gave him the keys to the place to do a walk-thru (glad the home didn’t get burned down before the afternoon closing). But what options did we have? And finally, the big kahuna, at the closing the Buyer’s lender wouldn’t let a fairly sizable closing cost credit show on the HUD-1 and a little side deal had to occur or the closing would not. The kind of side deal that’s not in writing and likely not enforceable at all but there was trust between the parties and the side deal occurred and the deal closed.

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We all know that the real estate market remains soft with Sellers outnumbering Buyers and although buying activity is improving, prices have yet to stabilize. That remains the “macro” economic picture but within the 45-60 days in a specific real estate transaction the leverage between a Buyer and Seller evolves over the course of the transaction.

I closed a transaction today on behalf of my Seller client today that exemplifies this “leverage evolution” quite well.

MAIN POINT: Although the Buyer has most of the leverage early in a transaction during the attorney review period regarding contract modifications and repair issues, the Buyer’s leverage advantage lessens considerably the more he becomes invested in the transaction and the closer he gets to the closing…think about a Buyer’s $$$/time investment in a deal as it rolls forward.

These days when I represent a Buyer, I take the position that up front in the attorney review period and certainly in dealing professional inspection issues my position as attorney is to unabashedly try to squeeze the Seller for every last penny. Why? I want to shape the transaction in a way that’s most beneficial to my client. And it’s usually pretty doable because during the first week of a transaction the Buyer has a big leverage advantage. The Seller likely has been waiting for weeks for an offer and might be struggling financially. Meanwhile the Buyer has literally hundreds of backup properties and at this stage the Buyer has made some time investment in putting together an offer but the $350 or so for the home inspection is probably his only monetary investment. So, if the Seller balks at Buyer’s upfront requests, many Buyer’s would simply walk away.

But when ya get to the closing table, the leverage has balanced out. That’s the scenario I faced at today’s sale.

The Buyer’s did a morning walk-thru and raised a couple of extremely minor repair issues when they got to the closing. I questioned the issues primarily because the property being sold had been unused for the month or so between contract signing and closing so any problems had to have existed the day the contract was entered into. Then the Buyer’s proceeded to produce an alleged home inspection that was actually for another property address. My strong opinion was that the Buyer’s were merely trying to squeeze a couple hundred bucks out of a Seller who was already giving the Buyers a good deal. I wasn’t going to give an inch. And here’s why…

Because once the Buyer’s are at the closing table they’ve got a LOT invested in a transaction and it’s tough to walk away. For example, today and generally by the time you’re at closing a typical Buyer will have spent $350 on an inspection and some $400+ for various lender charges like application, credit check, and appraisal fees. Additionally, they’ve often made irreversible plans with movers and may have a hard deadline to vacate a current rental property. Today I knew for a fact that the Buyer’s had a lease ending in 5 days. And you add to that a Buyer’s real estate agent and attorney expecting to see some $$$ once the transaction closes and those Buyer’s have a good deal of pressure to get the deal closed versus breaching a contract and walking away for some bogus $200 repair credit.

I didn’t budge and (no surprise) the deal closed.

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Just last week I worked with some Sellers and there was a $12,000 Buyer’s closing credit in the deal. However, since Buyer’s were using an FHA loan they had to put at least 3.5% of the purchase price into the deal. So, Buyer’s couldn’t get full credit for the $12k at closing and more importantly their bottom-line thus needed to be about $9,000 cash to close versus $1,500 cash to close. Needless to say, Buyer’s attorney hadn’t prepared them for this eventuality. Miraculously this deal closed because the Buyer’s could bring in extra dollars.

But, if I’m those Buyers my summary recollection for my first home purchase is, “remember that sloppy attorney who was $8,000 off in his estimate of funds to bring to closing.” Nope, I’m not recommending him to anyone else.

In conclusion this is a thoroughness issue. The day before the closing you’ve got to review the file…contract, attorney review letters, title charges…simply know the numbers and advise your client accordingly.

YOU WANT YOUR CLIENTS TO REMEMBER YOU…BUT FOR THE RIGHT REASONS!

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Home Buyer (11/6/09 version) Tax Credit:  10 Things to Know. I sometimes call myself a real estate lawyer but have been admittedly slow in getting up to speed on the revised tax credit…I do get to celebrate a few holidays, no? For my money the big change is the $6,500 credit to home buyers who have previously used the same home as principal residence for at least 5 of the last 8 years. Also note that military members on extended duty outside the U.S. have until 4/30/11 (a year beyond the rest of us) to take advantage of the credit. For the most part, the “first time” homebuyer part of the credit remains the same expiring 4/30/10 (or 6/30/10 for properties under contract by 4/30/10).

Here and Here are 2 somewhat complimentary stories on the success/not of the Making Home Affordable program…one a more national and the other more Illinois focused. On the upside, mortgage loans ARE now being modified (the lack of modification efforts used to be a favorite rant of mine). But, at least in Illinois only 7% of the modifications are permanent. So, does the program simply serve to lengthen the housing crisis by giving false hope to homeowners who in the end won’t be able to afford their homes in the end regardless??

Don’t Buy a House–Yet. I think the op-ed makes a compelling argument…namely, real estate prices likely haven’t hit bottom and the market’s recovery will be agonizingly slow so what’s the rush? Foreclosure rates remain near their high and banks haven’t even fully released all of their inventory onto the market and the unemployment rate is going to remain around 10% through the end of this year…those are facts.

Town house or condo. The difference isn’t always so obvious. Usually the townhomes are multi-story with the small front/backyard that you actually own whereas a condo is a self-contained unit on a single floor and the rest of the building is commonly owned. But it’s not always so stark…legally look at the declaration, a condo must use “condominium” is the legal title of the association and of course the Illinois Condominium Property Act governs condos but only section 18.5 governs town homes.

And lastly…

Debtor’s Dilemma:  Pay the Mortgage or Walk Away. A fairly lengthy piece from the Journal focusing on people who CAN afford to pay their mortgage loans but are choosing not to based on the property’s plummeting value. Hard for me to empathize too much with these people…I think this debate is centered in futile, American vanity. Namely the focus on your home’s value…if you’re like what 75% of people who aren’t planning on relocating, you needn’t/shouldn’t care if your home value has dropped. Banks aren’t offering lines-of-credit anymore anyways. Sit back, take that mortgage interest deduction, and enjoy the view.

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I’m bothered a tad when someone asks me to represent them at their real estate closing but particularly when I hear attorney colleagues use that as an expression of residential real estate representation. It diminishes the practice and if that’s all you are doing then you’re not representing your clients very well. I view my representation of people buying and selling residential real estate as a 4-part process:

1.  Initial contract review, attorney modification and inspection negotiation.
2.  Mortgage/title clearance monitoring.
3.  Closing.
4.  Deed recording & title insurance follow-up, post-closing escrow releases, and final client correspondence.

And I think I’m particularly annoyed by the expression because it de-emphasizes the importance of what an attorney is doing pre-closing and to ASSUME that a contract will close and everyone will live happily ever after is stupid! Here’s the recent war story, short and sweet…

A long-term client recently asked me to look at her son’s file regarding a problem getting his earnest money back after a failed real estate deal (he was the prospective buyer). And the lawyer he used seemed to have been writing the proper letters and the client appeared to not be at fault. He wanted to get out of the contract based on various legitimate inspection and mortgage contingency reasons.

Yet I saw 2 BIG things I didn’t like:

1.  Buyer’s attorney letters are never “accepted” by Seller’s attorney. Have an assistant follow-up on these after a day or two if you’re asking for a mortgage contingency extension or whatever. This file I was reviewing contained at least 5 extension requests but none are accepted by the Sellers attorney…that’s at a minimum a serious communication problem.

2.  You must keep proof of service/notice of your letters. This was the true shocker when reviewing this file. This law firm only kept its fax confirmation pages for two months. So now this client is considering options to get his earnest money back, including litigation, and yet he’s going to have a serious problem proving proof of proper notice. Send your letter, printout and staple your fax confirmation page to the letter, and file. Simple.

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Case-in-point, we’ve been working with some buyers over the last several months who had entered into a contract regarding a transaction that they knew up front was a short sale and I surely counseled them up front that this deal may take several months to close or it may not close. Fast forward 2-3 months and clients are getting a bit nervous that the deal may not close prior to Uncle Sam’s November 30, 2009 bewitching hour and they start considering other properties.

Well, Buyer’s find another property, want to kill the ‘short sale’ deal, and put in an offer on the “new” property. We send letter over to Seller’s lawyer on the short sale to null/void the contract and suddenly are told that first mortgage has approved the short sale and are given written proof of said approval and they’re just waiting for approval by the second mortgage-holder (what was worse was that my office had followed-up within the last couple weeks and we were told specifically Seller was still negotiating). So we may have just been getting the run around.

But the moral of the story is that particularly on the Seller’s side, you need to communicate the status of the lender negotiations to the Buyer or the Buyer’s eyes may start to wander. A quick e-mail or fax every 3ish weeks doesn’t take too much time. And it might keep that Buyer interested and save a Seller the ramifications of foreclosure.

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What’s the sweet spot in terms of $$ when negotiating fairly straight forward deals like the above?

Generally I think Seller should be willing to compromise up to the amount of his total monthly expenses that she pays each month for the property that she’s selling. In other words, add up mortgage liability, condo assessment, property taxes, utilities, insurance, ect. Say that total is $2,000. I’d suggest that Seller should be willing to deal up to that amount in order to get a deal closed with the current buyer. Probably even more in a soft market, but I think that’s a good, easy guide for finding the “sweet spot” needed to get a deal closed.

My reasoning is that even if there is a backup buyer ready to step in, by the time you play with the first buyer’s attorney review period for 10-14 days, kill the deal, then second buyer has 10-14 days in attorney review…a month is eaten up and closing is delayed approximately a month. Thus the one month’s expenses as a simple barometer. And this likely even leans optimistic for Seller.

Are you really ever certain that there’s another offer out there?

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Honestly, very minimal substantive changes save one.  Some changes in 5.0 to be aware of:

9. Attorney Review. 5.0 includes a new paragraph where a party to the contract can propose “suggested changes” to the deal which are different than “modifications” which would constitute a counter-offer. If the “suggested changes” are not agreed upon the underlying contract remains in effect. At the moment I can’t see myself making any use of these “suggested changes.” If I’m suggesting a contract modification it’s because there’s something important at stake, if there’s nothing at stake I’m not proposing any changes (modification or suggested changes).

10. Professional Inspections. 5.0 softens the “automatic kill” provisions contained in 4.0. Now you “may” kill a deal if there’s no agreement regarding inspection issues within 10 days whereas 4.0 declared deal “null and void” if no agreement within 10 days.

11. Mortgage Contingency. 5.0 includes a blank to add a loan amount in the % of purchase price whereas 4.0 had a blank to list an actual dollar value. The reality was that real estate agents were nearly always putting in a % regardless of what the contract form directed.

21. Seller’s Representations. 5.0 expands this listing to include a list of 9 Seller representations AND it state’s specifically that these representations “shall survive the closing.” This could have impact if you get a Seller who lied in the contract. Under 4.0 this sort of thing may have “merged” into the deed (i.e. not survived the closing).

27. Notice. The language regarding e-mail notice is modified to provide for opting out of receiving e-mail notice. Of course 5.0 also says flat-out that if party of party’s attorney provides their e-mail then he can get notice via e-mail unless he opts out. Likely a non-issue…as convenient as e-mail is I don’t know of many attorney’s who use it for formal notice matters under contracts.

Take a look at some of the IRELA breakdowns I reference above if you want to see a comparison of EVERY change. My list was just what I thought were the semi-significant changes. Quite honestly the changes are non-substantial enough that one might question if the new version was necessary or surely the timing of the redo.

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Here’s the case, Anderson v. Klasek, No. 5-07-0390…sort of your typical suit brought under the Residential Real Property Disclosure Act, et al, where home buyer sues seller and listing agent. The plaintiff/buyers brought separate counts under the Residential Real Property Disclosure Act, the Real Estate License Act, and the Consumer Fraud Act.

Since all of these Acts are not based on the common law and a jury right is not set forth within them, there’s no right to a jury trial said 5th District Appellate court. So, Plaintiff gets a second chance…read the case, I don’t like his chances anyways.

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