By Dan Provost
Every potential real estate transaction is fraught with challenges, from unrealistic pricing expectations from sellers to incorrectly filled-out forms to short sales that blow up when banks refuse offers that are too far below fair market value.
But even the trickiest deals can be managed. Agents can avoid most of the problems mentioned by communicating openly with their clients and by paying attention to even the most minor of details during the real estate transaction.
Here are some strategies for avoiding the most common pitfalls during the sales process.
Creating realistic sellers
The latest numbers from the Illinois Association of Realtors show that the median sales price of existing homes in the city of Chicago stood at $177,500 this February. That’s actually up a bit – 0.6 percent – from the same month one year earlier. But it’s a far cry from the median sales prices that sellers enjoyed during the boom times in 2004, 2005 and the first half of 2006.
Realtors, then, face a daunting task whenever they take on new listings: they have to create realistic price expectations for their sellers.
Many sellers today still believe that they can fetch higher-than-average prices for their own residences, despite the drumbeat of news stories detailing the fall in housing prices.
Anne Donnelly, an agent in the Evanston office of @properties, deals with this reality often. She helps resolve the problem by providing as much information about her sellers’ specific markets as possible.
“Sellers hear the national news. They hear about what is going on in Florida and Nevada,” Donnelly said. “What we have to do, though, is drill down. We have to be specific for their neighborhood, their property, their condo building and their condo specifically. You start wide and drill down to their specific case.”
In other words, Donnelly has to tell potential seller clients exactly what price the condo across the hall fetched when it sold two months ago. She has to tell her potential clients that the average selling prices in their neighborhood have fallen dramatically because of the high number of foreclosure sales in the area.
And she has to be honest: she has to tell her clients exactly what price she thinks their residences can fetch in today’s market.
This honest approach might mean losing a listing.
This happened in Evanston in 2009. Donnelly went on a listing presentation. She won over the sellers of the residence. And she suggested an initial asking price of $849,000, one that she based on recent sales and current market conditions.
The problem? Another agent called the sellers and suggested that they could nab $1 million for the property. Donnelly didn’t budge from her sales price, and the seller went with the other agent.
Donnelly then watched as the listing fell from $1 million to $949,000, $895,000 and $849,000. After seven months, the residence sold for $829,000. During the more than half a year that the residence sat on the market, the owner had to make mortgage payments, pay utility bills and cover the costs of landscaping and snow-removal services. If the seller had listed the residence at Donnelly’s suggested asking price, the home might have sold far more quickly.
“We are not afraid to lose a listing based on the prices we suggest,” Donnelly said. “Even in this market, some agents are still giving sellers false hope. Whether it’s based on the fact that they want to get the listing or that they have a lack of understanding about the market, this happens all the time.”
Donnelly’s listing presentations often last two-and-a-half hours. Donnelly spends much of this time covering recent sales activity. She also provides a detailed explanation of how she arrived at her suggested asking price. The goal is to show sellers that there are valid, data-based reasons for this figure.
“We have been on listing presentations in which people cry after hearing our numbers,” Donnelly said. “But all we can offer sellers, in addition to our marketing expertise and research, is our honesty. That’s the best thing we can bring to our sellers.”
Read “Keeping it Legal,” this cover story’s sidebar
Master the short sale
As home values continue to fall, short sales – in which banks agree to accept an offer for less money than what owners owe on their mortgage loans – are making up an ever-growing percentage of home sales.
The only sales that Nicole Fabiano handles are short sales. She’s the founder and lead negotiator of Chicago’s Home Solutions, Inc., a company that specializes in these transactions.
Short sales can trip up agents and sellers. The most frequent problem: the sellers accept an offer from buyers that is simply too low. The banks then refuse to accept it. This frustrates both the buyer and seller in the transaction, and makes the real estate agents involved seem awfully unprofessional.
The key to a successful short sale is research, Fabiano says. Agents have to study market conditions and comparable sales, just as they would with any type of transaction; listing agents must price even a short sale at fair market value, she says.
“The banks aren’t going to take just any offer on a short sale,” she said.
Fabiano follows a formula: she’ll set the initial asking price at fair market value. She’ll then wait two to three weeks. If that price doesn’t generate any solid offers, she’ll lower the price.
She’ll retain this schedule until the home sells, reducing the asking price every two to three weeks, depending on interest and the number of showings the home generates.
Using this method, Fabiano says, she usually nabs offers within the first 30 to 40 days.
Sellers then have to wait to hear back from their lenders on whether the offer is acceptable. Fabiano has some good news to report on this: banks are responding much more quickly today. She says she usually hears a “yes” or “no” within 30 to 45 days.
“Banks have come a long way from where they once were,” Fabiano said. “It’s a world of difference working with them today than it was a year ago.”
Besides pricing, communication is also essential for a successful short sale, Fabiano said. And that starts between agents and their clients. Those working with sellers need to explain clearly how the process works, that their banks won’t accept all offers, and that the house still has to sell for a price in line with the rest of the local real estate market.
Agents working with buyers have to make it clear to their clients that they can’t come in with a ridiculously low offer just because they’re working with a short sale. They also have to explain that the short-sale process can take longer to finalize, Fabiano said.
“The biggest thing I’ve seen agents not do is set the right expectations for buyers and sellers,” she said. “That’s the reason we have been so successful. We set the right expectations from the beginning of the process.”
Read our “How to Avoid Condo Board/HOA Nightmares” sidebar
Handling the Mountain of Paperwork
It’s little wonder that buyers and sellers leave the closing table with sore wrists: By the time they’ve closed their transactions, they’ve signed a mountain of disclosure forms, agreements and sales documents.
All that paperwork can mean problems for agents. After all, they must make sure that these forms are filled out properly. If they fail at this, a deal can be scuttled.
Jack Persin, managing broker of Ryan Hill Realty in Naperville, understands the chills that certain forms give agents. But he also brings good news: completing these forms properly rarely requires anything more than a bit of common sense and communication.
The first form that trips up many agents is the Agency Disclosure form. Too many agents, Persin says, fail to properly explain the different types of representation that they can provide to their clients. Other agents forget to include a signed copy of this form in their files, something that can haunt them if their relationship with their clients deteriorates in the future.
When agents ask their clients to sign this form, it’s important for them to explain, in depth, the differences between designated agency – when Realtors act solely as a buyer’s agent or seller’s agent – and dual agency, in which they can represent both the buyer and seller on the same property.
Persin also recommends that agents present their seller clients with a Seller’s Estimated Net Sheet, a form that estimates the funds that sellers will have at their disposal once their residence sells. This form, and the discussions that agents need to have with their clients when they present it, can help avoid financial surprises in the future.
Realtors can only create accurate Seller’s Estimated Net Sheets, though, if they have a frank and honest conversation with their sellers. Not only do they have to explain all the costs involved in selling a home, but they also have to convince their sellers to be forthcoming about everything that they owe on their homes.
Persin has seen sellers hesitate to disclose to their agents that they have a second mortgage on their homes. This then comes up late in the process, when it can scuttle deals. There are times when the information rearranges the finances of a deal so dramatically that traditional home sales suddenly become short sales. This, of course, can leave even the most prepared of agents scrambling.
“It’s so important that sellers be open in their discussions on what they owe on their homes,” Persin said. “Agents often find out that sellers are not as transparent as they’d like them to be. Often, the sellers are in denial about how bad their situations are.”
It might be uncomfortable for agents to probe deep into their sellers’ finances. But it’s best to risk an awkward moment or two, Persin says, especially if it can lead to a smoother transaction.
These two forms sometimes cause problems. But the one form that causes the most heartache for agents, according to Persin, is the Exclusive Buyer Agency Listing Agreement.
The problem? They worry that buyers will hesitate to work with them if they force them to sign this form.
Persin said that it’s important for agents to get over this concern. The Exclusive Buyer Agency Listing Agreement is designed to protect not only buyers – it spells out the services that agents provide them – but agents, too.
Many agents have worked in the past with buyers for weeks, driving them to listing presentations, helping them qualify for mortgage financing. But these buyers might attend an open house one weekend, fall in love with a residence and meet the agent hosting the event. Rather than calling the agent with whom they’ve been working, these buyers might work with the open house’s agent to write up an offer.
This, of course, leaves the buyers’ initial agent out of luck, with no commission. The Exclusive Buyer Agency Listing Agreement protects agents from this.
“There’s a mystique, though, that agents have. Many feel that you never want to ask a buyer to sign anything, that you’ll lose them if you do this,” Persin says.
Again, the solution lies in communication. Agents need to explain to their buyers that, no, they aren’t agreeing to pay any fees by signing this agreement. They are only agreeing that they are entering into a business relationship with their agent. Agents should also explain that the agreement offers protections to the buyers, too, specifically spelling out the services that they will provide them.
Read our sidebar, “How to Deal with Difficult Clients”
Financing isn’t the Burden you Think it is
Pamela Zank has read the stories decrying just how difficult it is for potential homebuyers to qualify for mortgage financing. She just hasn’t seen much evidence that they’re true.
Zank, a mortgage loan officer and branch manager in the Northbrook office of mortgage lender Guaranteed Rate, said that it’s not that much harder – if at all – for borrowers to qualify for mortgage loans today.
As long as these borrowers have a solid credit score and enough income to back up their mortgage requests, that is.
“One of the biggest hurdles to qualifying for a mortgage loan has always been credit,” Zank said. “Now, though, it’s an even bigger one. There was a time when credit was a bit like the wild, wild West. Even if you had a score in the 500s, you could get a conventional mortgage. That’s not the case today.”
And this, Zank says, is the most important piece of information that agents must provide to their loan-seeking clients: borrowers with weak credit scores today will either have to pay far higher interest rates or they won’t qualify for a loan at all.
According to Zank, borrowers won’t be able to qualify for a conventional mortgage loan if their credit scores are lower than 640. And even if their score sits at 640, they’ll have to pay substantially higher rates and put down a much larger down payment.
Today, borrowers who want to pay a low interest rate without having to come up with a large down payment need to have a credit score of at least 740, she said.
And one loan in particular is even more onerous: the jumbo mortgage loan. Those borrowers who need to finance more than $417,000 will need a credit score of at least 700 to even qualify for a home loan, Zank said.
Zank recommends that real estate agents work with their clients to help them boost ailing credit scores before they apply for mortgage loans. This is a relatively simple process: borrowers need to pay their monthly bills on time every month. And they need to eliminate as much of their credit card debt as they can.
The problem with this? It takes time. Despite what late-night TV commercials might promise, there is no way for borrowers to boost their credit scores by a significant factor overnight. Those who need to boost their scores by 50 or more points will have to exhibit good spending habits for several months before their scores budge.
This extra time, and effort, though, might be worth it.
According to Zank, those borrowers with credit scores under 640 will still pay higher interest rates than those with a score of 640, even if these first borrowers put down a whopping 40 percent down payment.
When the Appraised Value and Sales Price Don’t Match Up
It’s one of the most frustrating events in real estate today: a buyer and seller agree on a sales price. But then the real estate appraiser determines that the home’s current market value is far below the agreed-upon purchase price.
It’s a scenario that, unfortunately, usually derails a sale. That’s why Mike Battaglia, broker and sales manager with South Barrington’s ERA Countrywood Realty, says it’s best for agents to prevent this problem before it happens.
The key to doing this? Agents for both the seller and buyer must remind their clients of current market conditions. They must show them a list of comparable neighborhood sales.
This information might prevent sellers from setting an asking price that’s too high. And it might prevent buyers from making an offer that’s likely to come in much higher than a home’s market value.
“The sellers need to realize that they don’t just have to satisfy the buyers with their asking price,” Battaglia said. “They have to satisfy the appraisers, too. And the appraisers are looking at their homes without having any emotional attachment to them.”
If this advance work doesn’t pay off, and the buyer and seller still agree to a sales price that comes in higher than the home’s appraised value, agents have just two options to salvage the deal.
They can convince buyers to bring more money to the closing table to close the gap between a home’s appraised price and the final sales price. Unfortunately, this isn’t likely, Battaglia said. Most buyers don’t have the financial ability to bring extra money to the closing table, not when they’re already supplying a large down payment.
The second option? Agents can convince sellers to lower their asking prices. Again, this isn’t likely. Many sellers have already lowered their asking prices several times to even nab an offer, Battaglia said. They’re not likely to lower them again.
The key, then, lies in preventing this unfortunate situation from happening.
“The biggest way to resolve this is to educate the sellers,” Battaglia said. “This isn’t always an easy thing to do. Some sellers might have had an appraisal done a year ago. Well, that appraisal isn’t any good any more. Prices have fallen since then.” C.A.
Anne Donnelly
@properties
847.763.0200
adonnelly@atproperties.com
Nicole Fabiano
Home Solutions, Inc.
312.265.7071
nfabiano@home-solutionsinc.com
Jack Persin
Ryan Hill Realty
630.718.0424
JPersin@ryanhillrealty.com
Pamela Zank
Guaranteed Rate
847.943.2168
Pamela.Zank@guaranteedrate.com
Mike Battaglia
ERA Countrywood Realty
847.376.0454
mjb6007@aol.com