Managing homeowners’ great expectations

Kenneth R. Harney on May 29, 2015

WASHINGTON – Do you know what your house is worth? Would you concede that there’s a chance that your estimate of its value might be higher than what a buyer would pay?

A new statistical study, published in the Journal of Housing Economics, found that home owners on average “overestimate the value of their properties by about 8 percent.” Tapping into federal databases, researchers concluded that overvaluations are likely tied to erroneous owner estimations of the capital gains they’ve accumulated in the house.

The study is in sync with a monthly survey conducted by Quicken Loans, which compares estimates provided by applicants for refinancings with results from appraisers. The latest Quicken study found a “widening gap” on average across the country between what owners think their homes are worth and actual market value. The divergence was much narrower in the Quicken survey compared with the Journal of Housing Economics findings – currently just seven-tenths of 1 percent – though in 2008 it averaged around 7.5 percent.

Nobody can blame owners for thinking optimistically about their homes’ value, right? It’s human nature. But here’s a question I recently put to real estate appraisers in different parts of the country- Other than the obvious emotional attachments that color our perceptions of our homes, where do we tend to err when it comes to estimating value?

Top of the list- Unrealistic expectations about how much the improvements you’ve made to the house will add to its resale value. Because you’ve paid the bills, you know precisely how much you sunk into the kitchen remodeling, bathroom upgrades, landscaping and the new roof. Tom Horn, an appraiser in Birmingham, Alabama, says consumers “may think they can get back what they put into” the improvements they’ve made over the years. “But it doesn’t work that way.”

Annual real estate surveys consistently show that dollar-for-dollar returns are rarely the case. The 2015 “Cost-vs-Value” study by Remodeling Magazine and members of the National Association of Realtors in 102 markets found that many high-ticket improvements don’t come close to paying off what they cost. For example, based on national averages, a major kitchen remodeling costing nearly $57,000 would return just 67.8 percent – $38,485 – in resale value. A backup power generator returned just 59.9 percent and a home office remodeling less than half, 48.7 percent.

A closely related issue- Over-improvements of your home compared with the neighborhood norm. Don Boucher, an appraiser in the Washington D.C. area, says he sees it all the time- Owners sink tens of thousands of dollars into a super-premium gourmet kitchen in a neighborhood where nobody else has installed such luxury. When you renovate a kitchen or other feature of your house to a level typically seen only in communities where homes cost double what they do in yours, you’re not going to recoup that extra expense, Boucher says.

Another example of where owners get off track, according to appraisers- They install highly personal but costly items – features they love passionately or need, but most potential buyers don’t. Say you spend thousands of dollars to install an elaborate indoor lap pool or spa. It may be just what the doctor ordered for your health, but prospective buyers may not want it. They may even plan to remove it if they purchase, giving you zero in added value in their offer. Ditto for expensive, special-taste items such as all-glass conservatory rooms, over-the-top backyard “environments” and, in some northern markets, swimming pools. Gary Crabtree, an appraiser in Bakersfield, California, says lush landscaping that requires large amounts of water isn’t adding as much to value as it previously did, given the current severe drought conditions and water restrictions.

Finally, appraisers say owners may not understand the valuation dynamics of their local market. Glen Kangas, a Los Angeles appraiser, says owners frequently estimate value based on the square footage of the house. Yet “in my area, land value is really high,” he said. “So sales with larger lots have a higher price per square foot,” which owners of below-average-sized lots erroneously apply to their own home values.

Bottom line- Without access to key data – recent sales comparables, accurate information on appreciation rates over time – it’s tough to know exactly what your house is worth. If you really want to know, consider hiring an appraiser to perform an independent valuation – they work for owners, not just lenders – or talk to multiple realty agents who specialize in your neighborhood.

The murky world of broker commissions

Kenneth R. Harney on May 22, 2015

WASHINGTON – It’s one of the dark corners of American real estate that doesn’t get much attention from consumers- When realty agents representing potential buyers don’t like the commission split offered on a particular listing, they might boycott it – simply not show the house to clients.

The net result- Houses get less exposure. They sit on the market longer than they would otherwise and the seller may end up with a lower price. The practice – known as “sell-to-the-commission” – has surfaced recently as discount brokers in major markets advertise low fees on both sides of the transaction, and home sellers increasingly ask- Why am I paying 6 percent to agents when I know my well-priced, well-maintained house will sell quickly?

The issue bubbled up earlier this month during a frank discussion among agents across the country on the industry website ActiveRain.com. Some agents described the practice as commonplace or even “rampant” in their areas. One, Eve Alexander of Buyers Broker of Florida, in Orlando, said “It is a fact that when the co-op fee is peanuts, less agents will show it and it will more than likely take longer to sell.” In a subsequent interview with me, Alexander deplored the practice, saying “sellers usually don’t know” that their property is getting fewer showings because of the low fee-split to the buyer-side agent. And buyers don’t know what they’re not being shown.

Real estate commissions are all about splits. If you agree to list your home for a 6 percent total commission, frequently that means the listing agent and brokerage will take half at closing – 3 percent – and the buyer’s agent and brokerage will get the other half. Both brokerages split their fee with the individual agents involved, who may get half or more. If the listing agent offers the buyer-side agent what is seen as an inadequate split – or especially if there is a discounted fee involved – agents representing buyers may be much less interested in showing the property.

All real estate commissions are negotiable, so fee splits can vary widely. Some discount brokerages offer cut-rate fees to list and sell, and they tend to bear the brunt of agent boycotts. Joshua Hunt, broker and CEO at Denver’s Trelora realty agency, told me he has “filed over 100 complaints” with real estate regulatory authorities about “agents who said they will not show” Trelora listings. Trelora charges a flat $2,100 “service fee” to list a house for sale and offers $3,000 in compensation to agents who bring in buyers, though fees can be adjusted in negotiations.

Some agents staunchly defend such selective showings. Bill Reddington, an agent with RE/MAX Southern Realty, in Destin, Florida, said on ActiveRain, “the real question is how willing are you to work for free?” With discounted fees on the rise, he said, he “prefer[s] not to show those.” Other agents argued that low splits to the buyer’s agent suggest that the listing agent did not explain the potential consequences to the seller of offering too little. Others said stingy sellers tend to be difficult in negotiations.

But what about the ethics of not showing houses based on commission splits? The National Association of Realtors’ code of ethics prominently states that when representing a buyer or seller, agents must “protect and promote the interests of their clients.” If you’re not showing homes appropriate for your buyer, that doesn’t sound like good representation.

But hold on, things get more complicated. I asked the industry’s widely acknowledged ethics guru – Bruce H. Aydt, senior vice president and general counsel for Berkshire Hathaway Home Services Alliance Real Estate – about the issue and he said there’s considerable “gray” area here. Without a formal written buyer-agent agreement that specifies compensation and creates a fiduciary duty between agent and client, no one can reasonably expect an agent to work for little or nothing, Aydt believes. But “at some point,” he said, “the failure of a buyer’s agent to show properties because of a perceived ‘low’ commission” could violate a Realtor’s ethical duties “and perhaps state law.”

Bottom line- Whether you are a seller or a buyer, be aware of the commission split issue. If you are a seller and tempted to lowball the buyer-side agent commission, be aware that your house might not be shown as much. If you are a buyer looking at what’s available with the help of an agent with whom you have no written agreement, consider nailing down compensation in advance with a formal agreement.

Super liens pose perils for home buyers

Kenneth R. Harney on May 15, 2015

WASHINGTON – Could some of the nearly 67 million Americans who live in communities governed by homeowner associations – condominiums, master-planned developments, cooperatives and others – face much tougher underwriting and higher interest rates when they apply for a mortgage?

That is the looming threat from the mortgage industry in areas where state laws give community associations “super-priority” liens on dwellings whose owners have not paid their assessments.

Super-priority liens give a community association the power to initiate foreclosures and get first crack at the proceeds from the sale of a delinquent dwelling unit, ahead of the traditional first-lien position held by the mortgage lender. Twenty-two states plus the District of Columbia currently have authority for super liens on their books, and all 50 states recognize homeowner association liens.

Homeowner associations argue that, like property taxes for local governments, assessments or dues on units fund the essential operations of the community. They are crucial to maintain the community’s buildings, roadways, parks, recreation centers and other amenities. When unit owners fail to make the payments, the shortfall must be made up by the rest of the owners, often through higher assessments.

When large numbers of unit owners default on their mortgages and stop paying their assessments, the financial stress on a community association’s finances can become extreme. Marilyn Brainard, former president of her association’s board in a community outside Reno, Nevada, told me that in the wake of the housing bust and recession, many communities in Nevada were forced to hit remaining owners with large special assessments, as well as postpone essential maintenance work on elevators, roofs and key facilities.

“It was very hard, very painful, especially in communities where many of the residents were seniors living on fixed incomes,” said Brainard, who served on a statewide commission overseeing community associations. Numerous communities were pushed to the brink of insolvency, common areas deteriorated, and property values of homes plummeted.

The situation in Nevada, Florida and other states that suffered deeply after the bust was compounded, community association leaders say, by the unwillingness of lenders and investors who owned the mortgages on defaulting units to step in and pay assessments once it became clear that borrowers had moved out. Worse yet, according to the Community Associations Institute, which represents 33,000 member associations and managers nationwide, lenders “dragged their feet on foreclosures for years, delaying the process that would give them legal and financial responsibility” to pay assessments on properties they essentially owned.

To ensure that community boards get to collect unpaid assessments, some state legislatures have given them the right to initiate foreclosures, after giving notice to lenders and loan servicers. Typically there is a limit on the amounts they can collect from the sale proceeds, say six to nine months of assessments.

Mortgage lenders and servicers say they are sympathetic to associations’ need to collect delinquent assessments, but not at the price of their own collateral interests in mortgaged houses. Last fall, the Nevada Supreme Court ruled that when owners’ associations foreclose on delinquent units after providing notice and giving mortgage holders the opportunity to pay the delinquent assessments, the lender’s lien can be wiped out. For example, if the amount of back assessments owed is $6,000 but the first mortgage on the property is in the hundreds of thousands of dollars, the house might be sold at foreclosure to a bargain-hunting buyer for the assessment amount plus fees, leaving the lender with huge losses.

That is unacceptable to the giants of the mortgage market – Fannie Mae and Freddie Mac – and to their conservator, the Federal Housing Finance Agency, which is contesting such foreclosures through litigation. In testimony before the Nevada state legislature, FHFA’s general counsel, Alfred M. Pollard, also warned that if lenders’ collateral rights can be “extinguished” by associations, consumers “may face challenges in securing a loan to buy a unit or refinance.”

David Stevens, president and CEO of the Mortgage Bankers Association, was more explicit in an interview- In states with super liens that can wipe out lenders’ and investors interests, he said, buyers could face higher loan fees, heftier down payments and time-consuming examinations of community association finances. Some lenders have said they may reconsider whether to do business in communities affected by super liens.

Bottom line- This is likely to be fought out in courts and legislatures but could start affecting mortgage terms and availability in some areas if lenders judge the risks too high.

A way to keep money in the family

Kenneth R. Harney on May 1, 2015

WASHINGTON – Could there be a way to help senior homeowners with their cash flow needs without saddling them – and ultimately their families – with high costs?

That’s a key question at a time when millions of seniors are flooding into their post-retirement years, many of them with equity in their homes but insufficient income to handle expenses over the long term. If they want to stay in their homes, they can opt for a government-insured reverse mortgage, which may provide them cash in exchange for repayment plus interest after they die, move out or sell. Or they can apply for a home equity line of credit from a bank.

But there are problems with both choices. The dominant government-insured reverse mortgage program comes with high upfront lender fees, mortgage insurance premiums and newly toughened financial qualification requirements. A home equity credit line may be difficult for seniors to obtain because they cannot qualify on credit or debt-to-income grounds in today’s stricter underwriting environment.

Starting May 1 nationwide, however, some seniors have a new option – one that ties into increasingly popular “peer-to-peer” lending. It’s a family-funded reverse mortgage known as the “Caregiver” loan. It allows any number of children and grandchildren to pool resources to provide a flexible line of credit at interest rates far below what commercial reverse mortgage lenders charge and with far fewer hassles. In intra-family lending, there’s no bank or mortgage company. Family members are the bank.

Here’s a simplified example- Say you and two siblings want to help Mom and Dad, who are now in their late 70s. You and your siblings are all doing well enough that you have at least some cash to spare. Ultimately, you want to retain your parents’ house for the estate once your parents pass away, keep costs to a minimum, and only sell the property when you, not a faraway bank, choose to.

So you sit down with Mom and Dad and determine that, at least for the foreseeable future, they will need about $1,500 in additional income a month. You and your siblings agree to apportion the payments among yourselves in some way, maybe a commitment of $500 a month each for a period of years. You also pick an interest rate that achieves a win-win result for you and your parents – say 3 percent annually. That’s much lower than a commercial lender could charge but higher than what you’ve been earning on your bank deposits or money market funds. There are no required fees upfront – hey, it’s Mom and Dad.

What you need at this stage is help with putting all the details of your agreement into a legally binding reverse mortgage, recordable at the local courthouse. Enter National Family Mortgage, a Massachusetts-based company that has helped facilitate and service nearly $290 million in intra-family home loans in recent years – typically parents helping kids buy first homes. Now National Family is expanding its menu to include reverse mortgages.

Timothy Burke, founder and CEO, says the “Caregiver” concept is in response to requests by existing clients to come up with a plan that helps with the financial needs of the post-retirement years. National Family does not loan money itself. Instead it helps structure and customize lending arrangements among relatives – documentation, accounting, recordation, closing and servicing for home loans made by relatives who wish to “keep the money in the family.” For reverse mortgages, it offers step-by-step assistance online plus a calculator that allows participants to see how various contribution and disbursement arrangements would play out over time. National Family’s fee for its services- a flat $2,500.

Can there be complications and downsides to an intra-family reverse mortgage? Absolutely. Though agreements can be custom-tailored to almost any family’s needs, the fact remains that family members don’t always agree, don’t always get along.

To handle this, the loan documents structured by National Family can make provisions for various eventualities – individual co-lenders might have to drop out or reduce their contributions. Mom and Dad might forget to pay their property taxes or homeowner insurance – somebody needs to be in charge of handling unexpected expenses. Though not mandatory, Burke recommends that total loan commitments not exceed 65 percent of current home value, and that all participants consult with professional financial advisers before signing on.

Does this sort of deal work for every family? Hardly. But if you think it might fit for yours, check out the details at www.nationalfamilymortgage.com.