The real estate bubble is behind us and with default rates still rising, the rest of the meltdown is still ahead of us.  Purchasing or selling a home in this market has possible grave consequences. Are real estate agents educated enough to assist today’s consumers?

In this blog post, I will address the idea of adding a bachelor’s degree as a minimum barrier to entry for real estate agents. But first it’s important to review professional status. I must know thousands of real estate agents. Many of them are well educated and conduct their business in an honest and ethical manner.  Real estate agents are often cited as one of the least trusted professions.  But wait, are real estate agents professionals? Let’s take a look at the structural relationship between a professional and his or her client.

Is your barista at Starbucks or the person who bags your groceries a professional? If you answer “yes,” hold on: there’s something inherently different between a barista or a retail salesmen and a doctor, lawyer, engineer or CPA. We can use the word “professional” in many different ways.  Your barista can do his job in a professional manner. Anyone can do his or her job in a professional manner, according to his or her own subjective interpretation.  This is using the word “professional” as an adjective. When we use the word Professional as a noun, there’s a classic definition that we would refer to.

A Professional:

1. Has specialized knowledge in his or her field. This person knows way more than the average random consumer about his or her area of expertise;
2. Is required to complete a minimum amount of formal, academic education;
3. Is tested for competency;
4. Is licensed;
5. Must maintain that license with mandatory continuing education;
6. Subscribes to a mandatory code of ethics in an industry that is self-regulating. This is different from state or federal government regulatory oversight. The industry itself regulates ethical conduct over and above state and federal law;
7. The self-regulating body enforces their code of ethics with sanctions for violations;
8. Owes fiduciary duties to clients. This means the professional has the highest prescribed duty of loyalty to the client, to put the client’s interests above his or her own interests.

Real estate agents, does your industry hold professional status? Take a look at your state agency laws. Does your state mandate fiduciary duties owed to clients? I have been told by many Realtors in various states that their local association of Realtors does not enforce the Code of Ethics. Nationwide, to elevate the professional status of Realtors, I recommend ditching dual agency completely and self-regulate by enforcing the Realtor Code of Ethics with more integrity. By that I mean across all states and not just in some states. 

Is now the time to add a college degree as a minimum requirement?

I have met thousands of Realtors and real estate agents. Many of you already conduct your business as a Professional. However, just because you personally conduct your business in this way doesn’t mean consumers all throughout your market area place real estate agents or Realtors into the same category as a doctor, lawyer, engineer, or CPA.  Real estate agents and Realtors: The more you move towards elevating the professional status of your entire group, the more value you will hold in the eyes of your clients, and the more you will be able to charge for your services.

If we look back through history, with any of the classic professions, we see a narrative trajectory of that group’s movement from non-professionals to emerging professionals to professionals.  Real estate agents would fall somewhere between emerging pros and professionals based on the above criteria.

Notorious R.O.B. would set the bar much higher than it is now.  1000WattMarc’s dream real estate brokerage would be for all licensees to have, at the very minimum, a bachelor’s degree and a moral compass. I suggest that Marc’s dream brokerage would want to write a much more descriptive and prescriptive code of ethics, one that goes further than the NAR Code, which is a very, very good Code to start from.

When the first no-fault divorce laws started to pass from state to state in the 1970s, we saw a wave of women enter the workforce.  Real estate and mortgage lending were a place where a female could start out with no experience and make a living wage, and even more so, could not only rise through the ranks but could start her own company if the glass ceiling wouldn’t break.  Leaving the barrier to entry low for the real estate industry had its time and place.

The practice of real estate has become more complex since the 1960s and 1970s. Yet today person can move from selling sheets at Macys to real estate, to selling shoes at Nordstrom, to selling cell phones, and so forth. They did during the bubble run up, and now many have moved back into retail sales.

Some say a college degree is not required to be a good salesperson. But then let’s stop pretending that agents are in the same ranks as professionals with college degrees and let’s stop acting confused when consumers do not respect the practice of real estate and question an agent’s value and fees. Must the real estate agent of 2010 and beyond transform into more than just a salesperson? If the industry as a whole likes things the way they are, perhaps one firm could create market differentiation by making higher education mandatory.

To start with, a Bachelors degree in ANYTHING would be a minimum barrier to entry. As the years move on, curriculum would be developed for the profession of real estate.  Required core courses would include all facets of real estate, agency, and contract law, mortgage lending finance, economics, statistics, communications, counseling skills, conflict resolution, negotiation skills, multicultural competence, applied professional ethics, listening skills, business, accounting, taxation, foreclosure statutes, short sales, the unauthorized practice of law, consumer protection and fraud statutes. Agents could take specialized electives in land use, construction and development, property management, commercial real estate, multi-family, and principles of investment.

There would be no required technology classes.  Being able to use a computer would be a pre-requisite. There would be no elective classes on social media because the world has enough self-designated experts in this field to assign one to each real estate agent for the next decade.

There would be no required sales courses in this utopian bachelor’s degree curriculum of my dreams. Because selling would not be what graduates do once they’ve passed their licensing exam. Instead, they would need business development skills, marketing, entrepreneurial skills, and education on how to help their clients make informed decisions.

Yes, I am well aware that Bill Gates dropped out of college to start Microsoft. But he and others like him are Outliers.  They are not the norm. They are on the far end of the bell curve.  We need to take account of the middle. Any industry is judged on its lowest common denominator, not by the best of the best in an industry. 

Turnover of real estate salespeople falls in line with retail salespeople.  Having a constant stream of new to newer agents means a certain percentage of consumers will always be working with a new/newer agent.  This might lead to higher earnings for company owners who earn a higher fee split on those transactions but as a whole, the industry itself suffers from lack of consumer confidence.

At first, mandatory higher ed might not seem like a good idea for our existing real estate business models because broker/owners wouldn’t be able to make all the money off of the cash cow new agents. However, more educated agents from the start may save those broker/owners money in the long run.

Yes there are bad eggs in every profession, even those that require a college degree.  The sociopaths are at one end of the bell curve and don’t make up the majority of any one group. Well, except for the loan mod salesmen and coming soon to a market area near you: predatory short sale negotiators.

Requiring higher education is not just a business decision and profits. It is also a moral issue.  Professionals take into account more than just what’s good for them personally, they ground their decisions in what’s also good for the entire industry as well as what’s good for their clients. 

Already licensed agents would be grandfathered in, of course, which is the only way an idea like this could even begin to get traction.

In closing, if higher standards of education are put into place, then real estate instructors would absolutely have to meet higher standards. But that’s a different blog post for a different day.

Hi Everyone,

Here’s the follow up from class.

There was a request for recent delinquency stats. These numbers appear in four different posts:

Option ARM Recast/Reset Update but what about prime loans? Here you go:

We should also check on the re-default rate of loan mods and the HAMP program. 

Here’s the latest report from TransUnion showing delinquencies over 10%.

Jumbos aren’t doing all that well either.

Dare we check FHA? WTF? Does this report say what I think it says about FHA deliquencies? Quoting CR, “This will not end well.”

Here’s a nice graph that was released today showing homes with negative equity. WA State is standing at 20%. This is not a low number.

Here is the IRS link with regard to the Mortgage Forgiveness Debt Relief Act.

Here is a link to the article about credit scores and how short sales, foreclosure or BK will affect a person’s score.

Here are details on the Fannie Mae Deed for Lease program.

Here’s CR’s latest post debating inflation/deflation.

Hmm. This appears to be the place to find Class Action lawsuits, but I have not spent enough time on the site yet to warrant a recommendation from me.

No short sale classes on my calendar yet for the spring but check back often.

Here is the Home Affordable Foreclosure Alternative Program. Scroll down to Additional Resources and look for the Fact Sheet. More from NAR.

Thanks for a fun class yesterday!

Interview questions before real estate agent, buyers, or seller decide to work with a “third party short sale negotiator”

1. How long have you been in the “short sale negotiation” business (working with a real estate or LO license without the specific focus on short sales does not count.)

2. How many short sales have you successfully negotiated/closed?

3. What is your real estate OR loan originator license number?

4. What is the name of the company and list all the names of people with ownership interests.

5. How did you obtain your advertised methods: “I have special phone numbers to the lenders…I have special contacts with the lenders….I use special procedures.”

6. What work has been done thus far in the short sale process?  For example: Have you received ALL seller paperwork confirming they qualify for a short sale?

7. What is your fee?

8. Is your fee negotiable?

9. What percentage of the time is your fee paid by the lender?

10. What percentage of the time is your fee paid by the licensed real estate agents involved in the transaction?

11. What percentage of the time is your fee paid by the buyer?

12. How/when is your fee paid? (red flag if the fee is paid outside of closing or upfront before any work is performed.)

13. Is the short sale negotiation company owned by the listing agent for the seller? (red flag)

14. Is the short sale negotiation company owned by the listing agent’s designated broker? (red flag)

15. Is the short sale negotiation company owned by another licensed real estate agent in the listing broker’s office? (red flag)

16. Is the short sale negotiation company owned by the selling agent or his/her broker? (red flag)

17. Is the real estate agent who referred this company going to receive a portion of the short sale negotiation fee? (red flag)

18. Is the seller going to receive part of the negotiator’s fee after the close of escrow? (red flag)

19. Is the lender/loss mitigation worker going to receive a part of the negotiation fee? (red flag)

20. Will the seller still be shown my offer if I select a different negotiation company other than the company recommended by the listing broker? (red flag)

21. What work will be performed for the fee paid?

Ask the short sale negotiator to respond to each of these questions in writing so you have a record of his/her response.

I received a call the other day from a consumer who was in the process of purchasing a short sale home.  The homeowner has defaulted on her mortgage and the trustee sale auction has been postponed a few times now that this buyer’s firm offer has finally reached the lender’s loss mitigation decision-maker.  Once the offer was accepted by the seller, the homebuyer was surprised to learn that there’s a third party involved, a “Short Sale Negotiator” who is charging an additional $9,000 fee on top of the real estate commissions paid to both the agent for the seller and the agent for the buyer. The Short Sale Negotiator is demanding that the homebuyer sign an agreement that the homebuyer will be responsible for paying the $9,000 fee.  The homebuyer emailed me asking what I thought of this additional fee and could I offer some advice. 

The first thing I did was to find out the name of the Short Sale Negotiator company, the owner of the company, and the person who is doing the short sale negotiating. I discovered that the negotiation company is owned by the same person who also owns the real estate firm where the listing agent works.  I also ran the name of the short sale negotiator and discovered that this person IS a licensed real estate agent. 

Readers please note that WA State’s regulators recently changed the real estate licensing laws and there’s a great FAQ section here that answers the question: Does a Short Sale Negotiator have to be a licensed real estate agent? The answer is yes, or a licensed loan originator or otherwise exempt from licensing such as an attorney. (Clicking through from the link, scroll down to “doing business” and see the second question.)

So we have a licensed real estate agent who is earning money as a short sale negotiator who works for a company owned by the same person who owns the listing agent’s real estate company.

There are a couple of things that come to mind here. First of all, isn’t there a bit of a conflict of interest for the real estate broker/owner of that company?  Where are your duties? To the home seller, whose listing you’re charged with overseeing, or are your duties to the buyer, a client who signs the agreement to pay your other company $9K?  What are the duties of disclosure to BOTH the seller and the buyer?

For example, if I’m the seller in this transaction, charging a buyer an extra $9,000 out of pocket might preclude a number of qualified buyers to make an offer….unless I hold back this information until after the buyer has emotionally fallen in love with the home and is already arranging the furniture in his/her mind.  That seems manipulative.  Why not tell all possible prospects up front what the short sale negotiator’s fee is: Make it mandatory to display this extra fee in the PUBLIC comment section of the multiple listing service. 

You might be thinking: “Yes we could disclose this god-awful fee to the public this but that’s not in the best interest of the home seller.”  Well, okay but what happens if you end up attracting a lot of buyers but they all walk when told of this high third party fee? Now the listing agent has wasted everyone’s time.  It’s like if someone asks me out on a date and then later he tells me he’s married.  Come on! Hey, some women might say yes and it’s nice to know up front how big of an a-hole a guy is.   I say the listing agent would actually be attracting the right kind of buyer if they disclosed that their Short Sale Listing comes with baggage.  It seems to work fine for the married guys who post personal ads on craigslist day after day.

More: If there is an affiliated business arrangement going on between the two companies that are owned by the same person/people, then a RESPA-required Affiliated Business Arrangement disclosure form should ALSO be required so that the home seller and home buyer are aware of the dual company ownership. Part of that AFBA disclosure form should state that the homebuyer understands that buying this home means he/she does NOT have to use this particular short sale negotiation firm and is free to select another short sale negotiation company to do the same or similar work.

For a home buyer, a big red flag would be if the listing agent demands that you use this affiliated short sale negotiator. Demanding that a buyer use a real estate broker’s affiliated company is a licensing law violation as well as a violation of federal law when those companies are a title, escrow, appraisal company, and so forth. So why not a short sale negotiations company also?

Even more: Is the listing agent receiving part of that $9,000 fee? One way of structuring this is for the owner of both companies to promise the listing agent something like this: “if the lender cuts your commission, don’t worry, I’ll give you a portion of that $9,000 negotiator fee.”  Unearned fees are not allowed under RESPA.

The other logical problem that comes up for me when I see an additional fee of $9,000 is this: what work is being done for NINE THOUSAND DOLLARS?  That’s an awful lot of money. I could install all new vinyl windows in my 1959 house with that kind of money. I could put this in my teenager’s college fund. I could accomplish a lot with $9,000 so why would I want to pay that kind of money to a short sale negotiator?  Is this like extortion/payola in order to get that particular house for that price? 

Maybe not.  What is this third party negotiations company doing for their $9,000?  Wait, let me go find out. I’ll read their website.  Gee, there’s nothing on the website telling a consumer what their company actually does for that fee but the pictures of their team tell me they’re all good looking guys under 30. Not that there’s anything wrong with doing business with good looking guys under 30 but it should make us wonder how much experience the negotiator has at short sale negotiating.  In 2009 I believe we added ten million “short sale experts” in the real estate industry.

My advice to the consumer: Negotiate that fee down to somewhere around $1,000 to $2,000.  If the home is that close to the auction date, tell your real estate agent that you’re going to buy the home at the auction if the lender won’t approve the short sale and if the negotiators won’t go for a reduced fee.  Most of the third party short sale negotiators out there are paid much less than $9,000. 

Here’s some help with the math:  I asked the consumer to ask the short sale negotiator how many hours he’s spending on this file v. how many hours he’s working on those biceps. Consumer says the SSN said he’s spent 10 hours so far on this transation! !! !!! Wow! Well! Okay then, let’s divide $9,000 by 10 hours.  That’s a going rate of $900 per hour. That’s probably close to the hourly rate charged by the Johnnie Cochran law firm for litigation cases and I’m fairly certain that this licensed real estate agent negotiator doesn’t have as much experience or education as the JC legal team.  Counter back with $100/hour and settle around $200/hour max.

I am betting they’ll take the $2k.

Ask for the negotiator’s $2K to be put on the HUD I Settlement Statement as a seller’s closing cost.  There’s a chance the lender will pay it.  If not, the buyer needs to as himself: Is this house worth $2k out of pocket at closing?  It’s also important for the buyer’s new lender to know about this additional fee. Insist that it’s paid out through escrow and shows on the buyer’s side of the HUD I Settlement Statement if the lender refuses to pay it as a seller’s cost.

Buyers: do not agree to pay any money after closing, on the side, without disclosing this additional amount to all parties including the lender. 

Predatory Short Sale Negotiators: The world is watching you.  I wonder if your dreams are haunted the way I was haunted after watching The Hurt Locker.  Soon your predatory fees are going to explode in your face. Oh, and loan mod salesmen thinking that being a short sale negotiator is the next big way to “make six figures with no experience,” please go back to the used car lots. I’m sure there are some openings at the Toyota dealerships.

Spencer Rascoff from Zilllow has provided us with the slides from Dr. Humphries’ presentation to the Seattle Real Estate Roundtable.  Here’s the link.

Slide 13 has a heat map of peak-to-change in home values for King/Pierce/Snohomish counties.  This slide alone is enough to convince me of the reason why Seattle-area real estate agents are bullish on selling Seattle homes v. agents in outerlying cities. The further you go away from Seattle, the heat map becomes more red.

Look at slide 20 to see the percentage of homes (with mortgages) with negative equity. Seattle is right in there with the U.S. average.  There’s an interesting rate reset chart in slide 23 that looks vaguely like the Credit Suisse reset chart.

And some surprises on slide 25.

Thanks for posting this for us, Spencer!

This is a new term I heard in class from my real estate agent students.  It describes a home buyer shopping for a move-up home; a nicer home in a nicer neighborhood. The buyer has an existing home and the home’s value has dropped so far that in order to sell, they would have to go through a short sale approval process.

In order to qualify for any kind of short sale, the home seller must provide proof to the bank being shorted, that they do not have the funds to pay back the shortfall.  If they DO have the money, then instead of a short sale, we have a “seller brings cash to closing” transaction.  In a Shop, Swap, and Drop transaction, the home seller actually DOES have the money and/or assets to makeup the difference between what is owed to the bank, and the home’s current, much lower value.

But…the home seller doesn’t really want to hand that money over to the bank.  So instead, the home seller doesn’t sell.  Instead, he/she becomes a home buyer.  These folks shop for a new home and when asked about their existing home, they tell the bank “we’re going to rent it out.”  Since most banks and lenders have new strict guidelines about counting rental income from a new landlord, they will often make the homebuyer qualify for their new loan by including BOTH mortgage payments into the buyer’s debt-to-income calculations.

No problem for the Shop, Swap, and Drop buyers. They CAN qualify to repay both mortgage loans.  So they select a nicer home in a nicer neighborhood but with prices far below what they were at the peak of the bubble.

After the new loan closes, they move out of their underwater home, move into their move-up home, and then default on the first home. The dropped house goes into foreclosure and your Shop, Swap, and Drop neighbors throw their credit score under the bus for a while.  But they figure the gamble is worth it if they can get rid of a house with serious negative equity that they can’t rent for enough to cover the payment.

It will be interesting to see if this becomes more widespread.  At this point in time, I’m not so sure the masses would be able to qualify with both mortgage payments.  Instead, I’m hearing more stories about people who are just unable to pay their mortgage and are waiting it out, sometimes for many, many months before the foreclosure auction happens and they must move out into a rental.  I’m hearing that people are living mortgage-payment free for up to a year before the bank gets around to their auction. 

Hi Everyone,

Here’s the follow up from today’s class.

Here are two articles on how credit scores are effected by short sale v. foreclosure v. bankruptcy. First, here’s Ken Harney’s article and here’s Ardell’s follow up on the blog RCG.

Here’s the link to the Making Home Affordable government website for a homeowner to see whether or not they qualify for the Obama Administration’s foreclosure mitigation options, and to check to see whether or not the homeowner’s mortgage is owned by Fannie Mae.

Here’s a link to the CR blog on Option ARM loans.

and here’s a link to the IRS website (have no fear!) about the Mortgage Forgiveness Debt Relief Act.

A couple of folks were asking about a list of attorneys in this area that specialize in helping homeowners who need legal counsel on short sales. Here’s that link.

And the next Advanced Short Sale class is Feb 8th in the Northgate area.

Thanks for making today’s class fun!

Hi Everyone,

Here are the links I promised to send:

List of WA State Chartered Banks 

Here is the unofficial list of problem banks. Scroll down for the embedded spreadsheet. …and here is more info on Option ARMs for those who were asking lots of great questions about Option ARMs. This post contains the statistics you saw in the powerpoint graphs in class this morning.

We are all set for Advanced Short Sales on Monday, Feb 8th and I’m sure I’ll see most of you again on that day!

Thanks for all the excellent participation today.

Hi Students,

Here’s the follow up Q&As leftover from our class:

Here are two articles on how credit scores are effected by short sale v. foreclosure v. bankruptcy. First, here’s Ken Harney’s article and here’s Ardell’s follow up on the blog RCG.

Here’s more information on the new WA State Foreclosure laws. 

George asked “What constitutes ‘mitigation’ under the new law?”  Great question. Visit this page and click on “bill as passed by the legislature” and go to page 3.  Copying and pasting from the final bill:

During the initial contact, the beneficiary or authorized agent shall advise the borrower that he or she has the right to request a subsequent meeting and, if requested, the beneficiary or authorized agent shall schedule the meeting to occur within fourteen days of the request. The assessment of the borrower’s financial ability to repay the debt and a discussion of options may occur during the initial contact or at a subsequent meeting scheduled for that purpose. At the initial contact, the borrower must be provided the toll-free telephone number made available by the department to find a department-certified housing counseling agency and the toll-free numbers for the department of financial institutions and the statewide civil legal aid hotline for possible assistance and referrals.

Here’s the link to the Making Home Affordable government website for a homeowner to see whether or not they qualify for the Obama Administration’s foreclosure mitigation options.

Here’s the recent article about investors flipping foreclosed homes at various price ranges in the Seattle area.

I mentioned in class that “household creation” is one of the keys to the recovery of the housing market. Here’s the link to my favorite finance and econ blogger CR and his analysis.

Some folks were curious about the 3 investor groups that represent buyers who want to buy homes at the foreclosure auction like the one we watched in class, and the one I filmed in May here.

Those companies are: Vestus, Foreclosure Resolutions NW, and RE Investment Firm.

Here’s my youtube channel with the recent foreclosure video from this past May over in Factoria.

Thanks for coming to class and all your great questions!

Hi Everyone,

Here’s your Q&A follow up from class.

Here is a link to the Credit Suisse chart showing all the recasts of the Pay Option ARMs coming our way through 2012. Remember the good news here is that 46% of all Pay Option ARMs are currently in default.

Here’s a link to my favorite finance and econ blogger, CalculatedRiskBlog.com who provided the charts used in the Dec 8th powerpoint slides.  This link brings you the date and the graphs.

Here’s the link to Seattle Bubble and The Tim’s awesome foreclosure stats report for King County.  Reminder note to students to be reading Seattle Bubble daily.

Here’s the story about the Miami Herald’s investigative piece into the 1000 felons originating loans in Florida.

Here’s more information on the new WA State Foreclosure laws.

Here’s the New York Times interactive map showing the percentage of subprime loans made in various states and counties.

There was a question regarding a BPO only taking into account above ground square footage in the value.  I can find no supporting rule for all 50 states supporting this. It does appear as though lender guidelines vary and some lenders very well may follow this rule. 

Thanks for a fun class and I hope you all enjoy your holidays!