Negotiate without being a Jerk.

EXERPTED FROM REALTOR MAGAZINE SEPTEMBER 2008. 

By focusing on collaboration and shared goals rather than hardball tactics, you’ll increase your odds of coming out ahead. Here’s how to do it.

By Mariwyn Evans| September 2008 

You won’t get through even one day without the need to negotiate. So if you have to do it, why not get better at it?

Perhaps the first thing to learn about negotiating is that “better” doesn’t necessarily mean being the nasty guy. “There are basically two approaches to negotiation—the adversarial and the interest-based,” says Richard Reuben, associate professor at the University of Missouri—Columbia School of Law.  
 

Today, most negotiators favor the interest-based approach. This method, popularized by negotiating guru Roger Fisher, director of the Harvard Negotiation Project and co-author of the negotiation classic Getting to Yes: Negotiating Agreement Without Giving In (Houghton Mifflin, 1992), emphasizes collaboration and shared goals over hardball tactics. But don’t think interest-based negotiation equates to weakness.  

“You can still negotiate aggressively on your interests; you just don’t want to be a jerk,” Reuben says. 

Part 1: Prenegotiation Planning 

Scope Out the Goals. At the core of interest-based negotiation is understanding the goals and desires of all parties to a negotiation. In a real estate transaction, that includes you, your client, the other associate, and the other associate’s client, says Adorna Carroll, ABR®, ABRM(sm), vice president of Realty3 Carroll & Agostini in Berlin, Conn. 

Another part of preparing to negotiate involves compiling objective criteria, from CMAs and relative ratings of local school districts to the maximum mortgage a buyer can qualify for. These facts are key tools in what Fisher calls principled negotiation—the ability to negotiate on facts, not emotions. Armed with the facts, you don’t need to argue when a buyer indignantly claims your client’s house couldn’t possibly be worth that much. Instead, you point to the objective criteria of what comparable houses have sold for in the last few months. “Real estate is a classic example of the objective standard. You can calculate replacement cost and market value; you can create a formula for value outside the transactions,” says Palm Springs, Calif., attorney John Patrick Dolan, author of Negotiate Like the Pros. 

Asking the person on whose behalf you’re negotiating about factors such as bottom line price, timing, and terms is your next step, says Tom Hayman, president of Negotiation Expertise LLC in Peoria, Ariz. “You have to set the ceiling and the floor.” 

But while facts are critical, don’t focus on the nuts and bolts and ignore a client’s emotional needs, says John Ritchie, an associate broker with Gables & Gates, REALTORS®, in Knoxville, Tenn., and a certified trainer. “People make an objective decision after they satisfy their emotional needs.”  

Emotions may play a particularly large part in today’s market, which features longer times on market, sellers who may have lost equity to dropping prices, and buyers convinced they can bid down the price further. 

The way to understand these emotions is simple: Just listen, says Laurence Tamkin, broker-owner of Total Success Realty in Austin, Texas. “Really listen to what the other person is saying and repeat back what you’ve heard to validate their opinions,” he suggests. “You’ve made the emotional deposit by listening, so now they’re willing to let you make the withdrawal.”

Understanding goals is also a matter of questioning your assumptions about what another party wants and values, says Steven Cohen, president of Negotiation Skills Co. in Pride’s Crossing, Mass. “You have to try to put yourself in the other person’s shoes and understand his or her view of the issue. Often a conflict is not about facts, but about how those facts are perceived,” he says.

For example, says Cohen, a sales associate who came to list his house assumed that the property’s nearness to a train line was a negative. “She didn’t work downtown so she thought only about the noise from the train. I commuted every day so I thought being able to walk to the train was a big plus.” 

Decide on the Bottom Line. Another important aspect of prenegotiation research is determining your client’s best alternative to a negotiated agreement, or BATNA, says Cohen. Having a BATNA lets you weigh the risks and rewards of not making a deal against these alternatives. 

For real estate buyers, a BATNA can be walking away from the deal and looking for another home, renting until you find what you want, or staying where you are.  

One form of BATNA might be to continue to look at other homes during the negotiation or to have a second home already selected before you make your first offer, suggests Joeann Fossland, e-PRO®, PMN, a master certified coach with Advantage Solutions Group in Cortaro, Ariz. 

The strength of your alternatives is a big factor in who holds the power during the negotiation. The more powerful your client’s position—whether that results from market conditions, the ability to buy for cash, or a greater willingness to walk away from a deal—the more aggressive your negotiating tactics can be, says Michael Benoliel, director of the Center for Negotiation in Potomac, Md.

Also remember that in a negotiation, power can be real or perceived, says Rhonda Hamilton, ABR®, LTG, a speaker and trainer who heads LiveWire Presentations in Longview, Texas. If you have a strong personality or are much more knowledgeable about your local market than the other sales associate, for example, it might create a perception of power that actual market dynamics don’t justify. 

Scope Out the Other Side. Researching the goals and motivations of those on the other side of the transaction—both the client and the sales associate—is just as important to negotiating a mutually acceptable agreement. Before you begin a negotiation, ask peers in your office about the other sales associate and how he or she negotiates.  

Find out how long the house has been on the market. Search Google for information about the sellers and read up on their local job and charity activities, suggests Cohen. Everything you know works to your and your client’s advantage. 

“People behave based upon their backgrounds and experience. Knowing the past is a good predictor of the future,” says Herb Cohen, founder of Power Negotiations Institute in Delray Beach, Fla. “You need to understand what’s of long-term importance to all parties so that they’ll be satisfied with the transaction.” 

One of the biggest untapped sources of information on the other party is that party’s agent, says Carroll, author of the revised “Effective Negotiating for Real Estate Professionals” course offered by the Women’s Council of REALTORS®. “Ask questions like ‘Are your clients in a hurry to buy?’ or ‘How long has your client been looking?’ or even ‘What is it about the property that appeals to your client?’ You’ll be amazed at the information other sales associates will share with you.” 

 ”Before presenting an offer, I’ll often ask the other sales associate what it’s going to take to make a deal. Most of the time people will tell me,” says Ritchie, instructor for the REALTOR® University course “The 3 Ps of Negotiating” and author of Leading the Real Estate Transaction. Ritchie uses the information he gains to subtly “train” the other sales associate in how to present his offer.  

For example, he’ll tell the other associate how he and his client arrived at the price they’re offering. Then if a question arises, the other salesperson will be able to explain the offer more fully. “Someone has to manage the negotiation; it may as well be you,” he says. 

Part 2: In the Thick of the Deal 

Listen and Learn. If asking questions and listening are critical before beginning a negotiation, they’re just as vital during the give-and-take portion. “The words ‘tell me’ are golden,” says Hamilton. When the other party makes a statement, say, “Tell me again what is most appealing to you about this neighborhood” or “Tell me what about the price seems inconsistent to you.”   

Keep questions gentle, suggests Reuben. You don’t want your questions to seem like an interrogation that puts anyone on the defensive. 

Also, pay attention to seemingly irrelevant or throw-away comments spoken as asides or at the end of a conversation, suggests Rich Birke, director of the Center for Dispute Resolution at Willamette University in Salem, Ore. “People say things when they think no one is listening that will often ring true,” he says. Listening—without agreeing with the other party’s position—also shows that you’re a nice person and makes the other person more willing to hear your position. 

Once you’ve received a response to your question, paraphrase the answer back to your counterpart, and then ask if that’s what the other party meant.  

“Often it won’t be, so it gives you a chance to clarify a position,” says Herb Cohen, who has negotiated on behalf of presidents and corporations. He also favors taking notes of responses to your questions, both to ensure you get key information right and as a way to show respect for the other person’s point of view. “Always show respect for the other party and set a positive tone for the negotiation,” he says. “That isn’t a sign of weakness, only of decency.” 

Connect Through Emotions. Listening is also a way to understand another party’s emotions and build rapport. Emotions are present in every negotiation, says Daniel L. Shapiro, associate director of Harvard Law School’s Harvard Negotiation Project and co-author of Beyond Reason: Using Emotions as You Negotiate (Viking, 2005).  

“Buying a house is an incredibly emotional experience. Clients will trust you more if you appreciate their emotions—their fear of getting a bad deal, their excitement about moving, their sadness at leaving their home of 30 years. Connecting with them on a human level will make the whole negotiation flow better,” he says. 

Shapiro recounts his own attempt to buy a newly constructed home. The developer refused to live up to some of the terms of the purchase agreement—and refused to talk to Shapiro about his concerns. When they finally did connect, days before closing, Shapiro started the conversation by appreciating the developer’s craftsmanship in the house and asking questions to understand the developer’s perspective, not berating him for what hadn’t been done. 

“I listened first,” says Shapiro. “Once he felt heard, then I asked him to appreciate my perspective on wanting the terms fulfilled. This set a tone of collegiality, and it paid off.” Shapiro and his wife live in the house.

Another important way to build rapport is through affiliation, says Shapiro. Turn an adversary into a partner, like Shapiro did with the developer. When the two spoke, he said, “It looks like we have a shared problem. You want to sell; I’m interested in buying, but we have some obstacles, no? What’s your advice on moving forward?” Asking for advice immediately turned the adversarial developer into a partner seeking a mutual solution. 

But while understanding and responding to the emotional context of a negotiation is essential, it’s also important not to let emotions control you. “The crucial thing is to use your emotions rather than letting them use you,” says Steven Cohen.  

And no matter what, never lose your temper and escalate an angry situation. “You can address anger by saying that your feel uncomfortable with the statement a person is making, but never, ever attack someone personally,” he says. 

Be Flexible, Stay Focused. Keeping your emotions under control will prevent you from digging in your heels when you’re pushed hard by the other side. Instead, look for ways you can alter your positions to reach agreement without making a concession you’re not comfortable with, suggests Hamilton.  

It’s this ability to be flexible and look for alternatives during the negotiation process that’s the mark of a great negotiator, says University of Southern California professor Kathleen Reardon, who’s the author of several negotiating books, including It’s All Politics (Current Doubleday, 2005). 

Hamilton suggests asking “what if” questions to elicit points for further negotiation. Try something like: “What if we offered to reduce the price by $3,000? Would you be willing to let my client stay in the house for another two weeks?” “Such statements don’t commit your client to anything, but they open the door for a way to resolve a problem,” she says. If you’re not sure just what to reveal, “analyze what and how the other side is disclosing information and use that as a guide for your own disclosures,” Reuben suggests. 

To conduct this sort of negotiating, you must have discussed with your client in advance what information you should share and how and when you’re going to share that information during the negotiation, especially anything of a confidential nature. “It’s part of your fiduciary duty,” says Fossland. Ritchie suggests asking clients to prioritize options so that you’ll know where to make concessions first. 

Discussing options with your clients and letting them make the final decision on concessions also give the client a sense of autonomy that reinforces their trust in you, says Shapiro. Clients want your advice, but sometimes they want the freedom to make a decision that you may not agree with. And even if you don’t agree, it’s still critical to find merit in the client’s point of view and communicate that understanding to the client, he says. 

Even a BATNA isn’t a fixed point, says Steven Cohen, who’s also the author of Negotiating Skills for Managers (McGraw-Hill, 2002). “You’ll have one BATNA when you begin a negotiation, but once you’ve learned more about the other parties, you’ll have to modify it. Still, you should always have a point of no return.” 

As goals evolve, it’s important to keep all parties focused and not let them get distracted over one small point in the negotiation, says Birke. “Part of the salesperson’s job is to keep both parties focused on their goals, that they want to buy or sell the home.” 

Likewise, salespeople have to exercise care not to let egos get in the way of a settlement. Positional bargainers, those self-styled tough negotiators who refuse to budge, often hurt themselves and their clients in just this way. “Sometimes, they make a bad deal, just so they can win,” says Steven Cohen. 

“You have to differentiate between negotiating to produce an agreement and haggling,” says Howard Chung, vice president of Washington residential operations for John L. Scott Real Estate in Bellevue, Wash. Negotiators often get caught up in getting more and use tactics like splitting differences down the middle that may not really benefit their clients, he says. 

Also, keep in mind that beating down your opposite number can have a bad effect on your reputation. You will probably have to do business with this sales associate again, or someone else in the same company, so “don’t let a negotiation turn into a turf war,” says Chung. 

In addition, if the other side isn’t really satisfied with the deal, they’ll place endless roadblocks in the way of getting the transaction closed. “People who have made major concessions up front will perceive even minor concessions later as major stumbling blocks,” warns Carroll. 

Win-win doesn’t mean that everyone gets an equal share but rather that all parties get an agreement they can live with and fulfill, says Steven Cohen. As long as you never, never, never do or say anything contrary to your client’s interest during the negotiation, you’ll end up with a successful negotiation, whatever the market. In negotiating, as in life, having a goal and sticking to it is what gets the job done and leaves everybody satisfied. 

Nine Ways to Tone up Your Tactics 

Although most negotiators favor an atmosphere of mutual cooperation and emphasize strategies over tactics, that doesn’t mean they don’t have a few tricks of the trade. Those include: 

1. Start Simple and Build. Negotiate small points first, especially those on which you share a commonality, and get agreement on those, suggests Herb Cohen, founder of Power Negotiations Institute in Delray Beach, Fla. “Once people have invested the energy in a negotiation, the goal becomes more desirable. Always save the price for last.” Negotiating small points first also allows you to assess the other party’s negotiating style and build trust, says Michael Benoliel, director of the Center for Negotiation in Potomac, Md. The exception may be a deal-breaking point. 

2. Chip Away and Gain. Another common tactic is “the nibble.” After everyone is in agreement, you bring up an “Oh, by the way” type of minor point. Most people will give a concession then just to be finished with the negotiation, says Palm Springs, Calif., attorney John Patrick Dolan, author of Negotiate Like the Pros. 

3. Break the Deadlock. If you reach an impasse, take a break. Go to the bathroom, go to lunch, resume tomorrow. Faced with a tough question, Herb Cohen says he often slowly takes out his fountain pen, shakes it, writes a few notes, and returns it to his pocket before responding. “It gives me time to think,” he says. If your impasse is over one issue, such as price, it may be beneficial to move on and get agreement on other points and then return to your point of disagreement, says Benoliel. A similar idea is to backtrack to places where you have agreed earlier and remind the participants that you’re most of the way to a deal, suggests John Ritchie, an associate broker with Gables & Gates, REALTORS®, in Knoxville, Tenn. 

4. Try Again. If the offer really is as high as your buyer can afford, you can return a counter with the same price again, and the words, “This is our highest and best offer,” suggests Betty Byrnes with Coldwell Banker ERA Dave Trueblood, REALTORS®, in Kokomo, Ind. “It works like a charm when the asking price and the offer price are fairly close.” No matter what you’re offering, you can make it look better by using perceptual contrast, says Tom Hayman, president of Negotiation Expertise LLC in Peoria, Ariz. For example, to a seller faced with a low offer, you might say, “I know that this is $10,000 less than you wanted, but when you compare months of $3,000-a-month mortgage payments, it’s not too off base.” 

5. Try the Silent Treatment. Silence is another tried and true tactic that seldom fails, suggests Susan Kuttner Schiffman of Keller Williams Realty in Carmel, Calif. “Salespeople who get nervous during a silence and jump in with one more sentence or thought just display their own insecurity. Don’t be afraid to be quiet and give the other person time to process the information you’ve shared so they can come around to your position.” 

6. Offer Tit for Tat. Never make a concession without getting a reward, says Steven Cohen, president of Negotiation Skills Co. in Pride’s Crossing, Mass. If you give something—ideally something you don’t care much about—you should get something in return. 

7. Give the Illusion of Choice. Present concessions in pairs to give the other side a sense of control, says Lynn Johnson of Lynn Johnson Realty in Fulton, Texas. Johnson suggests something like “My seller could make the repairs indicated in the home inspection or we could give the buyer a check for $1,000 at closing to make the repairs.” Just be sure that your client will be equally happy with either choice. 

8. Act Up. If you’re confronted with an unrealistically low offer by a buyer, you can use a classic negotiating tactic—the flinch, or wince. This can be a truly physical reaction or just a “wow” or “gosh,” anything that is an overreaction to someone’s position, says Dolan. 

9. Never Say Never.  Remember that impasses are just a part of the negotiating process. “One of the biggest mistakes negotiators make is walking away too soon,” says Benoliel. Adorna Carroll, ABR®, ABRM(sm), vice president of Realty3 Carroll & Agostini in Berlin, Conn., says she’ll call up a buyer’s representative some weeks after a negotiation that didn’t reach an agreement to see if the buyer has made a purchase. “If not, I tell the sales associate that something has changed at the property and that they should take another look,” she says. “Providing new information is a great tactic for getting people back to the table.”

Inaccurate Square Footage Invites Trouble

Michael Kieffer, Realtor Coldwell Banker West Shell: In the Cincinnati MLS market, we do not quote square feet. The only source of square foot data is the various County Auditors.

Excerpted from REALTOR MAGAZINE September 2008 

Be careful about what numbers you use in your real estate marketing and MLS data. Measurement errors, even small ones, can mean thousands of dollars and are landing real estate professionals in court.

By D. Hampton “Hamp” Thomas September 2008

Square footage is one of the most basic tools of real estate. Salespeople often use it as they add listings to the MLS or write advertising copy. 

Yet, few real estate practitioners are likely to have ever questioned a property’s square footage as they copied it from the tax records, the developer’s floor plan, or the listing in the MLS. 

Do you think size—square footage—really matters? After all, if buyers love a property, do they really care if it’s 2,700 square feet or 2,560 square feet? When the housing market is strong, people generally don’t care as much about precision, but in a soft market, people become more demanding.  

Size affects everything from whether the couch will fit in the living room to whether the HVAC’s capacity is large enough to cool the space. Also, consumers are conscious of square footage and its impact on value. 

Measurement errors, even small ones, can mean thousands of dollars, so it’s not surprising that square-footage disputes are making news—and landing some real estate professionals in court. For example, in Brown v. Roth (N.C. Ct. App. 1999), the court held that a broker who provided inaccurate data might be liable for a breach of fiduciary duty or negligence unless he “exercised reasonable care in obtaining the square footage information and communicating it to the buyer.” 

Whose Numbers Can You Trust? 

Part of the challenge in supplying accurate square footage to clients is finding a reliable source of data. Many practitioners rely on the square footage contained in the tax assessor’s records. Those records are a convenient source, but public records were never intended to be used by the real estate industry as a source of square footage. These estimates were created by and for a mass appraisal system.  

After comparing appraisals, MLS listings, and public records for more than four years, I found both the percentage and the size of some errors alarming. 

One way to avoid liability is to simply avoid the question of square footage, a strategy the NATIONAL ASSOCIATION OF REALTORS® recommends. Almost all MLSs contain a general disclaimer indicating that although information is believed accurate, it’s not guaranteed.  

The courts have generally held that these disclaimers protect real estate practitioners from liability for inaccurate square footage numbers—but do they serve the consumer? I don’t think so. 

Another way to reduce liability is to give buyers a disclosure form that explains the source of the square footage information. Colorado has adopted such a standardized form for all residential property. Although this form doesn’t settle on one true measurement standard, it’s a big step in the right direction. 

In Search of a Standard 

So how do we get more accurate square footage data? One national standard sounds wonderful, but creating a single, widely accepted standard is an extremely complex challenge, no one system can account for every possible scenario.  

The only formal national measurement standard currently available is the American National Standards Institute (ANSI  Z765-2003) method. It has been in circulation for more than a decade but is still not widely used. 

To claim adherence to this standard, however, you must follow it completely, and not enough practitioners do to consider it a universal standard. 

A standard that I believe is closer to the measurement practices used in the field today is the American Measurement Standard. The AMS is not new; in fact, it was first used in the early 1900s. Until recently, however, it was never formalized in writing. Many real estate practitioners and builders already use AMS, so it makes sense to me to that it become the universal standard. 

Square footage—along with location—is one of the foundations of real estate valuation. A national standard, whatever its basis, will serve us and our customers well. 

Disclosure form 

View Colorado’s new form at www.dora.state.co.us/Real-Estate/contracts/writable/SF94-05-04.pdf. Opinions expressed in “Commentary” do not necessarily reflect the position of the NATIONAL ASSOCIATION OF REALTORS® or REALTOR® Magazine.You can contact the staff of REALTOR® magazine by e-mail at narpubs@realtors.org.

HOW TO BUY A HUD OWNED HOME

TEAM KIEFFER under COLDWELL BANKER WEST SHELL is registered to make offers on HUD owned homes! Excerpted from http://www.hud.gov/offices/hsg/sfh/reo/reobuyfaq.cfm What is a HUD Home? A HUD home is a 1 to 4 unit residential property acquired by HUD as a result of a foreclosure action on an FHA-insured mortgage. HUD becomes the property owner and offers it for sale to recover the loss on the foreclosure claim. Who can buy a HUD Home? Almost anyone! If you have the cash or can qualify for a loan (subject to certain restrictions) you may buy a HUD Home. HUD Homes are initially offered to owner-occupant purchasers (people who are buying the home as their primary residence). Following the priority period for owner occupants, unsold properties are available to all buyers, including investors.If you are an evacuee displaced by Hurricane Katrina, Rita or Wilma, HUD could sell a HUD home at a discount to you! How are HUD Homes sold? All properties available for purchase by the public are offered for sale at Internet listing sites maintained by management companies under contract to HUD. Any real estate broker registered with HUD may submit an offer and contract to purchase on your behalf. HUD pays the real estate broker’s commission, if included in the contract. Are there any special programs? Properties in designated areas are available at a reduced sales price to law enforcement officers, teachers, firefighters, emergency medical technicians, nonprofits and local governments. Read more about these Good Neighbor Initiatives. Should I get a home inspection? We encourage you to get an inspection after your offer is accepted. All HUD Homes are sold AS-IS, without warranty. HUD will not make repairs nor pay to correct any problems. What about financing? Although HUD does not offer financing directly, some of our homes qualify for FHA-insured loans. Shop around for a lender to find the best loan terms. Find out how an FHA loan can help you.
Content updated June 19, 2008

Housing and Economic Recovery Act of 2008 FAQ

Excerpted from: http://www.hud.gov/news/recoveryactfaq.cfm Q: How will the law help struggling homeowners keep their homes? A: Through the Federal Housing Administration (FHA), an estimated 400,000 borrowers in danger of losing their homes will be able to refinance into more affordable government-insured mortgages. The program offers government insurance to lenders who voluntarily reduce mortgages for at-risk homeowners to at least 90% of the property’s current value. Q: When will the program begin? A: The program will begin on October 1, 2008 and sunset on September 30, 2011. Homeowners in danger of losing their homes before October 1, however, should not wait to contact their loan servicers and should begin applying for federally insured mortgages now. Q: Who is eligible? A: To be eligible to participate in this program, a borrower must: Have a loan on an owner-occupied principal residence. Investors, speculators, or borrowers who own second homes cannot participate in this program. Have a monthly mortgage payment greater than at least 31 percent of the borrower’s total monthly income, as of March 1, 2008. Certify that he or she has not intentionally defaulted on an existing mortgage, and did not obtain the existing loan fraudulently. Not have been convicted of fraud. Q: How can a homeowner access this new program? A: Homeowners or a servicer of an existing eligible loan need to contact an FHA-approved lender. The FHA-approved lender will determine the size of a loan that a borrower can reasonably repay and that meets the requirements of the program. If the current lender or mortgage holder agrees to write-down the amount of the existing mortgage and make the new loan affordable, the FHA lender will pay off the discounted existing mortgage. Loans provided under this program must be 30-year fixed rate loans. Q: Are lenders required to participate in this program? A: No. The program is completely voluntary for lenders, investors, loan servicers, and borrowers. Q: How does this law help neighborhoods that have been hit by the foreclosure crisis? A: The impact of the current crisis has not been isolated to individual borrowers or investors, but has been felt broadly by neighbors, communities, and governments across the nation. The law strengthens neighborhoods hit hardest by the foreclosure crisis by providing $3.9 billion in Community Development Block Grants to states and localities to buy foreclosed homes standing empty, rehabilitate foreclosed properties, and stabilize the housing market. Q: Will this law be a bailout for speculators, homeowners, investors, and lenders? A: No. It is narrowly tailored to keep families in their homes. For example: Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced. Investors and lenders must take big losses first in order even to participate. The owner of the old mortgage can get a maximum of 90% of the current value of the home (which presumably will be considerably less than the value of the original loan). In many cases the loss will be significantly greater, but 10% is the minimum. In addition, lenders must waive any penalties or fees, and help pay for the origination and closing costs of the new loans. Most homeowners will have seen the equity in their homes disappear before being able to refinance under this program. In addition, the FHA will get a portion of any future profits on the house, to make sure the government recoups its investment over the long run. Q: Will this law reward families who bought homes they could not afford? A: Many homeowners facing foreclosure were misled, were deceived, or were in other ways the victims of unfair lending practices. To prevent future abuses by lenders, this law will establish a nationwide loan originator licensing and registration system to set minimum standards for all residential mortgage brokers and lenders. It also strengthens mortgage disclosure requirements to help ensure that borrowers understand their mortgage loan terms. Q: How will this law make it more affordable to own a home? A: There are a number of provisions that will make homeownership more affordable: Creates a refundable tax credit for first-time homebuyers that works like an interest-free loan of up to $7,500 (to be paid back over 15 years). Grants states $11 billion of additional tax-exempt bond authority in 2008 that they can use to refinance subprime loans, make loans to first-time homebuyers and to finance the building of affordable rental housing. Raises conforming loan limits for the FHA, Fannie Mae and Freddie Mac to $625,500. Because of the high cost of housing in California, a majority of the state’s residents were previously shut out from these programs. Raising these loan limits will lead to lower interest rates on some loans, greater refinancing opportunities, and enable more borrowers in high cost areas to avoid the type of nontraditional and frequently abusive loans that led to the current crisis. Provides couples using the standard deduction with up to an additional $1,000 deduction for property taxes ($500 for individuals). Q: Does the law provide help to those who still cannot afford to own a home? A: Yes. The bill includes a number of provisions to increase the supply of affordable housing, which has been a major problem in California pre-dating the current foreclosure crisis. For example: The bill creates a new permanent affordable housing trust fund – financed by Fannie Mae and Freddie Mac and not by taxpayers – to fund the construction, maintenance and preservation of affordable rental housing for low and very low-income individuals and families nationwide in both rural and urban areas. In addition, the legislation provides a temporary increase in the Low-Income Housing Tax Credit and simplification of the credit to help put builders to work to create new options for families seeking affordable housing alternatives.
Content updated August 5, 2008

Michael Kieffer: Qualified for OAR President’s Sales Club – Award of Achievement 2008

Congratulations!  

OAR President’s Sales Club Award Winner

Home Electrical Systems: 4 Questions You Should be Able to Answer

 

Practically all of your listings will have an electrical system. Whether working with buyers or sellers, it pays to understanding the basics.

By Leslie Banker
| August 2008

 
 

These days, every house or apartment is going to have an electrical system of one sort or another. Understanding the basics of these systems will help you evaluate homes and knowledgeably answer questions from prospective buyers.

 
 

Electricity typically is generated at a power plant and travels to transformers, which lower the voltage to a level that local distribution systems can handle. From there, electricity travels over local distribution systems to individual homes.

 
 

One problem in this method of delivery is that quite a bit of electricity is lost in the process of traveling from the plant to its final destination. An alternative is generating electricity on site by solar electrical systems, wind turbines, or generators.

 
 

So what else do you need to know about electric systems? While it’s best to leave the big questions to electricians, these are some basics that you should know.

 
 

1. Does the home have 220 volt service?

 
 

If the home was recently built, the answer is almost always yes. Most houses today have two 110 volt wires and one neutral wire running into the house from the local distribution system. These wires can run underground or above ground. If there are two 110 volt wires running to the house, then the house has 220 volt service and appliances, such as dryers and air conditioners.  

 
 

Older houses were usually built with 110 volt service; if the electrical system hasn’t been upgraded, it won’t be possible to use some models of appliances (though alternatives can be found).

 
 

It’s possible to upgrade a house from 110- to 220-volt service. How much it costs to upgrade will depend on the particular house and the location. If a buyer is interested in upgrading, an electrician can give an estimate for what the work will entail.

 
 

2. What’s the difference between a fuse and a circuit breaker?  

 
 

Fuses and circuit breakers are both found in the electrical panel (or sub-panel) of a house. They both serve the purpose of cutting the flow of electricity when a circuit gets overloaded—a potentially dangerous situation. Circuit breakers will be found in most houses built after the 1960s or in older buildings that have had their electrical systems upgraded.  

 
 

Fuses have a thin strip of metal that literally blows when there’s too much electricity flowing through it. When this happens, the fuse needs to be taken out and replaced.

 
 

Since the 1960s circuit breakers have been used instead of fuses. They are more convenient, as they just need to be flipped back on if they are tripped. Unlike a fuse, they don’t need to be replaced.

 
 

Both circuit breakers and fuses are rated according to how much electricity can flow through them before they trip and shut down the circuit. A 15- or 20-amp fuse is typical for regular light fixtures and such. If the right fuse or circuit breaker isn’t used, it can cause a dangerous situation. Clearly, if a fuse or circuit breaker becomes problematic, an electrician should be called in to look at it.

 
 

3. Where’s the “main panel?”

 
 

This is where all the circuits in the house originate from and it’s usually near where the electric power enters the building. It will be filled with circuit breakers (or fuses in an older building). The main panel has a rating that determines the total amount of current that can flow out to the circuits at one time before the main circuit breaker shuts the entire system down.

 
 

Most moderately sized older houses have 100 amp service, though a smaller house might only have 60 amp service. Larger new houses are often built with 200 amp service to accommodate all the electronics used these days. If a buyer is thinking of adding on to a house or just modernizing an older house, one consideration will be if the electrical system is big enough to handle the additional electrical requirements. It’s possible to upgrade the main panel to handle more amps. Again, an electrician can give a buyer an idea of how much work this will be in a particular house.

 
 

4. Are the outlets grounded? 

 
 

These days most electrical outlets that you see accept three prong plugs. This means, almost always, that the outlet is grounded. A grounding wire, which connects to the round third hole, protects against electric current escaping from the circuit and causing shocks.

 
 

Older houses might only have two prong outlets, meaning there’s no grounding protection in the circuits. Upgrading an electrical system to include grounding wires involves opening the walls and can be a significant amount of work. How much work it is depends on the size, construction and layout of the house.

 
 

GFI outlets (GFI stands for “ground fault interrupter”) are typically required by building codes when installing an outlet near a water source or a damp location. These are the three prong outlets that have two buttons on them reading “test” and “reset.” Since water and metal handles and spouts conduct electricity, it makes a ground fault particularly dangerous in wet locations such as a bathroom. A ground fault is where the electricity goes astray despite the grounding wire. If this happens the GFI quickly cuts the power. GFI outlets are also called GFCI, or ground fault circuit interrupter.

 
 

Knowing how to talk the talk about a listing’s electrical system will help to put a little spark in your sales pitch. The important thing to remember is that for a price, electrical systems can be upgraded and expanded to meet the needs of the buyer as well as building code requirements.

 
 

 
 

 Leslie Banker is co-author of The Pocket Renovator (2007, Universe), an illustrated guide to the language of home improvement and renovation. Banker, a writer and decorator, also co-authored the 2004 book The Pocket Decorator.

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Short Sales: Disclosing Distress

 

When you’re representing a seller who’s on shaky financial ground, what should you tell prospective buyers?

By Mariwyn Evans
| August 2008

As home prices stagnate, real estate practitioners are more likely to face the question of when, how, and how much to disclose about a financially distressed property.  

Such properties present two disclosure challenges—finding a reliable source of correct information about the physical condition of the property and deciding how and when to make a situational disclosure about the owner’s financial distress. 

Disclosing Property Issues Is Critical 

In a short sale, the net proceeds from the sale are insufficient to cover the mortgage debt and all other costs of selling. Home owners may already be in default on a mortgage or may recognize that they will not be able to continue to make payments much longer. Sellers in such circumstances may feel desperate and be particularly reluctant to disclose property defects.

In addition, a seller who is unable to pay a mortgage has often failed to maintain the property. In these situations, it’s critical to explain to the seller that withholding information will not improve the situation.  

In addition, distressed sellers should understand that they will still be vulnerable to a buyer’s lawsuit if known defects aren’t disclosed. 

Timing Is Tricky in Short Sale Disclosure  

An agent for a distressed seller also faces the decision of when to disclose the owner’s situation and how much to disclose. In general, a salesperson representing the seller should advise prospective buyers about the property’s financial status before they sign a purchase contract because the need for the lender’s approval of such sales can affect the terms of the sale and the timing of the closing. 

NAR’s MLS policy was amended earlier this year to require multiple listing services to give their participants the ability to disclose any possibility of a short sale to other MLS participants. Participants may also, but are not required to, communicate to other participants how any lender-mandated reduction in the gross commission stated in the listing contract will be apportioned between the listing and cooperating brokers. 

The policy also gives MLSs discretionary authority to require participants to disclose potential short sales when participants have reason to believe that the transaction may result in a short sale. The policy provides that short sale information should be included in the confidential remarks field of a listing as soon as the listing broker knows about the possibility of a short sale.

In particular, practitioners must be careful not to compromise the seller’s chance of getting the best price possible for a home by disclosing the sellers’ distressed condition too early. 

After a Foreclosure 

Once a property has been foreclosed and is owned by the lender, there’s no longer an issue about disclosing the property’s distressed status. Foreclosures, after all, are matters of public record. However, getting reliable information about a foreclosed property’s physical condition becomes even more challenging. 

When a property’s owner is no longer in possession, it’s extremely difficult for a sales associate to get the facts about property condition, in part because the lender may have little, if any, information about the property’s condition. 

Lenders are usually required to disclose what they know about REO properties but are generally exempt from requirements to complete property condition disclosure forms required for sellers in many states. However, agents must still make all disclosures of known defects required by their state’s law. Associates should encourage buyers to have a thorough inspection of any property prior to purchase. 

Providing such advice may help protect you from liability if the property is later found to have a defect. For example, in Reed v. Bank of America, 1995, a buyer whose lender had repeatedly advised him to get a home inspection, even though the practitioners involved did not notice any defects, lost in his suit against the bank because he chose to self-inspect instead of hiring a professional.  

More Tips for Disclosures

• •   Ask for copies of all relevant permits, repair receipts, and inspection reports from a home owner who is still in residence at a distressed property. 
  

 
 

• •   Take photos of any property defects you see, send copies to the lender, and get a written receipt.
  

 
 

• •   Inquire about past-due condominium assessments or homeowners association dues that might create a lien.
  

 
 

Mariwyn Evans is a senior editor of REALTOR® magazine.

Short Sales: Loan Forgiveness

This article was published on: 10/01/2007

Loan forgiveness
After the Short Sale: Taxing What Isn’t There

Too often, real estate practitioners are unaware of the tax liabilities arising from the cancellation of debt and fail to advise their clients accordingly.

BY LANCE CHURCHILL

You’ve just spent several stressful weeks helping your beleaguered seller negotiate a short sale. You’ve helped demonstrate to the lender that the home’s price has fallen and that to close the deal with the new buyer, the lender will have to forgive $10,000 of the seller’s outstanding mortgage loan not covered by the sale proceeds. But you did it, and now everyone is happy. The buyer gets a home, the lender avoids a messy foreclosure, and the seller walks away with no further financial burdens. Well, not quite.

Whenever real estate is sold, whether in a standard transaction, a short sale or a foreclosure auction, there are potential tax consequences for the seller. In this little scenario, the seller may still owe taxes to Uncle Sam — both in the form of capital gains on the home and on the unpaid portion of the mortgage. Yet, too often, real estate practitioners are unaware of the tax liabilities arising from the cancellation of debt and fail to advise their clients accordingly. Don’t make that mistake with your clients.

How Debt Forgiveness Works

With a short sale, the lender has three possible ways to handle the deficiency balance, which is the portion of the mortgage debt not covered by the sale of the home. First, the lender can attempt to collect the deficiency balance from the seller after the property has closed. Second, the lender may require the seller to sign an unsecured promissory note for the deficiency balance as a condition of agreeing to the short sale. If the new note is for less than the balance of the original debt, the difference would be considered canceled, or forgiven, debt. Third, the lender may agree to cancel the entire deficiency balance.

On the surface, option three would be seem to be the best alternative for a seller. However, the IRS considers any canceled mortgage debt ordinary income. This means that the amount forgiven is taxed at the same rate — somewhere between 15 percent and 30 percent — as the sellers’ salaries. In addition, because the IRS requires the lender to file a 1099-C form stating the amount of the canceled debt, Uncle Sam will have a record of the exact amount of the debt that was cancelled. A seller will also receive a copy of the 1099-C to use in filing income taxes. The seller’s home state would also consider the cancelled debt as ordinary income.

4 Exceptions to the Rule

The IRS does recognize four situations in which cancellation of debt will not result in tax liability for the seller. A seller may avoid tax liability:

• When the borrower receives a bankruptcy discharge and the deficiency was included in the bankruptcy
  
• When the borrower is insolvent at the time of the cancellation of the debt. Insolvency would occur when a borrower’s liabilities exceed assets. Note that seller would have to prove this insolvency to the IRS when filing a tax return.
  
• When the debt was secured by a nonrecourse loan. Under a nonrecourse loan, the lender does not have the legal right to collect a deficiency judgment from any assets of the debtor not pledged to secure the loan. While most home mortgages are do not fall into this category, purchase money loans on a person’s residence are nonrecourse in some states.
  
• When the tax liability from the cancellation of debt on an investment property can be offset against other business liabilities and expenses. This exception does not apply to properties occupied as a residence by the mortgagor.

  In many short sales, a seller would be able to qualify under the first two of these exemptions, especially since it was almost certainly necessary to show financial hardship in order to convince the lender to agree to a short sale. However, it is the seller’s responsibility to notify the IRS why the amount in the 1099-C should not be counted as ordinary income. Otherwise, the IRS will consider the forgiven debt as income and penalize the seller for unpaid taxes.

  What to Tell Clients

  To ensure that your sellers don’t run afoul of the IRS and blame you, you should notify all sellers in writing that they should seek professional tax advice regarding the possible tax consequences of selling their home.

  While you certainly don’t want to give specific tax advice, you should also alert short sellers to the basic facts about the tax consequences of short sales. With the current foreclosure crisis in this country, many, including NAR, are working to reverse this law. However, until that time, real estate sales associates must be aware of the potential tax issues for a seller in a short sale.

  Editor’s note: The NATIONAL ASSOCIATION OF REALTORS® has long worked to change the tax laws and eliminate this “phantom tax” on income. Currently NAR is supporting the passage of S. 1394, the Mortgage Cancellation Tax Relief Act, which would repeal the law that requires home owners to pay taxes on forgiven debt for their principal residents as part of a short sale or foreclosure. Learn more about this topic at REALTOR.org.

  About the Author: Lance Churchill is vice president of
  FrontLine Seminars, which educates and certifies real estate practitioners in foreclosure, preforeclosure, and short sales. Visit the company’s Web sitefor information about courses on foreclosures and short sales. It’s blog,
  FrontlineForeclosureForum.com , includes a discussion board for real estate practitioners working with foreclosures and short sales
  . Churchill can be reached at 208/846-9644 or lance@frontlinescompanies.com.
  

 
 

 

Lance Churchill is vice president of FrontLine Seminars, which educates and certifies real estate practitioners in foreclosure, preforeclosure, and short sales.

Learn More:

How to Succeed at Short Sales

NAR: Eliminating Phantom Tax Is Good for Consumers

REALTOR.org Issue Summary: Debt Forgiveness

IRS: Q&A on Home Foreclosure and Debt Cancellation