Good News for Denver Home Sellers

Forbes magazine just released their list of the 10 best cities for home sellers in 2008. And guess which market came in at #7? Our very own Denver!

To assess each market, Forbes looked at unsold vacancy rates, construction starts (to see if a lot of new construction would be cropping up and making vacancy rates worse), job creation (to see if buyers would have jobs, so they could buy houses) and Freddie Mac and Fannie Mae's new conforming loan limits (to see if those buyers could get loans without having to pay premium "jumbo" mortgage rates).

Apparently Denver looks good. We have a 3% unsold vacancy rate, which is great news because last year our rate was 23%. A 20% vacancy drop is a very, very good thing. We've also seen a 2% jump in new jobs, and -- best of all -- a 49% cut in construction starts. This makes me happy. Less new homes springing up means less inventory on the market, and more buyers gravitating toward purchasing existing homes.

And, if you'd like anecdotal evidence to back up the good news, I listed a 1970's Littleton townhouse a few weeks ago, and it went under contract within a week.

If you really want to feel better about our market, compare it to some of the riskiest markets. Phoenix, for example. When I lived there in the late '90's, housing prices were skyrocketing. Now they've tanked. There are over 53,000 homes currently on the market there. Fifty three thousand. That's over a five-fold increase over the past three years. Can you imagine competing with 52,999 other homes to sell yours? And the Catch-22 is that the local economy is built heavily on construction jobs. If construction starts decline (which they really need to do, with 53,000 existing homes in current inventory), then construction jobs are lost and buyers fall out of the market. It's tough to win in a scenario like that.

Yep, we've got it pretty good here in Colorful Colorado!

Top Ten Tips for Repairing Your House Before Sale

It's getting more and more important to prep a house before putting it on the market. There's a LOT of competition out there. The buyers who are looking at your house are looking at a bunch of other houses in the same area. Yours has to stand out. What's worse, some of that competition is bound to come from foreclosures. And they're going to stand out because they're priced 5% to 10% lower than yours. (I know that doesn't seem like a lot as a percentage, but 10% of $200,000 is $20,000. That's a lot of competition!)

So if you want to sell your house without letting it go at a foreclosure price, it's got to be in better shape than a foreclosure. Buyers might overlook bent screens, dinged woodwork and broken shingles if they think they're getting a great deal. But at market price, they don't like to see that stuff.

My favorite part of this has to do with smells. I'm a freak about this. When I'm with buyers, we usually give nicknames to each house we see. It's easier and more fun to remember a home as "Big Plaid Wallpaper House" than as "You know, the one on Vance Court. Two story, blue trim, 2000 square feet . . ."

And when a house smells, guess what name it gets. "Smelly Cat House." Or "Weird Cologne Trying To Cover Up Smelly Cat House." A bad smell will drive buyers away. So will a weird smell that's clearly an attempt to cover up a bad smell.

If you're selling a house that contains smelly pets, a smoker, weird or aromatic foods, or anything else with an overwhelming olifactory presence, you need to do some work. Get rid of the source of the smell. (Seriously, it's best if Kitty lives elsewhere for a while.) And then clean or get rid of everything that harbors the smell.

I know it's hard to tell what your own house smells like. Ask a neighbor. Ask your realtor.

And take the answer very, very seriously.

Remodeling to Sell? Think Twice . . .

Well, it's out. The annual "Cost vs. Value" report for 2007. It shows how much common remodeling projects cost, and how much they increase the value of a home. Results are divided by region, with some particularly common projects broken down by metro area.

Guess what? In the Mountain Region, not a single remodeling project recouped its cost. In other words, remodel if you want to live in it and enjoy it. But don't remodel to make money if you're ready to sell. It apparently doesn't pay these days.

Some examples: Replacing exterior siding was, nationally, a very popular option. Still didn't pay for itself in most places, but the national average gave it an 88% return on investment. In Denver, only a 69% return.

Adding a deck? Cost will be roughly $10,182. And it'll add just under $8000 to the value of your home. New windows? 75% return.

And then there's the old standard favorite, the kitchen remodel. It'll cost around $20,000, but only add about $15,000 to the value of the home.

Why so little return from remodeling these days? Basically, construction prices are going up and home prices are remaining stagnant. So you're paying for the increasingly expensive commodity, but not seeing a parallel increase on the return side.

Note that this is referring to remodeling jobs, not smaller "facelift" type projects. Painting, new carpet -- projects like that are inexpensive, and tend to give a bigger bang for the buck at closing time. They change the "feel" of a house without the high price tag of a remodel.

So when it comes to projects that help a house to sell, think small and pretty.

Four Multiple Bids and Counting

Okay, so now I'm up to four multiple bid situations in two weeks. Still don't know whether my buyer got the property.

I was contemplating this situation, and have concluded that it indicates that buyers are indeed out there. They've just been waiting for prices to adjust -- which in some segments they have. Two of my multiple bids have been foreclosures. Another was home on a large lot in a popular "scraping" neighborhood. And the fourth was a family home in an established, suburban neighborhood.

At any rate, it strikes me as a good indication of the direction of our market!

Dealing with Multiple Bid Situations

I've been involved in three multiple bid situations in the past week and a half. Three.

A multiple bid situation is where more than one buyer is competing to purchase a property. It used to happen a lot back in the "hot" market of the 1990's, where multiple offers would frequently come in immediately after a home was listed.

And in this "slow" market, I've had it happen three times in the past week and a half. Twice I was representing the seller, and once the buyer.

Things aren't as slow as you may have been led to believe.

In two of those cases, the final contract price wound up being higher than the original asking price. In fact, in this most recent case, my buyer offered $6000 over asking (on a property priced just over 200K), and still lost out to another buyer who apparently went even higher.

So I thought it might be fun to look at how these situations come about, and what factors to consider when in the midst of one.

More often than not, multiple offer scenarios happen in the first day or two a property is one the market. This was the case in two out of the three I was involved in. (The other had been on the market for several months when two offers suddenly came in on the same day.)

The first thing that usually happens is that the listing agent contacts both buyers' agents, notifies them that they are in a multiple bid situations, and invites them to submit their "highest and best" offers within a defined time period. (Usually no more than 24 hours, sometimes a lot less.) The sellers then review all of those "highest and best" offers. Usually they accept one and reject the other(s). Sometimes, if neither offer is high enough, they will counter one (with a "binding counter") or more (with "non-binding counters.").

This can be really tricky for the buyers involved.

For the buyer who really wants the property, it's a bit of a guessing game to try to figure out how much the other buyer or buyers want the property. That's especially tough because these buyers are completely anonymous. One buyer generally knows absolutely nothing about the others. What was there original offer? How much will they offer now? WIll they go over asking price? How far?

Sometimes (but not often) a buyer won't even bother raising the original offer. That happens when a) the buyer was only throwing the offer out to see how low the sellers would go, and has no intention of paying full market value, or b) the buyer really wants the house, but is foolish and/or stubborn.

When I'm representing buyers in that situation, here's the advice I give to them. First of all, this is most likely your one chance. I can't believe how many times I've seen this when representing a seller in a multiple bid. A buyer's agent submits, as the buyers' "highest and best", a relatively low offer. When they learn they lost to the other party, they say "Oh, we would have gone higher" or "we would have dropped the request to pay closing costs." Then they always say "We were expecting to get a counter."

Highest and best means highest and best. Odds are good there isn't going to be an opportunity to counter.

I always encourage buyers to stop looking at the asking price of the house and start to look at the value. If neighborhood comps show that the property is priced low, then a buyer can easily pay over asking price and still be getting a very good deal. And, in a multiple bid situation that happens when a property is first placed on the market, that is frequently the case.

The question comes down to how badly the buyers want the house, and if the numbers back them up. Obviously, if a property were overpriced and they were bidding over asking for purely emotional reasons or just to "win", I'd be questioning their motivation. (But if it were overpriced there probably wouldn't be multiple offers on the same day.) But if it's the right home for them, it just appeared on the market, and it's priced right, I usually encourage them to bid over asking price. I've just been in this situation many times, and the final price is literally ALWAYS over asking. How much over asking they should offer depends on 1) how far below market the property is priced, 2) how high they could go and still be getting a good "deal", 3) how high their budget will allow them to go, and 4) how badly they want the house and how likely it is that they'll find another one they like as much.

Another trick with multiple bids -- the terms of the offer start to matter more. If two bids wind up offering the same price, the other factors start to come into play. How much money is each putting down? (More down payment means more financially stable, less likely to flake out before closing.) How soon is each one willing to close? Is either asking for the seller to pay closing costs. I'm a firm believer that buyers in a multiple bid situation should never ask for the seller to pay closing costs? Sellers don't like that -- at least my sellers never have. Even if the net price winds up being the same (ie buyer asking for closing costs is offering the same amount as an increase in purchase price), sellers will most likely choose the buyer who isn't asking for closing costs. One, the purchase price is higher to incorporate the closing costs, therefore the property has to appraise for the higher amount. Two, not being able or willing to pay one's own closing costs makes a buyer look less financially stable. Three, every seller I've ever worked with just plain resents it.

When deciding how much to bid in a multiple offer situation, I always ask buyers this: "Which regret would you rather live with -- not living in this particular house because you bid a few thousand dollars too low, or living in it and wondering if you could have bought it for a few thousand dollars less?"

There is no right or wrong answer. But it sure helps clarify a buyer's thinking.

The Art of Negotiation: More is Not Always Better

Part of being a good realtor is to negotiate well on behalf of clients. That, after all, is supposed to be the reason we exist as a profession -- to look out for what is best for those clients when they're buying or selling real estate.

But being a good negotiator is more than just the ability to be cagey or slick. It's about understanding human nature and knowing what kind of behavior or "tactics" are appropriate in a given situation.

Case in point. Sellers get an offer on their house. The offer is significantly under market value, no doubt because the buyers have watched too much television news, and are convinced that all sellers are desperate and that they can swoop in and pick up real estate at bargain basement prices. The agent's cover letter lists a couple of minor issues -- like the color of the bedrooms and the "need" to replace a small area of perfectly good but not perfectly new carpet -- as the reason for the low offer.

Sellers are annoyed, and have no interest in selling at the offered price. They're preparing to counter at a reasonable price, and gritting their teeth because they suspect that even if they do reach a mutually acceptable price, these won't be easy people to work with.

And then, lo and behold, another offer comes in. So it's a multiple bid situation. (Yes, it still happens in this market -- more often than you might think.) Throughout the negotiations, agent #1 and her buyers are clearly "playing the angles" -- refusing to commit to or sign written counters, keeping their offers verbal, trying to stay as low as possible until the last possible moment and then suddenly bumping up. Meanwhile, agent and buyer #2 are cooperative and pleasant. Buyers don't hide the fact that they're in love with the home. They sign and return counters immediately. They work in good faith within the framework sellers have set up.

In the end, both prospective buyers have come up to a price very close to asking -- about 75% higher than #1's original offer. #1's final offer winds up being slightly higher (after literally bumping it up $6000 in 5 minutes after realizing they were falling out of the running).

And yet the sellers choose #2. Why? Because a real estate transaction is about more than raw numbers. Determining a mutually agreeable price is just the first in a long series of negotiations culminating in the close of the sale. There's inspection, negotation on what repairs will be done and when, and the host of unanticipated issues that can arise during the contract period. Even if buyers and sellers never meet, they're working together. They know when the other party is being difficult, and it affects everybody involved in the transaction. I've seen it happen over and over again. When you get one party, be it buyer, seller or agent, who is overly defensive and paranoid, the stress level goes up all around. Everybody becomes defensive, and subsequent negotiations are drawn out and difficult. When everyone is cooperative and looking to be fair and reasonable, the entire contract period can actually be a pleasant experience.

The sellers in this case are good people who want to be fair and want to do the right thing. And they want to work with somebody they trust to be on the same page.

None of this is to say that there's anything wrong with seller's working to get the best price they can for their home, or with a buyer trying to get the best deal possible. That's what we do for our clients. But are better and worse ways to go about doing that. In an impersonal corporate situation, or in a case where one party has proven untrustworthy, perhaps cagey game-playing is the way to go. But when families are buying and selling their homes, it's not the time to play slippery ace negotiator.

It can backfire. Badly.

We Make Ugly Deals

You've probably seen the "We Buy Ugly Houses" billboards around Denver. They're done by a company called Home Vestors, which buys houses for below market rates, for cash, with quick closing times. It's a set-up that appeals to people who are so desperate to get out of a house quickly that they're willing to take less than what they could get if they took the time to list and sell the house on the open market. I've never had any contact with Home Vestors, so to the best of my knowledge they're perfectly honest and do a good job at what they do -- which is buying houses for a lot less than their owners could otherwise have sold them for.

I HAVE, however, had some experience with at least one independent businessperson (NOT affiliated with Home Vestors) working on the same basic business model. And I didn't find him to be quite so honest.

A woman called me because this "nice man" had, for the past three years, been coming to her home offering to buy it. Over time "offering" had become "pressuring." She was feeling like it was time to sell, and was thinking of taking him up on his offer because it would involve a lot less hassle than going through the whole listing process. It would have been VERY easy, what with him showing up at the house regularly with pen in hand, insisting that she sign. I asked her to show me the contract.

Holy cow! I don't know where to being with all of the subtle ways he was ripping her off. We can start with the price, which was WAY below what I knew the property was worth. Then there was the non-existent earnest money. And the clause where he had the right to immediately begin repairs to the house -- and she would be contractually obligated to pay him two dollars for every dollar he spent. And the other clause where if she changed her mind, he would sue her and she would have to pay for all of his attorney's costs.

It went on and on like that, but you get the idea.

I told her to run and run fast.

She asked me to list the property for her. I did -- at $70,000 more than he was offering her. And it went under contract in a single day.

That's a whole lot more money in her pocket for really a lot LESS hassle than she would have gone through continuing to deal with him.

The moral of the story? Beware of deals that look too good to be true. And never, ever sign anything real estate related without at least having it reviewed by an attorney or a real estate professional who has your best interest at heart.

Open House Aren't What They Used to Be

So Realtor magazine is confirming today what I already knew -- open houses are not particularly helpful in selling a house.

In today's Daily News, they're reporting that while 80% of home buyers use the internet to search for homes, only 42% even visited a single open house in the past year. They didn't give the percentage of those buyers who wound up buying the open house they visited, but I suspect that number is very, very small.

When I was going through the various and sundry training sessions I received in the course of becoming a realtor, one thing became very clear to me. Realtors don't hold open houses to sell the houses they're holding open. They do open houses to get exposure to buyers to whom they can represent to buy other houses. It's a way of recruiting buyer clients. And, secondarily, as a way to show your sellers how very, very hard you're working to sell their house.

Still, once I got my license, I held a few open houses. I'd bring chocolate chip cookie dough, so that the smell of freshly baked cookied would make the house smell welcoming and home-y. Then I'd sit there. A few neighbors and looky-loos would trickle through. I'd eat all of those d**ed cookies myself (sometimes before they were even baked) and leave with a tummy ache.

As a rule, I don't do open houses any more. I have several reasons for that. One, they're notoriously ineffective at doing what they're supposed to do -- selling the house that's being held open. In the age of the internet, serious buyers don't spend their spare time driving around looking at open houses. They spend their spare time on the internet, where they can look at hundreds of houses in the time it takes to walk through one open house, all without using any gas or fending off an ambitious realtor trying to recruit them.

Second, they're relatively dangerous. To me, there's something very creepy about posting a sign that says "Mary Beth is sitting in this house alone. Please come in." More than a few realtors are assaulted and even murdered every year, and most of the time, it happens at an open house. Most realtors who do open houses have several stories about suspicious visitors, even threats and near-misses from known felons. Any why not? How many other situations are there where a woman posts a public notice that she's going to be alone somewhere? All kinds of personal safety devices are marketed to realtors in the name of keeping us safe at open houses. We can carry mace, alarms -- even firearms. I might take the risk and even "pack heat" if I thought it might result in the sale of a property for my clients. But the risk-benefit ratio just doesn't add up.

Third, I have other ways of finding buyer clients for myself. I build my business by referral, not by recrutiting strangers at open houses.

Fourth, I don't have to do "busy work" to convince my seller clients that I'm doing everything I can to sell their homes. They already know it. The staging, the pre-inspection, the mailings -- and most of us, the presence and prominence their listings receive on the internet, where the real buyers lurk, tell them everything they need to know about my commitment to selling their homes.

There are, of course, a very few exceptions. If a property is located in a particularly "hot" area with a lot of foot traffic, I'll try an open house. Most of the time I won't hold it myself, but rather give the opportunity to a new realtor who is using open houses to build business. Occasionally I've done them myself. And even in those situations, I find myself mostly sitting alone and eating a lot of cookie dough.

Open houses aren't what they used to be.

Forbes lists Denver in Ten Best Cities to Buy a Home

They say all real estate is local. And it's really true.

Forbes magazine recently did an analysis of estimated 2008 housing inventory, sales rates and turnovers to determine where there is most likely to be an increase in sales in the near future.

Guess what city came in at #5?

The article, called Best Places for Real Estate Deals, said that a pure "buyer's market" is one where there are far more sellers than buyers. That creates a drop in demand, which leads to a drop in prices. Or, in Denver's case, a stall. The article shows Denver's price growth since 2006 at exactly 0.0%. But if that market is expected to drop further, buying may not be a good idea.

So Forbes set out, using sales and inventory models from Moody.com, to determine which markets are expected to experience upswings that will make buying today worthwhile.

About Denver, they said While other markets have experienced meltdowns, Denver has been quietly correcting its inventory glut, which at the beginning of the year was one of the worst in the country. Though prices aren't expected to rebound quickly, if Denver sellers continue to unload their properties at discounted rates, it could be a strong year for buyers, with less risk than the past two years.

So don't believe the gloom and doom you read in the local papers. Now may be a very good time to buy!

Sellers who use a realtor make more money

Before I was a Realtor, I was a "realtor-wannabe." I was always the one volunteering to help friends (and sometimes total strangers) look for a new home. When somebody new moved into town, I was the "chamber of commerce" -- giving them tours, showing them neighborhoods, talking through their housing options. I loved doing that, and it's one of the reasons I hung up my "amateur" standing and became a professional Realtor.

But one time I took it too far. I tried to sell my own home as a "for sale by owner" (FSBO). "Why not?" I thought. "It's a hot market, I don't need help finding a buyer. And I could put all of that extra money in my pocket."

Famous last words.

It WAS a hot market, so it only took a couple of open houses and I had a buyer. Buyer didn't have an agent either. It was just the two of us -- the blind leading the blind. One of us (I don't remember which) found a contract template at an office supply store, we wrote it up, and we were good to go.

Or so we thought.

I got a call from the title company a few weeks later. Any conversation that starts "Gee, I'm glad I'm not you," can't possibly end well.

The house hadn't appraised for the agreed-upon sales price. The buyer was freaking out. I had no idea whether or not I had to let her out of the deal, or if I could force her to buy it anyway. I didn't think my templated contract had given her an "out" for appraisal. I called an attorney, who told me I didn't have a leg to stand on. She walked -- no, ran -- and I called a Realtor.

Looking back on that episode from the perspective of all of the real estate training I've had since, I see that the transaction would have been doomed 19 different ways even if the property had appraised. She wasn't planning on an inspection. I had never had it inspected, so I had no idea what lurked behind the walls. I had no familiarity with the various disclosures required by state law.

It was a lawsuit waiting to happen.

Believe me when I say that I understand the temptation to try to save that 3.2% of the purchase price. It's a lot of money to any homeowner -- it was a lot of money to me then, and it's still a lot of money to me now.

But what I've learned is that the math isn't so straightforward in a home sale. At the end of the day, someone who sells by owner probably doesn't wind up with an extra 3.2% in their pocket. In fact, the best statistics I've seen show that it's the sellers who use an agent who wind up pocketing more money -- a lot more money. According to National Association of Realtors' Profile of Home Buyers and Sellers for 2006, FSBO homes sold for an average of 36% less than homes sold with a real estate agent. That's thirty six percent. Not three point six percent. Thirty six. Over one third.

It makes sense to me. Realtors know how to prepare a home for sale. They know how to market it. They know how to position it to maximize the sales price (without, mind you, pricing it so high that it won't appraise and the buyer runs off like a scared bunny.) And, most important, they know the ins and outs of the sometimes very complex laws and paperwork and disclosures, so that a post-closing lawsuit doesn't sap whatever profit may have come from the sale.

Another factor: when buyers see a FSBO, they immediately start doing math in their heads. "Let's see, if they're not paying an agent, then I'm knocking 3.2% off my offer price." And if they're not coming in with a buyer's agent, you can bet that another 2.8% is going to come off the offer as well.

I can't guarantee that any one home is going to sell for 36% more with an agent than it would as a FSBO. But I'm pretty danged sure that the difference is going to be enough to make it well worth your while to hire a real estate professional.

Beware of brokers bearing bucks

A while back, a real estate agent's flyer showed up in my mailbox. In it, Mr. Agent announced that he would pay $300 to anyone who referred a client to him.

Three hundred bucks. That's a lot of money -- enough to make anybody want to start combing through their mental Rolodex to find this guy a prospect or two. It's a pretty good deal for Mr. Agent, too. After all, $300 really isn't a lot of money to get him a client and a closed transaction he wouldn't have had otherwise.

So why wouldn't every real estate agent offer a deal like that?

Simple. Because it's illegal.

And it's not just a "little bit" illegal, or illegal only here and there. It's prohibited by federal law. The Real Estate Settlement and Procedures Act (RESPA) governs all real estate transactions that involve a goverment entity (like FHA loans) or a financial institution that is regulated or insured by the federal government (like every bank and mortgage provider). So RESPA applies to every transaction involving a loan, unless the funds are coming from underneath Uncle Barney's mattress.

12 USC Section 2607 (a) says, "No person shall give and no person shall receive any fee … [pursuant to a referral agreement]." The paragraph goes on to exempt referrals between two people who are both licensed to sell real estate. But referral fees between agents and nonlicensed people are not exempted. Both broker and recipient would be guilty of a violation. And what a violation it is -- punishable by fines up to $10,000 and a maximum of one year in prison!

Suddenly that three hundred bucks isn't looking so good, is it?

What baffles me is how any competent real estate agent could not know that. In our world, RESPA looms large over everything. It regulates what gifts we can receive and from whom we can receive them. It regulates what fees we can pay and to whom we can pay them. We're constantly being reminded of the long arm of RESPA and the penalties of running afoul of the regulations. If an agent doesn't know about RESPA policies, it makes me wonder what else he doesn't know.

Even if this practice wasn't illegal, I'd have a problem with it. After all, if you asked a friend for a referral to a good realtor, what criterion would you want them to use? Would you prefer "I know and trust this person" or "I know nothing about this guy, but I get three hundred bucks if I can get you to use him." I want people to refer me because they know I'm good at what I do and that I'll take good care of their friends, not because I've paid them off.

At any rate, beware of brokers bearing bucks!!

First offer, best offer

I have a buyer who went under contract tonight.

Six months ago, he made an offer on the same property. It had just gone on the market, and he offered $10,000 under their asking price, in cash. In negotiations, he came up to $5000 under asking price. They said "no" because they wanted their full asking price.

Now, six months later it was still on the market, so we came back to them with our original offer, 10K under asking, take it or leave it. No negotiating. And they took it.

In other words, they could've sold it to us for $5000 more six months ago, and saved themselves six months worth of holding costs. (The property has been vacant this whole time.)

There's a saying in real estate "First offer, best offer." It doesn't mean that you have to roll over and take the first offer that comes along, no matter how low or ridiculous. It DOES mean that it's a good idea to take your first offer very, very seriously, because it does tend to represent the best opportunity to sell the property. These sellers were lucky -- we came back and repeated their first offer six months later. I've seen far too many people (not my clients, fortunately) turn down their first offers cold, make no effort to negotiate and/or show no willingness to come off their full asking price. Then, six months or a year later, they wind up selling for a lot less than their initial offer.

A lot of times, if a lowball offer comes in, sellers are offended. "Insult my house, insult me." That's usually not the case. People are reading that it's a "buyer's market", so they're coming in expecting unrealistic deals. I've seen more than one such lowball turn into a closed transaction, at a much higher price than the initial offer.

Take your first offer seriously.

Who Pays Whose Closing Costs?

"No buyer in their right mind pays their own closing costs. The seller will do that."

That's what one of my buyers was recently told at a "first time homebuyers seminar." It didn't strike me as particularly useful information. But it did make me realize that a lot of buyers don't fully understand the concept of "closing costs", whose costs are whose, what those costs go toward, and who's responsible for paying them.

I think a lot of buyers lump all "closing costs" into the category of "what it costs to close the deal", figure those costs are all mutually incurred, and thus each party equally benefitting. Under that scenario, one party is as responsible as the other, and who pays what is strictly a matter of negotiation.

But that's not the case. In Colorado, the only real expense that truly benefits both parties equally is the 200 bucks or so that the title company is paid to close the transaction. That fee is usually split between the buyer and seller. In addition there are some nominal recording and transaction fees required by the various municipalities for the privilege of recording the transaction. These fees are very, very small as an overall percentage of the total closing costs.

So when a buyer pays thousands of dollars in closing costs, what are they paying for? The vast majority of that money is paid to the buyer's lender for the buyer's loan. Here's a rough overview of how it breaks down:

Origination fee: Most lenders charge an origination fee of 1% of the loan amount. That's a lot of money -- $1000 for every $100,000 borrowed.

Points: Some buyers choose to pay additional "points" (usually 1% of the loan amount for every point) to buy down their interest rate.

Title Insurance: The lender doesn't want to get stuck with a loan on a house that the buyer doesn't rightfully own.

Appraisal: Because the property is the collateral on the loan, the lender will take it back if the buyer fails to make payments on the loan. The lender therefore has a vested interest in making sure that the house is worth what they're paying, and so they require an appraisal of the property to. Does the lender pay for that? Of course not -- the buyer does!!

Days of Interest: Most buyers are delighted to find out that they won't have to make their first house payment until the first day of the second month after closing. In other words, if the purchase closes in June, they won't have to make their first house payment until August 1st. There's a reason for that. Mortgage payments are made "in arrears", which means you're always paying for the previous month. An August 1st payment is paying the July interest expense. But where did June's interest go? It's collected at closing, when the buyer pays the interest on their loan for the rest of the month. If the loan closes early in the month, that can be equal to almost an entire month's loan payment.

Escrow: Most buyers set up their loans to take a certain amount every month for property taxes and insurance. Their lender will then require that the buyer set up a reserve in advance (ie at closing) so that those escrow accounts start out with a positive balance.

Fees, fees, fees: Processing fees and handling fees and overnight shipping fees, blah, blah, blah. If the lender incurs an expense along the way, it's passed on the the buyer.

All of these fees are the buyer's expenses. They benefit the buyer, and paying them is the buyer's responsibility.

Sometimes buyers, especially first-time buyers, don't have the thousands and thousands of dollars on hand that they need to close their loans. So, as a part of their offer, they ask the sellers to pay a certain amount toward their closing costs. Sellers will often agree to this because they realize it's the only way this particular buyer could buy the house. But they mentally subtract that amount from their net proceeds, and negotiate the price accordingly. In other words, if they're agreeing to pay $4000 in closing costs, they're going to ask for $4000 more in the purchase price than they would have if they weren't paying closing costs. Because essentially it's money they're giving to the buyer to pay costs that are the buyer's responsibility and for the buyer's benefit.

Remember, the sellers have their own closing costs, and they're generally much more than the buyer's costs. Seller pays:

Agent commissions: The seller pays both real estate agents. Yes, the seller generally pays anywhere from 5% to 7% of the purchase price of the home for commission, including 2.8% that goes to the buyer's real estate agent. That's a pretty good deal for the buyer!

Title Insurance: This is purchased for the sake of the buyers, to assure them that that they're not ending up paying for a home they don't legally own.

Property Taxes: The seller pays the buyer for whatever property taxes are owed for the days of the year the seller lived in the house. (The buyer will turn around and give that money to the county when the tax bill comes!)

HOA Transfer Fees: Oddly, this can add up to lots of hundreds of dollars. HOA management companies often charge into the three figures just to write a letter.

So will the seller pay the buyer's closing costs? That depends on a lot of factors. How long has the house been on the market? How "motivated" (anxious, desperate) is the seller? Can the seller make up enough in the purchase price to justify the money they're giving back in the form of closing costs?

Sometimes asking the seller to pay for closing costs is the right thing to do. But just know that "it all comes out in the wash." Purchase price or closing costs, sellers are going to be looking at their bottom line, and negotiating accordingly.

Slow Market?

"I'm sorry. That house just went under contract."

"Please submit your offer, but know that we've already received two other offers on that property."

We haven't hear talk like that too often in the past couple of years, but I'm certainly hearing it now. Over the past several weeks, I have faced the following scenarios:

I take buyers to look at a house that's been on the market for three days. While we're there two other potential buyers come through with their agents. My buyers like the house and make an offer that evening. Agent has already received another offer, and he receives a third the next morning. We're in a three-way bid situation. We get the house

I take buyer to look at house that's been on the market for two days. She falls in love with it. Having learned my lesson, we go straight back to write up the contract. I call the listing agent to tell her an offer is coming in. She tells me "Oh, that property just went under contract."

I take a buyer to look at a condo. She likes it a lot, but has a couple of questions. I call the listing agent, who tells me "Oh, that property just went under contract."

I take a buyer to look at houses. She likes two of them, and wants to go back and look again a couple of days later. Both have gone under contract.

If I'm with a buyer and we find the property they want, I am encouraging them to work with me to submit the offer ASAP. I would obviously never pressure anyone to make a decision before they're ready or submit an offer before they're certain. But once they're certain, it's time to act. I'm tired of seeing my buyers disappointed!

So I think the market is picking up! Granted, this is the case for certain well-priced properties in good condition in desirable neighborhoods. There are still plenty of homes languishing on the market for various reasons. Some sellers still think it's 1999 and that their homes have been appreciating at double-digit rates for the past few years. Some homes just aren't desirable. And some perfectly good, well-priced homes just haven't found the right buyer yet.

But, all in all, I'd say the signs are good!

Think twice before pulling equity out of your home

I know, I know. You hear all of those commercials. “Consolidate your debt.” “Refinance to one low payment.” And even “Your house is your bank.” It all seems so easy. Refinance your home and all of your “debt” goes away.

But I see the other side. People come to me because it’s time to sell their homes, and I’m the one who has to tell them that they probably can’t sell it for enough money to cover what they owe on the mortgage.

I really hate it when that happens.

But how does it happen? In many of these cases, people actually owe more than the initial purchase price they paid for the home. That’s because at some point they refinanced the property, the appraisal showed that the property had “appreciated”, and the mortgage company gave them the difference in cash in exchange for a loan based on the new appraised “value” of the home. In other cases, the homes’ owners have taken out a second mortgage or a line of credit on the property, also based on its appraised value.

Problem is, homes don’t always sell for their appraised value. Appraisals often tend to run on the high side of what a home is really worth. Plus, in this market and many others, values on some properties are slipping slightly. Plus it costs money to sell a home. Put it all together, and people frequently find that they’re “in” their homes for more than they can get “out.” In other words, there’s a good chance they’re going to have to show up at the closing table with cash in hand.

The situation gets even worse when you combine low equity with an adjustable rate loan. As interest rates rise, monthly payments go up. Many people find that they can no longer afford their mortgage. But when they go to sell, they find that they can’t sell the home for as much as they owe. So they can’t afford to sell and they can’t afford to stay.

The next step is foreclosure.

This is when people tell me “I have to sell it for $xxx price.” Believe me, I’d love to sell it for $xxx price. The problem is those darned buyers. They really don’t care how much the sellers owe. All they care about is the market value of the property. They (unfortunately) aren’t going to pay more just because they want to help the sellers pay off the mortgage.

I understand that some people make a conscious business decision to pull equity out of one property in order to invest the money elsewhere. That’s called “leveraging.” They’re putting the money to work for them to make more money. That’s a lot different than using the money to pay off credit cards or travel to the Bahamas. They’re taking the same risk, especially if they leave little or no equity in the first property. But at least they’re using the money to make money.

I also understand that sometimes people pull equity out of their homes because they have to – to pay medical bills or take time off to care for a sick loved one or whatever. In that case, thank God the money is there – and know that the downside is that it may be harder to sell the house down the line.

Different people have different philosophies regarding the equity in their home. Some work hard to pay their homes off as quickly as possible. Others like to pull equity back out to invest elsewhere and grow their net worth. Neither approach is right or wrong.

But leaving little or no equity in a property can be very dangerous to your financial health.