Settlement shenanigans

The Thinker by Rodin

Having recently completed a half-million dollar transaction (the sale of our house) I have been pondering the HUD-1 form we got at settlement. This is a standard form issued by the settlement agency that indicates all the costs of the buying and selling transaction. If a form could stink, this one would stink, at least a little.

Clearly commissions cost money, and the seller typically pays the commissions, both for the listing agent and the buyer’s agent. Traditionally this was six percent of the sale, split equally between agents. In recent years most realtors seems ready to bargain with sellers, perhaps because home prices are so inflated now. 5% is probably typical these days. Some sellers bargain for 4% and probably wonder if they get the same quality of service for this price. Some may get less than that. Our listing agent said she would take 2% in commission, so we agreed to pay 5%, with the buyer’s agent getting 3%. More than once I raised the fairness issue with our agent. She did most of the work and got 2% while the buyer’s agent earned more. She shrugged. That’s the way it goes. She often acts as a buyer’s agent and comes out ahead in those transactions.

Anyhow, the HUD-1 lays it all out. Since we sold the house for $505,000, our agent got $10,100 and the buyer’s agent got $15,150. Nice money if you can get it. But the buyer’s agent didn’t get $15,150. Unknown to us until settlement was the figure in the buyer’s column on Line 205. It’s called “Realtor credit” and it showed $7,000. This is money that the buyer’s agent will give back to the buyer for the privilege of being their agent. So she really got $8,150 from us for the sale of our house, and gave $7,000 of her $15,150 to the seller.

This means in effect that the buyer bought our house for $505,000 but really paid only $498,000 for the property. And this was because we were not savvy enough in the real estate trade to know we should try to discount the commission because the buyer would get a kickback, sorry a credit from his agent.

I am at once upset about this and wanting to shake our buyer’s hand. He’s one crafty dude. It’s not just us whose pocket he picked without us even knowing. He also got a kickback, sorry a credit from his lender (line 204), for $1000. Yes, for the privilege of taking out a loan with PrimeLending of Dallas, Texas, they gave him $1000 at settlement, which means in effect he paid only $497,000 for our $505,000 house. To the buyer’s credit, he did put 22% down in cash and financed the rest. Perhaps that had something to do with the credit.

Of course neither my wife nor I at any time knew we were effectively giving $7000 to the buyer. There was no piece of paper with the offer that said anything about this at all. Maybe there should be. We had two competing offers on the table, both for full price. Maybe we would have accepted the other one had we known. Or maybe we would have countered and asked for a credit from the buyer too. We could have asked for a higher asking price, of course, I just didn’t know these details.

What’s missing is transparency. These credits/kickbacks really affected the entire real estate purchase. Without them the buyer might not have made us an offer, or perhaps he would have raised his offer. We were just in ignorance.

The buyer’s agent just happens to be the top selling agent at our agent’s office. She has found a profitable niche. You see she is Indian and caters to the Indian community. Asians including many Indians are rapidly moving into our former zip code. I looked up the census data, and Asians went from 15% to 30% of our population between the 2000 and 2010 census, so it’s a growing market. There’s nothing wrong with this of course. Indians are likely to ask around mostly inside of their community when looking for an agent. Most likely they heard about her and heard that she offered generous credits on her commissions. In this case, it was a very generous credit, as $7000 is 46% of the money she could have gotten from us if she hadn’t kicked it back.

What she does get to do is to count the $505,000 sales price of our former house to her yearly sales total. It helps make her the #1 agent in that office. Doubtless nowhere in her marketing material is she calling attention to the fact that while she was one of two agents in the sale, she effectively earned a commission of 1.6%. So our agent really made more from the deal. The effect of our sale was that 3.6% was paid in commissions, but we were charged a 5% commission. We apparently gave the buyer a 1.4% rebate, but it’s not listed anywhere. The HUD-1 form at least provides this transparency; it just came too late to be useful.

I’m unlikely to do many more house sales in my lifetime. But if there is a next time I will be more wary. I will relate my experience to my new agent and suggest because we were effectively discounted, maybe 2% for each agent is appropriate. At least that way the buyer pays a higher percentage of the actual house sale, which will end up in our bank account. What I really want is all these details in the offer up front. I know I’m probably Don Quixote pointing my lance at a windmill on this issue.

So it’s too late for me, but not for you:

  • Sellers: if you are planning to sell your home you can at least be wise to what’s going on behind the scenes. Perhaps say you don’t want to pay more than 4% in commissions because you know it is likely that the buyer’s agent will give the buyer a credit.
  • Buyers: find an agent with both a good record of finding people the homes they want at a good price and who is willing to give you a substantial credit on their commission. Apparently 40 or 50 percent is not an unreasonable credit.

If this information is valuable to you, please send me 1.4% of the sale price. Thanks.

Sold to the man with $505,000

The Thinker by Rodin

Now here’s something I won’t miss I thought as we sat in capital beltway traffic during the middle of the day. How many weeks or months of my life had I squandered sitting in Washington traffic? There was no possible way to tally it, but at least it was coming to an end soon. While we were escaping to Baltimore, there was no escape from Washington’s predictably unpredictable traffic, at least not while we still lived here.

Or maybe there was. Ahead was the spur to I-270 north. A relatively new Intercounty Connector now connects Montgomery and Prince Georges counties in Maryland. For $3.20 we could avoid yet another tedious beltway tie up. It was hardly the shortest route to Baltimore but unsurprisingly it was the fastest today.

We were escaping to Baltimore because escaping was what our realtor recommended during open house weekend. Baltimore served the purpose of keeping us close but distracted while allowing our newly listed house to be easily inspected freely by prospective buyers. The big event was Sunday’s open house from 1-4. The calls from realtors had already started. Bright Photoshopped images of our house were now online, emphasizing light filled rooms, wood floors and empty kitchen countertops. Based on the calls we were getting, all the hassle of transforming our home into a house was clearing working. Come by anytime, we would tell the always-polite realtor on the other end of the call. The calls came while we drove down Eastern Avenue in Baltimore, in search of landmarks recommended by my sister who lives nearby. And they came in while we ate an early dinner at Matthew’s Pizza, Baltimore’s renowned hole in the wall pizza institution, also on Eastern Avenue.

The idea of escaping during open house weekend would only be partially realized. There was no escape Friday from the below freezing temperatures, endless snow banks and the partially snow filled parking spaces of Baltimore. There was no escape from the usury parking rates near the Hyatt Regency hotel at Inner Harbor, where we had a room for two nights. At least there wasn’t until we opted for the Arena parking garage six blocks away where the socialist City of Baltimore’s daily parking rate was just $16.00.

Inner Harbor was bone chillingly cold and mostly empty on this Friday night. We had made sporadic forays to Baltimore over the last thirty years, mostly to its touristy Inner Harbor area. In 1984 my then girlfriend Terri had surprised me with two nights in this very same hotel, a perk of being the one who made travel arrangements at her office (and being known by name by the Hyatt reservations staff). It is still an impressive hotel, but Inner Harbor was not quite as impressive thirty years later. The shops were less upscale and there were some vacancies. Thirty years ago Mayor (and future governor) Donald Shaffer might have been seen here strolling among the stores. Inner Harbor was his idea and it was very successful. While Shaffer is dead, his statue is still here overseeing Inner Harbor.

Saturday found warmth slowly returning and snow melting. The free Charm City Circulator made it relatively painless to get from point to point downtown. It helped if you liked to walk. Federal Hill was snow covered, but the walks to Fort McHenry were at least shoveled. The place known for the rockets’ red glare during the War of 1812 was unvisited by my wife, but even on this frosty morning the view of the harbor was still spectacular. The most spectacular find of the day turned out to be the Walters Museum accessed via a slow moving Circulator bus. William Thompson Walters was clearly filthy rich (he was a railroad tycoon). He and his son created a staggering collection of mostly European art, almost all of it in excellent condition that highlights medieval periods and the Renaissance. It’s all available for free but is largely unknown, perhaps because it is hard to get to.

Part of our mind was stuck back home. We wondered how many realtors had come through our house with clients in tow. The phone calls had slowed down, but some realtors might have not tried our cell number and simply brought their clients by. We had seen that happen routinely the last time we had a home on the market.

Sunday morning my sister Mary, who lives in nearby Columbia, volunteered to give us a driving tour of Baltimore. Mary might as well have been born in Baltimore. She adopted the city and likes to dress up like a Baltimore “Hon” with a beehive hairdo during Honfest week. She gave us a tour of areas of Baltimore we had never seen. Baltimore has an undeserved reputation. It’s actually an amazingly diverse but very urban city, known for its endless brownstones and many ethnic areas, most of which are quite safe and festooned mostly locally owned businesses. Urban prospectors would be smart to check it out. We checked out the Broadway Diner on the far side of Eastern Avenue for breakfast before starting our driving tour. We also checked out my father and stepmother on our drive back home, and stayed for dinner with them as well.

We returned home near sunset, our house emptied of people but with the back doors unlocked and a stack of real estate business cards on our dining room table. We spoke by phone with our realtor. The open house was a huge success. So many cars were parked along the side of the street that our neighbors had a hard time getting down the street. One prospect had driven up over our curb into our driveway, leaving tire tracks on our sod. Our house was still clean, but the driveway was full of muddy boot prints and tire tracks.

Our realtor was proactive enough to hire an assistant. They had prospects leave their boots and shoes on our porch. Debbie (our realtor) handled the front of the house while her assistant handled the back of the house. Rooms were frantically inspected and closets peered into while various couples tried to imagine if they could live here and afford our $505,000 asking price.

Debbie said we had an offer and to come by her office Monday afternoon. When we arrived on a spring-like Monday afternoon, she had two offers for us to consider. Both were at our full asking price. Both buyers were highly qualified, putting 20% down in cash and financing the rest. Both were happy to pay our asking price. And both were single men. The offers were essentially the same. We chose the Indian guy mainly because his settlement date worked better for us. (We imagined he had a bride to be back from India, and that our house would eventually be full of children.) We drove home with an Under Contract sign to place atop our For Sale sign. Our house had been on the market exactly three days.

This outcome was surprising but should not have been. It’s not for the same reason that we sat in beltway traffic three days earlier. Despite the hassle of living in the Washington region, people still have a frantic need to live here, and are willing to pay the price. It is a seller’s market in our area right now. Moreover, we were the only house for sale in our desirable neighborhood, and our house is in excellent condition. We hit the jackpot, but it was by design, not by chance. It meant about $10,000 more in fix up expenses in the last six months, and a huge amount of labor. It meant cringing while a stager turned our home into something we did not recognize. And it meant a weekend in Baltimore playing tourist while buyers assessed our house and pondered offers on our hot property.

It was a triumphant and to me stunning conclusion to our house selling odyssey. We now have to figure out where to live while our house is built, and we already have an unexpected offer from my sister Mary to live with her rent free in Maryland.

The Walls of Jericho have fallen down. A new adventure in Massachusetts waits for us.

There and back again: a three-day nerve-wracking adventure in house hunting

The Thinker by Rodin

It’s been a while since I have put out a post. When that happens it is usually because I am busy. Retirement is supposed to be less busy and more restful. So far that hasn’t proven to be true. Of course, most retirees don’t start their retirement actively working to move 500 miles away. We are moving of course to simplify our lives, but at least for a year or so it will make our lives much more complex.

Case in point was last Wednesday through Friday when we made a whirlwind visit to our future home in western Massachusetts. We had to go to pick a home. A confluence of events made a trip a necessity, but it all boiled down to my wife’s great desire to move into a new house. New houses don’t grow on trees, although it takes a lot of trees to make one. A new house takes six months, sometimes more to go from plot of land to house and it starts with the hassles of picking a plot and a style house at a negotiated price and then financing the deal. So we were there to look at a few final candidate-housing sites and hopefully make a selection. All this right before Christmas and after being delayed for a few weeks while my wife recovered from another cold from hell.

It could have been delayed again by winter weather, always problematic in December. But the weather gods were benevolent this time. We dealt with cold weather but no precipitation during our drive from Northern Virginia. We try to avoid the New Jersey Turnpike, which also allows us to dodge most Washington area traffic. So this meant sneaking out of town the back way, up U.S. 15 past Gettysburg, around Harrisburg on I-83, then I-81 to I-78, and then about forty miles of I-287 in New Jersey until we slipped into Connecticut on I-84. The only toll on this route was $5 to cross the Tappan Zee Bridge over the Hudson River. Traffic congestion was not too bad either: some roadwork on I-287 and some delay getting through Hartford during rush hour. Otherwise it felt surprisingly speedy, just 8 hours and 45 minutes with minimal stops. We arrived in Holyoke, Massachusetts in darkness and wended our way back to the now comfortable D Hotel where we had stayed in August. The affiliated restaurants at the hotel were jammed with locals there for holiday parties, but the hotel itself was largely empty, which was how we could get a room there for $68 a night at a Hotwire rate.

In the winter the Northampton Massachusetts area remains pretty but definitely looking different than in the lushness of summer. The trees of course are largely bare and the days are very short with near total darkness by 4:30. There was no snow on the ground except in a few piles in parking lots, but the temperature was at or below freezing most of the time with stiff breezes. It’s a beautiful area even in the winter without snow, but one thing I noticed in this trip is that it is obviously less prosperous than Fairfax County where we live. All the money in our county buys large houses that are newer in general but also meticulously well maintained. Fairfax County also has stricter zoning: no ugly billboards to view driving down the road. In Northampton there are quite a few shabby houses, shabby mostly due to age (many are a hundred years old or m ore), but also because people earn less there. Northampton has pretty good zoning laws, but go outside the city limits to places like Hadley across the Connecticut River and it quickly turns ugly. No place is perfect.

Thursday was decision day and it was as challenging as you can imagine. Next to deaths in the family, divorce and losing a job, buying a house out of state must be the next most challenging event in life. In August we had scouted lots of neighborhoods so we knew what we liked and where. In January there is not much on the market. But if you are going to have a house built it’s a bit past optimum time to place your order. Ideally you make these decisions before the foundation is laid but it took months of discussion for us to get this far. This late in the year it is problematic but still possible. Wait too long and groundbreaking is likely to occur April 1.

We looked at a new community being built in Hatfield, a bit north and east of Northampton. The houses we looked at were large and quite fancy, not to mention an excellent value. It’s just that no one was actually living there yet, and only one plot of the 12 had been sold. Two units had been finished, and one was under construction.

The salesman with a ring in his ear told us his husband was the architect and was currently out of state. (I mentally noted how completely banal gay marriage was in Massachusetts. It is so institutionalized that no one gives it a thought.) While I loved the house, Hatfield did not agree with me. It is filled with mostly old houses, very large and many not well maintained, often with a farm in the backyard. There was no bike path, no restaurants to speak of and no place to buy groceries beyond a corner store. My wife really liked the community but I couldn’t see myself spending the next thirty years in a community that did not appeal to me, no matter how nice the house. It was not yet noon and already we were in arguing.

So it was back to the 55+ community near Northampton that was the reason for our visit. Armed with our buyer agent realtor Craig, we met again with the realtor selling the property to go through available plots and other issues. Our realtor took us through a nearby park and we ate lunch at a local diner while we argued and tried his patience. Eventually we sent our realtor back to his office while we went back to the hotel to hash through all the options and then drive through both neighborhoods again.

We took a break to meet a client of mine living in the area. We met him at Joe’s Pizza in Northampton, so popular that even on a cold Thursday night there was a significant wait for a table. But the pizza at least lived up to its reputation. My client Roger turned out to be a really nice guy and we all got along great. Count one future friend in my future neighborhood. Roger helped take our mind off the impending decision and we agreed to sleep on it. Sleep was somewhat restless as we weighed in our own minds the size of our decision. Having a new house constructed would most likely mean we would close on the sale of our house first, so we’d have to endure temporary housing in the area. We were not thrilled with the alternative, but it’s the price to be paid when you make the decision to go for a new house.

Morning though at least brought clarity: we wanted a particular lot in this community in Florence, which is on the west side of Northampton. We ate breakfast at Sylvester’s in Northampton while trading calls with our realtor. Mostly though we needed to get back on the road for home. The greyish skies suggested snow and/or ice but nothing happened. The weather improved the further south we went. We tried a different route going home by taking I-84 through southern New York State and northern Pennsylvania, then connecting with I-81. It turns out it is just as quick as our other route, much less used and thus much less likely to be affected by traffic accidents. We made great time. Driving time was about eight hours.

Once back home we immediately started trading emails with our realtor and chatting with him on the phone. Yesterday we went back and forth on the wording of an offer. It was declined, not because they don’t like us, but because the seller wants a guarantee that we will buy the house even if our current house doesn’t sell. So more paperwork remains and our credit union will get a call in the morning.

Three days. There and back again. More forms to fill out. More paperwork to file. More decisions to be made. More house to clean and prepare to show. The house decisions at least is made but waiting to become more concrete. A new year approaches. 2015 looks like it will end a whole lot different than where it will start: in our new home in New England.

If you care about the environment, choose your realtor with care

The Thinker by Rodin

The Koch Brothers have been much in the news lately, at least if you follow political news. The two brothers own Koch Industries, which itself is a holding company for a lot of other companies it owns. The brothers are Charles and David Koch, but Koch Industries was actually built up by their father Fred, who long ago went to his reward.

Aside from their obscene wealth, the Koch Brothers have been known for their extremely conservative views. Moreover, they have not been afraid to put their money where their mouths are. Their money helped elect Scott Walker as Wisconsin’s governor. Together their political action committee, KochPAC, spent huge amounts of money on the 2012 elections, to little effect. As an investment, it was an unwise one, but its magnitude was stunning: over $400M. Their PACs alone spent nearly three times more in the 2012 election than the top ten labor unions combined.

Koch Industries is into lots of industries, principally industrial in nature. Their profits depend on getting natural resources cheaply to market. It’s not surprising then that Charles and David are premier anti-environmentalists, who vehemently deny that global warming is a problem and are trying to keep their industries from being impacted by pesky and costly pollution laws. Koch Carbon has created a lot of petroleum coke as a byproduct from refining oil shipped from Canadian tar sands. The product, called petcoke, has been piled up many stories high along parts of the Great Lakes. A huge noxious cloud of dust from a petcoke pile was captured on video last year. Its presence doesn’t bother the Koch Brothers, who don’t have to breathe the stuff, but it was of great concern to residents of Detroit and Windsor, Ontario, who were on the receiving end of these polluted dust clouds.

While primarily into industrial activities, the Koch Brothers have influence in some surprising areas. One thing the Koch Brothers do well is create PACs and network related companies to contribute toward these PACs to achieve common goals. For the Koch Brothers, this is principally electing conservatives with an anti-environmental bent.

Many parts of the country are controlled by a handful of national realtor firms. Ever hear of Realogy? I hadn’t. There is a good chance you have heard some of these real estate firm names: Coldwell Banker, Century 21, Southbys, ERA and Better Homes and Gardens RE. It just so happens that Realogy gives heavily to Koch Brothers-related PACs. And Koch Brothers PACs give money principally to candidates that are anti-environmental, not to mention anti-union.

Real estate commissions are quite profitable, typically six percent of a house’s purchase price. A house selling for $250,000 actually costs $265,000, when you add in the typical real estate commissions. (It’s more than that, of course, when you add in all those other fees that come with buying a house.) Often the fee is split between two realtors: the seller’s agent and the buyer’s agent. If you consider how many houses are sold across the country annually, you can see that real estate commissions amount to a huge amount of money. Of course the individual agents keep a lot of it: it amounts to their salary. However, they also kick back a lot of it to their companies. Companies like Coldwell Banker ship their profits back to Realogy. Realogy’s in turn uses some of those profits to fund Koch-related PACs. It helps explain why the Koch Brothers-related PACs can find more than $400M to spend influencing elections in 2012 alone. For a company this big, $400M amounts to the change found under the family’s sofa cushions.

Curiously, most of the agents who work for these companies have no idea where these profits go. It’s likely that many of them are like me: environmentalists. They would probably be aghast to learn a substantial amount of this money is spent to help elect politicians who will be anti-environmentalist. I’m not a realtor, but I am a likely home seller and buyer in the next year or so. I would have known none of this had I not spoken to a realtor, who shall remain anonymous, with progressive leanings, who gave me the inside dope on all this.

What this means for us home sellers and purchasers is that unless we are very careful we are indirectly contributing to the destruction of our planet. If next year when I expect to put our house on the market I choose a realtor who works for a company controlled by Realogy, I could be indirectly contributing to PACs controlled by the Koch brothers, which will go principally to electing people who will further harm the planet.

I am so glad to get this insider information. If you are an environmentalist and in the housing market, then you should be glad to be reading this post too. In fact, I hope you will take a moment to “like” it or hit one of the share buttons for this post, and broadcast it to your friends. Perhaps, before listing your house, you should choose a realtor firm not associated with Realogy. Among the national firms not part of Realogy are ReMax and Keller Williams. Perhaps, before hiring a buyer agent, you should do the same. That does not necessarily mean that ReMax and Keller Williams may not be channeling some of their profits into these anti-environmentalist causes. But it seems less likely that they are.

Deciding who to hire as your realtor or buyer agent of course is a complex decision. Typically you are more interested in the agent than the company they are affiliated with, and his or her track record. If you are an environmentalist, you can look for good agents that simply aren’t associated with these firms. You can also choose small, local and independent realtor firms. These firms don’t have to send their profits to a national office. They can keep the money in their community instead. And that sounds environmentally friendly.

You can bet that before I sign a contract with a realtor, I’ll be assured that my money will not indirectly support any Koch Brothers PAC, or any anti-environmental cause. I hope you will do the same.

Updated 3/9/14 – I initially published this with some incorrect information. I had suggested that Realogy was owned by the Koch Empire. This is not true, however Realogy does give heavily to the Koch Brothers’ related and approved PACs. The full extent is hard to determine, since individuals working for Realogy can make contributions to any organization they choose under their own name. As for the official Realogy PAC, you can see how it spent its money here. As you can see, a lot of it went to the Madison PAC, whose Facebook page indicates its purpose is to get conservatives elected to Congress.