Real estate is local—very local. Very very local.
There is no single road map to real estate. There can be no single correct explanation of real estate.
Contrary to what's often implied in real estate reporting and punditry, real estate isn’t one huge national market. First, the rules governing real estate transactions differ among the fifty states. Even in my state, California, practices vary from region to region, even though the legal codes governing real estate transactions are the same throughout the state. And even in my region, the San Francisco Bay Area, real estate practices vary by area—Peninsula, South Bay, East Bay, City—and sometimes even within those areas by city, neighborhood and price range.
Let’s drill down further still, to the most “micro” of levels. Real estate doesn’t differ just by area, it differs by agent. What if I told you I could go through ten purchase contracts written by ten agents in my office and find that they’d all been written slightly (and sometimes significantly) differently, yet all would get past my managing broker and meet the standard of care for my area?
Or what if I told you that I could go through ten different disclosure packages put together by ten different agents in my office and not find two exactly the same, even though our Germanic corporate legal department—rules which must be obeyed!—has given us a handy checklist.
It's a fact that no two agents approach their job the same way, even in the same area. Which makes the practice of real estate about as localized as you can get.
When real estate is that intensely localized and personalized, it’ll only be coincidence if the recommendations of a nationally-distributed “how to” book or real estate columnist are relevant to your marketplace. The details of real estate vary so much from locality to locality and from agent to agent that I’d be misleading you if I said, “This is how to buy and sell a house”, based on my own highly local and personal experience. Unless, of course, you're buying or selling a house in my locality. Then, of course, you can take what I say to the bank.
So what local differences am I talking about? Surprisingly, they're not just what you'd expect: home prices and neighborhoods. In fact, prices and neighborhoods may be the least important of differences, although they're essential to know. Instead, I’m talking about core differences, sometimes subtle but always important:
· local purchase contracts, the heart of the transaction, which differ in significant ways to reflect local customs and conditions
· local disclosure forms (which out-of-area agents don’t have and don’t even know about) which disclose local conditions (also unknown to outsiders) that significantly affect the value of local properties
· local practices: the nuts and bolts of how homes are bought and sold in an area
· individual office practices which can vary by area even within the same company or franchise
· the average level of professionalism in an area, which can vary from abysmal to inspirational
· the standard of care—the unwritten dos and don’t, the thou shalls and thou shalt nots—to which local practitioners are held by courts and expert witnesses.
You’re reeling in disbelief. Real estate is just real estate, right? It can't be nearly as complicated as the job you do and the field you're in. Why would each locality have what amounts to a secret handshake? How can two visually similar neighborhoods just miles apart have significantly different real estate practices? The answer is one of the many fascinating nuances of real estate: it’s because the people who live in these micro-markets are different, even if they look the same. The practices and standards of each micro-market are never flukes or aberrations, and they never exist by accident. They develop naturally and organically from the people who live there and do business there, evolved over time to meet their needs and address their comfort level. What’s appropriate to one micro-market might be too conservative or too aggressive, too sophisticated or unsophisticated, for another.
For example, I can drive forty-five minutes in any direction from my office and insert myself in a real estate market so different from the one I’m used to that I’d put you behind the eight ball if I was your agent. You’ve probably heard that, in Chinese, one word can have a variety of meanings depending on inflection. It’s the same in real estate. Yes, even outside my area I speak the same “language” as the locals: I’m still operating under the same state real estate licensing requirements and legal codes. But I’d be speaking the right language with the wrong inflections, and that can and does lead to serious consequences. At the very least it’d confuse and alienate the practitioners, buyers and sellers in that area. At worst, I could have you unknowingly taking real but unnecessary risks, ranging from the possibility that you were unlikely to ever buy or sell a home, up to and including an infinite variety of legal and financial screw-ups.
Even many real estate agents in my area don’t know how local real estate is, because they rarely if ever drive forty-five minutes to sell real estate. That’s what I mean by “real estate is local”. The forty-five minute rule may not apply where you live—an agent’s terra cognita may be larger or smaller, depending on how homogeneous your area is—but my point is that there isn’t just one set of rules for real estate, even in the same region. Imagine the differences you’ll find from state to state.
Not convinced? I’ll give you two true stories, each ripped from the pages of real estate (as are all the stories used on this Web site), which prove that even the rules of real estate just down the road, in the next town or neighboring county, aren’t necessarily the rules of real estate in your area. You’ll see how playing by “out of area” rules cost two buyers and one seller dearly. These stories should convince you to use a truly local agent.
First story: a middle-aged man approaches me at an open house I'm holding for a listing I have in Chip City. The man is a conventional type for my area, casually prosperous, obviously well-educated and with the buttoned-down, confident bordering-on-arrogant-and-maybe-not-just-bordering air of someone who's sure he knows all the angles. He strikes me as respectable but unreliable. After a few moments it's clear that he does indeed have a certain greasy sophistication about buying real estate—he knows from public records that my client has just re-financed her home, and guesses wrongly that she has money problems. (By the way, inferring that his seller is desperate is not a good way to strike up a conversation with a listing agent.)
He calls me a few days later to request a “disclosure package”, the several-inches-thick compilation of property reports and seller disclosures that sellers in my area give buyers to review and sign before they make an offer. Sellers provide this information so that a buyer's offer can be as clean and competitive as his or her risk tolerance permits. It's custom for the buyer's agent, not the buyer, to request the disclosure package, so I ask him who his agent is. He replies, “Sometimes we use an agent and sometimes we don’t. I don’t feel we need an agent in this case.” Translation: "This will be a walk in the park for a guy like me". Knowing exactly what he's up to, I make it clear that I won’t give him the 3 percent commission I'd give his agent if he was using one. He asks why. I explain that my listing contract gives me control of the entire 6 percent commission. Half (3 percent) is mine to give the buyer's agent if there is one. Since he doesn't have an agent, and since I see myself having to deal directly with this smart guy all through escrow and possibly beyond, I'll keep both the buyer’s and seller’s agent’s sides of the commission if my client accepts his offer.
This cools his jets, but not enough to do him much good, because he still feels the need to pull an ace out of his sleeve. He picks up a disclosure package, and a day later I get a call from an agent all the way in Beachton, about an hour from Chip City, who tells me she's his agent. Remember the forty-five minute rule I mentioned? Although Smart Guy is local, he's using an out-of-area agent. Why? The agent tells me that Smart Guy and her husband partner in real estate investments, and I assume that he's used that connection as leverage to gouge part of her commission out of her. Very clever! If Smart Guy can't get his hands on the full 3 percent buyer's agent's commission, he'll make sure he gets at least part of it. Yep, always thinking, he is.
On the day we're scheduled to hear offers, the Beachton agent shows up with Smart Guy's offer. Two local agents also show up, agents I've never worked with and know nothing about, either pro or con. In other words, Smart Guy's agent has a level playing field, even if she's from out of the area. The two local agents have had their buyers review and approve the seller's disclosure package, as is customary in my area, and they present good clean offers with no contingencies. The Beachton agent shows up with no disclosure package, reviewed and approved or un-reviewed and disapproved.
What we have here is a failure to communicate. Smart Guy had trundled home with his disclosure package, meticulously three-hole punched it, carefully put it in a binder and, for all I know, lovingly placed it on the sixteenth-century carved oak Venetian mantel in his library. He had failed, however, to do the one and only thing the disclosure package’s cover sheet plainly asks him to do: review and approve the package, prior to making his offer, and give me copies of all signature pages with the offer.
“I don’t feel we need an agent in this case.”
And because his agent works in an area that doesn’t use disclosure packages—the information included in them is either given to buyers after they get into contract, or left to the buyer to collect—she doesn’t know that a disclosure package exists and that her client has one. And even if she did, she wouldn't have known what to do with it. So his offer has an inspection contingency asking for time to do the due diligence the other buyers have already done. And in my area, contingencies of any kind will torpedo an offer whenever buyers compete for a home.
Of course, this turn of events comes as a major unpleasant surprise to Smart Guy and his agent. (Bless him, it turned out that Smart Guy was buying the townhouse for his daughter, and he must have sensed at this point that his father-knows-best act was showing a few holes.) The rest of Smart Guy's offer was decent, but by the time he'd steamed down to my office with his three-hole-punched-and-bound disclosure package, my seller had signed an even better offer from a local agent.
And I’m sure Smart Guy and his agent are still fuming about how badly treated they were. "Those Chip City agents treat you wrong if you're from out of the area."
Still not convinced? Yeah, I know, it’s hard to care much about Smart Guy. He’s not a sympathetic character, and his predilection for pulling aces out of his sleeve at the wrong moment isn’t typical. So how about if I tell you a tale of woe involving a nice, conventional couple, just plain folks without a bone of trickery in their bodies, playing by the rules of one area but not the rules of the area in which they want to buy?
A few months later I have another listing in Chip City, and shortly after we come on the market we get what seems at first glance to be a great offer. The price is what the sellers are hoping for, the escrow period is short, the buyers qualified. It's obvious that they and their agent have worked hard on the offer to make sure we’ll like it. It's a slam-dunk no-brainer.
No it isn’t a slam-dunk no-brainer. In fact, the offer has one serious flaw that makes it unacceptable: it's written for another area.
Their agent is so “out of area” that her phone numbers have the area code for a county an hour from Chip City. Forty-five minutes, remember? Strike one! However, she insists she really is local. Sure, she says, her home phone numbers are in another area code, but her office is in Chip City's area code and county, in a town I’ll call Hicksville.
Strike two! Hicksville is also an hour, and light-years, away from Chip City. I know this because I’d recently had a buyer for a Chip City home listed by a Hicksville agent. The listing agent was as good as they get in Hicksville, working with the same reputable, national real estate company I do, and successful enough to have his own licensed assistant. But in Chip City this nonpareil Hicksville agent was completely outgunned.
Yes, he’d gotten off on the right foot with a good list price, something that often trips up an out-of-area agent, but only because he'd had help from agents at a local office. Then he stumbled and fell flat on his face. His listing was in decent enough shape, good enough for Hicksville work, but showed poorly by Chip City standards, with none of the zip and polish local buyers expect. His marketing was, by Chip City standards, feeble and amateurish. Buyers were also put off his listing because the reports and disclosures—the “disclosure package” I mentioned above—normally compiled by sellers and given to buyers hadn’t been done. And he exposed his sellers to unnecessary risk by not disclosing a nearby amphitheatre known for its noisy concerts.
Thanks to "good enough for Hicksville", this home was a sitting duck. While everything else around it sold like hotcakes, this home sat unloved and unwanted. The longer it sat, the more buyers thought “something must be wrong with it”, when the only thing wrong with it was the listing agent. Because if he'd known how to present the home properly, it would’ve sold in days, with multiple offers, for above list price. Other listings were. Why not his? Because he was playing by out-of-area rules, which made his sellers an easy target for any savvy agent (ahem) and his buyer. After we were through grinding on them, the sellers sold their home for $40k (about 7 percent) less than list, and about $50k less than they could have gotten if their agent has been playing by local rules. Even my buyers felt sorry for the sellers.
So I know that Hicksville agents aren't up to Chip City speed, and this Hicksville agent's offer on my Chip City listing showed it. The deal killer is a seventeen-day financing contingency. Let’s pause for a moment and talk about this. The purpose of the financing contingency is to give buyers time to verify that 1) they qualify for the loan, and 2) the house also “qualifies” for the loan (good condition, clear title), and 3) an appraiser thinks the house is worth at least as much as the buyers are offering. However, buyers with cold feet sometimes use the financing contingency period to walk away from a deal. Worse, some buyers will use it to blackmail the seller into knocking a few bucks off the price in order to keep the deal alive.
Despite its drawbacks, sellers in many parts of California including Hicksville accept a financing contingency, because they're happy to get any offer, and seventeen days is the default contingency period in the purchase contract used throughout most of the state. So why do my sellers not like this "normal" contingency? Because this is Chip City, son, and we don’t like contingencies, and we use a different contract. Chip City sellers are usually in a stronger position than Hicksville sellers (unless they're using a Hicksville agent). More people want to live in Chip City than Hicksville. So Chip City sellers usually don’t have to accept a contingency that lets a buyer hijack a deal seventeen days into a thirty-day escrow, especially when it's a hot property that’s been on the market just five days.
But the Hicksville buyers’ agent insists that the contingency be left in the offer “to protect my clients.” Stree-ike three! Yer out!
To understand why this agent holds on desperately to a clause that a) is unnecessary, and b) actually harms her clients, and c) guarantees that she won’t get a commission check, we need to bring back her fellow Hicksville agent, the one who botched his Chip City listing and let my buyers get such a good deal. His selling strategy—what he did and didn’t do with his Chip City listing—explains this agent's strategy when making an offer on a Chip City listing. They’re the ying and yang of Hicksville real estate, each making the other whole, each explaining the other.
Bear with me, because it'll get a little technical, but we’re almost there. Recall that the Hicksville agent with the Chip City listing didn’t put together a disclosure package for Chip City buyers. He expected them to make offers without knowing the condition of the house. Did this make him lazy or unethical? Yes, according to Chip City buyers (“he must be hiding something”) but in fact, he was only playing by the rules—but Hicksville rules, not Chip City rules. He expected Chip City buyers to act like Hicksville buyers and make offers with the “normal” seventeen-day contingency to give them time to get the information themselves.
Also remember that the seventeen-day financing contingency is used to allow buyers to see if they qualify for a loan. It's there because Hicksville buyers get into contract without knowing whether they can afford the house(!) or not, so they need those seventeen days to see if they can get financing. So a Hicksville agent would be grossly irresponsible if she let her buyers get into contract without a financing contingency. However, Chip City buyers don’t need a contingency because Chip City rules say they have to be pre-approved for a loan before they make an offer. And what’s ironic about this is that the Hicksville agent’s buyers are pre-approved, almost certainly because they live in Chip City, not Hicksville. So they don’t need that seventeen-day financing contingency to protect them.
In this case, the only unanswered question is the appraisal: will the house appraise at the purchase price? The price these buyers are offering is one an appraiser can easily justify based on recent sales. In fact, appraisal is a non-issue in 99.999 percent of the transactions in my area, which may tell you something about the appraisal as a third-party justification of the purchase price. The infinitesimal risk that the home won't appraise is a .0001 percent risk that buyers in Chip City's ultra-competitive market are usually willing to take in order to beat off other buyers.
Bottom line? The Hicksville agent's financing contingency protects her buyers from a risk that's not even on the radar. Yet you can’t pry her from it with a ten-foot crowbar. And since her insistence on playing by out-of-area rules keeps her buyers from getting the house, in one sense she's doing a commendable job: the best way to minimize risk to your buyers is to write offers so poorly that they’re never accepted. But if, instead, you see her job as guiding her clients to incur the level of risk, no more and no less, necessary to get a house in a highly competitive market, then she's stumbled at the finish line and she’ll continue to stumble until her clients get tired of losing every house and leave her.
Yet she’s doing things right by the standards of her area.
Well, needless to say, that Hicksville agent’s clients didn’t get the house. She’s probably still grousing about how clannish and unreasonable Chip City agents are, a favorite excuse of out-of-area agents because it sounds better than “I was out of my league”. The next day nine more offers trickle in, two without contingencies, one from a local agent who knows exactly how to make Chip City sellers happy, without needing an argument or a demonstration using hand puppets. His clients get the house.
So the moral is: always use a local—I mean very local—I mean very very local—agent.