Thursday, January 12, 2006

Realtor: "you will make a minimum of 10% every year you live in the house"

I will never forgot when I passed my Series 7 exam with a score of 87 several years ago. For those of you that don't know, that is the 'stockbroker' exam to be an NASD securities dealer. It is a 6 hour test where only 65% of people get the passing score of 70% or higher. Why am I talking about that test you ask?!?!? Simple, the NASD (National Association of Securities Dealers) is adamant that people get ONE point through their thick skulls...and that is that you cannot promise, or guarantee investment returns to clients. That industry is by no means perfect, but at least they try to make a big point about brokers not guaranteeing investors returns on stocks, mutual funds, or other investments. Why do you think every mutual fund ad has some small print that says "past performance is not an indication of future results"?!?!?

I received an e-mail from a reader that I will post below. I want you to read the readers e-mail, and then the realtors reply. Make mental notes of anything that sounds a little "fishy" to you.

---Here is the e-mail that a reader sent to a realtor:

Why would someone pay 319K for this house when in 2002 it sold for 195K.. Haven’t you realtors seen yet that prices are coming down, why should I line the pockets of a greedy seller? You guys are going to have to start lowering prices, soon…MLS 25162980

---Here is the reply from the special attention to the 3rd paragraph:

Great question; agents don’t set the prices. Agents act for buyers and sellers. Agents can make recommendations to sellers, but most sellers think their homes are worth more than the market value. Homes in the Puget Sound area have appreciated at about a 20% annual rate over the past two to three years. That is beginning to slow and most experts predict they will go up about 10% this year.

As for the house that sold for $195k in 2002; the sellers put a lot of time and money into the house remodeling it. It is only worth what a willing buyer will pay. So we have to wait to see what that price is.

If you don’t own real estate, you should. You have to live somewhere and if you own you will make a minimum of 10% on the total purchase price for every year you live in the house. Most people can buy with no money down and in some cases ask the seller to pay their closing costs out of the purchase price. I’d recommend you use my website or any website to search for properties and find something you can afford and have me or another agent help you buy a home. Don’t wait for prices to come down, they will not come down. They will go up more slowly, but they will not come down. That has nothing to do with agents; it is simply based on the growth in population and a fixed amount of land.

If you want to find out how much you can barrow call Dxxxx and ask him. It is painless. Dxxxx – 425-xxx-xxxx.

Thanks for the email. Have a great week,

Mike xxxxxx

xxxxx Realty

Ok, anything jump out at anybody in there?!?!? How about the fact that the realtor says you will make "a minimum of 10% of the purchase price of the house every year that you live there". If this house was a stock, that would be a major no-no and you could be put on probation and possibly lose your license...but hey, it's real always goes up!

How about the part where he states 2 times in a row that property will NOT go down...just appreciate more slowly. So property will appreciate more slowly...but based on his first least 10% a year. How many of you would put your money in a mutual fund that never goes down, and will ALWAYS go up at least 10% a year?!?!? Sign me up!! But wait...there is no such investment that GUARANTEES that kind of return.

And finally...we get this precious jewel of information. The reason prices won't go down is because the population is growing and they aren't making any more land. Sounds good in theory, but we know that there are other factors that drove up prices, not the scarcity of land. Yes, there are areas that are completely built out, but not in the general context that the realtor was speaking.

I xxxxx'd out the names and other contact information of the realtor. I'm not here to out anybody...I'm here to point out the crap that the "experts" will say to make a deal happen. If you are reading this blog, you probably already know that property does not go up 10% a year, every year you live in the house. But, there are many people who have no clue, and will take this "experts" advice as gospel, and go into massive debt because it is a "can't lose" situation.

So there you have it...

Today was a pretty big day for this blog. I went over 100,000 page views and I have had over
66,000 unique visitors and since I really got this thing going less than 2 months ago. Please keep stopping by, and getting the word out to others. I want to thank everybody for the e-mails, comments, and donations that have been made...keep it coming!! We are just getting to the part where things are starting to get interesting. This thing will take years to play out, and I look foward to blogging through it all!

Thank you all!



Blogger grim said...

Please forward me the information and I'll gladly report Mike to the state licensing board as well as their local association.


1/13/2006 4:42 AM  
Blogger NoDebt4Me said...

I love the rational that backs up his "guarantee" - that they aren't making any more land.

I make my living as a pilot, and spend a lot of time aloft over the western United States. Anyone that thinks we're running out of land should take a look from that vantage point.

IIRC, only 3% of the Unites States is considered densely populated.

1/13/2006 5:45 AM  
Anonymous Anonymous said...

It would be a mistake to blame the bubble on dishonest realtors or "greedy" sellers. Salesmen will always say anything for the next commission and sellers always want the most. Also, everyone wants better housing. These human traits are pretty much constants. They didn't change suddenly and cause the housing bubble, but something did change. Credit. The international liquidity bubble caused the international housing bubble. Greenspan printed money to avoid a serious recession/deflation after the tech bubble burst. Still, I don't blame him entirely since a major recession/depression would have not have been very appealing.

Blaming realtors is like blaming umbrella salesman for the rain. It is more important for each household to figure out how not to be ruined by economic events, rather than to pin the blame on obvious, but irrelevant, market participants.

1/13/2006 5:56 AM  
Blogger David said...

Great post. Congrats on hitting 100K page views. I know it feels good.

Just curious how many pageviews a day do you get?

Bubble Meter

1/13/2006 6:54 AM  
Blogger drwende said...

Love this post! Y'know, it's possible that the realtor even believes his own spiel about 10% increases. I've been keeping an eye on the public records, following the transactions of a local realtor -- and it's clear from his own buying that he's expecting huge value increases to staunch his negative cash flow from rents (which has to have reached $10,000 a month).

My favorite transaction from that bunch... Homeowner has refinanced twice, clearly to pump the house for equity. Homeowner is now an FB. Last week, Realtor gave them a loan in exchange for being added to the deed!

1/13/2006 7:27 AM  
Anonymous Anonymous said...

love your blog, very original and
fantastic, keep it up!

1/13/2006 8:13 AM  
Anonymous Anonymous said...

I find this article interesting about how major mortgage companies in Orange County are laying people off and saying there is no bubble.

"One 2 watch (in the troubled mortgage industry)"
January 13, 2006

"Layoffs have started near the top at Irvine-based lender ECC Capital. The company said early today that Steven Szpytek has resigned as executive vice president and COO in connection with the 27 percent reduction in staff that ECC announced a week ago. He has moved into the position of production director at the company's wholesale-lending subsidiary, Encore Credit Corp.

Szpytek, 41, was collecting annual pay of $996,000, according to the company's latest filing with the SEC.

With mortgage rates rising and the pace of loans falling, many mortgage companies are under pressure. ECC, for example, said it expects to report a loss on its mortgage operations during the last quarter of 2004. The company said it can't estimate the full expense of its 440 layoffs, but the cost will include about $2 million in one-time termination benefits, including salaries paid through Feb. 3.

On balance, investors concluded that the layoffs would help the company. Since the announcement, ECC shares are up 11 percent, closing Thursday at $2.62. They're still down 55 percent over the past six months."

1/13/2006 8:21 AM  
Anonymous Anonymous said...

Man - What a dump for $319!!! Yeesh

1/13/2006 8:22 AM  
Anonymous Anonymous said...

^ article from Orange County Register today

1/13/2006 8:22 AM  
Blogger SoCalMtgGuy said...


Thank you for the post. I am NOT blaming this 'bubble' on realtors. I don't know how long you have been reading my blog, but I have not blamed any ONE person, thing, or entity. It is a combination of things.

My point is that the 'experts' make statements that have the potential to lead people down the wrong path. The investment industry is VERY careful to not promise/guarantee results. They make a huge deal about it when studying for the Series 7.

Check out some of my "popular posts" if you haven't already, and I think you will get a better picture of where I am coming from.

Thanks for stopping by.


1/13/2006 8:47 AM  
Blogger Mark said...

Yeah, what 'Mike' is doing is certainly unethical, and possibly illegal.

Say Mike, how do you determine what kind of appreciation a house is going to have this year?

Is there a table that you look it up on like on a savings bond? LOL!

1/13/2006 9:00 AM  
Blogger grim said...

RCW 18.85.230
Disciplinary action — Grounds.

In addition to the unprofessional conduct described in RCW 18.235.130, the director may take disciplinary action against any person engaged in the business or acting in the capacity of a real estate broker, associate real estate broker, or real estate salesperson, regardless of whether the transaction was for his or her own account or in his or her capacity as broker, associate real estate broker, or real estate salesperson, and may impose any of the sanctions specified in RCW 18.235.110 for any holder or applicant who is guilty of:

(2) Making, printing, publishing, distributing, or causing, authorizing, or knowingly permitting the making, printing, publication or distribution of false statements, descriptions or promises of such character as to reasonably induce any person to act thereon, if the statements, descriptions, or promises purport to be made or to be performed by either the licensee or his or her principal and the licensee then knew or, by the exercise of reasonable care and inquiry, could have known, of the falsity of the statements, descriptions or promises;


Caveat Emptor,
Northern NJ Real Estate Bubble

1/13/2006 9:41 AM  
Blogger Lou Minatti said...

I make my living as a pilot, and spend a lot of time aloft over the western United States. Anyone that thinks we're running out of land should take a look from that vantage point.

Heck, you don't have to be a pilot. And you don't have to be flying over the empty southwest. Look out the window anytime you're flying up the "developed" east coast and you'll see how much space is available for housing.

The only thing they are running out of is large 1-acre tracts for McMansions, and that's only in certain areas. If you're in the 'burbs of Houston, Dallas, Denver, Atlanta, even Chicago, there is always plenty of empty land for entire swarms of 1-acre McMansions.

1/13/2006 9:43 AM  
Anonymous Anonymous said...

Doesn't Ted Turner own all that empty land?


Great post, SoCal. It made my day.


1/13/2006 10:05 AM  
Anonymous Anonymous said...

Im one of the 100K people who read your blog daily, but have not yet posted...

I wonder if the person behind the quote knows what 10% a year *minimum* means in the long run...

Assume 10% appreciation translates to 6% a year adjusting for inflation.

What happens to a 250K home in one generation? I'll tell you what it means! 1.3+ MILLION! In today's dollars!!

Anyone able to get a piece of the pie now will become part of the new upper-class elite. While renting peasants will be priced out, then homeless when rents finally catch up to these values.

Therefore, i should get as much HOME as possible RIGHT NOW!!!

You are right... it is amazing that realtors are able to get away with this now.

1/13/2006 10:10 AM  
Anonymous Anonymous said...

The land argument holds more or less merit depending on location... around the Northeast, it's a tough issue. Not so much because the land isn't there, but because zoning makes it next to impossible to develop high-density housing. Around Boston (where I live) there are sizable tracts of land that sit idle because town planning commissions make it impossible to build anything but multi-million dollar homes on acre+ plots. Thus, young families (like mine) start to look South and West for greener pastures, where $500K buys you more than 1,000 ft2 on the second floor of a dilapidated two-family...

1/13/2006 10:33 AM  
Blogger SoCalMtgGuy said...

Renting peasant..

Glad you enjoy the blog.

I do want to clarify that I have had 100,000 page views from over 67,000 visitors. I WISH that is how many view it a day.

I am getting several thousand readers on a daily basis, and it is growing each week.

Thank you all for reading my blog, and getting the word out.


1/13/2006 10:56 AM  
Anonymous Anonymous said...

Toll Brothers Sees Slowdown in Contracts
Friday January 13, 1:31 pm ET
Toll Brothers Says Slowdown in New Home Contracts Continues Into First Quarter

NEW YORK (AP) -- Toll Brothers Inc., one of the nation's top luxury builders, said Friday it is seeing a slowdown in contracts for new homes, as people take more time to make buying decisions.
"Beginning in the fourth quarter of fiscal 2005 and continuing into the first quarter of fiscal 2006, we have experienced a slowdown in new contracts signed," Toll Brothers said in its annual 10-K report for 2005.

1/13/2006 12:49 PM  
Anonymous Anonymous said...

DMC in DC-

You don't understand. That property is a steal at $319. In a year it will certainly be worth $340, possibly much more than that! For the following reasons:


B) That home is situated on a tiny hill which keeps the property safer from the major flooding that is happening everywhere around here after 26 straight days of rain.

C) Lynwood is a very desirable suburb of Seattle. Especially for those who are inclined to shop til they drop. If I remember correctly, it's basically one huge strip mall.

1/13/2006 12:54 PM  
Anonymous Anonymous said...

Well lets see.

My parents bought a house in Daly City, CA back in 1988 for about $270k. Now its worth about 700k. Not a bad return.

Previous to that, they sold their previous house for about $170k which they bought in 1978 for about $30k.

1/13/2006 12:57 PM  
Anonymous Anonymous said...

Oh, by the way, if anybody remembers, 1988 was a top in RE back then. So they saw the value of their house go down by about 50k.

1/13/2006 1:01 PM  
Anonymous Anonymous said...

Thankyou for sharing your parents' story. It is exactly the kind of thing I need to hear to keep my spirits up. I really want to afford a house someday-w/o the loony pay-through-your-teeth-for-the-rest-of-your-life loan.

1/13/2006 3:55 PM  
Blogger Mark said...

Anon 3:55

Do keep your spirits up! The end is in sight. I dunno if you are in Canada as the poster you were responding to or not, but if you are in the US, here are a couple of tips for bottom-picking the housing market:

When to buy: When *everyone* is down on RE. You'll know it when you see it. Everyone will be sour, fearful, and you will likely be purchasing in the middle of a recession, where job security is very low. This is the bottom. You will also start seeing articles in the 'Money' section of your local newspaper recommending home reappraisal for tax purposes :) A dead givaway!!! You will probably have a year or two at this psychological point. Take your time, and get the house you want.

HUD repo homes are the best value for $. You submit a sealed bid for the home you are interested in (they will be MLS listed), and if you win the bid, you're in! Get prequalified, and get ready for some work and expense because...

They are usually small starter homes (think 1100-1500 sqft). Unfortunately, the vacating tenants (I can't think of them as 'owners', sorry to say) usually trash the place.

I don't know why, but they always take the electrical outlets, lights, ceiling fans, garbage disposal, dishwasher, garage door opener, etc, etc. Like this used crap is worth something when everyone else is stripping it out too...

Also, repo homes usually have dead lawns from having the water and electricity turned off, and have had poor maintenance. Be prepared to spend $5-10K getting a repo fixable.

If you don't want a repo, and don't mind spending more $/sqft, you can probably pick up a nicer mid-size house (say 1800-2300sqft) for about 1.5 -2.0x what you'd pay for a repo. You lose the headache of fixing up, and get a home that's immediately habitable.

Just thought I'd share some observations from the last shakeout. Hope you find it useful!

1/13/2006 6:46 PM  
Blogger subsonic22 said...


Great article.

"They call you and say 'you are so lucky .. this just came across.. it's going to be worth 100k before it closes,'"said Dyan Harmell. "We came with the hopes of buying two houses. We left the first day owning four. Within the next week, owning 6 -- all the way up to 19."

19 homes? Are you freaking kidding me? No sympathy for her, the mortgage company that gave her the money, nor the sales people that got that fat commission checks for these phantom deals. Here's hoping the true investors swoop in and buy this mess for pennies on the dollar.

To paraphrase a line from the movie Troy, when Achilles' mom warned him prior to the Trojan war that his impending everlasting glory walked hand in hand with his doom. These parties' greed, walks hand in hand with their stupidity.

1/13/2006 8:21 PM  
Anonymous Anonymous said...

Idaho Spud-
Thankyou very much for your tips and encouragement- I'm gonna print it out and tape it to the wall and watch for signs!!

1/14/2006 12:17 AM  
Anonymous Anonymous said...

My point is that the 'experts' make statements that have the potential to lead people down the wrong path.

But in the end, it is up to each individual to decide what path to take. I agree that the statement made by the realtor in this case is wrong, but it his right to say what he believes, and I don't think he should be held liable for giving bad advice, especially if he isn't being paid for the advice.

1/14/2006 9:21 AM  
Blogger SoCalMtgGuy said...

m davis,

you said ----But in the end, it is up to each individual to decide what path to take. I agree that the statement made by the realtor in this case is wrong, but it his right to say what he believes, and I don't think he should be held liable for giving bad advice, especially if he isn't being paid for the advice.----

Yes, it is the individuals ultimate decision. They need factual information to make that decision...and NOBODY can guarantee anything with any investment. The NASD is very clear in educating it's licensed reps on that fact.

What he was giving wasn't advice. Advice is, "I'd look for a house with newer plumbing...on higher ground...with a bigger garage...I think the house on 7th is niceer".

He IS giving his 'advice' so that he WILL make money from it. He 'promises' appreciation as a can't lose investment in hopes of having people buy through him.

If he said, you are right, property has gone up a lot lately. You should probably crunch the numbers to see if it makes sense for you. Property doesn't always go up, even though it has for the past several years. Over the long term, it has been shown to be a steady investment, but it has it's ups and downs along the way.


1/14/2006 12:14 PM  
Blogger Wes D said...

There is no bubble in Florida because:

A)We are completely out of buildable land
B)The weather is nice and the whole states of Michican and Ohio are preparing a mass migration
C)The economy is growing strong - 1,000 maids are being hired in hotels each day

Yip - people are looking desperate and coming up with stupid reasons why there isn't a bubble. I replied to a comment on the Business Week blog that said A) above in regards to FL. Guess that idiot slept until he was over Miami, didn't leave Miami the whole time he was here, and slept before the plane took off until he was home.

1/14/2006 9:45 PM  
Blogger Larry Walker said...

An interesting phenomenon happening right now in my market (Cocoa Beach, FL) is that exuberant investors have flocked to pre-construction condos in hopes of fat gains flipping their contracts while completely overlooking existing condos. On one stretch of river shoreline we have new condos going for $402 per sq. ft. while practically next door existing nice-but-older units with the exact same view and better grounds are offered for $188 per sq.ft. There are deals out there but generally they are not new construction. We are already seeing "investors" who put 10% down pre-construction in hopes of flipping the contracts before closing being forced to close on $500,000 to $1 million condos that will be difficult to rent at any price. I predict a catastrophe in high-end new construction here this year as hundreds of these investors make the decision to
(a) close and begin paying huge mortgage payments, condo fees and property taxes on their investment while praying for an eventual sale or resumption of appreciation OR
(b) walk away from their 10% deposit OR
(c) drop the price, in effect toppling the first domino

It will interesting to see how this plays out.

1/15/2006 5:28 AM  
Anonymous Anonymous said...

Well, you know what they say...

It's a new paradigm, and everybody who doesn't buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.

Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.

This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.

1/15/2006 8:21 PM  
Anonymous Anonymous said...

Looked at a rowhouse development this weekend a block from where I live. It overlooks Graceland Cemetery on Clark Street in Chicago. 4 Storeys, 4 bedrooms, granite kitchen, 3.5 baths (two of them granite), 2 family rooms, dining room, garage, patio overlooking the cemetery. The cops hang out at the White Hen all the time nearby, so it's pretty safe. The kind of place to raise 3 kids.

One million dollars.
That's 18 times my salary. The rowhouse two doors down is next to the gas station and it is 100 sq ft smaller, so it's 100K less. Still, 16 times my salary. If my live-in girlfriend can find a decent job, the cheaper one is still 10.5 times our combined salary.

I pay 1250 a month in a spacious 2+ bedroom apartment, in an ancient cozy two-storey greystone. That's 36% of my monthly income AFTER TAXES.

Pure insanity.

1/16/2006 9:57 AM  
Anonymous Anonymous said...

just got back from a week in orlando at Disney World. All of the Disney hotels were sold out so we looked outside the park. 5 miles from the west gate, we rented a 3 br 2ba 1500ft2 condo for 80/night. This is in a <5yr old community and it was so empty that the clubhouse pool was our private pool. Lots of empty timeshares in orlando.

1/17/2006 11:47 AM  
Anonymous Anonymous said...

anon above...
What was the name of the condo place you rented? i am headed to Orlando next week. Scheduled to stay at a friends but a condo for $80? Cant beat that with a baseball bat!

1/17/2006 12:38 PM  
Anonymous Anonymous said...

So, let me ask you guys a question:

Thanks to the stock market and my employee stock options, I've got about half a million bucks. I need a place to live, of course, and I do know how to calculate present value. My credit rating is for shit, because of the nasty bout of underemployment I had before joining the company I just left.

I'm single, no dependents, and planning to buy for cash. The question is, is it worthwhile to borrow against the property to free up the capital? What do you think?

1/19/2006 5:20 PM  

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