More than a couple of years ago, I witnessed something that makes me laugh and cringe at the same time. Having lunch at a local restaurant, I spied a real estate agent and a loan originator having what I would characterize as a “first date”. I couldn’t help but overhear little snippets of their conversation, and as far as I could tell, things were going relatively well . . . at least until the agent asked the LO this question: “So, do you like to sit at open houses with agents?” I immediately looked to the LO’s face awaiting the response. I didn’t need to hear another single word coming out of the LO’s mouth because his face said everything: you would have thought the agent had asked him if he enjoyed bobbing for apples in a pool of acid judging by the look on his face. While his face was communicating complete revulsion, his lips said, “Yes, of course.” And that’s when I looked over at the agent’s face to see, with absolutely no doubt, that she didn’t believe a word he said. And yet, he was so close!
Speaking of open houses, I recently had the chance to sit at one with an agent, and between the pop-ins from various interested parties, fellow agents, and curious neighbors, we got to know each other a little better and swapped stories, professional and personal. The one I remember most vividly was when she had graduated from high school, she joined the military –a heartfelt thanks to her and all others who serve!!! –and when she arrived at her first overseas assignment, she noticed that a very large number of her fellow female soldiers were pregnant. Thinking she might have missed something in her recruitment paperwork, she asked someone who had been stationed at this particular installation for a while for an explanation. Turns out the hospital at this military base had been dispensing outdated birth-control pills . . . and that’s not a good thing.
I’m going to give the medical staff at that hospital the benefit of the doubt and say they were most likely operating in completely good faith –I certainly don’t think they were sitting around the break room at the hospital thinking up ways to “prank” their female patients. However, it wouldn’t surprise me if there was a soldier working in the local supply depot or maybe a general back at the Pentagon (my money’s on both of them being male) who saw that there was old inventory of this medication at that base and even had an inkling that this could lead to less-than-positive things but did nothing about it. It would just be easier (for them) to let it go and deal with the results.
I’ve met a lot of real estate agents who tell me story after story of how they have a favorite LO, but this LO’s company is fairly regularly messing up their transactions, which results in MUCH LONGER closings, tons of mistakes, and understandably irate clients –their clients. Oddly enough, most of the agents who share these stories with me admit that they stay with the LO and just put up with the headaches caused by the LO’s company. What?!!!! That’s like going back to same doctor who dispensed the outdated medication KNOWING THAT THE HOSPITAL IS STILL STOCKING THE OUTDATED MEDICATION because you liked the doctor’s bedside manner. That’s cuckoo for Cocoa Puffs, folks! Just as it would be wise for the lunching agent to avoid referring business to the LO who lied to her face, it would be equally wise to find a new mortgage company who didn’t make YOU look like a liar, right?
Some time ago, in a science class I was required to take, I learned something that I actually remembered. Here in the United States, manufacturers of food and other consumer products are required to list the ingredients in the order of their quantity in said substance, largest to smallest – and that’s the reason that when you look at the ingredient list of a lot of products you see “water” listed first. And on those items that enter the health-and-wellness category like shampoo, you’ll see another listing on that back label that reads “Active Ingredient”. In essence, even if the item is, say, 90% water, the active ingredient is the thing that makes the product do what it says it does. For example, the active ingredient in Head & Shoulders shampoo is Pyrithione Zinc, and its job is to control and eliminate dandruff. Here’s another way to look at it: if H&S had ALL the other ingredients EXCEPT Pyrithione Zinc, it would probably clean your hair, but the shampoo would be ineffective as a dandruff fighter. (Dandruff Fighter: good name for an ‘80s cover band.)
In a mortgage, the active ingredient is the appraisal. You could have ALL the other “ingredients” in a mortgage ranging from financial verification and assets to proper debt-to-income ratio and dead-on LTV, but without the appraisal you wouldn’t have a benchmark – no benchmark, no loan, no sale/purchase.
This little exercise bears some attention for both the veteran agents and people who are buying or selling a home for the first time. When an appraiser comes out to do her/his job, they classify the condition of the home with one of six grades, and this factors into the overall value they apply to the home – yes, I know many of you already know that, but let the others catch up. From the Uniform Appraisal Dataset on Condition Ratings and Definitions, I give you the six grades with my English version of each definition:
C1: Brand new – no one has lived in this house
C2: Full remodel – virtually all building components are new or have been recently repaired or rehabilitated
C3: Partial remodel – improvements are well maintained and feature limited physical depreciation due to normal wear and tear
C4: Never been touched – some minor deferred maintenance/physical deterioration due to normal wear and tear
C5: Breaking – obvious deferred maintenance and in need of some significant repairs
C6: Broken – substantial damage/defects that affect the safety, soundness, or structural integrity
Now, think of these grades as the concentration of the active ingredient: C1 and C2 are going to be at full strength, while C5 and C6 are going to dilute significantly the effectiveness of the active ingredient, the appraisal. As I said earlier, everything hinges on the appraisal. If you’re an agent getting ready for a listing appointment, take those six definitions with you and bust them out when you start talking about the price point at which the home should be listed. This will give you more credibility when you tactfully point out that, yes, the neighbor’s home did list and sell for $350,000, but they had fully remodeled bathrooms and new windows – your potential client’s home has the original pink bathtub from 1968 and a window that’s using a plywood sheet instead of a pane of glass. (That’s a LITTLE extreme, I know, but you get the point.) Potential buyers and their agents, when armed with the same information, are going to be better prepared to make offers – the door swings both ways.
Of course, in a mortgage, the biggest ingredient is money – it’s the “water” of the formula, but it’s not going anywhere without the proper amount of the active ingredient (just like many single guys on a Friday evening if they don’t use enough Head & Shoulders during the week).
When my friend was in college, he minored in English and enrolled in a course called “Feminist Literature” (don’t worry, we’re not about to get political, I promise), which was taught by a very outspoken and intelligent professor who polarized the small university community. On the first day of class, the professor introduced herself and welcomed everyone to the new semester, and then she handed out the reading list for the course. As the professor was giving an overview of what she wanted the students to take away from her course, my friend started scanning the reading list. The authors and their subjects didn’t surprise him in the least – he went into this happily and with eyes wide open. What made him do a double take, though, was the sheer number of books he and the rest of the class were going to be required to read fully and be prepared to discuss at length and cover in exams. At that moment, he knew he was going to need to make a beeline to the administration building after class and withdraw from the course – there was no way he would be able to pass all his other courses if he devoted the time needed in this one.
The professor then asked that they go around the room and have everyone introduce themselves and tell the class why they chose to take this course. She started on the opposite side of the room, so it gave my friend time to get a feel for his classmates and see if there was a slim chance that he could convince himself to stick it out. The class was composed of about thirty students with four of them (including my friend) being male. Almost every single person who introduced her or himself gave a very (I’m using his term) “brown nose” answer to why they chose to take this course – everyone was clearly in love with this professor and the idea that they were taking this course to “rebel” against the conservative nature that pervaded the small university he was attending. The funny thing was he also noticed that each time a student sort of professed her/his love for the professor’s daring nature, the professor had a look on her face that could be interpreted as stoically pleased or slightly perturbed.
At long last, it fell to my friend to introduce himself and tell the class why he had chosen to take this course. Still not quite sure what the professor’s “look” was telling him, he decided to gamble by just introducing himself and then going silent. As the next student was eager to introduce herself and was about to launch into her story, the professor stopped her and asked why my friend was taking this course. He smiled and took his time to look around the room and make eye contact with as many of the female students as he could and then said, “Because I’m looking for dates.” Amid a few groans and some stifled laughter, he looked up at the professor and noticed that his gamble paid off: she smiled and openly laughed – she valued sense of humor over blind servitude.
He had decided to withdraw from the class (the “brown nose” classmates clinched it for him), and he knew that in the future he might cross paths again with that professor in another course. He figured if the professor remembered him, and remembered him positively, that would bode well for him. Even if she hadn’t found it funny, he figured it would be a lot easier to reason and work things out with one person than a group of them. (And he already had a girlfriend who would become his wife, so dates weren’t something he needed.)
In the real estate/mortgage world, it’s all about focusing on the single person rather than the group. If you’re someone who is looking to purchase a home, it’s important to focus on yourself (and your goal) by foregoing an occasional night out at the bar with the group so you can save for a down payment – the group won’t be buying the house for you. For us on the business side of things, it’s a sad day when you ask someone if they can name the agent and the lender who helped them buy their first house, and their response is, “I remember he/she was with X Company, but I couldn’t tell you his/her name.” When that happens to you, you’ve been lumped into a sad group, and that group isn’t going to help you get new business.
Depending on which news channel you watch or which website you follow, the economy and the world are either going to Hell in a hand basket or we’re exactly nine seconds away from entering Nirvana. We could go into the reasons for the differing perspectives, but since you’re reading this column, the only perspective that REALLY matters is mine, right? I say that with my tongue firmly planted in my cheek, of course, but I would like to take a moment and just point out a few things that are devoid of passions and politics that should help us all gain a little non-partisan perspective about the housing market.
I know I’ve written about this before, but it bears repeating: we are not approaching a bubble. “That’s your opinion, you filthy animal,” some of you may say, but let me give you some data to let you decide for yourself (data about it not being opinion – I can’t do anything, really, to dissuade you from thinking I’m a filthy animal). Using the Tucson, AZ, housing market as my data set, let’s take a look at a couple of things, and you can decide for yourself if my bubble comment is correct (and I hope you reconsider your opinion of my personal hygiene).
In April of 2007 at the height of the “Bubble Era” (I just made up that name), there were 10,387 houses for sale – that was the peak for the Tucson market, and the numbers started to decline from that point. In February of this year, the number of houses for sale was only 3,293.
Granted, those numbers are going to vary from market to market, and there will be exceptions, but I believe this proves the rule: we’re not even close to the numbers that we were seeing back in the Bubble Era.
Let me share a couple more pieces of information to round out this discussion on the state of the housing market – I’ll use Tucson again as my point of reference. In June of 2007 (the peak), the median home price was $225,000, average sales price was $293,443. In February of this year, the median home price was $207,000, and the average sales price was $249,095. For further perspective: the median home price in February of 2015 and 2016 were $168,900 and $194,000, respectively; the average sales price in February of 2015 and 2016 were $209,527 and $229,703, respectively.
While my stating the obvious may, perhaps, cause a collective “duh” to be uttered, I’ll do so anyway: home values are growing at a healthy but calm pace. Coupling that with the fact we’re not close to a bubble forming, you have reason to be happy if you’re a current homeowner and optimistic that a home is a good, solid investment if you’re a prospective buyer. I’m reminded of something a friend’s dad used to say each time they were on a road trip and my friend would ask, “Are we there yet?”. His dad would always reply, “No, son. We are always HERE.” Stop the hand wringing and embrace the now. The future is only the result of today.