Have you heard of an Escalation Clause?

Escalation Clauses Are Back: Handle With Care!
by Bob Hunt

One sure sign that the market has heated up is that not only have multiple offer situations become commonplace, but also that offers with escalation clauses are showing up in those situations. In this context, an escalation clause in an offer says that the buyer will pay some fixed amount more than any competing offer the seller might receive. There are – or should be – more details to it than that; but the stated willingness to pay more than others is the essence.

This is not a brand new phenomenon. Offers with escalation clauses (sometimes called “sharp bids”) were around in the mid to late 90s and also during the most recent bubble years. They may have been used before that, but at this point I am memory-challenged.

Reactions to the use of escalation clauses run the gamut. Some think they are the greatest invention since the catcher’s mitt. Others view them as instruments of the devil. Many people say, “huh?” One thing about them is for sure: everyone wants to be very, very careful if and when they come into play.

On the buyer’s side, there are a variety of caveats to keep in mind. First and foremost, a buyer should consider putting a cap or limit on his offer. Suppose the property is listed for $220,000; and further suppose that the buyer would be willing to pay up to $250,000, but no more. Then the buyer might want to cap his clause at $250,000. He could offer $220,000, and be willing, let’s say, to pay $2,000 above anyone else’s higher offer. But not beyond $250,000. Among other things, it keeps him out of an infinite loop that could occur with a competing escalation offer.

There are other things for a buyer to think about. His offer should compete on the basis of net proceeds. Remember his $220,000 offer. He doesn’t want to have to escalate over a competing offer of $222,000 that includes a $10,000 credit to the buyer’s closing costs.

The buyer also doesn’t want to compete with offers that include seller financing, much longer escrows, or a sale contingency. It should be an apples-to-apples comparison. It is also important for a buyer to specify the manner in which he can authenticate the bona fide nature of the competing offer. I have seen a number of escalation forms; and I have yet to see one that seems comfortable in this regard.

Another important issue for the buyer to think about is what will constitute a satisfactory seller response. Does the seller accept the offered price, even if the escalation provision never gets invoked? How long does the seller have to solicit and consider competing offers?

Many people emphasize the seller’s vulnerability to a buyer who wouldn’t or might not be able to perform. This, though, isn’t a lot different than in standard offer situations.

One of the major concerns of a seller in this situation is that it is not in his interest for other buyers to know that an escalation clause is in play. Why?

Consider the example we used earlier: Let’s suppose that the escalation offer’s cap of $250,000 really stretches the limit of value for the property and that it is likely that no other buyer would go that high. Now, suppose that Buyer 2 would be willing to pay $230,000 — $10,000 more than the offer with the escalation clause – but he would never pay $250,000.

If Buyer 2 knows about the escalation provision, then he knows his $230,000 offer will not be accepted. (Because the escalation offer will then go to $232,000.) Moreover, he knows he won’t go up to the $250,000 limit. So, there’s no point in making an offer at all.

As a consequence, the escalation clause offer at $220,000 trumps Buyer 2’s potential offer of $230,000. Not a good thing for the seller. And, of course, other potential buyers might reason the same way.

Escalation clause – or sharp bid – offers are neither illegal nor immoral. Indeed, various reputable companies, Realtor® associations, and MLS organizations have, over the years, produced forms designed to accommodate them. Using them is a strategy that some have employed with good success. The point here is simply that they demand handling with care.

Published: February 19, 2013

Fair Housing Rules and Loan Servicing, An Update

Fair Housing Rules Updated to Address Bust-Boom Era Discrimination
by Broderick Perkins

The U.S. Department of Housing and Urban Development (HUD) recently announced a final rule to update and formalize the national standard for determining whether a housing practice violates the Fair Housing Act as the result of discriminatory effect.

To address post boom housing concerns, the rules now specifically address discrimination by loan servicers and others offering loan servicing and financial assistance.

A host of fair-housing and discrimination suits and complaints arose from the housing boom and bust, including steering minority buyers to subprime mortgages, when those borrowers qualified for prime loans; handling foreclosed properties and foreclosure rescue and relief services and more.

On April 11, 1968, President Lyndon Johnson signed the Civil Rights Act of 1968, which was meant as a follow-up to the Civil Rights Act of 1964.

The 1968 act expanded on previous acts and the act’s Title VIII – the Fair Housing Act of 1968 – prohibited discrimination concerning the sale, rental, financing (and now loan servicing) of housing based on race, religion, national origin, sex, (and as amended) handicap and family status.

Discrimination ‘alive and well’

That was nearly a half-century ago but, last spring, “Housing discrimination is all too alive and well in the United States today. In fact, the changing face of housing discrimination now tends to zero in more on immigrants, the disabled and families with children than in the past,” said Ken McEldowney, executive director of Consumer Action (CA).

The statement was included in Consumer Action’s “Housing Discrimination Survey” of 549 community-based organizations (CBOs) serving people with disabilities, immigrants, families with children, and other underserved consumers.

CBOs reported housing discrimination remains a widespread problem in the United States, with the majority of CBOs reporting cases of refused opportunities to rent or buy housing.

Seven out of 10 CBOs said that housing discrimination is a “very serious” or “somewhat serious” problem for the people they serve. Half of CBOs said housing discrimination is a “very serious” problem today.

Four times more CBOs have “seen housing discrimination go up in the last two years” than those who reported a drop during the same period, by a margin of 40 percent to 11 percent.

HUD’s newest rule is designed to provide greater clarity and consistency for individuals, businesses, and government entities subject to the Fair Housing Act.

“HUD is maintaining well-established legal precedent and formalizing a nationally consistent, uniform burden-shifting test for determining whether a given housing practice has an unjustified discriminatory effect,” said John Trasvina, HUD’s Assistant Secretary for Fair Housing and Equal Opportunity.

Final fair housing rule

In part, the updated fair housing rule says:

Practices prohibited under this section in connection with a residential real estate-related transaction include, but are not limited to:

• Failing or refusing to provide to any person information regarding the availability of loans or other financial assistance, application requirements, procedures or standards for the review and approval of loans or financial assistance, or providing information which is inaccurate or different from that provided others, because of race, color, religion, sex, handicap, familial status, or national origin.

• Providing, failing to provide, or discouraging the receipt of loans or other financial assistance in a manner that discriminates in their denial rate or otherwise discriminates in their availability, because of race, color, religion, sex, handicap, familial status, or national origin.

Addressing bust-boom discrimination

The final rule also amends existing regulations to add the term “cost” to the list of potentially discriminatory terms or conditions of loans or other financial assistance.

In response to public comment, to address post-Great Recession cases of discrimination, the updated fair housing regulations also forbid discrimination in loan servicing and financial assistance practices.

The updated rule forbids “Servicing of loans or other financial assistance with respect to dwellings in a manner that discriminates, or servicing of loans or other financial assistance which are secured by residential real estate in a manner that discriminates, or providing such loans or financial assistance with other terms or conditions that discriminate, because of race, color, religion, sex, handicap, familial status, or national origin.”

Published: February 13, 2013

Delays in Short Sale closing due to Auction.com

As I have little experience with auction.com, I cant say this is typical, but it certainly is frustrating: We had a short sale that was getting no offers (or at least none the bank, BOA, would accept) and they, BOA, directed us to put the property on Auction.com

Finally, about 10 days AFTER the date the auction was to close down, all the while their website showing no offers, they tell us they received an offer. By then, the person who made the offer had already contacted us…

Next, all the paperwork is submitted to both BOA and to Auction.com… BOA acknowledges receipt, via their online system, while Auction.com does so as well, and then a week later has a new person call us saying they never received it… our agent sends it again… receipt acknowledged…

7 weeks more goes by, we hear nothing from Auction.com, and get a call from BOA saying the buyer had withdrawn their offer… which was not true… we were in continuing contact with the buyer, who was serious and wanted the property… it seems BOA had heard this from Auction.com

We are then asked by Auction.com to resubmit all the paperwork AGAIN, as they had closed the file… we do so and receive acknowledgement…

We are then awaiting approval, for another 5 weeks, and then get an email from Auction.com stating that our buyer had forgotten to initial a certain paragraph on the purchase contract… looking at the contract, we see his initials as plain as day, but resend it anyway…

At this point, Auction.com tells us that we have all in place, and should be able to close WITHIN 3 Weeks, thinking that was great news…

Ya Think?

We shall certainly see…

Perhaps it is
               after all
                         just another
                                         brick in the wall

Just another brick in the Wall...

GSE (Fannie Mae & Freddie Mac) Reform Could Have Dire Unintended Consequences for Renters

Rental housing is a growing crisis according to the
Center for American Progress, but policymakers have made it “an afterthought in
the debate over the future of mortgage giants Fannie Mae and Freddie Mac.”  David M. Abromowitz, a Senior Fellow at the
Center, said that the U.S. housing market appears on the road to recovery but
any mention of a broad “housing recovery” ignores the far less rosy future of
roughly a third of the U.S. population, the 100 million people who rent.

Renters face a long-term and growing affordability
crisis
.  The demand for rental housing has
skyrocketed and production has failed to keep up.  As a result rents have climbed 4 percent this
year while middle class wages have stalled and now one of every four renters
spends more than half their monthly income on housing.  Rents are projected to increase by at least
another 4.6 percent next year and 4 percent in both 2014 and 2015.

The percentage of Americans who rent
is at the highest level since 1995; 1 million new renters were added in 2011
alone.  Two major causes for the increase
are that both Baby Boomers and Millennials are entering ages likely to rent and
household formation is growing again after the recession.  Over one million new households formed in the
12 months ending in September 2012. 

Foreclosures have changed millions
of families
from homeowners to renters, especially among the working class and
in communities of color. According to the San Francisco Federal Reserve, it
could take more than a decade for many of these families to return to
homeownership, so they have no option but to rent. Finally, tight lending
standards make mortgage credit less accessible than at any time in the recent
past.  This is paradoxical given how
affordable owning a home is today.

While the number of low-income
renters grew by 2.2 million over the past decade, Harvard’s Joint Center for
Housing Studies says the number of adequate and affordable rental units
actually decreased and analysts project that the current pace for rental
construction will fall well short of what is needed to meet demand between now
and 2015.  Freddie Mac notes there will
be a net 1.7 million new renters between 2011 and 2015, but only about 200,000
new multifamily units per year.  The
numbers could increase even faster over the following five years, with perhaps
as many as 2.3 million new renters added between 2015 and 2021.   The
result will be an increasingly tight rental market and higher rents for many
Americans.

Abromowitz notes that even though
there is a glut of vacant single-family homes, most the result of foreclosure,
converting them to rentals will only help certain groups of renters.  Many are located in outlying suburbs or in
overbuilt markets and others are in economically distressed areas with little
housing demand because there are no jobs. The populations driving the demand
for rentals, downsizing seniors, young adults, and immigrant families forming
new households, are more likely to want rentals in larger multifamily buildings
or in urban areas and areas where jobs are plentiful.

This mismatch of supply and demand have forced
rents up and vacancies to fall from 8 percent at the end 2009 to 4.7 percent in
the second quarter of 2012.  Meanwhile
wages for the vast majority of workforce renters remain fairly stagnant.  Fifty-three percent of renters now pay more
than 30 percent of their income for housing, while 27 percent of renters pay
more than half.

When households spend so much for
rents it depresses demand for other goods and services. One analysis found that
housing-cost burdened families spend 50 percent less on clothes and health
care, 40 percent less on food, and 30 percent less on insurance and pensions
compared to families in affordable units.

Abromowitz says we are reaching a
crossroads in multifamily housing policy. Many of the roughly 4 million
apartment units built during the 1970s and early 1980s under a variety of Nixon-era
federal programs are nearing or at the end of their subsidy periods, leaving
many lower-income tenants at risk for sharp rent hikes. Affordability
restrictions on another 1 million apartments produced under the low income
housing tax credit program will also soon expire. These nearly 5 million
apartments represent roughly 15 percent of the nation’s apartment stock.

In addition to direct subsidy
programs, the federal government has long supported a multifamily housing
market through Fannie Mae, Freddie Mac, (the GSEs) and the Federal Housing
Administration. Specifically, the GSEs purchase and guarantee conforming
multifamily mortgage loans, package those loans into pools and sell the
resulting mortgage-backed securities (MBS), to outside investors.  They also hold some multifamily loans in
their own portfolios.

In good economic times, Fannie and
Freddie tend to back a smaller portion of the multifamily market because
private lenders and investors are eager to invest. In bad times however Fannie
and Freddie step in to keep the rental market afloat. Most recently, as private
investors fled the housing market in 2007 and 2008, the GSEs share of the
multifamily market shot up to fill the gap, and then eased back.  

Without government-backed credit for
multifamily mortgages, the rental market would have completely collapsed.  In 2009 Fannie and Freddie facilitated 85
percent of all multifamily loans, tripling their share of the multifamily loan
market from two years earlier. They continue in this rule, supporting 57
percent of multifamily loans in 2011.

Even with this support multifamily
unit construction dropped from 284,000 starts in 2008 to 109,000 in 2009, a
near 30-year low. Without government backing to attract private capital it is
likely that many of these units would not have been built and rents would have
increased faster.    Thousands of
much-needed construction jobs would also have been lost during the downturn
and, as a result, the current affordability crisis would be an economic
catastrophe.

GSE loans performed far better than
most originated in the private market. They experienced delinquency rates of
0.45 percent at the end of 2009 compared to 6.5 percent for private-label
Commercial MBS multifamily loans and 5 percent for commercial banks’
multifamily loans.  The GSEs also made
loans available for smaller buildings in markets not as popular with
institutional private lenders.

A healthy market for decent rental
housing requires wide access to multifamily mortgages under a range of market
conditions. This financing spurs the construction, maintenance, and resale of
apartment buildings; expands supply where there is pent-up demand, and helps
keep rents more stable for families at all income levels.  Despite the role the government has played in
keeping this market alive, some policymakers are considering significant reductions
of government support for all housing finance including multifamily housing. Some
are even calling for the federal government to withdraw from Fannie and
Freddie’s multifamily business entirely.  

The Federal Housing Finance Agency,
conservator of Fannie and Freddie, appears ready to privatize the multifamily
mortgage market
, announcing it was reviewing the possible impact of eliminating
the GSE-issued government guarantee on multifamily MBS.  If this reduces construction of new rental
units it could lead to increased rents for millions of low- and moderate-income
families. Abromowitz said that this and similar congressional proposals for
withdrawals of all government support for apartment finance would be a big
mistake.

He suggests instead that lawmakers
should focus on smart reforms.  He referred
to an earlier Center for American Progress plan to preserve a secondary market
for multifamily mortgages. The plan includes an explicit, privately paid for,
and limited guarantee on strictly underwritten MBS issued by private firms. In
addition, to assuring that renters benefit from any government backstop to the
apartment finance market, the plan proposes that at least 51 percent of the
rental housing units financed in the overall portfolio of private firms in a
given year have rents no more than 29 percent of the income of occupants
falling below 80 percent of local median income.

While most analysts agree that a
healthy multifamily market requires a strong government role, not everyone
things this includes an explicit government guarantee. The Center recently
reviewed 21 plans for mortgage market reform and only eight maintained an explicit
guarantee on multifamily securities. 
Most of those plans simply mentioned the rental market in passing.

Abromowitz said too many Americans including
many of the most vulnerable rely on the rentals for their housing and cannot remain
an afterthought in deciding the future of the housing market. “We must pursue
approaches that create a lasting 21st-century finance system and meet the needs
of both renters and homeowners,” he said

Back from South Africa, delayed by Sandy… Only to have lost electricity today…

We finally made it back into the country after a vacation in Cape Town South Africa, then a short jaunt to London en-route to New York City JFK airport… only to have a power failure due to a nor-easter storm here in Rhode Island today… if it is not one thing, it is apparently another thing…

That said, we are full steam ahead again today…

We have two rental properties up for new tenants: 1) at Sunbury Street in Providence, 2 bedrooms, 1.5 baths, townhouse style… $1000 per month plus utilities available immediately, and 2) A luxury house overlooking the Sakonett River in Island Park, Portsmouth… 3 or 4 bedrooms, 2 full baths, granite kitchen with stainless steel appliances, jacuzzi, and fire-place, available March 1… $2650 per month, plus utilities…

Any interest? Call 401-293-0631…

Getting Buyers to Boost Lowball Offers

When the market begins an upturn, like it’s doing now in most places, it’s easy to think that the biggest challenges for buyers are soon to be a thing of the past. Loan guidelines are a bit looser, it’s less likely that a property will decline in value after closing, and rates are still quite low. But experienced agents know that in an ascending market, it can be tough to get appraisal comps to keep pace.

And in the same vein, it can be even more challenging to get buyers’ mindsets to keep up with the heat of the market.

It’s not at all bizarre for a buyer to have to lose one, two or ten properties while the market “educates” them that when supply and demand shift, the lowballs of yesteryear just won’t cut it. Fortunately, there are a few powerful talking points agents can use to help their buyer clients experience less trauma and lose fewer dream homes before they stop lowballing sellers and seriously get into the game.
1. “A great deal isn’t a great deal if you don’t get the house.”

Many of today’s home buyers are remnants from the recession: people who craved to get the great deals and low prices of the bottom of the market, but were afraid to buy until home prices stopped dropping. While they might have done a mindset reset to understand that home prices have stabilized, making it safe (in their opinion) to buy, many have not adjusted their understanding of the flip side of market dynamics. Today’s market realities of competing with other buyers and having to make an offer at or even over the asking price are simply hard for them to swallow.

When your buyer clients insist on making a lowball offer because they want to “get a great deal,” gently remind them that an offer price that seems like a great deal is just an illusion, even a delusion, if the offer doesn’t get accepted by the seller. This reminds them that home buying is not a one-sided endeavor – that the sellers must agree with a price before it becomes the price. It also forces them to face the very real possibility that a lowball offer will result in rejection and loss of the house, especially in a multiple offer situation. If they choose to go in low anyway, that’s obviously their call to make, but this reminder helps you avoid being at the end of the finger-pointing if they make a lowball despite your advice.
2. “If you offer X vs. Y, you’ll actually only be saving Z%.”

You deal in six or seven figure transactions on a daily basis, so it can be easy to forget that your clients do not. For most of them, this is one of only a handful of occasions in their lifetime where they will be involved in a deal of this size and impact. Combine the fear of making a mistake on their biggest transaction ever with the deep desire to get a great deal and to make a smart decision, then add in the fact that many Americans just aren’t that great with math and you’ll see why it’s easy for buyers to think their lowball offer would reflect a much better deal than it really would.

This is especially the case with buyers making a decision between two offer prices on a higher-priced home where there are multiple offers. On an $850,000 listing where you know there are at least one or two other offers, your buyer might be vacillating between offering $860,000 and $865,000. Obviously, the higher offer positions them the most competitively. So, do the math for them: let them know that the $5,000 difference is a difference of only .6% – in a world where buyers are used to retail discounts of 10, 20, even 30%, many will feel that a .6% discount is not worth losing a home over. Similarly, you might want to point out the actual mortgage payment difference between two offer prices being considered.

This empowers your buyer client to make a completely informed decision about whether the level of “discount” reflected in their offer price is significant enough to be worth the reduced chances of successfully securing the property. And they may decide that it is, but if they make that decision with this information, they will feel much more comfortable and less regretful about it, if they aren’t the successful buyer.
3. “Make your best offer on your first offer, as you can’t count on being given another opportunity to go higher.”

Scenario: there are fifteen confirmed offers coming in on an REO property. You give your first-time buyer client the comps, which suggest the home should sell at $30,000 more than the asking price/offer price – and your client can easily afford to offer the offer price + $30K. Your buyer insists on offering the asking price, and no more, because they want to conserve money to negotiate with the bank.

Here’s your talking point: “I urge you to make your best offer on your first offer. This is a bank-owned property, and the bank is unlikely to go back and forth with all fifteen buyers. As well, if the highest offer is a cash offer or is willing to forego an appraisal contingency, the bank might simply take it outright, with no counters to anyone. When there are this many offers, you simply cannot count on being given an opportunity to negotiate and offer more later.”

This point, and all of the others listed here, have a strong track record of success at actually getting buyers to rethink their offer price and strategy on that go-round. However, even if they don’t take your advice, and they go in low and lose the first home, the fact that you gave them the comps, gave them this advice and warned them what would happen if they went in low – then cheerfully wrote the lowball offer anyway – places you in a position to have stellar credibility on your offer recommendations on the next go-round.
4. “How would you feel if you heard that the winning offer was at $X?”

This is a reality check, another one that most useful where you believe or know there are multiple offers. And this one is particularly powerful because it helps buyers understand that the value of a home at any moment is based on what a qualified buyer is willing to pay for it – and that every home is not necessarily worth blowing the bank on. If a buyer is trying to decide between two price points, this can help them make a decision about which one to choose – “What if you hear that the winning buyer made the same offer as your high offer? Will you feel regret? Or will you feel fine with having taken that risk, given the way you feel about the property?”

I pose this question even in heated multiple offer situations where my client is offering what I feel is a competitive price for a listing – this prepares them for the reality that they might not be successful, and helps them stay as emotionally detached as possible and move on to other listings very quickly, when they are not successful.
5. “Let’s look at the list price: sale price ratio for: my last few sales/my last few buyer clients/the recent comps.”

American home buyers aren’t all great at math, but they are desperately interested in making smart decisions, and they are well aware that the data can help them do it. If you’re struggling to get your buyer client to understand that the market has shifted and they need to be more aggressive with their offer prices, shift from giving advice to offering evidence: show them the full comps data for any or all of the following, with a specific emphasis on the actual list price, the actual sale price and the list: sale price ratio:

the last few homes you sold
the last few buyers you represented
the comparable sales for the listing they want to make an offer on.

If the data reflects that homes are selling at, near or over asking, this can be very influential in helping a buyer wrap their head around the new state of the market. It can even be helpful to give them references to other buyers you’ve represented who struggled with this and had to lose several homes before they started taking your offer price advice.

Ultimately, what to offer is a decision for the buyer to make, in consultation with their head, their hearts, their bank account and their tax and financial advisors. Helping buyers have these a-ha! moments is not about trying to talk people up in price, indiscriminately, to get a higher commission, nor is it about trying to convince people to spend more than they can afford on a home. In fact, some of the conversation a smart agent might need to have with lowballing buyers is around house hunting at a lower price range so they can make more competitive offers without blowing their budget.

Helping buyers manage their own mindsets in this way is meant helping buyers who are house hunting in a price range they can afford stop sabotaging their own offers by making time-wasting offers that have no chance of success. It’s also about helping them minimize the regret and frustration that comes with losing home after home and helping them avoid being priced out of a certain neighborhood or size home by a rise in prices.

Most importantly, this is about doing what they come to us for: helping them successfully secure a home that meets their wants, needs and budgets.

Tara-Nicholle Nelson
Trulia’s In-House Demystifyer of All Things Real Estate