Urgency Versus Reality: realtors Win, Buyers Lose (redux)

Redux

Oct 272012

realtors don’t stop finding reasons to buy until buyers have enough. It doesn’t matter if the reasons are good or bad, they just needs to be plausible and salable. Today, I want to explore why realtors are responsible for the rubbish they promote.

I want to start by saying that there are many good Realtors (deserving of a capital “R”), and they are as dismayed about the practices in their profession as I am. I have the utmost respect for the character of Randy Rector, broker of record for Evergreen Realty, and many other Realtors and brokers have approached me and told me they share many of my frustrations. I am painting bad realtors with a broad brush, and I want to recognize that good Realtors exist, and my exasperation is not a reflection on them.

With Expertise comes Responsibility

Bad realtors want to have their cake and eat it too; they want to be recognized as experts on real estate and real estate markets, but they want no responsibility when their expertise is confirmed as chicanery, a conundrum with no resolution. realtors are responsible for their representations that buyers rely on. If they say prices are going to the moon, then who is to blame when that doesn’t happen? Buyers for relying on the experts? Or the experts for making stuff up that people rely on?

Does this make my butt look fat?

Perhaps this analogy is politically incorrect, but… Imagine you are shopping for clothes in a high-end retail outlet. You are trying on an outfit, and you are concerned about its appearance, so you ask the salesperson, “Does this make my butt look fat?” What is the salesperson to do?

If the salesperson responds, “Yes, that is not flattering to your shape,” they fear they will not close the sale, so even if the garment does, in fact, make your butt look fat, the salesperson is probably not going to tell you. As a customer, you asked a question hoping for accurate information to help you make a purchase decision. What you are likely to get is a self-serving answer that makes the salesperson money.

If a buyer walks out of the store with ill-fitting or unflattering clothes, who is to blame? Is the buyer responsible for failing to see the conflict of interest, or is the salesperson at fault for dissembling for dollars?

Being stuck with a bad garments is a minor inconvenience, but losing a home in foreclosure or being trapped in an underwater mortgage for a decade is a catastrophe.

Patrick Killelea of Patrick.net

Patrick Killelea of Patrick.net is very hard on realtors,

“While Patrick is not a real estate professional, he’s well aware of why the housing bubble took shape and who’s to blame for all the hype and misinformation, “I just couldn’t stand the quoting of realtors in the press as if they were an objective source of information. They’re not, and I wanted to say the things they were not saying.” …”

“And can you expect a real estate agent to give you an honest opinion of the real estate market? When it comes to real estate professionals giving impartial advice about the housing market, we both found a comparison in the saying, “never ask a car salesperson if now’s a good time to buy a car.” When you’re paid by commission, it’s ALWAYS a good time to buy! Upton Sinclair’s classic quote “It is difficult to get a man to understand something when his salary depends upon his not understanding it” ….”

“While Patrick accepts donations and receives some advertising support, he finds his reward in exposing the truth about the real estate market, which is something that most real estate professionals are unable to do.

When I ask Patrick what his goals were for his site, he offered the following forthright, common sense perspective:

“I want to cause a sea-change in the mentality of the US. I want people to see that mortgage debt is destructive, with no benefits at all, except for bankers. Mortgage debt just drives up prices and enslaves workers to their bosses. If we all paid cash for houses, or rented, we would be more prosperous, more free, and happier.“

It is hard to argue with Patrick’s observations, although most would be dead before owning a house if we all paid cash. When we announced we were forming a brokerage back in April of 2009, many were concerned we would abandon truth and honesty in favor of cheap manipulations and easy money. Isn’t that what happens to all realtors?

realtor Mind ®™

I recently attended a realtor marketing seminar, and it was fascinating to watch the realtor mind at work. The presentation included many “reasons to buy” realtors could use in their own ~~consultations~~ manipulations with customers. There was little or no regard for the veracity of the claims, it only mattered that realtors have something, anything to create urgency in buyers.

Many realtors see their job as presenting buyers with reasons to buy, any reason, and hope the buyer is gullible enough to believe them. They feel no responsibility for buyer outcomes; whocouldanode, right? What other explanation is there?

realtor Mind is Everywhere

How widespread is realtor mind? Am I unfairly labeling a large group based on a few isolated incidents among unscrupulous practitioners?

Back at the peak of the housing bubble, the National Association of realtors produced the “Suzanne Researched This” commercial. The scene is set with a couple discussing a home purchase in their kitchen with a realtor voyeuristically listening on the phone. In stereotypical fashion the commercial shows women how to browbeat their spineless husbands into submission, and it shows men how to acquiesce gracefully and pretend you got something out of the deal.

In their defense, the NAR did not say prices are going to the moon, but it does show that manipulating people to buy — even in 2006 when it was disastrous to do so — it the primary goal of NAR advertising. It is easy to see this couple, and anyone who fell victim to the Suzannes of the NAR, going through the foreclosure process today. Is the NARs culpability for that? Are the Suzannes?

If there is a doubt that some realtors are simply clueless shills who will use the appreciation angle to their advantage, watch the video below:

realtor Reason Du Jour

The marketing presentation I attended had many examples of how to manipulate the current situation to create urgency when none exists. One of these pertains to the inevitability of rising interest rates, and it goes something like this:

If a buyer is looking at a $400,000 home, very low interest rates make the payment affordable, but when interest rates go up, it will be harder and harder to finance that $400,000 home. In fact, if interest rates go up a full point, a buyer might lose as much as $100,000 in buying power; therefore, you should buy before interest rates go up.

Hmmm… I nearly raised my hand to ask a follow up question but then I contemplated who my audience was and what they understand about real estate markets and finance, I decided against it. I ask the question here:

OK, if I buy today, the buyer who wants to purchase the house from me in the future when I am ready to move may not be able to borrow as much money. Won’t that make my house harder to sell, and might I have to lower the price — a great deal — like the $100,000 mentioned in the example? Isn’t the fact that my take-out buyer is going to be much less leveraged working against me?

We all know the answer to those questions (Your Buyer’s Loan Terms), and that was when I had an epiphany: the realtor mind is unconcerned with reality, it is only concerned with urgency, and if urgency conflicts with reality, urgency wins, and buyers lose. Buyers are supposed to believe the realtor cares and that they are looking out for the buyer’s best interest; beliefs wholly incompatible with a realtor Mind®™ that places urgency over honesty.

Blue Ocean Strategy

When I began writing about real estate, becoming a broker and helping people buy and sell real estate was far from my mind. I still have not joined a realtor association, and I doubt I will be getting any impassioned pleas to join. realtors are fond of pointing out that not all salespersons or brokers are realtors. Of course, they make the distinction as a way of elevating themselves above the riffraff; I turn the tables on them.

I recently read the book Blue Ocean Strategy. The authors conceptualize business as having defined oceans where competitors behave like sharks bloodying the water competing for food in a defined space creating the Red Ocean of established business models. Contrast this with Blue Oceans where businesses pioneer new niches where no competitors exist. One Blue Ocean example in the book is Cirque de Soleil, a company that left the bloody waters of the circus industry and crossed the divide between theater and circus to find a new blue ocean.

realtors with their ploys to create urgency are sharks operating in a red ocean. They seek out buyers foolish enough accept them as experts even when the information they present is nonsense. When 500,000 California licenced agents are united in their presentation of bullshit to customers, what are rational buyers supposed to do?

Our strategy is simple, we service the buyers annoyed by realtor duplicity by telling the truth and providing services realtors should provide but don’t. Perhaps the red ocean where realtors feed constitutes the bulk of the market — sheeple are abundant — but there is a blue ocean of frustrated buyers hungering for another way — I know because many of you have contacted me and told me so.

No kool aid

As a sign that some realtors don’t get it, I refer you to a less-than-astute observation from the IHB News of 1-9-2009: from “test” whoever that is:

[quoting me] ““we are all looking forward to a successful 2010…..”

Really? Why buy now when you keep predicting prices to drop until 2025.”

It is utterly incomprehensible to this poster that anyone would buy a home for any reason other than making a fortune. You can’t remove kool aid from blood like that because nothing else remains. My response was simple and direct, “People have many reasons to buy. Expectation of rising prices should not be among them.” Prices may go up, and in time when I no longer believe prices will fall, and I will say so; however, I will never tell people to buy because prices are going up. Yes, it does create urgency, but at a price I am unwilling to pay; my integrity.

When I first started blogging, a realtor asked me if I would feel guilty if a buyer following my advice missed their chance to own and was priced out forever. The intense kool aid intoxication and the thought of a realtor who caused untold financial ruin lecturing me on responsibility to buyers, was laugh-out-loud funny, but I did feel the need to answer the question.

First, unless it is less expensive to own than to rent, it is not in people’s best financial interest to buy, and advising people to buy for rapid appreciation is wrong. It may serve them emotionally, but it will not serve them financially. It is not in a buyer’s best interest to overpay for real estate, and the fact that greater fools occasionally come along and make it profitable doesn’t make it smart or right — it just makes certain people lucky.

Second, if someone really is priced out forever, and they are forced to rent and save money versus owning, I don’t see the harm. However, if someone believes they are priced out, buys in desperation, and finds themselves either underwater for a decade or losing their home later because they can’t make the payment, I think that is harmful. When it is more expensive to own than to rent, the prudent course of action is to rent and save money rather than going all-in and losing everything.

Third, history has shown that once prices reach their zenith, they fall until buyers have a new reason to buy — it is less expensive to own. Right now, with the FED controlled mortgage rates, many properties in many markets are selling at costs of ownership less than rent. For the first time in years, it is costing more to rent than to own. My blessing goes to anyone who buys to save versus renting if they use fixed-rate fully-amortizing financing and they expect a long holding period. That is a good decision.

Prices will go down as interest rates go up and inventory is washed through the system. But with a fixed cost of ownership below the cost of rent, today’s buyers are trapped in a gilded cage of their choosing. They know that going in.

Being priced out is a fallacy — a useful one for realtors to exploit, but a fallacy nonetheless. Rapid appreciation and resale flipping is past. (1) Flat home prices, (2) rising interest rates, (3) less borrowing, (4) increased saving and (5) less spending is future. Get used to the idea.

Is life really so simple? Is telling the truth, even when a lie is more expedient, a better way to serve people? The question is not rhetorical, but it should be.

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