Psychology Matters

Psychology and Effect

Instead of “cause and effect”, there are times when changes in the price of a house can be correlated to the change of the cost of loan funds.  But the reaction to the change in mortgage rates was psychologically driven – 3.99% is not much different than 4.26% but it’s a coup to get a rate “below 4%”.

Our government loves to help and the reduction of mortgage rates (specifically the 20 months from November 2011 through May 2013) were below 4% for the first time EVER!  Those same 20 months saw a total increase of 57% in the median price in Sacramento.  And Cash buyers peaked during that same time.  Investors were betting that prices were at a relative bottom. 

Since September ’13, the total increase in that same median price has only been 21%. For the entire period since November ’11, the increase in that Sacramento median price has only been 85%. In my opinion, the reduction in mortgage rates below a “psychological low” of 4% in 2011 led to a sharp increase in prices when inventory was very low – BECAUSE most sellers still had a psychology of “no equity” so didn’t try to sell and the foreclosures were drying up. There was no source of inventory to mitigate the demand in those 20 months except foreclosures which were starting to decrease.  And cash buyers were outbidding borrowers every time.  And then there was Blackstone and their ilk.

In fact, all 3 county median prices hold to that same increase – in the first 20 of the 67 months from November ’11 through now (May ’17) is when 50% of the price increases occurred.  That is 30% of the time (20/67 months) accounts for 50% of the appreciation (SA $165K-$344K, ED $240K-$467K, PL $245K-$462K).

So What

The good news is that buyers have refused to be lured into the price wars that resulted in the peaks in 2005-07.  The bad news is that the momentum has been stalled since the end of 2013 and continues in a lackluster way today – except for the nice homes under $400K (screaming off the market with multiple offers). 

Even though most of us have more equity now, employment opportunities (minus the costs and impacts of relocating) are still needed.  Jobs are still lacking.  Sure, there are a lot of jobs but not the kind of jobs that justify TWO mortgages (one being health insurance).  Gift letters are more common and some lenders are even providing the gifts.

There are loan programs.  There are fewer jobs.  There is more expense in a buyer’s budget.  Sellers must have an opportunity, too.  Affordability is not improving.

Jobs would be the best solution to our market “pickle”.  But congress is too comfortable to think and act big.


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Real Estate Financing and Investment

How real estate financing occurs tells me a large part of the market “story” each month. (I am not an investment advisor.  I am a real estate broker with a love for data, trends, and helping others with their story.)

Financing Trends

In analyzing this months’ data, it appears that Real Estate has become a regular place for investors to put their cash. I think the draw is due to the decrease in opportunity costs (savings rates) and then depressed by pressure from rising prices. I think the reason MORE cash is NOT being moved into “dirt” is because the equity/commodity Newscasts are stealing investor attention (and rising prices = decreasing yield).

This chart shows me:

  1. The entrance and abundance of FHA financing erodes the use of down payments (“skin in the game”) and therefore equity in real estate, and
  2. The entrance and continued use of cash financing means there are successes which begets more cash (and mitigates the loss of equity from FHA and VA).

The question you are probably facing: Is the timing right to bet on rental income (and maybe appreciation) rather than the better uses of our cash?

The most important 3 words in Real Estate SHOULD BE DIFFERENT for investors than those building a family. For a family that is buying a home, Location Location Location have long been the most important 3 words. However, for an investor, Timing is fundamental and always present and takes precedence to Location.  But, like any other investment, your tolerance for risk (and a licensed advisor) will help guide your decisions.  And, like any other investment, Timing is important.

Making Money in RE

These are the ways to make a profit in a real estate commodity:

  1. Cash-flow – This is like having a Dividend-paying stock in your portfolio; you value the periodic payments. (You still want to be favored by Timing when you sell.)
  2. Appreciation – This is like selling a stock at a price higher than when you bought it. This is what the typical homeowner wants and makes the Cash-flow investor happy, too.
  3. Building – Acquiring the empty dirt, adding a residence, and selling for a profit.
  4. Flipping – Like being a builder, you are purchasing low, adding value to an asset, and selling high.


A Cash-flow investor has a longer-term strategy that includes holding the rental property.  Whether the benefit is because of taxes or personal reasons, it remains true that “holding” real estate is how wealth is built, not “selling” real estate.  “Holding” means you’re getting rent payments (unless you’re “banking”).


Appreciation is a longer term strategy unless you’re Flipping without adding value.  That’s just arbitrage and doesn’t work very well when a bank, appraiser, government entity has some power over your eventual sales price.  There have to be comps and reasons your price jumped so much in a short amount of time (arbitrage).  Banks don’t appreciate other people making money; their money.


Building is a special art and requires a lot of capital.  This is the birthplace of what we call “home”.  It is also the birthplace of multi-family dwellings.  Demographics affects profit and, therefore, builders want to match projected buyer desires to construction details.  Timing is critical.  Location is critical.  Insurance and longevity are expensive.


Then there is the investment activity known as “Flipping”.  Simply put, Flipping requires working backward with the profit-chain to determine whether an asset is a good candidate for purchase and re-sale.  For example,

  • you have $200,000 to invest
  • your investment opportunities are limited to Flipping (determined by your Time and Money rules)
  • you want to make at least 10% in the Flip of an asset
  • a home is priced at $112,000 – the comps may support $212,000 with upgrades – kitchen, bath, roof, yard costs $25,000 – contractor and regulatory costs $25,000
  • spending $112,000 and $50,000 in upgrades could yield 31%; you could spend $65,000 on upgrades and still make 20%, notwithstanding the time it takes to achieve that return.

Barriers exist for any investment activity.  Specific to Flipping:

  • Regulatory costs
  • Market unknowns
  • Construction skills and availability

Being a real estate investor without guidance and help is sure to cause you pain.  Let me know if you have questions, needs, or if you have any feedback (or post it here).

I’m sure someone will have another way to make money in real estate.  Share your ideas. 

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Close To Shopping

Close to shopping, transportation, dining, and recreation.” 

Those are golden words [when true] if used in marketing and advertising a residential listing.  It follows that without one of them, the allure of the home is decreased.  After all, since 1956 shopping malls provided important social and economic environments.  Real estate values have historically resisted massive depreciation when close to shopping malls.

Unfortunately, since 2006 there hasn’t been a new enclosed mall built in this Country. Instead, they are being abandoned and torn down.

If you have been hearing the news about retail troubles lately, it is evident that what I call the “cloud effect” is not a fad and is inserting Power and WiFi into Maslow’s famous pyramid of needs.  (This depiction is not meant to insert electricity outside of Safety Needs nor am I dumb enough to show electricity above connectivity; the former is required for the latter.)

hierarchy-of-needsSo if demographics and behaviors are changing, as they always are, is “proximity to free wifi” the next golden attribute for sellers?  If solar panels could be used to save power (for rainy days), that amenity could be golden, too.  (The economic viability of solar panels is apparently not currently positive; the government has to entice homeowners with subsidies.)

Next time you are in the market to buy and listings are touting proximity to shopping, ask the seller to disclose the vacancy rate and trends of the nearby brick-and-mortar retail entities.  Better yet, the buyer should apply their own values to the house and its location.


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Real Estate Commissions

Nearly nine out of 10 real estate agents work on commission, and are paid only when the transaction closes. Except for the legal profession, real estate agents are the only fiduciaries and agents who work this way.

Commissions are paid according to the terms of two contracts – the listing agreement, and the purchase agreement. The listing agreement states the total compensation allocated to the listing broker and the amount of that total which is, in turn, promised to the buyer’s agent who 1) writes the offer and, 2) communicates acceptance to their principal.

To simplify how commissions are routed, the real estate industry customarily allows all sales commissions to be paid out of the seller’s proceeds, according to the terms of the listing agreement.


According to licensing law, only licensed brokers can serve as fiduciaries. They have “agents” or licensed salespeople who work for them, but they have the legal responsibilities of operating the brokerage. The salesperson license allows salespeople to serve as agents of the broker. They can negotiate contracts, but the seller is actually negotiating with the broker, by proxy. It’s the broker’s company name and signature on the listing contract.

But be careful; a licensed agent may not be a REALTOR® and, as such, is not compelled to follow any laws, conventions, or ethical framework.



Once the home is listed in the Multiple Listing Service (MLS), the listing broker discloses the terms of the commissions to other cooperating brokers, so they will bring their buyers to the listing. When the buyer’s broker presents a contract to the seller, it will include a provision to collect their share of the sales commission, as offered by the listing agent in the MLS. That means a commission can be split as many as four ways:

  • Listing broker or agent
  • Listing salesperson
  • Buyer’s broker or agent
  • Buyer’s salesperson

At closing, the listing agent is paid by the escrow agent out of the seller’s proceeds, or a day or two later when the buyer’s loan is funded by the lender. The listing agent, in turn, pays the buyer’s agent his or her share of the sales commission.

All commissions are negotiable, but sellers should keep in mind that commissions are incentives.  Skimping on commissions can reduce the exposure of your listing.

Simple Math

In California, it is commonly stated that “sellers pay commission” because the funds are distributed from the purchase price like the sellers’ loan balance.  Frequently, though, the math is overlooked which proves that the buyer pays half of the commission (and/or based on the agent/buyer agreement).

This math is simple because commissions, costs, loan fees, and seller profits all come from the purchase amount, NOT above and beyond the purchase amount.  That means the buyer is providing the money which includes commissions, costs, loan fees, and sellers’ Net.  Then it gets distributed at close-of-escrow.  The analogy is:  A seller provides “an empty bucket” which is filled with the buyers’ money.  The costs are taken off the top of that bucket and the seller gets the remainder.


So, when a seller asks for a discount on commissions, if agreed, the seller is giving the buyer a discount too.

P.S., You may hire a discount broker but “you get what you pay for”.  And I’m not a discount broker – my business would not succeed otherwise.  In fact, I am frequently under-compensated for the level of risk and negotiation management that I provide my principals.

P.S.S., In your line of work, do you allow the possibility of no success and no payment?

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