Sunday, January 20, 2008

To Be or Not To Be Represented - That Is The Question

Lori and I feel that if we, as REALTORS®, share the kind of Intel we offer below, with the public, they will think twice about giving any logical thought about engaging a real estate agent who is willing to work for less than poverty wages.

From time to time, Lori and I come across buyers and sellers who believe that real estate agents... simply make way too much money for the job that they do. That may be true in some instances. We also know of real estate agents who promise to give a good part of their earnings back to the buyer or seller when a transaction closes. We have heard of practices where real estate agents offer as much as 1/2 of their earnings and as much as 2/3s of the agent's earnings back to the buyer or seller at the close of escrow. Could such an altruistic position be putting the buyer or seller in harms way?

To that end, we thought it appropriate to offer our thoughts on this practice.

Lori & I do not believe that any agent who is giving up 1/2 to 2/3s or more, of his or her income can consistently keep a frame of mind that puts his/her client top of mind and above the real estate agent's need to keep the agent's car payments current, a roof over his/her families head and food on the table.

Keep in mind too, that the real estate markets of 2006, 2007 did not produce an abundance of closed transactions in the entire country, Arizona or the ARMLS (Arizona Regional Multiple Listing Service) region. 2008, 2009 and perhaps as far out as 2011 could ring in similar years of productivity.

FACT:

In August 2008 ARMLS recorded a total of 3930 residential resale and/or new home transaction closed.
In September 2008 ARMLS recorded a total of 3171 residential resale and/or new home transaction closed.
In October 2008 ARMLS recorded a total of 2824 residential resale and/or new home transaction closed.
In November 2008 ARMLS recorded a total of 2629 residential resale and/or new home transaction closed.
In December 2008 ARMLS recorded a total of 2591 residential resale and/or new home transaction closed.

You can review a complete seven year tracking of the real estate market's activity by CLICKING THIS LINK.

In the first 20 days of January 2008, ARMLS recorded 1,201 single family residential listings closed escrow. Now.. Keep in mind that the National Association of REALTORS® study sited that the average real estate agent closes 10 transactions per year (**SOURCE: Realtor.org). If we subscribe to the belief that, as of December 2007, Arizona now hosts over 110,000 licensees and that, perhaps 1/2 of them or more, practice right here in the ARMLS area, how may transactions do you think the average ARMLS real estate agent is closing each month? Contrast the first 20 days of January 2008's figure of 1,201 single family residential listings closing escrow with the first 20 days of January 2007 when 2482 single family residential listings closed escrow. The industry is 100% off target from the preceding 12 months.

However... Do not be disheartened. Even though these numbers look pretty dismal, the number of closed transactions are not too far off from January 2000 when the first 20 days of January 2000 produced 1642 of closed transactions. The two biggest variables are the increase of licensees by nearly 115% since December 2000 and the staggering number of failing mortgages which now helps sponsor nearly 60,000 properties that remain, on the market and UNSOLD!

NOW... DO THE MATH! The average sales price for homes in the valley, priced between $100,000 and $800,000, in 2007 was $286,000. Assume an average commission paid to the buyer or seller agent of 3% or $8,580. Let's also assume that our REALTOR® works for a 100% office, wherein the agent receives 100% of the compensation, less a usual franchise fee payment to his/her broker of 6% of the earned commission. (franchise fees vary but 6% is a good number to use as an average) In our example, the agent will receive a Gross Commission Check of $8,065.20. If our agent gives his/her client 2/3s of his/her commission, he/she earns a total Net Commission, before taxes, of $2,685.71. Now... Let's assume that our agent is in a 30% tax bracket. That means that our agent's take-home pay for this transaction is $1,879.99. Remember, the National Association of REALTORS® sites that the average real estate agent closes 10 transactions per year, from 7.7 in 2000 (**SOURCE: Realtor.org). If our agent is 1/2 again more efficient than the average real estate agent and closes 15 transactions per year, our agent will earn a total, Take-Home income of $28,951.84 which is just $4,800 above the 2007 USA National Poverty level for a family of 5 in 48 states and. **SOURCE: Federal Register, Vol. 72, No. 15, January 24, 2007, pp. 3147–3148

Now... What if our real estate agent worked for a traditional real estate company where the agent's commission is shared with his/her brokerage on a SPLIT. The majority of the REALTOR® population work for traditional real estate firms and even the most senior agents capture only 80% to 90% of the commission dollars, after their traditional franchise fee SPLIT.
Let

s move our benevolent agent into a traditional real estate firm, such as ERA, Century 21, Coldwell Banker, Better Homes and Gardens or any number of other companies that host traditional real estate commission SPLITS. Let's assume that he/she has achieved an 80% SPLIT agreement with his/her company, less his/her 6% franchise fee. That means that the 80% SPLIT is really 74%.

Now... Let's assume the same transaction with a total earned commission of $8,580. The agent's total Gross Commission, at a 74% SPLIT (after the 6% franchise fee) is $6,349. Now let's assume that our altruistic agent gives his/her buyer or seller 2/3s of his/her income netting our agent a grand total, before taxes, of $2,147.52. Remember, our agent is also in a 30% tax bracket, which in realty nets our agent a grand Take-Home income of $1,503. If our agent performs better than the NARs average REALTOR® and closes 15 transactions in one year, he/she will earn a grand total of $22,545 or $1,550 below the National Poverty level for a family of 5 in 48 states, Hawaii and Alaska's poverty level have a bit higher income ceiling. **SOURCE: Federal Register, Vol. 72, No. 15, January 24, 2007, pp. 3147–3148.

Lori and I believe that human nature will prevail and the client, on some unfortunate day... may pay a very heavy price because the real estate agent may not be able to conduct too many transactions with the altruistic contributions described in our scenarios. It is simple economics and human nature. This does not make REALTORS® bad people, it makes them human and as humans, we believe that REALTORS® should earn a fare price for performing their duties to protect the public. Remember, as Arizona licensees that is our charter, as defined by the ARS Title 33, to protect the public's interests.

How in the world can a real estate agent hope to assist a buyer or seller if the real estate agent is going to put himself or herself in financial harms way. Lori and I feel that if we, as REALTORS®, share this kind of Intel with the public, the public will think twice about giving any logical thought to engaging a real estate agent who is willing to work for less than poverty wages. Would you be willing to work for less than Poverty Wages? Do you believe that you would be able to put your client's needs ahead of the needs of you or your family if you were working for Poverty Wages or less?

It simply makes no sense to us... How about you? Think about it.

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Thursday, January 04, 2007

Builder Contracts, Be AWARE Of What You're Signing!


Builder Contracts, Be AWARE Of What You're Signing!


By "G-II" Varrato II,
Realtor®, Retired USAF Red Horse 820th CES
ePRO 500, ABR, RECS, Mentor
Coldwell Banker Residential Brokerage


Builder contracts come in all sizes, shapes and versions. There is little opportunity for the alteration of any of the terms of a Builder’s Contract. However, that said, it is imperative that you fully understand what you are signing. Even if you have made several purchases of residential real estate in the past, unless you are specifically trained in the art of understanding contract language, this is not a swamp you should venture into without a seasoned real estate professional by your side to guide you through the murky maze of contract terms, phrases and conditions.

Confucius Say:
“Man who starts out on journey alone and without a guide is soon lost and bewildered and he who continues on his excursion alone has a fool for a guide.”

Arizona is one of the few states that engage a little understood protocol known as “The Threshold Rule”. “The Threshold Rule”, simply stated, means if a consumer literally crosses the threshold of a builder’s showroom office entrance, the consumer gives up his/her right to FREE transaction representation. That is to say, the overwhelming majority of builders in Arizona have an agreement with real estate brokers to pay a licensed real estate broker to represent the interests of a buyer at no additional cost to the buyer. However, the caveat to this seemingly altruistic gesture is that the buyer MUST bring his/her licensed real estate agent with him/her on their first visit to the builder’s showroom. Failure to do so automatically will forfeit the buyer’s right to have the builder pay for the buyer’s transaction representation.

Now, that is not to say that the buyer is not entitled to engage the services of a buyer representative, however, if the
buyer does choose to do so, the buyer will be responsible for paying the broker for that service.

Many consumers unwittingly believe if they do not engage the services of a licensed real estate agent, to assist them with the purchase of their new construction home, the builder will cut them a better deal because the builder will not have to pay the real estate broker. This could not be further from accurate. The money the builder has budgeted into the transaction to pay the buyer broker, if not spent on that mission, is not refunded to the buyer in any form. The builder simply puts those funds back into his profit portfolio and the buyer is left to tramp through the swamp of contract language, all alone.

Here are some passages from a few builder contracts. For professional reasons, the builders have not been named but these excerpts are quoted directly from builder contracts. If you would like more information about any specific language below, please eMail Lori.and.G-II@RealEstateInPhoenix.net or call us at 602-796-5674.

Builder “W” Contract: “…Buyer’s obligations under this Contract are not contingent upon Buyer obtaining any specific interest rate on the loan or other loan terms…”

Builder “X” Contract: “…FINANCING, Buyer understands and agrees that obtaining financing is not a contingency or condition precedent to Buyer’s obligations under this Agreement…”

Builder “Y” Contract: “…Any delay in the Closing by Buyer… …shall constitute a material default hereunder by Buyer… …It is expressly agreed that the House… …may be subject to certain “punch list” items for additional work… the existence of such punch list items will not give Buyer cause to delay the closing or cancel this Contract. Punch list items may include failure of operation of appliances, electric outlets, plugs or fixtures…”

Builder “Z” Contract:
“…AGENCY DISCLOSURE: …Our sales agents at the project where the Home is located solely represent us…”

So, what could the penalties be if the buyer is late to close on the property.

Builder “W” Contract: “…a late Closing fee equal to $300.00 per day for each day from and including the original Closing Date scheduled by Seller to and excluding the actual day of Closing…”

Builder “X” Contract: “…a late closing fee equal to $75.00 per day for each day from and including the scheduled closing date and including the actual day of closing…”

Builder “Y” Contract: “…a late closing fee equal to $50.00 per day for each day and including the Closing Date, to and excluding the actual day of Closing…”

Builder “Z” Contract:
“…You agree to pay us a $100 per day extension fee for each day Closing is extended…”

This message covers ONLY the tip of the iceberg of Buyer Representation for buyers who wish to purchase New Construction from builders in Arizona.

If you would like to know more about how to take advantage of Buyer Representation, paid for by the builder, please contact us. We can be reached at cell phones 602-574-5674 for Lori, 602-796-5674 for G-II or by eMail at any number of eMail addresses, such as Lori.and.G-II@RealEstateInPhoenix.net or Lori.G-II@AirForceHomeSeller.com.

Bye till next time. Lori and I truly wish you and your family a Happy, Healthy, Safe, and Prosperous 2007!

Click Here To Read Some Really Inspection Stories

This article has been written by
"G-II". All rights reserved
Click to go to News in The Valley of The Sun


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Sunday, November 05, 2006

A LITTLE FAQ ABOUT LOANS, LENDERS AND LOAN PRODUCTS

Live chat with Lori & "G-II"
If the chat window does not open,
hold down the control key then
click the Chat Icon above.

Ok... school is in... LOL

The first thing I want to say is that for some folks, using their VA benefits is a good thing and for some folks, using their VA benefits is not only NOT fiscally prudent; it could even be financially irresponsible. Over the past 15 months, Lori and I have closed well over 75 transactions of our own and mentored and have been involved in another 60 transactions with protégés. Of that number, perhaps as many as 2/5th were veterans, active duty or retired or simply discharged from their particular branch of service. Of that 2/5th, less than a dozen or so used their VA benefits. The cost of money today is so inexpensive that there is little reason and almost NO advantage to a vet to use his or her VA benefit. There are numerous optional loan platforms that emulate the benefits of a VA loan without causing the buyer to toss away thousands of dollars in a VA funding fee.

Suffice for now to say that Lori & I have been in this industry nearly two decades. The VA loan platform is one that we are extremely proficient with and since I too am retired USAF, we tend to draw a huge number of vets to our web site who ultimately secure our services to procure their home, help with arranging home inspections, termite inspections and... oh yes... sorting out what type of loan makes the best sense for that particular eClient.

So, Let's Chat...

QUESTION: There are a million mortgage calculators online, and they all differ from one another. The simplest ones just ask for the amount of the loan, any down-payment, and number of years. However, there are some that have blanks that require specific information such as Tax Rate and Insurance. I have no idea what to plug in, for those items. Can you help me with this?

Correct; there are literally millions of mortgage calculators on the internet today. Quite frankly, over the years, Lori & I have played with hundreds of them, searching for what we feel are some of the best and least confusing. We have found that nearly all of the mortgage calculators, found on lender sites, are very confusing. Some, quite honestly, are actually weighted so that eConsumers conclude that the Lender who provided a particular mortgage calculator, appears to offer the best mortgage deal on the Internet or even the planet. In our opinion, this is unfortunate and very confusing and can tend to be a bit misleading.

As for how to divine what figures to use for Tax Rate and Insurance, let’s first discuss Tax Rate. Here’s a good rule of thumb we have arrived at after reading hundreds, perhaps thousands of Arizona Public Reports; if you use a figure of somewhere between $10.00 and $13.00 per $100 of property value (not purchase price), you will come really close to the actual tax rate. Property values, as we discuss in this article can be researched at http://www.maricopa.gov/Assessor/. Tax Rate calculations are extremely complex computations. If you would like to know more about how a municipality actually establishes the tax rate, call the county recorder in the county you wish to live and ask to speak to a clerk of the County Tax Assessor’s office. They are very happy to educate the consumers with the math… but… make sure that, if you have a full head of hair when you begin, you’re not going to be disappointed if some if it is missing after the tax rate calculation class concludes.

Insurance is a bit trickier, only because there are several variables that play into the actual insurance rate a buyer will be charged. Two of the most important variables are derived from the C.L.U.E. (Comprehensive Loss Underwriters Exchange). C.L.U.E. is a database that all insurance companies use to assess the risk factor for insuring a particular piece of real or personal property based on both the real or personal property and the individual wishing to be insured. The first assessment is conducted around the real or personal property. The next assessment is conducted around the credit score of the individual and the individual’s history of filing insurance claims. The C.L.U.E. retains a five year history for the majority of all insured individuals and their widgets. Learn more about C.L.U.E. at http://www.choicetrust.com/. Many factors play a vital roll in providing the information insurance companies require to tender a firm-fixed quote for a homeowner's insurance policy. Even in the early quotes, the figures are truly speculative numbers and could vary a few hundred dollars up or down in the final analysis, and the final analysis can only be determined once you have settled on a particular home in a particular geographic area and on a particular price and on a particular amount to finance.

Back to mortgage calculators; Lori & I actually favor mortgage calculators that have been put up on the web by college students. These are truly unbiased mortgage calculators that offer honest unbiased results. Some are very complex and some are very simple. In the following paragraphs we have provided links to three of our favorites, one of which we keep on our web site in a secure location, offered to eClients that have selected us as their Realtor Representatives. They were all developed by college students, one in Japan, the other in Pakistan.

QUESTION: Some calculators have fields for loan components called “points”. What the heck are these things, and do I need to worry about them?

POINTS – Perhaps lead the pack of some of the most confusing parts of the loan package. So what is this thing called “points”? Points are often confused with “origination fees”. The two serve completely different rolls in the loan process.

An “origination fee” is an amount of money, charged by a mortgage company, to the buyer as part of the lender’s cost of doing business. However… what most consumers do not know is that the “origination fee” is a totally negotiable charge, assuming the buyer has relatively good credit. It has been our experience that buyers with FICO scores in the high 600s or higher can usually shop, with great success, for lenders who will charge minimal or NO origination fee in their loan process. Our suggestion would be to stand your ground. Assuming that all of the other terms of the proposed loan are acceptable, make it clear to the loan officer, that if he/she does not alter their costs of the “origination fee” you will simply take your business elsewhere. If you are currently searching for a couple of lenders, check out Coldwell Banker Mortgage, Rosemarie Cox (602) 565-6948 and/or Pacific Funding Group, Mark Schmidt (800) 245-6722.

Points, often called Discount Points, are the amount of money a buyer will pay to control the interest rate on his mortgage. The “point” is calculated against the amount of money that will be financed, I.E. your mortgage amount. So, if you’re going to make a purchase of $350,000 with a 20% down payment, your mortgage amount will be $280,000. Therefore one point (1%) would be calculated to be $2,800. There are numerous formulas bandied about on the Internet about how these fees benefit or hinder a borrower’s loan. In short, if you spend one point of your loan amount, you can affect your interest rate by about 1/8th of a percent.

This means, if the consumer is quoted an annual interest rate of say... 6.5% but wants to reduce that rate (I.E. buy it down) to 6.0% by paying money at the time of closing to do so, the consumer would have to part with about $11,000. For some buyers this is a good idea, particularly if they are going to stay in their home or not refinance the home for many years. But keep in mind too, that another barometer to making such a decision is how long it will take to recapture the $11,000. By reducing the annual interest rate by 1/2 a percent, the payment reduction on a $280,000 loan is about $90 per month. That means that it will take about 10.18 years to recapture the interest savings. Not a bad scenario, and often a $90 reduction in the monthly payment can mean adding a little more tile in the house, or the cost of some appliances or any number of additional accoutrements or creature features that the buyer may want to add to the loan.

Here are a few thumbnail guidelines to help you decide if the return on this type of investment is warranted.

It may not be wise to spend money on Discount Points if:


  • you plan on selling your home in less than 3 to 4 years
  • you plan on refinancing your home in less than 5 years
  • you are applying for an ARM type mortgage
  • you are applying for an Interest Only loan product

It may be wise to spend money on Discount Points if:


  • you do not plan on selling your home in the next 5 years
  • you do not plan on refinancing within the next 5 years
  • your purchase is for investment and/or rental purposes

These are suggestions and not items to be thought of as “Set in stone”, but they are a good sound foundation for developing your loan strategy.

CLICK HERE for a very simple mortgage calculator, just plug in the numbers. Be sure to enter NO commas. The interest rate will accept a dot, for example 6.5 but do not include a % sign. This is by far one of the simplest mortgage calculators we have found and is GREAT for calculating VA loans because it does not automatically include MIP (Mortgage Insurance Premium). This calculator does not produce an amortization schedule but the next mortgage calculator does.

CLICK HERE to use a more sophisticated mortgage calculator. Again, only use numbers and no commas and too, the interest rate can be calculated using a decimal point in the rate, but again... DO NOT use the % sign. This calculator can produce an amortization that can be produced in HTML or Plain Text. In the " Monthly Principal Prepayment Amount " window, DO NOT enter any values and the same is true for the " Annual Principal Prepayment Amount (Enter B here for Bi-weekly Loans) " and " One-Time Prepayment Amount, to be paid before payment (month #) ".

CLICK HERE for an interesting mortgage calculator created by Hugh Chou. This is a mortgage calculator that compiles a maximum monthly payment that Hugh feels is appropriate for a home buyer. Keep in mind that Hugh built these calculators as a college project although now I believe he works in the financial industry.

There are many factors to consider when searching for a home loan, not only the total monthly payment, but also total loan costs. You asked about "Points". As we mentioned, this can be a confusing term. Often consumers believe that there MUST be points associated with ALL loans. As we explained above, that could not be further from the truth.

When considering a new construction home, remember, that in almost 100% of loans that are configured by a builder's lender, the builder's lender will add... at a minimum 1% to the loan cost (sometimes, incorrectly, referred to as a POINT). This fee is really an "Origination Fee". In our opinion, consumers with GREAT credit scores, also referred to as the "FICO" (Fair, Isaac and Company Inc) score, should not be subjected to these fees. Unfortunately, when builders offer incentive packages to the consumer, those incentive packages are tied directly to the requirement that the consumer utilize the builder's lender to secure financing for the purchase.

It would be sensible to consider not using the Builder’s Lender if the total incentive package hovers around the $5,000 mark. Some of our clients have had a GREAT deal of success using non-builder lenders, wherein our clients have given up as much as $5,000 in incentives from the builder and... even after doing so, have secured a much more favorable loan program and sometimes even lower monthly payments, with similar or lower closing costs, than they would have if they had used the builder's lender.

Another typical lender explanation for an Origination Point is: "An origination fee is the amount charged for services performed for handling the initial application and processing of the loan". Hog wash! While it is true that some loans should be burdened with such a fee, such as loans granted to buyers with less than perfect credit. The amount of effort and research that goes into locating an investor who is willing to purchase the loan from the lender can be intense. In our opinion, level of effort and perhaps even ‘arm twisting’ should be compensated. But if the consumer/borrower has a good to great FICO score, again in our opinion, there should be NO Origination Point... NONE... NADA... ZIP... ZILCH... got the picture? Why should a lender, granting a loan to a buyer with good to great credit, make profits on two transactions? The first transaction is between you and the lender. The next/second transaction for the lender is between the lender and his investor, the entity who will purchase the loan from the lender. Remember, if you keep your credit in good condition, you have a boat load of strength and negotiating power as you shop for your loan.

Another item to pay attention to are the ever swampy quagmire of Lender Fees... Ok... I know... so what does that all mean... ?... LOL Ok... Lender's fees are fees that offset the cost of producing the loan. Different companies may refer to them by different names, such as, processing fees, broker fees, tax service fees or underwriting fees; or you may have heard these fees referred to as Junk Fees. Most lenders are very sensible and fair about these fees. Obviously all businesses are in business to make a profit. Lender Fees are one of the vehicles that generate profits for lenders. Years ago I wrote an article for an On-Line Real Estate Forum, about Predatory Lending. CLICK HERE if you would like to read that article, but keep in mind that the figures in the article are very outdated, however the nefarious activities I write about are, unfortunately, still very much a part of the lending arena. I think that article will explain what you do not want to see in your lender.

I could write hours about the loan and lending process because the entire process is so interesting and is very involved. Here are a couple of more nuggets for you to ponder.

QUESTION: Is there a difference between APR and Interest rate?

You bet! The APR (Annual Percentage Rate) reflects the cost of your mortgage loan as a yearly rate. It also incorporates the cost to obtain the loan, such as discount fees and loan origination fee. The interest rate is the actual note rate.

When you finally get to the closing table, you will be presented with a TIL (Truth In Lending) statement. You will undoubtedly ask: "Why is the Annual Percentage Rate (APR) on the Truth-in-Lending Disclosure higher than the rate shown on my mortgage note?" Here is a simple explanation:

The rate reflected on the APR shows the cost of your mortgage loan as a yearly rate. This rate is generally higher than the rate stated on your mortgage note because, in addition to the interest rate, APR includes other costs such as origination fee, loan discount points, pre-paid interest, and mortgage insurance. The APR allows you to compare, in addition to the interest rate, the total cost of financing your loan, among various lenders.

CLICK HERE for an example of several loan scenarios in a spread sheet provided by one of our most reliable lenders to one of our past eClients. As you can see, the buyer was purchasing a home for $189,000 (that’s not going to happen again any time soon! LOL) and was pondering a VA loan VS. a conventional loan. This purchase was for an "as yet to be built" new construction home. If the buyer chose to NOT use the builder's lender, he would have given up $4,500 in incentives from the builder. This particular buyer had his own closing cost money and was able to put up to 5% down on the principal. All scenarios in the spread sheet are fixed rate loans, there are no ARMs (Adjustable Rate Mortgages), although to opt in for an ARM provided an even lower monthly payment for our buyer. The loan identified at the far right as an 80/20 is called a HELOC. This particular type of loan has been most attractive to our vets because it can be nearly 100% tax deductible and... as you can see... this type of loan produces a very low PITI (Principal Interest Tax and Insurance) payment. And... as you can see, if our buyer’s target ceiling were a $1,500 PITI monthly payment, he could actually increase his purchase well above $200,000 while still keeping his monthly payment well under $1,500. There is one catch to being able to take advantage of a HELOC, the buyer must have GREAT credit... the good news is... YOU DO!

Well... now that I have totally confused you...

Bye for now... and we'll be in touch in a couple of weeks. Lori and I trust that you are enjoying your FREE subscription to your CLUB membership.

Monday, October 09, 2006

Procuring Cause, What’s All The Fuss About?


Procuring Cause, What’s All The Fuss About?

By G-II Varrato II, ePRO 500, ABR, RECS, Mentor
Coldwell Banker Residential Brokerage


I recently had to help one of our Protégés navigate this very complex issue, the issue/concept of Procuring Cause.

Procuring Cause actions are, perhaps one of the most often registered complaints in real estate transactions, between Agents/Brokers. So what’s all the fuss about?

The Black Law Dictionary’s definition has been adopted by the National Association of Realtors® as the concept of Procuring Cause as it plays out in arbitration cases. The Black’s Law Dictionary definition has also been incorporated into the Realtors® Code of Ethics. You will find, in the NAR Arbitration Manual, reference to the Black’s Law Dictionary definition of Procuring Cause. The Black’s Law Dictionary definition is set in two sections or parts. The first part says of Procuring Cause: “A cause originating a series of events which without break in their continuity, results in accomplishment of a prime objective…”

In the world of real estate, at first blush, one might be predisposed to consider that this concept of, “…A cause originating a series of events which without break in their continuity, results in accomplishment of a prime objective …” shouldn’t be too difficult to establish. Not so, as you will see as we explore Procuring Cause.

The second part of the Black’s Law definition is where most of the confusion comes about. Black’s Law Dictionary goes on to say about Procuring Cause: "A Broker will be regarded as the ‘Procuring Cause’ of a sale, so as to be entitled to commission, if his efforts are the foundation on which the negotiations resulting in a sale are begun."

So how does this all play out in real life in the world of real estate? (NOTE for clarification; please understand that the terms Broker and Agent are interchangeable in this article.)

First, it’s important to understand that the NAR distills the concept of Procuring Cause to the following: ". . . for purposes of arbitration, Procuring Cause can be readily understood as the uninterrupted series of causal events which resulted in the successful transaction." In short, who or what, caused the transaction to conclude successfully? The questions that an arbitration panel would engage are which Realtor® was the most responsible for the Buyer’s decision to make an offer on the property. Therefore, that particular Realtor® would be the Realtor® with Procuring Cause.

Oooppss… not so fast. Before we get too far along, we must discuss the concept of Alienation. Alienation is interchangeable with two other words, Estrangement and Abandonment. All play a part in the concept of Procuring Cause.

The NAR Arbitration Manual states to conditions that would sustain Alienation. They are:

". . . [A] purchaser, despite reasonable efforts by the Broker to maintain ongoing contact, may seek assistance from another Broker. The panel will want to consider why the purchaser was estranged from the first Broker. .
. . [T]here may be no question that there was an ongoing relationship between the Broker and the purchaser; the issue then becomes whether the Broker engaged in conduct which caused the purchaser to terminate the relationship (estrangement)."


So, what types of events could cause Alienation? Perhaps the Agent conducted himself/herself in an inappropriate manner. Did the Agent say something that was offensive to the Buyer? Did the first Agent fail to stay in contact with the Buyer after their initial visit? Were there conditions within the emerging relationship between the Buyer and the Agent that were untenable to the Buyer? Did any of these, or similar actions, activities or inactivities, cause the Buyer to seek the services of another Agent? The NAR Arbitration manual makes it very clear that estrangement can be the product of actions or words by the Realtor®.

If the arbitration panel found that the Buyer had, in fact, been estranged by the first Realtor®, the arbitration panel would determine that there was good cause for the Buyer to seek out the second Realtor®. In this instance, the first Realtor® would not be entitled to compensation because he/she would not be the Procuring Cause.

Abandonment is perhaps one of the hinge-pins of many Procuring Cause actions. For example, what if the first Realtor® showed the Buyer a home and the Buyer tells the Realtor® he is interested in the home but, before he makes an offer, the Buyer would like the Realtor® to produce a list of comparable sales for the Buyer to review. This is not an unusual request or query by the Buyer. But, what if the Buyer feels that the first Realtor® does not produce the information in a timely manner; causing the Buyer to make contact with a second Realtor® in search of the comparable information? Who do you think is the Procuring Cause, Realtor® No.1 or Realtor® No.2?

What if the second Realtor® complies with the Buyer’s wishes and subsequently writes the offer on the property? Such an action, or in this case in-action, on the part of the first Realtor® could be deemed, by an Arbitration Panel to be abandonment, thus disallowing the first Realtor® Procuring Cause and awarding the Procuring Cause action to the second Realtor®.

Here’s a real twist for you. The Buyer is shown a particular home by a Realtor®. The Buyer tells the Realtor® that he is interested in the home but cannot move forward yet because he is waiting for a raise from his employer but that the raise is about 6 months away. The Buyer tells the Realtor® not to call him and that he would be in touch with the Realtor® when he receives his raise. The Buyer’s raise comes early, about seven weeks from when the Buyer and the first Realtor® last spoke. The Buyer calls at that time but the first Realtor® had not called the Buyer because of the Buyer’s specific instructions. Has the Buyer been abandoned by the Realtor®? Probably not. The Realtor® followed the specific instructions of the Buyer. In today’s world of electronic communication, it is not difficult for an Agent to prove that he/she has maintained contact with a client electronically. Even if the Buyer has no means of electronic communication, it is good practice to send a note, card or some form of communication in an effort to continue the unbroken chain of events with the Buyer prospect. The first Realtor® could probably make an effective argument that he/she was the Procuring Cause and that there was no break in the chain of events, caused by the first Realtor®.

Arbitration panelists who listen to Procuring Cause claims are just as bewildered by the “exact” definition. However, many arbitration panelists tend to center their focus on the “uninterrupted chain of events”. Here are some thoughts from arbitration panelists from around the country: **Source Active Rain –
http://www.activerain.com

Sharon Simms ABR, CIPS, CLHMS, CRS CyberStar – Re/Max Metro St. Petersburg FL

**“One of the aspects they consider is whether there was a continuous chain of events. Did Agent 1 abandon the client? Did Agent 2 interfere in the relationship with Agent 1?”

Jim Lee – Realty Executives Associates Knoxville TN

**“I think the continuous chain of events thing is what usually weighs heaviest with me. Estrangement is also a big factor; did the first Realtor do something terrible enough to alienate the Buyers. Also where did Realtor #2 come from and how did they get into the act after the first Realtor.”

Stephen McWilliam ABR, CRB, CRS, GRI – Florida State Realty Group, Inc. Ft Lauderdale, FL

**“I agree with most in the continuous chain of events and emails (etc) that support this fact. I also look for what the relationship is between the Buyer and Agent 2 (relative, friend, etc). Where was this Agent 2 when the Buyer was dealing with Agent 1. Also, is there some financial consideration being paid by Agent 2 back to the Buyer. If so, the Buyer's creditability goes right in the toilet.”

As you can see, Procuring Cause issues can be very complicated. It is incredibly important that the issue of Procuring Cause be explained to your Buyer prospect at the onset of any communication between you and him/her. In today’s world of electronic communication it is even more critical than ever before to keep excellent records of your communication log between Buyer prospects. Lori and I have closed many transactions over the Internet in the last decade. We use some of the most state-of-the-art tracking software available today. And while it would be unlikely that we would ever lose a Procuring Cause challenge, we try to head off any possibility of such an event by explaining Procuring Cause to our clients. And if you think it’s difficult for the real estate community to ferret out all of the nuances of Procuring Cause, it is much more confusing for many of our clients to understand. Given most consumers have no interest in ever being subpoenaed to an Arbitration Panel to defend their Agent, they would rather chew on nails than try to understand the exasperating world of Procuring Cause. From our perspective, it is much easier to keep an egg from getting scrambled than it is to try to unscramble an egg, and much more time efficient.

One might wonder, shouldn’t the Realtor® who did most of the work, showing the property, writing the offer, negotiating the offer, arranging the inspections, processing the closing and all of the other multitudes of tasks associated with a transaction, be entitled to the commission?

NO! The Realtor® entitled to the commission, I.E. Procuring Cause, is the Realtor® who did the KEY work that was the effective reason the Buyer chose to buy the property, I.E. make the offer on the property. (But… you must keep in mind that if an Arbitration Panel finds that the Buyer was estranged/abandoned by the Agent who did the KEY work, the panel would find for the second Broker as the Procuring Cause.)

Many times Realtors® feel that their agency relationship trumps Procuring Cause or that this is an integrated part or component of Procuring Cause. This could not be further from reality. The NAR manual holds that “…agency relationships are not synonymous with nor determinative of Procuring Cause. Representation and compensation are separate issues.”

Agency could be an issue if the Buyer has engaged an “Exclusive Buyer Broker Agreement” with a Realtor® and a subsequent Realtor® comes on the scene and, even after the Buyer tells the subsequent Realtor® of his/her “Exclusive Buyer Broker Agreement” with another Realtor®, chooses to continue to work with the Buyer, show the Buyer homes and subsequently writes an offer. This is a violation of the NAR Code of Ethics as the Code prohibits a Realtor® from interfering with an “Exclusive Agency Relationship” of another Realtor®.

One of the most annoying scenarios Lori and I encounter is a Buyer, flitting from Open House to Open House with a Realtor’s® business card in his/her hand. The Buyer enters the Open House and announces to the Realtor® holding the house open, “I’m working with a Realtor®. He/she told me to go out and look at homes and then give him/her a call when I found one.” At best this type of behavior on the part of the Business Card Realtor® demonstrates an “open” agency relationship. There is absolutely no Code of Ethics violation by the Realtor® who holds the house open, to try and sell the Buyer that property. NONE!

How can the Business Card Realtor® assert that he/she is doing his/her job? Where is the “Representation?” What protection does the Buyer have from knowing what he/she should or should not say in the presence of the Listing Agent? Remember, the operative words for proving Procuring Cause cases are, “…the Realtor® who did, and can prove, that he/she did the KEY work that caused the Buyer to come to a conclusion to make an offer and buy the property.”

However, remember too, if the Arbitration Panel determines that the first Realtor® abandoned the Buyer, then the second Realtor® would be the Procuring Cause.

I often hear Realtors® ask why they are not “Automatically” the Procuring Cause if they are the Agents who showed the home to a passerby Buyer who stopped into their “Open House”?

The reason is because the NAR professional standards policy and bylaws PROHIBIT any Association from developing or implementing any rule that would predetermine the outcome of an arbitration hearing. Therefore to make a statement that, because a Realtor® holds a house open presets Procuring Cause would be a violation of the National Association of Realtors professional standards policy and bylaws. But again, remember, the Arbitration Panel would have the duty to establish which Realtor® did the KEY work that caused the Buyer to make an offer on and buy that property.

Remember too, that merely finding the property, I.E. sending MLS datasheets to the Buyer or simply showing a property to the Buyer is not, in and of itself, grounds to sustain a claim of Procuring Cause. The end result and decision of an Arbitration Panel will be based on the Panel’s perception of who did the most work that caused the Buyer to make the decision to make the offer and purchase the property. One of the most important ingredients to defending a Procuring Cause action is to have all of your documentation in good order. Don’t make claims that are not cooperated by solid documentation. Your defense will go down in flames if you rely on “he said/she said” testimony. This is another reason to keep, not only a communication log, but a GREAT communication log. Notes scribbled on little pieces of paper will be your death. It is our opinion that Agents should distribute the final communication log to their office files and of course keep the original one for your personal file.

Here is a word of caution to all! Do not present yourself as a threat to the cooperating Broker/Agent. This could be considered intimidation. If the Listing Agent feels that he/she has clearly provided evidence of an unbroken chain of events, has not abandoned the Buyer and has done all of the heavy lifting “KEY work”, but for some inexplicable reason Realtor® number two comes upon the scene and threatens the Listing Agent with taking the Buyer elsewhere, this could, and in all likelihood would, end up as a Procuring Cause case. The Listing Agent and Broker would allow the transaction to close and then could file a complaint with the Arbitration Panel, and, if they could prove their case, would in all probability be awarded 100% of the commission earned. So, be careful what you say and how you act. Be professional.

What I find confuses Buyers the most is this question; “Why can’t I buy my house from the Agent I want to buy from?” The answer is, You Can! Unfortunately, Representation is not about compensation. The two don’t mix and this is where the biggest confusion rests for the consumer. Unless a clear case of Alienation exists, if the Realtor® who did the KEY work is not the Realtor® with whom the Buyer writes the offer to purchase, and if the “Key Work” Realtor® files a Procuring Cause claim against the subsequent Realtor®, there is a very good chance that an Arbitration Panel will rule that the “Key Work” Realtor® is the Procuring Cause and thus entitled to the compensation/commission.

If you are ever faced with a Procuring Cause action, remember that NONE of your defenses or the defenses of the other party should be about what took place after the offer was written and/or successfully negotiated to an agreement to purchase. The proof of Procuring Cause is in the preamble of the transaction. By that I mean, just because an Agent is managing inspections, responses to Buyer Inspection Notice and Seller’s Response forms, writing additional addenda or any of the myriads of tasks that go along with our responsibility to process a transaction, means NOTHING in establishing Procuring Cause. It’s all about “Who did the KEY work” the “Heavy Lifting”; who caused or most logically caused the Buyer to make a conscious decision to make an offer on and purchase the property.

Regarding compensation, it makes no difference whether or not a property is listed in the MLS system. If the Listing Agent makes an offer to pay compensation to a cooperating Broker, then there is an offer to pay compensation. Oddly enough the NAR Arbitration Manual does not even require the offer of commission to be in writing. Of course, in Arizona, the Statute of Frauds could find its way into a court room, but… remember, arbitration is not a court room and therefore the Statue of Frauds will, in all likelihood, not be part of the Panel’s equation in determining Procuring Cause or compensation owed/earned.

Finally, I have a suggestion to all Realtors® reading this article. If a Buyer asks you to show him/her a property that he/she has been shown by another Realtor® and subsequently wants to make an offer on that property, try to work out a commission agreement between the first Realtor® and yourself.

Most of the time the first Realtor®, assuming there is a potential for a Procuring Cause claim, will be happy to work out some form of equitable compensation. If you are uncomfortable with approaching the first Realtor® yourself, ask your Broker to have that discussion with the first Realtor® for you.

Be aware that asking the Buyer to write a note and have the note/letter notarized and sent to the first Realtor® is not a guarantee that you, the second Realtor® would prevail in Procuring Cause arbitration. Even if the Buyer sites all the reasons he/she chose to ask you to write the offer. Your fate in such a case truly rests with the Arbitration Panel and in your ability to produce absolute and clear details of why you were the KEY reason the Buyer made the offer to purchase that property. Even after all that effort, there is always a chance that the Arbitration Panel could find for the second Realtor® and award him/her Procuring Cause. You would have done all the work to get the transaction to and through the closing table for absolutely NO paycheck.

In my last example, if you feel there is a good chance that you would not prevail in a Procuring Cause fight, then… don’t represent the Buyer. Going through the process of an Arbitration Procuring Cause hearing is mentally draining as well as extremely time consuming.

Lori & G-II are Mentors for the Coldwell Banker Residential Brokerage Metro Office.
You can reach Lori & G-II at
Lori.and.G-II@RealEstateInPhoenix.net

Saturday, June 17, 2006

Phoenix Arizona Real Estate Podcasts