Richard Green shares the ins and outs of the real estate agent compensation in this Forbes.com article.
Real Estate agents are valuable–if they weren’t, we wouldn’t have them. The three times in my life I have sold a house, I thought the agent earned his/her commission.
But the commission structure –the agent gets a fixed percentage of the sale price of the house–makes no sense. (Steven Levitt pointed this out some time ago). There is a price at which anyone could sell a house without an agent–let’s call it 80 percent of market value (it may be more or less). So for the first 80 percent of the sales price of a house, the agent is adding no value.
But now let’s say it takes real effort to sell a house for more than 80 percent of market value. This means for every dollar the seller receives above 80 percent, the agent is producing more value than the typical commission percentage they currently receive.
This produces a perverse set of incentives. Agents have reason to sell the house quickly, but not at the highest possible price, because they don’t get rewarded for their effort. A compensation structure that would align everyone’s interest would be more like a consignment structure–one where the agent would get no compensation for any sale of less than an agreed to amount, but would get a large fraction of any proceeds above the agreed to amount. This would likely produce higher prices for the seller and higher compensation for the agent.
I understand that agents face upfront costs to marketing a house–it would be reasonable for them to charge a fee to recover those costs, regardless of outcomes. But we don’t observe that either.
This Clarence Butt blog site contains articles related to finance.
Monday, December 23, 2013
Thursday, November 28, 2013
Gold prices fall again near 2013 record lows
Gold prices have taken another beating as they fell close to the lowest levels.
The precious metal is currently valued at $1,245 per ounce, near the
lowest it traded for $1,211 an ounce in June. Its current value is down
by 25 percent from prices earlier this year.
“Gold has been under pressure since the European Central Bank announced a surprise interest rate cut earlier this month,” according to Carlos Sanchez, an analyst at CPM Group.
The move immediately created an impact of increasing the value of the dollar against the euro, making the dollar-denominated gold less attractive to buyers. The price of gold further fell after the Federal Reserve released the minutes of its October meeting.
In the report, speculations were rife that the central bank could taper off on its bond-buying program, known as quantitative easing, as early as December of this year. This means that support for gold prices could be held back or cut altogether.
Sanchez believes, though, that while prices are near its record lows, the smart trader sees the opportunity of a mid- to long-term investment. He also believes that “the economy is not yet strong enough for the Fed to begin tapering next month.”
Gold prices have been taking a massive hit for some time as traders reinvested their money in the stock markets in exchange for higher returns.
Clarence Butt finds interest in the latest financial news. Read more business updates on this Facebook page.
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| Image Source: bdonline.co.uk |
“Gold has been under pressure since the European Central Bank announced a surprise interest rate cut earlier this month,” according to Carlos Sanchez, an analyst at CPM Group.
 |
| Image Source: metallixrefining.com |
The move immediately created an impact of increasing the value of the dollar against the euro, making the dollar-denominated gold less attractive to buyers. The price of gold further fell after the Federal Reserve released the minutes of its October meeting.
In the report, speculations were rife that the central bank could taper off on its bond-buying program, known as quantitative easing, as early as December of this year. This means that support for gold prices could be held back or cut altogether.
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| Image Source: istockphoto.com |
Sanchez believes, though, that while prices are near its record lows, the smart trader sees the opportunity of a mid- to long-term investment. He also believes that “the economy is not yet strong enough for the Fed to begin tapering next month.”
Gold prices have been taking a massive hit for some time as traders reinvested their money in the stock markets in exchange for higher returns.
Clarence Butt finds interest in the latest financial news. Read more business updates on this Facebook page.
Friday, October 18, 2013
Thirty-year mortgage rates go down once again
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| Image Source: dailyfinance.com |
Earlier this month, the news of the government shutdown also came with reports on the drop in the average for fixed mortgage rates in the US for the third straight week—the lowest it has been since early July. According to Freddie Mac, the average rate on the 30-year loan fell from 4.32 percent to 4.22, while the average on the 15-year fixed loan dropped from 3.37 percent to 3.29 percent.
The decline in rates started when the Federal Reserve continued its $85-billion-a month in bond buys instead of slowing down. Meanwhile, the shutdown made investors sell their stocks to buy Treasury bonds. Mortgage rates are affected by the yield on the 10-year Treasury note and the 10-year note traded lower in early October at 2.63 percent, down from the 2.71 percent in late September.
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| Image Source: dailymail.co.uk |
While rates may have dropped, potential homebuyers have problems looming over the horizon as the Federal Housing Administration, responsible for guaranteeing 30 percent of home mortgages in the US, will be unable to continue approving loans if the shutdown continues until it runs out of funding.
When that happens, many prospective homebuyers will be unable to purchase homes until the government reopens. Home sellers will also have to wait before they can sell off their property, and activity in the housing market may continue to be slowed until backlogs are cleared.
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| Image Source: usatoday.com |
Find more articles on finance and the housing market on this Clarence Butt on Twitter page.
Friday, September 27, 2013
REPOST: Beware of fraud by closing agents at real estate settlements
This Los Angeles Times article shares the basic steps to protect yourself from settlement fraud.
In little-noticed proceedings earlier this year, 11 people pleaded guilty in a federal court in northern Virginia to a scam that fleeced banks out of millions of dollars.
According to the charging documents, the defendants were involved in overlapping conspiracies in which they would systematically alter the terms of real estate closings so lenders would send more money than they needed to. The thieves would then pocket the difference.
The case shines some light on perhaps the shadiest side of mortgage fraud. Shady because very few people know about it, and of those who do, few are willing to talk about it.
Settlement fraud, also known as escrow or closing fraud, doesn't occur very often, said Steve Gottheim of the American Land Title Assn., the trade group for people who review and insure titles and handle most real estate closings.
"It's extremely rare," Gottheim said. "Less than one half of 1% of all real estate transactions involve any type of fraud." But it does happen, he conceded.
Andrew Liput of Secure Settlements, a company that vets otherwise unsupervised closing professionals on behalf of lenders (who deliver billions of dollars into the hands of closing agents with little or no protection against fraud), estimates that 15% of the $4 billion lost by lenders to mortgage fraud last year — some $600 million — occurred at the closing table.
We're not talking about illegal or even questionable flipping arrangements, or even straw buyers. Those schemes are counted elsewhere. Rather, we're talking about nickel-and-dime cases in which the closing sheet you sign and the one sent to the lender are different, and the closing agent keeps the difference.
Maybe they change the amount of a single line-item closing cost, or perhaps two or three. You might pay $10 more here than you should have, or $25 more there. Or maybe the sales price you paid is lower than the amount the lender is asked to fund. Thieves can do wonders with Wite-Out.
Often, the difference is pocket change compared with the hundreds of thousands of dollars involved in the overall transaction. But alter enough settlement documents and pretty soon you're talking serious money.
Last year, for example, a South Florida closing agent was charged with falsifying HUD-1 settlement statements in 32 closings and stealing more than $3 million.
Big money is also lost when the closing agent fails to pay off a seller's lien and takes off with the money. The seller receives his due — the difference between the selling price and the mortgage or mortgages he had on the property — but the old lender gets nothing. And until that loan is paid off, the new lender — your lender — doesn't have a first-position mortgage.
An already disbarred Massachusetts lawyer was sentenced last year to 51 months in prison for failing to pay off existing liens and diverting more than $3 million into his own accounts. And Liput has "seen several cases" in the last six months in which nefarious title agents doctor their reports so the prior liens remain invisible.
Generally in cases of closing fraud, it's the lender that's on the hook. As long as you buy owner's title insurance at settlement, or at least what's called a "closing protection letter," the lender will bear the brunt of the loss, Gottheim said. But even if you decline to buy your own policy, he said, you'll "get some ancillary benefits from the lender's policy."
"Ninty-nine percent of the time when escrow funds are taken, the lender or the title insurance company bears the risk," Gottheim said. "And in many states, title agents buy into what's called 'crime bonds.'"
The lender's policy, which you pay for at closing, protects the lender against fraud and defects in the title. An owner's policy, which protects you and guarantees that the title insurance company will work on your behalf to correct problems, should cost about $250 when issued simultaneously with the lender's policy. The closing protection letter is sometimes free; other times, there's a small fee.
Your real headache would come when you go to sell your property, or perhaps refinance, and find out there's an existing mortgage or two on it that have never been paid off. If that happens, it could hold up your sale, perhaps delaying the deal for so long that your buyer decides to drop out and find a house elsewhere.
Here are some basic steps to take to protect yourself against this kind of "back end" fraud:
•Obtain your loan papers early, and make sure the numbers line up with the documents you are given at closing.
•Shop for a trustworthy professional. Don't be steered. Call your state regulator to make sure the agent's license is current, and ask if there have been any complaints lodged against him or her. But even then, be careful. Liput said yhat "nearly all the bad actors" his firm has unearthed were licensed and were members of a trade association.
•Ask for a color ID, and look for some kind of seal on the door or stationery that shows the agent has been vetted by an independent third party. In many instances, charlatans set up bogus companies that don't really exist. They just hang out a shingle and start doing business. Then, before you know it, they split, only to set up shop under another name somewhere else.
•When interviewing closing agents, ask how long they've been in business, if they are insured and if there have been any claims against them. You'll also want to know if they've ever been sued or lost their licenses. All of this is public information and can be discovered with what Liput calls a little "basic ground-level investigation."
•To protect yourself from being manipulated, schedule the closing a few days in advance of your move. If something smells fishy, walk away. You have every right to stop the show at any time.
•If you feel the need, hire an attorney to represent you at the settlement table. Even if the title pro you pick is legit, he or she represents the lender's interests, not yours.
More links to articles about real state strategies in financial planning can be found by visiting this Clarence Butt Facebook page.
In little-noticed proceedings earlier this year, 11 people pleaded guilty in a federal court in northern Virginia to a scam that fleeced banks out of millions of dollars.
According to the charging documents, the defendants were involved in overlapping conspiracies in which they would systematically alter the terms of real estate closings so lenders would send more money than they needed to. The thieves would then pocket the difference.
The case shines some light on perhaps the shadiest side of mortgage fraud. Shady because very few people know about it, and of those who do, few are willing to talk about it.
Settlement fraud, also known as escrow or closing fraud, doesn't occur very often, said Steve Gottheim of the American Land Title Assn., the trade group for people who review and insure titles and handle most real estate closings.
"It's extremely rare," Gottheim said. "Less than one half of 1% of all real estate transactions involve any type of fraud." But it does happen, he conceded.
Andrew Liput of Secure Settlements, a company that vets otherwise unsupervised closing professionals on behalf of lenders (who deliver billions of dollars into the hands of closing agents with little or no protection against fraud), estimates that 15% of the $4 billion lost by lenders to mortgage fraud last year — some $600 million — occurred at the closing table.
We're not talking about illegal or even questionable flipping arrangements, or even straw buyers. Those schemes are counted elsewhere. Rather, we're talking about nickel-and-dime cases in which the closing sheet you sign and the one sent to the lender are different, and the closing agent keeps the difference.
Maybe they change the amount of a single line-item closing cost, or perhaps two or three. You might pay $10 more here than you should have, or $25 more there. Or maybe the sales price you paid is lower than the amount the lender is asked to fund. Thieves can do wonders with Wite-Out.
Often, the difference is pocket change compared with the hundreds of thousands of dollars involved in the overall transaction. But alter enough settlement documents and pretty soon you're talking serious money.
Last year, for example, a South Florida closing agent was charged with falsifying HUD-1 settlement statements in 32 closings and stealing more than $3 million.
Big money is also lost when the closing agent fails to pay off a seller's lien and takes off with the money. The seller receives his due — the difference between the selling price and the mortgage or mortgages he had on the property — but the old lender gets nothing. And until that loan is paid off, the new lender — your lender — doesn't have a first-position mortgage.
An already disbarred Massachusetts lawyer was sentenced last year to 51 months in prison for failing to pay off existing liens and diverting more than $3 million into his own accounts. And Liput has "seen several cases" in the last six months in which nefarious title agents doctor their reports so the prior liens remain invisible.
Generally in cases of closing fraud, it's the lender that's on the hook. As long as you buy owner's title insurance at settlement, or at least what's called a "closing protection letter," the lender will bear the brunt of the loss, Gottheim said. But even if you decline to buy your own policy, he said, you'll "get some ancillary benefits from the lender's policy."
"Ninty-nine percent of the time when escrow funds are taken, the lender or the title insurance company bears the risk," Gottheim said. "And in many states, title agents buy into what's called 'crime bonds.'"
The lender's policy, which you pay for at closing, protects the lender against fraud and defects in the title. An owner's policy, which protects you and guarantees that the title insurance company will work on your behalf to correct problems, should cost about $250 when issued simultaneously with the lender's policy. The closing protection letter is sometimes free; other times, there's a small fee.
Your real headache would come when you go to sell your property, or perhaps refinance, and find out there's an existing mortgage or two on it that have never been paid off. If that happens, it could hold up your sale, perhaps delaying the deal for so long that your buyer decides to drop out and find a house elsewhere.
Here are some basic steps to take to protect yourself against this kind of "back end" fraud:
•Obtain your loan papers early, and make sure the numbers line up with the documents you are given at closing.
•Shop for a trustworthy professional. Don't be steered. Call your state regulator to make sure the agent's license is current, and ask if there have been any complaints lodged against him or her. But even then, be careful. Liput said yhat "nearly all the bad actors" his firm has unearthed were licensed and were members of a trade association.
•Ask for a color ID, and look for some kind of seal on the door or stationery that shows the agent has been vetted by an independent third party. In many instances, charlatans set up bogus companies that don't really exist. They just hang out a shingle and start doing business. Then, before you know it, they split, only to set up shop under another name somewhere else.
•When interviewing closing agents, ask how long they've been in business, if they are insured and if there have been any claims against them. You'll also want to know if they've ever been sued or lost their licenses. All of this is public information and can be discovered with what Liput calls a little "basic ground-level investigation."
•To protect yourself from being manipulated, schedule the closing a few days in advance of your move. If something smells fishy, walk away. You have every right to stop the show at any time.
•If you feel the need, hire an attorney to represent you at the settlement table. Even if the title pro you pick is legit, he or she represents the lender's interests, not yours.
More links to articles about real state strategies in financial planning can be found by visiting this Clarence Butt Facebook page.
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