excerpt from Prof Bruce’s Real Estate Handbook. It’s about deal-killing lawyers, as well as the value proposition of realtors and mortgage brokers…
Sometimes, you have to laugh. A client called me up the
other day and, in essence, she said that her lawyer wanted to kill her deal
because his legal fees were too high. Got that?
Basically, he told her that because the transaction had
taken so long to complete, his fees (about $5,500) were much higher than
expected (he thought that they should be around $1,500 for a transaction of the
size and complexity of this land purchase) and she should ask the Seller to
reimburse her for the extra four grand.
As a real estate Broker, it is my job to serve my clients.
I understand that but I also feel it is my job to tell my clients that before I
follow their instructions, these are the likely outcomes of those instructions…
So let’s take this one step at a time:
1. Did she still want to purchase this piece of land? Yes.
2. Did she remember why she entered into the transaction
in the first place? Yes. She wanted the land so she could build her own
building to house her thriving medical practice. She was tired of paying rent
across the street.
3. Did she feel the original deal was a good one? Yes.
4. Has it taken longer to complete the transaction than
she and everyone else involved had anticipated? Yes.
5. Did she know why it had taken so long? Not really. (The
City of Ottawa
had taken the Seller through a process that would defy interpretation by Franz
6. Did she know how much extra the Seller had spent to
rezone the lands specifically for her use? No. (It was an extra $30,000 and if
it goes to an OMB Hearing (a distinct possibility in 2009) it could double.)
7. What did she think the Seller might do if I asked him
on her behalf to decrease her Purchase Price by $4k? Well, her lawyer had said
that he would probably be OK with paying for her extra legal fees. (I told her:
“Are you kidding? The Seller has spent an extra $30k getting your lot severed
and rezoned for you over and above what he thought he would spend. Has he asked
you for a price increase? No, he has not.”)
8. If her Amendment is not accepted by the Seller, did she
know that he has the right to terminate her deal and re-sell the lot to
somebody else, probably for a higher price? No, no one had told her that.
So if you think this through logically for a moment, her
lawyer was basically opening up the deal in order to pay for his additional
legal fees. If the Seller refuses, then the deal dies because the lawyer wanted
to change the terms of the original deal. Do you think it is more likely that
the lawyer’s fees will get paid if the deal dies or goes ahead? In my
experience, clients are usually more inclined to pay their legal bills (and
other bills) if a deal proceeds to completion. Duh.
So now the doctor loses her deal, the lawyer may lose some
of his legal fees, the Seller loses a sale and our Brokerage loses a
commission. Right? Not quite. The Seller still owns the land. I think it is
quite likely that he can re-sell it for more than the original deal and he
knows it. The Brokerage will be fine because if we don’t sell it to the doctor,
we are quite likely to sell it to someone else and, if it sells at a higher
price, the Brokerage could end up with more dough not less*.
So, in all probability, the only ones to lose are the
doctor and the lawyer.
Lawyers, bankers and accountants are all limited by their
training to think like lawyers, bankers and accountants. Which is fine if they
stick to lawyering, banking and accounting. But when they think they know
something about deal-making and entrepreneurship, I’m afraid of the
One more thing, the above logic ‘diagram’ isn’t actually
the final determining factor in all of this. You know what is? It’s emotion. I
told her after discussing all of the above: “Look if you want, I will call the
Seller and ask him for the $4k. But I know this guy really well and I can tell
you what he is going to say: ‘ F**k! No way! I have spent an extra zillion
dollars on this damned deal. It’s over.’” Just one more thing, his answer won’t
be this polite.
Right after that, she asked me: “What’s your fax number
again? I am sending over the Extension Agreement right now (with no changes;
i.e., no deduction for extra legal fees, ed.).”
Look, logic is useful but, at the end of the day, people
still make many decisions using the older, more primitive part of their brains
(the basal ganglia) not the cerebral cortex. This older part of the human brain
(residing underneath the cerebral cortex) is much more tied to emotional
response, gut feeling, fight or flight reflexes, etc. So if you want to be a
deal maker instead of a deal-killer***, you need to appeal to both.
* In actual fact, the Brokerage could end up with even
more dough than suggested above. If the Brokerage can keep both the would-be
Buyer and would-be Seller on board, the Brokerage may sell the original piece
of land, probably at a higher price even in this distressed market, to someone
else and help the Buyer find another piece of land to purchase for her medical
practice (again probably at a higher price—she got a good deal for the first
piece of land). So we could turn one deal into two. Now we would never advise
any of our clients to terminate a deal for the benefit of the Brokerage but a
scenario like this can easily happen. If you advise your clients properly, they
are likely to remain loyal—they know that you are putting their interests first
and, if they act against their own best interests despite your best advice,
they tend to remember this. On occasion when a client says to me: “Oh, you want
this deal to proceed because you’re just interested in a commission.”, I point
out the above scenario and tell them: “Please don’t worry about the Brokerage,
we’ll be fine. Focus on what is truly best for you.”
** When my students and others who are starting companies
or managing high growth enterprises come to me looking for help, I ask them if
they have a mentor. Many of them do but, in my opinion, they often have the
wrong ones. Firms that have mentors tend to have a higher survival rate and
growth rate but you have to have the right mentor. I often hear how they have
assembled a great group of mentors—including the usual suspects: accountants,
lawyers and bankers. Guess what, none of these folks really know much about
entrepreneurship. Instead, I have a team of what I call ‘unconventional
mentors’—people who run plumbing, electrical, contracting, moving, packing
supplies, tech and other companies, people who know the value of a customer or
client, know what it means to meet a payroll, know how to collect receivables,
know how to sell, know how to operate and innovate in the face of complexity,
uncertainty and imperfect data, have some street smarts, know that it is better
to ask for forgiveness than beg for permission, know how to stretch a buck,
know how to market their companies and acquire new clients cost-effectively, know
how to bootstrap their financing without much help from banks, partners or VCs,
know how to buy their competitors by taking away their clients one customer at
a time, know how to learn from their competition and put in place best
practices from their industry even if they didn’t invent it or think of it
themselves, know how to create a business model that is sustainable and when to
change it if it’s not and, generally, know how to survive in the marketplace
*** Compare the response of our client, the doctor with
another client, an electrician. He had to deal with a much more difficult
situation. He is selling a family property to a large company for a LOT of money. When the markets began to melt down a
couple of months ago, this deal was in jeopardy of falling apart. The Buyer
wanted an extension of five months to get the deal into 2009 and, hopefully, a
better market after the inauguration of a new President in the US and
after the markets had stabilized. Now the Seller had the option to terminate the
deal, extend it or ask for changes (like, for instance, asking for either a
higher price or a non-refundable deposit in return for the extension.) One of
his family members at that meeting said: “Why don’t we ask our lawyer to tell
us what to do?” He looked at him and responded this way: “What is a lawyer
going to tell us that we don’t already know or can’t figure out for ourselves?
Give me that piece of paper, Bruce, I am going to sign it.” (He got an extra
$40k and a happier Xmas.)
**** In 2010, we dealt with another deal-killing lawyer.
This time, the lawyer wanted to crater the perfection of a land severance over
an upaid fee of, get this, $540. In Ontario,
you get one year from the date of approval of a land severance to perfect it
(to register it on title). There were three landowners affected by this
decision and a year’s worth of work had gone into it. Unfortunately, one of the
clients was overseas at the time but the lawyer would not release the documents
without the balance of his fee being paid first, a measly $540. The law firm
for the client who was overseas even offered to guarantee the $540 pending his
return but this too was rejected. Finally, the third client, now in full crisis
mode, paid it in cash and he will have to collect it back from the other guy
upon his return. But I have to say that rejecting a guarantee from a top Ottawa law firm is petty
indeed. The severance registered on the last day possible.
“A man may as well
open an oyster without a knife, as a lawyer’s mouth without a fee,”
***** In another case, my son, Matthew, a REALTOR, called
a lawyer to ask her: a) is there anything you need to complete a transaction
for the client and b) can he pick up his commission cheque when it was ready.
Matthew’s firm was owed $28,000. We have found that law firms lose everything:
the original Agreement of Purchase and Sale,
Waivers and Amendments, invoices, the name(s) of the lawyer(s) for the other
party(ies), you name it, they lose it.
The lawyer took offence that a REALTOR would have the
temerity to ask for his commission; she gave him heck and then called the
client to complain about it and, oh by the way, that Matt’s commission was too
high as well. Matthew being a young and sensitive guy, felt badly but I told
him (especially in light of the above story) that if the role was reversed and
the lawyer was owed $28,000 in legal fees instead, he could have expected not
just a phone call or two from her but serious demands for additional security
to ensure payment. I also asked him when was the last time that he or any other
REALTOR he knew had called a client to complain about a lawyer’s fees being too
I went to an all boys school and we had a name for people
who ratted out their brothers which I won’t repeat here. It was considered one
of the most contemptible things to do. I lost all respect that day for this
Lastly, I told Matthew that he can never be a professional
unless he can justify his fees not only to his clients but to himself. The
grunt work he does on every deal, the knwoledge, training and value he brings
to it and the risks he takes (he only gets paid if the deal completes)
justifies every cent he receives and then some. By the way, the lawyer gets
paid even if the deals fails.
NOTE: Certain details in the above posts have been changed
to protect the identity of the persons involved.
Their Minds (REALTORS Might not be Far Behind)
Have lawyers completely lost their minds? In the Great
Recession of the Double 00s, they are charging clients higher and higher hourly
rates, some as high as $950 per hour (that is the top rate being paid to
bankrupt Nortel’s legal beagles). Is anyone really worth that?
If they work 2,000 hours per annum at that rate, it works
out to a $1,900,000 take. Let’s compare that with the annual wage for, say, the
smartest investor on the planet who has made more money for more people than
anyone else I can think of, Warren Buffett, whose 2008 salary at Berkshire
Hathaway was $100,000 and his total compensation for that year was $491,000.
A few weeks ago, a highly paid lawyer I know, billing
around $475 per hour, was working on a file for a joint client of ours.
Here is the list of things he did:
1. Couldn’t find any of the documentation on the real
2. Nor could any of his assistants.
3. This is less than one week before completion.
4. We had to resend the APS and all other documents twice
more before we could finally be sure they wouldn’t lose them again.
5. They didn’t know who was acting for the Seller—despite
us having told the firm one day after the agreement had been reached (more than
two months previously).
6. Thus, they hadn’t contacted the Seller’s lawyer; when
they did they found out he was going on holiday and would not be able to close
7. “No problem, we’ll just ask for an extension.”
8. He didn’t realize that there were not one but three
Sellers and an extension agreement from one of the Seller’s lawyers was
worthless without the agreement of the other parties. (The three Sellers were
acting together but each of them had separate, independent legal counsel: the
pub owner, who was a tenant; she was selling her business along with the
building owner (the Landlord) who was selling the structure and the landowner
who had leased his land to the building owner on a longterm deal.)
9. He also didn’t know or couldn’t remember the name of
the other lawyers.
10. He instructed us to prepare an extension agreement and
have the Buyer sign that and then submit it to the Sellers for their signature
not realizing that one of the three Sellers was having second thoughts about
completing the deal.
11. He did not know or had forgotten that if a party (in
this case, the Buyer) signs an amendment, that re-opens the whole deal and the
other party or parties (the Seller or Sellers) could now walk away from the
12. You cannot offer an amendment and then when the other
side rejects it, say: “Just kidding, now we want the original deal back.” Ontario real estate law
just doesn’t work that way. Once you re-open a deal, it is a whole new ball
13. Obviously, the extension agreement had to be signed by
the Sellers (all of them) first. Then the Buyers can accept with no fear that
the deal could be torpedoed by one reluctant Seller.
In the end, we got all the Sellers to sign the extension
agreement (ethically (not legally), they really had to since it was one of
their lawyers who was unable to complete the deal since he was away) and then
the Buyers signed it and, at the end of the day, the deal was completed.
But what was the legal bill on this transaction and why
are sharp lawyers like this one performing so poorly?
For one thing, they are by and large technophobic—their
systems for e-filing and capturing information in an accurate manner that they
then can easily access and sort, suck.
For another, they are hurt by the sin of pride. They think
they are infallible and that, even if they make a mistake, they are protected
by their errors and omissions insurance plus intimidation. Who wants to sue a
lawyer? They have more ways to weasel out of things and more cunning legal
tricks than you will ever know.
Plus their legal fees are nothing to them since they have giant incomes and
access to their own legal counsel anyway.
Another reason: I believe that most lawyers today are far
more interested in money than they are in their clients. So they take on way
more clients than they can really handle and set up systems to churn those
accounts for maximum billings on each file.
Maximum churn may also align with failure to resolve
matters. That is, lawyers have a monetary incentive to become attack dogs for
their clients and refuse to settle or resolve issues. By prolonging things or
making them more complex than they need to be, lawyers can bill their clients
for more hours.
It also appeals to a client’s baser instincts to have
‘someone take their side’ or ‘stand up for them’ no matter what. Your desire
for revenge or to hurt someone you dislike or you believe has done you harm
lines up nicely with your lawyer’s desire for more billable hours.
Your job and, I believe your lawyer’s real job*, is to
resolve things. That requires a different set of skills such as the ability to listen to the other side, to see the other
side’s point of view and to propose ways to settle or reach a deal in addition
to putting your own point of view across in a non-inflammatory/non-defamatory
most law firms will not take on any cases on a contingency fee basis (where
they defer their fees and take a percentage of whatever they win in court). As
a result, ordinary Canadians just can’t afford legal representation and must
therefore do their best on their own.
REALTORS like me should never give
clients legal advice but what do you do when you know your client’s lawyer is a
* REALTORS should not be too smug on this issue. There is
a similar debate going on as to what a REALTOR’s job really is. Is it to
relentlessly represent their client’s POV? To listen only to their clients and
slavishly serve them? To be their attack dog? That is what regulators in the
industry believe and what Real Estate College’s teach and what is contained in
most REALTOR Codes of Ethics.
But I believe that REALTORS (and lawyers) better serve
their clients’ interests when they look beyond this and ask: What is truly in
my client’s best interests? Endless litigation? Endless disputes? Making points
off the other side? Never giving an inch? Never reaching a deal?
I don’t think we serve our client’s best interest this
way. I think, at least in part, our mission should be to arrive at a fair deal
for all parties. If your REALTOR client is a SELLER, then find a way to sell
his or her property; for a BUYER, do the reverse. Why? Because they need to sell or buy. There’s a reason why
they are doing this. You need to keep the end game in sight and not get caught
up in oneupmanship.
This doesn’t mean you substitute your judgment for your
client’s but it does mean you are more than either an attack dog, a mail box or
a ventriloquist’s dummy. Use your own judgment and keep your temper in check.
(Your IQ drops about ten points when you lose your temper.)
Lawyers, REALTORS and some of their clients seem to have
difficulty understanding that if you take all the
value in a deal, there will be no deal: you have to leave something on the
table for the other party otherwise, why would they ever agree?
This seems a simple concept; it is not. In a recent case,
I analyzed a situation for a potential SELLER. If they decided to disaggregate
their property by severing off a piece of vacant land and then turn their
existing building into a multi-tenant space, they could maximize value from it.
They could sell their land for around $750,000 on its own plus get a handsome
additional amount for their building once it is remodeled and tenanted.
The main factory (which they are about to shut down) is a
building of about 40,000 sq. ft. Once it is vacant, they could hire us to lease
the space for them, fill it with good quality tenants on long term leases after
they upgrade building systems and put demising walls in place to sub-divide the
This all costs money and time: a) to sever and sell the
vacant property, b) to demise and lease and c) to finally sell the building
based on its capitalization rate.
If the cap rate on this type of property is, say, 8.5%
p.a. and if they lease 40,000 sq. ft. of industrial space at $7.50 per sq. ft.
per year triple net with a long term vacancy rate of 6%, then the building
could be worth:
So the vacant land and building, in the fullness of time,
might be worth $4,067,647. But wait they have to pay some REALTOR fees so maybe
they net $3,864,265. But hold on again, this process might take two years and
we have not yet accounted for the time value of money nor the out-of-pocket
costs for doing a land severance and remodeling the building for multi-tenant
Meanwhile our mandate from this international client is to
get them out of the place by mid-year (four months away) which is obviously
inconsistent with this alternate, dollar-maximizing strategy.
Having said all of this, their CEO had a hard time understanding
why he simply couldn’t just ask $4 million for the property as is/where is. No
amount of analysis could persuade him otherwise. (It actually eventually listed
and sold for $2.4 million.) Finally, he got it when I said: “Bill (not his real
name and the numbers here have been changed as well), why would anybody ever buy anything if you keep all the money
and leave nothing on the table for them? Where’s their incentive to buy from
Ps. You will note above there is a difference between what
is ethical and what is legal. The Sellers probably did not legally have to
agree to the extension but ethically they did, at least in my view.
I have argued with lawyers that where ethics and the law
diverge, ethics should prevail. They do not agree with that view.
They are concerned that situational ethics (i.e, ethics
that changes in differing circumstances) will undermine the system of law that
we have inherited based on precedent known as common law.
But here is an instructive example for you:
You are a poor student; you are walking along a river bank
and you see some unfortunate fellow drowning. You rush over and pull him out of
It turns out he is a well to do chap and he thanks you
over and over and says: “You saved my life. I am in your debt. Let me send you
You tell him: “Really I was just doing what any good
Samaritan would have done. You don’t owe me anything.”
“No, I won’t accept that. Write down your address and I am
going to send you a $1,000.”
“OK, that will be a big help with my tuition fees. I
accept—here is my address.”
A few weeks later, you are wondering about that cheque.
You call him up at his big downtown office. You try a few times and finally you
get through his receptionist and his assistant to speak with the big man
himself. You politely remind him about his promise. He says: “Oh yeah, that. I
was just kidding, sorry. There’s no money for you. Too bad so sad. Oh, but
thanks for pulling me out of the river, kid. Bye.”
Now do you have a legal claim? You go see a lawyer and
explain what happened or maybe you just file a claim in small claims court.
Either way, the answer will be ‘no’.
A contract under common law requires offer, acceptance and
In this case, you performed the service (pulling him out
of the water) before there was any offer or acceptance and, hence, there is no
compensation owing under law.
Next time you see him drowning, you must first ask him:
“If I pull you out of the water, will you give me $1,000?” (This is the Offer).
He says: “Yes, anything, just save me!” (This is the Acceptance.) Then you pull
him out of the water. (This is the consideration—in this case, it is a service
performed rather than a financial exchange but the principal in law is the
Now tell me, what Good Samaritan would ever do this?
To my mind, in an emergency, you just act to save your
fellow human being. If he promises you some compensation after the fact, it’s a
promise and that has an ethical dimension that clearly trumps the legal
interpretation whatever lawyers and the courts may say.
When you were a kid and you promised to do something for a
pal, didn’t you think that meant anything? If you knew that when you were
seven, you probably haven’t forgotten it now that you are an adult.
“The legal profession used to quite esteemed (if not
liked) but is now much maligned. Lawyers moved with the times and, like most of
society, became the servants of whingers, whiners, blame-shifters and those
attempting to remove personal responsibility from the moral compass of
society,” Andrew Firestone, Regulatory Frameworks Branch, Department of Finance
& Deregulation, Australia.
Why You Need
a Professional Commercial REALTOR
I wanted to tell you about a recent experience I had.
We helped a business client negotiate with her existing
Landlord for an extension to her lease and when we were unable to arrive at
terms acceptable to both parties, we pursued a new lease with a different
We reached terms that we understood were acceptable to the
client, only to have the client walk away. The client then went back to her
existing Landlord and endeavored to complete those negotiations without us.
However, the new lease was emailed to our offices by the Brokerage representing
the Landlord for our client to initial and sign.
After several attempts to contact our former client, we
finally located her on holiday in the South Pacific. We offered to forward the
new lease to her for execution by her. We continued to help her even though we
no longer represented her and would not get paid for our efforts.
The new Offer to Lease (OTL) was sent to her via email:
she simply had to sign and return it before the irrevocable time and date and
we would get it to the Landlord’s Agent.
Several days passed and the Agent for the Landlord
contacted us looking for the documents. Again, we contacted our former client
and requested that she sign and return the documents. Finally with the
irrevocable date looming, we sent more emails and made additional phone calls.
A couple of days after the irrevocable time and date, she
finally sent the documents to us—not only was the OTL late, a handful of pages
were missing. Nevertheless, we forwarded the partial OTL to the Landlord’s
The Landlord’s Agent contacted us to inform us that he
needed a complete OTL and that this transaction was in jeopardy. This message
was conveyed to our former client with renewed urgency. She told us that she
would sort this out with her Landlord directly.
Within 24 hours, we received a cc of an email from the
Landlord to our former client that he had leased out the subject space to
another party and that the OTL was now null and void because the irrevocable
time and date had passed.
She now has 30 days to find new space. In commercial
leasing, unlike residential tenancies in Ontario,
there is no protection—you can be served notice to vacate at the end of your
lease and that’s it, you’re done.
The reason we became REALTORs, is to serve clients. We do
dozens of deals a year and we take a lot of courses to get and keep our
licenses in Ontario.
Who is likely to do a better job—someone who negotiates maybe a couple of
leases every ten years or an experienced REALTOR? Draw your own conclusions. A
day in the life of a REALTOR.
Steve Murray, REALTOR
1. Names and other details have been changed to protect the identity of persons
2. I have always believed that you should focus on your core competencies. When
we brought back the Ottawa Senators to play in the NHL in 1992, we identified
our core competencies this way: drafting and all player personnel decisions,
relations with season ticket holders and all corporate sponsorships. Pretty
much everything else was contracted out—arena management, security, hot dog
vending (food and beverage concessions), parking lot operations, radio and
television broadcasting, etc. We figured that professional service providers
knew a lot more about selling hot dogs and beer than we did and that we would
end up making MORE money by letting others do what they do well and pay us a
percentage of sales. I think this idea has even greater relevance today than it
did 16 years ago.
Proposition for a Residential REALTOR
I work in the Real Estate Brokerage industry and I am
amazed at how poorly most of the industry is at explaining their value
proposition. The FSBO (For Sale by Owner) market is growing and REALTORS in Canada and the US are losing ground. Now I realize
I am biased because of the work I do, but surely Residential REALTORS (and
commercial ones too—but that is a subject for a separate blog entry) can do a
better job at explaining what it is they do and how they add value to a
In my view, most Residential REALTORS do a great job. I
can say this because I do mostly commercial work and I must say I admire the
stick-to-it’ness of most of these folks. They work seven days a week (most
showings are on weekends and evenings), they are always on call (their clients
want 15 minutes or less response time so they are tethered to their cell phones
and email phones*), they drive around clients they don’t know much about
showing them two dozen homes only to find out that: a) they are not qualified
to buy (maybe they exaggerated their ability to purchase) or b) they find
something on their own (despite sometimes having signed a Buyer Agency
Agreement tying them to their Sale Representative) and put the transaction
through the Listing Agency (not realizing that the Listing Agency is now a dual
agent representing the Seller and the Buyer and not necessarily looking out for
the Buyer’s best interest).
(* A residential REALTOR who was helping me out in a
commercial transaction this summer answered his cell phone on a Saturday night
while sitting around a camp fire after the deal blew up and we needed to speak
with him urgently. I said: “George, you are amazing. No Commercial Sales Rep I
know would answer his phone at this time. I salute you.” I couldn’t believe his
Here is another example. I was at a Sens versus Leafs last
year and with five minutes to go in a tight game, one of my buddies got up to
leave. “Mike, where are you going? The game’s not over.”
“I have a client who wants to meet me at Tim Horton’s at
10:00 pm to make a counter offer on the home they are buying. Got to go, thanks
for the game…”
Now that is dedication and, if you know Ottawa, Residential REALTORS are out there at
night in 20 degrees below zero doing deals and servicing their clients.
Commercial people like me have it much easier—our clients
get in early but by 5 or 6 pm, that’s it, they go home and they don’t want to
hear from you evenings and weekends unless it is REALLY urgent.
Now Residential REALTORS aren’t just heroes because they
brave cold weather, waste their gas on clients who are not really serious or
get left at the altar by clients who ditch them at the last minute. They add
real dollars and cents value to transactions.
Here are some of the ways they can do that:
1. A decent Residential REALTOR does dozens of Agreements
per year. The FSBO does only one or two in a lifetime. The Residential REALTOR
is going to have much higher levels of expertise in doing these transactions,
in all likelihood. Most people don’t know that REALTROS in Ontario must go through six quite difficult
courses and exams to become fully licensed and, if they want to become Brokers,
they must do additional study and examinations. They must get 75% or better to
pass and the OREA
College is completely
inflexible on this*. Then, every two years they need to do 24 additional
credits. In another generation, REALTORS will go from being a second career to
being a first choice career and a profession and maybe even a calling. (I know
the latter sounds corny but I certainly enjoy working with clients and I feel
good when a client buys his or her own building for their company and they walk
in and they have realized their dream to own their own real estate…)
(* Some of my very smart University of Ottawa
students are taking their real estate licenses. Some are scraping through with
75s and 76s. Some are failing with 74s! So the courses are non-trivial and, in
my view, actually quite good.)
2. If the FSBO fails to sell his or her property and then
enlists an Agency, the likely selling price may be lower because the listing
has become ‘tired’.
3. The Agency has access to MLS.ca and a list of
established buyers. More than half of all real estate transactions are deriving
from web based searches and from existing clients.
4. The chances of not completing the FSBO Agreement is
also much higher. Real estate transactions are the only area of commerce that I
know about where, by law, the Agreement must be in writing. I guess because of the
importance for most people of the sale of their home, Ontario made it compulsory that these
transactions be in writing. Real estate is tricky and a lot can go wrong*.
Introducing the probability of failure would significantly increase the value
brought by the REALTOR to the transaction.
(* The list of what can go wrong is endless. Conditions
that are waived before building inspections or financings are completed.
Chattels or fixtures that are thought to be included that aren’t. Lawyers who
don’t get the paperwork on time to complete deals. How about an Oklahoma Offer? Ever
heard of those? (The term comes from the Dust Bowl of the 1930s in that State
where some smart Yankees fleeced naïve Okies out of their farms. Read on…)
Suppose you get an Offer on your home from a nice young couple that you think
are terrific. You are a FSBO and they need a ‘bit of help’. Will you give them
a second mortgage for just a couple of years so they can buy your home? Sure,
why not! So you sell your home to them for $300,000 with a $75,000 Seller Take
Back Mortgage with interest at 8%, interest only paid monthly in arrears. But
what you don’t know is that you have to specify what is the maximum first
mortgage they are allowed to place on the property. You didn’t know that. So on
completion, they have arranged a 95% first mortgage which together with their
second mortgage that they got from you they have $360,000 to buy your $300,000;
that means, they have an extra $60,000 in their jeans. If they default, you can
repo your house (by a foreclosure proceeding) or order its sale (through a
Power of Sale proceeding) but, you have to deal with the fact that the
mortgages on the property are now worth more than the home’s market value. God
forbid that they used it for a grow op too. Many grow op homes have to be
condemned because of the uncontrolled spread of mould due to the high humidity
levels in the house. Anyway, this is how sleazy con men defrauded many innocent
Okies out of their farms and walked away with huge fortunes from the misfortunate
of the hardest hit folks during the Great Depression. Use a professional
5. Legal disputes are also a costly reality: for example,
if there are certain fixtures or chattels or outbuildings in dispute, this can
further increase the value of the REALTOR’s services by avoiding costly
litigation. REALTORS are insured in Ontario
to provide the Sellers and Buyers with additional protection. The FSBO is not
insured against these risks. What if the FSBO takes the deposit and the conditions
in the transaction are not fulfilled? Will the FSBO return the deposit? In the
case of REALTORS, the deposits are in trust accounts, which also happen to be
6. Legal fees for FSBO transactions may also be higher as
lawyers attempt to fix mistakes.
7. The benefits of Agency are likely to be higher for
higher priced homes.
8. The Agency also brings other services: for instance,
experts on home staging that cost as little as $260 but can add significantly
to the value of the home. Other experts such as home inspectors, home
appraisers or mortgage brokers can also be brought into a transaction.
10. One other item needs to be mentioned and that is the
value of a person’s time. It takes time to gain the expertise of a REALTOR and
also it takes time to sell a home: to list it, to put it on MLS, to show it, to
draw up the Agreement, to arrange for inspections and financing, to waive
conditions, to provide the lawyers with documents, etc.
If a person’s time is worth $20 per hour or $100 per hour,
you have a significant saving for
homeowners who use REALTORS. Homeowners are often better off using their time
more productively in the things that they do for a living rather than trying to
11. The Agency saves the FSBO their marketing costs and
their costs to join a FOR-SALE-BY-OWNER network.
12. The Agency will do the open houses and showings and
negotiating. It is not easy representing yourself and Canadians especially find
it difficult to tout their own horns…
13. Now when people hear that a home is For Sale By Owner,
they immediately discount the price by 5% (because the client is not ‘paying
any commissions’) and then takes a bit more off so that they have some
14. Buyer’s will often not feel comfortable representing
themselves, so while they may show up to look by themselves, when it comes time
to present an offer, they will engage a Buyer Rep to do that for them.
15. Of course, the Buyer Rep will ask the Seller if they
will pay a commission but only 2.5% instead of 5% because they are only
representing the Buyer and giving what is known in the trade as “Customer”
service to the Seller.
16. The Seller figures they are still coming out ahead by
‘saving’ 2.5% of the Sale Price but they could be fooling themselves—they could
actually be paying the full commission and more because: the price offered is
more than 5% below what they would have otherwise received because of the
strategy employed by the Buyer and their Buyer Rep.
17. Compounding this, they may end up with less money from
the transaction than if they had used an Agency while doing all the work and
taking all the risks.
18. It may also take longer to sell your home if you go
the FSBO route. If you are changing jobs, moving cities, need the money,
whatever, that extra time to sell could place quite the burden on you.
I am sure you have heard the one about the Lawyer (or
Doctor) who represents (treats) himself. He has a client who is a fool.
I have summarized the value proposition of a Residential
REALTOR on a spreadsheet. You can download it in .xls format. Here is the URL:
I estimate that for the sale of a $315,000 home, the
Agency will receive a commission of around $15,435 but the Agency will add a
total of around $38,000 to the transaction. So if my calculations are right,
the FSBO is better off to enlist the services of a good quality REALTOR to the
tune of approximately $23,000. The spreadsheet shows the assumptions I used to
get there. You can download it and fool around with the variable—higher selling
prices, lower selling prices, higher or lower commissions, more or less time
spent selling a home by a FSBO, etc.
In an email exchange with one of my former students, I
summarized some of the advantages that Mortgage Brokers bring to the table:
1. They can source mortgages from 8, 10, 12 or more
lenders and get the most competitive interest rates and terms for you to choose
2. It saves you a lot of time: how long would it take you
to get in front of and apply to, say, a dozen lenders?
3. Banks sometimes try to sell tied products: property
insurance, mortgage insurance, life insurance, car insurance, RRSPs, TFSAs,
other banking services, credit cards and more, ‘forcing’ you to buy things
along with your new mortgage that: a) you don’t need and b) at higher prices
than you can get elsewhere. Mortgage insurance is one of those: you are almost always
better off buying life or term insurance from an independent provider than
taking the Bank’s mortgage insurance.
4. Mortgage Brokers can source multiple lenders with ONE
credit report on you and your partner. If you apply to multiple lenders yourself,
each one will ‘ping’ your credit rating and each ping on your credit rating
lowers your Beacon Score (your credit rating) by 2.7 points. Thus, if you apply
separately to 12 lenders, you would lower your credit score by 32.4 points. If
your Beacon Score was just above 700 (a good score) before, it would now be
below 700 and this could affect your loan rate (i.e., the interest rate goes
up; your mortgage just got more expensive.) The theory is that your credit
score goes down since, as far as the credit bureau is concerned, you are
applying ‘all over town’ for more and more credit. This is, of course, unfair
because you are only applying for one mortgage of, say, $200,000, but it
appears to be multiple applications for $2.4 million in financing and, hence, your
Beacon Score drops.
5. It doesn’t cost you a thing: Mortgage Lenders pay the
mortgage broker a fee for sourcing the loan (at least in the case of
residential mortgages. In commercial mortgages, the Borrowers often pays a fee
as well.) These fees are fairly small (anywhere between .75% and .85%,
occasionally rising to as much as 1% of the loan amount. If these lenders
didn’t pay it to the independent mortgage broker, they would have paid it
anyway to their internal people who source mortgages for them. So it really
does cost you nothing extra.
6. It isn’t just the interest rate that you need to be
concerned about. Many people are doing debt consolidations and need higher loan
amounts and better terms and amortization schedules. Your mortgage broker can get
you that because the lenders know they are competing for the business. Any Bank
that tells you that, because you are a loyal customer and have been with them a
long time, you don’t need to shop around and they will give you the best deal
anyway is not being straightforward with you.
Here is a spreadsheet I created in .xls format that tries
to quantify the merits of using a residential mortgage broker:
More than 75% of all mortgage loans in the US are
now sourced through mortgage brokers. The rate in Canada is about 30% but I expect it
will increase a lot in the next decade.
Dilys Hagerman, Mortgage Agent:
Running short of cash? Paying a lot out every month and
feeling like you’re never getting ahead?
Take a look at your mortgage situation and your debt to
see if you can do what three of my clients did last week:
1. Income of $48,000. Mortgage of $155,000. Credit card
debt of $13,000. We paid off their existing mortgage and all their cc debt by
putting in place a new mortgage so that now their monthly payment is $1,050
LESS than it was.
2. Income of $77,000. Mortgage of $165,000. Credit card
debt of $41,000. Same deal. Their monthly mortgage payment now is $865 LESS and
all their credit card debt is gone.
3. Income of $133,000. Mortgage of $198,000. Line of
credit of $105,000. All of it was renegotiated so that these folks are paying
$675 LESS than they were before with exactly the same debt.
Don’t be “scared” away by your current mortgage lender
(probably your Bank) who says you have to pay a penalty. In many cases, with
the interest rates now so low, it is worth it to pay the penalty to close out
A renewal offer from your current mortgage holder often
comes quite close to the renewal date so it makes it difficult for you to then
price-shop. It isn’t just interest rates you need to be concerned about—you
need some flexibility on loan amount and terms too.
John Walsh, Mortgage Agent:
I like what you say, however, using an actual numerical
number for a credit hit can be misleading.
As an example, I had one client who tried to get a new car
lease. He was consistent. He hit one car lease company every 3-4 weeks. His
credit score after 18 months of trying was down to 500 from probably over 700!
He had clean credit otherwise. So he went down roughly 200
points from just 18 hits (approximately).
In this case, he was seen as ‘seeking credit’. Someone
should have told him what was happening (I did and told him he wouldn’t be
eligible for a home mortgage for 12 months). He, like so many, had no clue what
was happening to his credit.
A credit score is more of a ‘ranking over time’.
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