Win-Win is a concept that’s been popular for a few decades, especially in the real estate industry. Most of the time though it’s been talk and not much walk. Since it supposedly refers to the buyer and seller in the same transaction, many would argue it’s a cruel hoax, and in fact an oxymoronic phrase. How can the buyer and seller both win?
It can only happen when the buyer and seller agree that their goals can only be realized with each other’s help. Become a team. It must be understood that taking an adversarial position will end any chance of both sides winning. This usually happens when one or usually both sides realize the market hasn’t and probably won’t provide the same solution they can by working together. Team players on the other hand can share in total victory.
This approach is almost impossible in the sales of homes in which the buyer intends to occupy their purchase. In that situation both sides by definition want obviously different outcomes. (The Real Estate Zebra begs to differ, saying most home buyers and sellers can team up for a mutual win.) Though they eventually can come to agreement, it’s nature is almost always adversarial. Captain Obvious lives. However, in the investment world, it sometimes happens that a buyer and seller can do something for each other that the market has failed miserably to provide.
Here is such a story.
Ellen and Rosa are my clients, referrals from family. Ellen had already executed the first leg of her Plan successfully. Rosa and I had just finished creating her Plan and were ready for the first leg, which was the sale of her condo. She’d acquired it several years ago and had well over $100k in net equity. She needed as much cash as possible in order to get her Plan going. She is 50ish and knows her retirement will not be more than marginally adequate if she doesn’t change her approach now.
Ellen desparately wanted a local condo in which she could opt to live at some future time. She was now living in a duplex that allowed her to keep costs way lower than condo living would allow. It wasn’t the most objective thing she could do as an investor, but it was an intensely held desire, and very important to her. Doing it in a market in which condo sellers were giving away the store was fortunate timing for her.
In an effort to obtain the most for Rosa’s condo that this market would allow, we marketed hard for almost five months. This included a couple price reductions, and an increase in commission for the buyer’s agent. We tried everything. The market was apathetic. Finally I decided to take the bull by the horns and put these two clients together. It was obvious to me they were a perfect match. I called them and told them of my idea, which was received by both with over the top enthusiasm. They both told me to make it happen.
Here’s how I structured their deal.
I established a price that was about 5% below the last sale in that development, which was almost six months old. It was about 10% less than the lowest asking price for her floor plan at the time. They both agreed it was fair. I asked Rosa if she’d consider leasing back from Ellen for a year, with a unilateral option (hers) for six additional months, then a mutual option for six more months. Apparently she hadn’t told me how much she loved living there because she just about reached through the phone and hugged me! She was willing to make the sacrifice but was only doing so because she felt improving her retirement was more important than maintaining the status quo. Ellen loved the idea as she felt very safe having Rosa as a tenant and not a stranger. Plus, a lease was far better than a month to month.
To make it work with the low down payment Ellen had was to have higher than market rent, which would have maxed out at about $1,200 a month. I did the calculations and told them $1,575 a month for the first year, then another $100 if the option to extend was exercised. Why did this work? Why did Rosa jump at this inflated rent amount? Because Rosa’s total monthly costs for that condo with her loan payments, HOA fee, and the rest was costing her well over $2,000. This was a savings of over $500 a month! And she didn’t have to move. And she’d end up with a net check from escrow of just under $145,000 – all of which was not taxable.
Rosa? She got her condo with a guaranteed quality tenant who was more than happy to be there. She was able to buy it with only 10% down, and still have it more than pay for itself. And because of the tax write-off she’d be saving roughly $3,500 in income taxes the following year. Furthermore, the price she paid was the lowest for that floorplan in over a year. She is still the only client who brings me Starbuck’s every time we meet at my office. A happy camper.
We gave the local market almost five months to produce results. Not even the threat of an offer. Two clients – one broker – three days – the perfect solution for both clients.
In my office we call that Win-Win. It’s what my clients hire me to do.
realist says:
Please explain how Ellen wins. You said Rosa’s total monthly costs for that condo with her loan payments, HOA fee, and the rest was costing her well over $2,000. You also state that Rosa ended up with a net check from escrow of just under $145,000. That means that Ellen paid around 160,000 more than Rosa’s mortgage(s) for the condo (145k + 15k closing costs (very conservatively estimated)). At 6.5%, this 160k leads to an additional mortgage payment of roughly $1,000/mo. So if Rosa’s monthly expenses for the condo were $2,000, then Ellen’s should be $3,000/mo. An “above market” rent of 1,575.00 still means a monthly loss $1,425 and a yearly loss of $17,100. Offset this with her tax savings of $3,500 annually and you still have an annual loss of $13,600. Will she make this up in appreciation? Not anytime soon, as condos prices just dropped 5.5% YoY. Maybe if Ellen knew this, she wouldn’t be buying you any more Starbucks. Please do tell how you think Ellen wins.
November 28, 2006 — 9:23 pm
Jeff Brown says:
Realist – Thanks for your comment. What I enjoy most about it is your immediate assumption that I’ve put Ellen into an obviously losing scenario. If I’d done what you so ably illustrated, Ellen would no doubt put an end to the Starbuck’s. I’d also be proving why I was never on M.I.T.’s short list. 🙂
Of course, that’s not the case. Your assumptions are based on what’s been the old school’s practice since the end of World War II. Buy the property, get a fixed rate loan for 30 years, and call anything else unrealistic. And it’s why my clients have been outperforming the market by 2 or 3 to 1 for the last couple decades, and in all kinds of market conditions.
What Ellen did, was make use of one of the many adjustable rate mortages available which made the lower payments possible. She is actually in a slight positive cash flow position. She bought at the lowest price in over a year.
And in case you’re now thinking the loan was ill-advised because of everything you’ve read in the media, you may be interested in what Greenspan just said.
“The worst of the housing correction is over.” Now those words weren’t carved on stone tablets, and he’s not Moses, but he ain’t chopped liver either. 🙂
Contrary to popular belief, Realist, we’re going to be OK. Your comment was right on the money if your assumptions had been correct.
Greenspan says we’re going to be ok AND I still keep getting my Starbuck’s. Life is good. 🙂
November 28, 2006 — 9:48 pm
realist says:
I agree that it was possible to outperform the market using adjustable mortgages in 2002-2004. Not in 2005-2006. Please break-down the numbers for me so I can understand your assessment. What type of ARM? Term? Rate/Spread/Index? Any neg-am? Sale price? Loan amt? Total Closing Costs? Monthly HOA fees? Annual Taxes? Annual Insurance? Who pays the utilities? How about special assessments? Let the numbers do the talking.
November 28, 2006 — 10:21 pm
Jeff Brown says:
I said for the last two decades not the last couple years. And I HAVE out-performed in 2005 if not 2006.
Allow me to give you the short answer, as I don’t have the time it takes to do what you wish. I actually have a life. 🙂
Before I do, let’s stop the pose of ‘so I can understand…” because we both know you understand very well. You’re not fooling anyone.
Ellen used an Option ARM with a start rate below two. When I crunched her numbers all expenses including the ones you mentioned were included, along with a generous pad. The renter pays untilities, and there are no special assessments currently or, according to the HOA in the near future.
It appears to me you’re probably not in favor of this approach which is absolutely a valid position to take. However, it’s worked for my clients and me since the mid-70’s quite well in every kind of market.
Thanks again for your interest.
November 28, 2006 — 10:38 pm
realist says:
Your article is entitled “Win-Win:A Recent Case Study” but it lacks study or analysis. Since the numbers speak for themselves, what are they? It took me about 3 minutes to read your first post and calculate the expected loss. It should take you three minutes to respond to my earlier post regarding terms/etc. I will be more than happy to crunch the numbers for you. However, as I expected, you just talk the talk but don’t walk the walk. Defend your “win-win” with the actual numbers, not some BS about how you always make money. I still think Ellen got burned. You don’t talk someone into an adjustable arm just to have a lower payment (Do you think banks are stupid?). I’m sure the mortgage broker you steered her to got a big fat commission for that Option ARM (3.25%YSP I would guess). Since it is an Option ARM, is she at least making the minimum interest payment? When does her rate adjust? Was she represented by an attorney at the closing? According to this blog, you consider yourself a real estate investments broker – you must have some analysis tools that you use, even if it is only an Excel spreadsheet. How hard is it to cut and paste those results into this blog. Please don’t respond back unless you actually intend to report the numbers.
November 29, 2006 — 8:42 am
Jeff Brown says:
realist – The post was only meant to illustrate how a transaction can be structured in a difficult market for both sides to win. It did that. It was merely meant to ‘study’ the concept of win-win, not be a full blown lesson on analysis.
However, I think your request is fair. I also think the majority of investors would like to know the difference between the two schools, old and new. I’ll assume you’re in the former. 🙂
So instead of answering you here in the comments section, I’m going to write a short post, probably early next week. (I have family coming from back east starting tomorrow.)
This post will include a transparent look at the financing used, the sales price, the percentage of operating expenses to rental income, along with some numbers I’m hoping to publish from one of the biggest lenders in the country.
You ask great questions which are the ones that should be asked. I think it deserves a post of its own.
I get just a slight inkling of bad feeling on your part, starting with your first comment. Am I wrong? Am I sensing something not really there? It appears there is some anger behind your questions or that maybe you’ve had a less than great experience with investments, or agents.
November 29, 2006 — 10:48 am
Joe says:
Here we go again!
Gosh, Greenspan Himself says we’re going to be OK. Wow, what a relief, Jeff. Greenspan says it’s OK. Whew! Now I can rest easy.
Never mind that Greenspan is probably the worst Fed chief we’ve ever had. Never mind that Greenspan created the stock market bubble 96-01 by having one of the loosest monetary policies of modern history. Never mind that Greenspan bailed out the stock market crash with an accompanying credit bubble by keeping the fed funds rate so low that people were encourage to overspend on everything from cars to vacations to… yes, houses.
But, Greenspan says we’ll be OK. I guess that means I should just stop worrying.
>However, it’s worked for my clients and me since the
>mid-70’s quite well in every kind of market.
Except that we have only your word to take for that, Jeff, since you’re “too busy” to show us otherwise.
Well, I guess we’re about to see how well Ellen performs in this market, aren’t we?
Word of advice Jeff: go watch the 1982 Stanford game. Don’t go rushing the field with your little victory dance until AFTER the clock reads 0:00.
And stop wiggling out of realist’s questions by changing the subject. Did Ellen qualify for the loan based on the full payment, or is she just making the I-O or Neg-Am part?
November 29, 2006 — 1:55 pm
Joe says:
>”The worst of the housing correction is over.” Now
>those words weren’t carved on stone tablets, and he’s
>not Moses, but he ain’t chopped liver either
By the way, what’s your supporting evidence that Greenspan is right? Since he spoke those words, we’ve had another month of dropping sales and prices, eclipsing the old record. Whoops – I guess the worst isn’t over after all.
There are other economists that have better track records than Alan G. Ever heard of Bill Gross, the PIMCO bond manager? What makes them less believable?
November 29, 2006 — 2:03 pm
Jeff Brown says:
Joe – If writing a separate post next week is ‘wriggling out of it’ I don’t know what to tell you.
That said, civil discussion on a blog is truly possible. Because we disagree with each other doesn’t mean you need to bring out your insult machine. It doesn’t wear well.
For the most part the folks who have disagreed with me using your approach have used insult, less than biting sarcasm, and a take that requires everyone to just accept their take on the future. The future hasn’t happened. How loudly one proclaims their opinion on what is still to happen doesn’t change that.
Arguing about the future is fun in sports, and for some in politics, but in business in general and real estate specifically it’s an exercise in one’s judgment. And that judgment will always be based upon that person’s analysis, conclusions, and the biases by which they may be inflienced.
I guarantee that those who disagree with another’s approach will not accept any argument no matter what is put forward. The believers in the bursting real estate bubble don’t believe there’s any chance of being wrong. The guy who thinks there’s absolutely no bubble just as certain of his position.
As far as Greenspan goes? I disagreed with the majority of his moves as Chairman. Quoting him was for my own entertainment. Thanks for playing.
November 29, 2006 — 2:27 pm
SoCalMtgGuy says:
I also find it interesting you call this a win-win situation when there are THREE parties involved. I see it as a win-win-uncertain situation at this time. The seller wins…they get to walk with 6-figure appreciation and live the the same residence for less than they were paying. The broker wins…they get their commission and get to continue drinking starbucks. It is still uncertain as to if the buyer has won or lost at this time. It might appear as a win at this time…but lets see what happens after 2007/2008. Something tells me the 5% off won’t look like very much after the next 24 months.
“However, I think your request is fair. I also think the majority of investors would like to know the difference between the two schools, old and new. I’ll assume you’re in the former. :-)”
I remember during the tech boom all the ‘old school/new school’ BS that was thrown around for years…looks like the ‘old school’ fundamentals won out in the year 2000. Same thing will happen here.
It will be interesting to see how this situation pans out in the long run. The buyer of the property is going to get hurt in the next 2-5 years on that place if they can’t start making ‘real’ mortgage payments.
And believe me, I understand the math behind all the various loans and how they ‘work’ to make money. The one problem is that these situations only work well in an increasing market…or when the ‘investor’ has deep pockets and can ‘bleed’ cash for a while.
It should tell you something that there were NO offers in 5+ months after lots of marketing.
And as far as listening to Greenspan, and taking his word as gospel…not the brightest idea. His guidance was a little ‘off’ with the stock market bubble as well. People in those high profile positions have to worry about starting a panic, and impacting all of the ‘industry leaders’ in the various segments that have been profiting HUGELY the past few years.
SoCalMtgGuy
November 29, 2006 — 2:58 pm
Kris Berg says:
Jeff – I dare you to guess which one is our friend Jack. 🙂
November 29, 2006 — 3:09 pm
Joe says:
Ok, Jeff. Sorry if I insulted you. The fact is that realist asked you some very direct questions and you ducked them and tried to change the subject. I suppose I could’ve been less sarcastic, and I’d probably flame you if you did it to me, so I’m sorry.
>For the most part the folks who have disagreed with me
>using your approach have used insult, less than biting sarcasm, and a take
>that requires everyone to just >accept their take on the future.
Jeff, just answer the questions. The more you duck them the more dishonest you look.
1) Does Ellen know that her loan is adding to her principal balance if she makes the lowest payment?
2) What is Ellen’s pre-payment penalty? Does she even know that she has one? Does she know that if something catastrophic happens in the next 2 years she’ll have to pay a lot of money to get out of her loan if that’s the case?
>The future hasn’t happened
YES IT HAS. Oh my God, Jeff, what part of the news are you not reading? There’s report after report after REPORT saying that non-traditional financing is getting out of control. Go ahead and dismiss it as “Joe’s opinion” if it makes ya feel better, but please don’t try to create your own reality by claiming that exotic financing isn’t ruining people.
And what’s going to happen when Ellen wants to refinance? Well, let’s see what your own North County Times has to say:
“Home sales in the San Diego region decreased 19.2 percent last month compared to the same period a year ago, while the median price of an existing home was down 4.5 percent to $574,530 from $601,850 in October 2005, a Realtors group reported.”
“In neighboring Orange County, sales were down 21.4 percent last month when compared to a year ago, while the median home price was off nearly 3 percent, to $681,340 from $701,520 in the year-ago period.”
Looks to me like Ellen will be in a little bit of trouble should she decide to refinance any time soon.
I could list link after link here if you need help finding the news. Option ARM loans are responsible for a growing number of defaults, Jeff. That’s fact, not hyperbole.
November 29, 2006 — 11:42 pm
Joe says:
Jeff,
Here’s what a 2-minute Google search turned up just for San Diego:
Foreclosures up dramatically in SD, Riverside counties
Mortgage Defaults & Foreclosures on the Rise in West & Southwest
“In San Diego for example,” said Ms. McGee, “more than half of home purchases in 2004 and 2005 were financed with these exotic mortgage products. When these loans reset to true market rates the payment shock can be severe and put many households in financial distress.”
Option ARMs: A Cautionary Tale
“These mortgages were originally designed for wealthy folks with a lot of disposable income…
…That’s not necessarily the case for the rest of us, who live in Tracturbia and get our financial advice from TV talking heads. For most of us, an option ARM is a very risky temptation, unless you have a big cushion of cash in the bank to cover future spikes in interest rates. (Most of us don’t — according to the U.S. Commerce Department, the national personal savings rate dropped to zero in June, down from 10.8% in 1984.)”
Mortgage default notices increase And this story was written in 2005 – joe
“The only product that would have any impact at all (on default rates) is the Pay Option ARM,” said Rob McNelis, president of One Stop Lending in San Diego. “That could have a slight impact if they’re sold improperly, and that’s probably happening to some extent, unfortunately.”
Homeowners feel pinch of adjustable-rate loans
“A recent spike in default notices may be a sign that some homeowners are struggling to pay the adjustable-rate mortgages that now dominate lending in San Diego County’s residential real estate market, analysts warn. “
November 30, 2006 — 12:11 am
Joe says:
And understand, Jeff, I’m not insinuating that you personally are being actually dishonest, my main point is that there are a large and growing # of people out there that should not have these loans. Not every broker is as ethical as you, and as a result everyone pays the price, not just the borrower that gets screwed.
November 30, 2006 — 12:27 am
realist says:
Joe, I concur. Real estate is a great investment when done properly. However, the reality of it is that if a realtor did give his clients a realistic analysis, the realtor would have fewer sales, plain and simple. Option ARMs and other exotics were intended for specific purposes, not as tools for speculation. It kind of reminds me of the 1990s when CALPERS was trading exotic interest rate options to get a better return for their pension fund but got burned bad. It doesn’t sound like Ellen intends to flip this condo, so why put her into something that she couldn’t afford with a regular coinventional mortgage. In Ellen’s case, the proper way to evaluate the investment would be to estimate the mortgage payments based on the APR, not on this month’s low adjustable rate. My guess is that the APR was probably 7.5% at time of closing (based on 12 mo avg of 1 year treasury) and about 8.8% as of today. Absent Jeff’s specifics on the structure of this deal, my take on the whole thing is that Ellen bought at the peak of an over-priced market and got suckered into a bad lease deal (probably intended to motivate Rosa to sell at the lower price). Jeff probably had a good idea that the market was peaking, but Jeff’s priority was to make a sale and put food on the table, not to discuss “complicated” details like adjustable rates with Ellen. So much for fiduciary responsibility. And yes Jeff, there is a possibility that housing prices will turn around and Ellen may actually make some money on this five or ten years down the road, but she would have better odds in Vegas.
November 30, 2006 — 6:01 pm
realist says:
One more thing, Jeff’s response dated November 29th, 2006 2:27 pm regarding ‘wriggling out of it’ probably took as much time to compose as it would have taken to just state the terms of the deal. It seems to me that either Jeff hopes this discussion quietly goes away or Jeff need time to find an out in his analysis (this should be good).
November 30, 2006 — 6:14 pm
Joe says:
Well, I’m not going to comment on Jeff’s motivation, because I don’t know him and I don’t know Ellen so I’m more than willing to give Jeff the benefit of the doubt at this point.
What bothers me, though, is that even if prices stay flat, Ellen is going to run into trouble if she has to sell early for any reason: catastrophic illness, loss of job, etc.
What bothers me more, though are stories like this one: 2006 Subprime Loans Doing Badly: UBS
Even if Ellen is the picture-perfect definition of credit quality, the number of subprime borrowers defaulting is increasing, which will only cause further problems as inventory rises and prices drop.
Option ARMs are just not intended to be used in order to afford properties. A friend of mine makes most of his income in a year-end bonus. He’s the one that the Option ARM was intended for – pay the I-O through the year, then make a large payment at year end to make sure the balance goes down.
I hope Ellen does well, but the odds are increasingly looking bad over the next 2-3 years.
November 30, 2006 — 6:18 pm
Joe says:
>One more thing, Jeff’s response dated November 29th,
>2006 2:27 pm regarding ‘wriggling out of it’ probably
>took as much time to compose as it would have taken to
>just state the terms of the deal. It seems to me that
>either Jeff hopes this discussion quietly goes away
This is something I’ve noticed throughout this blog more than one time. Several times now I’ve asked direct questions that would involve straightforward answers that mysteriously meet with no response.
November 30, 2006 — 11:14 pm
realist says:
Let’s not forget,Jeff’s purpose in writing this blog is to illustrate how effective he is as an agent in order to drum up additional business. That’s why my tone is less than even. Jeff is bragging about winning for Ellen when it is quite apparent (absent Jeff’s numbers) that the deal it is a loser for Ellen. Here, Ellen is looking for a place not now, but in a few years. What were the market conditions for condos in Phoenix at the time she purchased – likely a swelling inventory and declining prices. Under such market conditions with a buyer who does not need to buy, a wait and see approach is clearly more prudent. And yet Jeff has the gall to promote himself on this blog and declare Ellen a winner but won’t explain how. It is quite obvious to me why Jeff doesn’t respond to “very simple” requests for information about the deal he did such a good job on.
December 1, 2006 — 11:31 am
realist says:
I see moderation has been turned on. Good luck with that. Jeff, you are misleading people so that you can make commissions. You are exaggerating the benefits of real estate investing, minimizing the risks, and omitting or misstating important facts. Believe it or not, real estate agents have a duty to their clients. Here is a blurb from a recent NJ case:
NJ Homeowners sue real estate agent for fraud
From the Daily Record:
Jury to decide what’s in a name
A Morris County jury is expected to begin deciding today whether a real estate agent’s description of a new home as being in Montville constitutes fraud because the new homeowners claimed they later discovered that it is in Towaco –which they claimed was a less prestigious location.
In their lawsuit, Theodore and Frances Vagias claimed in 2001 that they told Weichert Co. real estate agent Gabrielle Dingle that they were seeking a home in a prestigious community.
After looking at about eight homes, they settled on one for sale for $743,435 in a then-new development called Woodmont Court at Montville.
The Vagiases claimed that only after the purchase was completed did they find out that the home they were led to believe was in the Montville section of Montville Township — which reflected the prestigious address they were seeking — was in fact in the Towaco section of the township, which they claimed was less prestigious.
The location of the home, the couple claimed, would mean that their son would have to attend a different school than they were seeking — one with a lesser reputation.
…
The case is being heard before Superior Court Judge Catherine M. Langlois in Morristown after the state appeals court overturned an earlier trial court dismissal of the case.
The Vagiases filed the original lawsuit in 2002 under the Consumer Fraud Act, claiming that Dingle’s statements were intentionally misleading.
The trial judge ruled that Dingle’s statements were an “omission,” not an affirmative misstatement, according to the appeals court decision. The appeals court ruled that the Consumer Fraud Act prohibits both affirmative acts of deception and acts of omission “with intent that others rely on such concealment, suppression or omission.”
December 3, 2006 — 12:55 pm
realist says:
Hmmm, it seems my post today regarding Jeff was deleted. I thought bloodhound blog didn’t delete posts. My post pointed out more problems with Jeff’s analysis of real estate investing. Can you give me an explanation as to why you deleted it?
December 3, 2006 — 9:36 pm
Greg Swann says:
> it seems my post today regarding Jeff was deleted
You don’t have posting privileges here. One of the two comments you posted today was auto-moderated. I deleted it because it was flame-bait. If you have a problem with BawldGuy Talking, take it there. Flame-bait here again and you’re done.
December 3, 2006 — 10:38 pm