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Our main blog has been moved to chicagonow.com/getting-real
but we occasionally post articles here as well.

Articles for ‘Industry Issues’

Lucid Realty Launches 100% Commission Rebate Program For Home Buyers In The Chicago Area

Monday, April 2nd, 2012 by Gary Lucido

Chicago, IL (PRWEB) April 02, 2012

Today Lucid Realty announced the launch of their 100% real estate commission rebate program for home buyers in the Chicago real estate market. Designed to offer unprecedented choices for consumers to maximize their savings in purchasing a home, this new program allows home buyers to optionally pay an hourly rate to Lucid Realty for assisting in the purchase of a home in exchange for a 100% commission rebate at closing. The full commission, which is paid by the home seller, is given to the home buyer in the form of a closing credit or a check.

The 100% commission rebate plan is the logical extension of Lucid Realty’s normal real estate commission rebate, which is paid on a sliding scale – a higher percentage for more expensive homes. The new plan will be more attractive for consumers who are buying more expensive homes or who feel that they don’t need as much attention.

“This 100% rebate plan solves two long standing problems in real estate,” said Gary Lucido, President of Lucid Realty. “First, clients who require little assistance in buying a home are basically paying for clients who require more assistance. Second, real estate agents can spend a considerable amount of time engaged in low value activities, earning very little on an hourly basis. Home buyers who opt into this new plan will have an incentive to use their agent more effectively. It should be a win-win situation.”

Gary also pointed out that Lucid Realty did not really invent this new structure. Their clients have been asking for an alternative like this. In fact, Lucid Realty is currently piloting this program with several clients.

Gary went on to contrast the 100% rebate program with Koenig & Strey’s recent announcement that effective today they will begin charging home buyers a fee to work with one of their agents: “We understand why Koenig & Strey introduced this fee. They are trying to solve the same problem that we are trying to solve. The main difference is that the Koenig & Strey solution ends up costing home buyers more while our solution should cost them less.”

Initially, Lucid Realty is offering an introductory rate of $75 per hour under the 100% rebate program in order to generate more interest. As Gary explains: “Compare that to mechanics, plumbers, and interior designers who all charge $100 per hour. This is a bargain.”

About Lucid Realty, Inc.
Lucid Realty, Inc. is the Chicago area’s full service, discount, real estate brokerage. Lucid Realty distances itself from traditional brokerages and provides a better value to the consumer. It is a full service broker, offering substantial savings to both buyers and sellers, providing services by employees not independent contractors, working as a team instead of competing against one another, with professionalism and high standards of customer service.

Lease With Option To Buy/ Rent To Own

Monday, September 13th, 2010 by Randy Whiting and Gary Lucido

A Tutorial

Lease with option to buy (aka rent-to-own) is a viable solution for many sellers and buyers, yet it is largely under used. Browsing through the various real estate blogs there are many people asking questions that often go unanswered or receive the same type of safe/fluff answers every time. As we have navigated this process from start to finish and seen it work, We’d like to dissect this topic in hopes of shedding some light on a very viable method of transacting real estate.

A lease with option to buy is an agreement to lease a home with the option to buy it before a certain future date at an agreed upon price. This type of agreement is ideal for someone who is either not ready to buy because of a lack of assets or credit or a lack of desire to risk their assets or credit. Even though this is not a new concept it is largely under-developed and there are many things to consider for both sides of the transaction. We cannot stress enough that having an agent that is experienced in this type of transaction is something that should be strongly considered by both sides.

How much should the rent be?

The rent should reflect current market prices for comparable rental units plus additional amounts that may go towards purchase of the home or payment for the option. However, all three of these rent components are negotiable so this is a great reason to have an agent working with you who is experienced in this type of transaction. The key is for the seller to be appropriately compensated for taking the risk of future price depreciation while forfeiting all price appreciation to the buyer.

How much should the rent be increased to fund the future purchase?

As mentioned above, this is negotiable. Again, because this process is rarely used there is no standard or often used guideline to consult.  However, incorporating an extra amount into the rent to fund a future purchase amounts to nothing more than the seller operating a savings account for the benefit of the buyer. Does the seller really want to be in the banking business? And from the buyer’s perspective, how is this any different than the buyer starting a savings account and putting that extra money in there for an eventual purchase that doesn’t tie them to a particular unit? The only difference is that under this arrangement the buyer is “forced” to save money for their purchase. Interestingly, the Chicago Association of Realtors has a “Lease With Option To Purchase” rider that doesn’t even provide for such an accumulation fund.

How should the accumulation fund be managed until it’s time to buy?

There are a couple ways to go about this and it is largely affected by the profile of the seller. Is it huge profitable developer or a struggling couple that is trying to sell? First of all, if it was agreed that the monthly rent would be increased by a specific amount each month (above market price) and that amount would be put toward the eventual purchase, that money should be put into a separate escrow account by the landlord/seller until such a time as it will be used for the purchase or refunded to the buyer/renter. Another way this can be handled is for the landlord to keep a ledger to record the agreed upon amount so that when the time comes to purchase, the landlord will reduce the sale price on the home by the amount in the ledger. From experience this is the most common method, however a number of risks for the buyer present themselves. Namely when the time comes to sell will the landlord be able to sell the home at the reduced price? In addition, lack of funds for a down payment is a very common reason that buyers seek a lease with option and it is not necessarily the price of the home that is preventing them from buying. Often the amount of money accrued is a drop in the bucket when compared to the over all cost of the home and as such the highest impact of that money would be as down payment assistance for the buyer. If the landlord is not keeping the money in escrow, there is no guarantee that the landlord will be able to cough it up at the closing table.

At what point in the process should we agree on a purchase price?

In the Chicago Association of Realtors “Lease With Option Rider” there are two choices (this may differ for your local association’s forms, please consult your agent):

“Tenant shall have the one-time right to purchase the Property (“Purchase Option”) for a purchase price equal to (strike one) $_______________________________ / the fair market value (“FMV”) of the Property at the time such Purchase Option is exercised (“Purchase Price”). (Strike the following sentence if it does not apply) The FMV of the Property shall be determined by Landlord and Tenant, in good faith, taking into consideration the purchase price for properties similar to the Property, located in the same geographic area as the Property, which have been purchased in the preceding nine months. “

There is a lot to consider here. When does the renter plan on converting himself or herself into a buyer? Will it be six months or two years? What does the housing market look like at the time of purchase? Is it stable, falling or experiencing growth? Either way there is risk involved for both parties.  In a standard option there is an agreed upon purchase price, the “strike price”, established at the point at which the option contract is entered into. It is this set price that creates the value of the option for the buyer. If there is merely an agreement to negotiate a fair market value at some point in the future then the option has absolutely no value whatsoever.  If the buyer ends up purchasing the property at fair market value in the future then they have forfeited any right to appreciation of the property up to that point in time.  What if the buyer and seller can’t agree upon a fair market value in the future? This essentially provides an out for the seller. In other words, the seller is not really obligated to sell the property and the buyer doesn’t really own an option.  The existence of this second alternative in the contract is really rather pointless. It creates a situation where the seller can’t sell the property to anyone else, but the buyer is not guaranteed that they will be able to purchase it for a price they consider reasonable.

As a seller, when should I ask for a pre-approval?

This is a tricky one because in many cases the reason people are looking for a lease with option is because they cannot yet qualify for a loan for one reason or the other. Our advice is this: With the assistance of a lender you or your agent are comfortable with, get the renter/buyer pre-qualified for the purchase amount you’ve negotiated and find out what it would take for them to be able to qualify. It could be increased assets or it could be credit clean up. Whatever the case may be, this will give them a clear picture of what their goals need to be in order to eventually purchase the home. This is also very important because this will give them a glimpse of what their monthly cost to own would be. A lot of first time home buyers have no idea what their mortgage, insurance, taxes, and assessments (for condos) will add up to. It may be that once they see what their monthly cost to own will be that they realize there is no way they would be able to ever buy this in the near future. The last thing a seller wants is to waste time renting their place when their goal is to attract a buyer. Getting the pre-approval done up front is also a good way for the seller to assess the risk of a given buyer. At the beginning this will serve as a credit check, which most landlords require anyway. If you see that the potential buyer has a 300 credit score and has never paid a bill on time, it may not be a good idea to tie your home up with that candidate. If you see that they are 800+ credit, never missed a payment, and the only thing preventing them from buying is a lack of down payment or lack of income, you may consider this to be less of a risk than the former example. Obviously the buyer will need to get re-approved once the purchase is close at hand.

Will the security deposit be handled separately from the earnest money?

We recommend that these two be handled separately. Through the Landlord Tenant Ordinance (LTO) the City of Chicago requires a lot from the landlord with respected to the security deposit and noncompliance comes with some very heavy penalties. That said, we feel that the seller acting the part of the landlord should adhere to the LTO and ask for earnest money if and when a purchase comes to fruition. This will reduce the liability to the landlord who is at significantly more risk than the potential buyer.

Should I keep my home for sale during the agreement?

Only if someone will buy it with the option attached. You gave the buyer/renter the right to buy the place and you can’t just ignore that fact. Again, consider the comfort level of the buyer. Do you think a buyer would go through all of this trouble with the possibility that the rug can be pulled out from underneath them at a moment’s notice? Plus a renter who is planning on buying this home may be very put out by having “potential buyers” traipsing through the home.

What happens if the home is foreclosed during our agreement?

This situation is largely effected by the type of agreement you had. If you are paying above market rent and having that money put into an escrow account, obviously you should have claim to that excess money. We recommend that you have some verbiage in your agreement that covers this possibility no matter how remote you think it may be.

Can section 8 vouchers be used in a rent-to-own home purchase?

The answer according to the HUD website is yes, depending on your personal situation and the program that you are involved with. We advise you to consult the hud.gov website for details.

Do I have to sell my home at the end of the agreement?

Absolutely. That’s the whole idea behind an option and that’s what you are being paid for.

In Conclusion

With all of the different variables to consider it is clear why a lot of agents steer clear of this type of transaction. It is unfortunate that often the professionals that people turn to for advice are the ones that push them away from viable options due to lack of familiarity or out of sheer laziness (short sales are another example of this). In the end, rent-to-own has the potential to be a win-win situation for all parties involved. The buyer gets a chance to test out a home before buying it, continue to build credit, and an opportunity to put their money toward a home purchase prior to qualifying to do so. For sellers, they can have a renter in the short term to help alleviate some of the financial burden of their cost to own while cultivating this renter into a buyer. The situation can also be a very easy out for both parties. In a market where serious buyers are hard to come by, this has the potential to be an excellent compromise.

How To Choose A Home Inspector

Saturday, July 3rd, 2010 by Gary Lucido
Thumbnail image for Home Inspector

I asked John Reim, from Bee Sure Home Inspection Services, to write a guest post this week on how to choose a home inspector. As with real estate attorneys, your realtor may have recommendations but you need to be armed with a bit more information so that you are not at the mercy of your realtor. After all, your realtor may have a fairly obvious agenda.

A home inspection is a comprehensive visual examination of the physical structure and systems of a home, from the foundation to the roof.  A home inspector is trained to be a detective in regard to the construction and working parts of homes.

Buying a home can be stressful and requires countless important decisions.  When you find a house you should hire a thorough home inspector to inspect the condition of the home and give you a detailed home inspection report.  Hiring a home inspector is a wise decision, even when buying a newly constructed home.  Having a detailed inspection report before you move in will prepare you for any potential problems and set your mind at ease.

Why hire a home inspector?

A home purchase may be the largest investment of your life.  Before you purchase the property you should learn as much as you can about the home and its systems, including what may need to be repaired and what kind of lifespan is remaining on the major systems.

A home inspection will also point out the positive aspects of a home, as well as required ongoing maintenance that will be needed to keep the property in good shape.  By having a professional home inspection you will have a clearer understanding of the home you are purchasing so you can make a confident decision.

What if the home inspection reveals problems?

If a home inspection reveals problems it does not necessarily mean you should not purchase the home.  The home inspection is meant to educate you in advance of the purchase of the condition of the property.  Quite often, a home inspection and its findings become a vital tool in the negotiation process between the buyer and seller of the property.  A home inspector is barred by law from providing an opinion to the question “should I buy this house?” or “if it were you, would you buy this house?”  Ultimately it is up to the buyer, their agent, and the attorney to decide which inspection items you wish to pursue for repairs or credits.  It is suggested that you try to avoid minor items and pursue the larger items in order to avoid unnecessary conflicts.  Keep in mind that there is no such thing as a “perfect house” and all homes have some type(s) of deficiencies.  It is your responsibility to be an informed buyer.  You should always be sure the house you purchase is satisfactory.  A careful examination of your potential new home is crucial in this process and could save you a great deal of money in the long run.  Potential problems that are identified in the inspection will often require further evaluation by specific specialists (i.e. HVAC professionals, Electrical Contractors, Roofing Specialists) to determine courses of action for repair/replacement or cost estimates.  The inspector is not a specialist, but is rather a generalist, with training and education which can help them identify potential problems with the major systems of your home.

How do I choose a Home Inspector?

What will it cost?

First, always take the time to research any home inspectors you consider hiring.  The most common question a home inspector receives during the hiring process is “how much does the inspection cost?”  This is often the first question asked as most homebuyers are unaware of what else to ask.  Keep in mind that home inspections are similar to other purchases that you make on an everyday basis, in that you often get what you pay for.  Since a home is without a doubt the single largest investment you will ever make it does not make sense to skimp on the inspection in order to save a few dollars.  Beware that like in any other business there are inspectors out there that will do your job on the cheap in order to make a quick dime.  The risk with this is of course having an inspection that is not overly thorough and might just do what is required to meet the minimum standards.  Though cost is certainly a relevant question, there are many other more important factors to consider when choosing an inspector.

How long have you been inspecting houses?

Ask your potential inspector how long they have been in business.  Many “newbie” inspectors will charge lower fees but may have very little experience when it comes to performing residential inspections.  These inspectors may or may not be around a year or two down the road to answer questions or address potential problems should they arise.  Ask how long they have been inspecting homes and how many inspections they have performed.

Is the inspector licensed?

Do not hire an inspector that is not fully licensed.  Though the state does a fairly good job of regulating the inspection industry, there are still incidences where inspectors are performing inspections without proper state licensing.  This is illegal and should you find an inspector who is not licensed you are encouraged to report them to the Illinois Department of Professional Regulation.  State licensed inspectors are required to follow a strict guide of ethics and inspect to state standards.

Is the inspector fully insured?

It is a good idea to make sure your inspector is fully insured to protect your investment.  A reputable inspector should carry both general liability and errors and omissions insurance.  This protects the buyer should the inspector accidentally miss something critical during the inspection process.

What is the inspector’s background and history?

Get some background on your potential inspector.  For instance, find out what they did prior to becoming a home inspector.  Though not required, an inspector with past experience in the building trades would be a better candidate than one who was previously a circus clown.  Some inspectors may have previously been tradesman in certain areas such as plumbing, electrical, or HVAC.  Though they may have extensive knowledge of these particular systems, keep in mind that a good inspector is knowledgeable in all areas of the home.  If you know of particular areas of concern with the home you are considering, it might be wise to find an inspector who may have extensive experience in that area.  For example, if the home has a history of water infiltration you may want to consider an inspector who has knowledge of water intrusion or mold assessment.

What type of report does the inspector provide and what is in it?

Some inspectors provide low quality hand written checklist style reports.  Though this was standard in the industry ten to fifteen years ago, times have changed.  Quality inspectors now provide clear streamlined computerized reports which can be delivered quickly via electronic means.  Reports should not be limited to basic checklists, but should contain written comments and summaries on the home and its systems.  Reports should contain detailed information on each system including the condition, the age, and possibly the life expectancy of particular systems.  It also is a good idea to have an inspector that provides digital photographs of the inspection, as this provides further documentation of potential deficiencies of certain systems and can help clarify exactly where and what the potential problem may be.  This is useful especially for attorney review of the report, and to help the seller identify what may need to be repaired prior to closing.

Is the inspector affiliated with any professional organizations?

It is a good idea to choose an inspector who is affiliated with a reputable national or local inspection organization.  Associations such as NACHI (The National Association of Certified Home Inspectors), ASHI (American Society of Home Inspectors), and NAHI (National Association of Home Inspectors) all have very high qualifications for membership.  These inspectors will often inspect to a level above and beyond what the minimum state requirements may be.  Typically they also require their members to fulfill continuing education requirements that are also well above state minimums.  Member inspectors have to follow strict codes of ethics and pass routine examinations in order to maintain membership status.

Referrals

The best way to choose an inspector often is to ask friends, relatives, or co-workers who may have recently had an inspection performed who they used and how their experience was.  Would they recommend that inspector or suggest you look elsewhere?  Sometimes a realtor or real estate attorney may have suggestions on who to use.  This is a fine source of information, but you are encouraged to do your own research on the inspector.  Find out why they recommend the inspector as opposed to someone else.  Quite often you will find there may have been an instance or instances where these inspectors may have done a stand up job or went above and beyond the call of duty in order to protect the interests of their clients.  It is also perfectly acceptable to ask your potential inspector for a list of references or client testimonials.  This may help in your decision making process.

John Reim
Bee Sure Home Inspection Services, LLC
389 Rock Hall Circle
Grayslake, IL 60030
(773)425-8275
jrinspect1@gmail.com

Real Estate’s Independent Contractor Model Broken

Monday, March 8th, 2010 by Gary Lucido

I would bet that most consumers of real estate services don’t realize that realtors in traditional brokerages are not really employees of their brokerages, but rather independent contractors. Basically it’s a cottage industry, with all its inherent flaws. I can only speculate as to why it evolved that way and I certainly don’t understand why this model persists today. Perhaps it made sense before the Internet. Return with us now to those thrilling days of yesteryear. All listing information is kept on non-searchable listing sheets of paper. Everything that can be known about a neighborhood or a property is in some agent’s head. And the only way to find an agent is through traditional media or personal relationships. In such a world the agent has all the power and the broker merely serves an administrative function.

Whatever the rationale for the model, it no longer works and I don’t think it ever worked that well. Let me count the many ways.

Fundamentally, this model is based upon the concept, still largely true today, that the agent brings in all the business. Consequently, the brokerage views the agent as a third party distribution channel. And since the marginal cost of hiring an agent is near zero the brokerages “hire” as many of these distributors as possible. If an agent only closes one deal this year for Aunt Margaret that’s one more deal that the brokerage gets. So the brokerage is going to hire agents without regard to their abilities. The more the merrier.

However, this situation is exacerbated by the fact that with independent contractors there are no performance standards – not even supervision – except with regard to statutory paperwork requirements. Of course, the broker is available to help the real estate agent – but only if requested. The agents come and go as they please. And the only time a real estate agent gets their contract terminated is when it becomes apparent that the agent is a huge embarrassment for the brokerage or when they represent a significant legal risk for the brokerage.

So you wonder why the real estate industry has so many bad agents? This is why. The irony in all of this is that the traditional brokerages spend a ton of money advertising their “brand” but there is no brand except in the mythical world of advertising. How can you have a brand when you will hire anyone who can fog a mirror? The agent that is working for brand A today worked for brand B yesterday. The only reason they moved is because they didn’t like their managing broker or they got a better commission split at the new place. Or maybe they also fell for the pictures in those very expensive newspaper ads of elegantly dressed buyers and sellers that represent huge commissions.

With the advent of the Internet this traditional model has become even more flawed because more and more people today are choosing agents and brokerages based upon business models and value propositions as opposed to relationships. It’s getting harder and harder for real estate agents to generate business using traditional techniques such as direct mail, wine and cheese parties, and pumpkin dropoffs. And effectively leveraging the Internet requires skills way beyond the capabilities of the vast majority of real estate agents. As I pointed out in a recent post, the vast majority of  real estate agents are starving in this market. Consequently, real estate agents are losing their power over the brokerages and are in need of more support that their brokerages can’t provide.

In summary,  the independent contractor model just isn’t working for the consumer or most realtors. Yet, are realtors willing to change? For decades real estate has been a lifestyle business, where people escape from the confines of the corporate world and pursue the American dream of working for yourself and setting your own hours (possibly another reason the independent contractor model persists). Are realtors the type of people who can make the switch to employee status in exchange for business success?

Most Realtors Starving In This Real Estate Market

Saturday, February 27th, 2010 by Gary Lucido

As I pointed out in a recent post, 1,000 realtors left the real estate business in Chicago last year. I can attest to how poorly most real estate agents are doing in this market because I periodically look up the sales statistics for agents that I know and most of the time their numbers are pretty low. So, finally, just the other day I decided to try to quantify realtor performance in the Chicago market. I pulled data on the last 12 month’s closings by realtor in the entire area covered by our MLS system, which is a huge area covering all the surrounding suburbs. I then ranked the real estate agents by the dollar value of their closings.

Distribution Of Realtor Earnings In Chicago AreaThe bottom line is that of the almost 25,000 real estate agents with recorded residential sales in the last 12 months only 3,189 agents exceeded $3 MM in sales. If we make the simplifying assumption that those agents earned 50% (their split) of a 3% commission on average then close to 22,000 agents earned less than $45,000 last year – and that is before expenses. At the national level median expenses for realtors were $5,810 in 2008. When you factor in that this is not a cheap area to live in you can see that these agents are struggling. Furthermore, as you might expect, a minority of the agents closed most of the deals.

Now this analysis comes with a whole bunch of caveats:

  • I emphasized above that this focuses on agents that had recorded sales. If an agent never closed a deal in the last 12 months then they are excluded from this analysis because I have no way to know who they are. But I suspect there are quite a few who did nothing in the last 12 months.
  • Assuming that these agents earned 50% of 3% on average is a very big assumption. Many agents earn quite a bit more than 50% but on the other hand the commissions might be a bit less than 3% – e.g. typical cooperating commissions are 2.5% but could be as low as 2%.
  • Many of the agents that are included in this analysis might actually make most of their income from commercial real estate and maybe they just did one or two residential deals in the last year.
  • Many of the included agents might be part timers
  • There may be quite a few agents that are excluded because they have no recorded sales in this time period but they might actually be quite profitably employed as members of a celebrity realtor‘s team, where the celebrity realtor takes all the credit for their business (this is a common practice).
  • There may be a few agents that are included above who are members of a celebrity realtor’s team but one or two transactions appear under their name for one reason or another.
  • As you start to get into the really high numbers – even as low as $16 MM – you start to run into the celebrity realtors who have teams working for them, some of which do a lot of developer work. So it’s not like the #1 realtor did $171 MM of closings all by himself.

Nevertheless, I believe that this data is directionally correct as it is consistent with data provided by the National Association of Realtors. In their 2009 member profile they show that on a national basis 62% of realtors had gross income of under $50,000 in 2008, with a median gross income of $36,700. After taxes and expenses those numbers drop to 64% earning under $35,000, with a median net income of $23,200. And those numbers are all for 2008. You can bet that 2009′s numbers are going to be a bit worse.



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