Keeping up with Chicago's North Shore Real Estate Market!

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Sunday, November 28, 2010

So what is a short sale?

I can't tell you how many times people have asked me, "What's a short sale?"  It was a term that was rarely used 5 years ago and yet, my quick scan of the MLS would indicate that there have been, at very least, 330 short sales on the North Shore in the last 12 months.  So what is a short sale?  Quite simply, the sale price is less than the mortgage due on the house.

House sold in 2005 for $1M, buyer borrowed 80% (LTV) or $800,000 and owes about $795,000 today.  The house comes on the market in 2010 and is listed for $850,000, but sells for $775,000.   To pay off the mortgage and cover the deficiency, the seller would need to bring to the closing table, $20K. 

There are probably a lot of homes on the North Shore -- particularly people who bought or refinanced in the 2004-2006 time frame - where the loan amount is greater than the market value of the home.  It's not a significant problem, unless the owner needs to sell the home and doesn't have the financial resources to cover the deficiency.  That's when things get sticky, because the lender needs to get involved.  

The process of foreclosing on a property is both lengthy and costly.  For many lenders, a short sale is preferred solution.  Both the seller and the lender need to consent to the short sale process.  It allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers.  One thing to keep in mind.  Agreeing to a short sale,  does not necessarily release the borrower from the obligation to pay the remaining balance of the loan.

If you find yourself in this situation and you need to sell your home, personally I would recommend that you hire an attorney with LOTS of experience dealing with short sales.  There are a number of excellent lawyers in our market who have gone through this and can help streamline the process for you. 

Here are a few other resources that might assist you in moving forward with a short sale:

Monday, November 22, 2010

REALTOR® Magazine-Daily News-Tips for Getting Vacant Homes Ready for Winter

REALTOR® Magazine-Daily News-Tips for Getting Vacant Homes Ready for Winter

My life in real estate: making a living

For those of you who don't know me, I had a 20+ year career as a consultant.  The work was stimulating and very interesting, but required long hours and a lot of travel... so I took a break to create a new life.   I wanted a life where I was self-employed, could have a reasonable income, never have to travel again and have some semblance of normalcy.    I've always enjoyed architecture, seeing neighborhoods and I like client service work, so starting a real estate business felt like a good fit.

Before I went into real estate -- like many others -- I thought that this would be a pretty straightforward job.  I mean, really, how difficult can it be to bring buyers to look at houses or to list a house for sale?  Now that I do this for a living, I have a very different view.  And one thing that has been really interesting is to see how most people really don't have a clue how hard the job really is and what efforts are required to make a living. 

The biggest myth that exists is: Realtors make a lot of money for very little work.  I have found the reality to be quite the opposite.  Typically the most successful real estate agents work all seven days of the week and all hours of the day and night.  Much of the work is not visible to others: quiet time on a computer: reading, studying, analyzing, writing to clients and prospects, etc.  But there is also a lot of phone work (often at odd hours), meeting people, networking, touring properties, showing homes, preparing pricing analyses, sitting open houses and working "floor duty" at the office.   While some days may require working only a few hours, my work week usually averages pretty close to 48-60 hours depending on the client load.

While a few, very successful agents make a nice income, in actuality, the vast majority of real estates agents make relatively little.  According to Bureau of Labor Statistics in May 2008, the median annual wages, including commissions, of salaried real estate sales agents were $40,150.  The middle 50 percent earned between $27,390 and $64,820 a year. The lowest 10 percent earned less than $21,120, and the highest 10 percent earned more than $101,860. 

I would venture to guess that these numbers have dropped considerably since 2008.  During the last two years, the volume and value of sales have been down significantly.   I know of many agents, who had to abandon their real estate businesses all together, in order to find full time or part time salaried employment.  Since most agents in our market have no salary, commissions are their income.  In just Lake Forest and Lake Bluff, there are around 300 licensed agents.  While some rarely work on a regular basis and just maintain their licenses, many work full time.  This year there have been about 330 real estate transactions in Lake Forest and Lake Bluff.  Given these numbers, it would mean that there are a significant number of agents who have had little or no income from commissions this year. 

So I thought I would take a moment and explain the realities and the economics of being an agent in the real estate business.

What does it cost to become a Realtor?
Pre-licensing classes.  To become an agent, one has to take 120 hours of classes from a pre-licensing organization.  These classes run anywhere from $600 - $1000.  After one has successfully completed the classes, they need to get a state license.   The cost of taking the test in Illinois is $25.  Every two years, an agent needs to take continuing education classes (that's about $400) and renew their license with IL (another $100).  

What does it cost to be a Realtor?
OK, now you're a licensed real estate agent.  What's next?  You need to find a sponsoring broker who will provide you with a desk and/or telephone, an email address, marketing capabilities and one initial set of business cards.  In exchange for that sponsorship, you agree to give them 50% of any commissions you might earn.

Membership Dues - Also required,  you need to join the National Association of Realtors, the Illinois Association of Realtors, and pay annual dues for them and the local board.  This costs about $450 annually.  Quarterly, you have membership fees to be able to use the Multiple Listing Service.  This is about $415 a year.
Insurance - An agent also needs to have errors and omissions insurance which costs anywhere from $300 - $700 a year.  Since the agent will be using their car on the job, they need to increase their liability coverage on their car.  As a self-employed contractor, they need to provide for their own health insurance.  (Some agents have other options: they can be insured on their spouses health insurance policy.  For those of us who are single, we need to find an individual policy, which is extremely costly - particularly when the premium prices go up 10-15% per year.)

Personal marketing costs - Most agents have some additional costs to maintain their businesses.  Monthly fees for personal websites, costs associated with printed or online advertising,  personal brochures, etc.

These are just the upfront and annual costs associated with being an independent contractor and licensed real estate agent.  So before one even makes a single commission, a real estate agent has, at least, an initial outlay of about $2,000 and an annual outlay of at least $1,750. 

[Brokerage costs - The real estate brokerage company obviously has a whole series of costs as well.  They have on staff: marketing, legal, finance, and information technology departments.   They also have operational broker managers who are responsible for recruiting agents,  managing a local office and local office administrative personnel.   These local office employees process the paperwork, handle the logistics a local office (appointments, processing listings and sales, agent support activities, etc.).  Like so many other industries, with the advent of the Internet, the technology requirements and costs that real estate brokerages need to maintain in order to stay relevant have been driving many of the changes in the real estate industry.  With the downturn of the housing market, many brokerages have either merged with other companies, consolidated offices, been bought up or gone out of business all together.]

Costs associated with working with clients
Now that you are a licensed agent, who has found a sponsoring broker, you need to find clients.  That requires personal marketing.  Those costs can be as little as working floor duty and hoping to get a phone call; making lots of phone calls, writing letters, sitting an open house and hoping to find a buyer who might work with you.  But there may also be an ad in the Pioneer Press ($150-$300) or joining the Chamber of Commerce, sponsoring events, etc.   There are so many ways to incur costs for personal marketing.   It's very clear the most effective way to bring in clients is through referrals from previous clients.  Great agents generate their business strictly by client referrals and testimonials.  But as a new agent, you really have to hustle to bring in business.

I was actually pretty lucky my first year in the business, because I knew a few people going through transitions.  I ended up being Rookie of the Year in my office with a total of five transactions. But often agents aren't in that same place.  I had colleagues, who worked full time as real estate agents for over a year, before they made their first commission.

That first year, I had a met a few people who were moving and one asked me to be their agent during the first month I was in the business.  I was so excited to get that listing.   I ended up marketing it for over nine months before a deal finally came together.  My clients had actually received an offer the first month, but they didn't like it, so I continued to market and advertise the house for 8 additional months.

Since my clients were not living in the house at the time, I needed to go to the house to turn on and off lights, monitor repairmen, etc.

So, for that first listing, these are my estimated costs.

  • At least 4 broker's open houses (18 hours)
  • Showings (assume 35 showings at 1 hour each -- 35 hours) 
  • Inspection, the walk-through and a few other miscellaneous times (repair men, etc.) -- assume 15 hours.
  • Monitoring and providing status and updates to my clients (assume 2 hours a week x 38 weeks) - assume 76 hours.
  • Negotiations and pre-closing activities (assume 3 contracts -- the first contract probably took 10 hours, the second contract took about 3 hours of time and the last contract was about 15 hours).
  • Touring and understanding competitive listings within the area -- assume 25 hours
  • Preparing for and attending the close -- 3 hours
  • If you add that all up, I would estimate that I spent about 175 hours on that first listing.  Assuming I were to bill out my time at anywhere from $35 - $75 an hour, that would amount to about $6,125 - $13,125 of just time put into that one listing.  
Out of Pocket Expenses
  • With two of the broker's open houses, I served lunch.  That was about $150.
  • Each trip to the house was about 8 miles.  Assume I made 40 trips, that would 320 miles.  Assume that I can charge about $.40 a mile, that would be about $128.
  • Advertising.  I think I did 3 ads in the Pioneer Press.  Each of those cost about $300 each or $1500)
  • Miscellaneous out of pocket expenses were probably around $100.
  • Out of pocket costs on this particular transaction were close to $2000.
Income for the transaction
  • The house sold for $805,000.  The seller's commission was 6% or $48,300.  Of that amount 50% went to the cooperating (buyers') broker.
  • Of the remaining $24,150, 50% went to my sponsoring broker to cover their costs, which left me $12,075.  I remember looking at that check and being so dismayed -- Nine months of working all that time and all those expenses and that's all I had to show for it?   
That commission check went to paying myself a little salary, taxes, FICA, etc. and a little went back into the business.   While I totally understand that sellers only see the big number, agents see only their portion of the commission.  By the time everyone takes their share, the agent's commission can feel pretty pitiful!

Of the five transactions that first year, some of the commission checks were less -- some more.   That said, the more work an agent has, the more things improve: less has to be split with the sponsoring broker.  But of course, more costs come as well.  It can be pretty expensive to have 20 listings and each one needing advertising, care and attention.   

Real estate agents also work with buyers.   Some buyers are fantastic -- they look for one day and make an offer.  But these are really unique buyers.  In my real estate career, I think I've had two like that.  Most buyers go out for days and sometimes years looking at properties.  People relocating from out of area want to see the whole North Shore or all of Lake County before they make a decision.  For example, I worked one couple a few years ago.   I think I put about 500 miles on my car showing them properties from Evanston on up the shore to Lake Bluff over a 2 month period of time.  We saw a lot of houses and I spent probably 80-100 hours of time working with these people.  They were lovely and I liked being with them quite a bit, but we really couldn't find a house on the North Shore that they liked.  Eventually they purchased something in Hinsdale with a Hinsdale agent.  Income from that transaction?  Net loss: countless hours and out of pocket losses of around $250. 

I'll concede that some transactions are easy.  The buyer selects house and makes a deal that comes together in a week.  Or the house sells in 4 days.  Sometimes you work with clients who are utterly fabulous and make sure their house is perfect for every showing.  I consider these the angel transactions.  Unfortunately, they don't happen very often, but when to do, you love every minute of them -- they're blessings.

Not every prospect turns into a client -- many are just asking you to do a market analysis to get a second opinion -- they've already selected the listing agent.  Or sometimes buyers are just thinking about moving, but aren't ready to actually move.   I always try to figure out the probability of a prospect turning into a client, to make sure that my time is well spent.  But that is not always possible; because every time you meet or work with someone, they could turn into being a client and I want them to know the quality of my work.

The most painful kind of transaction is one where you work with a seller for months, spend countless hours and dollars marketing their homes and they decide they want to try listing with a different agent.  So they cancel the agreement, list with another company -- almost always at a lower list price -- and the house goes under contract quickly.  Ouch.  I think it has happened to just about every agent -- it's so discouraging and costly.

The second most painful situation is when you work with "relocation" buyers, who don't want to move to the Chicago area.  They usually know very little about the suburbs or schools, so they want to see everything.  Inevitably, they bring their kids with them and no one is happy in the car.  These types of situations can make for very long and sometimes unpleasant days.   By 3:00 in the afternoon, everyone is a wreck; the car is a mess and you know it will be just like this all over again until a home is actually purchased.   If you've had to relocate, you know how house hunting can be really exhausting for everyone.  With moments like these, you feel like you should be getting combat pay -- instead, in these instances, the agent has to refer back over 30% of their split of the commission to the relocation company.  

But the one situation that really stings is when a client asks you to throw in some of your commission.  It's an attitude that suggests that an agents' time and efforts are not valued.  It doesn't happen to me very often, but when it does, I feel like saying: "Sure, I'll give you a % of my salary, if you'll give me a % of yours."  One agent I met along the way had a pat answer to this situation.  "I'll be happy to put in some of my commission, as long as you add my name to deed.  After all, you're asking for me to help pay for the house!"

It's a strange business -- I can't think of many businesses where you work for nothing for months on end, invest your own money and then have no guarantee that you will be compensated for your time and expenses.   Gold mining? Oil drilling?  Sometimes it feels like gambling.  I often like to envision a different business model -- more like that of other professionals with monthly bills or retainer fees, etc.  But that would require reinventing the whole industry.  To me this work is about delivering value and client service.  Hopefully my clients recognize my time and efforts, and don't feel any qualms about compensating me.

Regardless, in spite of some of the challenging and discouraging moments, I really do enjoy this work quite a bit.  And while the income may not be anywhere close to what I was making in my prior career, I love that you get to share in peoples' lives and in one of their major life decisions: buying or selling a home.  You see the moments of both joy and sorrow;  you get to really know people and how they operate as a family.  I love seeing how different people live and making new friends along the way; watching their children grow up.   It's real life and there is something personally satisfying about it; something, that I never felt with consulting.   

Besides, there are rewards in this business that aren't financial.  Like: being able to come home to have lunch or being able to take my dogs for a walk in the afternoon.  Or not having to spend time being stuck in traffic on the Kennedy trying to get to the airport, or waiting in a line to check into a hotel room!

Update: January 3, 2014
Interesting article in the Wall Street Journal
Can Selling Real Estate Make You Rich?

Saturday, November 20, 2010

Lake Forest celebrates 150 Anniversary

The 150th anniversary of Lake Forest will be kicked off at this year’s Annual Tree Lighting Ceremony on Friday, November 26.   The trees in the Square and a special Holiday Tree will sparkle with lights, the air will be filled with holiday song and a sesquicentennial banner will be strung from tower to tower.

Follow all the events this year on their website

Tuesday, November 16, 2010

5 Foreclosure Myths

1. Foreclosures happen fast
2. Buyers can't get clear title or title insurance on foreclosed home.
3. Buyers should wait for the shadow inventory to be released.
4. If you're looking for a deal, you're looking for a foreclosure.
5. Having a foreclosure on your credit history means it will take years before you can buy again.

Sunday, November 7, 2010

10 ways to reduce your utility bill

I just found a very useful website: Money Crashers the winter months are approaching here's a recent article that's timely,