Flat-Fee Defies Traditional Brokerage

WINDSOR - The fallout from the subprime lending market, and the near-disastrous foreclosure epidemic that resulted, plus fears of a nationwide recession that has buyers playing waiting games, are causing residential brokers to improvise and innovate.

So, taking a page from a residential real estate business model developed in Seattle and a handful of other big, metropolitan markets, Windsor broker Jerry Taylor has applied his software development experience in a new flat-fee, Internet-based real estate venture called eRealtyCo, found on the Web at erealtyco.net.

Likewise, H. Craig Plantz, another Windsor agent who is the managing broker for Resident Realty, is operating OwnersRealty.com, an online residential clearing house that puts properties on the MLS, and offers other services, for a $99 fee.

With a typical 6 percent commission in the offing for most traditional brokerage sales, sellers of a mid-priced home in Northern Colorado could bear charges ranging from $12,000 to $18,000 - a pretty big bite of the selling price.

Taylor, who spent 20 years in the software development business before turning to real estate as a career, said his new service is geared toward “doing things in a leading edge way.” His $2,000 flat fee - although 20 times higher than his competitor’s - still undercuts the standard commissions by a goodly amount.

“When the market started going down, I began thinking of ways to innovate,” Taylor said. “The progression to the Internet is nothing new, but the flat fee is. I’m looking to help people out and save them a ton of money.”

I questioned some of the members of the Fort Collins Board of Realtors at their awards luncheon earlier this month about these new, online, flat-fee products, and their response was both predictable and reasonable. Service, they said. Service, service, service.

At least Taylor, whose eRealtyCo is based on the success of Seattle-based Redfin.com, is aware of the objections. After all, as he pointed out, the big brokerages in Seattle are in an all-out war to preserve their interests in the face of Redfin’s growing presence and reputation among home sellers and buyers there.

His defense against the criticism from other brokers is a simple one: Exposure on his site, MLS listing, contract preparation and brokerage services are no different than those provided by the mainstream real estate people.

“The only thing we don’t do is open houses,” he said.

Both of the flat-fee services differ from the numerous for-sale-by-owner, or FSBO, real estate services in that each provides access to the region’s multiple listing service, a crucial link to buyers and other brokers that FSBOs are barred from.

Prior to acquiring licenses to use Resident Realty’s systems and software programs, Plantz was president of Colorado Real Estate Online, a company he built then sold to E.W. Scripps Co.

His pitch to prospective clients is linked closely to his rock-bottom fee.

“If they try my service for a month and aren’t happy, they can quit and all it will cost them is $99,” he said. “This gives them an opportunity to judge for themselves.”

Editor Tom Hacker covers real estate for the Northern Colorado Business Report. He can be reached at 970-221-5400, ext. 223 or at thacker@ncbr.com.

Where are mortgage rates headed?

An inflation-inspired popup in rates is reversing on news of a weakening economy. Mortgages are still above 6 percent (they touched 6.25 percent at Christmas Eve worst), and markets will now hold until the release of all-powerful payroll numbers on Friday, Jan. 4.

The inflation news before Christmas was disturbing: The indicator was a technical one (”core personal consumption expenditure deflator”), but a Fed favorite jumping the 2 percent top-of-target range. Not by much, 2.2 percent year-over-year, but 2.9 percent in the last three quarters. “Headline” overall CPI is north of 4 percent, felt by everyone.

New claims for unemployment insurance are in an unmistakable uptrend, at 350,000 weekly within 20,000 of the level at onset of the last two recessions.

November data is old, but indicative: Orders for durable goods crept to a 0.1 percent gain versus 2.2 percent forecast, and personal spending soared by 1.1 percent, personal savings going negative by 0.5 percent — hardly a sustainable party. Markets reacted to Friday’s report of a 9 percent collapse in new-home sales as bad news; it is not — we need these “incentive” discounters to take a couple of years off.

New Year predictions? Don’t be silly. Not for 2008.

Instead, herewith a “bracketing” forecast, the probability borders of happy and poor outcomes set by today’s mid-range optimists and pessimists. Outliers — the wacky fringe — need not apply (which excludes at least half of the commentariat).

First, on recessions in general: They are rare. Since the worst in modern times, the double-bottom ‘79-’82 affair, we’ve had only two, both short and shallow affairs, 1991 and 2001.

If you watch nothing else, watch the job market. Sensible optimists call for job “stability,” meaning marginal gains and a gradually rising unemployment rate, the consumer staying in the game. Heard everywhere: “Historically, it’s a bad idea to bet against the consumer.” Reluctant pessimists counter that the job market is a lagging component of the economy, breaking after the start of recession.

Inflation. So long as oil, commodity and food prices behave as they have, it will be hard to find an optimist. In this case, bracketing goes to the world economy, and is three-sided. Economic optimists, many believing that a go-go world has “de-coupled” from the United States, are the inflation worrywarts; the slowdowners think that inflation is another lagging component and will fall back. The third bracket, pushing in from the cutesy sideline, says “stagflation.” (I’ll be judgmental, here: Stagflation was coined in the ’70s during very high inflation and unemployment, both insignificant today by comparison. The stagflationists just can’t make up their minds.)

Credit crunch. The hopeful see markets digesting trillions in bad assets “in a couple of quarters” — Goldman Sachs. The non-apocalyptic skeptics see an impaired system short of credit suppressing growth for years — Goldman Sachs (different guy).

Housing. Given an absence of optimists, I’ll speak for the missing: Foreclosures will rise until 2011, but damage to the overall economy from housing alone (as opposed to the wreck in the financial system) will be less than forecast, as will be credit losses. Prices will stabilize in most Bubble Zones in 2008. Pick your own pessimist.

The Fed. Bernanke’s solution to failure as a communicator is to stop trying. Hence, all is guesswork. Truly expert monetary mechanics are in a fierce argument, unable to tell if the Fed is fire-hosing cash to float the economy (and failing), or syringing just enough into banks to keep them alive. The range of serious opinion includes: Bernanke is a courageous, modern-day Volcker who will let the economy slide as far as he can to squelch inflation; or, now at the limit of the Fed’s traditional power, is a passive Chairman. Quite incredible that we cannot tell which.

The World. Biggest forecast gap of all. Globalists expect strength to pull all through the credit wreck; old-timers look for Europe then Asia to follow the U.S. into the tank, then the U.S. to pull everybody out in 2009. I have increasing fondness for old guys.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

Desperate homeowner seeks foreclosure alternative

Q: I am at my wit’s end. My adjustable-rate mortgage (ARM) has reset and my mortgage has increased by $400. I also have a second mortgage and am unable to pay what I owe on my student loans each month.

I know I need to sell my home, but I also need to put floors down before I sell it. I had the carpet removed shortly after buying the house and want to place down laminate floors on top of the plywood. Here’s the problem: After I put in the floors, I don’t think I can get what I paid for the house.

Right now, I am current on my first and second mortgage, but I am running low on money. I am a medical professional, but I’m a single parent and there is not enough money go around.

What exactly is a short sale? Do they work? How about a deed in lieu of foreclosure? How hard will that hit my credit and for how long? Can I ask the lenders to readjust the loan? I hope you have answers for me.

A: You’re in a difficult situation, and I’m not sure how much help is out there for you.

First, you may have heard about the interest reset relief program that is starting up as of Jan. 1, 2008. You must be current on your mortgage (which you are) and you must have less than 3 percent equity in your property (which it sounds like you might have). However, you must have a loan that will have an interest rate reset starting Jan. 1, 2008. Because your loan has already reset, it’s possible you won’t qualify for this.

Still, it’s worth a shot, but you’ll have to do the work. Call the federal government’s toll-free mortgage crisis help line at (88 995-HOPE to see if you qualify for assistance.

If not, then you have to figure out your next steps. Can you find a way to either bring in more cash (rent out a bedroom in your house?) or reduce expenses until you get through this crisis?

I’d hate to see you do a short sale (where you sell the home for less than the loan amount) or a foreclosure (which will stay on your credit history for up to seven years), or even a deed-in-lieu of foreclosure (where the bank accepts the deed in lieu of you paying off the loan).

You’d be better off trying to trim your expenses or bring in extra income to put down the flooring you need and wait out the current mortgage crisis. Staying in your home will be the least costly choice, both in terms of cash and your credit. I hope you can find a way to make it happen.

No matter what, please talk to a housing counselor at the Department of Housing and Urban Development. You may qualify to refinance your mortgage at a lower rate through the new FHA Secure plan. Go online to www.hud.gov/news/fhasecure.cfm to get contact information or call toll-free (800) CALL-FHA for more information.

Q: I am looking at a fairly major renovation of a home I have lived in since 1981. I paid $60,000 for the house, and there is no mortgage. If I put the house on the market (with some inexpensive curb-appeal-type spiffing up), I think it would be listed in the area of $325,000.

I’m guessing that the renovation costs would run about $300,000, and the house would then sell for $450,000. I plan on continuing to live there for at least another 10 years.

Should I sell the house or should I stay and finance the renovation? Shall I get a construction loan followed by a 15-year mortgage? What about a home equity loan or line of credit? Does my age or income matter?

A: Your numbers are interesting, if they’re accurate. For simplicity’s sake, let’s assume they are.

If you sell your house today for $325,000, you’ll have a rough profit of $250,000, which you could keep tax-free. If you improve the property, the house would be worth $450,000, for a net profit of around $90,000.

Why would you do all of this work for a much smaller profit? Wouldn’t you be better selling your property, pocketing the cash and buying something else? If you sold your home, do you know how much you would have to pay for another home? Could you sell the home and buy another for less money? If you bought another home in the price range of $350,000 to $400,000, you’d have some price appreciation over the next few years, and you’d start the clock ticking on the next $250,000 in profits that you could keep tax-free.

Ideally, at the end of 10 years, you’d have sheltered at least $500,000 in profits tax-free. That’s a lot of cash.

Now let’s assume that despite the numbers, you still want to improve your property and then stay there for 10 years. How should you pay for your renovation?

The cheapest thing to do is pay cash. Barring that, the next-cheapest thing would be to do a cash-out refinance and get a new mortgage at today’s reasonable interest rates. You can do a home equity loan, but for as much money as you’re talking about, you’ll have an easier time with a cash-out refinance and you’ll be able to lock in the lower interest rate. As for a construction-to-permanent loan, you could do that, but the fees may be higher and you’ll have more paperwork.

I vote for a cash-out refinance, although you should still look into construction-to-permanent financing. If the company you work for has a credit union, you should start your search there because credit unions typically offer the best deals on home loans and auto loans.