Why You Can't Rely on Your Agent for Selling Advice

Have you ever noticed that according to your local real estate agent it’s always a great time to buy a house?   But when is it time to sell?   I recently observed a troubled homeowner pose her family’s dilemma on a real estate forum seeking advise from real estate agents on what to do with a home they still owned but no longer lived in. The advice of these agents provided was not surprising, but it was reckless and would be financially devasting to anyone who followed it.  

The Home Owner’s Dilemma

The homeowner had moved from central California to San Diego due to a job transfer. The employer didn’t pay the expenses of the move.  The homeowner was complaining the market in central California was soft and when they sell their house, after selling commissions and closing costs they wouldn’t come out of the transaction with any equity.  So they stubbornly held on to their asking price, deciding to rent the house out instead and hope for market to bounce back.  

Several months had passed since the move and these California homeowners were complaining to the agents of the strain they were feeling having to be responsible for making almost two mortgage payments.

Your First Clue- Rent is Only Half the Mortgage Payment

The rent on the home in central California was only enough to cover half the mortgage payment.  So these people find themselves being landlords by default and having to feed a negative cash flow property that they didn’t really want anymore.   The situation has gone on long enough to where it’s causing a strain on their finances and causing major stress.  Both of their houses happened to be in areas that have been way overvalued and prices are falling and in the process of correcting to sustainable levels.   The fact that the rent will only cover half the mortgage should be a major clue that the home price needs to come down substantially. (See Fundamental #3 The House as an Income Producing Asset)

Finanically Damaging Advice from Six Agents

Can you guess what the consensus of the advice from the six agents was?  Here’s a hint.  Think real estate agent spin.   The gist of their advice was “Hang in there”, “The market will come back”.

Certain Events Deserve More Weigh Than Uncertain Events

Before even considering the facts of this situation, it doesn’t make any

sense to risk what is a certainty, when what you stand to gain is predicated

on two uncertainties occurring.  In the teeter-totter of decision-making,

events that are certain should be given much more weight than events that

are uncertain.  It’s the bird in hand is worth more than two in the bush

philosophy.   The certainty being these people cannot afford two mortgages.  And it’s a certainty that maintaining two mortgage payments is straining them.   It’s uncertain

when the market will recover.  And it’s an uncertainty what recovery means

to prices.

Facing Reality

So these homeowners are running negative cash flow every month and it’s

a strain for them.  What should they do?  What would any non-biased

financial advisor advise them to do?   For starters, he/she should advise

them to be careful when getting advise from a real estate agent.   They

have a strong biased toward buying or holding.  Have you ever had a real

estate agent tell you it’s time to sell?

Thousands of Others Facing a Similar Dilemma

Thousands of people throughout the US have become landlords, not by

choice, but by default and find themselves being responsible for more than

one mortgage and wondering if supporting a negative cash flow property is

right thing to do.   And there are also scores of investors of single-family

rental homes running negative cash flow wondering if they should sell. 

 If you are in that situation now, it's important for you to realize your real estate agent is unlikely to be able to give you much of a recommendation when it comes to analyzing the financial aspects of a sell or hold decision. 

The Proper Advice

So what should the homeowner do?   This homeowner needs to stop their

financial bleeding, cut their losses and get rid of this house.     If they didn’t

own this house now would they buy it for an investment?   Of course not!  

Would anyone else buy this house that  produces a 50% negative cash flow?   No way!    Owning a negative cash flow property in a declining market is a high-risk proposition.   These folks

are not in the position to financially support a negative cash flow property

and gamble on whether or not prices will rebound.     Advising them to

hang in there only prolongs their pain.  Instead of cutting their losses and

moving on, by hanging in there, they get the constant aggravation of shelling

out money every month, money that could be used for other purposes,

to cover a house that is falling in value.  At some point, reality will sink in

and these folks will decide to lower their price to get the house sold.    While

they hang in there, they’ll have spent thousands of dollars making up for the

negative cash flow hoping for a price rebound that will never arrive.   Losing

cash every month is a certainty.  

The proper thing for these people to do is make their decision based on

what’s known and certain – the negative cash flow is a strain and

unsustainable.   Lower the price and get the house sold.  There are plenty

of people who will buy homes if they’re priced right. 

Real Estate Agents Can't Provide Advice on Whether to Hold or Sell

Agents should not be your only source of input and advice for buying, selling

or holding real estate.    First of all they have a major bias and a self-serving

interest in promoting the buying of real estate.  If the local market doesn’t produce

sales, that directly impacts the income of the agents in your local market. 

How can they tell you that prices in many areas, perhaps in your area are

likely to continue to fall?   How can an agent tell you that you that prices are

going to fall further and you should be bailing out, when they or one of their

colleagues will have to sell your place to the next person?   Your local agent

can’t tell you the hard facts about whether to hold or sell.  They have no

problem advising when to buy, but according to them it’s always a good

time to buy. 

There were plenty of real estate analysts and economists, not tied to the

real estate industry,  who were sounding the alarm warning us about the

real estate bubble and houses were significantly overvalued as far back as

2003 and 2004.  But unfortunately for many,  these warnings were drowned

out by the propaganda and hype from the real estate industry and real

estate trade associations such as NAR.  Real estate agents were busy

setting records for the commissions they generated in 2004 and 2005

selling overpriced houses to an over-trusting public.  

By now, it should be clear to everyone, that one would be wise to consult

other experts and seek other information sources when formulating the

decision to buy, sell or hold real estate and not limit yourself to only real estate persons.

You Are Responsible for Your Decisions on Buying or Selling.

Homebuyers in Carlsbad, CA purchased a house in 2005 near the top of the

market.  By 2007 the home value had dropped $100,000 from the 2005

purchase price.   They recently tried to sue the agent that sold it to them,

claiming the agent did not provide them with proper market information. 

The court ruled in favor of the agent reaffirming the long-standing position

that the ultimate responsibility for decisions on buying or selling real estate

remains with the homeowner or homebuyer – the person(s) signing on the

contract.  And that’s the way it should be.

Until next time,  

Marc Austin

Staff writer UsHousingMeltdown.org