The Functions of Real Estate Transactions

            Today at Coldwell Banker I learned the functions of the real estate transactions, from the initial offer to the closing documentations and the agents role in the process for the state of Massachusetts.  I don’t think I’ve absorbed so much information in one day since revising for my A-levels last year!

 The process takes place in five parts.

1.     Offer - (this is a written offer to purchase)

2.     Home inspection - (done 7 to 10 days after the signing of the written offer)

3.     Purchase and sales agreement – (created after the offer is accepted and agreed by all parties)

4.     Mortgage commitment – (a letter by a mortgage company or a bank which provides the written letter a buyers had obtain citing a mortgage acceptance to purchase a property)

5.     Closing – (complete ownership transferred from seller to buyer)

1. Offers

I have bullet pointed below the sequence of how an offer is made:

·      Preparing an offer – agents need to prepare an offer to present to a listing agent.

·      Presenting the offer

·      Required forms and contingencies

·      Counter offers – negotiations

·      Agreement reached.

In the state of Massachusetts, the offer must be summited to the purchase agreement. I have scanned in the exact copy of what Coldwell Banker looks like:

This includes all contracts agreed by all parties, such as:

·      Purchase price.

·      Date of agreement and of the closing.

·      Identity of the parties and description of property.

·      Amount of earnest money to be paid (Deposit).

·      Financial information (Terms and commitment date).

·      The pre-approval is not a commitment. A mortgage commitment date is important in protecting the buyer’s deposit.

·      Buyers choice to conduct any inspections 7 to 10 days after the offer, they must list what type of inspection.

·      Special conditions or requests can be made such as items included, items excluded, what the seller will pay like closing costs and home warranty.

·      The expiration date is usually 24 hours after the offer has been made.

There are certain forms that accompany the offer:

·      All contingencies inspections and deadlines.

·       A copy of a signed sellers property disclosure, initialed and signed by the buyer.

·      A copy of the buyers pre-approval, which confirms they have read and acknowledged the contract.

·      A copy of the seller’s signed lead disclosure initialed and signed by the buyer.

·      The buyer’s agent also needs to disclose their relationship with the buyer in writing. For example, are they working with or are they neutral. This is stated through a copy of the mandatory relationship disclosure form.

I have scanned in a copy of what a contingency form from a Coldwell banker sale would look like:

Offer can be multiple which means the sellers can choose one of three options:

1.     Can accept everything as written.

2.     Can reject everything as written.

3.     Can accept some of the terms and reject or make counter offers.

When managing the sale all the contingency dates should be met from the inspectors, financial and insurance advisors, utility readers and smoke carbon certificates. Open communication should be maintained with the client, co-operating agent, mortgage agent, inspectors and attorney. 

2. Home Inspection

            After 7 to 10 days from the signing of the offer to purchase, several inspections should be done. The goal is to uncover any additional substantial deficient conditions that weren’t previously known to the buyer. These include:

·      Pest infestation

·      Septic system

·      Flood plains

·      Wetlands

·      Hazardous substances        

    Radon Gas

·      Physical/Mechanical/Structural

·      Well water

·      Lead

The buyer can either pull out or give the seller a chance to repair. Any agreement reached after the inspection should be in writing, if defects are found the sale price can be reduced. The home inspection needs to take place in the home contingency period so that the deposit is not at risk.

Purchasing a house

3. Purchase and sales agreement

            In Massachusetts seller attorney usually drafts the P&S, the sellers and buyers attorney work together to finalize it. After reviewing with the clients it then gets forwarded to the listings agent. The selling agent will send all the copies with the buyers signature to the listing agent along with a second deposit check made out to the listing company. Listing agent has the seller sign all copies and then distributes to: The listing company, the selling company, the buyer, the seller, the mortgage agent and the attorney.

            Offers and purchase and sales agreement are a binding contract, if there are any changes to the P & S such as extensions and defaults, through the price, mortgage, commitment dates, inspection dates and closing dates. If any changes do occur all documentation must be initialed by all parties. If the buyer defaults on the agreement after all contingencies have been met then they may train the deposits and seek legal action. If the seller defaults the buyer can chose legal action. If the deal falls through both parties must sign a release to terminate the contract prior to any funds being returned.

4. Mortgage commitment letter

            The buyer needs to provide a mortgage letter 3 to 4 weeks after the signing of the purchase and sales agreement. The letter must state that the buyer has a commitment from a lender saying they have a mortgage on the property they are purchasing. If the lender doesn’t approve the loan a written denial must be provided to the seller and listing agent immediately upon receiving the denial. If the letter is receiving before the commitment letter is due then the deposit is returned to the buyer and the agreement is now null and void. If the commitment date has passes and if the buyer does not provide an acceptation or denial letter then the seller can retain the deposit and seek legal action if the buyer cant go through with the purchase.

            Once the mortgage is ready then the agents can prepare for closing. The closing time and location needs to be confirmed by all parties. All necessary paperwork is collected which includes the smoke certificate, insurance binder, commission state and final utility readings. All properties in Massachusetts need to have a certificate issued by the fire marshal and the insurance binder needs to have details of the mortgage lender like flood protection. A final walk through of the property will be done to ensure it is in a broom clean condition.

5. Closing

            The closing is done 6 to 8 weeks after signing of the purchase agreement. The closing attorney will review the closing statement then the seller will sign the documentation first. The buyer will then sign the paperwork and the mortgage. The closing attorney will ensure the receipt of the final utility reading, smoke and carbon monoxide inspection certificate and the insurance binder. The funds will then be collected and the closing deed will be recorded. The client must bring a bank check for the closing cost that are pre-determined, a checkbook for any unforeseen fees/costs and a driver’s license. The keys will then be given to the buyer after the deed is recorded. 

Compliance Packs and Investments

My day at Ameriprise Financial started with meeting two other interns from Roger Williams College who showed me the ropes that day. We began by writing out reminder postcards, this either gave two or four weeks notice to the clients so they could be reminded and prepare for the meeting coming up with Mr Pippett. We also needed to identify if the meeting were to be held at the Fall River office, at the client’s house or over the phone. For the meetings that would happen in the office, we produced client packs in order for Mr. Pippitt to have easy access to information before the meetings. This enables him to review the client’s portfolio to see if any changes need to be made to their investments. Compliance documents need to be signed yearly by clients, if meetings are to be done over the phone then the company will send out a variety of documents for them to sign in the comfort of their homes. Compliance packs include:

1.     Up-to-date account summaries

2.     Disclosure forms

3.     Account suitability

4.     Professional relationships and released client information, such as

·      Accountant

·      Tax Advisor

·      Attorney

·      Property and casualty insurance

·      Real estate broker

5.     Phone authorization – this allows over the phone transactions to be made.

6.     And an agreement of the service fee from the SPS (Strategic Planning System)

            Afterwards, I sat in on two phone calls that Mr Pippitt made. The first was to find out additional information regarding a K1 form of a clients, this is a tax form distributed from a trust account. The next was with a REIT (Real Estate Investment Trust) company, this was to have an update on their product in order inform a client in a meeting coming up of its expect revalue as it had currently fallen in share price since the last review.

 

            The next thing I learnt that day was that if a client is making the majority of their money in their working years, an individual RIA would be more beneficial for them, as they can retire without having to pay taxes on their invested capital. A RIA Roth on the other hand allows taxes on their capital to be paid after they retire.

If income is made through investments then there is only a 15% tax on their capital gains compared to a higher amount that would be charged through directly earned income. This subsequently helps to explain why the likes of Mitt Romney and Warren Buffett pay a lower tax bracket then their secretaries.

The Price of Free

            Unfortunately last night I received an email from Mr. Strand having to cancel our meeting today. As the end of the financial year is coming up on Tuesday, the need to finish tax returns understandably took priority.

            I decided to continue with the next chapter of my book “The Price of Everything” which discussed the “Price of Free”. The section uses multiple examples from Napster, a hotly debated free downloading music site to; what is the title of another of my senior project books – “There’s no such thing as a free lunch.” The most interesting thing learnt was about an experiment a British alternative band by the name of Radiohead. In October of 2007 they released their new album In Rainbows asking fans to pay whatever they chose to download. If they wanted they could get it for free. More than a million fans downloaded the album within the first month and of these six in ten paid nothing. Several more download the album from peer-to-peer services that offer fans the ability to share their music online, rather than from Radiohead’s free Website. The band made $2.26 per album from the 38% who choose to pay for it. They were allowed to keep all the profits and not have to give a share to the record label. When the high-quality version went on sale a few months later, it put the album at the top of both the American and British charts. It remained in the United States charts for fifty-two weeks, which is longer than any other albums of the bands. By October 2008, In Rainbows sold more than 3 million copies, including 100,000 special boxed sets that retailed at $80 each.

            I believe that this experiment shows the potential of the Internet. Radiohead displayed that the information economy could revolutionize capitalism by allowing creators to make a living while giving away their creation for free. This new type of economy might require people to radically change their approach to property. This album experiment demonstrated that if creators would free themselves of the capitalistic shackles represented by record labels, Hollywood studios and other representatives of corporate greed that siphoned off a big slice of their revenues, this new paradigm could work out for everybody.

Ameriprise Financial

            My day began with a very excitable morning; I was given the keys to the car Lisa Clark has kindly lent me for this six-week period. I was to master the US highway system single handily in order to get to Fall River, MA where my first day at Ameriprise Financial was to begin. Arriving at the office in one piece, I was greeted by Mr. Thomas Pippitt who will be my financial advisor mentor over my senior project time with the company.

           

            I was first given an overview of the company’s operational systems and the types of information that the database can provide from either the in house archives at Fall River or from the headquarters in Minneapolis. Before our first client meeting I was to learn the fundamentals between a traditional IRA (Individual Retirement Arrangement) and a Roth IRA. A traditional IRA is tax-deductible, all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income. Roth IRA however are contributions made with after-tax assets, all transactions within the IRA have no tax impact and withdrawals are usually tax-free. A holder for an IRA can take out their investment after the aged of 59 and a ½, if it the capital is to be taken out before this age then there is a 10 % penalty on the amount withdrawn. I also learnt that if you were to be considering a long-term health plan and wanted to be considered for Medicate, you would only be allowed up to $2,000 of assets in your name while your spouse is allowed up to $109,000.

            Our first client arrived; I was to sit in, listen and take notes to later write up for their file. We reviewed their current investment portfolio and spoke about future investment opportunities and planned for their next visit. It is normal practice for clients to come into the office every six months in order to review their investment plans. Listening to Mr Pippitt converse with his client taught me that is good to reminisce positive stories about previous beneficial investments in order boast their confidence and gain creditably.

            I learnt that age is used as a basis to decide the division between how much of the clients capital should invested into Equity and Bonds. The maximum aged used for this is 100 years, assuming the majority of the population would have already passes away by then. If the client was 60 years old, the amount of capital invested in equity would be at 40% while bonds at 60%, this is because as the client matures in age, reaching closer to retirement age they should seek low risk investments, which Bonds provide over Equity options. REIT’s are Real Estate Investment Trust’s, there is a 10% allowance of Bonds value that is allowed to be invest in REIT’s.

REIT’s come in three types:

1)    Industrial

2)    Retail

3)    Commercial

Of these there are two things seeking:

A)   Yield

B)   Capital Appreciation

Yields tend to fluctuate around the 6.5% rate of return, which would certainly be a worthwhile investment! Capital Appreciation on the other hand, has a fixed price of $10 per share. There is first an 'Offer Period' on the first 1-4 investments, after that comes the 'Management Period'; this is where the IPO (initial public offering) might go up to $12-$13, providing more capital gains than before.

           

            Before I finished for the day Mr Pippitt showed me “Morningstar report”. This system gives ratings of the benefits certain bonds can give to clients under its percentage rank category. It can also show whether any current investments are below the Standard and Poor’s base rate on statistical graphs, this enables those stocks to be sold and reinvested into more profitable 4 or 5 star rating ones.

          Today was certainly invaluable for me. It’s marvelous the amount of knowledge I have picked up from just my first day in the office, I am certainly looking forward to Monday when I’m next at Ameriprise learning the tricks of the trade.

The Price of Everything

           Today, I just had just had the morning to work on my project as sailing takes up the afternoon on Wednesday’s. I have booked the train tickets to New York City in early May for my time at the Stock Exchange kindly arranged with the help of Mrs. Merry Conway and Mr. Greg Barnhill. I’m thrilled to be given the opportunity to be shown around by employees who are at the forefront of today’s stock markets. I imagine the atmosphere on the trading floor would be electrifying, I hope to be able to take some pictures while I’m inside but for now, here is a picture of what the exterior and trading floor of the building look like.

            I started reading the first book on my reading list: The price of everything by Eduardo Porter. This book’s fundamental concept hopes to explain way behind every decision we make lays a price. The chapters I have covered so far are: The Price of Things, The Price of Life, The Price of Happiness, The Price of Women and the Price of Work.

            There are two sections of this book that have stood out to me as the most thought provoking. Under the chapter “The Price of Life”, I was interested to have the question answered that had first pondered me on arriving in the United States back in September – Why don’t American School buses have seat belts? Any reasonable person would surely think the same: Why would the US Congress put the lives of thousands of school children at risk of road accidents? Well low and behold, with a few Statistics their reasoning behind it suddenly becomes rational:

“The National Academy of Sciences contracted by the department of transportation recommended against a federal mandate to require seat belts in all school buses of the grounds that this would save one life a year, at a cost of $40 million apiece.”

Measuring this cost benefit analysis against another value of life example:

“The Consumer Product Safety Commission approved a new flammability standard for mattresses on the basis that it would save 1.08 lives and prevent 5.23 injuries per million mattress. Valuing each life at a more reasonable $5 million and each injury at $150,000, its benefits would amount to $51.25 per mattress with a cost to the industry only $15,07, so it would be worth the added expense to ago ahead with the higher safety standards.”

            The other section of the book, which I thought was an incredibly unique way to look at the foundation of the 2008 recession, was under the chapter of “The Price of Women”. “It has been suggested that the sex imbalance pushed the Chinese households into a race to save more, so their sons would have money to compete in the increasingly tight marriage market. This enormous savings rate has contributed to China’s accumulation of some $2.5 trillion in foreign exchange reserves at the end of 2009. China gender imbalance helped inflate the global housing bubble, as the mass of Chinese savings sloshing through the world’s financial system kept interest rates low and fueled the boom in housing prices all over the world”.

This may not be fully responsible for the financial crisis still being felt four years but it’s certainly worth a considering its influence globally.

            
            I begin my first day at Ameriprise Financial in Fall River tomorrow. As I have a British driving license I’ve had to learn how to drive the American way! This consists of being on the other side of the road and the other side of car! After a weekend of driving practice, I am feeling a lot more confident that I will be able to give Mrs. Lisa Clark her car back in one piece that she has kindly lent me during the six weeks.

Coldwell Banker

            I arrived at Coldwell Banker in Marion at 9am after my AP economic class. I had a chance to meet the agents for the first time and see the office staff again, some of whom I had first met when I came for my interview back in January. The morning began with a meeting where I was to introduce myself and give some background to the team. Afterwards, marketing techniques were discussed to boost public awareness of the Marion office. Plans were made to put advertisements in regatta brochures in order to target the sailing orientated market who maybe looking for a waterfront property. Marion is an affluent location so another idea was to put a half a page spread in theater pamphlets which would target the upper middle socio-economic segment. I learnt that there are eighty Coldwell Banker offices throughout the New England Area; Marie Lovely, my manager, is head of the Marion and Plymouth branches.

            I learnt that the secret to being successful in real estate lies in the previewing of the property in order to gain as much knowledge as possible. Four points in particular seemed to be key:

1)   Market knowledge – previewing property will teach you what is available in an area, what homes are listed for, what homes are selling for, what homes are worth and what to expect in a particular price range.

2)   Know the inventory – as agents are self employed people if they don’t know their market inventory with a clear understanding of the availability of what’s outs there they will lose precious and valuable time which is their main assets.

3)   A powerful listing presentation – knowing information about the property in detail such as other homes for sale in the area, on the same street, the power lines details and property boundaries will help to boost credibility as an agent.

4)   Meet potential buyers and sellers to work with – it is good to knock around on the doors of houses in the surrounding area to learn from the neighbors about previous properties sales and what the area has to offer.

            After the meeting I spoke to some of the agents, I learnt that there is a 5% commission on property sales of which they receive 2.5%, the other agent, from say the buyers side, would receive the other 2.5%.

Marie Lovely talked me through the database they use to compare information to other branches, the agents portfolio of property sales and information regarding the properties themselves. My last task of the day was a “diversity and cohesion program”. This was done on the intra-net to which the head office had sent in order for workers to become more aware of different nationalities, cultures and backgrounds in the workplace.