End of Chapter 22 Questions and Answers 1. What does NAR stand for? What is the difference between a broker, agent and REALTOR? Answer: NAR stands for the National Association of REALTORS®, a trade association made up primarily of licensed real estate agents. A broker is licensed to work independently while an agent is required to work under the supervision of a broker. An agent must be licensed within the state in which they work but need not be a REALTOR. 2. How can an agent calculate what a buyer can afford? Describe the factors to consider. Answer: Typically mortgage lenders prefer to see that no more than 25% of gross household income be needed for mortgage payments, and no more than 28% of gross household income be needed for mortgage payments plus property tax and property insurance payments. An agent can questions about income to see how much mortgage a household can afford and then ask about net worth or liquid assets to see how much down payment is available. Within reasonable loan to value ratios the agent can then estimate the total affordable price based on the sum of a supportable mortgage and the down payment less closing costs or other up front costs such as repairs. 3. For a household with an annual income of $80,000 and mortgage rates at 8.0% for 30 year amortization what can they afford if mortgage payments are held to no more then 25% of monthly income and they have enough for a 20% down payment? (Ignore all other criteria and use Chapter 19 to help with this calculation.) Answer: $227,139 is the supportable mortgage. Divide this by 80% to get a total affordable price of $283,924. 4. What are the objectives of a seller when selling a home? Answer: To sell at the maximum price and to sell quickly. These two objectives are difficult to achieve simultaneously as over priced property tends to sell slower if at all. 5. What is a CMA report? See of you can provide an automated appraisal based on one of the on line systems like www.valueyourhome.com for a relative’s home or perhaps your instructor? Answer: Comparable market analysis based on peer properties that have sold in the same area as the new listing. 6. When has a real estate agent earned a commission? Do they actually need to close the transaction? Answer: When they have produced a willing and able (qualified) buyer. They do not actually need to close the transaction in order to have earned the commission. 7. What can affect the time on the market for a home? Answer: Over pricing a listing will dramatically affect the typical time on market. Atypicality may also affect the time to sale. That is properties with unusual features may find a thinner market of buyers. 8. Why are new agents tempted to over price listings? Answer: Hungry for listings, new agents have the temptation to tell a seller that his/her home is worth more than other agents are willing to list it for. Optimistic or greedy sellers may fall for this higher priced sales pitch which may backfire. 9. What is a material defect? Do you think that a murder in the house being sold is a material defect? Answer: A material defect is anything that would alter the value of the property in the mind of the typical buyer if they had known about the defect. A leaky roof is an obvious material defect while a murder is not as clear. Only if most buyers would be concerned would it be a material defect. 10. How has the internet affected the buyer home search process? Check out three web based systems and see how many provide virtual tours. How good is the virtual touring to decide which homes to visit? Answer: The internet has greatly reduced initial home screening search time allowing exterior and interior views of a home. Virtual touring is a tool used by most modern thinking brokerage firms. Those that do not use virtual touring will probably not survive in the future within large city markets where competition is heavy. 11. Are typical sales agents employees or independent contractors? Why does it matter? Answer: Independent contractors. They save on social security costs as independent contractors and receive few benefits. It matters from the IRS point of view as employees can be charged a higher social security charge from income based on an employer and employee required match that exceeds the total paid by an independent contractor. 12. Why are the educational and experience standards for accepting licensed sales agents into a new firm so low? Why do most firms take the risk of providing a desk to a new agent? Answer: The marginal cost for a new agent is fairly low. A few sales will get the agent close to break even and at the same time the wash out rate is high, so a firm needs to bring in several agents to find the survivors. 13. Do you think that we will see more price competition and more ala carte services in the brokerage industry in the future? Answer: Yes, we are starting to see more innovation in brokerage with respect to services offered and charges.