The 20 Essential Questions Smart Home Buyers Ask to Avoid Overpaying in a "Buyer's Market"
A special report from Real Estate Expert Bob Bruss
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If you have recently attended any local gathering of home owners, such as a school PTA meeting or a cocktail party, before too long you can be sure the conversation topic will turn to “the real estate bubble” and/or the local “buyer’s market” for homes. Just for the record, I don’t think there ever was a real estate bubble in home sale prices. What happened was sales prices went up very fast and incomes haven’t kept pace – the result is a “plateau” in home prices in many communities.
To use an extreme example, in September 2006 I was in London attending Yanik Silver’s superb “Underground UK Internet Marketing Conference.” (If you want to attend his next conference in Washington, DC in March 2007, for information go to www.surefiremarketing.com.) The first night at dinner I was seated at a round table with about half-and-half U.S. attendees and “others” from various countries, mostly the U.K.
On my left side was a young man from India whose website sells skin care products. When he found out my website www.BobBruss.com provides free real estate information and sells real estate special reports and newsletter subscriptions, you would think we had nothing to talk about. Wrong! We discovered we had lots in common as we shared what works and doesn’t work on the internet.
On my other side was a young man in his twenties from Louisville, Kentucky. I never did find out exactly what his website is about, but when he heard I write about real estate he kept asking me if this was a good time for him to buy a home or if he should wait a few months to get a better bargain. Even in a foreign country on a “holiday” 6,000 miles from home I couldn’t get away from questions about buying and selling U.S. homes in a real estate “buyer’s market!” Incidentally, two of the mostly-European speakers at the internet marketing conference were “estate agents” in the U.K. who sell “villas” in Cyprus on the internet! It’s an amazing world we live in.
EXACTLY WHAT IS A BUYER’S MARKET FOR HOMES? The easy definition is a home buyer’s market has more sellers than qualified buyers. But that’s rather indefinite. A better criterion is a local home buyer’s market exists when the average time for houses and condos listed for sale exceeds 90 days on the market. Another test of a buyer’s market is there is a local supply of homes listed for sale which, at the current sales pace, will take more than six months to sell.
To be more exact, it’s important to know if your local market in your price range and desired neighborhood is in a buyer’s or seller’s market. In most communities, the least expensive houses and condos are selling very well – they are in a “seller’s market” because buyer demand for them remains high and there is a small supply of “affordable homes” available for sale.
But the higher-priced luxury homes in the same locality might be in a buyer’s market with too many listings and not enough buyers. Your local MLS (multiple listing service) may have detailed statistics available to MLS member agents by price range and neighborhood. If not, it’s up to MLS members to track the statistics and, when possible, work in a local seller’s market “niche.”
It’s a great time to be a home buyer, but not such a good time to be a seller. That’s what I told the “Louisville slugger” as I encouraged him to start searching for a house or condo to purchase during the buyer’s market. When he said he didn’t have much cash for a down payment, I quickly replied “Don’t let lack of cash stop you because there are lots of ways to buy a home for nothing down.” Unfortunately, I neglected to get his address so I could send him my special report “Five Easy Ways to Buy Your Home and Investment Property for Nothing Down.”
Whether you are a home buyer, seller, investor, or real estate agent, you can profit from a “buyer’s market” for houses and condominiums in virtually every U.S. city – if you know what you are doing!
If you are a home seller, it’s important to understand the facts (not the rumors) about the local home sales market.
If you are a home buyer, this special report is especially aimed at helping you make a profitable purchase and avoid costly mistakes.
If you are a real estate investor, this is a great time to start buying again (after five years of a “seller’s market” with severe competition from those darn full-price “retail buyers”).
If you are a real estate sales agent, the sudden shift in local home sales conditions will drive many licensed agents who can’t adjust out of the sales market, thus making your job easier, less competitive, and more profitable.
Just a few days ago, I was talking with a local real estate investor who owns rental houses in several diverse towns. He said he is on the sidelines for a few months to see what will happen in the three markets where he already invests. There’s nothing wrong with that. Lots of prospective home buyers are also doing that. Meanwhile, he could be missing some tremendous bargains being sold by motivated sellers (and their equally motivated and hungry listing agents!). I urged him to keep actively looking.
Unless you purchased your house or condo within the last year or two, and absolutely must sell now, my best advice is “don’t sell” in a buyer’s market. It’s a great time to buy, but not to sell.
EXAMPLE: A few weeks ago I talked with a reporter for a major news magazine who has an opportunity to move to Colorado where he grew up. He knows there are some incredible home purchase bargains there. But he and his wife bought their house outside Washington, DC last year at the peak of the market. They have it listed for sale and have had virtually zero buyer interest. His employer has no relocation program. I pointed out it is virtually impossible for any homeowner, even in the best of times, to sell a home after only a year of ownership without taking a loss, considering the costs of selling. Although I know he didn’t want to hear what I said, I hope he and his wife are resigned to staying in Washington, DC for a few more years unless they can afford to lose thousands of dollars on their home sale and are highly motivated to move to Colorado.
THE KEY QUESTIONS SAVVY HOME BUYERS MUST ASK IN A BUYER’S MARKET. Before shopping for a house or condominium, smart home buyers properly prepare. As long-time readers of these special reports know, the first step for home buyers is to get pre-approved in writing by an actual lender. Don’t be misled by a so-called “pre-qualification letter.” That means, “We think you can get a mortgage, based on the information you supplied on your loan application, but we haven’t verified anything yet.” In other words, mortgage pre-qualification means noting and is worthless!
Although mortgage brokers can arrange pre-approvals, the actual mortgage pre-approval letter or certificate must come from an actual lender, such as a bank or mortgage banker, who promises to loan the funds based on specified terms up to a maximum amount.
Most mortgage pre-approvals are valid for 60 to 90 days and are contingent upon (a) the lender’s satisfactory appraisal of the home to be purchased and (b) re-verification of the borrower’s credit report and income source shortly before the loan closing. Armed with your written mortgage pre-approval from an actual lender, now it’s time to get started.
1 – WHERE IS THE BEST PLACE TO START A LOCAL HOME SEARCH? According to the latest annual survey by the National Association of Realtors, over 75% of today’s home buyers begin their search on the internet. The most popular website is www.Realtor.com. But there are many other websites which have less complete listings.
The Realtor website is supposed to have all the local MLS residential listings. However, my experience has been that not all MLS listings show up there and specific listings are often either sold or have had price reductions which are not quickly reflected on the website listings. However, this is a great place to begin your search to see what is locally available and the price ranges. Of course, that website does not include “for sale by owner” (FSBO) offerings.
2 – DO YOU REPRESENT THE SELLER, BUYER, OR BOTH IN THIS HOME SALE? This is the first key question home buyers should ask of every real estate agent involved in the sale.
The smartest home buyers have their own “buyer’s agent” to represent the buyer exclusively. That sounds easy, but it often isn’t. Just as a husband and wife getting a divorce need separate lawyers to watch out for their best interests, home buyers and sellers each need separate real estate agents to look out for their diverse interests.
Listing agents are often eager to also represent home buyers as “dual agents” because then they don’t have to share the sales commission with a buyer’s agent. But having a dual agent can be a costly mistake for a home buyer because the listing agent will be very reluctant to reveal anything unfavorable (unless required by law, such as disclosing known material defects in the property).
To find a good buyer’s agent, ask friends and business associates for their recommendations. Frankly, finding a superb buyer’s agent isn’t simple. The reason is the best and most experienced real estate sales agents usually concentrate primarily on listing homes for sale instead of representing home buyers. These agents know the agent who has the listing controls the transaction. They follow the old real estate motto “Listers last” which means realty agents who specialize in listings will survive whereas agents who work primarily with home buyers usually don’t have much control over the home sales transaction.
Speaking of real estate mottos, another one is “Buyers are liars.” How true! Prospective buyers often tell their buyer’s agent the features they want in their home purchase, but then they change their minds and buy an entirely different type of residence. Long-time real estate agents usually agree working with home buyers can often be a waste of time, especially when the buyer isn’t highly motivated to purchase and is “just looking.”
Another source for finding a buyer’s agent is meeting lots of agents at weekend open houses. Any licensed agent can become your buyer’s agent! The agents holding Saturday and Sunday open houses represent the home sellers. That’s obvious. However, many of these agents will offer to act as your buyer’s agent if you are not yet represented by a buyer’s agent. Of course, if a buyer wants to purchase the house or condo being shown by its listing agent, that agent cannot also represent a buyer exclusively – it is called a “dual agency” and is an inherent conflict of interest (although it is perfectly legal) when one agent represents both buyer and seller.
Unless a buyer wants to purchase a home listed for sale by an agent, that agent can act as your buyer’s agent when selling homes listed for sale by another brokerage office. Smart buyers, however, watch out for the situation where their buyer’s agent shows a home listed by another agent who works in the same brokerage office. In that situation, because both the listing agent and the buyer’s agent work at the same office, that is a “dual agency” since both agents work for the same real estate firm.
When that situation occurs, the buyer should either accept the “dual agency” involving two agents working for the same brokerage or retain a buyer’s agent who works for a different brokerage firm. In some states, the brokerage office manager can appoint a “transaction agent” to look out for the buyer’s best interests, but that really isn’t a very good solution to the agency conflict within the same brokerage office.
3 – AS A HOME BUYER, CONSIDER HOW DIFFICULT RESELLING THE HOME IS LIKELY TO BE. No matter how great a bargain a house or condominium might seem to be, ask yourself and your buyer’s agent how difficult it will be to resell the home in a few years. To illustrate, if a nice home is in a bad location with a high crime rate and poor quality public schools, that’s probably not a smart purchase because the residence is likely to be very difficult to resell in the future.
A good way to determine how difficult reselling might be is to ask how long the home has been listed for sale. In a buyer’s market, the answer is likely to be at least 60 days. But watch out for a listing trick to make a listing appear brand new – when a home has been listed for sale a long time, the listing agent will often withdraw it from the local MLS for a week or two because it has become a “tired listing.” Then, when it is re-listed with a different asking price, it appears to be a fresh listing.
To avoid being misled, ask your buyer’s agent how long the home has been listed in its current listing and any previous listings. This information is easily available to your buyer’s agent from the MLS.
As a buyer, when you become seriously interested in buying a house or condo, it’s time to take a critical look at it. Don’t be misled by the recent interior and exterior paint, new carpets and light fixtures, fresh landscaping, and “professional staging.” Those are recommended techniques for home sellers to earn top dollar and get their homes sold in a slow buyer’s market. There’s nothing wrong with them. However, realizing that no home is perfect, buyers should think about how difficult it is likely to be to resell in the future.
EXAMPLE: Before I bought my current residence, I made a purchase offer on another house which I liked better. My experienced buyer’s agent agreed the house itself was very desirable, but it was about a block away from a noisy freeway and it backed up to a large city water tank (mostly hidden by large trees). When my purchase offer was counteroffered by the seller, my buyer’s agent wisely said, “I think we can do better.” She suggested not responding to the counteroffer. Looking back, that expert advice saved me from buying a house which could have been very difficult to resell in the future. Instead, I bought another house about six blocks away – when I’m out in my yard I can still hear the distant freeway noise, but I’m sure glad I didn’t buy that other house next to the big water tank and close to the freeway.
Virtually every large city has new suburban homes which have the latest features and are usually less expensive than residences located closer to employment centers. But smart buyers think very carefully before buying in a distant area where most of the homeowners have long commutes over 45 minutes each way.
Although those distant new homes look very desirable, compared to older close-in residences, they often prove very difficult to resell because most prospective buyers don’t want to buy if a long commute will be required.
4 – ASK YOURSELF AND YOUR BUYER’S AGENT IF THE HOME YOU ARE CONSIDERING IS THE BEST OR WORST RESIDENCE IN THE NEIGHBORHOOD? Buyers should avoid purchasing the best or most expensive home in the vicinity. The reason is it is probably an “over-improvement” which will be difficult to resell for more than the market value of the nearby less-impressive homes.
However, buying the worst house in the area can be a very smart purchase if it offers potential, such as being a “fixer-upper house,” and if it can be bought substantially below the recent sales prices of comparable neighborhood homes in good condition.
In other words, when buying a home it is usually best to be a conformist. Avoid purchasing unique or unusual homes which might not hold their market values well. That doesn’t mean, of course, you should buy a “cookie cutter” home which looks virtually the same as the residences next door and down the street.
Again, look at the resale potential. If the house you are considering looks like all the others on the street, you probably won’t be happy living in a home just like the one next door. Of course, sometimes conformity can’t be avoided, such as buying a townhouse in a development where all the townhouses look virtually the same.
5 – ASK WHY THE SELLER IS SELLING? Until you get serious about buying a specific house or condo, you might want to skip this question because you really don’t care about the answer if you aren’t interested in buying the home.
However, when you are considering making a purchase offer, you need to know the seller’s true motivation to determine if you can negotiate a “good deal.” Indications of high seller motivation include job transfer, unemployment, pending foreclosure, divorce, family changes such as a birth or death, health issues, etc.
Some listing agents are reluctant to reveal the true reason the seller is selling. However, when your buyer’s agent asks in a friendly way, the listing agent is more likely to reveal the true sales motivation. If the listing agent says, “Why do you want to know?” the best answer is “I want to make a purchase offer which will meet the seller’s needs.”
6 –WHEN DID THE SELLER BUY THIS HOME? This is a very important question if you are serious about buying a specific residence.
The longer the seller has owned the home, the better. If you learn the seller bought the home 20 years ago, for example, that seller is more likely to be flexible about the sales price whereas if the seller bought the house in the last few years, he probably doesn’t have as much equity and is likely to insist on selling for at least the amount of the purchase price.
7 – HOW MUCH DID THE SELLER PAY FOR THIS PROPERTY? Closely related to the previous question, the answer to this important query shows how much negotiation room the seller has. To illustrate, I bought one of my residences in 1978. Today, it is worth about eight times my purchase price! If I were to sell, I have lots of negotiation room. But should a buyer ask me how much I paid, I would evasively answer something like “Not very much compared to today’s market value.” Or I might say “Gosh. I really don’t remember because it was so long ago.”
However, a persistent buyer’s agent can easily obtain my purchase price from the public records. Or, you might be surprised to learn your home seller inherited the property or received it as a gift so the seller might not know their cost basis for it.
8 – WHAT ARE THE DETAILS ON THE CURRENT MORTGAGE(S) AND CAN THE MORTGAGE(S) BE ASSUMED? There are two primary reasons for asking this question: (a) to learn the details such as the fixed or adjustable interest rate, monthly payment, and any balloon payment in the existing mortgage(s) to determine if a mortgage assumption might be advantageous, and (b) to determine how much equity room (difference between total encumbrances and the market value) the seller has to be flexible about price and terms.
If you discover the seller has very little equity, or no equity after paying a sales commission, that seller is probably inflexible and will be difficult with the negotiations.
If there is a small mortgage balance, or none, then that home might be a candidate for easy seller financing terms. Retiree sellers often need more retirement income and are frequently eager to accept your offer of perhaps 6% interest in today’s mortgage market with a fixed monthly payment because that is a higher yield than the seller can obtain on a savings account. It’s a good deal for you and for the seller.
However, if you discover the total mortgage financing exceeds the home’s current market value, that listing probably isn’t worth wasting your time. To illustrate, suppose the seller bought a house last year for $300,000 with a $300,000 no down payment mortgage. In real estate terms, that house is “upside down,” meaning there is no equity. After paying the sales commission, the seller will lose money out of pocket.
If you hear the words “short sale” that means the mortgage lender will be asked to accept less than the mortgage balance owed, thus avoiding probable foreclosure sale losses. Lenders want to be certain in a short sale that the seller walks away with nothing! As a smart buyer, unless you and your buyer’s agent somehow smell a bargain, or you absolutely must have that home, keep looking and don’t waste your time on a short sale which often fails.
9 – IS THIS A SOUND, WELL-LOCATED PROPERTY? Even in a buyer’s market, just because a home looks like a bargain, don’t be misled. If it is a “fixer upper” house offered at a highly-discounted price, that’s a good start.
But don’t let a low asking price dazzle you. Remember the basics of buying a sound, well-located property. If the property needs extensive repairs, has a bad foundation, or is in an undesirable location near a railroad track or noisy freeway, even in a buyer’s market, that’s no bargain.
10 – DOES THE PROPERTY HAVE “THE RIGHT THINGS WRONG?” If you are buying a fixer-upper house, make a list of the obvious repairs needed. The “right things wrong” means profitable cosmetic improvements which will add more market value than the work costs.
Profitable examples include paint (the most profitable improvement of all, often adding $10 of market value for each $1 spent), new light fixtures, new carpet and/or flooring, fresh landscaping, and basic cleaning and repairing.
The “wrong things wrong” are expensive but necessary repairs which won’t add any more market value than the cost. Examples include a new roof, foundation repairs, plumbing or electrical work, and moving or eliminating interior walls. Also, adding an extra bedroom or a family room usually won’t add any more market value than the work costs.
An exception to the rule, however, is adding a second bathroom to a one-bathroom house, especially if you can do so without adding to the square footage. To illustrate, I once added a second bathroom off the master bedroom of a rental house by combining a closet and a center hallway. The cost was about $7,500. When the house was appraised, I asked the appraiser how much that second bathroom added to the home’s market value. He replied “About $15,000.” Needless to say, that was both a profitable improvement and it increased the desirability of that house.
11 – WHAT PROBLEMS HAVE YOU HAD WITH THIS HOME? This open-ended question is intended to learn from the seller if there have been any serious problems with the home which, hopefully, have been corrected. To illustrate, if a buyer asks me that question I would reply that about 15 years ago the roof of my house started to leak so I had the roof replaced.
12 – WHAT DO YOU LIKE BEST AND LEAST ABOUT THIS HOME? This is another important open-ended question intended to get the seller talking, perhaps mentioning the barking dog or the noisy neighbor next door.
13 – WHAT IS THE QUALITY OF THE LOCAL PUBLIC SCHOOLS? Even if you don’t have children, this is a very important question because good schools increase home buyer demand, thus increasing market value appreciation. Poor quality public schools reduce buyer demand, thus hurting market value appreciation.
Your buyer’s agent should be able to answer this question, usually with the latest statistics comparing local public school systems. On the internet, a good place to check is www.SchoolMatch.com. They also have a website www.HouseAppreciation.com which claims to predict likely home market value appreciation based on the quality of local public schools.
14 – WHAT IS THE CRIME RATE IN THE VICINITY OF THIS HOME? This question can best be answered by home buyers paying a visit to the local police department. Also, if you are concerned about possible sex predators living in the neighborhood, the police department can assist you with information.
15 – BEFORE MAKING A PURCHASE OFFER, ASK YOURSELF “DOES THIS HOME HAVE ANY INCURABLE DEFECT I WILL REGRET?” Each buyer will answer this question differently. Perhaps you don’t like the floor plan. Maybe you don’t like the small front or back yard. Or the street might too busy or too noisy, especially if you have small children.
Incurable defects, called “economic obsolescence” by appraisers, hurt property values and resales in indirect ways. What bothers you might not be a concern to other buyers.
16 – WHAT PROFESSIONAL INSPECTION REPORTS HAVE BEEN OBTAINED FOR THIS HOME? This is a very important question. Smart home sellers now obtain pre-listing inspections which are customary for the locality, such as for termites, radon, building code compliance, and energy efficiency. In addition, many savvy sellers obtain a professional home inspection report and have any discovered problems corrected before putting the house on the market for sale.
Although wise home buyers obtain their own inspection reports just in case the seller’s inspectors overlooked something, it doesn’t hurt to ask about and look at the seller’s professional reports. For example, suppose a previous prospective buyer of the home obtained a professional inspection report which revealed a serious problem which the seller didn’t know about and, as a result, that first buyer cancelled the purchase. A dishonest seller might “forget” to reveal that problem and the previous inspection report to a subsequent buyer.
17 – HAS THE HOME SELLER COMPLETED A HOME SALE DEFECT DISCLOSURE STATEMENT? Virtually all states now have laws requiring home sellers and the real estate agents involved in the sale to fill out home sale defect disclosure statements. These forms vary in each state. Many listing Realtors ask their sellers to provide additional disclosures.
The purpose of these important forms is to prevent after-sale lawsuits against sellers and agents when buyers discover defects the seller “forgot” to disclose, such as a leaking roof, or a garage which floods during a heavy rain.
Smart buyers, before making their purchase offers, ask for copies of the seller’s disclosure forms. In many states, the listing agent and the buyer’s agent must also fill out a visual disclosure form just in case the seller overlooked a defect the agent noticed. However, neither sellers nor agents are expected to make heroic inspections, such as crawling around the attic or underneath a house.
18 – WHAT CONTINGENCY CLAUSES SHOULD BE INCLUDED IN THE PURCHASE OFFER? Your buyer’s agent can best answer this question because he or she knows local market conditions. At a bare minimum there should be contingency clauses for (a) the mortgage lender’s professional appraisal of the residence (unless the seller will be financing your purchase) and (b) the buyer’s approval of a professional inspection report.
If you have to sell your current residence to be able to afford to buy another home, you might include a contingency clause for the sale of your current home. In a buyer’s market, sellers are unlikely to reject an otherwise acceptable purchase offer containing such a contingency clause.
However, smart home sellers will insist on keeping their home listed for sale with a 48-hour contingency release clause so if another acceptable purchase offer materializes from another buyer, without such a contingency clause, the first buyer can then decide to either cancel the contingency clause or cancel the purchase of that home.
A good place to find a reputable professional home inspector is at the website of the American Society of Home Inspectors (ASHI) which is www.ashi.org. Or phone 1-800-743-2744 to locate a local ASHI member. The cost, paid by the buyer, is usually around $300. Be sure to accompany your ASHI inspector on the two or three hour inspection so you can get to know the home and discuss any defects discovered.
19 – WHAT IS THE BEST WAY TO MAKE A REASONABLE HOME PURCHASE OFFER? As a smart home buyer, a major reason for working with a savvy buyer’s agent is, before making your written purchase offer, the buyer’s agent should prepare a written CMA (comparative market analysis). This CMA form is the same one which the listing agent prepared for the seller to (hopefully) arrive at a reasonable asking price.
However, the buyer’s CMA will be more up-to-date, possibly prepared several months after the seller’s CMA. The buyer’s CMA will show recent sales prices of comparable nearby homes within the last few months (but never more than six months old), current asking prices of similar neighborhood homes, and the asking prices of recently expired competitive listings (usually overpriced).
As a savvy home buyer, you will probably have inspected many of these comparable listings. With the help of your buyer’s agent, you can then arrive at a reasonable purchase offer price for the home you want to purchase.
A good way to compare homes is to determine the average sales price per square foot for comparable quality construction and then use that dollar amount, such as $150 per square foot, when making your purchase offer. In addition to helping you, the buyer, arrive at a reasonable offer price, the CMA will be used by your buyer’s agent to show the home seller and the listing agent why your purchase offer is fair and should be accepted by the seller.
When making a purchase offer, remember the buyer can always raise the offer price but, after the seller accepts the offer, the offered price can’t be lowered. If the seller rejects your offer and fails to make a counteroffer, don’t be insulted.
However, in today’s buyer’s market for homes in most cities, home sellers should always make a counteroffer even if the buyer’s initial purchase offer seems very low – the reason is buyers are often few and far between so it won’t hurt to attempt to negotiate further.
Unless demand for the home you want to buy is especially keen, you might want to wait at least a few days and then make a slightly better purchase offer if your first offer wasn’t accepted. By then, the seller is probably thinking, “I really should have accepted that earlier offer or at least made a counteroffer.”
20 – KEEP YOUR PURCHASE OFFER SIMPLE. By necessity, a home purchase offer should contain contingency clauses for the lender’s appraisal of the residence, the buyer’s approval of a professional inspection report to be obtained by the buyer after the seller accepts the purchase offer, and possibly for the sale of the buyer’s previous residence.
Customary local contingency clauses might include the buyer’s approval of inspections such as for termites, radon, etc. If the inspections reveal unfavorable information, and if there was an appropriate contingency clause in the purchase offer, then the buyer can (a) reopen negotiations or (b) cancel the purchase and obtain a refund of the earnest money deposit.
Smart home buyers keep their purchase offers as simple as possible. The reason is “A confused mind usually says ‘no.’” If the home seller and the listing agent have trouble understanding a complicated purchase offer, it will probably be rejected.
CONCLUSION. A home buyer’s market is a great opportunity for buyers to purchase at a reasonable purchase price without excessive competition from other buyers. However, the smartest home buyers ask lots of questions before purchase to be certain they purchase a home at the right price which they will enjoy for many years. If you are considering a condominium for purchase, please consult my special report “The 10 Key Questions Condo Sellers Hope Buyers Don’t Ask” for special condominium purchase safeguards.
ENTIRE CONTENTS COPYRIGHT 2006 BY ROBERT J. BRUSS
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