Hi Dan,

Your blogsite is great; I stumbled on it and find you very credible and knowledgeable.

I have two questions for you, if you are looking for things to write about:

1) What are your views on the DELETED area? That market is so high, and I wonder if it will follow the pattern that San Diego sets for price adjustments in the market this year. I'm looking to relocate there from San Diego, so I've started researching that market. And I thought San Diego was expensive... the DELETED area is unreal.

2) As a law student, I've had five professors mention that it's a good idea to get a broker's license in order to represent ourselves as our own buyer's agent when buying our homes (if we can ever afford to with those huge students loans to pay off!). The upside is getting back the buyer's agent commission as a sort of "rebate." To support this, a couple of professors framed the issue as roughly: "most agents you would work with only have a high school degree and a few real estate courses under their belt... and could know nothing about property law. Do it yourself, control your own contract, save a lot of money." What do you think about attorneys who get real estate licenses to represent themselves, having lots of knowledge about legal issues and contracts, but no practical experience and training?

Have a great weekend!

In theory, it's a really great idea.

In practice, unless you're out there in the market all of the time, learning all of the tricks that get played or attempted, learning what the market is actually like, etcetera, you will fall into that group of persons known by the technical description "sucker."

Some lawyers apply for their broker's license and use it constantly. Those folks do fine. They know that being an agent is not just about that subset of lawyer functions that agents are allowed to perform, and if they learn about the rest of the business and keep their finger on the pulse, they are formidable.

Those who just use it to do their own occasional transactions, on the other hand... Let's just say I've had to explain to lawyers who took that kind of professorial advice exactly how they got "taken" more than once. Loans are also the same license, but there probably isn't enough money in the average loan to interest the kind of lawyer that does well in the real estate market, and what clue do they have who are likely to be the best lenders who give the best rate for a given client if they won't spend the time learning the loan market? Truth be told, they can make more money with the same time representing those who've been raked over the coals than they can working their own transactions.

The lawyers that the good agents know about and go to when there's a question or a problem? They strongly tend to use agents and brokers for their own transactions. My last broker did half a dozen transactions in the year I worked for him for one of the best regarded real estate lawyers in town.

Your professor appears to me to be making a "does not follow" error. By the logic of "not much education", he'd be fixing a car himself, rather than using a professional mechanic. Once upon a time I was a pretty fair amateur mechanic. I haven't done more than an oil change in twenty years. I know better. These days, mechanics have to know an awful lot - it's just not reflected by a diploma or advanced degree from prestigious institutes of higher learning. They can take courses, but they've got to learn most of their profession through practical application on the job. The situation with competent real estate agents is the same.

The real problem here is confusing general education and specific expertise.

A lot of people, many of them with advanced degrees, seem to think this translates into general competence in all areas of life. Not so. That degree means you've demonstrated expertise in that one field. You can have a doctorate in mathematics, law, or any other area, and still be a babe in the woods outside of that field. In order to be a good agent, you have to spend time constantly keeping up with the state of the market - there aren't any schools except experience for what a good agent needs to know. If you think a given property is worth less than it is, no transaction. If you think it's worth more, your client is wasting money.

It's true that some agents are just barely high school graduates. Others have MBAs. More important than level of education, more important than how much business they do, more important even than experience, is attitude. Just as important as attitude is market knowledge. And right up there with both of them is negotiating skill in the context of real estate. None of these three skills is certified by a law degree, passing the bar, or anything else in the way of formal schooling.

The result? Lawyers who work at real estate make formidable agents and brokers. Lawyers who get their broker's license because they think they're going to save themselves money by doing their own transaction are fooling themselves. The amounts at stake in real estate are large enough that items which are small differences relative to the size of the entire transaction are nonetheless, significant amounts of money. Getting paid all of a three percent cooperating broker's concession can end up costing you ten percent easily, if you don't understand the market or any of a dozen other things. And that is in addition to the costs of doing real estate (MLS access, agent keys, licensing fees, etcetera) and the economic costs of the other money you could be making if you were doing what you're really trained for. Making three percent of a $750,000 transaction sounds great at first glance: $22,500 in your pocket! But look at the other side of the equation: not knowing and understanding the market meant that you paid $60,000 too much in this particular instance (to use a recent example), and the week or two of billable hours, minimum, that you exchanged for that $22,500. It could be a lot more, since you're not using an agent to preview property, either. Not using an agent to preview also means you have a lot higher chance to miss reasons not to buy a particular property, and it could very well mean you end up with the wrong property for a trivially preventable reason. On the selling side, do you know what an appropriate price is for your property in the current market? Getting it wrong has severe consequences for your sales price, or whether you sell at all. Do you know how to market the property effectively in order to appeal to your target buyers? Do you know how to present it? Do you understand how these three major factors and a host of minor ones influence your attempts to sell the property?

When you look at the whole situation, the benefits from representing yourself in a real estate transaction don't look so hot, do they?

Caveat Emptor

Original article here

Dear Mr. Melson, I was wondering if you could offer some insight re: the other side of the equation: what to do *after* you've bought a vampire property.

We bought one, quite by accident, despite a house inspection by a certified inspector and an additional mechanical inspection. Turns out we had a huge lemon. It was a combination of inexperience and bad luck. Some things were hidden really well. The owners were drug addicts, and their agent spent $6000 making the place look nice (we learned this upon closing, when we saw that $6000 of the profit was being paid to the agent on top of her fee). For the things that were more obvious, we thought the costs of fixing them wouldn't be as bad as they were, and our inspector didn't do a very good job of explaining his findings and their implications. The mechanical inspection was a joke. Our agent didn't represent our interests very well. And we were stupid, too caught up in the process to understand the red flags. Despite some poor representation, we blame ourselves.

We're not going to pursue a lawsuit with deadbeats since collection notices for their accounts continue to come to our house. So I guess I'd like to hear a professional perspective on how to handle a house like ours. Yes, we're looking into more work and income, but we have some limitations in that arena. We can't be the only idiots! If you have any suggestions, I'm sure there are a lot of us who'd appreciate it.

This is why I emphasize the importance of education and prevention. I am once again embarrassed on behalf of my profession, and offer you loads of sympathy, but there is no way to make it not happen. Unfortunately, this kind of scenario is all too common. People get caught up in the emotion of the fact that they're Buying a House! That We Will Own! It will Be Our Very Own! and then, because they were so caught up in the emotions of the moment to really examine the situation, they ended up buying a Vampire Property that gets its fangs into your wallet and sucks it dry. Repeatedly.

Indeed, a very large proportion of my profession makes a habit of building those emotions specifically so that you won't examine the situation. Not so much that they're intentionally trying to mess with folks, just that they don't care. They want a fast, easy transaction that results in a commission check, and they just don't care very much what happens after that.

I encourage everyone who reads this site to test their Buyer's Agent for attitude. Anybody can point out nice things in a property. But the true test of the attitude you want your Buyer's Agent to have is "Are they willing to say bad things about a property?" If they don't volunteer downsides about pretty much every property they show you, you should fire them. You want a buyer's agent who works in your best interest, not one who is looking for an easy sale. You don't get easy sales by talking about downsides of property, but you do get clients who go in with their eyes open and are generally much happier down the line.

Properties that are real bargains are never perfect. Actually, there's no such thing as a perfect property. Even if it really is in perfect condition instead of a vampire, odds are overwhelming that it will be overpriced. That's why the current owners put all that work into it: They want some innocent suckers to come along and plonk down way too much money because the property is "Just soooo beautiful!"

Now, as to your situation. You're right not to sue the broke deadbeats - sue those alleged professionals who did not represent your interests despite being paid to do so. To wit, the inspector and your buyer's agent brokerage. Depending upon your state law, it may be that you even have a good shot at the listing agent and their brokerage. It's one thing if they honestly didn't know about the property's faults, but it's quite a different thing to spend $6000 hiding problems. That evidence is likely to put a good strong bit of presumption on your side. Talk to a lawyer.

Not an optimal solution, but the reason I'm so big on education before hand and preventative measures is that once it's done, there is no going back to the way things were before. A lawsuit takes a long time, and doesn't make it all better, but it may give you some of the wherewithal so that you can make it better yourselves. In the meantime, of course, you're miserable.

Now the neighborhood must have been attractive to you, and odds are that you can improve the situation with some work. It might not be wonderful, but you probably have a property you can live in while dealing with the problems as you get the time and money to do so. "Make the best of the situation" is a rotten thing to be telling someone who thought they were getting their dream home, but we're all adults in the real world here. It's going to take time and money and a lot of work and it isn't going to be pleasant, but you can almost certainly improve your situation if you make the effort.

For Buyer's agents, it really is all about attitude. I can teach newer agents everything I know about construction and negotiations and all that agent stuff a million times easier than I can teach attitude. It's about being willing to walk in and tell people "Don't buy this POS, let me find you something better," instead of trying to sell every property. That's the listing agents job. The Buyer's Agent's job is to debunk the Male Bovine Fecal Matter. It's about honest evaluation and compare and contrast the benefits and drawbacks of each property with those of similar properties, and working within the client's budget, instead of grabbing commission checks as fast as possible. Sure, I do it because I want to get paid, but when the transaction closes I want to be proud of myself, not want to take a long hot shower to get the slime off.

Preventative measures: If you know about an issue, don't take an agent's word, or an inspector's word, about what it's going to cost to fix. Get a contractor out there who's willing to give you a repair estimate during your contingency period at the latest. If someone who can fix it tells you how much they'll charge, that's better information than anything anyone else can give.

A good Buyer's Agent is not afraid to give you their best honest evaluation of the good and bad points of a property - not just for living in, but for resale when you eventually do. When I take prospects out hunting, most of them drop their jaws the first time I say something uncomplimentary about a property. How can you honestly represent someone's best interest if you won't tell them about the flaws you see? Nonetheless, many members of my profession won't. You want to avoid them, but you do need a buyer's agent whether you realize it or not. You can pretend otherwise, but it will cost you more than any possible savings.

You can sell properties by being honest about their flaws. It just takes a little more effort. And everyone except the owners of Vampire Properties are a hundred times better covered against "unhappily ever after" I don't make offers without informing my clients of every wart I see in a property. What happens if they find something else after it closes? They are going to know that it was something I had no clue about. They'll call and tell me, I'm certain, and I'll go look so as to increase my knowledge. But that will be the end of it as far as I'm concerned - they're not going to sue me. Even if they try, a good lawyer is going to tell them they're wasting their money. But they are going to know that I did my best to protect them, no matter what happens.

There is a move afoot to make being a real estate agent into being a transaction facilitator. Many agents, particularly at the big chains, are trained to make it clear that that's their job function. They are not inspectors, market evaluators, or anything else. But they simultaneously want to be paid an expert's commission. Not going to happen. If that's all you've got, disintermediation is going to eat your business for lunch. There's no reason why the same person who processes the loan can't do that for an extra $500 - as opposed to regular real estate commissions. The first question I ask discounters is why they should get paid as much as they do, because I can point to flat fee open listing services that work just as well for far less. But the average home buyer is not an expert, and is not financially equipped to undertake, or even to understand, the risk that the person at the beginning of this article was on the losing end of. The reason that I'm worth every penny of what I get paid is because I've taken the time to learn what is necessary to act as their expert, as well as coordinating the real specialists, and prevent this sort of problem before it happens.

After the above was written, I got a follow-up email:


Thanks so much for your response. I usually reply a little faster to emails, but I have a sick toddler and was in crisis mode for a couple of days. I do really appreciate your taking the time to write.

I'll talk to my husband about approaching a lawyer. I think he feels it's probably not worth the effort and money, and that given our situation, we should save what we have to fix the house. He might be correct, but we should talk to an attorney anyway.

I agree with you that it's about attitude. We asked our inspector and agent for their opinions on the house, and they both hedged. We asked because we didn't understand everything, and when we didn't get a real opinion from those folks, we tried to educate ourselves and get estimates. We didn't see the red flags, both with the house and with that type of situation.

It's a learning experience, albeit one that keeps us up at night. I'm looking for some resources/books on what to do when you're in a vampire — where to skimp or delay, where to put more effort and energy. Some of these decisions will be made for us, since things break pretty regularly. I'm also thinking of bringing in a realtor in a year or two to make suggestions (we might have to sell in 5 years) on what would make the place more appealing. If you think that's a terrible idea, I'd appreciate your thoughts.

I hope your article prevents others from making the mistakes we made. I tell everyone about what we've gone through. I know that people don't like to hear about negative things, but we want people to know that this can happen even when you think you've educated yourself & chosen good representation. In the days leading up to our closing, I had a really bad gut feeling, and I was talked out of it. People need to know that they should listen to their guts!

Not certain that it's always a good idea to listen to your gut. Allowing gut level, irrational fear to overcome reason is a recipe for disaster - or at least huddling in caves in the shadows of modern skyscrapers. But there's usually an unexamined aspect to the whole situation, that as soon as you do investigate, it becomes obvious that you were heading for the abyss, awaiting only that quintessential moment when Wile E. Coyote (Super Genius!) looks down. Since real estate transactions are so large, there are a lot of people out there hoping you don't notice the ACME logo, so that they can go their merry way with your money. Kind of like those old Medieval period maps that say, "Here be Dragons." You need a guide who, if they haven't been precisely there before, is at least a trained explorer. That's why you need someone who's determined to be the best advocate they can for you. I'll take a first time agent with the right attitude over a commission grabber with forty years of experience, every time. That newbie agent can get the guidance they need from veterans in the office. The commission grabber won't even try to spot the issues. In fact, many of them do their best to collude in covering them up, as you have unfortunately discovered.

Now, "Vampire Properties" is just a label I invented because it seemed particularly appropriate. I've never seen it used elsewhere, although it's likely that I have "independently re-invented the wheel", because it seems like such a logical, appropriate, memorable phrase in retrospect. And it's not for nothing that they say, "Experience is what you get when you didn't get what you wanted." Unfortunately, with a real estate transaction, the dollar amounts involved are large enough that this experience is more costly than just about anything else. Consider that your average automobile is maybe $20,000, and consider all the games that can be played to scam you out of a few hundred. Then multiply that by a factor of 25 for real estate. The reason why there are so many scams in real estate is because they're so profitable.

Caveat Emptor

Original article here

I realized that I hadn't covered timeshares, and decided it was time.

I suppose I should define what a timeshare is, just in case. A timeshare is a property where you buy the rights to use it for a certain amount of time every year. The most typical time share is a two week period.

Timeshares are attractive to developers because they can get more money for building the same property. You might have a high-rise full of condos where the market price might be $200,000 each. But they can sell each of twenty-six timeshares for maybe $20,000 each. Because it's not such a big bite, their potential market is far wider, and more people can afford them. People are willing to pay more for vacation lodging than regular housing. For this reason as well as continuing income, developers are in love with timeshares.

Developers also make money off of the financing, and off of the monthly dues for management expenses, which are analogous to association dues in a condominium association, paid to keep the maintenance up (and usually maid service, etcetera). Furthermore, since very few lenders want to finance timeshares, the interest rate can be (and usually is) outrageous, not to mention that you should be prepared for severe interest rate sticker shock if you're financing one somewhere outside the United States. The developer can gouge because most lenders won't touch timeshares, and it's not like the buyers are going to do any better elsewhere. Title insurance companies don't like timeshares either. A lot of them won't touch timeshares.

Developers love to tell potential buyers that timeshares are an investment, because they are real estate. The fact is that timeshares are like cars - there's a large initial hit on value, the instant the transaction is final. Nor do they tend to recover. There are at least two websites that specialize in helping you sell your timeshare, because most people figure out within a year or two that they've been taken. I don't deal with them any more than I can avoid, but I have never even heard of someone recovering their investment in a timeshare (except the developers).

Sometimes the time you buy is always the same two weeks in the same unit, but this can very. Quite a few have a yearly drawing among owners of a given unit for the most desirable time frames, and a few even put all units and all owners into the same pool. Read the individual sales contract carefully for how this is accomplished. If you have or draw a time that's unusable to you, most of the same places that will help you sell the timeshare in its entirety will also help you sell or trade your time slot for the year. Nor do folks generally get back their annual cost of the unit by selling their time slot, but buying one yearly time slot can be a good way to buy a vacation time slot cheap if you are prudent and plan ahead.

Furthermore, of course the timeshare is always in the same place. This is great if you want to return to Honolulu every single year, but not so great if you want to go a different place every year. Many developers tout swap programs, often to swap your slot in such desirable locales as Little America for one in Tahiti. Not likely to happen, or if it does, likely to require a good deal of cash outlay in the direction of the people who bought in Tahiti.

Additional issues are that maintenance can be problematical. Since no single owner is responsible for the complete upkeep of any given unit, let alone the entire complex, the management is often lax about repairs and preventative maintenance. After all, if they put that new roof off for a year they can just pocket the money. Where even condominium owners have to deal with any problems pretty much every day, timeshare owners are there for a couple of weeks per year.

All of this is not to say that there are no happy timeshare owners. If you are going to go to Las Vegas for two weeks every year and your schedule is flexible enough that you can go no matter what time slot you end up with, more power to you, and a timeshare might be the way to go. If you need to go during the summer months because that's when the kids are out of school, or if you don't necessarily want to go there every year, not so much. I've never owned one myself, but I understand some nasty fights break out among co-owners for time slots, as well. Most people think the idea of a timeshare in Phoenix is to go there in the winter and play golf while the rest of the country is freezing, not go from perfectly acceptable weather elsewhere on July 4th to a modern day version of the La Brea Tar Pits because the temperature is 125 degrees Fahrenheit where the asphalt melts and people sink in and get trapped.

Caveat Emptor

Original here


UPDATE: Got a question:


I'm guessing by your website that you are a realtor, but maybe you can provide me into some insight about the legalities of timeshares. My husband and I have one, and like most, are not satisfied. I am willing to cut my losses, but am curious about the legal consequences of not paying the monthly dues. Is this even an area you can guide me in? Any advice would be greatly appreciated!


It varies with the laws of the jurisdiction where the property sits, but in general, failure to pay dues is grounds for foreclosure under rules not too much different than those for trust deeds. Yes, it hurts your credit as well.

I don't endorse specific providers, but you might try running "timeshare broker websites" or something similar through the search engine of your choice. You probably won't break even, but it's worth some money to get out with a clean credit record.

This question brought someone to my site:


If my house is going into foreclosure but the house is also in probate, can the lender actually go forward with the foreclosure sale while the house is in probate?

The short answer is yes.

The Trust Deed (or Mortgage Note), that was signed by the now deceased whomever, gives a security interest in the property to that lender in exchange for money. The lender lived up to their end of the bargain. That security interest is valid until the loan is paid off. It is not removed by the death of the person that signed over the security interest.

Probate takes an absolute minimum of nine months. During this time, the court will likely allow those members of your family to continue to live there, but they will not likely approve disposition of the asset except in an emergency, and that emergency is going to cost your heirs money for the courts, and money for the disposition. On the other hand, the lender still needs to get paid according to the terms of the contract, and they are entitled to foreclose if the terms are not being met. I'm not a lawyer, but I've never heard of an estate being permitted to declare bankruptcy, which some living folks use to temporarily stave off foreclosure, almost always to their eventual major detriment. Since the executor is claiming that the estate cannot pay its bills and rarely are dead people earning any more money, declaring bankruptcy would seem like an open and shut case of "the creditors get all of the assets and your heirs get nothing." Probably not what anybody who's part of the situation wants.

There are simple steps possible to avoid probate for major assets. A trust is probably the most flexible of these, in that the trust owns the asset and the successor trustee takes over the management and within the limits of the trust, does what needs to be done without the courts getting involved. Flexible, much cheaper than getting a probate court involved, and your heirs get control right away. But it requires planning ahead (which many people are loath to do, being in denial about the idea of death) and an upfront investment.

Given the fact that there is a loan and a Trust Deed against the property, somebody is going to have to make those payments until the loan is paid off, whether by outright payoff, refinancing, or sale. Given that in the absence of a trust, your heirs probably are not going to have access to any liquid wealth you left either as it is also locked up in probate, the odds are that your heirs are either going to have to come up with the cash out of pocket, or the property is going to be foreclosed upon.

There are some good options. If your heirs are wealthy and have the cash, perhaps some one or combination of them will make the payments in the interim if it's been agreed they will be compensated later. Not likely, I'll admit, and they're likely to drive a bargain for larger eventual replacement. In some instances, the probate judge may agree to taking out a Home Equity Line Of Credit (HELOC) to make the payments, but somebody's going to have to be able to qualify to make the payments, and a dead person is not on the list of options, which means somebody still living is going to have to do it. The rates on these are typically horrendous, and cost a lot more than a little bit of planning.

Another excellent option is life insurance. Life insurance passes (usually) tax free on death outside of probate to a named beneficiary. Therefore, it's available pretty much right away to pay bills and stuff. It's also leveraged money, so a few dollars now buys more dollars when you need them. The difficulty is that you've got to have it beforehand. There's that planning thing rearing it's ugly head again, and the upfront investment of the premium dollars for the life insurance policy. Finally, any money created by this becomes the property of those beneficiaries, and there is no way to compel them to spend the money on bills of the estate. If the beneficiary is the estate, well, the money is locked up in probate again, and you've got to get the probate judge to agree with doing the necessary.

Another option is the named beneficiary Transfer on Death feature of most investment accounts. These also transfer outside of probate to named beneficiaries. Problem is, they require the investment of those dollars beforehand, and they also require that you keep the beneficiaries current, and all of this requires, once again, planning. The money also becomes the property of the beneficiaries, just like life insurance, and if there's no named beneficiary, it gets locked up in probate.

There is no free, no-planning-necessary, magic bullet. I strongly suspect it's all part of the various Lawyers Full Employment Acts, but we've all got to take the system as it exists. At the very least, you've got to do some planning ahead, and an upfront investment is probably going to return itself several times over. Remember, everyone is going to die sometime - I know of precisely zero exceptions thus far in the history of the world. Denial of this simple fact simply digs you in deeper, and puts your heirs in line to have to lose or waste a major portion of what you would have left covering for your deficiency, as is evidenced by the person who asked this question.

Caveat Emptor

Original article here

I went to a "direct from the providers" seminar on credit reports and credit scores.

Some of this information has changed from previous information, and some of it will change in the future. Credit Reporting, FICO scores, and related items are an evolving knowledge, as they figure out how to better predict future performance of potential borrowers.

A FICO score is nothing more or less than a prediction of the likelihood of a particular consumer having a 90 day late in the next 24 months. It is a snapshot, based upon your position and your balances as reported at the exact moment it was run.

I learned a bit more about the various other credit reports besides mortgage. They emphasize different things (naturally) and score differently. Auto scores go to 900, where mortgages range 300 to 850. Landlord tenant screens are different from a mortgage score. Revolving credit screens are different than mortgage screens. Finally, and most important, the "Consumer Screen" reports you get on yourself will always have a higher credit score than the ones mortgage providers run.

What makes up your credit score? Inquiries are 10 percent of your credit score. They only go back twelve months. Whereas I've been informed in the past that additional inquiries will get you zonked, that is not the case currently. Depending upon your length of credit history, after three to five "hard" inquiries in the last twelve months, they quit counting. A hard inquiry is done at your request for reasons of granting credit. Fewer is better. Longer history of credit means they will allow you more inquiries.

Multiple mortgage inquiries, if done within the correct time frames, still only count as one, no matter how many. Automobile inquiries also count differently than other inquiries.

Types of credit used is 10%. They're looking for a reasonable balance between types. The absolute worst type of account to have is from one of those zero interest finance companies. You know the ones, "Buy this sofa now and no payments and no interest for twelve months." People who are broke but need or want stuff now do this, and that's why the hit happens. They are deferring payment on something they can't really afford. You suffer guilt by association.

15 percent is length of credit history. How long you have had revolving accounts divided by the number of revolving accounts you have had. You have three cards that have all been going for thirty years, that's a better picture than five cards of which four are brand new. As far as the credit score is concerned, however, five years is as good as forever.

I've been telling people not to close open accounts. This is confirmed as not a good thing to do. Closing an open account can cause your credit to drop by as much as 80 points in some circumstances. If it doesn't cost you anything, don't close it.

Balances is thirty percent of your score. There are significant hits at fifty and seventy five percent of your credit limit on each card. Significantly, a small balance is a little bit better than zero, even. This is one reason you want to charge something you'd buy anyway to your credit card, just make sure you pay it off when the bill comes. Some credit cards (specifically charge cards in particular, not to mention any specific names of charge card companies where the balance is due in full every month) will report your high balance as being your limit, which can have the effect that you appear to the reporting agency as "maxed out" if you've charged something big. So make certain your credit limit is being accurately reported. If your balance is incorrectly reported, in general the only way to correct it quickly is with a letter from the provider, signed and on their letterhead, saying "Your balance as of (date)is $X"

Payment history is 35 percent of your score. This is divided into three categories: within the last 6 months, 7 to 23 months old, and 24 months or older. If you have had a delinquent credit reported within 6 months, you are getting the full impact in terms of lowering of credit score. Between 7 and 23 months is a lesser impact. Over 24 months is still less impact.

Important: DO NOT PAY OFF OLD COLLECTION ACCOUNTS! It can cause a 100 point drop in your score. Here's why. You owed $X to company A, and five years ago they sent it out for collection. Now you go back and pay it off, and the date it's marked with is TODAY. It's gone from being over two years old to being current as of now, bringing the full impact to bear once more. The one exception to this is a deletion letter. If you get a deletion letter on their letterhead signed by them saying "Please delete this account," you can make it vanish off your credit report as if it never was. Note that you may still have to pay off collection accounts, but do it as a part of escrow, where the loan is done before your credit is hit.

There are tools out there that can be used to analyze and tell you how to improve your score or how best to improve it with a given amount of money.

Bankruptcy: Three things determine what kind of credit score you'll have coming out of bankruptcy. 1) Percentage of trade lines you include in the bankruptcy. More is worse, lower is better. Including half your trade lines will not hurt you nearly so bad as including all your trade lines. 2) Number of inquiries. If you've still got one or two open lines you didn't include, you may not need more after discharge and you won't go apply for more. The poor schmuck who includes everything needs more to start a credit history, and is dinged HARD for each turndown inquiry. 3) Post bankruptcy payment history: if you included everything in the bankruptcy, you have no history until you get more credit. Can you say, "Vicious Circle," boys and girls? No payment history is even worse than a bad payment history, but any reports of delinquencies after bankruptcy hits you much harder than if you were never bankrupt and had a late.

Last individual points:

Rate on credit card does not affect FICO score.

Nor does salary, occupation, employment history, title, or employer, although time in line of work is a separate criterion for mortgage providers.

Credit Repair Services cost a lot of money for things you can do for free.

If you are disputing a medical collection (and only a medical collection) it doesn't count on your score.

Caveat Emptor

Original here

One of my favorite blogs ran a picture of a listing sign that included the caption "REDUCED But Not Stupid or Desperate". I beg to differ on the former. On the latter, time will tell.

Most successful real estate investors are really skilled desperation prospectors. They make their money when they buy the property - the actual sale only confirms the success they previously had.

Here's the really good part: Most of the folks they buy from did it to themselves, by letting irrational greed rule them.

For buyers, there are three parts to this game: Persistence, a good buyer's agent, and being willing to move on the the next if this one won't deal yet.

For sellers, there are three failures: Failure to consider your property's real position in the marketplace and price accordingly, failure to consider your resources, and failure to consider your fallback options ahead of time.

The fact is that most buyers shop for homes by the value to them. There may be an explicit budget involved or there may not, but most people have a decent idea of what they can afford. The smart ones shop by purchase price, the silly ones based upon payment. During the Era of Make Believe Loans, many got burned even worse than usual by that, but it's still around. The point of the matter is that if there's a house down the street priced at $350,000, while you want $400,000, you are going to have to convince someone who doesn't have any ego invested in the property that your property is worth the extra $50,000 to them. If they won't willingly pay the extra, you are doing nothing but wasting your time. If, on the other hand, you can get them to pay the $50,000 extra, you have won. But people don't shell out $50,000 extra for stuff that's only worth $10,000 to them. They go buy the other property, and spend $10,000 making it into what they want. This is different only in degree from the folks you see comparing different bottles of aspirin at the supermarket.

So if you're not offering something worth $50,000 extra to one particular set of buyers, you are wasting your time as long as there are any competing properties on the market - and there are always competing properties on the market. Even during 2003 when the average time on market locally got down to about three days, there were properties that spent months languishing, and never did sell. I don't think it's news to anyone that this situation has become more likely rather than less.

Now, if you've just been transferred and can't afford to keep this residence, or your loan has reset and you can't keep making the payments, or any number of other situations, you have a deadline for action. Not only that, but your backup or alternative plans are the pits. It is critical to understand that if you need to sell in this situation, all of your hopes for getting a good price hinge on the first few days on the market. If it's priced appropriately and you don't make it too difficult to view, it'll draw visitors. If if is properly and attractively maintained and presented, especially vis a vis the competition, it will get offers, and probably good ones. If any one of these four conditions fail in the current market, the property will sit unsold. Once it's got thirty days or more on the market, buyers become decidedly less interested in the property. Most of them won't even look at it on-line. The only way to get that interest back is to lower the price - and I mean significantly lower than it needed to be in the first place. The feeling on the part of most buyers is that "there has to be something wrong with it" Most people trust the collective wisdom of the market perhaps a little too much, because it ain't necessarily so, but you can't tell them that. They're not listening to you. They aren't listening to me, either, and there's nothing I can do that will change that, except for individual buyers whose trust I have earned, on individual properties. Instead of trying to change what you can't, change what you can. Most people don't want to, but that's the difference between success and failure - overcoming that reluctance. Yes, it means you agree to hope for less money, or you agree to spend money you were hoping you wouldn't, but those hopes were illusory from the first, like a short fat kid with no ball handling skills who hopes to play in the NBA. One thing I can absolutely, positively guarantee you is that prospective buyers don't care what you need to get to make a profit, or what you'd "like to get" for a property. If they did, I'd tell everyone I'd "like" to get two million dollars for that one bedroom condo in the 'Hood sandwiched between the methadone clinic and the Pawn Shop. They care about how the property and the asking price compare to the competing properties.

It is critical to understand a property niche before you put it on the market. What are the competing properties? What do they have that yours doesn't? What does yours have that they don't? Where do you fall on the pricing scale? One of the critical functions of a good listing agent is to critique your property soundly and fairly, and if you choose the agent who says only things that make you happy, expect to pay for that happiness with ten times the misery later, not to mention much less money and significantly greater expenses. The biggest red flag I know for a failed listing is an easy listing discussion. Mind you, you shouldn't end up mud-wrestling in the street and kicking and punching each other through walls, either, but if your agent isn't willing to argue with you and point out property deficiencies, and overcome your objections, how are they going to overcome the objections of the buyers and their agents?

On the buyers side, the best way to successfully mine desperation is to zig when everyone else is zagging. Unattractive presentation? I'm there. On the market for six months or serially listed? I want to see that property! Viewing restrictions difficult enough to make the most exclusive nightclub ashamed? I will figure a way to see it. Obviously overpriced? No obstacle. Why? Because each and every one of these properties is making themselves unattractive to everyone else. Some of them will lose the property to foreclosure before they do something smart, but others will deal with me and my desperation mining clients. But nobody else is going to make an offer, so barring foreclosure, eventually they'll deal with me and my clients or someone else doing the same thing.

You do need an eye for property if you're going to do this, something a good agent will help you with. There are more Money Pits than potential winners out there. Vampire properties that will suck your wallet dry without returning a profit. Neighborhoods where the surrounding properties won't support the price level you need to make a profit. I know I said that buyers don't care what sellers need - but at this point you're a buyer. If you know ahead of time that you're going to spend $40,000 by the time you're done fixing it, and the neighborhood won't support the acquisition price plus costs of selling plus $40,000 plus your profit margin, that is not the property you are looking for.

There's a very old saying, "Before you find your prince, you've gotta kiss a lot of frogs." Nowhere does this apply more strongly than desperation mining. You've got to deal with something more far more unpredictable than the Heisenberg Uncertainty Principle: whether this particular seller has had the epiphany that this is about the best offer they're going to get yet. A good buyer's agent can do quite a bit to cause that epiphany, but if the listing agent is stuck in the Land of Happy Thoughts, it becomes decidedly unlikely to work. I don't have much mercy on the subject of enlightening them; they willingly did whatever it was to their client and cost that client at least tens of thousands of dollars. What's a little professional discomfort as compared to that? The ones who learn from the experience become better agents (one actually called just to thank me a while back), the ones who don't, I'm not likely to encounter very often. To be fair, I was this sort of agent once. Briefly.

But the point is that the hit ratio on these offers is not anything like the ratio on the more standard buyers who are looking for the beautiful, fresh on the market property. Famous desperation mining advice: "Some will. Some won't. So what?" There's always a fresh desperation assay to perform on another property half a mile away. There are always property owners who put themselves into the position of having no better option than to accept your offer. Whether they actually will or not right now is uncertain. Eventually, most of them will accept someone's offer and the ones that don't will wish they had. I don't resent it when they accept someone else's offer later. My clients benefit just as often from someone else's set up offer, and everybody has their limits on the number of properties they can handle and the money they have available. The supply of such properties is always being refreshed by wishful thinking and bad agents who cater to it.

How can sellers avoid this? By understanding their property and where it falls in the market, and pricing it accordingly. This number has to be modified for showing restrictions, presentation, and many other factors, almost all of which have a negative influence. The listing discussion you have with prospective agents should not be easy - that's a sign of an agent who's just telling you whatever they think you want to hear. There should be some arguments, perhaps even heated discussion, as to what is appropriate and obtainable by comparison with the competition, but trying to get more is much worse than drawing to an inside straight. You can hope for that winning card in defiance of all rationality, but if you lose that bet - and just about everybody loses it - you're setting yourself up for a far worse situation than you really can get if you act correctly in the first place. Overpricing the property is not a "no lose" event - it's a situation where a very few win an extra $10,000 or so, while the overwhelming majority lose several times that amount. Planning ahead and knowing your time-line, and being up front about it with your prospective listing agent, will also save your backside. If you can only make three more payments, or if it's already in or close to default, you need to price accordingly. Nothing happens instantly in real estate. If you need it sold inside of ninety days, with the loan times they way they are thanks to new regulation, you need a solid fully negotiated contract in under thirty days. You're most likely to get the best offer within the first thirty days anyway, if not the first week or so. Wasting your first couple of weeks or months overpriced because you "want to get more than that" is the best way I know of to end up with much less by putting yourself squarely in the crosshairs of desperation miners, because nobody else is interested in your property.

Caveat Emptor

Original article here


This is something that many folks don't understand about the loan market.

The labels "conforming", "jumbo" or, more accurately, "non-conforming" and "temporary conforming" only apply to so-called "A paper" loans, largely underwritten through Fannie Mae and Freddie Mac standards. The reasons for the labels are that they "conform" to Fannie and Freddie's requirements in all particulars, or that they conform in all respects except loan amount. But Loan to Value ratio, Debt to Income ratio, Time in Line of Work and everything else are according to the standards set down by Fannie and Freddie.

Government loans, VA and FHA, do not have conforming and Jumbo amounts. In the case of the VA loan, it's my understanding that they no longer have an explicit legal limit at all - just a limit on what lenders are willing to do given the limited nature of the guarantee. In the case of the FHA, there is a dollar limit, and it's usually even the same dollar limit at the upper bound as the temporary conforming limit. But to treat this as anything but a coincidence that saves brainwork on the part of the Department of Housing and Urban Development would be incorrect. In point of fact, the "regular" FHA limit is different from the conforming limit. Fannie and Freddie are now part of the government, but it's a different part than the FHA.

Subprime loans have none of this; only pricing and policy breakpoints, usually around $500,000, set by individual lenders.

So why is this such a big deal? You ask. Very simply, conforming loans get the best
tradeoff between rate and cost - what laymen think of as the best rates. It's an ambition worth having to have a conforming loan as opposed to anything else. The relationship between everything else varies over time, but you can expect sub-prime to have the highest rate/cost tradeoffs, while whether government beats non-conforming is time dependent. For about the past 18 months, government has been better, but back in 2003 for instance, non-conforming rates were generally lower than government - one more reason why government loans lost favor for several years. Conforming loans are also consistently available, and the government doesn't get involved. This was kind of a big deal several years ago when it could take four months for the government to process the paperwork needed for their loans. If I was told somebody wanted to buy my property with a government loan, there was quite a while there where I would have preferred another buyer.

Loans underwritten through Fannie and Freddie are also the most common sorts of loans out there, and they had the effect of standardizing the A paper market a couple decades back. When it was every lender for themselves, the standards varied by quite a bit. When they all want to sell to Fannie and Freddie, they all started using Fannie and Freddie's standards. Doing so meant they could loan the same money out several times per year, getting an origination bonus each time, rather than loan out the money and then only as it was repaid could they book the income. They could make far more money originating the loan and selling it to Fannie and Freddie than they could by actually holding it in their own portfolio. So-called "portfolio loans" still exist - large amounts of non-conforming loans end up being portfolio loans, which is one reason why they carry higher rates. When there's a ready, standardized secondary market for loan notes, and lenders can "turn" the money several times per year, they're willing to do the loans for less, which is a win for everybody.

Caveat Emptor

Original article here

Second Trust Deeds are something few real estate loan officers really understand well, mostly because the good ones don't make much money on them. Predatory lending laws in most states, limiting total compensation and total expenses to a given percentage of the loan amount, mean that brokers usually can't make enough to pay their expenses unless there's a first trust deed involved as well. Direct lenders can, because neither the premium they receive on the secondary market nor the interest rate is usually restricted. As a result, many direct lenders can get away with highly inflated rates on second mortgages. Most of the people who approach them won't know any better. I've lost count of the number of fourteen and sixteen percent rates I've seen, when eleven is a rotten rate for a sub-prime borrower. But if you will shop around, second mortgages can be found at surprisingly low rates and surprisingly low cost. If you've got decent credit and a verifiable source of income, fixed rate Home Equity Loans can be had under 8%, and variable rate Home Equity Lines of Credit can be found for 8 to 8.25%. Even sub-prime borrowers can usually find something around 11% if they'll look a little bit.

Second (and Third) Mortgages come in two basic flavors. If you get the proceeds all at once, they are typically fixed rate Home Equity Loans. These are essentially traditional loans. There are also Home Equity Lines of Credit, where you are approved for up to a certain amount, and you can take distributions any time during a draw period that varies from five to ten years in length. These work more like credit cards, albeit secured by real estate so you do get better rates. You pay interest only on the the outstanding balance at any given time. If you pay it down during the draw period, you can then take it out again.

Once upon a time, both products typically had all of the closing costs that first mortgages did. In the last few years, this has changed, largely driven by competition from credit unions, and I always suspected that second mortgages was why the banking industry was lobbying for restricting credit union membership a few years ago.

There are also two styles of obtaining a second mortgage. "Stand Alone" Second Trust Deeds are done on their own; when they are done in conjunction with a First Trust Deed, they are called "Piggyback" loans. With their popularization as a way of avoiding Private Mortgage Insurance (PMI) on low down payment purchases, pretty much every lender in my database does piggyback seconds. However, only about half will do stand alone seconds. With the regulations the way they are, even the higher interest rates are not attractive enough to get them to do the loan, because it takes basically the same amount of work.

Because "piggybacks" are done in conjunction with first mortgages, everybody wants them and everybody does them. Additional lender charges can be small to non-existent. They benefit from having the first done at the same time, and since all that work has already been done for the first, the additional work is kind of minimal. Whether they're a broker or direct lender, they make enough on the first that they don't have to charge as much for a second.

Good "stand alones" are harder to find. For instance, here in California, predatory lending laws limit both total broker compensation and total costs of the loan to six percent, but it still costs about $3500 to do the loan unless the lender relaxes one or more of the traditional requirements. For brokers, this means that they can't pay for it via a higher rate to the consumer, either. If the loan is $50,000, $3500 is seven percent of the loan amount. If brokers try to make it up via yield spread, Section 32 of the Real Estate Code limiting total broker compensation to six percent kicks in, and they cannot do it because real costs exceed what they are legally allowed to make. Note that this limitation does not apply to direct lenders, as their eventual premium on the secondary market is not regulated, and the amount of interest they receive if they hold the note is only subject to very weak governance rules. Upshot: Stand alone second mortgages, unlike first mortgages, are a very hard area for brokers to compete well in. I've got a couple internet based lenders for higher loan amounts (about $75,000 and up), but for smaller loans than that I will usually tell folks straight up that credit unions are likely to give a better deal than I can. For first mortgages, or firsts with piggyback seconds, that situation is reversed.

In some certain situations, due to the low cost of doing second mortgages, I can actually get a client a better loan by doing a purchase money loan under a program traditionally associated with stand alone second trust deeds. With some credit unions and major lenders offering them at 8% or even under, and up to $500,000 with minimal paperwork requirements and low to zero closing costs to the client, it can be a good way to get someone who cannot qualify full documentation anyway enough money a loan for a low end property, particularly if they are making a substantial down payment. If you're buying a $150,000 condo, avoiding the $3500 to $4000 for closing costs associated with a first mortgage can cut your effective interest rate for a loan you keep two to three years by about one percent.

One final note for this update: Right now second mortgages are only going up to about ninety percent loan to value ratio, period. Absolutely nobody is doing them for situations with less than 10% equity. I was saying until recently that the only way to get a loan with less than ten percent down payment was a single loan with PMI, but even first mortgages above 90% of value are rare, not subject to much competition right now, and even so they will not go above 95% of value, leaving government guaranteed loans (VA and FHA) as the only way to reliably get low down payment loans. Many municipalities also have first time buyer assistance that takes the form of a second trust deed, but the budget for those programs is notoriously limited.

Caveat Emptor

Original article here

One of the things I see all the time is notations made on the listing that demotivate buyers agents, or give them a reason not to show the property. This practice has had a drastic fall off for a while, with listing agents and brokerages desperate to sell after nine months on the market, but it came back with a vengeance more recently, and it's never in the client's best interest to restrict the field, or to give other agents a reason not to show your property, but that doesn't stop some listing agents from doing it, particularly in hot markets or particularly desirable neighborhoods.

"Seller to select all services." Well, duh, if they're paying for them, which they are in the case of owner's title insurance, and half for escrow. But my client is paying for lender's title and the other half of the escrow, and to say it's not even on the table for discussion is not only a violation of RESPA, but it tells me that the listing agent or brokerage likely has their hands out behind their backs, and that's a transaction I'd prefer to avoid. Either that, or they want to steer revenue to an escrow company in which the brokerage has an interest. Escrow officers with "captive" brokerage clients have a very high percentage of cluelessness, and their motivations to give top notch service aren't exactly stellar, either. Furthermore, in such cases my client is likely going to end up paying sub-escrow fees due to splitting the title and escrow, and if that's not the most useless waste of money in the business it's darned close. Suppose my client gets cheap rates for title or escrow, or free? Suppose I've got a contract with a different company for cheaper rates? Suppose I simply know of a company that gives better rates for the same product and still has top notch providers? If you're not willing to discuss it with my client and I, there are most likely some issues going on, and unless the seller gets reduced rates or free escrow and title, something that is far more rare than the notation, there is no reason for this notation. A major variant on this is "Title and Escrow already open." This makes me ask "Why?", and the only answer I can see is that they are trying to preempt the choice. The vast majority of buyers need loans, and the title and escrow are going to be ready long before the loan. Yes, the seller could already have filled out a statement of information with them, but that's not important to my clients.

"Buyer must be prequalified" or "Buyer must be preapproved." Neither one of these means anything real. They are both garbage requests. Not too long ago, minimum wage earners could be "pre-qualified" for million dollar properties. Even "pre-approval", which is supposed to be stronger, suffers a very high fall off rate when they actually have a purchase contract. In theory, pre-qualification means that you should be able to afford the payments on the type of loan you pre-qualified for, and pre-approval should mean that the application will be approved as soon as the blanks for the specific property are filled in. In neither case is what's really being done by most loan providers even vaguely in line with the billing. In many cases, the buyers have a hidden issue that has not yet come out, but with several hundred thousand dollars on the line, you can bet that the lender will find out about it before the loan actually funds. In a large number of cases, it may look like they might be able to qualify, but their loan officer wants to make a little too much money.

These days, with lenders being far more careful who they lend money to, it's even worse than that. At the minimum, until I have a loan commitment with conditions I know I can meet, every transaction is in jeopardy. Very qualified people are having difficulty getting their loans actually funded, and until you get pretty deep into the actual loan, there really isn't any way to know. Some buyers look beautiful as far the numbers go, but there's something lurking in the background that is going to mean no lender will approve them until the bond market paranoia dies down a bit.

(That paranoia will die down. But I don't know how long it's going to take. and the Federal Reserve isn't helping matters.)

Neither one of these makes difference to the purchase offer I write. No buyers agent wastes their time working with people that they do not believe will qualify for the required loan. Once I've got a credit report, income information and a liabilities statement, I ask if there's anything else that's going to show up, and ask about any changes or bumps in their career situation within the last two years. It used to be that providing a good loan officer gets the whole truth at that stage of the game, the loan should have gone through. That has now changed in a small percentage of cases but it's not smart to give that percentage too much weight as it is completely unpredictable.

I still do the due diligence when I'm on the listing side, I just know that there's a certain percentage that are going to fall through no matter what preliminary investigation I do. I've learned the hard way never to trust a prequalification or preapproval that I didn't do, and when I'm on the listing side, I have a form I require to be filled out by their loan officer and signed under penalty of perjury. I want to be certain I get enough information to be certain I could or could not do the loan in the absence of bond market paranoia striking it down. The alternative is to be very hard nosed about the deposit in negotiations - the information is easier and has less of a dampening effect upon negotiations. If I could get the loan done based upon the information, we've got a live one. If my listing clients gets the deposit if it falls out, they come out okay. But neither prequalification or pre-approval means anything real unless it's done by a loan officer with realistic expectations and the right attitude, something a listing agent has no real way of knowing. Indeed, the request for pre-approval or pre-qualification tells me it's a lazy listing agent who doesn't understand how to separate the wheat from the chaff, or is unwilling to do so. They're just filling in a little check box to perform CYA manouevers ("It's not my fault the transaction fell apart! We had a pre-qualification!").

"Must be prequalified/preapproved with lender X": This isn't a demand I'll even consider giving in to. Indeed, under RESPA, it's illegal.

From the text of RESPA:

Business referrals No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

Thou shalt not require the other party to use your lender, and even requiring a qualification with a particular lender is giving that lender a "business relationship" i.e. a thing of value. Even as a buyer's agent, I would never consider requiring a client to use me for the loan. Carrots only, never sticks. You are giving that lender something of value - a business relationship with the client. They can use this for targeted solicitation, sell the person's information to third parties, etcetera. Anybody want to argue that's not a thing of value?

In most of the cases, the lender specified is one that I wouldn't wish on my worst enemy. Especially not if I want the transaction to close on time. High margin providers who promise something great to get people to sign up and then show up with something completely different at closing. Agents: What do you think happens to your reputation with other agents when this happens?

In a significant number of these cases, the agent has their hand out behind their client's back. Whether it's explicit compensation or just wanting to put the buyer in a situation where they're using a lender that's indebted to that particular agent, and they refer clients back and forth. "I want the listing when this buyer goes to sell, so I'll send all the buyers to the loan officer who will refer them back to me." Agents and Loan officers go to seminars devoted to the idea of cutting out the competition, so they don't have to compete at all. It's not in your best interest to allow them to do so.

Some of them will follow the requirement they are trying to impose about being pre-approved with lender X with "Ok to use own lenders for the transaction." As if that lender doesn't have all my client's personal information. From my first week in the business, I was smarter than that. Of course, my brokers told me about the experiences of other loan officers: Their client was bombarded with multiple calls per day from that loan provider, and when the client tells them never to call again, they sell the client's information to dozens of other loan providers, and so the bombardment gets worse. A prequalification certainly counts as a "business relationship," and it's amazing how often "opt outs" aren't even offered until thirty to sixty days later. So as I said, the smart thing to do is ignore the request. "Here's an offer, take it to your client like you are legally required to do. Here's the qualification information. Ask your favorite loan provider if this is likely to fly". Many agents won't even honor that, but those agents will get caught eventually. I can understand that they want a certain transaction, but there is no such thing. If they're going to serve their clients, they should know something better to ask for in negotiations. It is illegal, no matter how they rationalize it.

Finally, it's often a way for listing agents who want both halves of the commission to discourage other agents from showing the property. If I see a demand that a client be prequalified with a particular lender, I'm either going to ignore it completely or not suggest that property to my clients. Perhaps I'll even show them the listing (usually on paper), and tell them why they should stay away or make a really low-ball offer because of how much of a pain the listing agent is trying to be. It all depends upon how good a deal I think the property might be, and whether I think the agent is desperate enough to be reasonable yet. But as a buyer's agent, I don't have a responsibility to any given seller - the listing agent does. Furthermore, neighbors talk. If George down the street gets twenty showings and four offers on a less attractive property than this agent's client, who gets only two showings and no offers (or nothing but low-balls), that listing client is probably going to ask their agent some hard questions. What comes around, goes around.

Caveat Emptor

Original Article here

Just got a search on "state of california fsbo questions to work directly with loan officers without a agent"

This isn't a problem. Whereas it is the same license, it is two entirely separate job functions and the government is in the process of instituting a separate license requirement for loan officers. I am one of the maybe 20% of licensees who does both, and I have no problems separating the job functions. The fact that you are or are not working with an agent has absolutely nothing to do with whether you can get a loan. In fact, if you're the seller, it's really no business of yours who the buyer gets a loan with, or where, or even whether they get a loan or pay cash. So long as you get your money, it's all the same. In fact, it is illegal under federal law for the seller or anyone else to require that the buyer obtain their loan through any particular provider. So just know that it's not a factor and keep your nose out of the buyer's business.

This also is not to say that some folks who do both might not attempt to trick or pressure you into signing an agency agreement. The way to deal with that is to contact your state Department of Real Estate (here's California's). In California, they do investigate all complaints thoroughly, even if the complainer later changes their mind.

This is not to say you should be looking for real estate agent responsibilities from someone acting solely as your loan officer. This happens quite a bit; If they're not getting an agent's commission, you should not ask them to do an agent's work or assume an agent's responsibility. Asking you to sign a form that says they are acting purely as a loan officer and are not responsible for anything except the loan is reasonable. Loan officer legal responsibility is minimal to non-existent anyway; it's one of the reasons the loan business is so messed up and out of control. But asking a loan officer to do both jobs for the pay of the lesser is unacceptable. You don't do extra work for free, you don't assume extra responsibility for free. Why should you expect someone else to do so?

In California, we changed the law a couple of years ago so that in certain circumstances where the firm is licensed with the Department of Corporations, the loan officers do not have to be individually licensed. I've seen a lot of abuses out of such situations; the loan officer who isn't individually licensed isn't risking their individual ability to work in the profession, no matter how egregious the violation. Indeed, many firms licensed with the Department of Corporations instead of the Department of Real Estate have made a point of recruiting people new to the profession who don't know any better, and no one will tell them until they go work for a company with better practices, which most of them never do. These folks also don't know how much the company makes per loan, so they don't have to pay them as much. Best of all possible worlds from the company's view!

I am not saying that doing without an agent is intelligent. In fact, unless you're a practicing agent yourself, it's one of the dumber ways to shoot yourself in the foot. It's just that there's no legal requirement to have an agent.

But so long as you only ask a loan officer to do the loan officer's job, there should be no problem with doing a loan on a For Sale By Owner property. After all, you don't need a real estate agent to refinance, do you?

Caveat Emptor

Original article here

This was originally from February 2007. The situation as to what loans are available has changed quite a bit since then, but the underlying advice is and will remain sound.

Shortly after the original article, things started downhill for lenders very quickly, something I'd been predicting since before I started this website, and about as difficult to predict as gravity. This was when most would-be Wile E. Coyotes looked down, but I'd seen it coming, it was only a matter of time. The lending market having the effect it does upon the real estate market, this had the effect of removing the veneer of believability even for the gullible.

On the other hand, that was then, this is now. The one constant about the real estate market is that it changes - and it usually takes a while for people to catch on because people, especially people who aren't in the industry, think what has happened recently will continue.

Hello Mr. Melson, Let me start off by saying that I am a big fan of your "Searchlight Crusade" website. I happened upon it a while back after I had already purchased my house. I've found a lot of useful information and I try to refer my friends and family to your site when they ask me home-buying/mortgage questions.

I am emailing you because I am considering a refinance. Just a little background info: I purchased a 3bedroom/2bath 1183 sq ft home in DELETED for $323,000 in Nov 2004. I am a DELETED with a credit score of 801. My wife is a part time DELETED with a credit score of 814.

I put no money down. I have my mortgage split into two loans (80/20). My first mortgage is $259K interest only with a rate of 5.375 fixed for 5 years with a payment of $1157.42. My second loan is about $64K HELOC interest only with what seems to be a monthly adjustable rate with my payments now close to $600. Both loans do not have a prepayment penalty. I've only been paying the interest every month. We plan to stay in the home for at least another three years (we are from out of state and might move back there when my son goes to high school - he's currently in the 5th grade). There is a possibility we might stay in DELETED at which point we're likely to stay in the house.

I was thinking about refinancing my HELOC so that the rate would be fixed. I spoke with my lender and I was offered a 15 yr loan with a fixed rate of 7.5% with a payment "around $600" with a prepayment penalty before 5 years.

Based on recent sales, my house is worth about $350K. Because of this I was told I could not refinance both loans into one.

Do you think it would be worth it to refinance. If so, what type of loan should I do? Or should I figure out if I'm staying in DELETED or moving back?

Any advice would be greatly appreciated.

I would love to give you my business if you know of anything that will work in my situation.


My first reaction was that there is no way anyone should accept a HELOC with a five year pre-payment penalty such as described.

You are going to need to refinance your first in November 2009 if not sooner. When that happens, there are going to be issues with subordination which are likely to cause you to want to pay your new second off, especially as the lender you mention has a policy of no subordinations.

This is an excellent question. Truthfully, an 8.00 or 8.25 percent Home Equity Loan (usually 30 year amortization, with the balance due at the end of 15 years in a balloon payment) will likely do better for you. Now my calculator says that a 30 due in 15 at 7.5 will have a fully amortized payment of $447.50, while a 15 year payoff is $593.29. Don't accept approximate payments, even as a quote - exact numbers tell you far too much about what's really going on. Also, you are and should remain at or below 95% Comprehensive Loan to Value (CLTV), which makes a difference on rate.

Some seconds have smaller penalties, so that may modify the answer. For instance, one lender I do a fair amount of business with has a very low closing cost second with a $500 prepayment penalty, in effect for three years. The cost to buy it off? $500. Either one of these, combined with the costs they assume, is still far less than the closing costs of most comparable loans. However, the standard prepayment penalty would be 80% of six months interest, or about $1920. Assuming you refinance in exactly three years, that boosts your effective rate by one full percent.

Now I'm happy to do whatever "stand alone" seconds come my way, a "stand alone" second trust deed being one where the primary mortgage is not being refinanced at the same time, as opposed to a "piggyback" where there is both a first and a second trust deed. However, the truth is that the best source for "stand alone" second mortgages is usually a credit union. I've got a couple of internet based lenders that are very competitive for high dollar value seconds, but for stand alone seconds below $75,000, credit unions rule. It was more cost effective to do our second with my wife's credit union than to do it myself. Just has to do with the mechanics of how brokers and correspondents are set up and the way that most second trust deed lenders work.

Now you do have to be able to make those payments. But what you should really be paying attention to is the total cost of the money. How much in closing costs you have to pay to get the loan done, plus how much the loan is going to cost you in interest every month. It was only a couple of years ago that most traditional lenders would charge the same closing costs for a stand alone second that they would for a primary mortgage. For a $64,000 second, that $3500 in closing costs is almost 5.5% before you get to the actual interest charge - the equivalent of a 1.8% surcharge to the rate, assuming you kept it three years. You're better off taking a 9.5% rate that carries no closing costs than you are with an 8% rate that carries traditional ones, and that's not even considering the fact that you still owe most, if not all of that extra $3500, when you go to sell your house or refinance.

The situation, luckily for borrowers, has changed. Many lenders have very low cost stand-alone second trust deed programs, whether you are looking for a fixed rate home equity loan (HEL) or a flexible Home Equity Line of Credit (HELOC). The rates are higher than first trust deed loans, but the requirements are lower. Because the rates are higher, lenders are competing for these loans, with credit unions leading the charge. If there's a first mortgage involved, things are different. Most credit unions don't really have the resources to handle first trust deeds, with dollar values having appreciated the way they have. So they partner with major commercial banks, becoming essentially dedicated brokers for first mortgages, while competing ever harder for second mortgages in their own right. Nonetheless, because lenders want second trust deed loans, the result of their competing with each other has been a drastic drop in closing costs for second trust deeds over the past few years.

Caveat Emptor

Original article here

Dear Mr. Melson,

If you sign two or more non-exclusive buyer's agent agreements in your search for a home to buy, how do you avoid putting yourself at risk for a procuring cause situation from either agent, or even the seller?

Thank you,

A Fan

The first thing I've got to say here is that I am not a lawyer, so for specific legal advice for your state and your situation, consult one. That said, here's a broad brush picture of what I've been given to understand.

I am a big fan of the non-exclusive buyers agency contract. Consumers give someone a chance to get the job done, and the agents concerned have only themselves to blame if they can't. Nor does it tie consumers to one particular agent. There's no way of telling if any particular agent is any good until they've shown you some property. They could be a bozo, they could be a commission grabber, they could have any number of potential problems with a buyer's agent. Consumers who limit themselves to non-exclusive contracts can have any number of agents they want working for them, as any counting number is possible. Finally, they can fire a bad agent simply by not working with them any more. The only thing you possibly give up is the ability to buy houses they introduced you to, and if you liked any of them, you would have made offers already. Nor is even that an absolute prohibition, as we will see a little later on.

The simplest way to deal with this is to tell whomever you're working with if you've seen a property before. You tell the agent you're with before they take you out there that they're not the procuring cause. I give every client a full list of what I'm planning to show them at the start of every hunting trip - and you should insist on this anyway, for this and many other reasons. I want my clients to have ready made paper for taking notes and writing down questions they may have and answers they get, even if that answer is, "I don't know yet but I will find out." If the clients don't want to see a particular property, if they've seen it before with someone else, etcetera, they have an opportunity to say so right away. If an agent takes you to something like that knowing they're not the procuring cause, they have no grounds for complaint when they don't get the commission. The easiest way for consumers is, "Joe with the office down the street already showed us 1234 Main Street, and we're considering it. We want you to show us something better if you can." That serves notice that there is no commission there for them, and it's going to be a rare exception that bothers with that property. If they start talking it down at that point, get out of the car, and tell them that their services are no longer desired. Here they were planning to show it to you as something they thought you should seriously consider, and now they're telling you it's a bad property because someone else will get the commission? They aren't out for your best interests, and they've just told you that in terms anyone should be able to understand. Fire them immediately, without any appeal. Nonetheless, dealing with the issue in this manner is more than sufficient to stop problems before they start as well as dead simple.

Note that I said it's sufficient, which is a logician's term that means it's at least enough. It's not the minimum necessary in this case. The entire thing about "procuring cause" is that this is the agent who made you want to buy the property. Therefore, sometimes I'm willing to disregard "I've seen it before" for clients I've got a good rapport with, if they tell me that they're not interested in that property for whatever reason that seems to them good and sufficient. "Please trust me with fifteen minutes of your time, because I think I've seen something that may change your mind." The essential point is that they've given me evidence that the other agent is not the procuring cause, because they did the exact opposite of interesting them in the property - they turned them off of it. If I can turn that around because I understand something about the property and their situation that causes them to see what I see, I am the procuring cause, and I have demonstrably provided value to those clients. It's rare, but it does happen. Two elements that are always necessary before I want to show a property: That I believe it will satisfy the client's needs and there's a good chance they'll like it enough to make an offer I can sell to the owners.

I should also mention that it's bad business for agents or brokerages to sue clients for commissions. Not only is it bad publicity and a good way to scare off future clients as well as probably more money to prosecute than you'll win if you're successful and half a dozen other disasters, but I've never heard of any agent or brokerage actually winning such a case. This is one reason why the incentives are there for agents to want to tie up your business with an exclusive agreement, but from a consumer point of view, exclusive buyer's agency agreements are a disaster in progress for no gain. You're tying your ability to buy a property for the next six months to one particular agent based upon their behavior in their office? I don't think so. I wouldn't do that on a bet, and neither should you. The games that can be played when one particular agent controls the transaction are too numerous to mention. The vast majority of my clients never talk to another agent, but that's by the client's choice, because I demonstrate I've got their best interests foremost in my mind every time we talk, meet, or correspond, and that they'll be lucky if the other agent is half as good as me. The knowledge that they do have a choice is one more motivation to do the best possible job I can, and a consumer can never have too many reasons why their agents want to do their best work possible. Which do you think is likely to do better work: The agent who knows that a commission is in the bag (eventually) as soon as he's got a signature on a piece of paper, or an agent who knows that the client always has a choice to try out the competition? I put it to you that the agent who's willing to be in the latter category will not only work harder, but that they're much more likely to be a capable agent, confident of their ability to make that client happier than anyone else.

This example may be fictional, but the character portrayed has one thing in common with a good agent, or anyone who really is good at what they do: He's not afraid to be measured against the competition.

I may not be Lancelot (he's fictional. I don't have the author writing fiats in my favor), but I'm more than happy to measure myself against the competition in the only way that counts: the actual battle to make my clients happy. This is what the non-exclusive agreement allows the consumer to do - find their Lancelot, or at least Bors or Percival, instead of being stuck with Mordred. It's easy for Mordred to talk the same game as Lancelot, which is why you need to get them out in the field to observe them at work. Non-exclusive agency agreements let you do that. They doesn't bind consumers to the first agent they meet for six months that might as well be forever, because most people aren't going to wait that long if he isn't as up to the task as he might be. Furthermore, it's a lot easier to manage than trying to get out of that exclusive contract Mordred talked you into.

Caveat Emptor

Original article here


I got this question in an email, and almost blew it off, but then I realized for every person who actually asks, there are probably at least a dozen who are unclear but don't ask, and I apologize that I almost blew off the question.

This is one of those questions with a deceptively simple answer. Transactions fall out of escrow because something goes wrong with the terms of the purchase contract as negotiated. This happens in all kinds of areas, not just real estate.

In real estate, it is usually not the fault of the escrow officer. I have encountered exceptions to this rule (I had one close just before I wrote this where the escrow officer tried their damnedest to sink it), but they are rare. The escrow officer is simply a hired middleman that handles the actual exchange by verifying everyone involved has in fact done everything spelled out in the contract, and assisting in certain ways those items which cannot be accomplished until close of escrow.

It is possible to fall out of escrow on a refinance, but nobody talks about it that way because the issues are a lot more limited, so usually people describe this in specific terms, such as "Couldn't qualify for the loan," or "The appraisal came in too low." These apply to purchase escrows as well, but the phrase "fall out of escrow" enables agents to avoid finger-pointing, and agents never know when the target you point at today is going to be someone whose good opinion you want tomorrow. Ergo, the commonality of the phrase. It may make it seem like escrow is the bad guy, but that is only rarely the case. There isn't some group of Nazgul masquerading as escrow officers going around and doing evil things to your real estate transaction. There are escrow officers out there who are incompetent buffoons, but most of the time it's not the escrow officer's fault when things fall apart. "It fell out of escrow," is mostly a way of avoiding any unnecessary bad feelings from a broken transaction.

The most common way a transaction falls out of escrow is the buyer fails to qualify for the requisite loan. For the buyer, this can be avoided by making certain ahead of time that you're going to qualify, staying within budget, and - the step that many are neglecting right now - following the market while you're shopping. For sellers, it's more complex because you can't steer business, but it is doable.

The next most common way transactions fall out of escrow is that the inspection reveals something that wasn't anticipated in the purchase contract, and the seller and buyer can't agree on what's going to be done about it. This is one of the reasons why I'm so fixated on finding all the issues I can before we make an offer. Sure the inspector is probably going to find other stuff, but if it's all trivial, normal wear and tear, we don't have a threat to the transaction. Put the major issues on the table during initial negotiations, and you've already got agreement before you've invested days to weeks and hundreds of dollars into a transaction. You would not believe how much this changes your outcome for the better without trying it.

Even if you don't catch everything ahead of time, be reasonable in negotiations after you find the problem. You can't force the other side to be reasonable, but if you control what you can control, chances are better that you'll come to a mutually satisfactory amendment. Remember, you wanted this deal in the first place. For the buyer or the seller, trying to sweeten it unreasonably because of a new fact is going to lose that transaction. Furthermore, the buyer has the inspection contingency to protect them, while they can decide to carry through on the sale on the previously negotiated contract even if the seller won't deal at all. Both buyer and seller jointly have the ability to decide whether the seller is going to fix it, give the buyer an allowance (usually a small amount larger than cost of fixing to make up for having to be the one to hassle with fixing it), or whatever else strikes them both as reasonable. Either one trying to dictate to the other is a recipe for a transaction falling apart.

As you can see, none of these is the escrow officer's fault, and they shouldn't be blamed for something that's not their fault. It's not due to this (sarcasm) scary mysterious (end sarcasm) process called escrow - it's that there was an issue endemic to the situation that the principals and the agents could not resolve in a satisfactory manner. There are any number of possible issues that the escrow process is intended to prevent: Title and unpermitted additions are also common. You name it, it probably happens and agents deal with these issues regularly. The process of escrow is intended, in large part, to shake these problems out so that the buyer doesn't have nasty surprises later, and the seller really does get the money they're due for their property. Without escrow, the incidence of real estate problems would rise dramatically, as would the cost for dealing with them. If you understand escrow, you know that the reason for it, and why it's usually a consumer's best overall protection from bad transactions.

Caveat Emptor

Original article here

Dear Mr. Melson:

My husband and I are great fans of your Searchlight Crusade essays. Excellent work!

In today's mortgage-mess market, will lenders reject loan applications from average buyers (not investors) wanting to purchase acreage with a teardown outside the city limits, with the intent of building a new home? Obviously, preservationists and neighborhood associations who might object to interference with the "character" of the area wouldn't be a major factor in this kind of decision.

Would the mortgage needed for such a purchase have to be a combo "jumbo" loan, or what? We are in DELETED and would be using a VA loan.

Okay, let's deal with the peripheral stuff quickly. The "jumbo" and "conforming" labels don't apply to VA loans. They're for conventional A paper financing only, and VA loans having a government guarantee attached as well as the ability to go up to 103% of purchase price with no PMI, there's no need to split the loan amount or to pay PMI at all with a VA loan. I know of at least one lender who'll do VA loans up to $1.5 million.

Now as to the main question: Buying teardown property.

All residential real estate loans require two things: 1) an interest in land, and 2) a permanently attached residence where people can live. Condos and PUDs qualify, because they do have an interest in land held in common, as well as the residence itself. But bare land does not qualify for standard residential financing, because it has no residence.

So the essential question here is: Is the building actually condemned? If it is, what you have isn't a residence at all, but bare land that it's going to cost you money to scrape clean. If you hear an agent talking about "land less demolition and haul away", this is the type of situation you're in. You can't get a residential loan on it because you can't live there. You have to go to one of the other loan types, which means higher down payment and usually higher rates, as well. You've still got the utility hook ups, and you might be able to use the original foundation, so you're not starting from nothing, but property with a condemned building on it is generally less valuable than bare land, because you've got the expense of getting rid of the condemned building. Condemned buildings also have the virtue of short-circuiting most concerns of historical preservation - not always, but most of the time. If the City of Philadelphia were to condemn Liberty Hall as unsafe, I'm pretty certain that wouldn't be the end of the matter. On the other end of the scale, there's a house on the same block I grew up designated historical because it was built in 1895 and by the time anyone in the City of La Mesa looked around, it was one of the oldest buildings remaining in the City. But it wasn't really anything special at the time, so if it was ever certified unsafe, I imagine there wouldn't be much fuss about actually tearing it down.

If the building is not actually condemned, however, you do have the ability to get a residential loan on the property, but you also have to be careful it's not designated historical in any way, shape or form - and that there's no one with any interest in designating it so. Once designated historical, it's like the labors of Sisyphus to try and get permission to get rid of it, and even the attempt to designate it as historical (whatever that attempt may be motivated by) can cost years and many thousands of dollars in expenses. Just because it's outside city limits doesn't mean that nobody has an axe to grind.

People do want to tear down existing buildings for other reasons than condemnation. They want to do something else with the land, or they just don't like what's there. In the meantime, they can still buy with a regular residential loan, until they're actually ready to tear it down. In such a situation, your lender would probably have the right to call the loan, so your destruction and construction financing should take cognizance of this fact. Even if your state law and loan contract do not give the lender the right to call the loan, one should be very careful that you're not misrepresenting your intentions in any way. In other words, if you're buying with intent to demolish, don't hide it from the lender. That's FRAUD. If you refinance out of the loan before destruction begins, it shouldn't be a problem. But if you sign loan documents today, and tomorrow the bulldozers start flattening, a reasonable person is going to see it as deception.

There are also the permits to consider. No matter where it is or what you want to do, it's going to require building permits. This is often a paper trail for preservationists of whatever stripe, as well as for the lender who wants to show fraud. You told the lender by signing the loan documents that everything was hunky-dory on the 15th, but you had applied for demolition and construction permits on the 14th. That's what is called a "smoking gun." Permits for single residence construction are both costly and byzantine, and often so contorted that the only practical way to get them is to commit an illegality. (sarcasm alert!) Poor civil servants, how else are they going to live in ten bedroom mansions and take a dozen foreign trips yearly?

There are a couple of commonly used alternatives. The first is to leave one or more walls standing. When you do that, it's not new construction, it's reconstruction - the same as after a fire or earthquake - and the permit process is far more streamlined, but you're still going to watch it as far as the original financing goes. Check with experts in your particular area as to the ins and outs. The other is to retain the old residence while you build a new one, then demolish the original structure after you've moved into the new. The advantage there is you can definitely keep the original financing in place during construction and only worry about the money you need for actual construction, but the disadvantage is that you've got to deal with zoning issues, as well as being unable to use the original site for the replacement residence - so you have to pour a new foundation and clone the utility hookups, and quite often, the lot is just too small to have a second site available that meets setback requirements, etcetera.

Destruction of an existing building and construction of a new one are both difficult tasks, fraught with landmines, if you want to do it legally. One of the things many folks just never quite understand is that those costly hurdles and roadblocks they want to throw in the way of "commercial developers" apply just as strongly to the individual property owner as they do to that corporation. In fact, what the corporation may accept as a cost of doing business, thereby passing that cost along to its customers, as well as economies of scale and everything else, that corporation is much more likely to be able to afford to navigate the process than any but the wealthiest of individual homeowners. Furthermore, by artificially limiting the supply of housing, this has the effect of raising the point at which supply and demand are in equilibrium (i.e. market price) quite significantly. I've seen recent estimates for San Diego County that this cost of getting permits raises the cost of single family detached housing by anywhere from $130,000 to $200,000 over what it would otherwise be. Incidentally, for the developer who goes through the process for several hundred units, the economies of scale reduce the price of the permits to roughly $20,000 per unit. They make a profit off the situation, while the poor guy who wants to build their own property may end up spending hundreds of thousands of dollars just to get the little pieces of paper that say it's okay for them to actually start construction. So be careful, and plan ahead, and make certain that it's going to be possible within your means in the area you want to buy before you sign on any dotted lines.

Caveat Emptor

Original article here

When I'm driving, and get to busy main streets, I hate turning left onto major streets unless there's a light there. Traffic is coming hard both ways, usually at high speeds, and with only intermittent breaks in each direction. If you're turning left, you've got to wait for those intermittent breaks to happen from both directions simultaneously. So for at least the past twenty years, I've employed an alternate tactic. Instead of sitting there waiting to turn left, hoping the deities of traffic are kind or being a jerk and risking an accident by pulling into traffic and stopping, I'll turn right instead, go down a block, and shoot a U turn. At least nine times out of ten, the person who was there ahead of me waiting to turn left will still be sitting there when I go by, already on my way despite having gotten there later than him.

Real estate can be a lot like that. Sometimes the best way to get what you really want isn't the direct and obvious one. Sometimes, taking what looks like a detour can help you.

This can take various forms. Every once in a while, a question hits my site like "Lenders who do 100% financing with a 520 credit score." Three words: Not. Gonna. Happen. But there are alternatives. Raising your credit score and Seller carry-back are the first two that come to mind. Given the market right now, a seller carry-back can be the little detour that gets both of you to where you want to be, if the seller has the option of doing it, which a good agent can find out. You'll pay a more than you might have with a good credit score and down payment, but it can be done. Raising your credit score is also surprisingly easy in many cases. I've gotten people's credit score up to 660 or even 680 in a couple of months. Pay your bills on time, know how to get rid of old derogatory items, a few other tricks. It takes some time and a surprisingly small amount of cash.

Those are comparatively easy. There's a much harder hurdle: "I can't afford anything I want!" The obvious - and deadly wrong - solution is an unsustainable loan like a Negative Amortization Loan or another unsustainable loan. What those have in common is that they are short term patches to a longer term problem. There are several better alternatives.

You can make your stuff last longer. No $600 car payments or $400 per month credit card obligations means that you can afford more for a house. Pay them off and keep the cars running and don't charge up any more. Assuming a 45% debt to income ratio, I've just added back as much into your housing budget as getting a $2250 per month raise - $27,000 per year. People who keep buying SUVs as opposed to compacts must want them more than they do a better dwelling place - and if they do want to drive an new SUV instead of an older compact more than they want to own a house, they are making the correct choice. But I'd rather buy an appreciating asset than a depreciating one.

First time buyer programs such as the Mortgage Credit Certificate and Locally based loan assistance can help you stretch what you can afford. Between the two, it can make a difference of as much as twenty or possibly even twenty-five percent of your budget. They cost a little money and you have to jump through their hoops, which can include where and when you buy, but they make about the same real difference as choosing some of the more dangerous loans - and instead of a risky gamble, they turn it into something sustainable when combined with a more sensible loan.

You can find a partner. Sure, you can only afford $275,000 by yourself. Put two people who can afford $275,000 together, though, and that's a $550,000 house. That's an above average 4 bedroom house with money to spare in a lot of areas. Put three of you together, and you've got an $825,000 mini mansion big enough for the three of you to rattle around in. It takes some legal preparation to protect the partnership from a bad partner, but it's not that difficult or that expensive. And it needn't be permanent. Let's say two of you buy that $550,000 house with zero down payment (possible when I originally wrote this, but not, alas, now), instead of saving for a down payment at $500 per month each. If you were to save that money, earning 10% tax free for five years, you'd each have just over $40,000 each, or about $81,000 grand total. If the house appreciates at 5% per year (low for this area by historical averages) and you make regular amortized payments, the home is worth $702,000, you owe $515,000 if you never paid an extra cent, and net of the cost of selling, you're splitting $137,000 two ways, or not quite $69,000 each. That $425,000 3 bedroom house you really wanted to yourself has appreciated to about $542,500, but now you have a $70,000 down payment. Assuming you got annual salary increases of 3%, it's 7% more affordable now, instead of only 1% - equivalent to boosting your monthly savings to $850 - and it's unlikely you'll make 10% tax free, which that assumes. If you last ten years in the partnership, you come away with $183,000 each instead of $112,000 by investing your $500 per month tax free at 10% and the house you really want is seventeen percent more affordable instead of only five.

Another way of putting leverage to work for you is to buy what you can afford, now. If you can only afford a two bedroom condominium, better you should buy that and the kids have to share a bedroom in a property you can afford, than that you buy something you cannot afford. My uncle raised a family of four in an 762 square foot two bedroom place - and he had my grandmother living there also when his daughters were teenagers (By the way, the living frugally allowed him to purchase a large home on 400 acres and retire in his fifties). Most two bedroom condos are bigger than that now. If he could do it for twenty years, you can do it for five. This is why, for example, certain Asian and African immigrants are doing very well despite being only a few years from having nothing and living in an apartment. It certainly beats the alternative. $69,000 and change net proceeds from the sale in five years, and once again you've got that 7% affordability increase after five years, and seventeen after ten - without saving one extra penny.

When you buy with a sustainable loan, you place your cost of housing forever under your own control. You step off the escalator of rising rents, and rising housing costs. The math in my examples assumes marriage, but it's more strongly in favor of ownership if you are single because the standard federal tax deduction is lower.

You can rent a storage closet for the stuff you don't use every day.

You can drive a couple miles further.

You can rent out a room.

You can take a second job, and use the difference to save money. It'll also leave you less likely to buy stuff you don't need.

You can invest some time and money and effort in improving your value to prospective employers.

What may be most difficult, you can adjust your expectations. In San Diego and other high demand areas, the price just isn't going to come down any further.

I am well aware that "settling" is not attractive to most folks. I'm also aware that some neighborhoods are less desirable, and others are considerably more so, some living conditions less desirable and others more. We live in a culture accustomed to instant total gratification. Nonetheless, if by accepting some delays and some costs you get what you want and end up in a better situation, isn't that something to consider, as opposed to crying that you can't have everything you want right now and so you're not going to do anything?

Doing nothing means that you miss out completely because the situation isn't perfect. How does that help the situation improve? Do you just wait and hope that housing values crash further? What is likely to cause such an event? Interest rates rising drastically is the only thing I can think of, but then the loans and their payments get commensurately more expensive. Instead of being unable to afford it when it costs $425,000, now you can't afford it even though it only costs $225,000. It also leaves your future subject to factors beyond your control. Suppose housing prices don't crash? Already the lenders have removed the "declining market" label. Lest you be unaware, this is a trailing indicator, not leading. We're almost thirty percent down, locally, depending upon the neighborhood. Suppose that's all the further down prices go? We've got an ongoing and increasing scarcity problem - not building enough new housing to cover the population increase. Even if rational growth policies took over all the planning commissions and departments tomorrow, do you think the environmentalists and NIMBYs are just going to roll over and play dead in court? I can hope, but that's not the way to bet.

I hope this gives all of you some you some useful alternatives to consider. There is usually more than one way to get something that you want. Sometimes it means that you have to go a bit out of your way, or do something that isn't quite as satisfying for a while. And if you're not willing to do a little bit extra, but expect it handed to you, then either you don't want it very badly, or you are extremely likely to get burned by people who put you into a situation that you were trying to avoid. I know people who've been wanting to buy real estate, waiting for affordability to increase, since the mid 1980s. It's gotten much less affordable since then, and it's not likely to get better than where it is today. You can take steps to make it happen, or you can sit on the sidelines and dream that affordability will some day be there. Which do you think is more likely to get you where you want to be, and more quickly than most people probably think?

You can usually get what you want. Sometimes it just takes intelligent planning, and a step or two in between.

Caveat Emptor

Original here

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