(This is a companion article to What Sellers Need: What Buyers Should Want to Supply)

Quite often, I hear people talking about the real estate market as if it's all some amorphous blob, and buyers and sellers are no more different than they are in the stock or bond market, or for that matter, people using the bank to make deposits or withdrawals.

I cannot agree with this concept. Real Estate is not liquid, and real estate is not commoditized, and in the absence of some future world government building precisely one identical housing unit with precisely the same environment for everybody, I daresay it never will be. Since the chance of the rulers of that government limiting themselves and their cronies to the same housing everyone else has are nil, you can take it from there.

What do buyers need? They have the cash the seller (that would be you) wants, or the ability to get it via a loan, which comes to the sellers as cash - providing they can actually qualify, hence the preceding paragraph. What they need in exchange for that cash is the the assurance they will be getting a clear title, unencumbered by outside interests who may come after them later. They also need an assurance that the building - which is what the vast majority of buyers are really interested in - is going to continue standing in good, inhabitable condition for the foreseeable future. If there is a loan involved, the lender will want reasonable assurance that they can recover their investment if something goes wrong with the loan, which also requires clear title among other things. Just as seller's issues become buyer's issues, so do buyer's issues become seller's issues.

This makes delivering clean title imperative. If there's a possibility buyers are going to put every penny they saved for three years into purchasing a property, together with putting themselves into debt for thirty years, and end up not owning that piece of property after all, it shouldn't be difficult to figure out that the property is worth much less to that buyer - or any other prospective buyer. There is a profitable niche in clearing title on real estate, but you've got to really know what you're doing, and you've got to be prepared to lose everything invested in a given property. There's a reason the standard California purchase contract requires the seller to purchase the buyer a specific very broad policy of title insurance, and why it allows and requires negotiation as to which title insurance company issues that policy. I want a good solid company that only insures good risks, because I want them to be around and able to pay the claim if one happens - even forty years down the line, as opposed to Fly Tonight Title that disappears as soon as it has the premium payment. If a good reputable company won't insure title, there is a reason, and title insurance that isn't there and solvent years later is useless. Actually, it's worse than useless because without that title policy that turned out to be useless, nobody in their right mind would have paid that anywhere near that price for that property. So yes, a good policy of title insurance costs money. However, without that title policy the property is worth a fraction of what you might get for it with that title policy - and this fraction is well under 50%. Paying for a title policy is part of the cost of getting as much cash as possible for the property. Examined in terms of return on investment, there's nothing that even vaguely approaches it.

As far as the building's structural integrity, inspections cost money: hundreds of dollars. It's not cost-effective for buyers to perform inspections on every property they want to make an offer on, and the owners - or their tenants - might have a little something to say about an inspector invading their personal spaces for three hours or so. But it is necessary that the inspector have legal responsibility to the buyer, and that's the reason why sellers are wasting their time getting an inspection. Yeah, it can help you fix problems before you put the property on the market. But no competently advised prospective buyer is going to accept such an inspection, because if there's something wrong or something missing, that buyer has no recourse to sue an inspector that was, after all, working for the seller. If you're planning to sell, and want an opinion as to what needs fixing, get a contractor out. But if their inspection reveals problems, the buyer is going to want the ability to negotiate repairs, compensation, or to get out of the contract entirely, hence, the inspection contingency. This is one reason why sellers misrepresenting the condition of their property are not only fooling themselves, but costing themselves money as well. Furthermore, the general inspector can recommend further inspections if there is something beyond their competence. Until somebody pays you the necessary cash to purchase the property, the problems that may exist aren't buyer problems - they're seller problems. Buyers can always (at least until the inspection contingency expires) choose to instead walk away and make an offer on the identical floor plan down the street without these issues. It's up to the seller and their agent to motivate them not to do that. Consider that if this prospective buyer's inspector found the problem, it's likely that the next prospective buyer's inspector will, as well. Actually, a good buyer's agent will probably spot things before it gets to the point of an offer. Until you have that escrow check in your hand for the equity, these problems are the seller's problems. Remember, that prospective buyer can simply decide they don't want the property. Until the property is successfully exchanged for cash, all of those problems are part of owning that property, and you need to find a buyer who's willing to deal with these issues in order to sell. Delivering what buyers need, a solid property without objectionable issues, is a seller concern. Good agents will help, but bottom line, it's the seller's profit or loss.

With the exception of all cash sales, a very small proportion of real estate sales, there is going to be a lender involved, and when there's a lender, the issues that buyers have with lenders become seller issues as well. It may be precisely the opposite of the inspection situation: It's always the seller's choice as to whether to work with a given prospective buyer, and buyer issues in this regard are subject to finding a seller willing to deal with them. Nonetheless, the vast majority of all buyers don't have the cash to buy your property without a loan, and if you want to restrict yourself to prospective buyers willing and able to offer all cash for your property, that's your prerogative. Doing that, however, restricts your pool of potential buyers far more than anything else. Drastically lessened number of buyers who could choose to offer all cash drastically reduces the sales price. Even those buyers who have the ability to pay all cash often do not want to, for various reasons, and this unwillingness on your part means that they will be willing to offer much less for your property.

Every loan does have the real possibility of being turned down. I can do everything from verify all the buyer's information to checking the prospective loan against lender guidelines for issues, but if that underwriter turns down the loan, or (more commonly) puts conditions on an approval that the prospective borrower can't meet, that's pretty much the end of the loan. There is one vote that counts, and it belongs to that underwriter. The loan officer can reason, wheedle, and appeal, but the bottom line is that if the underwriter can't be swayed, the loan is dead. They don't reject loans very often when a loan officer has done the work beforehand, but it does happen, and is the reason that nobody except a loan underwriter for the lender you're submitting it to can guarantee the loan will be approved. Since no loan gets to the underwriter without a fully negotiated purchase contract and no borrower ever communicates with an underwriter directly, there is always a very real possibility that the loan the borrower is counting on will be turned down. For most loans, there's other places that will do the loan, albeit upon slightly different terms. Occasionally, though, there are loans where it's this lender or nobody, as nobody else has loan guidelines that will allow that loan to be funded. These two terms add up to the necessity for a loan contingency. If the buyer can't find someone to loan them money on terms that satisfy this purchase contract, they don't want to lose their deposit, and definitely don't want to be obligated to purchase the property. If you, as a seller, do not want to allow a loan contingency, that is certainly something you can choose to do - but it's going to cost you in terms of the proffered sales price, probably a lot more than the amount of any deposit. If a seller doesn't have good evidence prospective buyers can qualify for the necessary loan, I don't know any reason why they would agree to work with those buyers at all. If they do have such evidence, I don't know of any reason why they would want to focus on the deposit instead of the purchase price. The deposit is iffy at best and takes paying legal costs to get, not to mention it's usually not going to pay for the costs of the escrow period. The purchase price, once you get it, makes those costs stop, and it's a lot more probable than getting that deposit.

What the lender is looking for (absent evidence of impending fraud) is two things: Evidence of borrower ability to repay the loan, and evidence that they'll get their investment back if the borrower defaults. It is to this end that lenders require an appraisal from a licensed appraiser who has some demonstrated ability to (insurance or a bond) to repay them if the property does not, in fact, possess that value. Now, here's the kicker: If the appraisal is too low, you can pretty much bet that any lender on earth will reject that loan. There really isn't a need for a separate appraisal contingency, and if I and my buyer clients don't see the value in the property, we're not making an offer in the first place. Even in those rare instances of "all cash" purchases, that appraisal should be nothing more than a confirmation for the lender of something I and my buyer client already know. I'm willing to counsel my buyer client to offer that much because I believe that property is worth that much for their purposes. If they're intending to "flip" the property, we should both have looked at that situation and decided we're comfortable with it before making an offer. If my client intends to hold the property some number of years, that appraisal has absolutely zero bearing on what it will be worth at some indefinite date in the future. And even if they are that rare "all cash" buyer, if the value isn't there in front of your own eyes to justify that price, why did they and their agent make that offer? Therefore, there really isn't a good reason for a buyer or a competent agent who knows what they're doing to object to dropping the appraisal contingency. When I'm listing a property, I'm very cognizant of the fact that insisting upon an appraisal contingency is a sign of an uncommitted buyer, overly cautious or overly opportunistic, who's insisting on having everything exactly their way and is likely to chip and chisel at every opportunity. Such a buyer is also likely to bolt at the first chance of a better deal. It's also usually a sign of an agent who doesn't understand the process covering themselves in CYA to a pointless degree, because they should explain it to their client when the issue comes up if not before. This kind of agent is analogous to someone who calls themselves a paratrooper because they wear a parachute - even though they've never actually used it and have no intention of making a jump. Both such a buyer and such an agent are signs of a deal that's likely to not get consummated.

Just like sellers and everyone else involved, buyers would really like a nice smooth transaction that moves from fully negotiated purchase contract to complete consummation as quickly as possible without bumps, burps, or deal killers. There will be bumps in most transactions that can't really be avoided, but most bumps are caused by problem personalities on one side or the other of a transaction. Unfortunately for sellers, there's a lot more information on their attitudes (and those of the listing agent!) in a typical listing than there is information on the buyers and their agent in a typical offer. Don't raise the barriers to a successful transaction any higher than you need to - and don't let your listing agent do so, either. Quite a lot of them will insist upon useless pre-qualifications and pre-approvals from their favorite loan officer. Not only is requiring someone to patronize a particular third party in this manner steering, and therefore illegal under RESPA, but it doesn't do you any good on determining whether or not they actually will qualify for the loan, and this notation can warn potential buyers with competent agents off your property until that property has been on the market so long that you're desperate. Listing agents will often insist for no good reason "seller to select all services." What's going on is that they want to select all services so that certain specific title and escrow companies are happy with them. You didn't tell them you wanted to select the services, did you? Even if you did, the law is quite clear that it is subject to negotiation, not that this stops that sort of agent. Wander into their office at random intervals, demand a listing agent copy of your property listing (You are entitled to such on your own property) and if it has any of these notations, fire that agent and their brokerage immediately. You've got all the justification you need in the fact that they're not only violating the law, but your best interests as well.

Now that we've gone over what sellers need, let's look at what seller's want. As any good salesperson knows, wants are far more important to making a sale than needs. People are funny that way, and one of the harder parts of a good buyer's agent's job is keeping the actual needs front and center with the wants. Most people would not believe how many buyers will ignore faults that will cause them to hate this property in about two months in favor of really neat, but unnecessary amenities.

What buyers want is the perception of a bargain. Notice I didn't say they want the bargain - but they do want to believe that the property is the best bargain they could have bought for the price they could afford. Quite often, the appearance is more important than the actuality, and I've certainly experienced more than a few people who thought they got a deal and couldn't wait to brag to me - but here's the kicker: They never want to hear the evidence against the brag they're trying to make - and there's always evidence against as well as evidence for. Every last negotiating coup I've pulled off had evidence on the other side - that's what a good negotiator uses to convince the other side to deal. If they don't want to hear the evidence against, that's a pretty good indication it's stronger than the evidence for, and that they didn't get a very good bargain.

One of the ways in which this manifests is buyer behavior. If your property is more expensive than another one that's essentially similar, those buyers are not going to want your property. You have to convince those buyers that there is a rational reason why they should want to pay more for your property than for the competing properties. If you cannot do this, your property will sit unsold. This is the reason every competent agent in the known universe counsels against overpricing a property. It's not like all the sellers in your local MLS receive offers in turn, strictly in accordance with order of listing the property for sale. Quite predictably, buyers make offers upon the properties that are most attractive to them at a given price. If you cannot convince your own agent that the property is more valuable than the competing properties, that agent is doing you a favor by telling you to reduce the price. I guarantee that not only that your agent will be kinder than any prospective buyers will be, but that they're trying to save you money as well. It's always a balancing act between too expensive to interest anyone, and not expensive enough so that you lose money you could have gotten. But remember that it's the appearance of a deal than most buyers want, far more than the actuality. Most have no clue what stuff costs and how easy or difficult it is to accomplish a given upgrade. They only know that they didn't have to deal with accomplishing it, and for that, they're willing to pay quite a lot under the right circumstances. A good agent will help you with all of this.

Caveat Emptor

Original article here

(This is a companion article to What Buyers Need: What Sellers Should Want to Supply)

Quite often, I hear people talking about the real estate market as if it's all some amorphous blob, and buyers and sellers are no more different than they are in the stock or bond market, or for that matter, people using the bank to make deposits or withdrawals.

I cannot agree with this concept. Real Estate is not liquid, and real estate is not commoditized, and in the absence of some future world government building precisely one identical housing unit with precisely the same environment for everybody, I daresay it never will be. Since the chance of the rulers of that government limiting themselves and their cronies to the same housing everyone else has are nil, you can take it from there.

Let's ask: What do sellers need? Cash, the universal problem solver. As much of it as possible. Why? Because there is something about this property that no longer fits their needs, and it would be more trouble, and more cash than it's worth, to change the property. If it was cost effective to convert the property to the configuration desired, nobody in their right mind would want to go through the process of a real estate transaction twice in order to sell this one and buy something else. The only thing they can really transfer from this property to that next one is the equity. More equity means they owe less on the next property, they can afford a better property, or they have more money left over after buying the next property. Most sellers want more money than is possible or likely, going to far as to shoot themselves in critical locations in pursuit of it. If they are not ready to be rational about it, there is nothing you can do to force them. You can decide you want the property bad enough to pay the extra or you can move on to other properties. Of course, in the former case, the property wasn't really overpriced, was it?

There is nothing sellers want so much as as much cash as possible. If the transaction doesn't get completed, they don't get their cash at all - so if the transaction doesn't complete, they don't get any of what they really want: cash. In fact, they spend cash for every day that property is on the market, or in the process of the transaction. Even if you don't understand this, whether you're a buyer, a seller, or an agent, you had better act as if you do. Even if they're in a short sale or other distress situation, time is important to sellers. I would rather have no offer than an offer a buyer cannot or will not make good on. Every day that property sits unsold costs that seller money - and this time does not end with entry into escrow and a pending sign. It ends only with a successful sale.

When sellers enter into a purchase contract, they are essentially closing down the prospects of any other buyer. A real estate purchase contract gives one particular buyer the sole and exclusive right to purchase that property until it is properly terminated. It not only gives that buyer the right to buy that property, it requires the owner to sell it to them on specified terms. If someone else comes along and offers a better deal, the current owner is not free to take that deal - they are contractually bound to the existing one.

Buyers therefore need to convince property owners of two very important things: First, that theirs is the best offer that the sellers are likely to receive. Second: That they are capable of consummating this transaction, as proposed, in a timely fashion with as few uncertainties as possible. Many listing agents want to take this way too far, into the illegal territory of steering, but their client, the seller, does have a legitimate need to know that prospective buyers can consummate this transaction in a timely fashion. That seller is making a decision whether to grant a buyer credit, just the same as the lender. They are entitled to ask for information that paints a coherent picture of the prospective buyer in fact being able to carry through on their end of the transaction. Sellers are not entitled to steer the transaction, and unless they're agreeing to a carryback loan, they are not entitled to information of a level sufficient to enable identity theft, but they are entitled to ask for and receive information as regards actual FICO score, verified income, current debts, source of down payment. In other words, an attestation where the person making it can be held accountable for any misstatements. The standard pre-qualification and pre-approval letters are a joke - not worth the paper they are printed on. I do them because lazy and irresponsible listing agents ask for them, and it's easier (and more profitable for my clients) to comply than argue them out of it. But the seller's issues become the buyer's issues, because if the prospective buyer cannot convince the seller that this is the best offer they're likely to get, the seller won't agree to sell to them.

One more thing sellers want. Actually, both sides want this: a nice smooth transaction, that moves from accepted offer to consummated transaction without any problems, hangups, or deal killers. If there's anybody who's willing to stand up and say they want all of these obstacles, I've certainly never met them. Here's the issue: Even the biggest problem personality in the known universe wants a smooth transaction. It's just that their definition is where they proceed to chip and chisel away further concessions the entire time. When a good agent submits an offer, they want it to move as quickly as possible and without the need for any further negotiations to a consummated transaction. Ditto a good listing agent on the counteroffer. Every time there are further negotiations, there is the possibility that intransigence on someone's part send the whole transaction south, and the reason you agreed to that contract in the first place was that you thought it was a good bargain to be making, and therefore, you should want it to close. There are good reasons why there are further negotiations after the contract on most transactions, but there shouldn't be multiple sessions, let alone one every couple of days when the other side thinks of something else they want.

Unfortunately, there is no method known to man that can guarantee to detect such twits before entering escrow. A good agent can know what the signs are, and at least as important, what they are not, but sometimes the warning signs aren't there, and sometimes they are there for someone who really is going to play it straight. The only real way to deal with these twits is upon confirmation of their nature. You don't want to refuse any transaction that very well might lead to a consummated sale, but you do need to be prepared to exit the transaction when such twits reveal their true nature, and if you don't understand when and how to do it, a good agent will really save your bacon - from a suit for specific performance, and paying their legal fees as well as your own.

Needless to say, you don't want to be one of these problem personalities either. So when you agree to a contract, it should be with full intent of carrying through on exactly the terms agreed - no chiseling allowed, only specific solutions for concrete issues that happen despite anyone's best efforts. The best way of preventing problems later is to come to an agreement in the first place which the other side should be pleased to honor.

Caveat Emptor

Original article here

do you agree that a non recourse loan on a single family home is loaned with out financial risk to the borrower... if they do not want to keep their home when the market drops below what they owe, they can walk away with immunity to any financial loss & the most the lender can do is take back the home, & if the borrower has made all their payments on time & have returned the home in the same condition as when they moved in, their credit will not be negatively, by the lender??? my reference is http://wwlaw.com/forecl.htm

Yes, it is true that purchase money loans are largely non recourse in California. However, I do not agree that there is no financial consequence.

First off, there are credit repercussions for up to ten years. Among other things, this will make it more difficult for the buyer to rent the next property they will live in, as well as making it more difficult to obtain financing on the next property they want to purchase, when they really are ready to join the grown-up world.

Second, just because the lender cannot seek a deficiency judgment does not mean that the IRS will not tax them for debt forgiveness (This is currently suspended but that suspension will expire soon). If the lender loses $50,000 in debt forgiveness, they will report it to the IRS, because they want that deduction from income. The IRS will then tax the now former owner whatever tax would be due upon the residence. Income from debt forgiveness is ordinary income, and it is fairly likely to boost the taxpayer up in tax bracket in such a case. So now they have to come up with thousands of dollars. If they had those thousands of dollars, they probably wouldn't have lost the property. So now the IRS is looking for other ways to get their money: attaching wages, confiscating other property, etcetera.

I should also note that there are significant exceptions to the law limiting deficiency judgments for purchase money loans. Fraud is one such limitation; if the buyer had to state more income than they in fact make, that would certainly prove to be an interesting case. I didn't do it, but that doesn't mean it never happens. Furthermore, just because the buyer doesn't fall into one of the exceptions does not mean the lender will not contend in court that they do. The law doesn't actually prevent the lender from seeking a deficiency judgment; what it says is that they're not entitled to one if certain conditions hold. Proving that proposition in court is expensive, and the lender can always hope that you simply default by not showing up or something similar.

There are very definitely negative consequences. Buying a property is a complex decision, and should not be done lightly, on the basis of "Walk away if it doesn't work out." The consequences, even if not direct, spread out like ripples in a pond when you drop in a stone. Real estate is a fantastic investment, properly approached. With the tax code and the way leverage works, among other things, it trivially beats anything of equivalent risk for potential reward, or alternatively, beats anything of equal potential for reward as far as low risk. But that risk is not and never will be zero. Indeed, it cannot be. Real estate isn't liquid, and you never get to play with someone else's money risk free. Those are two of the many reasons why you need competent professionals on your side.

Caveat Emptor

Original article here

From an email:


I was in the process of buying and selling the house when we saw a FSBO house we liked was for sale. But sale fell through, which is a good thing anyway because of contigency on our house. But I also suspected it failed because the seller refuses to pay commission to our buyer agent.

My question is that this real estate agent that would represent us as a listing agent is also a buyers agent. However, I had another friend look into the contract and the buyer's agent agreement is valid until December 31, 2005. So that means anytime we find a house, he will be paid? We do the work to find a house and he gets paid? It didn't strike to me as ethical or fair. It will simply takes us off the real estate market until January 1, 2006 when we can start all over with a clean slate. Correct?

We don't think it should've been in effect until December 31. It should be in effect only for that FSBO house we liked, and if the deal falls through, then his job as a buyer's agent also stops.

Am I dealing with a greedy real estate agent or is this typical?

Can I have one agent to sell our house and another agent that represents us to buy a house?

This depends upon the nature of the agreement you signed with him. I use non-exclusive buyer's agreements, which basically say that if I introduce you to the house you decide to buy ("procuring cause"), then I get paid when you buy it. Others use exclusive buyer's agreements, where they get paid no matter who finds the house.

If I have an exclusive buyer's agreement with you, then I am going to get paid on any house you buy. If I have an non-exclusive agreement, I will only get paid if I introduce you to the house, and you may have any number of non-exclusive agreements in effect as long as you are careful to inform each agent you are working with that you have previously been introduced to a given property, and therefore, any commission that takes place will be paid to the other agent. All of the forms used by California Association of Realtors state that you will pay a commission to the agent if the seller won't, so an agent has comparatively little stake in which house you buy, as long as you buy one through them. This gives them the largest possible incentive to work on your behalf, without binding you to one particular agent who rather be working with another client who came along with a bigger budget, and therefore a bigger commission in the offing. When looking for homes to show, ethical agents won't seek out a For Sale By Owner (FSBO) for reasons I go into near the bottom of this article (basically, protecting your pocketbook), but these do not apply if you, the client, choose to make an offer on a FSBO.

I suspect that you signed an Exclusive Buyer's Agent Contract with him, something I would not do unless he's providing you with lists of foreclosures or something that costs him money on an ongoing basis. Once such a thing is signed, that agent is going to get paid no matter what house you buy during the agreed upon period. I would never agree to either a listing or buyer's agents period longer than six months. This gives the agent plenty of time to sell your house or find you one. So if the agreed upon expiration is December 31, 2005, then if you buy before then, that agent will be paid - out of your pocket, if not the seller's.

There are two competing factors here. One is your desire not to pay for services not provided for this particular transaction, versus the agents desire to get paid if they actually do the work anyway. If they serve as your negotiating agent, or help expedite the transaction by providing services, they are ethically entitled to be paid whether or not they introduced you to the property. On the other hand, if all they do is obstruct, there is neither a legal nor an ethical reason why they should be paid. Depending upon the nature of their obstruction and how much it cost you, you may wish to contact an attorney to recover, or your state's Department of Real Estate

Sad to say, there are agents out there looking to line their own pockets in any way they can. A better agent wants to get paid, but realizes they will make an excellent living - better in the long term - by putting your interests first. Without more evidence, I cannot say for certain, but it appears at first glance that this agent had you sign an exclusive buyer's agent agreement in order to represent you in a transaction you found. I am not aware of any regulation prohibiting this, but it does seem like it's excessive from a neutral viewpoint. It is probably not voidable, however.

There are standard California Association of Realtors (CAR) forms for both exclusive and non-exclusive buyer's agents agreements, and this applies in every state I'm aware of. Look up at the title of your copy. If it says "Exclusive", you are stuck with this person. If it says "Non-exclusive" you may do business with anyone you please, as it applies only to those properties this particular agent works on. Of course, many agents and brokers use non-standard forms for this, as the standard CAR forms are readable and understandable by anybody. If they want to throw curves, non-standard forms are one of the best ways to do it.

As to whether you are dealing with a greedy agent or if this is typical, the truth lies somewhere in the middle. As in all sales occupations, the idea of locking up your business creates powerful motivations for them to have you sign exclusive agreements. There are nonetheless, people such as myself who feel that if I am not helping you, I don't deserve to be paid, and let someone else have a shot. But if I've got an exclusive agreement with you, I should be providing daily foreclosure lists, copies of all new listings with personal feedback from having visited, or at least something that goes above and beyond sitting on my hands.

Many agents want you to sign an exclusive buyer's agent agreement before they do anything else. Unless you're getting something special out of it, you shouldn't sign one at all. Offer to sign a non-exclusive buyer's agent agreement - that way you have leverage over them, not them over you. They are motivated to work for you and find you a property that is attractive to you at a price you want to pay, because if they don't, someone else will. Even the best agent can't find stuff that doesn't exist, like a 3 bedroom home in La Jolla for $250,000, but if it does exist I'm going to work to find it first, and I will get paid for it because our agreement says I will get paid if I introduce you to it. If you have signed an exclusive agreement, there is no particular hurry for them to help you.

Finally, listing agreements for sale are (in general) individual agreements for a particular piece of property for a particular period of time. As long as there is no more than one listing agreement per property in effect at a time, you can have any number of different agents for sales, even if you have signed an exclusive buyer's agreement for purchases. Furthermore, I would never consider using the listing agent as my buyer's agent - all the agents legal responsibilities point towards the seller in such a case.

Caveat Emptor

Original here

This woman made herself a victim


stayed in a hotel for 7 weeks looking for my "Dream Home." And, when I found it, even though it wasn't in my price range, I knew I would do anything I could to get it. I was vulnerable, emotional and became a victim.

Actually, that is not quite accurate - I made myself a victim.

First mistake: shopping outside your price range. Assuming that you get it, the bottom line is that you are going to have to make the payments, every month, from here on out. I can get you the loan, any competent loan officer can get you the loan (or at least we could when the article was originally written), but I would not even look at any home not in my price range. First, it's a useless exercise. You can't afford it. Why torture or tempt yourself? Second, the reason it's outside your price range is because it has something extra. So it's going to be more attractive to the average buyer than the ones you should be looking at. Many agents will capitalize on this by showing you such a property, knowing that a large percentage will fall in love with the property right there, and bingo, they've got a higher commission for an easy sale. Despite their highly touted "code of ethics" the proportion of Realtors® who do this is every bit as high as non-realtor agents. Ditto (if not worse) for every highly advertised national chain. "Well, it's just a little bit. I can handle the extra." Demand to know the asking price before you agree to view the property, and if it is outside your range, refuse to go. Fire any agent who suggests this to you more than once. I'd fire them the first time, myself.

Being self-employed, (actually at the time, I was on disability from hand surgery), the only loan I could qualify for was a Stated Income Loan. That's where you just tell them what you make, and it is not verified except through two years old tax records and your FICO score

This is not correct. You do sign an IRS 4506 form, but the whole idea behind a stated income loan is that the bank agrees not to verify your income. Maybe the lender wanted her to feel psychologically more comfortable, or something, but if you can show the income on current tax returns that's not a stated income loan - it's full documentation. And the lenders don't care what you made four years ago - they want documentation for what your making to be as current as possible - starting now and going back maybe two years. For Stated Income loans (no longer available anywhere I'm aware of at this update), they verify only that you have a source of income, and the amount you claim you make must be reasonable for someone in your profession in your area. If you can show income via two years of tax returns, that is a full documentation loan, and you get better rates (See this for information on documenting income). However, documenting income via tax returns is tougher because whereas the bank loves doing it, the number they will accept is the number that is after all the write-offs, often a significantly lower number. This is the reason for the stated income loan in the first place. Many business people, particularly small business people, are earning a heck of a good living but they find legal ways to pay for most of it with before tax dollars that they then are actually able to deduct. So they're living as if they make $10,000 per month, which they do, but the tax return only shows $3000 per month. Stated Income is intended to serve this niche, not the niche of people on weekly paychecks who don't really make enough money to justify this loan. Stated Income loans have, since the article was originally written, been essentially banned - something that's really hurting a lot of self-employed businessfolk.

six months later, when the interest rate changed, my payment went up. But I still had some disability money, so I didn't think about it - I just knew work would come.

What she is saying here is that she had to accept a short-term adjustable rate mortgage in order to get a rate low enough to qualify. Or that she was sold one on the basis of "low payment" and she didn't bother to check the fine print.

There are loan officers and real estate agents and realtors out there who make one heck of a living off the fact that people buy loans (and homes) on the basis of payment. They have short-term "interest only" and even negative amortization loans out there. During the Ear of Make Believe Loans, some agents and loan officers were doing 75% or more of their business in negative amortization loans. You should never buy a home with a negative amortization loan; it's a good way to get yourself in serious trouble. Of all the home loans I've done (and I've done a lot of loans) I've never seen a situation where I would recommend it on a purchase and the only negative amortization refinance I tried the loan was turned down by five lenders even though it met the written guidelines.

Look for terms that are going to be stable for at least a couple of years, preferably five, particularly if this is your first time in a home or the payments are going to be near the upper edge of what you're comfortable with.

I:

• Did not shop lenders (I felt I wasn't in a position to).

• Did not tell the truth about my income.

• Took the first loan they offered me.

• Didn't read the fine print.

• Did not fix a budget and stick to it.

• Bought way too much house.


Fact: If anybody tells you not to shop lenders, what they are really telling you is that their loans are not competitive and that they are afraid of the competition. The National Association of Mortgage Brokers got a law through congress a few years ago that all the mortgage inquiries within a thirty day period count as one inquiry on your credit report, so it no longer hurts your credit score to shop around.

There are issues out there with loan providers who will tell you with a Good Faith Estimate or, in California, Mortgage Loan Disclosure Statement, that they can do the loan on a given set of terms when they have no intention of and no ability to actually deliver those terms. Certainly the HUD 1 form at the end of the loan process is nothing like the earlier form. Furthermore, many loan providers cannot or will not deliver within a stated time frame, which is critical when you're buying, and still important when you are refinancing. So look for someone who's going to stand behind their quote with something that says they mean it.

(It's hard for anyone you'll actually be able to talk to to use the word "guarantee" with regards to a loan. It's not just loan providers who pull unethical tricks. People attempt fraud regularly. Furthermore, there are "nobody's fault" impediments that happen regularly, and they always change the transaction. That property doesn't appraise for enough value is probably the most common. Only an underwriter can give a loan commitment, you as a loan applicant will never talk to your underwriter, and until you've got that commitment, there is no guarantee it can be done at all. So the real guarantees from a loan officer are always conditional).

Here is a List of Red Flags, real estate and loan practices that should have you running away, and here is a list of Questions to You Should Ask Prospective Loan Providers. Those who are doing business honestly should be happy to answer these sorts of questions - it gives us assurance that we're not going to be competing with somebody blowing sunshine and wet sloppy kisses at you. Because the fact that you're asking the questions means you're not going to do business with those who give you unsatisfactory answers. Finally, here is an article on What to look for at Closing, to make certain all of your due diligence paid off.

Caveat Emptor

(and I'm always happy to get suggestions for additions to the lists)

Original here

I thought I'd share this with you as an example of the sort of mind set to beware. This is a real email I received, with identifying information redacted.

I found you through the DELETED web site and I thought you might appreciate the following idea for GENERATING MORE REFINANCE BUSINESS:

What would happen if you sent the following email to your email list of former and prospective clients?

====================================

Subject: OWN YOUR HOME FREE AND CLEAR IN 8-11 YEARS

Dear (former or prospective client):

We recently found an interesting 23 minute video on the web that shows you how to Bring MORE MONEY into your Life, OWN YOUR HOME FREE AND CLEAR IN 8-11 YEARS - instead of 30 years, AND SAVE 66% in Total Mortgage Interest. The video is about a computer program called the DELETED (May be a proprietary name). You can view this video by copying either of the addresses below into your browser and press "Enter":

CLICK --> (DELETED!) <-- CLICK

(Please Note: Your default video player will play the video, and your browser will stay blank.)

If you like the idea of bringing more money into your life, if would like to own your home FREE AND CLEAR in 8-11 years - instead of 30 years, and if you would like to save about 66% in total mortgage interest, get back to me at (123) 456-7890. We can make it happen for you.

Best regards,

(They had the gall to sign my name to this abomination!)

Here's WHAT YOU GET OUT OF THIS as a mortgage broker:

If your client wants to go ahead, a HELOC (DM: Home Equity Line of Credit) is required to implement the program, so they will need YOU to arrange an "Advanced" (Home Equity) Line of Credit for them (earning you a fully disclosed HELOC fee). Plus, you will Earn a $900 to $1500 fully disclosed commission for each DELETED you arrange, depending on your cumulative sales of the DELETED Program. All you do is help your client save tens of thousands of dollars (or more) in mortgage interest. They can also pay off credit card and other debts more quickly at the lower (HELOC) interest rate, and be guided step-by-step to become DEBT FREE.

This MMA program is a great RELATIONSHIP BUILDER. It will stimulate discussion with your clients and get you MORE REFINANCE BUSINESS.

....................................................

As an alternative, if you don't want to send out special emails like this, you certainly talk with people every day who decide NOT to refinance, or NOT to refinance with you. What if you were to ask "one more question"?

FOR EXAMPLE: "By the way, if you don't want to refinance, I know of a way you can bring more money into your life AND own your home FREE AND CLEAR in 8-11 years - instead of 30 years, and save about 66% in total mortgage interest, WITHOUT REFINANCING. Would you like to know HOW to do this? (Yes/No)

(If yes): "Point your browser to DELETED. This will play a 23 minute video that explains how the DELETED works. Will you watch the video? As soon as you've watched it, call me, OK?"

....................................................

Some clients should not have a HELOC because they do not have the financial discipline to handle easy access to credit responsibly. The factor of financial discipline could be part of your discussion with the client.

In any event, the above email gets you into direct contact with clients you would otherwise NOT connect with, without bringing up the subject of refinancing their loan. This allows you to assess and attempt to meet the client's needs in a perceived context of genuine service.

Sounds good? Get back to me at DELETED for more information and to get started!

Best regards - for increasing prosperity all around,

NAME AND CONTACT DELETED TO PROTECT THE GUILTY

Offer some brokers a way to make money, and they won't care if it hoses their clients. Others just won't examine the program, because it looks like it helps clients while it makes them money, although in fact it does not help clients.

Their web video wouldn't run, and I wasn't going to lower my computer's security settings for SPAM. But I found their information elsewhere. It's an accelerator program combined with a debt consolidation program. It wasn't much work at all to find.

Lowlights include:

$3500 sign up fee for something that should be free, as it cuts the lender's risk factors significantly. Furthermore, as I wrote in Debunking the Money Merge Account Scam, this cost is literally never recovered, even if you keep the loan until paid off. You will pay the loan off sooner if you simply take the $3500 sign up fee and use it for a one-time direct paydown on the mortgage.

Multi-level marketing scheme. I sign up other folks to sell it, I get paid for their production. Now there is nothing intrinsically wrong with multi-level marketing, but it does serve to inflate costs. Sometimes it is less expensive than retailer's inventory carrying costs and marketing costs, but for financial services it is a dead give away that something is not right here because there are no inventory costs, and they're certainly spending enough money on marketing - $900 to $1500 commission plus over-rides per program sold. What a beautiful idea, to get the suckers to pay for your marketing!

Unrealistically low mortgage balances, and outrageously high assumptions of extras payments under the program. This has the effect of magnifying the apparent benefits. It posits extra payments on the order of what it would take to pay off the loan normally in ten years. In reality, if you could afford that level of payments, you'd have a ten year mortgage or a more expensive house. Your average total benefits will be half a months interest savings on anything deposited. So if you deposit your entire $5000 paycheck and you have a $2000 mortgage payment, that's about half a months interest on $3000. At 6%, that's about $7.50 per month gain. Certainly not worth all the hoopla, is it? Definitely not worth thousands of dollars in sign up fees, not to mention the costs of that Home Equity Line of Credit. Considering the costs involved, you'd do better to ignore the program (which has a monthly cost of more than that), and just send the lender $10 extra per month. As a matter of fact, most of the increased benefits these programs claim has to do with the bank retaining a certain amount that they claim you just end up not spending - and I can do better than 6%, even net of taxes, with that money if I invest it elsewhere. If you can't do better than 6% elsewhere, just add whatever you want to your regular monthly payments when you send your lender their money, and ask them to apply it to principal. You will come out ahead. Not to mention I don't have to take out a second or refinance to get money out of investment accounts if I decide to do something else with it!

And that's the real kicker. There is no benefit to these programs that mortgage consumers cannot do cheaper or better themselves. The real benefits obtained by these programs are comparatively small, and in no way justify sign up expenses of hundreds to thousands of dollars, or monthly fees above $1 or so. Don't waste your money. If your lender will give you one of these for free, that's one way to get five extra dollars or so applied to your loan principal per month. If they want to charge you, don't waste your money on the sign up or the monthly fees. Instead, add whatever the program's fees are to whatever amount you would ordinarily pay, and you'll be ahead of the game.

I keep saying this because it is true: mortgage lenders do not want to compete on price, so they will try offering all kinds of bells and whistles that might appear to be neat stuff but are really a distraction from what's really important. Some very big names are trying to use these to sell much higher rates than people would otherwise be able to get, by distracting people with this shiny new toy of Mortgage Accelerator Programs that don't make nearly the difference that some folks say they do. Take your time and do the math. If you can save a fraction of a percent on the interest rate, or even just cut your closing costs by a thousand dollars because the other lender's trade-off between rate and cost is a little better, you'll be better off going to the other lender. Mortgage Accelerator Programs like this are an expensive waste of your money.

Caveat Emptor

Original article here

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

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