April 2007 Archives

An email:

I've recently been pitched the idea of refinancing my home and investing in apartments, or more precise, a four-plex. The idea is to refinance and get a negative amortization loan on my house. With the money I pull out of my home, put a down payment on a four-plex, also with a negative amortization loan. That way, I am told, my payments would stay relatively the same on my home and I can have a positive cash flow from the four-plex. Along with the pitch I am told that I can refinance after five years and get another plan, or sell outright, the apartments. Their belief is that in five years, the apartments and my home would have gone up enough to offset the interest that I will not be paying in a negative loan.

I've read, on this site and elsewhere, that negative loans are not the way to go for most people. I'd like some more input as to what to do in my situation.

Here are the specifics in my case:
Home --- owe - 200k
worth - 600k
would get around 200-215 from refi
Apartments --- worth about 900k
downpayment would be 20%, or 180k
keep the money left over from refi in savings for emergencies

loans for both properties is a five year fixed rate of 7%
paying only 4.25% of it, with the rest being added to debt

Is it too good to be true?

Now I know how Hercules must have felt fighting the Hydra.

This situation can be called many things, but "Too Good To Be True" is not among them. It not only isn't true, it isn't good.

Let's go over what's going on in the situation as proposed.

You would have a loan on your home for about $420,000, including closing costs. This is just over the conforming limit of $417,000, but negative amortization loans are not A paper and pay no attention to the conforming loan limit. A real principal and interest payment on that loan is $2794.28, of which you are paying $2066.15. Over the course of three years, your loan balance would increase to about $435,327.16, at which point that $15,200 and climbing pre-payment penalty is no longer hanging over your head. After 5 years, you owe $447,480. Total of payments to that point: $123,969.00.

On the apartment building, you would have a $720,000 loan at 7%. The real payment on that is $4790.19, of which you would be paying $3541.98. After three years, you would owe $746,275, at which point that pre-payment penalty of $26,100 (to start, and climbing) is no longer over your head. After your planned five years, you owe $767,109. Total of payments is $212,518.80.

Now, I'm going to compare and contrast with two other loans I really do have as I'm typing this, but will be out of date by the time anyone reads it. I should mention that I have difficulty believing that the investment property, especially, would not be at a higher rate than you have been quoted. I don't believe that these are zero points loans, but I'll even assume that they are, in order to have a fair compare and contrast. I know for a fact that this isn't even the best I can do, but I'm just picking the first rate sheet that comes to hand. This is with all costs included: loans I could lock and write a loan quote guarantee on. A 30 year fixed on $417,000 (maximum conforming) at 6.25%, and I can even give you about $750 to help cover your closing costs, but let's say net total cost to you is $3000, and therefore your net is $214,000 when all is said and done. The payment on this is $2567.54. There is no prepayment penalty on this loan. After 5 years, you owe $389,216.30 and your payments totalled $154,052.44.

The loan on the apartment building would be bumped all the way to 7.375% because it's non-conforming, and so that the yield spread covers the adjustments for investment property and 4 units. Every lender has these charges, and these are on the mild side. So you see why I do not believe the real rate on the investment property loan would end up being 7% without they charge you some pretty stiff figure in points. I'm not sure your real rate can be bought as low as 7% on such an Option ARM. This lender does both A and Alt A, and their adjustments on the Option Arm are a half point more expensive, which means even the highest rate on their sheet only buys your net retail points to one, but let's run with our assumptions as stated. Payment is $4972.87, after 5 years you will owe $680,400 and your total of payments will be $298,371.66.

Let's look at the end of those five years.

Total paid
Neg Am
30 fixed

So you see that every dollar you saved on cash flow cost you two dollars in real terms. Lenders love this kind of math! Nor am I certain that this is really a fair comparison between the loans, but it's what I have to work with.

Now, lets do the apartments. As I said, I am as certain as I can possibly be that this is not a true and fair comparison between loans. I'm restricting myself to "no points" loans, and if that lender told you there were going to be no points on an option arm at 7% on a 4 unit investment property, I'd call him a liar to his face.

Neg Am
30 fixed

So you see that, even giving this person every possible benefit of the doubt, you come out better on the thirty year fixed, even though I don't believe their loan really exists.

Now I'm have not, thus far, allowed for the possibility that you wouldn't qualify for both loans, (with all the lovely potential for gain on the apartments) with both sets of fully amortized payments. There is a pretty serious monthly income zone ($3800 wide) where you would qualify for negative amortization but not fully amortized, at least "full documentation." It is to be noted, however, that these loans can be done independently of one another, dropping the monthly income range gap where you qualify for at least one full documentation to just over $800. I am intentionally ignoring the possibility of "stated income" loans because stated income is a very dangerous game to play in these circumstances (or anything similar). Also keep in mind, however, that property values don't have to go up in five years. It's a pretty reasonable bet, especially right now, but I don't think we're going to see more than 5% annualized for a while.

People sell Negative Amortization loans based upon cash flow, not based upon how wonderful they are to your bottom line. When you consider them on anything other than a short term cash flow basis, their virtues become non-existent. They are popular because they are easy to sell to most people. Most folks think of cost in terms of the check they are writing every month, and that's just not all there is to it. There are also deferred costs - costs that have the potential to step out and grab you with a bill, in this case for another $85,000 that most people won't realize they owe. This is 2003 thinking in a 2007 world: "The equity increase will more than pay the difference." Except that it isn't necessarily so.

It's much easier to persuade people to give the bank tens of thousands of dollars in equity that they might have someday, than it is to persuade them to write a larger check or endure negative cash flow in the first place. Persuading them to write the larger checks remains the correct thing to do in 99% plus of all cases. You can't fault loan officers and real estate agents as sales folk for making the easy sale - but you can fault them to the extent they represent themselves as analysts, consultants, or advisers, and I just don't see a whole lot of people in either of my professions representing themselves as straightforward sales persons. I've got a property one of my clients is in escrow on with about eighty business cards on the kitchen counter - and mine is one of about three cards on that counter with anything like a sales representation ("Loan Officer and Agent"). Some say things like "Real Estate Consultant", while others say things like "Relocation Specialist" or "Financial Vice President". It's all very deliberate to convince people to drop their defenses, because "I'm not a salesperson," but if you are going to represent yourself that way, you have a responsibility to comport yourself in accordance with that representation - and all the evidence I'm seeing says that this is not the case. I would like to see some civil cases make their way through the courts which fault agents and loan officers on the basis of their self-representation as something other than sales folk.

Actually, let me take that back. If they're acting as your real estate agent, they do have a fiduciary duty to you no matter what they're representing themselves as. Loan Officers do not - which is one of the reason the loan side is so messed up - but Real Estate Agents do, and if they're also doing the loan, they have a responsibility to advise you that this appears to be beyond your means, and exactly what risks you may be taking with this purchase - something I'm seeing more evidence in contradiction of than in support of.

Negative amortization loans can serve a valid purpose as refinances in certain limited circumstances. They can help people avoid worse consequences than necessary, when the numbers are right for it. But as purchase money loans, they are like playing Russian Roulette with your financial future. Sure, the market might take off like it did a few years ago - but it also might sit stagnant for the next several years, or even decline a little. Even if it goes up, it may not go up enough to pay the extra money you now owe. Of all the scenarios listed, the market taking off at 10% plus gains per year is the least likely, in my opinion, at least for the forseeable future.

Caveat Emptor

Article UPDATED here

The only one I trust is one that I wrote.

I got this search engine hit:

pre-approved loan underwriter changes terms illegal

I have gone over these issues in discussing the pre-qualification.

Loan officers are salespersons. There is intense pressure on them from supervisors, brokers, stockholders and their own pocketbook to tell you what you want to hear. A large proportion of the people who ask me for a either pre-qualification or pre-approval already have a property in mind, and they get angry if I tell them it appears to be beyond their means. They should be kissing my shoes because I'm trying to keep them from making a half-million dollar mistake, or at least make certain they go into it with their eyes open, rather than just keeping my mouth shut and pocketing my commission. Most of these folks just go get their "Think Happy Thoughts" letter elsewhere.

Furthermore, if the loan officer is counting upon referrals from real estate agents for a living, now they're getting the agent angry to no good purpose. This agent thinks they have a commission check all lined up, and you're trying to talk the buyer out of it, threatening that commission check. Most Real Estate Agents do not respond well to this, I'm sad to report. I'm thinking, "Boy, I'm glad I found out now, before the default, when investigators and lawyers and courts get involved," but most agents see only the immediate check that just evaporated. One such experience is all it takes before they not only stop referring to that loan officer, but try getting any clients they may have in common away from that loan officer. This may be short-sighted, but it is also human nature.

Not to mention the fact that nothing about a pre-approval or pre-qualification is binding. In fact, until the underwriter writes a loan commitment, there is nothing that says you have a loan at all. Furthermore, it's rare for loans to be rejected outright. What happens far more often is the underwriter puts an unmeetable conditions on it.

Furthermore, there is nothing about any loan that says the terms cannot change unless there's a lock in effect. If the loan isn't locked, it's not real. Quite often, loan officers will tell people their loan is locked when it's not. Locking paperwork can be easily faked.

Finally, unless you have a written Loan Quote Guarantee, the loan officer can always decide to sock you for more in fees. The games that can be played with the Good Faith Estimate (Mortgage Loan Disclosure Statement in California), Truth-in-Lending, and all of those other forms you get when you sign up are legion. None of these forms means anything, really, in any objective sense.

Even with the best will in the world, I can't guarantee you've got a loan until I get the loan commitment from the underwriter. I can go through all the guidelines for a given program, and make certain the borrower meets every single one of them. It doesn't mean anything until the underwriter writes that loan commitment. I don't have the power to approve that loan - no loan officer does. Loan commitments are the exclusive province of the underwriter. A good loan officer can and does go through guidelines to ascertain whether there's an obvious reason that you will be turned down. If the underwriter rejects the loan, none of it means anything.

This is one of the reasons that I have written several articles explaining how to calculate what you qualify for, in terms of payment and in terms of purchase price, so that you will not be at the mercy of somebody who tells you, "Sure you can afford it," while qualifying you for a "stated income" negative amortization loan. The most mathematically correct and detailed of those articles is Should I buy a Home Part I, while the most accessible is Can I Afford This Property?.

The stages in this process are first, the lock. If you don't have a lock, the loan is not real, and it will fluctuate with the market - every day for A paper. Once you have a lock, then it is possible to get a loan quote guarantee that means something. Even that is not absolute, however. A real loan quote guarantee is written contingent upon underwriter approval. The loan officer cannot really promise you that loan until the underwriter writes a loan commitment with conditions you can meet. What I can do, however, with a loan quote guarantee is say, "If the underwriter approves it, the loan will be on these terms" If the underwriter rejects the loan (or doesn't approve it), you still don't have that loan. You can choose another one, that you are likely to qualify for, or you can do without. I'll tell people that if the loan officer gets back to them within a week, it's likely that they're honest and they really thought you qualified for the loan they told you about in the first place. If it takes them three weeks or longer, or if they spring it on you at closing, I wouldn't believe they were honest with sworn testimonials from George Washington, Abraham Lincoln, and Mohandas Gandhi that they saw the whole thing, and it's not the loan officer's fault.

Only when you have a lock agreement, loan quote guarantee, and a loan commitment from the underwriter do you have a deal going that somebody might be able to stand behind, in the sense of being able to hold them responsible if they don't deliver on exactly those terms, and even then there are limitations. Of course, what really happens most of the time is that loan officers tell you about loans they have no prayer of being able to deliver. This is despicable, but it's the way things are. There are reasons why the situation is complex, but that's no excuse for loan providers to play any additional games to obscure or confuse something that is already complicated enough. Part of the reason that I'm writing here is that I would like to change this for the better, but the power to demand real change is in the hands of consumers, not any individual provider.

Caveat Emptor

article UPDATED here

When we sold our home just over a year ago we were talked into selling for a bit more than the original offer so the person could get money back to do renovations... I objected based on percentages and stuff and my realtor and the other realtor agreed to commissions based only on the original agreed to asking price. Then I could not find any other reason to object, after all, if the loan officer was willing to loan that much money, what reason was it for me to say nay?

But now I hear it is illegal to do this? Yikes? Have you heard of this?

What should I do now?

The same thing anyone should do when they discover they may have inadvertently violated the law: Talk to a lawyer.

For all of this article, please keep in mind that I am not a lawyer. I don't even play one on TV. Not in California nor in any other state, and the laws and precedents can be different from place to place. So please double check everything with someone who is a lawyer, and if there is a conflict, follow their advice.

That said, my understanding is that it is not illegal per se for a seller to give a buyer cash back. If I hand you $500,000 cash - or something worth $500,000 to you - and you hand me back title to the property and $50,000 cash, or something worth $50,000 to me, there is absolutely nothing wrong with it. It's a free exchange, willingly agreed to by competent legal adults. No harm is done.

Where illegality does come into it is when there is another party to the transaction to whom it is not disclosed. In most transactions, there is a lender involved. That lender is loaning what is usually a very large sum of money based upon the representations which were submitted to them. To intentionally and materially falsify those representations in order to persuade a lender to make a loan they would not otherwise make is a textbook case of FRAUD. Loan fraud is, literally, a federal offense. Go to jail for a while, and be a convicted felon for the rest of your life. Whether it's done by lying (stating something that isn't true) or by omission (failure to inform the lender of relevant facts) does not matter. Furthermore, due to the fact that fraud is a felony, there's a good likelihood of adding conspiracy in there - another federal offense felony.

The potential offense here is in failing to disclose the cash back to all parties in the transaction. If the lender knows about it and issues the loan anyway, there is neither a criminal offense nor a civil tort, at least according to my best understanding.

The reason this happens is because if the cash back is disclosed to the lender, then they will treat the purchase price as being the purchase price less the cash back amount. If the purchase contract says $400,000, but the seller is giving the buyer $20,000 back, it isn't really a $400,000 purchase price, is it? Net to the seller is only $380,000. Net cost to the buyer is only $380,000. That looks like a $380,000 piece of property to me, not a $400,000 one. The lender will take the same point of view, and base all of their calculations off of a $380,000 purchase price.

What that means is that if the buyers are not putting at least $20,000 down, they are over 100 percent of the value of the property. Which means the borrowers loan amount will be reduced accordingly. In fact, as I have said elsewhere, it's better for both the buyer and the seller if they don't do this, because it is in both of their interests to use the lower purchase price.

In short, this whole charade is self-defeating if it is disclosed to the lender, as they will only lend based upon the net purchase price. If it's disclosed to the lender, I cannot think of a reason to do it, because whatever purpose you wanted to achieve with the cash back will be defeated. If the buyer wanted the cash to fix the property, they're either going to have to take it out of their down payment or, dollar for dollar, out of the cash they got back. $400,000 minus $20,000 is $380,000. So if they put $20,000 down, it's doable, but it's a 100% loan, and the net benefit they got out of their down payment is zero. Alternatively, they can just take the $20,000 cash and apply it to the purchase price, over and above the $380,000 the lender will base their loan calculations on. Net benefit to doing all of this: Zero. Furthermore, there are drawbacks for both the seller and the buyer. It actually hurts them to do this if they disclose it to the lender.

What was the purpose of that $20,000 again? If it wasn't a down payment, the buyers will need to come up with $20,000 from somewhere else. If it was a down payment, well, why not do 100% financing in the first place? I assure you that a lender to whom this is disclosed will see it this way. Why not just reduce the official sales price by $20,000, pay less in commissions, lower fees, less capital gains, and have the buyer have a lower sales price, which translates into lower property taxes in a lot of places?

Which is precisely the reason this whole thing does not get disclosed to the lender. The buyers are trying to have their cake and eat it, too. They only want to pay $380,000 for the property, and have the lenders think that they paid $400,000. In other words, a material misrepresentation of the situation in order to induce the lender to make a loan they would not otherwise have made.
In short, FRAUD.

It is mostly the buyers, their agents, and loan officers who pull this kind of nonsense. Some of them are thoroughly blatant about soliciting this kind of crime. I don't know what they're thinking, but this is not harmless, this is not minor, and it has been explained to licensees. I can only presume a willful disregard of the rules. It can be difficult for sellers to even know who the buyer's lender is going to be, and it really isn't any of their business. Nonetheless, if the lender can show that sellers were a party to the deception (side agreements aside from the main contract are pretty much proof on the face of it), they can be dragged into the mess. Actually, sellers and their agents can be dragged in quite easily, side agreement or no, but side agreements are the equivalent of a smoking gun still in your hand. So if you're going to insist upon a side agreement, also insist that it be disclosed to the lender and proof that it was disclosed to the lender. Better still to make it all a part of the main contract. Optimum is not to give or ask for cash back in the first place. It sets you up for a criminal fraud investigation, and no matter how innocent you may be in fact, I have it on good authority that they are no fun to endure. If you're a professional, it shows up in records as a complaint against your license, and I'm not even certain it comes off when you're found not culpable.

Caveat Emptor

Article updated here

Carnival of Consumer Oriented Real Estate


People Unclear On The Concept Department: Somebody comment spammed my article debunking mortgage accelerator programs with a pitch for ... (wait for it) ... a mortgage accelerator program. I deleted it, of course, but it would I find their picture in the dictionary under "clueless", "chutzpah", or both?

Remember how I said moths ago that I could see signs that the market might turn back this year, perhaps around the beginning of July?

That's looking to be a decent guess.

Making offers isn't quite the monopoly situation it was. Last week, I made an offer on behalf of a client, and the listing agent told me they got four offers on the property in a 24 hour period. I take those claims with a cynical mind, but my client's offer was good considering the market, and they have yet to counter. That agent is acting like somebody who does indeed have "offers to burn." If four people send offers to one of my listings, I send out four responses, whether they're rejections for hopeless low-balls or counters for everyone else. So far, it's just silence. Unless they're just going to accept one of the other offers as it sits, that's silly. An agent with more than about a week in the business isn't going to throw more money on the table without a counter from the owner.

However, the ratio of sellers to buyers is still about 30 to 1. Not as great as it was last year when the ratio hung in the 38 to 40 range for months, but buyers still have a lot more power than they had three years ago. And here's a critical difference: Properties that are properly priced to the market are drawing interest. I'm running into about two or two and a half times the number of other agents showing the same property I want to see as I was six months ago.

Condos, in particular, are starting to come back, where they were dead the last couple years. The seller to buyer ratio for condos is almost 10% lower than for detached housing. This is due, in large part, to the long delayed sub-prime lender meltdown. When you can metaphorically wave a magic wand and make it look like people with no down payment who cannot document the necessary income can afford the payment on anything they want, people are going to want single family detached homes. That's just the way it is. I lost at least half a dozen prospects that I can name to other agents because I was showing them the two bedroom condos they could really afford, while the other agents made it look like they could afford brand new four bedroom houses with negative amortization loans, often done on a stated income basis.

But now that lenders standards are in retreat, and some long anticipated legal action is starting to happen on Option ARMs, the loans people are being told about are a little less irresponsible. With most of the gonzo negative amortization 100% loans being gone, that means that agents have to sell something people can pay at least the interest on, or tell them they need a down payment. This existence of a down payment of 5% or more is black and white. People either have it or they don't. If they don't, no negative amortization loans. Since most people don't have it, and most negative amortization lenders are now limiting themselves to 80%, and most lenders don't want to stand second in line behind a negative amortization loan for some reason.

The upshot on all of this is that most folks have to make at least the interest every month, and that limits how far over their head unscrupulous agents and loan officers can go. Since it's difficult to make it look like they can afford a property three times more expensive than they should buy, now they are limited to properties no more than about forty percent more expensive than they can buy. Interest only loans are still just as available as they have been, as are short term hybrid ARMs. For people who can afford $300,000, most agents still aren't talking about the $300,000 condo - but they are talking about the $400,000 Planed Unit Development (PUD) instead of the $750,000 house.

Stated Income loans are going through most of the same things that negative amortization loans are. 100% financing has become far more difficult to pull off without a good credit score or ability to document that you make enough money - and "stated income stated asset" loans have been clamped down upon a lot harder than "stated income verified asset" loans. If you've got a down payment, a decent credit score, and money in reserve, you can still get a stated income loan. However, most folks that were buying properties fell into none of these three categories. Stated Income loans were never intended to be "anything goes." They were intended for commissioned sales folk and small business owners who really did make the money and could afford to pay their bills, but had a large number of deductions due to tax laws. With most folks having difficulty with newly tightened stated income guidelines, however, they're having to show they make enough money or go without. This means that they not only have to make the payments, but also that they are restricted to loans where they can prove they can afford the payments. In other words, if you want 100% financing, you may have no choice other than "full documentation."

All of this has consequences for sellers as well. I am going to make my computations off of top of the line A paper full documentation loans with no points, plus California property taxes, etcetera. For loans totaling $300,000 on a $300,000 condominium purchase, it will cost someone approximately $2500 per month for housing, which means they have to make $5000 per month in order to qualify, even if they have no other debts whatsoever. For a $500,000 home, the numbers are cost: $3875 and income: $7750 per month, assuming no other debt service. For someone who wants to buy a $750,000 home without a down payment, the numbers are about $5925 per month expenditure and $11,850 per month in income, assuming no other debts. For every $100 per month in debt service they have, raise the monthly income requirements by $200. How many people do you know with no car payments, no student loan payments, no credit card debt, no computer payments, no furniture payments, no payments at all? Furthermore, since Wikipedia has the median income as being $47,816 per year, or $3984 per month, the median person doesn't qualify for a $300,000 condo even if they didn't have any debt.

The farther up the price scale the property you are trying to sell is, the harder it's going to be to find a potential buyer. The upside is that people want to live in San Diego, and they will do what it takes to make it happen. The downside is that San Diego employers don't want to pay enough so that they can buy a house. You need to be realistic about how many people are competing for your property, and what their means is likely to be. To take the point of view that once you get paid for the property, it isn't your problem is not facing the entire scope of what's out there. Qualified buyers are scarce right now, if not quite so scarce as they were. Furthermore, most of the buyers at the upper end of the income range have already bought at least one property.

I think things are going to stabilize this year. Properties that are correctly priced are moving. Most of what's holding various properties on the market for months is denial on the part of sellers - trying to get more than the neighborhood will support. As a consequence, even though mean time on market is still high at 77 days, properties which are priced correctly are seeing strong activity, and even occasionally, multiple offers. Furthermore, if you're one of those that needs to sell, you are facing a financial deadline, and keeping your head in the sand isn't going to make it more likely you'll beat it. I can see two main tracks for properties out there: The ones that price correctly and get strong activity and a fairly quick sale, versus the ones that list. And sit. And eventually have to lower the asking price even lower than where it should have been to start with. The longer you wait to price correctly, the more it will cost you. In this market, just like any other.

Caveat Emptor

Sorry, but I don't have time to go through these Carnivals for the most recommended stuff today:

Carnival of Real Estate

(Cool, and thank you to the judge!)


Michael Barone reports on perceptions of bias

"Which brings to mind a conversation with a broadcast network news executive I remember from many years ago.

Q. Don't you think it affects your work product that 90 percent of your people are Democrats?

A. No, no, our people are objective, they have professional standards, they report fairly.

Q. Then doesn't that mean that your work product would be the same if 90 percent of your people were Republicans?

(Quickly) A. No, then it would be biased.

Reminds me of a passage from my first translation of the Illiad, a prose edition aimed at teenagers, when Zeus, looking to balance Poseidon's interference in the battle, amended his oath of neutrality "to be neutral on the Trojan side."

Or something I remember reading about a KKK leader saying, only with "Republicans" substituted for the "n-word"

"I'm not prejudiced. I hate all Republicans equally."

The truly scary thing is that I can envision some folks on the left saying it.


A Second Hand Conjecture points to The Ultimate Resource, which shows how people are solving their own problems, given the inventive and the means to do so. In other words, capitalism at its finest.

I have found your blog to be very informative. I was out riding my bike and rode past a house for sale. In a few minutes of Internet research I've found out a bit about it. The property is bank owned and it sounds like a property in need of repair. However the information I have found out doesn't add up.

From a real estate web site listing recent sales in the area, I found out that the property last sold for 5% less than the asking price. Apparently the sale happened in October 2006.

The house is now listed in the local MLS service, and the text of the listing leads me to believe that the house was listed in December of 2006. It seems from what I have read on your site a foreclosure takes at least 3 months, and this house apparently was back in the hands of the bank and listed two months after it sold.

The house is priced well below the market and within my budget, but that the bank got it back that quickly raises a giant red flag for me. Also, given that the MLS listing says the sale is as-is and that there are no contingencies allowed raises another red flag.

How if they don't accept contingencies do you do a home owners inspection? Pay for one before making an offer, and risk you'll be throwing the money away if the seller doesn't take your offer? Or do a home inspection after they accept your offer, and forfeit your deposit if the inspection covers up a big problem.

Actually, foreclosures are perfectly fine for a first time buyer if you've got the wherewithal to work with them.

Lender owned, which means it didn't sell at auction, is an entirely different story than buying at the auction. You can make offers with contingencies for inspection, usually for seven or ten days, and providing it's an attractive offer otherwise, the lender may very well accept. You're always risking the inspection money on any property, because if it comes out that the house is messed up, you still have to pay the inspector. For lender owned (REO) properties, you don't need to forego an inspection contingency. Financing contingencies are also very doable - I've got one in escrow now with both, and I'm working on another. If it wasn't possible, they would reject the offer out of hand, and they haven't. Disallowing an inspection contingency makes the property worth a lot less, because a lot fewer people are willing or able to handle the risks involved. If your particular property is specifically disallowing inspection contingencies, it tells me they know about a problem, and it's almost certainly a big one. It can still be worked, but get yourself a really top-notch buyer's agent. It's worth paying them (or paying them extra) yourself if you need to, because you'll make more on this property, and they will earn it, because there's a lot more liability for them on this kind of property.

If you're looking at an REO, be aware before you even step onto the property that there are going to be maintenance issues. More often than not, there are even sabotage issues. Furthermore, because the lender doesn't live there and almost certainly knows less about the property than an inspection will reveal, they are exempt from transfer disclosures. They are not for Mr. and Ms. Upper Middle Class looking for the perfect house, they are not for Mr. and Ms. Just Barely Scraping Into The Property, and they are not for Mr. and Ms. Fumblefingers, Mr. and Ms. No Time, or even Mr. and Ms. Procrastinate. But if you've got the inclination and the skill or the cash to fix it, foreclosures can be quite lucrative. Foreclosures are always a risk. But if you've got the resources to make that risk a manageable one, you can pick them up well below the price of properties with similar characteristics.

You might also want to read my article, "Why There Is Money in Fixer Properties" if you haven't already.

Caveat Emptor

Article UPDATED here

I've found several of your mortgage articles very helpful, and wondered if you could help me find a way to solve the dilemma I've been presented with by a loan officer at my bank. My husband is Active Duty DELETED, and is getting out in August of this year. We've found a house we want to buy in the state we'll be moving to, but when I went to the bank I was told no lender would touch him with less than a year in the service and no promise in writing of a job in DELETED. He doesn't have any credit history, but mine is fair (I haven't seen my FICO score recently but I do believe it to be over or around 620). I can provide w2s, income tax records, rental history (never a late payment), etc, but I cannot provide proof of the future. Is it true that we're simply out of luck? Where should I turn from here? I'd be very grateful for any information you can provide to me or post on your website, so far this seems to be a unique dilemma...

You have run smack into the question at the heart of every loan: How are you going to pay the money back?

This is understandably a cause for concern for the lenders. They don't want to make loans that aren't going to be paid back, and in order to pay them back, you've got to have or be able to get money from somewhere

What they are looking for is a regular source of income, and you don't apparently have one. You're not going to keep the one you have, and you haven't got a new one.

Now there are loans for people in such situations. They're called NINA or No Ratio loans, because there is no income stated or verified, and no debt to income ratio. However, these loans have lower allowable loan to value ratios (100% financing is tough to find for NINA loans, especially now, and I always did think it was a little over the top) and the rates are higher than full documentation or stated income. Full documentation shows that you have had and are likely to keep a good stable source of income, and documents that you've made enough in the last two years. Stated Income shows that you at least have had the same stable source of income for two years, and usually that you have some money in the bank. NINA loans are driven purely off the Loan to Value situation and your credit score. You are essentially telling the bank, "Here I am! Gotta love me!" You are not providing any kind of documentation that you are able to repay the loan.

Your husband's lack of credit history and the fact that your score is only about 620 do not help. There is no evidence in your email that you are working outside the home.

Now I understand how tempting it is, especially right now, to buy a home. The two of you are getting out and looking to start your post-military life together, and you want to move right in to your new home, and start your new lives all at once.

This is, unfortunately, the kind of desire that quite often leads to disaster. Have you considered what happens if you don't get work? What if you do get it, but delayed several months? Or what if they keep promising to hire you in a few months but it just never quite happens? Meanwhile, that mortgage have to be paid, and you're not likely to be able to pay them working fast food. Meanwhile, the fact that you have this house is tying you to that location and its commuting area, where maybe you could find something that would support your family if you were able to move.

The fact is that buying real estate is something to do when you're certain you are stable enough to make those payments - as in you already have the money coming in, or solid reason to believe it will be coming in. A written offer of employment might be such reason - it isn't always. Cousin Bob saying, "Sure, we'll take you on!" isn't. Even though he's family, Cousin Bob needs to feed his own kids before he feeds you. Friends, old military buddies, former employers - I've seen more than enough examples of people who thought they had a job but didn't than you'd care to know about. You might have a job when they're willing to promise it in writing - they can be held responsible for that in court if they fail to follow through. If they haven't given you such a written guarantee, there is a reason why they haven't.

The one thing that messes up your entire financial situation, for now and for the next several years, worse than anything else is failing to pay a real estate loan on time. I have seen credit scores drop by 150 points for one thirty day late payment. If it gets to the point of a notice of default, or foreclosure, the consequences last for years. Plus you still owe the money, even though you haven't got it.

Once upon a time I wrote an article called, "When You Should Not Buy Real Estate." You fall into the third category I mention, those without a sufficiently stable income. You might also fall into the insufficient time to benefit category. As much as I like putting people into houses and such, the fact of the matter is that you buying a property right now would be very likely to mess you up financially for a very long time. Move into a rental for a little while, unpleasant as it may be. That way, if you have to change your plan, you are free to pick and leave if you need to. Having a property ties you to it and it to your wallet until it is satisfactorily disposed of, something hard to arrange on good terms right now in large portions of the country. On a $500,000 property like most around here, you are risking $500,000. With purchase money loans, there are limits on your liability and the lender's ability to get a deficiency judgment in most states. Nonetheless, to go into a house purchase with the idea of sticking the lender for the difference if it doesn't work out is at least a close cousin to fraud - and it might be fraud itself. This sort of thinking is one of the primary reasons behind the bubble in many parts of the country - and is false to boot. One way or another, you will almost certainly pay for a lender's loss. Since I'm presuming you don't want to do that, better to just not do this until you are a little more stable.

If you could afford to pay cash, this would not be a concern. But if you could afford to pay cash, the loan would not be a stumbling point. Also, some folks might ask, "what if I can make the payments off of a minimum wage job?" which is not the case anywhere in California. To be fair, this does change matters, but be careful that minimum wage jobs are obtainable in your area. If there's 26% unemployment except for four weeks per year, you may not be able to get a minimum wage job, even if you've got the time for it. Furthermore, be careful that you're not biting off more in property taxes than you can chew. California's property taxes are comparatively low. ratewise, which is one reason why clueless renters come here from other states and think, "Wow, they're only paying $4000 per year on a $400,000 property!" and think there's plenty of room to raise property taxes. But somebody making California's minimum wage of $7.25 makes $14,500 - and $4000 is over 27% of that person's gross wages. Senior citizens will lose their homes in droves if the tax rates ever rise - not to mention property values would drop like a rock, thus turning it into a self-defeating measure. Nonetheless, other states do have much lower property values - and much higher property tax rates.

Caveat Emptor

Article UPDATED here

Every so often I'll say something about misplaced improvements. You may be wondering what a misplaced improvement is.

Simply put, it's something that stands out above the surrounding properties so far that they pull it down. Like having a mansion in a neighborhood of shanties. Yes, it's still a gorgeous house and yes, the functionality is exactly the same, but as soon as your walk out the front door you feel like you're in a third world country.

Repeat after me: Real Estate is only worth whatever I can get someone to pay for it. Real Estate is only worth whatever I can get someone to pay for it. One more time, with feeling: Real Estate is only worth whatever I can get someone to pay for it.

Got that? Good. Now ask yourself, would you be willing to pay more for a beautiful mansion surrounded by other beautiful mansions, or would you be willing to pay more for a beautiful mansion surrounded by cardboard boxes? The vast majority of the people out there want to look out of their beautiful mansion and see other beautiful mansions. I understand that even in the areas of the world where most folks live in shanties, the mansions of the wealthy are clustered together.

Probably the most egregious example of a misplaced improvement I've ever seen was this turkey. Yes, ladies and gentlemen, a Realtor really is making fun of a property. Beautiful brand new 2000 square foot home - actually an entire development of about 30 of them - less than a quarter mile off the departure end of the main use runway at a busy general aviation airport. That airport is open 24 hours per day, 365 days per year, and it has to by the terms of the land grant. I love small planes, and I couldn't have lived there. Plus you have to drive through a white trash neighborhood to get there, and there's a freeway being built that will come within about 75 yards. I have zero idea how the developer sold most of them. There shouldn't have been a housing development there at all. If they had to put something in, they should have run a road in off the other side and put in an industrial park or something, but I know of at least two crashes in the field where this development used to be. A travel trailer hook up would have been a misplaced improvement.

Now misplaced improvements aren't always that much of a waste. Matter of fact, if a buyer isn't looking at a property for its investment value, but rather for something like housing five or six kids as cheaply as practical, they can be a good way to find a property that meets your needs less expensively than comparable properties. Why? Because everything around it drags it down, where most like properties are surrounded by other properties of comparable features. You never want to buy the best house on the block if investment is your criterion - but you might want to if you're just trying to find housing for a family of seven and you don't make two million dollars per year.

For instance, about six months ago I found a gorgeous 5 bedroom 3 bathroom property in a sixty year old business route neighborhood, surrounded by trailer parks and older offices and apartments. Some nincompoop had wasted at least $60,000 fixing it up to look like some big executive's entertainment house - but the chance of some big executive buying the property was nil. Across the street was an old office building with chunks out of the stairs, the neighbors all look lower middle class, and there's a trailer park entrance at the end of the block. So I can guarantee that the target market wasn't interested, which is too bad, because it really was a nice place. The guy was asking $80,000 above what I thought the market might actually support, and he eventually lost the property because he couldn't afford the payments on a vacant property and nobody was willing to pay what he wanted. But if he had asked what the neighborhood would support, it would have sold quick to some working family who needed somewhere for their kids to sleep. But the brand new kitchen and travertine floors were just wasted money on the owner's part. Before you improve a property, if selling for a profit is your intention, always look around at the rest of your neighborhood to see if there's anybody else with that level of improvements. If not, you're wasting your money. Don't waste your money, because I guarantee you that potential buyers are going to look around before they make an offer.

Some misplaced improvements aren't as extreme. Just a couple of weeks ago, I found a beautiful property for a couple of my clients that was nonetheless a misplaced improvement. This was beautifully refurbished 3 bedroom 1.75 bathroom home in a neighborhood where those go for $450-460 thousand. The ask was a little over 550, and let me tell you, it was gorgeous. It might have been the nicest kitchen I'd ever seen in a property of that price range, the public areas were beautiful and open, and had a nice mountain view. The bathrooms were new and extremely attractive, not to mention a downright cozy place to take baths, and the bedrooms were great, too. Everything was just wonderfully laid out, and it even had an atrium that lit up the middle of the house. The owners did everything right except one: They didn't consider the neighborhood, which really was a pretty good neighborhood, but houses in this configuration and with this square footage just weren't selling for anything like 550. I consulted an appraiser, who said that if everything was as I described, they might have been able to justify as much as 510 on the appraisal. My clients were looking for a nice place to live and entertain for the rest of their lives, and they had a down payment, so the fact that it wouldn't appraise for 100% of purchase price was not an insurmountable obstacle, like it would be to someone without much of a down payment - which is to say 90% of everyone out there looking. Furthermore, it had sat vacant for seven months with no action (typical for misplaced improvements). We put an offer in, trying to jaw it down to something not too hugely above the neighborhood, and despite all of the evidence I cited, the owners blew us off. I understand that nobody likes to take a loss, but it's not the buyer's problem if you do, just like it's none of their concern how much you might be making. Residential properties are only worth what they are worth, and whereas this one didn't have many of the usual mandatory deductions, there really is no way to make a silk purse out of a sow's ear. The neighborhood is the neighborhood, and this one wasn't Rancho Santa Fe.

Misplaced improvements can be frustrating as anything to sell. Even if you do get an offer for $550,000, when the appraisal comes in at $490,000, that's all the lender will loan on. In fact, the vast majority of lenders won't fund if the total encumbrances are more than the appraisal, so even if you are in a position to offer a seller carryback for part of the price, it's just not going to work unless the down payment is at least equal to the difference between the appraisal and purchase price. How many people do you think want to put down $60,000 of their own money just so they can go through the hassle of obtaining 100% financing, breaking the loan into a first and a second or paying PMI? How many people are even going to have $60,000 to put down if they wanted to? Vanishingly few right now. What happens to most accepted offers is they waste 30 to 60 days in "pending," and then they fall out of escrow and you are back to square one. It's just a cold hard fact that if the proposed down payment won't at least cover the difference, you almost certainly don't have a transaction.

The way appraisers find comps is not by going out five, ten, or fifteen miles to find the comparable properties. Comps almost always have to be within one mile, and lenders prefer with half a mile. Further out, the appraiser is going to have to justify picking those properties as opposed to closer ones. The character of the neighborhood has to be very similar as well as the characteristics of the properties.

Often, in the case of misplaced improvements, someone suggests appraisal fraud. By some strange coincidence, this is almost always the owner, the listing agent, or both. Find an accommodating appraiser. Except that appraisal fraud is, well, fraud. Not to mention a violation of fiduciary duty, unless the buyer is stupid enough to choose to be unrepresented, and even there a good case can be made in law that this nasty seller and their agent took advantage of this poor ignorant buyer. No. Thank. You. There are reasons why there are limits to the lengths good agents will go to to make a transaction happen, and this is one of those cases where those limits are short, sharp, and crystal clear.

So we have seem that misplaced improvements are a disaster for the seller, while being a limited opportunity for a certain class of buyer, but they are tough transactions to make happen for a listing agent, and there is no glory in them. The seller is not going to be happy with the sales price, and it's almost certainly going to take longer than everything else around it to sell. I'm brutally frank with owners of misplaced improvements, because if they don't want to listen to what I tell them, they're not going to price the property appropriately or negotiate in the proper frame of mind, both of which are elements of a failed listing. Failed listings don't do anything good for anyone, and I prefer not to be a part of them. I'm not going to get paid, and everybody's going to end up angry at everyone else, which means it's likely to cost me some future clients also. I'd rather walk away before it gets started.

Caveat Emptor

Article UPDATED here

I have an adustable rate mortgage (5.875) which is set to adjust in 8/2008. My prepayment penalty I'm told expires 7/2008. My first goal is to lock in a fixed rate asap. My second goal is to cash out any equity, but not necessary. I've recently been hearing horror stories about people losing their homes over their rate adjustment. Should I refinance now and bite the bullet on the prepayment penalty? or Attempt to refinance quickly as soon as the penalty expires?


my credit score is 712. My current mortgage is 244,000.00 and homes of the same model are selling between 255 - 265,000.00. What more can you tell me?

The answer to this depends partly upon stuff I don't know, and partly upon stuff nobody knows yet.

5.875 is good enough that you probably don't want to give it away before you have to, especially since you're going to pay $5700 to $7200 in penalties. 6.25 is about where A paper 30 year fixed rate loans with no points rates are right now, so over the next year, and it will cost about another $1000 in interest between now and then, as well.

The problem is that nobody knows what rates will be like in July and August of 2008 yet. Nobody knows what your property value might be then either. Nor do I understand your local real estate market well enough to even guess (it's a long way from Southern California!).

It's going to be hard to get enough back in 15 to 16 months to pay for a pre-payment penalty. On the other hand, this could be balanced out if rates end up being much higher then, or if your equity situation is likely to deteriorate.

One thing I can tell you for certain is that there's no easy answer yet. Every answer I give is going to depend upon things nobody knows yet. If it looks like someone with leftist economic policies is going to get elected President, or someone with basically rational economic policy is looking highly probable, that's going to make a major difference in the election year financial markets right there.

Here's what I expect, as far as rates go: They're going up. I expect rates will be at least in the high sixes by then, more likely in the low sevens, at least on thirty year fixed. My guess is that 5/1 ARMs are going to be between 6 and 6.5. Take all of this with a Mega-grain of salt - I fully expected us to be in the sevens by now, and we're not.

But if we postulate a rate of 7% when your pre-payment penalty expires, that will cost you roughly $17,100 per year on $244,000. 6.25% of $250,000 (your loan with your penalty added) is roughly $15,600. You save approximately $1500 per year on your interest by refinancing now, if my guess on interest rates is correct. However, refinancing now will cost you about $7000. $7000 divided by $1500 per year is roughly 4 years 8 months after that to get your money back. I wouldn't do it. That's about six years you've got to keep your loan to break even on the cost of refinancing now, and it's conditional upon things happening that nobody knows.

Now you don't have a whole lot of equity, and if your market falls, you could be upside down, in which case you're going to have to pay your loan down in order to refinance. If there's no way you could come up with that money, that's another reason to consider refinancing now. However, you would be guaranteed to use up pretty much all of your equity by refinancing now.

In your position, I'd just sit tight. Of course that's very hard psychologically, because you are leaving yourself open to the vagaries of the market, which are not under anybody's personal control. Otherwise Bernanke would lower rates every time he wanted to refinance his own personal loans, and that's just not the way it happens, because that's not the way it works. But spending that much money now and over the next fifteen months just in case rates go up and it saves you enough money over the next six years to break even just doesn't make financial sense. Most folks don't keep their loans that long, which means you've wasted whatever portion of the sunk costs you haven't gotten back.

Just one word in closing: There is no reason for a loan officer to stick someone with a credit score over 680 with a prepayment penalty. You can choose to accept one if you want, but my experience says that most folks end up paying them, and the penalty is a lot more than you're likely to save by accepting one.

Caveat Emptor

Article UPDATED here

Penn and Teller on Gun Control (28:00 video) Severe Language Advisory applies.

As the point has been made any number of times before, in events like today's top news story, if law abiding citizens could have guns, the tally would probably be a lot lower than 32, and I think there would be a lot fewer incidents, as any number of studies have shown that incidence of violence declines when the population is armed.

As the gang member interviewed says: Gun control laws don't keep him from getting guns. All they do is keep the law abiding citizens from being able to shoot back. Because, hard as this fact is to assimilate for some people, criminals don't obey gun control laws.

Michelle Malkin gives specifics

That and sympathy for the families of the victims is all I've got to say.

(I actually had the Penn and Teller link saved here a couple days ago. I would rather not have had such a fresh and graphic illustration of how right they are to accent it)


Instapundit on fossil fuel use and global warming:

Indeed, from my perspective we should be doing the same things — working hard to reduce the use of fossil fuels — regardless of what you think about global warming. But the self-righteousness and exaggeration of the global-warming advocates does set my teeth on edge, and encourage mockery. As I wrote here: "I don't know a lot about climatology. But I know a lot about media bulldozing operations, and I see one of those in action at the moment on this subject. . . . However, my own position is that it doesn't matter much in terms of policy. We should be trying to minimize the burning of fossil fuels regardless of whether it's a cause of global warming or not. The rather patent hucksterism — and outright bullying — of some global warming advocates, though, will probably hurt that cause more than help it over the longer term."

It's good to have evidence that I am not the only sane man on the planet


I'm a bit late to this party, but Bill Whittle has finally posted SEEING THE UNSEEN, Part 2. Completely demolishes conspiracy theorists in general and four specific brands of them in particular. Some Bad Language, but warranted and necessary under the circumstances. Go. Read. It. Now.


VDH's Private Papers on the differences between Judeo-Christian violence and Islamic violence.

Martin Luther King had a dream. So does Victor Davis Hanson. Sadly, the dream of the latter is not likely to happen. Which will do more to endanger the dreams of the former than the actions of any white power bigot.


Argghhh! seems to have the best take on the behavior of the british hostages


Q and O on the largest tax increase in history - the Democrats allowing tax cuts with expirations in the next 2 to four years to expire.


An interesting intellectual approach to the disparity on inprisonment rates between "races" in the United States.

The other day I quoted a loan to someone, and they chose a 5/1 loan at 6 percent with .05 points of discount, and they told me the closest competition was 6.375 with more discount than that. Then when I tried to lock the loan with the lender, I discovered a transient compliance problem that prevented that lender from accepting loans from us for about a week. No biggie, I thought, I'll just go with the second best. It's not as if my competition was even close. So it became a loan that would cost about one tenth of a point of discount instead of only 5%. Difference (on a $500,000 loan): About $250. However, this particular client had opted for the Upfront Mortgage Broker Guarantee, where my compensation is a fixed amount, instead of my standard Loan Quote Guarantee, where if it's not precisely the loan I quote, I have to eat the difference. So I did the ethical thing under those circumstances, and called the client right away to let them know that the pricing was a little different. They then canceled the loan, despite having been specifically counseled about the risks of the plan they chose.

Now the loan they would have gotten was still a much better loan than the competition was offering, and I would have been legally compliant had I just waited and socked them with the difference at closing. Even the Upfront Mortgage Brokers would have accepted the facts had the client complained - if, indeed, they had even noticed. I could have kept my mouth shut and gotten a loan, and at least 95% of all loan providers would say I was stupid for not doing so.

But let's look at it through your eyes: Wouldn't you rather be told, weeks in advance, so that you know what you're really getting? So that if you so desire, you can go shopping for something better? Isn't it better than having it sprung upon you at closing? Isn't this the sign of someone you want to be doing business with?

Some people may feel it's a sign of someone who's springing a little change now in preparation for springing a bigger change later. Except that I don't have to tell you about the changes now. There is absolutely no legal requirement. The fact that your loan provider does tell you right away is a sign that they are going well past the legal requirements. The vast majority of all loan providers are pretending that thousands of dollars in fees and adjustments and even barefaced low-balls don't exist - and you're getting all angry and disappointed because someone who's delivering something thousands of dollars cheaper than the competition is telling you weeks in advance about a $250 difference between the initial quote and the numbers he's going to stand behind with a Loan Quote Guarantee that's still way less than the competition, which isn't willing to issue the guarantee even on the higher quotes?

The problem with the loan industry is that lenders can tell you about one set of numbers to get you to sign up - numbers that they know good and well they are not going to deliver - and then thirty days later when they actually have your loan ready, deliver something completely different, secure in the knowledge that they have this unbeatable advantage of you having actually given them this thirty days to get ready. Entire business plans are drawn up based upon the fact that they can lie, and conveniently "forget" to tell consumers about all of these additions to what the consumer is actually going to end up paying, and consumers will reward them by not only signing up, but signing on the dotted line when it's time.

Now, take a step back and ask yourself: Is someone who comes right back and tells you about the difference within a couple of hours playing that game? Not likely. If they give you a real loan quote guarantee based upon the revised numbers, any future games they are playing are pointless. In fact, if they tell you that the difference came about in the locking process, you can be more confident that they actually have locked your loan, itself a huge problem with the industry. If I haven't locked your loan, I can pretend that the difference isn't going to happen because the rates might go down, can't I?

When people come back right away and tell you about issues in your loan, you should become more comfortable with them, not less. The less ethical ones can pretend the issues don't exist for weeks, until they spring all these differences on you at closing while distracting you with a thousand other things so that you don't notice what you're signing. In fact, the sooner they tell you about an issue, the more likely it is they are doing their best to be honest.

Caveat Emptor

Article UPDATED here

My shoulder is starting to hurt a little less, but it's still going to be a while before my activity level is back to where it was. It still hurts to use the computer normally, and I have to use it a significant amount no matter how much I neglect the websites. But I am going to start putting in new articles again - there is a completely new article waiting for 7 AM Pacific Time tomorrow morning. I may be a while until there are four new ones per week on a reliable basis, but it should gradually increase over the next few weeks until I'm there again.

"what can a consumer recover from title company for undisclosed easement"

Basically, the cost of the immediate remedy, at least here in California.

Here's a standard example. Mr. and Ms. Smith buy a property and they wish to put a pool in. The purchase process reveals no easements and they quickly take possession of the property and start digging. Three hours later, the contractor hits a four foot water pipe buried six feet deep and cutting right across exactly where the pool needs to be.

With a standard owner's policy of title insurance, the title company will pay for the contractor's bill, including the cost of filling in that hole they dug. There may also be a small settlement made for the decreased utility of the property. After all, you can't really do anything about that easement, now can you? Nor can you build anything that conflicts with the easement holder's right of access. No pool, no granny flat, no game room or detached office, at least on that segment of the property, which, given the size of most recent lots, means not at all.

The title company will not, under the basic policy, purchase the property or make a large settlement. The reason for this is that if the standard policy made them liable for things like frustrated purpose of purchase, the standard policy would be far more expensive. People wouldn't want to purchase policies of title insurance, because they insured against risks which are relatively rare, but extremely expensive when they do occur. Who pays for that? The other policyholders, of course.

You can purchase a rider or endorsement for extended title coverage, of course. Furthermore, if certain purposes are critical to your reasons for acquiring the property, you can do additional research, or pay to have it done. It can be expensive, but if you don't want this $500,000 property unless you can build a pool, an office, or a granny flat on it, spending the money can be an excellent insurance policy. Which would you rather do: Spend a half million dollars based on "hope there's nothing wrong" or spend a couple hundred to a couple thousand in advance to make certain there isn't?

Caveat Emptor

Consumer Based Carnival of Real Estate

Haven't gone through this one yet, either. But have to meet my obligation to link back.

Sorry, this is just going to be links to carnivals I submitted to. It hurts to use the computer due to my separated shoulder, so I didn't go through them for especially good stuff like I normally do.

Carnival of Debt Reduction

Carnival of Personal Finance

This originally appeared May 19, 2006, but still has some relevance

I simply love: "Fear and Greed, or How Did the Housing Bubble Get so big?

I'm not sure if you are aware that there is a grass-roots group that is starting a "boycott on housing." They feel that the prices in the San Francisco Bay Area are unreasonable.

It's kind of interesting.

The website is at: http://www.boycotthousing.com/home.aspx

What do you think about websites like this? Do you think that something like this is "catch on?" I submitted my vote (I'm currently boycotting myself until my six figure downpayments actually matters in this wacky market). But I was just wondering what your thoughts would be on this issue.

Can boycotters make a difference in the "real estate" game?

I'm outraged at the high cost of food. Do you think me boycotting buying food will have an effect?

Well, if enough of us did, it would have a marginal effect for a while. But people have to have food to live, and creating all of your own food yourself is just not an option for most folks. This leaves your choices as supermarket or starve. Given those choices, I'll take the supermarket (much as a couple weeks without food might benefit my waistline)

The same goes with housing. I went and poked around that site, and just couldn't find any evidence of knowledge of the laws of economics. The only effect that boycotters will have is to marginally reduce demand, thereby slightly reducing prices for those who are buying, for which my clients surely thank you. If you couldn't afford to buy anyway, it makes zero difference. If it makes sense for you to buy but you choose not to, then you are hurting no one except yourself. If you want to do something real about the high cost of housing, you'd do better to read my article on The Economics of Housing Development and act accordingly.

There are circumstances where I straightforwardly recommend against buying. Right now, given the state of the market, those are a lot of circumstances. I could have made a lot more money than I have these last eighteen months had I been a shark. But the recommendation to buy or not to buy is always based upon individual circumstances balanced against the state of the market.

The clients I'm pursuing right now are those who are looking for a place they can be happy in for the next ten years. Speculators, Flippers, and other players of real estate roulette have mostly gotten the message and dropped out of the market anyway. Given past performance and the approximate size of the bubble (roughly 30 percent at peak in San Diego, in my estimation, which has since deflated by about 10 percent), the speculators who are left are like participants in a game of musical chairs who don't yet realize that the music has stopped. On the other hand, those who need a place to live and can afford it will do very well once prices recover in a few years. I know this from personal experience; I was one of those folks who bought near the peak of the last cycle. Furthermore, with the desperation of many sellers, the bargaining is highly favorable to my buyer clients right now.

There are also significant and increasing opportunities in distressed properties, providing you've got some cash and are willing to buy and hold for a while, or do some significant work. Distressed properties are not a game for the weak of wallet, because you've got to have a certain amount of cash to play the game decently. Given the state of the market, it's very possible to lose significant money even there, mostly if you're a do-nothing flipper. If you're a buy-and-holder or a fixer upper, there are still places for you to do very well in this market segment.

The third group of clients I'm seeking out is those who were taken advantage of by their agents and/or loan officers, to see if I can fix the situation with a new loan. These are folks who were sold on unstable or unsustainable loans in order to get into the property. I'm not an altruist by any means, I'm getting paid for my work, but that doesn't alter the fact that the client wins also, by being put into a better situation if it can be done. If it can't, I am set up to handle a distress sale to get them out of the situation before it gets worse. I'm not a magician who can make it never happen (and nobody else is, either!), but I can stop the green bleeding. Once the bleeding is stopped, then you can talk about getting some money back for having been the target of a Dastardly Deed™, but those sorts of solutions take years. If you try to get your pound of flesh first, you'll bleed to death long before you might possibly get it, with all kinds of unpleasant consequences.

To summarize, housing is a necessary good, one third of the basic "food, clothing, shelter" that everyone is familiar with. This creates a "need" as opposed to a "want". Mind you, most folks have wants bigger than their needs (and eyes bigger than their pocketbooks), but some market segment boycotting housing will hurt only themselves as rents get higher so that the landlords can feed the loan alligator. High demand is not going away. If you really want to make housing more affordable, start doing something about the low supply of new housing. Artificial scarcity benefits only those who are already owners, and that includes the flippers and speculators who are probably the largest part of the reason for the current bubble.

Caveat Emptor

Original here

I have reluctantly decided to start requiring comment accounts again. I was getting way too much comment spam for the level of real comments and even those who were real were often trying to drive their own agenda at the expense of the public, as the comments here illustrate - not at all the sort of discourse I'm trying to encourage.

Why comment spam is ruthlessly deleted: When I recently put up one link to my wife's Mary Kay site, my search engine traffic dropped by a full third, week on week. I did that because it's a part of my domestic responsibility. It's gone now because she wasn't seeing any benefit while it was hurting this site, but the illustrative principle remains: You want to boost your ranking at my expense, it's going to cost you some serious cash. A percentage of your net is not going to cut it. If you're not willing to front cash, don't bother.

Of course, the level of this nonsense was practically zero prior to the "no comment account" experiment, and I expect that's where it'll go back to.


I had an accident yesterday and hit my right shoulder on concrete. I thought I was fine, but later on it became plain that this was not the case. It's painful to keep my right arm in the usual place for computer operation right now. Net result: You may be seeing repeat articles for a few days. Sorry.

UPDATE: Just a shoulder separation. Painful, but no broken bones. Need to apply heat. Should be healed in a few weeks.


Since some people may eye the date and think either one of these items is a joke, I will specifically state that they are not. The experiment in "no comment account required" has become an obvious failure, and I really am going to see about urgent care for the shoulder. I would be happier were they jokes, but such is not the case.

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