September 2009 Archives

The guidelines for this carnival.

As always, I arranged the entries that met guidelines into three levels, based upon originality, usefulness to the consumer, and how much thought and effort and research went into an entry.

STRONGLY RECOMMENDED

We have an Editor's Choice!

Four Pillars talks about Pocket Listings. A pocket listing is where the listing agent keeps the listing "in his pocket" rather than putting it on MLS. It can be ok in very limited circumstances - like an expectation of a market improving later on. For instance, if someone wants to list property with me with Christmas approaching, I always ask if they want to delay putting it on MLS so that when the buyers start looking again after the holidays this property isn't showing 60+ days on market. Allowing a couple weeks for beautification before it hits MLS can also be a good idea. But the agent has to have written instructions from the client to keep it off MLS. Most pocket listings are agents trying to double-end the commission - and that is despicable because it also limits the number of buyers that see their client's property.

Your host presents Low Asking Price on Unfinanceable Properties

RECOMMENDED

What's an Emphyteutic Lease? (And Why You May Want to Avoid One) isn't something that's going to come up in the US much. Mostly in Hawaii and on Indian Reservations. But they are a bear to get financing for, as the lender wants their loan paid off before the lease period ends.

Your Home Is Not An Investment is a Devil's Advocate article that does make some cogent points. However, if you can't spot three issues with it you're not trying.

Five Cent Nickel starts with a very good point: Settle on a maximum purchase price before you start looking. Properties that cannot be obtained for that are not contenders for your purchase.

Real estate in Australia doesn't work the same way it does in the US. Things estate agents can't get away with paints a picture so different than US practices that I have difficulty getting my head around it - although I can point to a lot of listing agents here who'd like to be able to accept two offers at once.

Why Renters Need Insurance - because the owners insurance policy doesn't pay for the renter's belongings.

MET GUIDELINES

6 Surefire Ways To Avoid a Mortgage Meltdown is anything but. He tries to do too much and doesn't understand how real estate or mortgage loans work. But it did meet guidelines.

Credit Scores: How Important Are They? met guidelines, it just didn't contribute anything in the way of knowledge or recommendations.

Details About the $8,000 First-Time Home Buyer Tax Credit Actually, unless congress extends the program, it's probably too late to start because the purchase must be fully consummated within another 30-odd days

Consider Paying Home Mortgage Discount Points is missing a major part of the picture. What's important isn't necessarily how long you'll stay in the home - it's how long you keep the loan. More than 50% of all loans never see their third anniversary. Rates get better or the homeowner wants cash and they refinance. With a five year breakeven, I wouldn't advise paying points to buy the rate down unless I saw some good evidence the people involved are not going to refinance for at least that long.

I wouldn't follow the advice in How To Sell Your House Fast - 9 Tips To Get The Most From Your Home Sale, but it does meet guidelines and most of it isn't actually harmful.

SPAM AND OTHER RIDICULOUS SUBMISSIONS

A spam site submitted "How Retail Security Systems Can Protect Your Business" Does this sound like real estate to you? Doesn't to me. If they can't follow installation instructions, how good is their security system liable to be?

Another spam site submitted "Things That Make a Trade Show Rental Service a Quality One". Not to put too fine a point on it, their product placement is completely unacceptable. Hardly a recommendation for their professional services.

"50 Free Online Tools to Make Killer Graphs" was another spam submission. How about a riff on Paul Simon, "fifty ways to kill your spammer"?

A site named Green Packaging submitted "Go Green with Eco-DVD Cases" Green spam - if that's not a revolting thought, your stomach is stronger than mine.

A shill site submitted a post asking which is better, the movie or book "Angels and Demons" I'm not going to venture an opinion on that question, but I know which side of the title equation the submitters are on. If you have any doubts, consider that they submitted it 28 times to a carnival they shouldn't have submitted to at all.

Another shill site submitted "Guide to Getting Your Free Credit Report from (their paid advertiser site)" I really didn't need to read it to know it was spam. But when it wouldn't display without permission for scripts I had to wonder if there was something actively malicious in their webcode. Get your free credit reports direct from the credit bureaus.

Yet another spam post from an alleged designer website called "Classic Retro Furniture" was something that some people might think had something to do with real estate - until you read the post that talks about nothing but furniture pieces in isolation. I wouldn't consider a designer that doesn't deal with the space as a unified whole.

For those who might object to the treatment their submission received, the relevant information has been in the guidelines since before submissions were being accepted for this carnival. Having been told to read the guidelines, you willingly submitted these posts. Live with it.

Consumer Focused Carnival of Real Estate will return in one month on October 30, 2009, here at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be Midnight October 28th.

This week I participated in the Carnival of Personal Finance

I am usually working with people who really need to consider a condo or townhome who nonetheless have their hearts set on a single family residence. I agree to include single family residences in their search knowing full well I am going to get phone calls like this:

"Dan, a property just popped up on our search! It's right where we want to live and it's within our budget and we like the neighborhood and we want to buy it!"

And then I'm going to look at MLS and 999 times out of 1000 there is going to be a note in there that tells me there is no way lenders will touch the property (in 9 out of ten such properties that don't have it, it should have been there). Net result: the vast majority of all buyers can't touch it, and I have to tell Ms. Client exactly what's going on:

"I'm sorry, Ms. Client, but that property has a broken foundation which no traditional lender will loan money on. So if you can come up with about half the purchase price in cash, we have a possibility, but otherwise that property might as well be the most expensive property in the city, because while you could afford it if you could get a traditional loan, the reason it has such a low price on it is that you can't."

Put yourself in the seller's shoes: They want to get as much as possible for the property. There just aren't a whole lot of people who go looking for ways to give money away that they could have gotten. Even if they are a philanthropist, they give the money to charities, not to anonymous buyers they don't know. Therefore, there is a reason for a low asking price relative to everything comparable around them, and the reason for a major price differential is almost always some defect that prevents a normal residential real estate loan from being obtained.

Agents don't put this information in the public area of MLS or any other advertisements they do for one reason and one reason only: doing so would restrict their ability to attract buyer clients who don't understand either this or the fact that calling the listing agent is about the stupidest thing a buyer can do. I don't recall ever having a listing in this category, but I would make it absolutely the first thing I mentioned. There is no point getting my sellers worked up with showings to buyers who cannot buy the property, and my responsibility is to my clients, not to luring prospective buyers in my own front door. That is a major priority of mine, but helping me find clients is not what people sign my listing agreement for.

Here is what is going on. The sellers have a property with a defect that makes most lenders unwilling or unable to risk money on a loan against the property. A slab crack is the classic example, but there are many others.
Unpermitted additions are another potential deal killer. Properties that don't have a working bathroom or kitchen. Properties without hot and cold running water, or without heat. I can go on and on, but these are the ones agents see time and time again.

Now because traditional real estate loans with traditional real estate lenders are out of the question, the only lenders who can touch the property are the so-called "hard money" or "private money" lenders. Traditional lenders are publicly held companies loaning Other People's Money and they have to conform to what the SEC and Federal Reserve tell them to do. Hard Money loans are individuals and groups that have gotten together specifically for the purpose of loaning money to this market. They can do pretty much what they want, but the lowest rate on a "hard money" loan that I can remember seeing is about 12%, and right now hard money lenders want to see a 35 to 50% down payment minimum.

I keep saying this but it cannot be repeated too often: The Mortgage Loan Market Controls the Real Estate Market. The vast majority of everyone needs a loan in order to buy, and if they can't get a loan on a given property, it might as well be a storage area for what comes out of a sewage filtration plant. Such a property is worth much less than surrounding properties of otherwise equivalent features simply because of this defect. In fact, most such properties are still priced too high - the asking price reduction should be larger than it is - which is yet another piece of evidence on violations of fiduciary duty most agents will commit in order to get a listing agreement.

In point of fact, probably the majority of these properties go to "all cash" buyers who fix the disqualifying problem as well as making it pretty for Mr. and Ms. Upper Middle Class at a substantial markup from what they bought, making enough money to pay their expenses plus a substantial profit as well. That is the target market the agent has to hit. The fact that a given property cannot currently qualify for a traditional loan, but can be repaired so that it does is a business opportunity. Nobody risks pumping that kind of cash into a property without the lure of a potential profit that makes it all worthwhile, and there is nobody else involved in such transactions who is not made better off by the existence of this class of short term investor.

Needless to say, if you own such a property, fixing the problem yourself if you can will more than pay for itself. But there are many reasons people can't, most common of which is "we don't have the cash and can't get it", and without the people in the previous paragraph, what we all get is an abandoned condemned property of no use to anyone. The people who owned it get nothing. The people who would have eventually bought it (and been ecstatically happy to do so) would not even have considered it. The people who fix these properties are not only making money, they are performing a public service. I get angry when people think that the money these property fixers make is somehow morally wrong. It not only is morally right, it is economically beneficial to the community as a whole and everyone else involved in that transaction.

Nonetheless if you are a buyer without the requisite cash, however, the purchase is not going to happen for you. The property might as well cost ten quadrillion dollars, because it is every bit as much out of your reach as a property costing that much. People who don't understand this are taking lenders and loans for granted, and as anyone who's been involved in the real estate market will tell you, you should never do that. Yes, they make good money also. But they also take substantial risks, as any real estate market lender of the last few years can attest.

Without lenders, we'd be stuck in the era before loans. Without the standardized lenders and programs and methods of freeing up money for the real estate loan market that we have built up over the past seventy-odd years, real estate prices would be a lot lower and we'd still be stuck with mostly cash sales with the practical result that the vast majority of real estate value would go "poof" just like a cartoon illusion. It's real wealth, but it rests upon a foundation of our current system of loans being available.

When such a loan is not available for a given property however, that property goes outside the system that we have built up to make home ownership available. Until somebody fixes the property to bring it back inside that system, it really is only worth only a fraction of the value of surrounding, otherwise equivalent properties. And if you as a buyer are relying upon that system of loans to enable yourself to to become a homeowner, such a property is as unavailable to you as if it were somewhere in the Andromeda Galaxy. On the other hand, if you are someone with the cash to buy and fix the property in order to bring it within the system there is serious money to be made - but people who fit in that category already know that.

The usual comment I get from buyers when I explain the above is "Oh, that's a shame," or words to that effect. It isn't a shame and it isn't an unrelated factor - it's the entire reason for the low asking price. If the property didn't have that defect, it would never have come up in your search because the asking price would have been higher than you can afford.

Caveat Emptor

Article UPDATED here