August 2010 Archives

I hear it and read it all the time - advice that says to pre-emptively reject the possibility of paying points. People that talk to me about loan rates that tell me they will not consider any loan that requires paying points.

What they're thinking is that they don't want to pay origination. They don't want to pay for the person who gets their loan approved, figuring that the interest rate is enough for the bank. Here's a cold hard fact: Nobody does loans for free. The interest you are paying does not go to the bank who does your loan. It goes to the actual investor who furnishes the money. And here's the fallacy that completely guts the advice: What has become the most common system of loan origination, where the originator is separate from the investor, has become the most common system because it is cheaper for the consumers. Despite Congress' recent attempt to eliminate brokers as competition for big lenders, brokers are still far cheaper.

Once upon a time, all residential mortgages were done by lenders who intended to hold them for the life of the loan. There was no origination. There was no discount. The Rate was The Rate, and they would give you whatever rate they were offering everybody else that week - if you qualified - as they wanted to make a certain comparatively high margin on the money. If you didn't qualify for The Rate, there were alternatives but none of them was advantageous. In any case, The Rate wasn't that great, but there weren't many alternatives at all, and all the banks charged about the same Rate, and there was pretty much always a prepayment penalty of some sort because they had to be certain they'd make enough money via interest to pay their employees for doing the loan.

This started changing a very long time ago, with the advent of Fannie Mae (and its younger sibling, Freddie Mac). Nonetheless, the two GSEs didn't work in a way that made their role obvious to the consumer until about thirty to forty years ago. The fact that they bought mortgages, allowing lenders to loan what was essentially the same money over and over again meant that rates went down, but also as part of the same phenomenon that lenders were no longer making money from the interest rate of holding those mortgages. The upshot was that consumers now had a choice: In order to get the cheaper rates made possible by the GSEs, they had a choice: They could pay origination, or they could accept a higher rate, such that the lender who did their loan received either a bond premium or yield spread premium, which amounts to a different piece of the same thing. The advice not to pay points for a mortgage actually dates from this period, as holdouts equivalent to today's portfolio lenders came up with what was an advertising slogan that made it look like dealing with agency lenders was actually costing you more, when in reality agency lenders were saving consumers money over the longer term, albeit with slightly higher upfront costs. But when it's saving you as much as two percent per year over the portfolio lenders of yesteryear (who began charging points themselves because they could), it doesn't take long to see that paying a point of origination, or one percent of loan amount upfront in order to get a rate two percent lower with the agency lender was a much better deal than the alternative.

Once started, the advice to not pay points took on a life of its own. After all, what's not to like about not paying for something? But origination points pays for a real service, and if it saves you money in your particular context, then it is worth paying. But if you reject in blanket fashion the possibility of paying points, then you never consider the very real possibility that it might save you money. Nor, in the modern world, is not paying origination a real possibility. I can make my money in the form of points, I can make it via an explicit dollar figure charge that amounts to the same figure, or I can jack up the rate and make the money when the secondary loan market pays me more than the face value of the bond because the interest rate is above that of similar mortgages. Note that there is no option that says "your lender doesn't make money for doing your loan." If your lender doesn't make money, they don't stay in business. I don't do free loans. Nobody does free loans. If I'm not going to make money anyway, I'd prefer to stay home and play with the dog and teach the girls about TANSTAFL, because plainly there are an awful lot of naive children somehow getting through the educational system without absorbing this critical concept. Pretty much everyone else in the loan industry needs to make a living also. Refuse to pay origination, and you're back in the old days of portfolio lenders - with a rate two percent or so above the agency lenders for the same loans.

Points actually come in two forms. As well as origination, there is discount. Origination is going to be paid on every loan. It can come from a figure in points you are being charged that amount to a certain number of dollars, it can come from an explicit number of dollars you are being charged (that amounts to the same number of dollars as the points do), or it can come from jacking the rate up so as to receive yield spread (which must be disclosed) or a secondary market bond premium (which does not). It literally does not matter to me how I make my money - it's still the same number of dollars - but it is going to be made or neither I nor anyone else is going to do your loan. Some companies charge more origination than others, but if they can deliver a loan that is likely to save you money overall, that higher origination is worth paying. Don't lose sight of the forest because you're obsessed with one particular tree, and origination is not the only way that loan providers make money. Not too long ago, I had someone bring me a HUD-1 form where the lender hid eight thousand dollars of profit in plain sight where the borrower couldn't recognize it, in addition to the $1500 they claimed was all they were making via origination. Nor do all forms of origination have to be disclosed. Direct lenders and correspondent brokers do not have to disclose what they make when they sell the loan to the final investor and so advice telling you not to pay points or not to pay origination allows them the ability to cut out other loan providers, at least with the gullible, which is most of the public. Evaluate the loan in terms of the bottom line to you.

I happen to think it's both fair and a good idea to charge origination in terms of points. When I set the rate and cost of your loan, I'm risking more for a bigger loan - and working harder, too. If I make a mistake in pricing the loan, I have to pay a figure in points in order to make it good. If your credit score suffers a sudden drop, the difference isn't a flat fee - it's a charge in points. If you don't get me information I need promptly, or the lenders are just so snowed under that we need to extend the rate lock, that's a charge in points. The bigger the loan, the more work it is to get it accepted by the investor. Conforming loans are, by and large, the easiest - but that's not to say they're easy with the current paranoid lending environment. Super conforming gets tougher. Non-conforming loan amounts these days are like pulling teeth without anesthesia and it gets worse from there. The points charge for origination may go down in steps for larger loans, but for everyone in the industry, you're going to find that the bigger the loan, they larger the number of absolute dollars the lender needs to make it worth their while. They can hide it, lie about it, or risk scaring children of legal age away by honestly disclosing it, but I promise you that you are going to pay it in the final analysis.

Discount is an explicit charge for getting a lowered rate. This figure is always expressed in points. I can translate it into dollars for you, but the actual charge is a certain percentage of the final loan amount. Paying discount is pretty much optional, and the answer to the question of whether you should (and how much) changes with the type of loan, your situation, how long you're planning or likely to keep a particular loan, and the tradeoffs between rate and cost available at any given point in time. Discount points can be thought of as negative yield spread or bond premium, and yield spread or bond premium can be thought of as negative discount points. You cannot have discount points on a loan with yield spread or one where the loan officer says they will make what they need to on the secondary market. What you are paying in such cases is origination, not discount.

In neither case is cutting points out of a loan a matter of negotiating skill. Cutting points down is a matter of effectively shopping your loan and asking the right questions of prospective loan providers and nailing them down as to exactly what they are really offering and paying attention to the answers. You're probably not going to see huge differences of three points for the same rate or a full percent lower on the same loan for the same cost unless you're comparing yourself to someone who doesn't shop their loan effectively, but saving half a point on a $400,000 loan at the same rate is $2000, and saving an eighth of a percent for the same cost is $500 per year for as long as you keep the loan. I don't know about you, but that's more than enough to motivate me to spend the necessary time and effort to shop for a better loan.

In any case, evaluate loans in terms of the bottom line to you, not by how much the provider makes or has to disclose that they make. How much it's going to be in points and closing costs to get the loan done in the first place, versus what it is going to cost you in interest charges every month. They're not going to yield a single unequivocal answer, but rather breakeven points, or "How long do I have to keep this loan in order to get back my initial investment via lowered monthly cost of interest?" When you're refinancing, a zero cost loan is the only thing that can be ahead from day one, but even an ardent fan of zero cost loans like myself is finding them hard to justify in the current market, because the rate cost tradeoff is so shallow on that part of the tradeoff curve. In plain English, when you break even on increased costs in six or eight months due to lowered cost of interest, it's very hard for me not to recommend you pay those slightly higher costs, knowing that the median time people keep loans is about 28 months, and they'll get their money back four times over in that period, and keep getting it back all over again every six or eight months they keep the loan.

By the way, if someone won't guarantee their costs, how are you going to get those figures that gives you the answer of which loan is most likely best for you? The lender knows, or should know, what they can really deliver. You don't, except for what they tell you. If you're not going to follow this model, you're in the same position as the woman who goes to the singles bar looking for Mr. Right. What she's going to find is Mr. Right Now, the sleaze ball who says anything to get her into bed with him and leaves her feeling dumped on and used. The parallels are exact. Nothing wrong with it if all you're looking for is a quick roll in the hay - but I've never heard of anybody who went loan shopping with the intention of getting screwed.

If you don't nail them down with a written guarantee, loan providers can and will lie, omit charges that you are going to pay, and just flat out pull promises out of their backside in order to get you to sign up for a loan. The new RESPA rules only a little more difficult to lie, and it you don't sign up for their loan in the first place, there is no way they're going to get paid for doing that loan.

What I hope you take away from this article is simple: The idea that it may be to your benefit to pay points on a loan, and rejecting the possibility only encourages prospective loan providers to lie about what loan they are really going to deliver. Instead, nail them down as to exactly what they're willing to offer, whether they're willing to guarantee it, and what the limitations upon that guarantee are. Once you have this information, you have the information necessary to decide whether paying points is in your best interest - because it might very well be.

Caveat Emptor

Original article here

On a forum I frequent, someone posted this advice for prospective property purchasers: At closing, at the title office or bank, when signing the title, contract for sale or any transfer instrument (use a single obliterating line) mark out the word "tenant" and write above it "landlord" or "buyer".

Better yet, require a free simple title to transfer ownership without the buyer identified as a "tenant".

I do not understand this "advice" and am turning to you for clarification. Thanks!

I only work in California, but the only times the word "tenant" should appear on a title transfer deed is if it's a leasehold, or to describe the manner in which two or more grantees hold title amongst themselves.

It is possible that someone might contend that a title granted as "tenant" was a leasehold or rental interest of some nature. I can't see it working in the face of a purchase contract, though, unless there's a whole lot of scamming going on, and everybody involved would basically lose their license and their livelihood, and be liable to the purchaser for what they should have gotten, and didn't. Be advised, however, that I'm not a lawyer, so consult one. With that said, however, such words shouldn't appear unless there's a reason for it.

Here in California, the deeds typically read "(A) grants (B) (type of title or interest) in (legal description of property). It doesn't say seller, buyer, or anything else. It simply transfers title from one group of holders holder to another. There can be commonality between the first group and the second - say a parent granting the property from themselves to themselves and their child. Spouses usually automatically join title by action of law, but it can be beneficial to have them officially on title of record in some cases. They can also be used to remove a particular party to the deed, by omitting them from the list of parties the property is being granted to, as in from W, X, Y and Z to W, X and Z.

There are two kinds of transfer deeds most people will see: A Grant Deed conveys any interest in the property, including interests that may accrue due to operation of law at a later time. A Quitclaim Deed conveys only what interests you many currently have. An actual purchase should use a Grant Deed, transfers within a given family most often use Quitclaims. There are others: Warranty Deeds and Special Warranty Deeds, the latter being mostly used in lender owned property. Both are insurable, marketable title, but there are differences and if you need to know, consult a licensed attorney. Sometimes people acquire title through court judgment, and the title being granted is as strong as anything else, if subject to appeal.

The holder or holders can be lots of different things. It can be a corporation, husband and wife, a single individual, a trust, an estate, a partnership, etcetera, or even a combination.

It also includes how the grantees are going to hold title: joint tenants, tenants in common, common property, etcetera. Each of these has legal implications, and those implications change from state to state. Consult a lawyer in your state for more. Joint tenants, also known as joint tenants with rights of survivorship (i.e. survivor gets the entire share of title), is the most common way for married couples to hold property, but there are many others. There can be layers of this - say a husband and wife hold their share of title as joint tenants, but they are only part owners in a tenancy in common. Any time there are two or more owners, the title deed has to say how they are going to hold title between them. Each of the possibilities has legal meanings and consequences. Single property owners can be and usually are described as "a single man/woman", "an unmarried man/woman" (not the same thing as single!), "a married man/woman as his/her sole and separate property" and many other things, but the word "tenant" does not appear in any of the possibilities I am aware of. Each of these implies things about the state of title as they hold it, but a full description is beyond the scope of this article and changes from state to state. Consult your attorney for details.

The interest being granted can be one of several things or a combination of interests. A "fee" is a piece of actual land. An "easement" is the right to use a particular piece of land in a particular way, but without the rights of ownership. The most common easement is access. The owner of parcel A gives the owner of parcel B the right to travel over a specified part of parcel A in order to get to their own parcel, or for other purposes. Utility easements are part and parcel of this, and the parcel owner granting an easement is giving up rights to do things with their property that conflict with that easement - for instance, building a garage or granny flat over the gas line. If conflict happens, the property owner is required to do what is necessary to give the easement owner their rights. Quite often, easements run with the ownership of a given property, in which case the title being granted is a fee and one or more easements. A leasehold is a time interest - for a specified period of time. Think of it as a rental interest to get the idea. Finally, there is a condominium interest, in which someone holds title to a share of an underlying property, which interest cannot be partitioned off, and usually comes with some rights of exclusive use to a portion of that property. In plain English, you own a defined share of the entire thing, and exclusive rights to your condominium unit, your assigned parking space, and anything else that may have gone with a particular unit under the Condominium Plan, but you have no rights to split yourself off from the common ownership interest. Just because you live in detached housing does not mean you don't live in property that is legally a Condominium. It irritates me no end to read "title being conveyed" in MLS being "fee simple" and then find below read that are homeowners association dues on the property. These two things never go together. If there are association dues on the property, it isn't a fee simple.

Whether the person signing a title transfer deed had a right to grant the ownership interest conveyed (or all of the ownership interest conveyed) is a different story. I can grant my interest in a property on the moon to anyone else, but if I don't have any interest in the property granted it is meaningless - a wasted piece of paper. This is the strongest of many reasons for title insurance. People granting interests that they may not own or control happens all the time. Usually, it is to clear up a cloud on title, but fraud is a real and significant factor, and sometimes people legitimately may believe that they are (or were) the owner, but it turns out they weren't due to some unforseeable factor. If someone sells you a property they don't own, and you don't have title insurance, you are out the money, still owe the money on any mortgage you may have taken out, and you don't own the property. Here is a not too untypical example: Owner A dies, and sibling apparently inherits. Sibling sells property to someone, who eventually sells it to you. But Owner A had a long forgotten marriage that was never dissolved, and that spouse had a child. Child discovers undissolved marriage, checks to see what property may have been left by Owner A, finds your property. Child sues for title and wins, as they've got the law on their side. It can happen to you, no matter your current situation. Fifteen or so years ago, an heir of Alonzo Horton (who laid out what is now downtown San Diego well over a century ago) got several million dollars out of an interest in land it turned out he had inherited but lots of people had been using the entire intervening time.

Words in title grants can be important. Unless I was buying a leasehold, I probably wouldn't accept a title deed granted to a "tenant" (unless it was "joint tenants" or "tenants in common" with any co-purchasers in the property), and I'd decline to pay the money until the seller furnished a correct deed. Why should I, when they haven't lived up to their end of the bargain? Why allow them to create a potential can of worms when you don't have to? Lenders, for their part, have also wisely instituted requirements to make the title deeds they are lending money upon conform to certain requirements before they will consummate the loan. They are in the business of making loans that are going to be repaid, not of repossessing property where the owners didn't, but they're not going to tolerate needless clouds on their title if they do need to take over the property. Bottom line: Be careful about wording on the title deed. Word order and even the presence or absence of commas can be important. If at all in doubt, consult your own lawyer.

Caveat Emptor

Original article here

The most common mistake in real estate (and every other aspect of financial planning, for that matter) is to assume the situation now is going to continue indefinitely. In the stock market, people chase last year's returns. They "wait for the market to bottom out". When things are going well, they assume that real estate is going to continue to gain twenty percent per year every year.

This is pernicious. Otherwise rational people just assume that whatever is going on right now is going to continue, and it can be extremely difficult to talk them out of it, as I can tell you from personal experience, having lost an awful lot of income trying unsuccessfully to persuade people to limit themselves to what they could actually afford, and missed out on just as much by trying to move people off the sidelines now that we're ready for a recovery in San Diego. But "Past Performance Does Not Guarantee Future Results" is not just a legal disclaimer. It amounts to natural law, just as strong as gravity or the Second Law of Thermodynamics.

People get caught up in mass psychology, doing things because everybody else is doing them. Mass psychology can move the market. In fact, the history of real estate is mass psychology moving the market. Masses of people believing that a property is worth $600,000, and therefore it is. They believe it's worth $600,000 today in part because they think it's going to be worth $650,000 tomorrow. Or $700,000, $800,000 do I hear $1,000,000? You get the idea.

This works even more strongly on the downslide. People are afraid that if they invest $400,000 in the property today, it'll only be worth $350,000 tomorrow. They don't want to lose money, even if it's only a temporary theoretical loss on paper. They want to wait until the market "bottoms out". Newsflash: Real Estate isn't liquid like stocks and bonds, and should not be purchased (or sold) as if it were, with all of the false conclusions that one assumption leads you to.

I'm now going to invoke one of the great and dirty non-secrets of investing: There is no predicting the top or the bottom. Why? Because it turns so strongly on mass psychology. Nobody can tell when mass psychology is going to change. Nobody can tell what it's going to grab onto, or completely ignore. Not Hollywood, not Madison Avenue, and certainly not your friendly neighborhood agent or loan officer. Mass psychology is the "noise" that disguises the true economic signal.

There is a real economic signal. Most things really do have some kind of intrinsic value to them. This value is determined by function, by supply and demand, and by ability to pay, as well as lesser factors. Real estate is no different than most other stuff in this regard. Shares of corporations have a value strictly determined by the value of future earnings per share. $1 per year of future earnings may be more valuable in a low inflation environment than it is in a high inflation environment. Longer potential earnings streams are more valuable than short term ones - $1 per year per share from a well-run insurance company is more valuable than the same earnings from a company with one technological trick that currently leads the market.

The noise often obscures the signal. A little history that leads to some useful concepts: Back in the first half of the second millennium, the assumption was that Earth was the center of the universe, and that planets (and the sun) traveled in circular orbits about Earth. This didn't fit the observed data (planets sometimes moved backwards against the celestial background), so astronomers postulated that planets moved in "epicycles", smaller circles about what was presumed to be the center path of their orbits, called the deferent. Before Copernicus and Keplerfinally brought the whole house of cards down, astronomers were postulating epicycles within epicycles within epicycles in an attempt to fit the observed data.

Unlike planets, economic variables are moved by more than just one force. The fact that planets and artificial satellites are moved by precisely one known force is why we can plot their orbits so precisely. But economics is a lot more complicated, and so the astronomical concepts of epicycles and deferents have some value in understanding them. Let's even use those terms. It's far more complicated than this, but if you think of mass psychology as the epicycle moving about the deferent of the underlying value, you may begin to get a useful picture of what's going on. The epicycles can be very large and last for years, but markets always move about the deferent in the end. That's where the restorative economic forces trend - and the further away from the deferent things get carried by epicycles, the stronger those restorative economic forces are. Right near the deferent they're not very strong, but the further from the deferent that mass psychology and other epicycle creators move perception of value, the stronger the restorative forces get. Think of a a large ball the size of the US economy rolling down a broad shallow valley where the sides get progressively steeper. Things can happen to the ball to move it out of the exact bottom of the valley quite easily, but at the moment it moves off the deferent, forces start acting upon it to move it back to the deferent. Small, almost unnoticed forces that build up, and build up more the further you get from the deferent.

Now what does all of this have to do with the price of tea in China, or more precisely, the price of real estate in your area? Everything. For over a decade, we had been pushing that ball up one side of the curve, as I detailed in Fear and Greed, or How Did The Housing Bubble Get So Big? (first published February 2006). We had mass psychology and political direction and the lenders competing for market share and profit with ever more aggressive loan products, and they all pushed the ball about as far off the deferent as it was possible to go. We had hundreds of millions of people pushing that ball just a little more uphill, assisted and wedged and leveraged and braced by all the machinery we could bring to bring to bear. We had it firmly in our minds that this was the "good" side of the valley, where we wanted the ball to be, and we wanted it as far up the "good" side of the valley as possible. We even started thinking of this so-called "good" side of the valley as the deferent, but the deferent pays no attention to what we think.

Now let me ask you: When that 14 trillion dollars per year ball finally breaks loose and starts rolling down the hillside, building up momentum all the while as the restorative forces add more and more to that momentum all the way down, and keep adding more and more momentum (although the amounts being added get smaller) all the way to the center, do you think it's going to suddenly and magically stop right on the deferent?

Not in this world or any other. It's got all the momentum that a 14 trillion dollar ball can build up, and guess what? It crosses right over that deferent like it wasn't even there and keeps on going. By this time it's got mass psychology behind it just as much as it ever did on the way up, pushing it ever harder as well. In an economic analog to the gravity assist (aka slingshot effect), it is very easy to push it much further to the "bad" side of the deferent than ever we had it to the "good" side, particularly as the government meddling intending to slow the ball's rolling is in fact making it worse and worse and worse and worse and worse, because the government is not paying attention to the Law of Unintended Consequences.

What's the practical upshot? Well, other than the fact that any disturbance from the deferent distorts the markets and makes for future oscillations, and that anything we can do to the market generates just as many losers as winners, what is the practical upshot for individuals? Nobody can directly control the market actions of others, so how can we as individuals best deal with all of this?

The way we deal with all of this is quite simple. First we have to get as true a picture of where the deferent really is as we possibly can, or at least where we are in relation to the deferent. What is the supply of housing like in your market, and how easy is it to add more? What is the demand for housing like in your market? Do people want to live there? Are we talking San Diego and Honolulu, or are we talking Detroit and Cleveland? Next, we have to ask "what is the ability to pay?" How much do people make relative to the basic necessities of living? How strong and how varied is the area economy? Is it a hub for multiple industries like San Diego and Boston, where if one industry tanks the market is likely to be supported by others, or is it a one industry (like Silicon Valley was twenty years ago) or one company town (like Seattle used to be)?

At any one point in time, the value of a particular property is a function of the value of comparable properties around it. If model matches are selling for $300,000 right now, the property is likely to be worth about $300,000 right now. The only way to tell for sure, of course, is to put it on the market and see if anyone buys it for that. The trend is a function of supply and demand - how many properties are for sale right now and how many people want to buy them - as well as mass psychology. Finding the deferent precisely is incredibly tough, but finding which side of it we're on is usually much easier, if you will ignore mass psychology and what is happening right now and look at the underlying economic factors of a particular housing market.

I performed such a study a while ago; a study I stand by the results of (if anything, more strongly today than then). The study assumed an underlying interest rate of six and a half percent as that was what was available for about one point then; rates are much lower than that today. Mass psychology - a temporary phenomenon of millions of Chicken Littles screaming that the sky is falling - is obscuring the underlying basics as much as it ever did on the way up. Add in that the party in power in the government is doing its dead level best to kill the economy, and things get depressing. But governments change and mass psychology does too.

Obviously, the way to profit is different now than it was back when the market was going full gangbusters the other direction. Then, you could buy any damned property you like, pretend to fix it up a bit, and the rising tidal bore of the market would ensure you could make a profit. But the economics of relying upon flipping a property for quick profit are chancy; market sentiment can turn any time.

Longer term investing gives less spectacular results but more certain ones. The deferent for real estate values does rise over time, with population and economic prosperity and the fact that the amount of land available in an area is fixed, and the trend seems to be tying up more and more of that land in reserves of one sort or another: Open space, limited development zones, historical landmarks, etcetera, not to mention legal terrorism relating to property that may not be within a given reserve but that someone wants to prevent the development of. All of this makes property more valuable as time goes by, population rises, and that same population becomes more affluent. If there are 100,000 properties in your area and 150,000 families, the price will be whatever the top 100,000 bidders are willing and able to pay. If the 100,000th buyer is willing and able to pay $200,000 for a property, that becomes the price. Now suppose there are suddenly twice as many prospective buyers. Does the price go up or down? For the mentally challenged, the answer is "up". It's still the top 100,000 bidders who get the properties - but there are now 300,000 competitors. Bidders are going to have to do more in order to be successful buyers - and the ones who aren't willing or able to do more will go without, just like any other good. But housing isn't like concierge service or spa visits - The alternative is not to do without, but rather to do with a lesser substitute for what we really want. Even if it's underneath a bridge or in their car, people have got to have a place to live. This tends to make for more inelasticity rather than less in the demand curve, or to put it in everyday English, if the price of housing goes up, people tend more strongly to do without other things instead of cutting back on housing. Most people don't have a need for a six bedroom 3000 square foot home no matter how badly they want it - but most people would agree that the minimum acceptable substitute for a family is somewhere between a 2 bedroom rented apartment and a three bedroom1200 square foot PUD, rather than the inside of a drainage culvert. The strongly supported conclusion of all of this is that there is a level that housing values will trend back towards, and that deferent (at least in San Diego) is well above current values.

(Note to renters: The demand for rentals is increasing even more because of all the people who lost property and can't get a loan right now. The vacancy factor in San Diego is already a microscopic 2%. Nor can landlords skate on make-believe loans like so many of them were doing, planning to make money off a rising market. What do you think this is going to do to the rental price, particularly of non-apartment units? If you haven't shopped for a new rental lately, be prepared for a some sticker shock when you or your landlord terminate your current tenancy, and in the meantime be prepared for significantly increased rents as landlords discover they can get more)

So how to you make a profit in this sort of situation? First, put any thought of a quick flip out of your mind. The odds against it are so long as to equate to "Not gonna happen", at least not profitably. This is an investor's market. You buy with the idea that you're going to hold the property a minimum number of years. I would advise three at a minimum, and plan for at least five. Make sure you've got a loan that you're going to be happy with that entire time. It's a lot more expensive to refinance investment property than it is your primary residence, and the constraints on doing so are far more telling. If you're putting enough down, a commercial loan becomes a real possibility, simply because the qualifications are easier right now and the rates are competitive. You need a positive cash flow out of the property - which means most likely you're looking a larger down payment rather than a smaller.

Planning to rent the property out is always a winner. If you can get a positive cash flow out of renting it, the only viable economic model of ownership does not depend upon the location of your job in relation to the property. If you need to move hundreds of miles away and renting it out is not an option, you are at the mercy of the current market and whatever phase the mass psychology epicycle may be in. This is one thing that bit an awful lot of people in the last couple years. Just because renting it out is economically viable doesn't mean you can't choose to live in it yourself, but life throws curves. Having the ability to make your property into a viable rental is a pretty effective trump card for most risks of housing. Even if you can't live there because your new job is on the other side of the continent, someone will want to. Especially in San Diego.

Make it habitable, bring the maintenance up to date and keep it that way, but with that said, I would hesitate about upgrading a rental before the actual time comes to sell it. Renters can't ruin your new remodel if you haven't done it yet. Granite countertops, maple cabinets and travertine floors still need to be taken care of. Furthermore, they do got old and less attractive looking. When you go to sell, you want them to be brand spanking new to sucker in buyers without a good agent, one of those bits of detail that sells a property that has already appreciated for a noteworthy premium. Upgrading isn't what makes the property more valuable; the market has already done that. Just like most long term investors, you really made your money when you bought - you're just waiting for the market to formalize what you know is going to happen. You've already made a profit by buying when prices were cheap - you're just not sure when the check for the profit is going to get here. Warren Buffett (among many others) has made pretty much every one of his billions of dollars the same way.

There are precisely two times in the history of holding a property when the price counts: When you buy it and when you sell it. In between, the market value can be thirty-nine cents for all you care. If you don't sell it then, it's not important. If you know that market is going to revert to something higher in a few years, you know you've already made a profit, you're just waiting for the check to roll in. In the meantime, you're living in it (gaining the valuable benefit of shelter) or making a little money every month from the rental.

People think they're going to outsmart all of this by waiting for the market to "bottom out" or turn around, just like they think buying property when the market is rising is a "can't miss" proposition, and for precisely the same same fallacious reason. First, nobody can predict exactly when the market will turn. Second, when it does turn, it takes a while for it sink in to the public consciousness. Mass psychology, remember - it takes a lot for things to penetrate. Third, when it does manage to get people's attention, it's because you've already missed the best window. The way you figure out that the market is going up is by missing the first ten or twenty or fifty percent of increase, if not more. Fourth, mass psychology is fickle. It's difficult turn the market back around short of what I've been calling the deferent point, but it can happen, has happened, and will happen again. Fifth, as I have said previously, what I've been calling the deferent can be very hard to discern exactly. Suppose the market is already past that by the time you wake up and smell the coffee? That's how bubbles happen, and how people get caught up in them and metaphorically lose their shirts. How many bubbles of one sort or another have we had in the last ten years? Betting on making money because of another bubble like the one we just had anytime soon strikes me as a bad bet such that everybody that makes it is likely to lose. So don't make it. But the psychology of "waiting for the bottom" encourages precisely this kind of thinking.

You can always find a good investment if you've got the patience. But right now, properties that are going to make someone an awful lot of money when the market normalizes are so thick on the ground that you can't hardly avoid tripping on them. Furthermore, mortgage rates are near all time lows. The interest cost if you need a loan, or want one so that you can put leverage on your side, is even lower than the base cost in dollars. The time to make a bet that you're likely to win is when the odds are on your side - while the market is below long term trends. You know it's going to come back eventually, and as long as you can afford the property, you're just waiting for the check to arrive.

Caveat Emptor

Original article here

I am continually confirming that a large percentage of people can't handle negotiations like an adult. They focus in on garbage and ignore what's really important.

I recently was going to deliver a loan that cost less, as well as being 3/8ths of a percent lower interest rate on exactly the same terms as the competition quoted. Furthermore, my quote was guaranteed where the competition's was not. However, because my company's compensation was disclosed while the competition's was not, they chose the other loan.

Real Estate loans are not something that the minimum wage fast food worker can toss off in a few seconds like filling a soda cup. If we get all of the paperwork just right with no hitches and everything works on the first pass and it doesn't take too long to price it, such a loan can be done in five to ten working hours when I first wrote this. With complications due to new regulations and overly paranoid lenders that have arisen since, thirty working hours and 45 days seems to be about the minimum for a loan now. And getting in done in minimum time requires not just the right situation, but a lot of skill and a not inconsiderable amount of knowledge of the loan market.

Nobody does loans for free. Typical loan production, even at a busy brokerage, is three to six loans per loan officer per month. That's got to pay rent and utilities and the salaries of everyone from the receptionist to the CEO. Yes, I've done more, but if you investigate you're going to discover that for most loan officers, most of their time is spent prospecting and selling. That's part of the reason why most places have processors and transaction coordinators - to relieve sales folk of tasks that they don't have to do so they can go out and sell more with the time they save. I can point to lenders and brokerages where basically the only work that loan officers actually do is talk to prospects and clients. They don't price, they don't do the application, they don't process, they don't deal with underwriters or escrow or title, they don't attend signing - all they do is sell the loan. The reason for this is so they can talk to more prospects. The time of good sales folk is important, but some of these loan officers have no clue as to whether the loan is ultimately going to be approved. This is one of the reasons why people end up with different loans than they were originally told about. There was a reason why they weren't going to qualify for the loan on which the loan officer gave them a low quote, but the loan officer didn't know, and it's sure as gravity no one else is going to tell you between sign up and delivery, and at delivery, your choices are to sign these documents or don't. If you need that loan at that time, guess what? You are going to sign those loan documents and become part of the statistics.

Not too long ago, I had some people call me through Upfront Mortgage Brokers (UMB). They had heard the UMB way was better, and it is better than most, but it requires you be able to deal with money like an adult. These people wanted a million and a half dollar loan with a low down payment. They had great credit and likely sufficient income, but they wanted an A paper loan with no pre-payment penalty. Now I can get zero down payment A paper loans with no pre-payment penalty no problem up to the conforming limit (currently $417,000), but above that, lenders start making it harder and harder, and there are three break points in most lender's rules between conforming loans and a million and a half. When I'm working under UMB rules, I have to negotiate every penny that my company is going to make up front, and I told these people that my company needed $5400 to make that loan worth our while. This was between three and four tenths of a point grand total, and that included credit and what the processor was going to make. But that sounded like "too much" to these people, who told me that they were going to the bank who "promised never to charge more than two points." When you do the numbers, they were telling me that $5400 was "too much" but $30,000 wasn't - not to mention the fact that I know this lender, and they'd have made another four percent on the secondary market with the loan they gave these people - $60,000 in addition to the 2 points they charged. It's to be admitted that the lender I was going to put them with likely would have made about 2.5 percent, or a little under $40,000, selling their loan on the secondary market, but these lowered margins roughly $45,000 total that I and my lender would have made versus $90,000 that the other lender would charge translate directly to less cost, a lower interest rate, or some combination of the two (there is ALWAYS a trade off between rate and cost in mortgages). Direct lenders can price your loan to make anything they want on the secondary market - and they don't have to tell you about a penny of it, unlike brokers. Indeed, the loan I quoted was better all around to the prospective client - but my compensation was disclosed and theirs wasn't, despite the fact that what we were going to make was chump change compared to everyone else. So this person, a highly paid professional who should have known better, went with the other provider.

So despite the fact that working to UMB guidelines actually lets me quote and deliver loans with slightly better pricing than my usual way, I have discovered that it's mostly a waste of my time. The client is assuming pricing risk, all I get is a flat, pre-negotiated fee - but they know what that fee is, and it's not what most folks think of as "cheap." Never mind that it's a lot cheaper than the provider they ended up with, people seem to think that the $5400 they know about is somehow worse than the $30,000 they don't.

The smart thing to do, of course, is judge that loan based upon the net terms to you. Type of loan, rate, total cost, and whether there's a prepayment penalty. I can get my commission paid out of yield spread or rolling it into your balance, same as anyone else. You don't have to write me a check just because I'm working for known compensation. In fact, since that known compensation is less, I can get you a lower rate, or pay some or all of the closing costs that you'd end up paying through another provider - sometimes even both. But just because I can't hide my compensation in your new loan amount and rate, or pretend that I wasn't paid somehow, doesn't mean the other loan is better than mine.

Loans aren't free. If you don't understand how someone is getting paid, chances are they are making a lot more money than the loan officer who is willing to go over it. If this seems like too much work to you, take comfort in the fact that you're not wasting time scrutinizing the wrong thing.

The intelligent way to compare competing loans by the terms to you: What type of loan is it? What is the rate? How much will it cost, grand total? Is there a prepayment penalty? Will they guarantee their quote, or are they just talking "bigger better deal" to get you to sign up? Ask specific questions, and don't settle for anything other than specific answers. The usual modus operandi is to hide loan costs in your new loan amount after pretending that there aren't any until you go to sign documents. Just because nobody wants to talk about it doesn't mean the answer is "zero." Just because you don't have specific numbers doesn't mean it's going to be better for you - in fact, the opposite is the way to bet. Nail them down before you sign that loan application.

Caveat Emptor

Original article here

Got a search for "mortgage closing documents do not sign changes."

Unfortunately for this person, the documents you get at closing are what legal folks call a contract of adhesion. This means you can either accept it, sign, and adhere to all the terms as presented, or you can walk away. Basically your choice is to take it or leave it, in exactly the form presented.

Now on those rare occasions someone actually has the intelligence and good sense to walk away from a situation where the terms have been changed, the prospective loan provider does have the option of offering you a better deal as incentive to do business with them. Like, say, the loan they originally talked about to get you to sign up with them. Mind you, they don't have to, and the costs of that other loan may mean that they would rather do no loan than that loan. Furthermore, they've got to re-draw the appropriate paperwork.

Now I'm not a lawyer, but the way contracts of adhesion were explained to me is that if there is any legal ambiguity, it will be interpreted in your favor. This doesn't mean you can claim you thought it meant something different than the average person would understand; this means that if there is a legally ambiguous wording that could legitimately be interpreted two different ways, and you and your lender disagree as to the meaning, the courts will generally rule in your favor. Once again, the law is different from place to place and the courts have the final say; check with your lawyer.

Now in the loan world, it is much more common than not to be offered a loan contract at final signing which differs in some material form from the loan terms that were described to you in the beginning. The loan provider will generally offer you a loan of the same type, and usually at the same rate, but most often the costs to get that rate will be significantly higher than were listed on the Good Faith Estimate or Mortgage Loan Disclosure Statement. Neither one of these forms is in any way, shape or form a legal commitment, nor are any of the other forms you get at the beginning of the loan process, such as the Truth In Lending Advisory. This has improved for consumers somewhat since the new rules for the 2010 Good Faith Estimate became effective, but there are companies out there who have the loopholes completely wired to let them pull a legal "bait and switch" like the worst of the bad old days.

The only thing that means anything is the loan contract, or Note, that you are offered at the end of the process, together with the HUD-1 form, which is the only accounting of the loan required to be correct and complete.

Now the difference between the initial teaser loan they talked about and loan contract they actually got approved is one of the reasons why the less than ethical providers out there often want a cash deposit for the loan, particularly if their rates are not particularly competitive and they know it. If they're nervous someone will come along behind them and offer you a better deal, they want a cash deposit so that they still get something if you pull out, and many folks obsess about the cash deposit to the point where I could offer them a deal that saves them several times the cash deposit, and they still wouldn't switch. This isn't to say not to pay the twenty dollars or whatever it costs them for the credit report, this is to say don't deposit the appraisal fee (several hundred dollars, which should be paid at point of service) or even part of a point "to be refunded if the loan funds within (a certain amount of time)". Chances are the loan isn't that great, particularly not the real loan they are really going to offer, and that's why they want to lock you in by having something to hold over you if you don't sign on the dotted line at the end of the process.

Caveat Emptor

Original article here

The vast majority of the population out there wants single family detached housing. The virtues and benefits of the single family residence have been extolled ad nauseum, and the drawbacks of the alternatives are the stuff of urban legend.

Unfortunately, in San Diego and many of the other densely populated urban areas of the country, the price of single family detached housing has gone beyond what the average person can easily afford. Even if they fall further from this point, in many areas, San Diego among them, the price of a single family residence isn't going to fall to what the average single worker can afford. The supply is too low, and the demand is too high. When you consider economic reality, the evidence is overwhelming that the real estate market in San Diego at least was beginning a very turnaround before the government spooked everyone, and even in other areas where prices still have further to fall, there's a limit to how far they're going to go.

So for people earning average wages, the choice becomes purchasing one of those alternative forms of housing, saving until they can afford it, or being a renter for the rest of their life. I went over how little saving for a down payment helps most folks, and how a strategy of buying what you can afford now helps more and faster than saving for a down payment. One further option exists, of course: Move to a less expensive market, but that requires finding a job there. There's a reason that all of the highly demanded urban markets are in high demand: That's where the jobs are!

Still, people will tell me they don't want to buy until and unless they can afford a single family detached house, with no association. That's fine if they're going about the process of saving. Most of them would be better off buying the lesser property and using the appreciation to leverage their savings, but it's okay to decide to take an alternative route to getting what you want. It's a free country.

However, in my experience, it's really rather rare to find people who are actually putting the money aside. It's great if you want a house and are putting the money aside to make it happen. I just helped a couple that could afford a beautiful house in a great area because they both worked hard and saved something like five years of their combined earnings for a down payment, but they're the rare exception. I know a lot more people that have been planning to buy a house for twenty years and have nothing saved at all, than I do people like that couple.

The cold hard fact of the matter is that if you're making fifteen or twenty dollars per hour, you can't afford the payments on such a single family detached house unless you've got a huge down payment. That's not likely to change unless we start being a whole lot friendlier to development, and in places like San Diego, there isn't room to do so even if we wanted to. There's too many people who want that sort of housing, and not enough land and not enough houses to go around. High demand, limited supply. Remember your first economics class. What does that do to price?

People will tell me in one breath that they don't want to deal with home owner's associations, then turn around and tell me they'd rather continue dealing with landlords. Landlords have more power than HOAs, and are less subject to moderating influence. If you're an owner, you have a vote and a voice in the HOA, and you can even run for the board yourself. If you're renting and don't want to follow the rules, the landlord will evict you and find someone who will. They have all the power they need in a vacancy under 3%!

There is always going to be a wider market further down the socio-economic pyramid. There are more folks making fifteen or twenty dollars per hour than forty. Even those making more have the option of buying cheaper housing, and there are those who do so, while those who attempt tricks to afford more house than they can afford regret it pretty much universally. If you buy the property, you owe the money and are paying the interest. Tricks like negative amortization, that make it look like you can afford more property than you really can, will come back around to bite you, with so few exceptions as to be statistically a non-event.

In California, townhomes and PUD developments are most often legally condominiums as far as title goes. It's just the physical set up that differs. Condominiums are multiply layered, stacked one on top of another all in the same building. Townhomes are typically only one unit high. They may be multiple floors and have shared walls, but no upstairs or downstairs neighbors. This improves the privacy situation, but it also increases the price, because land is what costs the most money, and there's only one unit on any given piece of land. PUDs are one further step up the line: They may be individual completely detached structures, but they share a common lot, so maintenance and such is usually shared, and you usually have to match the neighbor's decor. There may not be much space between units in a PUD, as I've said before, but there is usually some. All three usually have some sort of shared recreational facilities, as well, but not necessarily. This can be a very good thing. Lots of people who want a pool can't really afford the cost and the maintenance on their own, but spread it out between twenty or fifty or a hundred owners, and it becomes an entirely different issue. Lots of folks get really like the community facilities offered by an HOA that they couldn't afford on their own.

There are ways to do each sort right and wrong. The sin most developers commit with PUDs and townhomes is trying so hard to cram as many as possible onto a given piece of land, that each unit has effectively no privacy. With pure straight condominiums, the main sin committed is failing to insulate each unit sufficiently from noise in the neighboring units. Doing it right isn't cheap, and cuts into the profit margin. This also happens with townhomes and some PUDs, but to a far lesser extent. A complex where the developer did it right will be a little more expensive per square foot, but will be a much better investment. Granite counters and travertine floors get old, get dirty, and eventually do need to be replaced. The fact that you and your significant other aren't entertaining the neighbors every time you get intimate, that you can have friends over without disturbing the neighbors, or even that you have a private little back yard to barbecue in, won't.

If you're careful in your initial purchase, you can be happy and private in a condo, townhome, or PUD for many years. If you fall for a bad unit with nice surfaces now, you're going to suffer. If you pick a good unit, the way that leverage works will quite likely leave you very happy with your investment. If you pick a bad one, not so much. If you pick a good one and decide to stay, you'll likely find that your cost of housing becomes a low fraction of what rent would cost before too many years have passed.

If you can't afford the payments on a more expensive property, it's not a good idea to buy it. But if you don't buy anything at all, the economic prognosis for lifelong renters isn't good. This means that if you can't afford the property you really want, it's still a good idea to buy something your family can live in. Condos, townhomes, and PUDs may not be as great as single family detached housing, but they're a long way better than renting, and you can use the leverage inherent in the way property values has worked for the last century or so to help you get where you really want to be more quickly and more easily. Even if you never move up, you have placed your costs of housing permanently under your own control, given yourself a voice and a vote in how things are run, and the odds are overwhelming that you'll end up in a much stronger economic position.

Caveat Emptor

Original article here