June 2013 Archives

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.

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, 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 before I wrote this, 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 large 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, but rather an early sixties upper middle class development that had not updated with the times.

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 with a normal down payment left over. 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 (when 100% financing could be obtained), plus the additional money lenders are now requiring for a 5% or more down payment? How many people are even going to have $60,000 extra 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, sold within the last three months. 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 (The one good thing about the new HVCC standards is that I don't get this request as often). 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 classic ingredients 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

Original article here

The original article was written when rates were higher. Rates are lower now so the answer is slightly different, the thought process to make that decision is the same.

I have an adustable rate mortgage (5.875) which is set to adjust in DELETED. My prepayment penalty I'm told expires DELETED (same time). 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?

later:

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 were when I originally wrote this, 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 when your fixed period and prepayment penalty expire. 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 18 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.

Let's assume rates are going up. Otherwise there would be no point to this conversation. If rates are the same or lower than they are now, any money you spend on refinancing or a prepayment penalty now is wasted.

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 this assumption 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.

You don't have a whole lot of equity currently, and if your market falls further, 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. At this update, refinancing at 100% loan to value ratio isn't going to happen except for a VA Interest Rate Reduction Refinance Loan (IRRRL), and the person writing the original question was not in a VA loan because as far as I'm aware, they only permit fixed rate loans.

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 the federal Reserve Board and company would lower rates every time they wanted to refinance their 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 eighteen 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 not and never has been a legitimate reason for a loan officer to stick someone with a credit score over 680 with a prepayment penalty. The only excuse I can come up with is that the borrower requested one in order to get a slightly better tradeoff between rate and cost. 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

Original article here

Just got a search "how can I tell if my prepayment penalty applies to selling my home"

Read The Full Note. You need to do this before you sign it. I know that many people are just thinking "Sign this and I get the house!" or "Sign this and I get the money!" but a lot of loan providers - often the very biggest - scam their customers by talking about one loan with very favorable characteristics, and when it comes time to sign they actually deliver a completely different loan with a prepayment penalty, burdensome and unfavorable arbitration requirements (I've seen stuff that amounted to "the bank chooses the arbitrator"), and any number of other unfavorable terms, not to mention having a higher rate and three times the cost, and being fixed for two years as opposed to the thirty they told you about.

Any loan officer can make up all sorts of paperwork along the way to lull you into a sense of security. The only paperwork that means anything are the papers you actually sign at closing with a notary present. The Trust Deed, the HUD-1 form, and the Note. Concentrate on these three items. The HUD-1 contains the only accounting of the money that is required to be correct (things like do you need to come up with more money than you were told?). And the Note contains all the other information on the loan that your provider might actually deliver. Notice that wording - I said might deliver. Just because you sign the Note doesn't necessarily mean you get any loan, let alone the one that Note is talking about, but these are the terms you're agreeing to now, and most Notes do actually fund. They can't change the terms without getting you to sign a different Note. But once you sign and the Right of Rescission (if applicable) expires, you are stuck.

Get that other loan - the one your loan provider has been talking about up to now - out of your head. This is the moment of truth as to what they actually intend to deliver. The majority of the time, the loan they actually deliver is significantly different from the loan they were talking about before now, and this document is where the truth lies. Amount of the loan (does that match what you were told?). Length of the loan. Period of fixed interest. What the fixed rate is, and how the rate will be computed after the rate starts adjusting. The Payments: how closely do they match what you were told? Payments are a lot less important than the interest you are being charged, but if the payments are $5 more than you were told (or if the interest rate is different), you were basically lied to. If the real loan was available and the principal correctly calculated, the payment should be within $1. $20 off gives the loan provider literally thousands of dollars to soak you for extra fees in, even if the rate is correct. A competent loan officer knows what loans are really available and whether you are likely to qualify, and can calculate pretty closely how much money it takes to get the loan done. From this flows the payment. Payment is a lot less important than most people think, but you do need to be able to make it, every month. Furthermore, that's how most people shop for loans and how unethical loan officers sell bad loans. Shopping by payment is a good way to end up with a bad loan. Many loan officers will tell you about this nice low payment, and conveniently neglect to mention the fact that if you make this low payment, you'll owe the bank $1200 more at the end of the month than you did at the beginning.

So take the time to read the entire Note before you sign. There are all sorts of things lenders slip in. I worked for a very short period at a place that trained its people in how to distract you from the numbers on this and the HUD-1 and the Trust Deed. This is a legally binding contract you are entering into, you are agreeing to everything it says, and there aren't a whole lot of methods of getting out of it if you don't like what it says later. Once the loan funds, you are stuck with the terms, the costs, and everything else. The only way out, in general, is to refinance, which means paying for another set of loan costs and quite likely the prepayment penalty on this loan. Prepayment penalties are multiple thousands of dollars. So don't allow yourself to be distracted. Read The Full Note.

Caveat Emptor

Original here

I've written articles on when you can't make your mortgage payment and how to react if you see foreclosure coming in time to do something about it, and even on Short Payoffs, but all of those are owner (seller) oriented. This is intended as a basic buyer's guide to getting a bargain from people who bit off more than they could chew, with emphasis on the current local market but applicability anywhere.

There are essentially four phases in the foreclosure process. The first is pre-default. They've made late payments or none at all, and there's no way they can keep the payments up, but they won't do the intelligent thing, which is sell for what they can get. Many people who own properties headed for default are deep in Denial. Yes, this is often because something bad happened to them for reasons beyond their control. I'd be happier if those sorts of things didn't happen, but the amount of rescuing that's going to get done is not as much as I would like - if you don't qualify for a loan modification, you are on a course for disaster. There are very few White Knights running around, and the ones who claim to be White Knights are usually blackguards. Unless the seller knows of some factor that is going to change, this is the smart time to deal with the problem. Before the Notice of Default is recorded, nobody really knows but the owner and the bank. Once the Notice of Default hits, all the sharks come out because everyone knows the owner is in Dire Circumstances. Let's face it: most folks will make the payments on their home even if they let every other bill slide. When someone can't make their mortgage payment, and it's public information as a Notice of Default is, everybody and their pet rock knows that you don't have any choice but to sell. They'll flood you with offers, but they won't be good offers.

Now if you're looking to buy at this stage, the thing to do is examine the Multiple Listing Service. "Motivated seller" and similar phrases are often code for "These people can't make their payments!", particularly in the current market with prices declining somewhat and many people who stretched beyond their means. It would be great to be able to get a list of properties that are sixty days or more delinquent, as this would include the folks in denial, but it just isn't going to happen. The only folks who know are the banks and the credit reporting agencies, and they are prohibited by privacy laws from disclosure. So at this point all you have to deal with are the people who are not in denial. When the market is rapidly appreciating, this is a good place to find a bargain, because once the Notice of Default hits, the sharks swarm, so if you can find these people before that, you're in a strong bargaining position if you correctly suspect they can't make their payments. The taxes being delinquent is often a good indicator of this, but there is no way to know for sure unless the people or their agent tell you, and the agent who tells you has just violated fiduciary duty. This can mean prospective buyers overplay their hands in negotiations, which is fine if you intend to move on if you can't get a "Manhattan for $24" type deal, but if it's a property you want and can make money on, overplaying your hand can poison the atmosphere. There aren't many "Manhattan for $24" type deals out there. There are a lot more good opportunities for someone willing to pay a reasonable price and hold the property a while or make improvements. Deals so good that they instantly make oodles of money, someone will usually come along and offer the poor schmoe on the other end a better deal, and if the poor schmoe has a decent agent who's looking out for their interests, they can switch to the other offer. Buyers and escrow companies don't like it, but it can be done. It's extra work for the listing agent, so they may not want to, and they may not have done the best set-up, but it can usually be done anyway.

The reason it's smart for sellers to sell at this time is that this is when they are going to get the best deal. The mere act of entering Default is likely to cost thousands of dollars. Furthermore, this is the phase with the most opportunity to find a property at a better than usual price for buyers, because most of these don't get to actual default. Someone will come along and make an offer, and a listing agent who gets an offer on one of these is likely to advocate taking the first reasonable offer, reasonable being defined as "anything vaguely in the neighborhood of the asking price," and the asking price itself is likely to be lower than it otherwise would be.

The second stage of the foreclosure process is default. The Notice of Default has been filed, and because it is a matter of public record, the sharks instantly react to the blood in the water. The seller is going to get dozens to hundreds or even thousands of solicitations. Also, once the property is in default, the bank can require the owner bring the Note entirely current in order to get out of default. Whether or not the property is listed, they're going to have agents offering to sell it for them, individual buyers who want those Manhattan for $24 deals, and lawyers offering to "protect" them by declaring bankruptcy. By the way, I've never heard of anyone who came out better in the end by declaring bankruptcy, so you probably don't want to do it if you're in this position. I know it's your home, and you're likely extremely emotionally attached to it, but declaring bankruptcy doesn't mean you don't owe the money when it comes to a Trust Deed.

Every single one of these folks, lawyer, agent, or prospective buyer, knows that you're in default. Some owners are still in denial at this point, but all denial means at this point is that such an owner is not likely to take the best offer they'll get. It's at this phase that most "subject to" deals happen, usually with highly appreciated properties with significant equity over and above the trust deed. If the owners owe anything approaching the value of the property, that's a silly situation to do a "subject to" purchase for buyers, and most of the prospective buyers (those with decent advisors or agents or experience) won't do it if the equity is less than a certain amount or proportion of the value.

The third phase of a foreclosure is the auction. This is typically a very short period. Five days before the auction date itself, the owner loses the legal right to redeem the property, although the bank will usually let them until the last possible instant. There is also a legal requirement to vacate the property before the auction. "Subject to" deals can still go through as long as the bank will accept redemption. Buying at the auction itself requires cash or an acceptable equivalent. You don't go to the auction and then get a loan later. At the very least you have to have the loan prearranged and a check for the proceeds in hand. This can mean that the rate is significantly higher, and it can be difficult to refinance within the first year.

The fourth phase is after the auction. In California, if the property does not get a bid for at least ninety percent of appraised value, it does not sell and becomes owned by the bank. The bank doesn't want it; they're not in the real estate business and in fact, they are legally required to dispose of it within a certain time. In the current market, this can be the best place to acquire a property. The bank knows they're taking a loss, and the longer it goes, the bigger the loss. Mind you, because the bank usually takes a loss, few properties go to this stage. Not only do they take a loss, it also ties up a lot of their working capital - money they could otherwise use to make a profit, but can't, because this property is a non-performing asset. The lenders will usually do anything reasonable in order to avoid auction, but once it goes to auction, they want to get rid of it. They usually require a substantial deposit, but the purchase price can be the best of all.

One thing to be wary of in foreclosures is they are often in less the ideal condition, to say the least. These people know they are losing the house, and usually that they are going to come away with nothing in the best realistic case. They have no incentive to take care of the property, and many actively work to mess it up - I have been in more than one where they ripped the copper plumbing out of the walls for sale and took a hammer to everything else. This is cause for care in purchasing them, and inspections, because not all of the damage may be obvious. Furthermore, many of them may have been unable to afford proper maintenance for some time before they lost the property. Purchasing a foreclosure often means you will need a large reservoir of cash in order to fix up the property to habitable condition.

Caveat Emptor

Original article here

"overpriced house offer rejected what next"

(Before I get started, I want to make it clear that I am using the same definition of worth found in this article. The property is worth what the seller can actually get a buyer to pay.)

Well, the seller obviously didn't feel that it was overpriced. Given that they were unwilling to sell for that, consider the possibility that you didn't offer enough.

It's human nature to always want to blame the other side. Given the state of real estate prices here in San Diego, I have considerable sympathy for buyers these days. On the other hand, if you look at the sales log, sales are still being made. This means willing buyers and willing sellers are coming to an agreement that both feel leaves them better off, and they are doing it at market prices.

Even if you made what really was a good offer, you can only control yourself - you can't control the other side of the negotiation. You have to decide how much the property is worth to you. Is it valuable enough to you to warrant a higher better offer? In some cases, properties offering something you want (or need) that is rare can command a premium over what a dispassionate analysis suggests.

The fact is, there are always at least two possibilities when an offer is rejected, and the truth may be a mixture of the two.

First, that the seller is being unreasonable. This happens a lot - usually around a third of the listings in my market are significantly overpriced. Somebody thinks their property is worth more than it's worth. The agent may be encouraging it in order to get the listing, but that doesn't make the property actually worth more. When people can buy better properties for less, they're not going to be interested in yours. In this situation, you're not likely to get any good offers. You'll get people doing desperation checks - coming in with lowball offers to see how desperate you really are, and if you're desperate enough yet. A very large proportion of these are people in my profession looking for a quick flip and the profit that comes with it, or other investors. Anybody looking at properties priced where this one should be priced is likely not even going to come look.

Second possibility, the buyer is the one being unreasonable. Properties like that one really are selling for the asking price, and you offered tens of thousands less. Some buyers do this because it's all they can afford. Some buyers do this because they want to get a "score". And some are just the standard "looking to flip for a profit" that I talked about in the previous paragraph. There is a point at which I tell all but the most desperate sellers that they're better off rejecting the offer completely than counter-offering. It saves time and effort, and the prospective buyer either comes back with a better offer, or they go away completely. Someone offering $250,000 for a $350,000 property is not likely to be the person you want to sell to. Even if you talk them up into a reasonable offer by lengthy negotiations, they're far more likely than not to try all sorts of games to get it back down as soon as you're in escrow. Better to serve notice right away that you won't play.

Now some bozo agents think that starting from an extreme position, whether high list price or lowball offer to purchase, gives them more leverage, or that somehow you're eventually likely to end up in the middle. This is b*llsh*t. A transaction requires a willing buyer and a willing seller. Price the property to market if you want it to sell. Offer a market price if you want the property.

Now, the Quickflippers™ have had a distorting effect on this, and for several years a disconcerting percentage of the properties being offered for sale were owned by people who bought with the intention of the quick flip for profit, rather than buy and hold. Many of those looking to buy still fall into this same category, and I suspect this is much the same in other formerly hot housing markets as well. They've become addicted accustomed to the market of the last few years, when a monkey could make a profit on a property six months after they paid too much money to purchase it. That is not the market we face today. This market favors the buy and hold investor. Actually, if you remember the spreadsheet I programmed a while back, I've pretty much confirmed that the market always favors the buy and hold investor, it's just been masked by the feeding frenzy of the past few years, where John and Jane Hubris could come off looking like geniuses when it was just a quickly rising market and the effects of leverage making them look good. It's just that the support for the illusions of Mr. and Mrs. Hubris has now been removed.

Now, what to do when your offer has been rejected. There are two possibilities. The first is to walk away. If the home really is overpriced, and there are better properties to be had for less money, you made a reasonable offer and were rejected, you're better off walking away. I don't want to pay more for a property than it's comparable properties are selling for, and I certainly don't want my clients to do so either. The sort of people who go around making desperation check offers walk away without a second thought with considerably less justification.

The second is to consider that the property might really be worth more than you offered. Okay, a 3 bedroom 1 bath home did sell for that price in that neighborhood, but when you check out the details, that was a 900 square foot home on a 5000 square foot lot and the one you made an offer on is a 1600 square foot home on a 9000 square foot lot, and in better condition with more amenities. It's a more valuable property, and you can refuse to see that from now until the end of the world and you're only fooling yourself. The reason you thought the property was attractive enough to make an offer was that it had something the others you looked at didn't, and most of these attractors add a certain amount of value to the property. The more value there is, the more folks are willing to pay for it. This is why one of the classical tricks of unethical agents is to show you a property that's out of your price range, then figure out a way to get a loan where you qualify for the payment. This property is priced higher because it has features that add more value and a reasonable person would therefore conclude that other reasonable persons would be willing to pay more for that property than others. Landscaping, location, condition, more room, amenities. There's something that the seller thinks reasonable people would be willing to pay more for. It's kind of like taking someone who can afford a $10,000 car and showing them a $25,000 one, then telling them they can get interest only or negative amortization payments to get them into it. You only thought you could afford the $400,000 home, but they've got a way that you can get into the $600,000 home, which obviously is going to have many things that the $400,000 home lacks. They manipulate the payment until it appears as if you can afford it, and consumer lust does the rest. Cha-ching! Easy sale, and the fact that they've hosed the client doesn't come out until long after those clients made a video for the agent on move-in day when they're so happy they've got this beautiful house that they didn't think they could afford (and really can't), and they gush gush gush about Mr. Unscrupulous Agent, who then uses this video to hook more unsuspecting clients - never mind that the original victims in the scam lost the house, declared bankruptcy, and got a divorce because of the position Mr. Unscrupulous Agent put them into. You want to impress me with an agent, don't show me happy clients on move-in day. When I originally wrote this, emotional high of being brand-new homeowners aside, any monkey of a loan officer could get anybody with quasi-reasonable credit into the property. What happens when they have to make the payments? More importantly, what happens when they have to make the real payments? Given the environment at the time, the question was not "can I get this loan through?" but "Is it in the best interests of the client to put this loan through?" You want to impress me with an agent, show me a happy customer five years out "My agent found this property that fit within my budget, told me all about the potential problems he saw, got the inspections and loan done, and it's been five years now with no surprises, and the only problem I've had was one he told me about before I even made the offer."

Of course, the real value of the property may be beyond your range or reach. If your agent showed you something you could not reasonably acquire within your budget, you should fire them. I accept clients with a known budget, I'm saying I can find something they want within that range. If it becomes evident I was wrong (eyes bigger than wallet syndrome) the proper thing to do is inform the client that their budget will not stretch to the kind of property they want, and suggest some solutions, starting with "look at less expensive properties" and moving from there to "find a way to increase the budget" and finally to "creative financing options." That's a real agent, not "Start with creative financing options but somehow 'neglect' to mention the issues down the road."

There is no universal always works strategy for rejected purchase offers. It's okay to do desperation checks, but be aware that most sellers aren't desperate and that it's likely to poison the environment if the seller isn't that desperate. Poisoning the environment is okay if you're a "check for desperation and then move on" Quickflipper™, but if you're looking for a property you want and have found something attractive, it's likely to be counterproductive so that you may end up paying thousands more than you maybe could have gotten the property for if you'd just offered something marginally reasonable in the first place. Make a reasonable offer in the first place, and you're likely to at least get a dialog. And if the seller rejected what really was a reasonable offer for an overpriced property, the only one to lose is them. Move on. Their loss is someone else's gain.

Caveat Emptor (and Vendor)

Original here

my prorated property taxes came were paid at closing but now I'm getting a delinquent tax bill

You mean they were supposed to be paid at closing.

There are two major possibilities:

1) They were not, in fact, paid

2) They were paid, but were miscredited, or they were properly credited, but your county goofed anyway.

In the first case, the county did not get the money they were supposed to, which means you still owe it. There are any number of explanations for why this happened. Some of them are innocent, some are criminal. But you owe the county money that they don't have, in which case you need to pay it, and precisely what happened to the money that was supposed to pay those taxes originally is not the county's problem - it's between you and your escrow provider.

Investigate this promptly. Look at your HUD 1 form. Lines 106 and 107 are for buyers reimbursing sellers for taxes. Lines 210 and 211 are for tax liabilities incurred but not yet paid. Line 1004 is taxes and assessment reserves, and I've also seen extra lines in section 900 used. If it is listed as paid, contact your escrow company to determine if it was paid in truth. Sometimes the escrow company messes up. If the escrow company tells you that taxes were paid, double check with the county. Sometimes the payment was misapplied to the wrong parcel, sometimes it was correctly credited, but due to the fact that government bureaucrats get paid the same whether the job is correctly done or not, they just aren't correct or up to date. Sometimes time will repair the problem, but it's not something to count on. Get a statement from the escrow officer that it was paid, receipt number X or in conjunction with escrow number so and so, thus and such date, in the amount of $X. In some cases, you may have to get a copy of the canceled check or wire transfer to prove that it was paid to the county's satisfaction.

Do not allow this problem to sit. It will only get worse, and you could find yourself facing tax liens, tax foreclosure, or a situation where the lender then pays the taxes to protect their interest, and follows up by presenting a bill to you. They'll charge you interest for any amount they pay in defense of your interests and theirs, plus a fee for the trouble they were put to. I've never had it happen to me or a client, so I don't know how high the interest is, but it's not cheap.

Property tax liens take first priority over basically everything. It takes a while - potentially years in California - before they can condemn the property for unpaid property taxes, but once they do start the process, all of the protections you have against lender foreclosure are much weaker against property tax foreclosures. Lenders are therefore understandably nervous about delinquent property taxes, and they typically want to take action pretty quickly. Don't let it get to that stage. If you have to, you're better off paying them a second time and applying for a refund than letting it get to the point where the lender feels obliged to step in to protect their interests.

Caveat Emptor

Original here

Got a search for that, and it occurred to me that it is a valid question. The answer is yes.

The degree varies. You can simply contact the bank to make yourself responsible for payment. They are usually happy to do this, although unlike revolving accounts you typically will not receive back credit on your credit score for the entire length of time the trade line has been open. Nonetheless, if the bank reports the mortgage as paid as part of your credit, it can help you increase your credit score, so long as the mortgage actually gets paid on time every month. One 30 day late is plenty to kill any advantage for most folks. This is typically free. Hey, the bank has one more person to pay the mortgage! This is often used as a way to start rebuilding credit after a bankruptcy or other financial disaster. A friend or family member qualifies for the loan, then adds the person looking to recover to the loan later.

If you want to go one better than that, you can actually modify the deed of trust to make yourself responsible for payment, although it really has no measurable benefit as opposed to simply agreeing to be responsible, and it costs money to negotiate, notarize and record the modification.

Unless you can get a better rate by doing so, I would advise against a full re-qualification for the mortgage just to add someone. It's a lot of hassle and expense for no particular gain. If you want to get me paid, I'm cool with that, but there are better ways to accomplish the gain to your credit at far less expense.

A Caveat: One thing some people want to try is "trading" borrowers. For instance, a woman who wanted to remove her ex-husband from the loan and add her new husband. That doesn't work. In order to let someone off the loan, the remaining borrowers must qualify on their own without the person to be excluded. In short, a full refinance is required to let someone off the hook. But adding someone can only benefit the lender.

Often, you may run across the "I want a commission" mentality. Someone who wants the commission money more than they want to do what is in the best interests of the bank they work for. The bottom line for the bank is they have money at risk from an outstanding loan, so anything which increases the probability of it being repaid (like adding someone else who's responsible for that money) is a Good Thing from the bank's viewpoint. You want to add another person to the list of those responsible for repayment? That's great as far as management is concerned. Nonetheless, many employees will tell you to do what causes them to be paid a new commission.

Caveat Emptor

Original here

Minimum

Time was, a few short years ago, when I could reliably do a purchase money loan in two and a half weeks. That has now changed. There are three separate delays of one to two weeks that have been built into the process since then. I can usually get purchase loans done in 45 days - but it's not a solid bet.

The first delay is due to the Home Valuation Code of Conduct. I keep hearing rumors of repeal and efforts to repeal, but it's still there. Loan officers no longer have any control over the appraiser - who it is or who it isn't. Net result: the appraisal gets done when it gets done. Three days used to be a very long time. Now, I might get it in three days if I put a rush on it and am very lucky. Seven to ten is about what I expect, and if it's fifteen, that's what it is. Neither I nor any other loan officer has any control - or working relationship - with appraisers any longer. The appraisal is now a source for at least 20 times the problems it was a few years ago, and the new standards didn't stop what they hoped they would stop, but hey, this is the result of government work we're talking about here. The politicians got paid to create a new way to make more money off the system - mostly off consumers - and they did so.

I should also mention that where lenders would formerly accept loan packages with a pending appraisal, and even grant underwriter approval on them with a "prior to docs" condition for an acceptable appraisal, they are now generally requiring the appraisal be in the loan package before they will accept the package. Why? Because it didn't take them long to figure out how many problems the appraisal was now causing. Why should they do all that work when it's so likely the appraisal will render the whole thing moot?

The second delay has to do with underwriting. To cut right to the point, the current underwriting environment is super-paranoid. Underwriters are encouraged to dig for reasons you might not qualify. The lenders are judged and paid by the secondary loan market based in part upon default rates. If you've been paying attention, you know that there have been an awful lot of defaults lately. The lenders are determined to get the default rates down. Wall Street adds its own nonsense to the mix - many of the secondary market buyers have added requirements to the mortgages they will consider buying. Since the lender wants to be able sell these mortgage anywhere, they add all the requirements to their loan underwriting. Net result: Lots of delays to get to your file, extra hoops to qualify when they do look at it, and a very high proportion of rejected loans - many for absolute nonsensical reasons.

The third delay has to do with more direct government nonsense - Regulation Z and redisclosure of APR. Specifically, changes to the rules arising out of Dodd-Frank and a couple other congressional actions that claim to have been for the consumer but were in fact made to advantage large campaign contributors. There isn't a lender out there that doesn't force a recalculation and redisclosure of APR with a mandatory regulatory 7 day delay built in before you can actually sign loan documents. If they don't, they can be sued - but if they do they are legally covered - even if the old number was closer to what the correct answer is. Furthermore they can generate lock extension fees out of it, while incurring no costs. Nor is this the only possible delay caused by new government regulation - but this one hits Every. Single. Loan. Other potential regulatory delays can add three additional weeks to the time it takes to get your loan.

If I do my job correctly and manage everything just right, I can and usually do close loans in six weeks or a little less - those that aren't rejected in unpredictable ways, that is. However, that's a far cry from three weeks it used to be, and there are things beyond my control that can kick it over the 45 day mark. Furthermore, I have one of the lowest average closing times out there - the industry average is better than half again mine and a lot of the high volume places are more than double that 45 days it takes the good ones.

When I'm wearing my Realtor hat, I really hate this (actually I hate it as a loan officer too), but it's the way things are. I tell my buyers to write a 60 day escrow period into the contract. I'd rather the offer be rejected upfront due to the escrow period than have it accepted and lose the deposit when the buyers can't perform on time because the loan isn't ready. On the rare occasions I list one, I tell my sellers it's going to take sixty days for any buyers to qualify for a loan, and while the all cash buyer is certainly nice, restricting yourself to all cash offers will result in a lower sales price and less money to the seller. Furthermore, an offer written that includes both a loan and a shorter escrow period is a red flag in no uncertain terms that there is something wrong with the agent. Any agent who hasn't figured out that the 30 day escrow isn't going to work by now (at least for purchases with a loan involved) is incompetent or actively plotting something. There really is no third option. Sometimes I can tell which right off the bat, other times I need to call the agent. So if there is a loan needed to consummate, plan on a 60 day escrow for your purchase or sale of residential real estate.

Caveat Emptor

With housing prices having crashed in most of the higher cost areas of the country, many people who were formerly priced completely out of the market have become interested once again in purchasing property. The drawback is that because lenders are scared of zero down payment programs right now, if you haven't got a down payment you are just as solidly locked out of property as if you could not afford the payment. So I thought I'd go over the down payment requirements for purchasing real estate. Keep in mind as you read that these are minimums. If you have more of a down payment, that's better. You cut the amount you need to borrow, thereby cutting the payment and increasing affordability still more, and you also likely improve the loan you are eligible for.

More mortgage insurance companies are becoming willing to go 95% loan to value ratio, but the catch is they want to see at least a decent credit score (680+, with the best rates not coming until 740 or so) and a slightly lower debt to income ratio than if you had a larger down payment. If this isn't you, I would plan on having 10% of the purchase price for a down payment with conventional conforming loans - especially if you want to split your loan to avoid PMI. On a $400,000 property, 10% is $40,000, which is quite a chunk of change for most folks. This is the "no government involvement necessary" loan, up to $417,000 of loan amount (not purchase price, a critical distinction to make!). If you're putting 10% down on a $450,000 property, what you have is a conventional loan amount - $405,000 - not "temporary conforming", not nonconforming, but a full on conforming loan, assuming you qualify on the basis of credit score debt to income ratio and loan to value ratio.

When I originally wrote this, all I had for 95% financing was one program from one lender . Things that only one lender offers can vanish at any time, and there is no Plan B. If that lender pulls the program while we're in escrow, that's not Monopoly Money my clients are risking. But when there's multiple lenders and a couple different insurers, that's less likely to vanish like faerie gold.

FHA loans now require a 3.5% down payment as opposed to 3%. On a $400,000 property, that's $14,000. On the plus side, the funding fee (Currently 1.75 points) can now be added back in to the loan amount, yielding a 98.25% loan to value ratio when everything is said and done, but you need a 3.5% actual down payment or the deal is off. Furthermore, they have a financing insurance charge of 0.5 or 0.55% on top of your note rate, but better to pay the charge and get the loan you need than not pay the charge and not get the loan.

VA loans really have become the magic bullet. Not only do they not require a down payment at all, but closing costs of the loan (including the VA Funding Fee, if it applies) can be rolled into the loan on top of the purchase price. Furthermore, there's no financing insurance charge, and only very minimal loan adjustments, if any at all.

The good news, to counterbalance the increased down payment requirements, is that prices are much lower. The bad news is that if you wait for the lenders to lower down payment requirements again, prices will be much higher then. You see, it's the difficulty in finding people who can get a down payment that is partially fueling the fall in prices. They're not going to stay this low when that changes.

So how do you take advantage now? Where can you get the money for a down payment quickly?

I'll skim over the obvious and simple candidates: Savings, investment accounts, sell some of your stuff. If you have a spare Ferrari lying around you're not using, that's probably a peachy down payment for just about anything. Just because folks were all wanting to buy without a down payment, to the point where it became unusual for folks to actually have a down payment there for several years, does not mean that doing so is in any way mandatory. But if you are in one of these categories, you probably don't need to hear me tell you that money you have stashed away could be used for a down payment for the purchase of real estate. I'll bet you can figure it out on your own.

So let's look at the non-obvious ways.

Let's start at the least painful, at least personally: Retirement accounts. The tax code allows you to withdraw up to $10,000 from certain IRAs for the purpose of a down payment (talk with your accountant for details). Put two spouses together, and you've got $20,000. That may have been only 3% when properties were $600,000, but when the property is $300,000, $20,000 is almost 7 percent - more than enough for an FHA loan or even traditional financing now that PMI companies are back at 95% financing.

Second option: 401k and its siblings and cousins 403b, 401b, 457, etcetera. These are group retirement plans where you cannot withdraw the contributions for so long as you work for the company, government, or non-profit. But the majority of these have plan documents that allow those who have previously contributed to take out loans from their balance in the plan and repay those loans from future contributions. Let's say you've contributed $30,000 which has grown to $50,000. The mechanics do vary, but if you take a $30,000 loan and repay it $200 every two weeks from your normal 401 contribution, that's mostly a wash in most cases. Be careful for rules on interest rate charged and method of repayment, but the federal government's Thrift Savings Plan (among many other employer sponsored plans) allows loans for this purpose. Meanwhile, your original contributions may even continue growing. Once again, it depends upon your plan document and everything it lays out. There is a drawback: If you leave that employer, the loan may become immediately due and payable, or it may be converted into a heavily taxed withdrawal. Again, consult an accountant for details

If your family (or your spouse's family) wants to give you a gift for the down payment, that works. FHA rules specifically allow up to a 6% gift from family members, VA rules are similar even though they don't require a down payment, and even conventional lenders make it easy enough to use family gifts for a down payment. This may seem like a no-brainer, but many times Junior wants so much to do it on their own without help, that they refuse to see a very obvious solution even though it is the best and most painless way under the circumstances. You can always save up the money to pay them back even though it was a gift. Just because it's a gift doesn't mean you can't give them a gift back later; it just means that it cannot be a loan masquerading as a gift.

Many locally based first time buyer programs exist. There programs lend (not grant) you the money for a down payment. In some cases, 20% or more of the purchase price. Most of these take the form of a "silent second" mortgage where there are no payments due, and it you hang onto the property for a certain amount of time, the loans can even be forgiven. The drawbacks are several, but the usual elephant in the room is that these programs run out of money at Warp Speed every time they get a new allocation. I've heard of people who had tried three, four or more times at intervals separated by six months and still couldn't get into these programs due to budget limitations. It can be very difficult to get in on these programs. I applied for one back in April for some clients. Despite the fact that we were less than two weeks out of the starting gate from when the budget allocation had been received, there was nothing left in the program. So even though your loan person may be eager to participate in such a program, the fact that your application is competing with those of many other people may preclude it actually happening.

The final possibility is a personal loan. These can be either from banks and credit unions issuing a fully underwritten loan with market rate interest, or from family members deciding to make a below-market rate loan based upon the fact that they like you. Lenders take a truly large number of precautions to prevent the down payment money from being borrowed unbeknownst to them, but a fully disclosed personal loan, not secured against the title of the property, is perfectly acceptable in most cases. If does impact debt to income ratio, because you've got to make payments on the personal loan as well as the real estate loan, so it does constrict what you could conceivably afford in the way of purchase price. On the other hand, it does put the purchase money in your bank account today, when you need it, rather than two years from now, when there is an excellent chance prices will be much higher by then.

So there you have them, half a dozen possible ways to get a down payment quickly, while it really makes a difference to the home you can afford the payments for because prices are down. Which they are, in part, because people with down payments available to them are so difficult to find. If you need a down payment to buy and neither these not any other method of acquiring one will work, you're just going to have to wait it out until the guidelines are relaxed, or until you do manage to save up the money for the required down payment.

Caveat Emptor

Original article here

Quite a while ago, when loan standards were other than they have become, I wrote an article with the title Is a VA Loan a Good Deal? Back then, if you could qualify for a loan that was both A paper and full documentation, I could get you a better loan as measured by cost of interest for the same closing cost, maybe even if you didn't have a down payment. Lenders were eager to make loans at 100% loan to value ratio, and since conventional conforming rates have always been the lowest for a given cost, they could beat VA loans despite not being designed for the same situations.

That is no longer the case.

100% financing for ordinary conventional loans has completely self-destructed, at least for now. I am firmly of the opinion that it will be back for full documentation borrowers who can prove actual income via tax returns or W-2 forms, but for right now, it is gone. FHA loans only go to 96.5% Loan to Value ratio, and the down payment assistance programs that formerly enabled people to get FHA loans without a down payment have been put out of business by legislation. This leaves the VA loan as the sole loan program available that currently allows purchase of real estate without a down payment. Not only do VA loans allow over 100% financing, they have absolutely no ongoing mortgage insurance charges. There is a half a percent funding fee charged by the VA, but this is eligible to be rolled into the loan itself, and the funding fee is waived if the veteran has 10% or greater service related disability.

Not everyone is eligible for a VA loan. You must have earned it via time in the armed services. Currently active-duty service-folks are potentially eligible, providing they have met the criteria. In some cases, a spouse of a deceased serviceperson is also eligible for a VA benefit. This still isn't as many people as was true formerly. Thirty years ago, far more people served in the military than currently do. Even though San Diego is a military town, most veterans seem to leave when their tour is over, so the population of discharged veterans is lower than might be expected. They're here, but they have mostly come back because of civilian employment or following spouses who are themselves in the military, rather than choosing to retire here.

Indeed, Active duty servicemembers have an advantage over retirees. They are able to draw a housing allowance if they do not live in military housing - a housing allowance that can pay their mortgage instead of rent, and when reassigned, they can rent the property to another military family, knowing the military family receives that same allowance. A military family that exercises due diligence can retire owning five or more properties, all with positive cash flow, and most likely with huge amounts of equity, if not owned outright. Current BAH allowances for San Diego won't purchase a mansion, but they will cash flow out for quite reasonable properties in desirable parts of town. Since VA loans are all fully amortized, this will eventually pay the mortgage off, leaving them with only property taxes and maintenance for the expense of owning the property.

For a decade or more, VA loans were pretty much useless in high cost areas because of loan limits too low to purchase desirable properties. There for a while, they were only useful for one bedroom condominiums here in San Diego because the price of housing had so far outstripped VA loan limits that that was all that could be bought with them. That has now changed, both because prices have fallen and because VA loan limits have risen dramatically thanks to new legislation. Recent legislation has extended VA loan limits above "regular" conforming loan limits..

The one limit to VA loans is a good one to have: They require documentation of earning enough income to be able to afford the payments, either through tax returns or w2 form. This prevents something that has happened all too often for several years, real estate agents and loan officers selling someone a property that there is no way there are able to afford in the longer term. This was another reason VA loans were often bypassed for about a decade there, but I actually like this protective feature. Debt to Income Ratio is more important to protect the borrower than it is to protect the lender!

So even though not everyone is eligible for a VA loan, if you are one of those who has earned eligibility through service to the country, the VA loan has become the best "magic bullet" currently available to assist you in buying real estate. By not having a mortgage insurance requirement, or boosting the basic rate through adjustments as other loans have, and by requiring full documentation of income, they not only aid the veteran in affording the property, but have a significant protective element.

Caveat Emptor

Original article here