October 2018 Archives

I recently got an email from a reader that was coming into a property as I left. I dropped my card and we did the lockbox shuffle thing, then there was an email when I got back to the office that said, "That was ME with the other agent! What did you think about the property?"


What I think is that if you're not going to give me the opportunity to earn the business, I'm not going to put my license, my insurance, and most importantly, my reputation on the line. I am in business to make money. I am not a charity. I earn my money by advancing your interests, by saving you more money than I cost, by preventing you from getting into bad situations, by warning you about them and knowing what protective or ameliorating actions to take before it all blows up. If you want to brag that you did it without an agent, you are not a potential client - but you're not someone I'm going to give free advice to, either. I don't begrudge "do it yourselfers" coming in to read my websites, but as I've made clear on many occasions, there's a world of difference between general knowledge and knowing how to diagnose whether there is a problem, if so, knowing what that problem really is and what is causing it, and knowing all the tradeoffs between the various methods of solving it. All of this stuff is "free" to clients, or at least, part of the package. But if I do it where you're not my client, not only am I possibly creating an agency relationship despite the fact that I'm not getting paid, but I'm removing some of the most important reasons why you should do business through me.

I'm going to decline to do that.

There seems to be a fundamental confusion on the part of many people. They want free information as to where the bargains are, free information on how to handle all the issues and problems that pop up, free opinions on the state of the property, free information on how to fix it up for maximum profitability, free this, free that, free everything. Then they turn around and say "Agents don't do anything!" Kind of like, "Other than that, Mrs. Lincoln, how did you enjoy the play?"

Agents aren't just about putting the property into MLS, putting up a lockbox, and on the buyer's side, opening the door so you can take a look, no matter how many people tell you otherwise. Maybe that's what the shake and half-bake agent at the do nothing discounter says, or the "do it yourself" real estate author trying to sell fairy tale books. There are people out there who are fully capable of working without an agent - but they don't make requests for basic information like these examples. They realize that by being unwilling to have an agent get paid, they're assuming these tasks and decisions themselves. Folks who are qualified and able to do it themselves are sharp cookies - sharper than many agents who benefit from large advertising budgets. I admire that sort of do-it-yourselfer for being sharp and dedicated enough to take on the difficulty of real estate as well as whatever else they do for a living. But if you're asking about basic questions, you're not one of them.

Agents are paid on a unique basis. It takes anywhere from weeks to months of work to earn a pay check, and the whole thing can fall apart at any time, and if it does we make nothing. Yes, it may seem like a large number of dollars, but we don't get to keep all of those dollars. Outside of the real estate field, I can think of exactly one example of this, and that's lawyers taking the case on a contingency basis, who make thirty to forty percent of every dollar they recover, not a mere 2.5 to 3% of the amount in question. By that standard, agents are ridiculously cheap. We're assuming all of the transaction risk, and we're at many times the liability risk of the legal profession, where even if your lawyer was a grossly incompetent tool who took bribes from the opposition, you have to get through members of a profession with more history of protecting fellow members than any other. Lawyers have written the law so that lawyers are less responsible to their clients than anyone else. But real estate agents get scrutinized by lawyers, so that is not the case with us.

What you're doing by asking for free advice is no different than asking for a free steak from your supermarket, a free cake from your bakery, or free legal advice from your lawyer. Actually, it's worse because there's no prospect of a business relationship or income from it, and there is potential liability. Your supermarket might occasionally give you a free steak because of your continuing custom and other purchases - mine's done it twice, actually. A bakery you go to anytime there's a birthday or other reason for a party might give you some freebies because you spend a lot of money there. Your lawyer might decide not to bill you for an unrelated discussion of another issue you ask about after the main business is done - but in all of these cases, it's due to an ongoing business relationship. If you asked for such favors without the relationship, the answer would definitely be "no". For an agent who gives free advice to non-clients, you're putting yourself on the line liability-wise, without the paycheck at the end. I'll give free consultations to prospective clients, I'll go over your situation and all of the other stuff. All contingent upon a successful transaction. If there isn't one, it's because you were working with another agent and they got the job done better and first, which is a risk I willingly assume. But the general doctrine in real estate is "If there is no transaction, there is no foul and therefore no liability" This is why slimy loan providers get away with so much, and if there's another agent who did the transaction, they're on the line, not me.

But if there is a transaction with no other agent, and I gave advice on it, I'm put my license and my pocketbook on the line. If I do that when I'm not getting paid, why should people use me as an agent? How the heck am I going to feed my family as an agent? Which means no more expertise for those who would use me as an agent, do a transaction, and get me paid.

This applies just as strongly to people who want to use other agents, but use my expertise. It's not for nothing that one of the recurring themes here is firing bad agents and learning enough not to hire them in the first place. There are way too many bad agents out there. Many of them are involved in a lot of transactions, because they do know how to market themselves even if that's the only thing they do know. Chances are that if you need to ask another agent's opinion, you should fire the one you've been with. My expertise is for my clients - you want it, you've got to be one of them.

I am willing to work hourly instead of contingent. But that requires you being willing to write a check to the brokerage right away rather than being able to lump it in with the costs of a successful transaction. It's not what people think of as being cheap, either. Most people aren't willing to part with that sort of cash, deluding themselves that they'd rather have what they think of as a "free" transaction. To be fair, it's usually much cheaper to sign the agency agreement where I get paid contingent upon a successful transaction. Doing real estate agency right is a very time intensive thing. I've usually got 200, 300, or more hours invested in a client before the transaction closes. Multiply that by my consulting rate (that some people really do pay), and you've got a very tidy sum; far in excess of what I make on transactions under a million dollars or so for even a 200 hour investment, and I don't do many million dollar transactions. And on hourly rate, there is no possibility of me not getting paid when the transaction fails to close because something made it fall apart. I did the work, I put in the time, you owe me the money. So when you really think about it, the normal small percentage, contingent upon closing, is an incredibly good deal for the client. Many people get freaked out when they see what agents make for a transaction, but considered in context of what a good agent provides it is both incredibly cheap and damned cost effective.

So unless you're one of those folks who really does know enough to do it themselves, make sure you've got a good agent who will do the work themselves instead of delegating it to a ten dollar an hour new hire fresh off the street. If they're not a good agent, fire them and find another - because the money we make is too much to spend for a bad agent. Finally, understand that what agents agents make is very much worth the cost of the money they make, and having them make that money is the price of having the end result of the transaction not only be more profitable to you, but reliably result in fewer and smaller problems down the line. If you're one of those who really doesn't need an agent, I'm not threatened and more power to you. But people who really don't need an agent don't ask me what I think of a property, how to price or market it, or how to handle the seemingly endless complicating details that can and really do crop up in most transactions. Nor do people with a good agent need to ask other agents those questions.

For everyone else, get yourself a good agent. If you're not in the areas I work, there are other agents that work on the same basis. Look around, read their websites - you can find them if you try. But if all the posts on the website are about sales and marketing, that's kind of a red flag that they're not really a good agent, and you should keep looking. Yes, sales and marketing are important for listing - they're what gets a property sold, or at least offers on it. But offers, even an accepted offer, does not necessarily translate into a sale, and it's a sale that sellers want. On the buyer's side, marketing means very little. Indeed, the ability to pierce and deflate marketing claims is one of the hallmarks of a good buyer's agent. Both buyer's and seller's agents need a lot of specific problem solving ability. And buyer's agent or seller's, if marketing is all they can do you need to keep looking for another agent.

Caveat Emptor

This is going to be one of those occasional posts that gets expanded and reposted from time to time. This list is not exhaustive, although over time it is intended to become closer. If you have one, send it to me (dm at)

Any of these is sufficient reason, all by itself, not to do business with that company or person, to cancel your loan if in progress, or to go get another backup loan.

Any actual lie

Up front application fees, or sign up fees.

Up front lock fees.

Up front appraisal fees, as opposed to at the point of appraisal. (NOTE: With HVCC now in effect, this has changed. Consumers are no longer allowed to pay the appraiser directly, so the lender now needs to collect it until and unless HVCC is removed)

Any up front fee beyond credit report (or for now, appraisal).

Requiring the originals of your documents.

Trying to sell you a Negative amortization loan, under any of its names, without explaining in detail all of the gotchas

I used to say "not locking your rate, or letting it float." This is another thing that has changed now with changes in the business. Every loan we lock that doesn't close for any reason is now costing all of our clients that do close extra fees, so we have to wait until there is a reasonable assurance of closing before locking. I'm not happy about it, but I have to do business the lender's way or leave the business

On stated income or NINA loans, not giving a real idea of what the payment is going to be, and making sure you can afford it. (Stated income is almost non-existent now).

On full documentation or EZ documentation loans, needing to document more money than you make.

Requiring you to pay an "in house" appraiser (Who is receiving a salary)

Not allowing you to choose an appraiser if you want to. (Another change with HVCC - this is not allowed now)

Consistently using the same phrase in response to a question. "Nothing out of your pocket" ($30,000 added to your mortgage) and "Thirty Year Loan" (note the absence of the words "fixed rate") are two that are sufficiently pervasive as to merit special mention.

An answer to a question that is somehow similar, instead of to the question you asked. Especially if said obviously intended to distract and mollify you, or is a pat phrase you've heard them use before.

You check their calculations on a couple of calculators and the numbers are both consistent and different from what you were quoted as a payment. (Some web calculators lie, but they usually lie in slightly different ways, although note that an auto payment calculator uses different first payment assumptions).

(Yes, regulations have been put in place that make it extremely difficult for the more ethical providers)


Use of non-standard forms when standard forms are available

Asking you to sign an Exclusive Buyer's Agent Agreement before they've shown any property.

Asking you to sign an Exclusive Buyer's Agent Agreement at all without furnishing you something special (i.e. daily foreclosures lists, or some service you would otherwise have to pay for).

Not finding out what your budget range is and sticking with it. For example, if you've got $30,000 for a down payment and closing costs, can qualify for a $270,000 loan, they shouldn't show you anything that you cannot get for $300,000 total, including all costs you need to pay.

Not finding out what you actually make, and what your current monthly obligations add up to. This lets me, as the real estate agent, know what I'm really dealing with here, even though I have no real need to know if I'm not doing the loan. In case you haven't gotten the idea, there are a lot of mortgage folks out there who may not have your best interest at heart, and "stated income" loans allow for a lot of sins. You can get offended at invasion of privacy if you want, but I'd be grateful - This is one part of the system checking another, looking out for you, when they could just grab their commission and bow out of the picture.

Promising to find houses below market value. I do my best, but so does every other agent out there. This is something nobody can guarantee, and most require taking risks or putting all cash into the transaction, and they're usually gone before the public even has a chance.

Telling you about "money in your pocket" when you ask about closing costs


Use of non-standard forms where standard forms are available.

Excessive pressure to sign listing agreement immediately (Some pressure is normal and to be expected)

Not being upfront about their business model. I've got an article about business models in the real estate industry (there are 2 basic, and many variations). Each has situations they are best for, and situations they are not so great for. You want to know if it fits your situation.

Not explaining what properties in your area are selling for before they ask for the listing.

Promising to get more for the property than the market will support. If there is a competing property on the market cheaper, or a better property on the market for the same price, buyers will choose that one instead of yours.

Putting the property on the market before it's ready and available to show.

Not holding at least one open house on a weekend date within two weeks of listing. Sometimes this is tough during the holiday season, but there's no excuse for the rest of the year. Especially during the summer, if they want to take a three week vacation, there should be someone else there to take up the slack. Perhaps it might be unproductive if you live in a thinly inhabited area, but anywhere within the commuting area of a major city, this is a minimum.

Caveat Emptor

Original here

We have several rental properties that we own (more than 10). When we were younger, before we got married, we both moved around a lot and bought houses, moved, stayed a year or so and did it again. I of course don't have to mention why we did this (no money down, low fixed rates, etc.) However, now I am running into a dilema. I am finding that no one wants to refi or do purchase money loans now that we have 10+ mortgages. I need good rates to make my cash flow work. I have recently herniated one of my discs and have been out of work for almost 3 months, so I need to take money out of our house that is paid for, but no one wants to do it. Any suggestions on how to get around that? My credit scores range from 763-805, so that is defintaely not the problem. Any advice would be greatly appreciated as I am down to crunch time in needing to get some money.
Tough situation.

The reason for this problem is that whereas nationally, vacancy rates are much higher, and here in high cost California they are only running about 4 percent, the bank will only allow 75 percent of rent to be used in the calculation of whether you qualify or do not (debt to income ratio). Furthermore, on the liabilities side they charge the full payment, taxes, and homeowner's insurance, as well as maintenance. To "pile on", Fannie Mae and Freddie Mac won't buy loans where the applicant has more than ten loans, period. But note that this is ten loans, not ten properties.

Here in the high cost areas of California there was a while where it was unheard of for a recent purchase rental to be turning a positive cash flow, at least according to "lender math". But for properties purchased a decade ago here as well as right now, and nationally in many markets, there are people making money hand over fist on rental properties whom the bank believes must be cash destitute. There is no way they will qualify for a mortgage loan without tweaking something.

There are two main ways to solve the problem.

10 mortgages (assuming you still own the properties) gives one serious status as a real estate investor. The loan should then be able to be done. Not necessarily A paper, but subprime with that kind of a credit score and a prepayment penalty will give them comparable - perhaps even better rates. Furthermore, on investment properties, there's a minimum of about a 1.5 point to 2 point hit on the loan costs just due to the fact that it is investment property. So refinancing an investment property is not something you want to do often. If you can't go 10 years between refinances, something is probably wrong. Especially given the extremely narrow spread between long term loans like the 30 year fixed rate loan and shorter term fixed rate hybrids, for investment property a 30 year fixed rate loan is likely the way to go.

The alternative is to go with a commercial loan. Commercial loans are much easier than residential, and they will allow a real estate investor to qualify where they wouldn't under residential rules. However, the rates are both much higher and variable ("Prime plus margin") rather than fixed.

But the key part is "real estate investor."

This is a business. You're going to need an accountant to attest to the fact that you've been operating this business at least two years. But that gives you standing as at least partially self-employed as the operator of a real estate investment business.

Which once upon a time gave you an out to do stated income, possibly even A paper. Unfortunately, that is no longer the case - one more instance in which people who abused stated income really ruined the market. You're going to have to state that you earn more income than you do. There are no longer stated income loans available from any source that I am aware of. Given the environment today, a good loan officer looking to cover themselves is going to want you to acknowledge that you can make whatever the payment is really going to be. I don't care if you need $6000 per month to qualify and you tell me that you make $12,000 per month, or $120,000. Any time you are looking at stated income, you're looking at a situation that is vulnerable to abuse, both from the point of view of a consumer being put into a loan they really cannot afford, and from the point of view of a bank lending money based upon a credit score and source of income that really may not be there. This one is especially vulnerable to the latter concern in the current market, and I would likely take a real careful look at any bank statements that pass through my hands to make certain it's not patently disprovable. If it makes a borrower uneasy, well half of the reason is to protect them. Stated Income may have been colloquially called "liar's loans", but that is not what they are intended for, and in this case you are intentionally overstating income in order to qualify under unrealistic underwriting rules.

The second approach was NINA - a No Income, No Asset loan, also known as "no ratio" - meaning no debt to income ratio. These were much easier to do for the loan officer, as they're completely driven off credit score, but carried still higher rates, and unfortunately, despite these being less fraudulent, I no longer have any idea of where to find one outside of "hard money" loans carrying interest rates above 12%.

The only general solution available today is a portfolio loan. If you really do make a million dollars a year from something else, you can get a loan on any number of properties from a lender who holds the loan in their own name rather than trying to sell it to Fannie and Freddie. This begs the question of how you make the money or where it comes from, but it is possible. Nor can your lender de-fund existing loans unless it's for a reason allowed in the Note (loan contract)

There always was serious potential for abuse in this situation, a potential that lenders were willfully refusing to see back in the Era of Make Believe Loans, but now the pendulum has swung too far in the other direction. The lenders are now so paranoid about these loans for which there is good reason and a valid market for existence, that these markets are going completely unserved. Self-employed people and commissioned salesfolk have to file taxes, also, and tax forms are the preferred method for documenting income. Nonetheless, because there are significant deductions that would not otherwise be allowed due to the fact that these professions are largely paying bills with "before tax" money whereas most folks are paying with "after tax" money, people in such professions needed the alternative documentation methods in order to qualify for loans. With those alternate methods all but non-existent now, people in many professions (including real estate agents and mortgage loan officers) are finding it difficult to get loans at all. There always was the danger of talking yourself into a loan that you could not really afford, but while lenders were being willfully blind to it until recently, now they've got an obsession with avoiding that market completely. I am sure that business models will spring up allowing that loan market to be served within a another year or two, but in the meantime it's going to be really hard for people who are confined to that market to get a loan.

Caveat Emptor

Originally here

Reserves for Real Estate Loans

Thanks again for the terrific posts. I've learned more about mortgages in the past two months than I ever dreamed I might.

I am looking to buy my first home soon, and have myself in a good credit position to do so. My credit score is over 800 and I have no back-end debt - no car payments, alimony, student loans, etc. My annual salary is well over $100K, and while my down payment will not be as much as I would like, I should be able to put up 20% of the purchase price.

Before I shop for a loan, I have some questions and would appreciate your insight.

1. Do monthly "subscriptions" such as landline phone bill, cable, internet, cell phone, etc. come into consideration? As I have no cell phone and no cable (and don't intend to get them), I see my monthly expenses in this regard as significantly lower than most other borrowers.

2. Do my retirement savings come into play? I have saved conscientiously for several years and between IRA's and pension funds (fully vested) I have a significant amount put away.

Thanks again for the teachings

Gosh, I didn't think a dream client like this existed any more!

In general, there are only three instances when reserves really come into play. They are:

1) Stated Income. Since people in this category were not documenting their income, for a true stated income loan they are looking for evidence that these folks are living within your means. The measurement that has evolved is six months PITI (Principal Interest Taxes and Insurance) in a form where you can get to it - savings accounts, investments, something. If you have a retirement account, such as a 401, IRA or similar, most lenders will allow you to use a discounted amount, most often 70 percent, as the money would require the payment of taxes and penalties. Roth IRAs may be treated differently, as the rules are different. There were Stated Income Stated Assets loan programs, but when you get right down to it, those loans look more like heavily propagandized NINA (No Income, No Assets, aka No Ratio loans) than they did a true Stated Income. (at this update, I am unaware of any lender who is actually funding stated income loans of any sort)

2) Payment shock. If your payments are going to be much higher than rent was (or previous payments were), many lenders will require two to three months reserves of PITI payments in reserves.

3) Cash to close. No matter what the loan, the underwriter is going to be looking at the loan to make certain that you have the cash to close, and any reserve requirements are in addition to this. If your loan is going to require a certain amount of cash, either in the form of down payment or loan costs or most often, for prepaid interest or an escrow account, then the underwriter wants to see evidence you've got it. It's no good for the bank for the loan to be approved, the documents printed and signed, the notary paid, and then the loan doesn't close because you didn't really have the cash. Seller paid closing costs are getting to be a really touchy point with many lenders, by the way, as they indicate the property may not really be worth the ostensible sales price.

In any of these cases, the underwriter is going to want to see evidence as to where the money came from. They want to know that you've either built it up over time or have had it for quite some time or that you can document where you got it from. What they are looking at with these requirements is the possibility that you got a loan from somewhere that you're going to have to pay back, and the payments on which may mean you no longer qualify under Debt to Income ratio guidelines.

Mind you, it never hurts to have money socked away. But it's not worth any huge amount of contortions to prove. For A paper lenders, the guidelines are razor sharp, and excessive reserves are not a part of them. You've either got the required amount or you don't, and the fact that you have $100 million in investment accounts isn't relevant - and it may cause some underwriters to start wondering why you're not paying for the property in cash or putting more of a down payment (Anytime you give an underwriter more information than required, you run the risk that they will ask you difficult questions about it). Some subprime lenders may approve a loan they would not otherwise have approved, or maybe offer better terms than they might otherwise, but there have been enough adverse experiences with this that it is becoming more rare.

Monthly subscriptions (utilities, etcetera) are why the permissible debt-to-income ratio (DTI) isn't higher. You can cancel cable TV, you can cancel dish network, you can cancel pay per view, you can cancel magazines, although most folks want phone, gas, and electricity. Utilities etcetera do not count against debt to income. Only the payments on actual debt count.

Caveat Emptor

Original article here

if our house is being foreclosed, can they take our retirement or make us sell our cars?

we both have (1-2 year old) cars that are paid off. Can they take our cars or make us sell them to pay them some money?
Can they place a judgment to take our retirement 401k?

Depends upon the law in your state, and whether the loans you have are subject to recourse.

Here in California, purchase money loans are not subject to recourse. Providing you don't commit fraud or any of the other things that void this protection, once they take the property, that's it. If your loan was purchase money, used to buy the property, they shouldn't be able to win a deficiency judgment after foreclosure.

However, this isn't likely to be as innocent a situation as all that. Can't make the mortgage payment, but have two vehicles less than two years old which are all paid off? That says this was likely to be a "cash out loan" to me!

I am unaware of any circumstance under which a "cash out" loan is not full recourse. It's not like you did it by accident. Now, if as I suspect may also have been the case, false promises were made to you as to your payment, interest rate, etcetera, that's a matter to take up with the people who did your loan. Actually, probably better to have your lawyer take it up with their lawyer. But that doesn't mean the current holder of that loan isn't entitled to their money.

If, as I suspect, you "cashed out" to pay for those cars, then you've got a full recourse loan, and they can pursue a deficiency judgment. Whether they will or not is subject to several variables, most significantly whether they think it's worth their while.

Once they get a deficiency judgment, talk to a lawyer about whether they can get court approval to take your vehicles. But they're going to get the deficiency judgment if they try. Cash out loans are pretty cut and dried. Unless there's something reasonably unusual going on, for which consult a lawyer, you're likely to be better off agreeing to it in the first place, rather than forcing them to pay attorney's fees and having the judgment say you've got to pay their attorney fees as well as your own, in addition to the base deficiency. My understanding is that safe harbors for assets in this case are intentionally as few as the legislature can make them.

One of those few safe harbors, though, though, is likely to be retirement accounts. Retirement accounts are a protected asset class, and while I suppose it's possible for a creditor to get at them, I've never heard of a case of them being successful, at least not until you start withdrawing from those accounts. Once it gets withdrawn, of course, the money you withdraw is ordinary income, and therefore, fair game. This can lead to the sort of situation computer programmers call a "deadly embrace". They can't get at the retirement account as long as the money is in there, you can keep the money in the retirement account, but if you try and withdraw it for use, they can then get at it. They can't get it until you try to use it, but they can get it if you do. Usually, people in this situation negotiate a settlement.

Caveat Emptor

Original article here

I am about to close on a condo unit. At the last minute, we received the resale document from the management company. All units are being assessed a one time charge of $3000 due in full Nov. 1 for roof repairs needed. I have not closed yet, but we are in contract. Who is responsible to pay this assessment? The current owners (sellers) or me, the buyer? I do not want to pay for this assessment as I am not the unit owner at the time this special assessment was placed.

This is a good question, and applies not only to HOA assessments, but property taxes, etcetera. The owner of record as of the assessment date is responsible.

However, assessments of this size generally have to approved by the association at large, so there was almost certainly a vote of the owners, so they knew about the assessment, and it should have been disclosed to you. Even if the owners at large didn't vote, it shows up in the minutes of the board, which the board is required to inform the owners of. The current owner knew, or should have known, and kept it to themselves in violation of the law. Most states treat this as fraud on the current owner's part (talk to a lawyer in yours). One more issue is why did the condo certification not show this assessment?

As for you reaping the benefits, that would be the case if they paid it now and you bought the day after. Tough cookies for them. It's part of owning communal property. The only way to determine who owes the assessment is who owns the property on the assessment date, but that doesn't mean that known assessments don't have to be disclosed. Indeed, homeowner's association information disclosure is a standard feature written right into all the standard WINFORMS contracts. Nor will any lender I'm aware of fund a loan without this information.

If they had disclosed this like they should have, it's likely you would have negotiated something as part of the purchase contract. As it is, you now have them in a hammerlock, because even if the assessment is due after the contracted closing date, their failure to disclose does mean that a reasonable person might not have entered into the contract you did. Even if it's not criminal fraud, it is a legal tort, and you're likely to recover legal fees and maybe damages if you sue (again, talk to a lawyer before you draw any lines in the sand). If they're smart, they'll pay the assessment out of sale proceeds and save themselves all that. On the other hand, if they were smart, they wouldn't be in this predicament, would they?

You probably have the option of bailing out, as well, even if the contingencies have all expired. Of course, all of the standard warnings about your deposit apply. Just because it falls out of escrow doesn't mean the escrow company will return the deposit. The other side has to agree, or you've got to get a judgment. Again, because of the failure to disclose issue, they're likely to end up responsible for your legal fees as well as their own and not getting the deposit anyway, so it would be smart for them to just agree. Unfortunately, all too many people aren't smart - they're hoping to scam something. The vast majority of the time, it costs them more than they might possibly have scammed even if they were successful.

This all applies to property tax assessments as well, except that around here the title search should have disclosed that, and it should have been on the title commitment (aka preliminary title report). Nonetheless, the owner and their agent are still responsible for disclosing it in a timely manner, although the exact period from acceptance of the contract varies. Ditto Mello-Roos assessments here in California, although there's a space in MLS itself for disclosing those. It's very rare for there to be a pending Mello-Roos, as they're used to pay for installing public utilities in new developments.

One more thing: Your buyer's agent should have covered all this. If you decide to bail out of this transaction, fire them. If for some reason you decide to go through with it, sue your agent and their broker - this performance is intolerable. If you've been using the listing agent as a Dual agent handling both sides of the transaction, you've just had a practical demonstration in one of the hundreds of reasons why that is a very bad idea. Go get yourself a Buyer's Agent that is going to work on your behalf.

Caveat Emptor

Original article here

Some fathers, sad to say, are not involved in their children's life beyond conception. Maybe it was just a one night stand and they have no idea they even have a child, maybe they were involved with the mother on some longer term basis and left, never to return. I've seen the term "sperm donor" applied to such fathers many times. I think it's equally applicable to the common concept of the buyer's agent.

The real estate business is set up around the listing of property for sale. NAR and all of its subsidiary associations are built upon the listing agent and being responsible to sellers, if that. One of the big reasons why most agents center all of their efforts upon listings is because they will pick up buyer clients who don't know any better simply by virtue of listing property. Many of the best listing agents I know think of the buyer's agent as an afterthought. The usual come-on is to rebate part of the "Cooperating Buyer's Broker" percentage to the buyer client in order to drum up business, with predictable results. The "Cooperating Buyer's Broker" percentage set up in MLS was an afterthought to encourage listing agents who picked up the confidence of one set of buyers during an open house to show their property, and for many years (until the courts started hammering on it) a buyer's agent was required to accept subagency for the seller, giving the seller their primary allegiance. Even today, that's the way a lot of agents think because they (or their trainer) learned the business when that was the case, and they think that buyer's agency is just a little bit of paperwork. But that is not the case; indeed representing a buyer's agent's job thusly is a recipe for disaster. There's a lot more to being a good buyer's agent than filling out a little bit of paperwork.

The fact is that choosing someone who's trying to sell you one particular house is a rotten way to pick a buyer's agent, almost guaranteed to get you someone who's just trying to turn a transaction. Fact is that in that situation, they should be focusing all of their effort on getting you to buy the house they showed you, that they have a listing agreement for, that they have agreed to carry a fiduciary responsibilty towards the owner of. This means trying to sell that property, not trying to pick up buyer clients by dangling your listed property out there as a lure for buyers to make contact. Tina Teaser is a horrible listing agent, and probably even worse as a buyer's agent.

I do not know how the urban legend about an agent being a disinterested party got started. It serves the interest of the huge chains that control the National Association of Realtors (and subsidiary associations) or it would have been firmly squashed by now, but it is completely false. An listing agent owes a fiduciary duty to the seller, a relationship which legally requires them to place that seller's interests above their own. They theoretically owe a duty of fair and honest dealing to all, but that is much harder to enforce legally, and not nearly so honored. As evidence, all of the listing agents who say they've got multiple offers when that is not the case.

A buyer's agent is precisely the opposite, owing a fiduciary duty to the buyer, but 'only' fair and honest dealing to a seller. As for dual agency (representing both), would anyone like to tell me how anyone is supposed to serve two masters with diametrically opposed interests while preserving fiduciary duty to both? It'd be like trying to serve in the Union and Confederate armies simultaneously, shooting bullets back and forth with the aim of hitting targets that include yourself. It can't be done. Every agent needs to pick a side and stay on it for at least the duration of the transaction.

Too many people only pick their buyer's agent after they've already settled on a property, with the result being that said buyer's agent is all too often the listing agent, or someone with an economic motivation NOT to speak up and tell you you shouldn't buy that property, or that you should buy it only under such terms as require major negotiation and a significant probability of a seller who is unwilling to be rational. "Sperm donor" agents is a charitable description of such activity. Yeah, you can probably get the property by giving the seller everything they want, but do you want the property that badly that you're willing to potentially deal with years of problems costing thousands to tens of thousands of dollars, until you find out that you can't sell it because of something your buyer's agent should have told you before you bought?

The fact is that a buyer's agent is more important than a listing agent. You're going to be living with the results of what the buyer's agent does for as long as you own the property at an absolute minimum. Most likely for the rest of your life. It isn't just a matter of "you paid too much" or "You paid more than you needed to," although those are huge factors. All of the negative issues that should have been brought up before you made an offer? Blame your buyer's agent. Crummy resale value due to floorplan, location, etcetera? Blame your buyer's agent. Nobody wants it due to some unfixable negative factor? Blame your buyer's agent. Houses with large and recurring repair bills? Blame your buyer's agent. Possibly in conjunction with other professionals such as inspectors and engineers, but your buyer's agent should get a share of any blame. At minimum, for not pursuing the issue if an inspector, etcetera raised a red flag. The Buyer's Agent is far more important than a listing agent to your future happiness. Do you want to trust someone with a fiduciary duty to the seller to point this all out? Especially given that if they do point it out, they are violating that fiduciary duty? "Known violator of fiduciary duty" seems like it would be a slam-dunk reason not to use them for your agent to me. This isn't a court of law and you don't need the verdict of a jury - you were a witness to the violation. You're not trying to send them to jail - only to determine whether or not they're a worthy guardian of your hard earned (or yet to be earned) money.

Many buyer's agents don't want to say negative things about the property they show. That's like a pilot who doesn't want to take off or fly the airplane; they only want to land. It's part of the job they take on with buyer's agency. I know how much harder it makes it to sell property, believe me. It's still part of the job. If they're not doing it, they're not buyer's agent's no matter what they call themselves. They're the agency equivalent of sperm donors.

It is dead simple to find a good buyer's agent. You (the consumer) only have to know one thing in advance: Sign only nonexclusive agency agreements. This lets you work with all the agents you want to until you find one that really does the job. You can have dozens of non-exclusive agreements in effect, allowing you to shop effectively for a buyer's agent by giving them all a chance - you simply stop working with the ones that don't measure up.

You should have at least one buyer's agent before you look at property. One of your buyer's agents should accompany you every time you visit a property you might like to buy, especially developer new construction. If you visit a property without your agent, you may be waiving your right to have a buyer's agent. I've heard from a couple dozen people in the last few months that were completely hosed by developers, but there's nothing I or any other agent can do after the transaction has already closed.

There are major rewards for sellers who make a property appear just a little bit better than it is. On a $500,000 property, it's pretty easy to make it look like it's worth another $50,000. Misplaced Improvements, Vampire Properties, unpermitted additions, just plain old money pits and properties with less obvious defects are out there. Just last week I had someone tell me via email "I just realized what a snakepit the property market is!" like it was some kind of revelation he'd just had. Once you buy, you are on the hook and it is very difficult (if not impossible) to undo the transaction. You might get lucky on your own, or with a "sperm donor" buyer's agent, but is that something you're willing to bet hundreds of thousands of dollars upon? Remember, it is very possible to lose this bet - people find out they lost it after the fact every day. Admittedly, you can still lose the bet with the best buyer's agent in the world - but it's several orders of magnitude less common.

A good buyer's agent does a lot of work. This work saves their client a lot of money hassle and work way more often than not and people who don't want a buyer's agent find out why they really needed one after the fact.

Find a buyer's agent first, before you start looking at property. Get comfortable with them, expect them to say things that shoot holes in most property. That's their job, and there really is no such thing as a perfect property. It may be harder to persuade yourself to put in an offer on a property with known defects, but would you rather know ahead of time or not know? The defects are still there, either way. A good buyer's agent will tell you about them. A sperm donor agent will not. Avoid the sperm donor agents, and fire them as soon as you identify them. Knowing enough to only sign non-exclusive agency agreements allows you to fire them pretty much at will, by just not working with them any more.

Caveat Emptor

Original article here

Market segmentation is what happens when certain things are much more in demand than others. For instance in the hot market brought on by the tax credit of 2009, the central area of San Diego was in high demand, simply because it's so close to everything. That's where the jobs are, all the cool nightclubs and restaurants, places to go and things to do. The Eastlake area was in very high demand, because you could get an almost new highly upgraded 3000 square foot house for half what the developers were selling them for five years previous. The North County Coastal region was probably hotter than anything else, because of the common belief of being where all of the really wealthy people live - the strip between Del Mar and Carlsbad has long been some of the most desired real estate in the world, and Rancho Santa Fe is the most expensive Zip Code in the country.

Once you get away from those areas, however, things were a lot more friendly to buyers. Some clients put in an offer on a property in Escondido, and some others on a property in Ramona, and instead of competing against a dozen or more offers, I'm pretty sure we're the only offer despite what one of the agents was telling me. La Mesa saw movement, but not anything like what happened in North Park despite being maybe 6 miles further east and usually being able to get to Mission Valley and points north quicker from my house than from most of North Park, simply because it's such a pain to get out of North Park. Downtown might be five minutes longer from La Mesa. South Bay is usually quicker from La Mesa. The houses are similar construction built at comparable times, and on average the La Mesa houses are larger and situated on bigger lots. Don't confuse "lesser distance" with "use less gas getting where you need to go." North Park is a horrible place to drive when you consider anything but the nightlife right there.

Pretty much every area is seeing more movement in the market than just a few months ago, but some areas are seeing a normal market with give and take, while others are seeing a white hot seller's market with ten or more offers on everything. Those extremely hot markets are seeing a lot of movement and if it weren't for HVCC preventing honest evaluations, we would have seen an even stronger recovery.

Some offers are more equal than others, and the new appraisal standards make them even more so. An "all cash" offer beats everything else for the same number of dollars. Offers under 70% loan to value offers beat everything except "all cash". Offers with twenty to thirty percent cash down come next in line. Exactly what beats what gets complicated and varies from property to property, but absolute bottom of the barrel is minimum down payment FHA loans. If you've got something near the top of this ladder, competing in the white hot areas may be something you can profitably do, particularly if you're willing and able to waive the appraisal contingency. Those areas are going to see rapid price appreciation in this environment, particularly if the industry forces lined up against it (NAR and NAMB, among others) manage to get those new appraisal standards repealed.

If, on the other hand, you're one of those trying to buy with minimum down FHA loan (or something else way down the preference ladder), you're not going to be able to compete with the offers at the top of the ladder. It's not really completely reasonable, because FHA standards aren't nearly so obnoxious as they used to be, but they still take longer, have more opportunity to fall apart, and require more from sellers, even if you're not asking for seller paid closing costs. If you are asking for a seller paid contribution, then the sellers are understandably going to want an even higher offer from you to offset those costs, as well as a premium to convince them to sell to you rather than the people coming in with a conventional loan with 25% down. This raises the specter of whether or not the property will appraise for the necessary value to consummate the transaction, with it being increasingly unlikely. Lenders in particular are unwilling to consider these sorts of offers for lender owned property because they often require the lender to spend money fixing up the property and can then fall apart anyway, the ultimate bad trip for them.

So what buyers in this situation need to do is zig when everybody is zagging. Look in the less trendy areas where the competition isn't so severe. Consider properties that are solid, but not necessarily so visually appealing. In such a situation as yours and a market such as this, you want to offer on properties where you may be the only offer, or only need to compete against people in similar situations. It isn't forever and you don't have to stay there the rest of your life. It may take longer for property appreciation to hit these sorts of properties, but it will hit when people start to realize that San Diego is never going to be this affordable again. Remember 2002 and 2003, when people were glad to get a rotten little tiny property in bad shape (and way out in the boonies) even though there was no way their family was going to fit into it? Those days are coming again. Proportionally, those properties will see even more appreciation from this point than those that are already highly sought after. I'm advising people with lots of ready cash to buy as many condos as they can, as condos have been hit especially hard in the downturn. And as I've said a time or two, buying such a property makes it likely you'll get what you really want sooner. The ability to harness leverage in your favor is more powerful than any other investment you can make, if it succeeds. The current environment makes carefully structured plays on leverage very likely to succeed. Not guaranteed, as
There is No Such Thing as a Risk Free Investment, but very likely to succeed.

There is always some segmentation in the real estate market, but we're seeing a higher level of segmentation now than I have ever seen in the past. Some types of property are more attractive to the aggregate market than others, and command a higher price as well as higher demand for them, and people are fighting like the gingham dog and calico cat over them. But those properties few people are considering now because people are still used to the buyer's market we had can be obtained more easily and for a bigger discount now simply because everybody is competing for the big beautiful properties in trendy areas will show a larger percentage gain later, when the big beautiful properties in trendy areas are completely out of reach, and large amounts of people start looking for substitutes because that's all they can have. The big beautiful properties in trendy areas are doing very well right now, thank you. They are quickly returning to nearly their peak price levels and the time to get a real bargain on them was a year or so ago. But the substitute properties, while severely lagging now, will catch most of the way up later, meaning that money invested in them will earn a higher return and quite likely enable those who do so invest to afford the big beautiful property in a trendy area once it does.

Caveat Emptor

Original article here

What do the mortgage companies mean when they say they can not insure you house loan.? What is the danger to the homeowner?

I have been in the new home for over a year now and they just now told me that they could not insure my loan. They said they made a mistake and overlooked something in my credit. I do not know what dangers I face now because of this.

You say you've been in the property a year, so I'm going to presume you're talking about an existing loan, rather than a new loan. The loan you used to buy the property, and what they're talking about is that the PMI company rejected the application to insure your loan, and they just now realized the problem.

That loan contract is binding to both sides. They accepted that loan contract with you. Once it's funded and recorded, they can't back out. Unless the contract has a call "feature" they can't pull your loan just because they feel like it after it's recorded, so the loan you've got now should be fine for you. It's no coincidence lenders are adding call features to more and more loans, to give them a bail out clause should they decide to. But if you don't have such a clause, as long as you keep making all your payments on time, keep the insurance and property taxes up, keep using the property for a principal residence for the requisite time and all that, they can't force you to do anything. The lender can offer you incentives, as lenders did back in the late seventies and early eighties, such as offering you a reduced payoff if you'll refinance or sell, but they can't force you to do anything as long as you continue to hold up your end of the bargain. The time for them to talk about qualifications is before the loan is funded and recorded. Afterwards, they can't do anything about it, any more than they can do something if values drop (which is one reason why many lenders would really like to be let off the hook - unfortunately other lenders don't want to go onto the hook), if you lose your job, if you decide to change lines of work, etcetera. The qualification process is not open-ended.

There is one more way the lender can get out of it. If you committed fraud or perjury during the loan qualification process, and they gave you the loan based upon those false representations. Having a loan called is no fun. There's a reason I keep telling people to tell the truth, the whole truth, and nothing but the truth in loan paperwork. In addition to possible criminal charges, you'll have between 7 and 30 days to get the money somewhere when your loan is called for this reason. If the rate is higher, if the closing costs are huge, even if you can't get that loan, it's not the lender's problem. They are within their rights if you misrepresented yourself in a material way.

What they're likely trying to do in this case, where you haven't told me of such a reason, is stampede you into refinancing, since without PMI they can't sell your loan on the secondary market. Unfortunately for them, they're stuck at this point unless you let them off the hook, and they'll have to hold your loan themselves and hope you don't default.

There's a fair amount of this sort of thing going on right now, as the lenders that gave out 'warm body' loans suddenly realize the consequences. Don't draw any lines in the sand without talking to a lawyer first, but if I understand your situation, they can't force you to refinance or anything. It's more than a little slimy of them to do this, of course. But a certain percentage of borrowers will panic and do something they don't need to.

Caveat Emptor

Original article here

Here are the facts of the situation, whether you're talking about San Diego or Manhattan, the Bay Area, Los Angeles, or any of the other densely packed, high cost areas where all the employment and career opportunities are.

Fact 1: Land is expensive. The cheapest unimproved little 8000 square foot irregular lots in the area I work most - no tests done, no utilities on the lot, even though they may be close, no permits whatsoever and zoning R1 at best - run just under $200,000. Matter of fact, I consider that one basically unsuitable for housing due to the freeway that runs through where the back yard would be. Here's the worse news: Prices are going to get higher. They're not making any more land. Demand is increasing. More people want to live in those high density areas every year. More businesses want to open. Not far from my office, there's a 9500 square foot R1 lot someone is buying for about $250,000 with a condemned residence on it. He's going to have to scrape it himself, and assume all risk of the city issuing the permits for new construction, and he was glad to get it, even though he knows the soil needs to be repacked also. (Manhattanites may jeer at the low price if they'd like - for now). Land is a scarce good in high density areas - the very places where everyone wants to live, needs to live, because they have to live within commuting distance of their career. Lots like this are where we're going to get buildable lots in the future, and usually, those purchasing them are going to pay for the single family residence that happens to sit on it now. There. Is. No. More. Dirt.

Land with residential structures, specifically, 8000 square foot lots that happen to have one residential structure are equally costly, in and of themselves, as the 8000 square foot lot next door which happens to have six residential structures, Or a commercial warehouse, manufacturing facility, office building, etcetera. They use the same amount of area on the earth's surface. With the exception of location and the soil that happens to be there, everything else that's been done to that land is completely artificial. This starts with the utilities that may or may not be there, extends through zoning and conditional use permits, and arrives at specific structures that may be in existence. All artificial. Absolutely nothing to do with any natural virtue of one parcel over another.

The first statistic I find says that cost of construction per square foot is roughly $150, while commercial buildings sell for roughly $300 per square foot locally. So, you can pay $200,000 for that lot, build one fifteen hundred square foot building, and sell for roughly $450,000, having made $25,000 net (450-225-200), and that's providing there's no existing structure. Second Choice: You can build a huge 3000 square foot house that relatively few people can afford at $700,000, netting twice as much (700-200-450=50). Or you can build six twelve hundred square foot two story buildings (or six one story units, three upstairs and three down), still have space for some kind of communal outdoor area, sell for $360,000 each, and make $2,160,000, leaving $880,000 net, still maybe $600,000 if you had to pay for the single family residence that used to be on it as well. I'm intentionally neglecting transaction costs, by the way, which swing the figures even more decisively in favor of the high density alternative. Question: Under which of these two scenarios is it more likely that they'll cut the price? Under which is it more likely they'll raise it? Question: Even if the price isn't cut, which of these two alternatives can more people afford? Which is a more efficient use of the land? Which ends up giving the better return on investment, indicating that more of them will be built? There's hardly an infinite supply of either, but which is likely to remain more affordable, as builders build more and more of them in relation to the alternative? Shared lots, particularly when paired with communal outdoor areas, make a whole lot more economic sense than single family residences, they will always be more plentifully available, and the more demand is placed upon a given amount of land, in the form of people wanting to live, work, and play there, the more strongly the economics will favor shared lots. New Yorkers have been used to this for decades. Now, some other areas of the country are becoming just as solidly built upon, if not yet nearly to the depth Manhattan has seen. In fact, by the standards of most cities worldwide, Manhattan isn't particularly dense. Many affluent old world cities have it beat like an dirty old rug when it comes to density per square mile. It's just that it seems dense by comparison with the rest of the US, where we have long been accustomed to lebensraum.

Corollary: The closer to commercial and recreational opportunities a particular parcel is, the more desirable it is. For those skimming this in their sleep, this means the price of that land is raised by people competing more strongly for it. This is one of those things everybody knows (ask people whether the lot by the beach is more expensive than the one twenty miles inland), but few people stop to think about all of the implications. The closer you want to live to the commercial zones, the closer you need to live to all the commercial zones, the more valuable the underlying land is and the more likely it will have some sort of communal lot arrangement. It doesn't matter if you don't drive, can't afford a car, or what, any more than nature cares how badly you want to fly in applying the force of gravity to you. It's nothing personal, any more than the saber tooth picking out one of our ancestors for dinner was after payback, movies or no. It's just a fact of the universe, and the fact that it's economics, measured in dollars, does not make it any more mutable than if we were talking about the thrust of the rocket, measured in Newtons.

For those reading this whose response to the above is governmental in nature, you cannot mandate the building of more affordable detached single family residences. The economics is not there to support it. Developers will build what can make them a profit. They won't build what won't make them a profit. Putting up regulatory hurdles only makes the affordability threshold rise further - if they have to pay an extra $100,000 to get the permits, they need to make $100,000 more in order to build anything. You can have the city, the state, the federal government subsidize individual people into them, but that amounts to giving a band-aid to a decapitated body, economically, because the number of people who can be thusly accommodated is microscopic as compared to the number of people there are who can't afford where prices are now, let alone where they are going if you try this route. Furthermore, limitations on the benefits when these people sell such units short-circuits all of the economic reasons why people should get into home-ownership. It amounts to creating, not a class of homeowners, but a class of privileged renters! It's not even permanently privileged renters. Those units of these "low cost housing" I've been involved in have clauses where if the bureaucratic or political masters can manufacture a reason, you can be dispossessed. If there are no such restrictions on the sale of the unit, then the lucky recipients get a windfall at the expense of taxpayers and/or everyone else who buys within the development! Kind of like forcing taxpayers to buy hundreds or thousands of dollars worth of lottery tickets per year at the point of a gun, with the suckers getting about their current fifty cents per dollar back, only in the form of real estate rather than cash to those few lucky winners. Except, such winners won't be random. It's like if the bureaucrats and politicians could pick the lottery winners, because they can. But I digress.

My point is this: in high density areas, single family detached homes are going to get less and less affordable from this point on. So, for that matter, is everything else. Go back to supply and demand. Demand, which is to say, population of people who want to live there, is increasing. Supply is constant. If I have three apples to sell, and there's only two people who want one, the price is very low. If I have three apples to sell, and there's three hundred people who want one, I set up an auction and the three people willing and able to pay the highest prices get apples, while I get a lot more money than the first case. Same principle with real estate. It doesn't matter that the other 297 people can't afford apples. It matters only at which point that 297th person drops out of bidding, leaving the remaining three winners.

(Some people are going to note that we have to put those 297 people somewhere, which is true, but that's not the concern I'm addressing here, although I will state we can plan to do so in a way that's economically logical, or it will happen anyway, no matter what the law and the planning commissions may say. The first way will be a lot more pleasant for everybody.)

If you're in a high density area, you can leave or stay. If you are able to leave, as for instance, retirees can, you're not who I'm planning for here. If you're one of those few who are sufficiently affluent to be able to afford whatever the economic costs are, you don't really care. Real Estate is still going to be every bit as fantastic an investment as it has always been. In fact, the higher the demand goes, the better the investment it's going to be. Real Estate does not increase, over the long term, at the same rate as wages. It increases at that rate plus an additional factor to reflect increasing demand in a constant supply market.

Suppose in my previous example, that I have some magical way to convert one apple into ten oranges? Persons 288 through 297 get together and outbid number 298. They can't have an apple. They decide, however, that it they can't have an apple, they do want an orange and are willing to pay for it. Between them, they outbid person number 298 for that third apple, and have me convert it into ten oranges so that they each can have one. I make more money, and persons 288 through 297 are happy, also. The only person who's unhappy is person 298, who then decides that if he can't have that apple, either, he at least wants an orange, and so he goes and trades some of his money to person number 288, who, if he doesn't have an orange after he makes the deal, does have more money than he started with, assuming it's a willing sale. So now I'm not the only person who has made a profit. Person 288 has also made one. Similarly, person 299, who observed person 298's experience, and still has his apple, voluntarily decides he wants to convert his apple into ten oranges, and offers me something I want in exchange for doing so (remember, I'm the one with the magic trick, aka the construction industry). Person 299 now has ten oranges, and proceeds to sell them to persons 279 to 288. This nets him enough to buy the remaining apple from person 300, who goes and buys person 279's orange with some of the proceeds, while person 299 decides that at this point they're happy and wants to keep this apple for themselves. Look at all of the people who made a profit and came out ahead because I could convert one apple (detached single family residence) into ten oranges (condominiums). Every single choice of every participant here was purely voluntary, and would not have been made if the recipient had not been made happier thereby. Note also, that there's eighteen people who have a place to live, where they would have been homeless if I (the construction industry) couldn't convert apples into oranges. These are all cold hard facts.

Like it or not, Manhattan and the surrounding area represent the way that other high density areas in this country are going to go. Let's leave all the non-essential stuff out of this, and consider only the economics. When the cost of land is high because there's a fixed amount, the only way you can create more space is along the vertical axis. You can go down, or you can go up. You can put multiple units on the same space where there was one. You can stack them fifty high or more. In any of these cases, it's no longer single family detached housing. The better you plan for your city's density, the more of your citizens have a home and the fewer that go homeless or have to relocate. My transform apples into oranges ability in the example raised the number of people who were able to afford housing by a factor of 7, but that's hardly the maximum possible.

If you don't have the money for an apple - single family residence - now, it's going to take some kind of major change in your circumstances to enable you to afford one. Get your law license, your medical license, win the lottery, make several million dollars in business, get a professional sports contract, something. Your circumstances are not going to change by magic. If you're a shoe salesman, even if you're making $20 per hour, and you're not doing something to change that, it's not likely to happen on its own. Matter of fact, it's going to keep getting more difficult. Right now there's 300 people who want to live in your area. What happens to the price when there's 500? A thousand? Ten thousand? This is an easy answer, straight from the pages of your first economics lesson. The price goes up, and not just in relative but in absolute terms.

If you don't have the money for an apple - single family residence - now, you can choose one of two options. You can decide not to play. Stay a renter forever, or at least until you realize what a mistake it is. Rents go up, and landlords have to pay mortgages and property taxes also. They can also decide to stop playing the landlord game and sell for what they can get at any time. I've heard from a lot of bitter renters who were displaced when their former landlords decided to take the money and run when the market was hot. Furthermore, the rental market is going to keep getting more expensive as the population, and therefore demand, increases also. Right at this moment, there's even more upwards pressure on the rental market as people who lost their properties through foreclosure need a place to stay. The vacancy rate locally was 2.6% when I originally wrote this. There is no way around one cold hard truth: Renting leaves decisions about your future in the hands of others, and of random fate.

Your second alternative is that you can decide to buy an orange - a condominium. Condominiums are going to see every bit of the long term gain single family detached housing will, at least proportionally. So you've only made $300,000 when your $300,000 condo doubles in price, as opposed to your $500,000 house doubling in price. Actually, I'll bet you that from this point on, in areas like San Diego, they see just a little bit more appreciation than single family detached homes. Right now, there's still a very large proportion of renters telling themselves they're going to own a house someday, but they're not interested in a condo. As that becomes more and more out of reach for them the majority of them - all of the rational ones - are going to switch their goal to the closest practical equivalent. Condos are never going to be as expensive as single family detached homes, but more people can afford them, and they're going to be more expensive per square foot of living space. Why? Because of the implicit cost of all that land that the single family detached home is not using for living space, which isn't taken into account. Because so many more people can afford a tenth of the lot than can afford the entire thing. When you've got the last single family residence on its own quarter acre lot on Manhattan, someone who sees the profit to be made in higher density construction is going to make you an offer you won't want to refuse, and eventually, you will sell voluntarily. Maybe that person will even be the owner, themselves, converting the lot into higher density housing.

This doesn't happen all at once. It happens piecemeal, over time, but it does happen. Already, I can take you back to the neighborhood I grew up in and the surrounding area. I can show you all of the buildings that weren't there thirty or thirty five years ago, and San Diego hasn't been completely built up anywhere near that length of time. Some of them were vacant land then. Most, however, have been converted from lower density to higher density. I cannot point to a single place that's gone from higher density to lower. People who are middle aged now or older have watched it happen in slow motion, so slow that all of the implications haven't sunk in to most of us, yet. Indeed, the slowness has allowed a lot of people to keep pretending it isn't happening. This doesn't change the fact that it is happening.

Some people don't like oranges (condos). For that matter, some people don't like apples (single unit detached housing). The ones who can afford single unit detached housing but prefer condos don't have a problem. The ones who can only afford condos but prefer single unit detached housing do. I've gone over the most obvious solution to this problem before, in Part 2 of Save For A Down Payment or Buy Now?. There are others, but they all involve similar principles of solution.

The bubble everyone (including me) was talking about a while ago is gone. In fact, it's more than gone. San Diego experienced a strictly temporary depression in prices, caused by psychological factors and fueled by governmental idiocy. When everything shakes out, the only thing that can cause it to be permanent is governmental idiocy. Mass media always paints things as being better than they are when they're good, and worse than it is when they're bad, causing people who believe mass media to over-react. This means opportunity, while it lasts, until a critical mass of people figure out that things aren't so catastrophic as they have been painted. Some people will see this article, and instantly decide to try to time the market. Don't. You'll mis-time it, with results worse than if you just acted. There are any number of studies that confirm this. When I first wrote this I had debated, in person and via email, three bubble advocates in the previous week. Every single one of them tried to start moving the goalposts on me, citing prices of college for the kids, prices of cars and this and that. These extraneous factors have been there for decades. They've never been absent. They're been living in the equation so long that people forget they've already been taken into account, even though they've been there all along. But that's the only way these folks with so much emotional investment in the bubble can pretend that prices are going to keep going down.

The condominium market, in particular, has been hit hard for several years. Stuff that was legitimately worth $300,000 several years ago declined in price to where $150,000 was a good offer. There are condo owners who wanted to sell four and five years ago who still have their units, but no one's been making offers. Part of this was "too much, too fast" - converting apartments to condominiums and building new condominiums, in the hope of cashing in on the rush, but the rate got above what were the current market requirements. This doesn't mean condos aren't going right back up in price once the housing market snake has digested that lump, especially with increasing demand as more people figure out their options are a condo or nothing.

The larger part, however, at least in my estimation, has been "elephant hunting." This is a well known phenomenon in just about any sales occupation, but real estate had been rewarding turning squirrels into elephants these last few years. The hardest part of making money as a loan officer or as an agent is getting clients to work with you, and it takes about the same amount of effort. When you've got a set of buyers (or borrowers) in front of you, the temptation is there to sell them the a larger home with a larger loan than they can really afford, so you get a larger commission. The sort of warm body loans that were available the last few years facilitated this practice. The people want to buy, but can't afford what they want? Instead of trying to talk them into limiting their budget to what they can afford, which risks them leaving your office and going to your competitor, sell them what they really want, with a stated income loan. If you need to lower the payment, make it a 2/28, spread it out over forty or fifty years, add an interest only period at the beginning, or just scrap all that and put them in a negative amortization loan from the get-go, further inflating your loan commission. I've seen estimates that over eighty percent of the sales locally at the peak of the market used one or more of these tricks in support of it. Like I said, turning squirrels into elephants so you can hunt elephants. These people should almost certainly have been buying condos, but weren't. Given the state and shape of the socio-economic pyramid locally, there should have been more condominiums bought and sold than single family detached housing, by a factor of about 3 to 2. That was not the case. The ratio was over 2 to 1 the other way. And if that's not quite a sufficient indictment of the ineffective regulation of the real estate profession (and financial ignorance of the American public) to measure up to Emile Zola "J'accuse!", it'll nonetheless have to do.

(I should mention that with all the political posturing about this, nothing has been done by the government to actually fix the problem. What actual change there's been that might repair the issue has been introduced solely by lender and investor policy)

In case you haven't been paying attention to the financial news lately, the loans that enabled these tricks are now gone. History, and they're not coming back for years at least, until the lenders develop collective amnesia again. Meanwhile, agents and loan officers who are used to hunting elephants are complaining that they're all gone. Well, they weren't really elephants in the first place, but the lax loan standards made it possible to get an elephant's worth of meat off them, at least for the agents, the loan officer, and the seller. The buyer and the lender, of course, ended up holding the sack. My sympathy for the lenders is non-existent. They knew better. My sympathy for these buyers, on the other hand, is great.

So the condo market has been dead due to the loans situation, while agents and loan officers hunted elephants who were really squirrels. Now that it's rectified, agents won't have a choice. If folks can only afford the price of a condo, It's condo or nothing. There are ways to come up with a down payment if you want to. Lack of down payment is not an insurmountable issue for responsible people, and objections to this amount to "I don't want to". Ability to afford the payments on the loan, however, is a question that cannot be dodged without dire consequence.

Let's hypothetically consider an FHA loan of $221,000 loan on a $225,000 condominium with homeowner's association dues of $250 per month. When I wrote this, for one point total retail, I had a thirty year fixed rate loan at 5.25%, with PMI of 0.55%%. Total payment on the loan is $1321.67, of which $1067 is tax deductible. Property taxes, at 1.25% (assumed - the base rate is actually lower), add $234.38 per month and are also deductible. Total: $1806 per month, and most buyers are going to get a significant amount of that back from lowered income taxes (married: roughly $150 per month, single, roughly $250 because the standard deduction is lower). Income needed, $4200 gross salary per month, or from just under $50,400 household gross per year, at most. This is well below area median income for 2006 of $64,900, and it's done with a sustainable loan, without any stated income tricks, without any special limited availability government programs for first time buyers, or anyone else, no MCC, nothing. These buyers are doing it completely on their own, without a large down payment. If they have a larger down payment, it gets a lot more affordable than this, fast.

Tell me you don't want a condominium, and I'll tell you that's fine, but I'm not going to let you pretend I didn't warn you about the consequences. Don't have the down payment? The fastest way to get it is to buy that condo, and I can prove it!

I've been aware for some time that I'm probably going to sell more condominiums than single family detached houses for the rest of my career. No, I don't have any objection to hunting elephants and in fact, yes, I would rather do so. It's just that there's more people who are going to be buying and selling condos out there than there are single family detached from now on, and I'd rather have the money from helping them than not have it, so I might as well hunt squirrels along with elephants. Not only will I make more money, those of my clients who do what is necessary to become elephants will likely come back with more business. And the fact that they listened to me about how to do it (and that this advice worked!) will be the obvious primary reason behind their ability to buy something bigger and more expensive later, making it even more likely they'll come back to me. Not that a commission on that $225,000 condo is squirrel feed, but when it leads to 2.5% of $600,000 to sell it in a few years as well as 3% of $1,000,000 when they can afford to buy that property they can't afford right now, my clients won't be the only ones smiling from ear to ear.

Caveat Emptor

Original article here

Okay, I did an article called Why Renting Really Is For Suckers (And What To Do About It). Fairness demands that I do a companion article on situations where buying is not a good idea.

There actually are some. First off, the math just plain works against it for less than about three years, as the transaction costs to pay for the acts of selling and buying can eat up more than your proceeds. If you know you're going to have to sell in less than three years, chances are that you shouldn't buy. This is not to say that professional speculators are stupid, just that they are playing with different assumptions than most people. If one victim isn't desperate enough to sell for thirty percent under the general market, they'll go find someone who is. But they don't buy for a place to live. They're buying with a professional eye towards making a profit, and sometimes they don't. If your situation is that you're looking for a home to live in, and you're going to have to sell it instead of renting it out after less than three years, chances are you shouldn't buy. In this instance, it's not the idea of being a property owner in general that is the major factor in the decision, it's how long you're going to own that property.

This is not to say that nobody has ever made money buying for less than three years. The decade long seller's market right here in California is the counterexample to that contention. But real estate appreciation happens when it happens, and you never know until afterward what it was. If people could predict the market with that much certainty, then it would make sense to try and time the market. They can't, and it doesn't, at least not for the ordinary person.

You shouldn't buy a particular property if you can't get a sustainable loan that you can afford. Setting your sights lower, for a property that can be obtained within your budget, is a better idea. If you don't have at least three years of a fixed rate on an amortizing loan you can afford, you should probably not buy. Five is my real comfort level, and it's better yet if you can afford something fixed rate, even if you choose a hybrid ARM in order to save money on your interest rate. The market returns 5 to 7 percent per year on average. That is a very different thing than five to seven percent every year. Some years see values shoot up 20%. Other years end up twenty percent down. If you have a sustainable, affordable loan, you'll pay some principal down and you should be able to refinance when the adjustment hits if there is one. This doesn't apply with negative amortization, interest only, or shorter term loans. Particularly if there's a prepayment penalty, you'll likely eat up all the principal payments you made with that prepayment penalty. Now suppose you got caught in a twenty percent down year? Over longer periods of time, things even out, trending towards the average return of 5 to 7 percent per year. But that's no comfort whatsoever to those people who bought into unsustainable loans on overinflated properties in the last few years and are now facing huge problems because they can't sell for what they owe, and they can't refinance into a payment they can make. I didn't do it to anyone; I could have made a lot more money if I was so willing. But that doesn't mean there aren't a lot of them out there.

The market is unpredictable. The cycle always turns. I cannot tell you precisely when, and neither can anybody else guarantee a time frame. Economic models are a lot more precise as to what than they are as to when. All I can tell you for sure is what is happening right now. The only time the value of your property is important is when you sell or when you refinance, but if you haven't got a stable loan, you're looking at what is essentially a mandatory deadline for refinancing, which is one of two times when your value is important. If the market doesn't support the refinance you need before that time, the eventual market upswing will be of no comfort. Eventually, I'm confident you'll make a better profit from real estate than you could anywhere else. But eventually can be quite a while, and if your time constraints don't stretch far enough, that's a problem. A big problem.

Third group of people who shouldn't buy is those without a sufficiently stable income, particularly if their available cash isn't enough to smooth out the bumps. If you need $6000 per month, and you make $24,000 in one whack about every four months, that might appear to be enough, but consider what happens if for some reason it is six months between paychecks? Once you're a couple of months behind and your credit score is toast, it doesn't make that go away if your next check after that is only two more months.

I think I've been clear enough on the evils of buying too much house for your income. People should not overstretch financially to buy a home, but the majority do. You get a month behind on rent, and it is a problem, but if you get a month behind on your mortgage, that's part of your credit score for ten years, and puts you in a whole different class of borrower for two. Plus you're likely to be behind on your next month, and the one after that. This is a lot less of a black mark for renters than it is for owners with a mortgage. If you find this out the hard way on a mortgage, then when you're ready and can otherwise really afford a mortgage, you can't get one or you can only get one on prohibitive terms. So save up enough to smooth out the bumps, and it certainly doesn't hurt to have a down payment also, as that will make the hurdles you have to get over with irregular paychecks that much lower.

That's basically it. If you think you have another one, I'm interested in it, but those are the only three I can think of. The mathematics and economics do generally favor home ownership, even without that generous tax allowance given for the interest deduction and state property taxes, but there are cases where the general rules get overridden. Contrary to what many people were saying not too long ago, you can lose money in real estate, as the fact that property values locally are down about 30 percent from peak should attest. You can also become financially crippled for years. Nonetheless, if you take care to keep it within the realm of what you can afford, and what you can afford to make payments on indefinitely, then the worst that is likely to happen is that you'll owe more than the property is theoretically worth for a while. If you don't need to refinance or sell during that period, that's just unimportant. In cycles stretching back hundreds of years, real estate has always come back to higher prices than before, even accounting for inflation. The critical thing is to make certain you can wait it out.

Caveat Emptor

Original here

Legally, immediately. This also applies to refinance loans.

With that said, there are economic reasons why it may not be a good idea for you to refinance.

If you have a prepayment penalty, you're going to have to save a lot of money to make it worth paying that penalty. Suppose you have a rate of 7 percent, and an penalty of eighty percent of six months interest, that's a prepayment penalty of 2.8 percent of the loan amount. So, in order to make it worth refinancing in that instance, you have to save at least 2.8 percent of your loan amount in addition to the costs of getting the loan done, all before the prepayment penalty would have expired anyway. So if it's a three year prepayment penalty, you have to cut almost a full percent off your rate just to balance out the prepayment penalty. The higher the rate you've got now, the bigger the penalty and the more you've got to save in order to make it worthwhile. On the other side of the argument, the longer the prepayment penalty is for, the easier it is to save enough to justify paying it. If you've got a five year prepayment penalty, you're likely to get transferred or need to sell or somehow end up paying it anyway.

Second, your home has not appreciated yet, especially not in the current market. You bought for $X, and your home is still worth $X, and you haven't paid the loan down much yet, so your equity situation is essentially unchanged. In fact, since relatively few loans are zero cost, you're either going to have to put money to the deal or accept a higher rate than you might otherwise get. Don't get me wrong; Zero Cost Refinancing is a really good idea if you refinance often. But when you go from a loan that takes money to buy the rate down to a loan where the lender is paying for all of the costs of getting it done, you're not going to get as good of a rate unless the rates are falling. Loan rates went through a broad and more or less steady increase in 2004-2006, although they seem to have leveled off after that, but then they plunged off a cliff for completely predictable reasons I won't go into lest you think I'm talking politics, although they are set for major increases now. If you or someone else paid two points to get the rate on your current loan, you are not getting those two points back if you refinance. They are sunk costs, gone forever when you let the lender off the hook. If rates had dropped, it might be a good idea to refinance (like at this update), but prior to that refinancing wasn't going to save most people money. Still fine to do so if you had a sufficiently good reason, but those are a lot more rare than "I can get a lower rate without paying a cent or adding a nickel to my balance!" One reason it takes so long to refinance right now is that just about everybody who can is doing so, and therefore the lenders are backed up like the worst traffic jam you've seen in your life.

If you got your current loan based upon a property value of $400,000 and total loans of $380,000, that's a 95 percent Loan to Value Ratio. So your property is still worth $400,000, you've only paid the loan down $400. That's still a ninety five percent Loan to Value Ratio; more actually, as doing most loans is not free. So unless your credit score has gone way up, you can now prove you make money where you couldn't before, or you have a large chunk of cash you intend to put to the loan, chances are not good that refinancing is going to help you where it really counts, in the cost of money. If your credit score has gone from 520 to 740, on the other hand, or you now have two years of tax returns that prove your income, or you did win $100,000 in Vegas and you want to pay your loan down, then it can become worthwhile to refinance, even in a market like this one where the rates are generally rising. Unfortunately for loan officers like me, that does not describe the situation most people find themselves in.

One more thing that can influence whether it's a good idea to refinance is your rental and mortgage payment history. If when you got your current loan, you had multiple sixty day lates on your credit within the past two years, and now they are all more than two years in the past, that can make a really positive difference in the rate you qualify for. On the other hand, if you had an immaculate history before and now you've had a bunch of payments late thirty days or more, then it's probably not going to be beneficial to refinance.

Cash out refinancing is one thing many people ask about surprisingly soon after they close on their home. If you have a down payment, it's better to put aside some of the down payment for use in renovations rather than to initially put it towards a purchase and then refinance it out, as it saves you the costs of doing a new loan. Furthermore, "cash out" loans have generally less favorable rate/cost tradeoffs than "purchase money." If the equity is there and if you have the discipline to take the money and actually do something financially beneficial with it, it can be a very good idea. If you're just taking the money to pay off debts so you can cut your payments and run up more debts, it's probably not a good idea, even if your equity situation supports getting the cash out. It often can and does in a rising market. In the current market where values have been retreating and are ready to stabilize, not so much. If you bought any time in the last few years, it is unlikely that you have significantly more equity now than when you bought, making the whole situation unlikely to be of benefit.

A lot of situations have something or other that makes them an exception to the general rules of thumb. The only way to know for certain if the general rules apply to your situation is have a good conversation with a loan provider or two.

Caveat Emptor

Original here

Be prepared for trouble before it happens, know how strong your position is or isn't, and don't ever overplay your hand.

Real estate transactions are the largest transactions most folks get involved in. Even small percentages of $500,000 or more are lots of money. A 1% difference in the purchase price, or cost of repairs, means more money than a lot of folks take home in a month. People will lie, cheat, and steal for much smaller amounts that that. It's a bad bet in general, and a worse one in real estate, but people do it. The new siding that hides the clues that say cracked foundation. The new paint that hides the water stained ceiling. New, well padded carpet over old wood where rot has set in. These are just the tip of the iceberg.

The most common game, though, I call the chiseler. Someone who comes into the transaction and may actually negotiate the initial contract reasonably, then proceeds to demand more than is reasonable every time there's the least little item for possible concern. There's another agent in my office has one for a client right now. I've told that agent that I'd drop that client at least half a dozen times. Even if the transaction gets finalized, this chiseler is going to come after this agent as soon as there's anything he can manufacture a complaint about. The other side is a desperate seller, or they'd have told this guy to get lost long since. The chiseler is getting a screaming deal just from the basic contract, and he's wanting hundreds of dollars in concessions to fix stuff that costs a dollar nineteen. My opinion is that before the transaction closes, he's going to ask for one thing too many and they're going to tell him no, and the transaction will be off, no matter how desperate they are.

"If you want peace, be prepared for war." Ancient wisdom. I'm not advocating war for real estate. Wars are expensive and usually a net loss, whether they're waged with bullets and bombs or lawyers and contracts. There's always another property for sale, always another buyer. You never have any more power over the other side in the transaction than they choose to grant you. It may be intelligent for them to grant it, but you can't make them. Similarly, they never have any more power over you than you are willing to grant them.

A quick lesson from the annals of real warfare. In 279 BC, Pyrrhus of Epirus fought the Roman legions at Ausculum. He won the battle, but when congratulated upon doing so, replied "One more such victory, and we shall be undone." The Romans could afford the losses much more easily than his army. It set the scene for the Battle of Beneventum, after which he gave up fighting the Romans. From the experience of Pyrrhus comes the term, Pyrrhic victory. He was supposedly a brilliant general, but if he was so brilliant why couldn't he win a battle without catastrophic casualties?

Any time lawyers get involved in a transaction, it's a reasonable bet it has become a Pyrrhic victory at best. Chances of recovering actual money in your pocket greater than your legal fees are slim, no matter how rotten their case or how much worse off than you they end up. You still don't have the transaction you wanted, and meantime, you've likely scared off other buyers or missed opportunities at other properties.

Knowing when a transaction is broken and being willing to counsel a client to get out of it are two of the hallmarks of a good agent. Recognizing it before it has become undeniable is crucial. Precisely when the transaction is broken is itself a function of the market. A buyer's market certainly allows buyers to drive much harder bargains than seller's markets, but there is a point at which even the most desperate seller should tell them, "No," to further demands. Of course, a really good listing agent won't let it get that far, any more than a good buyer's agent will. I'm perfectly willing to tell my clients in private that they're on the verge of messing up a contract that gets them the best deal they can reasonably expect, all because they tell themselves they want a little bit more. But if that messes up a good transaction, nobody ends up with what they wanted. See the chiseler, above. In order to know what's broken and what's not, you have to really understand the market.

None of this is to say that capitulation is the first order of business, any more than scorched earth. Both are the province of the agent that needs to get fired. What is necessary is judgment and market knowledge and an understanding of what a good compromise really is. A good agent has contingency plans for everything in negotiating, and throughout the transaction. If they do X, we'll do Y. If they want A, we want B. If they don't want to go for that, we'll offer D for C instead. The other side does not necessarily have to lose for your client to win. Indeed, it's the good agent that knows how to substitute other things for money, and the good agent who knows how much of the clients agenda to reveal. Information is always power, but sometimes knowledge of the other side's agenda enables us to craft a compromise that makes both sides happy.

Cutting corners is always bad, as is the agent who doesn't stay on top of the transaction. Listing agents should negotiate individually with each offer, and respond to every offer within a week at the most. The transaction coordinator should not be used in lieu of individual agent involvement, or as a "talk to the hand" type shield from the other side. That's a good way to lose some of the best offers you'll get on the listing side.

Time on market is a killer for the seller's pocketbook. I don't know where the urban legend about "The longer you wait the higher the sales price" got started, but it is a counterproductive myth. If research found some kind of positive correlation between lengthened time on market and sales price, it must have been conducted in a market going up 20% plus per year. Time on market turns buyers off. "If it's so great, why hasn't it sold by now?" is a quote I've heard from pretty much every buyer client I've ever had. In point of fact, the longer a property is on the market, the further the seller will have to cut price in order to sell (and the more desperate they likely are), and the better the deal it is possible for the buyer to get. In a normal market, the longer a property takes to sell, the lower the eventual sales price will be. The idea of putting it on the market overpriced "just to see if we can get it" is a good way to cost yourself money. Price it competitively out of the gate. If there are better properties for less, your property won't sell until after theirs does - and there will be more better properties for less on the market then.

The proper response varies with market conditions and the response you're getting to the property from the market. When I originally wrote this, if a given seller wouldn't recognize that desperation is the only valid reason for marketing a property when there are 40 plus sellers per buyer, a good buyer's agent doesn't need much reason to abandon a property. Just the fact that this seller or their agent was trying to act like it's still the seller's market of a few years ago is enough, and the sooner the idiots doing anything to get listings including misrepresentation of the market realize this, the sooner this will change. My most important questions have been and will continue to be concerning their need to sell and what possible alternative plans there might be. When things are bad for sellers (and wonderful for buyers), the only reason for a property to be on the market is if there is no other reasonable alternative. I told several people, everyone who had a reasonable alternative, "I'd love to sell your property, but given the state of the market right now, the kind of sale you want is not going to happen. I can list your property for sale, but it's not going to sell in this market unless you outcompete all the similar properties that are already for sale. All it would do is frustrate both of us, and get you angry at me, and for good reason. Here's my card, and if you decide you need to do what it's going to take, please call me. Otherwise, I'll check back in a few months and we'll discuss the state of the market again. I'm confident that waiting will get you more than enough extra money to be worth it."

Later on, the buyer's market that we had when the bubble burst went away. Bidding wars and price increases were the order of the day. Sellers didn't have the kind of power they did when the bubble was going gangbusters, but they had a lot more than they had during the burst, providing their property is priced correctly and in a desirable micro-market (e.g. Central San Diego, but not Escondido or El Cajon). The more people want your property, the more power a given seller has and the less power would-be buyers do. Nobody can force them to come to grips with reality, so if they're not going to listen to reason, it may be the listing agent's fault but the owner is the one who's going to suffer the consequences. Similarly on the other side. If the buyer's agent doesn't understand the market, their clients are either going to end up frustrated or rooked.

You can't learn this stuff on the fly, by the way, nor can you prepare retroactively - you have to be ready when the offer comes in. If you don't hire a sharp enough agent, you can't go get them when it drops in the pot. First off, you won't be able to recognize that it has dropped in the pot, and that you're now roast. Second, because the reason it doesn't drop in the pot with a sharp agent is because they're prepared, and they never let it get that far.

Don't ever confuse "sharp" with "experienced," or "high producer." Yes, a certain amount of experience is helpful and I learned a lot on my first few transactions. But the only times I've ever heard anybody say something like, "I've been in the business for three geologic eras" is when they were trying to defend something indefensible. The last time it was a woman who I found out didn't have a valid listing agreement (and it wasn't a small technicality, either!) bragging about her forty years in the business. And often the reason that someone is a high producer is the willingness to throw their client under the bus in pursuit of an immediate commission check. Ask what problems they've dealt with lately and how they handled them. There are always problems to be dealt with; it's the nature of the business. Sometimes it's the property, more often it's the people. Not every transaction, but if they don't have a certain proportion, it's more indicative of inability to recognize a problem than it is of not having any. On the loan side, I've done more loans than 99 percent of the loan officers out there, and I deal with problems by recognizing them and fixing them before the underwriter sees the file. It's not my experience - there are plenty of loan officers who've been in the business thirty years who still insist upon doing it the hard way. It's not the fact that I've done X number of loans in a month. I've learned more since the month I closed 100 loans than I knew then, by an order of magnitude. As a matter of fact, high volume is incompatible with significant problem solving, either in loans or in sales. There's only so much time in the day. It's that I've learned how to recognize this stuff and deal with it before it bites my client, even if I have to work much harder or do more work or wait a little longer than I originally thought I would. That's what makes a good agent or a good loan officer.

Caveat Emptor

Original article here

This is one of the biggest issues with my local real estate market. Because the San Diego market has very high demand and limited supply of property, prices are high. A reasonable two bedroom condo runs around $200,000. A 1200 square foot three bedroom, two bath detached home in decent shape on a 7000 square foot lot costs around $380,000. There are areas that are less expensive, and buyers have a lot of leverage right now, but those are real ballpark numbers. These numbers are sustainable, because even though a relatively small fraction of the population can afford such numbers, that fraction is enough to absorb the properties that come onto the market for sale. It doesn't matter if minimum wage people can't afford your property. All you need is one willing buyer who can. We're not the most expensive area of the country, but we're up there,

When you put people into this sort of environment, a certain number of them are going to want more expensive property than they can really afford. Most of them have what they believe are really excellent reasons for it. "My kids need a yard to play in!", "I've got two kids who need their own room!", and "I've got to live where the schools are the best!" are three of the most common. Other people will say they've got to live within so much distance of the ocean, they've got to have so much space, or they've got to live in a "safe" neighborhood. What they all have in common is that they're rationalizations.

There's nothing wrong with wanting a better property. I want lots of things I can't have right now. There's a car company called Morgan. They make cars that may not be the fastest or the most luxurious, but they are an absolute blast to drive. They've got a waiting list two years long. If I ever actually buy one, then in my own mind I will officially have more money than sense. I can think of roughly an infinite number of charities that would put that money to better use. But it's not wrong for me to want one - it's just stupid if I buy one without being able to afford it, and if I ever can afford it, it'll be my money to do as I want (although I hope I'd donate it to something like Soldier's Angels instead). I don't think I've ever met anyone who doesn't want something they can't really afford. It's not a crime, and it's not a sin, and it can even give you motivation to get to where you can afford it. It is self-destructive if you act on your desire before you get to that point.

Nonetheless, a lot of people, will convince themselves that because they're good people, they "deserve" this property even though they cannot afford it (or cannot afford it yet). They manage to convince themselves that what they're doing is really okay, and it'll all come out okay in the end. I must disagree, because if they "deserve" this property, they "deserve" the loan that comes with it, and "deserve" all the bad stuff that will happen when (not if) they default on their payments. The odds are strongly against everything coming out okay in the end.

If you've got the cash, you can do anything legal with it that you desire, among which is buying any property you desire. But these folks want this property now, and they don't have the cash and can't afford the loan. If either of these were not the case, well then I submit to you that they really can afford it, after all.

There aren't any loans that really make more than a marginal difference in whether you can afford the property. This isn't to say it's not worth shopping around. It is worth shopping around. The difference between the 4.75 thirty year fixed I could do when I originally wrote this for one point, and the 5.5 the branch of that same lender in the supermarket I was in the same day wanted two points for is quite noticeable. On a $400,000 loan, that's a difference of over $4000 in initial cost, and $3000 per year of interest, not counting the fact that the borrowers will have to borrow more money for the other loan. But with reasonable and equal assumptions about equity, property taxes, etcetera, none of which are under my control, the family who gets my loan will pay $2086 per month ($1583 cost of interest), requiring monthly income of $6014, while the other loan would cause their monthly total of payments to be $2271 per month ($1833 cost of interest), and the income to qualify is $6425. The difference is only about 6.8 percent, and that's actually a pretty big difference - when I originally wrote this article it was only a 2.2 percent difference. It still amounts to a lot of money, but the odds are that someone who qualifies for my loan will also qualify for the other, they'll just pay $185 per month more for the loan. This apparently small difference is one of the expensive lender's best defenses against smaller companies willing to do the loan more cheaply: it just doesn't seem like that much of a difference. Even if you dropped to a 4.25% 5/1 ARM that was available at the same time, that only drops the monthly cost of housing to $2588 ($1416 cost of interest), a further difference of only $118. This works out to a lot of money - as I said, $4000 plus $3000 per year for however many years you keep it, but it just doesn't seem like that much to most borrowers. Nonetheless, these loans are all good loans if you qualify. That's what's real. That's what's sustainable.

But if you wanted the property, back during the Era of Make Believe Loans, loan officers could have used one or more tricks, such as stated income, negative amortization, or teaser loans with a low initial payment where the rate will adjust upwards at a certain time, particularly if they're "interest only" until that time. Such loans can make it appear as if you can afford the property, when you really cannot. In the vast majority of cases where they are used, such loans are unsustainable . Let's say you think of the payment as your actual cost of housing, which may not be true. You decide you need to cut your cost of housing, but you still want the same property. Lenny the Loan Shark hauls out an interest only 2/28 at 5%, and voila! cost of interest is only $1666, and the total of monthly payments drops to $2286 under the same assumptions as the previous paragraph. But in two years, not only is that rate going to jump to 6.75% (assuming the bond market stays exactly where it is today), but it'll start amortizing at the same time. Net result? In month 25, your loan payment goes to $2653 (cost of interest $2250), an increase of over 50%, but your overall monthly cash flow to stay in that property goes to $3273. It's more likely you can afford $2891 now, the worst option from the previous paragraph, than $3273 in two years.

Suppose you want to stretch a little further than that? Lenny pulls out a negative amortization loan, even though he calls it by one of dozens of friendly sounding pseudonymns, like "Option ARM," "Pick a pay," "Flex pay," or "1% loan". As soon as the consumer grapevine picks up on one name for these nightmares, they come up with another. One of our local sharks is pushing these on the radio right now. Gosh, doesn't "1% loan" sound good? Why would anybody choose something different when those are available? Who wants to pay more interest?

The answer is that they're not really giving you a loan at 1%. Think of 1%, or whatever it is, as a "make believe" rate. Pretend it's your rate, and make that payment ($1286 for the loan, giving a total of monthly checks you write of $1812), and just don't pay attention to what's happening to your balance. Until of course, the loan hits recast, and you realize that they've really been charging you a variable rate above 8% this whole time, and now you discover that instead of $400,000, which you really couldn't afford the payments on, you now owe 110 to 125% of this amount you originally borrowed, and now they start charging you for the whole payment every month. Let's say you now owe $480,000, and your payment on the loan alone jumps to $3784, plus the same assumptions as previously, leads to a total of monthly payments of $4310 three years out. If you couldn't afford the real cost of housing at $2893, let along $3023, how likely is it you'll be able to afford $4310 three years down the line? How many people do you know that get 43% raises over three years? Now, how many people do you know that don't?

As for stated income, the thinking goes something like this: So what if you don't qualify by standard measurements! Those old banker stick in the muds don't ever want to loan money to people who really need it! You can make the payments, right? You're going to pay them back, right? We'll just tell them you make what you need to make in order to qualify! We do need to choose this short term loan to give you a payment you can make, but that's no problem! In two years, we'll refinance you into something better!

I'm perfectly willing to do unsustainable loans if the client can convince me they're aware of the downsides and risks. You're a legal adult, and being a legal adult means you're able to assume responsibility for your own mistakes. But doing this requires me to go over those downsides and risks in person with that client before we start the loan. Hiding it among 500 pages of disclosures while you're signing the final paperwork is not acceptable. People who accept these loans are putting themselves into a situation where it's essentially going to be mandatory that they refinance within two to three years. If the equity situation deteriorates, if their credit has gotten worse, if they've had late payments, if the market has receded and they have less equity (or none, or negative), they are not going to be able to obtain a loan on terms as good as what they initially had. If they didn't need a lower payment than could be had on a sustainable loan, they could have had a loan without any of these downsides. Nor is refinancing free. The fees can be paid by accepting a higher rate, but that higher rate itself means a higher payment, leading to questions of whether they can still qualify. For that matter, rates change over time. What it available rates then are significantly higher? Unlike everyone else, the person who accepts this type of loan does not really have the option of waiting for the rates to get better again. They need to understand that before they sign up to start it, not thirty days later when they're looking at final loan documents, and most people don't think they have any other choice but to sign.

All of this also begs a couple of other questions. What about pre-payment penalties, which I haven't touched on until now? What about the fact that the client who gets these loans is stretching beyond their real limits in most cases, and the credit score and situation is more likely to deteriorate than improve? Finally, most importantly, even if none of these concerns manages to bite this client, what makes you think that better loans will be available in two or three years? There just isn't anyone who can reliably predict the state of the loan market that far out.

In short, by attempting to circumvent debt to income ratio, one of the central questions of whether they qualify, these persons are not only short-circuiting a protective measure intended for their benefit as much as the lender's, but they're laying themselves open for unscrupulous providers. All of this is part of the reason why San Diego, which started out expensive and got more so, was on the bleeding edge of the bubble. If people want the house of their dreams right now, and they're seeing the market increase 20% per year with no end they can see in sight, Fear and Greed are both telling them to do whatever it takes - lie, cheat, steal, deal with shady practitioners, in order to get into that property. This was, predictably as gravity to anyone who understands macroeconomics, the wrong decision, but these folks didn't take the time to understand the market. Not to excuse them from all culpability, but here were people they thought of as credible experts, real estate agents and loan officers, telling them to do it. A rough equivalent would be if my lawyer told me it was permissible to haul off and shoot someone (other than in self defense). I'm still going to prison if I do, and rightly so, but the lawyer would certainly bear a certain amount of culpability. There is no magic wand that makes murder legal, and there is no magic wand that makes loans and properties well beyond your means affordable. Many of these were working class folks, told they qualified for a home that looks like it came straight out of Architectural Digest. This was a wedge that enabled them to be taken advantage of. It was a welcome message, it made them feel good about themselves, and it appeared to give them something that they desperately wanted, but fearful that there was no way they could afford. Yes, they were fooling themselves, but they've had a lot of company throughout history. While I cannot excuse their failure to heed warnings that most of them were given, or their failure to maybe do a little bit of research on something that any rational adult should have known was too good to be true, I can also understand it. It's a mistake I can see myself having made in different contexts.

There are variations in the market, but finding the beautiful mansion you can afford is not a matter of persistent looking, waiting for one to go on sale for the right price, or even just somehow finding the right loan. This isn't the meat section of the supermarket, where they try to lure you in with loss leaders in order to sell you the rest of your groceries for a higher price. People only buy one property or get one loan at a time. The lenders want you to pay a high cost of money, and they will play all sorts of games with payment, and what you have to pay for with money out of your pocket, or checks out of your checking account, in order to secure what they really want: You paying a higher cost for the money you borrow. That's what gets them paid. You paying a higher cost for the money you borrow than you might otherwise, gets them paid more. Much more. They can take a small portion of it and make it seem like you're getting something for free, and still come out way ahead. And there's really only one place all this money can come out of in the end: Your pocketbook. The lenders who really have superior loan prices and rates don't play these games, because on the margins they make, they can't afford to.

Getting people to be realistic about what they can afford is probably the hardest part of a buyer's agent's job, especially when your competition is telling them they can afford something they can't. It isn't popular, and you'll lose more than a few potential clients, but you'll keep yourself out of court, out of regulatory hearings, and out of jail.

For consumers, I advise you to limit yourself to sustainable loan types, fully amortized and fixed in interest rate for five years or more. There are exceptions, but if you're the kind of expert who can recognize those exceptions, you've stopped reading before this, because this article hasn't taught that person anything they don't already know. Set yourself a fixed budget in purchase price dollars, based upon your ability to afford the full payments at current rates, and refuse to go over that. If you've got a good buyer's agent, you can get a better property for less money than you might otherwise pay. If you're willing to rehab the place yourself, you can get a better property for less money, even considering the money and time you'll spend doing so. Think of it as your pay for handling the job in place of the soon to be former owner. If you shop around, you can find significantly better loans than if you don't. But you're not going to find a palace for the price of a dump. If you do, there's something wrong with the situation, and if you aren't so certain that you understand what it is and why, that you can give someone permission to tear your arm off and beat you to death with it if you're wrong, chances are you should run, not walk, in the other direction.

Caveat Emptor

Original article here

On a regular basis, I get emails that ask me what I think of a particular company. When I check out public forums, I see questions about particular companies every time. "What do you think of X Realty, or Y Mortgage?"

Reputation has a certain value of course, but in my experience, these people are overvaluing reputation. These people are looking for a "silver bullet" solution to their situation that lets them pretend they don't need to do diligence upon their own behalf, and there aren't any. They want to be taken care of without doing the mental work of figuring out whether the person is really doing a good job. "This is a great company, and great company would never take advantage of me, so I must be getting a great bargain!"

This utterly leaves aside any number of issues. Suppose the Mortgage or Real Estate Firm of Dewey, Cheatham, and Howe were paying me a fee for every referral. Most people might have justifiable concerns about whether my recommendation was motivated by that fee or by the desire to get them a great loan. Well if you're chumming for a recommendation, you have no idea if the anonymous person recommending the firm of Dewey, Cheatham, and Howe is a virtuous benefactor - or one of their employees. The bigger the firm, the more employees they have. Huge National Megacorporation can have hundreds of their loan officers or agents log on to the internet forums anonymously and all endorse National Megacorporation's loan programs for some mysterious reason. Suppose the person isn't affiliated with Dewey, Cheatham, and Howe, but does work for a similar firm. They could be trying to build demand for the same sort of operation that feeds them, so when people read about Dewey, Cheatham, and Howe's methods being recommended, and then encounter this similar firm, they are ready to do business.

Suppose the person answering is a complete babe in the woods? They just plain have no idea. They've never gotten a loan, or if they have, they got took just as badly as anyone else in the history of the world, and worse than most. Does the possibility of such a anonymous recommendation for the Mortgage firm of Dewey, Cheatham, and Howe seem like a thing you want to follow? Unless you audit that person's transaction and compare it to other similar transactions going on at the same time, you have no real idea whether this person would recognize a scam if it bit them. Even if you do audit their transaction, that doesn't necessarily mean anything, good or bad, for your situation.

Suppose the reason this person thought Dewey, Cheatham, and Howe did a good job was because they didn't pay attention. They've read every single one of my articles, and they understand all of the things that could go wrong, and they actually know how to read a HUD 1 form, but they just didn't bother because their Uncle Joe works for Dewey, Cheatham, and Howe, and they trust Uncle Joe completely, and Uncle Joe would never take advantage of them. This ignores the issue that their Uncle Joe is unlikely to be your loan officer, and even if he was, Uncle Joe may have compunctions about his family that do not apply to you. Furthermore, a very large fraction of the most unethical stuff I've seen since I've been in this business was Uncle Joe (or Brother Moe, or Sister Sue, or Cousin Lu) raking people over the coals who they knew would not shop around for a better deal. But even if they are completely unrelated, they decided to trust Joe, and didn't do the diligence that would have told them whether Joe was doing a good job, let alone the best possible job.

Most importantly, in both the loan and in the real estate business, service is provided by individuals, not companies. It's the guy you're sitting down talking to right here that decides how much of a margin they are going to work on, not some mysterious exalted Chief Operating Officer in New York City. That COO may lay out base requirements that say "no more than X, no less than Y" ("no less than" is a lot more common than "no more than"), but it's the person doing your loan, or the agent doing your transaction, that decides where in that spectrum you fall. And I shouldn't have to point out that if they say "The corporate president says we have to make at least two points on every loan!" and somebody else offers you a better loan for you, that's their problem, not yours. They are not getting, or at least they should not get your business if you know of a better possibility. You don't owe anyone your business.

Finally, every situation is unique. People ask me what I think of a particular lender, and I'm thinking about the clients they'll do well with, or the clients where that particular lender's programs are most competitive. The lender with the best thirty year fixed rate mortgage in the business is not a lender I would use for an 80/20 short term piggyback on someone with a 600 credit score. That particular lender never wanted to touch 100 percent financing, and refuses to do business at all with anyone whose credit score is less than 620. The lender I'd most likely use for the latter borrower has a rate and cost tradeoff for their loans that knocks them completely out of contention for the A paper full documentation 80 percent LTV thirty year fixed rate loan with no prepayment penalty. They're not competitive for that borrower, and both that account executive and I know it. They'd be grateful to me for placing the loan with them, and they'd certainly get it done, but my wholesalers and I have an understanding: The lender who has a program that can actually fund the loan with the lowest rate cost tradeoff on the best terms for the client gets the business. There are any number of constraints and possible aspects to a client situation that can cause me to turn away from one lender and to another lender, based upon how that particular lender treats that particular situation.

Lenders don't want to compete on price, but a good loan officer forces them to do precisely that. And if the wholesaler is one of those who refuses to compete on the basis I want them to compete on, there are plenty who will. Don't BS me about service. Everybody should have great service. If you don't have great service, we're not meant for each other, and the lenders I already do business with all have great service. What I want is a great loan for this client that you can actually deliver on time. If you've got that, we may have some business. If you haven't got that, we don't. This point, incidentally, is one of the reasons you'll end up with a better loan from a good brokerage or correspondent than you will from the best lender. A broker or correspondent loan officer knows how to shop loans better than any ordinary consumer. This is one reason why bankers are trying so hard to drive them out of business.

(Note: At this update, there are no generally available 100% financing programs. Every such 100% financing program that's currently available has significant restrictions, based upon factors like whether you're a veteran, where you want to live, whether you're a first time buyer, whether there is money in the budget, etcetera. I'm confident that 100% financing programs for the general public will come back, but they're not here right now)

This isn't to say you should just trust a broker. Indeed, my point is that you shouldn't trust anyone. Shop around, compare what's available, ask them what for written guarantees (insofar as they are available in a different and changed lending environment), verify everything, and don't give them your dollars to hold hostage until they've actually delivered. That's why I put out the yardsticks for measuring performance I do, that's why I give you the strategies for finding the people who will do a better job, and for forcing them to actually do a better job. I give you the tools to judge by the only reliable yardstick there is - their behavior. You can't know if something is a good bargain except by comparison with something else like it, or several somethings. Given the amount of legal wiggle room there is, unless you pin a loan officer or real estate agent down with specific guarantees and conditions in writing, what they actually deliver is completely dependent upon their good will. If they have good will, you don't need to work nearly so hard, although comparison shopping would still be a really good idea. But if a decent proportion of agents and loan officers had goodwill, there would be a lot fewer problems with the industry.

Caveat Emptor

Original here

A while ago I dealt with a very disturbing phone call from a would be client. He was very happy with the way I found bargain properties, and wanted me to find him such a property. All very well and good. But he said that a condition of the transaction had to be that he would receive cash back from the seller in order to rehabilitate the property while financing the entire amount. This is not so good.

I am well aware there are all kinds of self-proclaimed real estate gurus out there, many of whom push precisely this sort of strategy. That does not change the fact that it is FRAUD.

The lender evaluates a property based upon accounting principles, which is to say Lesser of Cost or Market. Whichever is less, the cost of the property or the market value. Market value is measured by the appraisal. It's not perfect, and it's not foolproof, but it's the best thing there is. Cost is measured by purchase price - the price at which a willing buyer and a willing seller exchanged the property. It has to be worth that much or the buyer would not have been willing to pay it, would they? It can't be worth more or the seller wouldn't have sold, would they?

Manipulating either purchase price or appraised value for financial purposes such as justifying a higher loan amount is fraud. Since there is no other rational reason to do that, it's pretty universal that manipulating appraisal value or purchase price is fraud.

Many people have all kinds of rationalizations why doing this sort of thing is permissible. "Real Estate goes up in value," "It'll be worth that much eventually," and "It'll be worth that after the renovations!" being very common. None of these addresses that fact that that's not the situation now, and the lender is lending based upon the value now, not later.

The purchase price, in particular, is the purchase price because that it how much money the buyer is paying and how much money the seller is receiving. But if the purchase price is $400,000 but the seller is returning $20,000 to the buyer, then the real purchase price is not $400,000, is it? The seller is only getting $380,000, and the buyer is only paying $380,000. If it was a cash transaction with no loan involved, there would be no doubt. If I hand you $400,000 and you hand me back $20,000, I've only given you $380,000, not $400,000, and there's no doubt about it. You've only got $380,000. Only the fact that there is a lender in the middle of most transactions gives any leeway to confuse the issue, and if you're hiding something about a transaction in order to induce some other party to perform a financial action they would not otherwise, that is a textbook definition of fraud.

Lest there be any mistake, you do have to hide it. If the terms of the purchase contract state that there will be this rebate, the lender will treat the purchase price as $380,000, and underwrite the loan based upon a $380,000 purchase price. Telling the entire truth defeats the possibility of it working, and once you have neglected to inform the lender of this significant fact, you are committing FRAUD.

Some people will cite the example of Seller Paid Closing Costs as justification for this, but that is an entirely different matter. Indeed, traditionally lenders treated seller paid closing costs, over and above the seller's usual share, as reducing the purchase price. It is only the last few years, when it has been pointed out that everything about real estate transactions is negotiable, and that the seller must have been willing to pay those costs in order to consummate that transaction, that the lenders began to allow it. But it is to be noted that all of that money is going to third parties, people who are being paid for their services in making the transaction happen, none back from the seller to the buyer.

Consider instead this scenario: Jim and Joe trade the stock of corporation A. The public sale price of that stock is $100 per share, but as soon as Jim has Joe's money, he quietly hands Joe back $20. The price Joe is paying Jim for the stock is $80, but to the observer unaware of the side transaction, it's $100. It's going to appear to the general public that both Jim and Joe consider that to be a fair trading price, and people will often be willing to pay both Joe and Jim that $100 per share price because it looks like that's the price, or think they're really "getting a deal" if Joe or Jim will sell to them for $98.

Now lest we be unclear, as soon as the side transaction comes to light, the SEC and FBI are going to sweep in and both Joe and Jim are going to find themselves charged with share price manipulation, which is to say, fraud.

The situation I've described as defrauding the lender in this instance is no different at the root. You are hiding a part of the transaction in order to induce the lender to give you a larger loan than they otherwise would have.

Before I leave this subject, I want to ask you what kind of an agent or loan officer you'd trust to commit fraud upon someone? When such activities are discovered, such agents and loan officers lose their license and usually go to jail. Do you want to do business with a loan officer or real estate agent who commits fraud? Who deserves to lose their license and go to jail? If they're willing to lie and commit fraud upon one part of the transaction at the lender's expense, why would they be unwilling to lie and commit fraud at someone else's expense? For instance, yours? If I were to point out some agent or loan officer who is under indictment for fraud, and is going to lose their license and go to jail as soon as the verdict comes back, how many of you would rush right out to get a transaction done with them before that all happens?

Now this would-be client quickly lost interest when I explained all of the above. He said, "I'll get back to you on the property!" and hung up. He'll find someone to help him out, no doubt about it. But that's one transaction a good professional wants no part of. I'm better off without him. And I'm confident that if he actually pulls a few of these transactions (fewer now than it used to be), one day he'll go to jail and be a convicted felon, and that is as it should be. Being able to kiss my wife and hug my kids every night is worth more than any money I might miss out on. Being able to look myself in the mirror is worth just as much.

Caveat Emptor

Original here

what happens if partner refuses to pay his half of the mortgage?

The lender will hold you each responsible for payment in full. That's the long and the short of it. You both agreed to the loan contract, and if it's not paid in full there will be all of the consequences for each of you: Hits to your credit, notice of default, foreclosure.

This is basically blackmail on the part of your partner, and a disturbing number of partnerships have this phenomenon. The only way I know of to recover the money is through the courts, which takes forever and costs more money. Even when you have a judgment, it can be difficult to actually get the money if they have taken certain steps to place it beyond your reach. Talk to an attorney right now, keep good records, and send everything Certified Mail.

Unfortunately, there are no method except time that I am aware of to repair the damage to your credit once it has been done. You just have to wait it out. For that reason, it is usually cost effective to loan your partner the money, even at zero percent interest.

What if you don't have the money for both halves of the payment? Well, that's a real question, and the answer is found in the article What Happens When You Can't Make Your Real Estate Loan Payment. This is not a good situation to be in. Talk to that attorney about liquidating your investment. It takes time and a lot of money if your partner doesn't want to.

What can you do to prevent this from happening? Pick a good partner that won't pull this nonsense. Spend the money to protect yourself up front with a partnership agreement. But that won't protect you if you didn't do it in advance, and the fact is that if your partner wants to be a problem personality, you really can't stop them in the short term. Not that it makes any difference to your pocketbook, but sometimes it's not intentional. People do fall on bad times for reasons not under their control.

Corporations are another step people take to protect themselves from this sort of thing, but that brings in all sorts of further problems. How the corporation qualifies for a loan is often a significant problem, and many times practically speaking, is insurmountable.

Borrowing money in partnership with someone else is something to be done with a lot of forethought and preparation, otherwise there's not much you can do when bad things happen.

Caveat Emptor

Original here

The first thing to consider is that maybe you shouldn't. You never want to get involved in a bidding war. There's a classic riddle I ask every single one of my buyer clients at least once.

"How often does the Deal of the Century happen in real estate?"

The preferred answer is "About once a week." I'll give full credit for anything under two months. Yeah, you might not get this one. But another bargain just as good will be along soon. My point is this: There just aren't any properties worth getting into a bidding war over, and part of a good buyer's agent's job is keeping you from going overboard because you've got tunnel vision for this one property.

The second thing to consider is that just because the listing agent tells you it's a multiple offer situation doesn't mean that it actually is one. Quite often, agents don't understand that lying about this is a good way to scare desirable potential buyers off, and they say they've got four (or fourteen, or four hundred) offers hoping to shake a better offer out of prospective buyers. Ladies and gentlemen, if these offers were any better than the one you just sent over, they'd be in hot and heavy negotiation with the other offer, if not in escrow. I've been told this on December 24th when the property had been on the market for six months. Neither Santa Claus nor the Real Estate Fairy are real. Yes, sometimes it may be the truth. See the answer to "How often does the Deal of the Century happen?" above. The rest of the time, it hurts the seller more than the buyer, scaring off good offers and puncturing credibility. Credibility is like a balloon - if there's one hole for the air to escape, what you've got is nothing. I don't understand agents who do this to themselves, especially as it hurts their clients also.

The third thing to consider is that you're always subject to how the the seller and their agent want to handle the transaction. You can't force them to do anything, even act in their own best interests. I'm coming up against an awful lot of horrible listing agents who respond as effectively to offers made as any other black hole. Put in a good offer and you get all the response of someone dropping it into a black hole. If you're not familiar with black holes, there's only three pieces of information it's possible to get on a black hole: Mass, charge, and spin. The real estate impact is similar; We can see it's still listed "active" on MLS, but no matter how many phone calls, emails, and faxes we send over to the listing office, we never get a response to our offer. And some of these listing agents have the gall to complain when they do respond six or eight weeks later that all of the prospective buyers have moved on. So be aware that you can't force the listing agent to respond at all. Fiduciary duty is supposed to accomplish that, but real world experience tells us that it often fails. I can point to many agents and brokerages that are completely incompetent at anything other than getting signatures on listing agreements.

In neither case am I saying that you always want to walk away from all multiple offer situations. What I am saying is that the situation is rife with potential for disappointment and other morale busters. But if you can keep a healthy attitude and not let the idiocy and failings of those you cannot control bring you down, it's still an attractive property that you obviously want. If you put in an offer, you might get it. If you don't, I can guarantee you won't.

The next thing to consider is trying to find something other than money that the sellers want, and offering that in lieu of a certain amount of cash. There are as many possibilities as there are scenarios. Short sales often want certain specific things, lender owned properties usually want different things, and regular sales still others. There is always the possibility that something other than money will win the day, and the smarter the seller and the better their agent is, the more likely this will be the case. Something over fifty percent of all escrows have been falling apart locally, thanks to the new appraisal standards, other legislation passed by Congress, and a generally over-paranoid lending environment.

Some sellers and their agents just stupidly choose the apparent highest offering price, and nothing I nor anyone else can say is going to dissuade them. The most probable explanation is that listing agent's commission check - since commission is paid upon official sales price, they will advise their client, the seller, to take whatever the highest offer is. Some of these agents may have ten or twenty years in the business and just consider it "bad luck" that all of their listings have the same exact problems after they have a contract. Problems are always with us, as well as the potential for problems. If it were easy, anyone could do it and there would be no need for real estate agents. But an agent where the vast majority of their accepted offers have these problems isn't luck - and the one common factor all of their problems have looks them in the mirror every time they walk by one.

There are strategies available to buyers that take advantage of this stupidity. Most of the common ones are variants upon the classic sales trick of the sales "take away". Get the seller wanting your offer, then make them work for it, doing things they would never have done for what they end up getting. Once the seller has chosen one offer and everyone else wanders off feeling demoralized and let down, that chosen buyer has a lot more power than they had previously, at least if they use that power carefully. The property goes back on the market two or three weeks later, and everyone looking at it in MLS is going to wonder what's wrong with it. I don't like using these strategies and definitely prefer not to, but some listing agents practically beg me to do so.

Another thing that can help quite a lot is your Buyer's Agent Presenting The Offer In Person. Theoretically, listing agents are required to honor this request or show written instructions to the contrary signed by their client, the seller (Clue to a certain nameless agent who knows who I'm talking about: A "forwarded email" is not acceptable for this). All too often, however, listing agents throw roadblocks in the way. It's actually in everybody's best interest for buyer's agents to present their client's offer in person, but many listing agents obsessed with control (or with getting both halves of the commission) throw so many roadblocks and so many delaying tactics that it's not worth fighting over. This is yet another excellent reason for sellers to write into the listing contract that the listing agent will not get the buyer's agent half of the commission! Maybe an extra half percent as a concession for doing the other agent's job as well as their own, but not the entire thing. I never accept dual agency, and every agent I respect agrees with this position. If someone insists upon me writing an offer on one of my own listings, Winforms has a very simple one page form called a Buyer Non-Agency Agreement that spells out that I am acting solely on behalf of the seller, and I'm just doing whatever it is because that seller's interests require me to, not because I'm accepting agency on their behalf. Nor is the buyer's agent presenting the offer something you can do on every property - the chances of it happening on lender or corporate owned property are pretty small. But if your buyer's agent presents your offer in person, that's an opportunity for humanization - making you into a human being that the seller can empathize with, not just a faceless pile of paper with markings on it. It's also an opportunity to stress the desirable parts of your offer.

As far as money itself goes, every client I have in a multiple offer situation gets asked two important questions:

1) If you got the property for this price, would you be happy or not?

2) If someone else got the property for $1000 more, would you care?

The proper answer to the first is "ecstatically happy!" If the happy part isn't in there, they're offering too much and need to reduce their offer. It doesn't matter if similar properties are selling like hotcakes for twice as much. If the client isn't happy, it may mean they need more discussion of the market, or alternatives to that property, but they shouldn't be offering that much money. The answer to the second should be "no", an indication that they really are offering what the property is worth to them. Not that they have to offer that much, just that they might. If they want to offer some lesser amount, I'll still do everything I can to get the offer accepted, but in that circumstance my clients are accepting the increased likelihood that someone else gets the property for a price less than they would have been willing to pay.

A question that's never misplaced is "Are we wasting our time with this offer?" It communicates quite plainly to the listing agent that under the current circumstances, this is the best they're going to get from you. You just have to be willing to walk away without hesitation if they say "Yes." It's not necessarily the end of the line for you and this property, it's just the end of the line for now. If the property is still on the market weeks later, a renewal or even a lesser offer can often move it "Pending" in your favor. It has to do with credibility, and steadily worsening circumstances for would-be sellers of real estate. Quite often the agent or seller who isn't willing to talk rationally in April is desperate in July. It's their own fault, if they had negotiated in good faith in April the problem would have been solved on terms more favorable to them.

Caveat Emptor

Original article here

A couple years ago, I took a look at a lender owned property a few miles from my office. It was ugly. I mean ugly. The yard was a mess, there was a deck that was rotting. The facade looked like it hadn't been painted since before President Kennedy was shot, and really needed to come off besides. Inside, the carpet was gone, the vinyl in the kitchen and bathroom looked like it was waiting for the return of President Truman, and most everything else looked even older. The color scheme was something out of the art deco age, too. You know the pastel salmon and blue.

But it had good intrinsics! Dynamite location within a mile of three freeways, although it didn't get traffic noise from any of them. The area is a resurgent one, and it's within fifteen to twenty minutes of just about everything, even during rush hour. The schools - especially the high school - are top notch public institutions. The property itself did not have any basic structural flaws that I could find - just an old and ugly surface. And that's not mentioning the fact that it had excellent sight lines and a pretty darned good view.

I tried real hard to get one set of prospective clients, a couple with two kids, to put an offer in on the property. Based upon what they had told me, they could afford the property with a thirty year fixed rate loan with good amount left over, even at the asking price, and the property was livable as it was. It just wasn't modern or gorgeous, and they still had room in their budget to fix it up. They could have spent roughly $40,000 for professionals to come in and fix the whole thing, or they could have cut those costs in half or more by doing it themselves. At the end of the process, they would have had a wonderful property worth at least $120,000 more than they paid for it, with at least $80,000 in smart sweat equity. Furthermore, the property taxes would have been lower, they would have had plenty of room in their budget for disasters, and on and on the list of advantages goes.

These people decided not to pay attention to me. They wanted something that was beautiful now, and someone else persuaded them to stretch past their real the limit to buy into a fairly new PUD on the other side of that particular suburb. HOA dues, and no room in the monthly budget for anything to go wrong. Not to mention they had to use an interest only 2/28 to qualify, and they called me about a year later and said they've got a late payment, but they were hoping I could do something for them. The answer was unfortunately no. I really hope for their sake that the market gains a lot of value soon, because otherwise they're going to be hosed as far as refinancing goes, and they're going to need to. I didn't say a thing even implying, "told you so", but to my surprise, he volunteered the information that he now wished he had listened to me. Unfortunately, he can't go back in time with what he knows now.

A flipper ended up buying the property I tried to talk them into for cash. He did a light surface rehab, and it's beautiful. He spent less than $500 getting someone to clean up the yard and haul away the wood from the old deck. He stripped off the old facade and put good quality siding on. Carpet went in before he even moved in, the vinyl is now a fairly nice tile, and the two bathrooms he basically resurfaced, one at a time. Kitchen cabinets he re-stained, and updated the sinks, the faucets, and the appliances. Put up a white picket fence, seeded grass, painted the inside, and now the property is on the market again. After all the costs of rehabbing and selling, he's going to come away with at least $40,000 pure profit, assuming he paid to have all the work done. Plus, he got a place to live for six months out of the deal, at least a $10,000 value even for a rental.

My point is this: Flippers aren't the only ones who can do this. In fact, the math works even more strongly in favor of someone buying a place to live. No seven or eight percent cost of getting the property sold. The lower purchase price means lower taxes, which last as long as you own the property. I know that career and kids are tough enough, but the property was livable as it sat, and you have however long you want to get it rehabilitated. Net difference to their situation: almost a year and a half of the income it would have taken to qualify. If I offered you a year and a half worth of pay to work overtime for less than six months, most people would jump at it, kids or not. Add to all of this the fact that this is money you didn't borrow, so you're not paying interest on it every month. At 6% interest, every $1000 you don't borrow saves you $5 per month, and this was a fair number of thousands of dollars.

Most folks are going to replace the carpet and paint the place anyway. It makes no difference if it was last painted by someone on an LSD trip in the sixties, or the carpet is a filthy nightmare shade of avocado green unseen since 1977. If you're planning to make it go away, it makes good economic sense to choose stuff that's ugly now, so you're not paying a premium for something beautiful you plan to replace anyway.

There is a reason Why There Is Money in Fixer Properties. I can understand if you're a big executive who needs to move into something beautiful now so you can have social professional or client sales meetings there right away, but this just doesn't describe most people. Not to mention that those folks aren't looking to scrape into a property - they make the money to easily afford the beautiful modern six bedroom home overlooking the ocean.

I'm not going to say that you'll never find a bargain property that isn't already beautiful. I'm saying you're at least a hundred times more likely to find this sort of bargain in a property that isn't beautiful yet, and that the vast majority of the time, the big stroke in the pocketbook goes to the people who make it beautiful. I had another couple a few months ago,and they listened to me about fixer properties, more than even I was really comfortable with. They bought a property that was almost a century old with some systemic issues (electrical, plumbing and sewage), and all through the inspections, I kept saying things like, "I expected worse." Turned out the property was more solid than I gave it credit for. I drove by a couple weeks ago, and the property has been fixed up significantly. Furthermore, I'll bet they could sell for a profit, even now, and there's still a long way to go. These people have basically zero pressure on their pocketbook, and zero stress in their life. They can still save money. They can still live like they were accustomed to. The only difference is that now they are owners rather than renters, and they have placed their cost of housing forevermore under their own control, they get the tax advantages of owning, and so on and so forth.

People stretch beyond their real means to buy that beautiful new gorgeous eye candy property all the time. It's never a sure bet, and when the market isn't going up twenty percent per year, it's considerably more risky. Far better to restrict yourself to a property you can afford with a sustainable loan, and that gives you some monthly cash flow for emergencies. You shouldn't plan to have a need to refinance for at least five years, but if such a need should happen, you're likely to be able to do so. If you'll buy a solid property that needs some updating and beautifying, it's likely to be a financially rewarding experience, and any number of professional property fixers can attest. There's no reason why you can't take advantage of this fact to find a property to live in, instead of the quick flip for profit. In fact, it makes even more sense to do it for a property you intend to live in for a long time.

Caveat Emptor

Original article here

This is a pure scam throughout, but it's legal as far as I know.

I'm not going to go into more details than I can avoid. The universe knows there's enough people pulling this right now, but the bad guys already know about it, so let's even the level of illumination a bit. Here's the general way it works. The owners are in default, and there's no way they're going to bring the loan current, as the lender can require once the Notice of Default hits. They do not have the requisite cash. Along comes a blackguard masquerading as a white knight, and makes the homeowner a proposition: Sign the property over to me, and I'll bring it current, rent it back to you long enough for you to get back on your feet. Pay the rent on time for two years, and I'll sell it back to you. There may even be a small amount of cash involved, as compensation for your equity "in case" you end up unable to purchase it back.

People desperate to stay in their property will agree. They think they'll be saving their equity, their kids won't have to change schools, and nobody will have to know they were in foreclosure. Of these, only the fact that the kids will be able to stay in their schools a little longer might be true.

Here's what happens: These scams are usually structured as a sale subject to existing deeds of trust, with all of the problems entailed in that, but not always. A signs the property over to B. B now owns it. In the absence of a contract for future activity, B can do whatever the heck they want to with the property. Usually, B will try to talk A out of demanding any actual written contract, and a verbal contract isn't worth the paper it's printed on. Without such a contract, what's preventing B from evicting A is essentially B's goodwill.

But with a contract or without, B is usually motivated to keep A in the property by the fact that they're going to charge A an above market rent - usually enough to pay not only the mortgage, but a significant monthly profit for B. I had a guy come to me a couple months ago who had accepted such an arrangement. His monthly payments had gone from $3100 to almost $4300. Where else is B going to get that kind of rent for properties that normally rent around $2000? And, of course, A is going to maintain the property. After all, they still think it's theirs.

If you can't make the payment now, let me ask you what makes you think you'll be able to afford a much higher payment? What makes you think you'll be able to pay it on time, as the contract, assuming there is one, demands in order to retain your right to re-purchase the property? It isn't going to happen. If you had that kind of spare cash, you would have brought the property current yourself. If you could afford the payment in the first place, you wouldn't be in this trouble. You probably wouldn't have been behind in the first place. But people will tell themselves all kinds of things, because "it's only temporary".

Now it's worth noting that for the ones of these structured as sales subject to existing deeds of trust, B is going to make a point of having some late payments on that mortgage. These hit A's credit rating. Chances of A being able to qualify for a better loan, that they can actually afford, when the two years are up? Zilch.

Even if they're not structured as sales subject to existing deeds of trust, the chances of A being able to qualify to buy the property back at the end of those two years are basically zero. There's going to be a late payment somewhere. "Sorry, but you're in default upon the contract terms." They can take the contract and a decent lawyer to court, and paint themselves as being a saint who kept A in the property, tried to give them the opportunity to buy it back, and was rewarded with default on the rental agreement and this lawsuit. Chances are that A ends up paying for B's lawyer, as well as their own. Even if A somehow manages to make all the rental payments on time and in full, they are now even more broke than before. No cash for closing costs, or anything else. Particularly in the sort of lending market we have now and expect to be having for the next several years, A is not going to qualify for the loan they need in order to repurchase the property.

What does the blackguard who pretends they're a white knight get out of all this? Well, they won't do it for properties without a good bit of equity. So for an investment of a few thousand dollars to bring the loan current, they get a property with 10% equity at a minimum, and usually more. They get a positive cash flow from having it rented above market for up to two years. And if A should somehow manage to leap all the hurdles to repurchase the property, that repurchase contract will give them back every penny they invested with cash to spare. And for the vast majority where A is unable to repurchase the property according to the terms of the contract, I'll bet that they get a good chunk of change, not only out of the equity built in to the deal, but also out of the differences between the market now and the market two years from now.

For being in denial, and unwilling to face the fact that they can no longer afford the property, A loses basically all of the equity they have built up. They would have lost some of it anyway, as it's not free to sell a property and in this market, you're unlikely to get top dollar for anything. But this ends up costing them more - tens of thousands more.

If you get into a situation where you're looking at losing the property, and someone pretending to be a white knight rides up and offers you this kind of deal, you're better off selling outright in pretty much every case. Yes, you've just lost the property. But you would have lost it anyway, together with basically every penny of equity if you accept one of these deals. How is that better than being responsible and realistic enough to accept the situation as it is, and sell on the regular market for the best deal you can get?

Caveat Emptor

Original article here

When things went south in the real estate market, I saw more changes in the lending industry in a few months than the previous five years. But those changes mostly restored us to the place we were a few years previous.

There is plenty of money available, rates are so good right now because lenders want very badly to lend money. For all the howling and gnashing and grinding of teeth you see in the media, and elsewhere, I can get loans at rates that are very low, historically speaking. 100% conventional financing may not be available any more, but I'll bet money it's going to come back, and I do have 95% conventional loans, 96.5% FHA loans (which are really 98.25%) and 103% VA loans.

You just have to be able to prove you can afford the payments.

And that's the rub. Starting a few years ago, and increasing until the house of cards collapsed, many real estate agents and loan officers stopped worrying about whether or not their client could really afford the property. The question was could they get the loan funded, and let the client worry about whether they could really afford it later.

The relaxation of lending standards was like manna from heaven to the less ethical members of my professions. Agents could sell people who could barely afford a condominium in reality a beautiful huge detached house with its own yard in an affluent community with great schools, and loan officers could make it look like they could afford the payments. Talk about your easy sale! The clients expect a chintzy little condo in a rough neighborhood, and the agents shows them a beautiful five bedroom home half a block from the beach, and says they can get it for the monthly payment they told the agent they could make. Prices skyrocket! People who bought a couple years ago and are strapped for bills refinance into these ridiculously low payments while getting cash out for all of the toys they can imagine! New SUV? How about two new SUVs! Some loan officer needs to get paid for a loan, and everybody has a thirty year fixed rate loan they got when rates were lower? Offer to cut the payment in half!

Never mind that the real interest rates on these loans was much higher. People just naturally assumed that if they kept making the payments, they'd pay the loan down, and eventually, off. After all, that's what loans are! Except that wasn't the case with the Make Believe Loans that were so popular. That small minimum payment, way below the real cost of interest, caused thousands of dollars to be added to the loan balances, where the above market interest rate could be charged on that money also - and the lenders could report all of this as income, doing wonderful things for their revenue and stock prices!

Some others may not have gone in for negative amortization loans in a big way. Instead, they put people into "interest only" loans where the loan and interest rate was fixed for two, or maybe even three years. They may have used stated income, or they may not, but they put people in unsustainable loans where the clients could barely afford the initial payment, and never mind thinking about what would happen, sure as gravity, when the adjustment hit. When the loan started to amortize at the same time the rate jumped by two percent, they affect to be somehow surprised that their former clients cannot afford the payments!

Or perhaps they used stated income only because the clients had two thousand dollars of other debt service per month. Well, hello! debt to income ratio is the most critical measure of whether someone qualifies for a loan there is. It protects the lender, but it also protects the borrower, and this intentionally short-circuited it. Yes, they could have afforded the property if they didn't have have this debt. It's not a distraction; it's the central, single most important issue in whether or not they qualify for that loan!

For those who were taken advantage of thusly, may I recommend finding a competent real estate attorney? The last couple years have seen some very interesting court decisions. One court in Ohio started it off by ordering a negative amortization loan rescinded due to failure to disclose its nature sufficiently. For a while, there were all kinds of lawsuits going on. Unfortunately, they pretty much came to an end when the bailouts happened. I was looking forward to seeing criminal trials for the worst crooks, but it appears as if orders have come down from Our Beloved Political Class not to put anyone in jail. Probably fair enough, as Our Beloved Political Class was at the heart of the reason for the bubble. Still, it doesn't precisely discourage a repeat of the whole mess, does it?

All of that is neither here nor there, really. My point is that the only thing that's changed is that the lenders have woken up to the fact that was evident all along - that they were the "deep pockets" who were liable to eat most of these losses from the price collapse, and from people who couldn't make payments on unsustainable loans, particularly after the payment started adjusting. The lending standards that contributed to the bubble are gone, and they are not coming back any time soon. Forget about them. That was then. This is now.

The lending standards in effect now are very livable. Bankers transported from the fifties would be horrified at how lax they are. Until 1997, there was precisely one lender that would loan 100 percent of the value of the property (when they bailed out of the 100% loan market in late 2005, it was the first sign that collapse of the lending market had actually started). When I originally wrote this, I still had at least a dozen lenders who would go 100%, but they wanted to see proof you can afford the payments. Failing that, lenders wanted to see enough equity (which means down payment in the case of purchases for you real estate agents reading this), so that if the loan were to go south, that lender would still get their money.

This means real affordability and down payment have become a lot more important to the purchase market, and if you're looking at a refinance, you had better be able to afford the real payments. If you can't, that refinance is not going to happen. Even the new 125% refinancing programs require documentation of enough income to afford them - they're in existence for loss mitigation, and loss mitigation only. If you can't afford the loan, even Fannie and Freddie are going to cut their losses by foreclosing.

If, on the other hand, you're willing to restrict yourself to properties you can really afford, welcome to ownership! For every person who can no longer qualify because they can't document enough income, there's someone else who can, and who has the down payment. Down payment requirements are very achievable for anyone who is reasonably frugal and doesn't make a habit of stiffing their creditors! Affordability of property has increased dramatically, and at this update, most properties in reasonable condition and with realistic asking prices here locally are going for the asking price.

The catch is that if you can only afford the payments on $300,000, then $300,000 is all you're going to be able to borrow. I've been selling my clients what they can really afford all along - the only difference it makes to me is that I'm no longer competing with the jokers that can only sell houses by showing clients the beautiful property they can't afford. I've been telling people about real, sustainable loans all along. The only difference this makes to my loan business is that I'm not competing with jokers who sell negative amortization loans by the minimum payment to unsuspecting people who don't understand what's going on.

What this means is that lazy agents and loan officers are going to have to bite the bullet and sell the client a property they can really afford with a loan they can really afford. Agents can have people make offers on property they can't afford, but they're wasting their time and the clients'. Loan officers can tell people about this loan and that loan they used to have, but they're wasting their time and the clients'. Possibly the clients deposit, inspection, and appraisal money too, in both cases. The loans to make this nonsense happen do not exist any longer.

On the other hand, low to (in some cases) zero down financing still exists for those who can afford the payments. But they have to be able to actually afford the payments. This means working within a budget, and settling for what you can afford within that budget. Settling is a very hard message to send someone who's going to be spending six figures on a property and is all emotionally tied up with how they want it to be beautiful, and in a great neighborhood with wonderful schools and all of the usual things that have buyers gushing - particularly when everyone else is telling them they don't have to settle. They really did have to settle, all along, and those that believed ethical practitioners when they were told that are doing just fine, thank you, while those who didn't are in real trouble. The real world has come crashing back into real estate. The fantasy may have been nice while it lasted, but the real world always comes crashing back.

Among those real world facts that have come crashing back is that all of the long term benefits of owning over renting are just as real, just as relevant, and just as true, as I painted them back when I wrote those articles. Let's review a few:

Should I buy a Home?, Leverage in Real Estate - Making a Decent Investment Spectacular, Why Renting Really Is For Suckers (And What To Do About It) (and its counterpoint, When You Should Not Buy Real Estate), Save For A Down Payment or Buy Now?, The High Cost of Waiting To Buy A Home, Real Estate: Getting From Where You Are To Where You Want To Be.

My local market in San Diego County has been on the bleeding edge of all of this, because it's such a desirable place to live, and our housing supply is probably the second most constricted in the nation (after Manhattan, and although the City of San Francisco also has a decent claim it covers a much smaller area). Between natural obstacles to growth and zoning codes constricting the building of new housing, I think we've had about all the downwards adjustment we're going to get. If you can't afford to buy a detached house, buy a condominium, townhome, or PUD (indeed, how dead the condo market has been is directly attributable to two factors: Over-conversion of apartments, and the fact that lazy agents were selling people properties they couldn't afford because it was easy), or think seriously about moving out of town, because with the number of people who want to live here, it's only the current meltdown in lending that's causing the hiccup in prices (and what effect do you think over-conversion of rentals will have on the rental market?). With local housing demand trends going the way they are going, even the prices at the peak of the bubble are going to look pathetically cheap in a few years, and that's pretty much the facts of the matter, albeit perhaps not so strongly where there's still room and the building codes to allow growth People are able to qualify here locally. Right now, the only thing preventing them is irrational Fear and Greed, exactly opposite to but caused by exactly the same psychological factors I wrote about in February 2006, back when everybody else thought the market was still going gangbusters, and updated here. But psychological fear and greed are difficult to maintain. People have figured out, en masse, that the economic basis is there to support the sales that are happening. Actually, the economic basis is more than there to support current prices - We've seen a definite increase in sales prices already. Buy something you can really afford, and be ready to see it increase in value.

If you buy something you can really afford, the moderate increases in value I expect to see will leverage your money favorably, such that you will be better able to afford something more expensive, more quickly, than if you saved your money, even if you invested those savings in the stock market. Even if you never move up, the fact that you have fixed your costs of housing now means that if you can afford those costs now, you will be even better able to afford those costs in the future, assuming inflation and all of those other economic factors we've gotten accustomed to these last fifty years. Homes are not going to continue at today's prices any more than candy bars are still ten cents, or that you're going to be happy working for today's wages thirty years from now. What's going on right now is still an opportunity for buyers, and an opportunity for those who would like to be able to continue to afford to live here for the rest of their lives. If you decide to wait until future events prove me right, that's your prerogative, but neither I nor anyone else will be able to bring the market back to today's state. The moving finger writes and moves on.

Caveat Emptor

Original article here

Real Estate information is asymmetrical. One of the central facts of real estate transactions is that the seller always knows more than the buyer. They've lived in the property for years, and had to deal with any defects first hand. Even if it was rented out, the chances are that the tenants contacted them over every defect those tenants encountered. It's not like tenants are noted for their desire to spend more money on behalf of someone else. The vast majority of the time, that seller could quote you chapter, verse, and receipt number for every repair they've had done, tell you more than you ever wanted to know about the time the tenant called them at 3AM to take a plunger to the toilet, or about the time the water heater exploded while they were on vacation and they came back to a property filled with water up to the window line on the second story. Water bills, stucco cracks, the cracked slab that was revealed the last time the floor covering was replaced. The question is: Will they?

The law is clear. The owners are required to inform prospective purchasers of any known issues, or for that matter, issues that they reasonably should have known, that a reasonable person might consider in their decision of whether or not to purchase that property, and by obvious (and well precedented) extension, on whether or not to purchase it for a particular price. Failure to do so can make you liable for the entire purchase price, repairs, legal fees, and even damages. Please, consult with a lawyer as to your responsibilities. I'll bet you a nickel, in advance, they advise you to disclose whatever issues with the property there may be.

There are exceptions. The major one where the sellers really don't know anything is lender owned property. The others may be legal exceptions like inherited property - but I'll bet you Junior knows all about the problems with Mom's property even though he may be legally exempted.

Nonetheless, two factors stop a lot of owners from proper disclosure. Particularly in this market, those owners may be hoping just to get out even, or even simply owe less money in taxes than they might after the lender accepts the short payoff. The old "blood from a turnip" argument. It's one of the maxims of the legal industry never to sue people who are broke. You can get a judgment. What you won't get is the money.

The second factor is that the current owners intend to shield their assets (via homesteading, etcetera), leave the country, or simply hope you're not going to sue due to one of a number of reasons. Mostly, these amount to denial. If you've got to put out $50,000 to get the property into the condition you were led to believe it was in when you bought it, it's worth their while to pay the lawyer and chase you down.

The various inspectors are your friend. Quite often, I encounter resistance from clients about spending the money for the inspection. I make it very plain that I will try my best to spot defects, but I am not a licensed inspector of any kind, and there aren't very many agents who are. I've met exactly one who was, and let's just say that I'll bet significant money that my clients end up happier than his, and expect to win a lot more arguments and disputes with him than I lost. Especially if our respective clients were asked how happy they were five or ten years out.

Admittedly, inspections cost money. However, on the scale of the value of real property, this is money you need to spend. Maybe $400 to make certain that a $500,000 property is basically sound. Look at it this way: Would you spend an extra eighty cents for a third party vouching for quality on a thousand dollar item? Particularly if you can sue them if they're wrong? Say you were looking at a $10,000 used car. Would it be worth $8 to you to have your favorite mechanic tell you what, if anything, was wrong with it? I'll bet every single one of you who drive answered "Yes," and that's even without the liability issue. The point I'm trying to make is that these are equivalent bets. It's just that "$400 is a lot of money." Well, $500,000 is a considerably larger pile of money than $400, and it's no less real if you happen to be borrowing the whole amount. In fact, it's even worse, because if you lose $500,000 cash, all you've lost is $500,000. If you borrow $500,000 and lose it, not only do you have to pay it back, you have to pay interest on it until you do. Not to mention that it's kind of hard to refinance, among other problems.

However, you don't want to be putting out that $400 inspection fee for properties you're not going to buy anyway, because there's something wrong that a knowledgeable agent can spot before it gets that far. Nor do you want to spend it before you've got a fully negotiated contract, especially in the current market, because the fact that you've spent $400 inspecting their property before negotiating a contract can be interpreted by sellers as giving them more power. Furthermore, negotiations post contract are always subject to whether the other side wants to be reasonable about their end of what the inspection reveals. You've already got a deposit in escrow, and my experience has been that it's easier for the owner to break an escrow that's not going anywhere, than it is for the former prospective buyer to force the owner to release their deposit money from that same escrow. You'd really prefer to find out about Vampire properties before you put an offer in.

This is one of the many areas where a good buyer's agent pays for themselves many times over. If they spot the vampire property before you make an offer, that's a minimum of about two weeks and $400 you saved, and it's likely to be a lot more. If you put a $5000 deposit down (and nobody sane accepts offers without a deposit), now you're wondering whether the other side is going to return it, which not only might necessitate hiring a lawyer, but also impact your Loan to Value Ratio until and unless you get it back, and could very well impact your Debt to Income Ratio. Time, money, headaches. All saved because your agent spotted the problem before you put an offer in. There aren't any spaces on the HUD-1 to document them for the government, but they're all real.

So when you're going around looking at properties, it's a lot more important for your agent to look critically at what might be wrong with the property, and compare and contrast it with other similar properties on the market, than it is for them to tell you about how the floor goes so well with the walls, or how gorgeous the view is. Most people really can figure those latter qualities out for themselves, and if they really want input, a good agent is happy to provide it, although most people will only be asking for confirmation that other people feel the same pain in the optic nerve that they do. The real job of a buyer's agent is to consider things other than the transient decorations that are likely going away. Physical situation (including defects!), orientation, and of course, location, location, location. How easy will be to maintain or improve the property's value? What will it be like to live there? What does the future hold for the neighborhood, at least according to current plans? What's the commute like? How's the grocery situation? What about other shopping? City services, how far to common activities? Most importantly for most people with kids, What are the schools and how good are they, really? None of this stuff is part of the standard disclosures from seller to buyer, because the buyers are theoretically just as capable of finding it out as the sellers. Not true in practice, I might add, because the seller has usually been dealing with these and other neighborhood issues the whole time they've owned the property. These and other questions are some of the reasons why good agents can only cover so much area, and why it's a real good idea for even current residents of a neighborhood to find a good agent and use them to help them buy a property.

Caveat Emptor

Original article here

I got a search for how one spouse could sign while the other was out of town, and act on their behalf. Since both spouses usually need to sign real estate papers, this is a real concern.

Actually, almost anybody you designate can sign for your real estate transaction, whether or you're available. The usual thing is you're out of town for some reason when closing happens, and so your spouse signs for both of you, themselves in their own right, and you by Power of Attorney. This actually covers all kinds of situations, not just real estate.

It is to be noted that real estate documents can usually be signed anywhere in the United States, so long as there's a notary available. I've had documents sent across the country multiple times. It's only when the principal is out of the country that life becomes difficult, as there's a requirement for the documents to be signed in the United States. The only way I'm aware of to have that done abroad is at an US embassy, where according to international law, the grounds are US territory. The chances of a US embassy having a notary are excellent, as they are employees of the US State Department, after all, and such services are part of the ones they exist to provide, but they're typically on a forty hour week Monday through Friday schedule and their fees are higher than most. I have done one such transaction, and I do have to report significant potential stumbling blocks.

The document required for someone else to sign documents on your behalf is called a Power of Attorney. You must sign it and have it notarized that it was really you that did so. In the case of real estate, it will be recorded along with the document it enabled your representative to sign. In it, you designate one particular person who has the right to undertake an action or group of actions, and they then act on your behalf, as your "attorney" for this matter.

Powers of Attorney can be made for all sorts of things, not just real estate transactions. For instance, pretty much everyone should have a Durable Power of Attorney for Health Care. Powers of Attorney can be very broad and ongoing or limited to one specific action in a limited range of time. You set this up at the point in time when you execute it. Whatever terms you set up when you signed it are binding, both upon you and the person you designate. Most stationery and office supply stores have ready made ones where you just fill in a few blanks and you're ready to have it notarized. I've seen ones with check marks, but those are dangerous in my opinion, as when a particular check mark was placed on there is a matter for considerable legal dispute. I'm not an attorney, but you don't have to be an attorney to be able to understand the potential problems there.

It is a misconception to believe that this person must always be an actual licensed attorney. In general, they need not be an actual attorney, only a competent adult. I'm sure there are circumstances when being an attorney is necessary, but it is not necessary most of the time. There may be circumstances where you may want a licensed attorney even where it is not legally necessary, but there's a major difference between being legal and being smart.

I've seen not only spouses used, but other relatives, close friends, and professionals such as accountants and attorneys. Note that the person you designate does not have to accept, and does not have to act on your behalf even if they accept. The idea is to get their consent first, and make certain they know your mind in the matters you designate them for.

Extremely important: You really need to trust the person you designate to act in your best interest, as well as to make certain they understand everything they are signing. If they sign something that you would not have, you must honor the contract, as long as it is within the mandate of that power of attorney. Whatever contract they signed on your behalf, you can be legally forced to live up to the terms. Your designate doing something you would not have is a side issue between you and the person you designated. That person with your power of attorney designate's signature on a contract can force you to live up to that contract, which is how it should be. Otherwise, nobody would accept powers of attorney as valid, and they would be regarded as one more way to run a scam. They're not supposed to be a scam at all, it's intended to be a way for one person to do another person's business legitimately. If they weren't as enforceable as the contract you signed yourself, nobody would accept them, and the business would have to await your ability to deal with it in person.

Caveat Emptor

Original here

My aunt is going to move to a new condo and wants to sell her old one. I would like to buy her old condo as an investment and rent it out (as I am already a home-owner). This whole investment/rental buying is all new to me.
She has lived there about 5 years and the value has increased more than double. Obviously I would love to be able to keep her tax base. I am thinking about getting an interest only loan to help me get into this. Can I get a loan for 100% of value? My aunt will need the entire amount to purchase her new place. What suggestions do you have to make the loan process easier and pay the least amount in fees?

It is worth between 360,000 to 390,000 (we haven't yet got an appraisal, this is from comps in area). My wife and I currently have a house in (City) with a value of 650,000 and a mortgage of 400,000. We both work and have some extra income, maybe 400 a month that we could supplement against a renter. I think we could qualify for the loan, but then we would have to refinance our house to cover a down payment and closing costs. We don't have any savings to pull from. My wife hopes to retire in 2 years and I will in about 8 years.

Investment property is a different item from a personal residence, in several particulars. First off, even if it's residential, the loan is a riskier one to the lender. A loan on investment property is going to carry a surcharge of 1.5 to 2 discount points (one discount point is one percent of the final loan amount), over and above any other charges for the rate you choose. Most people in wanting a loan on investment property end up choosing a somewhat higher rate to keep the initial costs down a bit. When I originally wrote this and the general atmosphere was that 100% financing was widely available, I had to continually explain why it wasn't available to investment property. As far as I can tell, there was never any lender that would do a loan on investment property for more than 95 percent of the value, and most of them at this update want the investor to have minimum 20 percent down payment plus closing costs, while I still have a couple financing 95% programs and lots of 90% programs for people buying themselves a place to live.

The good news is that whereas you do not have savings to pay it, you do have a considerable amount of home equity. Depending upon your exact situation, either a "cash out" refinance or just taking out a HELOC (Home Equity Line Of Credit) might be in your best interest. It depends upon your current mortgage and your credit, and I cannot make a recommendation one way or another without looking at the market you're in for current comparables, running your credit, and seeing what can be done. If you've got good credit and income, and have had the good credit and income for some time, it's more likely to be in your best interest to simply take out the HELOC. HELOCs are comparatively low cost, and I have a couple that allow cash out to 80% of value even in this market. Depending upon market changes, If your credit or income has improved of late, it may be in your best interest to refinance, or if you've got an ARM that's about to adjust anyway. Assuming you're "A" paper, you may now be a conforming loan where you would not have been when you took it out.

Cash flow is also an issue with investment properties. If you don't have a tenant, you get zero credit for the rent at initial purchase from A paper. If you do have a potential tenant, with a signed lease for at least one year, the lender will give you a credit of seventy-five percent of the proposed rent towards your cost of owning the home (principal, interest, taxes and insurance). Some subprime lenders used to credit you with ninety percent, but their rates are typically higher in compensation. With the vacancy rate in urban California being about four percent, even ninety percent is a bit low, but the standards are what they are. I know many people who are making money hand over fist on rentals where the bank thinks they are paupers.

Now there is no such thing as an easy documentation investment property. There never was even in the Era of Make Believe Loans. Indeed, for any loan, for all real property you have to show the full breakdown for each property you own. You used to be able state your overall income in most cases (and indeed, most folks with investment property had to do stated income due to the cash flow computations being so restrictive.)

When I originally wrote this, prices in urban California had gotten so high that it was just about impossible to find a single family residence being purchased for rental purposes that "penciled out" with a positive cash flow. As I said in my article Cold Hard Numbers, this was one of the things that convinced me California real estate was overvalued. Well, now investment property often does "pencil out" with a positive cash flow, even by lender standards, even single family residences. Condos have become cash machines again.

But you need to be very certain that you do have that cash flow. When I originally wrote this, you'd have been looking at $360,000 purchase price with a first loan at about 6.75 percent on $288,000, which gives a payment of $1868. Additionally, there's going to be Homeowner's Association dues of probably about $200, and taxes (assuming no Mello Roos) are about $375 per month, or about $200 if you can keep your aunt's tax basis. That sums to $2443 or $2268 if you can keep her tax basis. Now ask yourself how much similar units are renting for? If it's less than $2050 (or $1875 if you can keep the tax basis), your $400 per month isn't going to make up the difference. You might have formerly considered a negative amortization loan in this circumstance, but be advised that you're eating up your investment every month, the real interest rate is actually higher than the 6.75 percent, and prices may go down and not recover for several years, leaving you holding the bag for a big loss. It's a risk some folks are willing to take, others are not. I was always a big non-fan of these loans, but was willing to do them for people in this situation after I explain all the pitfalls (Option ARM and Pick a Pay - Negative Amortization Loansand Negative Amortization Loans - More Unfortunate Details cover most of them). Usually people who have been informed of the pitfalls decide that these loans are not for them, which is one of the reasons why I have always questioned whether the risks have been adequately explained to the forty percent of all local purchases that were at one point being financed by these. At this update, they don't exist any more, but they could come back.

Indeed, given the fact that you're going to have to make payments on the Home Equity Line of Credit as well, I don't see how your $400 per month of extra cash flow is going to stretch to cover. If your credit is decent, I can get you into the property, but that's not exactly doing you a favor if you find it impossible to make the payments. I would advise against this particular property.

Caveat Emptor

Original here

I have been asked by more than one person how to measure desirability of real estate objectively. Fortunately, the Phoenicians did all the hard work for me three thousand years ago when they invented money. Precisely what that measurement unit is varies from country to country, but here in the United States that measurement unit is dollars.

A more desirable property will sell for a higher number of dollars. It's as simple as that.

Consider: The same property, moved to a more desirable neighborhood, will sell for more. This difference is nothing more or less than the premium for living in the more desirable neighborhood than the less desirable one.

A four bedroom property with X square feet will sell for more than a three bedroom property with the exact same number of square feet right next door. This difference is the premium for that fourth bedroom, so that one or two more people in that family now have a private place to retreat to - a private place they don't have to share.

A newer property will sell for a higher price than an older one, a well-maintained property for more than one with significant deferred maintenance, a well laid out property will sell for more than a poorly laid out one. I can go on and on, but the difference in all of these cases is precisely the desirability premium for the good thing as opposed to the not so good one. This difference is - you got it - measured in dollars. If it's worth more money to have the laundry area upstairs, the selling price between two otherwise equivalent properties will reflect that difference. If it's not, then the selling price won't be any different.

(In this case, you can figure the difference is a couple thousand bucks in the case of most two story properties around here.)

The obvious question that occurs to most people right about now is, "Do I get a package deal by holding out for a property with everything I like?" The answer is "not usually." Every desirability factor you add on pulls that much more interest to the property. Large lot? Downstairs bedroom? Great view? One of these or many other factors seen as desirable pulls in a decent amount of interest. Put two together, the interest level more than adds, because you're dealing with people who have to have both as well as those who would be happy with one or the other and the fact that the combined features attract the desire of everyone who can afford them - including those who can more than afford them. Have three or more common desirability factors like "gourmet kitchen" and now everybody who even has a chance at affording it is making a bid, especially in a hot market. This is how Flippers and Fixers make lots of money. A good agent with enough time and who knows how to negotiate can and will play them off against each other. They're going to get a hefty premium for that property, leaving the seller very happy indeed. The usual fight in my mind when I'm listing such a property and evaluating offers is "how much over appraised value is this person willing and able to pay?", because the appraisal can only go, at the very most, 25% higher than recent sales in the area. Especially given the conservative nature of appraisals done under the new HVCC appraisal standards, the offer I'm going to recommend my client accept probably be from the buyer with the most room on the loan to value ratio and a willingness to do without an appraisal contingency. Sure those people over there may have a higher offer, but with just enough cash for the down payment if the appraisal comes in are not going to be able to consummate it. Because the appraisal is not going to come in for the full purchase price in such circumstances - bet on it. You might be pleasantly surprised, but if you plan for it, you won't be scrambling to contact people who made other offers four weeks out when the buyer comes back and says "We can't qualify unless you cut the price." The buyer's ability to add to the down payment (or finance a larger loan if their loan to value ratio is still good enough) is what gets the transaction done in such instances.

How do you use this as a buyer? It's very simple actually - keep your "must have" list firmly in your mind; don't get distracted by beautiful presentation or bells and whistles you don't have to have. Such properties are ripe for bidding wars. If you must get involved in such a bidding war, keep your maximum purchase price in mind and don't offer a penny more. If you haven't got a maximum purchase price engraved upon your soul before you go looking at property, check yourself into an insane asylum immediately.

You can always make the property better once you own it. There won't be a bidding war then - except maybe between contractors who want the job (the low bid isn't necessarily the best there, anymore than the highest offer is necessarily to one to take for sellers). You own the property, and it's difficult to force you to sell against your will. Doesn't matter how much they like it, they can't have it unless you decide the offer is worth taking even though you weren't planning to move again. But if sellers have twenty, forty, eighty offers there has to be a reason to pick your offer - and the reason is that they figure they'll net the most cash out of it. Your offer really has to stand out. If sellers only have one offer, though, there's a lot more room for meaningful negotiation. If there are even two offers, you can expect to get played against the other offer, at least to some degree. I'll admit this has become a lot less common of late - but the good agents still do it, and we've gotten better at it.

Look for solid instead of beautiful. Look for improvable over perfect. Look for clear and reasonable upgrade paths rather than properties that are already highly upgraded. Your pocketbook will thank you. Yes, it's a bit of hassle to upgrade, but the dense, highly desirable areas like San Diego are headed for another period very soon like the one a few years ago, where it didn't matter what faults the property had, the buyers were glad to get into anything. Only unlike before, without unsustainable loans over-heating the market and setting things up for a crash when there's a subsequent reality check, the prices are going to stay that high this time. We're still going to have cycles, but the low point of this one is not something I would expect to ever see again (especially with the way the government has been sabotaging the economy). It took an awful lot of loans that were complete garbage to make this happen. The loan type that was the chief culprit has been essentially regulated out of existence, most of the companies that provided other garbage loans are gone as well, and Wall Street and the global capital markets have learned a lesson about real estate loans that it'll take them a generation to forget. It wasn't that long ago I heard with my own ears buyers express gratitude that they had an accepted purchase contract on crummy little places where their family would be shoehorned into a fraction of the room they needed to be comfortable. Those days are coming back, and they're going to get worse over time.

Things that you're willing to put up with that bother most other folks are good wedges for a deal. Popcorn ceilings, power lines, and too many others to enumerate. You may think popcorn looks tacky, but it's pretty easy to remove in most cases. Many utility companies are in the process of burying their lines. If you bought before and it happens while you own, that's a price boost. Don't take the listing agent's word - do your own research, especially if someone tells you, "That airport's going to close." (there's an Act of Congress that makes it extremely costly to close down most airports. The city or county has to pay the federal government back every dime in revenue they've ever gotten through that land, plus interest). But if the property's situation is likely to improve, or if it's something you can live with regardless of whether it improves, that may be the property for you. Let the other buyers fight to outbid each other over one "absolutely perfect!" property. While they're distracted fighting over that "absolutely perfect" property over there, bidding the price up to something unjustifiable, it's time to grab a real bargain somewhere else.

Caveat Emptor

Original article here

This is one of those things that trips up people to buy a house or refinance it: student loans.

First off, Form 1003, the Federal Uniform Residential Loan Application has the following relevant questions on page 4, among the "deadly thirteen"

a. Are there any outstanding judgments against you?

f. Are you presently delinquent or in default on any Federal debt or any other loan, mortgage, financial obligation, bond, or loan guarantee?

One of the things they don't generally tell people about student loans is that a default of a federally guaranteed student loan stays with you for life, or at least until it is paid off in full. Unlike most defaulted debts, which are a black mark on your credit for 7 to 10 years, this one never goes away. With interest and penalties, the amount owed can be much larger than it was, even at the default point. Bankruptcy doesn't cure this debt. It is basically there forever. So don't default on your student loans. A yes answer on any of these questions turns a slam-dunk loan into a very questionable one. In this case, you can kiss any possibility of actually getting a VA loan or FHA loan funded, and first time buyer programs, which are provided via federal funds, are off limits as well. This includes both the Mortgage Credit Certificate as well as all of the local first time buyer programs. Sometimes a conventional conforming or subprime lender will do a purchase money loan - but refinancing is right out unless you're going to pay the student loan debt as part of escrow. With the federal government now owning Fannie and Freddie, I would anticipate the conventional conforming becoming even more difficult in the future, leaving subprime lending as your only option. Truthfully, it's been quite a while since I had someone in this position, so it might already have happened.

But most folks pretty much figure that if they're in default on student loans, they're not going to get much help from the feds or anyone associated with the feds. They might try to get around it, but they're not really surprised or bitter when they can't.

The thing that jumps out and surprises people is student loans not currently in "payment" status. You're not making payments on them now, so you don't tell the loan officer about them, and he doesn't take them into account in determining your debt to income ratio. Since the loan officer doesn't know about the student loans, they don't take them into account, and they say you qualify for a loan amount that you're not going to qualify for. Actually, this is pretty common even without student loans, but with them, it's practically ubiquitous.

Whether the loan is in payment status or not, it's a known debt. You're going to have to start making payments on it at some point. Sure, you might have a much larger income then, but that's not something you, I, or anyone else can guarantee. So what you're going to be paying in the future, when the loan enters payment status, is something that needs to be taken into account. You need to be able to afford the loan payment as well as all of your other debts, which most pointedly includes student loans.

So it doesn't matter that you're still in school, or the loan is in deferral or forbearance. The real estate lender is going to want to see documentation from the student loan lender as to exactly what that payment is anticipated to be. You might as well ask for it ahead of time, so you have it ready when it's needed. You should want to take it into account in figuring what you're able to afford, as well.

The last of the most common questions has to do with student loan consolidation. Since student loan consolidation usually extends the repayment period as well as fixing the interest rate, consolidating student loans has the effect of boosting what you can afford a portion of the way back up to what you could afford without them. The catch is that consolidation has got to be complete to get this benefit, a process that takes about six weeks. It's not something to try when you're in escrow; it's something you need to have done ahead of time if you want it to make the difference in getting your loan approved.

Most folks want to stretch to the limit to get the most house they possibly can. In fact, quite a few ask if there's any way they can extend what they qualify for. The general answer to that is "Only if interest rates drop or you start making more money that we can document." But in order to know how much you can really afford, you have to know not only the income, but what you're already obligated to pay via student loans as well as other credit payments.

Caveat Emptor

Original article 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 already funded the loan - the money is out there and they can't call it back, and another person has volunteered to be responsible for paying it back! This can be 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 notarize and record the modification.

It is entirely possible you'll encounter someone who is thinking only of the bonus they get for referring you to the loan department, or someone in the loan department who wants an easy commission. These folks will want you to go through a full refinance, and tell you that's the only way. To be 100% fair, many lenders don't go out of their way to tell their employees about this. Nevertheless, the lender loses nothing, as you're not taking anyone off, the people who qualified for the loan are still on it. You're only adding someone who, no matter how poor their credit and debt to income ratio may be, nonetheless is a legal adult and might have the money to make or assist in making the payment if something happens to all the other holders. Therefore, the lender can only gain in likelihood of the loan being repaid in full and on time, and that's what's important to them.

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.

Note that removing someone from a mortgage is an entirely different matter. Before the lender agrees to let someone off the hook, they're going to want a full refinance - appraisal, title insurance, everything. If the people remaining on the loan can qualify on their own, then lender will let the other person (or people) off the hook through the mechanism of an entirely new loan contract. Otherwise, it's not going to happen.

Caveat Emptor

Original here

The negative amortization loan is a very popular loan with certain kinds of real estate agents and loan officers. It has two great virtues as far as they are concerned. First, it has a low payment, and despite the fact that people should never choose a loan - or a house - based upon payment, the fact is that most people do both, and the negative amortization loan enables both sorts to quote a very low payment considering how much money their client is borrowing. Furthermore, because it has this very low minimum payment, it enables these agents and loan officers to persuade people to buy properties that they cannot really afford. When someone says, "I'll buy it if the payment is less that $3000 per month," this brand of agent goes to a loan officer that they know will reach for a negative amortization loan, without explaining this loan's horrific gotcha, or actually, gotcha!s. Instead of someone ethical explaining that the real rate and the real payment are way above $3000, and this is only a temporary thing, they keep their mouth shut and pocket the commission.

This commission is, incidentally, far larger than they would otherwise make, and that's the second advantage to these loans from their point of view. When the pay for doing such a loan is between three and four percent of the loan amount, with most of them clustering around 3.75%, and they can make it appear like someone can afford a much larger loan, that commission check blows the one for the loan and the property that this customer can really afford out of the water. When they can make it appear like someone who really barely qualifies for a $400,000 loan can afford a $775,000 loan, and the commission on the $400,000 loan is at most two percent of the loan amount, that loan officer is making over twenty-nine thousand dollars, as opposed to between four and eight thousand for the sustainable loan, and that real estate agent (assuming a 3% commission per side) is making over twenty-three thousand dollars as a buyer's agent for hosing their client, as opposed to $12,000 for the property the client can really afford. Not to mention that if they were the listing agent as well, not only have they made $46,000 for both sides of the real estate transaction, but they have found a sucker that can be made to look as if they qualify for that property, making their listing client extremely happy - the more so because one of listing agents standard tricks is talking people into upping their offers based upon how little difference it makes on the payment. Ladies and gentlemen, if the property is only worth $X, it's only worth $X, and it doesn't matter a hill of beans that an extra $20,000 only makes a difference of $50 on the minimum payment for an Option ARM, as these loans are also called. Indeed, Option ARM (aka negative amortization) loan sales were behind a lot of the general run-up in prices of the bubble years. By making it appear as if someone could afford a loan amount larger than they really can, this sort of real estate agent and loan officer sowed at least part of the seeds by making people apparently able, and therefore willing, to pay the higher prices because the minimum payment they were quoted fit within their budget. When someone ethical is showing you the two bedroom condo you can really afford, fifteen years old with formica counters and linoleum tile floors, these clowns were showing the same people brand new 2800 square foot detached houses with five bedrooms, granite counters, and travertine or Italian marble floors. Talk about the easy sale! Someone who's not happy about what they can really afford now finds out there's a way they can apparently afford the house of their dreams! For a while, anyway. What happens later isn't so pretty.

So now that the Option ARM has finally been generally discredited by all the damage it has been doing to people, and has become well known, and deservedly so, by the moniker "Nightmare Mortgage," among others, this type of agent and loan officer are jumping for joy and shouting from the rooftops that a couple of professors have done apparently some work showing that "the Option ARM is the optimal mortgage." It was reported in BusinessWeek, which would have reason to celebrate if this defused the mortgage crisis, and therefore the credit and spending crunch that comes with it.

The problem is that the "Option ARM" these professors are talking about has very little in common with the Option ARMs, or more properly, negative amortization loans that are actually sold for residential mortgages. If you read their research, the loans they describe actually look a lot more like commercial lines of credit secured by real property. There really isn't much more in common between the two than the name.

The characteristics the professors describe in their ideal loan include first, it being the lowest actual rate available. This is not currently the case with option ARMs. In fact, since I've been in the business, it has NEVER been the case - or even close to being the case. The nominal rate can't be beat, but the nominal rate is not the actual interest rate you are being charged. Ever since the first time I was approached about one of these by a lender's representative, I have always had loans at lower rates of interest, with that rate fixed for a minimum of five years. Most recently, I've had thirty year fixed rate loans - the paranoid consumer's dream loan, which usually carries a higher interest rate than anything else - at lower real rates of interest than Option ARM. When you're considering the real cost of the loan, it's the interest you're paying that's important. The lender, or the investor behind them, isn't reporting the payment amount as income. They're reporting the cost of interest to the buyer as income, and that's what they're paying taxes on as well. But because people don't know any better than to select loans on the basis of payment, lenders can and do get away with charging higher rates of interest on these. The suckers pay a higher rate of interest than they could otherwise have gotten, and their balances are going up, which means they're effectively borrowing more money all the time, on which they then pay the inflated interest rate that is the real cost of this money. What more could you ask for, from the lenders and investors point of view?

There is a real actuarial risk associated with these loans, as well, which does increase the interest rate that the lenders need to charge. This is that because there is an increased risk that the borrower's balance will eventually reach beyond their ability to pay, a risk which is exacerbated by how these loans are generally marketed and sold, a larger number of borrowers will default than would be the case with other kinds of loans. So these loans aren't all fun and games from the lenders point of view, either - as said lenders have been finding out firsthand for the last several years as these loans go into default. This leads us to the second dissimilarity between these loans as they exist, and the loans said to be optimum by the professors research, and this one is a real problem from the lender's point of view.

You see, the professors' study assumes that the lender can simply foreclose as easily and as quickly as sending out an email. That's not the way it works. First of all, foreclosure takes time, and it costs serious money. The law is set up that way. To quote something I wrote on August 23rd, 2007:

It takes a minimum of just under 200 days for a foreclosure to happen in California, and we're one of the shorter period states. Notice of Default can't happen until the mortgage is a minimum of 120 days late. Once that happens, it cannot be followed by a Notice of Trustee's Sale in fewer than sixty days, and there must be a minimum of 17 days between Notice of Trustee's Sale and Trustee's Sale. Absolute minimum, 197 days, and it's usually more like 240 to 300, and it is very subject to delaying tactics. There are lawyers out there who will tell you if you're going to lose your home anyway, they can keep you in it for a year and a half to two years without you writing a check for a single dollar to the mortgage company. It's stupid and hurts most of their clients worse in the long run, but it also happens. Pay a lawyer $500, and not pay your $4000 per month mortgage. Some people see only the immediate cash consequences, and think it's a good deal.

So that loan is non-performing for a time that starts at just under nine months, and goes up from there. This costs the lenders some serious money - money which they expect to be actuarially compensated for, which is to say, everybody pays a higher rate so that the lender doesn't lose more money on defaults than they make on the higher rate. I checked available rates on loans the afternoon I originally wrote this, and for average credit scores on reasonable assumptions, the closest the Option ARM came to matching the equivalent thirty year fixed rate loan was 80 basis points (8/10ths of a percent), and that wasn't an apples to apples comparison, as the Option ARM had a three year "hard" prepayment penalty, while that thirty year fixed rate loan had none, as well as the Option ARM had the real rate bought down by a full percent by a lender forfeiting sixty percent of the usual commission for the loan to buy the real rate down. How often do you think that's going to happen? Sure, the *bleeping* Option ARM had a minimum payment of about $1011 on a $400,000 loan, as opposed to $2463 for the thirty year fixed rate loan fully amortized, but the real cost of money was $2350 per month, as opposed to $2083 for that thirty year fixed rate loan. The equivalent payment for the Option ARM was, that accomplishes the same thing $2463 does for the thirty year fixed (theoretically paying the loan off in thirty years, providing the underlying rate remains the same), was $2675. Not to mention that the thirty year fixed rate loan has the cost of money locked in for the life of the loan, where that *bleeping* Option ARM can go as high as 9.95%, and the prepayment penalty for that *bleeping* Option ARM starts out at $14,100, and is more likely to go higher than lower for the three years it's in effect. You can't just handwave away $14,100 that the majority of people who accept a prepayment penalty are going to end up paying, for one reason or another. Not in the real world.

Another characteristic of the Option ARM envisioned by the professors is a so-called "soft" prepayment penalty, where no penalty is due if the property is actually sold, rather than refinanced. That's not the case with the vast majority of real-world Option ARMs. With only one exception I'm aware of, they're all "hard" pre-payment penalties, and the one lender who offered the "soft" penalty has discovered it's not a popular alternative, because they had to charge a higher nominal rate in order to make it work. Since the minimum payment was higher, and it wasn't quite so easy to qualify people quite so far beyond their means, that particular lender had been contracting operations, even while the rest of the Option ARM world was going gangbusters. Indeed, their parent company sold that lender in early 2007, over a year before the meltdown got noticeable, because they just weren't getting any profit out of them, and at one point, they had been a very major subprime lender (They were extremely competitive on 2/28s and 3/27s and their forty year variants, as well as versus other subprime lenders on thirty year fixed rate loans). Until I checked their website, I was not certain whether they're even still in business. I haven't heard from my old wholesaler since over a year before I originally wrote this article.

The Option ARM envisioned by the professors lacks the "payment recast" bug present in all current Option ARMs. Indeed, under Option ARMs, it is difficult to avoid this issue, because they recast in five years no matter what. Payment recast is what usually wakes people up to what a raw deal they got and they suddenly see themselves on a road that can only end in default and foreclosure. Furthermore, the professors' assumptions as to the longevity of the loan were open ended - essentially infinite in theory, although no loan given to individuals can be open ended in fact because we're all going to die someday, and most of us are going to want to retire before that, at which point these loans would definitely not be paid down to a point where they're affordable on retirement income under anything like our current system.

One final crock to the whole Option ARM concept as envisioned by the professors seems to be that the borrower gets a reserve amount if ever they default. The obvious retort is "Not in the real world." That is contrary to every practice of lending as it currently exists. That is the very basis of the real estate financing contract - the lender gets every penny they are due, first, and the borrower/purchaser/owner gets everything that's left over. As the authors themselves note, this does create a moral hazard for the lenders. Furthermore, and I must admit I'm not certain I'm reading the relevant passage correctly, another characteristic of the "Option ARM" they propose is that the lender gets primary benefit of any gain in value, and at least under certain circumstances, takes primary risk for any loss. In case you were unaware, this would completely sabotage the benefits of leverage that are the main reason why real estate is a worthwhile investment. This would certainly make the communities that make their living off selling other sorts of investment happy. Lenders, and especially current owners, not so much. Furthermore, I'm pretty certain that if they think about the economic consequences of this, real estate agents and loan officers don't want this to happen, either.

Those aren't all of the differences or relevant caveats, by any means. I took quite a few notes that I didn't go through, but it was past bedtime, and by this point it should be obvious to anyone who took the trouble to read through the above that there really isn't a whole lot in common between the Option ARM as the contracts were written, and how it was marketed and sold, and the loan of the same name as envisioned by the professor's research, except that name. Any claim that said research rehabilitates the Option ARM aka Negative Amortization Loan aka Pick a Pay aka "1% loan" aka (several dozen words of profanity), is based upon nothing more than the similarity in labeling, as if claiming a Chevette was the same thing as a Corvette, because they're both Chevrolets. Someone reading the professors' research would not recognize anything like the loan they are promulgating in any Option ARM that ever was on the market, because those were not based upon any of the same principles.

The negative amortization loan was essentially regulated out of existence in early 2008. There were a very few legitimate uses for it so I was a tiny bit sorry to see it go. However, the vast overwhelming majority of them were sold in order to persuade people to buy a property or take cash out that they could not afford, and millions of people have had their finances utterly ruined for years if not for life. Given these fact, and that alleged professionals proved incapable of using them appropriately as a group, I cannot come up with any kind of reason that justifies reversing the decision to ban them. But that doesn't stop some people who miss the days of easy money by hosing the people who put money in their pockets.

Caveat Emptor

Postscript: Lest I be misunderstood, I had previously come to a lot of the same conclusions that the professors had, although I had never integrated it into a single article, here or anywhere else. A lot of what they conclude, while pretty much theoretical, has some significant real world applications. Indeed, I have said several times in the past that leverage works best when it's maximized, and when you pay as little as possible towards paying off the loan, although that one result has to be modified for real world considerations like mortality, morbidity, and various psychological factors, which the professors mention in passing but do not really address or answer. I think I have some real academic appreciation for the value of Professors Piskorski and Tchistyi's work, and what went into it, and the results they have achieved. I had to dust off some portions of my brain (and mathematical textbooks!) that I haven't used in almost twenty five years, which was a treat of a certain kind once I got into it. Nonetheless, the products that go by the same name in the current world of loans have nothing to do with what these two distinguished gentlemen are talking about. The loan product I'm aware of that comes the closest is, as I said, a line of credit on commercial real estate.

Original article here

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

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

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

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

The title company will not, under the basic policy, purchase the property or make a large settlement. The reason for this is that if the standard policy made them liable for things like frustrated purpose of purchase, the standard policy would be far more expensive. People wouldn't want to purchase policies of title insurance, because they insure against risks which are relatively rare. However, those risks are extremely expensive when they do occur. Who pays for that? The other policyholders, of course. For a lot of people, they think of title insurance as junk when it will save your bacon if there's a real problem with title, and increasing the base price would mean that a lot of people would want to pass. The idea is to keep a policy of title insurance affordable, and still cover what it really has to cover, which is losing a property you thought you owned through action of law.

You can purchase a rider or endorsement for extended title coverage. Furthermore, if certain purposes are critical to your reasons for acquiring the property, you can do additional research, or pay to have it done. It can be expensive, but if you don't want this $500,000 property unless you can build a pool, an office, or a granny flat on it, spending the money is an excellent insurance policy. After all, even if you finance the vast majority of your purchase, you're on the hook for every dollar you spend buying the property. Spending a little extra to insure you're not wasting every dollar of the purchase cost makes sense in such circumstances.

Caveat Emptor

Original here

And I don't know why people expect it to be.

Cancel that. I do know why. Popular media. It's not all that common in popular media, but on those occasions I see someone buying a house in the movies or on TV, it's glossed over in terms that amount to the Fairy Godmother waving her magic wand. Partly, this is because the writers don't understand it, but mostly, it's because that if it's not your house, there isn't the necessary degree of emotional involvement to make it interesting. In short, it's boring, something studio and programming executives understand very well. Even on the real estate channels and shows, it's glossed over in ways as to render it basically into a simple magic spell (to the detriment of those agents who pay attention to those shows, and their clients). To an audience, all this stuff is boring, the cardinal sin in the entertainment industry. They can handle repetitive, they can handle stupid, they can handle insanely dangerous - they can handle pretty much anything except boring. To expect an accurate depiction of something so fundamentally boring to an audience is asking the impossible. When you add in how long it really takes (weeks if you're paying cash, months if you need a loan), how are they going to possibly depict that in a 30 or 60 minute TV program or 90 minute movie? Not to mention the fact they have no desire to because it's boring, and boring programs don't keep the audiences the advertisers pay for. There's no money in showing it accurately - the money for the media is in somehow being able to make it interesting. Even if they have to make up stuff that isn't there - and leave out 99.99% of what is there - to do it. Of course, by then what they show bears no relationship to the actual process.

There is nothing simple about an intelligent, informed decision as to which piece of real estate to buy, or securing any necessary financing. You can choose to do it the easy way, hoping that in your "ignorance is bliss" state of mind nobody takes excessive advantage of you. How many millions of people are in foreclosure right now who had that attitude? I have documented pretty extensively on this site exactly how easy the basic research that allows you to avoid the traps these people fell into is. Unsustainable loans aren't the only problem, though, only the biggest problem we're dealing with en masse right now. All of the individual con games that get played with real estate itself are still there, and nobody's proposing to pass any laws that will have any kind of real effect upon the problem.

Here is the situation: Here is a major asset, worth several years of your family's total income. Comparatively minor differences in perceived value make a major real world difference to how much money the seller walks away with. If that seller can net $10,000 more, that's roughly two months of free income from any regular employment they may have, and around here, a $10,000 difference is pretty trivial - the usual bar for quick turn fixing is at least $50,000, more like $80,000 to $100,000. Just because it's money borrowed from the lender doesn't make it any less real - in fact, it's all the more dangerous for that.

Given the high payoff for extremely minor games, people will play those games. People will lick the bugs off a car for $20. People will cheat on their taxes and risk nasty fines, penalties, and jail time for small amounts of money. 419 scams continue to make millions of dollars off their victims daily. People will bear professional false witness for dirt cheap amounts. 7% of the people surveyed said they'd murder a stranger for $10,000. On that scale, how likely do you think it is that they'll make things appear a little better than they are to net $50,000 extra out of a real estate transaction? With several times the amount at stake that takes 7% of the population to murder you, do you really want to take that risk?

There are friendly, amicable real estate transactions where everything goes easy, everything required is disclosed, the people concerned negotiate like reasonable adults, everybody keeps what is reasonable foremost in their minds and deals with the other people involved on that basis. I wouldn't bet on it happening in any particular transaction. Nor are many transactions something like the picture painted by Churchill's most famous speech, "I have nothing to offer but blood, toil, tears, and sweat. We have before us an ordeal of the most grievous kind. We have before us many, many months of struggle and suffering." But if you're mentally prepared for trouble and it doesn't happen, you're going to be pleasantly surprised. All too often, people think they're in for the media "magic wand" version, and freak out when they're confronted with reality. I'd like it to be easy, but frankly, if it were I'd be out of the most interesting part of what I do. Nobody would need an agent if it were easy. Those people who do business with me and through me know how often I use the phrase, "If it were easy, anybody could do it." The context is almost always something has come up, and I have to do some work to make it right, but I'm also making the point that that's exactly what I'm paid for. It's an inalienable part of the job. If it were all peaches and cream, the vast majority of all new agents wouldn't quit (or essentially quit), would they? One of the nice staff people down at my local Board of Realtors tells me that significantly more than half the registered agents do zero or one transaction per year. You can't survive on one transaction per year unless it's maybe a ten million dollar property. You can't even keep up with changes on one transaction per year (but nobody can really do fifty or more transactions per year, either - not and guard their clients interests as you're supposed to)

Buying real estate is a fantastically good idea and great investment, as this and this and this being just the major articles directly on point that I can think of off the top of my head. There are also obstacles, I will admit. Hell, I pretty much proclaim it in big bold type and explain many of those issues in detail. Credit issues, debt issues, how difficult it is to save for a down payment. Unless you're eligible for a VA loan, there are no more "zero down" or "no cash required" loans at this time. I do believe they're come back within a dew years years, but it's better to act before the boost in price that their return is going to give the market. The point is this: Nobody can make up your mind to do what is necessary but you. I can and will gladly help with preparation and planning and budget and evaluating property and everything else, but you've got to first be the one to make up your mind that you want the benefits of real estate ownership, and will pay the costs required to get those benefits. Nobody can do it for you. Nor is pretending it's free or easy in your best interest. The buyers who tried to pretend it was all free and easy are pretty much getting smashed between a rock and a hard place right now.

My point is this: You shouldn't expect to buy or sell a half million dollar or more unique asset like real estate in the same fashion you would a loaf of bread or a box of paper clips. Especially not when there are major rewards for making it appear just a little bit better for the other side than it really is. Expecting to do so is an artifact of Hollywood, and it's worse than all of the horrible cliches in all the bad movies and TV shows that have ever been made about most other situations, because the people who get involved in those other situations know (or learn in short order) what a horrible crock of fertilizer it is, while people who get ready to buy real estate generally don't, and have only the one experience to learn. But that one experience often controls their life from that point on - even when they don't understand how, why, or the fact that it is controlling their lives. I don't think I've ever seen anything like an accurate media description of being an Air Traffic Controller or any of the other jobs I've done. I've been witness to or involved with several major news stories in my lifetime. Aside from sports, I don't think I've ever seen any events with which I was familiar accurately reported. The reason for the ability to accurately report sports is shared experience and widespread audience understanding of the key elements through repeated personal involvement, or at least personal observation. Not to mention that people are interested in sports or they just tune out. If you care about Antarctic Rules Underwater Basketweaving, you tune in to the station that reports it, while if it comes on and you're not interested, you pay attention to something else. If you're interested, you understand all the major points of Antarctic Rules Underwater Basketweaving - you've done it or watched it enough that you're familiar with what's important, as should any reporters. But with every real estate transaction, things are different from other real estate transactions. Not only that, if it's not your money, it's boring as hell unless you're at least a pretty decent agent who understands everything going on. But pretty much everyone who hopes for a secure financial future is going to have to buy real estate at least once in their lives. It's going to be a unique experience, and it's not all going to be pleasant. Quite often, it's frustrating as hell, even when it doesn't need to be - but you can't force the other side to be reasonable. Don't expect it to be like Hollywood depictions, and you won't be shocked. Whatever your job is (except show business itself, of course) I'll bet you serious money that Hollywood doesn't portray it correctly either. Why should real estate be any different? But here's one prediction I'll stake serious money on: The more time and effort and often disappointment and frustration you spend going through the buying process, particularly if you've got a good agent working in your best interests, the happier the eventual result will be.

My most spectacular, satisfying results have all come from clients who were difficult, or had difficulties, and kept going to the very happy conclusion. I don't have any objective measurements, but it sure seems like to me those were the ones who ended up happiest with their purchases in the end. The stuff you go through to buy a property is temporary. The benefits you get from having done so are permanent, and usually quite large, as discussed above. Even after you sell such a property, you've got more money than you would have had otherwise, money you can use for whatever is important to you. Real estate doesn't have to be your life to benefit from it - or be ruined by it. Keeping this in mind, doesn't it seem like a good idea not to expect it to be accomplished by a Fairy Godmother waving her magic wand?

Caveat Emptor

Original article here

I have to admit I'm uncomfortable with it and don't like it. As a buyer's agent, here I am getting paid by someone who not only is not my client, but whose interests are aligned, in most issues, opposite to my clients. They want the highest possible price, my client wants the lowest. They want out of the property without spending money on repairs if possible, my client wants the necessary repairs made. The list goes on and on. About the only issue on which the two sides are in agreement is that they want the transaction to happen. Yet it has become essentially universal for the seller to pay the buyer's agent. Indeed, this is basically the only fig leaf protecting Dual Agency. If the money to pay the listing agent came from the buyers, they'd have to ask themselves "whose interest is this agent looking out for?" with the result being that dual agency would die overnight, and if staking dual agency through the heart doesn't appeal to you, you're unlikely to be on the consumer's side. Not to mention the myth of "Discount price, full service" would die just as quickly, on both buyer's and seller's sides of the transaction. There are protections in place to make it both legal and ethical, but getting paid by the seller when I'm acting on behalf of the buyers still makes me profoundly uncomfortable, and that's aside from facilitating these urban legends.

(The buyers are paying the listing agent, but not directly)

That said, let's consider why it happened, what it would take to make it change, and what the cost of that change would be.

The first paragraph makes obvious the benefits if no sellers were to pay buyer's agents - if what the seller paid out in agency fees was reserved solely to the listing agent, usually contingent upon a successful sale. No "Co-operating Broker" percentage. Not to mention the fact that the seller would come away with a larger percentage of the value of their property. Instead of seven to eight percent, the cost of selling the property would fall to between four and five percent. Not paying the buyer's agent sure looks like a win for the sellers, and one would think explaining that it would be part of an agent's fiduciary responsibility to explain, right?

But the reason that it is in any given seller's best interest is almost as obvious. Ask any agent and any loan officer what the number one obstacle to buyers being able to buy a given property is buyer cash. Okay, there are those unethical persons who will tell you that the problem is qualifying people for property beyond their means, but I'm talking about people who want to buy properties they can otherwise afford. Once they get the loan and the property, they will be able to afford the payments - the real payments on a sustainable loan - and keep up the property and all of the other stuff that essentially goes with "happily ever after". The number one constraint upon people wanting to purchase property they really can afford is cash in their pockets (or equivalently, bank account). The cash for the down payment, the closing costs of the loan, and everything else involved. It takes a long time to save that money, over and above the daily expenses of living. Some people find it difficult; others, impossible. Add the buyer's agent commission to that, and that sets the bar of cash they need to save that much higher.

The seller has the built up equity in their property, from the loan they've been paying on and usually, the increase in property value, and if that property commands a higher sales price, this equity is greater, and getting more money is the reason for them being willing to pay the buyer's agent. This willingness means that the pool of potential buyers doesn't need even more cash, which means that more potential buyers are able to afford this property. The more potential buyers able to potentially afford the property, the higher the likely sales price. The greater the economic demand, the higher the price, holding the supply constant, and there is only one such property. In fact, this increase in the sales price is typically much larger than the cash they pay, thus furnishing incentive for the sellers to be willing to pay the buyer's agent as part of paying their own. By shrinking the necessary pool of cash the buyer needs to a smaller percentage of the purchase price, they increase the potential selling price by more than they cash they put out. Furthermore, if everyone else is willing to pay this money and this particular seller isn't, then by making it harder to purchase their property than the competing ones, they shrink their pool of potential buyers, thus costing them more in eventual sales price than they are likely to recover. If my clients have just enough cash for closing costs plus down payment, they're not prospects for that property, because if they had to write the check for the buyer's agent, they fall short. One alternative is to lump the buyer's agent commission into a seller paid allowance for closing costs, but the six percent aggregate limit that most lenders draw in the sand for that can make it a real constraint. Considered on an individual basis, it's better for sellers to simply agree it's their responsibility in the listing agreement, thus removing the money from that allowance.

Indeed, an argument can be made that offering an average or higher incentive (locally, 3% or more) to a buyer's agent is one of the better ways to get the property sold. Not only do many buyer's agents shop that way explicitly, but if they have an exclusive contract that says 3% (as many do, because their clients aren't educated enough to know what a crock exclusive buyer's agency agreements are in the first place, but they'll also willingly trust the chain agent as to what is "standard"). If the Cooperating Broker's percentage is lower than what it shows on the buyer's agency agreement, that buyer will need to come up with more cash to pay their agent, from out of their limited pool of available cash. When that buyer's agent is in a position to demand 3% whatever property their victim buys, even if they didn't find it and weren't involved, that means properties paying less than that aren't contenders for this buyer's business, unless they've got so much available cash that it just isn't a constraint, and that is rare. A better buyer's agent puts a lower number on a nonexclusive contract, and if they get more, that's certainly fine with them, but because they have a non-exclusive contract, they don't get anything if the buyers become disenchanted with them and stop working with them. This gives a buyer's agent with a non-exclusive contract the incentive to find the property that's a real value to the clients as quickly as possible. I care far less about whether I'm getting two or three percent or something in between on a particular property, than I do about finding the property my clients want that's within their budget. My incentive is to make the clients as happy as possible so that I do get paid, because if I don't, I won't. But the buyer's agent with an exclusive contract that pays three percent has a different set of incentives, which is another reason I advise strongly against signing exclusive buyer's agency agreements, and the existence of such creatures is the reason why it may be a good idea for sellers to offer a higher percentage to a buyer's agent. (There is no consumer oriented reason to keep the amount of the Cooperating Broker's compensation secret, and I strongly support making it part of the general public's available information, which it currently is not on my local MLS.)

So sellers offer a commission because it shrinks the percentage of purchase price that buyers need to have, competing for buyer business as well as expanding the pool of possible buyers theoretically able to consider this property, both of which increase the purchase price more than enough to balance the money they spend. If by paying someone three percent, I increase my take by five percent or more, that's money any rational person will spend. The preliminary numbers I've seen indicate that the seller's increased take is about ten percent of gross price, which translates to almost seven percent more money in their pocket if the property is free and clear, and an even larger percentage if it isn't. On a $100,000 property, you spend $3000, get that money back and another $7000 besides - wouldn't you do that? Doesn't happen on every transaction, but those are the statistical averages. It might not be that much in your particular case - but it could as easily be more as less. If the dice were loaded on your behalf like this in Las Vegas, and that the expected value of a $3000 bet was $10,000, most of those reading this would quit their jobs and move there (at least until the casinos went bankrupt). In reality, it's pretty much the reverse: It'll cost you 10% not to put that 3% on the table.

We've seen what a winner this bet is, in the aggregate, and therefore why rational sellers who are allowed the option will opt to do offer a cooperating broker's percentage, which essentially goes to pay the buyer's agent. The economic incentives under the market therefore reduce it to something like one more tragedy of the commons, although unlike the classic example, it doesn't really hurt anyone directly, it just shifts the market price upwards. The only way to change it is therefore to pass a law prohibiting it. Leaving aside the mechanics of such a law and considerations of whether people could find loopholes in such a law (they would), and consider such a law as being proposed. Consider such a theoretical law as perfectly written and trivial to enforce, such that nobody could successfully get around it. I know that this is ridiculous (as should any adult), but let's pretend to believe this fairy tale for just long enough to tear it apart even under ideal circumstances. What happens? Well the market is priced to include the shift upwards in prices that sellers paying buyer's agents causes. It's just a one time shift, but we've already had the up, so now we'd get the down. Obviously, it would further damage current owners who would like to sell, and make prices more affordable to those who want to buy. Okay, so far we have a 1:1 correspondence between who gets helped and who gets hurt, and even, arguably, a $1:$1 ratio in hurt versus help. For every potential buyer who qualifies on the basis of income but no longer has the necessary cash in hand for a down payment, closing costs and a buyer's agent, to boot, we now have someone new qualify who has the money for the down payment, etcetera, and can now qualify on the basis of income. Like I said, direct effects help someone for every person they hurt. Before we leave direct effects, we might ask about how likely people are to vote to harm people who bought into the current system of homeownership based upon the status quo, in order to benefit an equal number of people who aren't - or aren't yet - part of that system at all. That equation doesn't play well very often in the United States.

Now let's consider the indirect effects. You see, people who want to sell and people who want to buy aren't the only ones affected. People who own, but want to hang on to their current properties will also be hurt. When prices fall 10%, everyone with less than 10% equity is suddenly upside-down, with all of the problems that brings. In the current market, the chances of them being able to obtain refinancing are essentially nonexistent. Maybe you're been paying attention to the news recently, maybe you haven't. There's an awful lot of people who want to hang on to their properties right now, and are having a very hard time. Just because I don't think the one proposal that's been made to bail them out directly is a good idea, doesn't mean I want to actively sabotage their efforts. This would flush all but a vanishingly small percentage of them out of their homes and back into rentals - after completely ruining their credit and making it difficult (costly) for them to persuade a landlord to rent to them.

Furthermore, there's a ripple effect across the rest of the loan to value spectrum. People who now have significantly less equity find it harder to refinance, and end up with higher rates, higher cost of money, etcetera. When prices shift downwards by ten percent, someone who had ten percent equity suddenly has none, making their loan much more difficult and costly. Someone who had eighty percent loan to value is now essentially at ninety. Someone who was at seventy is now almost to eighty, and indeed, a a 77 percent loan to value ratio is an eighty percent loan according to all lender guidelines. It's not until you get below sixty-three percent of current value (which becomes seventy once values have shifted downwards), that the differences become small enough to ignore. In a significant number of those cases, this is going to make enough of a difference such that these owners will not be able to refinance even though they need to, or they'll have to accept loans they can't really make the payments on. Whichever is the case, they lose the property. How many people who bought in the last few years have a loan to value ratio below 63%? Not a whole lot, it turns out. Even when value increases would have more than caused that level of equity, they've taken out equity lines to pay for improvements, cashed out for toys, or even in order to put the down payment on more real estate. Maybe they shouldn't have done that. It's not my place to make that kind of judgment. I'm only going to say that they did so having no reason to believe the status quo would change, and intentionally shifting it even further on them is moving the goalposts, and to the extent it causes current homeowners to fall short of their goals of meeting their financial obligations and lose their homes, is vile.

All this leads up to the killer reason: When I first wrote this, according to Statistical Abstract of the United States, residential real estate in the United States was valued at about 25.3 trillion dollars. Let it be devalued by ten percent, and that's 2 trillion, 530 billion dollars in real wealth, just gone. I could freak out enough people just by talking about the thirty billion, or roughly $100 for every man, woman, and child in the United States, but that's only the third decimal place of the loss, in this particular case. Accounting phantom consisting of numbers on paper or not, this is real money, every bit as real as that $100 in your checking account. Every penny that vanishes means that someone doesn't have it to invest in the economy. Whether it's an individual, a corporation, a lender, or what have you, it means that suddenly the last year or so of economic expansion goes poof!. This two and a half trillion dollars vanishing has second and third order consequences, each dislocation causing more troubles further down the line. The global depression of the 1930s had much milder causes, even considered proportionately. You want to know who gets hurt? The little guy and the emerging entrepreneur, who would have been responsible for most of tomorrow's growth. Old Money comes out fine, by and large. The depression was an inconvenience to the Astors and the DuPonts, to be sure, but that inconvenience didn't much effect their personal lifestyle. It economically killed a generation of innovators in addition to causing well documented economic misery among those who were less well off. Rereading this later, let me ask if there is anybody that seriously wants to argue for more of what we've been going through because real estate prices fell?

So now you know why the sellers pay the buyer's agents, you know why it is in the individual seller's best interest that it be so, what it would take to change this, and what the results of such a change would be. I still don't like it, but changing it would cause more damage, and more immediate damage, than allowing the status quo to continue.

Finally, consider this: The only person bringing any money to the table in a real estate transaction is the buyer. Every penny that seller puts out in order to make the transaction happen comes from cash they get from that buyer in one form or another. Either that buyer paid cash, or that buyer took out a loan that compensates that seller with cash. There is no way to alter the fact that the buyer is effectively paying everyone who gets so much as a penny out of the transaction. If the money they pay their own advocate has to go through a third party in order to pass muster with lenders, accountants, lawyers and regulators (and it does, for many excellent reasons rooted in both very basic principles of accounting as well as legal reasons relating to an "arm's length transaction"), then all the ethical issues it causes are something we need to put up with, because putting up with them is better than any possible alternative.

Caveat Emptor

Original article here

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