June 2019 Archives

This is something that often happens with highly appreciated properties where the owner can no longer keep up the payments, they get hit with a notice of default, and along comes Joe or Jane seemingly riding to the rescue on a noble white steed, offering to buy the owner out of the property "subject to" existing deeds of trust.

This is a terrific position for the buyer to be in, and a rotten position for the seller. Nor are the prices usually very good for the seller - that white knight usually ends up looking a lot more like a thief. So why does it happen? Why does the seller agree to it?

Here they are sitting on this highly appreciated asset, with loads of theoretical equity, and they cannot make the payments. If they go through the foreclosure process, chances are better of flying to the moon by flapping your arms than of getting any of the equity back out. Yes, in California it's got to sell for at least 90% of appraised value or it doesn't sell at auction, in which case the lender owns it. But those appraisals are intentionally low, because the lenders don't want to own them. Furthermore, all of the payments that weren't made, and the interest on them, all gets piled into the loan, as do fees for the default process and the trustees sale. If you have a mortgage loan, read your contract. Sight unseen, I'll bet you a penny there's a clause in there saying they can sock you for "reasonable" fees in the event of default or foreclosure.

So you have a $450,000 property which you paid $120,000 for and owe $320,000 on, but something has happened and now you can't make the payments. You put it on the market for $450,000 and don't get any takers. Then along comes someone and says, "I'll take over your payments and pay you $20,000 if you sign the property over to me."

This is certainly a gray area, legally. The loans have "due on sale" clauses, and the lender can call the notes as due in full in such situations. The buyer basically tells them, "tough", knowing that if they foreclose, the lender ends up in the situation they didn't want to be in in the first place, of owing the property, not to mention that the person who bought "subject to" can cost them a lot more money by delaying it in court, and there's a good chance they can win the case. Meanwhile, if they don't act quite so hard-nosed, this new owner is making the payments. They have the option of refusing the payments, but then we're dealing with the foreclosure process, and in the meantime, the checks for payment are there every month. What do you think most lenders will do? They will accept the payments!

Notice, however, that I didn't say the payments get there on time. This is the second raw deal that the seller has to swallow. The buyer's cash flow is a little tight, and the payment gets there 40 days late on a consistent basis. Who gets marked late? Whose credit gets dinged every time this happens? Not the buyer's. That buyer never applied for a loan with that lender on that property, the lender doesn't have their signature on a contract that says, "I agree to pay..." It's the seller's credit that gets hit. Kind of a nice situation to be in, no? Make a late payment any time you feel like it and your credit doesn't suffer! Not only that, but since the loan is still in the seller's name, the payments don't hit the buyer's debt to income ratio, allowing them to qualify for more loans, with larger payments, than they really should. Trying to leverage their investments like that is one reason why the folks who make a habit of "subject to" deals usually have tight cash flow. They don't want to let the property go into default, but as long as they don't get to the stage of being 120 days late (90 in some places), they have the best of all possible worlds!

Suppose, for whatever reason, the property becomes a short sale? Well, since the seller is the one that violated the loan contract, there will be recourse on them, not the buyer. Many times the buyer makes side deals for "pay me" type stuff and manages to make money, or at least get their money back, even though the property doesn't sell for enough to pay off the existing liens.

If you are getting the idea that agreeing to a "subject to" deal isn't the smartest thing in the world, why do buyers agree to them?

Desperation and Panic. They listened to the agent that told them that they could get more money than was likely by market conditions, or they listed with the cheap bump on a log agency that really doesn't do anything to market the property, or they just sat in denial until far too late. Nothing happens instantly in real estate; it always takes several weeks at a minimum to get a property sold, even if you get a fantastic offer on the very first day. When I first wrote this, If I had to I could get a loan done in one or two days, but that's not a situation you want to be in, because I don't know anyone who won't charge more in such a situation, and all of the usual loan caveats apply. But for whatever reason, the owners let the situation go too long, let themselves get behind the power curve, and suddenly realize that they are not going to catch up. They are looking at losing the property and getting nothing, so they panic. This is only one of the many reasons why staying ahead of the situation in real estate is so important. At the point where you're looking foreclosure square in the face ten days from now, there's not much else that can be done. I can offer you entire supertankers full of sympathy, and it won't make any difference. So if you're in this kind of situation, get the property on the market quick, price it attractively, and find an agent who will market it effectively, so that you avoid getting into the situation where the shark's offer is the best one you're going to get.

There is a scam that goes with this, that tells people, we'll keep you in your property. Even though you won't get to stay in your property, people sign it over and don't understand the gotcha! until they've already been had.

Caveat Emptor

Original here

If you haven't heard about the thirty year fixed rate mortgage, welcome to planet Earth and I hope we can be friends.

The thirty year fixed rate loan seems to be the holy grail of all mortgages. It's what everyone wants, and what they're calling about when they call me to talk about refinancing a loan.

Well, it is secure, and it is something you can count upon today, tomorrow, and next week, etcetera, until the mortgage will theoretically be paid off.

The problems are three fold: First, it is the most expensive loan out there. It always has had the highest rate of any loan available, and always will (Except for the 40 year loan which was making a comeback for no particularly good reason). This means you are paying more in interest charges every month for this loan. Second, according to data gathered by our government, the majority of the public will refinance or move every two to three years, whether they need to or not, paying again for benefits they paid for last time, and didn't use. This is essentially paying for 30 years of insurance your rate won't change, and then buying another 30-year policy two years down the road, then another two years after that, etcetera. Finally, because it is always the highest rate and this is what everyone wants, many mortgage providers will play games with their quote. They will quote you a rate on a "thirty year loan", meaning that it amortizes over thirty years, not that the rate is fixed the whole time. Or they'll even call it a "thirty year fixed rate" loan, but the rate is only fixed for two or three years. Every time you hear either phrase, the question "How long is the rate fixed for?" should automatically pop into your mind and proceed from there out of your mouth.

The fact of the matter is that there are other loans out there that most people would be better off considering. In the top of the loan ladder "A Paper" world, there are thirty-year loans that are fixed for three, five, seven, and ten years, as well as interest only variants and shorter-term loans (25, 20, 15, 10, and even 5 year loans). The shorter-term loans tend to be fixed for the whole length, but of course they require higher payments.

Until recently, I personally would never have considered a 30 year fixed rate loan for myself, and here's why. First, the available rates go up and down like a roller coaster. They are the most volatile rates out there. Given that I will lock it as soon as I decide I want it, it's still subject to more variations that any other loan type. Back when I bought my first place, thirty year fixed rate loans were running around ten and a half percent. Five years before that, they were fourteen percent and up. Second, having some mortgage history, I can tell you I refinance about every five years. Why would I want to pay for thirty years of insurance when I'm only going to use about five?

Even In the summer of 2003, when I could do a 30 year fixed rate mortgage at 5 percent without any points, I could do a 5 year ARM (fixed for five years, then goes adjustable for the rest of thirty) for four percent on the same terms. Rates are even lower at this update, but that's because the market is sick and a lot of people can't qualify, and ARMs still have a lower rate because the bank isn't potentially tying their money up for thirty years at a low rate when inflation is expected to take off within a few years.

I keep using a $270,000 mortgage as my default here, so let's compare. The 30 year fixed rate loan gives you a payment of $1449, of which $1125 is interest and $324 is principal. The five-year fixed rate loan gives me a payment of $1289, of which $900 is principal and $389 is principal. I saved $225 in interest the first month and have a payment that is $160 lower, while actually paying $65 more in principal. What's not to like? If I keep it the full five years, I pay $51,549 in interest, pay down $25,791 off my balance if I never pay an extra dollar, as opposed to paying $64,903 in interest on the thirty year fixed rate loan, while only paying down $22,062 of my balance - and I've got $13,500 in my pocket, as well as the $13,300 in interest expense I've saved and $3700 lower balance. If I choose the five-year ARM and make the thirty-year fixed-rate payment, I cut my interest expense to $50,539 while paying off $36,426 of principal (remember, every time I pay extra principal it cuts what I owe, and so on the amount of interest I pay next month.). If I then pay $3500 to refinance, adding it to my balance, I have saved many times that amount. I still only owe $237,074, as opposed to the 30 year fixed rate loan, which has a balance of $247,938. That's over $10,800 off my balance I've saved myself, plus over $14,300 in interest expense, simply by realizing that I'm likely to refinance every five years. And the available ARM rates are more stable as well as lower. From the first, I haven't had one with a rate that wasn't in the sixes or lower. Finally, if I watch the rates and like what I see and so I don't refinance, I'm perfectly welcome to keep the loan. And all of this presumes that the person who gets the thirty-year fixed rate loan doesn't refinance or sell the home, which is not likely to be the case. Statistically, the median mortgage is less than two years old, and less than 5 percent are five years old or more.

At rates prevailing when I first wrote this, I could get the same loans at 5.75 and 5.125 percent (without points), respectively - which was at that time about the narrowest I've ever seen the gap. Assuming a $270,000 loan, for the 30 year fixed rate loan that gives a payment of $1576, which five years out means that I have paid just under $74,996 of interest, $19542 of principal and have a balance of $250,457. If I choose the 5 year ARM, my payment is $1470, so if I keep it five years I've paid $66,581 in interest, $21,626 in principal, and my balance is $248,373. Plus I've kept $6300 in my pocket, or alternatively, if I used the $106 per month to pay down my loan, I've only paid $65,713 in interest, have paid $28,826 in principal, and have a balance of $241,174. Even if I then add $3500 in order to refinance and the thirty year fixed rate does not, I'm still ahead $5700 on my balance plus the $9200 in interest I've saved, and the chances of the person who chose the thirty year fixed rate loan not having refinanced is less than 5%.

ARM mortgages are not for everyone. If you're certain you are never going to sell and never going to refinance, it makes a certain amount to sense to go for the thirty year fixed rate loan. And of course, if you're going to lie in bed awake every night worrying about it, the savings work out to a few dollars a day and my sleep is worth more than that to me, and so I'm going to presume it is to you, as well.

The final factor is the current paranoia of the loan market. I do not believe it's going to last, but even people with long term jobs and businesses are finding it difficult to refinance under some circumstances - most notably if they're in a group that gets a lot of deductions on their taxes due to business expenses. There has got to be a niche created to serve such people, and I believe that there will be, but I don't know when and it isn't here yet. The last such niche, Stated Income Loans, was horribly abused, but right now as much as 20% of the population has difficulty persuading lenders they can make the same payments they've been making on time for years, and that percentage is rising as career W-2 type jobs travel in the direction of the Dodo and Great Auk, being displaced by self employed or 1099 contract positions. If you are among this group and can qualify now, a thirty year fixed rate mortgage is something you should strongly consider.

Furthermore, investors are cutting their own throats with their current overemphasis upon safety, which is why rates are so low. When nobody who's not in the perfect situation can qualify for the loan, the current situation amounts to too much money chasing too few borrowers, with wonderful consequences for those who are in a position to qualify. High supply low effective demand for money means low price, or in plain english, low interest rates that can be locked in for 30 years. I seriously doubt we're going to see sub 5% rates on real 30 year fixed rate loans ever again once the market normalizes.

But what most people should be trying to do is cut interest expense while not adding any more than necessary to the loan balance. As I've gone into elsewhere, money added to your balance sticks around an awful long time, usually long after you've sold or refinanced, and you end up paying interest on it, as well.

So even though various unethical loan providers tend to quote you rates on loans that aren't really what you are looking for if you want a thirty year fixed rate loan, in normal times they're actually doing you a favor in an oblique and unintentional way, and somebody who is up front about offering you a choice between the thirty year fixed rate loan and an ARM is quite likely trying to help you. Consider how long most people are likely to live in their home (average is about nine years right now), how long they're likely to go between refinancings (less than three years), and your own mindset. It is quite likely you can save a lot of money on ARMs. Why pay a higher interest rate in order to buy thirty years of insurance that your rate won't change, when you're likely to voluntarily abandon it about two years from now anyway? Why not just buy less insurance in the first place?

Caveat Emptor

UPDATE: I had someone question the numbers in the paragraph comparing the 4% 5/1 ARM against the 5% 30 year fixed rate loan, both of which were available at the same time in the summer of 2003. Now I have had it pointed out to me that I made a mistake in calculations somewhere. The numbers for interest and balance savings are correct, but those for payment savings are $9623, not counting the time value of money. Your savings are not the sum of the three numbers. It depends upon your point of view as to which is most important to you. The interest savings on one hand and the dollars in your pocket plus lowered balance on the other are essentially the same dollars. They are two sides of the same coin. It's just a question of what you're most interested in. Not that $13,000 plus is chump change, even on this scale, and no matter how you look at it, you're $13,000 plus to the good. You've either got $9623 in payment savings plus $3670 in lowered balance, both of which are "in your pocket" in one sense or the other. You wrote checks totaling $9623 less, and you've got $3670 in lowered balance, which translates to increased equity - not to mention that you're not paying interest on it any longer. Or you could look at it as simply 13,000 plus in interest you didn't pay. Most folks will lose some of the interest in the form of taxes they don't pay, but 1) That's never dollar for dollar and 2) I wasn't going that deep when I wrote this article.

UPDATE 2: We have also had a period since then where there was only about a quarter of a point difference in cost between 5/1s and thirty year fixed rate loans - with 7/1s and 10/1s being more expensive than the fixed rate loan at the same rate. In that situation, as I said at the time, it makes sense to get the thirty year fixed. Why not if it's essentially the same rate for the same cost? But that sort of narrow rate gap is not typical, and it has since widened back out considerably.


Original here

One of the things the place I work does to attract clients is advertise foreclosure lists to our clients. Several times a week, people call and ask for the lists, and we say, "Great! Just come on down, fill out a loan package and an agency agreement, and we'll get them to you fresh every morning, and when you see one you might be interested in, we'll help you get it!"

Before the end of the sentence, over 95% of the people have stopped us, saying they are already working with someone. "I just want the foreclosure list. Can't I get it?" Well, we pay money for that. Why should we give it to someone who is not our client and has the ability to pay for it on their own? Why didn't the agent they're already working with get it for them? (Everyone can get a weekly list for free from the county - but that list is worthless except as a time waster, because that list is three to ten days out of date and they've already been swarmed.) If they want to work the foreclosure market, they should have signed up with an agent who has daily foreclosure lists. They haven't even found a property they are interested in yet, and already they know their agent isn't cutting the mustard for their purposes. But they are still stuck with them.

Another trick high margin ("expensive") people use is social groups. Nothing wrong with social groups and using people you know there, but make certain you're not paying three or five times the going rate for a loan, and that your agent really knows what they are doing before you sign on the dotted line. Church groups, soccer coaches, scoutmasters - I can't tell you all of the social acquaintances I've rescued people who became my clients from. These predators look at other members of the group as a captive audience. It isn't so, of course, those people have the option of going elsewhere - it's just difficult socially, and many of them are unwilling to make the effort.

One of the worst of these is family. Your brother, sister, aunt, or nephew is in the business, and your family makes it difficult not to choose them. "You simply must use your sister Margaret!" Well, if subsidizing Margaret to the tune of two points more than anyone else would get is your cup of tea. Around here, that's $8000 or so for the average transaction. You are not writing the check for the extra to Margaret directly, but you're paying her just the same.

Lest I be misunderstood here, there is nothing wrong with using friends, family, members of your social group. Please do check with them. The mistake is not in giving them a shot; it lies in giving them the only chance. That's what you call a monopoly situation, and the chances of you getting the best possible treatment are horrid. But if Aunt Marge or Uncle Bob know you're shopping around, they have more incentive to do their best work. If they know you're not, well I hate to break it to you, but the average person is looking for a bigger paycheck for the same work, and this includes friends, family, and social acquaintances, particularly because you are not the one writing the check, but you will pay for it, guaranteed. The worst mess I've ever had to clean up was caused by my client's uncle, who had been in the business twenty years, and was trying to extort just a little too much money for the deal to work.

On the other hand, when my cousin calls me out of the blue, I can cut him a deal because here is a transaction that I didn't have to spend time and money wrestling it in the door; it walked in of its own volition. This is far and away the toughest part of any transaction, and one of the most expensive to any real estate practitioner - getting a potential client into your office. It's why the "big names" spend so much on advertising nationally, and give their folks half (or less) of the cut a smaller place will give them. (Hint: just like in financial planning or any other service, what's important is always the capabilities and conscientiousness of the individual performing the service, not the company).

So here's how you live up to the social expectations. Give them a shot, but not the only shot. If you are looking to buy and they are an agent, sign a non-exclusive buyer's agreement with them. This gives you free rein to work with other folks as well; just don't sign any exclusive agreements. Most agents, unfortunately, want to lock up the commission that your business represents and so they will present you with an exclusive agreement. The harder they argue for an exclusive agreement, the more you should avoid them. All that an exclusive agreement does is lock you in with one agent. If they are a lazy twit, you either have to wait until the agreement expires, use them for your transaction anyway, or hope you can get them to voluntarily release you. There is no way for you to force them to let you go. I get search phrases like "breaking an exclusive buyer's agreement" hitting the site every day. The only two ways to break an exclusive agreement are 1) wait for it to expire, or 2) get them to voluntarily let you go. I've never heard of the latter happening. So don't sign an exclusive agreement in the first place. Sign a non-exclusive agreement. This puts all of the motivations for work on your side, where they belong. The one who finds the property you are interested in will get the commission, but they have to work for it, as your business isn't locked up.

This also gives you an out if Aunt Marge or Uncle Bob doesn't cut the mustard. You can tell anybody who gets their nose out of joint, including them, that you gave them the opportunity to earn your business, and somebody else did a better job. The other guy saved you money, the other guy found you the property you wanted, the other guy got you a better loan. You wanted to do business with them, but they didn't measure up. Case closed, and Aunt Marge or Uncle Bob will drop it if they are smart, because the more stink they raise, the more likely it is that another family member, friend, or social acquaintance will pass them by in favor of "Could you give me the name of that guy who helped you?"

The only exception to the non-exclusive buyer's agreement is if they are giving you a service that you would otherwise have to pay money for. I am not talking about Multiple Listing Service - those are free and plentiful. I'm talking about real time information not available to the general public - like daily foreclosure listings. Our office pays hundreds of dollars per month for that as a way to bring in business. It is reasonable for someone working the foreclosure market thusly to be asked to sign an exclusive agreement, because otherwise there may be no way to determine who introduced you to the property (Lawyer's Full Employment Act strikes again!)

For sellers, unfortunately, you've got to make a commitment to list with one agent. It's just the way it has to be, economically, in order to get them to commit to spending the kind of money it takes to get a good result. But you can interview more than one agent. What are they going to do to sell your property for the highest possible price? Put it in the contract when you do sign. Everybody can put it in the MLS, and during the bull housing market we had for years, where unless the property was obviously overpriced you'd get multiple offers within a week, a lot of monkeys masquerading as agents made a good living doing that and only that. That doesn't cut the mustard any more. I work more with buyers than sellers, but there are venues that sell the property, venues that bring people to open houses, venues that generate people looking for the cheap bargain (which you don't want) and venues that generate people looking for property like yours in your neighborhood (who is your ideal buyer). Especially in a major city, these are all different venues, and the agent who knows which one is which is worth more than you will pay them, and the cheap agent who doesn't is likely to cost you a lot more money than their cheap asking price saves you.

For loans, I've written about this before, but shop around, ask the same questions of every loan provider you interview, beware of red flags, and stick to your guns. Until very recently, I used to volunteer to do back up loans when I knew the prospective borrower was being sold a bill of goods by someone else. The question I asked myself before volunteering to put in the work of a backup provider. "Could the loan they are telling me about be real?" If the answer was no, I volunteered to act as backup. Every single time, it was my loan the person ended up getting. I can't do this any longer due to changes in loan lock policy from all the lenders, but it used to work very well. Your prospective loan providers should know the market if they are competent. Make use of that knowledge. And lest you be tempted to quote something at those loan officers that is not real, it's a self-defeating strategy. Honest loan officers will tell you point blank they can't do that, while the scamsters are going to get into the spirit of the situation, by which I mean saying anything it takes, no matter how fanciful, to get you to sign up. And those who are knowledgeable about the state of the market always know what is likely real and deliverable, and what likely is not.

Caveat Emptor

Original here

The original appeared in April 2006, but has been updated for changes

I am hoping to buy in the (city) area and am reviewing the possibilities. While I fear that the local market may be peaking, I intend to live in the home for at least ten years, so I am not trying to time the market.

My questions have to do with the down payment. I expect to shop for a property in the $450,000 range, and currently have $60,000 available for a down payment. I make a decent salary and receive an annual bonus of $35,000 - $40,000 each February. The bonus, while not guaranteed, is very dependable. After taxes and deductions, I should realize about $20,000 - $25,000 from it.

Do you think I would be wise to wait until February, by which time I will be able to make a down payment of $90,000 and perhaps avoid PMI and pay less interest over the life of the loan, or seek to buy now and lessen the taxes on the bonus? (I itemize, am single and am in the 28% bracket). Will the greater down payment help me to capture a better interest rate on the loan? (My credit scores are right around 800). Also, if I buy now, is it possible that I will be able to negotiate a mortgage in such a way that I can pay my realized bonus in February as a lump sum towards the remaining principal without incurring penalties? Ideally, i would like to use my bonus each year to pay down principal, as I can afford to balance my budget, including regular mortgage payments, without touching the bonus.

While on the subject of credit scores, I am reminded of another question - does an 800 score do me any good as contrasted with, a 740 or 750? Thank you again for your consideration. Your writings have been invaluable to my education.


I needed some more information, so got a subsequent email

I would expect the property taxes to run about $5,000 annually and association dues to be another $350 monthly. As I don't have a car, parking fees will be inapplicable. My closing costs should be somewhat reduced as I work for a bank (parent company) and they offer employees favorable mortgage rates with no points and no origination fees. Of course if I go elsewhere for the loan that would not apply, but I would only expect to do so if I received even more favorable terms.

As for an equivalent property, the market would price the rent at about $2,200 a month, although I am only paying $1,520 now (for a less desirable place than what I am shopping for).

First things first. You are easily A paper. When I first wrote this, A paper was A paper - someone who just staggered over the line got the same rates as King Midas. That has now changed and there are cost differentials between people who just make it and people whose credit really shines. That said, focus on the bottom line to you, not how much of a differential you get over lesser customers. Which is really more important: getting a better price on the loan - better rate at a lower cost, or paying less than a prospective lender's next customer? It's not important that they give you a quarter point incentive if their basic tradeoffs were more than that above the competition. Look for a loan based upon the bottom line to you, not a little tweak that says you get treated a little better than the next guy.

A paper does differentiate between credit scores now, where they did not formerly - but much less so above 740 credit scores. Someone with a credit score below 720 who still qualifies A paper can expect a discount point surcharge on a lender's basic rates. At high loan to value ratios, this can be two points of difference - $5000 on a $250,000 loan, $10,000 on a $500,000 loan more than the higher credit score pays. Anyone reading this think $5000 isn't important? On the plus side, it's way better than going subprime (if you can even find a subprime lender that will take you with as tight as standards have gotten). One thing never changes about loans: shop by the bottom line to you.

Second, split your loan into two pieces to avoid PMI if you can. Current market conditions at this update are that second mortgages won't go over 90% of total value loaned, so you will probably have to pay PMI if you can't come up with 10% down. One first loan for 80% of the value, and a second for the remainder, whatever that is. The second will be at a higher rate, but better that than paying PMI on the whole balance. It's likely to save you a lot of money this way. If you intend to pay it down, be very certain that there will be no prepayment penalty.

Now, let's look at now versus basically a year from now. One thing I'm going to look at is whether your location may be above sustainable levels. My rule of thumb is that if a 20% down payment won't break even on rental cash flow, your area is likely to be overpriced. With current rates (6.25% for a thirty year fixed rate loan at par for the first, something like 9% for a 10% second), payment on $360,000 runs about $2215, plus taxes of $420 per month plus association dues of $350 plus an allowance of $50 per month for insurance. Total $3035 per month. As opposed to $2200 rent. An investor would be down $835 per month even if the place was never vacant and never needed repairs. Prices would need to drop $100,000 at least to cover that. I'm also going to assume you need $10,000 for closing costs out of your own pocket, reducing your down payment to $50,000. Now, I'm going to look 10 years out based upon this situation.



Year
0
1
2
3
4
5
6
7
8
9
10
Value
$450,000.00
$374,500.00
$400,715.00
$428,765.05
$458,778.60
$490,893.11
$525,255.62
$562,023.52
$601,365.16
$643,460.72
$688,502.98
Monthly Rent
$2,200.00
$2,288.00
$2,379.52
$2,474.70
$2,573.69
$2,676.64
$2,783.70
$2,895.05
$3,010.85
$3,131.29
$3,256.54
Equity
50,000.00
21,008.26
9,995.46
43,151.06
78,608.20
116,526.98
157,078.65
200,446.41
246,826.23
296,427.77
349,475.31
Net Benefit
31,500.00
-108,625.29
-91,384.89
-72,677.63
-52,395.49
-30,423.16
-6,637.55
19,092.60
46,907.31
76,955.83
109,397.24

Now, let's look at suppose prices have come down that same $100,000 in a year, but rents have gone up by inflation - roughly 4%. However, rates are a bit higher - let's say 7 percent (actually, they are slightly lower now). Furthermore, you have $90,000 less $10,000 for closing costs leaves $80,000 down payment. I'm assuming property taxes are based upon purchase price, as they are here in California, but if they don't go down when prices go down, that's going to make a difference of about $100 per month to start and more later on. Let's look 9 years out for an equivalent time frame.





Year

0

1

2

3

4

5

6

7

8

9

Value

$350,000.00

$374,500.00

$400,715.00

$428,765.05

$458,778.60

$490,893.11

$525,255.62

$562,023.52

$601,365.16

$643,460.72

Monthly Rent

$2,288.00

$2,379.52

$2,474.70

$2,573.69

$2,676.64

$2,783.70

$2,895.05

$3,010.85

$3,131.29

$3,256.54

Equity

80,000.00

107,242.69

136,398.64

167,602.25

200,997.33

236,737.81

274,988.43

315,925.50

359,737.71

406,627.01

Net Benefit

24,500.00

4,200.10

18,090.11

42,543.32

69,346.64

98,702.88

130,831.85

165,971.77

204,380.83

246,338.88

When I first wrote this, the picture looked much better by waiting a year for the market to get rational. If it hadn't, all you've done is taken that last year of benefits off the first chart, or worse, as perhaps the prices continue to rise for another year. Nor have I assumed that you paid extra on the loan. Quite frankly, once you've paid off that second trust deed, leverage is your friend, and you are better off investing the difference.

When I originally wrote this, the question was "When is Wile E. Coyote going to look down?" Okay, not all that funny, but it has applicability to the situation, and at this point it has happened, as you are aware unless you've been living as a hunted animal in a cave. As long as everyone was in denial, and there was a market of folks willing to pay those prices, the market could defy gravity. When people wised up, that ended. When prospective buyers "looked down", and they didn't like what they saw. There is no convincing reason why highly paid jobs have to be even more highly paid so that they can afford local housing here, whereas a large proportion of the jobs in certain cities like Washington DC or New York don't really have the option of leaving, as they are where they have to be. The government isn't leaving Washington DC unless it gets nuked, and the big guns of the financial industry aren't leaving New York unless every other big gun does so. You know better than I to where your city lies on that spectrum. My impression is that where you are is closer to the inelastic employment point. Nonetheless, if the rest of the country "looks down," so will those places that are relatively insulated.

If a 20 percent down payment doesn't pencil out as an investment property, as it doesn't in your case, the question is not likely to be "if?" the market is going to adjust, but "when?" and "how?" Here locally, you could almost hear the "pop!" If things are relatively inelastic, employer- and jobs-wise, a long slow deflation may be what occurs. You may even keep current prices while inflation makes things catch up, or keep going up but at a lower rate, taking longer to adjust. It's hard to say when I'm not as familiar with your city's economic engine as I am with my own, but here's what happens if prices stay stable for ten years:





Year

0

1

2

3

4

5

6

7

8

9

10

Value

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

Monthly Rent

$2,288.00

$2,379.52

$2,474.70

$2,573.69

$2,676.64

$2,783.70

$2,895.05

$3,010.85

$3,131.29

$3,256.54

$3,386.80

Equity

50,000.00

53,930.19

58,150.38

62,682.08

67,548.41

72,774.22

78,386.23

84,413.13

90,885.78

97,837.36

105,303.52

Net Benefit

-31,500.00

-39,318.42

-47,361.14

-55,634.47

-64,145.15

-72,900.45

-81,908.24

-91,177.08

-100,716.30

-110,536.19

-120,648.06


As you can see in this case, you build up a fair amount of equity, but would have been better off renting and investing the difference. However, the odds are against this sort of market reaction.

At this update, my local market has seen all the crash we're going to unless the employment situation gets even worse. There is a premium for beaches, tourist attractions, and weather that's at least decent and usually wonderful all year long. People want to live here if they can, which means demand is high, supply is fixed, and if you won't pay it, someone else will. There is also upwards pressure on rents of single family housing, as landlords are looking at long term cash flow rather than flipping the property in a year, and the local market has mostly worked its way through excess inventory and there isn't as much "shadow inventory" here as some people seem to think (doesn't matter how much there is nationwide. The question is "How much is here?" There is no such thing as a national market for real estate, and anyone who thinks there is has just labeled themselves a bozo. Even a unified commuting area market is pretty much an occasionally useful fiction. Look at zip codes or even neighborhoods if you want an accurate picture of what is going on in an area - but that's too much detail for talking heads on national television programs)

Caveat Emptor

Original article here


My general rule of thumb is "Remodel for your own enjoyment. If you're lucky, you'll get some of your money back when you sell." The remodeling industry has made a very large amount of money seducing people into believing they will recoup their investment, or more than their investment. But as you can see here, it's a rare remodeling project that returns more than the cost. Therefore, don't remodel with the idea of making a profit, because you won't. Not a single one of those multipliers is greater than 1.

But there are times when remodeling to sell makes dollars and sense.

Mostly, it's when the existing stuff is so outdated that Ms. Newlywed takes one look and flees in terror from the Uranium Yellow or Art Deco Pink and Blue that's been out of favor since before her mother was born. Maybe it was fine thirty years ago when you bought it, and you've gotten used to it, but now it's fifty years old and you've just never motivated yourself to do anything about it. If the kitchen is straight out of 1955, and the bathrooms look like they were last decorated when Hawaiian kitsch was the hot new fad (If you're not aware, Eisenhower was President), it's probably a good idea to do something about that before you try to sell - "Try" being the important word. Because people looking for their dream home aren't interested, and these properties sit on the market. If they eventually sell, they will sell for way below everything else on the market, first because of the visible age, second because it sat on the market and you had to reduce the price further and further while paying carrying costs for months. These are the sorts of homes rehabbers and flippers look for, because they can make a profit on them. If you have the money, why wouldn't you want that profit for yourself?

For buyers, if you're willing to buy something that's solid but older, you can get one heck of a deal as well as being able to remodel at whatever pace you're comfortable with. Truthfully, most folks I talk to have at least some plans for as soon as they buy, anyway. If you're planning to install new kitchen cabinets and granite counters anyway, what does it matter if what's there is ancient, ugly, or poorly laid out?

The first level of remodeling is to clean, shine, and repair any surfaces that need it. This is a straightforward extension of the "carpet and paint" principle. New paint and carpet are cheap, and have a great return on investment. If the formica is burned or chipped, if the tile is broken, if it's dull and dingy, make it shine. It always amazes me that people with hardwood floors will leave them looking like they haven't been polished since they were laid down in 1932. Strip them, sand them, polish them - before you put the property on the market. It's a lot cheaper than replacing or laying new carpet. They will look beautiful. They will make people want your house. Not everyone, of course, but how many buyers do you need? If you've got something lots of people see as desirable, flaunt it by making it beautiful. Hardwood floors are very high on that list.

Sometimes, there just isn't any choice but to take it to the next level. Stoves built in to the countertop and cooking ovens in the cabinets are so 1958. If there aren't any good matches for marred, gouged, or broken surfaces, you probably want to re-do the whole surface. Keep in mind that labor costs are pretty much a constant, and the largest expense of most jobs. You want to spend $4500 resurfacing the bathroom in plastic and linoleum, or $5000 resurfacing it in Travertine and nice tile? Add a moderately upscale toilet for a couple hundred bucks, and you've got a bathroom that looks like it comes out of Sunset magazine rather than an episode of the Flintstones. Somebody who flees in terror from the latter is likely to be attracted to the former. Even if they don't flee in terror from the Flintstones bathroom, most folks are going to be much more attracted to the Sunset magazine bathroom.

Keep in mind, also, that the new stuff you put in has to go with whatever you're keeping. If you've got a Mediterranean paint scheme, Art Deco counters are not going to work for most prospective buyers, and they're the ones you're trying to please at this point. Just sayin'. The more vanilla you keep it, the fewer prospective buyers you will alienate.

Don't go overboard. It can be a real temptation to spend $25,000 or more on new kitchen appliances, but you're not going to get your money back. Keep in mind that most appliances are personal property, so (in the absence of the contract specifying otherwise) you can take them with you when you go. However, in cases like that it's more common than not that those appliances remaining will be written into any purchase offer, and if you agree to leave them, you have to. If you don't want to leave them, then perhaps the purchase offer gets withdrawn to no beneficial effect, but perhaps they'll stay interested at a slightly lower price. If two-thirds of the gourmet kitchen that attracted a buyer is going away when you move out, it's not likely to do you much good in selling your property. I always ask my buyers why they're willing to pay more for the kitchen when most of it is going away. There are idiots who insist they don't want a buyer's agent, but betting on that is a bet you don't need to make - and almost always lose.

Poor lighting can kill a sale without the buyers ever realizing why. It's dark, it's cavelike, it feels old - they don't want it. Just leaving the drapes open when the property is being shown makes a huge difference. Replacing the lighting - particularly if you use CFL so you don't have to necessarily have to rewire for a bigger load - can be very cost effective.

If you're going to remodel anyway, clean up your lines of sight and floor plan if you can. The longer the uninterrupted lines of sight, the bigger the property "feels". The less complex the floor plan, the more open and larger it will feel. If you have to go through three switchbacks to get through the kitchen, that's a bad thing. Separate but connected "areas" are better than room dividers which are in turn better than walls, at least in the public areas of your property. If you're remodeling anyway, fix it.

One of the overlooked and relatively cheap remodels is the closet. Basic closets from fifty years ago are tiny by modern standards. People today have more stuff, and they want places to put it. People who get very interested in modern new kitchens and beautiful new bathrooms can just as easily get turned off by small closets. If they see a standard post-war closet arrangement (a three foot space between walls of two bedrooms, with half going to one bedroom and half to the other), they'll quite likely think that isn't enough closet space. "Next property! These closets are too small." Put a modern closet design in, with shoe holders drawers and cabinets and half size hanging spaces that efficiently use the space, and for most people, that's a horse of a different color. Closets are a bigger concern with more people than most folks give credence to, and they're way cheaper than most other remodels.

In many cases, remodeling may not get your money back, but it may be the difference between selling quickly and not selling for months, if at all. It's very hard to track this sort of information, and harder still to assign a dollar value to it. Keep in mind that a $200,000 mortgage at 6% costs $1000 per month, and property taxes and homeowner's insurance add to that. Not to mention that the longer it's on the market, the more you have to mark the property down in order to sell. At these prices, four months make a difference of about $6000 in carrying costs alone, never mind what you have to mark the property down to interest people in it with over a hundred days on the market!

Remodeling isn't the license to print money it's been portrayed as - except for the remodeling industry. Small budgets are more likely to recover large fractions of what you spend than larger ones. Unless the property is significantly behind the times, remodel for your own enjoyment, because you won't get as much back as you spend.

Caveat Emptor

Original article here


A while ago, I wrote Top Ten Reasons Your Home Isn't Selling. It was well received so I thought I'd take it from the buyer's perspective. Once again, I'll try to inject as much humor as I can. And in case a few people don't realize it, the real purpose of this article is to help you look ahead before you make these mistakes.

Number 10: The Commute: It never ceases to amaze me the number of people who will commit themselves to living in a neighborhood they've never lived in before without a real evaluation of how to get from there to everywhere else they need to be. Don't just drive from the house to work once when there's no traffic. Try to drive back and forth at the times you'll be driving it every day. Or if you're a public transportation person, figure out what that's going to be like before you're stuck doing it. Take into consideration that the commute is going to get less enjoyable as time goes on. Be certain in your own mind that you're going to be okay doing this as often and as long as you have to. If the commute is intolerable, then as certain as gravity you're not going to be living there or not going to be working there. For genius IQ points (or at least subgenius), try the paths you're going to have to take to your other common destinations. Grocery stores, the mall, your Tuesday night class in underwater basketweaving, the kids' scout meetings. If you have to travel or work in different locations, do those trips also. An good agent should ask about all this, and be aware of the effects. An Evil Agent, will, of course, induce you to buy property where you'll have to sell it - generating more commissions.

Number 9 Beautiful Surfaces: They've just put Travertine and Italian Marble all through the room you want for the nursery! Too bad about that six inch wide crack in the foundation they covered up! Still, it's obviously the house you've got to have! At least until the first time your toddler breaks multiple bones falling on those tiles. Unfortunately, by then it's too late. And just wait until the old cast iron plumbing fully closes up or springs a leak, but at least it puts out the fire caused by plugging too much into eighty year old wiring! Yes, beautiful surfaces are nice - and one of the best ways to get novice buyers to pay too much.

Number 8 Insufficient shopping: You looked at one house and fell in love. Unfortunately, it was the crummiest most overpriced house in the neighborhood. Other people trying to get out before the new needle exchange program opens down the street are going to be praising you for paying so much that their house will appraise for whatever value they need it to! If you don't look at ten to fifteen properties, you're definitely short of market information, even with the best agent in the world. I have seen people shop more for $20 toaster ovens than half-million dollar real estate. Scary.

Number 7: Skimping on Services: Trying to do without title insurance or inspection is a recipe for disaster. I've said this before, but title issues really do happen, and it's not always with the person who may appear to be the current owner. Ditto the inspection. I don't think I've ever had a property where the inspection didn't reveal anything I didn't know about the property. I've had the stuff the inspector found be trivial many times, but never non-existent. Here's one thing that seems to be a rule: if you're getting a good bargain, there will be something you want an inspector's opinion on before the sale is final. People understand cash, and many don't understand the concept of insurable risk. By the time you join the ranks of those folks out half a million dollars worth of property and still on the hook for the loan, you may have a different opinion.

Number 6: Location: Backing out of your driveway onto the high-speed expressway, your spouse's vehicle is flattened by the bus returning this week's escapees to the maximum security prison a quarter mile down the road - past the explosives factory, the toxic waste dump, and the chemical plant. She's taken to the emergency room at the hospital for the violently insane across the street, and neither you nor your lawyer ever do come up with conclusive proof of what happened after that when the airliner landed short of the runway. Seriously, there are many things that can rule out a location, from the above through several milder forms of ambient environmental issues, down to misplaced improvements. You might be able to move a building. Nobody has ever figured out how to move the land it came on.

Number 5 The Loan: The only way to qualify for the dollar amount you need is to take an unsustainable loan or a loan that is guaranteed to self-destruct. I'd like to be humorous here, but this is somewhat less funny than the most politically incorrect joke I've ever heard, let alone what I'm willing to print here. Betting on rising values and falling rates to enable you to refinance more favorably is literally putting your home and your future on a craps table. This leads into-

Number 4 Didn't Adhere To Budget, and not having a known budget in the first place is the ultimate case of this. I've written at least one two three articles directly upon the point of figuring how much you can afford. Figure out your budgetary limit first, and shop by purchase price, not payment. This isn't to say you have to spend the maximum, but the worst ways people shoot themselves in the head (not the foot) is by falling in love with the property that's too expensive for what they can really afford. In How to Effectively Shop for a Buyer's Agent, I tell you to immediately fire any agent who wants you to look at a property that cannot be obtained within the budget you tell them about. The asking price can be a little higher than your limit, with the understanding that if you can't get the price down that far via negotiation, you're not interested.

Number 3 Assuming Something That Isn't True: Josh Billings was correct. It's not what you don't know that gets you - it's what you know that ain't so. I've been the unwitting victim to this, and I've seen enough other transactions to have come to the conclusion that people who deal in real estate without an expert fall into two categories: Those who know they got taken, and those who don't realize it yet. There are so many tricks and traps that get played upon the unwary that there is literally no way to write about all of them because new ones are invented continuously. You have to be someone who deals with these issues every day to have a prayer of realizing the pitfalls of some of them. Consider that if some trick motivates a buyer to pay 10% extra for a $500,000 property, that's $50,000 extra in the seller's pocket and out of yours. I've learned to question everything, and to ask, "What are the possible explanations for this?" Unless you're an agent yourself, you probably wouldn't believe the grief this saves my clients.

Number 2 Failure to Plan: A good agent has contingency planning in effect for everything, and those plans don't include permanent vacations in countries without extradition. If you're seeing all this stuff for the first time, how likely is that to happen? Even the second or the third? The reason I do so well for my clients is that I've got a solid plan from the time they contact me for the first time, and I have plans to deal with everything I don't control. This includes everything from if they get their hearts set on exactly the wrong property to negotiations before and after the contract to what happens if the inspection reveals something major, and how to lay the groundwork in case stubborn negotiating partners don't see it may way, or the universe decides to jump in with an unpleasant surprise . If you don't have this sort of plan, may I suggest you hire someone who does. Because failure to have a plan in place will cost you large amounts of money.

Number 1 Not Having a Strong Buyer's Agent. This is the first thing you need to shop for, before you so much as look at online listings. Have at least one in place before you look at any property, even (especially!) new development. You want one who's going to go digging for both good and bad. There is no such thing as a perfect property, because if everything else is perfect, the price certainly won't be, and if you're only willing to settle for the perfect deal, you're either wasting your time or asking someone to take advantage of your ignorance. If you use the seller's agent, they have a fiduciary duty to present that property in the most favorable light. Given the choice between an agent pretending problems don't exist until the small print disclosures and an agent who fails to do their legal and contractual duty, which would you choose? If you don't like this choice, then you want to apply the information in How to Effectively Shop for a Buyer's Agent. Having a good buyer's agent will make more difference than anything else in your real estate experience.

Caveat Emptor

Original article here


Over five hundred years ago in Europe, there was a con game that was more practiced than any other con game in the history of the world. It was simply the thing to try on the new rube in town. Someone would claim to be selling a suckling pig in a sack ("poche", from which we get "pocket" as the diminutive, as well as "pouch"). You have to understand the situation back then to appreciate what was going on. Suckling pig was tender, delicious meat, the sort that the average person of the time might only eat a few times in their life. Perhaps never, if they were poorer than average. It was highly sought after, and commanded quite a price, in terms of the average person's wages.

In reality, what was in the pouch wasn't a pig at all, but rather a cat. Most modern Americans don't realize this, but "roof rabbit" was eaten back then, because the alternative was often starvation. Before potatoes were brought back from the New World, Europe did not find it easy to feed its population. Nonetheless, I'm given to understand cat meat is nasty disgusting stuff, a food of last resort, because cats are almost 100% carnivores. However, the victim of this scam didn't usually get to eat the cat, either, because they were expecting a pig, which was not nearly so nimble. As a result of this, when they opened the sack, the cat would escape. This con gave us three phrases that are very popular today: "Let the cat out of the bag," and "left holding the sack," as well as "Buy a pig in a poke."

So what if prospective buyers have a hard time viewing a property?

This isn't 500 years ago. People that have the financial resources to buy real estate in the United States today aren't likely to be that trusting. If they were, some alleged Nigerian millionaire would have relieved them of those resources. In fact, in advice given since at least 1530, people have been advised ""When ye proffer the pigge open the poke."

Why? Because if you don't, people are going to presume it's a cat (at best), and they're only going to offer what cat meat would be worth to them, which may not be anything. But if you show them that there really is a delicious suckling pig in the sack, they may be willing to pay the premium prices that suckling pig - or a beautiful turnkey property - commands.

I don't know how many times I've gone over this with clients. People aren't looking for reasons to buy your property, they're looking for reasons not to buy your property, and, "They don't want to let me look at it," is more than sufficient reason to lose interest.

Does that have anything in common with the educated pig buyer? You bet it does. They wanted to see the pig, otherwise it was only worth the cat price (i.e. nothing unless they were starving, and then not much).

The entire process of real estate has evolved with inspections, appraisals, etcetera is precisely because the information possessed by the parties at the time of the contract is asymmetrical. That's fancy talk for the seller knows more than the buyer. The entire viewing and inspection idea has evolved from this basic fact, and the need to remedy most of the imbalance of information.

But if prospective buyers have a hard time being allowed to see the property, they are not going to make good offers. The idea is that there's probably a reason that seller won't let them look at the property, and they're most often right in that presumption.

Every time I start looking through MLS for property that might suit my buyer clients, I run across several of the stupidest ideas in real estate. I can handle one and usually two hour notices, but when someone asks for four, they're not likely to get it. I've got someone who wants to go look at property now, or wants me to go look at property now and get back to them on it, and I'm usually trying to shoehorn a few extras in while I'm in the neighborhood. If I can see your property, I might think it's worth my clients attention. If I can't, I definitely won't.

But four hour notices aren't anywhere near the worst: 24 hour notices are at least as common. In a way, I understand. Tenants can legally require 24 hour notice, but it's to my listing clients advantage to come up with some reason to cut that as far as possible. What are the tenants paying, $2000 per month or so? Offer to rent a storage locker for them and rebate some rent money, and your average tenant is going to agree so fast your head will spin. This kills the "I'm worried about them stealing my stuff!" angle as well. Always be ready and willing to show, and since every day the property doesn't sell not only adds carrying costs but means a (statistically) lower sales price, the money you spend generating cooperative tenants is a fantastic short term investment, better than anything short of a jackpot lottery win, and a lot more dependable.

That's not the worst, though. That dishonor goes to "property shown with accepted offer." Here we go with the cat thing again. The question that goes through my mind when one of my buyers asks about one of those is, "How bad could it be?" Why that question? Because the worst case scenario is precisely what the property is worth until the seller opens the "poke" and shows us the "pigge" instead of the cat or worse. Contingencies aren't going to cut it. Contingencies are for when you know a little bit and want to know more. In this instance, the buyer doesn't know anything, because they haven't seen it. The fact is that in the absence of any observational evidence, I figure there's a reason why the seller doesn't want us to know, and negotiate accordingly. Mind you, if you're willing to take a blind risk this can generate a fantastic bargain at the right time, with a seller who's ready to listen to reason about the effects of this upon value. But most aren't.

I can't blame the seller who doesn't understand this. The fact that they're clueless on this point is evidence of agent failure. This is one more way that agents "buy" listings and hurt their clients. Failing to make the client understand that showing restrictions lower perceptions of value as well as sales price is a major agent failure. Because the agent does not make certain the client understands the way that buyers approach properties, that agent is failing in their fiduciary duty, and their client will end up paying more money in carrying costs as well as getting a lower sales price because of it.

A while ago, I wrote an article on Top Ten Reasons Your Home Isn't Selling. It's no coincidence that talking about real estate in this context explicitly hits the three biggest reasons why real estate doesn't sell. Not only is it a direct instance of problem number three ("Showing Restrictions"), but by restricting showings the property becomes less valuable ("Price") and highlights a major shortcoming of the listing agent. And since these folks have won gold, silver and bronze medals in the "shooting yourself in the foot" event, may I suggest that after some appropriate time has passed, such a property from such a seller may become a very lucrative desperation mine?

Caveat Emptor

Original article here

One of the questions we ask all the time is whether to do your financing as one loan or two loans. Until comparatively recently, one loan was the default option, but people have been learning that splitting their home financing up into two loans can save them significant amounts of money. Unfortunately, this was just in time for second lenders to get burned by the loss in values. As of this revision, currently no lender that I'm aware of is funding second mortgages over 90% CLTV. When this changes, I'll go back to preferring two loans.

There is significant resistance to the idea of having two mortgages on the part of some people. I have never had a conversation where somebody came out and said why they didn't want to split their mortgage into two pieces, but I can offer some hypotheses. Two loans is two sets of paperwork, two checks to write, twice as much paperwork to fill out and twice as many things to keep track of. If I can't show them concrete benefit, they don't want to do it.

In the cases where equity is or is going to be less than 20% of the value of the house, this is not difficult. Sometimes if the client is in a subprime situation anyway, a loan between eighty and ninety percent can sometimes be marginal, but loan amounts at or above ninety percent of the value of the home are pretty much universally better as two loans.

To illustrate why, let us consider a $300,000 home with a $300,000 loan. Let us posit that your credit score is right on the national median (720), and we desire a Full documentation 30 year fixed rate loan for the primary loan, and a thirty day lock, and that this is purchase money.

When I originally wrote this, I used a price sheet on a random "A paper" lender from my deleted files a few days old, and priced accordingly. I'm retaining those numbers even though they are no longer applicable except as an illustration. Since A paper price sheets change every day, this is intentionally stuff that is based upon outdated rates, used as an example lest somebody in the Department of Real Estate otherwise construe this as a solicitation. Furthermore, I was pricing at "par", no discount or rebate, so no points, to create a real comparison at the same cost. It wouldn't be a valid comparison if I was pricing a loan package that took two points against a loan with all closing costs paid.

If we priced it at par when I originally wrote this, this would have been 6.375%. To this would be added a charge for PMI of about 2.25% on the entire value of the loan, making your effective rate 8.625%. Furthermore, the PMI component is not deductible. Your payment is $1871.61 plus $562.50 PMI for a total of $2434.11, or which only $1593.75 is potentially tax deductible. If you want to make it deductible by using lender paid mortgage insurance, the payment goes to $2333.36 with potential tax deductions of $2156.25, so that's a benefit right off, but you then have to actually refinance in order to get rid of PMI as opposed to having it removed administratively or by simple appraisal if and when your home value appreciates sufficiently. Nonetheless, most people do refinance so I'll assume this is what you do.

Now let's price it out as two loans. Par is 5.875 percent for the 80 percent loan. Doing the second as a 30/15 gives a rate of 8.75. This means it's thirty year amortization, but the balance is due in fifteen years as a balloon - so you either have to pay it off by then or refinance by then. Nobody does 30 year flat fixed rates on 100 percent seconds at any kind of decent rate. Better to do is as a 30/15 second. Doing it as a variable rate home equity line of credit gave a rate of 8.75 also.

The payment is $1419.69 on the first, fixed for thirty years, and $472.02 on the second. Total payment $1891.71, potential tax deduction $1175.00 plus $437.50 for a total of $1612.50.

Comparing the one loan versus two loans directly, and assuming you're in the 28 percent marginal tax bracket with standard deduction of $9600 and assuming your other deductions of $5000 and you did get to deduct 100% of mortgage interest, for one loan you get a tax savings of $5975, plus principle paid down of $2211 - but your total payments are $28,000.32 over the year. Net total cost to you is $19,814. For splitting it into two pieces, you get tax savings of $4130, remaining principal paid down of $3448 total, and total payments is only $22,700. So your net total cost is $15,123 - a savings of $4691, plus you owe $1237 less next year, on which you will pay $74 less interest.

So you see, there are concrete advantages to having your loan split into two pieces.

Loan officers, however, typically get paid either zero or a small flat fee for the second mortgage, whereas they get a percentage for the first mortgage, so they may be motivated to sell you on doing one loan to increase their compensation. As you can see, this is not usually in your best interest. Matter of fact, if your loan is above the conforming loan limit (currently $417,000 for a single family residence) it can be beneficial to you so split it into a conforming loan and a second for that reason alone. If you shop around, you increase the chances of finding a loan officer who will do the loan from the point of view of what works best for you, rather than what best lines their own pockets.

I must stress that at this update, second mortgages where the total of all loans is more than 90% of the value of the property are not being offered anywhere that I am aware of. But that will change eventually, and when it does, two loans will likely once again be the superior option.

Caveat Emptor

Original here

There are a fair number of specific helpful suggestions to make in helping you purchase a home. All of them revolve around the loan. Let's face it, the loan is far and away the most hypothetical and uncertain part about most real estate transactions. If there is a non-loan related problem, chances are that you really didn't want to buy that particular property anyway. Most of the time, non-loan problems mean that you would be buying into trouble, and nothing but. Unless you have specialized knowledge in sorting out that particular problem, it's likely to be more expensive than any money you saved through reduced purchase price.

A poor loan officer can always botch a loan, of course, and even the best may not be able to push it through if you are a marginal enough case. So how do you improve your case standing?

The first thing is to get a credit score above 740. You can get most of the same loans with scores as low as 680, but there is a cost differential now where there wasn't before. If you're there already, keep doing what you're doing. Even if you're not there yet, it's easier to improve than most people think, although it takes time. Make all of your credit payments on time, especially any mortgages and rental payments. These are the most important things to mortgage lenders. Note that even though you may make a payment a few days later than it is due, and you may even pay a penalty, but the lender will not report it as late until 30 days later, and that's when it counts as late to everyone else. In order to qualify for the A paper loan, at the top of the market, the general rule is no more than two 30 day late payments on revolving debts within two years, or one 30 day late on mortgages or rent.

Most lenders want you to have three lines of credit, one or more of which have a twenty-four month credit history. Not all of them need to be still open, but if you don't have at least two open lines of credit, a given reporting bureau may not report a score, and if you don't have two different scores from the three big bureaus, it's very hard to find a lender in the current environment. Even during the Era of Make Believe Loans, only a few sub-prime lenders would give people without credit scores a loan - and they're mostly out of business now. The longer your particular lines of credit are open, the higher your score will be. So if you keep opening new lines of credit, expect your score to be low.

Revolving credit balances should be kept low, less than half of their limit. There is a significant hit if your credit line is more than half its limit, and the higher you go, the worse it is. If you have two $5000 limit credit cards, it is much better to have $1500 on each than $3000 on one and nothing on the other. It make even more difference if you have $2000 balance on each as opposed to $4000 on one. And if you're one of those people who keeps doing the "transfer your balance to a new card and get zero interest for six months" thing, it will really impact your credit in a negative way, because if your credit balances sum to $8000, that's usually what the limit on the new card will be, and so you've got a brand new credit card that's maxed out, which is a major hit on your credit. Furthermore, the opening of new credit accounts itself impacts the credit score in a significantly negative way.

One of the best ways to improve your credit score relatively quickly is to use your credit regularly but pay it off every time you get a bill. Once per month, charge something small that you know you will be able to pay off when the bill arrives. Something you'd buy anyway, with cash if you didn't have the card. This may still take some months to improve your score, but better months than years.

The next way to improve your ability to afford a house is not to have any large monthly payments. The best rates are for full documentation loans, where you prove to the lender that you make enough money to be able to afford all of your payments. "A paper" lenders will allow you to have total monthly payments of 38 to 45 percent of your gross monthly income, depending upon loan type. Some sub-prime lenders, back when we had them, would go to 55 or even 60 percent. If your family makes $6000 per month, this means that total payments can be up to $2700 for certain A paper loans, up to $3300 for sub-prime and still qualify full documentation. This also means that the more income you can document, and the less money you owe in payments, the larger the loan and therefore more expensive the house you can afford.

This number includes not only the amount of the mortgage, but also the property taxes, homeowners insurance, association dues (if applicable), and anything else you may need to pay in order to keep the home, as well as car payments, credit card payments, and any other debts you may have. This means that somebody with other payments of $80 per month can afford a lot more loan, and therefore a lot more house than somebody with other payments of $900 per month. This should be intuitive, but you'd be surprised how often people don't realize it. It has become something that cannot be gotten around with the death of stated income loans, and for most people, I'd have to agree that's a very good thing. There were some people for whom Stated Income loans were appropriate, even necessary, but they were abused so badly that regulators were correct to remove them. It was the least bad course.

The final thing that is helpful is a down payment. The larger your down payment, the less you have to borrow. Lending money is a risk-based business. Up to a point, the lower the ratio of loan balance to value of the property will help you get a lower interest rate and more favorable terms, because the bank will be more certain of getting all of their money back. Even when we had conventional 100% financing, a 5% down payment was better than none. 10% is better than 5%. I have one way to get 95% conventional financing now, but it's not competitive for people who have 10% or more. The first 5% makes the most difference (that difference currently being from "can't do it unless you're eligible for VA" to "there is a way"), but every bit helps. What is likely to be even more important is that with a lower rate on borrowing less money, your debt to income ratio also improves because your payments are less. Of course the larger your down payment, the less you have left over for other purposes. It seems to be a phenomenon today that people don't want to risk any more of their own money than they have to. 100% loans (except for VA loans) cannot be done be done right now, but I still get people who won't buy without one. As I keep writing, the loan market controls the real estate market, so when 100% loans make a comeback, expect the market to rise spectacularly. You'd really rather be in a property before that happens. People who make a habit of saving money are always in a stronger position that those who do not.

Caveat Emptor

Original here


For at least the last thirty years, I've been hearing "affordable housing" advocates yammer about the high cost of housing, and how working families can no longer afford "decent" housing, which they apparently consider to be the three or four bedroom, two bathroom detached home. They go on and on about what is necessary to create more of this type of housing and our "moral obligation" to create more of it. Against this, we have their actual actions, politically allying with forces that make housing more expensive by constricting the supply.

Newsflash: Making business difficult for suppliers of a good does not lower the price nor improve the availability of that good.

Who does artificial constriction of the housing supply hurt?

Certainly not developers. The price of the actual permits, last I checked was in the $20,000 per unit range. But the decreases and constrictions and delays in supply add something like $160,000 to the price tag of that same unit. The people who want housing are here. If the demand is there and the supply isn't, what does that do to price? Oh, those poor developers! They're being hurt to the tune of $140,000 additional profit for each unit they build, and the maze of regulations protects them from start-up competitors as well. Please, Brer Fox, don't throw me into that briar patch! To stay within the genre, trying to harm developers in this sort of fashion is a tar baby for those trying to do it.

It sure as heck doesn't hurt the wealthy, either. They can afford housing. Matter of fact, the constriction of supply makes their real estate investments appreciate more rapidly. Increasing demand and regulatory brakes on the ability to furnish supply is pretty much the recipe for rising prices. Furthermore, this encourages speculation, driving bubbles like the ones that we just went through. It wasn't the wealthy that got hurt by that bubble. It was the folks who could just barely qualify and the people who stretched more than they should have or told fibs in order to qualify. Who was that? It certainly wasn't the wealthy. High end housing was the first to start sitting longer, because the wealthy weren't worried about getting priced out.

It certainly doesn't hurt current owners, who ride the price wave in the same manner as the wealthy investors, if not quite to the same level of profit. Anytime the ratio of demand to supply rises, so does price, and anyone who already owns benefits. These are folks well-established in life for the most part, along with high income individuals and those who inherited wealth. Sound like anyone who needs to be getting what is effectively a public subsidy?

So who does keeping the supply of housing low hurt the worst?

The young. People just getting started out. People who won't get started for another fifteen years, by which time current housing prices will seem like the Golden Age. Every time there's a new household but no new housing, the price goes up. We're going to keep gaining new households, and I don't see enough new housing on the horizon. You do the math.

Transplants coming from where housing is cheaper. Even if they own a $100,000 house free and clear, that's only a 20% down payment on $500,000. Lots of San Diegans seem to have an attitude about transplants - but most of them are themselves transplants. The question of "who is a transplant?" is very much a question of where you draw the line. Speaking as a second generation native, my take is let's just trash the whole transplant prejudice thing. People want to live here. Providing they're in the country legally, they have the same rights to do so that my family and I do. We can create the housing for them, or we can create shortages, which lead to higher prices and unaffordable housing for everyone.

The working poor. Yes, the very people the affordable housing folks claim they want to help. But keeping the supply low, delaying the arrival of more units onto the market while keeping others from happening at all, is a recipe for rising prices. A couple making $15 per hour each makes just over $5000 per month, which translates to about $2300 they can afford for housing and all their debts. Assuming they have no other payments, that's a purchase price of a little over $300,000. That might buy a severe fixer detached home or a condo in decent shape. What happens the next time they need to buy a car? Unless they're one of the rare folks who still manage to put money aside every month, they have to consolidate the car loan with their mortgage in order to afford it. Ditto any other sudden expenses. This is the opening movement to a symphony of financial disaster.

I know that the political alliances in this country have gotten completely nonsensical, but it's past time for affordable housing advocates to break away from the same party that houses the anti-development and anti-business activists. Yes, ACORN, I'm looking at you (among many others), with your "retain voter registrations of your favorite party, trash registrations of their opposition" drives (blatantly illegal, by the way, and this isn't the only such documented instance by any means). Never mind what's the matter with Kansas, I want to know what's the matter with affordable housing activists. By any reasonable measure, they're making the problem worse with their political alliances, by supporting the agenda of their natural antithesis. If their game is to actually make housing more affordable, most of them are miserable failures at what they say they're working towards. What their actions say they actually want is tribute in the form of well paying government sinecures so they can continue to make the problem worse while pretending to help a small fraction of the people they financially maim.

Of course, if the game is to make the problem worse, so that people have no choice but to deal with these organizations as supposedly the only hope of the working poor, thereby increasing their own power, these organizations are doing just fine. Trojan horses for empire building are one of the classic recipes for political success. BUt they certainly don't help the people they claim to want to help.

Caveat Emptor

Original article here


With a few lenders starting to loosen their requirements slightly in San Diego, it's becoming increasingly obvious that the bottom is behind us. However, the issue has now become, "I don't have much of a down payment. How do I buy now so I can get into something before the market goes crazy again?"

There are several programs that exist that enable buyers to lower their down payment requirements. All of them have their limitations, but if you can jump through their hoops, they remove the need to save for a huge down payment.

The first of these are VA Loans. Right now, VA loans are the magic bullet. No down payment requirement, and you can even finance closing costs up to 3% on top of the purchase price right into the loan. Furthermore, there is not only no PMI, but the VA only charges a half point to fund the loan, and even that is waived with 10% or larger disability. Additionally, the conforming limit with VA loans is no longer applicable - I've had wholesalers tell me they would accept VA loans up to (potentially) $1.5 million dollars. There are no income limits, either, but you do have to qualify full documentation. However, because there's no PMI, no need to split loans, and no ongoing insurance charges for the loan, by debt to income ratio people with VA loan eligibility can afford almost ten percent larger loans than people applying for FHA loans, and about twenty percent larger loans than high loan to value conventional conforming loans (Below 80% loan to value ratio, conventional loans will most likely have a lower tradeoff between rate and cost). The biggest drawback is that you have to have served in the military or be serving, something comparatively few people do as opposed to former times. San Diego is a military town, and I've only dealt with one VA loan in the last year or so. It was formerly true that FICO credit score was not considered in VA loan qualification, but this has changed. How low a credit score they will work with is up to individual lender policy. Some lenders want a minimum of 580, others won't talk to you unless you've got a 680. The higher their qualification standards, of course, the lower the rate/cost tradeoff they offer will typically be.

Many locally based first time buyer programs take the form of loaning you a down payment. If you're buying a $300,000 property and the city you're buying in will loan you $60,000 for the down payment (usually in the form of a silent second), then you only need a $240,000 regular loan, which leaves you with an 80% loan to value ratio, and you are then able to qualify for a classic conforming A paper loan on your property. The drawbacks of these programs are two. First, budgetary constraints. As of a couple weeks ago, all the local municipalities were out of money for these until the new allocation comes in (usually in the fall and spring). If there's no money left in the budget when you want to apply, you're not going to get one. Second, income limits. These all have income limits, which vary with the program and municipality. Since like all other government programs you have to qualify for these via full documentation of income and proving you make enough for the payments via income tax forms, this can disqualify you or severely constrict what you qualify for, and the various municipal governments do put other strings on these programs. Nonetheless, the Cities of San Diego, El Cajon, and Santee have these programs in place, as does the County of San Diego for unincorporated areas, as well as administering the same program for Lemon Grove, Imperial Beach, Poway, and many other cities. Like VA loans, because there's no need for sellers to contribute to these financially, buyers who use these don't necessarily end up paying for it in the purchase price of their property, or by a limited selection of sellers with the wherewithal.

FHA Loans are not, in their basic form, a zero down payment program. They will only allow up to 96.5% of the purchase price, but they also allow family gifts of up to 6% of the cost of the home. Furthermore, they charge a point and a half upfront and a little over half a percent annualized per year for financing insurance. The good news is that you're still getting a very low down payment loan with comparatively low cost financing insurance. This is a government program, so you have to qualify via full documentation of income, and many properties are not eligible for FHA financing. The FHA also keeps what is functionally a blacklist, so you can find out that because your real estate agent, loan officer, etcetera contributed to fraud some time back, this particular transaction is not going to fly FHA. The FHA does allow seller paid closing costs of up to six percent, but if you think you're not going to pay for this via increased sales price, I've got some beachfront land in Florida. That means higher cost of interest, higher property taxes, and less equity if you sell or refinance. Furthermore, not every seller is going to be willing or able to work with people who want seller contribution for closing costs.

Until the latter part of 2008, there were Down Payment Assistance Programs targeted at FHA loans, providing the 3% down payment via a reciprocal loan paid back by the seller at close of escrow, and although FHA was not the only loan type they worked with, it was the lion's share of what they did. Once again, not every property owner is going to be willing or able to work with these programs, and if you think the money that sellers furnish for these programs doesn't result in a higher sales price, I own a bridge in Brooklyn I'm willing to sell on very reasonable terms. More than the amount of the loan you get, because they're offering something not everyone can. You have to be careful to disclose everything to everybody in these situations, and the purchase offer and subsequent counters have to be written very carefully. However, these programs are now prohibited by the FHA, officially because the default rate was too high.

Seller carrybacks are comparatively rare right now, as few sellers have significant equity. The ones who do and want to sell are likely to be able to wait until things get better, and so most of them are. Asking for a carryback is a major request on a purchase contract, because if that seller loans you $X, those dollars are not available for them to use purchasing their next property, or whatever investment they wanted to put the money into - they're still tied up in this one. Sellers willing and able to offer a carryback can command premium pricing, even in this sort of market, because many buyers will have exactly two choices: buy this property, or don't buy anything. Those sellers agreeing to carrybacks are also assuming a significant risk of non-payment and ending up in second position on a non-performing debt, which can cause them to lose every dollar they have invested.

Finally, a few lenders are once again willing to go 95% loan to value ratio for conventional conforming A paper loans, where for a while there the down payment requirements were ten to fifteen percent. There will be PMI, you are required to qualify full documentation, and the limit is the "regular" conforming limit of $417,000 as opposed to the "jumbo conforming" or "temporary" limits. But once again, you can do this with basically any residential property that's not too expensive, and the seller needn't be willing and able to financially contribute to the loan. There are a lot of properties out there that FHA will not touch, no matter how helpful the seller is willing to be. As long as it's an inhabitable residential structure meeting requirements, conforming loans will potentially work - if you've got 5% down. Nor do they require that the seller be willing and able to help out. 5% down is not usually a huge amount. For example, a couple each borrowing $10,000 from retirement accounts (as generally allowed by the rules - check with your accountant or tax preparer) has a down payment of 5% of $400,000, which buys a pretty decent place nowadays.

As you can see, there are drawbacks to all of these, as well as advantages. You would be well advised to consider an agent who is also a loan officer, because everything from the initial offer onwards has to be carefully written to remain within the limits of what lenders will work with and will fund. More than once I've had people come to me forty-five days into a thirty day escrow where the only way to make it happen was start by renegotiating the contract. Since the sellers were completely frustrated at this point and just wanted out, needless to say it didn't happen. So there is a limit to the ability to repair incorrectly written purchase contracts. Nonetheless, these options are there, are available, and I have funded loans on them in the past. Given the current state of at least my local market and its likely state a year or two from now, making use of them can mean that you're going to end up much better off than waiting to save that down payment. If the market appreciates in value ten to fifteen percent between now and whenever you have enough for a "normal" down payment, you definitely didn't help your cause by waiting.

Caveat Emptor

Original article here


Quite a lot of the time when I view a property, I get requests for feedback.

Usually it's an automated email. Other times, it's some office assistant who wants to fax me a form which will "only take a few minutes of your time".

The point of these, and the various other methods that get used, is to shift the burden of the work they should be doing from the listing agent, which is where it needs to be, to other people. Basically, my competition is asking me to do their job for them. The only time I will respond to requests for feedback is if the agent involved will spend at least as much of their own personal time as it takes for me to provide the feedback. In other words, the agent - not their flunky - has got to listen to me talk, and then write it down themselves. If they start arguing with me, it's no longer a request for feedback, it's a sales call. But in any other circumstances, they're telling me this feedback is not important enough to justify their time, so why should it justify mine? I don't have any responsibility to their client; they do.

The point of both of these, and three or four other methods that get used, is to pressure their listing clients to drop the price. Many offices have multiple employees gathering this information, the idea of which is to get the client to lower the price because the agent didn't do it in the first place. They get the listing by promising a price they know they can't get, and then use the feedback information to hammer the client into reducing the price. This is actually two cardinal sins in one action, and I'll be damned if I'm going to help these slimeballs not only hose their clients, but also take listings away from good agents doing their fiduciary duty by failing to do that duty. This should also tell you how good an agent who uses their great feedback system as a major selling point is likely to be. Agents who know the market don't need a feedback system.

This whole rigamarole is easily avoidable by the agent doing the job they agreed to by accepting the listing.

Here's the way it should work: Agent knows the market. Agent persuades listing client to put an appropriate asking price on the property before it hits the market. Listing gathers plenty of traffic, who like what they see. Appropriate offers come in, negotiations ensue, a contract is agreed upon, escrow is opened, and the transaction is consummated. Everybody emerges happy. Time elapsed: under thirty days from listing to contract, and 45-60 more to completion (less if there's no loan). The only hard part is the pricing and staging discussions with the client, at least a week before it hits MLS. By accepting the conflict then and doing their job in the first place, the agent avoids a lot of problems that will happen later if they do not. Furthermore, the client emerges from the successful transaction not only happier, but objectively better off in that they get more money as well as a quicker transaction.

Here's the way these problems start: Instead of the above situation, an agent doesn't know the market the property sits in. Maybe they work across town in a different suburb. People decide to list with an agent whose office is near their office for convenience. Unfortunately, that's twenty or thirty miles away from the neighborhood they live in, and the agent might be vaguely aware that the area the property is in actually exists. They have no clue what the market in that neighborhood is like. An agent from twenty miles away is one of the best predictors I know of a mis-priced property (at least in urban areas like mine. The situation changes in rural areas). They have no idea of the market in the immediate area. I was just in a very nice property today priced $110,000 more than a very comparable property two blocks away. It's got an extra 3/4 bath, the comparable has a nice California room. The comparable has been on the market for months, and it's only $30,000 overpriced. This should give you an idea how badly overpriced the newer listing is. The listing office is way up in Carlsbad. Big Mistake on the part of the homeowner, and it's going to cost them.

More importantly than market knowledge, the agent didn't do the most important part of their job.

Here's what happens: Homeowners are usually quite proud of their property, and they understandably want the highest possible price for it. They see high asking prices, and they think they should be able to get them. Few members of the general public understand the relationship between the market, asking price, and sales price, not to mention how long it takes to sell. So when they interview agents, they're looking for the agent that will promise the highest sales price.

Here's the issue behind that: How does the client know if the price an agent says they can get is real and deliverable? The answer is that they don't. Ladies and gentlemen, I get paid on commission. I'd like to be able to get $2 million for a tiny condo in The 'Hood. The fact is that buyers choose to make offers upon the property that appears to be the best bargain for their needs and desires. The entire idea of listing and marketing the property is to attract the attention of the buyer whose needs and desires that property meets better than any of the available competing properties. Yeah, there's an element of seducing the buyer into liking the property more so they will pay a higher price. But like a lover, an agent can never seduce two people at once, so if they're seducing the seller they're not seducing the buyer. Not successfully, anyway.

So what a bad agent does is promise whatever sales price they think will get the owner to sign that listing contract. As soon as they've got the contract, they start planning ways to get the owner to decrease the asking price.

What's the harm in that, you ask? Those buyers they are trying to appeal to look at the property online. They see that too high price, and decide they're not interested. The buyers who do come by see that they can get something better for the same price so they make offers on the other property. Thirty days out, pretty much everyone on the market has decided they're not interested, and new buyers coming onto the market see that it's been on the market for over a month and their first question is, "What's wrong with it?" They don't want to go look at it. A good buyer's agent like me might be able to talk them into seeing it if the agent sees a bargain, but they don't see a bargain because it's overpriced. In order to lure the buyers back, you've got to cut the asking price to below what you could have gotten if you had priced it correctly in the first place. Otherwise, you're waiting for months until people like me think you might be willing to negotiate to something advantageous for my clients, and that's going to end up even worse for you. Meanwhile, whatever reason you wanted to sell the property is on hold. Being hammered by your agent to lower the price, you get so desperate that you'll take offers you should have trashed when the property first hit the market.

Here's the cute part, if you're one of these agents: Because these properties eventually do sell, and lots of people fall for this trick, that sleazeball looks like a "top producer." They've always got a large number of listings in the pipeline, Waiting for Godot. When one of them finally has the price dropped far enough, it sells. Since in the production metric used by the real estate industry, they are getting their 3% of lots of different properties, they're doing great for themselves and it appears that they're successful - precisely the sort of agent many people look for. In reality, their clients end up hurting. A freshly minted licensee who approaches the listing correctly will reliably achieve results superior to this.

Unless you're basically an agent yourself, the pricing discussion should be difficult. There is a fundamental tension between the desire to get the highest possible price for a property and the need to price it competitively with other properties. If a prospective listing agent does not understand this, ditch them. If this tension is resolved easily, there are two possibilities. Far more common of the two is that the agent isn't doing their job. They could be ignorant of the market, or they could be seducing you into a listing contract by talking a Bigger Better Deal that they cannot deliver upon. There really isn't much difference. The other possibility is very rare around here, although it was more common when prices were going up like crazy: The homeowner doesn't try to overprice the property.

How can a homeowner deal with this issue? The only foolproof way is to really understand your competition - the other comparable properties for sale in your area. You also need to know about the properties that have actually sold, because it's not uncommon that some idea of inflated value creeps into a neighborhood, and all of the properties sit on the market unsold until they figure it out, while the next tract over is selling a little bit better. Since it's unlikely that the new owners are going to allow you to view their recent purchase, you're pretty certain to be at an information disadvantage.

Keep in mind, however, that the pricing discussion should be difficult. If it's not, there's probably something wrong. Furthermore, unless you're Martha Stewart, the "what to do so it shows well" discussion is likely going to be uncomfortable as well. Remember that it's for your advantage. I'm trying to make you more money, faster, by making your property more appealing to buyers. If the agent doesn't tell you how to clean it up and get rid of the clutter and make certain it stays presentable, that tells you that everything is either already perfect (unlikely) or that they're shying away from telling uncomfortable truths you need to hear. This is never a good sign in an agent.

Avoid listing agents who don't work your area consistently. In a city, if their office is more than ten miles away from your property, they're not likely to be a good agent for you. I am willing to list properties outside my area, but I am very upfront that it's going to take me a few days to size up the competition and the recent sales before I'm ready for the pricing discussion. An agent from further away who doesn't make a point of telling you this is dangerous to your pocketbook. My website tells people where I make a habit of working, and by extension, where I do not. Theirs should do the same thing. My website also talks about bargain properties I find in La Mesa and the nearby communities where I work. This is further evidence that I really do work that market. Look for similar evidence from any agent you consider.

The pricing discussion is important, and getting it right in the first place will reliably put more money in your pocket sooner than overpricing it. The agents who won't face the uncomfortable task of persuading you to price the property properly in the first place are not agents you will be happy with later. Keep searching until you find an agent who will work your best interests, even if it risks irritating you.

Caveat Emptor

Original article here

One of the most common questions in real estate is "What is this property really worth?"

The easy answer is the same as the deepest, most profound one I can come up with, "Whatever you can get someone to pay for it." It's the answers in between that you've got to watch out for. The appraised value is simply a guesstimate based upon the sales of similar properties. But there is no such thing as an identical property. A Price Opinion is just a guesstimate based upon what an expert thinks might be an appropriate asking price. Even an accepted offer means nothing if the people making it back out, change their mind, or can't qualify.

Now it's no secret that some people can get folks to pay more for real estate than others, and others can bargain the price down better. But the bottom line is that if it's not worth what you paid, why did you buy it? If it's worth more than you sold it for, why did you sell it? There isn't a good answer to either one of these questions. It's worth what it sold for. Period. The only possible exceptions are when there's a distress sale, and even then, the bottom line answer reads, "Under the circumstances, that's what the property was worth," which is identical to what that answer is in all other situations.

This goes for the other side of the coin, failed transactions, as well. Why didn't you sell to a good offer? Why didn't you offer more? Because it wasn't a good offer, or because it wasn't worth more, to that person.

If you walked up to the average person on the street and offered to sell them a parcel of land on which there's a home, anywhere in the US, for $5 or $10 or $100 or even $1000, most people would take you up on it sight unseen so long as you could deliver clear title. I can safely say that the average residential property in this country is worth at least $1000 to every legal adult in the country. Why then all of these elaborate rituals of listing contracts and MLS and inspections and offers and escrow and title insurance for the transfer of property?

The answer lies in the fact that sellers want to get the highest price possible. Ideally, they want to find the one buyer who will bid more than anyone else on that particular property, because the property is worth more to them than anyone else.

To find that one perfect buyer is actually fairly rare, in my experience. But you can certainly find buyers willing to pay more than $1000, in most cases. How much more? Well, that depends upon the property and the buyer, how widely and effectively your marketing net is cast, how effectively you negotiate, and other, lesser factors. As with all investments, it's a trade off and sometimes the money you'll get from a better buyer isn't worth the money you spend finding them. Knowing stuff like that is part of what I get paid for.

It does you no good to accept the offer of someone who can't qualify for the loan they need in order to purchase the property. It does no good to make such an offer. How do you tell, as a seller? Make it a part of your counteroffer that the deposit revert to you the day after contingencies expire. That's not friendly, and it may lose you some potential buyers, particularly in a buyer's market, but it's the only way to be sure. Prequalification and pre-approval letters are basically used paper, for all they really mean.

There is nothing wrong with saying, "My property is worth $X" as long as you understand that it's shorthand for "Similar properties in my area are selling for about $X". Because your property is never worth $X. Nor are any of mine, Donald Trump's, or anyone else's. It's not worth that unless you sold it for that, and if you sold it, it's not yours anymore, is it?

People get caught up in the damnedest ego blocks on comparatively few dollars. You put the property up for sale because you wanted something other than that property, right? You're out there offering money for the property because you think you can make more money with the property than with the money, right? Or that you'll be happier living there than any other property you can buy for a similar number of dollars? Trying to squeeze too many dollars out of the other side of the transaction can and often does leave you with no transaction, and no benefit at all. There is a thin line between hard bargaining that gets you a good bargain, and overplaying your hand that gets you left out in the cold.

Don't get left out in the cold.

Caveat Emptor

Original here

This question:


What real estate office can I trust to help buy below market house in (location) California?

brought someone to the site and I have not previously written a real answer to the question.


The short answer is "nobody."

This doesn't have to do with trust. It has to do with the facts of life and bad assumptions.

What is the definition of market price? It is the price at which a willing buyer and a willing seller exchange a property. In other words, what you buy it for is by definition the market price.

Everybody wants to buy real estate for less than it's really worth, just like everyone wants to sell it for more than it's really worth. Mathematically speaking, at least fifty percent of each have to fail, and the fact that you're even asking the question indicates that you have made incorrect assumptions.

Real Estate is not like stocks or bonds. No matter how big or how small your transaction, it's always a "one of a kind" transaction. Every property situation is unique. If you are selling, you need to find one buyer willing and able to buy that property for a price you are willing to sell. If you are buying, you need to find one property attractive to you where the owner is willing to sell at a price you are willing and able to buy it at.

If you're looking for a quick monetary profit, you have to change the property's position in the market. You have to make it more desirable for buyers. That takes cash, the willingness to work, and finding a property with room for profitable value improvements.

This is not to say that the general market is irrelevant. If someone is pricing a more desirable home lower than you, you've overpriced your property. If the identical condo next door to the one you bought sold for ten percent less, you probably overpaid. But it's not for nothing that the mantra about the three most important things in real estate being "location, location, and location." No two properties are ever identical. Think condos, even. Which would you rather have: The one right next to the parking lot, the mailboxes, and the swimming pool, or the one way in the back where you have to walk a quarter mile from your car, and further from everything else but have no disturbances? I assure you that a goodly portion of the population would choose the one you think of as less attractive. It's the choice of the individual buyer, and a real estate agent has to learn how to get the attention of the person who's most likely to be interested in that property.

I keep telling people that getting a good price at sale time is nice for both the buyer and the seller, but the really important thing for the quality of investment is your amount of time in the investment. Let's go back a few years. Homes in my neighborhood were worth maybe $180,000 at the time, and condos were worth maybe $65,000. Had people going around making low ball offers on everything. Offered maybe $55,000 for the condos, $150,000 for the homes. Nobody who wasn't desperate wanted to sell, of course, and that's just what they were checking for - desperation. Had they offered something vaguely reasonable, say $60,000 for the condos or $170,000 for the detached homes, they likely would have gotten a property. At least one group of these people ended up not buying anything. Fast forward five years. Those same condos were worth $275,000, and those same homes were selling for $500,000. If the thought of missing out on $210,000 profit for the condos because you couldn't make $217,000 bothers you, then you seem pretty rational to me. If, on the other hand, the thought of missing out on an extra $20,000 you're not going to get for the single family residence makes you want to just throw $330,000 base profit (tripling your money!) out the window, please go waste someone else's time.

This update allows me to make yet another point: those same properties are now selling for $150,000 for the condos and $380,000 for the detached homes. What's the difference? There are two actually. One is inventory. More people want to sell now, fewer people are willing and able to buy. The second is the loan environment controls the real estate market. When anyone with a pulse can get 100% financing, prices rise quickly because it's not real money to those buyers. When it's difficult to qualify for a loan, as it is right now, that holds the prices down. As a reaction to loan investor losses (aka closing barn door and adding five more after horse has already escaped), it's more difficult to qualify for a loan right now than any time since I have been an adult - thirty plus years. What happens to market prices when loan restrictions start easing back to some happier medium, as they will?

There is nothing wrong with desperation sales and offers that are desperation checks, so long as you are willing and able to then proceed to something more reasonable, or just as happy to move on. Nobody wants to sell to somebody looking to flip a property, but they do want to sell for a reasonable price. That's why the property is on the market. Somebody offers me (or my client) fifteen percent less than comparable market sales, I usually counsel my client to write something like "offer rejected. Why would I (my client) want to give you fifteen percent of my investment's value?" and append a list of comparable properties. Counter-offering just wastes time when the offer isn't even in the right ballpark. The ones who can come back with a reasonable offer want the property, or they wouldn't have made the offer. The ones just looking for the desperation sale aren't going to bother.

Now some potential buyers are only interested in desperation scenarios. I've got a couple clients like that. That's fine, but you're going to work awfully hard and put in a lot of offers before you get one, and the ones with the most potential for quick profit are going to be the ones where there is a lot of work to be done. Additionally, right now the market just won't support CondoFlippers Inc.

Yes, I believe in hard bargaining. Judging from evidence I see around me, I'm one of a small percentage who does. But I'm willing to come from a reasonable starting position. As I've said before, bargaining room is nothing. Bargaining strength is everything. I do love it, though, when my clients decide they want to put an offer in on a discount agent's listing, because the client I'm acting as buyer's agent for is going to think I walk on water when the transaction is over, while the sellers are going to find out first hand the truth of the adage "You get what you pay for".

Lest you think that your negotiation discount equals your profit, it isn't. It's a small part of your profit. Let's say you get the property for $250,000 or you won't buy it at all, even though comparables are selling for $275,000. Let's say you intend to flip for $290,000, not that that's going to happen in this market, but let's say you succeed anyway. Your net is something like $268,000, after spending $253,000 or so to buy, and you spent about $5000 making the payments on the mortgage even if it did sell right away (more likely, given the current realities, that you spend the entire "profit" on the mortgage payment!)

Now let's say, instead, that the market collapses twenty percent the day after you buy, down to $220,000. If you have a sustainable mortgage and bring in a tenant, your cash flow should be even or positive. Hold on to the darned thing for five years, and at historical seven percent average per year, the property is worth $308,000. Hold it ten years and it's worth $432,000 under the same assumptions. The first number gives you as much profit as the flipper even has a theoretical chance for, while the latter blows the flipper out of the water. Even after a price collapse, and because you've been in a sustainable situation this whole time, it really isn't critical how long the prices take to come back, because you're not under the gun of a deadline. So long as you have a sustainable cash flow, the risk is essentially nonexistent. It's when you have an unsustainable cash flow that you've got to worry. Say like, an empty unit where you've got to make the mortgage payment without rent because you're trying to flip it.

In fact, given a sustainable cash flow, unless property values collapse and stay down forever, the question is closer to when you're going to cash out and how much, rather than if. Southern California Real Estate has always moved in cycles. What's down today is up forty percent five years from now. The trick is being able to bridge the gap between now and then. Having the fortitude to buy when nobody else wants to, and sell when things are ripe for a fall, will make you more money than anything else.

If some of the above seems like I'm attacking the "bigger fool" theory of real estate, consider this: Somebody's always the last, biggest, fool in line, and until you find a buyer and consummate the sale, that person is you*. It should be an agent's responsibility to see to it that their clients aren't the only ones without a chair when the music stops. For all too many agents and loan officers, their thinking stops at the receipt of the commission check. I may not sell a house every day of the year, but my clients don't get foreclosed on. That isn't an accident.

Caveat Emptor

*- if you are buying a place to live, the bigger fool theory is limited in its application. You've got to have a place to live. If you never sell, it's not nearly as important what the property is worth. The only times the value of the property is important is when you sell or when you refinance.

Original here

There are many ways of suckering real estate consumers, and cash as an inducement to get people to swallow a raw deal is one of the most common.

From sellers (usually developers), "free" upgrades are one of the most common. They overprice the property by $50,000, and make you feel like you're getting a deal with "$10,000 worth of free upgrades" that really cost much less. In many cases, they're pre-installed and if you wanted to buy one without the upgrades, they would be unable to accommodate you. But if you're not working with a good buyer's agent who is looking out for your interests, you'll never hear about better properties offered for less.

From agents, they offer commission rebates or reduced price listing packages. But to pretend that these packages offer the same level of service as more expensive packages is ridiculous. If you're looking for a cheap MLS listing service, I've seen them for less than $100. But if you want someone to market your home, look for and attract the buyers you really want, or negotiate on your behalf, you are going to be extremely disappointed. When you are dealing with a strong sellers market like we've had for most of the last decade and don't care if your property sells for ten to twenty percent less than you could have gotten, discount listing services may be the way to go. If you are dealing with a buyer's market, if you have some issues with the property, if you really want someone to market it in such a way as to find your ideal buyer and get the best price, the more expensive agent who does more work is likely to get you enough more money to more than pay their increased compensation.

Agents who offer a portion of the buyers agents commission back are not the most proactive agents out there. They do not typically advise you as to the state of the market and whether there is a better buy out there. They aren't looking for the better bargain, they don't know enough about the state of the market to be strong negotiators, and they're certainly not out scouting properties looking for value and trying to spot issues before you make an offer. They do the minimum necessary to get a commission - they literally cannot afford to do more. It is trivial for a more involved agent to get you a better overall bargain.

Some sellers will offer cash back to the buyers. This needs to be distinguished from paying the closing costs you would normally pay as the buyer, which is legal and acceptable, providing it is disclosed to the lender. When the seller offers to put cash back in your pocket, you have the choice of either disclosing it to your lender or not disclosing it. If you don't disclose it to the lender, congratulations! You have just committed fraud, and lenders do get their dander up over it. If you do disclose it to the lender, they will base their loan off (at most) the net sales price, which is the official price minus the rebate. This shoots yourself in the foot other ways, as well, because it will likely increase your tax assessment, and could increase your cost of insurance.

Cash back from a loan provider is most often an intentional distraction, so that they don't have to compete on the real price of the loan. They tell you you're getting $10,000 cash back instead of how much the loan is costing, they can hit you for an extra $2000 in closing cost markups and three points of origination, not to mention that what they are really doing is adding all of that money AND the $10,000 to boot to your balance, where you'll not only owe the money, but pay interest on it for years. Plus it's likely that they stuck you with a higher than market rate of interest as well, because you were distracted by what you thought was free money, so they make more money there, also. Shop your loan by the terms, rate, and total cost to you. All of this can trivially eclipse the $10,000 they put in your pocket - even if they weren't adding that $10,000 to the balance of the loan.

Offers by a lender to pay your appraisal fees are most often trying to lock up your business from their competition. They're not competitive on price, so they apparently offer you a $400 freebie, while charging you $2000 extra in marked up closing costs, those same three points of origination I talked about, and then they ding you $500 for the appraisal on the final paperwork. This is one of the best ways to get a very high markup on a loan that there is. If you like paying more for a loan than you need to, a "free appraisal" is one of the best ways to go about it.

Finally, this article wouldn't be complete without mentioning several of the ways that quoting low payments for a loan can mess you up. The average consumer may know better in other contexts, but they still shop for real estate loans by which one has the lowest payment. This is basically financial suicide. When I first wrote this, there were so many loan providers out there pushing negative amortization loans, in which your balance owed increases from month to month in order to allow you to make lower payments, that it was difficult to find someone willing to do a thirty year fixed rate loan. The negative amortization loan is now gone - lenders and investors lost too much money on them - but the whole phenomenon is still instructive. People trying to sell you a low payment are crooks. Real cost is interest rate and closing cost of the loan, and negative amortization loans carried real rates more than two percent higher than thirty year fixed rate loans.

Nor is this the only game played by quoting low payments, merely the most prevalent and most egregious right now. Interest Only loans, short term hybrid ARMs, and Temporary Rate Buydowns are all quite common. Even if you manage to dodge that bullet with those who quote you low payments in order to sell you a loan (unlikely), there are still all of the standard games that get played with payment. They fudge the math, they "forget" to include the costs in the computations, they pretend you are going to pay the costs of the loan out of pocket when they know good and well that you intend rolling them into the loan, they just lie about their rates and the costs to get them, or, to be able to quote a low payment, they quote you the rate that costs so much that you will never recover the costs of that loan over its entire lifetime and pretend it doesn't have those costs. The payment is determined by how much you borrow, at what rate, with what length repayment schedule. The math is the same regardless of the lender. You need $X for the obligations - either the current loan or the purchase. Adding the least cost and being charged the lowest interest rate (always a trade-off between the two) makes for a lower real cost to the loan. Remember, when you refinance, or buy another property, you're paying for your loan rate all over again, so all that money you paid to get a lower rate is gone when you let the lender off the hook by refinancing or selling the property. Most folks do this far more often than they realize.

Greed is good, Gordon Gecko not withstanding. But let's make it rational greed, because thinking that you are getting a freebie and not asking what it really costs is likely to cost you many times the amount of what you think you're getting for free.

Caveat Emptor

Original here


There have always been real estate transactions that fall apart. The reasons why they fall apart are as varied as the people who enter into the transaction in the first place. Let's get back to the very basics for a moment. An offer to purchase is a representation that a given prospective buyer would be at least willing to purchase the property on the terms you are offering. Accepting that offer to purchase means that the seller is at least willing to sell it on the same terms that the buyer is offering to buy upon. If one or the other of these parties is not willing to consummate the deal on those terms, why was there both offer and acceptance? There was offer and acceptance, or there isn't anything more than negotiations to fall apart. People fail to reach agreement all the time. That's not what this article is about. It's about what happens to prevent the transaction from being completed after you have a valid contract.

The last credible figure I heard was that 50 percent of all escrows in San Diego County are falling apart. This means that one out of every two contracts don't happen. A few years ago, the proportion was a small fraction of that - I can't find it online, but I seem to remember 11%. This increase is both outrageous and preventable.

The first reason transactions fail is new information. It isn't cost effective or a good negotiations tool for a buyer to spend money on inspection and appraisal before there is an acceptable contract. When this information comes in, you can expect there to be a reassessment of the transaction, because you can expect there to be something about the property that does not conform to reasonable expectations. I certainly can't remember any transactions I've had where the inspections didn't reveal anything new. Most of the ones where I was buyer's agent, what was revealed was trivial enough to ignore, but never a one where there was nothing. Transfer disclosures from the current owner to the prospective buyer are another of the possibilities for new information to crop up.

All of this new information can indicate a need to subsequent negotiations when it comes to light. If the buyer thinks it's small enough that they are willing to accept the transaction "as is", they can choose to let the transaction continue on the track it's on. If it's big enough that they're unwilling to deal with the situation, they can also choose to walk away. The vast majority of the time, the sanest response is some new negotiations based upon the new information. This isn't normally about things like overall sales price, it's about getting the property into the condition and functionality that the buyer thought they were getting in the first place. Either party can be obstreperous and unreasonable at this point, effectively killing the transaction.

There's also the issue of cold feet, and the related issue of "grass is greener" syndrome. Either one can apply to either party in the transaction. In the first, the buyer decides they don't want to buy or the seller doesn't want to sell after all. In either case, they weren't really "sold" on the benefits of the transaction to them. "Grass is greener" is where they still want a deal, just not this deal. Those happen when markets are asymmetric in power. A few years ago, it was sellers who wanted to bail out of contracts they had duly negotiated because someone offered them a higher price. More recently, it's been buyers trying to pull out because they think they've found a better deal somewhere else. Both are vile. It's not a sin to want the best possible deal, but once you enter into a legal contract you should be prepared to honor your representation that you want that deal. Both of these phenomena are the fault of poor agents, and both are a good way to waste a lot of money in legal expenses when their clients are sued for specific performance. I don't want any part of agents that don't take appropriate steps to prevent either one of these in their clients, and I take note when I hear about them. It's also a reason not to take an attitude of "no quarter!" in negotiations. My client signed that offer or contract because those terms will make them happy. If the other side decides they need to bail out because the terms are odious, my client isn't happy.

Closer to the point is ability to perform. This can be a seller who can't or won't or doesn't meet their obligations in a timely fashion. Delivering good title to the buyer is kind of important to the transaction, and it does occasionally happen that the seller can't do this. Or they don't have the money to make needed repairs, or just won't get off their backside to actually do it.

But far more commonly, it's the ability of the buyer to perform their obligations under the contract that kills the transaction. I have heard about occasional buyers who couldn't or wouldn't or didn't perform on other scores, but the most central of these in the current market, and the reason for at least 90% of the rise in failed transactions, is that the buyer cannot qualify for the necessary loan.

The Era of Make-Believe Loans is over, but judging by the evidence, there's an awful lot of people who haven't figured this out yet. That's the first thing I want to find out when I get a new buyer into my office: What's the evidence of their ability to qualify for the necessary loan? How much do they make, what are their other payments, what is their credit score, how much do they have for a down payment, and is there anything about their situation which might be a cause for concern during the loan process? I don't want to give them the third degree, but I want to be confident I'm not wasting their time or mine, and that I'm not setting them up for a failed transaction. Failed transactions don't make clients happy, they waste the client's money, and they aren't any good for my business, either.

Ten years ago, if somebody came into my office with a 580 to 600 credit score and two years in the same line of work, chances were excellent that a loan could be done - even 100% financing. That is not the case currently, and the time to plan the loan is before the clients fall in love with the property they can't afford.

Lest I be unclear: except for VA loans,100% financing is completely gone (at least for right now). The same thing applies to Stated Income loans. Purchase contracts not written in concordance with current loan underwriting standards are going to fail and that is as predictable as gravity. Write the purchase contract wrong, and you have killed the deal before it begins because there's something there that's not going to be acceptable to the lender, and sometimes it can prevent other folks from signing off on the deal as well. Furthermore, if the required steps in the contract are going to cause the seller to balk, you're better off finding out before you've got a contract.

The loan environment, especially for loans above 80% loan to value ratio, has changed drastically in the last few years, and all of the changes thus far have been in the nature of making qualification more difficult.

Even the government programs like VA and FHA with their low down payment requirements have their stumbling blocks. Not only do they require a buyer to qualify via full documentation of income (as do ALL government-based loan programs), but there are subsidiary requirements as well. Some properties are not eligible, period. Some people (and some companies) can't be involved, period. Investment property and second homes are iffy to doubtful with the VA and practically non-existent for FHA. It's a real good idea to know if you're going to hit one of these roadblocks before you are sixty days into a transaction that's not going to happen, and now we're all going to pay lawyers to fight over the deposit.

When I list a property, I want real information that tells me a loan is doable for this borrower before I advise my client to accept a given offer. Pre-qualification is a joke and even pre-approvals aren't anything to put stock in. The only examples of either that I trust are ones that I wrote, because I know what went into them. However, Steering is illegal. I can't require the buyer to get their loan through me or even to talk to me (or anyone else of my choosing). What I can do is require their loan officer fill out my form and provide documentation that enables me to determine whether a loan is doable or not. If I can't find a lender that can fund that loan, we've got a problem. When I'm the listing agent, it's kind of important to know this before we counter.

Unfortunately, we've had ten years where loan money was easy to get, no matter how ridiculous the transaction, and it's left a very strong imprint on many agents. Many have literally known no other environment, and they're finding it hard to make the necessary mental changes. I haven't been in the business ten years, either, but I do understand how the loan environment has tightened up and its effects upon my clients. Even the agents who have been in the business much longer may have no real grasp of the loan environment and often they're just checking off the box that says, "pre-qualification" on the checklist because that shows they did their due diligence. That isn't going to fly anymore. It may or may not help them when they're defending against a lawsuit, but it certainly isn't going to make their future ex-client happy about the thousands of dollars they lost, either because they couldn't qualify or because their prospective buyer couldn't.

Caveat Emptor

Original article here


For at least the last thirty years, I've been hearing "affordable housing" advocates yammer about the high cost of housing, and how working families can no longer afford "decent" housing, which they apparently consider to be the three or four bedroom, two bathroom detached home. They go on and on about what is necessary to create more of this type of housing and our "moral obligation" to create more of it. In light of the current situation, I'm going to make a conscious effort to continue my occasional series on factors that influence the overall market for housing. I'm going to examine the broad macroeconomics involved, the assumptions necessary, whether it is or is not long term sustainable, and the choices we face in sustaining or curtailing it.

Today's topic is how the housing market of today came about and what sustains it. A century ago, roughly eighty-five percent of the population did not live in major cities, but rather in small farming communities which more or less blanketed the nation. Suitable land for housing could be anywhere, and so it was much more readily available and much cheaper. When the criteria is "anywhere there's land I can farm," you can choose any arable parcel and build a house on it. Even if you don't live on a farm but in one of the small towns, when you can walk the length of the town in five or ten minutes, it's a lot easier to arrange housing for everyone. If one particular town becomes too crowded, the next one over became attractive. If you need a place for a few more people, one of the farmers whose land immediately surrounded the town could usually be persuaded to sell some land for the right price. The cities were dense affairs, much more like european cities than is the case today. Indeed, the few large cities we had built up before World War II still retain that urban core with dense multistory housing that is characteristic of the period. The typical pattern of the day was that young women, in particular, would continue to live with their parents until marriage. Young men of marriageable age would most often live in rooming-houses or boarding houses once they became gainfully employed. Apartment dwelling was only somewhat expected for young couples just getting started and urban dwellers who might have been together for many years, yet could not afford anything better in close proximity to their profession. Urban housing was tight-packed because the land was very expensive by standards of the time, and urban transportation was communal to a far greater extent than today. It is much more common today for even people in Manhattan to own and drive cars than it was before World War II. The use of steel as a building material was a big deal for those urban centers because it meant that it was possible for them to build further up. San Diego is very much a post war city, but even we still have areas that were built in those times - packed in tightly, cheek by jowl, extremely dense living. Once upon a time, before reliance upon military work and bad policy ruined it, San Diego was a major west coast port and the base for the largest fishing fleet in the world - two of my aunts married tuna fishermen. Even further out, in what were before WWII the "newly urban" areas of North Park and National City, the housing very much resembled classic "company town" housing - 600 and 800 square foot one and two bedroom cottages sitting on 3500 square foot lots. These were the era's predecessor to the exurban bedroom community of today, usually owned by members of the skilled trades or young professionals. The core suburbs today such as La Mesa were still economically speaking, farming communities. Even Mission Valley was mostly farms until the early sixties. During this time frame, only the comparatively wealthy lived in larger houses within city limits. If you go to Mission Hills above Old Town, or Grant or Banker's Hill (and here and there in other neighborhoods) you can still see a very few of the large houses for the well-to-do of that era.

Indeed, the three bedroom, two bath detached house in an urban setting for the working class is almost entirely a creation of the post World War II mood in this country. For several years, very little housing had been built, and now these men who had gone off to war and saved the world as seventeen and eighteen year olds who had traditionally remained with their parents or moved on to boarding houses until they got married were now returning as twenty-two and twenty-three year olds who were traditionally married and starting families by that point in their lives. The women to marry them wasn't a problem; the housing to put the new families in was. These folks had several years of savings (war bonds, the wartime sacrifices, etcetera), and the traditional apartments were considered a poor and at best temporary inconvenience until that new modern post-War marvel - tract housing - could be built in sufficient numbers. And if such housing was horribly inefficient in terms of land, utilities, and transportation, nonetheless we were the wealthiest nation in the history of the world, and accommodating their desires for such was the least the nation could do for our valiant warriors. Furthermore, with the aforementioned savings they had accumulated during the war, the young men and their new wives could afford to pay for this new housing. If you're wondering about "It's a Wonderful Life," keep in mind that most of that 1946 movie takes place well before the war, and even by the time of its release, the country hadn't yet shifted very far from the way things were done pre-War.

The land was available and largely vacant then, and certainly could not and can not be covered effieciently by public transportation, but the newly affluent families (through savings during the war and better jobs after) could afford far more automobiles as well. For the first time, women were staying in the work force in significant numbers until motherhood. There was plenty of land available. As a young child in the early sixties, I can still remember when there was space between all of the suburbs, even when we drove to Los Angeles to visit family members or Disneyland. I-5 was brand new thanks to President Eisenhower, and from the point we got out view of the Pacific Beach, there weren't any towns visible from the road, just widely separated houses, until we passed Oceanside and Camp Pendleton, at which point there wasn't anything more until San Clemente and San Juan Capistrano, then another good long way past that before there was anything more again. It wasn't until just before Disneyland that we saw more city. The I-5/405 split in the middle of present day Irvine was out in the middle of nowhere back then. My parents almost bought a 320 acre farm just east of the Del Mar fairgrounds the year I was born. One of my best friend's parents had considered a farm in Mission Valley, despite the fact my friend's father was in the navy. If you clicked on the images, you know none of these are empty land any longer.

Why not? Suburban housing and to a lesser extent, support services have eaten it up. The only open area between the Mexican border and the Tejon Pass is the stuff that's been held aside for other reasons, such as Camp Pendleton, which the Marines badly need. Los Angeles with 3.8 million people has an area of almost 470 square miles, while by comparison cities of similar population elsewhere such as Ahmedabad in India, Alexandria in Egypt are a fraction the physical size. If we're going to keep doing the same thing, we're going to run out of places to put everybody. In fact, in Southern California we have essentially done so. New development is taking place in Hesperia and Victorville, or out past Banning, or out in Hemet or eastern Murrieta, all of which are an hour and a half minimum trip time from the center of the urban areas they service, even if you're driving it at an hour when there's no traffic. Nobody wants to drive an hour and a half each way to work - especially not in stop and go traffic when gas is this expensive.

This also creates a lot of logistical problems. Most inhabitants of the cities concerned would have no trouble naming the most salient problem, which is transportation. When you have that many people that spread out, and you need to move them all significant distances at pretty much the same time, it takes a massive amount of transportation infrastructure to do so. US 395, the predecessor to I-15, was one lane each direction from Escondido until just a few miles south of present day I-10. But it isn't just transportation. Utilities are a much larger headache to supply than sixty years ago as well, and the logistics of keeping that many people supplied with groceries and gas and everything else make the transportation and utilities problems seem easy.

Finally, there are legal and political barriers to continuing to build housing in this manner. Environmental concerns are the most obvious of these, but building codes, zoning, and other concerns form significant obstacles to its continuation, as does the consumption of land. Once upon a time Southern California was some of the most productive farm land there was. My wife's uncle was a well-off citrus grower until the developers bought his land for millions of dollars. I can remember (barely) large tracts of citrus in El Cajon and Lemon Grove and Escondido. The only reason the hillsides north of Escondido are still relatively uninhabited avocado farms is because they're steep enough to render development difficult. The same applies to all of the other agricultural land remaining.

All that aside, I would like for housing prices to be affordable, and for everyone who's going to grow up in this country for the next century to be able to afford the type of housing they want, where they want. Absent some major changes in public policy and employment practices, it's not going to happen. The land no longer exists, we can't afford ongoing losses in arable land (look up how few countries in the world are net exporters of food), the transportation networks are saturated, environmental regulations are restricting development as are legal hurdles such as necessary permits (which add roughly $20,000 per unit to the cost of new housing, but over $100,000 to the price due to constricted supply), and lets not forget legal challenges from NIMBYs, BANANAs and environmentalists who already have their 3 bedroom 2 bathroom suburban home, and whose property values just happen to increase in a manner directly dependent upon how far they can constrict the supply of new housing. In short, the current situation does not appear to be sustainable absent major societal changes.

Caveat Emptor

Original article here

Must you sell if you list at a specific price and the broker comes up with a qualified buyer?

in the US in general, no you do not have to sell, but you could still be liable to the broker for their commission. You might also need to justify why your decision was non-discriminatory (assuming that it wasn't), but if (for instance) your broker brings you someone you have had business dealings with in the past, and they have tried every maneuver possible to scam you after reaching agreement in those past dealings, you are (usually) quite justified in refusing to do business with them.

Talk to a lawyer, but generally speaking, if you do not have complete and perfect agreement between the parties on the contract, you do not have a valid purchase contract. If you didn't want to do business with (say) Barack Obama or Donald Trump, such is your right as long as you refuse to do so on the basis of them being a particular individual, not based upon them being members of a class protected under anti-discrimination law.

In general, nobody can force you to sell unless you've agreed to a fully executed purchase contract. But I'm talking about legal force here, not economic. It can be expensive not to take a particular offer. I am not familiar with any cases where a real estate agent, listing or buyer's, was awarded a commission even though there was no transaction consummated, but that doesn't mean it couldn't happen. And lest the general tone of this article be mis-interpreted, refusing to sell on the basis of race, sex, religion, sexual orientation, lifestyle or any other legally protected reason is setting yourself up for a lawsuit that you will lose.

List price is a representation that you would be willing to accept that price, but there are other proposed terms of the contract to consider. As I have said before, if you're still arguing about who replaces a given light bulb, you don't have a valid contract any more than you do if you're $100,000 apart on the price. I can't imagine stressing about a light bulb like that, but the point is just because someone offers you full list price does not mean you have to accept their offer. If the other terms proposed are onerous, if it comes attached with conditions you don't care to accept, or if it is merely from an individual who you have done business with in the past and are unwilling to be involved with again, you are usually within your rights to refuse the offer.

Or instead of an outright refusal, you can return a counter-offer back to them, which is usually the smarter thing to do.

Caveat Emptor

Original here

Purchase Money: This is a loan that enables you, in combination with your down payment, to actually purchase the property. If you spend cash to buy the property and get a loan the next day, that is not a purchase money loan. Whether it is or is not a purchase money loan has significant tax consequences everywhere, and significant legal consequences almost everywhere.

Rate/Term Refinance: This is a refinance that does not put money in your pocket for other purposes. As it is more usually defined, this is a refinance that does not put significant numbers of dollars in your pocket. These loans typically have the best rates of the three purposes. For A paper rate/term, you are allowed to pay off an existing first mortgage against the same property, you are allowed to borrow enough money to "seed" a new impound account, you are allowed enough money to pay up to one month of prepaid interest, and you are allowed up to 1% of the new loan amount, or $2000, whichever is less, to be put into your pocket for other purposes. In order to qualify as rate/term, A paper cannot do anything with an existing second (or third) mortgage, unless every last cent of that second (or third) mortgage was spent in acquiring the property, a fact which can force you to either do a cash out refinance or to subordinate your existing second mortgage to a new first trust deed. Sub-prime may have more forgiving definitions regarding other debts, but choosing a sub-prime loan because it allows your new loan to be defined as a rate/term refinance is like voting Cthulhu for President because you're tired of voting for the lesser of two evils. Sub-prime loans have pre-payment penalties by default, and generally carry higher rates.

The difference in tradeoffs between rate and cost can be small to non-existent between rate/term and cash out refinances, particularly at lower loan to value ratios. The difference also varies depending upon credit score, size of loan, and individual lender policy, but it can be quite steep. The point is to get an honest discussion of your options beforehand, not simply to sign up with some lender who pretends that the difference doesn't exist.

Cash Out Refinance is any refinance that does not meet the definition of rate/term. It puts cash in your pocket, it pays off other debts, it includes or combines or refinances a home equity loan or home equity line of credit that you took out for improvements or to pay other debts. Violating any of the requirements to be considered rate/term means that the loan becomes a "cash out" loan. Cash out refinances will usually have the least favorable set of rate and cost trade offs, what the uneducated think of as "highest rates" of these three purposes, at least at higher loan to value ratios. Depending upon the lender, cash out loans with loan to value ratios under seventy to sixty percent may have the same rate structure as rate term refinances. Cash out refinances also usually have slightly tougher underwriting guidelines than either of the other two categories. One specific example that trips a significant number of people is that there cannot have been anyone added to title in the last six months.

Caveat Emptor

Original here

One of the concepts I keep seeing without a decent treatment is the concept of leveraging an investment. Real Estate has this like no other investment. You go talk to a bank about leveraging eighty to ninety or even one hundred percent of your investment in the stock market, or the same percentage of a speculative venture, and see what happens. Be prepared for laughter, and they're not laughing with you. But for real estate the lenders will do it. Why? Because it's land. It's not going anywhere, and they're not making any more.

The fact is that real estate has the potential for leverage like no other. This is due to the interplay of two factors. One is the fact that you can rent the property out to pay for the expenses of owning it, and even if you use it yourself, you're able to save the money you would be paying in rent. Everyone's got to live somewhere, and every business needs a place to put it. The other, more important factor is leverage, the fact that you're able to use the bank's money for such a large portion of your investment. The bank will loan you anywhere from fifty to one hundred per cent of the value of the property. Yes, you've got to pay interest on it, but you're paying that through the rent - either the rent you'd save or the rent you're getting - and there are tax deductions that make such costs less than they might appear.

Now here are some computations based upon the situation local to me. Suppose you have a choice as to whether to buy a three bedroom single family residence for $450,000 (to pick the figure for a starter home) or rent it for $1900 per month. Let's even allow for the fact that the home may be overpriced by $100,000. You have $22500 - a five percent down payment. More than most folks, and you would invest that and the difference in monthly housing cost, and earn ten percent tax deferred if you didn't buy the house. Let's crank the numbers and see what they say.






Year

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

Value

$450,000.00

$374,500.00

$400,715.00

$428,765.05

$458,778.60

$490,893.11

$525,255.62

$562,023.52

$601,365.16

$643,460.72

$688,502.98

$736,698.18

$788,267.06

$843,445.75

$902,486.95

$965,661.04

$1,033,257.31

$1,105,585.32

$1,182,976.30

$1,265,784.64

$1,354,389.56

$1,449,196.83

$1,550,640.61

$1,659,185.45

$1,775,328.43

$1,899,601.42

$2,032,573.52

$2,174,853.67

$2,327,093.43

$2,489,989.97

Monthly Rent

$1,900.00

$1,976.00

$2,055.04

$2,137.24

$2,222.73

$2,311.64

$2,404.11

$2,500.27

$2,600.28

$2,704.29

$2,812.46

$2,924.96

$3,041.96

$3,163.64

$3,290.19

$3,421.79

$3,558.66

$3,701.01

$3,849.05

$4,003.01

$4,163.13

$4,329.66

$4,502.85

$4,682.96

$4,870.28

$5,065.09

$5,267.69

$5,478.40

$5,697.54

$5,925.44

Equity

22,500.00

-48,406.32

-17,287.01

15,999.55

51,604.93

89,691.37

130,432.52

174,014.27

220,635.59

270,509.51

323,864.05

380,943.34

442,008.77

507,340.18

577,237.20

652,020.69

732,034.20

817,645.65

909,249.05

1,007,266.37

1,112,149.54

1,224,382.64

1,344,484.16

1,473,009.54

1,610,553.79

1,757,754.34

1,915,294.15

2,083,904.97

2,264,370.91

2,457,532.19

Net Benefit

-31,500.00

-110,236.00

-94,761.88

-77,990.23

-59,828.07

-40,176.54

-18,930.59

-4,021.36

28,797.71

55,524.07

84,333.56

115,367.22

148,774.35

184,712.85

223,349.64

264,861.00

309,432.96

357,261.61

408,553.54

463,526.08

522,407.72

585,438.30

652,869.38

724,964.38

802,381.90

885,736.68

975,442.55

1,071,939.93

1,175,697.38

1,287,213.19


The Net Benefit Column is net of taxes, net of the value of the investment account. The cost of selling the property is also built in. Now most people won't really do this, invest every penny they'd save. I have intentionally created a scenario that contrasts a real world real estate investment where you bought in at a temporary top, with a hopelessly idealized other investment.

There is a potential downside, and it could be big. This is a real risk, and anyone who tells you otherwise is not your friend. Look at the beginning of years numbered 2 through 5 in the equity column. You haven't gotten your initial investment back until sometime in the fourth year. Look at years 1 through 7 in the net benefits column. You're immediately down $31,500, due to me assuming it would cost you seven percent to turn around and sell the property. A year later, due to me assuming the bubble has popped, you're down by over one hundred ten thousand dollars, as opposed to where you'd be in you put it in the idealized ten percent per year investment. There is no such thing, but for the purposes of this essay I'm assuming there is. This is the illustration of why you need to look ahead when you're playing with real estate - a long way ahead. A loan payment that makes you feel comfortable for a couple of years isn't going to cut it. You need something viable for a longer term. If you'll look at projected equity at the beginning of years five and six, it goes between fifty odd thousand and eighty some thousand, assuming you've been making a principal and interest payment. You have plenty of equity to refinance there if you need to. If you need to do something in year three, however, you're hosed. If you've been negatively amortizing, you're hosed. You owe more than the property is worth. The payment adjusts, you can't afford it, you can't refinance, and you have to sell at a loss, as well as getting that 1099 love note from the lender that says "You Owe Taxes!"

But now look ten years out. At the beginning of year 11, you have $323,000 in equity, and if you sell at that point, you are $84,000 ahead of where you would have been if you invested that money in the idealized investment I've posited. That's four times your original investment, and I only assumed real estate went up seven percent per year, whereas the alternative investment went up by ten percent per year. How could that possibly be right?

The answer is leverage. That $450,000 was almost entirely the bank's money. The appreciation applied to this entire amount. But you only invested $22,500. The bank isn't on the hook for the value; their upside is only the repayment of the loan. If the property goes to a value of $481,500 and then $515,205 (normal seven percent appreciation in two years), then that extra money is yours. Think Daffy Duck shouting "Mine! Mine! All Mine!". Daffy's got to pay some money to get the property sold, as real estate is not liquid. Then the bank gets all of its money. The bank always gets all of its money first. After that, however, then the extra belongs only to the owner, not the lender.

The lender gets none of the appreciation. This is all fine and well with them, by the way. They've been well paid whether the property increased in value or not. This money from increased value is all yours. This applies even, as in our example, if the property lost value for a while. Yes, if you had had to sell in year two, you'd have been up the creek. But you didn't; you kept your head and waited until the property increased again. Given that you didn't, the only numbers that are important are the numbers when you bought it, and when you sold it. The rest of the time is completely irrelevant to the equation, a fact that is true for any investment, by the way. Doesn't matter if the value is ten times what it was when you bought on paper, it only matters that when you actually sold, it was for a loss. Doesn't matter if the value goes to zero the day after you buy, and stays there for thirty years. If in the thirty-first year it rebounds to fifty or a hundred times the original purchase price and that's when you sell, then you really were a genius. Get it? Got it? Good.

So when the property appreciated back to $688,000 and change at the beginning of year eleven, and you only owe $364,000 and change, that's $323,000 in equity. You're almost fifty percent owner. Even after you pay seven percent to sell the property, you come away with $275,000, as opposed to a little over $191,000 that you'd have in the idealized but unleveraged investment.

Keep in mind this whole scenario is a hypothetical. Every Real Estate transaction is different. Every property is different, every market is different, and the timing makes a critical difference. That's why you can't just call your broker to sell it and get a check within seven days, like you can with stocks and bonds. That's why a decent agent is worth every penny, and a good one is worth more than you will ever pay us. But properly executed, a leveraged investment pays off like nothing else can, and real estate is the easiest way to make a highly leveraged investment that is stable until such time as it is favorable to sell.

Caveat Emptor

Original here


First off, neither the California Mortgage Loan Disclosure Statement nor the Federal Good Faith Estimate are promises, commitments, or anything more than your loan provider wants them to be. Quite often, they're nothing more than a fictional story told to get you to sign up for their loan. It's amazing and disgusting how much it's legal for lenders to lowball their quotes.

That said, there are three explanations as to why your rate, cost, or both are higher. They're not mutually exclusive by any means, but it has to be at least one of these three.

The one that reflects on you is that you somehow misrepresented your situation when you were getting that loan quote. In that case, you are no one's victim except your own. It is pointless to lie to a loan officer, and if you don't know the answer, you should say "I don't know" instead of making one up. This does happen, but it's probably the rarest of the three answers, and you should know if you did it. If you didn't do this, what's left is one or both of two common loan officer sins. They're not mutually exclusive; it can be both.

The less abusive of these is that the loan officer did not lock the loan. When I originally wrote this, I said, "This is either rank stupidity or frustrated avarice. Shorter rate locks are cheaper, and there's always the hope that rates will go down, so they can make more money on the same loan they quoted you. Of course, rates can go up, also, and they do so about fifty percent of the time. When that happens, they can either make less money, often to the point where delivering the original loan would cost them thousands of dollars, or they can deliver a loan with a higher rate. Since we're living in the real world here, which of these alternatives do you think is going to happen?"

Since then the market has changed, especially for brokers and correspondents. Every loan that is locked that does not result in a funded loan under that lender costs that loan officer and their future clients money in the form of higher costs for every loan, raising the tradeoff between rate and cost for their loans to the point they may no longer be competitive even with bank branches, much less other brokers and correspondents. Net result: Brokers and correspondents are having to be very careful which loans they lock, which means uncertainty for you, the client. What, you thought the regulators were looking after consumer interests? They're looking after the interests of large institutions, who want to put brokers and correspondents out of business because brokers and correspondents offer cheaper loans than they do.

The more abusive alternative is that you were deliberately lowballed. There is always a tradeoff between rate and cost for real estate loans, and the person who gave you that quote told you about a loan that didn't exist. Either it always carried a rate much higher than you were told, or the loan officer ignored potentially many thousands of dollars it was going to cost all along. I see this happening literally every time I check a loan quote forum. I do business with eighty lenders, among which are the lenders who are most keen (or least unwilling) to compete based upon price. I know what's deliverable and what is not, every other loan officer I respect knows what is and is not deliverable, and I can't imagine anyone in their right mind wanting to do business with anyone who doesn't know whether what they quote is deliverable. It's not exactly confidence inspiring to be told essentially, "I can get you this loan, but I don't know if it really exists." I'm sure you'd line up for that loan like it was free beer, right?

Not really. But loan officers do this because none of the paperwork you get at the beginning of the loan process is in any way binding. Not for price, not for a loan at all. In fact, the only form that's required to give an accurate accounting of the costs is the HUD 1, which you don't get even in preliminary form until you are signing final loan documents. Loan officers do this because once you have signed up for their loan, you are likely to sign the final loan documents no matter how bad they are. Why is that? Because thirty days or so have gone by, you've got a deposit at risk that you're going to lose if you don't sign, and you're not going to get that house that you wanted badly enough to put yourself in debt for thirty years. I assure you that loan officers know that they will have you over a barrel when you go to sign final documents. Many of them are counting upon that from the day you sign up, and they'll tell you anything at loan sign up in order to get you to choose their loan, because it's not like any of this is binding on them.

Let me get one other thing out of the way to clear the air: You didn't get a higher rate because you somehow didn't qualify for the lower rate. The way people qualify for loans is based upon debt to income ratio and loan to value ratio, and of those two ratios, debt to income ratio is much more important. The lower the debt to income ratio, the more qualified you are. Debt to income ratio is a measure of the ratio of how your housing and expenses compare to your overall income. Lower interest rate means lower payments. Lower payments mean lower debt to income ratio, and hence, you become better qualified the lower the interest rate that is available. Counter-intuitive though it may be, it's easier to qualify you for a lower interest rate than a higher one. Any loan officer who offers you an excuse that you didn't qualify for the lower rate has just flat out told you that they are a liar. (Note that "true" sub-prime allows a higher debt to income ratio than A paper, but 50% instead of 45 is not a major difference)

What really happens is that while this loan officer was spinning you a tale of how great the rate you were supposedly going to get was (a loan officer's version of, "Yes I'll respect you in the morning"), in amongst all that creative storytelling, they neglected to account for the money you really are going to be paying, or even the money they admitted you were going to be paying.

However, we're dealing in the real world here. That money still needs to be paid.

There are three ways to pay it: Borrower cash, rolling it into your mortgage balance, or by giving you a higher rate. They have to tell you if they want more cash, and you may not have it. There's only so much equity in the property, particularly since there are no playing valuation games via a compliant appraiser. But since there is always a tradeoff between rate and costs, they can always create some more cash by sticking you with a higher rate, resulting in more cash available to pay for the things you were going to be paying from the very first. Often it means they'll make more money as well, for providing this "service", because "you were such a hard loan." Sticking you with a higher rate is often the only way they can pay for all the things that need to get paid. Yes, this means that you end up paying more for the low-ball deceiver's loan than for a loan where you were quoted something honest.

All of this is nothing more than practical effects of the common phenomenon of lenders low-balling their quotes to get you to sign up with them, knowing that when the time comes to actually deliver that loan, they will have all of the power and you will have none, which is a 180 degree reversal from the situation at sign up. They have this loan that you need right now, where anyone else will take time you probably don't have. If rates have gone up (once again, this happens about fifty percent of the time), even the lowest cost, most ethical provider in the world might not be able to deliver what this scumbag is offering you by signing his loan right now. If he's got the originals of your documents, you can't take your loan elsewhere. Finally, most people are tired of the whole loan thing by the time it comes to sign documents. Many folks won't examine the final documents carefully - figures I've seen say that over fifty percent of all borrowers literally never figure out that they were hosed by their lender, and on the ones who do figure it out, about eighty five percent will sign anyway because signing means they're done.

The games that lenders play are legion. They can lure you in with talk of low rate that exists, but costs you more than you'll ever recover. Whether they deliver that rate and soak you on the cost end, or switch it off for a higher one to pay the costs and make more money, is up to them. I see lenders quoting full documentation A paper conforming loans for people who are known to be stated income, temporary conforming ("Jumbo conforming"), non-conforming loans, or even decidedly sub-prime. Even for people who are full documentation and would have qualified if that loan existed at the costs they told you about, this need to raise the rate can move you to over to being a stated income loan because you no longer qualify full documentation at the higher rate. With stated income loans now gone, this not only means higher rates, but quite often means that no loan can be done, something completely alien to the thinking of many agents and loan officers who became accustomed to the Era of Make Believe Loans, and they haven't yet gotten their heads out of that mindset.

How can you avoid this? Ask all these questions of every prospective loan provider, know what the red flags are if you encounter them, and take steps to protect yourself from being lowballed. A written loan quote guarantee used to be good, but even the most ethical provider in the world can't issue one without locking the rate, which the market has made costly for their future business. I used to tell people to get a back-up loan, but back up loans are dead. Even I cannot economically do them any longer. The only practical solution is to stop rate shopping by telephone and have a real problem solving conversation with prospective loan officers.

If someone goes over cost components for your loan and rate, chances are they are being more honest than someone who doesn't. If it's investment property and they tell you there's a point and a half surcharge from the lender right up front, they are likely being honest. Such adjustments exist, and you're going to pay the ones that apply to your loan. Period. Therefore, you're better off knowing what they are. You should still choose the loan that has the lowest bottom line to you, but choose the one with the real bottom line, not the one that looks lower because the person quoting you "forgot" the adjustments. If someone told you about the adjustments that apply to your loan, ask other prospective lenders about those adjustments. Even they're "included" in the quote you still want to know how much they are. Why? Because once you know this information, it may become apparent to you that the loan you are being quoted is not the real loan you will end up getting.

You don't need to get victimized by any of the things that go on in the world of mortgage loans. But you have to understand that they do happen, and you have to take specific steps to prevent it from happening to you. Otherwise, you're just trusting to luck, and judging by what people have brought me from other providers, you'd need less luck to win the lottery so you can pay cash for the property.

Caveat Emptor

Original article here


The buyer's deposit is always at risk. This is just a fact of real estate transactions. I could pretend it's not so, but that wouldn't keep the deposit from being at risk - it would just make me a liar. Nonetheless, because it's cash that the buyer had to forego spending that money in order to painstakingly set it aside a few dollars at a time, they understand that the deposit is real money in no uncertain terms, where most don't have that same understanding about a loan that's probably fifty times bigger and just as real. It may be comparatively rare that the buyer's deposit is actually forfeit (As of yet, I haven't lost one), but by recognizing that it is at risk and planning for it, I can protect a client's deposit far more effectively than anyone who pretends otherwise.

The first rule is to be careful writing the offer. I want to make certain that all offers (and counteroffers) consist of something my client qualifies for and that I can make happen. This is one of the best reasons why real estate agents want to know enough that they could do loans, even if they don't. If I wasn't a loan officer, I'd consult a loan officer before writing an offer. Review client qualifications and necessary loan guidelines before the offer is written. If the issues of whether the client can qualify and what needs to happen so they do qualify have already been solved, you start the transaction with the largest part of the road to successful completion already paved.

Related to this is the issue of a client getting cold feet, which is one of the most common ways to lose a deposit. The best way to solve this is by showing them enough properties that they really understand the value offered by this one. Some agents believe in pressure sales and glossing over problems with the property. I believe in meeting these issues head on. One thing I tell every buyer client at our first meeting is that there is no such thing as a perfect property. They need to decide what they're willing to live with and what they aren't, and how much they're willing to pay for not doing so. It's my job to make certain they understand what the issues are with a given property, and that they'd be happy paying the necessary price to live there. All of an agent's nightmare scenarios start with talking someone into buying a property they don't like, so I'm not going there ever. This also solves the "cold feet" before we make an offer, where someone who doesn't understand these issues is going to be in danger of cold feet at every bump in the road.

The main issue with all of the buyer contingencies is time. You have a certain number of days to deal with those contingencies. When I get them done well before the time limit, the time limit isn't a problem.

For the loan contingency, I want an automated underwriting decision ASAP. Usually, there are reasons not to do this before we've got that fully executed purchase contract, but once we have that contract, there's no reason whatsoever not to do it that day.

I also want to order inspection and appraisal immediately, to meet those contingencies. I've got seventeen days for those. If I've got the appraiser and inspector out there the next day, I should have their report within two to three business days after that. Any subsequent negotiations needed due to those reports, I can start on right away. If the seller isn't going to be reasonable (or reasonable enough), we can find out about it right away and if the buyer decides to walk away based upon these reports or subsequent negotiations, we're in a much better position to argue that they should retain the deposit than if it were twenty-five days into the transaction and now the deposit is in jeopardy regardless of whether the contingencies have been released in writing or not. All parties agreed the contingencies ran for seventeen days in the purchase contract, and if that period is up, there's an argument to be made that the deposit is forfeit. I'm not a lawyer, so I don't know if it's a good, valid, legal argument, but if the whole issue is moot because we're done on day ten, the argument never gets started.

While this is all going on, I'm getting any final loan stuff together. This includes Preliminary Title Report and Escrow information. That complete loan package should be submitted before I go home on the day I get the appraisal. If it's not done by then, something major is wrong. I can submit loan packages with the appraisal "to follow", but it's better to submit them complete in the first place, even if it does mean I've got to pay for color copies. Every time an underwriter touches a file, they can add conditions. Those conditions can effectively make a loan impossible, and far more loans are approved with impossible conditions than flatly rejected. Also, submitting a loan with minimal information is itself one of the best ways to raise red flags in an underwriter's mind, or would be if raising red flags in the underwriter's mind was a good thing. It isn't. Once red flags get raised, expect them to throw as many roadblocks at you as they can. Better to submit a clean, complete loan package as soon as possible. Doing the extra work right off the bat really does save you a lot of future work.

This has become even more important of late. When I first wrote this, underwriting was a lot less paranoid than it is now. Even when refinances were running several weeks, purchases were usually no more than two days for underwriting. If you submitted a clean complete file, any prior to documents conditions you do get would be minimal and trivial, and the funding conditions were just the absolutely standard cookie cutter stuff. That has now changed. Fannie and Freddie and the Federal Government have now added all kinds of new twists to lending. I have lately started saying that we need to extend the default loan contingency period on purchases to 30 days on purchase contracts, because it has become difficult to get a real loan commitment in seventeen, and even forty five day escrows are becoming a thing of the past because the new requirements mean that loans take longer - adding three weeks or more to the process in some cases. I don't like getting anything other than the routine funding conditions that happen on every transaction, because it means I have to get those conditions and wait a couple of days for the underwriter to get back to the file. I originally wrote that this waste of time is my fault if it happens, but with the best will in the world, it will happen to you a pretty significant percentage of the time. In the past year that percentage has increased to nearly 100%, and there's nothing that can be done to change this because giving unnecessary information to an underwriter is the Number One way to get the loan essentially rejected.

I believe in giving the seller and their agent a reasonable amount of time to hang themselves, but once the loan is submitted, I'm going to be asking about their responsibilities if I haven't gotten evidence they're done yet. Allowing them to hang themselves doesn't mean letting them hang my client. I want to see that termite inspection in particular before the end of seventeen days. The standard contract has the buyer responsible for section 2 work. It's never happened to me, but it's very possible that there's enough section 2 work needed to call the transaction into question. After seventeen days, this becomes more difficult for the buyer.

As soon as possible, I order the closing documents and get them signed. Even if you're not ready and able to close the transaction as a whole, this is a good idea. Something that's already done correctly isn't going to be an issue if my client gets called away on business - particularly out of the country as does happen. Notary work becomes a real issue outside the United States - it must be done at a US Consulate or Embassy. There is no exception for "Buyer had to leave the country" (or even just "go out of town") written into the time frames and contingencies on that purchase contract. I suppose you could ask for one, but it will make most sellers more than a little nervous, for tolerably obvious reasons. Better to know and plan in advance, but life happens. Better not to be bit if it does.

If I can get all the ducks in a row before the contingency period expires, not only does this preserve my buyers rights and give us an advantage in subsequent negotiations, but preserves as much as possible of my client's options to exit the transaction while preserving their right to recover the deposit. If I can close the entire transaction before the end of the contingency period, that makes me very very happy, and not just because I get paid sooner. It means that the issue of my client losing the deposit for walking away never comes up..

By finishing everything before the end of the contingency period, I've also preserved as much as possible of the right of specific performance in case the seller gets cold feet. It happens. Not so much right now, but a few years ago in the crazy seller's market, it happened because sellers decided they could get a higher price. If my buyer client is happy with the state of the contract as it sits, their lawyer can quite likely argue specific performance of the contract, and maybe recover legal costs too. Not my place to say whether or not, as I'm not a lawyer. I only know that lawyers seem to be much happier with agents that keep this information in mind.

If I can't close it before the end of contingency period (and I recently had signed loan documents sitting at escrow for two weeks while we waiting for the sellers to finish termite work), I still want to get together with my clients before the contingency period expires, put the evidence in front of them, and have them make a choice to continue or abort the transaction. Just because the contingencies haven't been released in writing is no reason that a seller's lawyer can't argue that they were released anyway. Much better if the argument never comes up because it's a moot point.

There is nothing I can do that generates an ironclad, foolproof guarantee that my client won't lose their deposit. But doing things the right way, quickly, can certainly make it a lot less likely than pretending that tje deposit isn't at risk. Lawyers and judges are the only ones who can answer the question of whether it has been forfeited, but it the issue is resolved without them getting involved, everybody is going to be happier. Neither party should have signed the purchase offer if they didn't want the transaction to happen on those terms set forth in the contract. Therefore, making it happen quickly, reliably, cleanly, and before the deadlines have passed is the best way to prevent making anyone unhappy.

Caveat Emptor

Original article here

That's one of the questions I've been asked, and it deserves an answer. Know that there is some flexibility to the answer, as there are embedded trade offs. You don't need as much of an income, or as high of a credit score, if you have a larger down payment. A sufficiently high credit score can also mean that you can afford a more expensive property, as higher credit scores get better interest rates, and therefore, lower payments for the same property. On the flip side, if you have monthly bills that consume a large amount of your income, you cannot afford to pay as much for a property. When I originally wrote this, there was another tradeoff involved in whether you can prove sufficient income via the traditional means of w-2s or income tax forms, as the alternative loan forms do not give rates as good, and most have higher down payment requirements. However, stated income loans are gone, at least for now. Finally, most of this only applies if you want or need a loan. If you intend to pay 100% of the price with cash, you can buy anything legal that you desire with your cash, and the hurdles become much smaller. So admittedly this only applies to 99.9999% of first time home buyers.

The first thing any buyers need if they want a loan for the property is a source of income. If you want a loan, you've got to have money coming in from somewhere to make the payments. Preferably, it's a documentable, regular source of income, such as paychecks or income from a business on which you report taxable income. I suppose I should mention that tax cheats have difficulty getting good quality home loans, because I have dealt with a few people I suspect of that. Don't worry, I'm not an IRS employee and I won't turn you in. But all lenders must report loan transactions, and every real estate transaction is a matter of public record. If you make a major purchase or take out a major loan, the IRS can take an interest in you. Just saying.

You income, together with whatever amount you have for a down payment, gives you a budget for a property. The vast majority of the loan is driven off two ratios, debt to income and loan to value. These two ratios together will determine minimums for everything else about your loan. If your credit score was not horrible, a down payment was pretty much optional for several years during the Era of Make Believe Loans, although it has since become essentially mandatory as the VA loan is the only loan out there where most lenders are willing to fund loans without a down payment.

You will need at least a few thousand dollars for a good faith deposit, and probably another thousand at least for appraisal, inspections, and miscellaneous stuff. The once-upon-a-time rule of thumb about a 2% earnest money deposit has long gone by the wayside, but a good deposit is often evidence that you are serious about your ability to consummate the deal, and might get you a lower price in negotiations. I will argue against my listing clients accepting any offer, no matter how good it may otherwise be, without a deposit, and most sane real estate agents agree with me.

The larger the down payment, the lower you can expect the needed income to be, and the better the interest rate you are likely to get at any given time. In order to make a difference on the terms of your loan, the required down payment generally goes in increments of 5%. 3.5% for an FHA loan is the absolute minimum for most people currently, but you will get a better deal from conventional loans that require a minimum of 5% down (But as few lenders as will do that, they can charge higher rates than others). 10% will get you better terms than you would get for 5% down, 15% will get you better terms than ten, and the really major differences happen if you can put 20% down. More still will get you better terms yet, but 20% is the big dividing line.

If you want to take advantage of a governmental first time buyer assistance program, either the Mortgage Credit Certificate or a locally based buyer assistance program, you need to be very careful about staying within what you can prove you can afford via tax forms. Stated Income, or documenting your income via bank statements, is not an option on any of those programs and never has been. Using creative financing options, such as negative amortization loans, with such programs is similarly forbidden. First time assistance programs are not designed to encourage irresponsibly buying a more expensive property than you can afford; they are designed to help you stretch what you can afford just a little further. Know what you can afford in terms of sales price, because agents and loan officers can too easily manipulate payment quotations. Rules of thumb based upon income (2.5 times income, four times income, whatever) are garbage, and the entire concept is a good way to get into trouble. This article will help you compute what you can afford, once you know the approximate rates for current thirty year fixed rate loans.

You will need to be able to document a two year history of housing payments. Since you have never bought before, this means rent. No fun to have had to enrich someone else for a couple of years, but there are valid reasons why lenders require a history of regular housing payments on time. If you can document that you've been paying regular rent to your parents, grandparents, or what have you, that can count, although lenders will usually demand copies of the canceled checks rather than accepting their word for it.

You will also need a history of credit payments. Mortgage lenders want to see evidence that you have the habit of paying your debts on time regularly. The usual criteria is three total lines of credit, one open for at least 24 months, the other two for at least six months. These can be revolving lines of credit such as credit cards, or installment debt such as car payments or student loans. Note that they do not necessarily have to still be open, but whatever balances and monthly payments you still have will be counted against your debt to income ratio.

Also, you generally need at least two open lines of credit in order to have credit scores reported by the major credit bureaus. Ideal is two long term credit cards with very small balances. The way I handle this is to charge one thing per month for about $20 or so that I would normally pay cash for, and pay the bill in full when it arrives. You will need an appropriate credit score for what you are trying to do. What score is sufficient will depend upon the exact characteristics of your transaction. Better scores will lower your rate, and therefore your payments, but the best thing that can be said about a 580 credit score (which some lenders will accept for FHA loans) is that it isn't putrid. Unfortunately for those who want to buy now without any cash, the lenders have now figured out that them being on the hook for 100% of the value of the property is a good way to lose money. I do anticipate 100% financing returning eventually, but "eventually" could be years, and even A paper has introduced differentials to the tradeoff between rate and cost based upon credit score, where until recently, as long as you staggered over the line into qualification, you'd get the same rates and costs as King Midas.

The last things I will mention that will stand you in good stead are also optional: An educated layperson's knowledge of the process (I would like to think being a regular reader here will help with that), a investigative attitude, and the willingness to shop effectively for services, both loan and real estate. There seems to be popular resistance to this, but getting a good buyer's agent will not only save your backside, it'll make a real difference to the quality of the property you end up with as well as to how much you pay.

Caveat Emptor

Original here


Many people think that mortgage interest works like rent: paid in advance before you live in the property for the month.

This is not the case.

Mortgage interest is paid in arrears. As you begin the month, interest begins accruing. It accrues throughout the month, and the payment is due at the beginning of the following month. The reason for this is that the interest is unearned until you have actually borrowed the money throughout the month. You could win the lottery, write a best seller, sign a contract a with professional sports team, or any number of other farfetched but real possibilities for suddenly acquiring a windfall of cash enabling you to pay that loan off. You could also refinance, in which case that lender is only entitled to the interest from the days you had their loan.

When you refinance, however, or even when you take out an initial purchase money loan, you will generally be required to pay the interest for the remainder of the month on that new loan in advance. The reason for this is quite simple administrative - it gives the lender some time to set all the bookkeeping on that account up, gives them a full month at least between initializing the loan and the time any money should be hitting their account in payment of that debt.

So when you refinance, you make an upfront payment to the old lender for the part of the month they held your loan during the month, and to the new lender for the time they held your loan. Say the new loan funds and pays off the old loan on June 15th. You will pay the interest from June 1st to 15th to the old lender, and from June 15th though the 30th to the new lender. You never, ever, get a free month, because interest never stops, at least so long as you owe the money. In point of fact, I tell people to think of it as making their normal payment early, as in this case they're writing the check they normally would have written July 1st two weeks early on June 15th. It's really just the interest owed, but since most folks don't keep their loan more than a few years, there usually isn't a large proportion of principal in their regular payment anyway. Therefore, if you think of it as your regular payment, paid early, it'll usually be a little bit less. There are usually one or two days of overlapping interest, which is why most escrow officers won't request funds on a Friday. You don't want to be paying interest on two loans over the weekend to no good purpose.

So why do lenders use the "skip a month of payments!" come on? Some will even use, "Skip two payments!" Because a new loan is being originated, they can (generally) roll that money into the balance on your new loan where you not only pay the money, but you pay interest on it for as long as you owe that money. Make you feel all warm and cuddly? Didn't think so. Anyone who uses the "skip a payment!" promise to get you to refinance has just told you point blank that they're a dishonest crook. However, since most people don't know how to translate loan officer speak into English, they get away with it disgustingly often. The state of financial education in this country is a national disgrace. Of course, it's to the benefit of certain political groups to have voters believing that there is such a thing as a free lunch.

You never really skip a loan payment when you refinance. If you try, all you're really doing is adding it to your balance. You can decide to pay your balance down at loan inception and pay closing costs out of pocket, and while an accountant or financial planner will generally tell you there are better uses for the money, it can be a very smart thing to do if your circumstances are right for it.

Caveat Emptor

Original article here

You've probably heard the horror stories, and I've mentioned the possibility more than once. Some unsuspecting person is looking at properties beyond their price range, and it therefore has all kinds of attractive features that properties which are in their price range do not have. They are just about to regretfully but firmly put the notion of buying this particular property out of their heads when the Real Estate agent whispers seductively, "I can see that you want it, so let me show you how you can afford it!"

There are all kinds of reasons why this happens. Bigger commission check for the bigger sale certainly is one, but a far bigger concern to most of the predators who do this is that it's an easy immediate sale. Instead of having to take those folks around to dozens more properties that are in their price range (and perhaps lose them to some other agent taking advantage of an opportunity in the meantime), while the clients agonize about the trade-offs of linoleum versus carpet in the bathroom and kitchen, and maybe if they'll keep looking just a little while longer they'll find one that is perfect despite the market, so they're not going to make an offer today, thank you very much, this predator has shown them the equivalent of the holy grail, provided the clients do not understand the downsides of the loan that is necessary to procure that property.

There is a reason why I advise people shopping for a property to make a budget based upon what they can afford based upon current rates on 30 year fixed rate loans costing no more than one point total, or at the very most a fully amortized 5/1 ARM, and stick to it (It's actually harder to qualify for the 5/1, due to lower debt to income ratio guidelines). That's the maximum price you will offer - end of discussion. Even if you, the client, end up applying for another type of loan that has lower payments, if you could make the payment on a thirty year fixed rate loan, you are pretty certain you are not getting in over your head. But shop by sales price, not payment. It's not like the sharks haven't figured out that suckers shop by payment - so don't be a sucker. "Creative financing" has become so pervasive and so varied that shopping by the payment the real estate agent has posted, or tells you about, is severely hazardous to your financial health. Maximum purchase price you are willing to consider should be the most important thing buyers discuss with their agents, and the budget must be quoted in terms of purchase price, not monthly payment. There are too many games that can be played with monthly payment, and just when I think I have them all covered, another one pops up.

Indeed, the very head of the list of reasons why buyers should fire an agent is that the agent showed them a property which can not reasonably be gotten for the sales price limit they told the agent about. You tell me that your limit is $320,000, it might be okay to show you a property listing for $340,000 or even $350,000 if buyers have enough power to bargain it down to the agreed maximum and are willing to walk away if they can't. In a seller's market, of course, it would likely rule out anything where the ask is over $325,000. But if the agent show you a property listing for $450,000, simply ask to be taken home or back to your vehicle immediately, and then inform them that their services are no longer required and that you desire them to make no further efforts to contact you. Were I shopping for a property, I would demand to know the asking prices before I went, and not only fire the agent but also refuse to go if they cannot show me why they think this property can be obtained for the total cost limits we have agreed upon. Not monthly payment limits, sales price.

So what loans should not be used to purchase a property? Well keep in mind that this list assumes that your loan providers are telling the truth about the kind of loan they are working on for you, an assumption that, judging by a dozen or so different e-mails I've gotten from people who were scammed, is increasingly iffy. Furthermore, if you are a real financial and loan expert, there are reasons why these warnings may not apply, particularly if the property in question is investment property, but those sorts of experts should know the exceptions, should not be looking to this website for advice, and are always able to accept the financial consequences of not following these guidelines (in other words, they have the ability to absorb the losses).

The absolute head of the list, the loan that should never be used for purchase of a primary residence is the negative amortization loan. Known by many other friendly sounding names such as "pick a pay", "Option ARM", "COFI loan," "MTA loan," and "1% loan" (which it is not), this loan is a truly horrible choice for the vast majority of the population (99%+). It was only approved by regulators to service a very small niche market, and if you are a member of that niche market, chances are that your Option ARM will not be approved by the lender! This loan is usually sold strictly on the basis of the fact that the minimum payment is lower than any other type of loan, making it look like clients can afford a loan that they cannot, in fact, afford. This low payment is based upon a low nominal, or "in name only" rate that is not the real rate the money is accumulating interest at. In fact, the real rate that you are being charged is currently at least 1.5 percent above equivalent rates for thirty year fixed rate loans, as well as being month to month variable. How often do you think people who are being fully informed of the loan would agree to accept a rate a full 1.5 percent higher on a fully variable loan than what they would have gotten on a thirty year fixed rate mortgage, and with a prepayment penalty also? The lenders pay very high yield spreads for doing these loans, and the bond market pays even higher premiums, so many lenders push them hard, and many wholesalers push them even harder. Despite being warned that I was not interested in any loans that feature negative amortization, three new potential wholesalers had gotten themselves thrown out of my office in the month prior to originally writing this. I guess they weren't interested - or able - to compete with other lenders on real loans. Fortunately, now that the chickens have come home to roost on this "Nightmare Mortgage," very few lenders are quite so eager - or even willing - to offer them. The lenders lost a blortload of money on them, investors aren't buying the bonds, and the federal government has made them very difficult to sell. I hope that continues because the absurdly low percentage of people who saved their homes after signing up for a negative amortization loan is completely unacceptable. And although this loan is gone now, I'm leaving it in because I thought it had been permanently staked through the heart in the early 1990s too.

The Interest only 2/28 does have one redeeming factor, as compared to the negative amortization loan: At least your balance isn't getting higher every month. With the average loan around here being about $400,000, a rate of 5.5% would have the payment being $1833. But if that's all you can afford, what happens in two years when the rate adjusts and it starts amortizing, and if the market stays right where it is today, the payment goes to $2771, an increase of 51%? You haven't paid the principal down. There's a pre-payment penalty stopping you from selling or refinancing until it does adjust. If prices have appreciated enough to pay the costs of selling you might not come out so bad, but what if they haven't, or if prices have actually gone down? This is not the sort of bet that someone with a fiduciary relationship should make, as real estate prices increasing in two years is not something you can make a risk free bet on. Millions of people are finding that out right now.

The next loan on the list is the 3/27 Interest Only. This does offer you one more year to get your act together and start making more money to make the payments with than the 2/28. The downside is that it actually adjust higher due to the increased interest only period. In the example above, the payment would adjust to $2804, an increase of just under 53%. This also means you have another year for the value of the property to do the historically normal thing and appreciate a little. Still doesn't mean it's a bet somebody with a fiduciary responsibility should be making with your finances.

The scamster's new favorite substitute for the essentially extinct negative amortization is the buydown, because it allows them to quote a lower payment and a lower interest rate, because they can pretend that the initial rate and payment are what is important. Most suckers will only look at now, and be far less concerned with a year or two down the line ("and maybe the horse will learn to sing"). Make no mistake - that rate and payment will rise in one year, and will almost always rise again in two. So not only are you stuck with what's probably a higher loan rate than you can otherwise get, but you paid good money - more than you will recover - for that temporarily lowered rate.

The next type of loan to be wary of is anything stated income or even lesser levels of documentation (NINA or "no ratio" loans). These loans are great and wonderful if you really are making that money and really can make those payments, but don't let the temptation to buy a more expensive property lead you to exaggerate what you really make, or allow a loan officer to exaggerate what you really make, in order to qualify for the loan. Remember, you are still going to have to make those payments, and if you can't, the bad things that will happen more than counterbalance the nicest thing that might happen. Again, millions of people are discovering this right now. As of this update, I know of no loan providers offering a stated income loan. The downside to this is that the people stated income was designed to serve now can't get a loan at all. The upside is that people it's inappropriate for can't be seduced into something that's most likely going to ruin their financial future.

Somewhat less dangerous are interest only loans with a longer term or extended amortization loans. A five, seven, or ten year interest only period, while much more endurable than a two or three, is still not a certain bet of making a profit. Same thing with a forty or fifty year amortization loan. Given the way the rate structure is applied by most lenders, these loans are given out by lenders wishing to cover questionable lending practices to people who do not qualify for interest only loans according to bond market guidelines. Still, if it's got a good long fixed period of at least five years, you are paying the balance down and it's a reasonable bet that you will be able to sell for a profit before the adjustment hits. Not a certain bet, but a reasonable one, as in "the odds of making a profit or being able to refinance on more favorable terms before the payment becomes something you cannot afford are definitely on your side."

The ordinary 2/28 and 3/27 are dangerous enough for most fully informed adults. Using the interest only examples above, the 5.5% rate actually becomes 5.25% fully amortized, as it's a less risky loan for the lender. The initial payment becomes $2208, which does pay the loan down some, but then the payment becomes $2691 (in the case of the 2/28) or $2678 (3/27) holding the market constant as it sits and keeping other background assumptions constant. If you cannot afford these smaller jumps when they happen, at least you've got several thousand dollars that you have paid the principal down to use for closing costs on the new loan or towards the costs of selling, but be aware that the market is never reliable in its fluctuations over a short period of time, and using these loans for a purchase can and many times has meant that when the fixed period ran out, those people who choose these loans are in the unenviable position of being unable to afford their current payments, being unable to refinance, and being unable to sell for enough to break even when you consider the costs of selling.

There is nothing really wrong if you can afford the thirty year fixed rate loan but deliberately choose some other loan. I do this myself to save money on interest charges, which is the real major cost of the loan, but as narrow as the gap in rates was when I originally wrote this, even I might have chosen a thirty year fixed rate loan if I had needed to refinance. It's not being able to afford the sustainable loan that will kill you. If not a thirty year fixed rate loan, at least a fully amortizing ARM with a fixed period of at least five years. I do like the 5/1 ARM, however, and rates for it are once again becoming attractive - as in significantly lower than the thirty year fixed rate loan.

The most important things about any loan is the interest you are being charged for the money you are borrowing, how long it lasts, and the cost in dollars of getting that loan done, not a lower minimum payment that, certain as gravity, has a gotcha! engraved on it that will cause you to regret getting that loan. Unfortunately, we cannot go back to the past with information we learn in the future, and real estate loans are especially unforgiving of borrowers who do not understand the future implications of their current loan decisions.

As a final note, I have structured this essay around the loan to purchase a property, but the arguments work just as strongly and just as universally for so-called "cash out" refinances as they do for purchase money loans.

Caveat Emptor

Original here


Many agents seem to answer this question differently depending upon whether their client is the prospective buyer or seller, according to what they think will make the client most comfortable. When their client is making an offer, "No, your deposit could never possibly be at risk," while when their client is evaluating an offer, "And besides, if they renege or can't bring it off, you get to keep the deposit." Both of these are false, misleading, and practicing law without a license.

The cold hard fact is that the deposit is always at risk, but there is absolutely no guarantee that a jilted seller will get it, either. The answer to "Is the deposit at risk?" from a real estate agent can never honestly be anything other than "Yes."

For buyers, the deposit is "at risk." Otherwise, what would be the point of having it? If it couldn't be lost, why would it need to go into escrow? Just to prove the buyer has a couple thousand dollars to their name? I can do that with a Verification of Deposit. The only reason to make a deposit on a purchase offer is that it is at risk, and no listing agent in their right mind is going to accept any purchase offer where there is no deposit - even if the buyer is doing a "one dollar down" VA loan. That seller is risking a minimum of a full month of all carrying costs (usually much more) upon your representation that you want the property, and they are entitled to keep your deposit if certain conditions are met. For sellers, no you don't automatically get the deposit if the buyer flakes out. There are burdens upon you and your agent, and contingencies, aka escape clauses for the buyer, built right into the purchase contract. You don't want to allow those clauses, that's your choice, but you'll severely restrict the number of people willing to make offers as well as the price you will actually get. Even if the seller negotiates the payment of the deposit to them as part of the contract, the buyers can still sue to get it back. This is the real world and an offer is being made with real money and real consequences to that money. If you're unable to come to terms with that fact, stay a renter, because that fact is not going to change. For agents, if the only way you can make a sale is to misrepresent the deposit, it doesn't take a great fortune teller to see a courtroom in your future.

For buyer clients, I can do a lot to keep a deposit from being forfeit - any agent and loan officer can. Get out in front of all the contingency issues and any other reason that my client might decide they don't want to purchase the property, and get them dealt with right away, during the contingency period. Loan, appraisal, inspection, I want them all done before their contingency expires, or at the absolute minimum, a loan commitment with contingencies I'm certain we can meet. As of this writing, I have not yet lost any buyer deposit money. Nonetheless, since no agent can honestly guarantee the deposit will not be lost, I cannot and will not pretend that I'm some kind of exception to the law. The only way I could make such a guarantee is by putting up my own money as a surety, and if my client lost a deposit for a reason that was in any way my fault, I hope I would reimburse them (Until it happens and I'm facing an actual choice, there's no way to be certain). But it's not my investment, and if the investment succeeds, I'm not going to share in the proceeds (I'm given to understand that's illegal, at least in California), and one of the essential, unchangeable facts about investment is that there is no such thing as a risk free investment. If you don't understand this, any money or assets you may have can be considered a temporary thing, and you have no business in a profession with responsibility for other people's money. Anyone willing to say that there is no risk is either a fool or a crook. Nor is it likely your agent or anyone will reimburse you, especially for situations beyond their control, or if you misrepresent your situation or miss deadlines.

For listing clients, the same thing applies: Get what I need to done right away, and keep after that buyer's agent to remove contingencies in a timely fashion. If they won't remove contingencies when they are supposed to be removed, it tells me all I need to know. It's my client's call, but I know what my recommendation is going to be. I want the transaction to work, but I also want my client to get that money if it doesn't. Incidentally, Deposit issues are one reason of many that nobody should ever be willing to accept dual agency.

The bottom line is like something out of quantum physics: Schrodinger's Cat. Ideally, you want the sale to go through and record and for everybody to be happy because it all turned out exactly as agreed. Unfortunately, that's not perfectly predictable or knowable in advance. If it was, no real estate transaction would ever blow up, and the deposit would not be an issue. There are laws and procedures, and things agreed to in the purchase contract, that you have to be a real estate lawyer to offer an informed opinion about, and the judge, arbitrator, or whatever making the decision to make a definitive ruling. Escrow has custody of the money, but they're not going to do anything without mutual agreement of the buyer and seller. Either side can potentially decide to be stubborn and force the matter to arbitration, court, or whatever is appropriate, and all the consequent expenses of the legal system (which additional money is also at risk as the usual agreement is that prevailing party is entitled to legal expenses). And the legal system runs in incomprehensible ways for unpredictable reasons - the one thing that seems to be a constant is that if the judge wants the ruling to go a certain way, they can probably find a precedent to justify it if they try.

The point is this: The deposit is at risk. It is not "safe", and it does not necessarily belong to the seller either. Since this is cash, people understand that it is real money, because they had to scrimp, save, and set every single dollar in it aside from other uses, so they get understandably nervous about it. It represents a great vacation, a down payment on a new car, or something else very desirable that they're giving up, and they're putting at risk of forfeiture. Against this, the seller wants it if the transaction fails. There are ways to protect it, and ways to endanger it, and you've got both agents working to their client's advantage. As with any other competitive or potentially competitive situation, that makes the result indefinite until the game is complete. It isn't common in my experience that the deposit is forfeit, but it does happen. And anybody who tells you otherwise is either lying or hopelessly incompetent. Nonetheless, real estate is such a powerful investment that you are well advised to come to terms with the risk, because it's a necessary risk in order to buy real estate.

Caveat Emptor

Original article here


When I wrote explaining why borrowers should consider a 5/1 ARM, because the tradeoff between rate and cost is lower for that loan, and most people don't keep their loans 5 years anyway, so having a likely need to refinance 5 years out is not an additional cost for most people with mortgages.

Costs for a loan break into two categories: The cost to get the loan done ("closing costs"). This pays for everything that needs to happen so that the loan gets done. These costs may vary from place to place, but they are absolutely mandatory - they are going to get paid. For instance, on a $400,000 refinance with full escrow, my clients are going to pay $2945 in closing costs, when you really include everything. Many lenders will try to pretend some or all of the closing costs don't exist in order to get people to sign up, but they do. I can save some money with virtual escrow in some cases, but $2945 is real. The proof is that I can put it in writing and guarantee not to go over. Lenders don't want to do this, but if they're not willing to put it in writing that they'll pay anything over that, the reason is because they know it's going to be more when it comes down to it at the end of the loan.

The other cost is the cost for the rate. There is always a tradeoff between rate and cost. If you want the lower rate, it is going to cost you more money. If you are willing to accept a higher rate, you can save money on the cost for the rate, to the point where it can reduce or eliminate the closing costs you're going to have to pay. Zero Cost Real Estate Loans exist - I've done dozens. I love them because they save my clients money.

NOTE: Since I wrote this Congress has changed the law to discriminate against brokers by making Yield Spread legally a cost of the loan, despite the fact that it adds zero to the amount the consumer pays and in fact can mean that what the loan actually costs the consumer is reduced. So technically, a broker can no longer deliver a zero cost loan. However, we can deliver a loan where you don't actually pay any money - either out of pocket or through increased loan balance. A matter of semantics and sounds to your average cynical but uneducated consumer like I'm weaseling in order to hose them later. If not for the law meant to confuse matters, it would be easier and more straightforward for consumers to understand. Not to mention that a broker who funds their own loans as a correspondent or a direct lender can still legally claim that their loan doing what is for all practical purposes the same thing isn't technically yield spread, and therefore doesn't magically become a cost because the government says yield spread is a cost. Thank Barney Frank and Christopher Dodd for "protecting" you.

You can lump the loan provider's profit in with the costs for the rate, as origination points, or in with the cost of the loan, as an origination fee, and pay it via Yield spread (if you're a broker) or even (in the case of a direct lender or correspondent) hide it in the fact that you're going to make a huge profit selling that loan on the secondary market, but I guarantee you it's going to get paid somehow. Nobody does loans for free, for the same reason you wouldn't work if you didn't get paid.

These costs are going to get paid. End of discussion. The costs are slightly different in states with different laws, but necessary costs are going to get paid. They can get paid out of pocket or they can get paid by rolling them into your loan balance but they are going to get paid. Most people don't understand loan costs which aren't paid by cash, and think that they are somehow "free", but that is not the case. Not only did you pay it, but it increases the dollar cost of any points you may pay, you're going to pay interest on it, and (less importantly) it's going to increase your payment amount.

The genesis of this whole thing was a guy I thought I had talked into a 5/1 ARM when I originally wrote this (rates are lower now). I went through this whole process of explaining why the rate/cost tradeoff for a 30 year fixed rate loan was not going to help him, and then a couple days later, he called me saying he'd found a thirty year fixed rate loan at 5.5, saving him three quarters of a percent on the interest rate and almost $400 on the payment. Remember that at the time, I had 5.5 available as well (rates are lower at this update). So I'm going to keep that exact same table:

30F Rate30F Cost5/1 rate5/1 Cost
5.5%2.65.25%1.5
5.875%1.85.5%0.9
6.25%0.25.875%0

The problem with the rate of 5.5% is that for a $600,000 loan, those closing costs are going up to $3475 (lender and third party costs are higher above the conforming limit) in order to get the loan done, and at the time, based upon current loan amount, 2.6 points would cost $16,100 and change. But he had gone to a loan officer who did his math as if that $19,585 (my loan quote at that time for that rate - I suspect the competitor's was higher) was going to magically disappear like one of a David Copperfield's illusions. He calculated payments and savings as if there were no costs - based upon the current balance and new interest rate and amortization period. Of course, this makes it look like the client was saving a lot of money $382 off the payment and three quarters of a percent off the rate, give him a whole new thirty years to pay off the loan, and pretend the costs of the loan aren't going to happen to get the guy to sign up. You'd think that somebody who reads this website every day would know better, but that does not appear to have been the case. In point of fact, the competing loan officer still has not told the guy how much his closing costs are or how much that 5.5% rate is going to cost him through him. I'll bet it's more than I would charge, but I don't know.

Psychologically speaking, what the competing loan officer is doing is smart. Because there's incomplete information available to the prospect, and I'm straightforwardly admitting how much it's going to cost (which is a lot, as most people who aren't billionaires or politicians think about money), an indefinite, uncertain number sounds like it might be less, even though it won't end up that way. Furthermore, by pretending costs don't exist, he has raised the possibility in the client's mind that there won't be any, because most people don't know how much lenders can legally lowball. There will be costs,and I'm willing to put my money where my mouth is that I have honestly represented mine. If this other loan officer could really deliver that loan at a cost lower than I can, there would be no reason for him to prevaricate, obfuscate, or attempt to confuse the issue. I've written before about how you can't compare loans without specific numbers, and there is no doubt in my mind that this other loan officer knows what those numbers really are - he just doesn't want to share that information, and the way our public consciousness about loans works, he can most often get away with it. It's still scummy behavior, and takes advantages of loopholes in the disclosure laws to practice bait and switch, knowing that when the deception comes to light (at closing) most people won't notice, and most of those who do notice will want to be done so badly they'll sign on the dotted line anyway.

Now what's really going to happen in 99% plus of all cases is that the costs are going to get rolled into the balance of the loan. The client certainly isn't going to be prepared to pay them "out of pocket" if they're not expecting those costs. So here's what happens: The client ends up with a new loan balance of $619,585 (Probably higher, because they're likely to roll the prepaid interest in as well, and quite likely the money to seed the impound account, but I'll limit myself to actual costs). In fact, the difference in payment drops to $290 when you consider cost, and $115 of that difference is directly attributable to starting over on the loan period, stretching out the repayment period to an entirely new thirty year schedule of payments (even though he was only two years in), completely debunking any serious consideration of payment as a reason to refinance. But lets compare cost of money, in the form upfront costs ($19,585 to get the new loan, versus zero to keep the loan he's got) and ongoing interest charges ($3125 per month on the existing loan, versus $2840 per month on the new loan). In this case, you're essentially spending nearly $20,000 in order to save $285 per month on interest. Straight line division has that taking sixty-nine months to break even. Actual computation of the progress of the respective loans cuts a month off that, to sixty eight months. As compared to a national mean time between refinances of 28 months, and this particular prospect is currently looking to refinance after less than that. In good conscience, I cannot recommend a loan where it's going to take him almost six years to break even, and by not considering the costs involved in getting that rate, he's setting himself up to waste probably half or more of the nearly $20,000 it's going to cost him to get that loan.

In fact, if this prospect were to refinance again in 28 months (once again, national median time), he would have spent $19,585 in order to save himself $7847. That doesn't sound like a good deal to me, and it shouldn't sound like a good deal to you. But here's the real kicker: The balance of the loan he refinances in two years is $19,250 higher. Let's assume it takes a low rate, rather than a cash out refinance to lure him into refinancing again, so he gets a 5% loan to refinance again. The extra $19,250 he owes will continue to cost him money, even thought the benefits of the refinance he is considering end when he refinances again or sells the property. At 5% for a putative future loan, that $19,250 extra he owes will cost him $962.50 per year extra on the new loan. Even if he sells in order to buy something else, that's $19,250 the client needs to borrow, and pay interest on, that he otherwise would not. Even if the client waits a full five years to refinance again, he's only saved roughly $16,400 in interest, and the additional balance owed on the new loan has actually increased slightly, to $19,280 (Remember, he's two years into the existing loan, hence $115 of phantom payment savings which keeps reducing his balance if he keeps paying it)

Failing to consider the fact that most people are not going to keep their new loan as long as they think they will is the gift that keeps on giving - to lenders. I run across people in their forties and fifties who have done this, all unsuspecting, half a dozen times or more, running up eighty to a hundred thousand dollars in debt for nothing but the cost of refinancing, and at 6% interest, that's $4800 to $6000 per year they're spending in interest on that debt. A more careful analysis says that the calculus of refinancing should emphasize finding a rate that helps you for a lower cost, but that's not the way lenders get paid the secondary market premium, and that's not the way that loan officers get paid to do lots of loans. Therefore, if you find someone who will go over these numbers with you and tell you it's not a good idea to refinance when it isn't, that loan officer is quite a valuable treasure because they're going to keep you from wasting all that money to no good purpose.

A good rule of thumb is that if a zero cost loan won't put you into a better situation, it is unlikely that paying costs and points to get the rate down is really going to help you either. You are unlikely to recover those costs and points before you sell or refinance your property. If a loan that's free doesn't buy you a better loan than you've got, then the current tradeoff between rate and cost isn't favorable to refinance. There may be reasons to do so anyway - cash out, ARM adjustment, etcetera, but chances are against you getting a rate that is enough better to justify the cost. When you consider how often most people refinance or even actually sell and move, it's hard to make a case for anything other than low cost loans and hybrid ARMs. I understand the people who want the security of a fixed rate loan and a low fixed rate - especially with the loan qualification standards as fussy as they currently are. But that rate, especially, is likely to come with a cost that they will never recover before they voluntarily let the lender off the hook. Good mortgage advice takes this into account, with the net result that the folks don't end up in debt to the tune of $80,000 to $100,000 extra, and spending thousands of dollars per year just on interest for money they shouldn't owe in the first place. No, they never wrote a check for it, but it's money they spent, and if they had needed to write a check for it, they probably wouldn't have spent the money in the first place. Kind of like having a credit card with a balance owing of $80,000 or more, just for the unrecovered costs of refinancing, but people don't realize it because it's not broken out of the total cost and balance of their mortgage, and nobody educates them as to where they would be if they hadn't made these mistakes. I try to teach my clients what they need to know to avoid that situation, so they don't find themselves victimized by it.

Caveat Emptor

Original article here

I've been taking a long look at the world of For Sale By Owner and similar concepts lately. With the digital revolution, you always want to be watching the tide to figure out if you're in a business that's about to go the way of milk delivery and diaper service - a few left, but only a tiny fraction of the size they were. Since blogs and online magazines replacing or at least greatly supplementing mainstream journalism is one thing I'm constantly reading about, it might be good information to know if my real career is about to go the way of journalism.

At this point, I'm not worried about needing to change professions. The world of For Sale By Owner (FSBO) does seem to be figuring out the legal ramifications fairly well. There are resources available to get most, if not all, of the legally required disclosures for sellers to avoid future liability to the buyers. I'm going to go on record as believing from the things that I have read and seen that they are not as assiduously practiced as they are by people with real estate agents working for them. Reading the groups, I am seeing all kinds of whining about "Do I have to disclose X?" "Do I really have to disclose Y?" Sometimes, the stuff is minor and inconsequential (leaky toilet, drippy faucet), but a lot of times it's pretty major as well (water leak in/under slab, lead based paint, asbestos, "minor" cracks in the slab). Mind you, I've heard similar whining from real estate agents, particularly new ones. But the real estate agents at least want to be in business (and not sued) for a long professional career with many transactions every year, and so have motivation to disclose everything they find out about, lest one transaction cost them their license. Many individual owners, it seems, even the ones who have been made aware of the legal requirement to disclose, are hoping to get through the one transaction unscathed. After all, they hope they're going to be long gone when the problem crops up. To this, I say, don't count on it, and failure to disclose can often make your legal liability worse than it needs to be.

Needless to say, this is a big "let the buyer beware," when dealing with FSBO properties. You're standing across the table from someone with an immediate motivation to not tell you about whatever metaphorical bodies are buried in the property because once told you may not still want to buy, and most particularly you may wish to reduce your offering price. They have only a hazy motivation to tell you - the indefinite threat of perhaps some legal action sometime in the future, when they may or may not have assets you can even go after. If that doesn't make you uneasy, something is wrong.

One area FSBO is falling short in is picking an appropriate asking price. By the evidence, this is not only lack of information but also homeowner ego speaking here. Some people are not aware of what their home is really worth, or if they are aware then they are ignoring the evidence. Speaking from personal experience, persuading people to put an appropriate asking price on their property is one of the most difficult parts of the listing interview. Also significantly, in the long seller's market we had, many real estate professionals were making a lot of money buying "For Sale By Owner" properties that were under-priced, and immediately "flipping" them for $30,000 to $50,000 profit, often more. Here's the math for a property that sells for $460,000 but should have sold for $500,000: In the latter case, assuming you pay a standard 5%, you paid a $25,000 commission, split between the buying and selling brokers. But you come away with a net that's $15,000 higher. I personally know of several sales where an agent purchasing a FSBO property then sold it again before escrow was even completed for profit of $75,000 or more.

There is still some of that going on, but the problem with most FSBO properties seems to be over-pricing the market, rather than under. Their neighbors house sold for $500,000, and by god they are going to get $525,000. Never mind that the neighbor house has an extra bedroom, an extra bathroom, 800 more square feet, sits on a corner lot that's twice the size, and most importantly, sold when demand was high and supply was low. They are going to get that price, come hell or high water. So they put that out as the asking price, and they wonder why the one or two people to express enough interest to look vanish as soon as they've seen it. The reason is simple: They've priced themselves out of the market. There are better homes to be had for less money. In a fast rising market, this may be a survivable defect. When prices are rising as fast as they were, the market would catch up to anything that was vaguely reasonable. That has changed now. It's bad enough with people who have a real estate agent for their listing. Two of the hardest fights with listing clients in this market are keeping the property priced to the market, and getting them to accept what in today's market is a good offer rather than hoping for previous years' "bigger fool." Seems that most people who don't have an agent are just in denial. There's a FSBO two doors down the block from a corner listing we had where I held an open house. Even with me drawing the traffic to him, he didn't get a single offer because his asking price was too high. That's fine if you would be happy and able to stay if the property doesn't sell. If you're not in that situation, it's not.

Another area where FSBO properties are falling short is in marketing. They've got an internet advertisement and a sign in the yard. Maybe they've got an advertisement in the paper (usually the wrong one), and maybe they are holding open houses. All of these are nice. None of these are optimal. First thing is that internet advertisement you have is often on one site where even internet savvy buyers don't necessarily see it. Even if that is free, it's probably worth money to list on a co-operating network of sites. For Sale By Owner signs in the yard are more bait for agents than a prospective buyer. I'll put a sign out there when I get a listing also - it does catch a few people, and a sign with an agent or broker's name on it keeps other agents from bothering you. But it's a long shot at actually selling the property.

There are places to advertise your property to actually sell it, and there are places where agents advertise their business to attract new clients. Most of the FSBO ads I see seem to be in the latter sort of place. I don't think I recall a "For Sale By Owner" ad in the places where I'd expect it to generate significant actual interest in buying that particular property. There are reasons for this. The ones that are likely to generate interest require more lead time. I don't mind spending the money (especially amalgamating my listing with other listings in the office). Even if it sells before then, it helps the office generate more clients we're going to go out and show similar properties with, and I get a certain proportion of those. But For Sale By Owners tend to balk, as they are thinking one transaction. There are also resources that make an Open House effective, but are not cost effective for somebody looking to sell one house.

Number one resource for actually selling the property is the Multiple Listing Service (MLS). Put it out there where the agents who the buyers come to will see it. My primary specialty is buyer's agent. I know they are ready, willing and able to buy a property. Do I even take them to look at "For Sale By Owner" properties? Not unless I know ahead of time that the seller will pay my commission. Nor does any other buyer's agent I know of. Before you "For Sale By Owner" types start cursing us, remember first, we've got to make a living so we'll be there for the next buyer. Second, we're actually living up to our fiduciary responsibility when we do this, as I've got their signature on a piece of paper that says they'll pay me if you don't. So unless your property is priced far enough under the market to justify the expense on my client's part, your property is not a contender, and I'd better be prepared to justify the expense on my client's part in court, so your under-pricing the market has got to be by more than my commission. Furthermore, going back to legal requirements, I've got to figure that there is a higher than usual chance that the seller will not make all the necessary disclosures, or perhaps won't tell the complete truth and nothing but the truth on them. This puts my clients, and through them, me in a bind: Sure my clients can and will sue you, but if you don't have the money my insurance is likely going to end up paying out, because even though I've done everything I reasonably could have done, you didn't have an agent.

Given that the Multiple Listing Service is far and away the best tool for selling any given property, if you're not on it, you're missing out on buyers. If you don't have a selling agent's commission listed on Multiple Listing Service that is at least what is specified in the default Buyer's Agent Agreement in your area, you are missing out on buyers. If you don't have an agent at all, you are missing more buyers. Because I, like other buyer's agents, want to be certain we're not wasting our time. I've done a real pre-qualification or even a preapproval on my buyers (if the transaction doesn't actually go through, I don't get paid by anyone). Compare that with Mr. P, whom I sent away the night before I finished this essay. He's out there looking at houses he wants to buy, but the fact is that given the situation he should continue renting. A competent loan officer such as myself who was less ethical could maybe get him the loan anyway, or maybe not. It would certainly be an uphill fight. So he's out low-balling "For Sale By Owner" properties on his own today. The one who's desperate enough to sell at that price needs the transaction done with the first buyer who comes along, and is going to spend at least a month finding out there's only a small chance of the transaction actually going through, a month that they likely don't have to spare. The other For Sale By Owners are likely to get mightily annoyed with him, but he's the customer they're most likely to get.

There are also issues of timeliness and context and negotiations to consider. Putting your property on the market for the wrong price is a recipe for disaster, because by the time you figure out that the buyers aren't interested at that price, your "days on market" counter is so high that they're not interested, period. Agents know - because they're dealing with the issues all the time - what is a good response in this situation to a given event, and the good ones understand a lot more about keeping negotiations appropriate, so as not to lose what really is a good offer.

Caveat Emptor (and Vendor)

Original here

Yet that is exactly what you want them to do.

To avoid competing on price, they have all kinds of distractions they offer to make life more convenient, but not cheaper. They offer automatic payment options, the convenience of having your mortgage at your corner financial institution, biweekly payments, mortgage accelerators, and even negative amortization loans, which offer the apparent benefit of lower payments, which many uneducated consumers believe is price, at the price of a much higher interest rate than you would otherwise be able to get, which is the price the lender really cares about, and the one you should also.

There is always a trade-off between rate and cost for a given type of loan. That doesn't mean that different lenders won't have different trade-offs. Some are less willing to compete on price than others, so they tell you about how great their service is, how you are such a difficult loan that nobody else can do, or how easy their paperwork is, or how easy their loans are to qualify for. As a matter of fact, the lender with the easiest paperwork and loosest qualification standards will usually have the highest price trade-off, because their loans are statistically more likely to default, and therefore have to bring in a higher interest rate in order to have the same return.

Just like branding in the world of consumer products, which is also in effect for mortgages (why else would National Megabank be spending all that money for commercials? They expect to make a profit on it!), all of these little extra bells and whistles increases the price they can charge consumers for their loans, which is to say, the rate that you get, and the cost to get that rate.

So long as the terms are comparable, a loan is a loan is a loan. Provided that it has no hidden gotchas, a 5.875% thirty year fixed rate loan is exactly the same loan from National Megabank as it is from the Lender You Have Never Heard Of. No pre-payment penalty, and lower costs for the same rate? That's the lender I'll choose. It should be the same one you choose as well. It doesn't matter to me what name I make the check out to, or what address I put on the envelope. It shouldn't matter what routing symbol you put on the automatic payment, either, if that's what floats your boat. Lower rate for the same cost on the same loan? Same situation. Everything else is window dressing.

(Okay, it doesn't often matter to me. There are lenders that I'll bet you've heard of where I won't place my client's loans no matter how good the price due to some issues with their lending practices. But those lenders trend heavily to be the ones with massive consumer ad campaigns that don't really try very hard for broker generated business, anyway, because brokers learn to stay away from them fast. Nor are they usually competitive on price, because they're aiming for the "consumers shopping by name recognition" market).

So how do you force lenders to compete based on price? It's actually very simple. Ignore all of the stuff that they try to distract you with, like low payments for a while or mortgage accelerators or biweekly payment programs. Those are bait, and they serve the same purpose as bait: To get you to take the hook. Think about the things that happen to the fish after it takes the hook. That's you, if you take the hook. Concentrate on the type of loan, the rate, and the cost to get that loan. Here is a list of Questions You Should Ask Prospective Loan Providers. Ask all of them with every conversation you have about what is the right loan for you, and the best rate and cost they can deliver on that type of loan. After you have settled on one loan with one provider, it is then okay to ask about the bells and whistles that lenders (and every other sales organization) love to distract you with. If you want auto-pay, or biweekly payments, or a mortgage accelerator, these are just as much in the lender's best interest to offer you as they are convenient for you to have. I wouldn't pay for them, but many people think they're nice to have, and that's fine. Just don't let them distract you from what's really important: The price of the money you're buying.

Caveat Emptor

Original here

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