September 2019 Archives

This is the final article in this series, and the most difficult. The reason is very simple: Unlike shopping for buyer's agents or shopping for loans, you have to make a binding choice - it is in your best interest to make a binding choice - before you obtain the result you want. With buyer's agents or loan officers, you can judge by actual results - the bargain properties they show you and the loan they actually deliver when the trust deed and Note are all ready to go. Shopping for an effective listing agent is always a leap of trust. It shouldn't be a huge leap into the unknown, but it's a lot easier to talk a good game than it is to deliver.

The important thought to remember as you read this article and shop for a listing agent is this: You might get what you pay for. You won't get what you don't pay for. Make certain you understand what the level of services provided are by a given agent before you sign on the dotted line, whether their fees are contingent upon a successful sale or are paid up front with no guarantees. I wouldn't sign on the dotted line without compensation being contingent upon a successful sale. If they're not confident enough of their abilities to bet their paycheck, I wouldn't bet on those abilities either. Of course, the contingency commission will be for a higher dollar amount, but ask yourself this: Suppose you got $10,000 for successfully completing a project at work, nothing for failing. Is your motivation to get it done, and get it done sooner, more or less than if you get a flat $5000 in advance whether you complete it successfully or not? Would you be willing to put in more effort? Spend more money? Be more aggressive? I assure you that real estate agents have basically the same motivational attitude as the rest of the world.

Most people do not take sufficient account of the time critical factor: Nothing happens immediately in real estate. If you have ninety days to get the house sold, you've really only got about thirty days to get an accepted offer - due to regulatory requirements, loans take a minimum of about 45 days now, more likely 60 and loan officers without a serious dedication to getting it right in the first place may take 3 months or more! I used to be able to reliably get a loan done in under three weeks - not any longer. The quicker everything moves, the better off everyone is, but even in the most optimistic scenario, this means that if you need the property sold in ninety days, you need an accepted offer within thirty. If you need an accepted offer within thirty days, you need an initial offer you can negotiate within fifteen to twenty days. When I originally wrote this, I had just opened Escrow March 21 on a negotiation that started February 7th (all of my client's responses were same business day, but the other side wasn't nearly so punctual). Forty-two days is definitely on the marathon end of negotiations, but you do need to make allowances for the time it takes. Furthermore, all of your advertising (except MLS and internet) takes anywhere from three days to thirty to appear. So from the time you know you need to sell in 90 days, you may really only have fifteen to twenty days to entice an offer. Understand that. Many agents don't.

You need to have figured out what your time frame for selling is. If you need the transaction done in ninety days, we've already seen that you really have about twenty at most to attract a prospective buyer. If you have to sell in thirty days, you waited too long to list it. If you have to sell in sixty days, you've got maybe a week to get an offer. If it's rented with tenants and your cash flow is positive, you don't have a real deadline, but having tenants in a property you're trying to sell raises its own issues and you are unlikely to get anything like the price you would from a clean and vacant property. Otherwise, until the whole thing is finished, as in grant deed signed, loan funded, old loan paid off and you get your money and your Reconveyance, you are paying mortgage and property taxes, either insurance or homeowner's dues, and possibly several other monthly fees. To pick lower than typical numbers, on a property in California that you bought for $200,000 and has a loan for that same amount at 6%, that's roughly $1600 per month it's costing in money out of your checking account. Most folks can't add $1600 to their monthly cost of living for very long. A $400,000 property with a $400,000 loan would be roughly $3100. If it doesn't sell before your reserves run out, you've got yourself a real problem.

The absolute first thing people look at is price. If your asking price is more than people are willing to pay for a property of those characteristics in that neighborhood, the buyers and their agents are going to ignore you. In fact, your traffic will largely be governed by the relationship between your asking price and everyone else's, in conjunction with your days on market counter. Price it right in the first place, and you get lots of traffic your first days on the market. Wait until later, and you'll not only miss out on your time of highest interest, you'll have to price lower to attract the same level of interest. So if you've got a short deadline, I'd be careful to price under the market. What's a short deadline? That's determined by how long properties are taking to sell. If everything listed is pending within three days, you're likely to be okay as long as you don't overprice. If the average property is sitting for ninety days or more and you need to have it not just in escrow but sold in ninety, I'd offer it up below the comparables were I you. Once you know you need to sell, you're the one who knows how long you can manage to keep paying for the property. It needs to be sold before that time runs out.

Condition can mean a lot more than square footage or number of bedrooms and bathrooms. Sometimes the first thought in my head when I drive up or walk in the door is, "It may be larger, or it may have this or that where the competing property doesn't, but I like the other place more because it looks better cared for." I assure you that I'm not alone. Thinking "The buyer will be able to spend $20,000 fixing it and have a million dollar property," does not justify a $980,000 price tag in anyone's mind. Get that whole idea out of your head. If you want the money fixing it up is going to bring, do the work yourself. Price the property for its value and condition now. In other words, even if you're right, you have to spend the $20,000, and be the one to deal with the hassle of making it happen yourself, in order to get that $980,000 net. But it's hard to quantify condition. Even most agents don't look at enough properties to be certain. I'm out there looking at a minimum of twenty per week, which means I know what the ones that sold recently looked like, but if you're outside my normal stomping grounds it's going to take me at least two trips looking in your area to figure the optimum listing price. That's a cold hard truth. It's critical that your listing agent makes a habit of working in the neighborhood the property you want to sell is in. I see something listed with an agent outside the county or even a different part of the county, the odds are that agent has no clue what they should have listed it at. Such listings are what real estate sharks call an opportunity. In urban areas such as San Diego, even a few miles away can be bad news. I'm not certain which is worse: an agent thinking "La Jolla" when the property is in Santee or an agent thinking "Santee" when it's in La Jolla. The former will overprice the property, resulting in the property sitting unsold, and probably all kinds of unpleasant consequences, the most important of which is that the property won't sell until you're desperate, and for far less than you could have gotten if it had been correctly priced in the first place. The latter will under-price the property, resulting in less money than you could have gotten, and usually way less net. There aren't any rules of thumb you can follow - you just have to know the neighborhoods, and even though these neighborhoods are only fifteen miles apart, anyone who tells you they know both is lying. There's too much for one agent to know. I've lived here essentially my whole life, and it takes me two "fishing trips" to neighborhoods I've known my whole life in order to start really understanding enough about that neighborhood professionally that I can start spotting which properties are bargains and which are not. The markets change way too fast for anyone to keep track of too much area. I might believe someone could understand the entire Manhattan condo market. Doubt it, but I might, although I'd be more inclined to trust the agent who said they specialize in a smaller area. I wouldn't believe they could understand Brooklyn or the Bronx as well. Where population is less dense, which San Diego definitely is, I'd say about quarter million population, tops. Out in rural areas, probably less than a third of that. I'd want to see something that indicates your neighborhood or area is one the agent really makes a habit of working before you list with them. This is more important than just about anything else in a listing agent.

Your time of highest interest is right when your property hits MLS. The vast majority of buyers are out there looking at what hit MLS this week, or today, not what hit six weeks ago. The feelings I hear most buyers articulate is that the good stuff gets found quickly. This is something which is generally true - most of the good stuff does get found quickly - but is not universally true. Some of the good stuff slips through under the radar. Some stuff becomes a worthwhile bargain when the seller gets real on the asking price after their deadline to sell has already passed. It may be crazy, but I've heard people talking about blowing off properties that looked like great bargains because they saw that the "Days on Market" counter was too high for their tastes. So you want to keep this in mind. Your agent is required to put your property in as quickly as possible once they have the listing contract, unless you instruct them in writing not to. If your deadline to sell is not looming too quickly, it can be a good thing to delay the actual listing of the property on MLS while you prepare the property for market. This gives your agent time to get longer term advertising ready! You don't want the advertising to appear first, but the property gets stronger traffic if the "days on market" counter says 4 when the ads appear than it does at 45 when those potentially interested see the ad.

Open houses are worth doing, but not worth doing too often. I want to do one the weekend after a property hits MLS without fail, and before that I want the neighborhood to know there's going to be an open house. When the neighbors bring you a buyer, that's a good way to sell the property for more than the typical MLS searcher. The latter is looking for a bargain. The former wants to live in this neighborhood, and already has a connection to it. I may also do an open house aimed at brokers and agents that first week, during the week, and a caravan is a good idea also - which is another possible reason to delay the listing appearing on MLS if either takes more than a few days to arrange. On the other hand, if there's an open house every weekend at Joe's house, there's no urgency. Many agents do open houses to meet new buyer prospects - that's really why they want a listing. I used to space them about four weeks. Now, I usually don't consider a second open house until six weeks out (and my few listings generally are in escrow well before that), and it seems to work better for actually getting interested buyers for that property.

Broker caravans and broker open houses can help, but they require the agent be willing to actually share the commission with a buyer's agent. If they're not, you're wasting your time, and likely turning off prospective buyers as well. If you can do these the week it hits MLS, you're ahead of the game.

If you're getting the idea that agents shouldn't list more than one property per week, you're getting the right idea. When I first wrote this, one listing per week was likely too many to service well in the current market - because if they price it right, the average property was not going to sell in three days. In strong seller's markets where things do sell that quickly, yes, one listing per week is doable. In buyer's markets where things are sitting ninety days and more on average, you are begging to become neglected with a listing per week agent unless you're paying the highest prospective commission. If someone has more than four to six listings at any one time, I'd cross them off the my list, no matter the state of the market.

Continued in Part II

Original article here

I just got a google search where the question asked was "What if the mortgage is recorded in the wrong county?"

I've never actually seen this (and San Diego County, once upon a time, included what is now Riverside, Imperial and San Bernardino counties), but if it's the mortgage on your loan, no big deal. You should get a copy of the recorded trust deed, and the county recorder's stamp should tell you the county it was recorded in. You probably want to record it in your own county, as when the document is scanned in both recorder's stamps will appear, thus making it obvious that these two documents are one and the same. There may be better ways to deal with it. Since the error was (everywhere I've ever worked) your title company's, they should be willing to repair it to eliminate the cloud on your title. If and when you refinance this loan or sell the property, make sure that the Reconveyance is recorded in both counties, and references both recordings.

More dangerous is the issue of what if it's the previous owner's loan that was wrongly recorded. The previous owner is obviously no longer making payments on the property. The lender may or may not have been paid off properly; if they were there may not be any difficulties. It could just disappear into some metaphorical black hole of things that weren't done right and were never corrected, but just don't matter because everybody's happy and nobody does anything to rock the boat. However, unlike black holes in astronomy, things do come back out of these sorts of black holes.

However, if the previous lender was not paid off correctly, or if they were paid but something causes it to not process correctly, they've got a claim on your property, and because the usual title search that is done is county-based, it won't show up in a regular title search. Let's face it, property in County A usually stays right where it's always been, in County A, as county boundaries don't move very often. There is no reason except error for it to be recorded in County B. Therefore, the title company almost certainly would not catch it when they did a search for documents affecting the property in County A; it would be a rare and lucky title examiner who caught it. Furthermore, since it likely antedates all the current loans, such a lien would be senior to them, and need to be paid off in full before any of the more recent loans got a penny. This is one of the reasons why lenders require borrowers to pay for a lender's policy of title insurance.

In some states, they still don't use title insurance, merely attorneys examining the state of title. When the previous owner's lender sues you, you're going to have to turn around and sue that attorney who did your title examination for negligence, who is then going to have to turn around and sue whoever recorded the documents wrong. If it's a small attorney's office and they've since gone out of business, best of luck and let me know how it all turns out, but the sharks are going to be circling for years on this one, and the only sure winners are the lawyers.

In most states, however, the concept of title insurance has become de rigeur. Here in California, lenders don't lend the money without a valid policy of title insurance involved.

Let's stop here for a moment and clarify a few things. When we're talking about title insurance, there are, in general, two separate title insurance policies in effect. When you bought the property, you required the previous owner to buy you a policy of title insurance as an assurance that they were the actual owners. By and large, it can only be purchased at the same time you purchase your property. This policy remains in effect as long as you or your heirs own the property. The first Title Company, which became Commonwealth Land Title (now part of the Fidelity group), was started in 1876, and there are likely insured properties from the 19th century still covered. If you don't know who your title insurance company is, you should. Most places, the company and the order of title insurance are on the grant deed.

The other policy of title insurance is a lender's policy of title insurance. This insures your lender against loss on that particular loan due to title defects, and when the loan is paid off (either because the property is sold, refinanced, or that rare property where the people now own it free and clear), it's over and done with. Let's face it, most people are not going to continue to make payments if they lose the property. If you take out a new loan, your new lender will require a new policy of title insurance. You pay but they are the ones insured by the policy. It's a requirement imposed on everyone who wants to borrow money for real estate.

To get back to the situation, what happens when you order title insurance is that a searcher and/or an examiner go out and find all of the documents they can find that are relevant to the title of the property. These days, they typically perform an automated search, and sometimes documents are indexed and cross referenced incorrectly and therefore they do not show up when they should. Nonetheless, the title company takes this list of documents and tells you about known issues with the title, and then basically says "We will sell you a policy of title insurance that covers everything else." This document is variously known as a Preliminary Report, PR, or Commitment.

Now it shouldn't take a genius to figure out why you want a policy of title insurance. Around here, the average single family residence goes for somewhere on the high side of $500,000. You're committing a half million dollars of your money on the representation that Joe Blow owns the property and that if you give him half a million, he'll give you valid title. I would never consider buying property without an owner's policy of title insurance. Even with the best will in the world and my best friend whose family has owned it since the stone age, all kinds of issues really do crop up (Another agent in the office has a client right now who bought a property via an uninsured transfer - and there was an unrecorded tax lien. Ouch. Say bye-bye to your investment). The lenders are the same way. No lender's policy, no loan.

So what happens when this old mortgage document is uncovered? Well, that's one of the hundreds of thousands of reasons why you have that policy of title insurance. You go to your title company and say, "I have a claim." Since they missed that document in their search, they usually pay off the loan (there are other possibilities). After all, if they hadn't missed it, it would have been taken care of before the Joe Blow got paid for the property and split to the Bahamas.

None of this considers the possibility of fraud, among many other possibilities, but those are all beyond the scope of this article.

So when buying, insist that your seller provide you with a policy of title insurance. When selling, it really isn't out of line for your buyer to require it - it shows that you have a serious buyer. Some places may have the buyer purchasing his own policy, but most places that use title insurance, the seller pays for the owner's policy out of the proceeds. Of course, anytime there is a loan done on the property, the lender is going to require you pay for a lender's policy. If the quotes you are given do not include this, be certain to ask why.

Caveat Emptor

Original here

One of the things you get with every mortgage loan quote is an APR, or Annual Percentage Rate. There is even its own special form, the federal Truth-In-Lending (TILA) form, required at application for every loan.

This was mandated by congress back in the early 1970s as a way to give consumers some way to compare between competing loans of equal rate, and it is governed by Federal Reserve Regulation Z.

The problems with APR are threefold. First off, it is computed from numbers on the Good Faith Estimate (or Mortgage Loan Disclosure Statement in California), which are often intentionally and legally under-stated. "Mis-underestimated," to use Former President Bush's famous phrase in an entirely different context where it is not a good thing. If the numbers on the Good Faith Estimate are incorrect, the computations that result in the APR will be similarly incorrect.

Here is a routine example, from an unfortunate soul I encountered awhile ago. They told him they were going to do his $230,000 loan for 3/8ths of a point and $1895, which works out to about $3400 total, APR was listed as 6.136 on a 6% loan when he signed up. But when the final documents were ready, the interest rate was 1/4 percent higher, the points were 2.25 points, and the closing costs were actually over $4000. Total cost: $9400 added to his mortgage, and the APR on final documents was 6.568 on a 6.25% loan. It stands out in my memory because I had been competing for his business. He came back to me during his three day right of rescission. Unfortunately, rates had moved up and by that point I couldn't do anything he liked better, so he rewarded the company who misquoted his loan (to use technical parlance, lied) by getting them paid. Unfortunately, you can't go backwards in time with what you learn at the end of the process. You need to be right the first time.

The second reason to ignore APR is that it is an attempt to compress what is fundamentally at least a two-dimensional number into a one dimensional number. Remember back in school when you learned graphing on a "number line" and then a Cartesian Plane? Which of them contains more information? The Cartesian Plane, of course. APR is an attempt to force a Cartesian Plane onto number line. In order to do it, you need to make some assumptions, and you still lose a lot of information.

The third, most important reason to ignore APR is that the assumptions that Congress and the Federal Reserve mandate were reasonably based on the reality of the 1960s, which has now changed. Back then, people bought homes they were going to live in for the rest of their lives, and re-financing was much less common. People are now living in homes about nine years on the average, and refinancing about every two to three years. But the regulation still reads that the costs of doing the loan, which are included in the APR calculation, are assumed to be spread out over the entire term of the loan, even with ARMs and hybrid ARMs, which almost nobody keeps after the initial fixed period. With the term of most loans being 30 years, and the average person refinancing about every two years, this computation makes absolutely no sense as it exists today. The costs of the loan should be spread over the period that the person getting the loan is likely to keep it, not the entire theoretical term of the loan.

Let us look at the earlier example in this light. Let's assume that the loan delivered to the unfortunate con victim above was a five year ARM, and compute APR as if he's going to keep it the full five years of the fixed period, rather than the thirty years he theoretically could keep it. The APR would have been listed as 7.067% on the final documents.

Let us go a step further and assume that instead of keeping his loan 5 full years, like less than 5 percent of the population, he keeps it for something close to the national median of two years, and compute APR based upon that. His final documents would have listed an APR of 8.293 percent.

To offer a better strategy: At the time, I could have done the loan at zero total cost to him - literally nothing. Zero added to his mortgage, he pays for the appraisal but is reimbursed when the loan funds - at 6.75%, APR 6.750 no matter how you compute. Yes, the payment is $17.75 per month higher than what he ended up with. But he wouldn't have added $9400 to his mortgage balance. Let's compare these two loans five years out, when 95 percent of the population has sold or refinanced and is no longer reaping the benefits of that payment that's lower by $17.75 per month. If he has the zero total cost loan I could have put him into his balance is $215,914.00, and he has paid $89,506 in payments. The loan he ended up with, he's going to owe $223,449, and he's paid $88,441 in payments. Okay, he's saved $17.75 per month, about $1065 total, in payments. But he owes $7535 more. If he sells the property and puts it all in a savings account, he would have been permanently ahead by $6470 if he initially chose the higher rate, higher payment, but lower cost loan. Not to mention that he would get $7535 extra all at once, as opposed to little dribbles of $17.75 per month that most people would never notice. If he buys another house, or if he keeps this home but refinances, he owes $7535 less with the zero cost loan. Let's say he gets a really great loan next time, with a thirty year fixed rate of 5%. That $17.75 per month he "saved" on his payment for five years is still going to cost him $376.75 per year, $31.40 per month for as long as he keeps the new loan. This is what comes from relying upon APR as a valid measurement of a loan.

This is not nitpicking. The so-called 2/28 and 2/38 were the most common subprime loans nationwide, when we had subprime. They are subprime hybrid ARMS with an initial two year fixed period. People get into them because they don't have the money for a down payment, or because they can't qualify for A paper. Considering that they're all straining to buy as much house as they possibly can get a loan for, this means they're in the subprime market. According to SANDICOR figures I saw a while back, something like 40% of all purchase money loans locally in the years from 2004 to 2007 being negative amortization loans which have no truly fixed period and are practically impossible to keep longer than five years with the best will in the world. Another thirty percent plus, according to SANDICOR, were interest only, so my estimate is that subprime lenders have at least eighty percent of the purchase money market locally, and probably fifty percent or more of the refinance market. With the vast majority of these loans being of the short-term variety as illustrated above, APR is worthless as a measure of a loan.

Caveat Emptor

P.S. Just as a parting shot, let us consider the above situation in the context of a fifteen year loan at 6.00 percent that, to be insanely generous to the $9400 closing cost loan, the gentleman will keep until he pays it off completely. APR for the $9400 closing cost loan: 6.779 percent. APR for the zero closing cost loan at 6.75% remains 6.750. That's not a typo, the loan with the higher rate has the lower APR, and this is common for fifteen year loans. Payment for the $9400 in closing costs loan: $2052.67. Payment for the loan with higher rate but zero closing costs: $2035.29. That's not a typo, either. The higher rate loan has a payment that's $17.38 per month lower, because you didn't add $9400 to the loan balance that you've got to pay back.


Original here

I got a search for "which states allow prepayment penalties". I'm not aware of any that don't. If you are, I'd like to know. Any such states should immediately be renamed "Denial".

I really hate prepayment penalties, for a large number of reasons. Nonetheless, to make them illegal would not be in the best interests of consumers.

I know this isn't popular. Economics isn't about popularity. It's about cold hard facts of human behavior. Pre-payment penalties are an incentive that get lenders (investors really) to do loans when otherwise, they wouldn't. Understand that making pre-payment penalties illegal means that the people trying their hardest to get a loan to buy a home to raise their family... can't.

Let's examine one common situation. Let's consider a hypothetical couple, the Smiths, who don't have much of a down payment (or can just barely scrape it together), and have difficulty qualifying for the loan. They want to become owners rather than renters, and it is in their best interests to do so.

The cold hard fact of the matter is that nobody does loans for free. Real Estate loans are complex creatures, and they don't just magically appear out of some hyperspatial vortex upon demand. I may cut my usual margin if I'm the buyer's agent as well, but the reason I'm willing to do so is because I've found I'm going to do a large portion of the work anyway, have to ride herd on the loan officer, and stress out because it's a major part of the transaction that can really hurt my clients that is not only not under my control, but I cannot monitor with any degree of confidence I'm being told the truth. I keep telling folks that the MLDS or GFE don't mean anything if the lender doesn't want them to. They are not contracts, they are not loan commitments, they are not the Note or Deed of Trust, and they definitely aren't a funded loan. They are supposed to be a best guess estimate of your loan conditions, but with all the limitations and wiggle room built into them, the regulators might as well not have bothered. By themselves, they are worthless. None of the paper you get before you sign final loan documents means anything unless the loan officer wants it to. Unless the loan officer guarantees it in writing that says that someone other than you will eat any difference in rate and costs, what you have is a used piece of paper with some unimportant markings on it. If I, as a better more experienced loan officer than the vast majority of loan officers out there, cannot monitor what another loan officer is doing with any degree of confidence, do you want to bet that you can?

So we have some folks who can just barely stretch to do the loan. In order to buy them a little space on their payments, so that any bill that comes in isn't an absolute disaster they cannot afford, and also so I can get paid without it coming out of the money these people don't have, I talk to them about the situation and we all agree to put a two year pre-payment penalty on the loan. This buys them a lower rate with lower payments, without adding anything to their loan balance. They don't owe any more money, they get a lower rate, I get paid, and they didn't have to come up with money they don't have. Everybody wins, whereas without the prepayment penalty they would be paying anywhere from a quarter to , and perhaps they couldn't qualify. No loan, no property, no start to the benefits of ownership. They certainly wouldn't have that $50 per month cushion that's likely to save their bacon from their first emergency. Leaving aside the issue that most folks want to buy more house than they can afford, that really stinks from the point of view of the people that those who would outlaw prepayment penalties altogether say they are trying to help, those who are trying to buy a home and just barely qualify.

Another common situation: Many folks have a long mortgage history, and they are comfortable in the knowledge that they will not refinance or sell within X number of years. They're willing to accept a pre-payment penalty in order to get the lower rate at a lower cost. They want that $X per month in their pocket, not the bank's, and they are willing to accept the risk that they may need to sell or refinance in return. After all, if they don't sell or refinance within the term of the penalty, it cost them nothing. Zip. Zero. Nada. For all intents and purposes, free money. I may advise against it, but it is their decision to make or not make that bet, not mine, not the bank's, not the legislature's, and definitely not some clueless bureaucrat's, let alone that of some activist who only understands that lenders make money from prepayment penalties, and not the benefits that real consumers can receive if they go into it with their eyes open.

Pre-payment penalties get abused. Badly abused. I know of places that think nothing of putting a three year pre-payment penalty on a loan with a two year fixed period. There is no way on this earth anyone can tell those folks truthfully what their payments will be like in the third year. I may be able to tell them what the lowest possible payment could be, but not the highest. I've seen five year prepayment penalties on two and three year fixed rate loans, and that situation is even worse. I've heard of ten year prepayment penalties on a three year fixed rate loan. I've seen even A paper lenders slide in long prepayment penalties on unsuspecting borrowers that mean they several extra points of profit when they sell the loan. So there are some real issues there.

With this in mind, there are some reforms I could really get behind. The first is making it illegal for a prepayment penalty to exceed the length of time that the actual interest rate is fixed. Regardless of what the contract says, once the real interest rate starts to adjust, no prepayment penalty can be charged (This would have meant no prepayment penalties on Option ARMS, among other things). The second is putting a prepayment penalty disclosure clause in large prominent type on every one of the standard forms, and making it mandatory that the loan provider indemnify the borrower if the final loan delivered does not conform to the initial pre-payment penalty disclosure. In other words, if I tell you there's no pre-payment penalty and there is one, I have to pay it for you. If I tell you there's a two year penalty, and it's a three year penalty, I have to pay it if you sell or refinance in the third year (in the first two years, it's your own lookout because you agreed to that from the beginning).

But to completely abolish the pre-payment payment penalty is not in the best interest of the consumers of any state. Show me a state that has abolished them completely, and I'll show you a state that has hurt its residents to no good purpose. Sometimes there is a good solution to a problem, as I believe I have demonstrated here. It's just not necessarily the first one that springs to mind.

Caveat Emptor

Original article here

Biweekly Mortgage Spam

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Sometimes spam makes writing an article all too easy.

Here is a piece of spam I got, probably because my email at work contains "realestate.com", with identifying information taken out. This goes to show that the financial ignorance of most mortgage providers is astounding.


Thank you for your interest in the DELETED Broker Program. Our program is designed to help you provide more value added service for your clients, increase your fee income and help you generate more loans. By simply providing a one page custom amortization and a completed one page enrollment form in your loan packages you will achieve a high enrollment ratio. By illustrating the three key benefits of the Bi-Weekly Payment Program for your clients, they will clearly see that your goal is to help them accomplish their financial goals sooner by saving thousands of dollars in interest, paying off their mortgages 5-10 years early and achieving a low effective interest rate. Please find enclosed an example of a custom calculator and our simple one page enrollment form.

Or the client can just make 13/12 of the regular payment, or make an extra payment once per year, and achieve the same result without any cost. This option without cost lets the customer choose to pay however much extra they can afford that month, or pay nothing extra if they're on a tight budget. As I computed in Prepayment Penalties and Biweekly Payment Schemes, the fact that you're making payments more often saves you almost nothing. It's the fact that you're making an extra mortgage payment per year that's saving you all that money.


Getting started is easy. All you have to do is pay a one time setup fee of $99. You will be provided with custom online tools and resources as well as training upon request. To sign up, just go to our online broker enrollment form and complete the required fields, shortly after you will receive an email with your broker code user name and password. Please be sure to save this email. Once you have these instructions you will be able to go to DELETED.com and access your custom calculator and other online resources.

So I (the provider) pay a sign up fee of $99 for an internet driven startup. Cha-ching!

The DELETED program is a great value at $395.00. You earn 300.00 on each enrollment, DELETED retains only 95.00. We also charge a $3.75 per debit fee (emphasis mine). Our customers truly appreciate our one-time only enrollment fee, if the client moves, refinances or the loan gets sold, X will simply take them off the system and put them back on with the new loan information. Most customers prefer to pay the enrollment fee and choose the 3 debit option, where we will take an additional 135.00, 130.00 and 130.00 over the first three debits to comprise our one-time fee. We pay commissions on the 15th of the month for all enrollments on the system the month prior. Once you receive your approved broker email you'll be able to start signing up clients immediately.

Now we get to the real meat of what's going on. For me doing the work of signing someone up on the internet, they get $95 to start with, while dangling out a $300 stroke to mortgage providers to betray their clients by getting them to pay for something they could do themselves, with more flexibility, for free.

Then, once this is started, they make $3.75 per transaction, every two weeks, for an automated process that costs them somewhere between $0.25 and $0.50. Great work if you can get it. Three guesses who gets stuck with all the problems if they screw up.

This is one more reason why you want to shop your mortgage around and get multiple opinions. Anybody wants you to pay anything for a biweekly payment program, that is a red flag not to do business with them. It is a good thing to do in some circumstances, but it's not worth paying any extra money for. Unless you've got a "first dollar" prepayment penalty, you can accomplish the same thing on your own, with more flexibility, and without paying a cent. And if you do have such a penalty, it'll cost more than making the extra payment will save.

Caveat Emptor


Original here

A while ago now, I spent several hours showing properties I had found to a couple of investors. One was a lender owned fixer, fairly priced at $440k. It needed carpet, paint, landscaping, and some facade work. The last comparable sale in the neighborhood was $575,000. There was also another lender owned property in a neighborhood where similar properties in good condition were going for $460,000 to $480,000. This one was also pretty fairly priced at $380k. The first one needed maybe $30 to $40k in work, the latter about $20k. It took me a lot of hours to find properties where there was a good profit to be made buying near or even at the asking price in this market. Not enough for these people. They had to put in offers for eighty thousand less. Needless to say, these offers were dead on arrival. Complete waste of my time.

The reason these properties were fairly priced was that the owners had taken a realistic look at the state of the market and the condition of the properties, and decided they wanted to sell the properties sooner, rather than spending months with their capital tied up only to reduce the price so they can sell later. They were justifiably upset at the low-ball offers, given that they had actually priced the properties correctly for their condition, a rare thing in this market. Even if these people now follow up with a reasonable offer, I have reason to believe that these wells have been poisoned. It's going to take something basically equal to the asking price from these people. They have marked themselves as being unable to be dealt with on a reasonable basis. Other folks might be able to start the negotiations lower, but not them. Maybe not me, either, despite the fact that I was just the agent, making it worse than a complete waste of my time, a likely destroyer of some of my most valuable information - the location of profitable properties.

Low-balls are not the way you acquire the property you've got your heart set on. Low-balls are not the way you acquire property that is already correctly or bargain priced. If it is already bargain priced, all you're going to do is deal yourself completely out of the picture, where you could have made a nice profit if you had offered something reasonably close. Low-balls are the way to acquire property where the owner is so desperate, they'll take anything and you can't hardly help but make a profit. Lest you be unclear on this fact, lender owned properties are not good targets for successful low-balls. That lender wants to get rid of the property, but they've always got money, and unless they're facing the regulatory deadline, that offer is going to be rejected 100 percent of the time. If they are facing a regulatory deadline, somebody internal will have already snapped it up.

If you're going to insist upon low-balling, the way I found those properties is not the way to do it. No need to invest time driving around inspecting the properties, or the effort of going into records. Just write an offer. Write lots of offers - no need to be picky. At that price, you'll make a profit if they accept, have no fear. But, if you're going to offer that far below market, you're going to have to kiss a lot of frogs before you find one that's desperate enough to turn into a prince, and most of the frogs are going to be mad. Real quick now: What's your first reaction to being told you're not worth what you think? "You're not a college graduate, you're a high school dropout!" It's more effective to write dozens of offers sight unseen, and give yourself a few days after acceptance for inspections if you're really worried about it. 99 out of 100 will just be angry and insulted, and that's all the further it will go. You're going to move on, because any possibility of a transaction is dead.

You can raise the hit rate, of course, and a good buyer's agent is invaluable for this. But the best targets for low-balling are not those who have priced the property reasonably, but rather those who have over-priced their property. Hit the people whose properties have been on the market for a long time because they're overpriced. Best is if they've expired off MLS at least once, and if they've changed listing agencies because there are a large proportion of agencies out there who will take even the most over-priced listing. Expired twice is better, more is ideal. Multiple drops in the asking price are also a good indicator of a good time to low ball. Of course, you've got to watch the market over time for that information, because even most MLS registries don't give you this information directly. There is no way around market knowledge, but the way to get a low-ball offer accepted is to be the first under the wire after the the owners realize they are desperate. There is no universal indicator of desperation, or everyone would be on them at the same time. If you're going to do this right, you have to have some things going for you that everyone doesn't - patience and persistence, and the ability to slave away on those offers. It takes as long as it takes, and likely candidates can and will be pulled out of the the available pool at any time. Even if they aren't, the owners can and will simply refuse your offer the vast majority of the time. If you get frustrated, you're doing it wrong. This isn't like being a used car dealer. The marks have an alleged professional on their side. If the listing agent were a real pro, they'd have persuaded them to price it right for the market and condition in the first place, and it would have sold before you got to it, but they're going to be good enough to recognize your desperation check when they see it. In order to consider accepting the offer or even seriously negotiating, the owners have got to have suddenly realized how desperate they are. That's the magic ingredient to getting a low-ball accepted. There is no magic way to telling when this has happened, or everybody would be doing it. Think of yourself as a telemarketer with a very low conversion ratio. You're metaphorically dialing a lot of numbers to get one sale, but when that one sale does hit, you've got one heck of a paycheck.

Caveat Emptor

Original article here

My husband and I are completely debt free right now. However, we are wanting to buy a house in the future and I see that as quite probably requiring a loan.

What should I do to make sure that we don't get dinged for having no credit? (A problem my husband has had in the past — ended up needing his mother to cosign for him on an auto loan because he chose to go completely credit card less during college after discovering he could not handle them well)

Without open credit, you won't have a score at all. No score, no loan with any regulated lenders - hard money becomes your only option. It's as simple as that. I can get people with horrible credit loans on better terms than I can people with no credit.

In order to get a credit score, you need two open lines of credit. Three is better, because sometimes one will not be reported to one of the three major bureaus. Car loans count. Installment loans count. Those stupid "Pay no interest for twelve months" accounts count, although they really do hurt your credit. But the best thing to have is credit cards, because you usually only apply once and you can then keep them forever, giving you a long average duration of credit. Read my article on Credit Reports: What They Are and How They Work for what goes into a credit score.

What you do for this is go out and apply for two credit cards. Not store cards, unless you can't get regular credit cards. I've seen many times the rate of problems with store cards that I have with regular credit cards. They don't need to be big lines of credit - $500 to $1000 is more than plenty. I have found credit unions to be a good place to send my clients to for this purpose, as San Diego has several excellent large credit unions, at least one of which any resident of the county can join. They may not be absolutely the lowest rate, but they're usually pretty low. Furthermore, the rate doesn't matter if you don't carry a balance, which you shouldn't. More importantly, credit unions usually have fewer gotchas in the fine print, usually no annual fee, and they want their members who want them to have credit cards, so they're more inclined to give members the benefit of the doubt.

Once per month, use each credit card for something small that you would buy whether you had the credit card or not - you'd just pay cash otherwise. No larger than 10% of your total credit line on the card. I usually pay for a meal out at a cheap family restaurant (in the range of $40 or so for two adults and two kids). As soon as the bill gets there, write the check and pay it off. Costs you a stamp but it builds your credit. Or you can do online bill pay if you'd rather. I've heard too many horror stories and dealt with their aftermath too often for that to be attractive to me.

If your husband has trouble with cards, keep his copies of your cards in a safe place, and you be the one who goes out and uses them. He still gets the benefits if they're joint cards.

Caveat Emptor

Original article here

That was a question I got. The answer is that it doesn't make a difference, but it used to be one more way you could be conned or cozened into buying a more expensive property than you could really afford. Until recent regulations that were long overdue took effect, lenders who work in markets that are less than A paper perform qualification calculations based upon the initial payment. Furthermore, I'm about 180 degrees from convinced that this was ever really helping anyone.

Here's how it works and why it works. Some lenders formerly performed their calculations as to whether or not a specific borrower qualifies based only upon the initial payment. Let's say the loan contemplated is an interest only 2/28 at a teaser rate of 6% that's going to jump to 8% in two years when it starts amortizing (even if the underlying index stays exactly where it is), and the loan amount contemplated is $250,000. This makes for an initial monthly payment of $1250. Because this fits within the guideline Debt to Income Ratio guidelines, usually 50% for sub-prime, they can qualify and get the loan approved. But in two years when the loan adjusts and starts to amortize, the payment jumps to $1866.90. This is not certain, but it's far from the worst case possible. It is what will happen if the financial indexes don't change, and so a good default guess, as nobody knows where the indexes will be in two years. If you know where the indexes will be in two years, please call me. With that knowledge and mine, we can make enough money for our grandchildren to retire on. Guaranteed. Because nobody else knows where the market will be in two years.

So the upshot is that even though the payment is predictably going to increase by essentially fifty percent (49.35) in two years, to a level this particular prospective borrower does not qualify for, this loan would likely be approved under sub-prime guidelines that were in effect when this article was originally written.

There were banking regulation changes made to change the qualification procedure, forcing all lenders, rather than only "A paper" ones, to perform their qualification computations based upon the fact that the payments on these loans are certain to increase. These regulations were long overdue in my honest opinion, but don't thank your congresscritter - they came from the Fed. Under previous guidelines, this loan would be approved. Actually, the directive that forces "A paper" to underwrite these loans based upon the higher payments formerly came from Fannie and Freddie pre-takeover, not the regulators, and this is also one reason why hybrid ARMS at a lower interest rate are actually harder to qualify for than fixed rate loans in the "A paper" world.

Nor is this 2/28 teaser loan what is generally meant by a "buydown", although it is one of the things the phrase has been misapplied to. A true buydown is a temporary reduction in rate on a fixed rate loan, purchased by means of discount points paid up front. As I explained in the linked article, these buydowns typically cost more than they are really worth to the client in terms of dollars. Indeed, they are most often used in conjunction with VA Loans, where because up to three percent of closing costs over and above purchase price can be rolled into the loan with no money out of the veteran's pockets, the typical borrower sees only the reduction in payments, not the costs, which are real and they did pay, albeit, due to an accounting trick, with money out of their future equity and not with money out of their savings. They're still going to owe that extra money, and be paying interest on it until they pay it back.

However, due to the fact that most people shop houses and loans based upon payment, the reduction in payments makes it look like they can afford a more expensive house than they should in fact buy. That temporary buydown is going to expire, certain as gravity, and the clients are going to end up making those higher payments. There is precisely zero uncertainty about it. If they can't afford them, the bad consequences will still happen, precisely as if the buydown had never been. All of the tricks of the past decade to defuse this were based upon falling interest rates and rapidly rising real estate values. Lest you not understand, these are never acceptable reasons for betting someone else's financial future, as so many agents and loan officers did. If you are a real estate and financial sophisticate who understands the risks, it is one thing to bet your own financial future. It is never acceptable to bet the future of someone else, particularly if they are not an expert, without a frank discussion of those risks and advising them to get the opinions of disinterested experts.

This whole idea of temporary buydowns is bad because it allows the less scrupulous real estate professionals to encourage buyers and borrowers to overextend themselves. Now that the general public has finally woken up to the downsides of negative amortization loans and stated income loans, these are one of the few remaining ways to make it appear as if people qualify for a more expensive property because of a higher dollar value loan, than they do in fact qualify for by objective consideration of the guidelines. This particular way of pushing the guidelines isn't as extreme as the previously mentioned ones, and doesn't push the bottom line on what they can make it look like people can afford by as much, but if these people could sell people based upon what they really qualify for, they wouldn't be playing these sorts of games with the numbers. It was also these people that the change in regulations was squarely aimed at.

Furthermore, if these folks could really afford the full payments on the loans being contemplated, there are better loans to be doing. Without that interest only rider on the 2/28, I could buy the interest rate down by at least a quarter of a percent on the same loan type. For that matter, I can quite likely get a thirty year fixed rate loan for that same borrower at a lower rate than the 2/28 will jump to in the default case of the underlying indexes going exactly nowhere. For the true temporary buydown, without my borrowers paying those three points of upfront cost, I could cut those borrowers real, permanent rate on that fixed rate loan by at least three quarters of a percent, probably more. Whether even that is worth doing is highly questionable, but at least it's an open question worthy of discussion with a possible case for "yes" that a reasonable person can defend with numbers, not a mathematically certain "no way!" Show me someone who uses buydowns for their clients habitually, and I'll show you a serial financial rapist.

In short, temporary buydowns don't really help anyone, except maybe the seller who can unload their house to someone who shouldn't be able to qualify. Not buyers or borrowers, who are encouraged to stretch beyond their means through their use. Not lenders, brokers, or agents, due to these problems that people were in denial about for a very long time coming home to roost, meaning that those who practice in this manner will very likely be subject to auditors and regulators in the near future, and quote probably lose their licenses. I think that's a good thing.

Caveat Emptor

Original article here

This is a little harder than shopping for buyer's agents, so congress critters might not be able to do it. But it's nowhere near as tough as high school algebra, so even if you're a politician you can just get your child, grandchild, niece or nephew to help you. High school aged children of your friends would work also. And if you're a politician who doesn't have any friends with children, you've got worse problems than getting the best home loan.

This problem actually breaks into two cases, one where you are looking for a purchase money loan and one where you are looking for a refinance.

For purchase money loans, the first step probably should not be an internet quote shop. Whether it's one of the ones where lenders advertise their lowest rates or one of the ones where you ask for four quotes (and get four hundred companies calling you), neither one of these is likely to be a good use of your time. At this point, you are trying to find out what loans are available to you, and how much of a loan you can afford based upon those loans. What you want is not someone who's trying to sell you their loan, what you want is someone who will tell you what's going on in the loan market right now, and how much you can afford (assuming the rates don't change).

What you need is a good conversation with a loan officer or six. At this stage, you're not willing to sign up for any loan, but you are looking for information that tells you whether or not that loan officer is likely to be a good prospect when you are. Are they willing to take you through the process verbally, and explain the results that they get and how they got them? They should use your salary as a starting point, move through a debt to income ratio and subtract from that your current monthly obligations, to arrive at what your monthly budget is for housing. From there, they can use current interest rates, as well as approximate tax rates and insurance costs, to show how much you can afford per month for housing. I would insist that they perform this computation based upon currently available rates for a fully amortized thirty year fixed rate mortgage with no more than one point of combined origination and discount. If you then want to choose an alternative loan type, and there may be reasons why you want to strongly consider doing so, you nonetheless know that you can afford the loan for the property you are considering, and that you're not getting in over your head with a loan that's going to turn around and bite you.

Now, just because the first loan officer gives you a number you are happy with is no reason to stop shopping. You want to have this same conversation with several different loan officers. The reason is confirmation. There is a large amount of pressure to qualify you for the largest loan possible, especially in the highly priced urban markets where most of the country lives. A little bit of difference can make a lot of difference on the property you think you can afford, which makes it a lot more likely that the average person will come back to them for the loan. They said they could get you a loan for $500,000, while the guy down the street said they could only get you a loan for $470,000. If, by some mysterious coincidence about as rare as gravity or air, people decide they want to stretch their budget to the maximum or beyond, who do you think most people in that situation will come back to? Most people buy a property at the highest possible end of the range they've been told they can afford. Actually, the most common thing that happens around here is that they'll go back to the people who said they qualified for $500,000 to see if there's any way they can stretch it so that they can qualify for this $530,000 (or $800,000) property they've gotten their hearts set upon. Since loan officers learn this pretty quick but you're still going to have to live with the consequences, you want to make certain they're not overpromising what you can deliver.

There are all kinds of incentives for loan officers to inflate pre-qualifications for loans. They get a higher probability of a larger commission check. There aren't any real reasons to give you the real numbers, as opposed to those highly inflated ones, except not wanting you to go through foreclosure and lose the property. The foreclosure thing is months to years away, and not certain, while the commission check is here and now and their benefit, as opposed to your problem. By the way, if you're one of those people who manage to beat the numbers and get through buying a property more expensive than you can afford, you're going to be thinking that loan officer walks on water and is your best friend in the world, because they got the loan through that "nobody else could." This is preposterous, but it's amazing the way that human psychology works, isn't it? With the way prices were climbing in 1996 through 2004, there were an awful lot of loan officers who got used to "betting on the market," and winning, because even if their client could not, in fact, afford the loan, they could refinance on more favorable terms when the rates dropped and the owner's equity went to more than fifty percent due to the general market. And if the rates didn't move by enough to save their house, they could still sell for enough to make what seemed like a mint. The predictable result was that these clients think that these loan officers are wonderful. Unfortunately, that's not the market we have today. That is unlikely to be the market we have at any point in the near future. As a result, you have these same people doing business with these same loan officers today, and losing their shirts as well as their homes.

What you need is to keep going, and keep having these conversations with loan officers. Why? The first one may have been the Marquis of Queensbury, but then again they may have been the Marquis de Sade. What you need is evidence. Evidence of confirmation. Evidence of consistency. Evidence that both they and all of the other loan officers you meet with are performing these pre-qualification upon the basis of sound loan underwriting and rates that are actually available and not too expensive in terms of up front cost, that they are remembering to make allowances for the expenses of property taxes and home owner's insurance, and association dues and Mello Roos and everything else that may be relevant. You're going to pay these things. Prospective loan officers should make appropriate allowances up front, because they're going to be part of what's coming out of your paycheck.

What's a sufficient number of conversations? At least three in any case, but I would keep going until I had talked with loan folks that have at least two or three significantly different approaches to your loan. Negative amortization is right out, of course, and you can cross anyone who suggests one off your list of possible loan providers (at this update, thankfully, those abominations that wrecked millions are essentially gone), but while you should do the calculations of what you can afford based upon a thirty year fixed rate loan, in most markets there are other loans such as a fully amortized 5/1 that are well worth considering, and that will serve most people better in most situations. Every single loan there is has its advantages and disadvantages. The disadvantage to the thirty year fixed is that it is almost always significantly higher rate than other alternatives, and more people than not keep exchanging one thirty year policy of insurance that their rate won't change for another thirty year policy every two years. The question I would like to ask those people is "Why buy the thirty year guarantee in the first place?" Why not buy the three or five or seven year guarantee, if that's all you're going to use? Right now the costs may be very comparable, but the shorter fixed period loans are usually much cheaper. You want to budget as if you're going to that 30 year fixed rate loan (the most expensive there is), but there are many reasons why something else may suit your needs better when it gets right down to it.

Similarly, why spend money buying the rate down if you're not likely to keep it long enough to recover the money you spend in the first place? Spending $8000 in points, especially if you roll it into your loan where you're going to have to pay interest on it, may cut your monthly interest charge from $1960 to $1833. However, it takes between six to seven years to break even when you consider interest on the remaining (higher) balance.

It's possible one loan officer will cover several approaches. Much as it pains me to tell you this because I habitually do that, you should still talk to more than one loan officer. You want more than one person's word for one what is available in the way of rates and the costs to get them, and it is always a Trade-off between low rates and high costs. Not understanding that there is always a trade off between the rates available and the costs to get them is the most critical piece of knowledge that causes most mortgage borrowers to make bad choices that cost them tens of thousands of dollars.

Furthermore, you want confirmation of what loans and rates are available to you. If three or four loan officers independently tell you the same things, you've got a pretty good idea that they're approaching it correctly and giving you real information. The ones that make it up are likely to do base their usually inflated numbers upon different markups and mis-assumptions. Find a financial calculator on the web or buy one or use a spreadsheet, and check their numbers yourself. This is one of the largest sums of money you will be dealing with in one transaction in your life. You owe it to yourself to take the time and do the research to be certain you are getting good information. Due to the fact that real estate loans are very large amounts of money, and the loan transactions are very complex, there are a certain percentage of people in the industry who will use this opportunity to skim money effectively back into their pocket. These amounts of money, quite large by most standards, can be camouflaged under the cover of the much larger amounts of a very complex real estate transaction. Even the most honest loan officer is in the business to make money. This is in almost direct conflict with your desire to get the best loan possible at the lowest costs, but the loan officer who actually delivers the best loan to you has earned every penny of what they make, whatever it is.

Once you have credible, verified data on how much of a property you can afford, then you can start looking for buyer's agents, and actually looking at properties. Keep in touch with loan officers who you might be working with during the shopping process. Why? Rates can change. Actually, rates will change, and the higher up the scale and more highly qualified you are, the more often they tend to change. Sub-prime rate sheets might stay constant for a month or longer, with a modifier that may change or may not. Top of the line "A paper" changes every business day, at a minimum. Maybe not grossly, but it does change. I saw rates on 30 year fixed rate loans with equivalent costs go from about 5.25 to 6.625 in one month during late summer 2003. If you did the math based upon 5.25 and you qualified for $500,000, you only qualify for about $430,000 at 6.625. That is data that is supremely important to your property hunting. Do not allow a real estate agent to tell you that you can afford more than your real budget. Ever. If they say they can't find all of your desired characteristics within that budget and in your area, ask them for alternative suggestions. Compromising what you want is better than foreclosure. Going without is better than foreclosure. Fire the agent immediately if they won't work within your budget. When you find something you like and have a purchase contract, your procedure becomes very comparable to a refinance. The differences are comparatively small.

For refinances, you have a property already. There is an existing loan that has to be paid off. If you're in a purchase situation, you should already be in contact with several lenders, and you don't really care about any existing loans on the property because they aren't your problem.

But now is the time when you want to do some intensive lender shopping. Furthermore, you really want to compare what everybody has at the same point in time, if it's at all practical. For instance, generally the available rates will be a little bit lower in the middle of the week. They will more often than not be higher on Monday, Friday, and Saturday than they are on Tuesday, Wednesday, and Thursday. This isn't always true, especially if the financial markets are reacting to some large event, but it seems that it happens more often than not.

In a purchase situation, talk to your existing prospects and keep adding others until you get enough of them. For refinances, you want to move quickly in order to be a fair comparison. Whether you are buying or refinancing, ask every one of them this set of questions you should ask prospective loan providers. What you are looking to do at this point is choose who you are going to sign up with. Before you do that, you want to cross-check what every single loan officer tells you with the available evidence. Weigh what you know against what you are told by any given loan provider, and what that loan provider tells you as compared to other loan providers. Most often, the preponderance of the evidence will clearly support the ones you should sign up with.

Now, I know I said this earlier. Not only does it bear repeating as many times as I can find an excuse for, the folks interested only in refinancing might have been skipping ahead. Remember that you can get the a loan officer who's the equivalent of the Marquis of Queensbury, but more of them are closer to the Marquis de Sade, and most will be somewhere in between. The bigger the lie they tell you, the more likely it is you will sign up with them. The government really did try to change this with the 2010 Good Faith Estimate, but they can still low-ball the hell out of that tradeoff between rate and costs to get you to sign up. Sure, it's possible you might walk away at document signing, although not likely. If you don't sign up with them, they are guaranteed not to make any money.

When I first wrote this article, it was possible and feasible to lock every loan at sign up. That has now changed to the point where even I cannot do it any longer. If I lock a loan and don't actually fund and deliver it, the lender charges me (which really means all my future clients) a stiff penalty. This is now universal even for direct lenders, so good loan officers who are trying to deliver a lower cost loan are not locking at sign up any longer. The only lenders who can lock at sign up are those who have built inflated margins into their loans, so that they can pay for those charges out of the increased profits they're making. There is now a decision making process on when to lock a loan that I take every client through.

There is always a Trade off between rate and cost in real estate loans. It's like gravity. Exactly what the available trade offs are varies over time, and varies from lender to lender at any one time. Remember, that lender can low ball you pretty badly to get you to sign up, and once you sign up, you're not likely to discover that they did low ball you until time to sign documents. Very few people continue to look at the market once they have chosen a provider. The reason many loan providers want a deposit is so they can hold that money hostage for you signing the final documents. Unless no one else can do your loan, I would never even consider putting up a deposit with a lender. What they're telling you by requiring a deposit is that they want you to stop shopping. If they are telling you about a loan that really exists, and their loan prices really are good, there is no reason for a loan to require a deposit. You will pay for the appraisal when it happens, but that's less than a deposit.

I do advise you to ask your other prospective providers about whether the loan you choose is deliverable, however. Mind you, there's a strong incentive for them all to say "no" but then ask them "why isn't this loan deliverable?" If the answer starts discussing wholesale pricing and lender incentives and bonuses that they have and others do not, listen carefully. What that loan provider makes is tied up in how costly your loan is really going to end up being. When they explain why the loan margin really isn't there to deliver the competition's lower quote, listen to them. Then take it back to the people who provided that quote and say, "convince me you can actually do this". This includes making enough money to make it profitable for them - at least a couple thousand dollars. The provider making this money is not a problem and not a reason to try and negotiate it down - what they make does not equate to "profit" let alone what the people doing your loan actually get to spend. Remember, you've already decided this was the best loan available based upon the bottom line to you! What it is is insurance that they will actually deliver this loan they are talking about because nobody does free loans. My clients who ask this find out exactly what loan from what lender I'm basing my quote upon and much I plan to make on the loan - and if that's a problem for them, they can go get someone else's more expensive one!

On a regular basis, I hear various folk advising people that they can avoid all this by "just picking a large, reputable provider." Nonsense. This is wishful thinking at its worst. Large scale reputation is established by advertising. Think about that for a moment. "Large reputable providers" spend millions per week trying to get the suckers to come in. Who pays for that? It certainly isn't the people who work there! "Large reputable providers" will sit you down in a nice comfortable chair in a beautiful office, and lull you with talk of how well they are going to take care of you. Somehow, they manage to deflect the conversation away from exact numbers and exact quotes. You can't compare loans without specific numbers. Then, this "large reputable company" is going to deliver a loan with a rate that's a quarter of a percent higher and costs you two points more than you could have had, not to mention higher fees - and they'll still be low-balling you! Trusting yourself to a "large reputable company" without the exact same due diligence isn't avoiding the issues of shopping a loan in that jungle out there - it's intentionally delivering yourself into the hands of the head-hunters. These companies do not compete on price. They compete on the basis of serving cattle who want to be comfortable. Serving them up to be slaughtered. On a $400,000 loan, you just wasted $8000 up front, and $1000 per year. Glad you could avoid that hassle, glad to avoid talking to sales people, glad you could avoid taking half a day off work to shop loans? You've paid handsomely for that avoidance. Kind of like committing suicide because somebody might murder you.

The main issue in all of this is finding the loan on the best terms available to you. The main obstacle to that is the fact that lenders can low ball their quotes shamelessly, and it's legal, so it takes some serious research to figure out what is likely to be real from what is not. The new rules for 2010 change a lot of that, but still leave gaping loopholes that any loan officer who tries can sail an ocean liner through.

When I first wrote this, I said "Unless there is something external holding the whole process back, such as "Your house isn't going to be finished for two more months," I will bet money that a loan done in thirty days or less is better than one that takes sixty days or longer." This is still a valid principle in that the loan that is done faster is likely to be better. The problem is that new government rules and regulations and Wall Street required underwriting checks inspired by their new requirements have added a minimum of about 3 weeks to the time it takes to do a loan since then. I used to be able to reliably fund a purchase money loan in 21 days or less without any extraordinary effort, a refinance in three extra days to cover the right of rescission. The way the process has been externally complicated, it is questionable if even the best loan officer trying their hardest will have the loan funded within 45 days of application. Sixty days is more likely. Plan for this. It's just a fact of life - one more "service" provided by your elected representatives. But better sixty than ninety or more.

You need to do your due diligence up front. Real estate loan rates change every day, and whatever reason it was that caused you to need or want a loan is almost certainly time critical. For purchases, you've got a purchase contract that's good for only so many days before they'll start charging extensions. For refinances, if it's to get cash out, you have a time critical need for that money, and if you don't get it on time, you're likely to have to pay it out of your checking account or put it on a credit card, if you can. For refinances without cash, just to get a lower rate, those attractive rates are not going to last forever, The one thing I can guarantee is that the available rates are not going to be the same by the time you go to sign documents at the end of the process. If the lender doesn't deliver what they talked about, it's going to cost you a large amount of money. Therefore, you really want to do enough due diligence to give them a reason to actually deliver that loan they talked about in order to get you to sign up.

Caveat Emptor

Original Article here

do your property taxes go up in California when you refinance your property?

This is one of those urban legends. People are concerned that because the house is appraised by the lender, the assessor is somehow going to find out that their property is worth more and send their tax bill soaring.

However, thanks to Proposition 13 in California, the formula for property taxes has little to do with current market value or what the home is really worth. The formula is based upon the purchase price plus two percent per year, compounded. If you can document that your home is worth less than this amount, contact your county assessor's office. But if it's worth more, they cannot increase it beyond this number.

Indeed, certain family transfers can preserve this lower tax basis. Mom and dad deed it (or will it) to the kids, and the kids keep paying taxes on it based upon a purchase price of perhaps $60,000 (Plus thirty-odd years of compounding at two percent, so maybe $115,000) when comparable homes may be selling for $600,000.

There are two major exceptions. First, a sale. If you sell it to someone else, then repurchase, you don't get the old tax basis back. Second, improvements. If you take out a building permit, the assessor will add the current value of your improvements to your tax bill. This can, in situations like the previous paragraph, result in a tax bill that literally doubles if you add a room. Indeed, this is one of the main reasons for the growth of the unlicensed contractor industry, because licensed ones have to make certain the permits are in order, and homeowners are trying to sneak one over on the county. This is why a very large proportion of properties in MLS have the notation that "this addition may not have been permitted." They know good and well that the addition wasn't permitted, and quite likely isn't to code, either. If it's built to code it's usually grandfathered in to subsequent updates. Subsequent owners can get forgiveness as innocent beneficiaries who bought the house like that, and so the purchase price included the value of that room (and occasionally, the state finds it worth its while to go after the previous owner for back taxes and possible penalties, and I believe that the incidence of this will likely increase dramatically in the next couple of years). If it's not built to code, however (an offense unlicensed contractors often commit), the subsequent owner can be looking at a large mandatory repair bill, or perhaps even demolishing the addition they paid for if the county inspector deems it unsound. You want to be very careful about properties with the "addition may not have been permitted" disclosure.

Other states, by and large, still follow the assessment model California used to follow, pre-Proposition 13. They have county records of the property characteristics, and evaluate the home based upon those characteristics, whence comes your assessment, and hence, your property tax bill. This still encourages unlicensed contractors and working without required permits, with effects much the same as the previous paragraph, which is definitely not good, but in this case subsequent owners have nothing but incentive to keep improvements off the county books, where in California, subsequent owners have motivation to want improvements updated into county records. I am not aware of any state which follows a model whereby refinancing will alter your tax bill.

Caveat Emptor

Original here

This really ticks me off.

I just got done going around about this with a clueless Realtor. According to them, it's not available. It's simply pending contract signatures. But it's showing as "Active" in MLS.

This is not a minor issue. Let me illustrate why. After I was told it was sold, I had a friend call and inquire about the property. He was told it was "available." The agent wanted to set up a time to get together and show it to him, and were there any other properties he wanted to see?

Now I'm fully aware that this may be an instance where that agent wants both halves of the commission, in which case they are violating their fiduciary duty to their listing client by telling me "We accepted another offer." But I'm going to presume that everything is exactly as they told me, in which case they are still violating both MLS and ethics rules, as well as trade law.

If everything they told me is absolutely true, they are still using the property as bait for a "bait and switch" game. If what they told me was true, they do not in fact have the property available for sale. My client and I did come in and make an offer, but they're telling me that the property is not available. But for those people without an agent who call, they're using it - dishonestly - as a means of gaining buyer clients. People should never call the listing agent, but more people do than don't. This is not a small ethics or practices issue. I understand that the hardest issue in obtaining clients is getting that first initial face to face meeting - I face that very same obstacle. But if someone gets a first meeting with you because they claim to be listing a property that is not, in fact, available, exactly how is that morally different from just making it up out of thin air (an activity that is also quite common)?

In fact, they claimed that their listing client didn't want it marked as pending yet. I understand the position they're in, but what the client wants is not on the list of available options. If the property is not available, it cannot be in the Active register. That's what we all have to agree to in order to get access to MLS. That's what the ethics we agree to as Realtors says. If you're not going to play by the rules, you shouldn't have access to MLS, and you shouldn't be able to call yourself a Realtor. There's also a section of commercial law that deals with false advertising. Somebody advertises something people want, the FTC and various state regulatory agencies have grounds to get very interested if you do not in fact have it. You might ask Big Bear supermarkets about that. Such an action is what put them out of business around here. I guarantee that six figure real estate is lot more important than 5 cans of peas for $1 in the estimation of the regulators.

The upshot? I told them to get it off the active list by 9:00 the next morning, or face a formal complaint to MLS and the Association of Realtors. I have a client that wants that property. If it's in MLS, they understandably want to know why their offer is not being considered. If I don't take action, my client will be justifiably curious as to whether I am somehow complicit in whatever is going on. This problem could be more severe than the listing agent is representing it. It could be a fiduciary and agency failure on their part, trying to get both halves of that commission, requiring a client to employ Dual Agency in order to get the property, in violation of fiduciary duty, agency law, and RESPA. It could even be an Equal Housing Opportunity issue. But one thing is for certain: as long as it stays active on MLS, there is something major significantly wrong. This isn't a minor bookkeeping issue. This is the bedrock of what we agree to in order to participate in the system, and someone who cannot adhere to this should not be in the business at all.

Caveat Emptor

Original article here

A search hit that I got:

What is the reasonable amount of notice to give when changing contract terms in California

Unfortunately for this person, a real estate contract is not something like Lando Calrissian's bargain with the Empire in Star Wars, where Darth Vader was free to alter it at will backed by Stormtroopers and Star Destroyers.

The real estate contract is negotiated until both sides are in complete agreement as to the terms the exchange will be made upon. There cannot be any differences in the terms of the proposed agreement and accepted agreement, or you aren't done negotiating yet. Actually it's stronger: If you're not in complete agreement as to terms, you don't have an agreement.

Once accepted by both parties, the contract terms are not unilaterally alterable by either party. You can, in most cases, walk away from the deal completely if something isn't right, but you can't say, "The deal is still on, but you're paying me $5000 more than you thought," any more than they can tell you, "And I get your car, too!"

If something pops up such that you don't think it's a good exchange to be making any more, in most cases you can walk away from it, albeit with possible consequences for the deposit. In such cases, if the other party wants to keep the deal going, they can offer concessions, just as you can ask for concessions, but you cannot force them to change the terms of the contract. The same thing holds true in reverse. They can't force you to alter the terms of the contract, but if they're ready to walk away and you want to keep them in the contract, you can offer concessions or ask what it would take to keep the transaction going. If you don't like what they say, you don't have to accept those terms, any more than they had to accept the contract in the first place.

In some cases (consult a lawyer in your state), the other party can force you to live up to the original contract via a court action called a suit for specific performance. It's also possible for them to sue you for more money than the deposit. I consider this an excellent reason not to sign a contract you're not completely satisfied with. I also consider it an excellent reason never to offer something I wouldn't happily accept as a purchase contract - because the other side can always just accept the offer and it then becomes a binding contract. But notice the essential elements: offer and acceptance. Both parties declaring their acceptance of the terms.

In short, contracts to purchase real estate are two-sided contracts, and are not alterable by any party to it without the agreement of all parties. Any alteration of terms must be agreed to by both parties, and if you cannot agree on those alterations, the contract is essentially dead. There are circumstances, however, where the other side can hold you to the original contract. Consult a lawyer for details.

Caveat Emptor

Original here

I have to admit to being conflicted. The numbers say no. The psychology says yes. Let's examine both.

Most first mortgages out there are between six and seven percent, and tax deductible at a marginal rate of about 28%. If you're one of those folks with something in the low fives or even below, enjoy it while you've got it, because the odds of getting something better when you move to a more expensive home or need to refinance are pretty slim.

I'm going to do the numbers based upon 6 percent, with 28% marginal deductibility. This has limits; to wit if your mortgage interest gets to be low enough that you don't hit the threshold where it is worthwhile to itemize, but instead take the standard deduction, that deductibility didn't do you any good. But above that threshold, which is most people, every dollar in interest you spend gives you back 28 cents. I'm also going to assume a 30 year fully amortized mortgage.

Obviously, you don't want to pay an effective 4.32 percent interest rate for no good reason at all, but this does not take place in a vacuum. If you didn't use that money to pay down your mortgage, you could use it to invest elsewhere. For instance, let's assume you could make 8% net on average if you invested this money elsewhere. This is a reasonable average when you consider ordinary income tax, capital gains tax, and possibly a certain amount of tax deferment.

Now, some people might think to add in the difference in interest paid, but that is not correct. The payment is constant. Whatever you didn't pay in interest was already applied to principal. To count it again would be double counting.

Let's say you've got $100 extra per month, and a $400,000 loan. I'm going to go yearly 10 years out, then at 5 year intervals. The median time in a property is about 9 years, which means a whole new set of decisions about which property to buy. This is only a valid experiment so long as all of the starting assumptions stay constant, and when you have a whole new set of decisions about which property to buy and for how much, all of that goes out the window, as it is no longer controlled only by the variables chosen at start. Truth be told, refinancing should probably halt the experiment as well.

For the below, I have just summarized the differences. Extra principal is how much more you've paid the loan down with the extra amount, if you did so. Tax cost is the total tax cost of the interest you didn't pay. Investment is how much the money you'd have if you didn't pay the extra towards your mortgage, but socked it away in an investment account. Gain/loss is the net result, positive if you came out ahead by adding to the payments, negative if you should have invested the money.



Year
1
2
3
4
5
6
7
8
9
10
15
20
25
Extra Prin
$1,233.56
$2,543.20
$3,933.61
$5,409.78
$6,977.00
$8,640.89
$10,407.39
$12,282.85
$14,273.99
$16,387.93
$29,081.87
$46,204.09
$69,299.40
tax cost
$11.12
$43.66
$98.92
$178.31
$283.33
$415.55
$576.64
$768.40
$992.70
$3,218.31
$8,083.64
$16,153.28
$28,545.04
investment
$1,353.29
$2,593.32
$4,180.58
$5,772.56
$7,496.67
$9,363.88
$11,386.07
$13,576.10
$15,947.91
$18,516.57
$34,934.51
$59,394.72
$95,836.66
gain/loss
-$130.86
-$211.07
-$345.89
-$541.09
-$803.00
-$1,138.54
-$1,555.32
-$2,061.65
-$2,666.62
-$3,380.20
-$8,996.28
-$19,472.46
-$37,638.11

As you can see, the numbers come out fairly strongly for not taking the extra and making payments, but instead finding an alternative investment for the money. Don't get me wrong - the return on investment of paying your mortgage off is guaranteed, while the return on alternative investments is anything but. Still, diversification and reasonably prudent risk calculation together with due diligence build a case for the alternative investment that has probability so strongly on your side it might as well be mathematical certainty over the long haul. Any time you have cash, whether it's an extra $100 you made this week or $100,000 you made investing over the last 20 years, you always have the option of taking it out of the other investment and paying off your mortgage. But the numbers come out pretty strongly for the alternative investment.

However, the psychology says yes. There's a major sense of accomplishment in paying off the property. Furthermore, once you don't owe the money, you've got it in the form of equity, as opposed to cash, which is all too easy to spend. In fact, most folks will fall off either the investment wagon or the extra payments wagon over time. Money you don't owe cannot be called due. If there's a temporary setback in the market, extra payments make it that much less likely you'll ever be upside down or in an impacted equity situation, although you could also apply the cash from the investment account to your equity or to the rest of your finances, to keep from having to do a cash out refinance. Finally, there's the reduced stress from being mortgage free for (in this case) thirty six months earlier, if you are one of those rare people who actually manages to pay their mortgage off.

I also have a spreadsheet that compares the net financial result between never refinancing, refinancing every 5 years and keeping a target of paying all loans off in 360 months from the time you bought, and refinancing every 5 years but making the minimum payment. In the vast majority of cases, the last situation comes out better, largely due to the effects of leverage, but leverage is always a two-edged sword. If things go the way you want, it makes them even better. If things don't go the way you want, it makes them even worse. There are lots of folks getting bit hard by over-leveraging real estate right now. The usual numbers say that making larger payments is likely not the best use you have for the money. But there is a certain psychological comfort in owing less and paying off the mortgage sooner. Furthermore, in a down market like right now, making larger payments might mean you end up able to sell or refinance when you need to, without those potentially nasty consequences of being upside-down.

Caveat Emptor

Original Article here

The inspiration for this article came when I checked my referral logs and found an article where somebody was essentially saying "If you want to be depressed, go read this site and then go rent somewhere for the rest of your life".

I can understand where the sentiment is coming from, particularly if they were of the sort of person who wants to meander around occasionally looking at houses until they find one they like, then sign a couple of papers and move in. Lest it not be obvious to you, these are the elements of disaster. I would never put an offer in without looking at at least ten to fifteen properties in the area, without aggressively shopping the mortgage market, or without taking positive steps to insure that I have at least as much leverage over the service providers as they do over me.

The fact is that for most people, the largest transactions of their life are all going to be real estate related. When the average transaction is in the hundreds of thousands of dollars, and those transactions are so complex as to defy understanding by non-professionals (and some alleged professionals), you have the elements for a system that's going to suffer abuses. Many past abuses have been corrected through the passage of legal impediments, but many others remain, and some are illegal but keep happening anyway (See my article on "What to Beware in Third Party Services).

What I am trying to do here is give you the insider's appreciation for what goes on (although not the professional's specialized knowledge. It may not be "rocket science", but to pretend you can pick up everything a working professional learns and gets exposed to every day by reading a few articles would be false, and of no service to you, the multi-billion dollar "self help" press notwithstanding). With this information, you can debunk the worst of the nonsense that you are told and get a better bargain for yourself no matter who your real estate agents and loan providers and financial planners and whatnot are. I am writing about knowledge that you need to have to understand the system, and I'm not pulling any punches about what goes on, anywhere in the transaction. I'm trying to show you limitations and blind spots in the information you may receive, and show you strategies that put you in a stronger position. Most of the articles I have written thus far pertain to real estate and mortgages, but I've written a few articles pertaining to finance as well (RULE: The best time to buy is when there is metaphorical blood in the streets of the financial world).

If you're the sort of person who prefers to go on in an "ignorance is bliss" state of mind, the education may be disturbing. Indeed, many people seem determined to go about their real estate (and other) transactions in this state of mind. They resist when I attempt to educate them in the realities of the market, figuratively in the same vein as people who put their hands over their ears and say "la-la-la! I am not listening! la-la-la! I am not listening!" It's like they want to get conned, or at least not having to think about it is worth more to them than the money they're being taken for. Since the money they're being taken for can easily go into five figures whether it's a purchase or a refinance, and can be six figures for a purchase or sale, I find this difficult to believe. If you're making that much, you shouldn't need a loan, for one thing, let alone be concerned about minimum down payment. Nor would you be concerned about affordable housing and getting the best deal possible for your money. You would be so wealthy, and your time so valuable, that it would make economic sense to buy the first property that met your needs - and you'd be buying properties in the unique custom home range ($2 million dollars or so around here).

Nobody does loans for free. Nobody does real estate for free (nobody does financial planning for free, legal advice for free, etcetera). "Free" is likely to be the most expensive service of all (This is different from at such a rate that yield spread pays all costs, or the custom that sellers pay the costs of both agents - but the only source for those funds is the money the buyer brings to the table). If something about a loan, a real estate deal, or some aspect of financial planning seems "too good to be true," that should set alarm bells ringing right there. If the payment or interest rate on a prospective loan is nothing like what everyone else is talking about, they are looking to pull a con job on you.

If you're of the school that forewarned is forearmed, what you're reading here should give you the information you need to guard yourself against the deceits in the system. I've done lists of "red flags," warning signs not to do business there, "Questions to ask" that you can print out and take with you, "Salesgoodspeakian to English Translations," debunking of pat phrases used to mislead you and what they really mean. I've given you strategies that, if adhered to, give you more leverage right down the line. I've gone through what real closing costs are, what points are, and warned you of the dangers of shopping for loans or real estate by what they tell you the payment will be. Most importantly, I've shown you how to keep control of your transaction by being aware at the start of the process what the likely bumps are going to be.

Not everyone in the business does everything I've warned you against. There are ethical providers out there; people like myself who will walk away from business or tell clients the pitfalls if something is not in the client's best interest. You can find us if you look, but we can't help you if you close your ears to the things you don't want to hear. Nor are those who practice otherwise necessarily evil, and there is an entire range of practice from best to worst. Real Estate, financial planning, and many other fields are set up such that someone new in the business learns from somebody experienced. In many cases, they've been told "This is the way things are," and they just don't know any better. The person who taught them didn't know any better. It is my aim to ensure that people "know better." The change is not going to come from within the industry - the system is set up for the practitioner's best advantage, and any one agent or loan provider unwilling to toe the industry line is at a competitive disadvantage, and their business is likely to fail. It's kind of the tragedy of the commons: their own individual behavior shows them nothing to gain, and everything to lose, by full truthful disclosure, and where there are people who do it anyway, we are comparatively few. Therefore, the change must come from outside the industry. So by being knowledgeable consumers and helping yourselves, you provide impetus for practitioners to reform their practices for everyone. It may take a long time, and it may never be complete, but if it's never started I can guarantee that things will not get any better.

Caveat Emptor

Original here

This has been a noticeable phenomenon for quite a while in San Diego. I've been loath to talk about it because I didn't want to be giving fraudsters ideas. Most lenders have now put into place safeguards against this measure. As always, they do not distinguish between guilty and innocent, but the lender is the one risking their money. Keep in mind Real Estate loans are not about the "benefit of the doubt", they are about proving to the bank that they are likely to get their money repaid with interest.

The basic event is this: People have decided to relinquish their current property to the lender. It's not worth as much as the loan is for, so they see only a gain to be had there with current law declaring the income from forgiven debts non-taxable. Perhaps they couldn't afford their new payments after the teaser expired. Perhaps they could; they just don't understand what they are doing to their credit and the fact that the market is going to come back - sooner than they probably think. Perhaps it's a non-recourse loan and they see only the fact that they owe more than the property is currently worth.

But these people don't want to be homeless, and they do understand that after they have gone through foreclosure, not only are lenders going to be highly resistant to lending to them, but landlords are going to be reluctant to rent to them. So they hit upon what they think is a brilliant plan: Buy a new house before allowing the old one to go into foreclosure. After all, the degradation to credit hasn't happened yet! However, this is still fraud. These people have an actual plan to allow a property to be foreclosed upon, and a reasonable person would know that lenders would consider that in deciding whether to grant credit.

Unfortunately, there has been enough of this going on that lenders are no longer willing to let it go unchecked and unchallenged, so they are looking for evidence that new buyers of primary residences and second homes do not plan to "buy and bail". Since this was originally written, there have been stronger requirements put into place: First, there has to be significant equity in the current property. Fannie and Freddie both require 30% equity in the existing property in order to lend on a new one. They also want to see either the ability to make both payments without any rental income or a verifiable job change to a new commuting area, and the need to relocate (i.e. nothing in the same commuting area). There are portfolio lenders out there who will waive the 30% equity requirement, but they are very careful about the circumstances and even more careful if the move is within the same commuting area.

Meeting these basic conditions is not a "get out of underwriting free" card in the current paranoid environment. There are other checks being made upon the process, checks I am not going to discuss beyond saying that the transaction has to pass a "smell test." Being someone who doesn't like seeing bad real estate loans made for a plethora of reasons, I welcome the return of the smell test. I've seen the aftermath of too many transactions that smelled worse that week old fish in dumpster on a hot day. You may think you're a "a special case," but every single one of those folks out there facing foreclosure or having gone through it already also thought that they were "a special case" then, and the ones trying this fraud think so again now.

These new restrictions have hurt, and will continue to hurt, legitimate investors and purchasers by making it more difficult to qualify for the loans. It is nonetheless a fact of life brought upon us by the market. Furthermore, 20% down is pretty much an absolute minimum for buying investment property currently currently. Furthermore, even the lenders that were accepting loans for both a primary residence and a second home in the same commuting area have now stopped that practice. It was silly to start with, and it has only gotten worse of late, but people who want to avoid the constraints and requirements of investment property loans were eager for it. I just don't understand why lenders were willing to accommodate them. Either the charges and higher equity and qualification standards were necessary, or they were not. If they were necessary, why were the lenders bypassing them? If not, why did they exist in the first place?

I can understand people who don't want to be homeless. However, while "Buy and Bail" may not always be obvious before the fact, but it is afterwards, and the lenders are starting to take notice of foreclosures against other companies, and they are even writing in clauses that make their loan callable, by which I mean they can demand you pay that loan off in full, giving you 7 to 30 days to make the actual payment. Once again, this sort of clause is going to disadvantage people who have had the property a while and be intending no harm who do hit hard times: Job loss, disability, etcetera. Nevertheless, "Buy and Bail" is fraud, and the lenders are entitled to take whatever measures they think reasonable to insure that they don't lose their money to a suddenly unacceptable credit risk, as well as to return a reasonable return on that money. It may seem like cruelty to you, but I'd like to see some of the folks pulling it sentenced to an enforced residency in a government institution wearing funny pajamas, because games like this destabilize the mortgage market for everyone, and every time somebody pulls a game like this, the lender's reaction hurts many others who should be able to qualify for a loan and are now unable to do so, further screwing up the home loan market for 300 million Americans.

After this was originally published, I got a question from Realtor Ricki Widlak who doesn't understand how people pull this, in that they're going to have another home loan on their credit report. The answer is that they claim they are going to be receiving $X in rent per month. They fake up a lease contract, usually between themselves and a family member or close friend. The added number of dollars per month from this entirely fictional contract makes it appear as if they qualify. However, because the lease is not real, they don't. Ergo, the qualify without rental income restriction.

He ends with this question: "How do people "walk away"? Who walks away from anything in this information age anyway? I just don't get it. These people are "leaving behind" their soc numbers, right?".

The answer to all of these questions is that lenders have no difficulty in identifying this phenomenon in retrospect - these people aren't getting away with anything, and some of the lenders are starting to follow the criminal prosecution route. But identifying the perpetrators in retrospect does not assist the lenders in not making bad loans in the first place, which is the situation the lenders want. So they raise the bar for qualification for everybody in order to weed out these bad apples. Yes, people who would otherwise qualify are getting turned down for loans. However, the lenders are not a court of law, where we'd rather a dozen guilty people go free than one innocent one be punished. In fact, the lenders have precisely the opposite view, especially in the current environment: They'd rather turn down a dozen or more good loans than accept one bad loan, and they are now writing their lending criteria accordingly.

Caveat Emptor

Original article here

Seller Carrybacks

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A seller carryback is when the seller agrees to "carry back" at least part of the purchase price themselves. In other words, instead of getting the full sales price of the property (less outstanding liens), the seller accepts a certain amount of the purchase price in the form of a promissory note from the buyer. This note is usually secured by the property, making it a "purchase money" loan for purposes of determining recourse, which means there usually isn't recourse on the buyer, at least in California. Furthermore, the seller's trust deed is usually in second or third position, behind the primary loan and possibly a secondary loan.

The reason behind doing this is that some buyers cannot qualify for a sufficient loan, or have credit sufficiently bad that no lender is willing to loan them the necessary percentage of the value, considering the down payment they have (usually zero). But in the current environment, every last potential buyer is heavily sought after, and some sellers are willing to do whatever it takes to make the transaction happen. Particularly as being willing and able to do a seller carryback is one tool for being able to get full price or more from a buyer who needs one.

As an example, let's consider someone with a 560 credit score and less than 5% down payment in the current lending environment. They can't get an FHA loan, they can't go A paper and there is no true subprime. A portfolio lender might consider a 70% loan at most. These folks might be able to get 70% financing full documentation, and even that is iffy. But all they've got is less than 5. If the seller wants to do business with them, it takes a carryback to make the deal happen. If the buyer needs a carryback, he's got to be willing to meet the seller's terms for making it happen. This gives the seller who is willing and able to do a carryback access to potential buyers that sellers who are unwilling or unable to do so do not have. Furthermore, it gives those sellers who are willing and able to carryback part of the purchase price leverage in negotiations to get a higher price than they otherwise would have. Not every seller has the option of a carryback. Matter of fact, right now relatively few have that ability. With the loss of equity current homeowners have gone through and the need they have to use what equity they may have as down payment on another residence, sellers who can do carrybacks are scarce.

Lest there be any doubt, a carryback is not something you keep secret. You don't need to shout it from the rooftops, but at a minimum, all of the lenders involved have to be notified in writing as to what's going on, and have to accept it, also in writing. There are some lenders who will not permit them at all, even though their loan takes priority. There are other lenders who will accept them but impose conditions. They are all going to want to see a loan repayment schedule, and include that in debt to income ratio calculations. It may be possible, in theory, for a "silent second" type carryback to be approved, but the lender wants to see something that seller is getting in return for extending financing, and most such loans will not meet the underwriter's "smell test," particularly not in the current loan environment, which has gone within a from being far too permissive a few years ago to completely paranoid today, as the lenders scramble to avoid consequences of years of bad decision-making, after they are already suffering from them. Trying to game the system in this environment in order to get a higher debt to income ratio through the system is highly likely to be interpreted as fraud.

I've mentioned that sellers' trust deeds will be occupying second or even third position, which means that in the event of default the loans occupying higher positions are paid in full, before there is one penny paid to the sellers for their subordinate loan. It therefore behooves sellers to be extraordinarily careful about extending financing, as if the people were able to qualify for the full amount of financing they need with regular lenders, chances are that they would have done so. Furthermore, not having a down payment, or only a clearly insignificant one is not a sign of sterling financial discipline. Furthermore, if the holders of the higher priority trust deeds foreclose, your deed will be wiped out by the action of the trustee's sale. Concrete example: Let's say that a $500,000 purchase is financed 80/10/10: 80% ($400,000) on a first trust deed, 10% ($50,000) on a conventional second trust deed, and 10% ($50,000) on a seller carryback. The buyer discovers that they're in over their head, and even if prices don't recede the property only nets $450,000 at auction. Less the costs of the trustee's sale, that first trust deed gets all of their money (or at least most) the second trust deed might get some of theirs, but there is no way that seller carryback going to see a penny of that money. Even if prices go back to ballooning like they were several years ago and the property is now worth $700,000 after two years, they might not see any of their money unless you go to the trustee's sale armed with cash to defend their interests - just like any other holder of a junior trust deed.

Servicing can be a real issue as well. Do you know the proper way to service that loan in the state you are operating in without missing any i-dottings or t-crossings? If not, you could lose most or possibly even all of your rights under the loan contract. Professional servicing organizations exist, but they 1) cost money that cuts into your margin, and 2) make mistakes anyway, which you are responsible for. Not too long ago I fought and won a battle with an out of state servicing company that was violating California law. If I had wanted to, I could have sued both them and the holder of the note as well as making criminal complaint. Servicing requirements are deadly serious.

With all that said, many sellers right now are in a situation where a carryback means, "Hey, I might get the money, where if I didn't, I definitely wouldn't." If this describes your situation, a carryback might be something you should consider.

Lest you not understand, most sellers want cash, not a loan. It's very hard to use a loan, particularly a private loan of dubious quality, to assist you in buying your next property. You can't just spend a promissory note like you can cash. There are loan buying services out there, but most of the time the amount you get will be heavily discounted, particularly if you cannot document a history of on-time payments and you are in a bad credit situation. It is this fact which sellers who are able to offer carryback financing leverage use in order to get better deals.

There are those out there who like carryback financing. Most often, they are real estate sharks. What they are hoping is that they will get their twelve percent for a couple of years, during which time value will go up, and when they turn around and foreclose, having not only been paid their above market interest but also having leveraged that loan into renewed ownership of the property at an appreciated price. Another one of their tactics to use the existence of the carryback as leverage to get a price significantly above market for the property from desperate buyers who can't get anything else, and as soon as the buyer has made the payments for a few months, sell the note. However, the note buyers have caught on to that little trick, and in the current environment of decreasing or stagnant prices (flat locally), they are balking at paying full price or anything like it for those notes.

And that's where I'll stop, lest I inadvertently release more scams into the wild. Suffice it to say that there is sufficient potential for abuse in the practice of carrybacks that lenders have become very sensitized to the possibilities, and have taken what they feel are appropriate steps to limit their potential for losses due to the abuses that have taken place in the past.

Caveat Emptor

Original Article here

The Return of Portfolio Lending

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For a long time, Fannie Mae and Freddie Mac had a policy that they would not fund investment property (non-owner occupied) beyond 10 loans for a given investor. Although it did impact a certain number of investors, for most folks that rule just never came into play. They have now reduced that limit to 4 loans, which is putting an awful lot more investors in the position of needing a portfolio loan.

Portfolio loans are loans where the lenders originate the loan with the intention of holding it themselves. In recent years, this has been a very limited niche, and even those A paper loans written with the full intention on the part of the lender to hold it themselves were often underwritten to Fannie and Freddie standards, so that they could sell such a loan. Not that there were very many of those.

Portfolio loans largely went away because the tradeoff between rate and costs is much higher than the standard securitizable loans. In plain english, the rates are higher. When the lender originates a loan and sells it on Wall Street, it gets an immediate return of 2.5 to 4 percent on its money. Not as much as holding a six percent loan for the year, but they can turn right around and use the money to sell another loan. Lenders don't have any trouble getting four to six loan sales on the same money per year, some manage eight or better, and twelve is possible, if unlikely. Therefore, they make anywhere from 10% to maybe 25% per year by selling the loan repeatedly, as opposed to about six percent for holding it. Which of those do you think the average lender sees as more attractive, particularly if they also retain servicing rights and make money that way without risking any of their own?

So if the lender is not going to be able to sell the loan, but rather have its money tied up until you decide to sell or refinance the property, then they're going to want something more akin to the 10% or better return they get on their money by originating and selling the loans. Portfolio loans have a higher rate for the same cost; albeit a much smaller difference than when I first wrote this article. Some people will tell me they don't want their loan sold. I ask why, and they tell me about the hassles and ending up with an unknown company. I explain that the contract is the contract, and the only differences if your loan is sold are the name on the check and the address on the envelope (or, if you pay online, the routing number you use). For those that still come back with "I don't want my loan sold," I then say, "Well, then it sounds like what you want is a portfolio loan. The interest rate will be higher, meaning your payments will be X dollars per month higher, and your cost of interest will be higher." Them's the facts. Some lenders will lie about it to get clients to sign up for their loan, but that doesn't change the facts. They can deliver a portfolio loan, or they can deliver a regular loan where the lender is still going to sell that loan. Which would you rather have, an honest discussion of alternatives or someone who chose one alternative without consulting you? Because the loan they deliver will be one or the other, and whether it's the choice you would have made is mostly a matter of luck.

To be completely honest, even portfolio loans can be sold. However, not being designed with standard loan packages in mind, it's harder. Selling portfolio loans is a harder thing than what Fannie and Freddie do, as the ways in which portfolio loans are underwritten is not written to some broad industry standard. Selling portfolio loans is more common now than it was a couple of years ago, but the same lender generally retains servicing. Not every lender offers portfolio loans, as they are a different thing entirely to the corporate finance people than the standardized loans Fannie and Freddie require.

But for those that do, they allow that lender to make the underwriting decision by whether they are comfortable making such a loan, rather than whether or not it meets standardized criteria for Wall Street. This can enable those lenders who do offer portfolio lending to be able to make a certain specific loan, where a lender with its eyes fixed solely on Wall Street does not have the option of saying "Yes."

There are a fair number of loan niches that have always been portfolio loans. Many commercial loans, and loans for investors with over ten properties, to name two. Traditional "non-conforming" loans are not one of them, however. Just because Fannie and Freddie couldn't buy them doesn't mean nobody would. In fact, because they were underwritten to Fannie and Freddie standards in all matters except loan amount meant they were sought after, especially as opposed to subprime loans. But just because portfolio loans are not underwritten for Wall Street doesn't mean that the lenders can ignore Federal Reserve regulations, for instance the one about "Must be able to repay the loan from a source other than additional borrowing against the property". For that, you have to go hard money.

Final point: Because the interest rate for portfolio loans is higher, and therefore the cost of borrowing the money, there are going to be a lot of properties that would be a good investment for someone able to qualify under Fannie and Freddie's rules, where they would not be a good investment for someone who needs a portfolio loan. This is likely to constrain prices from rising to a small degree, and force rents to rise to a somewhat higher degree. If your landlord can't make it work on the basis of the rent you're paying, they have two real choices: Raise your rent or sell the property. Nor is the second alternative any kind of relief. If that landlord couldn't make it work, why would you think the next one can? That's assuming the purchaser doesn't plan to live in it themselves from day one. I have an inflexible rule with tenants where my clients don't want to keep them: They must be out before close of escrow. I suspect most buyer's agents are the same way. One of the fall-outs from the bursting of the real estate bubble that most people don't realize yet is that the economic factors which kept rent increases low for the last decade or more are all gone now. Furthermore, if someone is looking to buy an investment property, the cash flow is going to have to work from day one. If it won't, they're not going to buy it, and it will never become a rental property in the first place. On a $300,000 loan, a portfolio loan instead of a securitizable one means a difference of over $500 per month in the cash flow requirement, which translates to rent increases, and not just from the big landlords with portfolio loans.

Portfolio lending is set for a comeback. With Wall Street becoming ever pickier about the loans it wants to fund, and mortgage insurers restricting what they will insure, a strong lender with good reserves can make a lot of money in this environment by lending to selected borrowers with good credit and plenty of income, that "originate and sell" lenders cannot touch, because Wall Street isn't interested under current standards.

Caveat Emptor

Original article here

There's no question which I'd rather have.

It has been traditional for a client to write a check to their broker's escrow account. Sometimes the check is actually deposited, but usually it's just held. It has recently become become a game with certain listing agents to ask for a copy of that check with the offer. I don't know why. It's not like it means anything beyond that the clients have a checking account.

Asking for a copy of the check doesn't do my listing clients any good. That check may not be good, and you don't have it anyway, nor is it even in escrow most of the time. In fact, even if it's written to the appropriate escrow company, sometimes they don't cash it for weeks. Furthermore, since you haven't agreed upon an escrow holder yet, it's kind of ridiculous to be writing a check when you don't know who's going to be holding it. All of which means that asking for a copy of the check doesn't mean a damned thing.

From a broker's viewpoint, the number one way brokers get in trouble is escrow account paperwork. Stupid, minor little piddly crap on the scale of the transactions we handle, whose entire purpose is seeing that client funds are separated completely from broker funds, but problems are caused by the fact that broker funds have to be used to pay the costs of such an account and therefore incredibly dumb little minor inadvertent stuff can cause a brokerage to lose their license. I'd like to see more unethical agents and brokers get charged with violations on other things that really make a difference to their clients, but that's no reason for witch hunts on the escrow account so long as the client's money goes in and out properly. Nonetheless, since brokerage escrow accounts are a witch hunt mentality on the part of the Department of Real Estate, I don't want custody of client funds if it can at all be avoided, and I see no reason to ask other agents do do something I wouldn't want to, and that doesn't benefit my clients anyway.

What I do want is evidence that the buyer does, in fact, have the money for the deposit. That's it's sitting there in a bank account, ready to write the check. That when they do write the check, the escrow holder will be able to cash it and get the funds into the account for this transaction without delay. I can make acceptance of the offer contingent upon the receipt of good funds by escrow, but why would I want to open escrow if the funds might not exist in the first place?

The first step is verification that the money is, in fact, there - and believably there. I cannot require account numbers, but I can require redacted account statements, or verification of deposit. If we're going to obsess about the deposit money, I'm at least going to obsess about things that mean something to my client, like whether the money is there and available, not whether the prospective buyer is willing to write a check that may or may not have the funds to make it good.

Caveat Emptor

Original article here

This is easy. Much easier than effectively shopping for a loan or a listing agent. So easy that a congresscritter can do it. So easy that congressional leadership can do it.

The only thing possibly moderately difficult to understand is that finding a good Buyer's Agent takes place in two steps, not one.

The first thing to do is figure out your situation. What do you want in a property, and what is your budget? I've written several articles to help you determine your budget, but the one piece of data they are missing, because they have to be, is what the rates that are available to you are. Unless you're sure that you fall into the topmost category - great credit score, no late payments or anything, and you're looking to buy something well beneath what you can prove that you can afford, you can only find this out by having good conversations with several loan officers. Rate advertisements are teasers, aimed at getting you to call, useless in reality. I have never seen an advertisement for a loan that 1) actually existed, and 2) that I would consider signing up for, even if I could get paid for it.

Then, make a list of agents you might like to work with. This can certainly include Uncle Bob, your neighbor, or your poker buddy, but you want more than one agent on the list. My experience is that agents at the big chains are (in the aggregate) not up to the standards of the ones working at independent brokerages, but your mileage may vary. Also, I am a Realtor, but that's for reasons completely unrelated to competence or ethics. I'll believe that Realtors are superior to non-Realtors when the boards of Realtors start handing out penalties for non-compliance with the alleged code of ethics that mean something. Ditto all of those little "designations" that have been cooked up to parallel the ones financial planners get. Unlike many financial planning designations, some of which are graduate degrees of one value or another, these are marketing efforts cooked up to fool a gullible public for sitting through a couple days worth of lecture. The qualifications for the real estate designations are laughable in the context of ChFC (Chartered Financial Consultant) and other financial planning designations that require five to ten graduate level college courses to attain.

Then, have a good conversation with those agents. The first thing you should ask, on the phone, is whether they require an Exclusive Buyer's Agent Agreement, or whether they will accept a Non-exclusive Buyer's Agent Agreement. If they require an exclusive agreement, that should be the end of the conversation, and cross their name off of your list. If you sign an exclusive agreement, you are locking your business up with that agent. You are putting yourself in their hands completely. The only reason that you should even consider an exclusive agreement is if you are asking for something special that costs money - for instance, expedited foreclosure lists (The free lists are a waste of time, because they're already flooded before you get them. The subjects of the free lists have said, "no" to literally hundreds of others before you even got the free list, so unless you've got something very special in the way of an offer, you are wasting your time.)

There is absolutely no good reason not to sign a standard Non-Exclusive Buyer's Agreement. You risk nothing by signing. You lose nothing by signing. You can have any number of them in effect, and as long as you don't sign any exclusive agreements, you're fine. All you do is assure the person whose services you use that if they find and help you purchase the property you like, then they will get paid. The only reason not to sign such an agreement is if you're looking to stiff a good agent who finds you the property you like, so that you can use a discounter on the transaction, and that's shooting yourself in the foot. The money you get back is unlikely to be as much as the difference the good agent will make in negotiations, or the trouble the good agent will save you.

One more thing any buyer's agreement you sign should have: An explicit release if they are the listing agent for the property you decide to put an offer on. It is a very bad idea for buyers to accept a dual agent, because the agent has a responsibility to the sellers, but nearly so deep of one to you. They're on the other side. I wouldn't pick a quarterback that played for the opposition at the same time, and neither should you. Tell them to pick a side and stay on it, and as they already have a listing agreement, they've already chosen the other side. It's great for them and for the sellers that they've sold the property, but their desire to get paid double does not outweigh your right to representation with responsibility to you and no conflicts with other duties.

Tell them what you want in a property, where you would like to live, and what your budget is. Then ask them if it's a realistic, and see what they say. If they say yes, that's great, but wait until you hear it more than once before you celebrate. Many agents will tell you yes, figuring that it's easier to raise your budget than lower your expectations, especially once you have seen this beautiful property that they "just happen" to know someone who can get the loan for. Nor is this a straight yes/no question. They might tell you an unqualified yes, as desirable properties possessing those characteristics you want are available in that area below your budget. They might tell you that such properties are available, but that they are scarce and you must be prepared to act expeditiously when you find one. They might tell you that you're going to need a fixer to get those characteristics, or that you're likely to need to compromise some of them. Or they might tell you that what you want is sufficiently beyond your budget that an alternative approach is probably called for.

Now, whatever the first agent tells you, don't swallow it whole. Get some evidence. If they show you literature for brand new beautiful properties just being sold out that are less than your budget right where you want to live, that's evidence. If they execute an MLS search and the only things that pop up in your budget are out of area properties being cross-marketed, that's evidence. The worse the news they tell you, the more likely it is to be true. Sales persons do not like to be bearers of bad tidings, especially before their commission is paid. But if they're willing to give you evidence that your expectations need to be adjusted downward, that is evidence that this is probably someone who takes their fiduciary duty seriously, and that is an agent you probably want to work with. By comparison, the agent who fills your head with happy thoughts is one to avoid, as millions of people have discovered the hard way in the last few years after they went through foreclosure on properties that they shouldn't have bought in the first place.

Notice that I said an agent you want to work with, not the agent. There's a reason for this. Remember that non-exclusive agreement you signed? Remember that I told you it's fine to sign more than one? Here's the good thing about signing more than one: Now you have multiple agents looking for that special property that will make you happy. You won't pay any more for this than for one agent, because they are all competing for your business and the same commission check. This is the stage at which the agents are actually competing for your business, by looking for the property you want. You don't have to decide who gets paid up front. You wait until one of them brings you what you want. Furthermore, the agents will self-select or disqualify themselves to a large extent.

Let's say you signed seven non-exclusive agreements. One is Teresa Top Producer, who slams clients into the first property that's even a rough fit. She'll take you shopping one day, try hard to sell you every property, and get upset if you don't make an offer on the first day. By "try hard to sell" I don't mean anything so crass as the hard sell. What happens is she talks up everything she mentions, very little if any compare and contrast, and whatever she does, no calling your attention to defects or undesirable items. In fact, she'll do her best to distract you or get you to ignore them. For savvy, patient, intelligent buyers, Teresa is not a good fit as an agent, and you're going to realize it after one or two properties. And here's another great thing about the non-exclusive agreement: You just stop working with her, and she's out of the picture!

The second person you sign an agreement with is Martin MLS. Martin does an MLS search, and wants you to go around with him to every property on that list. He sets up an automatic notification to you of every property that fits some basic criteria that gets listed, and he wants to go check out every one with you. Lest you not have figured it out while reading the last two sentences, Martin's approach is basically throw a lot of mud at the wall and hope that if he throws enough, a little bit will stick. Martin may or may not have any real idea of the spread and breadth of your market, and he may or may not be able to recognize a real bargain when it bites him, but he probably has a good idea of the general state of the market. You'll get the same idea pretty quickly by working with Martin, after you see fifteen or twenty properties that seem pretty much to run into one another - except for the ones that are drastically over-priced. You get the idea that working with Martin is not an effective use of your time, and soon, you stop, at which point Martin's out of the picture.

The third person you sign up with is Benny Bump. Benny's got his own unique way of making transactions happen. Actually, it's not at all unique. It's common enough to have a general slang term among Realtors. What Benny does is take you to three or four properties that look like war zones, comparatively speaking. These are not desirable properties on the scale you're using. They fall well short of desirable on one scale or another, and usually on several scales. Then, just as you are despairing of ever finding something you like, Benny Bumps you by showing you this absolutely gorgeous property in perfect condition. "Yes!" you happily cry, having quite predictably come to the conclusion that You Want This One, and you'll do Whatever It Takes to get it. You may or may not notice right away that the price is way above the budget you stated to Benny, and he's counting on you not caring when he whispers that he knows how to get the loan, or knows someone who can. The vast majority of people who meet Benny will fall for "The Bump", and most of the ones who don't fall for it will not realize what a vicious, unethical trick it is. You, being that one in a hundred or so who is smart enough to realize what happens next to Benny's former clients, inform Benny that his services are no longer desired.

I have said it before, and I will say it again. You should demand to know the asking price of every single property before you agree to view it, and if the agent can not explain why that property might be obtained within the budget they agreed to work with, that is an offense not only worthy of firing them, but one for which financial prudence demands firing them. You can't fire someone who you've signed an exclusive agreement with except by waiting out the agreed upon period. You can fire someone whom you have signed a non-exclusive agreement at any time by Just. Not. Working. With. Them.

The fourth person you signed with is Rhonda Rebater. Rhonda is a discount agent sits in her office, and waits for you to bring her the property you like to her for negotiations. She'll usually also expect you to meet the appraiser, meet the inspector, etcetera, nor will she shop services for effective value. Quite often, Rhonda has her hand out to these people behind your back. Not necessarily for a lot of money in any one place, but her whole approach to the business is based upon volume. And she does quite a lot of volume, because people who think in terms of cash in their pocket (that rebate of some portion of the buyer's broker's commission that Rhonda gives them back) are her legitimate prey, and they flock to her in droves, like politicians to campaign contributions. If you're savvy enough in the business that the value provided by a good agent is negligible, why don't you get licensed and earn yourself the entire buyer's broker commission? Because Rhonda has little real market knowledge, she's a very weak negotiator on your behalf, and because her business model is predicated upon high volume, she's an awful guardian of your interests as the transaction goes along. So Rhonda may not be precisely out, but she's not likely to go out and find you a real value.

The fifth agreement you signed is with the team of Gary and Gladys Gladhand. Gary and Gladys get their business from social groupings. Gary has a bowling team and a softball team and he's a soccer coach and Gladys is PTA president and girl scout troop leader and organizer of the party circuit. And, of course, their ads are all over the place. "Mr. and Mrs. East Side" on the East Side and "Mr. and Ms. West Side" on the West. Together, their objective is to know enough people, and make certain all of these people know that they are Realtors, that they are always getting referrals from these folk because "of course" they'll use Gladys and Gary, and walk-ins from those stupid enough to believe their advertising. You may have come to them as Uncle Gary and Aunt Gladys, because normally Gary and Gladys don't allow non-exclusive agreements, and they will almost certainly balk at the no dual agency release, even from a relative. Their whole business approach is predicated upon not competing for your business, and locking out the competition so that they don't have to compete by making it a social obligation to do business with them. In point of fact, Gary and Gladys may be decent or good listing agents, but are extremely unlikely to be strong buyer's agents, because all of this schmoozing takes a lot of time that could more productively - from potential buyers' point of view - be spent obtaining market knowledge and finding bargains. Their approach is reasonable on the surface: You want a house and their listing wants to sell a house for too much money and they want to get paid both halves of that commission, so there just isn't any reason not to make everybody happy, is there? But a good buyer's agent is going to be the one that looks at every single property, whether they listed it themselves or not, with a cold, rational, logical mind and clear eyes for comparative value. I don't list many, but I rarely show one of my listings to one of my buyer's clients, because my listings are priced to the market and the situation. This means that while they're not over-priced, they're not the greatest bargains in the market, either. I only need to price low enough to attract people foolish enough to sign an exclusive agreement with one of these problem agents, not to attract a cold, steely-eyed buyer's specialist. Gary and Gladys are going to show you all of their own listings (except the ones that are obviously unsuitable) first, then, all of the listings with other agents in their office that might interest you, and then they are going to start acting an awful lot like Martin MLS: Throw enough mud at the wall, eventually some of it might stick. Are any of these tactics likely to generate a superior value from a buyer's point of view? Not on Planet Earth.

Now, you got really lucky, and beat the odds. Out of the seven you signed up with, you've actually got two agents that are going to do their job by going out and looking for the best values in your current market by actually looking at them and comparing them to each other, from the standpoint of your needs and your desires and your budget. The ratio of these agents in the real world is much lower than that. If you don't have at least a couple agents left on your list when you're done vetting, go out and find more. You can sign any number of non-exclusive agreements, at any time.

When good agents show you a property, they show it to you with context in mind. They're willing to say bad things about every property, not just the ones they don't want to sell you, even though they should only be showing you superior values. They're going to compare and contrast virtues and defects. Lest I be unclear, it is precisely for these virtues that you have been vetting your candidate agents. You can only see real evidence as to whether they are present or absent in action, not during the interview process. Knowing enough to sign a non-exclusive agreement gets you the ability to find the defects in the five agents who didn't do what you wanted, and you didn't need to commit yourself to any of them before you observe them under fire. Instead, you know enough to understand that there is no real need to commit to anyone until you make an offer.

Now, which one of these two of three good agents gets paid? That depends upon which one of them does a better job of finding you the property you want. Best trade-off of those things you want in a property versus price. Of course, you won't be sure exactly what price you can get it for until you go through the negotiations. And it is possible that one of the others really does have something good, if not nearly so likely. In my experience, Martin MLS will eventually get the job done, if you have enough patience or he gets lucky. Rhonda Rebater will be there if you get frustrated enough to take matters into your own hands. And it is possible that Gary and Gladys Gladhand have something you like, but it is unlikely to be a superior value. Teresa Top-Producer and Benny Bump are deadly poison, as far as buyers are concerned, and once you discover this hidden attribute, you should give thanks that nothing you saw with them was attractive to you. But none of these others has gone out and physically looked at all those properties, which gives those two good buyer's agents you did find an unbeatable amount of market knowledge, which they can then turn around and use to your benefit in negotiations. When they can tell you what the bad points in a property are as compared to the other stuff, you have evidence that they can explain it to the agent on the other side of the transaction. Except for those owners who just won't listen to reason because they want their property to be worth more than it is and they are not going to entertain evidence to the contrary, this evidence is powerful stuff, and can make a huge difference on the price you end up paying, even on a property that is legitimately an above average value to start with.

Caveat Emptor

Original article here

There are actually several distinct marketplaces consumers can obtain their funds from, and several types of providers. John the wealthy highly salaried person with great credit and a substantial down payment should not and usually does not obtain his mortgage from the same funds providers as his twin brother Jim, the self-employed, always-broke person with terrible credit and no down payment. They may deal with the same employee at the same business, but the funds and parameters for using those funds, are entirely different.

In order to make sense later on, I've first got to acquaint you with two concepts: yield spread and pre-payment penalty. The yield spread is what the lender pays the person or company who does the paperwork for your loan in order to give them an incentive to choose that lender, loan type, and rate, as well as any of several other reasons. The yield spread is based upon the rate of the loan, the type of the loan, and other factors as well

Yield Spread is explicitly associated with the premium (amount over face value) that the actual lender will receive when they sell the loan. I find it entirely and intentionally misleading that the government now requires brokers to treat yield spread as a cost and added to other costs of the loan while not requiring that direct lenders disclose this secondary market premium at all. The new 2010 Good Faith Estimate adds Yield Spread as a cost when under the new rules it is an offset, lowering the cost of the loan to the consumer. This has the effect of making broker originated loans appear more expensive than they are, while allowing direct lender loans to continue to hide this method in which they get compensated on basically every loan.

Prepayment penalty is a penalty you agree to pay if you sell your home or refinance before a certain period of time has passed. If there is a prepayment penalty, Industry standard is six months interest, with some lenders making this 80 percent of six months interest. Usually (not always) they will let you pay a certain amount over the normal, agreed upon principal per year without triggering the penalty, but if you sell or refinance out of their loan, the penalty is always triggered for the duration of the penalty. Some lenders will actually phase it out in stages, although this is not common.

Lest it be not plain to you, a prepayment penalty is a thing to avoid if you reasonably can. Let's say you get transferred and need to sell the house in six months, and that you have a $200,000 loan at 6%. That's six thousand dollars less that you will receive from the sale of your home, not to mention that the average person refinances every two years, which is typically the shortest pre-payment penalty. If you need to refinance within two years, that's six thousand dollars of your equity gone for no good purpose. Mind you, if you need the loan, and it gets you the loan, so be it. It's still a thing to avoid.

The top of the food chain from the point of view of consumers are the so-called A paper lenders. This market is controlled by the two federally chartered giants, Fannie Mae and Freddie Mac. Lenders who participate in these markets lend in full accordance with Fannie Mae and Freddie Mac rules, because they want to be able to sell the loan to them. In many cases, they actually do sell them seamlessly by retaining the servicing rights, and the consumer never knows they have done it. In others, they retain the loans entire, and in still others, they sell them off entire. They do this for many reasons, but mostly to raise cash so they can do more loans. In any case, the only difference it should make to you, the consumer, is where to address the check and who to make it out to. Unlike the other markets, if the secondary market pays a premium in this market it does not automatically mean that there will be a pre-payment penalty. Although they will pay a higher yield spread if the loan officer sticks the client with a pre-payment penalty (and the longer the prepayment penalty is, the more they will pay). WARNING! Many loan officers will not tell you about it unless asked ("Why bring up a reason not to choose your loan?" is a direct quote I've heard any number of times) and some will flat out lie even if you ask. This is not ethical, but they know they can almost certainly get away with it. There really is no reason why an A paper loan should have a prepayment penalty, except that a loan officer wanted to get paid more. The new rules make this more difficult, but it is still happening, mostly because consumers aren't very careful. ALWAYS be careful about pre-payment penalties; they are an excellent way for lenders to sock you with thousands to tens of thousands of dollars in extra revenue that will end up coming out of your wallet.

It is not difficult to qualify for an A paper loan. As long as you're not taking equity out of the home, they can go through with credit scores as low as 620 for a full documentation loan, although there are caveats. Despite what you read in Internet pop-ups, according to National Mortgage Reporting a 620 credit score is 100 points below the national average. So even someone with modestly below average credit can still qualify for an A paper loan. There are minimum equity requirements, however. Also, it until recently it didn't matter if you were King Midas who had never failed to pay a bill immediately in full or someone who barely staggered over the line into qualification by the computer models put out by Fannie Mae and Freddie Mac. That has now changed with risk based pricing, such that credit score and equity picture can cause you to be assessed a differential, but the differential is a lot better than going sub-prime or Alt A. There is nothing better than A paper.

The next market below A paper is called A minus. The rates are a little bit higher, and there are prepayment penalties anytime the lender pays a yield spread. A minus is still a program associated with Fannie and Freddie for the "almost but not quite" people, although the window of qualification has become a lot narrower of late.

Then comes the so-called Alt A, which are typically loans for fairly unusual circumstances. At this update, Alt A really isn't available due to Wall Street being more nervous than a cat at a rocking chair convention, but I'm going to leave the rest of what I originally wrote untouched because it will come back: The credit scores here go down to about 580, although there is less standardization. The worst, most dangerous, absolutely awful loan in the world comes from the "Alt A" world. There are all kinds of friendly sounding names for it, like "Option ARM", "pick a pay", and such things, but they are all negative amortization loans at their heart - you end up owing more than you borrow. They sound benign: "pick your monthly payment!" But in fact most people choose the minimum monthly payment which capitalizes and then amortizes more money into your loan every month. Every single one I've ever heard about carries a prepayment penalty. Once upon a time, I saw ads for these abominations every day all over the internet. If anybody quotes you a mortgage rate below 3%, or a payment that seems too low to be true, I will bet you millions to milliamps they are trying to sell you one of these abominations. There are still loan providers out there that do nothing but these - they're easy to sell to unsuspecting victims because the minimum payment is so small, and most people shop for a home loan based upon payment. There really isn't space here to go over everything that's wrong with them (or where they may be appropriate), but except in certain special circumstances, RUN AWAY! And do not do business with that person! They have just proven themselves unworthy of your business. Fortunately, the Negative Amortization loan has now had regulatory controls placed on it, and lenders have figured out that these loans aren't as good for their bottom line as they thought, due to a high default rate that was as predictable as falling objects hitting something.

(Every so often, a representative from a new lender walks into my office. I'm always glad to talk to them so long as they answer my questions in a straightforward way, but I have one inflexible rule. As I just said, it doesn't happen much any more, but if the first thing they talked about was a Negative Amortization loan - no matter the happy sounding name they call it by, I throw them out and do not allow them to return. I think it indicative of the state of things in the Negative Amortization world that the one time I had a client who would actually benefit from this thing, and I took the time to tell him exactly where all of the traps I knew about were, give him strategies to turn it to maximum benefit, and he agreed that he wanted to do it - not one of the five companies I tried would actually approve the loan despite him meeting all of the written loan guidelines.)

The final niche that comes from regular lenders is called sub-prime. Until recently, in the world of sub prime lending you could do a lot of things that higher rungs on the ladder will not allow you to do. As in A minus or Alt A, anytime the lender pays a yield spread there will be a pre-payment penalty, and I think I've run across exactly one sub prime loan that didn't have a prepayment penalty in my whole time as a loan officer. However, the people who subsidize sub prime lenders just didn't have a whole lot of choice. That has now changed. Unless you've got a very high down payment or amount of equity, subprime is being about as strict as A paper with qualification standards. However, if you don't qualify for a better market, this is typically the only way you're actually getting a home loan, be it because of low credit, low equity, or what have you. The rates are high, but it's that or nothing. Sub prime loans are very lucrative - the average lender or broker specializing in them usually makes about 5 points - 5 percent of the loan amount - on each and every loan. I've had people thank me so profusely I was almost embarrassed when I got them a loan on something more closely resembling a typical margin from higher niches. The lines between A minus, Alt A, and sub prime are blurring more and more as time goes on. When I first wrote this, it was to the point now where if someone said they did sub prime, that usually meant Alt A and A minus as well - it's just a matter of where on the spectrum a given client sat. Nowadays, what that same provider is looking for is an A paper borrower who doesn't realize they are A paper, or whom they can make think is not an A paper prospect.

The final niche is Hard Money. These are not typical lenders, in fact, they have almost nothing in common with traditional lenders. They are agents for individual investors, sometimes even loaning you their own personal money. The rates for this start an absolute rock bottom of about 13 percent, and go up from there. Typically there will be a front-end charge of about 5 percent of the loan amount, and a prepayment penalty of about 7%. These are loans for people with sub 500 credit scores, people with homes that have been damaged in some way and must make repairs before a regular lender will touch the property, and so on and so forth. The equity requirements are large - 75 percent of the value of the home based upon a conservative appraisal is about the highest a hard money lender would ever go, and all of the ones I'm aware of now have an absolute limit of 65%. Lenders in markets higher up the chain are in the business of making loans, and are likely to cut you as much slack as practical if you have some difficulty making payments, as they are not in the business of foreclosures. A hard money lender has no such constraint. They will foreclose on your home immediately and without a second thought. One way or another, they will get their money back and then some. WARNING! It is common practice on the part of hard money lenders to have you sign the Note and Deed of Trust "conditional" upon them finding an investor. The person signing the documents thinks the loan is done, and that their situation (usually a time critical one) is resolved, and everything is all roses now, but it isn't. They may still want you to pay for multiple appraisals, jump through multitudinous hoops, and still not give you the loan in the end. This is just their way of binding you to them so that you don't or can't go elsewhere. Not that this is completely unknown in the higher niches (in fact, some lenders market their services to real estate agents and brokers based upon this practice - people who are true loan officers learn that this is not a good idea), but it's not common, as it is here.

There are three main types of places to go to get a loan. The first is a regular lender. The second is what I call a "packaging house", although in practical terms it is very similar to a regular lender. The third is a broker or correspondent. Each has their advantages and disadvantages.

A regular lender is what you think of when you think of a bank. Most of the big names are regular lenders. They typically have their own offices, often mingled with other banking functions. They have their own funds, wherever they've gotten them from, and they have executives and such that put together their own loan programs, complete with criteria for approving or not approving a given loan. These people do loans with at least the possibility of keeping them in mind, and some do keep every loan they do, while others sell almost every loan. The good news is that they'll typically be slightly more willing to make exceptions around the edges (whether or not the loan is a good one for you!). The bad news, from the consumer point of view, is that they consider you a captive from the moment you walk in the door. Even if they know of another lender with better pricing or a program that suits your needs better, they're still going to keep you "in-house". And their loan pricing is such that it's going to pay for all of the salaries and benefits for all of the people in the office, and the beautiful office itself and all of its contents.

A "packaging house" is like a regular lender except that they do their loans with the explicit intention of selling off every single one, either immediately or a few months down the line. Practical difference to consumer: there's a 100% chance you're going to end up making payments to someone else. In other words, no big deal. Packaging houses are lending their own money - they are not brokers. The difference is that a traditional lender is at least set up for long term servicing - the packaging house is not. Some sell immediately, some wait for one payment (better price in the secondary market), some wait three payments, as this gets them an even better price when they sell the loan. This is nothing to fear. The original lender recently sold my own home loan. The only difference is that now I write the check to company B instead of company A, and mail it to place X instead of place Y. California has stronger consumer mortgage protection laws than the federal government, but there are laws in place nationwide for the consumer's protection that avoid payments being unjustly marked late because your mortgage was sold.

A broker is not lending their own money, but is being paid instead to put the loan together and get it to the point where it is funded, at which point they are out of the picture. A packaging house could, in theory, decide to keep a particular loan - there is no legal impediment. They just don't do it. A broker doesn't have this option - it's not their money being loaned, but instead that of a regular lender or a packaging house. On the down side, a broker has somewhat less leverage to get underwriters to make exceptions to the rules (although the difference is academic for those outside this narrow range). There is also a lot of variation on quality. You'll find the very best loan officers in the country working as loan brokers - and the very worst, as well. On the up side, a broker always has at least the ability to get you a lower price than the other alternatives, although they may not have the willingness. Correspondents are a cross between brokers and packaging houses. They've got multiple providers like brokers - but the company also has a line of credit they use to fund your loan so they receive the secondary market premium rather than merely whatever yield spread there may be. They're still putting your loan through a particular lender's underwriting and funding program, but they fact that they initially fund your loan themselves allows them to act more like a direct lender.

The first reason for this is that a good broker shops many different lenders to find the program that's priced best for you. This is less important but still very noticeable at the A paper level (A paper had pretty standardized rules) then it is for borrowers whose situations (either through credit, or through needing to do something A paper doesn't support) need to go to markets lower down on the totem pole. A traditional lender or packaging house puts you in the program they have that they feel is the best fit - they won't go outside the company. A broker may shop fifty lenders or more to find the one program at the one lender that fits you best. Second, I (as a broker) get better pricing from the lenders, either regular or packaging house, than their own loan officers. Why? Partially because they're not paying my support expenses - office rent, furnishings, support staff salaries, etcetera. Mostly because it's my customer, and I can and will take my customer elsewhere if they don't give me the best possible deal. As a broker, I am never held captive by any single lender, and they know it, and they know I know it, where once a member of the public walks into their office, they consider you "captive" business, whereas at any point in the process, I can take my paperwork back from the lender and take you to someone else. Used to be, I usually didn't even need you to fill out anything new. That has now changed with the new Home Valuation Code of Conduct which means appraisals are no longer portable (What? You thought it was for consumers?).

Still, I do have the option of moving the loan, so they give me better pricing than they give you, and they don't play games because I've got more business every week that they want, whereas they're not going to see you again for a couple years, if ever. The upshot is: every week when I do the family shopping, I hit three or four supermarkets all competing for my business within a mile and a half from my home. Because of this competition, I can save pretty good money buying the things that each market has good sales on, and if the quality at one market isn't so hot on some sale merchandise, I will get a pretty good price at one of the others. Mortgage brokers work on the same principle. I do the running around and quality check for you, and because this is what I do for a living, I can spot the bad stuff a lot easier than you can. When I do my grocery shopping, I always make a point of checking what the banks in the supermarkets are offering on their mortgage deals, and I always smile because I'm always getting somebody a better price on the same loan from that same lender.

Caveat Emptor

Original here

There are all sorts of reasons why escrow falls through, but they fall into three main categories. They can best be described as failures of qualification, failures of the property itself, and failures of execution.

Before I get into the main subject matter of the article, I need to define a contingency period. This is a period built into the beginning of the escrow process when one party or the other can walk away without consequences or penalty, usually for a specific reason. For instance, the default on the standard forms here in California is that all offers to purchase are contingent upon the loan for seventeen calendar days after acceptance. If the loan is turned down on the sixteenth day and the buyer notifies the seller that they want out immediately, the seller should allow the deposit to be returned by escrow. If it happened on the nineteenth day, the buyer should be aware that their deposit is likely forfeit. A contingency, just like anything else, is something negotiated as part of the purchase contract. If it's in the contract, you have one. If it's not, you don't, although some states may give buyers certain contingency rights as a matter of law.

Failure of the buyer to qualify for financing is by far the most common reason for escrow failure. This means that something goes astray with the buyer's quest to acquire necessary financing. They cannot qualify for the loan, they do not qualify within the escrow period under the contract, they allow their loan officer to spin all kinds of fairy tales about what the market is doing or likely to be doing when the plain fact of the matter is that the loan officer just can't do the loan on the terms they indicated when the poor unsuspecting consumer signed up. Maybe it existed at one time, or maybe they just hoped it would. In any case, it wasn't locked in and it certainly doesn't exist now, so rather than pay the difference out of their commission, the loan officer delays and hopes for the market or a miracle to save them. Or they told the consumer about a loan they thought they might be able to qualify them for, only to find out they don't, and they're stalling, hoping a better alternative will open up. Due to changes in lending law and practices, it's now taking a minimum of 45 days for loans, but when I originally wrote this, if a loan officer couldn't get the loan done in thirty days, I'd have bet money they couldn't do it on the terms stated in the initial documents.

Sometimes it does happen that consumers don't qualify for the loans due to real problems that just don't come up until the file is in underwriting. Since this can cause you to lose your deposit, it's a good idea to ask your loan officer about any potential problems before you make an offer. You know your personal financial situation but you probably don't know what all of the potential disqualifying issues for a lender. The loan officer should know what the issues are that may cause lenders to have difficulty approving your loan, but they don't know your history and situation unless you tell them. Many things that underwriting will catch do not necessarily show up on a loan application or credit report, so if you have an unpaid collection, monthly expenses that might not show up, a lien, a dispute in progress, any issues with your source of income, or anything else in your background that you have any questions about whether it could impact your loan, it's a good idea to ask right upfront, before you get into the process. Sometimes these issues mean that you flat out do not qualify, sometimes they mean that instead of 90 percent or more financing, you only qualify for 70 percent. Unless you have that extra 20 percent of the purchase price lying around somewhere, the transaction isn't going to fly, and the sooner you find out, the better. A loan officer who can't show you a loan commitment with conditions you can meet before the end of the contingency period is not your friend.

The second category of reasons escrow fails are failures of the property. Some defect is disclosed by the inspection process that the owner does not want to correct or is unable to correct, and the buyer decides that the property is not for them under the circumstances. Mold, termite damage, seepage, damage to the foundation, and all of the other usual suspects fall into this category. Title issues are here also, although they usually become unsolvable when they impact the loan. If the seller can't deliver clear title, the title company won't insure it, the lender won't lend the money, and any rational buyer should want to walk away. Why do you want to give someone money when they are likely not legally entitled to sell you the property?

For defects with the property, providing it was discovered within the contingency period, it's up to the seller to convince the buyer they should still be interested. After the contingency period is over, things are more complicated as there is the possible forfeiture of the deposit to weigh. Good agents that you want to recommend to your friends get out and get the inspections done right away to avoid this issue. Agents that are looking to line their own pocket wait until the contingency period is over before doing so, as this gives the buyer more incentive to stay in the transaction. Let's say you've got a $5000 deposit on the line and seventeen days to remove contingencies, as is the default here in California. Would you rather your agent got an inspector out within a couple of days, or waited three weeks? Keep in mind that you're going to pay the inspector, but that's money you're going to spend regardless. The first possibility means that you find out about potential defects while you can still recover your deposit, while the second possibility means the seller can likely keep that deposit. I know which situation I'd rather be in.

Failures of execution are likely to be because someone messed up. The seller didn't do this. The buyer didn't do that. One agent or the other dropped the ball. The escrow officer didn't do their job. Loan officer failures would be here if loans weren't a whole category on their own. This category covers all the little details in the purchase contract, each of which has to be met before the escrow officer can close the transaction. These failures may or may not be actionable, in the sense of you being able to hold them responsible for their failure. Many times, the escrow officer is used as a whipping post for the failures of other parties, but some escrow officers do screw up big time. Sometimes it takes an outside expert to dissect things dispassionately in order to figure out what went wrong where and whose fault it was, but outside experts cost money, so most of the time everybody just fades into the sunset pointing fingers at each other, unless there's some pretty significant cash involved. The transaction is dead and it's not coming back. Unless there's a good possibility of recovering enough money to make it worthwhile, let it go.

Caveat Emptor

Original article here

Listings from Non-MLS Websites

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About once a week, I get an email from a client or prospect asking about a property they found on a site not sourced from MLS. These properties are pretty universally non-existent, at least as far as being for sale for the advertised price.

MLS listings have to pass some very important tests. Other agents, and for that matter, regular clients have got to be able to verify that they exist. What is it being offered for, what are the showing instructions. Agents who put properties in MLS without having listing agreements are subject to pretty severe sanctions when it is discovered. Fines, Loss of MLS access, possibly even regulatory action if it's severe enough.

That's not the case with the rest of the websites, the ones that get their listings from somewhere other than MLS. I'm not going to name names, but it's pretty easy to discover whether a site is sourced in MLS or not. I will say that client gateways and emails and IDX sites (such as agent websites that say "search MLS!" and realtor.com) are sourced on MLS. Sites sourced on MLS will still have puffery, but the property exists, is for sale for the listed asking price, and the hard numbers will generally be as correct as possible.

If the site does not source its listings from MLS, then agents can write up any property they want. In the past month or six weeks, I've had clients ask about

  • properties that were already sold - escrow closed before the ad was written
  • properties that aren't on the market and haven't been for years
  • properties allegedly priced at sale prices from over ten years ago
  • one property that doesn't exist anymore because it was torn down for new development

What is going on is that agents are writing up false listings for the express purpose of trolling for clients. Getting people to call so that they can maybe pick up a new client. This is very subject to the "talking a bigger better deal" phenomenon, because the person that talks the biggest best deals gets the most calls.

But here's the catch: These bigger better deals don't exist. What happens when you find out that deal doesn't exist? When you discover that an agent dishonestly claims to have a property for sale that they don't in order to get your business. Does that sound like the kind of agent you want? Of course, if you've already signed an exclusive agreement by then, you're stuck. Yet another reason to prefer the non-exclusive agency contract, where you can fire that agent by simply not working with them any more.

I have also seen the actual listing agent writing up ads on third party sites for far less than the list price of the property - a violation of fiduciary duty if ever there was one. This isn't a buyer's agent saying "I think I can get it for $X" This is a listing agent essentially repricing the property without consultation with the client. Nor can they have it both ways. If they believe that is a correct pricing of the property, why haven't they persuaded the owner of that, so the listing is priced correctly in MLS?

It is to be admitted that every once in a while - maybe one in a hundred - the property in question is a "For Sale By Owner" that hasn't figured out how to put their property on MLS through some discount service, or is too cheap to spend sixty or a hundred dollars to do so. Neither one of these is a recommendation for the property. If they're too greedy to spend that small an amount of money that will get the property sold better and faster than everything else, that doesn't bode well for their negotiating stance. On a $200,000 loan at six percent, $100 is three days interest, and that's a tiny loan around here. If the property gets sold three days faster by alerting the agents (and all of their clients with automatic feeds) to its existence, that owner is ahead. And if they can't figure this out, or don't care, how likely are they to negotiate in good faith?

On MLS, there are checks. The property is linked to public records. Other agents who know the area can challenge it. Not to mention the fact that the price listed must be the current asking price per the listing agreement. There are penalties for claiming something that is objectively untrue. There is a limit to the puffery due to these facts. Third party sites, not so much.

I suppose I should mention that it's not the MLS name that's important, nor ownership by Realtors. It's the fact that there are mechanisms for verification and challenge built into the website - mechanisms that are easily invoked, and once used, are actually followed up upon quickly with bogus entries being promptly removed or corrected and penalties applied for having put them there. I can send a complaint to my local MLS in about thirty seconds, the bogus information will be gone within 24 hours (usually within 30 minutes if it's during their business day), and the broker who put it there is likely to have some adverse consequences. Those are the important reasons MLS can be accorded some measure of respect.

All of this is quite aside from the fact that Dual Agency is a recipe for disaster, but at least a third of the buyers out there don't know this, because that's about the ratio of buyers that use the listing agent, according to Association of Realtor figures.

But the key feature of the third party sites for these ads is that they are not checked by anyone. The only way to find out if they're BS is by calling - and that's what the agent wants you to do. If they can convert one call in twenty to a client by writing an ad for a nonexistent listing on a third party site, they are way ahead of the game. The other nineteen weren't going to be their clients anyway, and one client with a $150,000 purchase - tiny around here - can put anywhere from $4500 to $9000 in their pocket. But do you really want to work with an agent who got your business by telling a lie?

I wouldn't.

Caveat Emptor

Original article here

We read Searchlight Crusade every day and consider your essays a priceless education in avoiding the major pitfalls in the home-buying process. On behalf of all of us consumers, thank you so much for your hard work!

Please comment on any pitfalls in selecting a property to purchase that is on a community water system. How do we find out how many homes share the resource, how often the water is tested and what the results mean, the GPM rate and whether it's sufficient for usage without any rationing, etc. We've had a long-time driller tell us NEVER to share a well, but this is a community system, not a single well. Unless the system uses only a single well...?

To be honest, there aren't a lot of properties around here still on a well. The water table has gotten too low in the populated areas to make it work. Most of the properties that are on wells are isolated and in rural or quasi-rural settings.

First a little background for folks who may not understand anything about wells. You have to be aware of the well parameters, of which there are three that are most important: "How deep has it been drilled?", "How big is the holding tank?" and "How fast does the pump replenish it?" These aren't the only issues to pay attention to, but they're the ones that are guaranteed to bite you if you don't pay attention. Wells do silt up over time and may need to be re-drilled. Pipes and pumping mechanisms corrode, get old and break down. And water quality is sometimes a very big issue - for instance if the tank at the town filling station springs a leak, and it may even be caused by something nobody knows about. I knew a gas station owner who got fingered by the EPA for a leak and spent 4 years and over $100,000 digging it out, diluting the underground flume he couldn't get to, and everything else anyone could think of before someone discovered an old forgotten military tank left over from WWII that was the real cause of the whole thing. (No, he didn't get any of his expenses back). Not to mention the water may just taste bad. It happens.

Finally, I should also mention that most of the properties I know of that are on wells use septic waste disposal systems. It may be revolting if you think about it, but in some areas you won't have any choice if you're going to live there. People have been doing fine with these systems for quite a while and it's quite safe - but you need to be careful that both systems are completely up to snuff and separated by the appropriate buffers. I'm no expert on what those are, but be certain to check with someone who is an expert before you buy. This can also make it very questionable as to whether you're going to be able to do any expansions you may desire in a legal and safe fashion. Septic systems are only rated for so much, and if you want to add additions, you may need to expand them - if the soil will absorb the extra, and if there's room. Sometimes the soil won't, and there may not be the necessary expansion room even if the soil will take it.

Now, getting to your specific question: Do you know how many wells we're talking about, and what the communal capacities are? Ask yourself how much water you're likely to use, and multiply that by the number of folks on the system. Ask if there are any agricultural or industrial users on the system, and how much water they use. Add in a finagle factor for bumps in demand - for instance, if a main pipe or holding tank springs a leak, one of your neighbors hosts a family reunion with a fleet of RVs, etcetera. If one of the users is agricultural and it's a dry growing season, they're going to put a lot of demand on the system. I haven't encountered it personally, but given that southern California used to be the citrus capital of the world, I've heard older relatives tell me about water wars between citrus growers and between citrus growers and everyone else. It still happens today, even though most agriculture has now left the area.

Now, let me ask what feeds your water supply? What's the source of the water? Is it just rainfall, or is there some permanent stream nearby that feeds it? How is the water table holding up under current and projected demand? Is it holding steady or dropping? Go ask some people that have lived there for a while about dry years and whether they have water worries. Ask about whether there has been more demand placed upon the water available in the past few years. Ladies and gentlemen, my father told me stories about the San Diego River filling Mission Valley from side to side, so there wasn't any way across that didn't involve boats. I remember floods that completely filled the underground garage at Mission Valley Center, right up to the ceiling. In the last thirty years, however, there has been too much demand placed upon the water table for it to flood like that.

My point is this: water tables don't replenish themselves. There has to be water coming in to replace what is used. If there isn't enough coming in to replace what's going out, there's going to be a problem. Eventually, everybody is going to be out of water if this is the case. The only question is when. Do you want to buy into a situation like that? They can drill deeper and all the other stuff; it only delays the day of reckoning and makes it worse. This was one of the root causes of the Dust Bowl back in the 1930s - everyone had kept putting increasing demand upon the aquifer that underlay an area basically several states in size, drilling ever more deeply to be able to water their crops one more year. A tragedy of the commons if ever there was one.

Which segues into another issue: All it takes is a small proportion of nitwits to exhaust the community water source. I've heard that your area is dry - perhaps not as dry as some of southern California, but that it doesn't get a lot of rain due to being in the rain shadow of some high mountains. If a few of your neighbors want to simulate a rain forest, it can leave everyone else without enough water. Exactly how many it takes depends upon the system and how much extra capacity it theoretically has. Even if everything is hunky dory now, all it takes is one water hog buying a property that's served by the system to possibly create problems. So let me ask you what the provisions are for limiting the water of abusers of the system? If you have to get law enforcement involved and go to court for years, where is the community going to get the money? Can you afford your share? Not to mention you would probably like to know where you're going to get water in the meantime. And what happens if the community water authority is run by control freaks? You don't necessarily have to do anything wrong to incur their wrath. Sometimes, all it takes is changing something they're used to, and even though it doesn't impact water use adversely, they'll try and use the water authority as a means of getting back at you (I suppose I should thank Larry Niven for introducing me to the concept of hydraulic despotism at a relatively early age). How big is the community water system? The bigger it is, the more nitwits it takes to drain the system, but the smaller it is, the more likely everybody is to make a good faith effort to get along and the less likely it is that some people see it as a lever for power over others. The issues aren't at all unlike those encountered by common interest developments in the cities, except that it's water rather than parking, recreational access, or loud parties that make it difficult for everyone else to live their lives, and a board that's more interested in its own power than in harmonious administration of common resources for the benefit of all. Unfortunately, these are all depressingly common occurrences.

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Original article here

My article Debunking the Money Merge Account Scam has been getting a lot of attention and a large amount of hate mail lately. The scamsters that sell these things love to send me hate mail for exposing the fact that their particular emperor has no clothes.

Here is the bottom line: The only benefit these programs actually get is about two weeks temporary reduction of principal per month, based upon your take-home pay. On a $200,000 mortgage at 6 percent, that is worth roughly $4.41 per month under ideal conditions. It will pay the mortgage off approximately three and a half months early. On a $400,000 mortgage at 7%, it's worth about $11.41 per month under optimum conditions, and will pay off your mortgage a little over five months early.

They programs do not give you the right to make extra payments, and they don't save you the money that those extra payments saves on your mortgage. Anyone who doesn't have a "first dollar" prepayment penalty can do that, any time they want, for free, and if you do have such a penalty, Mortgage Accelerators and Money Merge accounts will not prevent that penalty for being levied.

What they do is charge you anywhere from $2000 to $6000 as a sign up fee for these programs, and most of them require a Home Equity Line of Credit (HELOC) as well, increasing the cost of interest of whatever money is in them. Quite a few of them also require a monthly fee that varies from $1 up to about $8. I have yet to find one of these where the numbers say that the gain is not more than offset by the fees.

Suppose instead, you spend the sign up fee on a one-time pay-down of your mortgage. Instead of paying $2000 to $6000 for this program that gets you a few bucks per month, you spend that money on a one time pay-down of your mortgage. I have yet to find a scenario where that doesn't pay off your mortgage earlier, and have a lower balance the entire time it is in effect, so that if you do refinance or sell as most people do, you're ahead of the game the whole way.

The people selling these scams love to pull the ad hominem. They accuse me of not liking the program because people on this program won't want to refinance, and there's usually something in their accusation about how I cannot sell the program. Both of these claims are nonsense. I have idiots begging me to sell these things on a regular basis, and I could sign up with any one of them and make money. I have not done so, because these programs will not deliver, and my entire method of doing business is predicated upon doing the right thing for the client, so they are motivated not only to come back to me themselves, but also to send me anyone they care about. Furthermore, people on these programs refinance almost as often as anyone else. The difference in the numbers these programs make is a lot less than saving an eighth of a percent off the actual interest rate, and I can prove it. If I have a refinance that saves them money starting the day it happens, they're going to sign up just the same as anyone else.

The only effective selling tool these con artists have to sell these programs is the appearance of free money. They assume that the money for extra payments comes out of some hyperspatial vortex. They do generate a few dollars per month in interest savings through temporary payment reductions, but as I covered above, you're better off using the sign-up fee to pay the balance of your mortgage down. Any extra payments that do get made don't come out of a hyperspatial vortex - they come out of your checking account, which comes from your paycheck. Such money for extra payments is then not available for other things, whether it's a vacation, a new car, an alternative investment, or just blowing the money down at Joe's Bar. The extra money is the same, and you have the exact same right to use it to pay your mortgage down faster with or without one of these programs. If you have it extra to pay down your mortgage, you can do so regardless of whether or not you have paid the sign-up fee for one of these scams. If you don't have the extra money, then obviously it's not going to get paid to your mortgage, is it?

In fact, one of the things these folks never mention is that the entire question of whether to pay off your mortgage faster is an open one, subject to a lot of variables, and the numbers in most cases argue that you should not. If you can make more with an alternate investment than you save by paying your mortgage down, the default answer is going to be that you should go with that alternate investment. Since average return over time of bonds and stocks and other possible investments is considerably higher than the six percent interest of your average mortgage, with federal and state deductions for mortgage interest paid lowering the effective cost of the mortgage further, it's silly to pay down your mortgage faster unless there are other factors. A mortgage accelerator may actually lock you into that when there are better, smarter, more profitable alternatives available. Finally, even though paying your mortgage down may be the alternative best in line with your current situation and plan for your life, paying any kind of sign up fee or monthly maintenance for such a program is a waste of money when you have the perfect right to make those payments on your own, for free, at any time you choose. Any fee you are thinking about paying for one of these things is a waste of money. You are better off putting that fee towards a one time direct pay-down of your mortgage.

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One of the things I have to deal with on a continuing basis is people calling me because they like something they saw on one of my websites, but they have no intention of doing business with me.

Most common is would be buyers calling me, "Just tell me the address of that Hot Bargain Property." That's not how it works, as I explain in literally every one of those posts. It isn't luck I find those properties. It's dedication and skill. I spend a lot of time looking, not just in MLS, but in public records and physically going out and looking at them. I've spent a lot of time learning what to look for and how to look for it in all three places. Maybe, if I had personal need of their professional services, I might consider a barter - mine for theirs. But in point of fact, I suspect a large percentage of the calls I get of being lazy agents (A receptionist answering the phone in the background saying the name of a certain major chain is a dead giveaway).

There is a reason these properties are of interest. I'm going out and finding properties that are noteworthy bargains. If it could be done by any random person with MLS access, anybody who could type realtor.com could do it. I can do it, in large part, because I make a habit of doing it and most others won't. It is work. If George digs a ditch, you don't pay Charlie. You pay George. Same principal here. The reason I'm worth more than the discounter, in terms of what I find, how well I negotiate, and everything else, is a function of all of the work I do that helps me find good properties, spot problems, know the micro-markets I work in, understand what is critical and what is not. If you find the property yourself without any help from me, yes I'll discount my services for negotiation and facilitation because you're not getting the largest part of the value I provide, and I'm not risking the largest source of agent lawsuits. Otherwise, I am providing more value to you than the discounter and am therefore worth more pay. And I'm providing it, not that discounter. I'm not going to give out the locations of the special bargains I find to anyone not willing to work with me. Like I said, George digs a ditch for you, you pay George, not Charlie. You want to pay Charlie, get Charlie to dig the ditch. But in this case, he not only can't, he won't try.

Borrowers will call about my Real Loans for Real People. They want to know what lender that's with. Well, I hate to break it to you, but the loan I have is the loan I have. Credit Unions, National Megabank, etecetera may use the phrase "cut out the middleman" to try to get you to avoid brokers, but that's not the way it works. Even if I gave you the name of the lender, very few of them give their captive loan officers rates as low as brokers get from their wholesale division. Why? Because they're not paying my overhead, and my clients aren't captive to them. They regard their clients as captive because comparatively few people shop loans effectively. They go to big name lenders, who have no more programs than other lenders, and comparatively little imagination. They may or may not have the most appropriate loan program for a given client. Usually not. Big lenders mostly compete on the basis of name recognition and consumer comfort. A broker may be a middleman, but we function more like discount outlets. And the specific stuff I get is for my clients. If you want it, you've got to be one of them. If you weren't interested, you wouldn't have called.

What I'm trying to get at is this: Trying to cut out the person who provides the value you're interested in is counter-productive. Even if I told you what lender a particular loan was with, rates change at least every day, and it's unlikely they will offer as good a deal through their dedicated loan officers, even if they are the right fit for your loan. Trying to cut out the person whose market knowledge and work enabled them to recognize a bargain means that even if you know what property it is, you're in a weaker position on negotiations. Net result, you get some money back, but you also paid a higher price than you needed to in order to get it. The latter is almost certainly more than the former - probably several times more. Once again, if you want George to dig a ditch for you, or if you want George's ditch, pay George, not Charlie. You'll come out better, even if George wants a few bucks more than Charlie. If Charlie's ditch was something you wanted, you wouldn't have needed to get George involved. Chances are, even if you buy Charlie's ditch, you're going to want George to fix it, so the money you paid Charlie is wasted. Actually, it's worse than that, because in real estate, once something is screwed up, there are no shortcuts to fixing it. Once a real estate transaction is done, unwinding it or fixing it becomes far more expensive and difficult than doing it right in the first place.

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Original Article here

There are actually several different kinds of listing agreements. They get their names from the rights conferred when you sign the contract. The vast majority of agreements concluded are either Exclusive Right to Sell or Exclusive Agency.

Exclusive Right To Sell means that no matter who buys the property, that agent will get the listing commission. There is an intelligent reason why most listings are Exclusive Right to Sell: If I can spend all that money and time doing the work to sell your property, and then you can not pay me for it even though I'm successful, well, let's just say I'm not going to be so enthusiastic about spending that money and that time if the prospective buyer can then go straight to the seller and I get nothing for my efforts. Some agents won't accept other kinds of listings. Other agents will only do so on a flat, up front fee basis, as opposed to deferring their fee unless and until the property actually sells. If you want a good agent to devote their full energy to selling your property, this is the kind of listing contract for you. If there is one particular person you think might buy direct from you, the owner, that can be handled via an Exclusive Right with Exception, which designates one of more persons who are exceptions to having to pay the agent, but even that is a marginal idea. Yes, it might save you a commission. But it will definitely create some doubt in the agent's mind, and less willingness to spend what they might really need to in order to get a sale made. Better to get a solid yes - or no - from that person who is an exception ahead of time. If they really want the property, they won't have any problem committing saying they want it when you ask them. And you can't sell to more than one person, right? So you shouldn't be wondering about somebody you found when you contact an agent. And before you condemn agents for acting like this, ask yourself how hard you would work at your job in order to maybe get paid, or maybe not, even if the job is successfully completed.

Exclusive Agency means that you won't pay agent commission if you sell it yourself, but you will pay if they, or some other agent, brings you the buyer. Any agent with a buyer is presumed to have been procured through the listing agent's marketing efforts. Nonetheless, this does allow for random people to knock on your door and buy the property direct from you - despite the fact that the listing agent's efforts were what alerted them to the existence of the property. Since most agents have been burned on this one or know someone who has, few agents want to accept this style of agency without requiring you to at least pay for their efforts, and they are mostly not the top-notch ones. But if you really want to exercise the escape clause in having to pay the agent, count on being on your own through the negotiations and escrow process. A very large proportion of prospective buyers who will go around your agent to negotiate with you directly are sharks, unqualified buyers unable to buy, or possess some other characteristic that's going to cost you a large amount of money, time and frustration. Real estate sharks like being able to cut an agent out of the transaction, because if you negotiate a direct sale, your agent is certainly going to pack up the tent and leave, which then leaves the shark a clear field with nobody who knows how to deal effectively with that shark.

Limited Service listings are popular with discounters, but they typically do not work on the basis of commission delayed and contingent upon a successful sale. They want their money up front. Cash, check, or, sometimes, charge. Furthermore, the reason they are called limited service listings is because they are not fulfilling all of the services that real estate agents are normally expected to fulfill, and their responsibility to you is also much lower. Might be a good thing to do if you're a former real estate agent who knows how to do it, but the average client doesn't know how much they don't know. The pitch is "save money!" but that's not how it usually works out. When the agent on the other side is a discounter, a good buyer's agent knows that their client is going to end up very happy - especially once it's been on the market a while. The same thing applies when a good listing agent gets someone represented by a commission rebate buyer's agent. In both cases, the difference in sales price is likely to be several times the commission difference. One more thing I should mention: A lot of both types make their living by shifting their work onto the full service agent that they presume is going to be on the other side of the transaction. What happens if there is no such full service agent - in other words, if the other side is using a limited service discounter also? The work needs to get done, and neither agent is going to do it. You're going to do it yourself or pay a lawyer - and paying a lawyer to avoid paying a real estate agent full commission is like spending a dollar to save a few pennies.

Open Listings are listings where there is no single agent that has a right to get paid. Of course, no one has the responsibility to act on the owner's behalf, either. Not to market the property, not to make certain you get the best deal possible, and not to represent your best interests in other ways. Therefore, most agents and discount listing services usually want a flat fee in advance for open listings. It may be small or relatively small, but it's cash upfront. There may or may not be a listed payment to buyer's agents in open listings, and therein lies the horns of a dilemma. You don't list a buyer's agent commission and buyer's agents avoid you because there is nothing in it for all of their hard work. You list a low one, and they're still going to take their buyer's elsewhere. You list a good one, and they'll bring their buyers all right - while working on their buyer's behalf to get them a better deal. Kind of like an arms race, except it's not life or freedom at stake, only money. Still, you just invited a bigger, better equipped army than yours into the fight, on the other side.

Probate is a special purpose listing when the property is being controlled by the estate of someone who died. Probate listings almost always go to full service agents because the probate judges are looking to get the best deal possible. Furthermore, the probate attorneys and executors aren't going to do the work, and the deceased definitely isn't going to do the work. There are often debts and there are almost always tax bills, and there are always heirs looking to get the most money possible. Probate is a real pain to deal with, and it takes forever, because the courts are involved. Nor are they necessarily great deals. Quite often, the court or the heirs have set a minimum bid that's more than the property is worth, because they evaluated the property on the basis of the prices when the owner shuffled off the mortal coil, or without subtractions for things like bad maintenance or bad condition. They're only hurting themselves when they do so. There's one not too far from my office where I had a client it would have been perfect for - except that the minimum bid is at least $40,000 more than the property was worth on the market. It had been on the market for a good long while before I found it, and it's still on the market today, more than six months later. If they'd priced it $20,000 lower, it probably would have sold within a month of going on the market. By the time I found it, prices were diverging by $40,000. Now, it's more than that.

I'm the sort of agent who believes in competition, and an exclusive right to sell kills competition once it has been signed. Nonetheless, there are enough countervailing reasons why it is in your interest to sign an exclusive right to sell. I may not like it, but you can have agents compete before you sign a listing agreement. Your house is a half million dollar investment around here. You probably want to interview at least as many agents as you would visit stores when you're looking for major appliances, before you trust anyone to handle that kind of investment. The difference in likely results is a lot more than the entire cost of a refrigerator.

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I have a landlord, that is always harassing me every 2 weeks, for the past 2 years, on the upkeep of the property, and wants to have inspections. Also want me to mail them all their mail. Most of which is Bank stuff. I am fed up, and thinking they are under a Owner Occupied Loan. Is there a way I could find out? And who do I complain to, if I decide to?

It is a misconception to think that just because someone moves out, they can no longer have an owner occupied loan.

In fact, the typical owner occupancy agreement that is required in order to get owner occupied financing is only a twelve month occupancy. When I buy or refinance today, I agree to live in it for twelve months in order to get those rates. After I have met that requirement, I can move out, rent it out, and there is absolutely nothing wrong with it. That loan contract is in effect, I have lived up to all of my obligations as far as owner occupancy, and I can keep that loan as long as I maintain my end of the other parts of the contract. It is fraud to claim I'm living there, or intend to live there, for those twelve months if I do not actually live there, but once I've met that twelve month occupancy requirement I can go live in Timbuktu so long as I get my loan payments in on time, properly insure and maintain the property, pay taxes in a timely fashion, etcetera.

It is possible, as I discovered once upon a time, that if you have an owner occupied loan with lender A, that same lender may refuse to give you another owner occupied loan on a different property. In this case, it was refinance the loan on the other property, or accept a second home loan on property A. But notice how, even then, the lender did not force them to refinance despite the fact that they hadn't lived in the other property for years. They just offered the owner the choice of accepting a slightly less favorable loan (Second home financing, still much better than investment property) or refinancing the existing owner occupied into another occupancy type. Or, being brokers, we could submit the package to another lender. There are circumstances where each of these three possibilities may be the best choice. The lenders do not share this data between each other; indeed, my understanding is that they cannot legally do so. It was only applying for a second owner occupied loan from the same lender that brought this on, and not every lender even does this much. If thirty year fixed rate loans are the only type you ever apply for, it is theoretically possible to legitimately have a new owner occupied loan starting each and every time you have met the minimum time for owner occupancy for the previous lender. In extreme cases, it might be possible to get upwards of twenty owner occupied loans all in force at the same time, while having honored your contractual requirements for each and every one.

The minimum owner occupancy requirement can be different. One year is by far the most common, but there is no reason that I am aware of why it cannot be longer, if that is what is specified in the contract. However, I do not know of any lenders that requires you to refinance or requires you to pay a surcharge if you move out once you have met the required period of owner occupancy specified in your Note.

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I find it fascinating the number of people who will claim that because no college degree is required to become a real estate agent, that agents can't possibly be worth any significant amount of money.

The reason no college degree is required is because no college curriculum can teach what a good agent needs to know.

Oh, there are license preparatory schools in abundance. They'll teach you what you need to know to pass the licensing exam. You do need to know that stuff to practice real estate, but doing a good job on real estate is a lot harder than answering multiple choice questions on a government exam. You have to understand how it all fits together. No school in the world teaches that. Real estate law and practice is an extremely complex profession, and every situation, every real estate transaction, is different because no two properties are the same, no two sellers are the same and no two buyers are the same. There are common recurring elements, but there is not one line of the standard eight page purchase contract (in California) that there isn't occasional reason to change via negotiation, and there isn't a school going that teaches what those exceptions are.

Popular media loves to gloss over what agents do. People see the media depiction and think they can do it. Ladies and gentlemen, the reason the media glosses over it is because it's boring detail work, and most of the dramatic interactions take place between pieces of paper. When's the last time you saw a legal thriller that spent a proportional amount of time on all the boring background work that goes on? Same principle. I was an air traffic controller for twelve years and I have yet to see a single media program get that right, and ATC is considerably more interesting to the outsider. People are not on the edge of their seats to see if form WPA or the addendum controls in this instance, the way they are when there's two 747s on a collision course and Jack Bauer (24) has to save the day - but the real estate agent has to know, and if they don't know, they have to find out without anyone giving them the answer. It's not exciting to watch the agent visit the comparables to compare features and condition and figure out what a good offer or a good price is. It might be good drama to watch a good listing agent talk a potential client into listing for the right price as opposed to their fevered dreams of avarice, but few media writers are that good - and even fewer have a clue that this is a good thing to be doing. It's definitely not drama the way a good agent closes with prospective buyers, the best way being to show them they've already convinced themselves that they want it.

Most people also don't have the critical skill necessary for an agent - the skill of betting their paycheck on weeks or months of work that may or may not move to a successful conclusion. If the transaction doesn't close, we get nothing. How many doctors you know work on that basis? Lawyers? Even the ones that work on contingency want their expenses paid, and that includes office staff, and they're not likely to take contingency cases without a very large prospective payoff. Nobody but real estate agents bet weeks to months of their time for such a small payoff. The whole mindset is completely foreign to educational faculty. Grant application papers, yes - but they're getting a regular salary while they write those. The fact that you've got to go out and get hired at least a couple times per month in order to survive is also completely outside their frame of reference, as well as most other members of modern society. For academics, even if they're turned down for a grant, they've still got money coming in. Even if they get refused tenure, they only need to get hired again once to have a new regular paycheck rolling in.

Most importantly, real estate markets are both hyperlocal and changeable. I've written a series that's eight or nine articles long about the neighborhoods of La Mesa, a city of about 60,000 people, and I have at least as many more to write. Those markets are different today than they were three months ago, and three months from now, they'll be different again. The only way you can keep track of what's going on in those markets out there is by being out there in those markets and living those changes. You can't do it from the inside of a college classroom, grading papers, and agents can't get this information from a college professor because that college professor doesn't know. That property that sold last week for $487,000 - what condition was it in? What amenities did it have? How big was it, really? Were those floors good hardwood or cheap pergo? This property right here that meets these client's criteria - What are the competing properties, and where does this one shine by comparison, and what are the problems with it? (There are always problems with every property). What were the recent sales really like? You don't know unless you were there. Old listings on MLS don't give you a good idea. It takes a good agent maybe two weeks to learn not to trust MLS claims, MLS pictures, or MLS video. A bad agent might learn, they just don't act like they've learned. It's a very rare consumer who doesn't take MLS as gospel.

This segues in to the war of information. Listing reports are, in a very real sense, a battlefield of information. You can only learn by experience what is and is not important, what had damned well better be correct versus what's in there for purposes of puffery, what's important and real, what's useless and unimportant, and what's in between. What, you didn't realize that sellers and listing agents want to present the property in the best possible light? Ladies and Gentlemen, they're practicing informational warfare with the goal of making this house seem like the bargain of the century. Lest you think I'm getting all holier than thou, I do this too, when I list a property. It's my contractual fiduciary duty to sell my listings for the highest possible price on the best possible terms in the least amount of time, and it is my job to tell the property's story in such a way as convinces someone to buy it on those terms. And roughly a third of all buyers use the listing agents as their buyer's agent, which is the single decision most likely to prove disastrous in real estate. Scary, when you think about it. Do schools teach how to fight that informational war? Maybe the military educational establishment does, but nobody else, and they don't show how the principles apply to real estate, and even the marketers who've learned a good informational offense are sometimes stumped as to providing any defense whatsoever. Furthermore, an inappropriate or overly aggressive response to the situation can sink you worse than doing nothing at all. Did you learn all that in college? Me neither - and I took marketing. I had to learn how to handle the informational war by doing it.

Admittedly, a lot of agents don't know, either, and won't make the effort to learn, which is why I'll back a newbie with the right attitude and a brand new license over someone with thirty years experience and the wrong attitude any day of the week. Nothing says "bozo!" like the agent who brags about thirty-seven years of experience and acts like a deer in the headlights when he's presented with facts he'd rather pretend don't exist. But the point is this: the good agent didn't pick it up in school, and the rotten agent thinks they already know everything there is to know because they've got the license and one or two of those meaningless NAR designators designed to gull the public as you sit through 18 hours of class to put initials after their name. I just did six hours calling around and reading today and yesterday on a subject I researched and wrote about two years ago, and learned some things I didn't know. The final answer wasn't what my clients wanted, but I'd rather find out now, before we've made the offer than after we're in the middle of a transaction and my clients are out appraisal and inspection money and their deposit is at risk. I know for a fact that the answers to my research weren't in any NAR class, or anywhere else in any educational curriculum. Real estate is one of those fields where you've got to be prepared to learn as you go, but unless you've got the background of detailed knowledge of the field, quite often you run into a landmine you never knew was there, simply because you weren't looking for it. Someone a little more complacent than I am would never have questioned the obvious answer, which turned out to be wrong (It had to do with a municipal first time buyer program). My client is still questioning it, it's so counter-intuitive to a layperson, and I don't blame her. But there are huge and obvious traps that claim large numbers of victims. For example: the roughly one-third of all buyers who don't have a buyer's agent at all, using the listing agent to facilitate the transaction.

It's very hard to dodge landmines you're not looking for, and once the explosion happens, the damage is done. To be fair, even the best agent hits a landmine sometimes. But I'd rather be avoiding the mines in the first place than doing damage control afterward, and the odds of doing that are better if you've got someone on your side who knows what to look for, and is in the habit of questioning every irregular feature of the landscape they can before you drive over it, and who recognizes what an irregular feature is, because it's the hazard that you don't understand is a hazard that gets you. I say this regularly because it bears repeating at every opportunity: with the dollar amounts at stake in real estate, there are a large number of people out there who regularly and easily make multiple tens of thousands of dollars extra because the people on the other side of the transaction weren't careful enough.

Caveat Emptor

Original article here

With the down payment presenting the largest difficulty for most people want to buy right now, I am covering every base I can think of as a place to get a down payment. I have covered VA Loans, FHA loans which require a relatively small down payment, and Municipal first time buyer programs, some of which can take the place of a down payment. There are also seller carrybacks and lease with option to buy. There's also the traditional "Save it over time", and in some circumstances, you can also borrow from your retirement accounts or even take a withdrawal. You can even Sell Some Stuff. But there is at least one more entry to the pantheon.

Most people don't think of it, but a personal loan is one of the ways to get a down payment quickly. It has some notable drawbacks, but it can be done. Being unsecured, the interest rate is higher than real estate loans, and the repayment period is shorter, meaning higher payments.

A personal loan is a loan not secured by real property. Because it is not secured by real property, all the lender really cares about is the payments and whether you can qualify for their loan by underwriting guidelines including the payments for such a loan. Personal loans include car loans and student loans and just about every other type of installment debt out there, as well as personal lines of credit and even credit cards. Not all of these are a possibility for the subject at hand, which is rapidly acquiring a real estate down payment. CREDIT CARD CASH ADVANCES ARE RIGHT OUT!. But the possibility exists of borrowing enough to get a down payment with a personal loan.

This possibility includes both institutional loans from a bank or credit union, and "good in-law" loans from family members. Negotiate a loan contract, sign it, and be certain to disclose it to your mortgage lender on your mortgage application so that they know you're not trying to pull a fast one. The reason why mortgage lenders are obsessed with sourcing and seasoning of funds is because they don't want an undisclosed loan, which might mean that you cannot really afford the all of payments you're going to be making. But a fully disclosed personal loan is just like any other open credit. It has a repayment schedule, maturity date, etcetera. The mortgage lender looks at the situation, including the loan that got the down payment, according to lending guidelines, and if it appears you have the income to make those payments, they will approve the loan.

The major and irrefutable drawback to getting a personal loan for the down payment is that it impacts debt to income ratio. You have to account for the fact that you owe this money, and you are obligated to make those payments, and therefore, you cannot afford as big a real estate loan as you otherwise could. Since most people try to stretch their budget further than they should anyway, this can be a deal-killer. It can force you to buy a less expensive property than the one you have your heart set upon, or even than the property you could otherwise afford, at least by debt to income ratio. Of course, if you don't have a down payment, you can't buy the property of your dreams either. But if you buy a property, especially while the market is down, leverage can mean you will be able to buy the property of your dreams much sooner and much easier, or in plain words, buying the less expensive property is smart if that's what you can afford now.

If you've got more than enough income but no down payment, that's the situation where getting a personal loan for a down payment is a serious possibility. Say you're a doctor who just spent the last two years paying off your student loans ahead of schedule. You've got a great income, but you spent everything on getting rid of that debt, and as a consequence, you don't have much for the down payment, right when it will do you the most good.

It is possible, for some people who have a large down payment but are nonetheless getting a loan from somewhere (most likely a close relative), for the loan to be a subordinate real estate loan. This happens mostly when Mom and Dad are rich and doing estate planning. They loan Princess (their daughter) and her Darling Husband some money to make it easier to buy, often planning to forgive the debt in accordance with federal gift guidelines. Note that the thing controlling it here is that lenders have guidelines that set maximum comprehensive loan to value ratio (CLTV), or the ratio of all loans secured by the property to the value of the property. Even though they may be in first position, lenders may not be willing to loan when there's another loan behind theirs on the property if the CLTV is higher than underwriting guidelines allow. It is necessary to make certain that the lender you apply with will permit any other contemplated loans. And even though Mom and Dad may be intending to forgive Princess' loan in accordance with gifting schedules, Princess and Darling Husband still need to have an official repayment schedule on the loan and those putative payments must be taken into account on the debt to income ratio.

One more thing I should mention is that if you're going to do this, the personal loan needs to be in place before you apply for the real estate loan. Contract signed, funds dispersed, at least one payment made, preferably two or more, and preferably reported to the major agencies. Failure to do any of these is a potential failure point for the real estate loan. The only exception is if you're trying for a subordinate loan, and the lenders have been especially unforgiving of that lately. I've had people I did the primary loan with a private money second previously, unable to refinance even with the same lender. Yes, this means that if you can't get the real estate loan, you still have this loan which you didn't want. This whole idea of personal loans to get a real estate down payment is risky and has downsides. It is not something to try if you have a better alternative, and not without careful scrutiny of all the numbers beforehand, and even then it can fail. It is a risk.

I must emphasize this again: DO NOT TAKE A CASH ADVANCE ON YOUR CREDIT CARDS!. Unless you have credit limits in the multiple hundreds of thousands of dollars, your credit score will plummet, and you will be unable to qualify for the loan no matter how much income you have. I will bet a nickel that someone will email me saying that they "did what you said," and that now they cannot qualify for the loan because their credit score is in the toilet. If you write me with such an accusation, I will drag you down to the zoo, where I will arrange for the elephants to do a line dance on your sorry carcass, and the rhinos to use what is left as a target for both ends. Taking a personal loan for a real estate down payment is playing with fire. If you're going to do it, make certain to follow lender and loan officer instructions exactly and carefully. There are a number of other pitfalls, that may not be as bad as the credit card cash advance but will still sink your loan. Getting a personal loan for a mortgage down payment is the mortgage equivalent of a circus high-wire act - one wrong move and the whole thing is a disaster where people get crippled for life even if they aren't killed outright. Having the numbers be right for it is not a common occurrence. But if the numbers are right, and you and your loan officer are careful, it can work.

Caveat Emptor

Original article here

Not too long ago, I started negotiating for a property. I did extensive research online, and and I and my clients visited several competing properties. We made an offer that was a little under 90% of the asking price, and I justified it in a cover letter with several direct comparisons. The property had potential - but my clients were going to have to really work at realizing any of that potential - and I don't mean just carpet and paint.

The owner's response? They did come down a little bit - about 2% of the asking price. But all they said was, "We want $X"

That's it. No, "But the kitchen is beautiful, it's 500 square feet more than those, the location prevents it from getting socked in by traffic noise." None of which was true, but are examples of the kinds of things they could have said.

Instead, just an ultimatum. I don't believe anyone can legitimately call that "negotiation", unless you want to include the sense that a flying creature with feathers that waddles on land, swims on water and goes "quack" can be labeled a Doberman Pinscher. It's still a duck, no matter what you call it, and that's still an ultimatum. If you look at diplomatic ultimatums, what spot do they occupy in the hierarchy? They're the last step before war. Similarly, in real estate, they're the last step before walking away. They should be a sign that negotiations have essentially failed. They're certainly not the way to start successful negotiations.

If you want more for the property, tell me why in the heck you think I should give it to you. What you want (more money) is irrelevant. It's counterbalanced by what I want - which is the exact opposite, to pay less money. Start a conversation for crying out loud - that's what I was trying to do. I didn't expect them to take my first offer, but my clients have the ability and interest to give them what they want - cash - for what they have: a property they no longer want. Even if my clients are getting a loan, it still amounts to cash for the sellers. That's what any offer is really saying - "We're interested in buying this property, if we can reach an appropriate agreement." The initial offer is your bona fides as to what sort of agreement you're willing to reach. I don't make first offers I expect to have accepted, but neither do I make hopeless low-balls unless it is just a shot in the dark and I don't care if it "poisons the well" of possible rapport. I do want a reasonable response, and I do everything I can to encourage such a response rather than an ultimatum.

Duelling ultimatums is kind of like throwing matter and anti-matter at each other. Often, there's an explosion, and even when there isn't, nobody is happy because the radiation when they combine poisons everything. If you do end up with a purchase contract, there's still no rapport, so anything that comes along later is likely to cause the whole thing to fall apart. Why in the nine billion names of god would anyone want to do that? You don't get any empathy, you don't get any respect, and you're very likely not to get a transaction, which means the buyer is unhappy, the seller is unhappy, and both agents are unhappy. Nobody is happy. It's nearly as certain as gravity. Why would you want to "negotiate" by dueling ultimatums when you know it's going to cause you and your client to end up unhappy?

I know how this happened. During the seller's markets, sellers had all the power. For a couple of years, there were dueling offers on almost every property on the market that was even vaguely reasonable in asking price. Listing agents got used to being able to dictate terms, and buyer's agents went along, in part because they could only hope to extract one or two things and going along with everything else was the only way to make it happen, and in part because the next time they made an offer to that listing agent, they didn't want it rejected out of hand. And it's taken three years of a buyer's market to start to get the message across that buyers are in command right now, buyers have needs of their own, and in the current environment if you don't give one buyer what they need in order to qualify or want in order to prefer your property to another, you may not get another buyer. You want to play hardball with this buyer, they're going to go down the street to the competing property, leaving you as the seller high and dry.

We're moving back to a more normal state of affairs now, but this doesn't mean sellers can play the autarch again. You have equity in a real estate property. You can't spend it at the grocery store, the gas station, or put it into your 401k. It's a real pain to swap it for another property, and if you're not willing to dive in and negotiate, you're not going to do well there either. You need the cash from a buyer - not necessarily this one, but how many do you think you're likely to get? There are almost always more properties for sale than there are people looking to buy them, and more coming onto the market every day. You can compete strongly enough to convince one buyer that they want your property instead of a competing one, or you are wasting your time. Effective negotiations are a large part of that competition.

A negotiation is first and foremost, a conversation. You ever had someone you got off on the wrong foot with, but then you had a conversation and found out they're a pretty swell person? Guess what? When you negotiate in good faith, both sides stop thinking of the other so much as "the enemy" and start to see each other in more human terms. This is good.

Negotiations are also an argument. A civilized refined argument. Many of us have forgotten how to have an argument that doesn't end up with lost tempers. You can find examples of this on both ends of the political spectrum - a sort of take-no-prisoners way of talking past each other - argument by slogan. Argument by putting the worst possible spin upon everything the opposition says or does (and conversely, the best on everything your side says or does) is worse than argument by slogan, as it shows actively bad intent, rather than just closed ears. Sometimes, one side is entirely in the right (or the wrong), but that's not the way it generally happens. Most times, there's evidence on both sides and some darker and lighter shades of gray involved, some justice and points on one side versus some justice and points on the other. In politics, the posturing is showmanship intended to woo third parties, but in real estate negotiations, the transaction is entirely dependent upon the two parties coming to an agreement both sides think makes them better off. Neither one can force the other to sign on the dotted line.

And what happens when you recognize the virtue of something the other side says? Yes, you give away something, but you get something as well. The other side takes a step back and says, "Wait a minute. This person is not just a member of the ravening horde, simply intent upon taking everything they can get." Yes, I'm trying to get everything for my client that I can, but if I try and get it by ultimatum, what happens when the other side is in a stronger position? If I try and get it at sword-point, what happens when the other side is better with sabers than I am? Even the very best lose at violence sometimes. This is why the idea of negotiations started - both sides end up better off and nobody ends up dead. The whole "defeat the vikings/huns/mongols" idea goes out the window when they start seeing you as human. Maybe when you say you see one of their points, maybe they come back and acknowledge some of your points as valid, and they give up something too. Guess what? The more both sides do this, the more likely the negotiation and transaction is to succeed.

Not everybody will negotiate in good faith. You always have the option of walking away from the negotiation table if they don't. I'm walking away less often these days than formerly, but it's still on the table. Knowing when is a matter of judgment and experience, and maybe training if you can find someone good enough, but you're not going to learn it all in one transaction. Sometimes walking away will knock some sense into the other side, most often when you've seen the virtue of some of what they're saying and they suddenly realize that in order to salvage this deal they want, they're going to have to get with the program. Sometimes, it doesn't. But in that case, there are other properties and other buyers out there that will be a better fit and give you a better bargain. If there isn't something better, then you shouldn't have walked away. It's as simple as that (Pssst: You can go back. Really. It's not easy, and you're likely to end up less well off than if you hadn't walked in the first place, but if it's still the best fit and the best bargain out there, you should).

So don't just trade ultimatums. Tell the other side why what you're asking for is necessary, reasonable, or both. Listen to what they say in response, acknowledge not only that you heard the response, but that you might even see the justice of some of it, if you can. They'll usually do the same. Give some ground where it is appropriate, and I am confident that your negotiations will come out better, as mine do, because we're not going back to a situation where one side dictates to the other any time soon. But you neither I nor anyone else can hold a conversation with the other side of a transaction if the other side is unwilling to hold it. If you are always willing, and always trying to start such a conversation, the odds of a successful negotiation increase dramatically.

My transaction? I think I've finally persuaded them to actually talk to me, rather than just trading ultimatums, both sides still have the ability to talk it over in private and think about it for a day or two. I was expecting an answer to my most recent proposal the day I originally wrote the article. We did eventually come to an agreement and consummate the transaction. Everybody ended up much happier than they would have had I not been able to talk them away from their ultimatum.

Caveat Emptor

Original article here

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