May 2020 Archives

This is a real, major and pervasive problem in the industry. For a while, it mostly went away as listing agents were desperate for any offer, but it has come back. At least two properties my buyer clients have made offers on in the last few months have sold for substantially less than my clients offered and were both willing and able to pay for the property. Their offers were never acknowledged, nor did we receive a counter-offer. I can tell you this because I have copies of the offer paperwork and have since obtained the final sales price from public records.

This happens for two reasons: The listing agent wants both halves of the commission, and control issues having to do with kickbacks of one sort or another from other sources.

The first is by far the worse. Even if the property sells for ten percent off the price it could have gotten (which may be most or all of your possible equity), the listing agent representing both sides gets paid eighty percent more than if the property sold for the highest possible price to an offer represented by someone else. There are many agencies and brokerages out there that do one thing very well: Getting signatures on listing agreements. Everything else, not so much, but they really are great at getting access to property owners. No matter what city you live in, you've seen the advertising of this type of brokerage. They claim they're great so you should do business with them. However, anyone can claim they are great, especially in non-specific ways.

The goal of all of this is to get you to take the easy way and come to them first, because if they're that successful to afford all that advertising they must be doing a pretty good job for their clients, right? As a result, they can get listing agreements out of property owners who don't understand what's really going on. I hope regular readers know better, because I've gone over why you don't want a "top producer" listing your property before. However, because that signature on the listing agreement gives them control over the property, control over access to the owner of the property, control over what information the owners have access to, and control over who can so much as see the property, there isn't much anyone except the owner can do about it. Indeed, once they sign the listing agreement, there's not much even the owner can do about it.

There are also control issues with kickbacks. Illegal though it may be, many brokerages mandate that all of their transactions go to a certain title company, a certain escrow provider, etcetera, because they somehow make more money (either through kickbacks, common ownership, special services, or reciprocal referrals). However, if the listing agent controls both sides of the transaction, who's going to tell the principals involved that the agent is breaking the law?

Quite often, they even restrict showings of other people's clients, because one of their agenda items is using the property to get buyer clients. Rather than actually working to sell that property (which is what they are obligated to do), they dangle it out there as bait so they can make contact with the foolish sort of buyer who calls the listing agent to see the property and force them into a buyer's agency contract. I was out of town for two days one weekend, and one set of my clients called a listing agent about seeing a property. First, the listing agent told them that "Sure, no problem to see it today!" even though the MLS listing which all other agents see said "48 hour advance notice - by appointment only" There might have been a special circumstance of which the listing agent was aware, but I kind of doubt it because they also wanted my clients to sign an Exclusive Buyer's Agency Agreement in order to see that property. Since I make it a point to educate my clients on this point, they knew to refuse.

Here's the real sticking point: When that agent signed the listing agreement, they accepted a fiduciary responsibility to that seller. It is their responsibility to get it sold for the highest possible price in the quickest time with the fewest problems. It is a violation of that fiduciary duty to their listing client to act as that agent did towards my clients. Their duty is to get that house sold. If someone doesn't see it, they're certainly not going to make a good purchase offer. Anything unnecessary that causes or might cause a buyer to balk about making an offer on that property is a violation of their contractual and legal fiduciary duties. By conditioning prospective buyers seeing the property upon anything other than being there at the first mutually reasonable time, they are in violation of that fiduciary duty to their listing client. However, I must once again ask: If they control all access to that owner, who's going to point this out to the owner?

Here's one person who definitely can't: Any prospective buyer's agent. Both agency law and MLS rules everywhere that I am aware of make it a punishable offense for buyer's agents to contact that owner directly. A buyer's agent could lose their license, MLS access, or both for doing so. It doesn't matter if I "only" lose one - I can't stay in business without both. In other words, the one group of people who have the professional knowledge and interest to possibly inform that property owner that they are being hosed is legally and professionally constrained from doing so. Yes, Virginia, real estate law is structured to protect the major chains and brokerages that advertise constantly (and control the National Association of Realtors and state associations, so they control the vast majority of real estate lobbying).

Nonetheless, if you want to sell your property quickly for the best possible price and without it coming back to bite you, you really do want an agent. The pitfalls and ways that the real estate sharks trap you into their own private feeding frenzy really are enough to make you want an agent even if you couldn't do anything to protect yourself from the bad ones.

So what is a self-interested consumer to do to protect themselves?

Two things: Eliminate the motivation to do this, and eliminate their control over access to you, the property owner.

Both are easy if you know how before you sign the listing contract. Afterwards, they are considerably more difficult if not impossible. Since most consumers don't know enough or don't care enough to do the research beforehand, this is why the vast majority of people who want to sell their property aren't protected. Some listing agents do a very creditable job even though you're not legally protected, but many others don't. Nor is there any real way of gauging their personality for certain ahead of time. It's easy to say the right things before that listing agreement is signed, then go off and do something completely different. Do you want to bet the return on a half million dollar investment on how they will really handle it?

The easy one first: eliminating control of listing agents. There is one exception to the rule about other agents having no permission to contact you: If they are instructed to. Most of the time, you (as the seller) don't want to talk to other agents. But there are two exceptions: If they're having difficulty seeing the property, and if they're making an actual offer. If the listing contract is silent about these two issues, then the listing agent controls these absolutely. Actually, it's their broker, which amounts to the same thing at best, and could be much worse. So if you don't negotiate this in advance, know that you're committing complete control over these two issues to that agent or their brokerage, and there literally is no way for you to find out about any difficulties they don't want you to know about.

What you, as a consumer want, is to get at least duplicates of any offers sent to you directly, and you want to be the one people come to with access issues. You want there to be explicit instructions in MLS to call you directly with any access issues, and to send at least copies of all offers to some facsimile number or email address that you control - not the agent. Put this right into the listing contract. You are entitled to check this on the listing at any time, and you should wander into your listing office at least once during the first week the property is on the market (without telling them you're coming) and demand a copy of your property's full MLS printout - the one that other agents see. You are permitted this on your property and your property only, so be prepared to prove you are who you say you are (Photo ID and copy of listing contract). You should also do this every couple of weeks the property is on the market. Check that the instructions stay what you want them to say in this regard.

Note that even if prospective buyers and their agents don't comply with this instruction, the listing agent has no real way of knowing they didn't. Especially if you wait for that agent to contact you instead of calling them the second you get the fax or email. If they don't contact you within 24 hours, that's everything you need to know about that agent and brokerage. As a buyer's agent, I would be happy to send such duplicates - it means I have some real assurance my client's offer doesn't disappear into the trash can, as I'm pretty certain the ones at the start of the article did. As a listing agent, even if I'm working with the buyers to get me more information (like whether they are qualified) before presenting the offer, I'm going to make sure my seller client knows we've got an offer right away. For me, this happens whether there are instructions to send offer duplicates directly to you or not, but if it didn't, how would you know? I won't get offended by such requests. No good agent who will work for their clients best interests should get offended. It's a legitimate control you are exercising upon the situation, just like any other contractor-contractee relationship. The old maxim about "trust but verify" applies. The agents who get offended or don't want to do this are the ones you should avoid at all costs.

Eliminating the monetary motivation for agents to filter out offers submitted by other agents is harder, but even more important. You as the seller do not want your agent also representing the buyer. Whose side would they really be on? In most cases, all but the worst crooks will be on the side of the seller, but there isn't any way to be certain you aren't one of the exceptions. There are tricks and things that one agent can do that you really can't guard against in general, but it is much less likely that two agents each representing different parties will collude upon. Anything shady, no matter what that might be, and at least one of them can be held legally responsible in a court of law! Nobody wants to be representing the mark in a con when the mark can come after them with an attack lawyer and expect to win a major damage award plus court costs and in many cases jail time.

The way to do this is actually pretty simple: Write it into the listing contract that you will not accept Dual Agency. Period. You don't really care if the buyer is represented or not - if they choose not to be, that's their problem - but you won't permit your agent to represent them. That agent needs to pick a side of the transaction - yours - and stay on it, or they're not getting the listing. If they show the property to some prospective buyer or some buyer wants them to submit an offer, there is a standard form - the Non-Agency Agreement, that explicitly states that both the buyer and that agent agree that there is no agency relationship being created, and the agent is doing whatever they are doing because their contractual relationship with you, the owner of the property, requires that they do it. Tell that agent you won't even consider offers made without another agent until they show you the Non-Agency Agreement. If they can't give you their absolute and sole loyalty for the sale, do you really want them to have the listing?

Furthermore, write it into the listing agreement that if there isn't another agent involved, your agent won't get to keep the buyer's agency share of the commission. A small amount of additional compensation is in order - there really is extra work and extra costs involved, so I ask for an extra half a percent if the buyer is unrepresented, which might just about pay for the extra my transaction coordinator charges plus the gas for meeting the appraiser, inspector, etcetera. You don't want your agent shooing away unrepresented fools offers, either, as they might do if they had to do extra work for no extra pay. You want to put the listing agent's financial motivation squarely where it belongs - they get paid the most money by getting you the highest price on the quickest sale with the fewest problems, not by getting both halves of the commission and the maximum in referral kickbacks.

I'm not real hot on Designated Agency, either, where two different agents working for the same brokerage are buyers and seller's agent. It can work, but the controls necessary to safeguard consumers on both sides are both complex and opaque to that consumer - not to mention that most brokerages don't have them. As a rule of thumb for buyers, if you're working with a good buyer's agent, have been for a while, and it just happens you like a property one of the other agents that works with them is listing, chances are decent that might be okay (about 8 in 10). If you contact the brokerage because they're the ones listing the property, and they refer you to their in-house buyer's agent, chances are 999+ out of 1000 that you should run, not walk, in the other direction. For sellers, it's worse. Unless your listing agent is unavailable for some reason, or that other agent from the brokerage can show a pre-existing buyer's representation agreement, I wouldn't want that offer. There are too many games that can be played, and it makes collusion to someone's detriment much more likely, as these agents work together constantly and might well have the level of mutual trust and teamwork (and possibly direction from the broker) to make a scam work and get away with it. In the majority of cases, this collusion more likely favors the seller than the buyer, but there just isn't a good way for anyone to be certain. As always, if there's a game being played and you can't prove who the mark is, you should assume it's you. Real estate attracts a lot of sharks because of the potential for high profits, and even the cheapest properties have enough profit potential to attract those sharks and all of the con games they play.

The difficult part about this is that the vast majority of agents, even those who aren't necessarily among the worst, will strenuously object to these provisions. Most agents really want to "double end" their deals - represent both the buyer and seller - simply because they do get paid more. Most have never taken the time to understand all of the ethical and legal issues with "double ending" a transaction. But these provisions against getting both halves of the commission really are necessary to remove the motivation that causes bad agents to throw up barriers to offers not represented by them. You don't want them to even be tempted to filter out offers, restrict or refuse showings, or require that prospective buyers do business with their business associates, all of which are bad for you, but result in that agent eventually receiving more money either directly or indirectly.

One more thing is beneficial: Require a notation in MLS that says you welcome
buyer's agents presenting offers in person. Your agent should also want to present counter-offers in person. This not only gives you another opportunity for outside contact uncontrolled by your listing agent, it humanizes that transaction. It turns a faceless fax machine spewing paper into real live human beings. You'd be amazed how much it helps the probability of the transaction actually closing.

The issue of listing agents acting for their own benefit to the detriment of the clients is real, is common, and is once more increasing in magnitude. If you're a property owner who wants to sell on the best terms possible, you need to protect yourself from the problem before you sign that listing contract.

Caveat Emptor

Original article here

what if i sign all the paper work for a house at a title agency, can i back off the house?

Depends upon the laws in your state. The Federal three day right of rescission only applies to refinancing your primary residence.

(here's an article about that in case this is a refinance, because refinancing your primary residence has a mandatory three day right of rescission.)

In most states, for purchases and purchase money loans, there is no right of rescission whatsoever - you have to go through the courts, and prove something actionable, to get out of the purchase. The person handling escrow could theoretically fund and record a purchase immediately upon signing, although in practice you can figure it happening next day, providing everything really is ready to go.

If the escrow officer has not yet funded and recorded, then by amending those escrow instructions, giving the escrow handler new instructions not to continue with the transaction, and making them aware of amending instructions, you can almost certainly get them to stop if they're not yet finished. However, there are likely to be legal consequences and cancellation fees and all of that stuff. Talk to a lawyer in your state if you want to know all about this dismal subject.

But once you sign the basic documents, there is no legal impediment to finishing a purchase transaction. So you want to be darned certain before you sign that all is as it should be. TAKE YOUR TIME. If the signing agent is in a hurry, that's their problem. Concentrate on three items for the loan: The Note, the Trust Deed, and the HUD-1. Any funny business with the loan has to show up on at least one of those, and usually two. Forget what you were promised - these papers are what you are signing a legal commitment for, and control the terms from here on out. If they are different from what you've been told up until now, that's simply the way it is once you sign. So don't sign unless those papers are something you're willing to live up to.

For the property, make certain they're not trying to slide any last minute disclosures that you weren't aware of ("You didn't know that they're building a chemical factory on one side and a stockyard on the other?" "You didn't know that the foundation is cracked and the roof leaks?"). It's disgusting how often I hear about things buyers should have known before they made an offer being presented to them at the final signing. That's not an agent who was looking out for your best interests - that was an agent who hosed you engaging in legal maneuvers to cover their backside after the fact. An uncommonly large proportion of the ones I find out about are in Dual Agency situations, where the agent is pretending they can serve two diametrically opposed interests at the same time.

There's a blortload of paperwork at signing for a loan, just by itself, and adding a purchase at the same time doesn't exactly cut it down. Quite often, the less scrupulous will use that, trying to hide something that should kill the deal (at least as written) in amongst the blizzard of paperwork you're asked to sign. You need to understand everything you sign. If they tell you a given form doesn't apply to you, there is no reason why you should have to sign it. Set it aside in a separate stack under your control, so they can't ask again. If you don't understand it, read it until you do. Ask questions. If there's a problem, get it dealt with before you sign. Do not accept, "Just sign now, and we'll deal with it later." Once you have signed, you are stuck.

I always call the signing "The Moment of Truth," because if there's an issue you should be concerned about, whether it be property or loan based, it can be hidden until then, and often is, because at the signing your average person has their eyes on the prize, and they're thinking "all I have to do is sign all of this and we're done!" So many unscrupulous sellers and agents and loan officers will hide things until then, knowing that industry statistics say something like half of all the people won't even notice changes at signing, and of the ones that do, eighty to ninety percent will sign anyway, not knowing enough to realize they shouldn't. You shouldn't be discovering anything for the first time at signing. If you are, it's a sure sign that someone didn't do their job, and quite often, indicative that they actively hid things from you. I cannot tell you absolutely that you should cancel the entire transaction if you discover something you didn't know at signing, but you should always go to signing mentally prepared to cancel. You always need to keep a sense of perspective in real estate, but if you discover something you didn't previously know at signing, especially if you don't immediately understand all the consequences, chances are good that you should cancel.

A good agent or loan officer has absolutely nothing to fear from someone going into signing ready to cancel if something is not as they were led to expect. Oh, occasionally a loan officer you've never worked with before will bite a good agent, and vice versa. This is one reason I try very hard to get my buyer clients to apply for a loan with me, and why I really want my purchase money loan clients to work with me as a buyer's agent (While carefully emphasizing that it is their choice as under RESPA it's a serious offense to try and force people to do this). That way, whatever happens is all my fault and I have nobody else to blame - but also I can make sure nothing goes wrong with either side by making sure my client knows everything well in advance. Nothing that my clients see at final signing should be a surprise. Ever.

Caveat Emptor

Original article here

One of the hard things to get through to sellers is to understand the characteristics of the sort of buyers they need in order to have a successful transaction. If a given set of prospective buyers can't afford the property, they might look anyway. They might even make an offer, and it's possible the offer might even be accepted. But in the current loan environment, the necessary loan won't fund, so the transaction isn't going to actually happen.

Furthermore, it's a good idea to know the income characteristics you're aiming at by the price you set. If you set a price of $400,000, what does someone who can afford a combination of cash and loan that add up to $400,000 look like, in the economic sense of the word? You'll know better than I who makes and does not make that kind of money in your area, but you should know it. I know it for San Diego. This isn't the kind of knowledge that comes from 10 minutes on the internet. I know what professions do and do not make the required money, and what professions for which it's a matter of where a particular prospect falls on that profession's pay scale, but it's taken me years to learn, just for San Diego, and every city is different.

The point is this: Once you've figured out how much various professions make and the price you think the property is worthy of, that gives us a lot of information about how to get the property sold. You have to figure out how to get the attention of buyers in that category, you have to have a plan of how to set the bait so they will go look, you have to figure out how to make the property attractive to them when they do go look, and they have to have a clear action to take in order to make an offer. In theory, this is nothing more than the standard marketer's AIDA (Attention, Interest, Desire, Action) sequence, but the practicalities take a lot of effort to learn in this specific instance.

Most areas have their own character. Some neighborhoods have a working class character, while others attract highly paid professionals. Some have an artsy orientation, others are very matter of fact. Properties have their own characteristics. The one property in the neighborhood with a panoramic view of the area is not going to appeal to the buyer who's looking for any hole in the wall, so long as it's in that neighborhood so their kid can go to Super Education High School. Put property character and neighborhood character and the price you want to obtain together, and if you're a listing agent, that had better give you an idea of exactly who you're hoping to attract to your property. Like all targeted marketing, you won't turn away someone from out of the targeted demographic, so long as they can actually get the transaction done, but you don't have to be in the business long to discover that you'll do better by appealing to the degreed professional who makes the money to qualify based on Debt to Income Ratio for an 80 to 90 percent Loan to Value Ratio loan, than you will targeting the fry cook who's saved and invested for twenty years and is all of a sudden ready to buy the property now that he has a 70 percent down payment. That fry cook may show up on their own anyway, but how many people do you know who save that much over that long a period and then want to spend it all on real estate? As opposed to the newly married professional couple who've been in their careers a few years each, have a little bit of money saved, and now they want to stretch their budget as far as they can? Most people take precisely this latter path, and that is why you should concentrate your efforts to sell to those people most likely to buy your property.

The rates are going to change a little bit every day, but in most cases, it's not going to be significant change. Things like interest only loans will stretch their qualification a little bit, but those are best approached with a trembling hand for purchases, and you're better off planning for the buyer being advised that the property may be too expensive for them in such an instance, and having a plan in place, than you are hoping that everything goes perfectly for you to sell to an unsuspecting buyer. Yes, you're selling and once you get your money, you really don't care what happens. But these days, a lot of agents and loan officers are suddenly discovering the advantages of really looking out for their client's best interest, and you don't want to assume that your prospective buyer's agent will not be one of them. Remember, you're trying to look ahead and get a consummated transaction for the best practical price - and a buyer with a loan that does not fund is not the one you want, no matter how good the initial offer.

Not all loan amounts are the same. Conforming Loans are better than "Jumbo". There is no more 100% financing except for VA Loans (and they have issues of their own). Subprime was kind of in Never Never Land back then (now it's mostly dead). If you read between the lines of what their reps were saying before the industry imploded completely, they wanted A paper borrowers who didn't know they could get an A paper loan. And nobody wants to touch stated income loans right now, no matter how good the credit score or down payment. Fact. Whether you're a seller or a buyer, you can live with it and plan for it, or you can fight it and still lose.

So what I'm going to do is compute the monthly cost of housing on purchases of a given size, together with the income to qualify. I'm going to assume this is California, with California property tax rates. Furthermore, I'm just going to make a flat allowance for Homeowner's Insurance plus Association dues of $250 per month. It's not exact, but it'll put you in the right ballpark. With a specific property, you can get closer, or course.

Let's start with 90% financing, a 90% loan with PMI, because that's the only way to do it right now. This obviously requires the buyer having a 10% down payment plus a bit, and limits us to conforming loan amounts. I'm also going to do the numbers at an assumed 6% loan rate, because that is a better long term rule of thumb. Here's what it takes:

In other words, a family who wants to buy a $400,000 property with a 10% down payment needs to be making almost $82,000 per year. Them's the facts, and that's not including any existing debt service they may have. Credit cards, car payments, student loans, etcetera. If other debt service is $500 per month, you raise the income to qualify by over $1100, and the yearly income by $13,000 plus change. San Diego's Area Median Income is a little over $69,000, and a family making that much money can afford a loan of about $320,000 currently - if they don't have any other debt. If they have a huge down payment, of course, it's easier, but how many people have you encountered recently with huge down payments?

Now, let's consider people who actually have a 20% down payment. Most likely, they bought a condo a few years ago and now they've sold it, but they had enough equity in the condo to account for that 20% down on the more expensive property. Or they sold the condo and bought a starter home, and now they've sold that and are looking to move up again. This is without PMI, and having some equity means that not only are the terms of the loan more favorable, but you don't have to borrow as much to buy a property that costs the same, and so a property of the same value is much more easily affordable.

Once again, this assumes there's no other debt service involved. But if you've got a home with a $700,000 price tag, you're still looking at trying to lure in a buyer family that makes a minimum of at least $10,000 per month. These kinds of buyers are not going to go for old carpet and a carpet allowance. They want the seller to have already dealt with it. Even if it's the cheapest, most beat up property in Rancho Santa Fe, on the smallest lot, the sellers are still going to take a hit on the price that's a lot bigger than the actual cost of such things for not dealing with it themselves.

For a successful listing, you need to know your target market - know who you are trying to sell to. It's a hard lesson to get across, but it really is necessary to pick your targets in order to hit them. Some people do buy properties that are apparent mismatches between their lifestyle and the property, but not many. As listing agents, we need to understand what is and is not a match before setting off to attract a buyer, and recommending appropriate measures to the owner before it goes on the market. We need to write the listing promo appropriately to attract to needed demographic, and not only we but our clients as well are much better off by concentrating our marketing efforts where they are most likely to net a fully consummated transaction at the best possible price.

Caveat Emptor

Original article here

Somebody asked me that.

Well, I'd want to set some aside for liquidity and reserves, in case something happened where I needed money now. invest those funds in a diversified mutual fund and money market portfolio. Once that's done, I'd buy some rental properties, because when government inflicted economic sabotage shakes out, anything I buy now is going to be a lot more valuable in real terms. Leverage the money right, and we're talking at least two to one return, probably more like four to six.

Specifically, Condominiums, and Townhomes. High density housing.

Why? Well for an illustration as to the first part of that reason, look at my article Economics of Home Ownership in High Density Areas. We're in a phase here in southern California where we're getting ready to switch, by economic necessity, away from the single family detached property on its own lot and towards the community interest lot. Land is just too expensive. The average person or family, making an average paycheck, can no longer afford single family detached housing within commuting distance of work unless they've got one heck of a down payment. The demand is too high, and the supply too limited, for everyone who wants one to have one. When that sort of situation happens, price goes up until enough people get priced out.

Here's the trip: When you're talking rent, half million dollar single family detached housing rents for maybe $1800 per month. But if you buy a $200,000 condo, it rents for $1000 to $1200. Put 20% down, and it's very possible to have a positive cash flow on such a unit - something it's not currently possible to have with the detached house. The fact that the spread is so small is temporary, of course, but in the meantime it's an opportunity for a sort of arbitrage.

Furthermore, the average family can afford a fairly nice condominium or townhome. It's just that during the Era of Make Believe Loans, people were told they didn't have to "settle." So they purchased properties far beyond their real means, because they were being told they could qualify for those ridiculously high dollar value loans.

(I call it the Era of Make Believe Loans because the agent made believe people could afford more expensive properties, the lender made believe that people could qualify, and the consumers made believe that there weren't deadly traps they were falling into on every single one of them. It was seductively easy for everyone. The agent didn't have to sell only the property the client could afford, or "settle" for the smaller commission. The lender and loan originators could make money hand over fist on paper. The consumers could pretend they could afford a property far beyond their means, and didn't have to "settle" for what they could really afford. And people are still making believe that the Era of Make Believe Loans is going to come back.)

But denial has a definite half life when it encounters pervasive economic reality. Once it's become accepted that the housing market has stabilized from its free fall, people will be forced to look reality straight in the eye. We had the bubble, we had the pop, and now it's time to start going up again. Once it starts happening, families will be forced to confront the fact that they can't get the American Dream all in one easy step by essentially clicking their heels together and declaiming, "There's no place like Oz!" They will have three options: Stay a renter forever, move away to somewhere there is less demand or more supply, or settle for what they can afford, leveraging it to something better. When larger number of people realize that those are their choices, the demand for and price of condominiums is going to shoot up.

So, put $40,000 or $50,000 into a $200,000 condo, rent it for $1200 per month, and your cash flow is just about even. That's the second half; the situation right now, as it exists. I've predicted rents are heading up in the near future several times (and they have been). Rent goes up, I'm making a couple hundred dollars per month while values are climbing. In a few years, I've a property that has doubled in value while making me some small cash in the meantime. Multiply this by a dozen, and I've got two to three million dollars from an investment of six hundred thousand or so. Plus, of course, I'm going to pull all the old flipper's tricks just before I sell them. Yes, there's risk - risk that can be minimized and dealt with. That's why I wouldn't be sinking every last penny I had into it, a mistake way too many people have made in the last few years.

Right now, the market in Southern California is very highly segmented, meaning that prices and demand for some things (Single family residences in desirable parts of town) is through the roof while there's a glut of other things (condos in most places). Condos are, for most people, what my econ professors used to call substitute goods for single family detached housing. But when people figure out that it's condos or rent or leave the city where they really want to live, they'll start going for the condos. The hassle of HOAs is nothing near as bad as having a landlord.

Of course, nobody's giving me a million dollars. But if you have $50,000 sitting around, you can make about 10% per year in the stock market with a reasonable amount of risk, Over ten years, that's turning your money into about $138,000. Or, if California real estate increases at an average rate of 5% per year for the next ten years (our forty year average is about 7%), that $200,000 condo turns into a $325,000 condo, while your loan has been paid down to $125,000 and you walk away with $200,000, not counting the cash in your pocket between now and then. If we should actually tie our long term average of 7% annualized increases, that's a $390,000 condo and you walk away with $265,000. Meanwhile, the cash flow picture gets better every year as rents increase. Your choice, of course, but I'm not the only one who sees an opportunity here.

Caveat Emptor

Original article here

If a home for sale has a refrigerator included on the listing report, and the buyer's agent does not write that it goes to the seller in a contract, is the buyer actually entitled to the refrigerator. I am actually going through this right now.

The listing does not matter. What does the purchase contract say? That is the complete controlling fact of the whole entire transaction.

If the contract is silent, what matters most is whether the refrigerator in question is appurtenant to the land or not. Appurtenances are things which are physically and structurally attached to the land which is always the primary thing being sold in a real estate transaction. For a standard house, nobody would seriously argue that they have the right to remove it, because it is attached securely to the property. There are service pipes coming out of the ground attached to the ground and a foundation it is attached to. There are electrical service wires, telephone wires, and cable TV wires. All of which would come up if you pulled the house away. So the house is appurtenant to the land. This is how all real estate transactions are really structured, by the way. You are buying the land, and the house, if there is one, comes along because it's attached to that land.

So if the refrigerator is somehow built in, such that removal would be a nontrivial project, then it's appurtenant to the land. If all you have to do us unplug it and push it away on a dolly, that's not appurtenant, and there is no more reason why they should have to leave that than why they should have to leave their dog, cat, or child.

Now this is not to say that you can't build an excellent court case based upon the fact that there was an implicit promise made in the listing, and everything else in the contract was built off of what that listing said. Talk to an attorney for more information than I can ever give you on that score.

Even if they're not obligated, the seller might leave the refrigerator anyway. Maybe they've got another, maybe they are just living up to what they promised even though they might not be legally required to do so. It's not like most people go around looking for ways to be evil. I've never met anyone who acted like a Disney villain. I have met some pretty shady characters, but mostly they're more sophisticated about it.

The thing to do, if you're concerned about the refrigerator or anything else where you want it to stay, is to put it in the purchase contract. If the listing says these appliances stay, putting it into the purchase contract won't offend the owner - it should be something they expect.

In any of these cases, the seller can force you to go to court by being an obstinate donkey, even when they haven't got a leg to stand on, legally speaking. It's not like you have the magic power of enforcing agreements. That power belongs solely to the executive branch of government, which will take no action in cases like this without a court order. Whatever the court says is final. Be aware, however, of the cost of bringing the law into it. Unless it's some $25,000 wonder fridge, it is not likely to be worth going to court over, and maybe not then. Much cheaper to buy a new refrigerator, and your expected return on investment is much higher.

Caveat Emptor

Original here

I am seeing a very disturbing trend these past few months. Rather than do the work they should be doing, listing agents are treating the entire short sale process as a kind of "Black Box", delegating the negotiations with the lender to a negotiations firm, treating the negotiation firm's advice as if it were handed down from on high, and expecting buyers (and their agents) to blindly follow along in profound indifference to the buyer's interest. Sadly, they're getting a lot of cooperation from buyer's agents who should know better but are acting more like sperm donor agents than real agents.

I have seen the following demands from these knuckleheads :

• trying to require buyers to pay repairs, termite etc before they own a property, when in fact the transaction may never come off
• requiring buyers to pay the negotiation firms that they had no role in hiring, because the lenders allegedly won't allow it to come out of sale proceeds. Maybe you should take the hint the lenders are giving you - these negotiators and their recommendations do not serve the interests of any of the three principals to a short sale transaction. The interests they serve are those of a lazy (and horrible) listing agent
• Agreeing to keep the offer open at least sixty days without an accepted purchase contract

The answer to any of these demands is short, simple, and to the point: No.

You want my client to pay for repairs to a property they don't own (and most often the sellers don't want to take it off the market)? How can agreeing to this not be a violation of buyer fiduciary interest?

You want my buyer to give keep an offer open two months without a valid purchase contract?

You want my buyer to pay a firm that they have no role in hiring and does nothing to represent their best interests?

First off, ladies and gentlemen, if you don't have a valid purchase contract, the thing to do is walk away. There is a world of difference between "offer accepted pending lender approval of short sale" and "we have submitted your offer to the lender" In the first case, you have a contract with one contingency - kind of like a loan or inspection contingency on the buyer's side, only from the seller's side instead. Nothing wrong with that. Transactions with seller contingencies happen every day. But it also means you have an accepted offer. There can be only one accepted offer, and once there is an accepted offer, the property needs to be removed from the market and no other offers may be considered until this one falls apart. In other words, the seller is stuck with the buyer every bit as much as the buyer is stuck with the seller.

But if you don't have an accepted offer, what you have is "Hope I get it". Kind of like the Little Engine That Could, except there is no defined end to the process and it's not under your control. It's just repeat the mantra of "Hope I get it' until you get told that you didn't. That choice of phrasing was very considered, by the way. Under this scenario, listing agents submit multiple offers to the bank - a recipe for disaster if ever there was one from both the perspective of the buyer and the seller. If the bank keeps getting offers, what are they going to do? That's right, keep the property on the market hoping for a better offer. Whereas if you show them some hard back and forth negotiation and one or more prospective buyers dropping out of the process until only one is left, that's good evidence that that is all the property is worth.

Understand this in your bones: That short sale lender wants one thing above all else: Their money. As much of their money as they can possibly arrange to get back. The owner's job transfer, illness, etcetera, are not their problem. I straightforwardly advise buyers to avoid short sales but some people decide they just have to try for one. That lender needs to see conclusive evidence that there is no way they are getting any more money out of this property and this owner before they will approve the short sale. They need to understand that this is all the market will support, and that the current owner cannot pay them any additional money, and that if they don't get off their fat backsides and approve this pronto, not only are they going to end up with less money when this buyer walks, but they're going to have to pay the expenses of getting it sold as well as the penalties for having a nonperforming asset on their books.

The way to approach that is to negotiate hard with prospective buyers, as if the lender weren't part of the picture. You still have to disclose short sale status, but negotiate as if it's a regular sale (Sadly, many listing agents can't even do that). The best evidence that this is what the property is worth is that you tried to convince multiple people to offer more, and this one you picked is the one that's the best for the lender. Submitting more than one offer to the lender is a recipe for Delay and two different forms of Denial from that lender. They are going to want to wait until they get still more offers.

The lenders do have a secondary concern to getting their money, and that is time. It may be difficult to believe for agents and buyers and sellers who wait three months waiting for the bank to make up their mind, but the bank really would rather move quickly. Time costs them more money. It's just that most listing agents do not and will not do the work of actually getting the offer approved by the short sale lender - which they accepted responsibility for when they took that listing. "Short sale specialist" means a lot more than hiring a negotiating firm!

This nonsense about asking buyers to fork over cash for repairs before closing, asking them to keep offers open without an acceptance of that offer, and asking them to agree to pay the negotiating firm are all things that an appropriately represented buyer is going to ask for concessions for. Concessions on price, concessions on indemnification, concessions just for putting up with the ridiculous nonsense on stilts. This all translates to the buyers who are well-qualified and have plenty of resources walking away, while the ones who are marginal or even below qualification level are perfectly willing to hang around in the hope that a miracle will happen. What else this means is that the property sells for a lower price. But the Broker's Price Opinion has no way to reflect these unattractive things making the property worth less to the buyers. It is therefore going to come in higher than the sales price. So we have two additional ways that the transaction falls apart because the listing agent couldn't do the correct thing in the first place. With stuff like this happening, is it any mystery why four out of five short sales fail? Is it any wonder that the better buyer's agents advise their clients to avoid short sales?

Short sales done correctly are really pretty much like regular sales, albeit with one long, difficult and thoroughly unpleasant step added. But what happens before that step shouldn't be any different for a short sale than any other property. Nor should what comes after be any different, except that the seller cannot get any cash out of the deal. The one extra step that is actually necessary does impact buyer desirability, but not nearly so much as all of the unnecessary nonsense (euphemism alert!) that some listing agents insist upon adding.

All of this is, incidentally, one more piece of evidence that most major real estate brokerages are built around the seller and listing property for sale for minimum effort on their part, especially of any actual licensed agent involved. The buyer can go hang. In some cases, literally. No buyer's agent worth what comes out of the south side of a northbound cow is going to counsel their buyers to put up with this stuff, at least not without a lot of concessions including a major downwards adjustment on price (and as I covered above, the lenders will deny such sales when the broker's price opinion comes in too high). But people still keep calling listing agents about their property without having a buyer's agent to advise them. Given that, the agents think they'll find some clueless victim to sell it to. All too often, someone proves them right. In the meantime, like Tina Teaser, the worthless listing agent who is really impeding the sale of the property uses the listing to make contact with as many buyers as possible.

Buyers can't force sellers to sell, much less to sell to them in particular. But sellers and listing agents shouldn't be blind to things that cause buyers to walk away or to be willing to pay less simply because the sellers are not getting cash out of the deal. Especially in a short sale situation. They may not get cash, but soon enough they will be back to getting 1099s for forgiveness of debt, a taxable event. Every dollar they can prevent the lender from losing is going to help them.

The general statistic is that one short sale in five actually comes off. Given the nonsense listing agents expect buyers to put up with, it's no wonder that buyers getting disgusted and walking away is right at the top of the list of reasons for fall out. Sellers need that buyer - without a buyer, they don't have a sale, and nobody sells their property on a short sale without a need. Nor does this nonsense on stilts motivate the bank to get off their backside and approve the short sale. Quite the opposite, actually.

Caveat Emptor (and Vendor)

Original article here

I've heard this story, in all of its variations, at least hundreds of times.

Someone will send me an email and say "They told me not to make my loan payment because I was going to skip one. So I spent the money on something else. Now they're telling me they can't fund my loan and I can't come up with the cash to make this month's payment!"

First off, engrave this into your soul: You will never skip a mortgage payment. The interest accrues every month and it must be paid every month. What many loan providers do is plan to add an amount equal to your monthly interest charges to your loan balance. This gives the illusion of skipping that payment, but you not only made the payment, you're now paying interest on the extra amount you borrowed.

I never tell people not to make their loan payment. At most I will tell them to wait a few days to give the loan a chance to fund. This lets them know it is still a concern, still an item they need to stay on top of. This way, if there's a funding issue they still have the ability to make their payment. I'm pretty certain I've never had a funding issue like that, but I'm also certain if I said anything different, the universe would bite both me and my next client. The universe is hostile and you always want a Plan B (and Plan C if practical).

Here's how it works: At the end of every month, you've got a fifteen day grace period to make your payment (i.e. by the 15th of the following month) before any penalties begin. So if your new loan was funded any time prior to the 16th, everything is at least under control. If you pretend you're skipping a month's payment, you've just added an amount roughly equal to the principle you pay in six months back into your loan (on top of all the other closing costs if you didn't pay them in with cash out of your bank account)

So quite predictably what happens is at the end of every month there is a massive wave of loan fundings to take advantage of this as unscrupulous loan officers pretend this month is free. Escrow gets so busy at that time of month that things get lost in the shuffle quite often. It's for this reason that I prefer to avoid funding loans in the last two or three business days of a month. If you're not trying to pretend your client is skipping a payment that they aren't skipping, things become much easier.

Let's say we fund your loan on the 28th of the month. Actually, this works anytime between the first of the month and the 15th of the next month, but the last few days of the month is typical. You can pay for the interest due in cash or by rolling it into your new mortgage. Either way will get the job done. It depends upon which is more important to you: having the cash from pretending you didn't need to make a payment, or not losing about six months worth of principle payments. By paying this interest, in either case you are covering the payment that would be due for that month.

Here's where it gets a little tricky, but not much. If you fund on the first of a new month or before, the interest paid is for the ending month, and the new loan starts accruing interest immediately. There will be a payment due at the end of that month. If you fund from the second to the fifteenth of the new month, the new loan needs to cover the interest for two months (either by rolling it into your balance, paying it cash, or some combination). In this case, the new loan (or cash you put into the deal) covers the ending month and the new month just beginning. It's also for twice as much money, by the way. This is why some very unscrupulous loan officers can advertise "Skip two payments!" even though there is never a single second on any loan when it is not accruing interest.

As long as everything goes well enough for the new loan to fund by the 15th of the new month, everything is at least under control. Yeah, you might have chosen to roll all the costs into the new loan but that's okay as long as you go into it with your eyes open having made a conscious choice.

But what happens if they tell you "Don't worry about your loan payment!" and then it doesn't fund? (or doesn't fund in time!)

Well, problems. If you're fifteen days late on your mortgage, expect to get hit with a penalty of at least 4% and more likely 6%. Work out the interest rate, and you'll see the interest rate on payments late that sixteenth of the month is 96 to 144 percent!

If that were all there were, that would be bad enough but livable. Usually it puts people a full month behind on their old mortgage. That noise you just heard was your credit score being nuked. I have seen a single 30 day late make a difference of 150 points on the Fair-Issacsson (FICO) model. Plus if you think you had difficulty qualifying for a prime mortgage before, wait until you see what happens after you've got a thirty day late! This usually ends up becoming what subprime calls a "rolling thirty" for several months until you get the extra money from some other source, but A paper (i.e. the good loans) doesn't have a "rolling thirty" category - every single one of those late payments hits you again as yet another late payment within the past 24 months.

Then there's the problem of where you've going to get the money to replace what you've spent because you were told you didn't have to make a payment this month. It's not coming out of some hyperspatial vortex. My clients would have to get it from somewhere. What if they really don't have it?

This sorry little charade that many loan providers play even has an ultimate downside. There is no need to skip a month's payment. You, the client, will get full and complete credit for any cash you put into the transaction or your loan. It may take a little while to get back to you, but you will get it. In the meantime, however, it may spell difficulty for your cash flow. You made that payment but your old lender hasn't yet credited it (or it cannot be confirmed that you made the payment)? You will get the money back when the accounting all finalizes. The reason we tell people they might want to hold off is that quite often it takes a few days between mailing the check off and the time that the old lender admits that they got it. You can't close the old loan off unless you pay the full amount the old lender is asking for right now. If you can't close the old loan off, you can't fund the new loan. Escrow has to pay the loan off in full by the old lender's payoff demand. If more money comes in later, the old lender needs to send it back to you when it does.

So if someone ever tells you not to make your loan payment, ask them if what they really mean is to wait. Because if they really mean "Don't make your loan payment this month": they are risking an awful lot of potentially bad consequences to you, the borrower, if they can't actually fund your new loan. And judging by the amount of email I've had on this subject, it really does happen pretty much every day and to quite a few people per day.

Caveat Emptor

Original article here

One of the things I'm seeing a lot of these days is blanket advice on bridge loans.

A bridge loan is a loan that you take out with the explicit intention of having it be short term. The most common situation is a loan against property A, which you own but plan to sell, so that you can put a down payment on property B (or buy it outright) right now.

The motivation for this comes from the fact that people get paid to do bridge loans, and they are typically very easy loans to do. Frankly, the people making the recommendation make more money by doing the bridge loan than by not doing it, and they are not motivated to do the calculations and legwork to see which is the better deal for the consumer.

When it comes to money, blanket recommendations of any sort are automatically suspect, and usually wrong. Every situation is different, and there can be factors that cause an ethical professional to recommend something in one case where they would recommend against in another superficially similar one.

Bridge loans are no exception. In the example above, the advantage is that they make you a more qualified buyer, and can get you better rates on the loan for the new property. The disadvantage is that their closing costs are just as high as any other loan. So you're spending about $3500 extra plus points plus junk fees (if any). They are also, by definition, cash out refinances. The rate-cost tradeoff for cash-out refinances is less favorable than for purchase money loans. In plain English, they cost more.

The next major issue that arises is that they can make it more difficult to qualify for the loan on the new property, which can often mean that you need to go stated income or NINA when you might otherwise have qualified full documentation, which means you got a higher rate on the new property anyway, and that you're going to want to refinance your new purchase as soon as Property A sells anyway, sending another set of loan costs down the drain. Don't get me wrong, I love to do loans, and my pocketbook loves for me to do loans, but it's a good loan officer's job to look after your interests first.

Finally, choosing a bridge loan can force a choice upon you: A good loan that puts you in the position of having a need to sell within a specified time frame, and a mediocre loan that may not. The best (lowest) rates are for short term loans. Always have been, always will be. However, if the market sours, this can cause you to either accept an offer you would not have otherwise considered, or flush another set of closing costs down the toilet, when if you had chosen the mediocre loan, you would have been okay indefinitely.

Let's crunch some numbers. Let's say you have a property currently worth $250,000 that you bought for $125,000 and have paid down to $100,000. You want to upgrade to a $400,000 property now that your promotion and raise have settled in.

The first thing you do is pull cash out to 80 percent. On a 30 day lock of a 30 year conforming fixed rate loan, assuming you've got good credit, when I originally wrote this was about a 6.5 rate without points, and you'll actually get about $96,500 of that $100,000 you take out. I looked at shorter term fixed rate loans as well, but with the yield curve inverted right now since you're planning to sell, anything without a prepayment penalty is about the same, and a prepayment penalty is contra-indicated, as it means you'll have to pay thousands of dollars when you do sell.

You take and put that $96500 down on a new home purchase loan on a $400,000 home. It's over 20% down, so no PMI concerns, and no splitting into a second loan. But because you've got that $200k loan sitting over there, now you have to go stated income on the loan for the new home.

Actually, at this update, I don't know of any stated income loans. What that means is there's no way to qualify without coming up with more cash or waiting for the first property to sell. This means moving twice or hoping your buyer will let you lease the property back long enough to find a new property. Or simultaneous closings, a massively stress-inducing plan, because you're betting your ability to close on someone else being on-the ball.

But when we had it, stated income was one way of making this work. This means you traded no verification of income for a higher rate/cost tradeoff. In the example we're using, your rate would have been about 6.75 without points. Soak off another $3500 in loan costs, plus purchase costs of maybe another $1000. You now have two loans, one for $200k at 6.5 and one for about $312,000 at 6.75. Now the original home sells. Let's say you got full value of $250,000. You pay 5% in real estate commission, and maybe 2% more in other costs. That's $17,500, so you get $32,500 in your pocket. You have three choices, two of them productive. You can 1) Spend the money, 2) Invest the money, or 3) Use it on the other mortgage. A paydown, where you just plop the money down and keep making your same old current payment is a good idea (Unless there's a "first dollar" prepayment penalty), but most folks are obsessed with lowering their payment. So they take that $32,500, and of which $3500 is loan expenses, and (because now they can do full documentation), they end up with something like a $283,000 loan at 6.25 percent, assuming rates don't move. Total cost of loans: $10,500 assuming you pay no points for any of your loans. Perhaps possible for someone with above average credit. Not likely if your credit is below average.

Suppose instead, that you just leave that $100,000 loan sit on your original property. You're still going to have to do stated income on the new loan on the new property. But instead, you go with a 80 percent first, 15 percent second (another thing you can't do at the update because no second mortgage holder will go over 90% loan to value ratio) because you can come up with $25,000 until the first property sells. Same 6.75 rate on the first, and the second is an interest only at about 10.25, just to use the same lender whose sheet I happened to pull from the stack for the exercise. Loan costs, $4000 without points, which I priced the loan to avoid. First house sells, you get $132,500, replace the $25,000, and pay off that second, leaving you a $320,000 loan and about $47,500, holding cost assumptions constant ($1000 in non-loan costs). You could do a paydown, leaving $272,500 balance on a 6.75 loan, or you could take $3500 in closing costs and refinance to 6.25, just as above, leaving a balance of $276,000 if you don't pay any points. Total loan costs, $7500 and you only have to avoid paying points twice (once, as opposed to twice, if you take the paydown option. It takes a little under 37 months to break even on your interest savings). Furthermore, in less than hot markets, it gives you greater leverage with your seller to pay some part of your closing costs: "Do this, or I don't qualify". They have the home on the market for a reason, and they can help the buyer in hand or they can hope for another buyer to come along.

In this example, not doing a bridge loan saves you about $6500, less the additional interest (about $512/month) for the second mortgage until your first home sells, but plus approximately $541 per month interest every month between the time you initially refinance your original property and the time it finally sells, a longer period of time. Plus one set of possible mortgage points. So it's not difficult to construct scenarios where it's a good idea not to.

Let's look at a different scenario, however. Let's say instead of upgrading, you're already in the $400,000 home, and looking to downsize to a $100,000 condo. Furthermore, let's say you bought for $200,000 and are now down to $160,000 owed, just to keep the proportions consistent. You borrow out to $265,000 (paying $3500 in loan costs), which you qualify for full doc at 6.25. You then pay cash for the condo (including $1000 for purchase transaction costs, and you've still got $500 in your pocket). Furthermore, an all cash, no contingency transaction is a powerful negotiating tool for a seller to give you a good price. Then when your original property sells, costing you say 7%, or $28,000, in selling costs. You net $107,500 in your pocket. If you did no bridge loan, let's still assume you can come up with $25,000 on the short term, and you still qualify full documentation. Your rate on the condo is 6.375 without points, holding assumptions consistent. Then you sell the first property for the same $400k, paying the same 7% ($28,000) and paying off the $80,000 loan on the condo as well as replacing the $25,000. Net still $107,500 in your pocket, less additional interest charges for a little longer period, but you cut your stress level and put yourself in a stronger bargaining position, which is likely to be worth doing.

There are any number of reasons and factors to do a bridge loan or not to do a bridge loan. You may not have a minimum down payment without a bridge loan. That's probably the most common, as not all properties and purchases are eligible for 100 percent financing (at this update, the only way I know to get 100% financing is with a VA loan, and some require as much as a forty or even fifty percent down. The way a necessary transaction is structured. The presence or absence of 1035 exchange considerations is often a factor. Your credit score may limit you, or your ability to qualify full documentation may dictate the advantage lies in a different direction. Every situation has the potential for factors that may dictate an answer other than that given by pure numerical computation, and there are therefore, no valid blanket answers to the question of whether or not to do a bridge loan.

Caveat Emptor

Original here

What is a good interest rate for a house that is for someone with low income?

Well, if you make enough to afford the property, your income isn't a factor on the interest rate you get! You either qualify or you don't. Banks may charge an additional fee for low loan amounts, but your income is not the issue, except as to whether or not you qualify for the loan as it is submitted. The lender does not care if you just barely scrape through, or if you have a hundred times the minimum income to qualify. Kind of like there's no such thing as "a little bit pregnant." You either are or you aren't. Same thing with loans: You either qualify or you don't. It's possible you might qualify for a better program than you got, or that you might qualify with another program where you don't qualify with this one, but those aren't questions that the underwriter or the underwriting process are going to address. They're questions your loan officer needs to get right before the loan is submitted.

There may be programs you are eligible for, such as Mortgage Credit Certificate or a locally based first time buyer assistance program. These programs can make it easier to qualify, in that they effectively raise your take home pay, they keep you from having to borrow so much, or even that the save you from the choice of PMI or splitting your loan. However, be aware that every single one of these programs requires full documentation qualification for a loan that's fixed for at least three years and fully amortized, or fixed and interest only for at least five years. Stated Income and negative amortization loans are not (and never have been) permitted with any of these programs that I am aware of. The idea is that you buy a property you can afford and stay in it for a long time, not a property you cannot afford, and get foreclosed upon. These programs also have income limits that many people might not consider "low." Up to $96,000 per year here locally can still qualify - the big concern is whether there's money still left in the budget for these programs when your application is ready for approval.

Nobody is really going to give you money at a lower interest rate than someone else, just because your income is lower. If this means you have to settle for a condo when you want a single family detached property, or a less expensive home than you would like, well, that's what everyone else has to do. There is no special magic wand that enables low income people to stretch beyond their normal means in purchasing a home. There's a lot of unscrupulous people who have gotten paid a lot of money pretending that there is, but there isn't. Stretching beyond your means is pretty much a guaranteed disaster. If not now, then a couple years down the road. Better to get it fixed in your head as to what you can really afford and live within that.

Caveat Emptor

Original article here

I want to sell my home for sale by owner. Is 1.5% a good amount to co-broke? Or will agents avoid me?

In most of the country, this is a buyer's market right now. You need to compete more strongly for that buyer's business than anyone else in order to win the sale.

When I'm working with a buyer, the contract says that my brokerage gets a certain percentage of the sales price. So it doesn't matter too much to me what your co-broke (aka CBB, paid to a buyer's agent by the listing agent or seller) is to me. If you don't pay it, my buyers will. Furthermore, my contract is non-exclusive, so I have incentive to get them into whatever property is going to make them happiest, as soon as possible. If I won't (or can't) do it, somebody else will, and that's how it should be, so if your property really is the best property for that client, the low co-broke won't stop me. As I said, I get my minimum percentage from any property I help the client with. Better the minimum off yours than nothing when somebody else turns them onto yours. So you're not going to be eliminated by good agents on that scale alone. However:

Even to agents in situations comparable to mine, a low CBB like that is very indicative of an owner who is overly greedy, has over-priced the property, and won't negotiate it down to anything reasonable. I've seen this at least dozens of times, probably hundreds. No exceptions to this rule yet. Better I just don't waste my time or worse, that of my clients.

This is on top of the constant issues of dealing with a For Sale By Owner (FSBO), 99% plus of whom want me to act as their agent. or at least do the work of their agent and assume that liability, as well as the buyers'. Well, I don't do dual agency anyway, and I certainly don't do it unpaid, and because there's nobody with E&O insurance on the other side of the equation, I can do all of my due diligence and then some, but because the seller lies, I still end up sued by an unhappy buyer because I'm the only one involved they can get money from. FSBOs have literally 100 times the disclosure problems agent represented properties do. Trying to persuade owners who think they did everything they need to by putting a sign in the yard to fulfill the rest of their legal obligations is a painful process, and getting them to negotiate in good faith is chancy. I've had - and heard from other agents - more "chiseler" episodes from trying to buy a FSBO property. The probability of dealing with the "chiseler" goes up by at least a factor of 10 for all FSBO properties. And if you think I don't cover this with my clients, you're wrong. It's part of my job to let them know the risks of what they might be getting into, before they're in the middle of them. A good percentage of all clients comes straight out and tells me that they don't want to consider FSBOs once I've explained the facts.

Yes, a lot of this is "guilt by association" type judgments. Nonetheless, it's how you are asking people to view you. People who hang out with outlaw biker gangs are presumed to be outlaw bikers. Doesn't matter if you wear a suit and tie and a $400 haircut and have a nice genteel manner. You're an outlaw biker gang member, and until and unless people get to know you as an individual, that's the perception you're going to have to live with. (Lest my meaning be mistaken, I'm pulling a hypothetical example. I don't think I've ever actually met or seen an outlaw biker gang. There was a large biker club seated next to us at a restaurant not too long ago. Their clothes and haircut were a little out of the ordinary, but they were mostly like other folks. Had a great conversation about our respective kids with one couple). I'd like to have the time to individually know all of the properties available well enough to discard guilt by association, but there aren't enough hours in the day.

Finally, if my buyer's cash is a little tight in the first place, the fact that they're going to have to come up with that money out of their pocket can be a deal-killer right there. Buyer cash to close is the number one obstacle to a successful transaction. It's a "lose your license" offense for agents to attempt to negotiate a higher CBB at point of offer in my state. Agents do it anyway, but I have zero sympathy for them when they get caught. But having to come up with that extra amount of cash can drive my buyers below a breakpoint on the loan, and possibly even torpedo the loan altogether, which means it's significantly harder to convince myself your property is the best one for the client.

One more thing: For agents who get exclusive buyer's agency agreements, as opposed to the non-exclusive ones I work with, your property is not a contender. Period, end of sentence. You're making them work too hard, plus they want the highest CBB they can get, and they get paid no matter who helps the buyers buy, and they have enough control to make it very difficult for a buyer to go to a place with a low CBB. Not to mention that their usual CBB is higher and this means yet more difference between what you're paying and what their contract calls for, meaning that even if their client should somehow find your property, and love it, the cash to close issue is going to make it very difficult for them to do business with you.

So you make the call:

Buyer's market, you have to make your property look more attractive than anyone else's to even attract attention. Price, condition, location - you've got to have something that stands out above the market to attract an offer in the first place, and everything else has to be competitive as well.

Add the fact that a low CBB tells experienced buyer's agents that you're someone to stay away from

Add all of the FSBO issues, and there's a lot of them. They're not minor from the agent's perspective, and they're even worse from an informed buyer's.

Then top it off with hitting the buyer's cash to close, potentially killing a viable deal, and both the buyer and their agent want to know why they should bother with your property, as opposed to the one across the street, with a CBB that pays the buyer's agent what they've got coming without the buyer having to come up with cash, with an agent on the other side who at least might know your market and price it correctly, and is unlikely to try to deceive my client by not disclosing known issues, and is going to get all of the work done in a timely fashion without me having to work them over, because they want to get paid too, and they don't want this transaction coming back to bite them any more than I do.

Which of these two properties do you think buyers and their agents are going to find more attractive? Even if they're equivalent properties priced the same?

People aren't looking for reasons to buy your property. They're looking for reasons not to buy your property. If you want to sell your property, get a good agent to list it for you, list at a price that reflects the current market, and offer an average CBB for your area. If you don't want to sell your property, why are you putting yourself through the hassle and expense of putting it on the market?

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Original article here

My husband and I are on title and loan to a piece of property with 4 homes on it. We want to add 3 people to title. Can we do this if they are not on the loan? Also, any advice as to where I can find information as to how to hold title? Each party wants their percentage to go to next of kin and not to the rest of us on title.

This is a property that my family all live on. Basically we all bought it but we couldn't put all of them on loan for various reasons. We do have a sort of "operating agreement" going for maintenance and stuff like that, so I just want to know if they can be added to title so it's all official.

There are significant perils in this, especially since you're the only one on the loan. I can envision half a dozen scenarios where you end up liable for the loan even though you no longer own the property, or end up only owning a smaller piece of the property. Nobody likes to consider ending up in court opposite a family member, but family members are much more likely a legal adversary than complete strangers. This stuff happens every day. Partition suits aren't exactly uncommon. I suspect a certain number of them may even be manufactured, because a multi-residence property may be more valuable as multiple legally separate lots. But even if you manufacture such a suit, there's no way to insure that the other party will remain loyal to you.

Quitclaiming is easy, and requires no permission from anyone, but you really need to understand the consequences of what you intend to do before you do it. Furthermore, there's more than one way to hold title, each of which means different things. Joint Tenants, Tenants in Common, trust, corporation, partnership, etcetera. You need to choose a form of ownership that protects you, while still serving your needs.

I'd suggest getting a partnership or corporation agreement executed first, and quitclaiming to that entity, but you really need to pay a real estate attorney for some advice, first, and you'll be better off following their advice than mine.

Not that I'm a big fan of lawyers. But the hour of time you pay for now has a good chance of saving you at least a million dollars down the road, from the type of property you're talking about. Ounce of prevention and all that.

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Original article here

I just got off the phone with an agent who claims to have three offers on the property, but he doesn't want to counter the offer. He just wants my client to voluntarily throw more money (or more something) onto the table.

We're going to decline to do that.

The offer we made was good. The other agent, if they knew what they were doing, would just be fishing - or rather, hoping to get us to go fishing voluntarily, adding more and more bait until they finally decide they had better hit it. Not really a horrible strategy, but wickedly vulnerable to agents who understand negotiation. The only reasonable way to respond is to ask the other side to take it, leave it, or tell you what they really want. Someone who understands negotiation is going to tell them exactly what I did - which is "You can take it, leave it, or counter. But we're not going to go on a fishing expedition. Tell us what you want and we'll talk about it."

However this particular agent either didn't know what they were doing or were pretending not to know. As a rationalization for his actions, he said, "I've had multiple offers and lost them all when I countered."

So?

Every listing agent gets desperation checks. Sometimes they're flippers looking to turn a quick buck. Sometimes they're serious investors. Sometimes they are even people who intend to live there forever and ever. What all three of these (and many other situations) have in common is that they say to themselves, "Let's see if we can get it for that."

The intelligent way to respond is usually to counter offer. Below a certain point, of course, you want to respond with, "Offer rejected - do better!". But if they're in the right general ballpark, the way to get what you want is to tell them what you want. You won't get everything. That's what negotiation is all about. But you would be amazed at how often terms that are important to one party are something the other party can meet without any downside.

Furthermore, you don't want to sell to a "Let's see if we can get it for that" offer. Yeah, some folks will walk away if you counter. Those are the folks that you don't want to sell to anyway. Even if every single one of ten offers walks away, you haven't lost anything - because those people weren't willing to offer a reasonable price. If you price the property correctly, it will get offers, and you will be able to sell to one of them for right around the market price. If you over-priced your property, desperation checks are all that you're likely to get. If you underprice the property, you will get hordes of offers, but it's unlikely to be bid up as far as where it should have been in the first place.

(How can a consumer tell if their property is over-priced or under-priced or priced just right? By the offers you get and their timing, of course! It's one of those zen things like the chicken and the egg. It's also why the discussion of list price should not be easy for anyone - because by the time it becomes apparent you went with the wrong answer, fixing it will only repair some of the damage)

You never know which offer is and isn't going to come back with something better. So you give them a reason to offer you something better by telling them what you really want. Yeah, number one on the list is usually money. But sometimes it isn't. And sometimes subsidiary concerns can make all the difference, even getting the property for fewer dollars than another offer.

Being unwilling or unable to counter without losing good offers is the mark of a very weak agent. Unfortunately, by the time you find out they're a weak agent in this fashion, it's probably too late. When I'm the buyer's agent, I don't really want the first offer accepted, and those few of my clients who've had it happen can testify that I really am mortified when it happens. I want to talk about what my client wants, and how we can go from the first offer to something both sides are happy with. Whatever happened to "never take the first offer"? Don't they teach that anymore? The first offer is just an opening, like "hello" in a conversation.

One legitimate fear is that an unqualified buyer may sign a counter exactly as it is, creating a purchase contract that ties the property up for months while you find out they can't really qualify. That is the only situation where I delay the actual counter until I am certain the buyer can qualify. But I do call the offering agent and ask for more evidence the buyer will be able to qualify. This is in line with the precept of "ask for what you want, and explain why they should give it to you" precept. After they provide information that persuades me these folks will qualify for the necessary loan, they'll get a counter.

Counter as fast as you can - within a day is best if you can. Don't wait for X number of offers before you counter. Every day you delay is a chance these buyers will get interested in something else and walk away, or just get tired of waiting and move on with their search. It does no good to counter six weeks later when they're almost ready to close escrow on a different property. Even if they're not in escrow on something else yet, if you take more than two weeks (within three days is much better!) at the most they've mentally written your property off and moved on with their search. It's no longer fresh on their mind. You've lost your window of opportunity.

If a qualified buyer signs one of several counters my clients make, that's not a disaster. That's exactly what I want. Every counter I put out there is something that would make my client happy. Do I care which offer gets signed? Well, sometimes when something about their situation (like having a known problem agent representing them) makes me hope it isn't them. But that doesn't stop me from putting the offer back out there. It's my clients needs that are important, and if my client needs me to deal with these issues, that's part of why I'm getting paid.

Not being willing to counter is like hoping the fish is going to jump right into the boat. Yes, you know they're out there in the lake, but you haven't hooked them and you definitely haven't landed them yet. The property is the bait, but the counter is the hook - it lets them know exactly what you want, and why they should give it to you. You're more likely to get what you want by telling a buyer what that is.

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Original article here

The stock market has a phenomenon where a company's stock is "Priced for perfection." It may sound nice, but "priced for perfection" is emphatically not a good thing. It's where the stock price of a company has been bid up so much that only if absolutely everything goes the company's way is it going to be a good investment. If anything doesn't fall the company's way, their stock will prove to have been overpriced because the income stream will then not support the stock price at current market levels. In a nutshell, an analyst who tells you a stock is "priced for perfection" is telling you that it's very likely you'll lose money in the short term, and even if it's a good solid company the time to buy is not now.

Real estate has a similar phenomenon. Real estate agents aren't stock analysts, so I've never heard someone else use the phrase in this context, but it's very similar to the stock market phenomenon of the same name. I saw a property a few days ago that brought the concept to mind more strongly than any other I've seen recently.

The first thing that leaped out at you was that this property was a work of art. Someone had put a huge amount of money and labor into this property. The kitchen was almost brand new, well laid out, and had pretty much every amenity or convenience I can think of. The floors were all beautiful. The back yard pool needed to be resurfaced, but the entire thing was laid out beautifully for entertaining. The front bedroom had been converted to a very functional and attractive office. Both bathrooms were gorgeous and modern. The electrical was wonderful. Even the garage had been done up with a dozen or so tall cedar (cedar!) storage cabinets.

But the more I thought about it, the less I liked the property. First off, it was a tiny house with tiny rooms on a tiny lot - it was only the fact it was vacant that prevented it from driving this point home on the level of a ball-peen hammer between the eyes. My clients were talking about moving walls to make it more livable, and with everything they thought of, I immediately had a reason why they didn't want to do that, relating to either eventual sale value or severely impacted livability in the meantime. You literally could not do anything to improve the house without adversely impacting something else. My clients were hung up on how gorgeous the whole thing was "But this room is small and we want it bigger" and I had to explain that you could get the room by taking it from the kitchen or garage. If you take it from the kitchen, there goes that beautiful kitchen you love and the family area goes away. If you take it from the garage, you lost half those storage cabinets you love. Want to expand the master? Same trouble. The Second bedroom? There goes a third of that yard you love, and all that's left is a small ring around the pool. There simply was no room. The current owners had done literally everything that could be done.

Then there was the matter that the neighborhood was in such a condition as led me to believe it had seen better days, and this was the smallest house on the smallest lot. The investment potential in such circumstances is limited, to say the least. The house was priced with a premium for how beautiful it was now - but new appliances get old, beautiful surfaces do age, and entropy will take its toll. The more I thought about it, the more strongly I was against my clients buying it. The only thing in favor of buying it was the same thing in favor of buying any residential property right then - the generally low price condition of the market in general.

The entire effect was a property that just oozed the "I'm beautiful! Buy me!" vibe that works so very well on the majority of middle class buyers. And if it was a "forever and ever" house where you just wanted to live there exactly as it was, and didn't care about how much your heirs get after you die, there would be no reason not to buy it. But such buyers are exceedingly rare. I can think of one such set I've had in the last three years, and the people I was with weren't them, so as I explained the property's shortcomings to them, I kept going back to what their Plan was, which included likely moving again in a few years.

Lest you misunderstand, it was neither a Misplaced Improvement nor a Vampire Property. It was in excellent shape; the only repair bill I could see coming was resurfacing the pool. And the neighborhood supported its value just fine, thank you. No, the neighborhood wasn't beautiful, but it was decent, and everywhere you looked were bigger properties on bigger lots. If they weren't so exquisitely cared for, they still supported the value of this property just fine. The problem with this property was precisely how beautiful it was, which made it attractive to Mr. and Ms. Middle class, and therefore quite likely to bid the sales price up and considerably over the real value of the property. Future value appreciation would be limited to general market increases, less the effects of time on all of the beautiful surfaces that are freshly installed now, less the effects of what looks like a neighborhood that is on a gradual downslope relative to the general market.

Would I have pointed any of this out if I were the listing agent? Are you out of your mind? When listing, my responsibility is to get the highest price for the quickest sale and the fewest issues. If I were the listing agent, I would have pointed out all of the beautiful areas and exquisite craftsmanship, and kept my mouth shut about how small it was and how their plans to move this wall or that would adversely impact everything else. That's the listing agent's legal duty, it's good business and it's even fair, honest and ethical dealing.

In this case however, I was acting on behalf of the buyers, so I had an obligation to talk to my clients and save them from being seduced by the property, or at least enter into the relationship with their eyes open. If on sober reflection they had wanted to make an offer anyway, I certainly would have done so, but it's the buyer's agent's legal duty to point out and explain any downsides they see to a property. That many alleged buyer's agents fail in this is not an excuse for me to do so. It's also a crucial difference between a discount agent who rebates a percentage of their commission and a real buyer's agent. I saved my clients a lot more than the entire agency commission by talking them out of this property; something a discounter would never do. Not to mention that they would have been miserable the entire time they were in the property. Which means I may not get paid for my work that day, but when I do get paid, I will have earned every penny before they even see the property they eventually do buy, by keeping them out of this financial disaster waiting to happen. It will happen to someone - but not my clients.

This is one more illustration of why you want a good buyer's agent, and why you want to sign a non-exclusive buyer's agency agreement. A bad or discount agent will never spot this problem, and if you don't give them the security of knowing you're willing to keep working with them as long as they do a good job, there's no incentive for even the good agent to mention it. I would have told them anyhow - what's right for my clients is right for me, period. But it shouldn't be news to anyone that there are agents who will keep quiet about such things if you're only asking them to show you one property. Find a Good Buyer's Agent and be willing to sign the standard non-exclusive agency contract. It really does protect you.

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Original article here

I am buying a home, but the contract said they wont sell the oil rights, what does this means? should I buy

That was J Paul Getty's great contribution to real estate, and why he got so rich. He retained the mineral rights on every parcel he sold, and it has become standard practice in the industry nationwide, if not worldwide, with respect to most property. Such rights typically pass without any rights of ingress (meaning they can't enter your property), but it typically isn't difficult for the holders to buy rights of ingress from someone in the area. This means they can't sink a mine shaft on your property unless you sell them the rights to do so. It is to to be noted that you're not likely to be real happy if one of your neighbors sells them access, either, but you can't control that directly. Zoning boards and conditional use permits and all of that, not to mention the courts. I'm neither a lawyer nor any kind of elected official so I am not going there.

Odds are that the person selling you the property does not, themselves, own the mineral rights. Most developers have bought the property without mineral rights attached, or if they did buy them, they have most likely long since sold them to some speculator. Even if you buy from a developer, they probably don't own the mineral rights any more, let alone the property's post developer homeowners, who didn't buy them in the first place. Since they can't sell what they don't own, that's what the contract is going to say, period. It isn't a matter of negotiating skill or them holding on to a mineral windfall at your expense. Those mineral rights are no longer part of the surface parcel - they've already been sold off, most likely before the developer did the first minute of work on the land to get it ready for the houses to be built. Somebody else owns them. If you want a parcel with mineral rights, look elsewhere. If you want a place to live, all it means is that the chances of you getting a mineral windfall change from remote to zero.

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I just moved into a rental house with an option to buy. I figure I can probably save up around $40-45k for a down payment in three years. how should i save? The Roth IRA tax loophole for first time home buyers maxes out at $10k and takes 5 years anyway. It sounds dumb, but the best safe short term investment I can think of is savings bonds. There has to be something better!

When I originally wrote this, a down payment was not a requirement. For people with not too horrible credit, who could document enough income to afford the loan, at or below a conforming loan amount, 100% financing was available. Unless you've got access to a VA loan, that is no longer the case. Every other loan requires one. I'm confident lenders will start doing 100% loans again within a few years, but if you wait until then, you're going to miss the appreciation that's going to convince them to bring it back.

As to the possibilities: A Roth IRA, along with traditional IRA, 401k, etcetera, are special accounts with tax advantages which are mostly forfeit if you intend to use them for relatively short term goals. More important is your choice of investment vehicle.

Your major constraints here are a relatively short time frame and you want a certain amount of safety. The idea of investing the money is that you want to get more money, not lose your investment savings.

So if you're going to move outside the realm of guaranteed investments for this purpose, you are going to worship at the altar of diversification. Stocks generally go up, but can go down (roughly 28 percent of all years since records have been kept), and indeed, are not anything like a panacea. Therefore, if you're going to risk the stock market or the bond market in order to obtain their higher returns, you're going to want to diversify, diversify, diversify in order to prevent anything short of a general market decline from ruining your investment.

With that firmly in mind, individual stocks are probably not a good idea. If successful, the idea is that the income will be mostly capital gains, which are taxed at a lower rate. Unfortunately for this idea, it's hard to get efficient and diversified individual stock investment for less than $100k. At $100,000, you've got a down payment to be extremely proud of.

The same with individual bonds to an even greater extent. When most bonds run in $10,000 to $50,000 denominations, diversifying is not really an option when you're just trying to save up for a down payment. If one of your bonds suffered a significant downgrade, bond price would take a hit, and therefore a very large part of your investment would suffer a setback.

Next on the list is government savings bonds and bank CDs. These offer a guaranteed return. The problems are that it's a mediocre return at best, and it's all ordinary income. Still, 2.5% or so for bank CDs is safe and secure, even if it reduces to about 2% after taxes. US Treasury securities have a four year minimum holding period to get their guarantee. Me? I stopped loaning the government money decades ago.

All of the various insurance products are a bad idea. You're saving for something you want within five years, not something forty years away or trying to insure a possible loss. Nor does the tax treatment help. Secure commodities investment is one of those oxymorons like "plastic glass".

Finally, there are mutual funds. These are diversified by their very nature. In fact, my usual complaint is that they are too diversified, but in this case, that's actually good due to the short timeline (only a few years, one hopes). Pick a good fund family that covers all of the major asset classes, including bonds. Yes, you pay management fees (and advisement fees or a sales load if you are smart to help keep you from over-reacting to short term market events), but you can average nine to 13 percent per year, pretax, seven to ten afterward. A large portion of gains will be capital gains, taxed at lower rates than ordinary income. This isn't a certain or guaranteed investment, and can lose some of your principal, even all of it in theory. Nonetheless if you're comfortable taking what is in my estimation a small amount of risk, it can really pay off.

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My husband and I bought a golf course-view house in DELETED. We closed 5 days ago; moved-in 4 days ago; and 2 days ago found out that the golf course is scheduled to close. It was announced by the golf course management 2 years ago at the home-owners' association meeting, and the seller and her realtor most likely knew. But they did not disclose it to us, even though they had ample opportunity to do so. They had advertised the house everywhere as golf course view. We definitely would not have bought the house if we had known that the view is there only for 2 more months. We paid for the view and know that homes without a view like that go for a lot less.

Now a school or more homes are scheduled to be constructed in its place. What are our legal rights? Can we "return" the sale of the house?

Please advise. Thanks.

First off, I'm not attorney, so this is layman's perspective. Get an attorney who specializes in real estate in your state, and ask them. Each state has its own law.

Here in California, agents and sellers are liable for disclosing not only what they knew, but what they reasonably should have known. They are required to disclose all such information that a reasonable person might consider in their decision on whether to buy a particular property, and by well precedented legal extension, whether to pay a particular price. Cases have been decided based upon an increased water bill, that the court ruled should have tipped the owner off to the fact that there was a leak somewhere, and water is notorious for its erosional capability, among other things. Were you in California, it appears as if you might have a very strong case. I have no idea whatsoever about whether it's worth pursuing, even if the law in your state is similar. For that, you need to talk to a local attorney.

The first question that attorney is likely to ask you is what evidence you have that the former owner knew, or should have known, that the golf course was closing. Announced at homeowner's meeting is good. In the minutes is better. HOA informing all of the residents directly would be better yet. Neighborhood vows to get together and fight the closure? Probably best, especially if your home's former owners were somehow listed as being members or directors. That's the evidence they knew part.

Evidence that a reasonable person might not have bought that property at that price is pretty easy to come by in this case. Golf courses are highly desired, highly sought after neighbors on the part of many people, and golf course views are valued. Schools, not so much. People want good ones close, but they don't want to deal with playground noise, or high school football stadium noise for that matter. Advertisements of the property as being next to a golf course, or looking out over a golf course, would likely be good evidence to have, because it would show that the owners knew that golf course view was a part of their value, and they were committing this deception maliciously.

Then we get to the real crux of the matter: How certain are you that they didn't slip one piece of paper that says, "The golf course is closing so they can put a new school in" into that ream or four of paper you signed at closing? Or a few sentences on one of the standard disclosures? Not only whether they informed you, but also when and in what manner can be important. If they had a marching band blowing a fanfare to attract your attention to this fact before you had come to a final agreement, that likely blows any case you might have out of the water. If they slipped it into your stack of papers at closing, that might be a horse of a different color. Talk to your lawyer about that.

Now as to remedy. No matter how egregious it was, you're unlikely to get a free house out of it. Possibly, if the agent knowingly misrepresented the situation and you can prove it. Less likely if all you can show is that the seller know, but the agent may have been acting in good faith accordance with the seller's wishes. They shouldn't do this, but let's stipulate that nobody is perfect, and maybe they weren't being paid for that part of a listing agent's services. You may also be able to sue your agent, if you had one, for failure to protect you from these scalawags and perform their due diligence. Then again, if you didn't have a full service buyer's agent, you're not likely to be able to sue them successfully. If you're stuck with the former owner as your only legal target, you may still be able to get not only damages, but legal fees and possibly punitive damages out of it. Alternatively, you might also be able to force them to buy the property back, if you so desire, instead of the other remedies. Talk to your lawyer.

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Original article here

Over the last couple of decades, there's been a rising movement, mostly on the part of those who want a piece of real estate agents business, to sell agents as a toll booth. Tollbooths sit there, guarding the entry to the road you want to travel on. Once you've paid, you get access to the wonderful world of MLS and making offers on real estate - or having offers made upon your real estate. This movement has accelerated in the last ten years or so, with the universal advent of broadband internet connections and ungated sites with all of the listings for sale in a particular area.

Even a large number of allegedly "full service" agents and brokerages have sold themselves based upon the tollbooth model. "Sign up with me, and you get access to all of these wonderful things along this road to where you want to go."

Unfortunately for these agents, there's always someone willing to provide a cheaper tollbooth.

The bar to get into the real estate business, when you really look at it, is absurdly low. I've seen good arguments with valid points for both making it much more difficult or eliminating licensing requirements altogether. Score seventy percent or above on a multiple choice test that doesn't have math any more complex than multiplication and without any practical applications whatsoever, pay a toll of $100 or so to the state of your choice for licensing, and another $100 or so for MLS access, and you're in business! They even let you use a calculator for the math on the test!

It shouldn't be any great surprise that we have large numbers of agents who think that's all there is, let alone members of the general public. Therefore, agents who pretend to be agents - and look like they might be, on paper - can cut the toll to access MLS and the world of making and receiving offers on real estate. They pretend that they do something important, sitting in their offices with a fax machine and ZipForms. It even looks impressive enough, on the surface. "I went into this lady's office, and she fired up a computer and it spit out this contract for me to sign, and she faxed it off to the other agent and now I'm in escrow! Best of all, she's going to give me 2% of the purchase price for doing business with her!" So all of the friends and relatives, who according to the way they think are making $5000 or $10,000 by using this person, drop by, and she makes $2500 to $5000 on every single one of them, by pretending to do something valuable, that can really be done by any high school graduate capable of using a word processor. Alternatively, "I went to this guy's office, signed a listing contract that pays him 1% up front instead of 6% when it sells, to put my house on the MLS, He even let me pick the price I wanted to sell it for!" Now every agent worth their license knows what's wrong with both of these scenarios (and if you are an agent who doesn't, you need to learn before you talk with any members of the public), but the average person who doesn't know what they're getting into. They don't even know what they don't know, and they think they're getting a real bargain.

Lest it be said that I'm being all holier-than-thou, I'm perfectly willing to make $2500 to $5000 acting like a high school graduate with a word processor and fax machine. And a license, can't forget that license! I'm even happy to do this work! And if all you need is someone to grant you that access, like paying toll to access that road, I'm perfectly happy to collect my little toll and send you on your way. Instead of one full size toll that takes me dozens to hundreds of hours to earn, I can earn one of these half-size tolls every couple hours. People who come to me for this level of service may wonder why I never try to "upsell" them on the more expensive package, or at least the majority who don't understand what's really going on do. Furthermore, the probability of such tolls coming back to bite me, legally, is practically non-existent. I made no representations as to the state of the property - I didn't even go visit! I advised them of their responsibilities ("get an inspection!", "fill out this TDS!") and have their signature on documents that say I did. And I never promised their property would sell, or that the property they're buying was worth what they were offering. Whether or not they realized that's what they were doing, they were saying they were perfectly capable of handling all those aspects for themselves, and they signed that piece of paper that says what I am and am not going to do for them.

But once again, there's always someone who's willing to build a cheaper tollbooth. That's not the future of a successful real estate agent, to get paid less and less for doing nothing, anymore than that's the future of a successful software company, a successful health insurance plan, or a successful anything. And for those people who think they're getting a some kind of bargain, would you be happy paying a word processor that kind of money for a couple of hours of work? There's always someone willing to operate a cheaper tollbooth, but unless you really understand what you're up to, a tollbooth is not what what you are really looking for.

What's going on, of course, is people who don't understand what they're not getting are just thinking in terms of cost. If you don't understand what you need to, if you don't even understand that there is more to what a good agent does than MLS access, a word processor and a fax machine, if you've dealt with agents who expected full pay for being MLS access, a word processor and a fax machine, then you think you're getting a deal when someone offers you a discount. But if you're an agent, you have to ask yourself why people should be willing to pay you that much money when people are willing to take less. If you're one of those discounters, you should be asking yourself why people should continue to be willing to pay you 1% when there are people who will do it for 1/2%. And if you're one of the latest wave of internet based super discounters, making money hand over fist, you should be wondering why they should continue to pay your half a percent when someone starts offering it for 4 tenths of a percent, 3 tenths, or less than one tenth. They can still make money at that level, but anyone can do nothing just as well as anyone else, and with a little more time, we get down to the economically stable point where you have people in a sweatshop in Bangladesh typing and emailing a contract they took over the telephone for $10 per transaction, all working on one license that the owner of the company got 15 years ago. Or completely automated, without human interface at all. No service, no knowledge, no liability, and no protection for the consumer, but they certainly are cheap. That's the endpoint of the tollbooth model of business, and it's visible from here.

If you want to know how this shortchanges the consumers, check out any one of dozens to hundreds of domestic real estate forums. Every day, you see people talking about having already made a mistake that is going to cost them a dozen times what a good agent would. These people generally want to know how to get out of the situation unscathed, but you know and I know that's not likely to happen. You've got to be ahead of the curve and not make the mistake in the first place. There are sharks out there for whom such people are nothing more than their lawful prey. Some of them are the agent sitting on the other side of the transaction. Others are investors, hoping to snare someone who doesn't understand everything they're doing. The uneducated buyer thinks "It's a beautiful house, we love it, somebody says they can do the loan - what could go wrong?" The list of tricks that get played on sellers is, I believe, probably longer than the list that gets played on buyers if less common individually. More tricks, smaller market shares.

One of the things I keep harping on is the fact that real estate deals are for large amounts of money. Numbers big enough so that 10% is more than a lot of people make in a year, and I've seen at least a gross of 10% coups - or bigger - pulled off in properties I have actually been in and compared to others on the market within the last year. What does this mean? If you're a shark who can pull off one 10% coup per month, you're in Fat City. You've got the Manhattan penthouse, the private jet, and the rock star lifestyle - more and more so as your deals get bigger and more frequent. If you pull off one 10% coup per year, instead of making $60,000 per year, you're making $100,000 per year immediately, and with just a few years like that, you're living the rock star lifestyle also! And you know the best part of all? Most of the suckers think they got a bargain! I went and talked to the guy that got taken worse than anyone else I knew of a while back, who paid over 40% more than he could have had a basically identical property for a quarter mile up the road, and he's happy as a clam, because he likes the property and he got 2% of that 40% back in the form of cash! Nor do you have to make 10% per transaction to be profitable. If you can consistently pull off 5% coups, or 2%, you're still in the money.

When I'm acting for buyers, my business model is that of a big game hunting guide. For this, you need to know the lay of the land (market), where the most desirable game is, the tricks to spotting its trail, the ruses it may use to escape, etcetera, etcetera - and all before some other big game guide leads their client to bag my client's trophy. You've also got to know the traps laid by the dangerous predators and avoid them. My goal is to make a 10% net difference to my client's final position, Either 10% cheaper, or a property comparable to one that might legitimately fetch 10% more. Buddha forbid my clients don't end up with anything, but that's preferable to shooting some farmer's prize cow, or the farmer themselves! Meanwhile, the people who don't understand this are singing Tom Lehrer's Hunting Song, whether they realize it or not. The problem is that in the real world people who figuratively shoot "Two game wardens, seven hunters, and a cow" instead of the deer they were after face some pretty severe and ongoing consequences.

Before the new appraisal standards, considering appraised value, the lowest difference I had made the previous year was a little over 15%, and that's just negotiating capability and market knowledge. I had got a couple of strictly honest appraisers, and not one of those purchase appraisals came in lower than 115% of purchase price. Even with all the problems the new standards are causing and the fact I have to take whatever turkey the appraisal management company assigns me, I'm not having difficulty on purchase appraisals. To change the independent element (me negotiating purchase prices for the right property), those same appraisers I kept using torpedoed almost 30% of the refinances I was hoping to do. Add the number of traps I've kept those same clients out of by spotting problems before we made on offer, and it adds up to quite a chunk of change they've got in their pocket, or that they don't owe some lender, because I did my job as an agent, not the least part of which is that I take responsibility for not selling them something they can't really afford.

As a listing agent, the process has a lot more lead time. I can interview buyers in the morning, and if they're as ready to buy as they think they are, get an understanding of their situation in an hour or so, be looking at properties myself that afternoon and showing the ones that pass my muster to them the next day. Listings take longer, and are more like a fishing expedition. First, you have to know what kind of fish you're able to catch with the bait you have available. You're not going to hook a sperm whale with krill. You've got to know where these target fish hang out. Then you've got to figure out how to make the bait look attractive to the target fish, how to get them to notice this bait, how to get them to hit it hard enough that you can set the hook and haul them in. Among the factors you have to understand is how much patience the client has. Just like in fishing it doesn't do any good for the fishermen to keep hauling the line out of the water before the right fish is willing to hit it - but the real trick is working the bait so it gets hit as quickly as possible. Sometimes the situation isn't right - usually because the bait won't catch what the fisherman wants, no matter how much you do. Nor does getting the bait hit (getting an offer) necessarily mean a landed fish (consummated sale), particularly not at the offer price.

A lot of the people I counsel to wait, or who don't like the asking price I want to set on a property will go sign up with someone else who's willing to promise the moon to get that signature on the listing agreement. I've never had one of them call me up to gloat that I was wrong. The ones that I've seen actually sell sold for less than I believe I could have gotten, and it took months. Some were even victims of the "Jaws" phenomenon as well. That is what happens when the homeowner gets desperate for any offer - the big shark comes along and eats them.

You may have noticed that both of these analogies are pretty violent, and the better known activities they emulate tend to end up very badly for the big game, or the fish, at least on a successful mission. Nor is there any kind of "catch and release" program. Whether you realize it or not, that's the way the game is played. The language is normally civil, not something out of pro wrestling trash talk, but it's no less deadly for being played with offers and contracts instead of rifles and gaffes. Military men who intend to kill the enemy if they can are very careful and very respectful of capable opponents - they live longer that way. They know somebody's going home in a body bag, and they don't want it to be them. With the amount of money at stake in real estate, the incentives are there. Look at some of the reality shows on TV, and what the contestants go through for much smaller prizes. The tollbooth model of agency seems to be producing an ever larger number of willing fish and game. Actually, they're eager!

Real estate may be the largest transaction of most people's lives, but most people don't do it very often, particularly not in the same area. People will move cross country to a new city they've never been in before, and expect to buy real estate within a month. They'll expect the rules for sellers now are the same as the rules for buyers ten years ago when they bought - if they even understood the market then. They have been led so far astray by the popularly pushed tollbooth model of real estate (and its media depictions), that they have no idea what they're doing wrong - or what they're not doing that they should be.

There's not only marketing to consider on the listing side, and search on the buyer's. There's knowledge of laws, of procedures. There's negotiating tricks that put you into a better position, or prevent someone from disadvantaging you. There's sucker bait, and being able to recognize it - or far more than someone who doesn't do this for a living can. There's buyer qualification issues and property maintenance issues. Do you know how to spot them? Here's a couple free hints: The answer to the first has nothing to do with prequalification letters, and the answer to the second should not be, "Get an inspection!" The former are a waste of paper and the latter is leaving an issue to be resolved at the final point of no return and hoping it gets caught there, and hoping the other side is willing to renegotiate the agreement in accordance with your views as to what reasonable is. There are location issues, condition issues, amenities issues, price issues, market issues, financing issues, and issues that mix several of these.

There Ain't No Such Thing As A Free Lunch in the real world or in real estate. You can be careful, do your own due diligence, pay the fees for superior service, and get someone who acts as an effective guide to big game, or an effective charter sportfisher, or you can pay your little toll and likely end up as the fish or venison on the table. Yes, it's work. No, it's not easy. If it was, anyone could do it just as well as anyone else. Since that is not the case, then we need to consider alternative hypotheses, and using the one that best fits the facts.

The people who habitually dine well on fish and big game? Either they buy and sell enough real estate in that area that they are effectively agents themselves, or they've learned what a fantastic investment paying a good guide is. Yes, the good guides can also eat very well off their profession. That doesn't change the fact that you end up with a better dinner, even considering the chunk of meat you paid them, and if it keeps you from being the meat on the table, well, you make your own call how much not having your financial antlers nailed to a wall somewhere is worth to you. Think of it as financial evolution in action.

Caveat Emptor

Original article here

Really.

I know that most people who read that title are replying "no kidding" but you would be amazed at how many people act like there is such a fairy godmother.

I got an email yesterday that said, basically, "Help me! I bought with a prepayment penalty and my payment is too high. I've got a 100% loan at 7.125% and a three year prepayment penalty, and I need to drop my payment by at least $500 per month!" As I explained, the only honest responses that really solve this problem have to do with increasing the income, decreasing the other outgo, or, as a last resort, getting rid of the property, because he's not going to get a loan like that. They don't exist. They never did, really, but negative amortization loans allowed people to fool themselves into believing they existed.

The guy referenced above is stuck in a negative amortization loan because it was the only way to afford the property he wanted. He treated it like a fairy godmother waving her wand, and didn't ask what happens on the 12th stroke of midnight when the loan recasts.

Anytime you are signing up for anything other than a fully amortized loan at a fixed rate of interest, you should ask "What happens next?" What happens when the initial period of lowered payments ends? Because each and every one of these loans has a boosted payment when that happens, and many, like negative amortization loans, are adding thousands of dollars onto the balance of your loan whenever you make that special low payment they're so proud of! So in three years, when the loan recasts, you owe about 10% more than you did to start with, and a shorter amortization period means your payments go up even more to reflect that. If you couldn't afford the loan originally, how are you going to afford it later?

(I am not saying don't get any other type of loan. I'm saying make sure you understand what happens when the adjustments start. For my own use, I am a big fan of the 5/1 hybrid ARM, but I understand what happens after 5 years, and have always refinanced before then.)

Real Estate Mortgage Loans are something you've got to get right in the first place. Lenders often allow a higher loan to value ratio for purchase money loans than anything else. Put into plain English, if you bought with a loan for ninety percent of the value of the property, I might not be able to refinance it at all, anymore. If Fannie or Freddie own your current loan, then we can likely refinance you under restrictions noted above, but most of the rotten loans were with Alt A or subprime lenders, not Fannie or Freddie. Second, there are closing costs in every loan. Closing costs are around $3000 or so, not counting origination and any discount you may decide to pay to get a lower rate. You can pay these costs out of pocket, you can pay them through yield spread (and equivalent things) by accepting a higher rate - making it harder for a refinance to get you a lower rate - or you can roll those costs into your balance, meaning that the loan to value ratio gets worse. Even a few dollars over a given level's cut off goes to the next higher level, getting worse pricing. If you were at 86.2 percent loan to value and you go to 87.2 percent, we've still got a ninety percent loan. But if you were at 89.1 and you go to 90.1 (or even 90.001), that puts you into the 95% loan to value bracket, with higher pricing and I've only got one or two lenders who will of do it at all, even purchase money. Unless your current loan is with Fannie or Freddie, I can't think of anyone right now who'll do a 95% bracket refinance loan at all. Not to mention that the appraisal may not come in and there's nothing your loan officer can do about it. So if you start with a bad loan, the practical result may be that you cannot fix it by refinancing because lenders won't do it.

So before you sign on the dotted line, make sure you understand all the nuts and bolts of your loan. Keep asking the question "What happens later?" If you don't understand it, or it is too complex, get some disinterested professional advice. Chances are that something is going on that's going to be bad for you later on. Lenders don't want to compete on price if you don't make them, and they know most people choose loans based upon payment, and they know how to play all of the games with payment and interest rate to make their loan appear good to the casual public.

Ask the hard questions before you sign up. Unfortunately, with new lending environment the best realistically possible answers aren't as good as I'd like, but the answers that prospective loan providers give are still instructive if you pay attention.

Caveat Emptor

Original article here

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

No.

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

I'm going to decline to do that.

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

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

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

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

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

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

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

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

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

Caveat Emptor

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

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

Any actual lie

Up front application fees, or sign up fees.

Up front lock fees.

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

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

Requiring the originals of your documents.

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

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

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

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

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

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

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

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

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

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

Buying:

Use of non-standard forms when standard forms are available

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

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

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

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

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

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

Selling:

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

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

There are two main ways to solve the problem.

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

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

But the key part is "real estate investor."

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

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

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

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

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

Caveat Emptor

Originally here

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

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

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

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

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

Thanks again for the teachings

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

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

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



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



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



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



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



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

Caveat Emptor

Original article here

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here